[House Hearing, 116 Congress]
[From the U.S. Government Publishing Office]
THE IMPACTS OF STATE-OWNED ENTERPRISES ON PUBLIC TRANSIT AND FREIGHT
RAIL SECTORS
=======================================================================
(116-16)
HEARING
BEFORE THE
COMMITTEE ON
TRANSPORTATION AND INFRASTRUCTURE
HOUSE OF REPRESENTATIVES
ONE HUNDRED SIXTEENTH CONGRESS
FIRST SESSION
__________
MAY 16, 2019
__________
Printed for the use of the
Committee on Transportation and Infrastructure
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Available online at: https://www.govinfo.gov/committee/house-
transportation?path=/browsecommittee/chamber/house/committee/
transportation
__________
U.S. GOVERNMENT PUBLISHING OFFICE
37-138 PDF WASHINGTON : 2020
COMMITTEE ON TRANSPORTATION AND INFRASTRUCTURE
PETER A. DeFAZIO, Oregon, Chair
ELEANOR HOLMES NORTON, SAM GRAVES, Missouri
District of Columbia DON YOUNG, Alaska
EDDIE BERNICE JOHNSON, Texas ERIC A. ``RICK'' CRAWFORD,
ELIJAH E. CUMMINGS, Maryland Arkansas
RICK LARSEN, Washington BOB GIBBS, Ohio
GRACE F. NAPOLITANO, California DANIEL WEBSTER, Florida
DANIEL LIPINSKI, Illinois THOMAS MASSIE, Kentucky
STEVE COHEN, Tennessee MARK MEADOWS, North Carolina
ALBIO SIRES, New Jersey SCOTT PERRY, Pennsylvania
JOHN GARAMENDI, California RODNEY DAVIS, Illinois
HENRY C. ``HANK'' JOHNSON, Jr., ROB WOODALL, Georgia
Georgia JOHN KATKO, New York
ANDRE CARSON, Indiana BRIAN BABIN, Texas
DINA TITUS, Nevada GARRET GRAVES, Louisiana
SEAN PATRICK MALONEY, New York DAVID ROUZER, North Carolina
JARED HUFFMAN, California MIKE BOST, Illinois
JULIA BROWNLEY, California RANDY K. WEBER, Sr., Texas
FREDERICA S. WILSON, Florida DOUG LaMALFA, California
DONALD M. PAYNE, Jr., New Jersey BRUCE WESTERMAN, Arkansas
ALAN S. LOWENTHAL, California LLOYD SMUCKER, Pennsylvania
MARK DeSAULNIER, California PAUL MITCHELL, Michigan
STACEY E. PLASKETT, Virgin Islands BRIAN J. MAST, Florida
STEPHEN F. LYNCH, Massachusetts MIKE GALLAGHER, Wisconsin
SALUD O. CARBAJAL, California, Vice GARY J. PALMER, Alabama
Chair BRIAN K. FITZPATRICK, Pennsylvania
ANTHONY G. BROWN, Maryland JENNIFFER GONZALEZ-COLON,
ADRIANO ESPAILLAT, New York Puerto Rico
TOM MALINOWSKI, New Jersey TROY BALDERSON, Ohio
GREG STANTON, Arizona ROSS SPANO, Florida
DEBBIE MUCARSEL-POWELL, Florida PETE STAUBER, Minnesota
LIZZIE FLETCHER, Texas CAROL D. MILLER, West Virginia
COLIN Z. ALLRED, Texas GREG PENCE, Indiana
SHARICE DAVIDS, Kansas
ABBY FINKENAUER, Iowa
JESUS G. ``CHUY'' GARCIA, Illinois
ANTONIO DELGADO, New York
CHRIS PAPPAS, New Hampshire
ANGIE CRAIG, Minnesota
HARLEY ROUDA, California
CONTENTS
Page
Summary of Subject Matter........................................ v
STATEMENTS OF MEMBERS OF CONGRESS
Hon. Peter A. DeFazio, a Representative in Congress from the
State of Oregon, and Chair, Committee on Transportation and
Infrastructure:
Opening statement............................................ 1
Prepared statement........................................... 3
Hon. Sam Graves, a Representative in Congress from the State of
Missouri, and Ranking Member, Committee on Transportation and
Infrastructure:
Opening statement............................................ 4
Prepared statement........................................... 5
Hon. Daniel Lipinski, a Representative in Congress from the State
of Illinois, and Chair, Subcommittee on Railroads, Pipelines,
and Hazardous Materials, prepared statement.................... 87
WITNESSES
Scott N. Paul, President, Alliance for American Manufacturing:
Oral statement............................................... 6
Prepared statement........................................... 8
Brigadier General John Adams, U.S. Army (Retired), President,
Guardian Six LLC:
Oral statement............................................... 15
Prepared statement........................................... 17
Hamilton Galloway, Head of Consultancy for the Americas, Oxford
Economics:
Oral statement............................................... 23
Prepared statement........................................... 25
Frank J. Cilluffo, Director, McCrary Institute for Cyber and
Critical Infrastructure Security, Auburn University:
Oral statement............................................... 29
Prepared statement........................................... 30
Zachary Kahn, Director of Government Relations, North America,
BYD Motors LLC:
Oral statement............................................... 37
Prepared statement........................................... 38
Phillip A. Washington, CEO, Los Angeles County Metropolitan
Transportation Authority:
Oral statement............................................... 41
Prepared statement........................................... 43
SUBMISSIONS FOR THE RECORD
CRRC Tweet Submitted for the Record by Hon. Eric A. ``Rick''
Crawford, a Representative in Congress from the State of
Arkansas, and Ranking Member, Subcommittee on Railroads,
Pipelines, and Hazardous Materials............................. 49
E-mail Submitted for the Record by Hon. Crawford................. 88
Letter from Scott N. Paul, President, Alliance for American
Manufacturing, Submitted for the Record by Hon. DeFazio........ 88
Letter from Lonnie R. Stephenson, International President,
International Brotherhood of Electrical Workers, Submitted for
the Record by Hon. DeFazio..................................... 89
Statement of the Railway Supply Institute, Submitted for the
Record by Hon. DeFazio......................................... 90
Letter from Jeffrey D. Knueppel, General Manager, Southeastern
Pennsylvania Transportation Authority, Submitted for the Record
by Hon. DeFazio................................................ 92
Letter from John Samuelsen, International President, Transport
Workers Union of America, AFL-CIO, Submitted for the Record by
Hon. DeFazio................................................... 93
Report, ``Assessing How Foreign State-Owned Enterprises' U.S.-
Based Operations Disrupt U.S. Jobs,'' Oxford Economics, June
2019, Submitted for the Record by Hon. DeFazio................. 93
Statement of Ian Jefferies, President and Chief Executive
Officer, Association of American Railroads, Submitted for the
Record by Hon. Graves of Missouri.............................. 93
APPENDIX
Questions from Hon. Henry C. ``Hank'' Johnson, Jr. for Scott N.
Paul, President, Alliance for American Manufacturing........... 97
Questions from Hon. Peter A. DeFazio for Brigadier General John
Adams, U.S. Army (Retired), President, Guardian Six LLC........ 98
Questions from Hon. Eleanor Holmes Norton for Brigadier General
John Adams, U.S. Army (Retired), President, Guardian Six LLC... 99
Questions from Hon. Peter A. DeFazio for Hamilton Galloway, Head
of Consultancy for the Americas, Oxford Economics.............. 100
Questions from Hon. Eleanor Holmes Norton for Hamilton Galloway,
Head of Consultancy for the Americas, Oxford Economics......... 101
Questions from Hon. Henry C. ``Hank'' Johnson, Jr. for Hamilton
Galloway, Head of Consultancy for the Americas, Oxford
Economics...................................................... 101
Questions from Hon. Peter A. DeFazio for Frank J. Cilluffo,
Director, McCrary Institute for Cyber and Critical
Infrastructure Security, Auburn University..................... 102
Questions from Hon. Eleanor Holmes Norton for Frank J. Cilluffo,
Director, McCrary Institute for Cyber and Critical
Infrastructure Security, Auburn University..................... 103
Questions from Hon. Henry C. ``Hank'' Johnson, Jr. for Frank J.
Cilluffo, Director, McCrary Institute for Cyber and Critical
Infrastructure Security, Auburn University..................... 103
Questions from Hon. Peter A. DeFazio for Zachary Kahn, Director
of Government Relations, North America, BYD Motors LLC......... 104
Questions from Hon. Peter A. DeFazio for Phillip A. Washington,
CEO, Los Angeles County Metropolitan Transportation Authority.. 104
Questions from Hon. Greg Stanton for Phillip A. Washington, CEO,
Los Angeles County Metropolitan Transportation Authority....... 105
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May 14, 2019
SUMMARY OF SUBJECT MATTER
TO: Members, Committee on Transportation and
Infrastructure
FROM: Staff, Committee on Transportation and
Infrastructure
RE: Full Committee Hearing on ``The Impacts of State-
Owned Enterprises on Public Transit and Freight Rail Sectors''
PURPOSE
The Committee on Transportation and Infrastructure will
meet on Thursday, May 16, 2019, at 10 a.m. in 2167 Rayburn
House Office Building, to receive testimony on ``The Impacts of
State-Owned Enterprises on Public Transit and Freight Rail
Sectors.'' At the hearing, Members will receive testimony about
recent entrants to the rolling stock market, current Federal
policies, and the impacts on American workers, American
taxpayers and transit riders. The Committee will hear from
representatives of the Alliance for American Manufacturing,
Guardian Six Consulting, Oxford Economics, McCrary Institute
for Cyber and Critical Infrastructure Security, BYD, and Los
Angeles County Metropolitan Transportation Authority.
BACKGROUND
Capitalist markets thrive on fair and open competition to
promote efficiency, reduce costs, and improve innovation.
Foreign state-owned enterprises (SOEs) can undermine otherwise
functioning free markets because they benefit from state
subsidies and preferential treatment and use those benefits to
undercut the competition.
In China, a non-market economy, the central government owns
51,000 SOEs, valued at $29.2 trillion USD and that employ
approximately 20.2 million people.\1\ These SOEs benefit from
Chinese SOE loan rates that averaged approximately 3.8 percent
in 2012, while private companies in China paid approximately
6.8 percent for their loans.\2\ In addition, Chinese SOE return
on investment was less than half that of private companies in
China. The ability to reduce their profit margins enables SOEs
to undercut foreign competition.\3\
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\1\ Korin Kane. Size and Sectoral Distribution of State-Owned
Enterprises: Main Findings of the Latest Review. OECD. 28 September
2017. https://www.oecd.org/industry/ind/Item_6_3_OECD_Korin_Kane.pdf
\2\ Can a Tiger Change Its Stripes? Reform of Chinese State owned-
enterprises in the Penumbra State. Page 14. Working Paper 25475.
National Bureau of Economic research. http://www.nber.org/papers/w25475
\3\ Ibid. Page 17.
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CRRC STATE OWNERSHIP AND SUBSIDIES
The state-owned China Railway Rolling Stock Corporation,
known as CRRC, was formed in 2015 by the merger of China CNR
and CSR, creating a monopoly within China that employs 176,000
people. It is by far the largest train manufacturer in the
world. As the rail construction boom across China begins to
slow down, the Chinese government facilitated the merger to
boost their international market share.
Top 10 rolling stock manufacturers ranked by estimated new
rolling stock revenue 2017 [EUR billion]
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As a SOE, CRRC has preferential access to cheap credit from
Chinese state banks and remains heavily subsidized. In its
listing announcement on the Shanghai Stock Exchange, CRRC noted
that in 2014 and 2015, it received $194 million (RMB 1.3
billion) and $268.7 million (RMB 1.8 billion) in government
subsidies, respectively. The company stated that were its
government subsidies reduced, it would have a ``definite
negative impact on the company's business results and financial
position.'' \4\ This access to capital and heavy subsidies
allows CRRC to bid below market rates and undercut the
competition.
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\4\ Michelle Ker. China's High Speed Rail Diplomacy. U.S.-China
Economic and Security Review Commission. 21 February 2017. https://
www.uscc.gov/sites/default/files/Research/
China%27s%20High%20Speed%20Rail%20Diplomacy.pdf.
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CRRC IN THE PUBLIC TRANSIT SECTOR
Since 2015, CRRC won four consecutive transit rail rolling
stock contracts with public transit agencies in the United
States. These contracts were awarded to CRRC, because its bids
were substantially lower than competitor bids. A summary of
each contract follows:
Boston: In 2015, Massachusetts Bay Transportation Authority
(MBTA) awarded CNR, now part of CRRC, a contract for 342 heavy
rail cars with a bid of $567 million. This was significantly
lower than any of the other bids, with the closest coming from
Hyundai Rotem at $720.6 million, Kawasaki at $904.9 million,
and Bombardier at $1.08 billion. Above the rolling stock bid,
CRRC built a new $60 million assembly plant in Springfield, MA,
where the rail cars will be assembled.\5\ The original 342 rail
car order amounts to $1.66 million per rail car. CRRC MA
President Xiwei Lu said the company offered such a low bid, in
part because it viewed the MBTA project as an entry point to
the U.S. market: ``We are committed to be here. I want to enter
this market. So I don't calculate all the investment in one
project.'' \6\ In 2016, MTBA agreed to a no bid contract for
$280 million for an additional 130 rail cars from CRRC.\7\ This
second order, for the same cars, rose to $2.15 million per rail
car, reflecting a 30 percent price increase over the initial
order. Federal funding was not used to purchase the heavy rail
cars because the RFP mandated that the final assembly take
place in Massachusetts.\8\
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\5\ Matt Murphy. Chinese Rail Company Won MBTA Contract over
Objections of Other Bidders. Mass Live. 23 October 2014.
www.masslive.com/news/index.ssf/2014/10/
chinese_rail_company_wins_out.html.
\6\ Id.
\7\ Matt Stout. MBTA's No-Bid Plan Barrels Along to Replace Red,
Orange Line Cars. The Boston Herald. 13 December 2016. https://
www.bostonherald.com/2016/12/13/mbtas-no-bid-plan-barrels-along-to-
replace-red-orange-line-cars.
\8\ Paul Tuthill. Gov. Baker Hails First Springfield-Built Subway
Cars For The MBTA. WAMC. Dec 18, 2018 https://www.wamc.org/post/gov-
baker-hails-first-springfield-built-subway-cars-mbta.
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Chicago: In 2016, Chicago Transit Authority (CTA) awarded a
$1.3 billion contract to CRRC for 846 heavy rail cars if all
options are exercised. This amounts to $1.53 million per rail
car.\9\ Bombardier, which supplied 714 rail cars to CTA between
2009 and 2015, bid $226 million higher. Above the rolling stock
bid, CRRC built a new $100 million assembly plant in
Chicago.\10\ Federal funding was used to purchase the heavy
rail cars.\11\
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\9\ CTA Press Release. CTA Chooses Manufacturer for Newest-
Generation Rail Cars. March 9, 2016. https://www.transitchicago.com/
cta-chooses-manufacturer-for-newest-generation-rail-cars.
\10\ Mary Wisniewski. CTA Board Approves Contract to Replace Half
of Rail Cars. The Chicago Tribune. 10 March 2016. https://
www.chicagotribune.com/news/local/breaking/ct-cta-board-rail-cars-0310-
20160309-story.html.
\11\ Federal Transit Administration. Red and Purple Modernization
Phase One Project Chicago, Illinois (December 2018)https://
www.transit.dot.gov/sites/fta.dot.gov/files/docs/funding/grant-
programs/capital-investments/130361/il-redpurple-line-mod-profile-
profile.pdf.
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Los Angeles: In 2017, Los Angeles Metropolitan
Transportation Authority (LA METRO) awarded a $647 million bid
to CRRC for 282 heavy rail cars if all options are exercised.
The price per rail car is $2.29 million.\12\ The rail cars will
be assembled in the Springfield, MA plant. LA METRO did not
release competitor bid information. Federal funding was used to
purchase the heavy rail cars.\13\
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\12\ Brenda Goh. China's CRRC Corp Wins LA Metro Contract Worth Up
to $647 Million. Reuters. 27 March 2017. https://www.reuters.com/
article/us-crrc-usa/chinas-crrc-corp-wins-la-metro-contract-worth-up-
to-647-million-idUSKBN16Y0ZA.
\13\ Progressive Railroading. L.A. Metro inks pact with CRRC for up
to 282 new rail cars. March 24, 2017. https://
www.progressiverailroading.com/mechanical/article/LA-Metro-inks-pact-
with-CRRC-for-up-to-282-new-rail-cars--51154.
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Philadelphia: In 2017, Southeastern Pennsylvania
Transportation Authority (SEPTA) awarded a $137.5 million
contract to CRRC for 45 commuter rail cars, plus an option for
10 additional cars. Bombardier bid $171.5 million and Hyundai
Rotem, which has a manufacturing plant in South Philadelphia,
bid $184.7 million. The price per rail car is $3 million.
Federal funding was used to purchase the commuter rail
cars.\14\
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\14\ SEPTA Press Release. SEPTA Board Approves Purchase of Multi-
Level Coaches for Regional Rail. March 23, 2017. http://www.septa.org/
media/releases/2017/03-23-2017.html.
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Given that the other rolling stock competitors already have
final assembly plants in the U.S., CRRC is merely shifting jobs
from the competition to their new plants using their state-
owned enterprise advantage. This is evident from the recent
closure of the Hyundai Rotem plant in Philadelphia.\15\
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\15\ Joseph N. DiStefano. Philly railcar maker Hyundai Rotem gives
up and leaves town. Philadelphia Inquirer. August 17, 2018. https://
www.philly.com/philly/blogs/inq-phillydeals/septa-hyundai-rotem-crrc-
rail-cars-philadelphia-20180817.html.
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CRRC IN FREIGHT RAIL SECTOR
The United States freight rail sector could be affected by
CRRC. Currently, a number of U.S.-based companies manufacture
the majority of the freight rail cars that haul shipments
acrossthe United States.\16\ However, the experience of CRRC
entering, and then overtaking, the Australianfreight rail
industry once dominated by domestic companies is illustrative
of what could occur in the U.S.\17\
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\16\ Oxford Economics, Will we Derail US Freight Rolling Stock
Production? An Assessment of the Impact of Foreign State-owned
Enterprises on the US Freight Rolling Stock Production. May 2017. p. 4.
\17\ Oxford Economics, Will we Derail US Freight Rolling Stock
Production? An Assessment of the Impact of Foreign State-owned
Enterprises on the US Freight Rolling Stock Production. May 2017. p. 5.
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As recently as 2004, almost all of Australia's rail
vehicles were designed and produced by Australian-owned
companies. However, as CRRC entered this market, the Australian
manufacturers' share of the domestic freight rail market
dropped. In 2008, CRRC and its predecessors held a less than 40
percent market share of the Australian freight car market,
while the rest of the market was shared by Downer, UGL, and
Bradken of Australia.\18\ By 2016, however, CRRC dominated
freight rail car delivery, holding more than 95 percent of the
market share. Bradken was the only remaining domestic player,
with roughly less than 5 percent of freight railcar deliveries.
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\18\ Oxford Economics, Will we Derail US Freight Rolling Stock
Production? An Assessment of the Impact of Foreign State-owned
Enterprises on the US Freight Rolling Stock Production. May 2017. p. 16
citing SCI Verkehr data.
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Notably, in an attempt to remain competitive with CRRC,
Bradken had moved some of its manufacturing operations to China
in 2010. By 2014, the company moved all freight rail car
production out of Australia, yet it still struggled to compete
with CRRC, and in 2017 became a wholly-owned subsidiary of
Hitachi Machinery Company.\19\
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\19\ Bradken Limited, May 2014, Annual Report to Shareholders.
http://www.annualreports.com/HostedData/AnnualReportArchive/B/
ASX_BKN_2014.pdf.
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The freight rail industry invests significant amounts of
private funds into its network and systems, including the cars
railroads use to haul goods. Such purchases of rail cars not
using Federal funding are not subject to Federal Buy America
standards. While the majority of freight rail cars used today
are made by U.S. companies, the Australian experience suggests
that a SOE could disrupt this manufacturing sector. Domestic
freight rail car production supports approximately 65,000 jobs
and an estimated $6.5 billion in GDP. This economic impact
includes the direct impacts on the freight industry, the
industry's supply chain, and lost spending in the economy.\20\
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\20\ Oxford Economics, Will we Derail US Freight Rolling Stock
Production? An Assessment of the Impact of Foreign State-owned
Enterprises on the US Freight Rolling Stock Production. May 2017. p.
31.
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NATIONAL SECURITY IMPLICATIONS
New technologies intended to improve safety and efficiency
are being incorporated in freight and transit rail sectors.
These include advanced technologies and increasingly
interconnected systems that should be properly secured to
ensure they are not vulnerable to breaches.
Concerns about breaches of systems by those with malicious
intent are not unfounded. In May 2018, the Pentagon prevented
service members from purchasing on military bases phones made
by Chinese companies Huawei and ZTE, stemming from concerns
that a dominant presence of Chinese-made technology could make
it easier for hacking or spying.\21\ Congress later enacted the
John S. McCain National Defense Authorization Act for Fiscal
Year 2019 [P.L. 115-232], preventing Federal agencies from
using telecommunications equipment made by those same
companies, and in May of 2019, the FCC voted to block China
Mobile from U.S. markets due to national security concerns.\22\
In December 2018, the Department of Justice indicted two
individuals who, for at least 12 years, acted in association
with the Chinese Ministry of State Security to hack into
computers around the world, targeting intellectual property and
confidential information. These individuals targeted a range of
industries, including aviation and maritime technology as well
as telecommunications.\23\ Following that indictment, a
Department of Defense spokesman indicated that, ``the Chinese
Communist Party's use of predatory economic practices like
illegal states-sponsored cybertheft reinforce concerns about
Chinese companies playing a role in critical infrastructure--
whether it be rail cars or 5G telecommunications networks.''
\24\
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\21\ Hamza Shaban. Pentagon Tells U.S. Military Bases to Stop
Selling ZTE, Huawei Phones. The Washington Post. 2 May 2018. https://
www.washingtonpost.com/news/the-switch/wp/2018/05/02/pentagon-tells-u-
s-military-bases-to-stop-selling-zte-huawei-phones/?utm_term=
.da5df9799503.
\22\ David Shepardson, Sijia Jiang, China Urges U.S. to Respect
Market Economy After China Mobile Denied Entry. Reuters. May 9, 2019.
https://www.reuters.com/article/us-usa-fcc-china/fcc-votes-to-deny-
china-mobile-bid-to-operate-in-u-s-idUSKCN1SF1SX?feedType=RSS&feedName=
businessNews.
\23\ Department of Justice. Two Chinese Hackers Associated with the
Ministry of State Security Charged with Global Computer Intrusion
Campaigns Targeting Intellectual Property and Confidential Business
Information. 20 December 2018. https://www.justice.gov/opa/pr/two-
chinese-hackers-associated-ministry-state-security-charged-global-
computer-intrusion.
\24\ Robert McCartney and Faiz Siddiqui. Could a Chinese-made Metro
Car Spy on Us? Many Experts Say Yes. The Washington Post. 7 January
2019. https://www.washingtonpost.com/local/trafficandcommuting/could-a-
chinese-made-metro-car-spy-on-us-many-experts-say-yes/2019/01/07/
00304b2c-03c9-11e9-5df-5d3874f1ac36_story.html?noredirect=on&utm_term=
.644e6da8bc91. quoting Air Force Lt. Col Mike Andrew, a Defense
Department spokesman.
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Nearly 10.2 billion rides occurred on U.S. public transit
systems in 2017, during many of which passengers were connected
to the internet through on-board wifi routers.\25\ Advanced
technologies embedded on these rail cars could be exploited for
``spying and hacking of riders' personal data to intentional
disruptions of day-to-day operations to deliberate acts of
terrorism.'' \26\
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\25\ American Public Transportation Association. 2019 Public
Transportation Fact Book. https://www.apta.com/wp-content/uploads/
APTA_Fact-Book-2019_FINAL.pdf page 12.
\26\ Brigham A. McCown. China on the March: Cybersecurity and
Hidden Risks. Forbes. 17 December 2018. https://www.forbes.com/sites/
brighammccown/2018/12/17/china-on-the-march-cybersecurity-and-hidden-
risks/#5a7f1b164b88.
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The Department of Homeland Security (DHS) and the
Department of Transportation are designated as the Co-Sector-
Specific Agencies for the Transportation Systems Sector. The
U.S. freight rail network is designated by the DHS as being
part of the country's critical infrastructure.\27\ The freight
network hauls almost two billion tons of goods every year,
including approximately 35 percent of all U.S. exports. These
shipments include a wide array of goods ranging from
agricultural products and construction materials, to auto
parts, chemicals and energy products. Notably, freight rail
transports a significant share of hazardous materials,
including poisonous inhalation hazard and toxic inhalation
hazard materials, in addition to flammable and combustible
products.\28\ Protecting this material while in transport is
critical to public safety and environmental safeguarding.
Additionally, a 33,000-mile interconnected network of railroad
corridors are designated as the Strategic Rail Corridor Network
(STRACNET). Together with an additional 4,700 miles of
designated lines, STRACNET includes the railroad lines most
important to national defense, as they can serve U.S. defense
installations and activities and help ensure the rail network
infrastructure is robust and capable of quickly moving a large
force for contingency deployments.\29\
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\27\ See Department of Homeland Security. Critical Infrastructure
Sectors. Available at: https://www.dhs.gov/cisa/critical-
infrastructure-sectors; see also Presidential Policy Directive PPD-21.
The White House. 12 February 2013, available at: https://www.dhs.gov/
sites/default/files/publications/PPD-21-Critical-Infrastructure-and-
Resilience-508.pdf.
\28\ See Pipeline and Hazardous Materials Safety Administration.
Hazardous materials by Rail Liability Study. Pp. 16-17. https://
www.phmsa.dot.gov/sites/phmsa.dot.gov/files/docs/news/57011/report-
congress-hazardous-materials-rail-liability-study-nov-2017_1.pdf.
\29\ United States Army. Strategic Rail Corridor Network (STRACNET)
and Defense Connector Lines. October 2018. https://www.sddc.army.mil/
sites/TEA/Functions/SpecialAssistant/RND%20Publications/
STRACNET%202018_Reduced.pdf.
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BYD OWNERSHIP AND SUBSIDIES
BYD asserts that it is a private company. It does benefit
from Chinese state-owned investment funds and enterprises that
hold equity interests in BYD and its subsidiaries. These
investments from the Chinese investment funds are in addition
to substantial Chinese government subsides, which totaled $191
million (RMB 1.3 billion) in 2017 alone.\30\ In 2018, BYD
recognized $338 million in (RMB 2.3 billion) in Chinese
government grants in its income statement.\31\
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\30\ BYD 2017 Annual Report, page 140.
\31\ Kenji Kawase. For Some Chinese Companies, Generous State
Subsidies Make up for Losses. Nikkei Asian Review. 24 April 2019.
https://asia.nikkei.com/Spotlight/Cover-Story/For-some-Chinese-
companies-generous-state-subsidies-make-up-for-losses.
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China's electric battery subsidies appear to be targeted
specifically to BYD over other Chinese electric battery
companies, allowing BYD a competitive advantage.\32\ China has
poured more than $10 billion into the electric vehicle (EV)
battery industry since 2012, equating to a subsidy of around
$10,000 per electric car, and higher for electric buses. The
government also shouldered much of the cost for battery
plants.\33\ Despite this significant effort by BYD and the
Chinese government to invest heavily in battery manufacturing
in China, BYD is certifying its batteries as U.S. domestic
content under Buy America rules. BYD calculates that these
battery packs meet 53 percent out of 65 percent of the domestic
content standard.\34\
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\32\ Anjani Trivedi. Buffett's China Ride Is Losing Power With
Investors. Bloomberg. February 19, 2019. https://www.bloomberg.com/
opinion/articles/2019-02-19/china-s-byd-backed-by-buffett-is-losing-
its-electric-car-edge.
\33\ https://asia.nikkei.com/Economy/Brutal-culling-awaits-China-s-
EV-battery-makers-as-support-ends.
\34\ Albuquerque City Inspector General. OIG 18-0001-R Report of
Inspection: ART Project. Page 31.
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BYD IN PUBLIC TRANSIT SECTOR
BYD has won electric bus contracts with 45 entities,
including Los Angeles, Albuquerque, and Indianapolis. Concerns
about reliability, delivery schedules, and meeting the
contracted specification of battery range have been publically
raised for some of the orders.
Los Angeles Metro returned five BYD buses in 2016, pulling
these five buses off the road after less than five months of
service. A recent Los Angeles Times report cited internal
emails and other agency records in which agency staff called
BYD buses ``unsuitable,'' poorly made, and unreliable for more
than 100 miles.\35\
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\35\ Paige St. John. Stalls, Stops and Breakdowns: Problems Plague
Push for Electric Buses. The Los Angeles Times. 20 May 2018. https://
www.latimes.com/local/lanow/la-me-electric-buses-20180520-story.html.
---------------------------------------------------------------------------
The City of Albuquerque contracted with BYD for 20 electric
buses at just under $23 million, using Federal Capital
Investment Grant program funding. Bus delivery delays and
concerns that the buses could not complete the route as
specified in the contract led the city to seek an independent
report from the Center for Transportation and the Environment
(CTE). They modelled the bus route to test the buses and
simulate various conditions that mirror real service in the
corridor--running the doors, heat, HVAC and all other bus
systems, and also loading weight onto the buses to simulate
passengers. The simulations found that the operational plan
developed for Albuquerque could not be achieved by the buses
BYD delivered.\36\ The buses only averaged 177 miles on a
single charge, as opposed to the 275 miles specified in the
contract. The City Inspector General also found significant
concerns with federally required post-delivery Buy America
certification.\37\ Ultimately, the city returned all the BYD
buses for failure to meet contract specifications and filed a
lawsuit, which is still pending.\38\
---------------------------------------------------------------------------
\36\ City of Albuquerque Files Lawsuit Against BYD. Intelligent
Transport. 14 December 2018. https://www.intelligenttransport.com/
transport-news/74221/city-albuquerque-lawsuit-byd.
\37\ Office of Inspector General. City of Albuquerque. Inspection
of Albuquerque Rapid Transit Project Procurement. 6 June 2018. https://
media.krqe.com/nxs-krqetv-media-us-east-1/document_dev/2018/06/07/
Rep%20of%20Inspection%20ART_1528430650775_44821973_
ver1.0.pdf.
\38\ Maddy Hayden. City Sues BYD Over ART buses. Albuquerque
Journal. 7 December 2018. https://www.abqjournal.com/1254901/city-sues-
over-art-buses.html.
---------------------------------------------------------------------------
In 2017, the City of Indianapolis approved a contract with
BYD for electric buses using Federal Capital Investment Grant
program funding.\39\ The IndyGo Bus Rapid Transit BRT Red and
Blue lines will also use BYD electric buses, but the first
buses delivered are also experiencing significant range issues,
averaging only 205 miles during testing by IndyGo well under
the contractual specification of 275 miles.\40\
---------------------------------------------------------------------------
\39\ https://www.transit.dot.gov/sites/fta.dot.gov/files/docs/
funding/grant-programs/capital-investments/130096/indygo-red-line-
rapid-transit-fy-19-profile.pdf.
\40\ Paris Lewbel. IndyGo Red Line Electric Bus Testing Results May
Have Been Flawed. RTV6 Indianapolis. 13 March 2019. https://
www.theindychannel.com/news/call-6-investigators/call-6-indygo-red-
line-electric-bus-testing-results-may-have-been-flawed.
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PENDING LEGISLATION
Senators Cornyn (R-TX), Baldwin (D-WI), Crapo (R-ID), and
Brown (D-OH) introduced S. 846, the Transit Infrastructure
Vehicle Security Act, a bill to prevent Federal funds from
being used to buy transit rail cars or buses manufactured by
Chinese owned, controlled, or subsidized companies, although
pre-existing contracts would be continued. The bill also
requires cybersecurity certification and 3rd party testing of
critical hardware and software. A companion House bill is
expected to be introduced by the date of this hearing.
WITNESS LIST
Mr. Scott N. Paul, President, Alliance for
American Manufacturing (AAM)
Brigadier General John Adams, U.S. Army (Ret.),
President, Guardian Six Consultancy LLC
Mr. Hamilton Galloway, Head of Consultancy,
Americas, Oxford Economics
Mr. Frank Cilluffo, Director, McCrary Institute
for Cyber and Critical Infrastructure Security, Auburn
University
Mr. Zachary Kahn, Director of Government
Relations, BYD Heavy Industries
Mr. Phillip A. Washington, CEO, Los Angeles
County Metropolitan Transportation Authority
THE IMPACTS OF STATE-OWNED ENTERPRISES ON PUBLIC TRANSIT AND FREIGHT
RAIL SECTORS
----------
Thursday, May 16, 2019
House of Representatives,
Committee on Transportation and Infrastructure,
Washington, DC.
The committee met, pursuant to notice, at 10 a.m., in room
2167, Rayburn House Office Building, Hon. Peter A. DeFazio
(Chairman of the committee) presiding.
Mr. DeFazio. I would like to have the committee come to
order for today's hearing.
This hearing today is not about any one company or one
sector or one nation. This is about how Congress will respond
to other nations, in this case specifically China, wiping out
U.S. transit and rail manufacturing and yet taking away more of
our high-paying, blue-collar jobs.
I have been fighting these sorts of battles for many
decades. I opposed every so-called free trade agreement since I
have been here. I opposed China's ascension into the WTO under
Clinton's premise that if we put them in the WTO, they would
follow the rules. They do not and they have not.
And I am going to use all of the tools we have to see that
they do not decimate the freight industry in America like they
did in Australia in a very short period of time, and that they
do not decimate our passenger railcar and bus manufacturing in
this country.
It is not just about the ultimate assembly. It is about all
of the parts that go into these vehicles and all of the jobs
that they support.
So today we are going to focus on that issue, state-owned
enterprises.
I was having a conversation with the President's Economic
Advisor about the Jones Act, and he said, ``Well, you
understand I am a free market guy. I like competition.''
And I said, ``Well, Larry, is it competition for an
American shipyard to compete with the Government of Communist
China?''
And he really had to kind of think about that for a minute,
and he said, ``Well, yeah.''
I said, ``Yeah. How about competition with a level playing
field?''
In this case, U.S. companies currently produce the majority
of freight railcars. We have one of the most robust freight
networks in the world, 65,000 jobs. But as I mentioned earlier,
we saw that industry wiped out in Australia by China in a very
short period of time.
And I believe they have set their targets, and part of
their 2025 plan is to take over that industry worldwide with
unfair--subsidized in this case of the railcar company, CRRC,
state-owned. Communist Government of China owns the company.
And in the case of the BYD, we have a company that is very
heavily subsidized by the Government of Communist China.
You know, I strengthened. We had a long discussion. We did
the FAST Act, and we moved up the Buy American standards of
domestic content up to 70 percent, and we are phasing that in.
Yet there are loopholes in the way things are defined,
subassembly, assembly, component, you know, system, whatever.
We have had these discussions before. Clearly, the law needs
some clarification.
And in the case of BYD, they send over all of these small
batteries made in China, send over a battery case made in
China, but workers here assemble it, and then they claim that
was made in America, and it constitutes 53 percent of the value
of the bus.
I mean, clearly, there is something wrong with the way that
is being scored, and that is not made in America.
So and then I have a local example in my district.
Sometimes politics is local. My LTD, my local bus company,
ordered some of these spiffy BYD buses in 2016. After they
finally were belatedly and outside the contract delivered and
did not work, they were sent back.
Albuquerque, of course, is in litigation with BYD for
dysfunctional buses, and you know, I understand. Transit
agencies are under a lot of pressure. The Federal Government
has not been a good partner. We have got a $100 billion backlog
for state of good repair in our transit, which could be one
hell of a lot of American jobs if we go about this right.
But the Federal Government has not had the will nor has
Congress to raise the revenues necessary to better partner and
begin to chip away at that deficit.
