Chinese State-Owned Enterprises are Eyeing U.S. Freight Rail Manufacturing: Report

Chinese State-Owned Enterprises are Eyeing U.S. Freight Rail Manufacturing: Report

October 26, 2018  | Alexander Laska

October 22, 2018

Chinese-backed companies are targeting U.S. freight rail car manufacturing, and their market dominance would threaten America’s economic and national security, according to a report released Monday.

“National Security Vulnerabilities of the U.S. Freight Rail Infrastructure and Manufacturing Sector – Threats and Mitigation,” written by Brigadier General John Adams, US Army (Retired) and released by the Rail Security Alliance, sounds the alarm on Chinese state-owned enterprises’ (SOE) intentions to gain a foothold in U.S. freight railcar manufacturing.

Chinese-backed companies like China Railway Rolling Stock Corporation (CRRC) have already signed contracts with transit agencies in Boston, Los Angeles, Philadelphia, and Chicago to supply them with new rail cars. CRRC is able to underbid its competitors by tens of millions of dollars because it is subsidized by the Chinese government. Under China’s “Made in China 2025” initiative, the Chinese government uses state subsidies, state financing, and other resources to support SOEs like CRRC in entering new markets.

Eno recently released a report on this topic, which found that transit agencies are swayed by CRRC’s low bids and willingness to open factories in those localities. Until more is known about the national security implications of Chinese rail cars being used in transit systems, the report finds that a one-year appropriations ban like the kind Congress is currently considering makes more sense than a permanent policy change. Importantly, the report noted that transit systems and the national freight rail system have many differences and should be considered separately. In particular, the U.S. market for mass transit rail cars is already completely dominated by international companies, while the U.S. freight rail car market is almost completely domestic.

General Adams’ report characterizes these transit contracts as a “stepping stone” for China to take over U.S. freight rail car manufacturing much like it did in Australia, where in nine years CRRC “decimated” Australia’s rail car manufacturing industry, capturing 100 percent of the market (worldwide, CRRC operates or has built 83 percent of all rail products). Without action, the report says, the U.S. faces a similar fate.

“The Chinese government is banking on the fact that once CRRC secures sufficient US municipal transit contracts, it can pivot quickly and inexpensively toward the more strategically important freight rail sector,” the report says.

This would pose a graver threat than China’s market ascension in the transit rail car industry because America’s freight rail network also has defense applications, moving military equipment in preparation for conflict. Chinese-made rail cars, the report warns, could provide the Chinese government with early warning of U.S. military mobilization based on waybill commodity information of loaded freight cars, precise GPS train location, and other information the Chinese could gain access to.

As freight cars become more increasingly sophisticated, there is greater opportunity for the Chinese—or other actors with bad intentions who might hack into the systems—to do damage. False sensor readings of service valves could lead to undetected release of toxic chemicals; unauthorized changes to instructions or alarm thresholds could prevent operators from avoiding collisions; interference with the operation of equipment protection and safety systems could cause accidents. (Ed. Note: In the short term, however, freight rail cars have little to no computerization. The short-term cybersecurity threat is from potential hacking into locomotives and switching systems, particularly all the new wireless systems being installed for positive train control.)

The report recommends three key reforms:

1. Develop comprehensive restrictions and additional reviews on investments from foreign state-backed entities in critical infrastructure integral to our national defense

The report points out that greenfield investments (wherein a foreign entity creates entirely new investments, rather than through an acquisition, merger, or joint venture) are not explicitly covered under the Committee on Foreign Investment in the United States’ (CGIUS) scope of authority, so CRRC and others can make new investments in the U.S. without oversight. The report recommends creating a parallel committee under the Department of Commerce to review transactions for the effects they would have on economic security.

2. Ensure that appropriate federal agencies, in coordination with states and localities, develop robust standards for cyber and data integrity applicable to any rail or transit sector contracts involving foreign state-backed entities

The Departments of Homeland Security and Transportation, the report suggests, should work with state and local agencies to develop and implement standards that ensure cyber and data security for U.S. rail systems. (Ed. Note: The American Public Transportation Association on October 17 issued a best practices document for mass transit cybersecurity.)

3. Strengthen oversight of Buy America laws to ensure that existing laws and regulations are adhered to in federally-funded transit and rail procurements including railcar manufacturing and explore new avenues to further protect the manufacturing capabilities of freight rail and other core domestic industries that are integral to support and maintain our defense industrial base

The report cites “various loopholes and lax enforcement” which have “limited the effectiveness” of Buy America laws. At the release event for the report, General Adams clarified that he does not want to “enlargen” Buy America rules (in other words, he does not suggest increasing the percentage requirement of American content) but wants federal agencies to better enforce the existing rules. Federal agencies, the report says, rely too heavily on the claims of manufacturers and suppliers, and “when those manufacturers are foreign state-owned enterprises, we have little incentive to take them at their word.”

Indeed, Rail Security Alliance Vice President Erik Olson suggested at the release event that some of CRRC’s American assembly plants are “skirting” Buy America rules. And in the case of Boston’s MBTA, which is procuring rail cars from China without using federal funds, Buy America does not apply at all.

There is precedent for America limiting China’s ability to do business with the U.S. government and particularly with the military: there is reportedly a government ban on contracting with Chinese computer firm Lenovo, a ban on the purchase of Chinese drones, and Chinese-made security cameras were removed from U.S. military bases. The Department of Defense has also banned Huawei and ZTE cell phones from sale in U.S. military exchanges.

Other countries are exploring and enacting policies to protect their domestic rail and other sectors from China, as well. Israel recently blocked China from purchasing two of Israel’s major pension funds and forbid China from bidding on tenders for the Israel Defense Forces. Germany passed a law forbidding a foreign entity to own more than 25 percent of essential infrastructure; Canada and Australia have passed similar laws. And the European Union passed legislation last year to curb trade-dumping by state-subsidized companies that cause “substantial market distortion” (not naming, but clearly targeting, China’s SOEs).

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