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US-China trade tensions: will espionage fears scupper rail group?

State-owned CRRC faces claims that its rail cars could be used for spying

In its 19th century heyday, the city of Springfield in Massachusetts produced the first industrial assembly line, the first gasoline-powered automobile and the first sleeping rail car. Wason, one of its leading companies, made passenger coaches and streetcars for clients across the US and countries as far afield as Egypt. While Wason went out of business in the 1930s, Springfield prospered well into the 20th century before deindustrialisation forced many of its factories to close.

So when a Chinese company announced in 2014 that it was investing $95m in a new plant to build rail cars — on a site that once housed a vast Westinghouse factory that closed in the 1970s — many in the region were excited about the prospects. For the past four years, around 200 workers have been employed in a gleaming new factory producing cars for the Boston subway system, with work on similar contracts for Philadelphia and Los Angeles to follow. 

Yet rather than being celebrated as a symbol of potential regeneration, the plant has found itself sucked into the escalating trade conflict between the US and China.

For its critics, the issue is symbolised by the giant Chinese flag flying alongside the stars and stripes at the main gates — a nod to its ownership by CRRC, a Chinese state-owned enterprise that is the biggest manufacturer of rolling stock in the world.

Leading US politicians from both parties have accused the company of using its links with the Chinese state to compete unfairly for contracts and of being a vehicle for possible Chinese espionage. Some have called for CRRC’s exclusion from upcoming tenders for the Washington and New York subway systems.

Such criticisms have been greeted with bemusement in Springfield. John Scavotto Jr, the leader of the local chapter of the sheet metal workers union, says the CRRC facility is a “godsend” — with high-paying jobs including benefits — but is worried about its future and is angry at the hostility coming from US President Donald Trump and Washington.

“This guy wants to have his war with China, let him have it, but leave us alone in Springfield,” he says, speaking of the US president. “I beg them to come down here from Washington and see for themselves what they’re trying to hurt, what they’re trying to quash, what they’re trying to make disappear.”

The furore over CRRC and its Massachusetts plant is emblematic of the increasingly febrile climate surrounding many Chinese investments in the US, at a time when the world’s two biggest economies are engaging in a process of decoupling that is driven by broader commercial and strategic tensions. 

Chinese investment in the US has always been fairly controversial, even after the country’s accession to the World Trade Organization in 2001. Oil company Cnooc’s proposed 2005 takeover of Unocal was scuppered in large part because of political opposition, and others have met similar fates since then.

Chinese foreign direct investment in the US did, however, increase over the years, hitting a peak of $46bn in 2016. Since Mr Trump came into office, it has dropped sharply, to $29bn in 2017 and just $5bn in 2018, according to Rhodium Group. A key driver of the decline emanated from Beijing, rather than Washington, following capital controls that reined in foreign acquisitions by many private Chinese entities. But perceived US hostility has been another major spur, especially over the past year.

Chinese acquisitions of American companies in sensitive technological sectors are now routinely knocked back on national security grounds by the Committee on Foreign Investment in the US. Cfius also recently forced a Beijing-based company to sell Grindr, the gay dating app, over fears of potential misuse of its trove of personal data. 

CRRC’s initial Springfield investment, agreed after it won a contract in 2014 to supply Boston’s subway system with more than 280 cars, represents a rare instance of a Chinese greenfield manufacturing investment. Such projects have trickled into the US at a rate of about $1bn a year since 2011 according to Rhodium. The Springfield plant was precisely the type of investment that both Washington and Beijing welcomed at the time — a rare infusion of Chinese manufacturing dollars and knowhow in an industrial sector that no longer exists in the US. 

Kevin Kennedy, the official in charge of Springfield’s economic development, calls the CRRC investment “a return to our manufacturing roots”. 

After its breakthrough tender win in Boston over Canadian, Japanese and South Korean rivals in 2014, CRRC went on to secure subway car contracts in Chicago, Philadelphia and Los Angeles between March 2016 and March 2017. CRRC won the Boston tender with a bid of $557m, substantially below those of Hyundai Rotem ($721m), Kawasaki ($905m) and Bombardier ($1bn).