So some transit agencies have turned to these below cost
vehicles or very low-cost vehicles, and you know, again, I
cannot totally blame them, but you know, for every U.S. transit
railcar final assembly job, and, yes, some of these are union
jobs, good jobs, and this is not about those workers. They are
doing the best they can with what the Chinese ship here for
them to put together.
And they do not do the engineering and design work. All of
that is done in China, where many of the problems lie.
And for every one of those jobs we get as assembling
Chinese parts over here, we lose 3.5 jobs in our economy, and
that includes an assumption that they comply with Buy America,
which, I think, in this case is very, very questionable.
They are smart. They unionized. They put these plants in
very strategic places. They did not know Democrats were going
to take over the House. So they put the plant in Kevin
McCarthy's district. I think they would put it in someone
else's district if they had known Democrats would take over the
House, but they are not dumb.
So we are here today to get into this issue and see what
remedies might lie. Legislation has been introduced in the
Senate and in the House to address this issue. Harley Rouda, a
member of this committee, is the sponsor in the House, and we
will be looking and talking about that legislation here today
in the hearing.
With that I yield back the balance of my time and recognize
the ranking member, Representative Graves.
[Mr. DeFazio's prepared statement follows:]
Prepared Statement of Hon. Peter A. DeFazio, a Representative in
Congress from the State of Oregon, and Chair, Committee on
Transportation and Infrastructure
Today's hearing is not about one company, one sector, or one
nation. It is about how Congress will respond to other nations'
systematically wiping out the U.S. transit and rail manufacturing base
and our blue-collar workforce.
I have been fighting similar battles for decades. I opposed
multiple Free Trade Agreements that failed to protect U.S.
manufacturers and American workers. I opposed China's ascension into
the WTO. And I will continue to wage this battle with every tool in the
toolbox to vigorously defend our domestic transportation manufacturing
sector from state-subsidized entities.
My views of trade policy are not ideological; they are informed by
observing the long run effects that unfair trade has had on my
district. For three decades, blue-collar workers have been getting
shafted all in the name of free trade. I have watched industries suffer
the fate of bad trade deals and foreign incursions into the U.S.
marketplace. I have battled to save multiple industries including
paper, lumber, furniture, solar, trucking, auto, maritime, and
agriculture.
And the hits keep coming. Today, state-owned enterprises and
similarly subsidized corporations are beginning to enter the transit
rail and bus market, using subsidies from foreign governments to
undercut long-established manufacturers and grab American taxpayer
dollars. State-owned enterprises are also eyeing the U.S. domestic
freight rail market. Tens of thousands of U.S. jobs are supported by
this domestic manufacturing sector, but it could be decimated by unfair
foreign competition.
Not on my watch.
Today we will hear from several witnesses raising concern about
state-owned enterprises and similar corporations undercutting the U.S.
rail and bus rolling stock market, the potential long-term effect on
U.S. workers, cybersecurity risks, and reliability problems. I share
these concerns.
Currently, U.S. companies produce the majority of the freight rail
cars that haul shipments across the country. Nearly 65,000 jobs are
supported by the production of these rail cars. But as the Australian
domestic manufacturing sector experienced, if left unchecked, state-
owned enterprises can enter the market, dominate production, and
squeeze-out domestic companies. We cannot let that happen in the U.S.
Today's witnesses will help explain the dangers of letting domestic
companies fall victim to state-subsidized companies as well as the
security concerns that would be created if that occurred.
I also want to hear today if these state-owned companies are truly
complying with federal transit Buy America rules. Federal laws like Buy
America protect taxpayer interests in preserving U.S. jobs when local
transit agencies use federal funds to purchase rolling stock. In the
FAST Act, I strengthened Buy America standards by increasing the
domestic content percentage phased-in to 70 percent.
Members of the House and Senate sharing these concerns have
introduced the Transit Infrastructure Vehicle Security Act to prevent
federal transit dollars from being used to procure transit rail rolling
stock and transit buses from Chinese state-owned, controlled or
subsidized enterprises. The House bill, H.R. 2739, was introduced by
Representative Rouda, a Transportation and Infrastructure Committee
member, along with several other Committee members who are original co-
sponsors of the bill. I look forward to hearing the views of today's
witnesses on this pending legislation.
I don't blame transit agencies for seeking cheaper rolling stock. I
know they are severely underfunded, and the state of good repair back
log continues to grow. That backlog is currently approaching $100
billion nationwide and the federal government only provides
approximately $12.5 billion a year to meet all transit needs.
For example, in my district, the local transit agency, LTD, ordered
five BYD buses in 2016. After years of delay and delivery of defective
buses, they still do not have all five buses. Similar problems are
found in several other transit agencies across the U.S. These poorly
constructed buses only exacerbate the $100 billion backlog of state of
good repair.
I realize most products today are built with the goal of low
initial cost, rather than durability. But dollar for dollar, it is
cheaper to build for durability over the long run and that principal is
enshrined in federal rules that require a bus to remain in service for
12 years.
I also understand that the state-owned enterprises with U.S.
contracts have hired U.S. workers, and in some cases these workers even
have union contracts. This hearing is not a criticism of those workers,
or unions. In fact, I think the number of workers who benefit from a
union contract ought to be much higher.
However, nobody today can honestly believe that Chinese companies
are pro-labor union. The unionization of these jobs is a tactic to
dodge the real issues these state-owned enterprises bring to the table.
State-owned enterprises have a history of using supply chains in
low-cost countries and shipping the product to the destination country.
Research suggests that for every U.S. transit rail car final assembly
job created by a state-owned enterprise, the net loss is 3.5 jobs in
the U.S. economy--and that estimate assumes the company complies with
Buy America standards.
State-owned enterprises ultimately pose serious risk to U.S.
skilled workers, labor unions, and the existing companies who play by
the rules. That's why we're holding this hearing. I thank the witnesses
for being here and look forward to your testimony.
Mr. Graves of Missouri. Thank you, Mr. Chairman.
A modern transportation infrastructure system means a
strong and secure America. Our public transit and freight rail
systems are an integral part of our larger transportation
network.
Technology modernization, which has been a priority of mine
for a long time, drives improvements in safety and congestion,
and it creates efficiencies.
However, as we adopt transportation technologies, safety
and cybersecurity have to remain top priorities. And earlier
this month, the Federal Government released a list of 55
national critical functions, and it is no surprise that these
functions include transportation by rail, and mass transit,
along with transport by air, road, vessel, pipeline, all of the
areas that this committee is responsible for overseeing.
Any disruption or corruption to these functions or to our
transportation network as a whole would have a very
debilitating effect. This is why today we are going to study
the effects of state-owned enterprises, of SOEs, on our
infrastructure network.
SOEs are either wholly owned, as has been pointed out, or
partially owned by a government that receives government
funding to subsidize its operations, and these subsidies allow
SOEs to gain U.S. market share by underbidding on their
contracts.
And in addition, as an extension of a government, an SOE
can carry out political, economic, and militarist interests of
that state government. And make no mistake. We have to
investigate the motivation and intent of SOEs when they enter
our infrastructure markets.
China, in particular, possesses sophisticated capabilities,
and it does have a track record of committing economic
espionage focused on data collection of trade secrets and
intellectual property.
And today we are focused on entrants to the rolling stock
market and the impacts of these entrants on the public transit
and freight rail sectors. Concerns have been raised about these
recent entrants and particularly whether or not their ownership
or access to government subsidies gave them an unfair
advantage.
One of those recent entrants, the China Railway Rolling
Stock Corporation, or the CRRC, successfully won contracts from
public transit agencies in major metropolitan cities across the
country to provide railcars with significantly lower bids than
the competition.
Concerns exist that CRRC will also expand to the freight
rail sector, and it is going to undermine a lot of U.S.
companies. This committee plays an integral role in ensuring
the safety and cybersecurity of the entire transportation
network.
I look forward to hearing about possible solutions to
ensure that we protect U.S. interests and maintain the security
of our transportation system.
And with that I yield back.
[Mr. Graves' prepared statement follows:]
Prepared Statement of Hon. Sam Graves, a Representative in Congress
from the State of Missouri, and Ranking Member, Committee on
Transportation and Infrastructure
A modern transportation infrastructure system means a strong,
secure America.
Our public transit and freight rail systems are integral to our
larger transportation network. Technology modernization, which has been
a priority of mine, drives improvements in safety and congestion, and
creates efficiencies.
However, as we adopt transportation technologies, safety and
cybersecurity must remain top priorities.
Earlier this month, the federal government released a list of 55
national critical functions. It is no surprise that these functions
include transport by rail and mass transit, along with transport by
air, road, vessel, and pipeline: all areas this committee is
responsible for overseeing. Any disruption or corruption to these
functions or to our transportation network as a whole would have a
debilitating effect.
This is why today we are studying the effects of state-owned
enterprises (SOEs) on our infrastructure network. SOEs are either
wholly or partially owned by a government and receives government
funding to subsidize its operations. The subsidies allow SOEs to gain
U.S. market share by under-bidding on contracts.
In addition, as an extension of a government, an SOE could carry
out political, economic, and militaristic interests of that state
government.
Make no mistake, we must investigate the motivation and intent of
SOEs entering our infrastructure markets. China in particular possesses
sophisticated capabilities and has a track record of committing
economic espionage focused on data collection of trade secrets and
intellectual property.
Today, we are focused on entrants to the rolling stock market and
the impacts of these entrants on the public transit and freight rail
sectors. Concerns have been raised about these recent entrants, in
particular whether or not their ownership or access to government
subsidies gave them an unfair advantage.
One of these recent entrants, the China Railway Rolling Stock
Corporation (CRRC) successfully won contracts from public transit
agencies in major metropolitan cities across the country to provide
rail cars with significantly lower bids than the competition. Concerns
exist that CRRC will also expand to the freight rail sector and
undermine U.S companies.
This Committee plays an integral role in ensuring the safety and
cybersecurity of the entire transportation network. I look forward to
hearing about possible solutions to ensure we protect U.S. interests
and maintain the security of our transportation systems.
Mr. DeFazio. I thank the gentleman for his opening
statement.
Now I would like to welcome our witnesses: Mr. Scott N.
Paul, president, Alliance for American Manufacturing;
Brigadier General John Adams, U.S. Army (Retired),
president, Guardian Six LLC;
Mr. Hamilton Galloway, head of consultancy for the
Americas, Oxford Economics;
Mr. Frank Cilluffo, director, McCrary Institute for Cyber
and Critical Infrastructure Security, Auburn University;
Zachary Kahn, director of government relations, BYD Heavy
Industries; and
Mr. Phillip A. Washington, CEO, Los Angeles County
Metropolitan Transportation Authority.
Thank you all for being here today. I look forward to your
testimony.
But before we do hear from the panel, I believe Mrs.
Napolitano wanted to do a special introduction.
Mrs. Napolitano. Yes, sir. Thank you, Mr. Chairman.
I am, indeed, greatly honored to introduce Phil Washington,
the CEO of Los Angeles Metro since 2015. He has been a
transformative leader in our region, in southern California, as
he has transitioned the L.A. Metro bus fleet to clean energy
vehicles, and he has passed major transportation measures to
construct rail transit lines and remove highway choke points
through L.A.
He is leading on innovation with first-mile and last-mile
solutions, such as bicycle and pedestrian paths, and on-demand
transportation services.
He also is helping create the next generation of
transportation workers with a workforce training partnership,
practical labor agreements that support apprenticeship, and is
even creating a transportation focus in high school for young
people.
Thank you, Mr. Washington, for being here. I thank you very
much.
I yield back.
Mr. DeFazio. I thank the gentlelady.
We now proceed to our first witness, Mr. Paul.
Mr. Paul, you have 5 minutes. You can summarize or
extemporaneously talk, whatever you want to do.
TESTIMONY OF SCOTT N. PAUL, PRESIDENT, ALLIANCE FOR AMERICAN
MANUFACTURING; BRIGADIER GENERAL JOHN ADAMS, U.S. ARMY
(RETIRED), PRESIDENT, GUARDIAN SIX LLC; HAMILTON GALLOWAY, HEAD
OF CONSULTANCY FOR THE AMERICAS, OXFORD ECONOMICS; FRANK J.
CILLUFFO, DIRECTOR, McCRARY INSTITUTE FOR CYBER AND CRITICAL
INFRASTRUCTURE SECURITY, AUBURN UNIVERSITY; ZACHARY KAHN,
DIRECTOR OF GOVERNMENT RELATIONS, NORTH AMERICA, BYD MOTORS
LLC; AND PHILLIP A. WASHINGTON, CEO, LOS ANGELES COUNTY
METROPOLITAN TRANSPORTATION AUTHORITY
Mr. Paul. Thank you. I will not read the entire 5,500
words.
Mr. DeFazio. Thank you.
Mr. Paul. Mr. DeFazio, I want to also thank you, and I
appreciate your longstanding and enlightened view on trade
policy. You have been proven to be correct about this.
And I want to thank Mr. Graves and the members of the
committee.
On behalf of the Alliance for American Manufacturing, a
labor-business partnership, thanks for the opportunity to
testify.
I am going to summarize my written testimony by making
three points. First, China's state-owned enterprises and
Beijing's economic policies that support these firms are a real
threat to American jobs and security.
Second, firms in the rail and bus transit space, such as
CRRC and BYD, that have established a foothold in the United
States, thanks in part to Government contracts financed by
taxpayers, are part of this web and represent the tip of the
iceberg.
Third, you can protect American jobs and security and
demand reciprocity through legislation and regulation.
China's model of state-led capitalism has contributed to
the loss of 3.4 million U.S. jobs and the hollowing out of our
industrial base as dumped and subsidized imports surged into
our market since China joined the WTO in 2001.
China heavily subsidizes its 51,000 state-owned enterprises
in almost every industry imaginable. These SOEs have devastated
broad swaths of American manufacturing through dumping
products, by building up over-capacity, and targeting American
firms with cyber hacking and IP theft.
The SOEs are also supported by policies, including, but not
limited to, discriminatory loan rates, tax rates, direct
subsidies, protected home markets, lax labor and environmental
regulation, and exchange rate misalignment.
Put simply, firms in the U.S. and elsewhere are not
competing with other companies. Rather, they are competing with
an entire nation which has amassed $29 trillion in value for
these state-owned enterprises.
And now these SOEs threaten the infrastructure arena. Two
such firms, CRRC and BYD, have begun securing lucrative U.S.
taxpayer financed contracts to supply our major cities with
transit railcars and electric buses. Their ambitions are
sizable, establishing a substantial foothold in public
procurement as a means of expanding into private sectors, such
as freight rail and passenger automobile markets, as I
illustrate in my written testimony.
CRRC is systematically working to drive established
competitors out of the market and achieve a monopoly in transit
railcar production. Now, if successful, this would be a
disaster for taxpayers and for transit providers that are
looking for legitimate, fair and broad competition for their
contracts.
And you can look at the Australian market for perspective.
In just the last decade, CRRC undertook a similar campaign
leading to the obliteration of that country's domestic rail
manufacturing sector.
And while final assembly of CRRC railcars may be local,
components and parts manufacturing include heavy Chinese
content. CRRC's U.S. assembly plants are a vehicle for this
content to be delivered into the U.S. market. That puts 90,000
highways jobs, many of them unionized, and 750 companies in 39
States at risk of being displaced.
Dominating the medium- and heavy-duty electric bus sector
is also in Beijing's plans. A key feature of China's industrial
policy is the support of national champions, such as BYD. BYD's
revenue growth has coincided closely with the trend of
government-supported subsidies, access to below-market-rate
capital, and other industrial policies.
And it is clear that BYD is also a delivery system for
Chinese imports at taxpayer expense. An inspector general
report issued by the city of Albuquerque calls into question
the legitimacy of BYD's compliance with Federal Buy America
laws.
Further evidence to support these assertions include BYD's
public comments to the USTR requesting section 301 tariff
relief for made-in-China storage batteries, parts, and electric
vehicles, specifically noting four electric bus models.
Already the world's largest electric vehicle company by
sales, BYD executives have been outspoken in their plans to one
day sell passenger cars in the United States. Now, this model
would threaten over 5,600 parts suppliers spread across the
Nation employing 871,000 workers, the very heart of American
manufacturing.
My testimony today should not be read as an attack on the
American workers employed by CRRC or BYD, nor on foreign
investment. We must respect the dignity of work and encourage
foreign investment.
But this is no ordinary foreign investment. Our workers and
firms in the supply chain are not competing with a company in
CRRC or BYD. They are competing with an entire country.
I have policy recommendations that I am happy to discuss in
Q&A, and I want to thank you for your time, Mr. Chairman.
[Mr. Paul's prepared statement follows:]
Prepared Statement of Scott N. Paul, President, Alliance for American
Manufacturing
Chairman DeFazio, Ranking Member Graves, and members of the
Committee, on behalf of the Alliance for American Manufacturing (AAM),
thank you for the opportunity to testify at today's hearing on the
Impacts of State-Owned Enterprises on Public Transit and Freight Rail
Sectors.
The Alliance for American Manufacturing is a non-profit, non-
partisan partnership formed in 2007 by some of America's leading
manufacturers and the United Steelworkers. Our mission is to strengthen
American manufacturing and create new private-sector jobs through smart
public policies. We believe that an innovative and growing
manufacturing base is vital to America's economic and national
security, as well as to providing good jobs for future generations. AAM
achieves its mission through research, public education, advocacy,
strategic communications, and coalition building around the issues that
matter most to America's manufacturers and workers.
introduction
For years, we have seen the destructive impacts of China's model of
state-led capitalism on our domestic manufacturing sector, and the
damaging ripple effects on thousands of communities across our nation.
Between 2001, when China entered the World Trade Organization (WTO),
and 2017, 3.4 million U.S. jobs were lost or displaced because of our
massive bilateral trade deficit with China.\1\ This economic carnage
has been fueled by predatory trade practices and disruptive economic
policies, including heavy subsidization of state-owned enterprises
(SOEs) and other firms that Beijing has deemed strategically important
for their own security and economic interests.
---------------------------------------------------------------------------
\1\ ``The China toll deepens: Growth in the bilateral trade deficit
between 2001 and 2017 cost 3.4 million U.S. jobs, with losses in every
state and congressional district,'' Robert E. Scott and Zane Mokhiber.
Economic Policy Institute. 23 October 2018.
---------------------------------------------------------------------------
A threat is growing in the infrastructure arena. China's state-
owned, state-subsidized, and state-supported enterprises are setting up
assembly operations right here in the United States. Backed by deep
government support, two such firms--China Railroad Rolling Stock
Corporation (CRRC) and Build Your Dreams (BYD)--have begun securing
lucrative, U.S. taxpayer-supported contracts to supply our major cities
with transit rail cars and electric buses. Their ambitions are
sizeable, that is to establish a substantial foothold into our market
as a means of expanding into private sectors such as the freight rail
and passenger automobile markets.
On a local level, it is understandably a positive outcome that
these firms have established assembly operations and are hiring
American workers--in many cases, skilled, union workers that deserve
our utmost respect. However, it is the duty of this committee and of
Congress to examine how these firms are systematically destroying the
competitive national landscape for U.S. rolling stock manufacturing.
With the seemingly endless backing of a foreign, non-market economy
government and the stated goal of dominating these sectors, these firms
pose a grave danger to established competitors. And, because their U.S.
assembly operations are merely a supply line for imported components,
ultimately the jobs of millions of American workers throughout our
domestic supply chains are at risk.
It is essential that we scrutinize these investments and implement
appropriate policies to protect against any deceptive or predatory
actions that harm American workers and domestic companies, the U.S.
supply chain, and the national security of our nation. At the
conclusion of my testimony, I offer a number of policy recommendations
for your consideration.
china railroad rolling stock corporation (crrc)
The Chinese government has shown its intention to dominate the
global rail industry through various high-level, government
initiatives, like Belt & Road and Made in China 2025. And it is
carrying out this effort through its state-owned enterprises (SOE) like
CRRC that benefit from an array of government subsidies and supports.
China is not a fair player, and neither is CRRC.
In 2014 the Massachusetts Bay Transportation Authority (MBTA) made
what I believe to be a shortsighted decision to award a $566 million
contract to a Chinese SOE that would ultimately become CRRC (after
merging with another Chinese SOE that was disqualified from the same
bidding process). At the time, I wrote to then-Massachusetts Governor
Deval Patrick warning that CRRC would drastically alter the competitive
landscape for domestic railcar manufacturing. ``As a basic principle of
fairness,'' I wrote, ``all bids should play by the same set of market
rules and none should be allowed to benefit from the backing of a
foreign government . . . It is cheating, plain and simple, and should
not be rewarded using taxpayer dollars.'' CRRC's bid was more than $200
million below the next lowest bidder and roughly half that of another
established firm. Because of CRRC's promise to build an assembly
facility in Springfield with 120 jobs, local policymakers put potential
short-term gains ahead of our collective, longer-term interests. They
even gave CRRC an additional $277 million add-on contract in 2016.
Unfortunately, this warning was ignored, and the concerns outlined
in that letter five years ago have become reality. Once MBTA
legitimized CRRC with its first major U.S. contract, the SOE quickly
secured an additional $2 billion in transit rail car contracts in
Philadelphia, Los Angeles, and Chicago by again submitting implausibly
low bids that no private-sector competitor could possibly match. In
Philadelphia, another bidder was quoted as saying, ``I cannot grasp how
they are able to do it at that cost.'' \2\ With potential deals in
Washington, DC and New York City in CRRC's sights, the consequences are
enormous for maintaining competition, national security, innovation,
and jobs.
---------------------------------------------------------------------------
\2\ ``Mass.-based company with Chinese backing beats local group
for SEPTA car contract,'' The Philadelphia Inquirer. 21 March 2017.
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CRRC is Disrupting the Marketplace.
With the financial backing of Beijing, CRRC is systematically
working to drive established competitors out of the market and to
achieve a monopoly in transit rail car production. If successful, this
would be a disaster for taxpayers and for transit providers that are
looking for legitimate, fair and broad competition for their contracts.
Once established competitors are driven out of the U.S. market, it is
reasonable to assume that the lowball bids of CRRC will disappear and
U.S. customers will be at their mercy in terms of pricing. If you don't
think this is possible, I suggest you look at the Australian market for
perspective. In just the last decade, CRRC undertook a similar campaign
leading to the obliteration of that country's rail manufacturing
sector.\3\
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\3\ ``China to bid on D.C. Metro rail deal as national security
hawks circle,'' Reuters. 09 May 2019.
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Already, established companies in the U.S. rail manufacturing space
are facing unprecedented economic pressure to stay afloat. And, high-
wage jobs throughout the domestic rail manufacturing supply chain are
at risk of being displaced by workers operating under harsh conditions
and little pay in China. To be fair, Boston, Los Angeles, and Chicago
each stipulated that final assembly of rail cars be completed locally,
but there are few guarantees that component and parts manufacturing
will be conducted in the United States. CRRC's U.S. assembly plants are
a vehicle--both literally and figuratively--for Chinese content to be
delivered into the U.S. market.
According to the BlueGreen Alliance, there are more than 750
companies in at least 39 states that manufacture components for
passenger rail and transit rail. This includes: 24 major locomotive,
railcar, and streetcar assembly facilities; 188 direct suppliers that
manufacture major propulsion, electronics, and body components and
systems; and, in the Midwest and Mid-Atlantic alone, 540 additional
companies manufacturing sub-components, materials, track and
infrastructure, as well as providing repair and re-manufacturing to the
industry. All told, the U.S. rail manufacturing sector supports 90,000
jobs.\4\
---------------------------------------------------------------------------
\4\ ``Passenger Rail & Transit Rail Manufacturing in the U.S.'',
BlueGreen Alliance and the Environmental Law & Policy Center. January
2015.
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Security Concerns.
CRRC's ascent also raises alarming questions about Beijing's access
to, or operational control over, critical technology embedded in our
rail infrastructure--such as GPS, sensors, and other safety features.
This is why security experts have raised concerns that the Washington
Metropolitan Area Transit Authority (WMATA) may award its pending
procurement contract for its 8000-series car to CRRC--putting rail cars
manufactured by a Chinese state-owned firm underneath the Pentagon and
in close proximity to other sensitive locations. Doing so would
potentially provide an adversary with operational control of or access
to a major U.S. transit system and potentially expose sensitive data
and communications of riders.
CRRC's entry into the transit procurement market is almost
assuredly a precursor to entering the freight rail market, a sector
that not only supports 65,000 manufacturing jobs but is also
responsible for moving 40 percent of all goods in the United States.\5\
This is a clear security risk.
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\5\ ``Will we derail US freight rolling stock production: An
assessment of the impact of foreign state-owned enterprises on US
freight rolling stock production,'' Oxford Economics. May 2017.
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build your dreams (byd)
The medium- and heavy-duty electric bus sector is also in Beijing's
sights. In 2013, BYD Motors, Inc.--a subsidiary of BYD Company, Ltd.
(short for ``Build Your Dreams'')--established an electric bus assembly
facility in Lancaster, California, signaling its intention to compete
for taxpayer-funded transit contracts in U.S. cities. As of September
2018, BYD says it has delivered more than 270 buses in North America,
has more than 80 more in production, and has 300 bus orders with
options in place. It has expanded its facility to produce up to 1,500
electric buses each year.\6\
---------------------------------------------------------------------------
\6\ BYD Press Release. 25 September 2018.
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BYD Benefits from Government Subsidies, Policy Direction, and a
Protected Home Market.
A key feature of China's industrial policy is the support of
``national champions.'' These are industry leaders that Beijing
believes to have a high potential for growth, innovation, and the
ability to advance China's industrial and other policy goals. Hence,
BYD has been the beneficiary of a mix of government support, including
a lower corporate tax rate, loans from state-owned and policy banks,
and generous grants and subsidies.
China started its government support for new energy vehicles with a
2009 pilot program that evolved into a national program targeting
battery, hybrid, and fuel cell electric vehicles, covering both
passenger and commercial vehicles.\7\ According to a 2019 Bloomberg
article, ``The company received new energy vehicle subsidies equal to
380 percent of its electric-car sales . . . The Shenzhen-based company
gets about 8.2 billion yuan ($1.2 billion) from the central government
and 4.4 billion yuan [$647 million] from local governments . . .
Official aid even enabled BYD to push into making electric commercial
vehicles.'' \8\ BYD's revenue growth has coincided closely with the
trend of government support subsidies, access to below-market-rate
capital and other industrial policies. While the initial stream of
direct electric vehicle subsidies has now declined, many of the other
programs not only remain in place but are buttressed by Beijing's
continued push to achieve the goals of President Xi to advance the
country's national champions and promote global competitors.
---------------------------------------------------------------------------
\7\ Compiled from Government of China Announcements
\8\ ``Buffett's China Ride Is Losing Power With Investors,''
Bloomberg. 19 February 2019.
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New energy vehicles have been deemed a priority, high-technology
industry important to China's mid- and long-term growth strategy. Two
national-level industrial plans have outlined the development objective
and strategic importance of the new energy vehicle sector: the 13th
Five-Year Plan for Strategic and Emerging Industries Development and
the Made in China 2025 Strategy, which identified new energy vehicles
as one of 10 priority sectors for developing indigenous innovation
capability. Made in China 2025 leverages state resources to rework and
generate prejudicial advantage on a global scale. This unparalleled
state-driven intrusion will continue to destabilize the market, causing
artificially reduced prices, and distort U.S. manufacturing and
innovation of medium- and heavy-duty electric buses. Meanwhile, BYD has
enjoyed nearly exclusive access to its home market of Shenzhen, a city
of 12 million people, where it has supplied upwards of 80 percent of
the city's 14,000 electric buses.\9\
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\9\ ``100% Electric Bus Fleet For Shenzhen (Population 11.9
Million) By End Of 2017,'' Clean Technica. 12 November 2017.
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BYD is Not Your Average ``Privately-Owned Company.''
Despite BYD's assertion that the company is ``privately-owned,'' a
closer look raises legitimate questions about its connections to the
Chinese government. For example, while Berkshire Hathaway is a major
investor in BYD, there are several Chinese state-owned investment funds
that hold equity interests in BYD or its subsidiaries.\10\ This
indicates that the central government has confidence in BYD as a leader
in a priority industry, which, in turn, attracts private investment.
And, as the U.S.-China Economic & Security Review Commission has noted,
``some private Chinese companies operating in strategic sectors are
private only in name, with the Chinese government using an array of
measures, including financial support and other incentives, as well as
coercion, to influence private business decisions and achieve state
goals.'' \11\ BYD certainly falls in that category.
---------------------------------------------------------------------------
\10\ BYD 2017 Annual Report and BYD Financial Releases
\11\ US-China Economic and Security Review Commission, 2017 Annual
Report to Congress, at 3.
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BYD's leadership have past and current ties to local and national
Chinese governments. Its Chairman and CEO Wang Chuanfu, who owns a
significant stake in the company \12\, was a delegate of the People's
Congress of Shenzhen from 2000 to 2010 and held a position with the
city legislature from 2005 to 2015. Zou Fei, an expert of the
``Thousand Talents Program'' of the Organization Department of the
Central Committee of the Communist Party of China, serves as a
supervisor on BYD's Board.\13\ Zou was previously the managing director
of the special investment department of the China Investment
Corporation, a sovereign wealth fund responsible for managing China's
foreign exchange reserves. Also, the deputy general manager of Norinco
Group--a state-owned defense company--serves as a supervisor on BYD's
Board.\14\
---------------------------------------------------------------------------
\12\ BYD 2017 Annual Report
\13\ BYD 2017 Annual Report
\14\ BYD 2013 Interim Report
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BYD Relies on the Battery Power System to Meet Buy America Laws.
U.S. domestic content preference laws--including the Buy America
law applied to transit federal assistance--are an important policy to
incentivize domestic capital investment and ensure that American
workers supply the materials and components used to build our vehicles
and infrastructure. The statutory Buy America law for rolling stock
procurements funded with Federal Transit Administration (FTA) grants
requires that assembly occur in the United States and that domestic
content account for a minimum of 65 percent as measured by total
material cost. The cost of the components and subcomponents produced in
the U.S. increases to 70 percent or more for Fiscal Year 2020 and
beyond.
A critical area of concern is the way battery power systems with
Chinese subcomponents are accounted for as part of the Buy America
calculation and certification. In our view, this issue sets BYD aside
from its competition. An Inspector General (IG) report issued by the
City of Albuquerque calls into question the legitimacy of BYD's
compliance with federal Buy America laws. In the case of buses provided
to the City of Albuquerque, BYD met the 65 percent threshold with 53
percent of the total cost of materials attributed to its Power Battery
System, which appears to have been manufactured by another BYD
subsidiary. This, in turn, means that all other domestic components--
such as seats and the farebox--accounted for as little as 18 percent of
the total cost of materials.\15\ Meanwhile, other major elements of
BYD's buses, such as steel chassis, are imported directly from China.
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\15\ ``Inspection of Albuquerque Rapid Transit Project
Procurement,'' Peter Pacheco, Office of the Inspector General, City of
Albuquerque. 6 June 2018.
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America is still gaining its footing with regard to designing,
developing, and deploying cutting-edge battery technology that can meet
the needs of companies. We need to dramatically enhance the capacity to
meet this growing demand. Unfortunately, it appears that BYD imports
large quantities of battery cells from another BYD subsidiary in China.
They are likely combined into a battery pack in the United States,
allowing Chinese state-subsidized foreign content to qualify as a
domestic component.\16\
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\16\ BYD's U.S. Imports Derived from Shipping Manifests, 2017 and
2018 YTD as of Nov. 28, 2018, Obtained from Panjiva, Inc.
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We must recognize that short-term market limitations exist for the
domestic production of battery packs and a supporting supply chain. For
the long-run, however, we must take appropriate steps to ensure that
millions of new energy vehicles--both passenger and mass transit--rely
on domestic production rather than Chinese imports. Congress and the
administration should work together to establish a mix of incentives
and policies to maximize the utilization of new energy vehicles and to
expand the supply chain for the domestic production of batteries.
Adopting the right kind of transition policies would also ensure that
the recently-negotiated update of the North American Free Trade
Agreement--which requires that advanced batteries, including the cells,
originate in the United States--will advance the interests of the
United States, Canada, and Mexico.\17\
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\17\ Office of the United States Trade Representative, ``Estimated
Impact of the United States-Mexico-Canada Agreement (USMCA) on the U.S.
Automotive Sector,'' April 18, 2019, at 5.
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An Individual was ``Pressured'' to Validate Buy America Compliance.
Based on the comments of individuals interviewed as part of the
Albuquerque IG report, there is ample cause for concern that BYD is
misrepresenting the already meager amount of domestic content in its
buses. An individual identified in the report as ``TD-1'' indicated
that he felt ``pressured'' to validate [Buy America] compliance by
signing documents representing that he personally validated the
origination of the components. Upon being told that ``signing the
document was just a 'formality' to ensure compliance,'' he said that he
felt ``uncomfortable'' signing. He later told the IG ``that he felt he
was under duress in being pressured to sign the document.'' Meanwhile,
the IG report indicates that BYD provided the ``summary of calculations
for the percentages of United States made parts'' to the auditor tasked
with ensuring Buy America compliance. This raises serious questions as
to the accuracy of that information and how thorough of an audit was
conducted.
``Everything Appeared to Originate in China.''
According to the Albuquerque IG report, a BYD official said ``that
only the frames of the buses were made in China, and that all of the
other assemblies and components were manufactured in the United States
by American suppliers.'' Yet, city inspectors interviewed offered
sharply different accounts.
An individual identified as TD-5 observed that ``many of the
shipping labels for various components had Chinese characters.'' TD-6
said that based on package markings, discussions with BYD personnel,
and other factors he believed that the chassis, walls, drive train,
axles, motor, and modules were made in China. TD-7 said that when
asking about the assembly process status for electric lights, seating,
seat belts, and other components, he was told ``it's on the boat.'' He
said that as far he knows, it seemed everything appeared to originate
in China based on responses to his questions. And, TD-9 said ``the
majority, if not all, parts were manufactured in China and shipped to
the United States.''
Further evidence to support these assertions includes BYD's public
comments to the Office of the U.S. Trade Representative (USTR)
requesting Section 301 tariff relief for storage batteries \18\, air
conditioning machines, seats, parts and accessories \19\, and electric
vehicles, specifically noting its K9S \20\, K9MC \21\, K7M \22\, and
K8S \23\ electric bus models. BYD submitted Section 301 tariff
exclusion requests to USTR for its electric buses, which were all
denied. USTR's General Counsel stated that the ``request was denied
because the request concerns a product strategically important or
related to ``Made in China 2025'' or other Chinese industrial
programs.''
---------------------------------------------------------------------------
\18\ BYD America Corp. comments and appendix, Proposed
Determination of Action Pursuant to Section 301: China's Acts,
Policies, and Practices Related to Technology Transfer, Intellectual
Property, and Innovation, Docket No. USTR-2018-0005, May 14, 2018.
\19\ BYD Motors LLC comments, China's Acts, Policies, and Practices
Related to Technology Transfer, Intellectual Property, and Innovation,
Docket No. USTR-2018-0026, Sept. 6, 2018.
\20\ Exclusion Denied, BYD Motors Inc., Electric bus, HTS
8702903100, USTR-2018-0025-7530, Oct. 26 2018.
\21\ Exclusion Denied, BYD Motors Inc., Electric bus, HTS
8702903100, USTR-2018-0025-7528, Oct. 26, 2018.
\22\ Exclusion Denied, BYD Motors Inc., Electric bus, HTS
8702903100, USTR-2018-0025-7346, Oct. 25, 2018.
\23\ Exclusion Denied, BYD Motors Inc., Electric bus., HTS
8702903100, USTR-2018-0025-7347, Oct. 25, 2018.
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Press Reports Document BYD's Quality and Consistency Issues.
The City of Albuquerque has resorted to legal action against BYD
for delays and incomplete certification testing.\24\ According to city
officials, the bus batteries limited the bus range to 177 miles on a
single charge, far short of the 275 miles stipulated in its contract.
The buses also experienced serious safety issues, including brake
pressure issues, door issues, cracked and missing welds compromising
the integrity of the buses, malfunctioning wheelchair accessibility,
and exposed high voltage cables that created a risk of electrical
fire.\25\
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\24\ City of Albuquerque v. BYD Motors, Inc., No. 1:2019-cv-00012
(US Dist. Ct., NM).
