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Historically rail transport systems in Europe have been running as per national standards through the monopolistic and vertically integrated state owned operators. Most of the railway network in Europe is designed for different technical and operational standards of the member states, which makes it impossible or expensive for rail transport across borders. With a vision of achieving a single European railway network, in 1991, the European commission adopted a policy of revitalizing the railway sector to harmonize the technical and operational standards across the member states. This policy promotes a single set of Technical Specifications for Interoperability (TSIs)todefine common railway system architectureanda common approach to railway safety management. The long-term objective of such a policy is to open up the rail passenger and freight market for competition and promote the rail transport as sustainable means of transportation. The future of the rail supply industry in Europe is linked to the creation of sustainable transport system, which can only be achieved by increasing the competition in the industry to provide cost effective solutions. Harmonization of the railway networks in Europe will be one of the important driving forces in shaping the rail supply industry in Europe.
This paper analyses the current structure of the German rail supply industry and how the industry may evolve given the current drive for interoperability through harmonization of standards and technologies. The policies of interoperability were conceived during the early 90s, but the impact of such policies are yet to be seen due to the lack of co-ordination between the manufactures, the regulatory mechanism, insufficient funding and the political will. Though the rail supply industry of Europe is in favour of achieving the common technical standards, the resulting market dynamics due to the common European market remains unanswered.
The purpose of this paper is to analyse the effects of harmonization of railway infrastructure in Europe on the rail supply industry in Europe with focus on Germany. Various directives and regulations of European commission have set off a series of dramatic changes in the European railway sector. The liberalization process has seen unbundling of the vertically integrated state owned operators. The directive of interoperability is enforcing the member states to transition from the existing signalling systems to common rail traffic management systems across Europe. Besides the control systems, there is significant thrust by the European commission to harmonize the technical and operational standards of the other components of the railway infrastructure like the tracks, electrification, power supply substations etc. These would render common product characteristics across the infrastructure segments with some exceptions in the stations and tunnel construction as the nature of these requirements varies depending on the local needs and resource restrictions and also these components doesn't contribute to the desired interoperability. Thus the harmonization process would increase the size of the accessible market for companies in rail supply industry. Hence harmonization is bound to have a significant effect on how the industry is structured and the competition within the industry.
The German railway infrastructure is the key component of the entire railway transport industry, where in the state owned operator and Logistics Company, Deutsche Bahn AG owns the entire infrastructure. Deutsche Bahn AG (DB) has a monopoly on the upstream of the value chain of German railway industry and at the same time DB exists as a monopsony at the downstream of the value chain. Thus, DB is a single buyer of the infrastructure services and products with very high bargaining power over their suppliers. The processes of harmonization and liberalization in the European railway sector have been shaping the complete value chain of industry. The increasing competition among the railway operator has brought in many benefits to the consumers and also to all other stakeholders involved in the industry.
The German rail supply industry is highly fragmented with small to large companies involved in different segments of infrastructure services. The Fragmented nature of the industry has given rise to aggressive competition in the industry with many large players trying to claim their stakes in the market. The presence of only a single buyer, Deutsche Bahn, has defined the competition as price oriented, with many infrastructure companies trying to innovate on the technology and process to provide the infrastructure as per the national standards and at lower costs. This paper will discuss the benefits of the standardization in the industry and would also discuss how the rail supply industry in Germany may restructure to the changing market dynamics once the single European market is in place for the railway sector.
Chapter 2 of this paper presents entire value chain of the German railway transport industry. This will be followed by the description of the key stake holders of the industry and the interaction mechanism between them. Further the analysis will focus on the railway infrastructure part of the value chain. The analysis in this section will try to evaluate the forces that drive the industry and the bargaining power of the decision makers.
Chapter 3 of the document discusses process of harmonization through the EU directives of interoperability and safety. The analysis here will try to explain the various regulation, time frames and governing bodies involved in the process. The discussion will also highlight the progress of harmonization and the issues and obstacles to achieving the desired targets of interoperability.
Chapter 4 will discuss the benefits of harmonization to the industry and chart out the current strategic environment of the German rail supply industry. This section will include a note on the key causal factors and actors influencing harmonization and will develop and discuss few scenarios as to how the industry may evolve post harmonization of the railway infrastructure in Europe in general and Germany in particular. The analysis in this section will draw inferences from the views of some opinion leaders and academics who are involved with the industry.
Finally the conclusions of the study will be presented in the chapter 5 which will summarize the findings and hypothesis of chapters 3 and 4 respectively. The conclusion will highlight the limitations of this research paper and will also suggest further research options concerning the rail supply industry.
2. The Value chain of German Railway Industry
2.1. Over view of value chain
The German railway industry is composed of various players along the value chain. A brief overview of the Railway industry value chain is as shown the figure1.
The first link in the value chain of German railway industry is the infrastructure construction, which includes the building and maintaining various infrastructure components that support the railway network. The infrastructure components can be track, electrification, power supply substation, electro mechanical works, signalling and command control, railway stations, maintenance and upgrade of tracks and public announcement, displays, ticketing devices etc. Many private companies as well as the subsidiaries of DB are active in this part of the value chain.
The second component of the value chain is the infrastructure management, which is driven by many stake holders, but is controlled mainly by DB Netze, which owns the complete mainline and high speed railway network in Germany. The infrastructure for the urban transport is usually owned by the urban transport operators. The governing bodies like Federal Railway Authority of Germany and the Public Transport Authorities of the various states are the key decision makers for infrastructure management.
The most important component of the value chain is the network operation and logistics. This segment of the industry caters to the rail transport market, by providing services to the end customers. The main players in this segment are the Deutsche Bahn, which is a monopoly with around 85% of market share in Germany. The liberalization process has led to the advent of few private operators, who lease the infrastructure from the DB Netze. The urban transport operators are active players in the metro/ tram segment of the railway transport market.
The last link of the value chain includes the end customers, which is constituted of both the passenger and freight transport market. Customers are the central focus for the various reforms in the industry as the growth is dependent on the ability of the industry to provide the transport services at affordable prices in comparison with other alternatives like road and air transport. The details of different segments of the rail transport market and the related statistics are provided in Appendix 1.
