China Power

Why China Won Mexico’s High-Speed Rail Project

As the only bidder, Beijing reflects its growing appetite for risky projects.

The government of Mexico announced that it has chosen China Railway Corp to build a high-speed rail line connecting the capital of Mexico City with Queretaro, a manufacturing city 210 km to the north. The project is slated to start in December and the line is expected to begin operation in 2017, according to Mexican government officials, at a cost of $3.75 billion. As the competition heats up to win high-speed rail contracts abroad, China has struck first, winning the first such bid in Latin America. The question is how China managed to win, and what that means for competitors like Japan and Germany.

This will be Mexico’s reentry into passenger rail in general, after the sector was privatized in the 1990s. Its government expects the train to travel at speeds of up to 300 kph, carrying as many as 23,000 passengers a day and cutting the commute time from two-and-a-half hours to 58 minutes. Mexico’s transportation ministry said there were 16 companies originally interested in the deal, among them Germany’s Siemens and Japan’s Mitsubishi, but that only the Chinese conglomerate submitted a proposal by the October 15 deadline.

Underlying Mexico’s decision to choose China, and what may have made it the only country able to meet to proposal deadline, was its decision to finance 85 percent of the project through the Export-Import Bank of China. While Japan has offered in the past to finance whole portions of larger projects, such as a proposed maglev high-speed rail line connecting the major urban centers of the U.S. East Coast, it has not shown a willingness to finance entire projects.

China Railway Corp’s low bid and short timeline, not to mention willingness to finance the lion’s share of the project, likely met Mexican Transportation Minister Gerardo Ruiz Esparza’s desire to have “Mexico’s infrastructure… quickly up to date to meet the present and future needs of the country and its regions.”

It may also be that Japanese and other Western firms do not share China’s threshold for risk. Providing security for workers and executives from China will be difficult along such a long and exposed project. With kidnappings by Mexican cartels in exchange for ransom still rampant, other companies may not have been willing to submit proposals without adequately evaluating and pricing-in their security risks. That is not to say that China did not perform its due diligence with regards to security, but that the risk may not have been accurately reflected in their bid. As breaking into new markets and securing employment for its vast labor force often trump China’s profit motive, Beijing is likely to win out in riskier, high-cost infrastructure bids.