China Business

Chinese-Built U.S. Rail System: I Don’t Think So

China dispute resolution lawyers

Financial Times did an article, Made in America by Chinese Contractors [link no longer exists], on how a consortium of China’s state-owned railway companies (Shanghai Railway Bureau, CSRC, China Railway Construction, and the Third Railway Survey and Design Institute) will likely win the bid to build the United States’ first high-speed railway network.

The winning bidder will design the rail network, supply the stock, build the tracks, and operate the line. This network is to run from Northern California to Southern California and will cost about $45bn to build.

I am betting China does not end up with this project.

Yes, I would expect the Chinese companies to win on price, but I find it hard to believe US politicians will allow a group of state-owned Chinese companies (SOEs) to build and run America’s high speed rail system.  I just do not see that happening. I am in China right now and have heard a lot of talk on how China has really not done well at all with building its own high speed rail. That system is rife with all sorts of build problems and virtually everyone here with whom I have talked is skeptical regarding its safety.

The FT article mentions this consortium’s having “lost $623m from its railway project in Mecca due to major cost-overruns,” but word on the street in China is a bit different. What I am hearing is that this consortium grossly underbid the Mecca project, fully intending to raise its fee once things got going. But when the consortium went to Saudi Arabia seeking another $1 billion, China was told there would be major political and economic repercussions for both China and for Chinese workers in Saudi Arabia if it did not back off. China backed down, hence the massive losses. My law firm’s China dispute resolution lawyers have worked on similar cases and this all rings very true to me.

I think the U.S. will reject China’s bid (even though it will likely come in way lower than any other) and it will use the cost overrun and quality control issues as its reason. In the final analysis, I do not see the U.S. as ready to accept China building and running something like this. Not yet anyway.

What do you think?

28 responses to “Chinese-Built U.S. Rail System: I Don’t Think So”

  1. I couldn’t agree more. New York Times articles (and legitimate economic benefits) aside, the Chinese high speed rail effort seems to be throwing up red flags on a daily basis. Add that to the huge political issue of handing such a high-profile project to a consortium of Chinese SOEs, and I don’t see it happening.

  2. I would think to act as a perfect example is that a chinese company bid to build a 50km section of highway between warsaw and berlin. 1 year in and delayed they came to polish govt. and asked for more money stating cost increases. Chinese did not pay local contractors for 3+ months. It all came to a halt. Warsaw announced last week they fired the chinese state owned company and will re-tender the entire process. Blocking the chinese from bidding ever again. (It was stated at the beginning the chinese bid was severely under priced). Chinese SOE’s are again and again severely underbidding in african projects and sometimes winning and sometimes loosing. Their track record for the public GOOD is very negative. Their record of building a road from where the oil is to a public port is very good as it serves the SOE’s interest. Otherwise good luck with that.

  3. This opinion piece is a little ironic considering the past history of Chinese involvement in the construction of North American railroads.
    Notwithstanding, with 1000 CHR services and up to one million passengers per day, the success of China’s High Speed Rail speaks for itself.
    Perhaps you’ve been talking to the wrong people.

  4. 3 links as an answer to this post
    http://cprr.org/Museum/Chinese.html
    and from today’s NYT:
    http://www.nytimes.com/2011/06/23/business/global/23rail.html?partner=rssnyt&emc=rss
    http://www.nytimes.com/2011/06/22/opinion/22friedman.html?partner=rssnyt&emc=rss
    I am not sure “how it feels” matters much in today’s shifting world.
    and keeping in mind your blog post: “China Government Contracts. Good Luck With That”. After saying no to Huawei, let the US refuse a cheaper Chinese bid for railway. It will certainly give Beijing a useful argument. This is worth enough going through the trouble to bid in the first place.

  5. Search for “It’s China’s version of the American dream: made in America, by the Chinese.” using news.google.com and click on the result to read the article sans registration.

  6. It would certainly be politically inconvenient for Obama (or any administration) to award such a huge, union-backed project to a Chinese company. So I expect they’ll do anything to avoid it, and even if they did award it to a Chinese company, the unions would keep the project tied up with lawsuits. Not to mention that anti-trade ignoramuses would be up in arms.
    Honestly, though, I don’t see the high-speed rail thing happening in the US at all (or at least not soon). The population of all of California (i.e., including the people who would not ride the proposed high-speed train) is about 37 million. Link Beijing & Shanghai together and you’ve already got more than that, to say nothing of the stops in between. And even with the population density in their favor, China’s high-speed rail might not be financially viable.

  7. Funny, when I read the title I thought you intended to discuss the existing U.S. rail system, which was (as I’m sure you know) built with the contributions of many Chinese-American contractors back in the day. Anyway, other than that, I agree with your analysis. Considering the quality control issues that the “China brand” has had in the last decade, I cannot imagine that any rational decision-maker choosing a Chinese firm to build something that will so significantly impact the safety of others. I’m sure that Ray LaHood is beyond apprehensive about picking a reliable contractor for the first showpiece of the US HSR system.

