- May 8, 2012
- Posted by: matt
- Category: Archived Newsletters
Buy American and Regional Development: Emerging Opportunities in Rail Transportation
When President Obama entered office and subsequently devoted a large share of federal stimulus funds to high speed rail (HSR), long-time transportation advocates were ecstatic. Many projected a rail renaissance, where Americans would travel seamlessly and rapidly on high-speed bullet trains like those already operating in Europe and Asia. Fast forward to 2012, and many of those hopes seem far-fetched. Today, only one large high-speed rail projectâ€â€in California—is moving forward, and even that plan faces huge obstacles and opposition.
While these high profile HSR projects face some hiccups, the overall prospects for the rail industry are quite promising. The US freight rail industry Is booming, and is still the world’s largest freight market. Equally exciting is the emergence of new opportunities in the passenger rail industry. Several exciting trends are coalescing. Ridership numbers are rapidly rising. Between 1995 and 2008, ridership on commuter, light and heavy rail jumped 72 percent. Demographic trends suggest these patterns will accelerate. New USPIRG research shows that younger Americans have strong preferences for alternative transportation, including rail. Finally, new resources are being deployed to upgrade and expand rail infrastructure across the US.
The emergence of a revitalized rail industry is a good thing for residents and for business as it ensures that people and goods can move more easily. But, the benefits go further. The emergence of new demand for rail creates new opportunities for American manufacturing. After years of neglect, the prospects for US passenger rail suppliers are looking up.
Until the 1970s, the US was a leader in rail manufacturing, with world class firms producing locomotives, rail cars, rails, and other components. As US passenger rail investment dried up, US firms closed shop. Today, nearly every major rail manufacturerâ€â€with the exception of GEâ€â€is based overseas. These original equipment manufacturers (OEMs), such as Siemens, Bombardier, and Alstom, often operate large facilities in the US but they understandably focus more attention and resources on overseas markets.
Thanks to years of neglect, it’s difficult to speak of a cohesive US rail manufacturing industry. Firms bid on individual jobs, especially for light rail and other transit vehicles, but sustained opportunities have been lacking. Fortunately, change appears to be in the air. The states of California and Illinois have just announced a major joint rail car procurement that is valued at more than $550 million. Meanwhile, Amtrak is in the midst of a modernization program that is expected to invest several hundred million dollars per year in new and upgraded locomotives and rail cars.
These projects offer an unprecedented opportunity to help rebuild a strong American rail manufacturing capacity. The new procurements include provisions that require 100% domestic content. In other words, the cars and their components must be made in America. Some of this content is unique to the rail sector, but OEMs also purchase much that could be considered “dual use†(i.e. items like castings, wiring, lighting, and other fixtures). Many firms in other sectors, such as automotive or aerospace, could supply the rail market.
Rail procurements have long included strong domestic content rules. In fact, these rules are a primary reason why many foreign OEMs have located facilities in the US. Most US rail cars and locomotives now contain a minimum (if not higher) of 60% domestic content. Thanks to new rules, OEMs will now be expected to reach 100% domestic content. Getting to 100% domestic content is no simple task, and, when pressed, OEMs have previously requested Buy American waivers that allow them to use foreign suppliers when US suppliers aren’t available. However, these waivers are no longer available as the Federal Rail Administration has vowed to reject any such requests.
This is where new opportunities emerge. Leading global OEMs are pursuing huge new procurement opportunities but must develop a domestic supplier base for thousands of components, parts and supplies. Meanwhile, thousands of smaller American manufacturers are hungry for new business opportunities. The policy challenge? How to connect them!!
This is where a new initiative from the National Institute of Standards and Technology Hollings Manufacturing Extension Partnership (MEP) comes in. Its new Supplier Scouting effort builds connections between OEMs and new US-based suppliers. OEMs may lack the resources and capacity to find new suppliers, especially at lower tiers of their supply chains. MEP is in the business of working with these firms, and its national network worked with nearly 34,000 manufacturers last year.
This effort is just underway, with a number of regional Rail Connectivity Forums held in recent months. These events match OEMs with hundreds of potential suppliers around the US. Important new business linkages are being built. The Next Generation Rail effort was based on a successful pilot program with the Department of Energy where MEP succeed in finding new US suppliers for more than half of the requested products or services. Similar positive outcomes for rail are envisioned.
Supplier scouting and related programs are already creating new business connections, but they have also long term implications in terms of revitalizing American manufacturing. The rail industry in the US is already sizable. According to the Railway Supply Institute, it presently employs 90,000 workers in 650 companies, with $23 billion in revenues. But, it could grow even bigger. In 2010, Northeastern University researchers estimated that new investments in passenger rail could help create anywhere from 21,000 to more than 50,000 new manufacturing jobs.
These efforts also mean lucrative opportunities at the regional level as well. National groups, such as the Blue Green Alliance, monitor this industry, but few local efforts are underway. Regions with manufacturing clusters can and should seek to link local firms to these emerging rail opportunities. At present, only one such regional effort appears to be operating in the US. In New York, the Long Island Forum for Technology has created the Long Island Rail Suppliers Alliance. Meanwhile, in Europe and Asia, dozens of cluster organizations support rail and related manufacturing.
What else needs to happen to create a vibrant US rail manufacturing capacity? At the most basic level, sustained demand is essential. Suppliers won’t retool if each new procurement is an isolated one-time opportunity. New R&D funds and the development of new testing facilities are also needed so that suppliers can introduce new innovations into the industry. In addition, FRA and other key players should continue to support the work of the Next Generation Rail Corridor Equipment Committee which is developing new standards for new rail infrastructure. Finally, efforts to promote Buy American and Supplier Scouting must continue.
Supplier scouting and related efforts represent new types of demand-side innovation policies where governments use procurement, regulation, and standards setting as tools to nurture innovation. (To see a recent OECD compendium on demand-side innovation, click here.) These approaches are gaining traction around the world, and also have great interest across the Obama Administration as part of its broader advanced manufacturing strategy. The emerging partnerships around rail manufacturing will be an important test bed for these new innovation policy approaches.
(NOTE: EntreWorks Consulting is presently engaged in a rail manufacturing-related research project for NIST-MEP. We will provide further updates on this work in future newsletters and on the EntreWorks Blog.)
What’s New at EntreWorks Consulting?
Spring is a time for new beginnings, and it’s also meant kicking off some new projects for us. These include an evaluation effort for Harvest Foundation of the Piedmont (VA); an impact assessment of the Pipeline Entrepreneurship Program (KS/MO/NE), and strategic planning assistance for the National Association of Community College Entrepreneurship.
We continue to provide more regular news and updates at the EntreWorks blog at http://entreworks.net/blog. Recent postings have included some mini-book reviews, a look at economic mobility patterns, and assessments of several new entrepreneurial development programs. You can also access blog updates at our Facebook page.
In addition, we’ve updated our website library with some new reports from our annual research and development evaluations in Maine. You will also be able to find us at upcoming speaking and training engagements in North Carolina, Virginia, and Connecticut. Look to our blog for these updates. Hope to see you on the road!