As seen from the figure 1, the intensity of the competition increases as we move up the value chain from the network operators to the infrastructure suppliers. The process of liberalization has induced competition amongst the operators, but the very high sunk costs involved, have erected a strong barrier for new entrants. Further up the value chain, there are many players involved in infrastructure management and infrastructure construction due to the attractive market size. Though the liberalization process has contributed to the opening up of this market, historically many small and big players are involved in this part of the value chain leading to an increased competition.
2.2. Key players of German railway infrastructure management
To understand the rail infrastructure industry in Germany, It is essential to understand the various stakeholders in the industry and their contribution and importance in driving the market dynamics. Figure 2 is a schematic of the industry structure with a focus on infrastructure management.
2.2.1. European Commission
European Commission is a governing body which is one of the important demand drivers for the infrastructure market. The federal and local governments of the member states in the European Union are obligated to adhere to the regulations and policies devised by European Commission. European commission reviews and responds to the transportation needs of the member states of EU, which has the construction of modern, safe and integrated railway network in Europe as priority to fuel the growth of intra and international trade among the EU members. Hence, the reformatory regulations and their periodic reviews lie within the gamut of European commission's functions.
European Commission has set up the European Railway Agency (ERA) to oversee the creation of integrated European railway network by enforcing and implementing safety and interoperability through standardizations and harmonization. ERA works as a coordinating body between the railway sector companies, national authorities, European Commission and other concerned parties. ERA's main task is to develop common technical standards and approaches for the European railway systems and infrastructure. ERA is also the system authority for the implementation of the European Rail Traffic Management Systems (ERTMS) project.
Source: Adapted from the article separation of operators from infrastructure
The German government oversees the overall transport sector through the Federal ministry for Transport, Building and Urban affairs. The Federal Railway Authority (Eisenbahn Bundesamt: EBA) is the supervisory authority for 30 railroad traffic operators and for 5 infrastructure companies - mainly for the Deutsche Bahn AG. The functions of EBA include issuing licenses for infrastructure companies, providing investments and funding for infrastructure projects, making railroad access discrimination free, facilitates innovation within the accepted safety standards, ensures value creation for customers and also checks for unfair competitive practices.
The supervisory authority of the urban transport lies with the 31 Public Transport Authorities (PTA) in the different federal states of Germany. The duties of the PTA are similar to those of EBA, but within the context of urban transport. PTAs work in conjunction with EBA for the infrastructure planning and funding activities at the local level.
The political decision makers own the responsibility to define the legislative framework to fully integrate the European railways, in terms of enhanced market access, interoperability and safety rules. A sound legislative framework that works in tandem with the EU commission is expected to accelerate the harmonization process.
2.2.3. Network Operators/ Owners
In Germany most of the mainline and regional rail networks infrastructure are owned and operated by the DB Netze AG , DB Regio Netz Infrastruktur GmbH, DB Station & Service AG, DB Railionand the DB reise und touristik , who are all directly owned by the Federal Government.
The DB Netze AG is responsible for track installations, coordination of network usage time tables and pricing. The DB Station & Service AG operates, maintains and develops the passenger stations and also ensures the provision of services to travellers and railway undertakings. The DB Regio Netz Infrastruktur GmbH is responsible for local and regional traffic operation and infrastructure management. DB Railion is responsible for operation of freight traffic and DB Reise und touristik is responsible for long distance traffic operation. Besides these many new private traffic operators like Veolia Transportation, TX logistics, AKN Eisenbahn AG, Ostdeutsche Eisenbahn GmbH, S-Bahn Hamburg GmbH, etc have entered the German railway market.
Railway operators are responsible for improving the quality of services in terms of information accessibility, customer comfort, reservation and ticketing, network accessibility, availability of services, punctuality and reliability. The infrastructure managers or the network owners are responsible for optimising the capacity utilization of the available network infrastructure; ensure fair and non discriminatory access to network for all railway undertakings and also to ensure operational efficiency and safety.
2.2.4. Infrastructure providers
Infrastructure providers are the companies that supply the railway transport industry with various infrastructure services like the rolling stock, track, electrification, maintenance etc. The infrastructure providers can also be termed as rail supply industry focused on the infrastructure development as per the standards and regulations set by the other stakeholders listed above.
The rail supply industry is responsible for organising themselves to provide the ready to use equipment and infrastructure needed by the railway undertakings and infrastructure managers. The research and development of new products to promote the process of harmonization depends on the capabilities of rail supply industry.
2.2.5. Associations and Organizations
Many organizations and agencies of the railway industry in Europe work closely with the EU and the national governments of the member states to support and promote the rail transport by setting technical standards and promoting fair competitive practices in the industry. Some of the important associations and agencies that are relevant to the rail supply industry are UNIFE, ERRAC, UITP, UIC, CER, EFRTC etc. Details of these associations are provided in the Appendix 2.
2.3. Overview of German rail supply market
Worldwide, total rail supply market volume exceeds € 120 bn. Of which, the size of the rail supply market in Germany is estimated to be around € 6.3 bn. Based on the railway network type and usage characteristics, the rail supply markets can be further classified as High speed and very high-speed lines, conventional and regional rail lines and the urban rail transport networks. While Deutsche Bahn is the single customer in the high speed and very high speed lines and the conventional and regional lines segments, the different public transport authorities are the customers in the urban rail infrastructure market.
- High speed and very high-speed lines: These are usually the rail networks that spans across the borders to enable faster connectivity across Europe. The high speed lines between the important cities within the country also fall into this category, as they have the future potential to be integrated with cross border traffic. In Germany, this segment is currently small in size and is expected to grow especially due to the increasing need of cross border traffic.
- Conventional and regional lines: These are usually referred to as main lines and consist of the rail networks that connect the different regions with in a country. So, the entire regional rail transport networks that support the intra train transport with in a country and the freight transport networks can be grouped into this category. Currently this segment is built and operated as per the national standards set by the Federal railway authority and the volume of this network is very huge and is highly heterogeneous and is also operationally underutilised.