\25\ ``BYD faces Albuquerque lawsuit: City claims bus firm didn't
live up to deal,'' Antelope Valley Press. 08 December 2018.
---------------------------------------------------------------------------
According to the Los Angeles Times, ``Internal emails and other
agency records show that agency staff called them 'unsuitable,' poorly
made and unreliable for more than 100 miles.'' Buses used in Los
Angeles experienced white smoke, wouldn't start, lost charge, and
stalled on the road. Others experienced door and air system failures.
In Denver, bus doors would not open or close. In Columbia, Maryland,
passengers were ``jolted by an explosion and a wheel fire.'' \26\
---------------------------------------------------------------------------
\26\ ``Stalls, stops and breakdowns: Problems plague push for
electric buses,'' Paige St. John. Los Angeles Times. 20 May 2018.
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BYD Aspires to Dominate the Global Electric Vehicle and Battery Market.
Already the world's largest electric vehicle company by sales, BYD
executives have been outspoken in their plans to one day sell passenger
cars in the United States. The Los Angeles Times reported that in 2008
BYD's chairman ``boasted of plans to dominate world auto sales by
2025.'' Reuters reported that in 2017 a BYD executive said the company
planned to sell passenger cars in the United States in ``roughly 2 to 3
years.'' And, in the meantime, the company is planning to raise funds
through a public listing of its battery business in order to build
vehicle-battery factories in Europe and the United States.\27\
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\27\ ``Warren Buffett-Backed Electric Vehicle Maker Plans Battery
Unit IPO,'' Bloomberg. 05 December 2018.
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Allowing BYD to extend its non-market influence and operations into
the U.S. auto market would put hundreds of thousands of jobs at risk.
BYD's economic model of assembling vehicles in the United States, but
relying on imported parts and components, would threaten over 5,600
auto parts suppliers spread across the nation, employing 871,000
workers.\28\
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\28\ ``State of the U.S. Automotive Industry,'' American Auto
Policy Council. August 2018.
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state-owned chinese firms are an exception to the rule
My testimony today should not be read as an attack on the hundreds
of American workers employed by CRRC or BYD. These dedicated
individuals get up and go to work each day focused on providing for
their families. Many have the protections of a union which, as anti-
union activity in the U.S. rises, cannot be overlooked. As a former
shop steward for the CWA and policy advocate for the AFL-CIO who has
walked picket lines with, marched with, and represented these workers,
I urge you to respect the dignity of work. That's an entirely separate
question from the impact of state-owned enterprises on our economy.
Tens of thousands of American jobs are supported by a competitive,
market-based ecosystem of companies that do not benefit from aggressive
foreign government support to bankroll anti-competitive behavior.
Ultimately, millions of our jobs are still at risk, while millions more
have been vanquished by shifts of production and import competition
over the past two decades.
Neither should our criticisms be read as an attack on international
competition. Foreign investment is welcomed in our economy, and many
foreign firms that manufacture in the United States provide high-wage
jobs and contribute to economic growth. This includes foreign firms
that manufacture buses and rail cars for our transit procurement
markets. State-owned, state-subsidized, and state-supported Chinese
firms, though, are an exception to the rule. Short-term promises of
assembly jobs belie the long-term economic damage being done to our
economy--it is an unhealthy proposition to allow foreign government-
funded competition to push market-based firms into bankruptcy.
congress needs to act
It is timely that action be taken to promote fair competition,
ensuring that the next generation of transit vehicles supported by U.S.
taxpayers at the federal, state, and local level and deployed in major
U.S. cities are made by American workers and rely on a robust domestic
supply chain. Even though CRRC and BYD have made substantial
investments in our market, it is not too late to implement policies
that will prevent the destruction of the competitive landscape for
rolling stock manufacturing. I wish to outline a series of
recommendations for this committee and Congress to consider.
First, we urge your support for the bipartisan Transit
Infrastructure Vehicle Security Act, which has been introduced in the
House and Senate. This bill would prohibit federal funds from being
used by transit agencies to purchase rail cars or buses manufactured by
foreign-government-owned, controlled, or subsidized companies.
America's tax dollars should not be used to support Chinese SOEs
seeking to undermine legitimate competition.
Second, it is necessary to apply further pressure to transit
systems that aim to employ clever accounting as a means of using non-
federal resources to award contracts to these Chinese SOEs. The
Washington Metropolitan Area Transit Authority (WMATA) is currently
reviewing bids--including one from CRRC--to supply its 8000-series rail
cars. The procurement of CRRC rail cars would hurt thousands of workers
throughout the rail supply chain and it poses security risks as it
serves countless government and private-sector contractor employees in
our nation's capital. WMATA should not be permitted to allocate ``non-
federal'' resources for the procurement of rail cars from CRRC when it
also receives hundreds of millions annually from the federal
government.
Third, it is necessary to make improvements to longstanding Buy
America laws by closing loopholes and adding additional teeth to
prevent erosion of our supply chains. The U.S. Department of
Transportation and Federal Transit Administration (FTA) need to
promptly modernize Buy America rules as it pertains to battery-electric
power propulsion systems on buses. A long-term plan, with appropriate
recognition of the need for transition strategies, must be adopted.
Fourth, we urge that both CRRC's and BYD's Buy America
certifications be audited to ensure compliance. Individuals interviewed
as part of the City of Albuquerque IG Report said that they were
``pressured'' to validate domestic content and felt as if they were
``under duress'' to do so. Others suggested that ``everything was made
in China.''
Fifth, even if bids by firms like CRRC and BYD were to abide by
market-based pricing, it is necessary that we address security concerns
related to Chinese state-owned, -invested, and -supported firms having
operational access or control over critical infrastructure systems.
These firms must be required to provide the source code for U.S.
government experts to analyze for any signs of suspicious activity,
including any installed software, patches, updates, upgrades, and any
other modifications. It is simply not enough to accept the word of
these firms that they will structure their operations in a manner that
resolves our security concerns. Extensive oversight is vital for the
safety and security of Americans.
Sixth, we must protect our freight rail sector with unprecedented
transparency and limitations on Chinese state involvement. Any U.S.
entity seeking to procure freight rail cars from a Chinese state-owned,
-controlled, or -subsidized firm, should be required to publicly
disclose the details of that purchase and assume full liability for any
future misdeeds that may occur.
Seventh, we must insist on reciprocity in procurement. No U.S.-
based firm may enter the Chinese procurement market the way in which
CRRC and BYD have entered the American market. China is not a signatory
to the Government Procurement Agreement (GPA). Put simply, the United
States should consider banning all Chinese products and firms from our
procurement market until there is demonstrable progress on reciprocity
in law and in practice.
Last, but certainly not least, we encourage you to continue the
hard work of passing a substantial infrastructure investment paired
with strong Buy America requirements. A lack of adequate, consistent
funding puts added pressure on transit agencies to find ways to cut
costs, even if that means sourcing rolling stock from companies with
lingering quality issues, dubious Buy America compliance, security
issues, and clear designs on leveraging state backing to grab market
share from their competitors.
conclusion
I applaud the Committee for holding today's hearing and for drawing
attention to impacts of China's state-owned, state-subsidized, and
state-supported entities on our public transit and freight rail
sectors.
Thank you for the opportunity to testify. We look forward to
working with you to strengthen America's economy and national security
through smart infrastructure and procurement policy.
Mr. DeFazio. I thank the gentleman.
Next would be Brigadier General Adams.
General Adams. Good morning, Chairman DeFazio.
Mr. DeFazio. Yes, there you go. That is better. Thanks.
General Adams. Good morning, Chairman DeFazio, Ranking
Member Graves, and members of the committee. I want to thank
you for inviting me to testify at this critically important
hearing on securing our freight and transit rail sectors
against Chinese state-owned enterprises.
My name is John Adams, and I am a 30-year veteran of the
U.S. Army and president of Guardian Six Consulting.
We depend upon the freight rail system to provide safe,
reliable and effective transportation for our defense and
homeland security infrastructure. Our national survival depends
upon these rail links to transport, for example, military
equipment, hazardous waste, toxic substances, and a range of
products and commodities that support our entire economy.
U.S. freight rail is a strategic asset, the health and
integrity upon which our Armed Forces rely.
Today I would like to draw the committee's attention to
China's strategic targeting of the U.S. rail manufacturing
sector with aggressive, strategic, and anticompetitive actions
that threaten to turn this system from a bedrock strategic
asset into a potentially crippling vulnerability.
These efforts are being driven by a Chinese SOE called the
China Railway Rolling Stock Corporation, a massive conglomerate
wholly controlled by the Chinese Government as part of
coordinated efforts to advance Chinese industrial policy, such
as Made in China 2025.
So what are some of the tactics that CRRC uses to
infiltrate our rail industry?
First, they have unlimited resources since they are backed
by the Chinese Government. They can easily underbid their
competitors. Just in the last 5 years, CRRC's underbidding has
allowed them to establish rail assembly operations for transit
railcars in two States, along with research and bidding
operations in several others.
Emboldened with contract victories in four cities, CRRC
continues to target other U.S. cities, including our Nation's
Capital where the request for proposal includes video
surveillance, monitoring and diagnostics, data interfaces, and
automatic train control systems that are susceptible to
cyberattacks.
Whomever is selected to supply railcars for WMATA will
become a partner in in the day-to-day operations of a Metro
system whose stops include the Pentagon and the Capitol, as
well as unfettered access to our Nation's tunnels and
underground infrastructure.
The prospect of the Chinese Government using these trains
for intelligence gathering is alarming. Chinese built-in
surveillance cameras could track the movements and routines of
passengers, searching for high-value targets from whom
intelligence officials could vacuum data using the train's
built-in Wi-Fi systems.
China already boasts of using the latest advances in
artificial intelligence and facial recognition technology,
creating a very real chance that they have the capacity and
interest in doing so here in the United States.
Even more alarming is that CRRC can easily pivot into
freight rail assembly, a subsector of rail that does not
benefit from the same Buy America protections as transit rail.
Concerns about CRRC's transition to freight rail
manufacturing are best illustrated by the recent experiences of
third-country markets like Australia, whose freight rail
manufacturing sector CRRC decimated in less than 10 years.
The Department of Defense has a longstanding reliance on
freight rail. Most of the military's heavy and track vehicles
are transported by freight rail, meaning that freight rail runs
through every military base in the United States.
Freight rail is also core to the U.S. Transportation
Command, DoD's global defense transportation system,
coordinating transportation assets around the world.
The national security concerns related to CRRC cannot be
underestimated. Chinese intelligence awareness of U.S. rail
logistical movements could provide China with a destabilizing
strategic and economic competitive edge, and of course, Chinese
access to U.S. freight rail also means that the risk of
malicious incursions into our rail infrastructure, including
those carried out by terrorists, would become much more
difficult for U.S. operators to detect or counter.
While Congress has recognized and taken steps to address
similar threats to products, such as computer chips and
cellular technology, it is equally important that policymakers
enact legislation to stop immediately the scope and impact of
China's ongoing incursion into an increasingly digitized rail
network.
I greatly appreciate the committee's interest in addressing
these critical issues. We must safeguard our U.S. rail system's
health and integrity before we lose it.
We owe it to the American people to ensure that the
American freight rail sector continues to be a vibrant and
secure element of our Nation's infrastructure.
Thank you, again, for the opportunity to testify. I look
forward to answering your questions.
[General Adams' prepared statement follows:]
Prepared Statement of Brigadier General John Adams, U.S. Army
(Retired), President, Guardian Six LLC
introduction
Chairman DeFazio, Ranking Member Graves, and members of the
Committee, I want to thank you for inviting me to testify at this
critically important hearing on securing our freight and transit rail
sectors against Chinese state-owned enterprises (SOE). My name is John
Adams and I am a 30-year veteran of the US Army and President of
Guardian Six LLC, (Guardian). Guardian Six is a defense and national
security consulting firm, which specializes in understanding,
assessing, and mitigating against national security threats to our
Nation's defense industrial base. Guardian Six is also a national
security advisor to the Rail Security Alliance (RSA) which is a
coalition of North American freight railcar manufacturers, suppliers,
steel interest and unions committed to ensuring the economic and
national security of our freight and transit rail systems. Notably, on
October 22, 2018, Guardian Six published a report titled ``National
Security Vulnerabilities of the U.S. Freight Rail Infrastructure and
Manufacturing Sector--Threats and Mitigation,'' which systematically
examines, among other things, the threats posed by SOEs in this
industry.
Our country depends upon the freight rail system to provide safe,
reliable, and effective transportation for our defense and homeland
security infrastructure. I know first-hand that our national survival
depends upon these vital rail links as the primary transportation for
U.S. military equipment, infrastructure logistics, hazardous waste,
toxic substances, and the range of products and commodities that
support our entire economy. U.S. freight rail is a strategic asset, the
health and integrity upon which our armed forces depend to maintain
readiness and preserve our defense capacity. Our freight rail system
connects ports to rural and urban inland hubs, military bases to each
other, and to key logistics nodes throughout our Nation. It also links
the U.S. by land to key allies and trading partners Canada and Mexico
and enables transportation between coastal and inland military and
homeland infrastructure nodes. On the passenger side, millions of
Americans rely on transit rail systems every day. The U.S. rail system
is also highly sophisticated, relying on a constantly expanding network
of technology and digitization that dramatically increases its risk to
cyber-attack and hacking.
Today, I would like to draw the Committee's attention to China's
strategic targeting of the U.S. rail manufacturing sector, with
aggressive, strategic and anti-competitive actions. China is making
substantial economic inroads into our rail system's supporting supply
chains, as well as rolling stock asset ownership and management.
Beijing's 2015 ``Made in China 2025'' plan leverages state resources
and industrial policy, specifically aiming for a comparative advantage
in the global advanced rail sector among nine other sectors. China's
strategy to capture the U.S. rail system's supply chain threatens the
system's cyber-security, reliability, and safety. Any Chinese dominance
of the U.S. rail system would turn the system from a bedrock strategic
asset into a potentially crippling vulnerability.
china's state-owned enterprises target u.s. rail manufacturing
The United States has seen a growth in Chinese foreign direct
investment over the last few decades, exceeding $140 billion in
2018.\1\ Much of this investment is targeted in several sectors
including energy, telecommunications, and transportation--industries
that make up key pillars of our country's critical infrastructure. In
the rail transportation sector, this investment has been spearheaded by
a Chinese SOE called the China Railway Rolling Stock Corporation
(CRRC). Specifically, CRRC is a massive conglomerate that is wholly
owned by the Chinese government, with deep ties to the Communist Party
of China. Not only does CRRC possess 90 percent of China's domestic
market to produce rail locomotives, bullet trains, passenger trains and
metro vehicles, but it has dramatically and strategically increased its
investment and footprint in the United States. This fact raises serious
questions and concerns about the current and future safety and security
of our Nation's railroads.
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\1\ Rhodium Group, China Investment Monitor: Capturing Chinese
Foreign Investment Data in Real Time. https://rhg.com/impact/china-
investment-monitor/
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The ``Made in China 2025'' initiative, a key component of China's
13th Five-Year plan,\2\ identifies the rail manufacturing sector as a
top target for Chinese expansion. This initiative has systematically
and deliberately driven strategic investment and financing activities
of the SOE CRRC in third-country markets and the United States.\3\ In
2015, CRRC reported revenues of more than $37 billion \4\--
significantly outpacing the entire U.S. railcar market, which had $22
billion of output during the same year.\5\ According to Chinese state
media, CRRC plans to increase overseas sales to $15 billion by next
year alone. This represents about double the level of export orders
from just four years ago \6\ and according to CRRC's own presentation
materials the U.S. market remains a prime target to, as they put it,
``conquer.'' \7\
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\2\ U.S.-China Economic and Security Review Commission, 2016 Report
to Congress, November 2016, at 100.
\3\ Langi Chiang, China's largest train maker CRRC Corp announces
12.2 billion yuan in contracts, South China Morning Report, July 23,
2015. https://www.scmp.com/business/companies/article/1842983/chinas-
largest-train-maker-crrc-corp-announces-122-billion-yuan
\4\ CRRC Corporation, 2015 CRRC Annual Report, https://
www.crrcgc.cc/Portals/73/Uploads/Files/2016/8-23/636075436968234671.pdf
\5\ Oxford Economics, Will We Derail US Freight Rolling Stock
Production? May 2017, at 24.
\6\ Brenda Goh, China Trainmaker CRRC to build more plants abroad
in expansion plan: China Daily, REUTERS, Dec. 5, 2016, http://
www.reuters.com/article/us-crrc-expansion-idUSKBN13U0EJ
\7\ @CRRC global, ``Following CRRC's entry to Jamaica, our products
are now offered to 104 countries and regions. So far, 83% of all rail
products in the world are operated by #CRRC or are CRRC ones. How long
will it take for us conquering the remaining 17%?'' Twitter, January
11, 2018. [Tweet deleted]
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CRRC's bylaws direct that the company seek guidance from the
Communist Party of China on significant matters affecting the company's
operations.\8\ Three of CRRC's current board members previously held
high-level positions at several state-owned defense companies
including, Aviation Industry Corporation of China (AVIC), which
produces fighter and bomber aircraft, helicopters, and unmanned aerial
vehicles for the Chinese Army, and China Shipbuilding Industry
Corporation (CSIC), which produces submarines, warships, and other
naval equipment for the Chinese Navy. Furthermore, two former CRRC
board members held positions at AVIC and China North Industries Group
Corporation Limited (NORINCO), a state-owned defense company that
supplies tanks, aircraft, missiles, firearms, and related products for
the Chinese military.
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\8\ ``CRRC Corporation Limited Articles of Association,'' CRRC
Corporation Limited, at 70. http://www.crrcgc.cc/Portals/73/Uploads/
Files/2018/6-4/636637164457871915.pdf
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The latter two of these entities, CSIC and NORINCO, have been
subject to allegations of espionage and sanctions evasion by the U.S.
government, raising serious questions about the link between CRRC board
members and these compromising activities. Coupled with these facts, in
2007, AVIC was reputed to have stolen data on the F-35 fighter jet from
Lockheed Martin and used it to build the Chinese J-31 fighter.\9\
Similarly, CSIC was indicted in 2016 by the U.S. Department of Justice
for entering into contracts with another Chinese company for the
purchase of industrial materials that were created using stolen trade
secrets from an American company.\10\ NORINCO has also been sanctioned
by the U.S. State Department on six occasions for contributing to
Iranian Weapons of Mass Destruction (WMD) development.\11\ Two of
CRRC's board members were respectively employed in high-level positions
at CSIC and NORINCO at the time these offenses occurred, suggesting
that they were likely aware of, if not complicit in, this illicit
activity.
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\9\ ``America's most expensive weapons system, the F-35, is a key
symbol of Trump's trade gripe with China,'' CNBC, March 22, 2018
https://www.cnbc.com/2018/03/22/americas-most-expensive-weapons-system-
the-f-35-is-a-key-symbol-of-trumps-trade-gripe-with-china.html
\10\ ``Chinese Nationals Stole Marine Technology to Benefit Chinese
Regime, According to US Justice Department,'' Epoch Times, April 30,
2018. https://www.theepochtimes.com/chinese-nationals-stole-marine-
technology-to-benefit-chinese-regime-according-to-u-s-justice-
department_2509135.html
\11\ ``United States Imposes Sanctions Against Chinese Firm,''
Nuclear Threat Initiative, September 22, 2004. https://www.nti.org/gsn/
article/united-states-imposes-sanctions-against-chinese-firm/
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Using state-backed financing, subsidies, and an array of other
government resources, CRRC has strategically targeted and sought to
capture the U.S. railcar manufacturing sector. In just the last five
years the United States has witnessed CRRC establish rail assembly
operations for transit railcars in two states, along with additional
research and bidding operations in several others. By beginning with a
business strategy to take market share in the U.S. transit rail
manufacturing sector and deploying near-limitless financing from its
home government to help ensure the well below-market bids for new U.S.
metropolitan transit projects, CRRC has quickly established itself as a
formidable force and major competitor in the U.S. transit rail system.
Thus far China has secured four U.S. metropolitan transit
contracts, totaling $2.6 billion, largely by utilizing anticompetitive
under-bidding practices. In each case, CRRC leveraged massive subsidies
and other resources from the Chinese government to dramatically
underbid its competitors, and in one case going as much as fifty
percent below the bid submitted by another competitor. The trains
purchased by those U.S. metropolitan transit agencies will contain Wi-
Fi systems, automatic train control, automatic passenger counters,
surveillance cameras, and the Internet of Things (IoT) technology that
will be thoroughly integrated into the information and communications
technology infrastructure of transit authorities, all designed and
built by the Government of China.
The fact that the advanced technologies in these trains is sole-
sourced from a Chinese state-owned enterprise is alarming and the risk
is very high that Chinese-built-in surveillance cameras could track the
movements and routines of passengers, searching for high-value targets
that intelligence officials can then identify to vacuum data from using
the train's built-in Wi-Fi systems. Some argue that these risks are low
and manageable; however, I beg to differ. Already, China is openly
developing a system of ``algorithmic surveillance'' that leverages
advances in artificial intelligence and facial recognition technology
to enable the Chinese Communist Party to monitor the movements and
patterns of its own citizens, purportedly as a means of combatting
crime. China boasts about how it has utilized the latest advances in
Artificial Intelligence (AI) and facial recognition technology to
identify and track its 1.4 billion citizens,\12\ creating a very real
prospect that they have the current capacity and interest in doing the
same here, in the United States.
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\12\ Surveillance Cameras Made by China Are Hanging All Over the
U.S., The Wall Street Journal, November 12, 2017. https://www.wsj.com/
articles/surveillance-cameras-made-by-china-are-hanging-all-over-the-u-
s-1510513949
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Several recent cases involving CRRC bids for new transit rail
projects serve as compelling examples of the strategy being employed by
China to capture our rail systems. For example:
CRRC bid $567 million to win a contract with the
Massachusetts Bay Transit Authority (MBTA) in Boston in 2014, coming as
much as 50 percent below other bidders.\13\
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\13\ Bonnie Cao, After Winning MBTA Contract, China Trainmaker CRRC
Plans American Expansion, Boston Globe, Sept. 11, 2015. https://
www.bostonglobe.com/business/2015/09/11/after-winning-mbta-contract-
china-trainmaker-crrc-plans-american-expansion/jnS1kU7uHWFGR
9gjWmDEjM/story.html
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CRRC won a 2016 contract to provide transit rail for the
Chicago Transit Authority (CTA), bidding $226 million less than the
next-highest bidder.\14\
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\14\ Corilyn Shropshire, First Step to New CTA Rail Cars: Build the
Factory in Chicago, Chicago Tribune, Mar. 16, 2017. http://
www.chicagotribune.com/business/ct-cta-new-railcar-plant-0316-biz-
20170315-story.html
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CRRC bid $137.5 million in 2017 for a contract with
Southeastern Pennsylvania Transportation Authority (SEPTA) in
Philadelphia, underbidding the next-lowest bidder-which had a robust
local manufacturing presence-by $34 million.\15\
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\15\ Jason Laughlin, Mass.-Based Company with Chinese Backing Beats
Local Group for SEPTA Car Contract, The Philadelphia Inquirer, Mar. 21,
2017. http://www.philly.com/philly/business/transportation/Mass-based-
company-with-Chinese-backing-beats-out-local-group-for-SEPTA-car-
contract.html
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CRRC finalized a contract with the Los Angeles County
Metropolitan Transportation Authority in 2017 for its transit rail
system worth up to $647 million.\16\ Again, China did this by
leveraging below-market financing, which in turn undercut other
bidders.
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\16\ Keith Barrow, Los Angeles Orders CRRC Metro Cars,
International Railway Journal, Mar. 24, 2017. http://
www.railjournal.com/index.php/north-america/los-angeles-orders-crrc-
metro-cars.html
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Emboldened with these contract victories, CRRC continues to target
other U.S. cities, including our nation's capital. In September, the
Washington Metropolitan Transit Authority (WMATA), which is the second
largest mass transit system in the country, issued a Request for
Proposals (RFP) for the new 8000-series metro car. This RFP includes
video surveillance, monitoring and diagnostics, data interface with
WMATA, and automatic train control systems that are susceptible to
cyber-attacks. In response to concerns expressed by a number of
lawmakers, including the Vice Chairman of the Senate Intelligence
Committee, WMATA re-issued its RFP to include additional cybersecurity
protections.\17\
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\17\ Sean Lyngaas, D.C. Metro system beefs up supply-chain
cybersecurity provisions for new railcars, Cyberscoop, February 6,
2019. https://www.cyberscoop.com/metro-dc-subway-cyberscecurity-rfp/
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Most concerning is that whomever is selected to supply railcars for
WMATA will become a partner in the day-to-day operations of a Metro
system whose stops include the Pentagon and the Capitol, as well as
unfettered access to our Nation's tunnels and underground
infrastructure. We couple this reality with two additional critical
facts. First, a classified report written by WMATA's Inspector General
recently concluded that there were significant shortcomings in WMATA's
enterprise-level cybersecurity posture.\18\ Second, the New York Times
recently noted that ``businesses and government agencies in the United
States have been targeted in aggressive attacks by . . . Chinese
hackers . . . '' \19\ So, in light of China's pervasive history of
cyber espionage and hacking, we cannot trust a Chinese SOE to build,
own, or operate U.S. critical infrastructure.
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\18\ Ryan Johnston, D.C. Metro needs to improve its cybersecurity,
audit finds, Statescoop, July 9, 2018. https://statescoop.com/wmata-
incident-response-audit-calls-for-improved-cybersecurity-plan/
\19\ Nicole Perlroth, Chinese and Iranian Hackers Renew Their
Attacks on U.S. Companies, New York Times, February 18, 2019. https://
www.nytimes.com/2019/02/18/technology/hackers-chinese-iran-usa.html
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As troubling as these developments in our transit rail sector are,
they are even more alarming because they provide CRRC the opportunity
to pivot into freight rail assembly, a subsector of rail not protected
by the same Buy America requirements as transit rail, and one that
represents a dangerous vulnerability if overtaken by the Government of
China. The Chinese government is banking on the fact that once CRRC
secures sufficient U.S. municipal transit contracts, it can pivot
quickly and inexpensively toward the more strategically important
freight rail sector. With 140,000 miles of rail lines across the United
States, the North American freight rail system transports five million
tons of goods and materials each day. By providing a means for safe,
reliable and effective transportation, freight rail keeps our nation's
economy thriving while helping to ensure the security of our homeland.
Penetrating our freight rail market will allow China to unload much of
its current freight car manufacturing capacity oversupply--offsetting
its own, slowing domestic market, while continuing its strategy of
using exports to sustain its own employment base.
CRRC is making steady and deliberate headway into the freight rail
sector with the launch of Vertex Rail Corporation and American Railcar
Services. Vertex Rail Corporation is now a defunct freight rail
assembly facility that was based in Wilmington, North Carolina. On the
other hand, American Railcar Services is a separate assembly facility
headquartered in Miami, Florida, that maintains assembly operations in
Moncton, New Brunswick.
Concerns about CRRC's transition into freight rail manufacturing
are best illustrated by the recent experiences of third-country markets
like Australia, whose freight rail manufacturing sector CRRC entered in
2008. In less than ten years, CRRC effectively decimated the sector,
forcing the four domestic suppliers out of business and out of the rail
market which left only CRRC standing. Today, almost no meaningful
Australian passenger or freight rolling stock manufacturing exists--
CRRC's Australia footprint is almost exclusively that of an assembler
of Chinese-made parts and a financier of purchases from CRRC. That
cannot happen here.
national security implications
As stated earlier in my testimony, the threat of Chinese dominance
of our freight and transit rail sectors is more than just a market
concern. The Department of Defense (DoD) has a longstanding reliance on
freight rail in the United States. Unlike the U.S. maritime shipping
industry, whose security is protected by the Jones Act, a measure that
requires vessels transporting goods between U.S. ports to be U.S.-built
and majority U.S.-owned, freight rail in America has been left
comparatively unprotected. Yet, the Department of Homeland Security
(DHS) deems the U.S. rail sector as part of the nation's critical
infrastructure,\20\ noting that 140,000 rail miles enable U.S. freight
rail to run through every major American city and every military base
in the nation. Most of the military's heavy and tracked vehicles are
transported by freight rail meaning that freight rail runs through
every military base in the United States.\21\ The DOD's Military
Traffic Management Command (MTMC) has designated nearly 40,000 miles of
freight rail track as being uniquely important to our Nation's defense,
and thus part of the Strategic Rail Corridor Network, or ``STRACNET.''
STRACNET serves 193 U.S. defense installations, connecting military
bases with maritime ports of embarkation and other key points across
the country. Because of the deep reliance of our military on U.S.
commercial rail, MTMC monitors and evaluates data on railroad industry
construction, industry mergers, bankruptcies and other similar events
to determine how they may affect DoD's mobility and readiness
capabilities.
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\20\ Presidential Policy Directive 21 (PPD-21) identifies 16
critical infrastructure sectors, including ``Transportation Systems.''
The Department of Homeland Security defines ``Freight Rail'' as one of
the seven key subsectors. See generally, PPD-21, Critical
Infrastructure Security and Resilience, Feb. 12, 2013, https://
www.whitehouse.gov/the-press-office/2013/02/12/presidential-policy-
directive-critical-infrastructure-security-and-resil and Transportation
Systems Sector, Dep't of Homeland Sec., Mar. 25, 2013, http://
www.dhs.gov/transportation-systems-sector
\21\ ``Strategic Rail Corridor Network (STRACNET),'' Global
Security, 2012. https://www.globalsecurity.org/military/facility/
stracnet.htm
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Freight rail is also core to the U. S. Transportation Command
(TRANSCOM), DoD's global defense transportation system, coordinating
people and transportation assets around the world. The Surface
Deployment and Distribution Command (SDDC), a component of TRANSCOM,
operates 10,000 containers and some 1,350 rail cars to deliver
equipment and supplies for deployed members of the Army, Navy, Air
Force, Marines, and Coast Guard. SDCC also leverages commercial freight
rail to provide important components of DoD's surface transportation
requirements.\22\ SDCC uses a fleet of 1,850 specially designed heavy-
duty flatcars managed by a company owned by the major freight
railroads.
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\22\ ``About SDDC,'' U.S. Army Military Surface Deployment and
Distribution Command, 2016. https://web.archive.org/web/20110818114337/
http://www.sddc.army.mil/What/default.aspx
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The specter of Chinese dominance over our freight rail system
presents a myriad of national security concerns. The implications of
U.S. industry and military interests being forced to rely on Chinese
government-manufactured railcars are jarringly self-evident: Chinese
penetration of the rail system's cyber-structure would provide early
and reliable warning of U.S. military mobilization and logistical
preparations for conflict. Were the Chinese to gain access to advanced
U.S. freight car technology (notably specific rolling stock asset
health, waybill commodity information on loaded freight cars, or
precise GPS train location) the potential exists for the generation of
a false negative (or positive) sensor activation--something
particularly worrisome given that freight rail transports most of our t
nuclear waste and hazardous material. A false sensor reading (e.g. tank
car outlet dome cover is secure) could lead to a false level of
confidence that tank car service valves are secure. If service valves
are disturbed and that disturbance is undetected, a release of toxic
chemicals could have catastrophic consequences and cost American lives.
Moreover, Chinese intelligence about U.S. rail freight logistical
movements could provide China with a destabilizing economic competitive
edge. Last and certainly not least, Chinese access to U.S. freight rail
would also mean that the risk of malicious intrusions into our rail
infrastructure, including those carried out by terrorists, would become
more difficult for U.S. operators to detect or counter.
Predatory Chinese efforts to penetrate our freight rail market also
create the potential for disruption to the most advanced technologies
upon which our rail system depends for safety and efficiency.
Commercial railroads are, of course, aware of the risks they face from
potential cyber-security incursions and are investing in cybersecurity
capabilities. Even so, we significantly increase the risk of Chinese
cyber-espionage or even cyber-terrorism by allowing CRRC to displace
U.S. rail interests and shift our freight rail supply reliance to the
Government of China. If allowed to penetrate the U.S. freight rail
system, Chinese government-backed entities could simply vacuum data
from individuals and firms connected to the rail network.
China's history of cyberattacks on U.S. interests, combined with
the Chinese Government's known efforts to use facial recognition and
artificial intelligence for tracking its own citizens through ``a vast
and unprecedented national surveillance system'' make this security
risk all the more acute.\23\
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\23\ Paul Mozur, ``Inside China's Dystopian Dreams: A.I., Shame and
Lots of Cameras,'' The New York Times, July 8, 2018. https://
www.nytimes.com/2018/07/08/business/china-surveillance-technology.html
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As noted in my 2018 report on the vulnerabilities of freight
rail,\24\ our rail system's rapidly expanding IoT capabilities present
an array of national security challenges that include:
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\24\ National Security Vulnerabilities of the U.S. Freight Rail
Infrastructure and Manufacturing Sector--Threats and Mitigation,
Brigadier General John Adams, US Army (Retired), October 22, 2018.
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Digitized railroad network/IoT: Integrated teams of data
scientists, software developers, and engineers develop and apply
technology across every aspect of the nationwide freight rail network,
effectively increasing the vulnerability of industrial control systems,
train operations, and perhaps even the industry's metadata warehousing
centers to cyber threats.
Rail Signaling: Congress has mandated the installation of
positive train control (PTC) systems on much of the nation's rail
systems as a means of preventing specific accidents. A malicious cyber
breach of PTC or underlying existing rail signaling systems could wreak
havoc and cause accidents or derailments on the highly interdependent
freight railway network.
Locomotives: Rail locomotives rely upon hundreds of
sensors to monitor asset health and performance of train systems.
Onboard Freight Car Location & Asset Health Monitoring:
Thousands of freight cars are equipped with telematics or remote
monitoring equipment, many of which are carrying hazardous materials
like chlorine, anhydrous ammonia, ethylene oxide, and flammable
liquids. This tracking technology includes a wireless communication
management unit to track precise near-real time location via GPS,
direction of travel, speed, and dwell time within the Transportation
Security Administration (TSA)'s 45 designated high-threat urban areas
(HTUAs).\25\
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\25\ The Transportation Security Administration defines an HTUA as
an area comprising one or more cities and the surrounding areas,
including a 10-mile buffer zone.
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End-of-Train Telemetry (EOT): The FRA requires all
freight trains operating on excess of 30 mph to be equipped with a 2-
way EOT device that tracks GPS location and can allow a locomotive
engineer to initiate an emergency brake application, a critical safety
feature for trains that can stretch upwards of 10,000 feet long.
The presence of these evolving technologies underscores the clear
danger of a foreign country, and particularly the Government of China
and its SOEs, having unfettered control of freight manufacturing in the
U.S. market. Already, there are reports of Chinese manufacturers
investigating the production of their own ``telematics'' technology to
allow the monitoring and control of their rail cars.\26\
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\26\ China plans `smart trains' to take on global rail companies,
CHINA DAILY, March 10, 2016, page 1 http://english.chinamil.com.cn/
news-channels/2016-03/10/content_6952271_2.htm
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We depend on technology, machinery and a robust system of
intellectual property protections to support our national security;
when we allow foreign states to interfere--especially our strategic
competitors--we risk that security. While Congress has recognized and
taken steps to address similar threats to products such as computer
chips and cellular technology, it is equally important that
policymakers enact legislation directed to stop immediately the scope
and impact of China's ongoing incursion into an increasingly digitized
rail network.
mitigation
Chinese intrusion into the U.S. rail system's supply chain
threatens the health and sustainability of this vital economic pillar,
especially in a national emergency. Were China to gain inroads into
those operations, management, and supply chains, the ability of U.S. to
effectively utilize and leverage the freight rail network in a crisis
could be crippled. Moreover, the extensive telematics and digitization
of the American rail network, while integrating the most modern
technology, also exposes the system and those who use it to a wide
array of cyber risks.
In other U.S. economic sectors where Chinese SOEs have engaged
aggressively, the U.S. Government has responded with targeted
restrictions to mitigate clear security risks. Such measures have
included a reported U.S. government ban on the purchase of Chinese
drones \27\ and the removal of Chinese-made security cameras from U.S.
military bases.\28\ In April 2018, DoD reportedly also banned Huawei
and ZTE cell phones from sale in U.S. military exchanges world-
wide.\29\ We have yet to do the same to protect Chinese incursions into
the U.S. freight rail manufacturing base.
