What a way to run a railroad
The Economist: Mar 9th 2006
Hartmut Mehdorn's vision for Deutsche Bahn includes seaports, cars and bicycles according to this article from pro-privatisation magazine, The Economist. But as Europe's largest rail business expands the chances of DB complying with European Union rail liberalisation directives - opening up to 'competition' - diminish.
FROM the top of his skyscraper on Berlin's Potsdamer Platz, Hartmut Mehdorn likes to train his binoculars on another vast edifice a kilometre away. This is Berlin's new Hauptbahnhof, or central station, a huge glass-clad railway hub, 14 years in the making, that will link all intercity and regional trains from east, west, north and south. It has to be finished by May 26th when Angela Merkel, the German chancellor, will preside over a grand opening?just weeks before the start of the 2006 World Cup, which Germany is hosting. The world's football fans will use the services of Deutsche Bahn, Europe's biggest railway, to travel between the 12 cities that are staging matches.
Germany's enduring ability to make the trains run on time should impress visitors. Businessmen and investors, however, may be impressed by something else that Mr Mehdorn has done with Deutsche Bahn. He has taken a huge state-owned railway system, successfully diversified it into other related businesses, and made it profitable. The managers of America's famously troubled Amtrak system, or of Britain's controversial privatised railways, would love to be able to say the same.
Running Deutsche Bahn has been one long battle for the pugnacious Mr Mehdorn. A stocky Berliner, his goal was to turn the Bahn from a heavily subsidised, state-owned railway into a self-financing ?mobility provider?. His style has made him unpopular with some politicians?the mayor of Berlin recently accused him of planning a ?deal made in the madhouse? with the City of Hamburg. But his unfussy bluntness has also won admirers. Despite the halving of the company's workforce over the past 11 years, he is regarded as a boss who cares. It helps that his pay?rumoured to be ?650,000 ($767,000) a year?is modest by fat-cat standards. He also has little time for elaborate public relations. He makes no secret of his love for driving?cars not trains?and says frankly that if it makes more sense to take the plane than the train, that is what he will do.
Mr Mehdorn's adventures with Deutsche Bahn began when he joined as chief executive in 1999, after a career at engineering firms. Through a strategy of acquisition and diversification, he has transformed the group into Europe's biggest rail-freight operator, Germany's biggest bus operator, and the world's number two in airfreight and number three in sea-freight. Deutsche Bahn has just bought Bax Global, an American logistics firm, for $1.1 billion, adding it to Schenker and Stinnes, two German logistics firms which Mr Mehdorn acquired in 2002. The firm is also making more imaginative use of its own technology?it is hoping to sell its digital-radio-network technology to the federal police and emergency services. With car-sharing, multi-storey car parks at stations and even bicycle hire added to its portfolio under Mr Mehdorn, Deutsche Bahn is sending the message that rail is only one part, albeit the core, of the services it provides. Some 34% of the firm's turnover is now outside Germany, and nearly half (46%) of its overall turnover is non-rail.
Mr Mehdorn is spurred by the example of Deutsche Post, whose McKinsey-bred management has turned it from a sleepy sorting office into a global logistics firm. But he also sees no alternative to diversification beyond rail, given the protectionism in Europe, which would otherwise constrain Deutsche Bahn's growth. Despite a 1991 European Union directive which set targets for inter-operability between national rail systems, little progress has been made. ?Imagine if a truck driver had to put in different fuel, change the position of his headlights, and speak the native language every time he crossed a border in Europe, that's what it's like for trains,? fumes Mr Mehdorn. A dozen different types of fire extinguisher are specified across Europe. In Scandinavia every train must carry a gun on board, in case of reindeer. Only recently, after years of wrangling, did Deutsche Bahn and SNCF, its French counterpart, finally agree on streamlining the vital link between Frankfurt and Paris.
Cargo trains imprisoned by national borders cannot make money, Mr Mehdorn says. Only because of its diversification was Deutsche Bahn able to turn its first profit, of ?154m ($181.7m) in 2004, 11 years after it became a (state-owned) joint-stock company. Profits for 2005, not yet announced, are expected to be above ?400m. Although the German railway system as a whole is still heavily subsidised?particularly municipal railways?Deutsche Bahn says it is now free of the need for subsidy.
All aboard for privatisation
Its long-distance and regional passenger routes are certainly profitable. But Mr Mehdorn's critics point to the sluggish growth of rail use. The Bahn scored an own-goal in 2002 by trying to sell tickets with demand-driven pricing?like a low-cost airline?misjudging totally the value its customers placed on flexible rail travel. Passengers deserted in droves. It took until last year to claw numbers back to 1999 levels. Mr Mehdorn insists there is lots of growth potential?half the German population does not yet use rail. Overall rail usage rose by 26% for passengers and 39% for freight between 1993 and 2005, he points out.
Mr Mehdorn may have convinced himself; but his job is to convince investors and politicians that Deutsche Bahn will be fit to sell some of its shares, perhaps 20%, in two or three years' time. Opinions are deeply divided on how the deal should be structured. Mr Mehdorn insists on an ?integrated? solution in which Deutsche Bahn keeps ownership of the tracks. Others argue that control of the tracks stifles competition and, anyway, would make the Bahn impossible for investors to value.
A decision on the privatisation is likely to come this summer. Because of Germany's financial plight, the need to raise cash may weigh more heavily than a desire to do the very best by Deutsche Bahn. After all that Mr Mehdorn has done to get the business into shape, that would be a real pity.