Missing the train

Alstom's growth train has Chinese twist

Alstom's 2014 decision to focus entirely on trains is paying off. But the current success of the French group's transport unit masks big challenges. The rise of a vastly bigger and aggressive Chinese rival threatens the maker of TGV high-speed trains and urban tramways. Alstom group may be too small to compete in the long run.

Near term, the group's full-year results vindicate the politically contentious sale of its energy unit to US rival General Electric. The division is suffering from falling global demand for fossil power plants leading to sharp drops in sales, orders and net profit.

Transport looks like a better place to be. Alstom orders were up 63 per cent to euro 10 billion, giving the company around four and a half years' work on the books. Revenue and free cashflow strengthened. The operating profit margin rose from 4.7 per cent to 5.2 per cent and is guided to increase to up to 7 per cent over the medium term.

But the merger of China CNR Corp and CSR Corp, two Chinese trainmakers, will create a powerhouse four times larger than Alstom. The new company has global growth ambitions and may exert fresh competitive pressure. The industry's relatively high research and development costs mean smaller players such as Alstom may face structural cost disadvantages.

M&A may provide an answer. In 2014, Siemens already signalled a willingness to merge its train division with Alstom. Canadian rival Bombardier is also reviewing the future of its rolling stock unit, with CNR/CSR lining up as potential buyers, Reuters reported in April.

In theory, Alstom is in a strong position to become an active consolidator because of the roughly euro 10 billion cash coming down the road from the GE deal. But Alstom has other calls on its financial resources. The French government has asked Alstom to keep euro 2.5 billion tied up in energy joint ventures with GE. Alstom's net debt, which currently stands at euro 3.1 billion, also needs relief.

Up to another euro 4 billion have been earmarked for redistribution to shareholders. A rethink of that could transform the size of Alstom's war chest. M&A options are complicated by the French government's likely wish to preserve Alstom's status as a French national champion. Still, finding a way of teaming up with Bombardier or Siemens may be Alstom's next destination.