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\27\ Alwyn Scott, ``China drone maker steps up security after U.S.
Army ban,'' Reuters, August 14, 2017. https://www.reuters.com/article/
us-usa-drones-dji/china-drone-maker-steps-up-security-after-u-s-army-
ban-idUSKCN1AU294
\28\ Max Greenwood, ``US Army base removes Chinese-made
surveillance cameras,'' The Hill, January 12, 2018. http://thehill.com/
policy/defense/368710-us-army-base-removes-chinese-made-surveillance-
cameras
\29\ Hamza Shaban, ``Pentagon tells U.S. military bases to stop
selling ZTE, Huawei phones,'' The Washington Post, May 2, 2018. https:/
/www.washingtonpost.com/news/the-switch/wp/2018/05/02/pentagon-tells-u-
s-military-bases-to-stop-selling-zte-huawei-phones/?utm_term=.bf1e
99041b11
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While there is no single solution that will mitigate the concerns
and risks described in my testimony today, I suggest that we must
modernize our national policies to reflect these security risks. It is
difficult to overstate the potential impact on our national security
and our economic future if we do not take a comprehensive and long-
range approach to CRRC specifically, and SOEs generally.
Considering these security risks, both chambers of Congress last
year attempted to pass a ban on federal funding going to CRRC through
the appropriations process. This year 30 Senators have so far signed
onto legislation that would place a permanent ban on Federal funding
going to CRRC and the House just recently introduced a bill as well. I
would urge members of this Committee to join their colleagues in co-
sponsoring the Transit Infrastructure Vehicle Security Act. Congress
also passed legislation last year that would mandate DHS, in
coordination with the Committee on Foreign Investment in the United
States and the Department of Transportation, to produce a report on the
national security threats of Chinese SOE investment in our rolling
stock manufacturing sector.\30\
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\30\ See. H.R.5515--John S. McCain National Defense Authorization
Act for Fiscal Year 2019, Sec. 1719(c)
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It is now time for our Nation's leaders to put an end to CRRC's
infiltration of the U.S. rail manufacturing industry by developing
comprehensive restrictions to ensure the integrity of our Nation's
transportation systems. In that vein, I recommend that Congress and the
Administration giver serious and immediate consideration to:
Developing comprehensive restrictions and additional
reviews on investments from SOEs in critical infrastructure integral to
our national defense.
Ensuring that appropriate federal agencies, in
coordination with states and localities, develop robust standards for
cyber and data integrity applicable to any rail or transit sector
contracts involving foreign state-owned entities.
Strengthening oversight of Buy America laws to ensure
that existing laws and regulations are adhered to in Federally-funded
transit and rail procurements including railcar manufacturing, and
explore new avenues to further protect the manufacturing capabilities
of freight rail and other core domestic industries that are integral to
support and maintain our defense industrial base.
conclusion
We need urgent action to safeguard our U.S. rail system's health
and integrity. Chinese control of our rail system's supply chains, much
less control of the system through cyber-intrusion or outright firm
ownership, threatens this vital national security asset. The strategic
targeting of our Nation's infrastructure by the Government of China and
its state-owned enterprises poses a fundamental threat to the fabric of
our critical infrastructure and is a pressure point for malicious cyber
actors to threaten not only the economic and national security of the
United States, but to our standing as a global power.
We greatly appreciate the Committee's interest in addressing these
critical issues. We must take action to safeguard our U.S. rail
system's health and integrity before we lose it. We owe it to the
American people to ensure that the American freight rail sector
continues to be a vibrant and secure element of our Nation's
infrastructure, keeping us safe and carrying our economy into the
future.
Thank you again for the opportunity to testify. I look forward to
answering your questions.
Mr. DeFazio. Precisely on time. I thank you, General.
Mr. Galloway.
Mr. Galloway. Chairman DeFazio, Ranking Member Graves, and
members of the Committee on Transportation and Infrastructure,
thank you for inviting me to testify today.
My name is Hamilton Galloway, and I am the head of
consultancy for the Americas at Oxford Economics, a leader in
global forecasting in quantitative analysis.
Oxford Economics has conducted several economic impact
studies, including those within the rail industry. A September
2018 study that Oxford did with the Rail Supply Institute found
that the rail supply industry supports 650,000 mostly middle-
income jobs, generates $74 billion in U.S. GDP, and touches
every State.
This sector also supports hundreds of producers of parts
and components and systems for the rail supply industry.
Now, nested within this rail supply industry lies a sector
that manufactures public transit and freight railcars and
rolling stock. This sector employs over 21,000 middle-class
workers in the U.S. and supports nearly 190,000 jobs in the
U.S.
In other words, every job in the public transit and freight
railcar and rolling stock manufacturing sector supports nearly
eight additional jobs in the U.S. economy. It is these jobs
that are under threat by foreign state-owned enterprises.
Foreign competition from SOEs is an increasing challenge
for the U.S. economy because they operate with a different
business model. Their core purpose is to fulfill a social or
economic need in their own country's economy.
But in recent decades several SOEs have become
multinational. SOEs pose a risk to us because they enjoy
advantages like state-direct subsidies, concessionary financing
from state-owned banks, and regulatory exemptions.
These anticompetitive practices displace private-sector
competitors causing cascading negative effects upon business
owners, workers, and families in the U.S.
In 2017, Oxford Economics researched the potential
disruption of SOEs in the U.S. freight railcar manufacturing
sector. We found a pattern of anticompetitive behavior in
countries outside the U.S. with respect to pricing.
To cite one example, this led to the collapse of
Australia's freight railcar manufacturing industry, and we
concluded that if similar practices were to occur here in the
U.S., it would threaten 65,000 American jobs.
Under one worst-case scenario, if just $1 billion in
freight railcar sales were lost to an SOE, nearly 13,000 jobs
would be lost in the U.S., and $1.3 billion would be lost to
U.S. GDP. The bulk of this loss would be felt across the supply
chains of freight railcar manufacturing, recalling that these
supply chains span every State in the Union.
At Oxford, we recently turned our attention to passenger
railcar manufacturing, a sector where SOEs already established
operations in the U.S., including final assembly facilities.
Although railcars will be assembled here, a large number of the
components are likely to be sourced from the SOE's home
country, like China.
We assessed two scenarios of potential disruption. In the
first scenario the SOE does not need to adhere to Federal Buy
America provisions, which is currently set at 65 percent U.S.
content, but will jump to 70 percent next year.
In this scenario, we assume the municipality purchasing
railcars is not using Federal funds. So much of the railcar
content will actually be made in the SOE's home country.
In our second scenario, we assume a good faith adherence to
Buy America provisions, which applies when Federal dollars are
used. For context, local municipalities, including Boston,
Philadelphia, Los Angeles and Chicago, have already awarded
contracts to an SOE. Three of these city contracts are entirely
funded by State and local governments. So the Buy America
provisions do not apply.
In the non-Buy America scenario, over half of the railcar's
value is lost overseas. This means that for every $1 billion in
railcar productions by an SOE, it costs the U.S. more than
5,000 jobs and $500 million in GDP.
Put another way, for every final assembly job created by an
SOE here in the U.S., 5.4 jobs are lost elsewhere in the U.S.
economy.
In the Buy American scenario, more of the railcar's value
is kept here in the U.S. However, we estimate that $1 billion
in production awarded to an SOE still leads to a net loss of
3,200 jobs and a reduction of almost $320 million in U.S. GDP.
In this scenario, every SOE final assembly job created
still eliminates 3.5 jobs here in the U.S. economy. So
ultimately America loses in both scenarios. We just lose less
in the Buy America.
Our research, therefore, suggests that anticompetitive
practices by SOEs could destabilize competitive private-sector
railcar manufacturing, causing long-term consequences to
productivity and efficiency. This creates cascading negative
effects across the U.S. due to the loss of private-sector jobs.
In sum, it is imperative that policymakers promptly
acknowledge, assess, and respond to the SOEs making headway in
the U.S. rail industry to prevent the loss of thousands of
jobs, as well as hundreds of millions in wages, GDP, and taxes.
Thank you again for this opportunity, and I look forward to
answering any of the questions that you may have.
[Mr. Galloway's prepared statement follows:]
Prepared Statement of Hamilton Galloway, Head of Consultancy for the
Americas, Oxford Economics
Chairman DeFazio, Ranking Member Graves and members of the
Committee on Transportation and Infrastructure Committee. First and
most importantly I want to thank you for inviting me to testify today.
My name is Hamilton Galloway and I am the Head of Consultancy for the
Americas at Oxford Economics--a leader in global forecasting and
quantitative analysis. Our worldwide client base comprises more than
1,500 international corporations, financial institutions, government
organizations, and universities. Headquartered in Oxford, England, with
offices around the world, we employ 400 staff, including 250 advanced
degreed economists and analysts. Our best-in-class global economic and
industry models and analytical tools give us an unmatched ability to
forecast external market trends and assess their economic, social and
business impact. Over the past four years, my team and I have conducted
a significant number of robust economic impact assessments that have
been time tested, across a broad range of industrial manufacturing
activities, including those within the rail industry, giving us unique
insight into the domestic value that private companies provide the
U.S.--specifically in terms of jobs, income, Gross Domestic Product
(GDP) and taxes. Our work is regarded as best-in-class by some of the
world's leading firms. It is within this context that I appear before
you today.
overview
In September 2018, Oxford Economics in collaboration with the Rail
Supply Institute published a report that analyzed the economic
contribution of the rail supply industry. That report is attached to my
testimony. Our study included the manufacturing of railcars,
locomotives, signaling and communication, rail ties and tracks, as well
as the maintenance of way. Taking into consideration the extensive,
integrated domestic supply chains of hundreds of producers of parts and
components for the rail supply industry, we concluded that the
activities of this sector support 650,000 mostly middle-income jobs,
$74 billion in U.S. GDP and contributes nearly $17 billion to federal,
state and local taxes. This value spreads coast to coast, covering
every state in the Union. Simply stated, one job in the rail supply
industry supports four additional jobs elsewhere in the U.S. economy,
which means that significant value is retained in here in the U.S. In
fact, data from the U.S. Bureau of Economic Analysis indicates that
approximately 82% of the rolling stock manufacturing supply chain is
U.S. based.\1\
---------------------------------------------------------------------------
\1\ IMPLAN 2016 figures, based on U.S. Bureau of Economic Analysis
data
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Nested within the rail supply industry is the sector that
manufactures public transit and freight railcars, and rolling stock--a
sector that directly employs over 21,000 middle-class workers in the
U.S. and supports nearly 190,000 U.S. jobs.\2\ In other words, every
job in the public transit and freight rail car and rolling stock
manufacturing sector supports nearly eight additional jobs in the U.S.
economy. This is the context of value to the U.S. that is under threat
from anti-competitive business practices demonstrated by state-owned
enterprises.
---------------------------------------------------------------------------
\2\ Freight railcar manufacturing supports approximately 65,000
jobs--as evidenced from an Oxford Economics study conducted in 2017
evaluating the industry with respect to the threat of state-owned
enterprises. Passenger railcar and locomotive manufacturing represent
the remaining balance of 125,000 total jobs supported.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
state-owned enterprises
Foreign competition in the form of state-owned enterprises is an
increasing factor for the U.S. economy. While competition in the
private sector is generally regarded as positive, state-owned
enterprises operate with a different business model than for-profit
companies. At their core, state-owned enterprises have as their purpose
to fill a social or economic need within their home country's economy.
In recent decades, however, many state-owned enterprises have expanded
outward, becoming multinational. Because state-owned enterprises enjoy
certain advantages of government ownership--including direct state
subsidies, concessionary financing from state-owned banks, state-backed
guarantees, and exemptions from antitrust enforcement or bankruptcy
rules--this expansion raises serious questions about the role that
government owners of some of the world's top companies have on
competition, particularly in the U.S. In fact, the advantages afforded
state-owned enterprises threaten to undermine the benefits gained from
fair competition in true private sector production--such as
improvements to efficiency and technological advancement. Instead,
anti-competitive practices displace private sector competitors, causing
cascading effects through U.S. domestic supply chains and the business
owners, workers and families who rely on them.
implications on freight railcar manufacturing
In 2017, Oxford Economics conducted original research into the
potential disruption of state-owned enterprises in the freight railcar
manufacturing sector.\3\ That report is attached to my testimony. Our
findings illustrated a pattern of anti-competitive behavior with
respect to pricing freight railcars, which ultimately led to the
collapse of Australia's freight railcar manufacturing industry. If
similar practices were to occur in the U.S., it would threaten the
65,000 jobs supported by freight railcar manufacturing. This problem is
further amplified because measures designed to preserve domestic
production and content, such as Buy America, do not apply in the fright
rail sector.
---------------------------------------------------------------------------
\3\ Oxford Economics (May 2017). Will We Derail U.S. Freight
Rolling Stock Production? An Assessment of the Impact of Foreign State-
Owned Enterprises on U.S. Freight Rolling Stock Production.
---------------------------------------------------------------------------
In its 2017 research, Oxford Economics built two scenarios to
better understand the implication of state-owned enterprise disruption
in the U.S. freight railcar market. These scenarios were calculated in
$1 billion sales/output increments--about one-fifth the size of the
current freight railcar market. The first scenario evaluated a partial
preservation of domestic supply chains--although the bulk of the
railcar inputs would be produced in China. Under this scenario, if $1
billion in freight railcar sales were to shift to a state-owned
enterprise, approximately 5,100 U.S. jobs would be lost and U.S. GDP
would decrease by approximately $540 million. The second scenario
evaluated a full transfer of freight railcar production to China--
similar to what occurred in Australia.\4\ Under this scenario, a $1
billion shift in freight railcar sales to a state-owned enterprise
would result in a U.S. job loss of nearly 12,900, as well as a $1.3
billion loss to U.S. GDP. The bulk of this loss would be felt across
the supply chains of freight railcar manufacturing.
---------------------------------------------------------------------------
\4\ Australia's freight rail market was nearly fully displaced by a
state-owned enterprise in a span of less than one decade. In 2008, CRRC
comprised about 40% of production output in Australia. By 2016, CRRC
comprised more than 95% of output. Three key factors contributed to
this outcome: 1) The Australian dollar during this time was very strong
relative to foreign currencies, which reduced the effective price of
Chinese freight railcars. 2) Australia's increasing economic reliance
on China to buy Australian goods. 3) Australia's recognition of China
as a market economy leading up to the bilateral Chinese-Australian Free
Trade Agreement, which limits Australia's access to WTO remedies
related to pricing and anti-dumping.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
implications on public transit and passenger railcar manufacturing
State-owned enterprises have already established operations here in
the U.S.--including the establishment of final assembly facilities.
While the activity of assembling components and parts will occur here
in the U.S., a significant proportion of those components are likely to
be sourced from the home country of the state-owned enterprise. There
are two key reasons for this: 1) the mission of the state-owned
enterprise is to drive value back to the home country, and 2) the
state-owned enterprise has already made significant long-run capital
investment in their home country's supply chain, which they rely on to
produce railcars. As a result, the supply-chain jobs and value that
have largely been a staple of the U.S. railcar economic landscape would
be offshored.
New research by Oxford Economics evaluating the potential
disruption of these activities covers two scenarios. The first scenario
evaluates the net impact of passenger railcar manufacturing wherein the
state-owned enterprise does not need to abide by Buy America provisions
(wherein, for FY2018-19, 65% of the parts used in railcar manufacturing
must consist of content made in America. After FY2020, the U.S. content
requirement moves up to 70%)--in other words, the municipality
purchasing railcars in this scenario is not drawing on federal funds.
Therefore, it is highly likely that much of the railcar content will be
made in the state-owned enterprise's home country. The second scenario
evaluates the impact of a good faith adherence to Buy
Americaprovisions.
For context, local municipalities, including MBTA in Boston, SEPTA
in Pennsylvania, LACMTA in Los Angeles and CTA in Chicago have already
awarded contracts to a state-owned enterprise. Three of these four
contracts are entirely funded by state and local governments, meaning
that Buy America provisions are not required.
scenario one--no buy america provision
In the non-Buy America adherence scenario, we assume that
approximately 52% of the parts used in the railcar are produced
overseas, with final assembly completed in the U.S. The outcome from
this scenario is a net loss of 5,100 jobs, $508 million in productivity
and $113 million in taxes in the U.S. economy for every $1 billion in
passenger railcar final output. Put another way, for every 1 US final
assembly job created by a state-owned railcar manufacturer, a net 5.4
jobs are lost in the US economy relative to traditional non-SOE
producers, including direct, indirect, and induced impacts.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
scenario two--adherence to buy america provision
In the Buy America scenario, where more U.S. domestic content is
incorporated into the production of railcars and final assembly
completed, the effects are less severe, though the outcome still
implies loss of jobs and value in the U.S. We estimate that there would
be a net loss of 3,250 jobs, $318 million in productivity and $70
million in taxes for every $1 billion in final output. In this
scenario, every state-owned enterprise US final assembly job created
results in a net loss of 3.5 jobs in the U.S. economy.\5\
---------------------------------------------------------------------------
\5\ This scenario is designed to apply to situations similar to the
SEPTA contract, wherein Buy America is a requirement.
---------------------------------------------------------------------------
conclusion
The conclusions drawn from our research suggest that anti-
competitive business practices among state-owned enterprises could:
Destabilize competitive, private sector railcar
manufacturing, causing long-term consequences to productivity and
efficiency
Lead to significant losses of private-sector jobs and
value in the U.S. economy, as supply chains for state-owned enterprises
are offshored
Create cascading negative effects across the U.S. due to
the loss of private sector jobs in key manufacturing industries
This disruption is further amplified when one factors in the
passenger railcar manufacturing sector--an area where state-owned
enterprises have already established operations here in the U.S. In
sum, it is imperative that policy makers acknowledge, assess, and
respond to state-owned enterprises that have and will likely continue
to make headway into the U.S. rail industry in the near future to
prevent, among other things, the loss of tens of thousands of jobs, as
well as billions in wages, GDP and taxes.
Thank you again for this opportunity and I look forward to
answering any questions that you may have.
Mr. DeFazio. Well, again, very, very good on the time.
Thank you, Mr. Galloway.
Mr. Cilluffo.
Mr. Cilluffo. Thank you, Chairman DeFazio, Ranking Member
Graves, and distinguished committee members. Thank you for the
opportunity to testify before you today on an issue that is
clearly of national importance.
And I applaud your leadership in examining the impacts of
foreign-owned and state-owned enterprises on the transportation
sector and critical infrastructure more broadly.
The subject is as timely as it is concerning, given the
impact to U.S. economic power, national security, military
strength, innovation, and of course, jobs.
At a top level, and I might note, covering so much terrain
in 5 minutes is a tall order, especially for me since I have
never had an unspoken thought, but I will try.
At the top level, from a cyber perspective, the threat
comes in various shapes, sizes, and forms. Intentions vary, as
do capabilities. Topping the list are Russia and China. They
are both advanced, persistent threats, and both countries have
turned to proxies to do their bidding.
The primary concerns include computer network exploit where
the theft of information to include intellectual property and
other forms of espionage, as well as the mapping of critical
infrastructure; computer network attack where the means to
disrupt, destroy, or modify information and/or their systems;
and of course, the insider threat.
In relation to both Russian and state-owned enterprises, I
wanted to underscore that companies may willingly or even
unwittingly serve as conduits of sensitive information as legal
provisions in their countries require that they share
information with the security services, and they can even be
compelled to do so.
To give a sense of the scale and scope, I thought I would
quickly tick off a very few examples, and I will focus on China
since they account for over 90 percent of DOJ's economic
espionage prosecutions and a vast majority of the cyber
espionage cases.
It is also worth noting, as General Adams brought up
earlier, the Made in China 2025 plan. Most of the technologies
targeted are directly in the Transportation and Infrastructure
Committee's jurisdiction, and those that are not touch your
jurisdiction in an integral kind of way.
But to paraphrase Mark Twain, and I am not going to go over
all of the espionage cases, whereas history may not repeat
itself, it tends to rhyme, and there is a whole lot of rhyming
going on right now.
Taken individually, each of these cases, you can understand
why people would brush them off. In the aggregate, however, it
sends a very strong and compelling message to our national
security interests.
CRRC, we discussed briefly, or General Adams did, the
significance of it having a foothold in our supply chain in
some of the biggest cities in America. Obviously a 20- to 50-
percent procurement bids under the competition, this is an
unlevel playing field, but it is, again, consistent of a
broader pattern here, a broader strategy here.
Drones, what most people do not realize is Chinese
manufacturer DJI has largely captured the American UAS market,
and in 2017, U.S. Customs authorities allege that drones
produced by DJI provided China with access to U.S. critical
infrastructure and law enforcement data.
Major concerns abound where the data resides and whether it
is corrupted and/or transmitting data back to third parties.
Cameras, Hikvision, they are the biggest company in the
world right now in terms of video surveillance equipment, and
they have had access to U.S. infrastructures, including
schools, prisons, and even sensitive military and Government
installations.
5G, Huawei, ZTE, the strategic significance of 5G as the
bedrock upon which telecommunications and so much more will
rely has direct relevance to the transportation sector. Not
only does the attack surface grow exponentially, but smart
highways and vehicles of tomorrow will be paved in silicon as
much as they are in asphalt.
This would be the tech equivalent of building on quicksand
since 5G is going to be at the very core, at the operating
systems of our smart infrastructures. This is the crux of the
Executive order that the President promulgated last night.
Financing, foreign proxy entities can step in and scoop up
U.S. assets and entities on the verge of bankruptcy or seeking
startup capital. These are two primary blind spots in CFIUS.
Those are two issues that I think the committee can play a role
in elevating since China was the largest single foreign venture
capitalist in the United States cumulatively between 2015 and
2017.
The grid, more than 200 Chinese transformers have come into
the U.S. energy sector during the past decade. Previously,
there were none, and I can go on and on and on with the lists.
But let me just close with there are certain things we need
to be able to grapple with here, and what we cannot afford to
do is grind the U.S. economy to a halt with blanket or overly
blunt measures.
Instead, we need to tailor and calibrate our responses to
limit collateral damage to U.S. interests. National security
and free markets are not either/or propositions. They are not
mutually exclusive.
We can and must do both.
And I will touch on any recommendations during the Q&A.
Thank you, Mr. Chairman. And sorry for blowing the good
record of----
[Mr. Cilluffo's prepared statement follows:]
Prepared Statement of Frank J. Cilluffo, Director, McCrary Institute
for Cyber and Critical Infrastructure Security, Auburn University
introduction
Chairman DeFazio, Ranking Member Graves, and distinguished
Committee Members, thank you for the opportunity to testify before you
today on a subject that is clearly of national importance. Your
leadership in examining the impacts of foreign-owned enterprises on
critical U.S. infrastructure and in the transportation sector in
particular is commendable. The subject is as timely as it is
concerning.
In this testimony, my goal is threefold: First, to offer a snapshot
of the threat. Second, to place that threat in context by elaborating
upon why it matters. And, third, to suggest a handful of feasible,
impact-oriented policy recommendations that fall within the Committee's
jurisdiction. However, before proceeding, I offer one caveat. Whereas
other witnesses will focus deeply on the specifics of particular
modalities of transportation and the impacts in connection thereto, my
contribution will reside more at the strategic level. I will speak to
the broader challenges, primarily the threats to critical U.S.
infrastructure posed by foreign-owned enterprises and the response.
This approach is intended to add value by acknowledging and emphasizing
that the transportation sector must not be examined in isolation.
Pursuant to this approach, there are three chief concerns on the
cyber side. One, the theft of information for the purpose of espionage
or computer network exploitation, to include the mapping of critical
U.S. infrastructure. Two, the theft of information to enable disruptive
or destructive computer network attack, including hybrid cyber/physical
attack. And, three, the insider threat, which cuts across all of these
categories. In relation to foreign state-owned enterprises, it is also
important to recognize that the potential threat is equally acute. It
may arise deliberately with the foreign company acting as a willing
conduit for its state of origin or inadvertently with the foreign
company simply being subject in principle and/or by law of the state of
origin to provide assistance upon request.
the state of play: risks to national & economic security
Foreign state-owned enterprises and China Railway Rolling Stock
Corporation (CRRC) in particular is increasingly taking center-stage
when it comes to building new rail cars for major American cities.
Boston, Chicago, Los Angeles, and Philadelphia have each awarded
contracts recently to CRRC, which placed markedly lower bids than the
competition. The company is also expected to bid on upcoming rail-car
contracts with the New York Metropolitan Transportation Authority, and
the Washington (DC) Metropolitan Area Transit Authority.\1\
---------------------------------------------------------------------------
\1\ Candice Norwood, ``As China Builds Transit Cars for U.S.
Cities, Congress Seeks to Ban Them,'' Mass Transit (March 19, 2019),
https://www.masstransitmag.com/rail/vehicles/news/21072662/as-china-
builds-transit-cars-for-us-cities-congress-seeks-to-ban-them
---------------------------------------------------------------------------
These procurement decisions and processes raise multiple concerns.
First, the playing field is tilted: CRRC is able to underbid others
because it benefits from state support.\2\ Second, this support is just
one element of a much broader strategy on China's part to challenge and
undermine America economically.\3\ Third, these economic factors are
inextricably intertwined with U.S. national security because to
undercut America's competitiveness is to damage the engine that powers
our national security. And, fourth, CRRC's foothold in the supply chain
of public transit to some of the largest cities in America effectively
provides China with a wealth of intelligence, accessible through cyber
means and vulnerabilities, among others. In military terms, such
gathering of information for future exploitation and potential attack
is called Intelligence Preparation of the Battlefield (IPB)--an
important concept here, as China conceives of cyber, economic,
military, and other measures as interconnected tools to achieve the
country's larger geopolitical aims and ambitions. Looking beyond public
transit and beyond China alone, the unfortunate reality that we must
take as our operating assumption, is that U.S. critical infrastructures
have already been mapped by our adversaries.
---------------------------------------------------------------------------
\2\ ``CRRC has been winning U.S. procurements by bidding anywhere
from 20 to 50 percent below bids from its non-subsidized, private
sector competitors.'' Annie I. Anton and Justin Hemmings, ``Recognizing
Vendor Risks to National Security in the CFIUS Process,'' Lawfare
(January 4, 2019), https://www.lawfareblog.com/recognizing-vendor-
risks-national-security-cfius-process
\3\ As explained by a senior official at the U.S. Department of
Justice just last month: ``The problem is not that China is working to
master critical technologies, or even that it is competing with the
United States, but rather the means by which it is doing so. `Made in
China 2025' is as much a roadmap to theft as it is guidance to
innovate. Since the plan was announced in 2015, the Justice Department
has charged Chinese individuals and entities with trade secret theft
implicating at least eight of the ten sectors [identified as `strategic
manufacturing industries for promotion and development' by the Made in
China 2025 strategy]. Over a longer time period, since 2011, more than
90 percent of the Department's economic espionage prosecutions (i.e.,
cases alleging trade secret theft by or to benefit a foreign state)
involve China, and more than two-thirds of all federal trade secret
theft cases during that period have had at least a geographical nexus
to China. Some of those cases demonstrate that China is using its
intelligence services and their tradecraft to target our private
sector's intellectual property. In the space of two months last year,
the Department announced three cases alleging crimes by the same arm of
the Chinese intelligence services, the Jiangsu Ministry of State
Security, also known as the `JSSD'.'' ``Deputy Assistant Attorney
General Adam S. Hickey of the National Security Division Delivers
Remarks at the Fifth Annual Conference on CFIUS and Team Telecom,''
(April 24, 2019), https://www.justice.gov/opa/speech/deputy-assistant-
attorney-general-adam-s-hickey-national-security-division-delivers-0
---------------------------------------------------------------------------
The situation is no less concerning in the air, where the use of
unmanned aircraft systems (UAS) is becoming ever more common, for a
range of purposes including surveying and securing large tracts of
land. Notably, a Chinese manufacturer--DJI--has largely captured the
American market for UAS. While UAS serve valuable functions, use of
these Internet-connected systems entails risks. Most importantly, the
using entity's sensitive data may be exposed and accessed.\4\ This type
of breach is especially problematic if the using entity supports a
critical U.S. sector or function, and the manufacturer of the UAS is a
foreign state-owned enterprise. Chinese companies, for example, may be
legally required to help advance the mission and goals of China's
security and intelligence services. The use of UAS also raises the
prospect of cyber/physical convergence, whereby cyber tools and
operations may be invoked (particularly by an adversary with hostile
intent) to generate kinetic or real-world consequences. Notwithstanding
this background, the UAS issue has yet to receive in this country the
attention and commensurate timely action that this concerning matter
deserves.
---------------------------------------------------------------------------
\4\ ``In 2017, U.S. customs authorities alleged that drones
produced by Chinese company DJI, which has dominated the U.S. and
Canadian drone markets, likely provided China with access to U.S.
critical infrastructure and law enforcement data. DJI denied the
allegation.'' Matthew Pennington, ``US panel warns against government
purchase of Chinese tech,'' The Associated Press (November 14, 2018),
https://www.fifthdomain.com/critical-infrastructure/2018/11/14/us-
panel-warns-against-government-purchase-of-chinese-tech/
---------------------------------------------------------------------------
Within the transportation sector alone, the potential
vulnerabilities are manifold. Public transit, freight rail, UAS,
seaports, and so on--each presents a tempting target on its own.\5\ At
the same time however, these transport hubs in surface, air and
maritime also individually and collectively support and enable the U.S.
military to achieve its ends and operations both at home and abroad.
The ability of U.S. forces to complete these activities successfully
and in service of the national interest is what the U.S. defense
community refers to as Mission Assurance. Continuity of these
operations, and resilience in the face of disruptive or destructive
events, is of fundamental importance. National defense priorities thus
intersect and, to a certain extent, depend upon the integrity of the
transportation sector. If the latter is compromised that may put
Mission Assurance at risk, since logistics are the lifeblood of the
U.S. military; and to hamper that planning and execution is to
jeopardize our ability to deploy forces and prosecute war. Put
differently, the impacts of foreign state-owned enterprises on the
transportation sector range well beyond the economic and stray deeply
and directly into the realm of national security. Again, the potential
for cyber/physical convergence, with resulting consequences on the
battlefield, is concerning. Indeed, the Center for Cyber and Homeland
Security will be releasing a report shortly entitled ``Strengthening
Defense Mission Assurance Against Emerging Threats.'' We will make it
available to the Committee.
---------------------------------------------------------------------------
\5\ ``State and local government agencies have become increasingly
vulnerable to cyberattacks--particularly when it comes to public
transportation. In 2016, hackers hit the San Francisco transit system
with a ransomware attack demanding $70,000. The following year,
Sacramento Regional Transit faced a similar strike. In 2018, the
Colorado Department of Transportation shut down 2,000 computers after
falling victim to two ransomware attacks in two weeks.'' Norwood,
https://www.governing.com/topics/transportation-infrastructure/gov-
china-crrc-congress-cities-transit-federal-funding-bill.html
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Foreign state-owned enterprises and the advanced technologies that
they offer, often at highly competitive prices and frequently
accompanied by additional concessionary financing, present a dilemma
for other critical infrastructure sectors, too. 5G telecommunications
technology proffered worldwide by Chinese companies Huawei and ZTE is a
clear and prominent example. 5G will be the foundation upon which next-
generation networks, globally, will rest. Currently, countries are in
the process of selecting the entities that will build and contribute to
that foundation. This is a seminal decision that will affect not only
the telecommunications sector in each country, but all of the other
sectors that the telecommunications industry supports and services
(such as transportation--including autonomous vehicles where the cyber
domain meets and melds with the physical world).
As such, 5G will be the hub powering many spokes that in turn may
be critical sectors or functions. To be selected a preferred provider
of the components for the hub is a tremendous economic opportunity.
Huawei and ZTE are therefore competing aggressively to act as
suppliers, including to the United States. Based on evidence of these
companies' complicity with the Chinese government, and the national
security concerns that this raises (e.g., espionage, IPB, intellectual
property theft, etc.), the United States has rejected these overtures,
and urged its allies and partners to do the same.\6\ While paths
forward may ultimately diverge, the U.S. way ahead is clear, and it
will not engage Huawei or ZTE. Significantly, the strategic
significance of 5G, as the bedrock upon which telecommunications and so
much more will rely, has also been recognized by more than 30
countries, which met recently in Prague, and produced a series of
principles regarding the ``cyber security of communications networks in
a globally digitized world.'' \7\
---------------------------------------------------------------------------
\6\ Frank J. Cilluffo and Sharon L. Cardash, ``What's wrong with
Huawei, and why are countries banning the Chinese telecommunications
firm?'' The Conversation (December 19, 2018), https://
theconversation.com/whats-wrong-with-huawei-and-why-are-countries-
banning-the-chinese-telecommunications-firm-109036. Note also, ``the
potential impact of malicious cyberattacks . . . will intensify with
the adoption of ultra-fast 5G networks that could quicken data speeds
by up to 100 times.'' Pennington, https://www.fifthdomain.com/critical-
infrastructure/2018/11/14/us-panel-warns-against-government-purchase-
of-chinese-tech/
\7\ Government of the Czech Republic, ``Prague 5G Security
Conference announced series of recommendations: the Prague Proposals,''
(May 3, 2019), https://www.vlada.cz/en/media-centrum/aktualne/prague-
5g-security-conference-announced-series-of-recommendations-the-prague-
proposals-173422/
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Other products and technologies supplied by Chinese companies that
have raised security concerns in the United States include cameras,
such as video surveillance equipment, manufactured by Hangzhou
Hikvision Digital Technology. The company, a global giant in its field,
began as a Chinese government research institute. Today, three Chinese
state-owned enterprises retain a large ownership stake of more than 40
percent in the company. Nevertheless, Hikvision cameras have been used
in U.S. prisons and schools, and ``sensitive sites such as the Fort
Leonard Wood army base and the U.S. embassy in Kabul.'' Hikvision has
also been the subject of allegations that the company maintains access
to its devices ``even if you change the admin [passwords] and the
firewall.'' \8\
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\8\ Sidney Leng, ``China's Hikvision hits out at US Congress over
`baseless' ban on using surveillance equipment over national security
concerns,'' South China Morning Post (May 27, 2018), https://
www.scmp.com/news/china/diplomacy-defence/article/2148010/chinas-
hikvision-hits-out-us-congress-over-baseless-ban
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Many other smaller but still important opportunities exist for
foreign state-owned enterprises to make inroads into U.S. critical
infrastructure either directly or indirectly. Flush with the financial
backing of their state sponsors, these foreign proxy entities can step
in and scoop up U.S. assets and entities that are on the verge of
bankruptcy or in need of start-up capital.\9\ Such acquisitions may
relate to a niche or component that may seem minor to the untrained
eye, but may bear significant import. Consider switches, for instance.
They play a crucial role in freight and passenger rail, and the ability
to alter their activation or operation could cause substantial harm to
both persons and property. Nor would such alteration be necessary to
perform in person or onsite. Instead, tampering could take place from
afar through silent and stealthy cyber means.
---------------------------------------------------------------------------
\9\ The U.S.-China Economic and Security Review Commission notes
that China was ``the largest single foreign VC [venture capital]
investor ($24 billion) in the United States cumulatively between 2015
and 2017, according to a recent U.S. government study.'' 2018 Report to
Congress (November 2018), https://www.uscc.gov/sites/default/files/
annual_reports/2018%20Annual%
20Report%20to%20Congress.pdf at page 30. See also: Michael Brown and
Pavneet Singh, China's Technology Transfer Strategy: How Chinese
Investments in Emerging Technology Enable A Strategic Competitor to
Access the Crown Jewels of U.S. Innovation (January 2018), Defense
Innovation Unit Experimental (DIUx) Report.
