Deal on new rail cars embroils SEPTA in U.S. suspicions of China manufacturer

SPRINGFIELD, Mass. — An order for new Regional Rail cars is putting SEPTA in the middle of the U.S. trade war with China.

In 2017, SEPTA awarded a contract to CRRC MA, which has a factory in Springfield, to build 45 multilevel cars to replace those dating to the Nixon era. SEPTA is paying $138 million, about $34 million less than the nearest bidder sought. The first cars are scheduled to arrive in 2020.

CRRC MA is a branch of China Railway Rolling Stock Corp., a company owned by the Chinese government. The company’s practice of bidding significantly below competitors caught U.S. legislators’ eyes, and in September, the House passed a military spending bill that makes it significantly harder for CRRC to do business in the United States.

Lawmakers say the company poses an economic and security risk to U.S. interests and shouldn’t be building critical parts of U.S. infrastructure. The bill, which still has to pass the Senate, wouldn’t be retroactive, so SEPTA will get its cars regardless. But the concerns put Philadelphia’s transit agency in the awkward position of doing business with a company that legislators in both parties want exiled.

“We know that, for China, the boundary between commerce and national security has effectively been washed away,” said Scott Kennedy, senior adviser and trustee chair in Chinese business and economics at the Center for Strategic and International Studies in Washington.

CRRC is just one source of friction in an economic struggle between the U.S. and China, which is seeking to become a dominant international power. State-owned enterprises are only one way China’s policies make it harder for U.S. companies to do business there than it is for Chinese companies to operate here, said Rep. Harley Rouda (D., Calif.), a member of the House Committee for Transportation and Infrastructure.

“It’s really about that a strategic industry that is critical to the national security and defense of our country should not be up for purchase by foreign governments," Rouda said. “The end product is controlled by a Chinese state-sponsored enterprise, which is more or less one and the same with the Chinese government.”

The action in Washington was a surprise to Jia Bo, president and chairman of CRRC MA, who said his company is not unfairly benefiting from support from China and complies with U.S. rail manufacturing standards that require 70% of components by fiscal year 2020 to come from U.S. sources. CRRC MA is being punished by poor Sino-American relations, he said.

“Right now we are definitely a victim of those relationships,” he said through a translator. “I was very surprised. I was not anticipating this.”

A state-owned enterprise such as CRRC allows government to more directly control employment and production, said Marshall Meyer, a professor at the Wharton School and University of Pennsylvania’s Center for the Study of Contemporary China.

“Social stability is a priority,” he said.

CRRC can benefit from state-sponsored advantages that could be valued in the billions of dollars, congressional staff said, potentially allowing the company to offer rail cars at artificially low prices.

The company’s U.S. branches have won contracts in Philadelphia, Boston, Los Angeles, and Chicago, and in each city its bids were by far the lowest.

“We see CRRC winning contracts by a pretty substantial amount,” said Mike O’Malley, president of the Railway Supply Institute, which represents 200 U.S. rail car designers and manufacturers. “It’s undermining the ability of private companies to compete in the marketplace.”

» READ MORE: Boston is testing Chinese train cars, and SEPTA is watching

Making a profit may not be the priority for China. The nation’s Made in China 2025 economic strategy proposes achieving Chinese dominance in part by emphasizing innovation and a more aggressive stand on international competition, according to an April report from the Congressional Research Service.

Rail car manufacturing supports 125,000 U.S. jobs and generates $74 billion in gross domestic product, RSI reported in a letter to Congress. There’s concern that CRRC could threaten those jobs.

“There is definitely this sense that China is not playing by the same rules,” said Christopher Balding, an economics and finance expert at Fulbright University Vietnam in Ho Chi Minh City.

CRRC’s low bids are possible because of revenue from business elsewhere in the world, not Chinese subsidies, the company’s executives contended. In previous interviews, Bo has said savings also come from design work done in China, existing relationships with suppliers, and shared expenses among its other U.S. rail projects.

“The North American market is one of the growing markets right now,” said Vincent Conti, CRRC MA’s director of business administration, and CRRC is following the playbook of anyone trying to be competitive. “Typically, how did they get into the market? They bought their way in.”

SEPTA, meanwhile, sees CRRC MA’s business model as a win for its customers.

“We always think it’s better to have more options when you’re going out and making a rail car purchase,” said Andrew Busch, a SEPTA spokesperson. “The more competition, the better we’re able to do by our taxpayers and the fare-paying riders.”