- Urban rail networks: This market segment consists of metros and the commuter/sub urban rail networks which support the public transport with in a city. The product requirements within this segment can vary depending on the local geographical characteristics and funds availability. This segment is mostly independent of and incompatible with the other segments and so provides many avenues of differentiation for the companies that are active in this segment. As of now there are no regulations enforcing harmonization of these networks.
2.4. Structure of rail supply industry in Germany
The rail supply industry in Germany is classified into four segments namely; Rolling stock, Infrastructure, Signalling and control system and services. Figure 3 represents a schematic of the different segments of the German rail supply industry.
- Rolling stock: The products in this segment are characterized by all the vehicles that run on the railways like locomotives, railroad cars, coaches and wagons. Due to the high capital investments, this segment usually consists of large companies like Bombardier, Siemens and Alstom.
- Infrastructure: This segment is characterized by the infrastructure components like tracks, electrification and stations. Many companies with diversified products serve in one or more of the components of this segment.
- Signalling and control systems: The infrastructure components like the track side signal installations, on board control equipment, control stations etc are grouped as signalling and control systems.
- Services: This segment includes the service and maintenance for all the other segments. This segment also comprises the project management and turnkey solutions. In Germany most of the maintenance and project management is carried out by the subsidiaries of Deutsche Bahn.
2.5. Segmentation of the German rail supply market
Putting the rail supply market and the rail supply industry segmentation together will provide a complete segmentation matrix, which will help in the better understanding and analysis of the market. The segmentation matrix is provided in figure 4.
High Speed and very high speed lines
Conventional and regional lines
Urban rail transport lines
Signalling and control systems
Figure 4: German rail supply Market Segmentation matrix
In the above matrix, the shaded regions indicate an overlap of product and service similarities in the different infrastructure components and the market segments of the railway industry.
For a successful, larger and integrated Europe, the availability of efficient transport systems is essential for supporting sustainable economic growth and social development. Passenger and freight transportation by rail is a potentially effective instrument to combat congestion, pollution, global warming and traffic accidents. These negative externalities undermine the capability and efficiency of European economy and the health of future generations.
The growing European Union and the globalization of the world economy have necessitated an international transport market, to support the outpacing economic growth. Today, the rail sector faces an ever increasing demand of accommodating higher transport volumes, a result of transport growth, and of policies favouring competition in the sector. Rail transport in Europe is a future-oriented industry, striving to offer attractive, affordable, safe, clean, competitive and reliable transport mode.
Harmonization is the process of standardization of infrastructure components like types of track gauges, different types of power supply, speed control systems, train safety systems and technologies as well as the job profiles of drivers. The objective of harmonization is to achieve interoperability between the heterogeneous railway networks of the member states with in EU. Harmonizing products and technologies through innovation is a necessity for the rail supply industry to deploy its potential, and for its stakeholders to deliver cost-effective services for intermediate and final clients.
3.1. Need for harmonization
Prior to the formation of European Union, the railway systems in Europe were run at the national level and were managed and operated by vertically integrated state owned companies. These railway systems were designed under different national operational rules, policies and standards. This resulted in the lack of interoperability in the railway transport sector which hampered the goal of growth in European economy through increased trade activities amongst the member states. The EU thus envisaged a goal of unified railway transport network across the EU member states to promote the trade and thus foster the economy. This goal transformed into a number of directives and regulations to achieve a Trans European network.
3.2. Components of harmonization
To transition from the heterogeneous railway networks to a homogenised railway transport infrastructure across Europe, different components of harmonisations were evaluated by the European commission. European commission defined the homologation process in terms of interoperability, safety and signalling systems.
Interoperability of the rail systems renders a safe and uninterrupted movement of trains, while accomplishing the required and specified levels of performance. Interoperability rests on all the technical, operational and regulatory conditions that must be met in order to satisfy the essential requirements.
Interoperability has been mandated by several EU directives. The first one is the Directive 96/48/EC, which was passed in 1996 and is only concerned with the interoperability of the Trans- European high speed rail system. The second one is the Directive 2001/16/EC, which applies interoperability to lines within the trans-European transport network and other infrastructure facilities. Both these directives were later modified by the directive 2004/50/EC along with the corrigendum for the former directives. Most recently the directive 2008/57/EC was passed to include the community railway systems within the scope of interoperability. A consolidated history of regulatory framework evolution concerning interoperability in European railways is provided as Appendix 3.
To overcome the technical fragmentation of rail networks, the interoperability directives provided that the Community legislation is gradually establishing mandatory so called Technical Specifications for Interoperability, commonly referred to as TSIs. The European Railway Agency owns the responsibility to draw up and revise the TSIs, on the basis of inputs provided by the member states and other stakeholders of the railway sector.
Several subsystem constituents of interoperability of railway transport for both conventional and high speed lines are as below:
- Infrastructure( track works, tunnels, bridges and stations) and energy (electrification system)
- Operation and telematic application for passengers: related equipment and procedures to enable a coherent operation of different subsystems and also the requirements of professional qualification for the skilled labour involved in operations.
- Rolling stock: vehicle dynamics, superstructure, on board command and control system equipment, current-collection devices, traction units, energy conversion units, braking, coupling and running gear and suspension, doors, man/machine interfaces, passive or active safety devices.
- Maintenance: procedures and processes, technical documentation, related equipments, logistics centres for maintenance work.
Safety is one of the important components of the railway systems which is highly regulated at both national and EU level. Safety is one of the prime concerns of the customers of rail transport and hence there is a special focus on the safety standards which have to be designed in line with the interoperability directives. Hence common safety standards, practices and targets have to complement interoperability to successfully achieve the desired homologation of the trans-European railway network. The European commission issued many directives to mandate the safety methods to support the harmonization process. These directives include Directive 2004/49/EC, Directive 2007/59/EC, the directive on certification of train drivers and other relevant EU legislation.
