Conference on Railroad Industry Structure, Competition & Investments Toulouse, 8 Nov. 2003

1. Conference on Railroad Industry Structure, Competition & Investments Toulouse, 8 Nov. 2003 A decade of change in the Rail European Market;Influence on R&D and Innovation.“Toward a new equilibrium in the Rail sector” Dr Guillaume de Tilière (ALSTOM Transport), Dr Staffan Hulten (ECPI) ECP

2. Plan of the presentation I. Introduction: objective & methodology II. Change of Institutional Models III. Impact on Innovation (patterns of rail innovations) IV. Impact on Rail Innovation Diffusion Models V. Impact on Rail Innovation Models VI. Conclusion EPRC 2003 / G. de Tilière & S. Hulten 2

3. I. Introduction Background: Since a decade the EU transportation market has drastically changed: - Harmonisation of the European transport market: => Increase interoperability in the EU rail transportation network => Increase the competitiveness of the rail sector (industries) - Globalisation of the transportation industry (merges, standardisation) => Operators / Industry => more pressure for competitiveness, especially for rail (national barriers) Focus: EU rail market change and impact on innovation processes, looking at systemic innovations (technological trajectories) which aim at increasing interoperability, safety and capacity of the rail system. EPRC 2003 / G. de Tilière & S. Hulten 3

4. Objective: 1. look at the main changes of the EU rail market and their impacts on innovation Case studies approach / empirical research: 1.1 Case of national innovation systems (before the 90’s) - development of HSR technologies (TGV, ICE, X2 case, ) - development of Signaling technologies (ATP systems) 1.2 Case of the new European innovation system (after the 90’s) - development of new HSR generations (AGV, ICE3, Regina case) - development of Signaling technologies (ERTMS technology) 2. Working out Innovation Models for the Rail Sector: 2.1 The National Rail Innovation Model (before the 90’s) 2.1 The European Rail Innovation Model (after the 90’s) 3. Define challenges related to the transition phase between these two equilibrium. EPRC 2003 / G. de Tilière & S. Hulten 4

5. II. Changes of Institutional models A. Former National Institutional systems ACADEMIC RESEARCH Management Fundamental Technology INSTITUTIONS INDUSTRY OPERATORS Technical specifications Transportation ministry R&D ministry Production Development Development Operations Support Support Finance ministry FINANCING INSTITUTIONS INSURANCE COMPANIES FINAL USERS EPRC 2003 / G. de Tilière & S. Hulten 5

6. B. New Institutional systemssince the European harmonisation ACADEMIC RESEARCH Management Fundamental Technology Technical specifications Functional specifications INSTITUTIONS INDUSTRY OPERATORS Transportation ministry R&D ministry Production Development Development Operations Support Support Infrastructure owner Finance ministry FINANCING INSTITUTIONS INSTITUTIONS EU Level INSURANCE COMPANIES FINAL USERS EPRC 2003 / G. de Tilière & S. Hulten 6

7. III. Impact on Innovation - Systemic innovation requires close cohesion of partners but: - Operators are no more codevelopers and wants proven technologies: => Transfer of the risks to manufacturers Effects of a continuing improvement of a technology & Market requirements Performance min required at the exit of the market Product performance (system) Progress due to the Improvement of the technology Progress due to the Improvement of the technology Rupture of a technological innovation Performance min required at the entrance of the market Time * Performances include many factors as reliability, speed, comfort, investments & operating costs… EPRC 2003 / G. de Tilière & S. Hulten 7

8. S-curve and the notion of “critical mass”: Higher opportunities / higher market risks for manufacturers Units of item produced Or lenght of the new network fitted N4: Saturation of the market, competition with other new technologies N4 N3 N3: Mastered technology (in terms of technics and costs) N2: Level of adoption Operator 1 sufficient, Other operator interested N2 L1: Level of adoption Operator 1 Critical Mass of adoption (controlled by operators) N1 LF: First adoption Operator 1 Time t0 t1 t2 LF: represents the level of prototype maturity required for first adoption L1: represents the level of first adoption required to pursue any further extention of the network EPRC 2003 / G. de Tilière & S. Hulten 8

9. R&D Programs, public & private partnership Will vertical disintegration lead toward Less radical innovations (“technological wonder”), but more efficient use of R&D funding? Scale of Investment values Emerging technologies Key technologies basic technologies Value of the competing technology Risk taking, Systemic innovations Resource level attributed to R&D Risk aversion Conservative strategy Logical level of resources attributed to R&D Time EPRC 2003 / G. de Tilière & S. Hulten 9

