Market Share Study for Leasing Companies Rolling Stock

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PRESS RELEASE

Oliver Wyman study: Rolling Stock Service Market
The two-track strategy
    •    The highest profits in today’s market for rolling stock are generated in the
         areas of services and after sales, not in production
    •    The service business of third-party providers will generate above-average
         growth in years to come
    •    New competitors are ready to enter the business and will increase the
         pressure on established companies
    •    In 2020, more than ten percent of services will be generated by new
         business areas
    •    Established manufacturers and suppliers must exploit these attractive
         growth opportunities by increasingly customizing their service offerings
         and optimizing their ongoing service business operations


Munich / Zurich, November 11, 2009 – The service market for rolling stock will generate
annual growth of 2.8 percent, rising from Euro 50 billion today to Euro 70 billion in 2020.
Across all service segments, companies are achieving high EBIT margins that average
more than eight percent. Going forward, the increasing liberalization,
internationalization and intensifying cost pressures are resulting in significantly
different requirements being placed on manufacturers, suppliers as well as rental and
leasing companies. In a new study titled “Profitable Growth Opportunities in the Rolling
Stock Service Market,” Oliver Wyman surveyed numerous top managers in the sector
across Europe. The finding: Change is already under way, but many established
providers still have not developed the necessary service strategy. The broader market
opening and cost pressures are also breeding new competition in many areas. The
demand for low-cost spare parts enables competitors from Eastern European and Asia
to gain a foothold in the Western European market and squeeze established
manufacturers. Companies that want to succeed in the future must pursue a dual
strategy: They must scrutinize their current business operations and conquer new,
attractive growth fields.

Around the world, there are nearly six million railway vehicles, primarily locomotives and train
cars. The rolling stock service market totaled about Euro 50 billion in 2008 globally. Through
2020, it will grow by an average of 2.8 percent a year and reach Euro 70 billion. In reaching
this level, it will clearly surpass the market for new railway vehicles, which currently amounts to
about Euro 37 billion around the world.




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In 2008, the largest service markets were in Western Europe with a volume of Euro 15.2 billion
and North America with a volume of Euro 13.5 billion. The emerging markets, which make up
considerably less than half of the world market today, are producing the highest growth rates.
For instance, the market in the Commonwealth of Independent States will expand by about
eight percent in future years, while the growth rate in Western European markets will be well
below two percent.

The market for services consists of six segments: Spare parts (41 percent), maintenance and
overhaul (32 percent), rental/leasing (15 percent), cleaning (7 percent) and miscellaneous
services (5 percent). Railroad operators themselves perform the largest share of these
services at around Euro 19 billion, or about 40 percent. This is particularly the case for light
and heavy maintenance as well as overhauls, areas in which railroad companies frequently
draw on the personnel and repair-center infrastructure in place from the era of government-run
monopolies. Major railroad-vehicle manufacturers such as Bombardier, Siemens and Alstom
also maintain a similar infrastructure. There also are several thousand suppliers of parts and
spare parts, rental and leasing companies as well as cleaners with a range from local to global.

The profitability level of services differs widely. Of the total market, the outsourced service
market with an average EBIT margin of eleven percent is especially attractive, although if the
margins per service vary considerably. In the rental, leasing and spare parts business, the
margins are well above eleven percent. But they rarely exceed five percent in the rather labor-
intensive areas such as light and heavy maintenance and cleaning. Among railroad operators
that currently perform these services internally, the managers surveyed by Oliver Wyman said
they frequently just covered their costs and produced no profit.

Liberalization is changing the rules of the game

“The increasing liberalization and internationalization of the railway market as well as the
intensifying cost pressures will completely change the requirements being placed on the
service-provider business,” says Joris D’Incà, a Partner and railroad expert at Oliver Wyman.
As a result of increasing privatization, upcoming IPOs and the high reinvestment need among
government-run railroads, the focus on costs and efficiency is sharpening. This, too, will affect
the future requirements on service providers. In 2020, the survey respondents expect new
service models to make up more than ten percent of the market.