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This scenario also highlights the criticality of time, as invoked
by the phrase Positioning, Navigation, and Timing (PNT). Accuracy of
time and the positioning and navigation functions that it enables is
too often overlooked, underplayed, or taken as given. We do so at our
peril. Here again, China is investing heavily with the dual goals of
enhancing its ability to safeguard its own PNT and undermine others,
such as through anti-satellite capabilities that could blind and bind
the U.S. military. Modern militaries rely heavily on space-based assets
for their transit and targeting requirements and other needs, thereby
expanding the potential surface of attack. In addition, the continued
expansion of the Internet of Things and the related number of connected
devices worldwide that are giving us smart cities, smart cars, and
sensors galore, likewise serves to increase exponentially both
vulnerabilities and possibilities for attack. Heightened functionality
comes at a price for soldiers and consumers alike.\10\ The ever-present
criticality of PNT functions and the coming ubiquity of 5G technology
each underscore the need to remain resilient, including by considering
alternatives to our heavy reliance on the space-based Global
Positioning System (GPS), as a precautionary measure.
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\10\ `` `The scale of Chinese state support for the IoT, the close
supply chain integration between the United States and China, and
China's role as an economic and military competitor to the United
States creates enormous economic, security, supply chain, and data
privacy risks for the United States . . . ' ''. Pennington, https://
www.fifthdomain.com/critical-infrastructure/2018/11/14/us-panel-warns-
against-government-purchase-of-chinese-tech/ [citing the 2018 Report of
the U.S.-China Economic and Security Review Commission]
---------------------------------------------------------------------------
Supply chain concerns are by no means limited to goods or services
of Chinese origin.\11\ Software produced by the Russian anti-virus
company Kaspersky Lab is the subject of a ban on use by U.S. federal
agencies. Kaspersky Lab's leadership has close ties to Russia's
leadership, and the Lab may be legally obligated to assist Russian
security and intelligence officials with espionage efforts directed
against the U.S. government.\12\ Indeed, even if the assist to foreign
state officials in Moscow, Beijing, or elsewhere, were inadvertent or
unwitting on the part of the foreign supplier, the possibility for that
enterprise and its products, technologies and services to serve as
conduit is simply unacceptable.
---------------------------------------------------------------------------
\11\ But note: ``the U.S. government depends on commercial, off-
the-shelf products, many of them made in China, for more than 95
percent of its electronics components and information technology
systems.'' Pennington, https://www.fifthdomain.com/critical-
infrastructure/2018/11/14/us-panel-warns-against-government-purchase-
of-chinese-tech/. Moreover: ``An analysis of seven major U.S. based
tech companies--HP, IBM, Dell, Cisco, Unisys, Microsoft and Intel--
found that more than half of the products they and their suppliers use
are shipped from China.'' Derek B. Johnson, ``China's penetration of
U.S. supply chain runs deep, says report,'' FCW (April 23, 2018),
https://fcw.com/articles/2018/04/23/china-supply-chain-cyber.aspx?m=1
\12\ Joseph Marks, ``Government's Kaspersky Ban Takes Effect,''
Nextgov (July 16, 2018), https://www.nextgov.com/cybersecurity/2018/07/
governments-kaspersky-ban-takes-effect/149758/
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Despite measures like the Kaspersky software ban that are intended
to mitigate harm to U.S. national security, the imprint of foreign
state-owned enterprises upon critical U.S. infrastructure today remains
troubling. Consider the grid. According to the deputy director of
counterintelligence at the Department of Energy, more than 200 Chinese
transformers have come into the U.S. energy sector during the past
decade. Previously there were none.\13\ The groundwork for future
sabotage, actioned remotely by digital means, is now in place.
---------------------------------------------------------------------------
\13\ Blake Sobczak and Peter Behr, ``China and America's 400-ton
electric albatross,'' E&E News (April 25, 2019), https://
www.eenews.net/stories/1060216451
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In some instances, the problem is low-tech, at least on its face. A
recent GAO report revealed that just six TSA employees were responsible
for overseeing the security of 2.7 million miles of oil & gas
pipeline.\14\ This is patently insufficient, regardless the degree of
foreign state-owned enterprise involvement in this area. The problem
appears to be compounded by shortfalls in cybersecurity expertise on
the part of relevant personnel, and this further inhibits robust
oversight at a time when pipeline operations are increasingly
computerized.
---------------------------------------------------------------------------
\14\ Catalin Cimpanu, ``Only six TSA staffers are overseeing US oil
& gas pipeline security,'' ZDNet (May 2, 2019), https://www.zdnet.com/
article/only-six-tsa-staffers-are-overseeing-us-oil-gas-pipeline-
security/
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In short, we have failed to inoculate ourselves against the many
and varied threats to U.S. critical infrastructure posed by nation-
state actors and their proxies. This, despite the fact that our
adversaries have demonstrated their interest year after year in mapping
our architectures and engaging in persistent computer network
exploitation efforts that have no benign purpose and could ultimately
be combined with kinetic measures. China and Russia are not alone in
these pursuits. Iran and North Korea join them and possess a degree of
hostile intent that more than makes up for any shortfalls in their
respective capacities and capabilities. In this regard, we ought not to
forget Iran's past cyber-targeting of U.S. banks (DDoS attacks) or its
cyber-foray into the workings of a New York State dam.\15\ The 2018
Foreign Economic Espionage in Cyberspace Report produced by the
National Counterintelligence and Security Center notes also, ``Iranian
hackers target U.S. aerospace and civil aviation firms.'' \16\ Nor
should we forget North Korea's destructive cyber-attack on Sony
Pictures Entertainment.\17\
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\15\ Dustin Volz, Nate Raymond, Jim Finkle, ``U.S. to charge Iran
in cyber attacks against banks, New York dam-sources,'' Reuters (March
23, 2016), https://www.reuters.com/article/us-usa-iran-cyber-
idUSKCN0WP2NM
\16\ National Counterintelligence and Security Center, Foreign
Economic Espionage in Cyberspace (2018), https://www.dni.gov/files/
NCSC/documents/news/20180724-economic-espionage-pub.pdf at page 9. In
respect of Russia, the Report notes further (at page 8): ``Moscow has
used cyber operations to collect intellectual property data from U.S.
energy, healthcare, and technology companies. For example, Russian
Government hackers last year compromised dozens of U.S. energy firms,
including their operational networks. This activity could be driven by
multiple objectives, including collecting intelligence, developing
accesses for disruptive purposes, and providing sensitive U.S.
intellectual property to Russian companies.''
\17\ Peter Elkind, ``Inside the Hack of the Century,'' Fortune
(June 25, 2015), http://fortune.com/sony-hack-part-1/
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proposed response: selected action recommendations
The magnitude of the challenge is daunting, but there are steps
that we can and should take in order to confront and counter the array
of threats and problems that prevail, particularly those of highest
potential consequence. What we cannot afford to do is grind the U.S.
economy to a halt by introducing blanket and overly blunt security
measures. Instead, we must tailor and calibrate our responses to limit
any collateral damage to U.S. interests, separate and apart from
national security concerns. In practice, this means working to elevate
security concerns, monitor them, test our responses, and continually
refine those regimes. Admittedly, this is a tall order. But, like any
complex task, it can be broken down into a series of steps to be taken
in a sequence that deals with first things first:
Prioritize Lifeline Sectors and National Critical Functions. If
everything is critical then nothing is, and since we cannot protect
everything, everywhere, all the time, we must focus our limited human,
capital and other resources on those assets and operations whose
takedown or undermining would be most damaging to the nation. Put
differently, we must manage risk since we cannot eliminate it. To this
end, a good place to start would be to direct our attention to the so-
called ``Lifeline'' Sectors, which have already been identified as the
most critical of the critical. These include the defense industrial
base, energy, financial services, transportation, telecommunications,
and water. In addition, the list of National Critical Functions (NCF)
recently released by the National Risk Management Center, nested within
the Department of Homeland Security (DHS)'s Cybersecurity and
Infrastructure Security Agency (CISA), provides another series of
guideposts for prioritization. The NCF list addresses cross-sector and
system-wide risks, and thereby complements a focus on lifeline sectors,
by taking the logical next step, which is aligning and calibrating the
most critical of sectors and the most critical of functions.
Know and Scrutinize Your Supply Chain. It should be patently clear
from the above-described state of play that any entity is only as
strong as the weakest link in its chain. In the context of business
operations or government enterprise, this means that knowing and
scrutinizing your supply chain is a prerequisite to public safety and
security. However, while few would argue with this statement as a
matter of principle, not enough businesses or government officials and
contractors are paying this principle the heed that it deserves in
practice. Instead of acting according to the old adage, ``trust but
verify,'' too many of us are relying on trust alone \18\. In the
context of critical infrastructure, this could have catastrophic
consequences. Executive Order 13806 on Assessing and Strengthening the
Manufacturing and Defense Industrial Base and Supply Chain Resiliency
of the United States \19\ was assuredly a helpful initiative in this
respect as was the Department of Defense-led Interagency Task Force
Report \20\ and, the Information and Communications Technology (ICT)
Supply Chain Risk Management Task Force launched recently by DHS
CISA.\21\ However, it is incumbent upon all of us to widen and deepen
the effort.\22\
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\18\ Phil Muncaster, ``Most Firms Rely on Trust Alone for Supply
Chain Security,'' Infosecurity Magazine (May 1, 2019), https://
www.infosecurity-magazine.com/news/most-firms-rely-trust-alone-supply-
1/
\19\ (July 21, 2017), https://www.federalregister.gov/documents/
2017/07/26/2017-15860/assessing-and-strengthening-the-manufacturing-
and-defense-industrial-base-and-supply-chain
\20\ Report to President Donald J. Trump by the Interagency Task
Force in Fulfillment of Executive Order 13806, Assessing and
Strengthening the Manufacturing and Defense Industrial Base and Supply
Chain Resiliency of the United States (September 2018), https://
media.defense.gov/2018/Oct/05/2002048904/-1/-1/1/ASSESSING-AND-
STRENGTHENING-THE-MANUFACTURING-AND%20DEFENSE-INDUSTRIAL-BASE-AND-
SUPPLY-CHAIN-RESILIENCY.PDF
\21\ Robert Kolasky, Statement for the Record for a Hearing on
``Securing U.S. Surface Transportation from Cyber Attacks,'' before the
U.S. House of Representatives Committee on Homeland Security,
Subcommittee on Transportation and Maritime Security, Subcommittee on
Cybersecurity, Infrastructure Protection, and Innovation (February 26,
2019), https://homeland.house.gov/sites/democrats.homeland.house.gov/
files/documents/Testimony-Kolasky.pdf at page 5
\22\ Late last year, the Senate passed legislation to stand up an
interagency council to ``develop rules of the road for federal supply
chain security.'' Derek B. Johnson, ``Senate passes bill to establish
governmentwide supply chain council,'' FCW (December 19, 2018), https:/
/fcw.com/articles/2018/12/19/senate-supply-chain-bill-johnson.aspx?m=1.
The subsequently enacted SECURE Technology Act established the Federal
Acquisition Security Council. See H.R. 7327 (January 3, 2018), at Title
II, https://www.dni.gov/files/NCSC/documents/supplychain/20190327-Law-
BILLS-7327.pdf
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Empower CFIUS to better Protect Critical U.S. Infrastructure. The
Committee on Foreign Investment in the United States (CFIUS) is an
interagency body mandated to review the national security implications
of certain transactions. Taken together with the 2018 Foreign
Investment Risk Review and Modernization Act, and our export control
regime, we have in place an architecture and mechanisms to assess and
thwart significant, negative consequences for U.S. national security
that might arise from foreign investment or technology transfer. The
system in place entails evidence-based inquiry and analysis but
contains some important gaps. These are identified and discussed in
specific bilateral context in a staff research report of the U.S.-China
Economic and Security Review Commission released earlier this month.
The report includes the concern that ``investments in U.S. critical
technologies based outside the United States'' fall beyond the
detection ambit of CFIUS.\23\
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\23\ Sean O'Connor, How Chinese Companies Facilitate Technology
Transfer from the United States, U.S.-China Economic and Security
Review Commission Staff Research Report (May 6, 2019), https://
insidecybersecurity.com/sites/insidecybersecurity.com/files/documents/
2019/may/cs05072019_China_Tech_Transfer.pdf at page 10. Also, as noted
in the 2018 Foreign Economic Espionage in Cyberspace Report: ``China
uses front companies to obscure the hand of the Chinese government and
acquire export controlled technology.'' https://www.dni.gov/files/NCSC/
documents/news/20180724-economic-espionage-pub.pdf at page 6.
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Develop Strategy, Not Just Tactics, and Integrate Cyber. American
economic advantage, military strength, innovation, jobs and many other
important national equities are at stake.\24\ There is a resultant
compelling need to address the ecosystem of threats in a comprehensive
and contextualized manner that balances and accommodates the tensions
that may exist among the various equities at play. At the same time,
cybersecurity factors, such as risk assessments and risk management
strategies, should be woven into strategy at inception and across the
board, rather than treated as a separate vertical, that must be
retrofitted. To these ends, a domestic version of The Prague Proposals,
which are principles regarding the ``cyber security of communication
networks in a globally digitized world'' generated at the recent 5G
Security Conference in which 32 countries participated, could prove
useful for safeguarding U.S. Lifeline Sectors and National Critical
Functions in connection with the widespread rollout and implementation
of 5G technology.\25\
---------------------------------------------------------------------------
\24\ The list is illustrative, not exhaustive, and elaborated by
the National Counterintelligence and Security Center. https://
www.dni.gov/index.php/ncsc-what-we-do/ncsc-supply-chain-threats
\25\ Government of the Czech Republic, https://www.vlada.cz/en/
media-centrum/aktualne/prague-5g-security-conference-announced-series-
of-recommendations-the-prague-proposals-173422/
---------------------------------------------------------------------------
Make Building the Cyber Workforce and a Network of Critical
Technologies Testbeds National Imperatives. Report after report has
identified large shortfalls in the supply of skilled cyber
professionals relative to U.S. demand for them in both the public and
private sectors. Yet, cyber practitioners are crucial to identifying,
assessing, and responding to the threat as manifested and previously
described. For government, the under-supply problem is magnified
because private industry can offer prospective and existing employees
greater salary and benefits. Although psychic income derived from the
government mission of serving the national interest is a significant
pull and retention factor, the fact remains that the pool of qualified
candidates is itself too small. It must be expanded, urgently, to
address the deficit of knowledge and bandwidth that is needed in our
public institutions and in our companies to counter and thwart cyber
threats posed by state actors to U.S. critical infrastructure. The
recent Executive Order on America's Cybersecurity Workforce recognizes
this challenge,\26\ but continued and whole-of-society efforts will be
required. In addition, on the technology side, we lack a strategic
approach to integrating advancements into the broader ecosystem. An R&D
effort, in the form of a nationwide network of technology testbeds that
simulate a realistic pan-sectoral environment, is needed to remedy this
shortfall. Taken in aggregate, such a platform would identify and
explore the various national and economic security implications of new
and critical technologies before they are in widespread use.
---------------------------------------------------------------------------
\26\ (May 2, 2019), https://www.whitehouse.gov/presidential-
actions/executive-order-americas-cybersecurity-workforce/
---------------------------------------------------------------------------
conclusion
National security and free markets need not be an either/or
proposition--we need both. With leadership and sustained determination
on the part of both government and industry, complemented and supported
by robust partnership of the two, we can meet that goal. Thank you
again for the opportunity to appear before you today. It is a privilege
to contribute to this important conversation and analysis,\27\ and I
look forward to trying to answer any questions that you may have.
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\27\ I would be remiss if I did not thank the deputy director of
the Center for Cyber and Homeland Security, Sharon L. Cardash, for her
skillful assistance in preparing this testimony.
Mr. DeFazio. No, it's only 28 seconds. This is a good panel
altogether. Thank you, and we are almost exactly on time.
Mr. Kahn.
Mr. Kahn. I will try to make up those seconds.
Chairman DeFazio, Ranking Member Graves, distinguished
members of the committee, thank you for the opportunity to
speak here this morning.
My name is Zach Kahn, and I lead public policy efforts and
government relations for BYD Motors.
I would like to acknowledge several of our employees here
from our Lancaster, California, facility, as well as
representatives from out union partners who are here as well.
Thank you for the opportunity to speak with you today.
These are exciting times for BYD in America. We recently
delivered our 300th electric bus in the U.S., and one of our
first customers logged its millionth mile on BYD buses.
I do appreciate this opportunity to clarify that BYD is not
a state-owned enterprise. As discussed in my written testimony,
BYD is a privately held, publicly traded, global company with
more than 200,000 employees, 900 of which are in the U.S.
Berkshire Hathaway Energy, a subsidiary of Berkshire
Hathaway, is BYD's long-term investment strategic partner and
single largest outside shareholder.
Our U.S. headquarters are in Los Angeles. We have multiple
manufacturing facilities in Lancaster, California. BYD is a
proud union company with a collective bargaining agreement with
the International Association of Sheet Metal, Air, Rail and
Transportation Workers, also known as SMART, Local 105.
We have grown, as I said, to nearly 900 U.S. employees,
including more than 775 SMART Union workers.
We also have a community benefits agreement with Jobs to
Move America and SMART, establishing training and
apprenticeship programs for workers with traditionally high
barriers to employment who have been historically
underrepresented in the manufacturing industry.
We are immensely proud of our diverse and talented
workforce and invite any interested members of this committee
to come out to Lancaster to meet our employees and see what we
are building there together.
BYD has invested more than $250 million on our U.S.
operations. Last year alone, BYD spent more than $70 million on
components made by American vendors located all across the
country, which is twice what we spent in 2016. We source
components from hundreds of U.S. vendor partners across the
country.
Our procurements allow our vendors to create and maintain
hundreds, if not thousands, of American jobs. BYD is helping to
create a truly competitive market for buses in America.
The competition has led to rapid technological improvements
in the electric bus sector for manufacturers across the
industry, while also driving down costs and, most importantly,
helping public transit agencies meet their Clean Air goals in a
safe and economically viable way.
Competition is the life blood of our country, and rather
than hurt the market, this competition sparks innovation,
reduces acquisition and life-cycle costs, and facilitates the
growth and adoption of zero emission options for U.S. transit
operators.
The competition also creates new technology jobs outside of
the vehicle manufacturer space. For example, BYD is the only
manufacturer with numerous projects deploying en route,
inductive, or wireless charging technology, which has the
potential to transform transportation electrification by
virtually eliminating operator concerns about vehicle range.
BYD has worked directly with two companies, Momentum
Dynamics from Malvern, Pennsylvania, and WAVE from Salt Lake
City, Utah, investing millions of dollars in initial projects
with each company.
These companies are now deploying these technologies not
only inside the U.S., but also outside the U.S. in Europe and
abroad, as well as expanding their wireless charging
applications to other industries besides transit buses.
Were it not for this early support from BYD, these amazing
and innovative U.S. startup companies would in all likelihood
have stalled out.
This is the kind of innovative technology that thrives in a
competitive environment, driving local investment and creating
new manufacturing, engineering, and design jobs in the process.
We proudly note that we have had 14 different repeat
customers who purchased zero emission buses after their first
appointments with BYD.
Just this week Anaheim Transportation Network ordered 40
additional clean energy buses from BYD. As their executive
director Diana Kotler noted, ``We have been operating four BYD
buses on our routes over the past 2 years, and based on their
performance, we are confident in BYD's quality, product, and
their support of our effort to electrify our fleet.''
Thank you, again, for this opportunity to tell you about
BYD. I look forward to answering your questions.
[Mr. Kahn's prepared statement follows:]
Prepared Statement of Zachary Kahn, Director of Government Relations,
North America, BYD Motors LLC
Chairman DeFazio, Ranking Member Graves, distinguished members of
the Committee, thank you for the opportunity to speak to you this
morning on the important topic of ``The Impacts of State-Owned
Enterprises on Public Transit and Freight Rail Sectors.'' My name is
Zach Kahn and I lead policy efforts and government relations for BYD
Motors. I have been with the company for more than 4 years and began as
a regional sales manager. Prior to this, I worked on charging
infrastructure for heavy duty electric vehicles, so I have not only
seen the growth of BYD, but also the maturation of zero emission
vehicles in the United States. There is a lot of positive news in this
space and I hope to come back in the future and tell that story.
I appreciate this opportunity to clarify that BYD is not a State-
Owned Enterprise. BYD is a privately held, publicly-traded global
company. BYD US Holdings Inc., is a subsidiary of the global BYD
Company and is incorporated in Delaware with headquarters in Los
Angeles. BYD Coach & Bus LLC and BYD Energy LLC are subsidiaries of BYD
US Holdings Inc. with manufacturing facilities in Lancaster, CA. Our
U.S. operations are run out of these companies. That being said, we
welcome this opportunity to tell you about BYD and what we have been
doing in the United States to create good union jobs and to help
transit agencies across the country electrify their bus fleets. We have
been, and will continue to be, transparent and open.
Since opening its Coach & Bus manufacturing facility in Lancaster
in 2014, BYD has grown to nearly 900 total U.S. employees, including
more than 775 union workers. To date, BYD has delivered more than 300
electric buses in North America and has sold over 500 all-electric
heavy-duty buses to more than 50 municipal, transit agency, university,
airport, and other commercial and private sector clients across 13
states including Massachusetts, Louisiana, Missouri, Oregon,
Washington, and California, and four provinces in Canada. These buses
are safe, economical, energy-efficient, quiet and environmentally
friendly. Riders benefit from the smooth and quiet ride and the absence
of tailpipe emissions, while we all benefit from the low environmental
impact all-electric public transpiration provides.
In Lancaster, we recently completed an expansion of our state-of-
the-art, ISO 9001, certified manufacturing facility to over 550,000
square feet, and our American workers now have the capacity to
domestically build 1,500 electric buses per year.
In April of this year, BYD opened our first service center in San
Carlos, CA. It is the first of several we plan to open around the
country to better support customers with parts, training and technical
support, ultimately creating more jobs and opportunity for American
workers while providing better service to our customers. Additionally,
BYD plans to expand its manufacturing presence in California and the
U.S. by at least 2 million square feet in the coming years and expects
to continue to significantly expand our employee base.
byd buses are made in america
All BYD buses sold to U.S. transit agencies are made in America and
meet the Federal Transit Administration's regulatory requirements.
These buses exceed Buy America standards and have undergone numerous
third party Buy America audits, each of which confirmed BYD's
compliance with Buy America requirements. Each purchase of BYD buses
includes both a pre-award Buy America Audit and a Post-Award Audit.
These audits are conducted by a third party Buy America expert who is
compensated by the customer, not BYD.\1\ In fact, during the Senate
Banking Committee's work on the FAST Act in 2015, BYD encouraged
committee staff to push the Buy America content requirements up to 70
percent U.S. content.
---------------------------------------------------------------------------
\1\ Buy America auditors who have worked on audits on BYD bus
projects include: Steve Policar, LLC, Transit Resource Center, and
Global Innovations, USA.
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BYD also surpasses the regulatory requirements related to safety
and testing. For example, BYD has had three bus models approved for
sale to U.S. transit agencies based on Altoona testing.\2\ In addition,
we currently have two other electric bus models on the track in Altoona
undergoing the certification and approval process--our five door, 60,
all-electric K11 bus, and our 45, over the road all-electric coach bus.
---------------------------------------------------------------------------
\2\ BYD's completed Altoona Testing Reports can be found here:
http://apps.altoonabustest.psu.edu/buses/441, http://
apps.altoonabustest.psu.edu/buses/476
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byd supports local u.s. vendors
BYD has invested more than $250 million on U.S. operations since
initiating domestic operations in 2014. Last year alone, BYD invested
more than $70 million on components made by American vendors located
all across the nation, which is a 3400% increase over what BYD spent on
U.S. operations in the first year of U.S. operations and twice what the
company spent in 2016. BYD sources components from more than 1,000 U.S.
vendor partners across the country, including Trussville, Alabama;
Windcrest, Texas; Murfreesboro, Tennessee; Elkhart, Indiana; Upper
Sandusky, Ohio; Bronson, Michigan; and Neenah, Wisconsin. Our
procurements allow our vendors to create and maintain thousands of
American jobs across the country.
byd ownership--privately-owned & publicly-traded
BYD's founding and ownership are as transparent as every other
multinational manufacturer and we strive to be as forthcoming as
possible. Integrity and transparency are core values for BYD as a
company. BYD was founded in February 1995, as a private company with 20
employees making cell phone batteries. BYD has grown into a global
publicly traded corporation with more than 200,000 employees globally.
Throughout its 24 years of growth, BYD has established over 30
industrial parks on six continents and has played a significant role in
industries related to electronics, automobiles, clean energy and
transit. From energy generation and storage to transportation, BYD is
dedicated to providing zero-emission energy solutions for customers
around the world. Two cornerstones of BYD's success is its dedication
to innovation and transparency. The clean technologies it has developed
benefit communities and transit agencies in the United States and all
around the world, seeking to improve the environment with safe, quiet,
efficient and affordable products.
BYD has been publicly listed on the Hong Kong Stock Exchange since
2002, and on the Shenzhen Stock Exchange since 2011. BYD has never been
owned, operated, and controlled by any nation-state. The two founders
of BYD together own 33.58 percent of the company.\3\ In September 2008,
MidAmerican Energy Holdings Company (now renamed as Berkshire Hathaway
Energy), a subsidiary of Berkshire Hathaway, based in Nebraska, entered
into an agreement with BYD, pursuant to which it acquired approximately
8.25 percent of the Company, to become BYD's long term investment
strategic partner and single largest stockholder outside of the
founders.
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\3\ BYD 2018 Annual Report, http://www.byd.com/en/
InvestorAnnals.html
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proud union company
BYD is a proud union company with a collective bargaining agreement
with the International Association of Sheet Metal, Air, Rail and
Transportation workers (SMART). As well as being the only electric bus
manufacturer in the U.S. that employs union labor at every single one
of its bus manufacturing facilities, we are also the only electric bus
manufacturer in the country with a Community Benefits Agreement with
Jobs to Move America and SMART. This legally binding agreement
establishes training and apprenticeship programs for workers with
traditionally high barriers to employment, and BYD has committed to
work toward the goal of recruiting and hiring 40% of our workers from
populations, such as veterans, who face significant barriers to
employment. BYD has also initiated an effort to recruit workers from
other populations that have been historically underrepresented in the
manufacturing industry, including women and African Americans. We
currently exceed the goals set out in our agreement and are immensely
proud of our diverse and talented workforce. We are working with
Antelope Valley College and our labor partners to create both a pre-
apprenticeship program at the college level and an ambitious
apprenticeship program in 2019 that will include six months of
classroom training and a year of on-the-job training. Our workers are
diverse and reflect the communities in which we operate. We are proud
of these workers and especially proud of the second chances we are
providing to many of those working in our Lancaster facility. BYD
stands by its products and its U.S. employees, which include over 775
proud American union members. We are especially proud of the
relationship we have developed with the cities of Lancaster and
Palmdale in the Antelope Valley. We are active civic participants in
the community and have been supportive of numerous local charities and
institutions--from sponsoring the Advanced Zero Emission Transportation
Endowment Fund Program at Antelope Valley College to supporting the Boy
Scouts and the California Poppy Festival--and are honored to build
buses here.
byd has increased competition in the u.s. benefiting taxpayers
BYD is a market leader and innovator responsible for many firsts in
the bus industry--the first long range electric bus, the first electric
bus to utilize in-wheel hub motors, the first manufacturer to offer a
12 year battery warranty, the first manufacturer to build a 60-foot
electric articulated bus, and the first to build a 45-foot electric
coach bus, to name a few of many notable achievements. BYD is helping
to create a truly competitive market for buses in the United States for
the first time in decades. We believe, the competition BYD provides to
the U.S. market has led to rapid technological improvements in the
electric bus sector from manufacturers across the industry, while also
driving down costs and, most importantly helping public transit
agencies meet clean air goals in a safe and economically viable way.
Competition is the life blood of our country and rather than hurt the
market, the competition represented by BYD and other participants in
the U.S. electric bus market sparks innovation, reduces acquisition and
lifecycle costs, and facilitates the growth and adoption of zero
emission options for U.S. transit operators.
Competition in the transit market leads directly to innovation and
job creation outside of the vehicle manufacturer space. For example,
BYD is the only manufacturer with numerous projects deploying en route
inductive charging technology. This technology has the potential to
transform transportation electrification by virtually eliminating
operator concerns regarding vehicle range. BYD has worked directly with
two U.S. companies, Momentum Dynamics, from Malvern, Pennsylvania, and
WAVE, from Salt Lake City, Utah, investing millions of dollars in
initial projects including the first high powered 200 kW+ wireless
chargers for each company. These two companies are now deploying their
technology both inside and outside of the U.S., as well as expanding
their wireless charging applications to other industries besides
transit buses to include charging technologies for private vehicles and
port equipment. Were it not for early support from BYD, these amazing
and innovative U.S. startup companies would, in all likelihood, have
stalled. Instead, they have been able to raise millions of dollars from
investors and are now the international leaders in the wireless
charging space. This is the kind of innovative technology that thrives
in a competitive environment driving local investment and creating new
manufacturing, engineering, and design jobs in the process.
This competitive dynamic supported by BYD's presence in the U.S.
has also driven down costs for transit agencies. Simply by having
another viable alternative in the marketplace has forced traditional
manufacturers to better respond to the needs of their customers by
introducing zero emission options, investing in their own zero emission
bus technology, and knowledge base. The entry of BYD, and others, into
the electric bus market in the U.S. has created a vibrant and
competitive market for transit agencies interested in procuring
electric buses. Unlike in the traditional diesel or CNG bus market,
where competition is minimal, each public Request for Proposals for
electric buses is likely to garner at least four responses from
legitimate bus manufacturers. Each proposer will have different
technologies, different solutions to offer, and will each be competing
on pricing. Without this market in place, it is unlikely that the price
of an electric bus would have come down as quickly as it has in the
last five years. By our calculations, the prices have stayed the same
(or gone up). Competition is something to be encouraged in public
transit as it benefits virtually all participants, with the possible
exception of legacy manufacturers who have benefited from the lack of
competition to date.
Finally, the transit bus manufacturing industry appears to be
thriving with the new competition. Proterra has quickly established
itself as a leading electric bus manufacturer in the U.S. building a
second manufacturing facility in the last few years and growing its
customer base to over 85 agencies across North America. The Canadian-
based New Flyer wrote in a recent letter to the House Appropriations
Committee that ``New Flyer continues to expand its operations across
the U.S. Our Anniston, Alabama facility, with 750 employees, is
dedicated to the advancement of bus and coach technology, including
electric, autonomous and telematics technologies. We've also invested
$28 million to establish a new part fabrication facility in
Shepherdsville, Kentucky--and anticipate hiring over 550 employees.''
And the California-based Gillig recently announced the launch of its
electric bus program as well.\4\ In short, competition is doing exactly
what policymakers want it to do--forcing manufacturers to build better
products at lower prices for the end user, while creating jobs across
America.
---------------------------------------------------------------------------
\4\ https://www.masstransitmag.com/bus/vehicles/hybrid-hydrogen-
electric-vehicles/press-release/21079183/gillig-llc-gillig-previews-
new-zeroemission-battery-electric-bus
---------------------------------------------------------------------------
Before I close, I would also like to highlight just how important
it is to have a robust electric bus market and why I choose to work for
BYD. I believe we must do everything in our power to transition our
nation to a cleaner, safer, more efficient, more economical,
transportation system and meet our air quality and climate goals. This
is why efforts in California and around the country to require all
public transit buses be zero emission by 2040 are so important. And it
is also why BYD is a proud California company that stands ready to help
deliver on this promise. If we can improve the transit sector by
lowering emissions through innovative technology, it opens the door for
other sectors to adopt electric vehicles. As BYD has proven, we can
make these vehicles in America.
Thank you again for this opportunity to tell you about BYD. I
welcome any questions you have and will answer them to the best of my
ability.
Mr. DeFazio. Thank you. You are within the time limits.
And we now turn to Mr. Washington.
Mr. Washington. Chairman DeFazio, Ranking Member Graves,
Congresswoman Napolitano, and the honorable members of this
committee, it is a genuine honor to join you here today. I am
thrilled to be here and happy the committee has called this
hearing.
Today there is not a single American manufacturer of mass
transit railcars, and that is certainly an issue worthy of
congressional consideration, deliberation, and action.
I am pleased to submit my formal testimony for the record
and want to summarize my testimony by sharing the following
four points.
Point one, America's proud mass transit history in my own
backyard of Illinois, having grown up as a child in the Midwest
and specifically in public housing on the South Side of
Chicago, I have great respect for America's tremendous
manufacturing history and the path to the middle class of the
history provided to millions of hard-working Americans.
While growing up as a child in Chicago in the 1970s, I was
not aware that about 130 miles south of my home over a century
before, America was designing and producing mass transit
railcars in the town of Bloomington, Illinois.
In this American town, workers began building the iconic
Pullman coaches. Years later, the company would set up a shop
closer to Chicago, within 5 miles of my public housing project
in the town aptly called Pullman, where thousands of American,
would spend decades building mobility for our Nation.
I would like to add that at one time, that Pullman company
was the largest employer of African Americans in the United
States, where members of my family were Pullman porters and
worked primarily for tips, and they organized themselves as the
Brotherhood of Sleeping Car Porters under the leadership of A.
Phillip Randolph.
Point two, today for reasons that are both very complex and
very simple, there are no American manufacturers of mass
transit railcars. So as was clearly explained in a very smartly
worded Eno Center for Transportation report, the companies that
build transit railcars and sell them to public transit agencies
are all foreign-owned companies.
As members of this committee are well aware, there is a
large delta between the benefits of simply assembling rolling
stock in the United States as opposed to manufacturing rolling
stock in our Nation.
To be clear, when we lost that manufacturing base, we also
lost our leadership in the design and innovation realms to
foreign manufacturers.
I say it is complex because I am convinced that the absence
of the domestic transit railcar manufacturer is directly tied
to both the intense competition of the global marketplace and
government actions that have created an uneven playing field
for rolling stock firms.
That said, I also believe that the lack of any domestic
manufacturer has taken place because of an absence of Federal,
State and local rules and regulations that prioritize a dynamic
and competitive environment for the emergence of the American
transit railcar.
For Los Angeles, a most recent rail rolling stock
procurement that was held in line with all current Federal
rules and resulted in a contract being awarded to CRRC, we
entered into a contract on March 10th, 2017, to purchase 64 new
heavy rail vehicles for our growing subway system, with five
additional options for another 218 subway cars.
The shell for these railcars will be made in China, and its
assembly will be done in Springfield, Massachusetts.
The third point is that as a U.S. military veteran who
enlisted in the United States Army as an 18-year-old and
retired as a command sergeant major, a disabled veteran with 25
years of service, I would like to share the following
observation that has to do with manufacturing facilities of the
Apache helicopter, which was synonymous with our branch of
service.
If we look at where this attack helicopter is manufactured,
it is not abroad. It is in Mesa, Arizona. Four thousand
Americans are building the Apache.
Point four, like the Boeing plant and the base of suppliers
surrounding it in and around Mesa, I have outlined a vision for
a one-of-a-kind center of manufacturing of rolling stock in the
United States in Los Angeles County, where rolling stock would
be not simply assembled, but manufactured.
So with support of the county of Los Angeles and the city
of Los Angeles, we are taking that initiative as we move
forward.
Chairman DeFazio, Ranking Member Graves and honorable
members of the committee, on behalf of L.A. County, I look to
return to the committee in the coming year to share some
positive news on our effort to stand up this country's only
railcar manufacturing facility.
Thank you.
[Mr. Washington's prepared statement follows:]
Prepared Statement of Phillip A. Washington, CEO, Los Angeles County
Metropolitan Transportation Authority
introduction:
Chairman DeFazio, Ranking member Graves and honorable members of
this committee--it is a genuine honor to join you today at this
important hearing.
Having grown up as a child in the Mid-West and specifically in
public housing on the South Side of Chicago--I have great respect for
America's tremendous manufacturing history and the path--the ticket--to
the middle class that history provided to millions of hard working
Americans. We are thrilled to be here and happy the committee has
called this hearing. Today there is not a single American manufacturer
of mass transit railcars and that is certainly an issue worthy of
congressional consideration, deliberation and action.