  8. They tried the bait-and-switch in Poland as well. The Chinese bid $500M for a highway construction project that the Polish government had estimated would cost $1B. When the Chinese stopped paying their suppliers and asked for more money, Poland canceled the contract. They’re now suing the Chinese for damages. Meanwhile, the road won’t be ready for the European Championship in 2012, so the government has egg on its faces. http://blogs.ft.com/beyond-brics/2011/06/14/poland-to-china-youre-fired/
    There is also all that Chinese-built infrastructure quickly falling apart in Africa. Like this: http://allafrica.com/stories/201104260233.html
    To answer your question: A California administration would have to be suicidal to go with a Chinese bid.

  9. What’s the big deal?
    Don’t Americans remember that the western part of the Transcontinental Railroad from California to Utah was built almost entirely by Chinese?
    “On January 8, 1863, with a ground-breaking ceremony at Sacramento, the Central Pacific Railroad finally started work on the western end of the long talked about transcontinental railroad….Two years after the beginning of construction, the line had completed less than 50 miles of running track. Central Pacific’s construction superintendent, J. H. Strobridge, needed 5,000 laborers “for constant and permanent work.” But the largest force that he was able to muster at any time during the spring of 1865 was 800. Labor was as scarce and as unreliable as ever. The desperate superintendent finally decided to experiment by hiring fifty Chinese from the vicinity, restricting them to the simple work of filling dump carts. This was in February 1865. The Chinese proved so adept at this task that they were soon given the duty of driving the carts as well as loading them. Next, though doubting that they were capable of really hard physical labor, he tried them using picks on softer excavations, with excellent results. Strobridge now began to hire in earnest. The railroad’s agents scoured the towns of California for Chinese laborers. By fall of that year there were 3,000 on the payroll. “The number rapidly increased to ten or eleven thousand and from then till the golden spike was placed, at Promontory, four men in every five hired by the Central Pacific were Chinese. After the supply of local Chinese labor was exhausted, the railroad began recruiting in the Far East….”
    “Loss of life was heavy. Snow slides were frequent. On December 25, 1866, the Dutch Flat Enquirer reported that “a gang of Chinamen employed by the railroad were covered up by a snow slide and 4 or 5 died before they could be exhumed…. The snow fell to such a depth that one whole camp of Chinamen was covered up during the night and parties were digging them out when our informant left.”….Years later Strobridge told the following to a federal investigating commission: “The snow slides carried away our camps and we lost a good many men in these slides; many of them we did not find until the next season when the snow melted.” However, in mid-1868, the Central Pacific finally broke through the Sierra barrier. The true cost in human lives will probably never be known since little records were kept, but it must have been high.”
    “Strobridge and Crocker drove their men, especially the Chinese, mercilessly. It is on record that in June 1867, some 2,000 Chinese engaged in tunnel work in the high Sierras went on strike. However, the Chinese had no support from the other workers, and the strike collapsed in one week. The workers asked for a raise to forty dollars per month. They wanted the workday in the open to be limited to ten hours and that in the tunnels reduced to eight. As one spokesman put it “Eight hours a day good for white men, all the same good for Chinamen.” They also objected to the right of the overseers of the company to either whip them or restrain them from leaving the road when they desired other employment. This strike so alarmed the railroad that they wired East for several thousand Negroes as replacements….”
    “The Central Pacific tracks were officially joined to the Union Pacific rails at Promontory Point [sic] near Ogden, Utah, on May 10, 1869. There were many eloquent orations on that day but E. B. Crocker was one of the very few to pay any tribute to the role of the Chinese. In a speech at Sacramento he declared: “I wish to call to your minds that the early completion of this railroad we have built has been in large measure due to that poor, despised class of laborers called the Chinese, to the fidelity and industry they have shown.”
    http://cprr(dot)org/Museum/Chinese_Syllabus.html

  10. @Everyone-thinking-they-were-clever-with-their-“Chinese-built-the-original-railway-system”-comments-and-links, way to be completely irrelevant to this discussion!
    As to the pertinent points from this post, I agree with William more than anything. The political ramifications of choosing Chinese state-owned companies to construct this system would be tantamount to political suicide, even without considering potential opposition from unions. Even if the quality of work would be great, there are too many nativists in this great country of ours to allow something like this plan to succeed. Or at least, so many as to guarantee that the leader agreeing to this plan is out of office by the next term, especially given that the benefits of this system will not be felt for a long while.
    Of course, that seems to be moot if the track record of the developer’s quality of work is poor, which appears to be the case. I’m also not convinced that high-speed rail will be a feasible option for middle-to-low income Americans. I can’t imagine pricing in the first few years would be accommodating. Not without running huge losses. That issue is even mentioned in the first New York Times piece posted by Marc. I’d imagine costs might be proportionally the same for Americans with middle to low incomes.
    @Marc What is the relevance of the second Times piece you posted? There is no discussion of China or railways.

