Stimulus Spending Boosts Japan's Train Manufacturers

As electronics and auto companies flounder, global stimulus spending may aid Japan's rail companies

By Ian Rowley

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With Japan's economy plunging at a faster rate than Europe or the U.S., thousands of jobs lost, and failing politicians lapsing from one crisis to the next, it's been a miserable few months for Japan Inc. Yet amid mounting grim headlines, one deal stands out. On Feb. 13 the British government signaled that a consortium led by Tokyo-based Hitachi (HIT) had won preferred bidder status for a $10 billion contract to build and maintain rolling stock for train lines running along Britain's east and west coasts.

For Hitachi, a sprawling conglomerate that makes everything from flat-panel TVs to nuclear plants, the British contract could not come at a more important time. Hitachi expects to lose $7 billion in the financial year that ends later this month, marking it as one of Japan's worst-performing large companies. This year, despite the huge loss for the group, railway-related sales at the company are forecast to jump a healthy 17%, to $1.5 billion. The British deal, if finalized in October, should see Hitachi and its partners John Laing and Barclays Private Equity supply up to 1,400 train cars. The consortium will also service the trains over a 20-year period.

Perhaps more important, analysts say the deal could be a sign that Hitachi and other Japanese companies can win more new business in the rail industry at a time when governments fighting the global recession are using stimulus spending to invest in infrastructure projects. Even as Japan's major export markets of autos and electronics slump, rail could provide a welcome growth opportunity. "This is very big news in Japan," says Hiroki Shibata, an analyst in Tokyo with Standard & Poor's (which, like BusinessWeek, is owned by The McGraw-Hill Companies (MHP)), referring to the Hitachi deal.

Battling Foreign Rivals

There should be plenty of opportunities to bid for more contracts. In the U.S., for example, the Obama Administration's $789 billion stimulus plan will provide an impetus for rail spending with $18.1 billion earmarked for transit and railways. In Europe, the European Union is contributing $630 million to member nations to spend on rail links as part of its stimulus efforts. And European national governments are increasing spending. Italy, for instance, is building a new freight line between Rome and Milan, while France is extending its renowned TGV high-speed rail services.

Faster-growing economies should provide further growth. China plans to increase the total distance of its rail network by 50%, to 75,000 miles, by 2020 at a cost of $700 billion. That spending will include eight high-speed lines, including the long-awaited route between Beijing and Shanghai. Among foreign players, Japan's Kawasaki Heavy is battling with Germany's Siemens (SI), Canada's Bombardier, and France's Alstom (ALSO.PA) to win business.