While growing up as a kid in Chicago in the 1970s--I wasn't aware
that about 130 miles south of my home--over a century before--America
was designing and producing mass transit rail cars in the town of
Bloomington, Illinois. In this American town, workers began building--
in 1859--the iconic Pullman coaches, which were made at the Chicago and
Alton shops by workers who literally built our growing nation. Years
later, the company would set up shop closer to Chicago within 5 miles
of my public housing project--in a town aptly called Pullman--where
thousands of Americans would spend decades building mobility for our
nation. I should also add that at one time--the Pullman Company was the
largest employer of African Americans in the United States--where--as
porters (my grandfather and late pastor were Pullman porters and worked
primarily for tips)--they organized themselves as the Brotherhood of
Sleeping Car Porters under the leadership of A. Phillip Randolph.
transit railcars--no domestic manufacturer
Today, for reasons that are both very complex and very simple--
there are no American manufacturers of mass transit railcars. So as was
clearly explained in a smartly worded Eno Center for Transportation
report entitled, The Implications of the Federal Ban on Chinese
Railcars,--``the companies that build transit railcars and sell them to
public transit agencies are all foreign-owned companies with assembly
facilities in the United States.'' And as members of this committee are
well aware--there is a large delta between the benefits of simply
assembling rolling stock in the United States as opposed to
manufacturing rolling stock in our nation. To be clear, when we lost
our manufacturing base we also lost our leadership in the design and
innovation realms to foreign manufacturers.
I say the reason is complex because I am convinced that the absence
of a domestic transit railcar manufacturer is directly tied to both the
intense competition of the global marketplace and government actions
that have created an uneven playing field for rolling stock firms--
leaving some at a clear disadvantage.
That said, I also believe that the lack of any domestic
manufacturer has taken place because of an absence of federal, state
and local rules and regulations that prioritize a dynamic and
competitive environment for the emergence of an American transit
railcar manufacturer. In effect--we have no American-owned Pullman's
today because we have failed--in my opinion--to create the economic
environment in which a new Pullman-like firm--American owned--would
prosper in a truly free, fair and open marketplace.
For Los Angeles Metro, our most recent rail rolling stock
procurement was held in line with all current federal rules and
resulted in a contract being awarded to the China Railway Rolling Stock
Corporation (CRRC). We entered into a contract on March 10, 2017 to
purchase sixty four new heavy rail vehicles for our growing subway
system--with five additional options for another 218 subway cars. The
shell for these railcars will be made at the CRRC's facility in
Changchun, China and its assembly would be done in Springfield,
Massachusetts. Work on the assembly of propulsion systems, HVAC and
lighting components will be performed at a facility in the City of
Industry--which is situated in Los Angeles County. In total, our agency
is spending a combination of federal and local funds in the amount of
$647 million for this procurement.
military procurement--the apache helicopter
As a U.S. military veteran--who enlisted in the U.S. Army as an
eighteen year old and retired as a Command Sergeant Major after twenty
five years of service--I would like to share the following observation.
Wherever I was based--either at military facilities across America or
abroad--the Apache helicopter was synonymous with our branch of
service. And, if we look at where this attack helicopter is
manufactured--it is not abroad--it is in Mesa, Arizona.
There in Mesa--over 4,000 Americans are building the Apache--and
perhaps just as importantly--there are over 500 suppliers to Boeing's
plant in Mesa--parts suppliers who employ thousands of Americans. And
just over two years ago--in March of 2017--the U.S. Government entered
into a five year $3.4 billion agreement with Boeing to construct many
more Apaches--ensuring continued employment for hard working Americans.
los angeles metro--rolling stock industrial park initiative:
Like the Boeing plant and the base of suppliers surrounding it--in
and around Mesa, Arizona--I have outlined a vision to my Board of
Directors to create in Los Angeles County a one of a kind center for
the manufacturing of rolling stock in the United States--as opposed to
many facilities in the United States--where rolling stock is simply
assembled--not manufactured.
With support from the County of Los Angeles, the City of Los
Angeles and other municipalities, our agency has taken the initiative
to host several roundtables--including one last year with Chief
Executive Officers of major rail manufacturing companies around the
world and a second gathering held at our agency on April 2, 2019 with
major bus and rail suppliers.
The goal of these two gatherings was to collect the information
necessary for our agency to smartly move forward--with dispatch--to
identify a location in Los Angeles County that could serve as the home
to a future rail/bus manufacturing center. And related to the
manufacturing part of this effort--I also want to emphasize and make
clear that my goal is to see the associated design and innovation
related to rolling stock occur in the United States--much like in the
automotive realm, where southern California is the center for the
design of automobiles produced here in the United States and around the
world.
This future manufacturing center in Los Angeles County could also
serve the growing mass transit rolling stock needs for agencies across
the Western United States.
The motivation for my initiative is clear. With LA Metro slated to
spend over $400 billion over the next four decades on mobility in our
region--we must make sure that the benefits of our spending--which in
our case is 82%--or $350 billion--from Los Angeles County residents--
stays local.
So for those on this panel who believe in states' rights and local
control--my initiative for this future rail/bus manufacturing center is
to make sure our local funds have a local benefit--without rules that--
for example--prohibit us from hiring locally and giving preference to
local manufacturers when we procure rolling stock--especially when a
majority of the funds being spent come from the residents of Los
Angeles County's 88 cities.
And for others on this panel--who are squarely focused on bringing
good paying manufacturing jobs back to America--my initiative aims to
do just that--offering a welcome ticket to the middle class that I
touched on earlier in my testimony.
conclusion:
Chairman DeFazio, Ranking member Graves and honorable members of
this committee--on behalf of the Los Angeles County Metropolitan
Transportation Authority--I want to thank you for giving us this
opportunity to discuss our views on the critical subject raised by this
hearing.
I look forward to returning to this committee in the coming year to
share some very positive news on LA Metro's effort to bring back the
manufacturing of mass transit rolling stock to America. With
leadership, focus and a little help from Congress--I am convinced that
the golden era of manufacturing mass transit rolling stock in America
is ahead of us.
Mr. DeFazio. I thank the gentleman.
With that I would now turn to the first round of questions,
as soon as I get back to my questions. I will look for my piece
of paper here. Here we go.
So I was particularly alarmed at General Adams' and Mr.
Cilluffo's testimony regarding the potential for cybersecurity
breaches.
I mean, could you just get a little bit more into that
issue?
In a major deployment, especially if we have to move our
tanks, I assume we are tremendously dependent upon the freight
rail network. I am not sure how much it applies to the
logistics chain.
Could you address that at all, General?
General Adams. Yes, sir.
Mr. DeFazio. Turn your mic on please.
General Adams. Let's look at it from the strategic
perspective, which I appreciate is a good place to start. First
of all, intermodal transportation is the key here, and we think
we need to focus on that.
As you know, and as I said in the testimony, freight rail
runs through every military base, runs through every American
city, runs through every depot, every port, and the transfer of
goods and services and commodities from freight rail to
shipping is really something that we should focus on from a
strategic perspective.
That is where a potential adversary will focus as well.
First of all, it is a real strength of our freight rail system
that we have this kind of network that smoothly transports
military goods, hazardous waste, and all sorts of other
commodities from the place where they are produced or stored,
in the case of the military, to ports so that they can deploy
overseas.
A strategic adversary will look closely at this as an I&W,
and it is an indications and warnings problem for them, and
they are looking closely at our rail network. We should be
concerned about that from a strategic perspective.
Mr. DeFazio. Let me. I assume we do not limit the freight
that goes through the bases. I mean, we may have people
transporting chlorine through a military base to another
destination. Is that possible?
General Adams. Yes, sir, absolutely.
Mr. DeFazio. Right. And----
General Adams. And that is one of the reasons--I am sorry.
Go ahead.
Mr. DeFazio. Right, and derailment of a chlorine vehicle,
railcar, is potentially absolutely catastrophic.
General Adams. Potentially catastrophic, and if I may,
since our railcars are continually technology improved, one of
the things the telematics on our railcars do is provide
positive indication that hatch covers are closed, for example.
Mr. DeFazio. Sure.
General Adams. A cybersecurity intrusion into that
particular technology could give false assurance that the hatch
cover is closed.
Mr. DeFazio. OK. All right. Mr. Cilluffo, briefly because I
have another question for another member of the panel.
Mr. Cilluffo. I will try to be brief. Two quick points
here. So we discussed some of the cases where you have seen
theft of intellectual property and economic secrets, as well as
political and military secrets.
On the espionage sets of issues, there is a litany and a
long list of examples we can turn to in other sectors as well,
but I think what gets lost is disruptive and/or destructive
types of attacks, and from a cyber perspective, if you can
exploit, you can also attack. It all hinges around the intent
of the perpetrator.
So if they are in these systems, they can use it for more
malicious aim than just stealing secrets as bad as that is. So
basically when you think about the transportation sector, your
dependence on PNT, on positioning, navigation and timing,
clocks is 100 percent.
So GPS and other issues that are maybe outside of what you
would think of as transportation and disruptive attacks, such
as jamming or spoofing of some of these systems could really
take a major toll economically as well as from a national
security standpoint.
And I just want to bring one point on the defense side. I
mean the mission assurance. There is an old adage. Amateurs
talk strategy. Professionals talk logistics. I think it was the
Marine Corps that came up with it, but I am not 100 percent
sure.
Logistics here is everything, and if you impede the ability
to project power, you are basically impeding the ability to
fight and win wars. So this is more than just a homeland
security set of issues. It is a national security set of
issues.
Mr. DeFazio. OK. Thank you.
Mr. Kahn, I am just a little confused here. We invited you
to testify, and you were going to, we thought, testify on
behalf of BYD as a whole, and we have a truth in testimony
statement, but it indicates you are testifying on behalf of BYD
Motors.
BYD Motors is the sales team subsidiary of BYD U.S.
Holdings. Another subsidiary, BYD Coach and Bus, makes the
buses.
So, you know, basically, I am a little confused here. Are
you here on behalf of the company as a whole or just on the
sales team?
Mr. Kahn. Sure. I work for BYD Motors. I am happy to talk
about BYD Motors. I work hand in hand with BYD Coach and Bus. I
can answer questions about BYD Coach and Bus.
Mr. DeFazio. OK. I just wanted to get that clear.
So BYD recognized in 2017 $338 million in Chinese
Government grants on its income statement; is that correct?
Mr. Kahn. Which year was that? I missed that.
Mr. DeFazio. Pardon?
Mr. Kahn. What year did you say?
Mr. DeFazio. 2017.
Mr. Kahn. I believe that is correct. I do not have----
Mr. DeFazio. OK. All right. And then the batteries, which
are assembled here, those are made in China, correct?
Mr. Kahn. The battery cells are made in China, yes.
Mr. DeFazio. Yes. So and somehow we assemble battery cells
here, and we say that is a made-in-America product when it is
assembled.
Mr. Kahn. So BYD since we have come here has followed the
rules of the road when it comes to Buy America.
Mr. DeFazio. Right. I know, and it is very complicated
rules, and we will act to clarify the components, subcomponents
and all of that. It has been gamed before, and you know, it is
being gamed here.
Yes, you are following the rules. The rules are defective.
So if BYD were required to actually source the required amount
of the vehicle in the United States, you know, by law, would
they do that or would they just close up shop even with the
$250 million investment?
Mr. Kahn. Just for clarity, are you talking specifically
about the batteries?
Mr. DeFazio. Well, once we reduce that down to a very minor
component, you are going to have to source other things here in
the United States.
Mr. Kahn. So thank you for the question.
I think what BYD would say to that would be we would
evaluate. You know, once those rules were promulgated for
everyone, we would evaluate it and see the opportunity.
We certainly, as the demand for battery electric vehicles
has grown around the world, we have, I believe, plants. I do
not know if we have actually built them yet, battery cell
plants elsewhere.
So if there was a demand in the U.S. for battery electric
vehicles of the scale necessary to justify building our own
plant, that is certainly something we would explore.
Mr. DeFazio. OK. Thank you.
I turn now to Mr. Graves.
Mr. Graves of Missouri. I want to go back to Mr. Cilluffo.
Just drill straight down in, you know, just to be
straightforward on what this committee can do to better
integrate cybersecurity and our transportation policy.
I mean, it is very concerning to me what you said, but just
shoot it straight out there.
Mr. Cilluffo. Well, thank you, Congressman Graves, and
thank you for that question, because I think cyber is treated
still as a black magic and an art, isolated or independent of
other critical infrastructure. I think it is actually part and
parcel with everything your committee is grappling with and
looking at.
It is pervasive. It is ubiquitous. So what I would suggest,
and I am so happy you brought up the national critical
functions in your opening statement. So marry up the national
critical functions.
If you see issues to the national critical functions to all
of our various lifeline sectors or critical infrastructure
issues, you need to start getting to a risk-based approach and
assessing and evaluating risk across modalities of
transportation.
So I would be looking at a series of hearings across all
the different modalities, looking at national critical
functions, and then racking and stacking and seeing where you
have some common vulnerabilities that cut across all of those,
and that is where I think you would put your most muscle and
weight behind trying to ameliorate the risk.
The reality is, if everything is critical, nothing is
critical, but heck, transportation is at the very top of that
list. If you are not moving, we have got big problems on our
hands.
So I would actually make this a broader set of issues that
your committee can start weighing in, and then there are
sectoral issues outside of your jurisdiction that you are going
to have to be able to work with your colleagues in other
committees just as the executive branch is struggling with some
of these issues.
So I think you have a major role to play here. I think I
would start by matching up the national critical functions with
the different modes of transportation, racking and stacking
there.
And the other concept that might be worth looking at is how
all of these entities come together. So I had proposed in my
prepared remarks a testbed because we want to be testing these
technologies before they are adopted in the market or used in
the market.
But we look at the technology through a soda straw. We look
at it through a very narrow lens. What we really need to be
able to do is see how it impacts other infrastructures.
So I think you have got an important role to play. If we
can help in any way we want to, but I think when you look at
China, in particular, 2025, almost all of the issues they are
interested in are in your bailiwick.
So I think cyber should be not a sidebar issue, not a
footnote. I think it should be a principal issue your committee
grapples with.
Mr. DeFazio. OK. Mr. Graves.
Mr. Graves of Missouri. I will yield my time to Mr.
Crawford.
Mr. DeFazio. OK. With that I turn to Mr. Crawford.
Mr. Crawford. Thank you, Mr. Chairman. I thank the ranking
member.
Earlier today, in fact, concurrently as we speak, the House
Permanent Select Committee on Intelligence is holding a hearing
on China's emerging digital authoritarianism and global
influence operations targeting the United States and its
partners.
I am a member of that committee, and I got to stay for the
oral testimony of four very highly credentialed individuals
that presented testimony on that topic.
I would ask the chairman for unanimous consent to enter
that into the record.
Mr. DeFazio. Without objection.
Mr. Crawford. Thank you.
I think that informs our committee here as well and, as you
mentioned, on the cyber side in particular. So global influence
operations.
Shortly before delivering its first products to Jamaica
last year, the CRRC corporate Twitter account showed the
following. I believe we have that on the screen. I will direct
your attention to the screen. If not, I have the tweet in hand.
And that tweet reads, ``Following CRRC's entry to Jamaica,
our products now are offered to 104 countries and regions. So
far, 83 percent of all rail products in the world are operated
by CRRC or are CRRC ones. How long will it take for us
conquering the remaining 17 percent?''
There is the tweet on the monitor for your review.
[The information follows:]
CRRC Tweet Submitted for the Record by Hon. Eric A. ``Rick'' Crawford,
a Representative in Congress from the State of Arkansas, and Ranking
Member, Subcommittee on Railroads, Pipelines, and Hazardous Materials
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Mr. Crawford. One of those 104 countries that they
referenced is Iran, by the way, an interesting footnote.
Mr. Washington, I have a question for you. When you used
Federal grant funds to purchase CRRC rolling stock for the Los
Angeles Metro, did you know that it was an SOE hell-bent on,
quote, ``conquering the global rail market''?
Mr. Washington. Thank you for the question.
I cannot say I personally did, but this was the best value
procurement where two proposers bid on this. We had evaluation
criteria where CRRC came in number one.
The evaluation criteria consisted of past performance,
delivery, experience, technical price, all of those things. But
I cannot say that I personally knew the SOE.
Mr. Crawford. Given what we know and what has been shared
with us in testimony, Mr. Cilluffo has referenced this. It has
been referenced by the chairman and the ranking member.
Given what we know and what I just highlighted with regard
to China's emerging digital authoritarianism and global
influence operations and how that is extending into the United
States, and I understand you are bottom line oriented, and you
have to be. I know that particularly mass transit is an
expensive enterprise, and you are looking for the best value.
But given what we know about China's influence operations
and how they are trying to project that into the United States,
would it not behoove you to look for other sources that are not
state-owned enterprises of a country who has really a malign
influence campaign targeting the United States?
Mr. Washington. Is that question for me?
Mr. Crawford. Yes, sir, and anybody else that wants to
answer that.
Mr. Washington. Well, sure. No, I stand by our procurement.
I stand by the process that we used. I stand by the evaluation
criteria that we used to evaluate. I stand by that.
Mr. Crawford. OK. Well, given the fact that other taxpayers
outside of those in the area that you serve, outside the State
of California, contribute to funding operations like yours, I
think that we probably in the future ought to take a closer
look because I think it is incumbent on us to be good stewards
of taxpayer dollars.
And I do not really want to go back home to my constituents
in Arkansas and say that their Federal tax dollars went to help
a state-owned enterprise of China to access mass transit
projects in places like Los Angeles.
So I just think that we should probably endeavor to be
better stewards, and anybody that wants to comment on that. Mr.
Kahn, certainly you are welcome to chime in on this as well
because I think there is probably some explaining that you
might want to offer on that subject as well.
Mr. Washington. Mr. Crawford, can I add one other thing----
Mr. Crawford. Sure.
Mr. Washington [continuing]. To my response. Standing by
the procurement does not mean that we will not do our due
diligence as it relates to cybersecurity. We are looking to
perform penetration testing on the various systems, the vehicle
networks, the wireless data communications, all of those
things.
So while standing by our procurement and our processes, we
still stand ready to do our due diligence as it relates to
cybersecurity.
Mr. Crawford. That is comforting. I appreciate that.
Mr. Kahn. Thank you, Mr. Crawford.
Just to respond to your point, I think Huawei is in a
different ball because we are not a state-owned entity. We have
never had state control. We have always been privately funded
and publicly traded.
Mr. Crawford. I am having a hard time believing that, but
that is a conversation for another time.
General Adams, you made some pretty important observations
with our freight rail moving through military installations.
How we move materiel and personnel and things like that are
certainly of strategic interest to countries like China.
Wouldn't you agree?
General Adams. Yes, sir, and in fact, it is one of the most
important assets we have, is that we can, in fact, move our
military supplies or military equipment from bases to ports
effectively because we have a good freight rail system.
But, on the other hand, that also could be a crippling
vulnerability if China were, for example, to build our freight
railcars. They would be able to track them. They would be able
to know what is on them, and we would lose the ability to move
our military equipment without observation.
Mr. Crawford. So I think I am understanding you here.
Basically, the entry of Chinese state-owned enterprises into
our freight rail, which is essentially what they are
endeavoring to tee up, presents a strategic vulnerability to
us, correct?
General Adams. Yes, sir. That is absolutely correct.
And if I may enlarge on that point just a moment?
Mr. Crawford. Please do.
General Adams. We also lose the ability to conduct. If we
only have the assembly operations here for freight rail or for
transit rail, we lose the rest of the supply chain. We lose the
R&D.
Mr. Crawford. An important note. Thank you for that.
General Adams. And that is important from a standpoint of
for the future we need to preserve that supply chain here in
the United States.
Mr. Crawford. Thank you.
Mr. Cilluffo, would you like to comment on it as well?
Mr. Cilluffo. Yes. I think that the point you raised is
really important in terms of global perception management or
influence operations, and obviously, this is part and parcel of
Russia's strategic plan, which they look at cyber.
We mirror image. We tend to think others look at it the way
they do, but perception management, psychological operations,
camouflage concealment and deception, this is all part and
parcel of some of our adversaries' cyber toolkits.
And you see that with respect to China as well, and you
have got two other countries that are starting to ramp up their
activity, Iran and North Korea. They are by no means at the
same level in integrating computer network attack and exploit
into their warfighting strategy and doctrine as the Russians
and the Chinese are, but what they lack in capability they more
than make up for with intent, and they are more likely to turn
to disruptive and destructive attacks.
At least some of the bigger countries, they have to weigh
the consequences of some of their bad behavior, which they have
gotten away with murder, if you ask me, but that is a different
question.
But I am glad you brought up the influence operations
because that is very much part of the cyber discussion we have
to have. It is more than just hacking into systems.
If you can actually create the outcome you want without
doing any harm, you are 10 steps ahead. And if you can induce
changes in behavior on the good guys' side, meaning we make
decisions or we lose trust and confidence in our systems or we
lose trust and confidence in our democracy or our
transportation, those are big issues to think about, and that
has to be part of the cyber discussion.
Mr. Crawford. Thank you.
General Adams, a final question here. In your opinion, do
you think TRANSCOM is doing enough to secure freight rail
movement?
General Adams. Sir, could you repeat the question?
Mr. Crawford. Do you think our TRANSCOM is doing enough to
help secure freight rail movement with regard to military
operations?
General Adams. I do not think we can do enough. I know that
TRANSCOM is diligently working on it and resolutely working on
it, but I do not think we can do enough.
I think we should be very concerned about the threat. I
like the idea of the TIVSA bill that has been dropped in the
House yesterday. I like it being in the Senate.
We need to stop their incursion into freight rail
especially, and I think we have. We are fortunate to have the
opportunity to do that.
We will help TRANSCOM if they work hard, but they need as
much support as they can get.
Mr. Crawford. Thank you.
And I thank the panel for their testimony, and I yield
back.
Mr. DeFazio. I thank the gentlemen.
I just want to explain to Members. I went over on my time.
So we yielded the same amount of time on the Republican side to
be fair, and now we will go to 5-minute questioning.
And who is next? Representative Napolitano.
Mrs. Napolitano. Thank you, Mr. Chairman.
Mr. Washington, I would like to know what steps you think
Congress could take in the next surface transportation
authorization bill to realize your vision of bringing the
manufacture of mass transit railcars to America, and in your
case, L.A. County.
And to follow up, are there challenges with research,
development and deployment of electric bus technology?
And what can Congress do to help?
Mr. Washington. Thank you for the question.
And thank you for your advocacy as well in the district and
also for the transportation industry.
I think the best step that Congress can take is to, one,
give preferential treatment to mass transit manufacturers to
base their facilities in America. And, again, I am not talking
about just assembly plants. I am talking about from soup to
nuts, to forge steel, to do the things that real manufacturing
outfits for passenger railcar vehicles do all over Europe, in
China. We need to do that here.
So I think that a strong message from this committee to
say, and Congress to say, that in the next transportation
reauthorization bill that there will be a priority given for
those regions that are looking to stand up in our case an
industrial park that includes the manufacturing facility, that
includes electric bus manufacturers as well, I think is very,
very key.
Also and lastly, enabling local hire and allowing local
hire to be at least piloted again I think is very, very key to
making sure that if a manufacturing facility is stood up, that
local entities that in our case are putting in 82 percent of
the funding for infrastructure in L.A. County would benefit.
Mrs. Napolitano. Well, that is very good.
What incentives do you think Congress might provide to help
transportation quarters make up the difference for the low bid
for the foreign company?
Mr. Washington. I think going through the process, in our
case I think the difference was maybe $30 million or so, I
believe, and that is in my testimony. It was not that big of a
difference.
We had two bidders, and so if Congress were to consider
making up the difference, I think that there are other things
that are in the evaluation criteria that is not just price,
things like experience in project management and things like
that.
So I think that has to be considered as well.
Mrs. Napolitano. Very good. Thank you, Mr. Washington.
I yield to Mr. Lipinski.
Mr. DeFazio. Or actually he has 5 minutes next if you want.
Mrs. Napolitano. That is fine.
Mr. DeFazio. Because we did two in a row on the Republican
side.
So do you want to do for 1 minute or you can use your 5?
Mr. Lipinski. I will use my 5.
Mr. DeFazio. OK. There you go. All right.
Mr. Lipinski. Thank you.
Mr. DeFazio. I recognize the gentleman.
Mr. Lipinski. And so I will not make this too much more
confusing.
I want to thank you, Mr. Chairman, for holding this
hearing. I have been working on this issue, especially Buy
America, now not as long as the chairman has, but I think the
fact that the Chinese Government has made very clear in their
plan for their Made in China 2025 initiative that they want the
rail manufacturing sector to target.
I think that should concern us on top of the what the
ranking member of the Railroads, Pipelines, and Hazardous
Materials Subcommittee, Mr. Crawford, pointed out, that tweet
by CRRC.
You know, conquering the remaining 17 percent of all rail
in the world, we really need to wake up. We need to understand
what a threat this is and do something about it.
We cannot just sit here and talk about it and then years
from now when it happens say, ``Well, I remember talking about
that, but, well, it happened.''
My first question, Mr. Galloway, in Australia, you talked
about how the freight railcar manufacturing industry was
eliminated. How quickly could that happen here in the U.S.?
And I know we have a much more robust domestic market than
Australia had, but you know, how quickly could you see this
happening?
Mr. Galloway. I think a lot of that would depend on the
level of investment that CRRC or other state-owned enterprises
would be making here in the U.S. in terms of either
establishing final assembly facilities, specifically in freight
rail, which is where.
[Disturbance in the hearing room.]
Mr. Galloway. I think a lot of that actually depends on the
level of focus and investment that CRRC would be looking to
make to disrupt specifically freight rail, which was the
example that I was pointing to in Australia.
I think it could occur in less than 10 years if the
conditions are right. In Australia the conditions were right.
Australia recognized China as a market economy, granted market
economy status that opened a lot of doors of a company like
CRRC to enter into that market and utilize their tactics to
displace the market within freight rail.
There were a lot of other kind of global macroeconomic
conditions that were taking place. The Australia dollar was
very, very strong during that period, and so that made the
purchase of foreign railcars much cheaper, and so they were
able to acquire CRRC cars at a much lower price.
And on top of that, Australia was engaged in a trade deal,
the Chinese-Australian free trade agreement, during that
period, which also opened up a lot of those doors for a lot of
disruption within the marketplace.
I think there are some corollaries that are here in the
U.S., and some of those specific instances that could
ultimately open up those doors for that type of disruption here
in the U.S., and it could span in that same period of time in
terms of our own disruption.
Mr. Lipinski. What leverage do you suggest that we use in
order to prevent that from happening here in the U.S.?
Mr. Galloway. Well, I think right now there is one lever
that is being utilized through the section 232, steel and
aluminum tariffs that help to mitigate some of those price
advantages.
However, you know, we are looking at a short-term solution
to a long-term problem, and the long-term problem is you have a
company that is owned by a foreign government that is
supporting that company, and ultimately the levers that need to
get pulled is a long-term solution to move state-owned
enterprises, wean them off of government subsidies and
concessionary financing or tactics that they are using to
disrupt the U.S. economy and manufacturing.
Mr. Lipinski. Mr. Paul, do you have any suggestions on what
levers we can use?
Mr. Paul. I do. First, a robust spend. As the chairman
indicated, the Federal Government has not always been a good
partner. So if there is a stable, long-term market, there will
be more entrants into it.
The second is that CRRC is predatory, and we have to
understand that they now dominate the world rail market after
being a bit player 20 years ago, and the same thing that is
happening globally will happen in the United States as they
drive competition out.
An incumbent rail maker left Philadelphia after it lost its
contract there, and we can assume that is going to happen down
the road.
So the TIVSA legislation is a start. We should also insist
on reciprocity. There is no American company that has the same
opportunities that CRRC or BYD have in the United States.
We do not have those opportunities in China. China is not a
signatory to the Government procurement agreement. It can
discriminate, and it does, against our products, and so we
should ensure that we have that reciprocity as well.
Mr. Lipinski. Thank you.
I yield back.
Mr. DeFazio. I thank the gentleman.
Representative Gibbs, 5 minutes.
[No response.]
Mr. DeFazio. Mr. Davis. I think he is here.
Mr. Davis. Can I take Gibbs' time, too?
[Laughter.]
Mr. DeFazio. That applies later on.
Mr. Davis. Actually to make it a little more confusing, I
am going to yield my time to the gentleman from Michigan, Mr.
Mitchell.
Mr. Mitchell. Thank you, Mr. Davis.
And, Mr. Chair, if I could have Mr. Gibbs' time, too, it
would be interesting.
Mr. Kahn, it is a long morning for you, and it is going to
get a little bit longer. The $338 million in Chinese grants,
what are the terms of those grants?
Mr. Kahn. I cannot speak to the terms of those grants. I
just do not know the answer. I could look into it and get back
to you.
Mr. Mitchell. Were the loans from the Chinese Government?
Mr. Kahn. China set up a number of incentive programs. So I
know some of them are voucher type programs that are similar to
vouchers that we can receive in California. Some are, you
know----
Mr. Mitchell. With all due respect, Mr. Kahn, I think the
voucher type programs to support that you get in California and
from the Chinese Government are a little different. So we would
like detail in writing to the committee----
Mr. Kahn. Sure.
Mr. Mitchell [continuing]. Of what those grants were, the
terms of those grants, whether they were loans, whether they
had to be paid back.
BYD's board of directors, how many members are there?
Mr. Kahn. I would have to review the annual report. I
believe it is five, but I would have to confirm.
Mr. Mitchell. Let's assume you are right. It is five. Two
of them, let's see, the chairman, Mr. Chuan-fu; then there is
Zuo. The two founders, as they are worded, own 33.58 percent of
the company.
I did a variety of private equity deals, and almost 34
percent is controlling interest in the company.
There is one other interesting guy who is on the board of
directors, making it three, someone from Norinco group, which
is a state-owned defense company. That is three. Three of five
means you have control. Math is pretty simple, right?
Mr. Kahn. Three of five, yes, that would be control, but I
do not know the gentleman that you just mentioned with Norinco.
I do not know about that.
Mr. Mitchell. Well, it is cited here with a footnote.
Footnote 14 is the BYD 2013 Interim Report. So I am assuming
the Alliance for American Manufacturing did their homework on
it. I suggest you may want to confirm that.
Mr. Kahn. If that is a 2013 report, I do not believe that
is the 2018 report. So I do not----
Mr. Mitchell. Well, why do you not detail for the committee
the ownership, the board of directors--excuse me--of BYD as
well as the overall organizational structure?
Because, as the chair noted, you have multiple companies
and groups, and sometimes that happens in companies, but to be
absolutely honest with you, we need to make a distinction, in
my opinion, as we look at this, Mr. Chair, between state owned
and state influenced.
Can you share with us the 33.58 percent of the company,
what the equity value of that when the company was founded? How
much was that?
Mr. Kahn. I cannot share, but I can look into that and get
back to you with that.
Mr. Mitchell. I have a list of questions.
Mr. Kahn. OK.
Mr. Mitchell. The followup question to that is: on what
terms, what general sources did that money come from?
Because, you know, to be honest with you, economic
transactions in China are pretty opaque at best, and I still
have doubts whether or not the money that founded this company
came from individual earnings or came through them from the
Chinese Government.
And you can paper this all you want in terms of you have a
union agreement, you have employees. That is great. We want
employment in America, but if, in fact, whether this is
technically state owned or state influenced, we have a problem
here.
I also serve on the House Armed Services Committee, and
what is very abundantly clear by the Chinese Government is they
plan to assume a dominant position in the world by 2025 in all
aspects, including economic. This is a threat to the security
of this Nation.
So let's not dress this up and say that BYD is not state
owned when, in fact, I want documentation of how this company
is funded, where the money came from, who the board of
directors are, this $338 million grant.
And while the chair and I may have a different perspective
in terms of how we address this problem, we need to in this
country address predatory, state-owned entities or state-
influenced entities that are taking jobs away from Americans
and threatening our national security.
And unless you prove otherwise in terms of BYD, Mr. Kahn,
you are going to be on that list of people we have serious
questions why they are in the United States taking our
Government money and sending it to China.
So we have serious questions that I would like to have
addressed by your company.
And with that, Mr. Chair, I yield back. Thank you.
Mr. DeFazio. I thank the gentleman.
Next would be Representative Sires.
Mr. Sires. Thank you, Mr. Chairman, and thank you for
having this hearing, and it is a very informative hearing.
Brigadier General, I could not agree with you more on the
concerns that this country should have about foreign entities
being so involved in our rail system. I really do believe that
while we sleep, these countries plot, Russia, China, and I am a
believer of that just about all my life.
So with that, as we get into these companies, how do we
track what they are doing? Or we do not.
Does any entity in the Government keep an eye on these
people that you know of on what they are doing, whatever their
involvement is with us?
General Adams. Sir, thank you for the question.
I know that our intelligence agencies are busily and
resolutely working on that very problem, and I am encouraged to
know that the Congress is also working on that problem.
This today represents a great moment. I look at the glass
half full for just a moment. We know and we have awareness of
the problem, and I think that is the beginning of resolving it.
I have referred to the TIVSA bill before. I think that is a
very good step forward, and I appreciate those that have both
sponsored it and signed onto the bill.
We cannot solve this problem overnight, but we can
certainly wake up, as you suggest, and begin to address it
effectively. We still, even if we stop Chinese incursion into
transit rail and we prevent Chinese incursion into freight
rail, we are still going to have some mitigation that we are
going to need to do because we have got Chinese-made vehicles
in our country, and we need to do the proper mitigation,
primarily cybersecurity, to make sure that they do not take
advantage of us already.
Allow me to suggest that the other thing we really need to
do is look at this, and I know this is how you are looking at
it. This is just one front in a broad campaign.
China is directed from the top. The Chinese Communist Party
by the bylaws of the China Railway Rolling Stock Corporation,
CRRC has to ask the Chinese Communist Party for guidance on any
of the major operations.
The number of people on its board of directors who are also
People's Liberation Army, former People's Liberation Army
personnel, is large. There is a real overlap between the
direction of the company and the direction of the Chinese
Communist Party.
They do not do anything independently. Fortunately, we live
in a country where our businesses are independent. We have a
market economy, and thank God for that.
But China does not work like that, and I think the first
realization that we have to have is this is one front in a
broad campaign.
Mr. Sires. I also think that we have to make the American
people aware, more aware so that they become knowledgeable
about what is going on actually. I just think the American
people sometimes, it is too late sometimes when they become
aware of some of these things, and as I look at Australia, you
know, what happened to them.
I just want to ask Mr. Washington a question.
Mr. Washington, what are the problems that you as an
administrator have dealing with these foreign countries that
are subsidized; that when you go for a bid, they come in very
low?
Now, you are appointed. You have to answer to the people.
How do you say to the people, ``Well, this guy is 20 percent
cheaper. We should go to him''?
I mean, that is a nightmare. You know, having been a former
elected official myself, and when you take the bids, you know,
if you take the higher bid, they say, ``Oh, this guy has got to
have something going with this guy.''
Mr. Washington. Yes.
Mr. Sires. You know, so how do you deal with the public and
say, ``Look. This may be 20 percent cheaper, but the final
product may cost us a lot more at the end''?
Mr. Washington. Yes, sir. This particular solicitation was
a best value, and so we were not just looking at the lowest
cost or the lowest price, I should say. And so most of these
that have to do with rolling stock are usually best value.
So as I mentioned earlier, the evaluation criteria in this
case looking at past performance, looking at past experience,
technical compliance, project management expertise, voluntary
local employment programs, as well, and price, all of these
things with price being one of six have to be looked at.
And I would also add that in our case, with this
solicitation, we had two bidders, CRRC and a South Korean firm,
Hyundai Rotem. Coincidentally, as the CEO in Denver when I was
there, I actually selected Hyundai Rotem, and I cannot remember
if CRRC bid on that.
But that is reflective of the various evaluation criteria
on any solicitation.
So it is tough to look at these kinds of things. You are
criticized if you take something too high.
Mr. Sires. If you do not----
Mr. DeFazio. You are over.
Mr. Sires. I am sorry. That is my time?
Mr. DeFazio. Yes.
Mr. Sires. OK.
Mr. DeFazio. All right. Sorry. Thank you. Thank you both.
Representative Bost.