  11. Wait… Can someone remind me again where the workers who built the US railroads in the 19th century came from? Russia, was it?

  12. Hey… looks to me like another stone on the WeiQi board!
    If the Chinese bid become politically noisy in the most banal way, Chinese can allege that Chinese companies face persistent discrimination in the US and therefore China has no impetus to improve the environment for US companies looking to win Chinese public tender. Sounds like a win to me.

  13. I thought there were also IPR/contractual issues that prevent China from using that technology in third countries — at least those with rule of law.

  14. There are no parallels between the Chinese construction of our current rail system and what they consortium has bid on. It’s out there to even suggest it. Extremely cheap labor over a century ago vs. a high tech initiative in a flagging economy with the country that (rightly or wrongly) many Americans view as eating our collective lunch… and during a time or rising nostalgia and nationalism in the U.S? Apples and oranges, gents.
    China’s highspeed rail is being roasted in the Chinese domestic press. Cost overruns, shoddy workmanship, cronyism… I think Dan’s right on the money.

  15. What if the Chinese bid comes with funding for the project, a low-interest or no interest one from a Chinese bank?
    As WSJ reported, http://online.wsj.com/article/SB10001424052748703312904576146520512195278.html, “On Monday, Baha Mar Resorts Ltd. is set to break ground on the $3.4 billion hotel, casino and resort project. Its unlikely partners: China State Construction Engineering Corp., the country’s largest construction company by revenue, and the Export-Import Bank of China, a state-owned bank with the mission to help Chinese companies expand overseas.”, and in the same article, it also reported ” The two also are bidding to rebuild the Goethals Bridge connecting New Jersey to Staten Island, N.Y., according to people familiar with the matter. If they are awarded the $1 billion project, the bank would finance construction and get repaid over time by the Port Authority of New York and New Jersey.”. Though the congress has more than once blocked high profile Chinese transactions, it is not clear if they can block every deal, especially if it comes with free financing.
    Also interesting is, according to China State Construction Engineering Corp’s website, they already won the bid and finished the construction of a New York housing authority project. http://www.chinaconstruction.us/News.jsp?id=63. Congress didn’t notice this transaction or it didn’t care about it?
    As I spent part of my life in Boston, it is always amusing to run into a discussion about construction cost went over budget. Anyone remember the Big Dig? “The Big Dig was the most expensive highway project in the U.S., and was plagued by criminal arrests,[2][3] escalating costs, leaks, charges of poor execution and use of substandard materials, and four deaths.[4]” http://en.wikipedia.org/wiki/Big_Dig. The last time I checked, there is no Chinese company involving in this project, but still, it went over budget so much that all of us paid for it, as a tax payer.

  16. One common them in this blog is how all everything is local.
    They aren’t “US politicians” but “California politicians” and the politics of Sacremento is quite different from the politics of Washington D.C., which is important since this is a state issue and not a Federal one.
    In particular, one reason Chinese companies are interested in HSR in California is that now ex-Governor Schwarzenegger was in China courting them
    http://www.boston.com/business/technology/articles/2010/09/12/schwarzenegger_tries_out_chinas_high_speed_rail/
    http://www.signonsandiego.com/news/2010/sep/11/schwarzenegger-checks-out-chinas-high-speed-rail/
    California has a large Asian population which is politically critical because they are socially conservative and liberal on immigration issues so they can go either way. China-baiting is might work in Arizona or the mid-West. It’s political suicide in California or NY.
    However, I don’t think that the big question is whether or not Chinese SOE’s will be able to bid on the HSR. The big question is whether or not the HSR is going to get built at all.

  17. What are the legal issues involved in rejecting a bid based on the nationality of the bidder? I can see why you could turn down a Chinese SOE bid to build US nuclear installations, but presumably WTO rules would forbid that, no?
    “However, I don’t think that the big question is whether or not Chinese SOE’s will be able to bid on the HSR. The big question is whether or not the HSR is going to get built at all.”
    Sadly, that comment is right on the money.

  18. Laobaixing: What are the legal issues involved in rejecting a bid based on the nationality of the bidder?
    Pretty much none in this situation, China is not a member of the Government Procurement Agreement so there is no requirement that the US not discriminate against China when it comes to government procurement.
    Also if hypothetically the state of California wanted to contract with a Chinese company, and the Federal government wanted to block it, you are looking at some very interesting issues of US Constitutional law.
    Laobaixing: I can see why you could turn down a Chinese SOE bid to build US nuclear installations, but presumably WTO rules would forbid that, no?
    Article XXI of GATT has a specific nuclear exception.

