From Mass Transit to New Manufacturing

A new industrial-policy initiative for domestic production of mass-transit products could help the United States overcome multiple economic challenges. It could provide high-wage jobs, generate tax revenue, expand exports, and reduce trade deficits. This mass-transit-production strategy requires a new kind of industrial and planning policy to overcome the limits of traditional public works. It's not enough to lay more tracks and upgrade rail facilities. The government has to support domestic production of trains, signals, and related transit hardware and software.

According to the Institute for Supply Management, U.S. manufacturing activity recently fell to its lowest level in 28 years. Manufacturing has also suffered across the globe. But overseas the downturn reflects mainly the recession, while in the U.S. there is a long-term manufacturing decline. Traditional public-works outlays alone won't restore American manufacturing -- but they could supply new demand if we had industrial policies in place.

Mass transit could be the incubator for an industrial renaissance, based on new kinds of producers and processes. If public investment is connected to developing new industries, then government spending will not "crowd out" private investment. On the contrary, the public outlay could provide demand for new private investments. But when the market and existing firms fail to make the necessary investments, the government must fill the void.

There are important niche markets in subways (the primary focus of this article), high-speed rail, local commuter rail, and the growing light-rail industry. Consultants from the firm IBISWorld, a leading business consulting firm, calculate that today, about 45 percent of revenue within the U.S. train, subway, and transit-car manufacturing sector is tied to new and rebuilt locomotives and parts, and 27 percent of revenue is tied to street, subway, and transit cars.

Of all the non-defense products that government purchases, mass-transit goods are among the most technically advanced, and they rely heavily on manufacturing. Mass transit conserves energy and is one of the least polluting forms of travel. Government purchasing power, combined with heavy unionization in the transit service and producer sectors, also makes this sector amenable to public planning for good social outcomes. Government can support local production, particularly in highly unionized and population centers. The density of cities facilitates both union organizing and mass transit.

The economic and political circumstances and growing local public support suggest the time is ripe for such a national initiative. President Barack Obama has supported mass-transit products as part of his economic-recovery program. The American Recovery and Reinvestment Act passed by Congress in February will lead to $8.4 billion in public-transportation investments. In the recent state and local elections, voters supported some 23 mass-transit initiatives worth about $75 billion. This included $18 billion to expand Seattle-area mass-transit service and $10 billion in bonds to begin a high-speed-rail network in California. These public investments directly translate into privately organized jobs and export potential.

The scale of the mass-transit sector can be seen in the Metropolitan Transit Authority's (MTA) budget plans. This New York regional authority is the giant among U.S. transit agencies. The MTA board approved a capital program for 2005 to 2009 worth $23.7 billion. The MTA plan includes about $2.2 billion for subway cars, about $928 million for buses, and $385 million for cars for the Long Island Rail Road commuter line. Another big-ticket item was signals and communications, slated for $2.2 billion. Nationally, the American Public Transportation Association reports that 260 heavy-rail cars, 189 commuter-rail cars, 83 light-rail cars, and 12 "automated guideway vehicles," such as airport people movers, were delivered and used in service in 2008. The association estimates that 10,944 buses and "paratransit" vehicles (vans or small buses that offer door-to-door service, usually for disabled or elderly persons) were purchased in 2006.

The problem, however, is that in key parts of the mass-transit industry, domestic suppliers have exited the business, so public capital investments in mass transit become significantly captured by imports. There is no longer any U.S.–based producer of subways, although assembly operations owned by foreign firms exist and are clustered in New York state.