Mr. Bost. Thank you, Mr. Chairman.
You know, when we are looking at this, I can see a similar
situation that occurred in our steel industry. Both industries
must compete against China state-owned enterprises.
Now, you can magically say it is not, but the reality is,
from what the questions Mr. Mitchell brought forward, I think
it is.
Now, the solution might be a little different, but the
outcome is the same. China unfairly undercuts the competition
and then comes in and dominates the market. We can see that
with the email that was sent out.
You know, here in Congress, I worked on a law that would
improve our anti-dumping and countervailing trade remedy laws.
In this case, we can request by the industry or we can start
the Commerce Commission to look into this.
I am just curious if the industry has started looking at
this for potential trade by using this law. Mr. Paul, do you
know that?
Mr. Paul. I am not aware of any specific efforts with
respect to transit equipment or railcars, but the component
parts thereof, absolutely, steel being one of the key values by
ingredient in railcars.
And I was just in Granite City the other week, and I have
seen both the challenges with dumping and then also what can
happen when you have taken some action and restored some jobs
there.
And what I will say, and I think it is worth noting this,
that both BYD and CRRC made substantial requests for tariff
relief from both the 232 and the 301 tariffs for equipment that
they were bringing into the United States.
And so this is already an issue.
Mr. Bost. Were they granted the request?
Mr. Paul. Pardon me?
Mr. Bost. Were they granted those?
Mr. Paul. They were not precisely because in the case of
BYD's request, virtually all of them were products that were
part of the Made in China 2025 plan, where there is a very well
laid out set of objectives that the Chinese Government has for
industry domination. It is there for everybody to read.
But this is an emerging threat, and as you indicated, in
the steel market now, the global steel market is so distorted
by China that it is almost unrecoverable. China makes half the
world's steel. It does not consume that much, and 5 out of the
top 10 companies in the world are state-owned enterprises.
They do not play in market conditions. It has completely
wrecked the steel market around the world, and you see CRRC
doing the same thing now in the rail space where, again, they
were a bit player 20 years ago.
They are by far the most dominant rail company in the
world. Bombardier and others are small players now compared to
China and BYD.
Again, the ambitions of BYD are to become the world's
largest automobile maker, and we have the luxury right now of
not seeing a lot of imported cars from China. That may soon
change.
Mr. Bost. Have you thought about bringing those anti-
dumping challenges to the WTO?
Mr. Paul. To the WTO? No. I find the WTO to be slow and
incredibly inefficient.
Mr. Bost. So do I.
Mr. Paul. From a domestic perspective, I think we would
want to look at the market conditions to see if there is, in
fact, a case because, as you know, the criteria are sometimes
lagging and complicated.
But, again, the component parts, some of the component
parts are already subject to specific dumping orders or tariffs
because of that unfair competition.
Mr. Bost. Is there a way that you have been able to see
where we can enhance those through law or does existing
antidumping language we have suffice?
Mr. Paul. No. Those laws need to be improved. They need to
be improved dramatically, and there needs to be, first, the
opportunity for the Commerce Department to initiate more cases.
As you know, they are expensive for the private industry.
There needs to be a much more early warning activation
system, and you have seen with this administration a lot more
executive action that is being taken as well.
And so I do not think that that authority should be
restricted in any way. In fact, I think the Federal Government
should be much more assertive about standing up for the
interests and rights of its domestic industry.
Mr. Bost. OK. One real quick question because I have got
just a few seconds left. The Buy America, would it apply to the
transit projects that receive Federal dollars?
Do you feel that this is being manipulated to make it look
like they are not receiving Federal dollars?
Mr. Paul. Absolutely. The Buy America laws need to be
reformed. The chairman briefly mentioned this with respect to
advanced batteries.
There is a new kind of standard that has been proposed in
the USMCA that is worth looking at to get more of that battery
content into the North American, specifically to the U.S.,
market.
And also, the CRRC and BYD claims with respect to Buy
America, they should be audited. The inspector general's report
in Albuquerque indicates that there is very clearly the
possibility that BYD is not fully meeting its Buy America
obligations.
Mr. Bost. Thank you, Mr. Paul.
Mr. Chairman, I yield back.
Mr. DeFazio. Representative Espaillat.
Mr. Espaillat. Thank you, Mr. Chairman.
And thank you to all the witnesses for your testimony
today.
This is a very important conversation that we are having
today. I also sit on the Foreign Affairs Committee, and just
last week we held hearings about China's influence in the
world, particularly developing nations and in Latin America,
and there they are building ports. They are building rail. They
are building all kinds of transportation and infrastructure
projects.
Of course, when you have control of the ports, there is no
telling what will go through them.
They are also looking to control facial imaging and data,
and so I think they are very crafty and they are out-foxing us.
So here in the U.S., we have to be mindful of ways in which
China is undermining not only our competitiveness, but also our
national security. Chinese state-owned enterprises have made it
their goal to corner the market in terms of infrastructure,
whether it is ports or rail, and their involvement in
constructing rolling stock is of particular concern to me,
coming from New York City where we have the largest transit
system in the country.
FTA regulations require competitive solicitation of rolling
stock contracts to the maximum extent feasible, but in many
cases because of Chinese SOE's dominance, transit and commuter
rail agencies end up having few options to choose from.
I would like to ask Mr. Washington whether he has
experienced similar problems in Los Angeles.
And I would like to ask the other panelists what they think
Congress can do to promote competitiveness in this area.
This is a real issue. As much as we can talk about it, I
think we need to develop a strategy to derail them, no pun
intended.
Mr. Washington.
Mr. Washington. Well, thank you for the question. I hate to
hear the word ``derailment'' in my business.
[Laughter.]
Mr. Washington. But, yes, as I mentioned, we had two
bidders on this particular contract for heavy rail vehicles. We
also have contracts with other rolling stock providers, namely,
Kinki Sharyo, Alstom, Talgo.
And so there are some, not many, that we have to choose
from. In our case, we have proven in Los Angeles that these
are, again, best value solicitations. So we are going to look
at them very, very closely to determine not just price, but a
number of other things.
But there are not many players.
Mr. Espaillat. What kind of other factors will you be
looking at besides pricing?
Mr. Washington. The program management, the past
performance, delivery of the rolling stock vehicles. In our
case, the local employment plan; what do they plan to do
locally in terms of training local folks in the community,
those kinds of things.
Mr. Espaillat. Has anybody else had any other experiences
across the country?
Mr. Kahn. I would just add, sir, just on the electric bus
phase, which is different than the rail side, I think right now
the electric bus space is actually the most competitive. The
bus market right now compared to diesel or CNG, there are four
legitimate OEMs that are submitting competitive bids, leading
to technology getting better and better.
For example, in New York City, they have got 10 buses up
and running. Five of them are with New Flyer, five of them with
Proterra. BYD submitted a bid, was not selected, but there is
an open and robust competitive process going on now on the
electric bus space, which is leading to cleaner buses getting
out on the roads around the U.S.
Mr. Espaillat. Thank you.
Mr. Chairman, I yield back.
Mr. DeFazio. I thank the gentleman.
Representative Gallagher.
Mr. Gallagher. Thank you, Mr. Chairman.
Mr. Cilluffo, could you explain in simple terms to the
committee the connection between transportation and
telecommunications?
In other words, why is 5G and the internet playing such a
crucial part of this conversation on rail and public transit
security?
Mr. Cilluffo. Well, thank you, Congressman Gallagher.
And I mentioned briefly in my oral that the highways and
vehicles of tomorrow are going to be paved in silicon as much
as they are in asphalt, and that is the reality.
Ultimately, when you think of 5G, it is going to be the hub
that you have so many other spokes that will connect not only
transportation; basically all of our lifeline sectors and
critical infrastructure.
So if we get that wrong, we are really building some of the
most sophisticated networks in infrastructure on very weak
foundations. So I think that the President was right in
promulgating the Executive order last night to prohibit, in
essence, Huawei and ZTE from engaging in the market in the
United States.
And I might note Australia has already done so. So I think
from learning some of the hard lessons they learned on the rail
side, that could have factored into their decisionmaking on 5G.
Mr. Gallagher. I think part of our challenge is these
threats, while real, sometimes we talk about them in abstract
ways. Could you give us perhaps some real-world examples of how
a smart train or public transit could be compromised or
weaponized?
Mr. Cilluffo. Yes. So I mean, I think it was General Adams
who brought up some of the examples in terms of Wi-Fi, and we
talked a lot about security, but there are legitimate privacy
issues here, too, given the use of technologies to monitor
individuals.
So I mean, if you can get into the system, it really does
hinge around what the perpetrator's intent is. So if you are
exploiting Wi-Fi, which is just one of many avenues to be able
to get into a system, you can cause some significant harm.
I am more worried from a national security standpoint. If
you talk about switching, and if you are talking about rails
and that is where it goes from a security concern to a genuine
national security concern.
You know, I know an amazing and incredibly thoughtful
chairman of an important commission that I hope can take some
of this on in the Solarium Commission.
Mr. Gallagher. I will not ask you to elaborate on that
further.
[Laughter.]
Mr. Gallagher. General, I will get to you in one second,
but, Mr. Kahn, first--if I have time--if your company was asked
to conduct espionage in any form under the 2017 National
Intelligence Law on American citizens using your products,
would BYD comply?
Mr. Kahn. BYD Motors would not comply. BYD, to my
knowledge, BYD would not comply with that.
Mr. Gallagher. What recourse would BYD have if the Chinese
Communist Party seized their assets under the 2017 National
Intelligence Law?
Mr. Kahn. I do not know the answer to that. I am sorry. I
can ask and get back to you on that.
Mr. Gallagher. Thank you.
Is your understanding that the judicial system in China is
independent of the Chinese Community Party or subordinate to
it?
Mr. Kahn. I am not an expert on the judicial system in
China.
Mr. Gallagher. OK. And, General Adams, just to circle back
to with the time remaining what I asked Mr. Cilluffo about,
could you sort of add to what you have already laid out in your
testimony, real-world examples of smart trains, public transit
threats, any drone threats that you see in transportation going
forward?
Help us really tease out that connection between the future
of the internet and the future of transportation.
General Adams. One of the things that we want to do with
our industry and its vulnerability to cyber intrusion, for
example, is reduce the attack surface.
Specifically, we know the Chinese have technology, such as
facial recognition technology and intercept technology. If we
want to let them make our railcars, transit or freight, we are
going to expose ourselves to their intrusion using facial
recognition technology.
Now, I have commuted to the Pentagon a lot over the past 40
years. I do not want my face recognized getting on and off or
any others who serve the country every day, whether they are in
uniform or civilian clothes. We do not need to have Chinese
facial recognition technology on a transit railcar going to the
Pentagon or anyplace else in Washington, DC, or I would enlarge
that to Boston or L.A. or Chicago or Atlanta.
But we have got to be reducing our attack surface all the
time because they will exploit it.
Mr. Gallagher. Thank you.
And I am going to run out of time, and I apologize. We have
a very vast number of witnesses here. So I cannot get to every
one of them, but I yield back.
Thank you, Mr. Chairman.
Mr. DeFazio. I thank the gentleman for his questions.
With that, Representative Allred.
Mr. Allred. Well, thank you, Mr. Chairman. I want to thank
you and the ranking member for holding this important hearing.
I am also a member of the Foreign Affairs Committee, and as
has been mentioned, we have taken a close look at Chinese
actions around the world recently, and I am happy to see us
taking a close look at Chinese economic expansion into our own
industries seriously now.
And I want to say that I welcome the legislation introduced
by my colleague Harley Rouda and my fellow Texan, John Cornyn,
in the Senate, the Transit Infrastructure Vehicle Security Act
to prevent Federal funds from being used to buy transit
railcars or buses manufactured by Chinese-owned companies.
I welcome that and look forward to supporting that.
And I want to recognize Trinity Industries, which is here
today, which is headquartered in my hometown of Dallas and has
provided good-paying American jobs for 85 years as a leading
manufacturer of railcar products and services in North America.
And I want to begin with Mr. Kahn here. The United States
is a top exporter of technology products and services, an
industry powered by innovative, forward-thinking entrepreneurs
and a robust network of some of the world's top research
institutions.
In your written testimony, you mention some of the
partnerships that BYD has made with community colleges in
localities to diversify and bolster its manufacturing
workforce.
Has BYD also partnered within the U.S. research
institutions to develop products sold within the U.S.?
Mr. Kahn. Thank you for that question.
I think that is a really important thing that a lot of OEMs
are looking at.
I do not believe we have worked with a specific research
institution, but we have worked with startup companies, as I
mentioned earlier, on the inductive and wireless charging
space. We are the only OEM that has got a number of projects
where we use wireless charging as a way to increase the range
of our electric buses so that customers do not have as much
range concerns as they might otherwise.
So those are two companies that came out of the U.S., one
out of Pennsylvania, one out of the State of Utah where I
actually used to work, but these are companies that are now
being able to take the technology that they worked on with BYD
and sell it to other agencies, but also abroad and bring it to
other areas, such as the port environment and other areas where
they operate.
That is technology that if there was not an OEM partner,
those companies would have had a lot of trouble raising funding
and developing that technology.
So it has been a great partnership that creating that
competitive, innovative space that we have right now in the
electric bus space in the U.S. has been vital for that.
Mr. Allred. OK. I want to turn to General Adams very
quickly.
In your testimony you describe the deep ties between CRRC
and the Chinese Government, and my question is: would CRRC be
able to resist an order from the Chinese Government to take a
malevolent action against the United States rail system?
General Adams. Sir, if I understand the question correctly,
would the CRRC take orders from the Chinese Government?
Mr. Allred. That is right.
General Adams. No question about it. They are already doing
that, and it is because not only is the directorship
interlinked, but they are required by bylaw to solicit the
opinion of the Chinese Communist Party for any decisions
regarding company operations.
Mr. Allred. Well, I would like you to elaborate a bit. My
colleague was just asking you about this as well, the
statements you made in your testimony about the Chinese
dominance of the U.S. rail system would turn the system from a
bedrock strategic asset into a potentially crippling
vulnerability for us.
If you could, elaborate on your thoughts there just a
little bit.
General Adams. Yes, sir. Rail, especially freight rail, is
the major way we move military supplies within the country. It
is also the way we deploy military supplies from the bases in
the country to the ports for deployment overseas.
We could not do without it. We move tanks. We move trucks.
We move everything that is of military significance that
requires transportation because rail is, one, it is effective
and, two, it is the least expensive way to move things in the
country.
That is a great asset for us, but if China were to make our
railcars, if China were in control of not only the railcars,
but the system itself, that would turn it into a strategic
vulnerability because they would be able to monitor our
movements. They would be able to receive advanced indication
and warning of our movements. They would know what our plans
were by knowing in detail what is on the cars.
So instead of something that would be to our benefit, it
would be something that we would be giving the enemy, potential
adversary, I should say, a warning about what we are doing, and
they would be able to monitor our movements.
Mr. Allred. Well, in the foreign affairs space, I think we
are seeing a change to great power competition, and I want to
commend this committee and the bipartisan approach that we are
having to this to try and counter what I do see as, you know, a
new competition for us, something we will be keeping our eye
on.
I do not want to stifle innovation. I still want to have
trade and bring in new ideas, but I think this is something we
need to keep an eye on.
I want to thank you for your testimony and for helping
share this with the American people today.
Mr. DeFazio. I thank the gentleman.
Representative Balderson.
Mr. Balderson. Thank you, Mr. Chairman.
Thank you all for being here this morning.
My first question is for Mr. Paul and Mr. Galloway. As
noted in your testimonies, the manufacturing of public transit
freight railcars and rolling stock employs over 21,000 American
middle-class workers and supports nearly 190,000 jobs here in
the United States.
Right now CRRC is consistently bidding 20 to 50 percent
lower than nonsubsidized private-sector companies. Do you
believe that once CRRC undercuts all other competition, that
their current assembly jobs will be kept in the United States?
Mr. Paul. Perhaps in name only, and that is the situation
that we are operating under now, Mr. Balderson, is that there
is final assembly occurring in the United States, turning the
screw, adding very little value, adding some value, but a lot
of that content is coming from Chinese imports.
In the process by CRRC underbidding all these other firms,
and again, many of them have foreign investment, but they have
to operate under market conditions. They are driving out
competition.
And any economic textbook will tell you once a firm
achieves a monopoly and/or a monopsony, the price is going to
rise. The quality is not necessarily going to improve, and
ultimately the victims of that are going to be transit riders
and transit systems when there is not that robust competitive
system in the United States.
The Australian example is a good one because Australia had
a domestic rail industry. It now has virtually none. Ninety-
five percent of the market is controlled outside of Australia.
In fact, the one Australian firm went to China to make its
products and bring them back in.
So we are not Australia, but I think there is a lot of
lessons to be learned there, and it is important to remember
that most of the jobs in railcar assembly are outside of those
assembly facilities. They are in the steel, the wheels,
everything else that goes into making that vehicle.
That is where the preponderance of jobs is, and so if you
have a company like CRRC that is not necessarily committed to
that domestic manufacturing footprint and to expanding it, you
are going to cost jobs in the supply chain.
Mr. Balderson. Thank you.
Mr. Galloway, would you like to add?
Mr. Galloway. Yes, I will just add a couple of notes.
I think it is important, and I agree with everything Mr.
Paul has said. I think the key to understanding some of the
potential disruption here is the fact that the U.S. domestic
railcar and rolling stock manufacturing sector has very, very
deep supply chains within the U.S.
And it covers every State, and it covers hundreds of
congressional districts, and so there is a lot of value that is
being retained here in the U.S., and that even includes the
private-sector foreign owners of rail rolling stock
manufacturing. They have made significant investments here in
the U.S. in our domestic supply chains. So that value is being
retained.
The problem you are running into now is when you have a
foreign SOE that is coming in here, and they are disrupting
that by pulling that value-added supply chain out of the U.S.
and moving it back to their home country because they are not
making those investments into the U.S. manufacturing process.
That is where you are going to find a lot of that huge amount
of disruption.
But going back to my earlier comments, even under the
existing Buy America provisions, you are still finding a net
loss under SOE type of market activities and conditions.
Mr. Balderson. Thank you.
And, Mr. Paul, my last question to both of you also, but
you kind of touched on it with the Australia issue.
If Chinese state-owned enterprises are ultimately
successful in driving out and undercutting our competition just
like they did in Australia, how long do you think it would take
for America's railcar manufacturing and industry to bounce
back?
Mr. Paul. Obviously, there are a lot of factors that go
into that, you know, public investment and many other issues.
But the roadmap is pretty dire.
And we have seen what has happened in other industries of
the United States that have been targeted through the 5-year
industrial plans or the Made in China 2025.
And as I mentioned in my testimony, this is the tip of the
iceberg. The procurement market is not insignificant, but the
more significant market, I think, for these companies is the
U.S. automotive market, and that is of serious concern because
that is the very heart of American manufacturing.
One out of about every eight or nine jobs is connected to
auto manufacturing in the United States, and so I look at the
playbook, and I am very concerned unless the committee and the
Congress take some action.
Mr. Balderson. Thank you.
Mr. Galloway, do you want to follow up or you are fine?
Mr. Galloway. I am good.
Mr. Balderson. Thank you very much.
Mr. Chairman, I yield back my remaining time.
Mr. DeFazio. The 2 seconds.
Representative Rouda. Is he here? No. OK. Oh, there he is.
Sorry. God, Harley, you are way down there. I forgot we had so
many rows.
Mr. Rouda. Thank you, Mr. Chairman.
And thank you, Chairman and Ranking Member, for holding
today's hearing on such an important topic and for the guidance
and protecting American manufacturing jobs.
I recently introduced the House companion of S. 846, the
Transit Infrastructure Vehicle Security Act, TIVSA, that would
prevent Federal transit dollars from being used to procure
Chinese transportation assets.
The free market principles of capitalism are how the United
States of America became the most powerful country in the
history of the world. Yet we know nonfree market economies and
their state-owned enterprises, SOEs, are a direct threat, a
national security threat to our country's commitment to fair
and open competition.
Why? Because SOEs undermine free markets by benefitting
from government funding and preferential treatment to undercut
the competition.
As part of the Made in China 2025 initiative, China has
dramatically underwritten its rail and bus industries to the
tune of billions of dollars through direct funding and other
subsidies.
As this committee considers aggressive investments in our
infrastructure, we must ensure we are not investing in rail and
bus stock that could jeopardize our national security or
disadvantage companies based in the United States who operate
without the benefit of billions of dollars of direct government
funding.
I support fair trade, as do all the Members in this room
and on this committee, but there is nothing fair about forcing
American rail and bus stock manufacturers to compete with
companies who receive billions of dollars from their government
in order to win contracts in the United States. And American
tax dollars should not be used in that means.
I am proud to work with a bipartisan, bicameral group to
introduce legislation to hold China accountable because we need
to do all we can to support American workers and American-made
products.
I would like to thank Representatives Ryan, Holmes Norton,
Garamendi, Crawford, Perry, Granger, and Weber for joining me
as original cosponsors of the House version of TIVSA, and I
also want to thank Senators Cornyn, Baldwin, Brown, Crapo, and
Shelby for their work in the Senate.
I have a few questions. I will start with you, Mr.
Galloway.
Australia's freight railcar manufacturing has all been
decimated, but decimated by what has taken place there with the
Chinese SOEs; is that correct?
Mr. Galloway. That is correct.
Mr. Rouda. And I think I read somewhere that we are looking
at 65,000 American jobs could be at risk if we continue down
this process, if you want to take that question or the general
as well.
Mr. Galloway. Our research at Oxford Economics confirms
that the freight rail sector, just as a sector in itself----
Mr. Rouda. Just that sector alone?
Mr. Galloway [continuing]. Is freight railcar
manufacturing, that is correct.
Mr. Rouda. Is that direct and indirect jobs?
Mr. Galloway. That would be direct and indirect and induced
effects. That is correct.
Mr. Rouda. What is the cost, GDP?
Mr. Galloway. The cost to GDP, it is in my notes. I believe
it is about $7 or $16 billion. I do not have on hand, but it is
significant.
Mr. Rouda. Can you talk about what the ripple effects are
through our economy if we use American tax dollars to fund
SOEs? The impact of losing those jobs, losing the $7 billion of
GDP, and what the ripple effects would be through our economy?
Mr. Galloway. Yes, so the ripple effects would be
substantial because you are dealing with supply chains that are
domestic. So you have the suppliers of all sorts of parts and
components, systems and subsystems that are manufactured here
in the United States.
It is those jobs are strong middle-class, middle-income
jobs in the U.S. that would be displaced as a result of foreign
competition that would be coming in and underpricing and taking
that market share away from good corporate citizens and
producers of products here in the United States.
Mr. Rouda. And, Mr. Paul, what is the total level of direct
investment by the Chinese Government into these SOEs?
Mr. Paul. The value of the 51,000 Chinese state-owned
enterprises is $29 trillion. The amount of money they receive
is almost incalculable because it is through every policy
aspect that you can imagine, from preferential tax treatment,
low-interest loans, a protected home market, labor and
environmental regulations that are not complied with
domestically, a misaligned currency from time to time, and the
well-established technology transfer and intellectual property
theft.
And so attracting the R&D and development is well below the
cost of doing that in the United States, and so it is the
world's largest racket.
And if China chooses to do that, I guess that is the
Chinese Government's prerogative, but there is no reason
whatsoever why American taxpayers should have to subsidize
that. So I am glad that you introduced the legislation. We are
proud to endorse it.
Mr. Rouda. So American companies and any companies that
follow fair and free trade in a capitalistic process, you
invest money, you have revenue, you have expenses, and you have
a return to shareholders.
Yet these SOEs do not work under those rules, right? There
is no obligation for return to shareholders. In fact, by making
these massive investments in these companies, they can
underprice any other company out there in ways that it is
absolutely impossible for us here in the U.S. and elsewhere----
Mr. DeFazio. I know the gentleman feels very passionately
about the issue, but he is over time.
Mr. Rouda. Thank you, Chairman.
I yield back.
Mr. DeFazio. I thank you.
And I would turn to Representative Palmer.
Mr. Palmer. Thank you, Mr. Chairman. Thank you for holding
this hearing.
Mr. Washington, how much lower in dollars was the CRRC bid
versus Hyundai?
Mr. Washington. I believe it was about $35 million, sir.
Mr. Palmer. What would that be as a percentage of the
difference? Put that in percentage terms. What percent lower
than Hyundai?
Mr. Washington. I would say probably about between 5 and 10
percent or so.
Mr. Palmer. Given what we have heard today, I am amazed
that we are even having the discussion about doing business
with China.
General Adams, the Commander of the U.S. Southern Command
says Beijing is using this information and debt diplomacy to
help Maduro hold on in power. We know that Xi has pledged $250
billion in investment and infrastructure and energy,
infrastructure in Latin America.
There was this scandal involving a company called Otabek
that they have taken over their projects in Colombia, Peru,
Brazil, the Dominican Republic.
Does it make sense to you that we would allow China to come
in?
You have already made the case. I am just going to ask you
to repeat it, for how problematic this could be and how
strategic it could be for China to get into our freight system.
General Adams. Sure. Thank you for bringing up the foreign
element of this and the influence element of this because one
of the ways that China does make its influence known in the
world is they work in areas that need their technology, that
need their financial support, and then they use that as
leverage for all sorts of things.
Now, part of my service was in Africa, and this was 15
years ago.
Mr. Palmer. There are 10,000 Chinese-owned companies doing
business in Africa today, and they are in every sphere you can
think of, infrastructure, energy, small and medium-size
businesses, telecom.
General Adams. They are assiduous about developing
influence in the developing world. They know that the
developing world wants their help, and they can provide it at
cheap cost and develop as much money as they want.
It is a very important point of leverage for them to have
these friends and these influences in the developing world.
Sir, if I may the other part of that is what they do when
they buy this influence is they develop the supply chain
entirely in China.
Mr. Palmer. Right.
General Adams. The Chinese are masters of vertical
integration. They want not just to sell their goods. They want
to make the goods in China, and if they can sell to the
developing world, they are not going to put the supply chain
there. They are going to keep it back in China, which means
that they grow their industry with R&D, intellectual capital,
basic research.
And once they have got the industry, they use that, again,
for global domination.
Mr. Palmer. But they have got partners that are playing in
this game with them as well where they might not manufacture
the steel pipe or whatever it is they are selling. They will
provide the material to do that in, say, Thailand or someplace
like that and not have to pay any duties on it.
So they have these agreements that are undermining not only
our interest, but the interest of other countries.
I want to move. You brought up the technology, and, Mr.
Cilluffo, my concern, too, is when we are talking about China's
expertise in building these electric vehicles and others, how
much of the technology that they are using is pirated from the
United States?
Mr. Cilluffo. A great question because, I mean, if you look
in totality, and I think it was Mr. Bost who brought up the
question earlier about steel. The first big indictments were
about 5 years ago where you had five PLA military officers
indicted by the U.S. Government, and they were using state-
owned enterprises to achieve industrial and economic espionage.
When we start looking at autonomous vehicles, that is so
critical to our society, to our country and the great State of
Alabama and elsewhere. So we need to get that right. I would be
willing to bet you if you were to look in context that it is
not all originally made in China.
Mr. Palmer. Oh, I go back to my opening comment about why
we are even having a discussion about allowing China to play in
our freight space, considering how we, I think, have been
asleep at the wheel to a certain extent with them having
control of the Panama Canal and other strategic footholds that
they have established in Central and South America.
Thank you for your indulgence, Mr. Chairman. I yield back.
Mr. DeFazio. I thank the gentleman for his questions.
Representative Fletcher.
Mrs. Fletcher. Thank you, Mr. Chairman, and thank you,
Ranking Member Graves, for holding this important hearing
today.
Thank you to all the witnesses for taking time to testify.
It has been clear here from the testimony today that these
state-owned enterprises, Chinese state-owned enterprises have
an unfair advantage in the bidding process for public rail
projects and that we have a real situation on our hands of
addressing a number of potential impacts as they continue to be
engaged in this market.
Certainly if they can corner the market and drive domestic
companies out of the business, we may not see these savings in
the long term that we are seeing now in some of this bidding.
And beyond that, I think that there are a lot of national
security and other concerns that your testimony has raised.
General Adams, I wanted to ask you specifically. In your
written testimony, you explain that the contracts that the CRRC
won for the U.S. metropolitan transit projects include the
delivery of trains that contain Wi-Fi systems, automatic train
controls, passenger counters, surveillance cameras, and other
technologies that will be thoroughly integrated.
In an era where Americans are increasingly concerned about
privacy and data privacy and artificial intelligence, can you
talk a little bit about how the Chinese Government could use
some of the advances in artificial intelligence and facial
recognition to extract even more value out of its investment in
the U.S. transit systems?
General Adams. Thank you very much.
The point of having technology on our trains is ultimately
efficiency and safety, which means that we welcome the
inclusion of technology in our transit system trains, in our
freight rail trains. We want more of it, not less.
We are not Luddites. We like technology. China knows that,
too, and in fact, their technology is advanced. They are not as
good as we are, but they are very good, and they know that they
can answer our requests for proposal for building transit
railcars, in particular, like WMATA is soliciting. They know
they can satisfy that, and we want those requirements to be
satisfied.
But we do not want to, as I go back to, we do not want to
enlarge our attack surface, and if we allow them to build the
cars that have this advanced technology, we are exposing
ourselves to the maximum amount of intrusion, and they will do
whatever they can.
They are very interested in tracking the movement of the
cars. They are very interested in tracking the people that are
on the cars. When it comes to transit rail, it is a clear
problem for Washington, DC, because we all ride the Metro.
But when you talk about the freight rail system, I think
the problem gets even more intense because we are talking about
tracking the movement of sensitive goods, hazardous waste,
toxic chemicals and so forth. We do not want to let China know
where those cars are.
If they go into a high-threat urban area, for example, the
last thing we want is for China to manipulate the controls on
the hatches, either give a false read or give a spoofing read
so that we think the hatches are open or closed. They can do
whatever they want, if they have the control of the telematics
on the railcars.
So to sum up, the exposure that we have to technology is
something that we actually welcome. However, at the same time,
we want to make sure that we do not want to have an attack
surface that a potential adversary could exploit.
Mrs. Fletcher. And just as a followup, what kind of
safeguards, if any, do we have now to prevent that information
from being utilized or what do we have in place?
General Adams. We do have standards for cybersecurity. I
think we need to strengthen them, and because so much of
especially the transit cars are property or bought by the local
and the State governments, we need to help the State and local
governments develop greater, tighter cybersecurity standards.
So there is a lot of work to do on that. Certainly, the
TIVSA bill is important because the best way to manage risk is
to avoid it. We do not want to use Federal dollars to purchase
Chinese railcars. Let's avoid the risk. Let's not let them do
it.
Mrs. Fletcher. Thank you very much.
I yield back my time.
Mr. DeFazio. I thank the gentlelady.
We now turn to Representative Katko.
Mr. Katko. Thank you, Mr. Chairman.
And thank you all for being here.
Unfortunately, this is a concern that is compounded by the
cyber threat, and I am well aware of that through my role as
ranking member on the Committee on Homeland Security's
Subcommittee on Cybersecurity, Infrastructure Protection, and
Innovation, and it really is stunning to me that, number one,
we are not good stewards of our cyber systems in the United
States, and we do not always anticipate the vulnerabilities.
And then we compound that by taking one of the worst actors
in China and giving basically free access to the movement of
millions of people and all of the implications that has.
So I am very concerned about that. In my previous life, way
back when I was starting out as a lawyer, I was an antitrust
lawyer, and that sure sounds like predatory pricing to me to
price everybody out of the market, and that sure sounds like
they are dumping in our market, too, basically, products
because of state-support and government-owned entities.
But I want to focus on a cyber threat and all the threats,
and I want to use a case example from something that is going
on right now, and that is what they are doing in New York City.
Governor Cuomo announced in May of 2017 that the MTA would
launch the Genius Transit Challenge, a grant program to
challenge companies and individuals to develop innovative
solutions to improve the New York City subway system.
On March 9th of last year, they announced that the winners
of the grant program would include--you guessed it--CRRC, which
invested $50 million of its own funds to develop a new subway
car for the MTA transit system, despite the absence of any
ongoing procurements.
The railcar would include modern train control technology,
Wi-Fi, and other systems that could be susceptible to
cyberattack.
So, Mr. Cilluffo, if you could start and if we have time,
General, could you tell me based on that fact scenario, which
is happening, what your concerns are?
Mr. Cilluffo. Big, big concern. I mean, firstly, we
discussed this threat that China poses from a cyber
perspective, and quite honestly, we have not levied
consequences or incurred costs for bad behavior. It seems like
we are doing quite the opposite if we are rewarding bad
behavior with winning potential contracts in the United States.
So CRRC has to be looked at in the broader context of what
we have seen in other sectors, in other environments, and I
think that that is important.
The bottom line in all this is we have let the bad guys
have run of the field, and I think we need to change that. You
have done some amazing work historically as a prosecutor, and I
do think we need to start prosecuting some of these bad actors.
But we need to bring other instruments to bear as well, be
those economic and in some cases maybe even military, but at
the end of the day, we have yet to articulate a deterrence
strategy to dissuade, deter, and if need be, compel bad
behavior.
And amidst all of this, you have got economic levers that
we are just not minding the store. So as a former New Yorker, I
really hope that we do not continue.
Mr. Katko. I appreciate your comments.
And, General, can you focus a little bit more?
I understand the problem, but focus more on this particular
situation. What could go wrong with the Chinese railcars in New
York City in the current fact pattern?
General Adams. The most effective cyberattack is one we
never know about, and the sooner we know about it, the least
effective it is.
They have succeeded in flying under the radar, to use
another military term, for a long time. We do not even know the
extent of their intrusion. In fact, the minute that we find out
about it is going to be too late.
Mr. Katko. Too late.
General Adams. That is the problem that really concerns me.
We have already seen how they conduct business. They conduct
business under the radar, surreptitiously, without raising any
concerns.
And again, look at the glass half full. This hearing is a
wonderful way to shine some light on the situation, and I
appreciate the questions.
But I think we need to be much more resolute and diligent
even than we are today. I think I know our intelligence
agencies are working on the problem, and I presume that you
have heard some of their concerns. I am happy that they are and
have great confidence that they are doing resolute work on this
issue.
But we in the public also need to know that we are taking
this issue seriously. State and local governments do not have
access to that information. They are making decisions, I am
sure, in good faith, but in the blind, and I think the more we
can tell about the incipient and insidious threats that we have
from China and the way they exploit our technology for their
own purposes the better off we are going to be.
Mr. Katko. I thank you.
I yield back my 7 seconds, Mr. Chairman.
Mr. DeFazio. I thank the gentleman. We will use it wisely.
I would now turn to Representative Brownley.
Ms. Brownley. Thank you, Mr. Chairman, and thank you for
holding this hearing on the impacts of state-owned enterprises
in the transit and rail industry.
Throughout my career in public service, I have supported
Buy America and Buy America laws. In fact, I consistently
cosponsored legislation to improve these laws, and I continue
to believe we must strive to do everything possible to promote
jobs in manufacturing in our country and in California, which
is my home State.
Lancaster, California, is home to one of BYD's
manufacturing facilities. It employs 900 individuals. Lancaster
is very close to my congressional district and probably employs
many of my constituents. I have heard from the sheet metal,
air, rail, and transportation workers' unions that represent
most of these employees, and they have raised real concerns
about the loss of jobs should BYD be prohibited from doing
business with our local transit agencies.
I am also concerned about how this issue relates to
addressing climate change. In California, we have passed a new
law requiring transit agencies to transition to zero emission
buses by 2029. I believe we should pass similar legislation at
the Federal level, and I have introduced the Green Bus Act to
accomplish that purpose.
I hope, Mr. Chairman, that we can look to calibrate a
solution as it relates to transit and to transit only, and to
improve Buy America, and I hope we can distinguish between bad
actions of state-owned companies and investments that create
good jobs and help us address climate change.
And, Mr. Chairman, I hope we can work together to ensure
all these issues are fully debated and considered before moving
forward.
And finally, I would just like to say to my colleagues on
the other side of the aisle China is investing in clean
energies in the United States because China's leadership knows
our cities and counties want to move to a clean economy, and
they want to move to a clean economy as quickly as they
possibly can.