ERA acts as a supporting organization to the European commission to develop the further implementation plans for the EU directives by networking with the national bodies of the member states. ERA has structured four different business sectors concerning railway safety and provides central support to the stakeholders involved in the complete process from formulation of regulation to implementation and periodic reviews. The four different segments are:
- Safety Assessment: developing common safety methods for risk evaluation and assessment and common safety targets according to articles 6 and 7 of the Directive 2004/49/EC. This unit assists each member state to define their safety targets and develop a methodology for calculating and assessing the achievement of those targets. This unit also collaborates to define safety requirements for TSIs and to support technical opinions to be given to European commission.
- Safety Certification: define, develop and evaluate implementation of common safety methods for certification of railway undertakings as well as certification for train drivers and authorization of infrastructure managers. The objective of this unit includes proposing a migration strategy towards a single Community Safety certificate.
- Safety Reporting: Monitors and analyzes the development of safety on Europe's railways and disseminates information, reports biennially on the safety performance of railways within the European Union. Functions also include developing and maintaining public databases of safety related documents such as safety certificates, licenses, national safety rules, investigation reports and indicators. Responsibility of coordinating with the national investigation bodies concerning safety and facilitating information exchange between them lies with this unit
- Safety Regulation: Functions include, validating the notification of national safety rules, register and notify the national safety rules accepted by the commission, analyze the way in which the national safety rules are published, maintain the communication protocol between the member states and the responsible organizations for railway regulation.
The command control and signalling systems is an important instrument that should also be harmonised to support the much required interoperability of the trans-European railway network. ERTMS is considered to be a first major step in fostering the creation of single European railway market. ERTMS would also address the increasing costs of operation due to the incompatible and obsolete signalling systems across Europe. Currently around 20 signalling systems are in place across Europe, most of which are adopted by the network operators of the member countries as stipulated by national standards. These different signal systems impose a restriction on the rail transport across the borders of the member states of EU, as the costs of incorporating compatibility with the international networks increases. A common standards and systems for intra as well as international rail traffic management in the EU member countries would enhance the attractiveness of rail transport making it affordable and environment friendly.
The idea of common traffic management systems for European railways was conceived during the late 1980s, but the process of drawing up technical specification was started during 1998, following the interoperability directive of 1996. The ERTMS specification was approved by EU in 2000, followed by which, between 2005 and 2008, the implementations plans were charted out for the six freight corridors across Europe and the memorandum of understanding was signed between the EU, member states and the other railway stakeholders. The implementation plan was devised considering the national implementation plans of the member states, which was then consolidated taking into consideration the priority for the freight corridors connecting different member states. The proposed completion of implementation of ERTMS across Europe is by the end of 2020. UNIFE and a consortium of railway signal equipment manufacturers are working closely with the European commission and the infrastructure managers of member companies for the development and implementation of cost effective technical solutions concerning ERTMS implementation.
3.3. Process of Harmonization
For successful harmonization of European railways, close cooperation of the institutional bodies, political representations and also commitment of the railway operators and rail supply industry are required. The harmonization and standardization process to achieve European railway interoperability can be grouped into two stages:
3.3.1. Directives to Standards
The directives of the European Commission are transformed into the TSIs by ERA, which are then validated against the standards requirement at the national and the EU level by relevant standardization organization like CEN, CENELEC and ETSI. At the end of this stage a detailed documentation of the standards, while adopting the TSIs are produced. Figure 5 provides and illustration of this process.
Source: Dealing with standardization in liberalized network industries by Dr Marc Laperrouza
3.3.2. Standards to Products
Once the directives are turned into standards, the next challenge is to transform the standards into the products. The standards are again reviewed by the ERA and then passed over to the European Union for the legal process. Once the compliance with legal process is established, the standards are to be ratified by the member states. Approval by the member states initiates the implementation process, which eventually results in the product/service with the desired standards for interoperability. Figure 6 provides an illustration of standards to products transformation.
Source: Dealing with standardization in liberalized network industries by Dr Marc Laperrouza
3.4. Progress of Harmonization
Though the conception of the single European market started in late 1980s, the progress in realising the desired harmonised European railway market is still insignificant. As of 2009, the TSIs for the high speed rail is completed, but the TSIs for the conventional rail is still in the development stages. The ERA measures the progress of implementation of interoperability directives by the number of the certificates issues by the notified bodies. Below is the chart that shows the number of the certificates issues and requested in 2007.
Source: European Commission progress report on implementation of interoperability and safety. SEC (2009) 1157
The implementation of ERTMS is also progressing at snail's pace with only 2000 kilometres of lines equipped by the end of 2008. But recently the EU commission and the member states have signed the MOUs for the deployment plans and expect that 11500 kilometres will be in service by the end of 2012 and 23000 by the end of 2015.
As per the Trans European Networks (TEN) plan, agreed in Maastricht in 1995, the targets for two segments are estimated; high-speed lines (new or upgraded, Appendix 4), main lines comprising of networks for combined freight transport (Appendix 5) and other important lines. These targets are estimated to be achieved by 2020 and include the expansion of the high-speed network to 28,900 km and improvement of a network for the internationally important mainlines consisting of 49,700 km tracks
Though the European Commission enforces the interoperability directives on the high speed and very high speed lines as well as the conventional and regional lines, the progress of implementation of interoperability in the conventional lines is very minimal as the high speed lines are seen as priority to achieve the cross border interoperability in the short term.
The new Directive 2008/57/EC on interoperability of community railways, which entered into force on 19 July 2008 provides for an optional exclusion of urban guided transport from its scope (article 1(3)).Member States may exclude from the measures they adopt in implementation of this Directive:
- Metros, trams and other light rail systems, which are the constituents of urban rail transport.
- Networks intended only for the operation of local, urban or suburban passenger services and are functionally separate from the rest of the railway systems
- Infrastructure and vehicles reserved for historical or touristic use.
3.5. Issues with Harmonization
A number of obstacles to implementation of interoperability directives have hampered the harmonization process. The issues that have to be addressed for an efficient and faster harmonization of the European railways are as follows:
- The longer lifespan of rail assets makes the infrastructure owners reluctant for migration to interoperable railways. Hence the interoperability requirements are applied only to the new, renewed and upgraded systems, leaving the older rail assets still remaining incompatible.