The main foreign suppliers of subways to the U.S. are Alstom, Bombardier, and Kawasaki (principally based in France, Canada, and Japan respectively). South Korean–based Hyundai Rotem and German-based Siemens supply transit vehicles. These firms provide a valuable service to U.S. transit agencies. Nevertheless, foreign sourcing limits the wealth and employment dividend of public investments in subway cars, despite some local assembly. Fully 100 percent of final assembly of subway cars is done by U.S. workers employed at local affiliates of foreign manufacturers. Yet, this contribution to a subway car represents only about 10 percent of the total value added. In contrast, only 50 percent of the engineering work for a subway car is done domestically. Yet, such engineering represents about 25 percent to 40 percent of value added. In contrast, the propulsion system can represent anywhere from 15 percent to 20 percent of value added, but only 60 percent of such work is done domestically. Estimates for the French-based company Alstom show that the number of domestic engineering staff working on subway production in New York dropped in recent years from about 100 to about 45. Some of the design engineering work is being consolidated in Europe to capitalize on economies of scale.

The story of the Pullman Corporation's exit from the mass-transit market illustrates that much of the problem facing mass-transit manufacturers was tied to the competence of suppliers and not to the size of the market. As a 1979 article by David Young in Mass Transit explains, in 1972 all the mass-transit manufacturers had their eyes "turned to New York," where the city's request for 754 new subway cars was "the largest order in U.S. history." Pullman won this contract with a bid of $210 million, "underselling General Electric by $27 million and Rohr by $40 million." Transit experts noted that Pullman Standard had automated its production facilities to build subways for New York City. They also used numerically controlled welding machines, suggesting that the company was committed to the subway-car market. Pullman turned to Rockwell to build the truck, or undercarriage, for the New York subway. Arthur Murphy, a New York City transit analyst, says that Rockwell's system was untested in New York City's tougher conditions (where, for example, the roadbed that cars move on is rougher). These created cracks, leading to welds, which then weakened connections and led to further cracks. Eventually, New York City won an $80 million suit against Rockwell. The problems with the R46 cars led the Pullman Company to leave the subway-car business. The failure to properly organize production also created problems for other U.S. suppliers like the Budd Corporation (when making subways) and Boeing Vertol (when making light-rail vehicles).

Russell E. Jackson, an engineer and consultant and a longtime observer of the subway industry, says that one key problem was that old-line suppliers like St. Louis Car, Pullman, and Budd lacked advanced systems-integration know-how and the skills required to manage complex electrical systems and electronics. Each of these firms had built railroad and subway cars, but modern subway cars became increasingly complicated. Like aircraft and automobiles, they became platforms for electronics. Historically, each had built railroad-car bodies and had purchased the relatively simple light fixtures, electrical outlets, and other electrical components. But electrically, these railroad cars were not very complex or technically sophisticated compared to modern subway vehicles. Jackson quips that some colleagues at his former consulting firm came to believe that "the Budd Company's idea of electricity in a passenger car was the lights and the electric-razor outlets." In subway cars, he explained, "a much greater percentage of the car price goes to outside suppliers because of all the electrical equipment." Each of the old-line builders thus needed to manage its modern subway-car suppliers "in a much more sophisticated fashion" than was done within the railroad-car business. But each failed to do this well.

Other domestic manufacturers like G.E., Rohr, and Boeing Vertol, which could supply the advanced skills and systems-integration capacity lacking in Budd, were diverted by several factors: a hollowing out globalization strategy that did not champion a stronger domestic-rail industrial policy (G.E.); defense specialization (Rohr and Boeing Vertol), and the lure of the superior profits of the defense market. The military-industrial system, together with America's huge subsidies for autos, created an economic and political environment that helped erode the incentives and capacities to domestically produce state-of-the-art mass-transportation goods.

Since the Cold War began, the government has promoted domestic military-contractors firms through the Defense Department. But the Transportation Department has no comparable policy to promote domestic rail suppliers. The government made extensive investments in the highway system, subsidizing the auto sector, but made weak or uneven investments in the nation's rail network. We also lack the extensive high-speed-rail networks found in Japan, Spain, and France, where our competitors made budgetary commitments and organized their industrial policies to promote the production of mass-transit goods and the underlying infrastructure to support them.

