Train makers seek alternatives to prop up businesses after losing steam amid economic crisis, pandemic

07/12/2022

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Brazil’s rail industry is at a virtual standstill. Without large orders from cargo and passenger operators, train makers in the country are sustaining their businesses thanks to exports and revenues from services like overhauls and updates of equipment already on the streets. In the segment of passengers, the idleness in train manufacturing – considering that each train is made of one locomotive and eight cars – is at 80%. In the cargo field, including locomotives and cars, it is nearly 100%.

After an exceptional year in 2015 – with 4,700 cars, 129 locomotives and 322 passenger cars manufactured – the industry started to lose steam amid the economic crisis in the following years. In addition, the expectation for a better decade was delayed for at least two years due to the effects of the pandemic in the passenger segment and the postponement of investments in rolling stock by cargo transporters.

The pandemic reduced drastically revenues of companies operating subway and commuter trains, impacting the capacity of these companies to invest. Cargo transportation, on the other hand, saw demand rise in the meanwhile, but not to the point of increasing orders.

The industry hit bottom in 2019, with only 1,000 cars and 34 locomotives made for the cargo segment. In the passenger segment, according to the Brazilian Association of the Rail Industry (Abifer), the last contract for delivery of new trains was signed in 2013. In 2020, 72 cars were made. Competition from Chinese companies is now the biggest challenge for Brazilian companies in both segments. The landscape is now compounded by the input inflation, which hits steel particularly hard.

Vicente Abate — Foto: Anna Carolina Negri/Valor

Vicente Abate, head of Abifer, highlights the hurdles but is still upbeat. “We believe in growth in the next years [in cargo transportation]. Rail transportation tends to strengthen, and that will have repercussions in the industry. The aim at increasing railroad share in cargo transportation to 40% from 20% by 2035.” As for passenger trains, Mr. Abate sees room for commuter trains and interstate services, besides longer tracks for subway and light rails.

But he changes the tone when talking about competition from Chinese companies. Mr. Abate warned that the federal government’s decision to reduce the tax on imported products could increase difficulties in the sector. The 14% rate may be reduced to as down as 8.4%. “They [Chinese] do not intend to produce here. Brazil’s productive chain is in condition of meeting any need from them.” The executive argues that any tax reduction should be followed by a lower Brazil cost to level the playing field.

Foreign companies are seen as taking space from the local product but can also offer alternatives. After failing to produce for an entire year, Alstom ended 2021 with good perspectives in the foreign market as it won auctions of €2 billion in the region. Half will be made in Mexico and the other half in Brazil. The Brazilian production will supply orders in Chile, Taiwan and Bucharest, besides the São Paulo subway system.

There is no shortage of demand for passenger transportation in Brazil, said Michel Boccaccio, Alstom’s vice president for Latin America and chief executive in Brazil. In his opinion, there is shortage of funds for states to invest in commuter trains and subways. “São Paulo is doing the right thing in seeking partnerships with the private sector for its projects.”

Alstom had two plants in Brazil: one in the city of São Paulo and the other in Taubaté (São Paulo state). The company was forced to close the former due to the lack of orders and spent the recent years betting on services – the engineering team took part in global projects in the period. “Brazil excels at [making] stainless steel cars.”

The Taubaté plant has now 1,000 cars in the backlog. “The unit is going from zero production to the start of assembling later this year or in early 2023,” Mr. Boccaccio said. The company will invest €10 million to prepare the plant and hire 850 people. Alstom’s headcount is 800 now.

Marcopolo Rail, a Brazilian newcomer, was created during the crisis. The rail division of the traditional bus maker started to operate in 2017 and has bet on passenger niches. The company will supply the trains for the so-called People Mover, a system that will link the terminals of Guarulhos International Airport. Petras Amaral Santos, Marcopolo Rail’s business head, said that during the pandemic the company invested in light rail, and there is already an equipment operating in Bento Gonçalves (Rio Grande do Sul) and deals secured for 2023.

Mr. Santos believes that there is space for every type of passenger vehicle, and that each city will have to choose the best solution according with its demand. “We lack good projects,” he said. “If the study is well executed, there will be financing, and the project will be feasible.”

Being part of a large group makes it easier for the division to face the downturns in the sector and to get better prices with input suppliers. In addition, the objective is to take advantage of Marcopolo’s international structure to export, especially to neighboring countries in Latin America.

Asked about competition from Chinese companies, Mr. Santos summed up the sector’s prevailing assessment. “Which country do we want? We have to think about that. We want an industrialized country.”

*By Carlos Prieto — São Paulo

Source: Valor International

https://valorinternational.globo.com/