New, smaller railroad operators will no longer consider services that have traditionally been
performed internally as one of their core responsibilities. These operators include small
government-run railroads like the Ostholsteinische Eisenbahn and the Hamburger
Hochbahn/BeNEX; private railroad operators that focus on passenger transport like NTV (I)
and Arriva (UK); as well as private railroad companies that concentrate on freight transport like
Hector Rail (S) or Crossrail (CH).

As a result of the cost squeeze being applied to railroad operators and the intensified
competition among manufacturers and suppliers, traditional services are coming under more
and more pressure. In the mid term, this will bring EBIT margins under pressure.

Growth opportunities lie in new services

Faced with annual cost pressure of two percent to three percent a year, railroad operators will
increasingly seek out alternative, lower-priced spare parts as well as require the
reconditioning of everything from parts to entire modules. In taking this approach, they
will no longer order new parts from the rolling stock manufacturers or suppliers. A wave of


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industrialization is bearing down on the entire area of reconditioning, a development that will
result in higher quality and lower costs. This will open the door for independent business
models like the one employed by the French company ACC, which refurbishes spare parts for
five French railroad operators.

Increasing numbers of technically skilled Eastern European and Asian parts manufacturers
with significantly lower costs are entering the marketplace. Established manufacturers will
come under pressure if they fail to develop concepts for fending off the threat at an early stage.
As an example, around the world, about 5.5 million wheels are produced, and more than 60
percent of those are spare parts. The global spare part market for wheels is Euro three billion
annually. In Europe, a number of established wheel suppliers have largely carved up the
market among themselves. At the same time, numerous Eastern European and CIS providers
are pushing their way into the market. The major barrier they face is the long permit-approval
process.

In addition to companies’ search for low-priced solutions, professionalization will spread
throughout spare part logistics. Currently, (former) government-run railroads have national
networks of repair facilities that serve as warehouses for spare parts. But these facilities are
rarely managed in a central manner, a development that results in unnecessarily high
inventories and lower availability levels. Professional companies that successfully provide
logistics services for spare parts in other sectors are moving into this market. One example of
this development is the airline sector where many major players like DHL and CAT Logistics
provide spare part logistics as a service. This model can be applied to the rail industry as well.

Furthermore, services that are not considered to be part of a railroad operator’s core business
activities will be even more systematically outsourced in the future. The study foresees the
degree of outsourcing rising from 60 percent today to 75 percent by 2020. One critical area
that will be outsourced in the future is heavy maintenance and overhaul of the entire rail
vehicle. Many of the smaller railroad companies are positioned like major national players,
doing their own heavy maintenance as well as overhaul. “Due to the intensifying competition in
freight transport and the tough license conditions in passenger transport, this will no longer be
possible in the future,” says Henning Thormählen, a Partner and rail expert at Oliver Wyman.
Strategic adjustments must be made. This will extend to completely turning over operations
external service providers as an individual service or as part of a “full-service operating model.”

As part of this outsourcing trend, partners who offer a full range of operational services,
including financing and maintenance of the entire vehicle fleet, will be in demand. In
addition to leasing companies, traditional vehicle manufacturers must come to terms with full-
service concepts that include not only the vehicle in the price, but also maintenance services.
With few exceptions, however, no solutions for full-service concepts exist today.

Liberalization has also set an internationalization trend in motion among rail companies, both
in terms of freight transport along the main routes in Europe and in terms of passenger
transport primarily in regional metropolitan areas and in international shipping. Railroad
operators face a challenge associated with their need for partners abroad who can perform the
daily light maintenance. Today, though, there are no providers with a multinational footprint.