- Upgrading the existing railway infrastructure to make them interoperable is very expensive for the infrastructure owners. The lack of financial support by the member states is an important setback for harmonization. Hence, sufficient funding by the national governments as well as the European commission is required for timely implementation of interoperability directives.
- The continuation of the national practices, while the European harmonization has already started is contributing to the gaps or bottlenecks for interoperability.
- The delay in the TSI and standards development due to the longer time needed by the European Standardization bodies to deliver the standards. The standardization process can take between 5 to 10 years.
- Non coordinated infrastructure development and the TSI for interoperability, this is mainly due to the delay in TSIs formulation and subsequent product development. To address the growing need for transportation, the member states cannot wait until the TSIs and standards are finalised and so, many infrastructure projects are implemented as per the national standards, contributing to increasing incompatibility of the systems.
- Harmonization is more focused on technical interoperability and has ignored the operational rules, which has also contributed to the delay.
- The existence of the “open points” in TSIs has led to gaps in interoperability as different interface solutions are applied for different subsystems of the railways.
- As the harmonization process is taking place in parallel to the railway market liberalization, which has already redefined some of the railway stakeholders and institutions, thus creating disincentives for railway infrastructure companies to consider migration to common standards.
- As safety and interoperability are complementary, the existence of incoherence between the relevant directives is further contributing to the delays.
- Limited authority of ERA and the overlap of functions between the ERA and the Article 21 committee of European commission have induced the gaps in standardization process.
4. Impact of Harmonization on the industry
Harmonization or standardization of the European rail network is carried out by the national and super national governing bodies with an initiative to increase the value add for all the stakeholders in the railway industry. As the harmonization process is progressing at a very slow pace, the estimated time of actual realization of a completely harmonised railway market in Europe may be a two to three decades from now. This long time of implementation can lead to many uncertainties during the course of the harmonization process. Before arriving at different hypothesis for industry evolution, it is essential to understand the benefits of harmonization to all the stakeholders in the industry and also different strategic environments that currently define the entire German rail supply industry.
4.1. Benefits to stakeholders
- Following is the list of some of the important benefits that the proposed harmonization of the railways in Europe is expected to bring to the stakeholders involved.
- Geographically extended market as the entire European rail supply market is integrated with harmonised products and services
- Reduced costs of rail transport, thus bringing in social welfare as trains being environmentally friendly means of transport relative to air and road transport
- Increased competition amongst the railway undertakings is expected to increase the quality of service to the customers
- Collaborated research and development for the rolling stock and subsystems manufacturers, thus reduction in R&D expenses
- Economies of scale for the rolling stock, subsystems and component manufacturer
- Simplified and faster authorization process. A common authorization/certification for the entire European market would save time and expenses for authorization in each member states. The current estimated costs for certification and authorization is 1 to 5 million EUR per product per country.
- Faster supplier certification process from the customers. The standards and safety conformity authorization is handled at the EU level would reduce the time and costs involved in the supplier certification process of the state owned infrastructure managers.
- Reduced barriers of entry into a new geographical market as well as for new entrants. Harmonization would reduce the importance of technical capabilities as an entry barrier of the industry.
- Establishes transparency in the market, which increases the attractiveness of the industry for new entrants.
- Reduction in train fatalities, as harmonised infrastructure establishes common safety measures and common job profiles for the drivers.
- Capacity enhancements of the railway lines and stations and improved efficiency of the network usage
- Improvement in connectivity and geographical availability of the networks infrastructure.
- Cost efficient maintenance systems as the dependency on single infrastructure provider is reduced
4.2. Current strategic environments of the rail supply industry in Germany
The current rail supply industry in Germany constitutes of many players engaged in a range of activities. The current strategic environments in the industry are best explained using the BCG's Strategic Environments matrix as illustrated in the figure 8.
The German rail supply industry exhibits different characteristics in different segments of the market. Hence, sources and size of competitive advantage varies for different industry players that are active in the respective segments. Some of the companies in the industry are vertically integrated and active across all the segments of the rail supply industry, usually these companies are big in size with presence in more than one country within the EU area. Few companies that are active in the infrastructure services are also active in the general civil engineering and road construction industry due to the similarities between the activities, thus trying to achieve cost advantage through economies of scale.
4.3. Scenario planning for future Industry evolution
The development of possible hypothesis for the future industry evolution pattern in the rail supply industry can be deduced by considering the key variables of uncertainties and the key actors and causal factors influencing those variables. Various tools and methods for hypothesizing the industry evolution in event of uncertainties are Contingency Planning, Sensitivity Analysis, Game Theory and Scenario Planning.
While Contingency planning is mostly used as a “What if” tool that can used in case of a single uncertainty, Sensitivity analysis can be used to study the variation in the outcome of an event within the range of possible values of the key variable. Further, Game theory as an analysis tool is most suitable in the context of competitive actions between firms with in the same segment of a market and it limits the scope of analysis when the industry under consideration has multiple segments and is more relevant for the occurrence of a specific event. Scenario planning as an analysis tool can be used when the sources of uncertainties are numerous and originate from within the industry as well as from the industry's broader environment. Moreover, Scenario planning helps in formulation of consistent set of hypothesis like optimistic, pessimistic and most likely outcomes of the future state of the industry based on several key variables and key actors.
This paper addresses the evolution of industry structure as a result of the harmonization. Harmonization is one of the several evolutionary forces driving the structural changes in the rail supply industry in Europe. Several other forces are also equally responsible for the structural changes in the industry, but they are out of scope of this study and are listed as limitations in the section 5.2. As explained in section 2.1 and 3.3, several key actors and their decisions are responsible for the successful implementation of harmonization. The future state of the rail supply industry structure is defined by the degree of attractiveness of the market and the erosion of some of the barriers across the different segments of the rail network infrastructure, which is affected by the harmonization process. But the harmonization process is bogged by certain issues and regulatory mechanisms, which is makes it hard to predict the course of the process. The key variables contributing to uncertainties in the harmonization process are rate at which the harmonization is implemented and the scope of harmonization. The significance of these variables on uncertainties of future industry structure can further be strengthened or weakened depending on the various initiatives of the key actors involved in the decision making process concerning harmonization. The number of actors involved with varying degree of authority in decision making process concerning harmonization increases the propensity of unprecedented events. Hence in the context of analysing the industry evolution resulting from uncertainties associated with the rate and scope of harmonization of railway network, Scenario planning serves as the best tool for the purpose.
