Rail Deal Siemens on Track to Supply U.S. Trains

As America's love affair with the car wanes amid environmental and congestion concerns, California is building the country's first high-speed rail system. Germany is pulling out all stops to get the contract.
A model of the high-speed line to Los Angeles.

People are standing in line in front of a wooden train model, emblazoned with the words "connecting cities at 220 miles per hour!"

Siemens has set up this life-sized model of a high-speed train in the Californian capital, Sacramento, one of the hub cities in the first segment of California's planned high-speed rail system.

"Fantastic, fantastic," says Sacramento retiree Bob Hobza, as he inspects the driver's cabin and tries out the seats. "This is the future."

California is set to begin initial test runs of the service in two years' time. Operations on the first section are expected to start in 2022, and by 2029 Americans will be able to travel from either Sacramento or San Francisco to Los Angeles in less than three hours.

The entire project comes at an estimated cost of $68 billion (€61 billion).

The California High-Speed Rail Authority is currently accepting bids for the first locomotives.

Potential providers like Siemens, Alstom, GE and Chinese and Japanese companies stand to earn $1 billion for the first 15 trains, with potential orders for another 80 trains down the line.

Siemens will be a strong contender in the bidding process. Jeff Morales, CEO, California High-Speed Rail Authority

"Siemens will be a strong contender in the bidding process," said Jeff Morales, CEO of the CHSR. "We lag behind the rest of the world when it comes to high-speed trains, but that's changing now."

It's a curious turn of events for California, a state many associate with self-driving cars made by Google and Mercedes, or the Hyperloop, a futuristic tube train envisioned by Elon Musk, the founder of electric-car pioneer Tesla and rocket-maker Space X.

CHSR was also interested in the Hyperloop idea. "We met with Musk's team," said Mr. Morales, "but the technology is purely theoretical. We sent them on their way with some good advice."

According to Mr. Morales, self-driving cars would not compete directly with a high-speed rail system, as fully automated driving would only be implemented in urban areas at first.

The high-speed rail system, however, solves a transportation problem on a route totaling about 1,000 kilometers (621 miles), which could transport 290,000 passengers a year. "Otherwise we'll drown in traffic," said Mr. Morales.

California's population is projected to grow from 38 million today to 50 million in 2050.

In addition to overcrowding on the state's highways, the two major airports in both Los Angeles and San Francisco are operating at full capacity.

There are far too many flights operating between the two cities, says Julian Potter, chief administration officer at San Francisco International Airport. "Hopefully this train will be built soon," he said.

It's a surprising statement, at first glance, but air and rail are in fact not competitors. Short flights are costly and unprofitable compared to long-haul flights. Mr. Potter hopes to expand his airport into a hub for flights to China and other Asian countries.

Video: A glimpse of Siemens' high-speed train model in Sacramento.

The American love for the automobile is waning. "We Americans used to write songs about cars," CHSR chairman Dan Richards said. But he explained that cars are becoming less important to the younger generation, who prefer to live in cities and use public transport.

Passenger numbers are increasing on all current rail routes, and California has three of the nation's five most heavily traveled routes.

"We will never have the kind of rail system you have in Germany," said Mr. Richards, explaining that the country is simply too big for that. But, he added, there will be many changes at the regional level, including the possible expansion of high-speed rail from Los Angeles to Phoenix or Las Vegas.

Bullet trains are also in the works in other parts of the country. A Texas consortium is working with the Japanese export bank and the Central Japan Railway Company to bring a train based on Japan's Shinkansen bullet train to the state, which would reduce travel time between Dallas and Houston to only 90 minutes.

In Florida, a new railroad will offer a service from Miami to West Palm Beach in two years' time, but using fast diesel trains rather than high-speed trains.

Private funds are expected to cover about a third of the total cost, and interest among pension funds and banks has increased recently.

High-speed rail projects are not without detractors. Californians who live near the proposed routes are worried about the noise, while others are unwilling to relinquish their property. So far, CHSR has acquired 125 of the 1,100 properties it needs to build the tracks, including places where there are currently houses – the authority can take property owners to court and force them to sell.

Funding is currently the biggest challenge. Private funds are expected to cover $20 billion, or about a third of the total cost.

According to CHSR, interest among pension funds and banks has increased recently, now that California Governor Jerry Brown has provided the project with a lucrative and stable source of revenue: A quarter of the proceeds from the state's CO2 trading system – with no time limit on the funding.

In California, which has the most stringent emissions regulations in the United States, emitters are required to buy CO2 certificates on the market. CHSR received $250 million from the CO2 emissions fund in 2014, and revenues could increase to several billion dollars this year.

Siemens is hopeful about the project. It would be the largest U.S. rail contract by far for the German conglomerate, and would bolster its international reputation.

Last Wednesday, Siemens sponsored a conference in Sacramento on the topic of high-speed rail, hosted by the Atlantic magazine. Michael Cahill, president of the Siemens rail systems division in the United States, gave the opening speech. Mr. Richards and Mr. Morales were sitting in the front row, together with several top CHSR officials who will be awarding the initial contract in late 2015.

"There is no doubt that Siemens is one of the world's top providers," said Mr. Richards, adding that he intended to take members of the California state legislature to Germany for a demonstration of the advantages of high-speed rail.


The author is Handelsblatt's New York bureau chief. To contact the author: [email protected]