Other factors that undercut domestic design and production of mass-transit systems and vehicles included: lack of upfront financing; problems in other parts of firms that spilled over to subway divisions; limited advanced engineering skills; lack of cooperation between labor and management; an excessive number of job classifications; poorly qualified workers; a failure to train workers and provide them with job security; design failures; and the weakness and boom-and-bust character of U.S. mass-transit industrial policies (where procurement policies did not adequately support domestic suppliers). The last domestic manufacturer of subways was the Budd Company (reorganized under the name of Transit America), and it ended its railcar production in April 1987.

The new multibillion-dollar investments in mass transit suggest a growing market. While only hundreds of domestic subway cars and thousands of buses are supplied each year, the global subway market was worth $9.3 billion in 2005, according to BusinessWeek.

Jack Martinson, an executive at Hyundai Rotem, says the U.S. market became particularly attractive for his firm because of the lack of domestic manufacturers. The Buy-America Act of 1933 encourages U.S. "domestic content" in purchases of public goods like mass-transit vehicles. Paradoxically, Buy-America provisions in existing law actually create a level playing field for all foreign suppliers, since there are no real U.S.–based transit-vehicle manufacturers. Thus, Martinson adds, "no manufacturer has a cost advantage when Buy America is required." These reasons help explain why his company had the confidence to establish a final-assembly facility in the U.S. even prior to winning its first contracts worth more than $700 million over the least three years.

One benefit to an industrial policy for mass-transit production is the industry's long production lead times, which make it countercyclical and useful as anti--recession policy. According to a January 2009 report by IBISWorld business consultants, the train, subway, and transit-car "industry operates on long lag times of up to three to four years," reducing the recession's immediate impact on demand. According to the report, at the end of 2008, the "industry had a backlog of approximately 50,000 rail cars and locomotives." Industry revenue grew 6.8 percent in 2008 but was expected to slow down by 2009. Ultimately, however, the government can make or break transit-industry growth based on its budgetary priorities.

New public investments in rail have already helped some U.S. suppliers to strengthen their position as international competitors. One U.S. company, Brookville Equipment Corporation in Brookville, Pennsylvania, increased employment by 25 percent in 2008. The corporation currently has 204 employees and is expected to double its sales to $50 million. It also had backlogs in orders until 2011. In 2008, 40 percent of their locomotive production was for public-transit agencies. The company has refurbished street cars for various cities including New Orleans, Philadelphia, and San Francisco and has become a leading U.S. manufacturer of haulage equipment, shipping machines to 80 countries throughout the world. Michael White, a sales and marketing specialist at Brookville, explains that the firm's success has been linked to its focus on quality and customer needs. The firm's shares are not publicly traded, and it has been under private ownership since 1918.

In looking at the potential for domestic production of mass transit, we should not consider simply one submarket as the relevant indicator of the potential opportunity. The greater commitment to rail made by European and Asian nations created a foundation for complementary growth of local mass-transit systems and long-distance rail. These two markets could be tapped by system-integrator firms in these nations. The coupling of an effective industrial policy at the government level and flexible suppliers at the firm level created multiple markets and greater growth prospects for foreign suppliers, in two respects.

First, these nations' commitments to long-distance rail created possible synergies with shorter-distance commuter-rail, subways, and light-rail systems. More sophisticated system-integrator firms could break into these multiple markets. For example, Bombardier and Kawasaki have a presence in both subway and light-rail markets. The more diversified the production capabilities, the more firms can enter multiple markets. Thus, even though there are differences between supplying light-rail vehicles and subway cars, these two firms do both and thereby increase the size of the mass-transit markets that they can enter.

Second, more skilled system-integrator firms in these nations have used subway and rail-transit markets to enter or support their activities in non-rail markets and promote trade and innovation gains in those markets as well. In some cases, companies are part of well-functioning conglomerates that use supply-side capacities (like military or automotive divisions) to both support subway production and diversification efforts. Mitsubishi, for example, uses its orders for commuter-rail propulsion systems in the U.S. to help extend its market for highly profitable products like air conditioners. Mitsubishi exploits what could be called "economies of scope in marketing," i.e. leveraging the supply of one good to build a market for another good. These diversification effects and synergies illustrate why policies to support a domestic rail system have benefits far greater than just the domestic rail market.