10. IV. Impact on the InnovationDiffusion System A. The former National Innovation Diffusion System National Rail innovation system: centralized & ascendant R&D System, Systemic innovations • The change agents for the system architecture are the duo operator-manufacturer (but leads to captive markets). • Integration of “component innovations” leading to a systemic innovation. • Concept of incremental innovations characterized by an ascendant diffusion system. • Concerning innovations on components, change actors are usually small and medium enterprises (SME), who leads R&D more aggressively than big manufacturers (integrators). Change Agent (System & Components) System Specificator Operator System Innovator Manufacturer Component Innovators S M E Change Agents (Components) R&D on Components, Component innovations EPRC 2003 / G. de Tilière & S. Hulten 10

11. B. The new Innovation Diffusion Systems (new European environment) The new European Rail innovation system R&D System, Systemic & architectural innovations • A new paradigm: Interoperability => harmonisation • The EU harmonization process put more pressure on standardization of both operation and manufacturing market. • Open competition “in principle” of the rail manufacturing market (limitation: current specific national technologies). • The purpose is to put into competition for the long term the maximum of manufacturers to increase cost efficiency Change Agent (System & Components) functional Specificators Operator A Operator B Operator C System Innovators Manufacturer A Manufacturer B Manufacturer B Component Innovators S M E Change Agents (Components) R&D on Components, Component innovations EPRC 2003 / G. de Tilière & S. Hulten 11

12. V. Impact on the Rail InnovationModel A. National Innovation Model for Rail technologies (up to the 1990’s) Need recognition Knowledge Persuasion Decision Adoption Diffusion Diffusion of the technology National market (protected by standards & close relation Operator- Industry Diffusion of the technology International market National Transportation & Industrial Policy 0perators from other countries interested in the new technology National operator Definition of operator needs: Functional & technical specifications Preselection Sale contract / Commercial operation (national market) Sale contract / Commercial operation (Export market) R&D contract “Study contract” Prototype Validation / Test track National Industrial Consortium (preselected) Pricing of the technology doesn’t include full R&D costs as strongly supported by national operator and by state Limitation of technical risks: complete validation process before implementation Close relation Operator-Industry (National level) Limitation of financial risks linked to R&D investments. Strongly supported by operator and state Limitation of commercial risks as operator has a leading role and interest for implementation Proven technology National market = Show case for international sales Leading countries in the Rail Innovative technologies National Market: a platform to reach the critical adoption threshold Following countries Buying proven technologies EPRC 2003 / G. de Tilière & S. Hulten 12

13. B. New European Innovation Model for Rail technologies (since the 1990’s) Need recognition Knowledge Persuasion Decision Adoption Diffusion European Transportation & Industrial Policy First adoption of the technology EU market Additional development for final Validation needed Diffusion of the technology International market Infrastructure Owner 0perators from other countries interested in the new technology Operator Definition of needs: Functional specifications European R&D Programs (Def of standards) Sale contract / Commercial operation (European market) Sale contract / Commercial operation (Export market) Industrial Consortium Prototype Validation / Test track Internal R&D Program Limitation of technical risks: by a first validation process. But uncomplete Validation process Operators Group & Industrial Group (ERRI, UNISIG, etc) Pricing of the technology should nowinclude full Industrial R&D costs Proven technology European market = Show case for international sales R&D investmentsindependently of the national operators => higher financial risks for Industry Higher commercial risks as no more duo operator/industry leading together the whole innovation process. But new market opportunities as less national barriers Leading countries in the Rail Innovative technologies No more “National platform” to guarantee a national industrial that the critical adoption threshold will be reached; but the globally the “EU standard” will lead to a “more risks/more opportunities” type of market Following countries Buying proven and more standardised technologies, EPRC 2003 / G. de Tilière & S. Hulten 13

14. VI. Conclusion: Future achievements: - This new model will increase cost efficiency through standardisation and through the end of “captive markets” - The standardisation will allow strong improvement of interoperability. Current Challenges: - Operators have to shift from technical to functional specificators. - R&D tasks are fully transferred to manufacturers. They will have to define carefully their R&D strategy (before “directions” were given by operators). - Increase of market opportunities but also of commercial risks. - Manufacturers must now include all R&D costs in their price, which is not yet in their habits (as strongly funded before by operators). - No more co-development, leading to no more complete validation phase with the operator: higher technical risks on first product generations. - The role of operators & infra owners in system integration is getting more complex. 14

15. For information and comments, thanks to contact: Dr Guillaume de Tilière ALSTOM TRANSPORT 33 rue des Batelliers, F-93400 St-Ouen guillaume.de-tiliere@transport.alstom.com ECP Dr Staffan Hulten Ecole Centrale de Paris hultens@cti.ecp.fr