Fortune: China's Amazing New Bullet Train, and America's Amazing Railroad Oligarchs

Warren Buffet is no dummy - there is a reason he loves the US railroads as investments; essentially no competition. Anyhow, like 2 ships passing in the night - let us look at the rail prospects in the US v China with 2 articles from Fortune. Notwithstanding, that the U.S. is technically broke (in massive deficit) it should dispell the notion that a high speed network cannot get done in the States due to "being a much larger country than the European countries or Japan, who have such rail lines". That's a red herring excuse - especially for a country who put someone on the moon in the 1960s. China has huge land masses to build over, just as we would.

China's Amazing New Bullet Train

Embedded video from CNNMoney.com Video

• Xi is among a vast army of workers in China -- according to Beijing's Railroad Ministry, 110,000 were laboring on a single line, the Beijing-Shanghai route, at the beginning of 2009 -- who are building one of the largest infrastructure projects in history: a nationwide high-speed passenger rail network that, once completed, will be the largest, fastest, and most technologically sophisticated in the world.
• Creating a rail system in a country of 1.3 billion people guarantees that the scale will be gargantuan. Almost 16,000 miles of new track will have been laid when the build-out is done in 2020.
• China will consume about 117 million tons of concrete just to construct the buttresses on which the tracks will be carried. The total amount of rolled steel on the Beijing-to-Shanghai line alone would be enough to construct 120 copies of the "Bird's Nest" -- the iconic Olympic stadium in Beijing. [Aug 26, 2009: China Studies Curbs on Overcapacity in Steel, Cement]
• The top speed on trains that will run from Beijing to Shanghai will approach 220 miles an hour. Last year passengers in China made 1.4 billion rail journeys, and Chinese railroad officials expect that in a nation whose major cities are already choked with traffic, the figure could easily double over the next decade.
• Construction on the vast multibillion-dollar project commenced in 2005 and will run through 2020. This year China will invest $50 billion in its new high-speed passenger rail system, more than double the amount spent in 2008. By the time the project is completed, Beijing will have pumped $300 billion into it. (which in the US would mean about $700 billion and completed by 2030 with cost overruns and typical delay)
• This effort is of more than passing historical interest. It can be seen properly as part and parcel of China's economic rise as a developing nation modernizing at warp speed, catching up with the rich world and in some instances -- like high-speed rail -- leapfrogging it entirely.
• That the government-led infrastructure spending, as Li says, is driving this growth is beyond dispute. A recent survey by Australia's mining industry shows that China's overall steel production capacity has actually increased by 10% to 12% over a year ago, despite the worst global downturn in decades. But nearly all that production is being used domestically, the survey said.
• And across the Chinese landscape, it's pretty easy to see why. Whether in Dalian in the northeast, Wuhan in the west, or Shanghai in the east, one constant is the sight of massive concrete buttresses about 246 feet apart, lined up one after another in rows extending as far as the eye can see. The buttresses support the tracks over which the high-speed trains will run. They weigh 800 tons each and are reinforced by steel cables. There are close to 200,000 of them being built, all across the country.

• Last year China Railway Construction Co., the nation's largest railroad builder, hired 14,000 new university graduates -- civil and electrical engineers mostly -- from the class of 2008. This year, says Liang Yi, the vice CEO of the CRCC subsidiary working on the Beijing-to-Shanghai high-speed line, the company may hire up to 20,000 new university grads to cope with the company's intensifying workload.
• In America, jokes Sean Maloney, the No. 3 executive at Intel, "NIMBY-ism [Not in My Backyard] is still an issue. In China, it's more like IMBY-ism. They plan, they build things, and they move fast."
• Fortune estimates that foreign companies have won some $10 billion worth of contracts so far, and in a program that extends to 2020, there's more where that came from.
• IBM (IBM, Fortune 500) is among the companies aggressively pushing for a share of the historic build-out. It won a contract to provide the software for the high-speed train spur (as well as a local intracity rail system) in Guangdong province. High-speed rail systems are as much about silicon chips and software as about cement and steel. So-called smart train networks -- and the software systems that run them -- can boost on-time performance, speed up maintenance, and improve safety.

A funny elbow jab at the end of the article

• Consider that the Northeast Corridor, between Boston and Washington, D.C., is served by Amtrak's Acela train, which clips along at a stately average speed of 79 miles an hour. There's a lot of talk now, as part of President Obama's stimulus plan, about upgrading the system and building new, faster lines all across the nation.
• Maybe, after environmental reviews are finished and eminent domain issues settled, those lines will be built. Meanwhile, IBM opened its new global high-speed-rail innovation center last month. In Beijing.

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Now let's look at the industrial railroad system (not people transport) in the States, and some potential regulation coming their way - Do Railroads Have a Free Ride?

• The railroad industry is an old-time business, and for a while it was indeed stuck in the past -- choked by regulation and constantly beset with bankruptcies. Then railroads won more freedom to dictate prices and, as one of the only industries exempt from federal antitrust law, they've enjoyed an unexpected renaissance ever since.
• And investors fell in love. Warren Buffett plowed money into one of the biggest rail companies, Burlington Northern Santa Fe (BNI). Children's Investment Fund, the activist hedge fund better known as TCI, muscled its way onto the board of CSX (CSX). And the private equity firm Fortress bought Florida East Coast Industries and the short line operator RailAmerica.
• At the peak of investment about one year ago, hedge funds owned 25% of the rail industry.
• Yet their success, especially at raising prices, has made some customers unhappy -- including companies that ship chemicals, coal, and ethanol, all of which have their own political muscle in Washington.
• Controls over the industry could tighten again -- thanks to a group of proposals from powerful legislators -- and send Wall Street investors running. Jay Rockefeller (D-W.Va.), who chairs the Senate Committee on Commerce, Science, and Transportation, Sen. Herb Kohl (D-Wis.), and some members of the House have introduced bills that would remove antitrust exemptions that rail opponents call unfair and would toughen the Surface Transportation Board, the entity that currently regulates rails and hears grievances from shippers.
• In the U.S., the industry is dominated by a pair of duopolies: CSX and Norfolk Southern dominate the East Coast, while Union Pacific (UNP, Fortune 500) and Burlington Santa Fe rule the West. Proponents say this structure is inevitable given how expensive it is to run a railroad business. (on this point I agree - it's not exactly easy to build competing networks; I'm not sure how it would be possible to even bring in new competitors)
• But politicians who support some of the shippers say the setup has led to price gouging. Rep. Tammy Baldwin (D-Wis.), who has introduced a bill in the House, says that the Dairyland Power Cooperative in her state has seen a 93% rise in shipping costs in just one year. "This is what happens when there's no competition," she says. "They can name their price."
• (Railroads) ... argue that regulation would only hurt the American economy.
• The rail industry has just begun its comeback, and Buffett is more likely than the hedge funds to stick with it for the long haul. But if enough investors get skittish, the rail industry could go from Wall Street darling right back to its old sleepy state.