Generic railway strategies TOCs
train operator strategies
a research-oriented knowledge base for train operating companies (TOCs)
a research-oriented knowledge base for train operating companies (TOCs)
2.2 Power of suppliers of TOCs
In the suppliers section of train operators two crucial groups can be defined: Rolling stock suppliers and infrastructure managers. Other supplying functions such as beverage supply are not regarded as crucial for train operations. As a result they are excluded in this analysis.
Rolling stock
The major argument in Porter’s Five Forces framework with a focus on suppliers is that when a firm is heavily dependent on a small number of suppliers, those suppliers regard themselves as a scarce resource for the company and might ask for higher prices and in the end earn a higher share of the overall profit made in the industry (Porter, 1985, pp. 5-11). Consequently, the choice for a certain type of train and a certain rolling stock OEM is a crucial decision because it affects all operating costs over a lifetime of a train. High degrees of switching costs are related to this decision because after choosing a train, maintenance can in most cases only be executed by or with help of the manufacturing rolling stock OEM. When following the low cost airline’s strategy of a unified rolling stock park, one has to be aware that a trade-off between leveraging economies of scale via a unified rolling stock park and high levels of dependence from one single supplier exists.
In the suppliers section of train operators two crucial groups can be defined: Rolling stock suppliers and infrastructure managers. Other supplying functions such as beverage supply are not regarded as crucial for train operations. As a result they are excluded in this analysis.
Rolling stock
The major argument in Porter’s Five Forces framework with a focus on suppliers is that when a firm is heavily dependent on a small number of suppliers, those suppliers regard themselves as a scarce resource for the company and might ask for higher prices and in the end earn a higher share of the overall profit made in the industry (Porter, 1985, pp. 5-11). Consequently, the choice for a certain type of train and a certain rolling stock OEM is a crucial decision because it affects all operating costs over a lifetime of a train. High degrees of switching costs are related to this decision because after choosing a train, maintenance can in most cases only be executed by or with help of the manufacturing rolling stock OEM. When following the low cost airline’s strategy of a unified rolling stock park, one has to be aware that a trade-off between leveraging economies of scale via a unified rolling stock park and high levels of dependence from one single supplier exists.
Present developments in the European rolling stock industry are heavily affected by globalization and welfare growth especially in Asian countries. New challenging players such as Japanese Hitachi, Chinese CSR and CNR or Korean Hyundai Rotem have entered the rolling stock manufacturing business and expanded rapidly. Yet, not all new challengers have been able to produce trains at European high standard levels as for example Hitachi with its trains in operation for private TOCs in Great Britain. However, rolling stock OEM challengers will likely catch-up. They seem willing to enter the European market because it is the industry’s focal market with high revenue potentials (UNIFE & Boston Consulting Group, 2010, p. 56; Clausecker, 2011, pp. 49-51).
Network infrastructure
Railway infrastructure is an essential facility for train operations. Because of high sunk costs for its establishment a railway network can only be duplicated with high costs related (di Pietrantonio & Pelkmans, 2004, p. 9). The essential facility definition of railway infrastructure comprises tracks, signaling, stations and depending on definition sometimes even maintenance facilities as well as ticketing and distribution facilities (Seabright et al., 2003, p. 46).
As a result of EU’s railway liberalization efforts basically two vertical integration models to manage railway infrastructure have emerged in Europe. In model one the infrastructure managing organization is completely separated from all railway undertakings as an independent legal company without belonging to a holding organization (vertical separation). In the second model the infrastructure manager belongs to the historic rail incumbent conglomerate and is operating as a separate legal unit in a holding structure (partial disintegration). In both models infrastructure managers shall provide non-discriminatory access to incumbents and new entrants (Drew, 2010, p. 16).
Because of its single supply function, infrastructure managers possess a special role in the railway industry. Therefore, a strict surveillance of their actions by national authorities is crucial to allow fair competition. Because of high barriers of entry for new players, complete separation of the infrastructure manager from the incumbent operator seems to foster fair competition.