Rouda rejects the idea that CRRC MA is not unfairly benefiting from subsidies.

“The Chinese government is underwriting the cost of producing these,” he said, “at the expense of those working under a fair market system.”

The legislation would bar federal funding for public rail car purchases from Chinese state-owned enterprises. The law, which is endorsed by the White House, would not ban CRRC from doing business in the United States, but because public transit agencies can’t afford expensive car purchases without federal help, CRRC’s U.S. operations would struggle to remain viable. SEPTA, for example, relied on $40 million in federal money to make its purchase.

In testimony before Congress, experts also proposed that electronics on the cars could be used to spy on Americans or sabotage trains. Train cars include cameras, automatic controls, and passenger counters that some fear could be breached by the Chinese government.

Balding thinks the fears are legitimate. Chinese companies’ attempted acquisition of a money transfer company, the dating app Grindr, and a mobile marketing firm have been blocked or opposed by a government panel that oversees foreign acquisitions of U.S. companies over concerns that data could be used by a foreign government, Reuters reported.

“It’s one of those things where you need to look a lot more closely,” Balding said. “The level of electronics going even in a car, much less a train, is astounding.”

Others doubted that the rail cars pose a risk.

“There’s much better ways for them to get intelligence if they want to,” Kennedy said. “I just think the technology itself doesn’t avail them the opportunity to do that.”

» READ MORE: SEPTA approves contract for new rail cars

CRRC executives at an assembly plant in Springfield took pains to demonstrate that they could not insert surveillance equipment or sabotage a train car. Electronic components related to train control, brakes, and communication are subcontracted to U.S.-based, European-owned companies. A German company, Siemens, is providing the electronics for SEPTA’s cars. And the software is proprietary, Conti said, and can’t be accessed remotely.

The manufacturer is considering hiring a third party to conduct security checks on all cars before they’re delivered, Conti said.

CRRC’s customers also are taking security precautions. The Massachusetts Bay Transportation Authority is using a military standard in its cybersecurity analysis and is conducting an independent security review of its cars. SEPTA will do the same, Busch said. The new cars will use a WiFi system already vetted for use on existing SEPTA vehicles, and when the cars are delivered, they will be subject to independent testing.

The Chinese flag flies alongside the Stars and Stripes at the gate of CRRC’s $95 million facility in Springfield. Inside, the assembly floor is spotless, and train cars’ bare steel gleams as workers install doors, seats, and electronics.

The cars are bound for Boston, among the first of 404 vehicles that MBTA bought from CRRC, which is based in the Boston suburb of Quincy. The Philadelphia cars were originally supposed to arrive this year, but SEPTA’s concerns with original welding designs and a desire to test the first cars in China pushed back the arrival time.

The hollow steel shells at the two-year-old plant begin their lives in Changchun, a province in the northeast of China. SEPTA staff are there now, overseeing construction and testing on two pilot cars.

When the shells are complete, they will be put on ships at Dalian, on the Yellow Sea, and traverse two oceans to the ports of New York or Newark, and then ride by truck to Springfield.

Eventually, 40 cars at a time will be under assembly there, providing work for nearly 300 employees through 2026 in a city where nearly a quarter of families live in poverty.

“They have benefits, vacation time, holidays,” said John Scavotto, a business manager for the local sheet metal workers union. “We don’t get that in the building trades.”

Debate continues over whether the proposed legislation is needed. Kennedy, the China expert from D.C., argued that Congress didn’t need to address Chinese state-owned enterprises in law. There are already options through the courts, Department of Commerce, and World Trade Organization to challenge anti-competitive practices.

Rouda countered that China’s intention to dominate international trade and the possibility that CRRC’s bidding practices could shutter other rail car manufacturers require action.

“If there were ever hostilities, you have to make sure you have control of your infrastructure and a potentially hostile government does not,” he said.

Penn’s Meyer, meanwhile, sees CRRC as just another entrant in an industry already owned by foreign companies. All U.S. passenger rail vehicles are manufactured by foreign-owned companies, though they have assembly facilities in the U.S. and rely on U.S. subcontractors for components. Focusing on a Chinese company is good politics, he said, but distracts from the United States’s overall retreat from manufacturing.

“What to me is not understandable is the reluctance to face up to the underlying problem,” he said. “Why aren’t we competing?”