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High Stakes Victory Or Runaway Train?


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HIGH-STAKES VICTORY OR RUNAWAY TRAIN?

Park You-Kwang was beaming. It was Apr. 18, 1994, and the Korean had just finished negotiating with executives from the Anglo-French GEC-Alsthom consortium. The French negotiators had landed a $2.1 billion contract to supply 46 trains and other equipment to South Korea's first high-speed rail system, a project costing $13.4

billion.

But it was Park who came out the real winner. By skillfully playing the French off rival German bidders, he won one concession after another, including a transfer of train knowhow to the

Koreans, an agreement on rock-bottom financing, and even a cut of $270 million off the final price tag. The French felt so squeezed, Park recalls, that "when they presented the final proposal, they said they had run out of flesh."

For Westerners eyeing Asia's infrastructure boom, it's a cautionary tale: Some companies risk giving away more technology and making less money than they bargained for. French executives who manage GEC-Alsthom argue that winning the contract was essential to staying ahead of their German and Japanese competitors and winning an edge for future projects in Asia. That may be true. But they may also have created a new competitor in the world's most lucrative market.

The Koreans had several advantages from the start. There was the attractiveness of the project itself, one of the biggest infrastructure projects in the East and the first high-speed rail system outside of Japan. The plan called for laying 431 km of special track and building a new network of stations, terminals, and support systems. The system will connect the capital of Seoul in the northwest with the country's heavily industrialized southeast coast, where the Hyundai group, for example, maintains much of its manufacturing activity.

OPEN DOOR. The Koreans also had world-class expertise on their side. Park, the English-speaking chairman and president of South Korea's High-Speed Rail Construction Authority, is a former executive director of the World Bank in Washington. His 50 or so colleagues had years of experience at places such as the Asian Development Bank. With help from Bechtel Group Inc., they set up a process to evaluate 302 different aspects of the bids.

Besides inviting the French bid, the Koreans requested proposals from Japan's Mitsubishi group and Germany's Siemens. The Japanese consortium failed to qualify. That disqualification was largely seen as a political decision since one of the Koreans' primary goals was to obtain technology. But the Japanese balked at yielding the technology.

So in 1992, the Koreans started negotiating in earnest with GEC-Alsthom for its well-established train a grande vitesse (TGV) technology and with Siemens for its newer InterCityExpress system. After six rounds of evaluations, the Koreans selected GEC-Alsthom as the likeliest partner. Still, they kept the door open to Siemens to maintain maximum pressure on the French.

SOPHIE'S CHOICE. The French government stepped in to help GEC-Alsthom. First, the government opened France's previously closed market to Korean automobiles. Then, after German Chancellor Helmut Kohl visited Seoul in 1993 to plead Siemens' cause, French President Franois Mitterrand paid a visit. Mitterrand brought along Sophie Marceau, a French actress enormously popular among Koreans, and even presented an 18th century royal Korean document preserved at the Bibliothque Nationale in Paris. But Siemens hung in there, forcing the French to cut their price, once by 43%, then by 11% from their "final" offer. The Germans then zeroed in on a key Korean demand: that the Europeans finance 18% of the total $13.4 billion cost at favorable rates.

Siemens offered loan terms costing $270 million less than the French pro-

posal. "The moment the Germans put a lower offer on the table, it was hard for the Korean parties to turn it down," says Claude Darmon, Paris-based general manager of GEC-Alsthom's transport unit. The German offer, says Darmon, "was a kick in the shin."

The German move forced the French to offer a finance package that will in part carry an annual interest rate of 6.25%, the lowest a Korean government-backed borrower has received since 1986. And the Koreans probably will not have to start paying back the principal until 2012.

The Germans threw in the towel. "We were very willing to offer technology transfer," says Juergen Oberg, Siemens' Munich-based executive director for the Far East. But, he adds, "we could not match the financing of the French."

GEC-Alsthom dismisses suggestions that the financing package, organized by Banque Indosuez, was offered below prevailing rates. "The banks simply made a special effort to drive down their commissions," Darmon explains, pointing out that the French government is also guaranteeing the loans. The seamless coordination among French agencies and the banks helped give them the edge over the more loosely organized Germans.

The French also agreed to transfer all the designs needed to make their latest model and provide training to Korean designers, manufacturers, and other engineers at no cost. Hyundai Precision Industries, Daewoo Heavy Industries, and Hanjin Heavy Industries will manufacture the engines and rolling stock, while Goldstar Industrial Systems and Samsung Electronics will work on control systems. "At the end of the project, we'll make sure that we have fully digested the technology," says Park.

"FORMIDABLE." Although the French retain rights to export the TGV to Europe and North America, the Koreans are eyeing the prospects in Asia itself, where they will be free to export once their own high-speed railway is up and running. Inside South Korea, Park already wants to extend the original plans to include extra TGV links between Seoul and Kangnung and between Seoul and Mokpo. Ultimately, the plans also call for a TGV link between North and South Korea, with a further connection to the Chinese market.

Did the French give away the store? GEC-Alsthom's Darmon acknowledges that "the Koreans are formidable negotiators," but he discounts prospects that the Koreans will be competitors for future deals in Asia. "The Koreans will know how to make only one model," Darmon says. "When the time comes to make a different train with different characteristics, it won't be easy to do it without us." French Transport Ministry officials also argue that by the time the Koreans start exporting their own TGV in six years, the French will have developed new models that carry more passengers, make less noise, and travel at between 350 km and 400 km per hour vs. 300 km currently.

But it is clear that the French gave away more than they would have liked. "The real danger is that the technologies we transfer will be used to make simpler equipment such as subway cars and tramways and give them a competitive advantage," says Darmon. "Then, yes, we will have created new competition." In Asia, that's always a risky business.WHAT HIGH-SPEED RAIL MEANS TO KOREA'S ECONOMY

THE CORRIDOR The 431-km Seoul-Pusan-Ulsan corridor currently handles 65% of Korea's total passenger traffic and 70% of its freight traffic.

SPEED Depending on traffic, it can take from 12 hours to 20 hours to drive this distance. The high-speed railway will take about 2 hours.

IMPACT ON COSTS The new railway will greatly ease congestion that has raised Korea's manufacturing costs by 20% and distribution costs by 50%.

TRADE Because the TGV will relieve overwhelmed ports, exports will surge.

GNP The savings costs will be about 15% of GNP.

DATA: BW

Laxmi Nakarmi and William J. Holstein in Seoul, with Farah Nayeri in Paris and Karen Lowry Miller in Munich


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