Bomb ticking under North American project of JR Tokai subsidiary

Updated : 27.03.2017 / Category Capsule

The stock price of Nippon Sharyo, Ltd., a subsidiary of Central Japan Railway Co., has surged since the inauguration of U.S. President Donald Trump, who has touted a massive investment in the U.S. railway network.

But industry sources say Nippon Sharyo has a ticking bomb sitting under its U.S. project, which could make it difficult to receive new orders.

The problem lies with a \28 billion order for train cars Nippon Sharyo received from the state of California. Nippon Sharyo planned to include revenue from the project, which amounts to as much as \100 billion if option contracts are included, in its sales for fiscal 2016 and beyond. But an industry insider said the company has been forced to redesign the train cars, pushing back the delivery date. "Additional costs the company has to shoulder swelled, resulting in a \1.01 billion operating loss in the business year ending March 2016," the insider said.

Making matters even worse, the company found last year that it needed to redesign the structure of the train cars, which will result in an additional loss of \10 billion. In the business year ending March 2017, "it is possible the company will breach the financial covenants over its long-term debts," the insider said, referring to agreements Nippon Sharyo signed with financial institutions that stipulate if the borrower's financial standing deteriorates, banks can declare the loans are in default or place additional interest on the loans.

Nippon Sharyo won the California contract partly due to its efforts to create U.S. jobs by setting up a train car factory in Illinois. But the company later found local employees lacked the necessary skills, prompting it to spend more money to train them.

Nippon Sharyo apparently is in no mood to kick up its heels despite Trump's inauguration.

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This is a translation of an article from the March 2017 issue of Sentaku.