China is Aiming to Take Over the U.S. Transit Market. So Far, the Plan is Working.

AAM President Scott Paul on Thursday told Congress that “firms in the U.S. and elsewhere are not competing with other companies, they are competing with an entire nation.”

Congress on Thursday examined the threat of Chinese SOEs to transit systems. Here’s what’s going on.

China is taking over American transit, one government procurement contract at a time.

AAM President Scott Paul was among the experts who testified before the House Committtee on Transportation and Infrastructure on Thursday about the threat that Chinese state-owned enterprises (SOEs) pose to American public transit and freight systems. 

China's SOEs have devastated broad swaths of American manufacturing over the past two decades, and now there is growing concern that the Chinese government is setting its sights on dominating America's freight rail, transit rail and bus systems, putting American manufacturers out of business and monopolizing the market.

It's a complicated issue, so we decided to break it down.

O.K., first off: What is an state-owned enterprise (SOE)?

A state-owned enterprise can be loosely defined as a company that doesn't operate freely in an open market but rather maintains direct ties to the government. There are 51,000 Chinese SOEs, who take direction from the government and receive a number of unfair benefits in return, including discriminatory loan rates, direct subsidies, protected home markets, lax labor and environmental regulations and even exchange rate misalignments. China also routinely steals the intellectual property and trade secrets of rival companies, which it can give to its SOEs.

All of this, of course, is hugely unfair to American companies and others from countries that operate in an open market and play by the rules.

Why does China have SOEs?

China is aiming to dominate key industries around the world as part of its Made in China 2025 plan. Rather than encourage the growth of businesses in an open market, it uses SOEs to unfairly enter and monopolize key markets in other countries, including in the United States.

One example is what is happening in steel. Chinese SOEs have made far more steel than they can use, so they dump it into the global market at rock-bottom prices, and gradually are able to capture market share. SOEs are able to do this because unlike other companies, they don't have to worry about making a profit. Tariffs placed on steel have stopped the flood of imports into the U.S. market for now, but China is continuing to produce massive amounts of steel, which is driving the global crisis. China is playing the long game — its goal is to eventually run everyone else out of business and take power over the entire global steel sector.

How does this relate to transit?

As in the steel industry, China is aiming to use its SOEs to take global control over rail and other transit systems, including here in the United States. So far, the plan has been working. The China Railway Rolling Stock Corporation (CRRC) has won a number of local contracts for transit rail projects, including in cities like Boston, Chicago, Philadelphia and Los Angeles. Meanwhile, Chinese battery maker Build Your Dreams (BYD) has built electric buses for places like Albuquerque and Los Angeles.

CRRC and BYD nab these contracts because they significantly underbid competitors. For example, Philadelphia's SEPTA picked CRRC because it outbid its next closest competitor, Canadian company Bombardier, by $34 million. CRRC's bid was $47.2 million lower than Hyundai Rotem, a South Korean company that even had a manufacturing presence in Philly. "I cannot grasp how they are able to do it at that cost," a Hyundai Rotem spokesperson said.

What are the risks of a Chinese SOE building American transit?

There are several. First, there is the risk to American jobs and companies up and down the supply chain. As Paul told Congress on Thursday, there are 90,000 high-wage jobs — many of them unionized — in 750 companies and 39 states. If China were to control the U.S. rail and bus market, all of those jobs are likely to disappear. The worst part: This would happen at the expense of U.S. taxpayers, who are footing the bill for these transit projects.

But there are also major security risks. As Brig. Gen. John Adams, U.S. Army (Ret.) told the committee on Thursday, we already know that the Chinese government is using facial recognition technology to track its own people. That makes it pretty likely that the Chinese would deploy such technology to track Americans on American transit systems, which is especially concerning in a city like Washington, D.C., where the local transit agency is considering going with CRRC to build new Metrorail cars. 

Adams also outlined threats to the U.S. freight rail system, which presents additional concerns because the Defense Department often uses freight to transport equipment and other sensitive materials. Freight rail is also tied to other key infrastructure, like ports. China has taken over such systems before, by the way: Within a decade after entering the Australian market, CRRC had used underpricing and other anti-competitive tactics to entirely wipe out the domestic rail industry there. Today, railcar manufacturing in Australia is wholly controlled by CRRC.

Then there's BYD. Although the company has run into some serious quality control issues, it continues to capture market share and now has set its sights on dominating world auto sales by 2025. "BYD’s economic model of assembling vehicles in the United States, but relying on imported parts and components, would threaten over 5,600 parts suppliers spread across the nation, employing 871,000 workers, the very heart of American manufacturing," Paul warned lawmakers on Thursday.

What can be done to mitigate all these risks?

That's an outstanding question! Thankfully, there's a lot that can be done, and Paul outlined several recommendations in his testimony:

  1. Congress should pass the Transit Infrastructure Vehicle Security Act, legislation that would ensure America’s tax dollars are not used to support Chinese SOEs seeking to undermine legitimate competition.
  2. Transit systems such as D.C.'s WMATA should not be permitted to allocate “non-federal” resources for the procurement of rail cars from CRRC when it also receives hundreds of millions annually from the federal government.
  3. Policymakers and others should close loopholes and strengthen Buy America, ensuring that America's infrastructure — including its transit systems! — are built by American workers using American-made materials. Specifically, the U.S. Department of Transportation and Federal Transit Administration (FTA) need to promptly modernize Buy America rules as it pertains to battery-electric power propulsion systems on buses. A long-term plan, with appropriate recognition of the need for transition strategies, must be adopted.
  4. Both CRRC’s and BYD’s Buy America certifications be audited to ensure that their current U.S. operations are in compliance.
  5. Even if bids by firms like CRRC and BYD were to abide by market-based pricing, it is necessary that the government work to address the security concerns outlined above.
  6. The United States must protect its freight rail sector with far more transparency and limitations on Chinese state involvement.
  7. The United States must insist on reciprocity in procurement. No U.S.-based firm can enter the Chinese procurement market the way in which CRRC and BYD have entered the America's. China is not a signatory to the Government Procurement Agreement (GPA). Put simply, the United States should consider banning all Chinese products and firms from our procurement market until there is demonstrable progress on reciprocity in law and in practice.
  8. It's time for robust infrastructure investment paired with strong Buy America requirements. A lack of adequate, consistent funding puts added pressure on transit agencies to find ways to cut costs, even if that means sourcing rolling stock from companies with lingering quality issues, dubious Buy America compliance, security issues, and clear designs on leveraging state backing to grab market share from their competitors.

Looking for more information on all of this? Click here for more details from Thursday's hearing.