Profiting from the change with a two-track strategy
The changes sweeping through the market and many regions are not only a risk, but also an
opportunity for established companies. These companies must act now. But many players are
unprepared for this approaching change because they haven’t had to change their business
model over the past decades. “We do too little strategic thinking about the service business as


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if we already had adequate concepts for changes in our business,” the strategic director of a
component supplier noted in a self-critical statement as part of the Oliver Wyman study.
Companies must break out of this comfort zone now.

If railroad operators, vehicle manufacturers, component suppliers as well as rental and leasing
companies are to succeed in the services market at today’s profit levels, they must follow two
principles: They must cut costs in their ongoing business operations, and they must
systematically refine the service business model to incorporate selected new services. Both
actions must be specifically designed to meet the needs of target customers.

The survey respondents agreed that their current service business operations have cost-
improvement potential of an average of five percent among suppliers, generated in part by
optimizing the production network, as well as an average of ten percent in the maintenance
and overhaul business of railroad operators, produced in part by industrializing the entire
maintenance area as well as introducing lean principles. But strategies to lower the cost of
services must not be implemented at the expense of reliability. This need is reflected in the
current failures of axles, wheel sets and brakes among suburban trains, high-speed trains and
freight trains. In a similar way to the new parts or vehicle business, vehicle manufacturers and
component suppliers must also organize their service activities as a stand-alone business with
its own strategy. The frequently indistinctive coverage of the service business must be
replaced by a more differentiated approach.

The sensible integration of the new services into the current business model must be
selectively carried out. Companies will be successful only if they employ a focused strategy
because the various requirements of customer groups and vehicle segments are too broad. On
the one hand, a component supplier can try to professionalize the company’s own
reconditioning activities and view it as a stand-alone business in order to block independent
reconditioning companies. On the other hand, the component supplier can wage the battle
against low-cost spare parts suppliers by cutting the life-cycle costs for the operators through
the use of intelligent measuring systems on the parts. A part would be exchanged based on its
wear and not simply on a pre-determined period of time. Even though many areas of the
market are being swept by change, most railroad operators, manufacturers and suppliers
continue to employ their traditional business model for services. “Companies that optimize and
modify their business models will be the only ones that can profit from the new challenges in
the service market for railroad vehicles,” consultant Thormählen says. “Or others will exploit
the opportunities offered to them.”




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Five theses on the service market for rail vehicles

1. Continuingly attractive market
The market for rail vehicles is growing, offering EBIT margins of nearly ten percent. But there
are broad differences in the profitability of individual services. In the future, increasingly tough
battles will be fought over profitable segments like the spare parts business.


2. Pressure to act for established companies
Through liberalization, internationalization and increasing cost pressure, structures are being
squeezed. Established players must leave their comfort zone.


3. Lack of necessary service strategies
Up to now, no systematic thought has been given to customers and their future service needs
as well as to the potential threat posed by new competition. The service strategies have not yet
been optimized.


4. Two levers for future success
Significant potential can be found in the optimization of the ongoing service business. To
create strategic points of control, selective integration of new services into the business model
must be carried out.


5. A need for change
Those who come first are the victors. The longer established players let their opportunities go
untapped, the stronger the new market players will become.




Oliver Wyman study “Profitable Growth in the Rolling Stock Service Market”

For the new study “Profitable Growth Opportunities in the Rolling Stock Service Market,” Oliver
Wyman surveyed many top managers of railroad operators, vehicle makers, component
suppliers as well as rental and leasing companies around the world in mid-2009. The experts
described the market for rolling stock services for the years of 2008 through 2020 in the
context of liberalization and increasing cost pressure. They also analyzed growth drivers,
changes in demand for services, identified attractive new service fields as well as the
opportunities and risks facing fundamental market players. The results were then
supplemented by extensive secondary research and other in-depth discussions with experts.




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Contact
Andrea Steverding
Corporate Communications
Oliver Wyman
Marstallstraße 11
80539 Munich
Tel.: 089.939 49 763
Fax: 089.939 49 515
andrea.steverding@oliverwyman.com
www.oliverwyman.com/de


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