Those four contract wins, secured during the final years of Barack Obama’s presidency and the first few months of Mr Trump’s, occurred in a markedly different phase in Sino-US relations. Since Mr Trump signalled his intention in late 2017 to take a tougher line on Chinese trade and investment issues than his predecessors had, CRRC has lost at least three bids for railcar contracts, including two in New York and one in Atlanta.

China-made components that CRRC assembles in Springfield were targeted in Mr Trump’s first round of trade war tariffs, imposed in July 2018 on Chinese industrial exports worth about $50bn a year. When CRRC applied for an exemption from tariffs on China earlier this year, the request was rejected by the office of the US trade representative — despite dozens of letters of support for its relief petition from politicians, union officials, chambers of commerce and vocational schools in Massachusetts and California.

“CRRC’s first North American facility and its success is critical to our city and region’s economy, bringing back manufacturing and skilled labour,” Springfield mayor Domenic Sarno wrote.

“I am surprised by the knee-jerk reactions in the world of trade that have happened in this country under this president,” adds Mr Kennedy. “The business world wants you to be reliable and predictable and that’s how we, the mayor and I, try to do our business in Springfield . . . CRRC kept its word and created upwards of 200 jobs here in Massachusetts. Most of those are in Springfield and they’re looking at expansion. We have no complaints at all about the relationship.”

Outside of Massachusetts, the Chinese company has another US affiliate in Chicago, CRRC Sifang America, which is building rail cars for the subway system there and possibly the Washington metro, should it win that contract.

But as the company’s US presence has expanded, so has the political opposition. CRRC’s most vocal critics on Capitol Hill include Chuck Schumer, the leader of the Democrats in the Senate, and Marco Rubio, the Republican senator from Florida. “This is part of China’s long-term strategy to undermine US industry and dominate the advanced technologies of the 21st century,” Mr Rubio wrote in the New York Post at the end of May. 

A few days earlier, Mr Schumer had called for the US commerce department to probe whether CRRC posed a national security risk “given what we know about how cyberwarfare works”.

A small lobbying group called the Rail Security Alliance (RSA), backed by some of America’s top freight rail companies, has been beating the drum hard about the dangers allegedly posed by CRRC. Its arguments range from suspicion that CRRC will eventually move on from passenger rail cars and dominate the US freight rail sector to worries about the state support it enjoys. “If they wanted to play by the same rules as France, Germany, Canada, Korea and Japan play by, fine,” RSA’s Erik Olson says. “But those aren’t the rules they play by. From an economic standpoint they are driven to produce jobs in China for the Chinese.”

The tariffs imposed on CRRC’s China-made components last July are having an impact. “We basically lost the Atlanta contract [in March] because of price, which is unusual,” says Russell Askalof, a former quality control manager at CRRC in Springfield. “Part of the reason we won so many of the other contracts was that CRRC [Massachusetts] was able to parlay the cheap labour in China that it uses to build the frame of the cars into a substantial discount for the total car.”

“Morale is pretty low right now,” adds Mr Askalof, who left the company last month. “People are very concerned about their jobs.”

As for the concerns about hacked subway cars, the RSA points to the advanced technology that is contained in modern rail cars, with sensors and systems used to track and regulate everything from temperature to location. The allegation levelled against CRRC that it could be a vehicle for espionage strikes a particular nerve as the company enters the Washington Metro race.

“You have members of Congress, the intelligence community, Department of Defense officials, staff, whoever [riding the DC Metro],” says Mr Olson. “We don’t think CRRC will do anything nefarious and start a war or anything, but could they track people, could they use this as an intelligence gathering tool? One hundred per cent.”

Thilo Hanemann, a partner at Rhodium, says that protectionism has driven some of the backlash against Chinese companies. “There is a long list of Chinese greenfield projects in the US that [have been] attacked by special interest groups trying to protect their market and the current climate provides fertile ground for those campaigns,” he says. “It seems everyone is jumping on the red-scare bandwagon now.”

Jia Bo, vice-president of CRRC’s Massachusetts unit, rejects the criticisms from the RSA and lawmakers. The rail cars built in Springfield, he says, abide by all the safety standards and procurement rules requiring that the majority of components are made in the US. While the shells of the cars are indeed imported from a CRRC subsidiary in north-east China — and therefore subject to Mr Trump’s punitive tariffs — the high-value networking and monitoring systems are sourced from US, Japanese and German suppliers also used by CRRC rivals. “I feel they are using this as an excuse to exclude us from the competition,” Mr Jia says.

