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5.5 Infrastructure Exporting as a Systems Integration Business

According to METI, infrastructure investment between 2011 and 2020 in Asia is estimated at approximately USD eight trillion, of which 51 % is estimated to be energy related, such as power generation; 31 % to be transportation related, such as roads and railways; 13 % to be telecommunications related; and 5 % to be water and hygiene related (METI 2010). For example, India, a region of high economic growth, is only capable of meeting 80 % of its electricity needs during peak demand times, resulting in frequent power outages in the country. India also suffers from a lagging road and railway infrastructure, which remains an obstacle to manufacturers entering the market. On the other hand, the capital requirement to invest in such future infrastructure demands exceeds the amount that the Indian government has budgeted, so expectations are high for private capital. For Japanese companies, this presents a significant business opportunity, and infrastructure exports have been highlighted in government growth strategies as an area that both the government and the private sector should undertake. We examine infrastructure exports as an example of system integration and evaluate ways to expand in developing countries.

Infrastructure services, such as roads, railways, water, and sewerage, are public utilities traditionally controlled by governments. However, in countries such as the UK and France, these services are outsourced to private undertakings through public–private partnerships (PPPs). While the responsibility to provide these services as public utilities may rest with the government, this arrangement is based on views that management by specialized businesses is more efficient; moreover, this aids in effectively incorporating taxes. Governments in developing countries lack the expertise and financial resources to efficiently manage such large-scale public services and mitigate the gap between infrastructure supply and demand. Thus, governments aim to employ the PPP system for infrastructure improvement. PPP businesses for infrastructure services often operate within a build, operate, and transfer (BOT) system. Thus, government organizations outsource the building and operation of infrastructure to private businesses, and subsequently, the ownership of infrastructure is transferred back to the country at the end of the outsourcing period. These are typically long-term projects that last 20–30 years and are high-risk businesses from the cash flow perspective, involving high expenditures in the initial construction period; these expenditures are then made up for through revenues generation from infrastructure operation over the long-term. A special purpose company (SPC) is typically established to run a BOT business. There are many dependent parties that profit from these projects—investors as the creditors that finance the business, public organizations requesting the business, plant operators, and others. PPPs for infrastructure services are large, complex systems that involve many different parties over a long period of time.

We now examine the characteristics of infrastructure businesses using a railway transportation service as an example. In addition to hardware infrastructure such as railcars, tracks, and train stations, providing transportation services for passengers or freight via railways requires operational and signaling expertise. The systems' components are not deployed using modules, but are instead designed in an integrated fashion, through mutual collaboration. For example, the UK revised its railway laws in 1993 and broad deregulation was implemented. Specifically, a public organization called “RailTrack” was created to consolidate infrastructure management, such as tracks, bridges, stations, and operational planning. Further, railway operations and ownership and maintenance of rolling stocks were outsourced to a private company. However, this arrangement caused various problems (Gayer and Davies 2000). For example, a company managing a particular line decided that it was appropriate to increase the speed of trains on that line to improve passenger service—a change that required a signaling system be installed in the rolling stocks. However, a leasing company, which leased to other railway operating companies, was separately involved with the railcars. Changing the signaling system of certain cars was inefficient for the leasing company, since, depending on the line, they would be forced to use other cars. Accordingly, the leasing company did not agree to the installation of this signaling system, and therefore the decision to increase the speed of the line was postponed, with parties unable to respond to differing circumstances and provide appropriate railway services. Issues such as the train schedule, signaling system, and rolling stock specifications form an integral structure, and an overall balance must be struck through mutual collaboration. Issues arose in this case when the operations providers were fragmented, and RailTrack was unable to function as a system integrator.

The railway business provides a stable service through a purchase order that spans decades, requiring a flexible operating structure to respond to technological progress and economic situations. Consequently, the rolling stocks and signaling systems (i.e., the technological aspects) that comprise the service must be provided in unison with planning and management that are in sync with customer and freight transportation demand (i.e., the organizational aspects). Developing countries' capabilities to operate local railways is low; thus, there is a great need for an integrated system, from construction to transportation management, to be provided by developed countries. Japan provides high quality services in both long distance railways, as seen in the Shinkansen, or bullet train, as well as urban systems, as seen around Tokyo. Thus, the heightened demand for infrastructure in developing countries presents Japanese companies with significant business opportunities.

However, Japanese companies have had a late start in expanding the railway business in developing countries that would oversee projects from construction to management. The track record of Japanese companies to date consists primarily of projects under a “standalone product model,” such as rolling stock's delivery, and few Japanese companies have been involved in railway operations. On the other hand, Alstom, Siemens, Bombardier, and other Western railcar manufacturers are aggressively chasing the package-style railcar business. In the 1990s, the EU used an open access policy for railroads to create a “top and bottom” organization, separating ownership and management of structures, such as tracks and stations, from operation of the railcars. As a result, a public organization was responsible for the infrastructure (the “bottom”) as with the case of the UK, while railcar operations (the “top”) were outsourced to private businesses. Thus, train manufacturers managed the railway service operations, becoming more competitive as railway service companies. On the other hand, beginning in the 1980s, Japan split railway companies by region as a means of reforming the national railways; the railway systems have been managed as one ever since, without “top” and “bottom” separation. Therefore, railcar manufacturers have not been able to build a knowledge base for operating railway businesses (Akizuki and Konagai 2010).

Accordingly, Japan Railways and private railway companies hold the key to future overseas expansions for the Japanese railway business. Taking advantage of Japan's strengths in railway services, namely its safety and accuracy in train management, requires the partnership of Japanese manufacturers to provide an integrated Japanese-style system as a package. However, the requirement of a high level of customer service is possibly higher in developed countries such as the US or Europe, rather than developing countries. A European team originally had the right of first refusal for the Taiwan High Speed Rail (the so-called Taiwanese shinkansen), which was designed as per European standards, but Taiwanese authorities were nervous about the design's earthquake resistance and ultimately chose Japan's shinkansen. This led to not only the purchase of railcars and management systems, but also to the dispatching of train conductors from Japan Railways to provide guidance. This is an example of Japanese companies providing railway services down to the operational level. In this case, a Japanese system was selected because of its geographical similarities with Japan's mountainous terrain and earthquake frequency. Infrastructure businesses such as railway systems need design and operation that respond to the geographical characteristics of each region. Therefore, it is imperative for companies to refine their targeted regions and formulate a proposal for such targets.

Moreover, Japanese companies must sort their technological (equipment and services) and organizational (management know-how) strengths, and clarify how each feature can enhance customer services. Package exports of an infrastructure business cannot merely be expanding Japanese business overseas as-is, considering the level of local customer demands and costs. Rather, companies need to filter the expertise required for core operations in current services, and then match that to the level demanded by the target region in terms of service levels and cost. In doing so, they must also consider how to differentiate themselves from their Western competitors and offer recommendations from the proposal stage that highlight the strengths of a coalition of Japanese companies.

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