The sale of Vossloh Locomotives to Chinese state actors: risk or mutual opportunity?

In August 2019, the German firm Vossloh announced that it was planning on selling its subsidiary Vossloh Locomotives to Chinese firm CRRC Zhuzhou Electric Locomotive Co., Ltd. (CRRC ZELC). CRRC ZELC is a subsidiary of China Railway Rolling Corporation Ltd. (CRRC). The majority of CRRC shares are held by the State Council of the People’s Republic of China through a complex system of corporate governance, involving several layers of state-owned enterprises (SOEs). Additionally, the CRRC is also a key company in the Made In China 2025 and Belt and Road national initiatives of the Chinese government.

Vossloh Locomotives is based in Kiel, Germany, and is specialised in production and repair of diesel-electric. The firm has established itself as a key producer in the European market of diesel-powered locomotives ever since its establishment in the late 1800s. Now, the locomotive manufacturer has been sold to the largest rail-vehicle manufacturer of China, CRRC ZELC, which is mainly active in the Chinese market.

A Road to New Opportunities

The Chief Executive Officer of the German firm, Oliver Schuster, referred to the acquisition as an “extremely important milestone” as it would lead to new opportunities in the development of new products and further innovation. Vossloh Locomotives would be in need for new innovative input to keep up with the rapidly advancing competition.

Vossloh Locomotives has not been the first unit of the Vossloh transportation branch to be sold to another firm. A few years prior, in 2015 and 2017, two other units, Rail Vehicles and Electrical Systems, have been sold to new (non-Chinese) owners. The acquisition of the Locomotives unit marks the sale of the last remaining branch of Vossloh.

The deal brings fresh opportunities for both partners, as it allows Vossloh Locomotives to develop new products and boost innovation, and the Chinese acquirer to gain direct access to the European market, an important strategic goal the company had been struggling with for years.

Access to the European Railway Market

Even though CRRC ZELC is a core player in the rail-vehicle manufacturing industry in China, the company has faced difficulty engaging with the European market. The firm has, previously, provided shunting locomotives to German Rail (DB) and Rail Cargo Hungaria, and supplied Sirius EMUs to Leo Express, Czech Republic. Aside from these ventures, the firm has not been able to successfully enter the market.

For European providers of railway services, expanding within and between EU nations is relatively easy, as the European market for railway operators has been completely liberalized. European railway operators are permitted to be active within and between other EU nations. The aim of liberalization is to grant the market fair and open competition. However, this is does not apply to non-EU firms which have increasingly faced more stringent regulations.

Entry Restrictions for Chinese Firms

The European Commission enforced the “Guidance on the participation of third-country bidders and goods in the EU procurement market”, which included the provision that Chinese operators may not access the necessary acquisition procedures, and could therefore be blocked from any tenders. Chinadoes not have the bilateral agreements with Europe which would be necessary for such access, as China itself does not assure mutual opening of the acquisition market. Following the Vossloh Locomotives acquisition, the Association of the European Rail Industry (UNIFE) took it a step further and demanded more restrictions on Chinese firms aiming for the EU market, warning against the negative influences that Chinese enterprises could have on fair competition within the European market.

Given that the barriers to entry for inter-EU operations decreased, while the barriers to entry for Chinese activities in the EU have increased, the acquisition of Vossloh Locomotives by CRCC ZELC is a significant strategic move for gaining access to the EU market without any restrictions, via an acquisition of a preexisting European firm with free access to expand across the EU.

A Potential Block by the German Government

Before the acquisition took place, the German government was expected to block the merger when the German Federal Cartel Office expressed its concerns and started an investigation into the acquisition. The government considered the block based on foreign trade and investment regulations. The concerns were mainly rooted in the fact that the acquirer is largely owned by the Chinese government, and led to uncertainty regarding the associated risks. Particularly, the risk of state influence could harm fair competition, as CRRC ZELC has continual access to government funding and technological resources. Aside from state funding, the threat of price-dumping strategies also sparked concern among German officials.

The Final Approval

Ultimately, the Office conducted an elaborate risk-assessment regarding the acquisition and internally concluded that there was no reason for blocking the acquisition. Even though the merger might cause an imbalance in competition, given the CRRC’s state-backup, it would level out with the fact that Vossloh Locomotives itself has been losing competitiveness for years. Relatedly, the Office concluded that the suspected risks government involvement would not necessarily materialized, when weighed during the risk assessment. Hence, on April 27, 2020, the German Federal Cartel Office gave its approval of the acquisition. The sale became completely effective on May 31.

Through this acquisition, Vossloh Locomotives hopes to regain competitiveness through innovation and the development of new products guided by the new owner. Likewise, CRRC ZELC has allowed itself to gain better access to the European railway market by means of this acquisition and is a step closer to expanding abroad.