Traditionally the key variables in scenario planning are identified by first listing down all the variables affecting the industry evolution and then drawing a cross impact matrix to identify the relationship between these variables and their effect on the industry evolution. But, the purpose of this analysis is to study the impact of harmonization on the industry by defining the uncertainties associated with the progression of the process. And the uncertainties that actually determine the end state of the industry structure are best defined by the rate and scope of implementation which gives rise to the scenarios wherein the firms in the industry behave differently depending on their current competitive advantages and capabilities. Various factors like political will of member states and EU commission, sufficient funding, regulatory frameworks, consistent TSIs and cooperation & capabilities of rail supply industry are the underlying variables driving the rate and scope of implementation of harmonization, which finally determines the industry evolution. Hence these are the only tow variables that are within the scope of the analysis of scenarios for possible structural changes in rail supply industry.
Time/Rate of implementation: Since the European commission has ratified the directives of interoperability and safety, the implementation is progressing slowly due to many factors that are listed in section 3.5. These issues along with the volume of the European railway network make it difficult to accelerate the process of implementation of harmonization. But the rate of implementation can be greatly influenced by the strong political will and funding by the member states and also from the support of the rail supply industry to scale up the product features to the TSIs approved by the EU commission. By equipping the ERA with more powers concerning the implementation of interoperability, the currently existent institutional inefficiencies can be improved for a faster harmonization and subsequent implementation. As with any rate variable, the possible values that this variable can assume are slow, moderate and fast indicating the speed at which the harmonization progresses.
Scope of Harmonization: The scope of harmonization varies due to the evolving regulations of EU commission, which stipulates the various parts of the rail network segments for harmonization process.As illustrated in the section 3.4, the current focus of harmonization is in the high speed line and very high speed line segments. But the interoperability directives also stipulate the harmonization of conventional railways (main lines) at the same time adoption of harmonization is made optional for the urban rail networks and other functionally separated railway infrastructure. This introduces the uncertainties of possible enforcement of interoperability directives into different segments of the railway infrastructure.
Considering the possible values of rate of implementation and enforcement of interoperability in different segments of the railway infrastructure as the causal factors of uncertainties in harmonization process, one can deduce many different scenarios for the analysis of industry evolution. The analysis of the industry evolution patterns for all the possible outcomes may be very exhaustive and would demean the objective of scenario planning. Hence three different scenarios are deduced depending on the current trends and progress of harmonization process and the probability of reaching the interoperability targets set by EU commission along with a scenario of extreme case of an accelerated process.
- Scenario 1: Slow and limited harmonization; interoperability of high speed and very high speed lines (HSL and VHSL)
- Scenario 2: On schedule and medium scale harmonization; Interoperability of conventional and high speed lines
- Scenario 3: Accelerated and complete harmonization; interoperability of HSL, VHSL, conventional and urban transport networks
4.3.1. Slow and limited harmonization
This scenario is the most probable outcome of the harmonization of the European railways to achieve cross border interoperability. Though slow, most of the progress that is achieved for harmonization is predominantly in the high speed and very high speed lines. This scenario reflects the current proceedings with the implementation of interoperability directives by the member states. The issues listed in the section 3.5 are causing the delay in harmonization and so it would be a reasonable assumption that the current process of harmonization would continue to be slow and would remain limited in scope. The possible effects of this scenario on the industry structure are as illustrated in the figure 9.
High Speed and very high speed lines
Conventional and regional lines
Urban rail transport lines
Signalling and control systems
As the harmonization progresses in the HSL and VHSL segments, the larger companies that are usually active in most of the segments of the rail supply industry may vertically integrate and specialize in the products and services spanning the complete segment. Moreover the infrastructure owners of member states are price sensitive and a single vertically integrated infrastructure provider would reduce the maintenance costs. A single integrated company with necessary certification and proven compliance with interoperability and safety directives of EU would be easy to establish credibility of member states' efforts at achieving harmonization in Trans European railway network. Hence the infrastructure owners may prefer the leading companies in harmonization process over the other small players. More over the infrastructure plan for European high speed rail networks by the year 2020 suggests a potentially attractive market which would be the impetus for the big players, active in this segment of the market, to vertically integrate as the harmonization process progresses.
The current trend that is seen in the German rail supply industry is that more and more internationally active, large sized companies are making inroads into all segments of rail supply industry. This is a suggestive evidence of vertical integration especially that is already in vogue in the high speed rail segments. Some examples of companies that are active in most of the segments are Balfour Beatty, Siemens, Alstom, Strabag etc. These big players can also benefit from the economies of scale especially among the rolling stock and the signalling systems, due to the opening up of the European rail supply market with harmonised products.
While the big players in the market gain strong foothold on all the segments of HSL and VHSL, the smaller players involved in railway superstructure construction and maintenance activities may tend to move to the conventional and regional rail segments and the urban rail infrastructure segments. This would be the most logical move as the other segments would provide the opportunity for the small and medium sized infrastructure suppliers to gain dominance and preferential positioning in these railways infrastructure segment. As these segments are not obligated by the interoperability directives, the infrastructure providers would have an opportunity to differentiate by their products and process, which would give them more flexibility to tailor the products and processes to gain cost leadership.
The evolution of the industry in this scenario will define an aggressive competition among all the segments. In the HSL and VHSL segments the harmonization brings in transparency in terms of costs and thus the competition will be price driven which brings in consumer welfare, undercutting the margins of the incumbent companies. As more and more players accumulate in the conventional and regional lines and the urban lines, the competition in these segments will also get intense again leading to more cost effective solutions.
