Selling the Shinkansen Overseas: What Are Japan’s Chances?

Countries around the world are planning to construct high-speed rail networks, and the competition to win their orders is heating up. Japan, justifiably proud of its Shinkansen bullet train system, is an energetic competitor, but sparks are now flying as China and European countries have entered the fray. Just when it seemed to be coming Japan’s way, the order for a high-speed rail line in Indonesia went to China in September 2015. The administration of Prime Minister Abe Shinzō is doing its utmost to export rail infrastructure, but the task is certainly not an easy one.

A Successful Indian Sale

In December 2015 Japan closed a major Shinkansen sale to India. Abe and his Indian counterpart, Prime Minister Narendra Modi, concluded an agreement for a 520-kilometer section linking India’s largest city of Mumbai with the industrial city of Ahmedabad. Construction on this first line to be built by India’s High Speed Rail Corporation is scheduled to begin in 2017 and finish in 2023. The total cost will be about 980 billion rupees (about ¥1.8 trillion), with about ¥1 trillion covered by a low-interest yen loan from Japan.

This is the second time for Shinkansen technology to be exported overseas, the first having been for a high-speed rail line in Taiwan, which opened in 2007. Countries including Vietnam, Malaysia, and Singapore also have plans to construct HSR lines, and global suppliers of rail systems are already jockeying for their orders. As Associate Professor Jimbo Ken of Keio University notes, “The outcome of competition between China and Japan to win Asian rail orders is going to attract attention this year as well.”

Last year Japan made up somewhat for its loss to China in the bidding for an HSR line in Indonesia by securing the Indian order. India has further rail plans, and Japanese companies are hoping to maintain the momentum of the 2015 victory into future bids as well. In reality, though, it will not be so simple. A Chinese consortium and consulting companies in France and Spain are conducting feasibility studies for the other routes, and the Indian government appears to be considering the option of distributing the routes among various Asian and European bidders.

Brisk Demand Centering on Asia

Why is the global railway business stirring to this extent? For one reason, demand for urban transportation systems capable of carrying large numbers of passengers is on the rise, especially in Asian countries, where urbanization is advancing at a rapid pace as a result of economic development. The construction of railway infrastructure, both urban and longer-distance, is essential for people’s lives and economic growth.

The “big three” names in the global railway business are Canada’s Bombardier, Germany’s Siemens, and France’s Alstom. But China, which has leapt to the top spot in the world in terms of the total length of laid lines, is eager to boost exports as well. National projects like HSR construction involve huge monetary outlays, so governments take many things into consideration when selecting who gets the order.

In the case of the railway in Taiwan, initially a consortium of French and German companies received the order. On September 21, 1999, however, a large earthquake hit central Taiwan, and attention turned to quake-resistant technology for HSR systems—a key reason for the adoption of carriages and signals made in Japan, with a proven track record in this area. In India, too, although Japan has managed to win the contract this time, this is no guarantee of follow-up business. Prime Minister Modi will likely use the bidding for planned routes as a bargaining chip in negotiations with other countries.

China’s Come-from-Behind Victory in Indonesia

In the race for Indonesia’s HSR order, both China and Japan conducted “top-level” sales campaigns, with national leaders playing key marketing roles. In September 2015, though, Japan lost out to China at the last minute. The plan to construct a first-phase Jakarta-Bandung section (about 140 kilometers) and a second-phase Bandung-Surabaya section (about 590 kilometers) was a national project that surfaced at the time of the administration of President Susilo Bambang Yudhoyono. A Japanese consortium had taken the lead, but later China launched a fierce challenge. In the final stages, the plan was temporarily returned to square one after President Joko “Jokowi” Widodo reportedly said that instead of high-speed trains, medium-fast trains running at 200–250 kilometers per hour would be quite adequate. After that, all of a sudden, Indonesia was leaning toward China.

Various reasons have been cited for Japan’s defeat, but what is clear is that China, in accordance with the wishes of the Jokowi administration, made a new proposal for lending construction funds so as not to financially burden the Indonesian government. Japan, in contrast, did not submit any amendments to its plan and was finally pipped at the post.

Experts have pointed out that Japan lost in the end because of the cost difference. Japan had been making proposals since several years ago, but then China, a latecomer to the race, submitted the same specifications and claimed it was capable of providing a rail system with the same level of safety as Japan. China managed to woo Indonesia with conditions that were more appealing than Japan’s. Furthermore, overseas Chinese have a significant influence in Indonesia, and the changeover to the Jokowi government seems also to have worked to Japan’s disadvantage.

Safety and Performance vs. Cost and Delivery Date

The Shinkansen, which celebrated its fiftieth anniversary in 2014, has operated without any fatal accidents so far, and the Japanese Ministry of Land, Infrastructure, Transport, and Tourism has advertised it as an excellent railway system in terms of safety, reliability, energy efficiency, and eco-friendly performance. However, the financial situation and state of social infrastructure in countries considering introducing the system are varied. While the Japanese side might trumpet the system’s world-beating safety and punctuality track records, the other side may well retort that some delays are permissible if they mean a cheaper system.

One Japanese engineer stationed overseas emphasizes that technical ability and quality are a separate matter entirely from success or failure in business negotiations. Regarding Japan’s defeat in Indonesia, he says, “Japanese engineers enjoy enormous trust overseas, and Japan’s technical strength and performance capabilities are rated very highly. But compared with competitors like China and South Korea, they are not business-minded people.”

China Benefiting from AIIB Influence?

China is now Japan’s biggest rival in HSR exports to Asia. Under the “One Belt, One Road” concept, an economic and foreign policy aimed at expanding China’s influence overseas, the administration led by President Xi Jinping is accelerating the export of such infrastructure as high-speed rail, roads, and bridges. China’s HSR system itself incorporates Japanese technology and parts, so it differs little from Japan’s in terms of comfort and convenience. Consequently, the low costs and short construction periods proposed by China become major selling points.

In order to strengthen its international competitiveness, China has reintegrated two state-run railway carriage makers that it previously split up. In addition, the presence of the Asian Infrastructure Investment Bank, which was founded on China’s initiative, cannot be overlooked either. The Chinese government has repeatedly said that the AIIB is not a Chinese bank. But if the bank’s presence expands in the future, we will likely see the emergence of a new international financial order and increased Chinese influence in Asia’s emerging and developing economies.

Next Battleground in Thailand?

Following Taiwan and India, Japan’s next hope for exporting the Shinkansen system is Thailand, which is planning to construct an HSR link between Bangkok and Chiangmai (about 670 kilometers), a huge project costing a total of ¥1.6 trillion. According to media reports, the Thai government concluded a memorandum with Japan for the introduction of the Shinkansen in May 2015. A final contract has not yet been signed, though, and there is a strong possibility that Japan will end up one of multiple partners in a joint project.

In Singapore and Malaysia, there is a plan to construct a high-speed rail line across the Malay Peninsula (about 350 kilometers), linking the capitals of the two countries in around 90 minutes. As well as Japanese, Chinese, and South Korean companies, French and German firms are showing an interest.

Since various political factors are intertwined, the outcome of large-scale projects involving the construction of HSR links is not going to be plain sailing. Japan will not win orders every time by any means. But on the basis of the know-how and achievements accumulated so far, one hopes that Japan, as an advanced high-speed rail country, will display a little more aggression in the railway business.

(Originally published in Japanese on January 27, 2016. Banner photo: A Taiwan HSR train departs from Taichung Station in November 2011. © Jiji.)