bullet trains – The OM Blog by Heizer, Render, & Munson

OM in the News: Bullet Trains and Freight Trains

Japan Railway’s maglev train set a speed record when it hit 366 mph near Mt. Fuji

Fortune‘s latest issue (June 15, 2015) contains two separate articles that tie together our discussion of railroads in Chapter 11, Supply Chain Management. The contrast between bullet trains and freight trains in the U.S. is evident. The 1st article, “Super Fast Trains on a Roll Globally”, notes that over the past decade, China has built the world’s biggest high-speed-train network, with some 6,900 miles of track. Since the service was first launched in 2007, the number of passengers riding each day has risen from 237,000 to 2.5 million. To give you an idea of the scale, China is investing more than $128 billion in domestic railway construction in 2015–adding another 4,700 miles of passenger tracks this year alone. By comparison, the U.S. invests $1.4 billion annually in Amtrak. Amtrak’s Acela Express is America’s fastest train, yet its average speed is only 68 mph on the trip between Boston and Washington, D.C. The train does hit 150 mph along a few stretches of straight track.

In contrast, America’s freight rail industry is flourishing. The 2nd article, “Profit Engines on the Rails,” describes the 153-year-old Union Pacific, which is beating almost every other industrial company in the Fortune 500. The old-economy warhorse generates profits at a rate that rivals those of the best tech, pharmaceutical, and financial services companies. There are 3 reasons. First, Union Pacific’s central tenet is network planning, which mean that every outlay for new track, locomotives, or terminals must yield a return of at least 15%.

Union Pacific's dispatch center in Omaha, where workers direct as many as 1,000 trains per day across 23 states — Union Pacific’s dispatch center in Omaha, where workers direct as many as 1,000 trains per day across 23 states

Second, the railroad enjoys a big, and growing, cost advantage over trucks for long-haul shipments. Third, Union Pacific is an expert at constantly, relentlessly improving its efficiency. In a hugely capital-intensive business, that means increasing its volumes of freight far faster than it adds new employees, locomotives, and boxcars. Its capital expenditure has almost doubled, from $2.2 billion in 2006 to $4.2 billion in 2015.

Classroom discussion questions:

1. Why is the railway industry important to operations management?

2. What are the advantages and disadvantages of shipping by railroad vs. air, trucking, and water?

Existing miles of high-speed rail
China	Europe	Japan	U.S.
6,917 miles	4,699 miles	1,655 miles	456 miles

OM in the News: China Discovers the Dangers of Reverse Engineering

It has been almost a year since we wrote a blog on how China has pulled ahead of competitors by reverse engineering many high-tech products, including bullet trains. It turns out though, that such an approach is not without dangers as The Wall Street Journal (Oct.3, 2011) points out under the front page headline “China Bullet Trains Trip on Technology” (with a 5 min. video clip embedded in the article). As you may recall, during a July lightning storm, two of China’s bullet trains collided in Wenzhou, killing 40 and injuring 100’s. More recently, two trains collided in Shanghai, injuring 280.

Thus arises the issue of deep international distrust over China’s questionable use of foreign technology, including weak intellectual property protections. For in fact, key components in China’s high-speed rail system come from Japan’s Hitachi Ltd. Fearful that Chinese technicians might reverse engineer and steal their signaling technology, Hitachi locked many components in a “black box” design. This approach made it harder to copy, but as a downside, made it harder to understand during testing and use. By withholding technical blueprints, known in Japanese as zumen, troubleshooting the gear was also more difficult. “Providing zumen means we completely trust the buyer of our technology”, says a Hitachi exec. He adds, we do not want a buyer who would “become a competitive threat in other markets”.

In less than 7 years, China has built a bullet-train network larger than the ones Japan and Germany took decades to construct. According to the CFO of the company working with Hitachi on the signaling systems, China has made it a “very clear mandate of localizing the product. Basically, foreign players are not allowed to bid independently for high-speed rail projects”.

Discussion questions:

1. Why don’t all companies transferring technology to China protect their “zumen”?

2. How has corruption played a factor in China’s rail system?

OM in the News: Planes, Trains, and Drones–China’s Reverse Engineering Controversy

When the Japanese and European high-speed rail companies signed on to build trains for China, they eyed the $ multibillion contracts in the booming new market. What they got was competition from Chinese firms who took their technology and turned it against them within a few short years. Chinese companies, fueled by technology transfer, reverse engineering, and process redesign (Ch.7), are now selling trains even faster than foreign rivals Kawasaki, Bombardier, and Siemens. The national strategy of boosting state-owned firms and obtaining advanced technology at the expense of foreign powers is challenging the US and other powers doing business in China.

Yesterday’s Wall Street Journal (Nov.18,2010) quotes a China rail official who says they are “learning and systematically compiling and re-innovating foreign …technology” and now have trains that go 37 miles an hour faster (236 mph) than European and Japanese rivals. Kawasaki’s view: a few tweaks to exterior paint scheme…and a beefed up propulsion system is not a new technology. “Its nothing but deceitful propaganda”, says an exec. Kawasaki had set up production facilities in China, trained Chinese engineers, and developed a supply chain for components.

Today, the Journal’s headline addressed China’s advances in pilotless drones— putting the US and Israel at risk in their worldwide dominance. Same story: technology transfer by Israel propelled the 25 different models of unmanned aircraft…a major advance in only 2 years. And last week’s lead story was the unveiling of China’s C919 commercial jet, a direct threat to the Boeing 737.

So how is this different from post-war Japan (and Korea as well) transforming their economies by reverse-engineering foreign technologies in steel, autos, ship building, and computers? China’s share of manufacturing advanced equipment could climb from 8% today to 30% of global exports within the decade, writes the Journal.

Discussion questions:

1. Discuss the ethical issues that arise from these articles.

2. What is China’s long-term manufacturing strategy, and how is it changing?

3. How did companies like Kawasaki end up losing their dominance in the Chinese market?