He defends CRRC even more forcefully over the spying claims: safety cameras are installed to ensure the rail cars run securely and any data goes to the relevant transit authorities. “What they are saying, espionage, is a kind of speculation or an imaginary allegation,” he says. As for whether CRRC’s investment is now in jeopardy, he acknowledges that the company does “face a certain level of risk” and thinks the US and China both need “better communication”, but he does not believe the tension would be permanent. “The issues will be solved,” he says.

In Washington, CRRC does have one powerful defender in Richard Neal, the Democratic chairman of the House Ways and Means committee, which oversees taxes and trade. Mr Neal represents Springfield and its surrounding region and has been pushing back against some of the criticism. “There’s no question that the Chinese have a long history of actions that have threatened American jobs, technology and national security,” Mr Neal said last month. “However, it’s in our best interest, whenever possible, to strike the proper balance between protecting our national security and welcoming companies that create jobs and invest in our community. I believe we can do both.”

Kathy Brown, head of a neighbourhood council in Springfield, says she has not seen any evidence of opposition to, or scepticism about, CRRC in her meetings with residents — or even on local social media networks. “It’s pretty exciting to watch one of those cars roll out and make their way down Page Boulevard [the Springfield street where CRRC is located],” she says.

Ollie Hall, a Springfield resident and military veteran, agrees that CRRC should not be targeted simply because it is a Chinese company. “We buy a lot of products from [Chinese companies], now they want to make trains,” Mr Hall says. “If they make them for this country, to help build this country, to make it a better country, who could it harm?”

Giovanni De Caro, a 43-year old electrical assembly and repair worker at CRRC’s plant who grew up in Springfield, says the investment “brought this part of the city back to life”. He is confident that the company can continue to win contracts in America. “I think other cities throughout the US, are going to say ‘OK, let’s see what [CRRC] can do for us’,” he says. “They’ll realise that [what] other people are saying about us isn’t true.”

Mr De Caro has little sympathy for Mr Trump’s trade war with China. “I think it’s going to backfire. It will hurt us in the long run, and not just here at our company. All goods will get more expensive, so it’s going to be harder on working class families.”

If Tehran decides to sue for peace, supply could quickly begin to flow again

Despite attacks on shipping in the Gulf and the continued instability across the Middle East, the oil market has settled into a new normal. Even after last week’s attack on two tankers in the Gulf of Oman, the effect on prices was muted. On Thursday, oil briefly rose 4.5 per cent to over $62 a barrel but quickly slipped back, leaving prices at the end of week lower than they were a week before, and 20 per cent down over the past month.

The shift from around $110 a barrel for Brent crude in the spring of 2014 to the current figure, of around $65, has been tough for many — including the companies involved. And traumatic for the producing countries that are still overwhelmingly dependent on oil exports for their public revenue.

The new normal is the product of the interplay between a number of elements.

• Global demand continues to rise gradually, with that from Asia more than covering the fall in oil use in Europe and other parts of the industrialised world. Chinese imports now account for more than 20 per cent of international oil trade. But doubts over the strength of Chinese demand growth have been a big factor in the recent price fall.

• Supply is being steadily augmented by US shale production, which has increased by 5m b/d over the past four years.

• Costs have fallen, thanks largely to the squeeze applied on the service sector by private companies within the oil industry. This has permitted a renewal of investment in numerous new projects.

• Political events coupled with speculation drive short-term volatility, but as this year has shown even major disruptions to supply from places such as Iran and Venezuela, which have respectively taken 1m b/d and some 500,000 b/d out of the market in the past 12 months, have caused only temporary blips in prices.

• Producing countries, having largely failed to diversify their economies, remain in urgent need of revenue to maintain public spending. A recent International Monetary Fund analysis shows that even Saudi Arabia needs an oil price of $80 to $85 to balance its budget. When prices are low, the incentive for many producers is to increase output to maximise revenue. When exports from Iran are reduced by sanctions there are many other suppliers ready to step in.

