The Duel Over KCS Not a Sign of Ottawa Failure, but a Strategy to Exploit Customers’ China Aversion

Commentary, Transportation, Ian Madsen

Recently, a bidding war has erupted between Canada’s two mammoth and historic railways, Canadian National, ‘CN’ and archrival, Canadian Pacific, ‘CP,’ for the U.S. railroad, Kansas City Southern, ‘KCS.’

This is all about KCS’ mid-American location and its extensive network in Mexico, where there is considerable volume and potential growth, in industrial and commodity shipments to and from that developing nation as it modernizes and industrializes. The potential of Mexico, the U.S. and of Canadian trade to both nations, is what is alluring to both CN and CP’s upper management and they are willing to pay up for it; they see more there than their big U.S. rival railroaders do or could capitalize on.

A case could be made that the regulatory environment for the railways in Canada is what makes foreign expansion not only more attractive but necessary to avoid stagnation or decline.  However, as regulated industries go, railroads are not oppressed, especially when compared to pipelines, trucking and airlines, all of which are at least partial competitors to rail. The key is that railways own their own rights-of-way and, generally, their terminals and the access to the seaports they terminate at, unlike all the rest.

However, there are limits to how big the railways can grow just serving Canadian customers or even overseas ones. Lucrative markets such as China, India, Japan, South Korea and the EU are still attractive, but not a cure-all for domestic near-stagnation. China’s population growth rate is slowing down, as is its high-intensity use of commodities Canada ships to it, such as metals, coal, potash, fertilizer and lumber. The other aforementioned markets are also slow-growth. So, while there is some room for further sales overseas, there are also some risks too, as tensions with China rise.  

Australia has already lost substantial exports to China due to diplomatic spats. Canada is also not favoured in Beijing’s eyes and this could worsen. Meanwhile, a renewed NAFTA, called USMCA by former president Trump, has reinvigorated trade and investment prospects between its three signatories. Railways facilitate the intensification and extension of commercial activity.

Mexico is not fast-growing, nor is the U.S., but both have steady population growth and growing industrial networks are enhancing development of both. Mexico is urbanizing and its manufacturing sector is growing, requiring more machinery and equipment and things like building materials, pipes, conduit and cable and wire—most economically shipped by rail. There is also that other factor: China.

All North American firms are conscious that, as tempting a market as China is, overreliance on it in a firm’s supply chain could put it at risk if Beijing takes a dislike to it or its suppliers or if there is a trade or political dispute between the increasingly assertive nation and its perceived adversaries.

The U.S. government is already dangling subsidies, credits and low-cost financing to ‘sensitive’ industry companies such as microchip manufacturers to invest in its territory and to reduce exposure to China. East Asian firms nervous about putting too much money into a temperamental and possible hostile nation are amenable to such enticements. Taiwan in particular is now wary of mainland investment.

There will be much more ‘reshoring’ and ‘onshoring’ of production and supply to ensure against risk of running short of anything or having to answer awkward questions from politicians or shareholders about why management did not prepare for potential disruptions that are eminently foreseeable.  

As the low-cost manufacturing nation in the NAFTA II trio, Mexico stands to gain a lot from this process of extrication from and future avoidance of, the Beijing Bully. Both CN and CP see this and it is this geopolitical factor more than anything else that makes the takeover strategy sensible, if not at any price.

 

Ian Madsen is a senior policy analyst at the Frontier Centre for Public Policy.

Photo by Wolfgang Rottmann on Unsplash.