4.3.2. On schedule and medium scale harmonization
The scenario of on schedule and medium scale harmonization reflects the current plan of interoperability as proposed by EU commission. The probability of this scenario depends on the rate at which the harmonization can be implemented in conventional and regional lines relative to that of high speed lines. This can be achieved by ensuring that the TSIs for conventional networks are not creating potential incompatibility between the national and EU standards. The delays in standards implementation and uncoordinated planning of the standards setting and infrastructure planning in the member states is inducing gaps in the network which may remain incompatible with HSL and VHSL lines. Provided that the harmonization progresses as planned for the HSL, VHSL and conventional lines, the industry may restructure as illustrated in Figure 10.
As the harmonization is implemented in the HSL, VHSL and conventional/regional lines segments, the big players mainly focused in the HSL and VHSL segments may get vertically integrated and can even make an easy entry into the conventional lines segment. The reasons to support the vertical integration claim still remain same as in scenario 1. But, the entry into the conventional and regional railway infrastructure segments can be justified by the economies of scale that these companies can realise as the market gets bigger due to harmonization.
The established small and medium sized companies in the conventional rail segment can sustain their competitive advantage by gaining regional dominance and differentiation through cost effective processes. These companies' expertise and track record in the infrastructure services for conventional lines makes it easier to retain their presence in the conventional and regional lines and at the same time gain customer loyalty and credibility in the urban rail infrastructure market. Specialization in the urban rail infrastructure will be another strategic option for the companies that are active in this segment. As urban rail networks remain out of the harmonization process, specialization would provide differentiation for the players to gain a competitive advantage.
High Speed and very high speed lines
Conventional and regional lines
Urban rail transport lines
Signalling and control systems
Figure 10: Possible outcome of on schedule and medium scale harmonization
The above possible structural changes increase the competition in the infrastructure and services of conventional and regional rail segment. The competition will evolve to be on price as more and more players try to compete for the infrastructure projects, unless the incumbents are strongly positioned in a certain geographical segments. The small and medium sized incumbents may even pursue a diversification strategy like venturing into general construction, civil engineering, road construction etc to retain their revenue stream and growth rates. Also the track record of regionally established companies will enable them to gain easy access to the urban rail infrastructure market due to the synergies and overlapping capabilities. Thus the competition in the urban rail segment can also be aggressive as the number of players in this segment increases.
The harmonization of conventional/main lines would increase the market size for the rolling stock, subsystems and signalling system manufacturers. This would attract more players into this segment and thus increase the competition within these segments as well.
4.3.3. Accelerated and complete harmonization
Given the current setbacks and insufficient institutional support in harmonization process, the scenario of an accelerated and total harmonization of the entire railway networks of Europe, which includes even the urban railway networks, cannot be realised in the near future. This study of this scenario is to illustrate a hypothetical outcome in case of a very effective and faster process of harmonization. This scenario couples the possibility of near total harmonization of railway network and faster rate of implementation. This is a very optimistic view of the harmonization process and the analysis of this scenario presents the possible effects on the industry structure due to the faster process and increased size of the overall rail supply market.
Before illustrating the aftermath of this scenario, it would be important to know the preconditions for the occurrence of this scenario. The acceleration of the rate of harmonization process depends on four main factors:
- Stronger and favourable political will and coordinated efforts of the federal states of Germany
- Well managed institutional environments with clearly defined roles and responsibilities
- Availability of funds and appropriate funding mechanisms throughout the implementation process
- Technical capabilities of rail supply industry to scale up to the TSIs
Further the growing incompatible interfaces between the different segments of the railway infrastructure may drive the European commission to consider making interoperability mandatory even for the urban railway infrastructure. This scenario would remove the entry barriers of lack of the technical capabilities for all the segments of the railway infrastructure and a single market for rail supply will be created. Figure 11 illustrates the possible changes to the industry in the event of occurrence of this scenario.
Complete harmonization would mean an aggressive price competition in the rolling stock segments. Usually the rolling stock segments constitutes of multinational and large sized companies with enough resources as this segment is highly capital intensive. A single European market for rolling stock would increase the competition with in all the member states as the same big players try to capture the market in all the geographical segments. But this would still leave the opportunity to differentiate by providing rolling stocks with better performance and also on the other components like the aesthetics and luxury of travel with add on facilities.
The argument of vertical integration within the HSL and VHSL segments would still remain valid even in this scenario. Since the HSL and VHSL segments in Germany are still in the growth phase, most of the current players active in this segment are vouching for turnkey projects to provide the complete set of solutions. Hence the acceleration of the harmonization would not have any significant effect on the vertical integration argument. As the urban railway networks are also obligated to implement to the interoperability directives, the vertically integrated big players in the HSL and VHSL segment can make an easy entry into the urban infrastructure and service segments as well. But the opportunities or the size of the market for the specialised and customised products and services for urban rail shrinks, as the interoperability limits the scope of specialization.
The small and medium sized companies can still retain their regional dominance, but would have to be more diversified as the competition gets very aggressive. The probable competitive advantages would be customer loyalty, cost effective processes to increase operational efficiencies. A faster harmonization would create an attractive market, which would invite more and more new international players moving into German rail supply industry through acquisition and partnerships with small and medium sized players. The common standards in the conventional and urban rail segments would cause some of the firm's active only in the urban rail segment to gain entry into the conventional segment. The rationale behind such a move would be to expand into other segments given the increase in competition in urban segment due to the spill over of the firms from the conventional lines segment into urban segment.
High Speed and very high speed lines
Conventional and regional lines
Urban rail transport lines
Signalling and control systems
As a single open European market is created for the signalling and control systems, the market becomes more attractive and may welcome more and more new players to the market. The supplier certification is not a major entry barrier for the signalling and command control systems, hence, more new entrants can benefit from the scale economies, unless the incumbents have strong cost leadership and sets in a price war. The acceptance of ERTMS as a global standard of train traffic systems, the market size gets even bigger for the already established players in the European markets. This would compensate for the increased competition in the European market and at the same time new players from the developing countries can enter the European market. As these new players in the developing countries can have cost leadership due to the lower labour costs, they pose a serious threat to the market share of the existing players in the European markets.