• Modest Opec quotas are in place, reducing supply by 1.2m b/d under the agreement reached in December. Spikes are always possible, and even likely given the influence of speculation in the market, but they are usually brief affairs and it would take significantly deeper cuts, particularly from Saudi Arabia, or a large-scale Middle East conflict to shift the price above $65 to $70, on anything more than a temporary basis.

Between them, these factors set a band around the price that could remain in place for a long time — a view confirmed by the market’s relative indifference to the attacks on tankers in the Gulf.

Ironically, the greatest threat to the relative stability of the new normal comes from Iran. The country’s exports have fallen under the pressure of US sanctions and could drop further if the US is able to extend its extraterritorial power and limit or halt Iran’s oil trade with China and India. But markets have so far shrugged off the risks, on the assumption that others can and will fill the gap.

Inflation in Iran is high and unemployment is growing. Tehran could decide that the possibility of real economic disruption is too great and sue for peace — or at least a new settlement. If the mullahs decide that the survival of the Islamic Revolution is more important than the distant prospect of possessing nuclear weapons, Mr Trump could claim victory (if not a Nobel Peace Prize) and oil could begin to flow again.

In contrast to Venezuela, which will take years to recover its lost production levels, Iran could restore exports within weeks, adding at least 1m b/d — and probably more — to a market that is clearly already fully supplied.

Maintaining the new normal will only be possible if Iranian production remains heavily constrained.

The writer is an energy commentator for the FT and chair of The Policy Institute at King’s College London

FT analysis of Carbon Delta data shows only 15% of groups are in line with the accord

It has been a big week for climate change — and the companies trying to tackle it.

The UK announced it would adopt a net zero emissions target for 2050, becoming the first major economy in the world to do so. At the same time, BP’s annual energy report revealed that global energy demand surged last year — helping push carbon dioxide emissions to a record high.

Just when government policy signals strengthen, real world data show that the gap between climate ambition and reality is still growing. Caught in the middle of this mismatch, what are companies to do?

The risks they face are material: These include the physical impacts of a warmer world, like rising sea levels, as well as policy risks, such as higher taxes on emissions. The world’s largest companies anticipate climate risks of about $1tn — much of it during the next five years — according to a study published earlier this month by CDP, a non-profit.

A growing number of companies are responding to the uncertainty by announcing their own emissions targets. AP Moller Maersk, the world’s largest container shipping company, has pledged to cut emissions to net zero by 2050, jettisoning bunker fuel. Even Royal Dutch Shell, which derives most of its revenue from selling oil and gas, has an “ambition” to halve its carbon footprint by 2050.

As more companies set emissions targets, that seems like good news for the planet. However, for investors, it can also be confusing to parse through the multiplying corporate climate goals and visions, which are each defined in different ways.

A nascent field of financial analysis has recently sprung up to quantify climate risks and measure which companies are most prepared (regardless of how many environmental press releases they might put out).

One new metric, reflected in the accompanying chart, assesses how the world’s top 500 companies by market capitalisation are preparing for a low carbon world, by measuring their current emissions and the number of low-carbon patents they hold.

This analysis maps out each company’s current behaviour, and correlates it with the level of global warming it would imply by the end of the century, if every company in the world made similar choices.

“We generally avoid using statements that companies make in regard to what their [climate] goals are,” said Phanos Hadjikyriakou, analyst at Carbon Delta, a boutique climate analysis group that modelled the data. “The reason is that it is difficult to judge which of these statements might become concrete, and which are marketing.”

The result shows huge differences in how various sectors are preparing for a decarbonised world. Fields such as utilities, oil and gas, and mining are among those that appear to be doing the least, according to this analysis, while the tech sector and healthcare seem to be doing the most.

But almost all of them have some way to go — the analysis shows that only 15 per cent are in line with the goals of the Paris climate accord, which seeks to limit global warming to well below 2C. If the world is to avoid the worst effects of global warming, that will have to change.

The country needs to build the infrastructure for its emission-reduction solution

On a Tokyo street in 2050, a long queue of automobiles belch their exhaust into the evening sky. A bus brakes hard as it makes its stuttering progress through town. Yet all the while, the air quality is excellent because these vehicles emit nothing but water vapour: the sole exhaust product from the hydrogen fuel cells that lend them power.