One U.S.–based systems integrator, Oregon Iron Works (OIW), is a new developer of street cars. In an interview last year with Rail Magazine, Chandra Brown, president of the OIW's United Streetcar company, explained why she believes her firm can survive the initial volatile market: "The company has enough work and projects underway that it isn't dependent upon a certain number of streetcar orders. We have a big and diverse job shop. So we don't have to have the line running for any specified duration in order to survive financially. ... If we win three car orders one year, 30 the next, and then seven the following year, we can handle it."

As Brown explained to me, diversified production produces flexibility. The company anticipates getting an order for six street cars from Portland and hopes to get another order for seven cars from Tucson. These are admittedly small numbers, but the firm has a list of over 80 municipalities interested in developing street cars. The company differs from the failed suppliers of mass-transit systems because it has grown up in a very competitive environment, teamed with a Czech firm to gain access to state-of-the-art designs, and has the necessary systems-integration skills from its history of developing nuclear, defense, and renewable energy as well as other advanced product lines.

As the Iraq War winds down, other systems integrators that are defense firms may follow the example of OIW. The ability to service the much larger subway market is enhanced in transit agencies like the Metropolitan Transit Authority and Chicago Transit Authority (CTA) through in-house engineering staffs that write specifications and do maintenance work. For example, in New York City, one top maintenance engineer argued that after the two-year suppliers' warranty has expired, the MTA is able to learn more than the original supplier about how vehicles (and thus the technology behind them) work in service. And in Chicago, the CTA's superior knowledge once helped U.S.–based Boeing Vertol successfully enter the subway market. Boeing Vertol's designs and engineers, ironically, later helped Kawasaki enter the U.S. market.

A comprehensive policy to encourage domestic production of mass-transit goods would include not only increasing the share of local content but also increasing public investment in mass-transit research and development, supporting rail infrastructure, and encouraging a research-and-production consortium. Such a consortium could include joint ventures between U.S. universities and systems integrators, foreign suppliers, and domestic suppliers of key components, and the development of an industrial workshop that could integrate research, testing, and prototype development. Companies like Brookville Equipment Corporation and Oregon Iron Works could provide a nucleus for a domestic revival of transit production. Worker and community ownership will also limit outsourcing and protect domestic jobs.

The AFL-CIO, New York City Metropolitan Transit Authority, U.S. Business and Industry Council, and University Transportation Research Center (UTRC) at the City University of New York are all interested in increasing domestic content in mass transit. In a potential coalition linking labor, local government, business groups and universities, the government is a key actor because of government's procurement power. A leading official at the MTA recently suggested to me that if New York state and the federal government could cover the increased costs of domestic production, the agency would consider supporting greater domestic content in subways.

Meanwhile, Robert E. Paaswell, UTRC's director, together with trade unions and the Institute for Policy Studies in Washington, D.C., is organizing meetings in June of labor, transit agencies, and other stakeholders to support increased domestic content in mass transportation. As Paaswell explains, "Such meetings are critical to provide focus on a major effort that addresses two key objectives of the stimulus bill; these are, first, to create career ladder jobs and second, to plant the seeds for long-term investments." We now have a chance, he points out, to connect spending on infrastructure and rail vehicles to a scale and continuity of financing that will make long-term investment worthwhile for manufacturers. The situation today is in stark contrast, Paaswell says, to the recent past when weak support "drove the last of U.S. suppliers offshore."

Our multiple crises suggest that a Green New Deal must mean more than one-shot investments. Support for mass transit and its supply industry can help promote domestically rooted system integrators, manufacturers, employment, and wealth creation. The expansion of domestic production, based on expanded investments in mass transit, could help link recovery plans centered on public works to a more comprehensive reindustrialization program.

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