In Germany infrastructure services within the conventional/main lines segment will remain a small market for the private companies as most of the maintenance of infrastructure is done by the subsidiary of Deutsche Bahn. So the effect of harmonization may not be of a significant impact in this segment unless the ongoing liberalization process enforces a regulation to increase the competitiveness of the segment or if DB lacks the required competence to maintain the network infrastructure with the new harmonised products.
The future of the rail transport market is closely tied to the efficiencies of the infrastructure and services, which should be capable of reducing the costs for both the intermediate and the end customer. As the rail transport is a sustainable means of transport as against the other modes, the European commission has embarked upon the harmonization program of the European railway system. Harmonization through interoperability and common standards for safety and train traffic systems is seen a mechanism to increase the competition in the railway market both among the operators and also among the rail supply companies. Increased competitive landscape will result in improved quality of products and services, thus increasing the attractiveness of rail transport for both passengers and freight.
Given the high degree of heterogeneity and volume of the railway infrastructure in Europe, the practical realization of a completely harmonised network looks implausible within the time frame proposed by the European commission. Addressing some of the vital issues for implementation of harmonization, can to some extent speed up the process, but estimating the exact timeframe would not be feasible due to the complexity and the number of stakeholders involved in the process. Moreover the directives of interoperability and safety have excluded or have made it optional to harmonise certain segments of the railway infrastructure. But the continuously evolving regulatory framework concerning the railways in Europe, have made it highly impossible to predict the exact future course actions concerning the scope and limitations of harmonization. These uncertainties associated with harmonization gives rise to different scenarios under which the evolution of the rail supply industry shows different patterns.
Having analysed the different scenarios, a conclusion can be deduced that, harmonization being a key driving force will lead to certain restructuring in the rail supply industry in Europe. But the industry dynamics and the bargaining power of the players involved varies in different member states and so the evolutionary trends of the rail supply industry would not be same in all the member states. In the case of Germany, the presence of the monopoly of the state owned operator Deutsche Bahn AG defines the competition on price, which is an important order winner for the infrastructure companies to secure a project. Hence this aspect of the industry has reduced the importance of product differentiation in the rail supply industry. The effects of harmonization would then be considered by evaluating the possible actions of the industry participants as the market size gets attractive and opportunities of gaining economies of scale arises especially in the components and subsystems. These factors are important considerations for profitability and growth of the companies and thus harmonization will be one of major forcers that will influence the positioning of the players and the competitive landscape of the German rail supply industry.
Many forces shape the industry structure and influence the actions of the key decision makers; this research is limited to analysis of one of driving force, that is, harmonization of European railways. Other factors that are equally important as harmonization are the regulatory framework concerning the liberalization of railway industry, increase in infrastructure demand due to the urbanization, competition from other modes of transport like road, airways and waterways, Influence of environmental performance regulations, evolution of technologies in the area of energy efficiency and changing political scope in the transport infrastructure planning and execution. Many of these factors jointly influence the future of the rail supply industry in Germany as well as in the other member states of EU, analysing the effects of all these factors in all the member states would give rise to many scenarios and the findings can be very exhaustive. Hence the focus of this paper is to analyse the effects on harmonization in the German rail supply industry along with drawing some implications for the European rail supply industry.
5.3. Further research areas
The above discussed limitations prompt for further research areas concerning the evolution of rail supply industry in Germany. Some of the possible future research areas in relation to the ongoing harmonization can be as listed below.
- Attractiveness and technical advancements in the other transport sectors: These factors contribute to the demand fluctuations in the rail transport sector, which influences the focus on the infrastructure development. The possible research questions can be; Are there any potential technological breakthrough in other modes of transport, which can move the focus of mobility requirements from railways to other modes of transport?
- The growing intermodal traffic and the role of railways in intermodal transportation: The research questions in this area could be, does intermodal traffic increase the demand for railways? What factors drive the need and feasibility of intermodal traffic? How those factors influence the size of the rail supply market?
- The effects of liberalizationof the railways in European Union: The possible research question here can be; what is the best model of liberalization for German railway industry? Should operations and infrastructure be completely separated? Should the scope of liberalization be extended to rail supply industry?
- Evolving regulatory frameworks: Increasing regulatory scope of European commission has resulted in ever evolving and sometimes conflicting regulatory frameworks. The research questions in this area can be; what is the optimum level of regulatory interference in the railway market? What is the political scope of the member states in setting the regulatory mechanisms concerning infrastructure planning, which involves the pan European transport networks.
- The expansion of EU and integration with the other geographies: The possible research options are: what would be the size of the railway market if more European countries join the EU? What are the technical and operational difficulties associated with the integration of railway networks in EU with those in Eastern Europe, Middle East and Asia?
- Rail infrastructure usage and charging: The possible research in this area could be around; should there be a dedicated rail freight transport or should it operate in conjunction with the passenger traffic? What are the optimum charging mechanisms that drive the demand for new infrastructure? What influences the need for development of new concepts to encourage interoperability through modular approaches?
The choice of scenario planning, as a method of analysis of the possible industry evolution mechanisms in the rail supply industry, implies the uncertainties involved with the realization of harmonization of trans-European railway network. The analysis of different scenarios in the section 4.3 is based on the possible response of the industry for the rate and scope of implementation of interoperability. The growth in the market size due to the general trends that drive the infrastructure demand is also implied in the analysis.
The complexity and volume of railway networks and the number of stakeholders involved in the rail supply industry makes impossible the practical interoperability of the networks across the EU member states. Though most of the member states and the railway infrastructure managers welcome the directives of interoperability, but they also doubt the feasibility of realising this within the time frame that EU has set. Thus this research emphasises on the significance of harmonization as a prominent driving force along the complete value chain of the railway transport industry in Germany. Without any doubts a single harmonised railway network in Europe would redefine the competition in the rail supply industry, but the evolution of competition would vary depending on the speed with which the harmonization takes place and the expansion of market size due to harmonization.