By Brenda Goh
China's top trainmakers, China CNR and CSR Corp, are in merger talks to create a giant able to compete globally with the likes of Siemens and Bombardier, state media reported on Tuesday.
China built the world's longest high-speed train network in less than a decade and has expressed its desire to export its technology. The two state-owned firms, however, have fiercely competed against each other while trying to sell trains abroad.
The official China Securities Journal, citing unidentified sources, said the firms had set up working groups to discuss the integration, and that investment bank China International Capital Corp had been appointed to oversee the reorganisation.
"The heads of CNR and CSR are in agreement on the companies' integration," the newspaper quoted an industry source as saying.
"As the State Council is in charge of this, it can be done at great speed and at the moment, the biggest concern is related to their projects and personnel changes."
CNR and CSR halted trading on Monday and subsequently issued statements saying they would resolve "major issues" as soon as possible. Trading would resume within five working days, they added.
The companies did not respond to requests for comment on the Journal report.
Last month, CNR and CSR dismissed a report by financial news magazine Caixin that the government was looking to merge the firms to create a giant that can better compete with foreign rivals such as Germany's Siemens and Canada's Bombardier.
A merged CNR-CSR would have combined annual revenue of about 200 billion yuan ($32.71 billion) based on 2013 company data, compared with Siemens' 75.9 billion euros ($96.5 billion) revenue last year and Bombadier's $18.2 billion.
Zhuzhou CSR Times Electric, a CSR subsidiary, also suspended trading. CNR is due to report third-quarter results on Wednesday, while CSR is scheduled to report on Friday, according to the Shanghai Stock Exchange.
Fierce competition
The official Xinhua news agency, quoting Chinese Academy of Engineering railway expert Wang Mengshu, said a merger was aimed at reducing unhealthy competition between the two and to promote China's high-speed rail products overseas.
The trainmakers were demerged from the government in 2000 to promote competition, and have profited from China's drive to connect the vast country by rail. Their main domestic customer is national operator China Railway Corp.
But they have clashed in their chase for overseas sales. In 2011, they fought a price war for a Turkish contract, which eventually went to a South Korean firm. Two years later they were embroiled in a dispute over supplying trains to Argentina, leading the now-defunct Ministry of Railways to openly criticise the firms, according to Caixin.
Most recently, both firms have separately indicated their early interest in supplying trains to California's proposed $68 billion high-speed network. The Californian rail authority has yet to issue formal requests for proposals.
CNR, which listed on the Hong Kong stock exchange in May, posted 2013 sales of 97.24 billion yuan and net profits of 4.13 billion yuan, while CSR reported full-year revenue of 97.89 billion yuan and net profits of 4.14 billion yuan.
"We estimate 14 percent potential profit accretion if CSR and CNR were to merge into one entity," Barclays analyst Yang Song said in a Sep. 23 note, citing the removal of price competition and lower research and development costs.
"Most developed countries do not have two competing railway equipment manufacturers," she said.