  19. “What are the legal issues involved in rejecting a bid based on the nationality of the bidder?”
    It’s not like China allows foreigners access to their market. China is not a party to the WTO government procurement agreement, so there’s no WTO barrier to having a blanket prohibition on Chinese companies bidding on government projects elsewhere.
    Regardless of legal issues, any administration would consider the credibility of the bid and all the issues surrounding it. A Chinese bid would come with a history of broken promises, shoddy quality, technology theft, disregard for labor and other laws, and a host of other problems.

  20. @Derek: you are right the third article has no relevance to China or railways and could have been left out. Both articles were published the same day by the NYT and I feel together they are relevant for a broader discussion: The US debate while China build. I think 5 year planning and 10 year long leadership versus 100 days should be worrying. And the EU are nowhere to be counted either now that it has transformed itself into a vaste shapeless Belgium. But you are right again, nothing to do with China and railway per say.

  21. SF-Oakland Bay Bridge is now being assembled with Chinese steel, Chinese machinery and American labor.
    Now, as for the proposed NorCal-SoCal HSRR boondoggle. Aside from the asinine economic cost/benefit projection, I don’t see why not (i.e. Chinese involvement.)

  22. HI: A Chinese bid would come with a history of broken promises, shoddy quality, technology theft, disregard for labor and other laws, and a host of other problems.
    True, but its cheap and it gets done.
    The cheap part is important because California is under a heavy, heavy budget crisis, and people of California may conclude that having a shoddy HSR system is better than having nothing at all, or not.
    I think asking whether or not China will be allowed to bid on the California HSR system misses the big question which is that right now it looks like that there isn’t going to be any HSR system at all, because of budget issues.
    The other thing is that the China angle is merely a sideline to a bigger argument in the US about the right direction of the US economy. There is one side that believes in low taxes, minimal government spending, small businesses, and low state intervention in government. The other side believes in higher taxes, large amounts of government spending, big mega-projects, and large capital spending. HSR is a wedge issue, because one side believes that HSR is essential for economic growth whereas the other believes that HSR shouldn’t be built at all. China is also a wedge issue, because the Chinese government is massively interventionist.
    In the US, the two sides have fought themselves to a stalemate, and one consequence of the stalemate is no money for HSR. If the HSR proponents do end up winning the argument over the next few years (and I think it’s going to take three to five years to sort out the argument), I don’t think that the fact that Chinese companies are involved will be a bad thing, because if the “big government” people win, then then there will be a general belief that the US should be more like China.

  23. If the US chose to become more like China that would be terrible for China. The US would block Chinese imports and investments, take natural resources off the world market, disregard its WTO commitments, and sneakily sabotage Chinese interests around the world. I don’t think China really wishes for the US to behave like China is behaving now.

  24. It doesn’t matter even if the Chinese build the very best high-speed rail systems for the least money hands down. There is no way that the taxpayers of California, who have suffered from years of stagnant economy and the effects of offshoring of huge numbers of high-tech jobs, are going to accept to see their tax dollars flowing to China for a public works project in their own state! It would political suicide for whoever agreed to it. The state doesn’t “save money” by paying a lower price to a foreign country, you have to count the net effect. If the state spends into the local economy, it comes back to them as tax receipts and growth and stimulus. Think of the WPA paying its wages to foreign workers; it would have defeated the whole purpose.

  25. There is no possibility of Chinese bid winning in California, for the simple fact that Chinese do not own the technology they are trying to sell and Kawasaki already vowed to sue to block Chinese bids if Chinese submitted one. Second problem is that China’s bullet trains aren’t designed for the FRA crashworthiness standard and cannot win an FRA approval to be sold in the US.
    Just like in Brazil, California project will be a fierce competition between three bidders, Japanese, French and Korean.

  26. LH: There is no way that the taxpayers of California, who have suffered from years of stagnant economy and the effects of offshoring of huge numbers of high-tech jobs, are going to accept to see their tax dollars flowing to China for a public works project in their own state! It would political suicide for whoever agreed to it.
    A lot of California taxpayers are immigrants so if California money goes to India or China, then it’s going to someone’s cousin. This is particularly true in the high-tech industry. There is a lot of resistance to jobs going overseas in the Midwest, but there is a lot less resistance in Silicon Valley because everyone thinks in international terms.
    A large number of people in Silicon Valley are recent immigrants from India and China and when there is outsourcing that is seen positively.

  27. Train rides are already so expensive, why not try to reduce costs by outsourcing to China. It seems like the natural idea to me. I’m all for American made items, but we also need to be cost conscious as well.

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