This is a vision shared by Japan’s government and its world-leading auto industry, which are together making a huge bet that hydrogen — not batteries — will provide power for the emission-free cars of the future. Starting with the Tokyo Olympics in 2020, they want to put millions of hydrogen vehicles onto the nation’s roads.

Entrepreneurs and researchers worldwide are pursuing hydrogen. An industry-government collaboration in California targets 1m hydrogen-powered vehicles by 2030. Anita Sengupta, co-founder of US aviation start-up Airspace Experience Technologies, sees hydrogen fuel cells as a viable option for longer-range commercial jets by 2050. But there is nowhere more enthusiastic than Japan.

“Hydrogen, as both a primary source, and more importantly, a carrier of energy, must become cheaper and more easily affordable,” declared prime minister Shinzo Abe in Davos this year. “My government is aiming to reduce the production cost of hydrogen by at least 90 per cent by the year 2050, to make it cheaper than natural gas.”

The hydrogen vision published by Japan’s ministry of economy, trade and industry is expansive. It starts with brown coal in Australia, which will be gasified to produce low-cost hydrogen, with the carbon pumped back underground.

The hydrogen will then be shipped to Japan on vast tankers and distributed to a nationwide network of filling stations. Finally, it will be pumped into cars, buses and trucks, all equipped with affordable fuel cells to convert the hydrogen into electricity to power their wheels.

Get it right and hydrogen offers a way to fully decarbonise Japan’s transport sector, using fuel from a reliable strategic ally, while providing the automotive industry with a fresh source of competitive advantage over international rivals. The only problem is that this visionary infrastructure does not yet exist.

“One can’t forecast whether there’ll be a hydrogen society by 2050. It’s in the realm of scenario planning,” says Tetsuya Kaneko, a senior consultant on energy issues at Nomura Research Institute. “From a technological perspective, the biggest issue is large-scale provision of hydrogen.”

At present, hydrogen is mainly produced as a byproduct in the chemical industry, during processes that emit carbon dioxide. It can also be produced by electrolysis from water, but if fossil fuels were burnt to provide the electricity, this is not carbon-free either. The plan to import hydrogen from Australia is still at the pilot phase.

Meti’s road map calls for a hydrogen supply cost of ¥30 per normal cubic metre by 2030 — down from a cost of several hundred yen during the pilot coal-to-hydrogen project.

“The big bottleneck is carbon capture and storage,” says Takeo Kikkawa, professor of management at the Tokyo University of Science. “It’s not that it can’t be done. It’s the economics.”

Get the hydrogen to Japan and there is still the need for vehicles and fuelling stations — and it is hard to justify building one until the other is in place. The road map demands a fall in the price premium for fuel cell vehicles over hybrid vehicles from ¥3m ($27,690) today to ¥0.7m by 2025.

It sets a target of 200,000 fuel cell vehicles on the road by 2025 and 800,000 by 2030, fuelled from a network of 900 filling stations, up around nine-fold from today.

Analysts remain politely sceptical given the cost challenges and the lack of infrastructure. Toyota, one of the biggest backers of hydrogen, has recently stepped up its investment in battery-powered vehicles.

But Japan is unlikely to give up easily on the hydrogen dream. “I think Japan is the most advanced nation in the world for hydrogen,” said Mr Kaneko. “If you ask why, it’s because Japan has so few other options to reduce its carbon emissions.”

Japan’s small, mountainous and densely populated islands are ill-suited to large-scale production of renewable electricity, while in the aftermath of the meltdowns at Fukushima Daiichi in 2011, the country has little appetite for nuclear power. If those constraints remain, some form of carbon-free import is all that is left.

“We have to consider hydrogen as an option,” said Mr Kaneko. “But at present it’s only an option.”

Asian stocks were mixed at the start of a big week for central-bank policy. Treasuries edged lower.

Japanese and Australian shares saw modest losses, while equities in Hong Kong climbed after the government suspended a controversial extradition bill. S&P 500 Index futures rose after U.S. shares dipped Friday and Chinese shares were flat. Treasury yields ticked higher after upbeat economic data at the end of last week left some doubts about a more dovish position from the Federal Reserve.

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