So let's be clear. China's strategy fits very neatly into
their Made in China by 2025 plan to become the world
manufacturing power in 10 years. So we need to take the lead on
clean energy.
So I have gotten that off my chest, and I would like to ask
Mr. Paul, and this question is directed at transit and not
rail.
Is there a solution, a calibrated solution, that does not
simply just require creating a new U.S. manufacturing here in
the United States?
Mr. Paul. It is a good question, and I will say I come at
this from the perspective of my background. I was a CWA member,
a shop steward. I represented workers at the AFL-CIO. I have
deep concern about the dignity of work and about the future of
work in the United States.
I think there does need to be a level playing field, and I
think that BYD as a corporate entity owes some answers about
some of its subsidies and what have you.
I do think, and I agree with you that electrification is
the future and that we ought to be a big part of it and
investing in it as well. I think one way to achieve that goal
is to have a robust infrastructure investment so that there are
more companies that know that there is a sustainable, large
enough market for them to make long-term investments in their
workers and capital in the United States, and so I will say
that.
I do not think it is a question of pitting the workers in
Lancaster against everybody else. We are all in this together,
and I do believe that there is a solution.
I also believe that every company needs to play by the
rules, and those rules need to be strictly enforced.
Ms. Brownley. And do you believe in this notion of
electrification being the future, and that we are at a climate
crisis, and the quicker we can get there the better off we are
going to be and the world is going to be?
Mr. Paul. I drive a union-made, Chevy-made Chevrolet Volt.
I am part of that. I totally agree with you that
electrification and other sorts of advanced energy forms, and
there may be some transitions as well, but we have to get there
as well. I completely agree with you.
Ms. Brownley. Thank you very much.
And I see my time is up. So I will yield back, Mr.
Chairman. Thank you for the time.
Mr. DeFazio. I thank the gentlelady.
Now Representative Babin.
Dr. Babin. Sir, thank you so much, Mr. Chairman.
This is a very, very valuable and revealing hearing. It
shows just how serious the threat is not only in the
transportation issue, but many, many other issues that our
country is facing. Thank you for having this.
Mr. Cilluffo, I would like to ask you a question. I want to
say thank you to all of you witnesses. It is valuable
testimony.
Mr. Cilluffo, I appreciate what you said in your testimony.
Quote, ``to undercut America's competitiveness is to damage the
engine that powers our national security.'' Well said.
To allow the Chinese to undermine our otherwise well-
functioning, free markets, undercut American competition, and
jeopardize our national security is a travesty. And I have
become aware recently of foreign state-owned enterprises
attempting to enter into the U.S. market of passenger boarding
bridges, and I personally have a number of cyber and data
privacy concerns in response to some technologies that they are
proposing, like facial recognition and others.
So in light of that, should the same concerns that are
being raised about Chinese-owned or subsidized freight and
passenger rail companies also be raised in the context of other
critical transportation infrastructure, including aviation
infrastructure?
Mr. Cilluffo. Thank you, Mr. Congressman.
Without a doubt, I think it is important to look at it
across all modes of transportation and even beyond because
different modes of transportation are dependent upon critical
infrastructures outside of that particular domain.
Take PNT, GPS, some of the timing signaling, I think it is
very important that you look at it beyond that.
And one thing on the facial recognition piece that you
raise, I mean what did not come up yet today was also they were
the perpetrators behind one of the biggest hacks of all time,
of OPM. Everyone with security clearances, match that up with
fingerprints and then facial recognition, and you have got a
pretty big privacy nightmare on our hands.
Dr. Babin. Absolutely. All right. Well, thank you so much.
And, Mr. Galloway, as you know, China's Made in China 2025
initiative targets 10 major industries for global domination,
covering a range of critical industries such as rail equipment,
aerospace, maritime equipment, and many others. China's plan
involves far-reaching state support for these industries,
offering government subsidies, below-market financing, and a
range of other tools to advance China's state-owned entities at
the expense of domestic companies right here in the United
States.
In your opinion, what long-term solutions should the United
States implement to respond to China's anticompetitive
behavior?
Mr. Galloway. I think the challenge is long-term solutions
really reside in getting the state-owned enterprises to conform
to good corporate behavior and level the playing field here in
the U.S.
I think from a policy perspective it presents a unique
challenge because convincing a government to stop funding and
supporting their entities is something that goes against what
their objectives are here in the U.S. and globally.
There are certain tools I think that you have as a
congressional body in terms of helping to mitigate some of that
either through certain protectionist measurements, shoring up
things like Buy America or using other types of tactics to
target specific areas that are specifically susceptible to
anticompetitive and disruptive behavior here in the U.S.
But I think a lot of encouragement for direct investment in
building out supply chains and curbing the types of subsidies
and other concessionary financing and activities that the
state-owned enterprises are actually doing here and globally is
really the next step.
Dr. Babin. I think that is well said. And do you agree with
some of the initiatives that the administration is currently
doing in their negotiations with China to try to mitigate some
of these problems that you just said?
Mr. Galloway. I do agree with some of them. I think the
issue is holding firm and keeping a close eye and focus on
ensuring that the provisions that are attached to those types
of engagements and those types of policies are enforced, and
they are well designed in order to protect and preserve the
sanctity of the supply chain systems and the competitiveness
within our domestic economy.
Dr. Babin. Absolutely, and I am running out of time. I
could ask a lot more questions, but I will yield back. What is
it, 11 seconds?
Mr. DeFazio. I thank the gentleman. Again, we will spend it
wisely.
Representative Payne.
Mr. Payne. Thank you, Mr. Chairman, and I thank the ranking
member for having this hearing today.
Mr. Cilluffo, as you may be aware, New Jersey and my
district has been described as the two most dangerous miles in
America because of the chemical installations, seaport,
airport, rail, and interstate all coming together in a 2-mile
radius.
What do you see as potential cyber threats to the area
because of railcars manufactured by state-owned enterprises?
And what can be done to ensure safety?
Mr. Cilluffo. Thank you, Congressman. That is an excellent
question.
And when I highlighted the national critical functions
earlier, these are 55 designated issues that, if denigrated,
could have a debilitating effect on our national security
economy and the like.
And industrial control systems, whether from the chemical
side or from other sectors, share common vulnerabilities, and
that is something we would call a single point failure.
So I do think that what we need to start doing is racking
and stacking because we cannot get our arms around everything
all the time, and the last thing we want is the ``spread the
peanut butter'' approach where everything is even. We have got
to get the most important issues addressed first, and I would
put chemical and I would put, obviously, transportation on that
list, along with a handful of others, financial services,
defense, industrial base, telecommunications, water, and the
like.
So I do think that that is an important set of issues, and
from a rail, from a movement, absolutely that is something that
we should be concerned about.
Mr. Payne. Thank you.
Mr. Galloway, the U.S. is in a dire need, obviously, of
robust investment in our aging transportation infrastructure.
If this investment goes to railcars manufactured by state-owned
enterprises, would that impact the effectiveness of the
investment?
And how so?
Mr. Galloway. If I am hearing your question correctly, if
it is going into freight railcar manufacturing that would be
completed by state-owned enterprises, the disruption would be
significant.
And earlier in my testimony and what we have actually,
research at Oxford Economics, even $1 billion in freight
railcar manufacturing that would go to a state-owned
enterprise, and keep in mind $1 billion is only a fraction of
the size of the industry, you are looking at a potential loss
of 5,000 U.S. jobs, good-paying U.S. jobs, as well as $1.3
billion in U.S. GDP.
Because that value ripples through the economy, because the
supply chains are here, and you are keeping a lot of that
economic value retained here in the U.S., that is going to dry
up. That is going to go overseas.
Mr. Payne. And would those figures and statistics and jobs
continue at that level?
Mr. Galloway. If the investment would continue at that
level, yes, it would, and you can look at this as an additive
effect. It would double if it goes from $1 billion to $2
billion. It would triple going from $1 billion to $3 billion.
And these are annualized figures. So as that investment
would continue, that same disruption and that loss would
continue.
Mr. Payne. Thank you.
And, Mr. Chairman, I am going to yield back 1 minute and 15
seconds.
Mr. DeFazio. Thank you. I appreciate that.
Representative LaMalfa.
Mr. LaMalfa. I appreciate it, Mr. Chairman.
Thank you, witnesses. It has been a full-length hearing
here with many Members. I will just narrow my questions down a
little bit here to issues of security.
Mr. Cilluffo, the bottom line on the amount of data that a
Chinese company can be collecting on our transit systems, that
is fully expected to be sent back to mainland China and used in
their intel systems, right?
I mean, we fully expect that that is going to be.
Mr. Cilluffo. That is a major concern, yes. As General
Keith Alexander, then-Director of the National Security Agency,
referred to it as the greatest transfer of wealth in our
history. So intellectual property theft.
Mr. LaMalfa. There is no reason to believe that that will
not happen?
Mr. Cilluffo. No reason. I mean, obviously you want to
agnostic to everyone. You want to put in all the right security
controls you can and standards and most importantly, here is
the reality. The threat moves so fast, technology changes, that
you have got to be testing your systems all the time, red
teaming and looking for vulnerabilities.
I mean, if you legislate a law right now that tries to
handle security itself, not the importance of security, it is
going to be out of date by the time the ink dries. So you want
to consistently probe and test our systems, and that is maybe
where the mandate should be.
Mr. LaMalfa. To hack-proof them, et cetera?
Mr. Cilluffo. As much as you can hack-proof them, yes, or
at least minimize the impact and consequences when the
inevitable occurs. They are hacked.
Mr. LaMalfa. But if we are bringing them in to be the
manufacturers and installers of these----
Mr. Cilluffo. A big problem, yes.
Mr. LaMalfa [continuing]. Then they have free access. They
do not have to hack.
Mr. Cilluffo. That is the concern.
Mr. LaMalfa. There is no way we can ensure that.
Mr. Cilluffo. Yes.
Mr. LaMalfa. OK. Thank you.
Mr. Paul, when we are talking about, you know, railcars,
for example, any product built in China or ostensibly starts to
be built in China and only assembled here, let's talk about
railcars, and I will also throw this to Mr. Washington, as
well.
You know, bottom line, if the bidders are looking for
savings involved by using Chinese-made products over American
made, what kind of savings percentage-wise or dollar-wise are
you looking at for a transit railcar?
What are you really saving at the end of the day?
And I come from northern California where only a couple of
hours from me is the Bay Bridge, which, you know, the cost
overruns on that were something else.
Mr. Paul. Right.
Mr. LaMalfa. But also immediately as they are building it
or immediately after it was deemed ready, they are talking
about quality issues with bolts and type of metal and the way
the metal was initially manufactured.
So, you know, compare all of those things please.
Mr. Paul. Yes. And I specifically remember the Bay Bridge
example because California taxpayers essentially subsidized an
enterprise in China in Shenjian to begin a bridge building
exercise that resulted in cost overruns and delays and
ultimately did not deliver what it promised.
With respect to CRRC----
Mr. LaMalfa. I know people that will not drive across the
bridge.
Mr. Paul. Yes.
Mr. LaMalfa. I mean, I am not scared, but you know.
Mr. Paul. In addition to the traffic, the safety.
Mr. LaMalfa. Yes.
Mr. Paul. So CRRC entered the U.S. market a few years ago
first in Massachusetts, and it won a contract after combining
with another company, another Chinese-owned company that was
disqualified from the bidding process, and it undercut every
bidder.
It then quickly secured contracts in Philadelphia and
Chicago, in Los Angeles, and I think the representative from
Los Angeles said that the bid could have been 10 percent under.
In some cases, it was tens of millions or even hundreds of
millions of dollars less than the next lowest bidder.
And CRRC was able to do this because it is a loss leader.
This is not a profit-making enterprise. This is a tool of
Chinese state power designed to build an industrial capacity
and dominate a market.
Mr. LaMalfa. I am going to run out of time here real
quickly. So bottom line, and then Mr. Washington, what initial
savings for those that are tempted by that bid would they see?
Just a few seconds, please.
Mr. Paul. Well, on paper----
Mr. LaMalfa. Just a rough number here.
Mr. Paul [continuing]. It could be up to 30 or 40 percent.
Mr. LaMalfa. Yes, yes.
Mr. Paul. That may not be the case down the road, as you
mentioned, but it can be quite sizable.
Mr. LaMalfa. OK. Mr. Washington, please.
Mr. Washington. Yes, I would just say that, first of all,
current Federal procurement rules do not allow public agencies
to disqualify a CRRC or an SOE or an SOE-influenced agency.
I would also say, and I mentioned earlier that the delta
between the CRRC and the second bidder was between 5 and 10
percent. It was actually 3.5 percent.
But I think in our case that savings or that delta was not
very big.
Mr. LaMalfa. Was not what?
Mr. Washington. Not very large, 3.5 percent.
Mr. LaMalfa. Very, very little. OK.
Mr. Chairman, thank you.
Mr. DeFazio. I thank the gentleman.
I just again do a little editorial comment at this point
since you raised the new Oakland Bay Bridge. When I chaired the
Highways and Transit Subcommittee back in probably 2008 or
2009, I held a hearing on that procurement, and we had the
successful bidder sitting right there, and he had bid the U.S.
side and the China side.
And I said to him, ``Well, how is it that, you know, do
they have the capability of building this bridge in China?'' I
said, ``I am not aware, you know, because of the innovative
design.''
He said, ``Oh, no. No,'' he said, ``I am going to build a
factory over there.''
And I said to him, ``Well, what if I tightened up the Buy
America?''
He said, ``Oh, I would build a factory here.''
That is on the record. I mean, just pathetic what we have
done.
With that, Representative Malinowski.
Mr. Malinowski. Thank you, Mr. Chairman.
As a predicate to my question, let me make a couple of
comments. First of all, China is setting up the most
sophisticated surveillance state in human history. If you live
in China, particularly in a sensitive area, we are at a point
where the government is essentially tracking your movements 24/
7 through apps installed on your phone and, of course,
surveillance cameras that are everywhere with facial
recognition that is getting better and better.
Number two, we are seeing that China, among other
countries, is increasingly brazen in extending the tentacles of
its repressive apparatus to other countries. Just last week we
saw Amnesty International could not rent office space in New
York City because a Chinese state-owned enterprise owned the
building and told them no.
In New York City, we had a Canadian Member of Parliament
using a WeChat page to communicate with her Chinese-Canadian
constituents, and her messages, her posts were being taken down
by the Chinese Government in Canada.
More to the point we have thousands and thousands and
thousands of Chinese-Americans living in the United States,
many of whom have taken refuge in this country, many of whom
are dissidents. They are critics of the Chinese Government, and
in the last couple of years more and more reports of Chinese
agents in the United States directly confronting them,
threatening them, of course, threatening their family members
still back home in China.
So these are people, not hypothetical. These are people in
the United States that are persons of great interest to the
Chinese Government today.
Now, General, I wanted to ask you. Describe how China could
use the fact that it is manufacturing train railcars, investing
in mass transit in the United States, to follow these people
and enable harassment of these people.
General Adams. I am sure that it is the case that one of
the most interesting demographics for the United States for
Chinese intelligence is Chinese ex-pats, American citizens
whose families come from China, Americans who have emigrated
from China and are now contributing to our economy,
contributing to our society. Welcome American citizens.
I am sure that that is one of their targets.
Mr. Malinowski. And they would have an interest in tracking
them increasingly in real time to the extent that they can, and
of course, Wi-Fi signals intercepting communications and so
forth.
General Adams. It is like putting an antenna for their
intelligence collection systems in every major city in the
country, assuming that this dynamic continues.
But they have already got those antennae in some of the
largest cities in our country, and I am sure they will use it
for that.
If I may, strategically, one of the hardest things to do,
you have to know the capabilities of the adversary. The hardest
thing to do is to find the intentions of the adversary for us
as well as our adversaries.
We look at each other all the time. China is developing the
capability in bounds to collect against us, to collect against
whatever targets they want. Giving them attack surfaces of our
transit railcars is a gift to them.
The same thing with freight rail, much more strategic, much
more logistically challenging for us because, again, it is our
strategic asset, but we need to understand that what they
really want to know is our intent, and the more detailed, the
more fidelity they have, let's say, on the Chinese-American
demographic, let's say on our demographic right here in this
room; the more detail they have on who we are and what our
intents are, the more full their intel picture of the United
States is going to be.
Mr. Malinowski. Well, that is the national security risk,
and what I am suggesting is that there is a very real personal
danger to people living in the United States who are American
citizens who have ties to China.
And this, of course, could perhaps extend to other
dictatorships. China is the head of a club of autocrats and
could share this intelligence with the Egyptians, the
Pakistanis, others who may have similar interests.
The ultimate question for me then is: what are the
safeguards, if any?
Are there technical safeguards short of simply not allowing
Chinese investment in these sectors that would enable us,
setting aside the economic questions that you all raise, but
looking strictly at the national security and privacy concerns;
are there technical safeguards that could be applied to the
importation of railcars, buses, automobiles, which we have not
mentioned, but of course could pose similar concerns, or is the
only safeguard simply not accepting the investment?
General Adams. If we want to avoid the risk, then we need
to not accept the investment. If we want to manage the risk,
then there are some things we can do short of prohibiting it.
We have techniques that we can use to mitigate
cybersecurity vulnerabilities, but we are going to have to
manage it no matter what, whether it is completely cutting it
off or using the technical measures that we have to detect
transmission of signals, for example.
But, again, the best way to manage risk is to avoid it.
Mr. Cilluffo. Congressman, can I add one very quick point
to this, very, very quick? And I have got a flight to catch so
I do so at my own peril here.
But the reality is agnostic to the perpetrator. We have a
responsibility to do more from a cybersecurity standpoint
because that attack surface is growing exponentially whether it
is China-driven or anything else.
So I would argue that there are a lot of steps that can and
should be taken. I just do not want that heavy regulatory
hammer alone to be driving all that. We need to test our
vulnerabilities and test systems within systems.
Mr. DeFazio. Mr. Garamendi.
Mr. Garamendi. Thank you, Mr. Chairman.
As you know and those who have followed my time here in
Congress, make it in America has been my theme, multiple pieces
of legislation over the years and more than enough talking,
well, maybe not enough talking.
We have been somewhat successful. We have increased the Buy
American percentage for the highway transit to I think it will
be 70 percent. I tried to cut back on some of the loopholes
that are there.
We have a piece of legislation before us today, Mr. Rouda's
legislation, that goes directly to the heart of unfair
competition.
The Chinese state enterprises as been discussed repeatedly
by Members as well as our witnesses, make it very, very clear
that competing with the state-owned enterprises in China is not
a market-based system. It has nothing to do with that.
And as long as that system of state-owned enterprises
exists, we need laws here in the United States to say, no, you
cannot enter the American market.
Now, much of the discussion that the President is engaged
in with tariffs misses this key point and, frankly, he would be
better off dealing with it directly as Mr. Rouda's legislation
does.
I do have a couple of things that I want to bring out. We
do have laws. We have the Clayton and the Sherman Antitrust
Act. There is a right of private lawsuits that could and should
be brought by those that have been harmed by the unfair
predatory pricing.
I would suggest that there is a triple penalty. So if you
find that it has cost you $1, the penalty can be $3. You ought
to take a look at that.
Secondly, this is a question for Mr. Washington. I think
you dealt with this at least in part, and I want to come back
to it.
Do the Federal transit procurement rules allow an agency,
such as yours, to reject a bid due to cybersecurity concerns,
say, by the Chinese state-controlled company like CRRC?
Mr. Washington. They do not. Currently, the Federal
procurement rules do not allow public agencies to disqualify a,
in this case, a CRRC or a BYD. To my knowledge, only Congress
can do that, and I would----
Mr. Garamendi. Well--excuse me. Please complete.
Mr. Washington. And I would just also add one thing.
Transit agencies need guidance in this area because the
increased need for railcars and many of the areas around the
country as referendums are being approved is upon us.
Mr. Garamendi. I appreciate that, and it sounds like there
ought to be law.
And, in fact, there is a law that at least goes partway
towards dealing with this, and that is Mr. Rouda's law that
says that if the cybersecurity concerns cannot be addressed,
then that particular company or that particular bid must be
rejected.
And so it does go directly to that, and I draw that to the
attention of those of us who will be voting on this eventually.
And I am proud to be an original cosponsor of that legislation.
My final point really deals with another piece of
legislation that we are dealing with, and that is to extend the
Buy America requirements to the entire infrastructure package
that may eventually emerge from this committee. And so it is
everything from pipes to pumps and broadband and other
activities that hopefully will be part of a very rich and
successful piece of legislation.
Apparently, the President is going to suggest how we might
pay for it. That would be helpful, but along the way, that bill
has been introduced by, will be introduced by Senator Baldwin
over in the Senate side, and I will be introducing it here on
this side in the next few days. I draw the attention of the
committee and anybody that is interested in extending the Buy
America to all money that the Federal Government would be
spending on infrastructure writ large.
A most unusual event, I am yielding back time.
Mr. DeFazio. I thank the gentleman.
I just take the opportunity on his time to say, you know, I
am determined. I got us to move to 70 percent American content,
but I was not successful in getting amendments to how you
classify components, subcomponent, systems, et cetera, et
cetera.
It is very complicated, but clearly, the loophole that BYD
is using in this case to get to the value that theoretically
they are eligible.
So I really thank the gentleman for his initiative, and
there are some very specific places where we need to apply
that.
So with that, I would turn to the gentleman, Mr. Johnson.
Mr. Johnson of Georgia. Thank you, Mr. Chairman.
Mr. Paul, your testimony and several others who have
submitted testimony today express clear concern that the CRRC
is intentionally seeking to dominate our Nation's transit rail
sector. With the completion of several U.S. public transit
projects already, CRRC has postured itself to be a dominant
competitor in our transit and railcar manufacturing industry.
Do you anticipate that CRRC will make a gradual impact on
our rail sector or can we expect a more dramatic and swifter
impact?
Mr. Paul. Mr. Johnson, it is a terrific question.
It has already altered the landscape. There is no question
about that, and it is winning approximately three out of every
four transit awards.
Atlanta is actually an exception to that, but they are
making substantial progress, again, by offering prices that are
essentially loss leading.
The ultimate result of all of this is going to be reduced
competition. That is, its competitors, the incumbent firms like
Hyundai, Kawasaki, Alstom, the others, will exit the market if
they are not winning awards.
And so there is a combination of tools that are available,
I think, to both make the experience better for local transit
agencies and for taxpayers as well.
One of those is obviously to create a level playing field
for the bidding. The incumbent companies are simply not
competing against another company in CRRC. They are competing
against a country. That is the issue that the TIVSA would
alleviate.
The other issue----
Mr. Johnson of Georgia. So how do you level that playing
field?
Mr. Paul. How do you level that playing field? Well, that
would exclude state-owned enterprises from competing for the
contracts, and so CRRC would need to divest itself of its
interest in the Chinese Government or find another buyer for
its assets.
The other issue, and I think this is an important one, is
the size of the transit spend, and that has been an impediment
for many firms to stay engaged in the U.S. market.
And so I am hoping as part of this infrastructure
conversation that the Congress is having with the White House
that there will be a robust, sustained commitment to building
out transit rail infrastructure in the United States that is
going to send a signal to these firms that it can stay in these
markets, invest in these workers, invest in capital.
And I think that is the ultimate outcome that we would like
to see.
Mr. Johnson of Georgia. Thank you.
Mr. Cilluffo, the integration of Chinese technology into
our transit network is intertwined with national security. With
the implementation of GPS, safety features, Wi-Fi systems, and
numerous other nuanced technologies, China gains considerable
access to gather intelligence.
Do you believe that this requires hyper vigilance from our
intelligence community?
And I would like for you to answer also, General Adams.
Mr. Cilluffo. Congressman Johnson, without a doubt, and the
good news is if you look at the number of industrial and
economic espionage cases and if you look at the cyber espionage
cases in particular, they are heavily focused on the People's
Republic of China and their intentions because that is where a
lot of the activity is.
They are by no means the only player we have to worry about
or actor we have to worry about, but the good news is that
awareness is high. The bad news is that awareness is high
because there is a whole lot of activity going on.
Mr. Johnson of Georgia. General Adams.
General Adams. Yes, sir, we do need to be hyper vigilant,
and as I said before, by the time we detect a threat from
cybersecurity, it is already too late.
The Chinese are not interested in telegraphing their
intent. Good for us, they actually have. We know they want to
conquer the global freight rail market, and it is good to see
this level of interest from Congress because it supports our
intelligence community's hyper interest in this dynamic as
well.
So thank you.
Mr. Johnson of Georgia. Thank you.
I want to thank all of the witnesses for their testimony,
and I also want to thank Chairman DeFazio for holding this very
important hearing today on how we can protect our Nation's rail
infrastructure.
With that I yield back.
Mr. DeFazio. I thank the gentleman.
Representative Miller.
Mrs. Miller. Thank you, Chairman DeFazio and Ranking Member
Graves, and thank all of you all for being here today.
Mr. DeFazio. Mr. Cilluffo, if you need to get a plane, go.
They do not hold planes for me and they are not going to hold
it for you.
[Laughter.]
Mr. Cilluffo. I apologize. Thank you.
Mrs. Miller. Be safe.
It is of the utmost importance that we continue to focus on
stabilizing our domestic industries by preventing unfair
business practices. We know that anticompetitive business
practices among the SOEs could damage private-sector railcars
manufacturing and create an imbalance, leading to the loss of
jobs in the United States.
The railcar manufacturing industry is one that we must
protect.
Mr. Galloway, I enjoyed your quote on the internal
structure of how a competitive market is supposed to work. The
advantages given to state-owned enterprises threaten to
undermine the benefits gained from fair competition in true
private-sector productions, such as improving efficiency and
technological advancement.
You state that the anticompetitive practices displace
private-sector competitors causing a domino effect throughout
the United States supply chains and the business owners,
workers, and families who rely on them.
What are some ways in which Congress can improve oversight
to ensure that state-owned enterprises do not upset our rail
economy?
Mr. Galloway. I think from a policy perspective and an
action perspective, ensuring that state-owned enterprises are
behaving as good corporate citizens, they are making the
investments necessary in the U.S. to produce goods here in the
U.S. rather than offshoring their supply chains and their goods
production back to the Chinese economy or elsewhere is critical
to maintaining that level playing field.
Unfortunately, under the current structure of SOEs, that is
very unlikely to occur.
And not being a policymaker, I am uncertain on what the
best path forward would be to ensure that if CRRC is going to
operate here in the U.S. and is going to provide railcars, that
they are doing it above board and they are doing it as a good
corporate citizen, short of preventing them from actually
operating here in the U.S. to begin with.
Mrs. Miller. What is the future of the world market if this
behavior continues?
Mr. Galloway. Oh, I think we are already seeing what the
future of the world market is, which is heavy displacement of
domestic railcar manufacturing in many different countries.
I cited earlier the Australian example where the freight
railcar manufacturing sector has been completely decimated, and
then the last remaining producer moved their operations to
China in order to compete with Chinese firms, with CRRC.
So and you are seeing this type of cascading effect across
a lot of other markets, both developed and developing, where
there were railcar sectors that existed that are no longer the
case.
Mrs. Miller. Thank you.
Mr. Washington, what are the top issues that you are
dealing with as a transit agency with foreign companies that
bid and operate here?
Mr. Washington. Well, I think one of the top issues is
making sure that they invest in the local area, which is why we
included in the evaluation criteria local employment plans and
local employment requirements.
I think the other big thing is suppliers, as well. Having
suppliers near or in close proximity in this case to final
assembly plants is very, very important as well. I see those as
some of the top challenges.
Mrs. Miller. Would those suppliers be locally owned as
well?
Mr. Washington. Pardon me?
Mrs. Miller. Would the suppliers be locally owned?
Mr. Washington. The suppliers can be locally owned, yes. We
prefer that. We definitely prefer that, which is why I said in
my statement the idea that we need to stand up our own
passenger railcar manufacturing facility in this country,
slash, an industrial yard with suppliers located there as well.
Mrs. Miller. OK. Thank you.
I yield back my time.
Mr. DeFazio. I thank the gentlelady.
Seeing no other Members prepared to ask questions, I would
thank all of the members of the panel for their interesting and
instructive testimony and the amount of time you devoted to us
today.
This is a critical issue, and thank you for being here.
With that the committee stands adjourned.
[Whereupon, at 12:51 p.m., the committee was adjourned.]
Submissions for the Record
----------
Prepared Statement of Hon. Daniel Lipinski, a Representative in
Congress from the State of Illinois, and Chair, Subcommittee on
Railroads, Pipelines, and Hazardous Materials
Thank you Chairman DeFazio and Ranking Member Graves for holding
this important hearing about the ``The Impact of Foreign State-Owned
Enterprises on the U.S. Public Transit and Freight Rail Sectors.''
As we will hear today from our witnesses and from many of our
members including myself, the entry of Chinese State Owned Enterprises
has made a lot of companies and public policy makers concerned. Since
2015, the China Railroad Rolling Stock Corporation also known as CRRC
has won four large transit rail rolling stock contracts with public
transit agencies in the United States, including in my home region of
Chicago. Furthermore, recent media reports indicate they may bid on
several more contracts, including WMATA, the New York City Subway and
possible my home commuter railroad, Metra.
Let me be clear about my own views on the issue. The entry of
Chinese State Owned Enterprises into this country is a huge threat to
America's economic livelihood and national security.
Chinese State Owned Enterprises are a very different entity than a
typical foreign corporation. In my mind, there absolutely is a huge
difference between CRRC and Stadler for example. CRRC is controlled by
a government that is competing with us economically, in many cases
unfairly, and poses a potential substantial military threat. Last time
I checked Mr. Chairman, Stadler was not controlled by the Swiss
Government nor are we worried about the Swiss Government threatening
the United States economically or militarily.
I want to note I am cognizant of the workers at CRRC's factories in
Chicago and elsewhere. These factories do provide well-paying jobs to
hundreds of workers and I understand from the local unions that CRRC
has treated these workers and their unions well. So in this process, we
should not forget that these workers are our constituents or that our
actions could affect their livelihoods and families.
However, we can't turn a blind eye to this threat and assume that
CRRC or China will continue to play by the rules. The Chinese
government has a terrible record when it comes to respecting workers
rights or competing fairly economically. As General Adams notes in his
testimony, the Chinese Government has a ``Made in China 2025''
initiative, a key component of China's 13th Five-Year plan, and
identifies the rail manufacturing sector as a top target for Chinese
expansion. We should absolutely assume that the ultimate goal of CRRC
or the Chinese government is to move into the US freight market and
that should scare us all. One only has to look at our domestic steel
market and the closing of steel plants in communities all across this
country and the tremendous hardship that has resulted to see what
happens when China decides they want to enter a market and compete
unfairly.
According to testimony we will hear today from Hamilton Galloway,
the rail supply industry supports 650,000 mostly middle-income jobs,
$74 billion in U.S. GDP and contributes nearly $17 billion to federal,
state and local taxes. Highlighting the importance of the railway
supply industry in this country, my home region of Chicago has lot of
railway suppliers that keep our American manufacturing strong and
employ thousands of Chicagoans. I have heard strong concerns from these
companies about their ability to compete with unfairly subsidized state
owned entities, and we absolutely need to be forward thinking and
address this potential threat.
As Mr. Galloway's testimony indicates, even if a state-owned rail
manufacturer adds some jobs, the likely overall effect in the future is
a significant decrease in jobs as the domestic supply chain is wiped
out and most production is outsourced to where the state owned
enterprise is located, say China. The potential future degradation of
our domestic supply chain is something we are facing right now.
It is true that there are no American based manufacturers of
transit rolling stock. However, that does not mean we should just give
up and start accepting corporations controlled by foreign governments
that may be adversaries to us both militarily and economically. I
appreciate Mr. Washington's testimony that he would like to see to see
the associated design and innovation related to rolling stock occur in
the United States. I share that same goal. However, I fail to see how
our transit agencies selecting Chinese state enterprises with a history
of undercutting bids from other companies using Chinese state subsidies
takes us closer to that goal. If anything, it drastically reduces the
chances that we will create a thriving domestic market for rolling
stock.
So above all, we need to be focused on protecting our domestic
freight supplier industry and also figuring out how to create a
thriving domestic transit and bus rolling stock industry right here in
the United States.
I look forward to hearing from our witnesses and other members on
how we can accomplish these two critical goals.
Thank you again Mr. Chairman for holding this important hearing and
I yield back the balance of my time.
E-mail Submitted for the Record by Hon. Crawford
Information provided by the Federal Transit Administration re:
Federal funds used in CRRC contracts.
On 5/16/19, 3:47 PM, ``Webb, Kate (FTA)'' <
@dot.gov> wrote:
Hi Jay,
My apologies for the delayed response. I don't have a formal table
but I can tell you that .the following transit agencies have used
federal funding to purchase CRCC [sic] subway cars:
Chicago Transit Authority (CTA)
Southeastern Pennsylvania Transportation Authority (SEPTA)
Los Angeles County Metropolitan Transportation Authority
(LACMTA)
None of the ordered cars have yet entered into service.
Please let us know if you have any questions.
Kate
Kate Webb,
Office of Communications and Congressional Affairs, Federal Transit
Administration, Washington, DC 20590
Letter from Scott N. Paul, President, Alliance for American
Manufacturing, Submitted for the Record by Hon. DeFazio
May 29, 2019.
Support H.R. 2739, the Transit Infrastructure Vehicle Security Act
aam supports rouda-crawford-perry-granger-ryan-holmes norton-weber-
garamendi bipartisan legislation to prohibit federal funds going to
chinese-owned, controlled or subsidized rail car or bus manufacturers
Dear Representatives:
On behalf of the Alliance for American Manufacturing (AAM), a
partnership between the United Steelworkers (USW) and leading U.S.
manufacturing companies, I am writing to express our support for H.R.
2739, the Transit Infrastructure Vehicle Security Act (TIVSA). This
bicameral, bipartisan legislation would ban Federal Transit
Administration (FTA) funds from being used to award a contract or
subcontract to a Chinese state-owned, controlled, or subsidized
enterprise.
Backed by deep government support and Beijing's ``Made in China
2025'' initiative, China's electric bus and rail state-owned
enterprises (SOEs) are rapidly altering the U.S. competitive landscape
for rolling stock manufacturing. This is having a profoundly negative
impact on established, private-sector U.S. firms and jeopardizing
supply chains that employ tens of thousands of American workers.
China Railroad Rolling Stock Corporation (CRRC)--a Chinese SOE--has
drastically altered the competitive landscape for domestic railcar
manufacturing. Since 2014, CRRC has secured major metro transit car
contracts in Boston, Philadelphia, Los Angeles, and Chicago with
impossibly low bids. In Boston, CRRC's bid was hundreds of millions of
dollars below the next lowest bidder. In Philadelphia, another bidder
was quoted as saying, ``I cannot grasp how they are able to do it at
that cost.'' There should be no doubting CRRC's strategy to establish
itself in the U.S. market and to eliminate legitimate competition
through any means necessary, even if it means losing substantial sums
of money along the way. With potential deals in Washington, DC and New
York City in CRRC's sights, it is vital for U.S. national security,
innovation, and jobs that we stop subsidizing the destruction of our
domestic rolling stock manufacturing base with federal dollars.
The electric bus industry is also in Beijing's sights. BYD, or
Build Your Dreams, assembles electric buses in the United States and is
both influenced and subsidized by the Chinese government. BYD has been
plagued by quality issues and a recent OIG investigation by the City of
Albuquerque suggests that ``the majority, if not all, parts were
manufactured in China and shipped to the United States''--including the
bus frame, chassis, walls, drive train, axels, motor, lights, seating
and seat belts, and more. BYD not only aggressively undermines healthy
market competition in the electric bus procurement market, it threatens
to displace supply chains here in the United States with imported parts
and components shipped in from China.
It is vital that the United States act to prevent the destruction
of the U.S. competitive landscape for rolling stock manufacturing
before it is too late. America's tax dollars should not be used to
support Chinese state-owned firms seeking to undermine market
competition. Please support the bipartisan, bicameral Transit
Infrastructure Vehicle Security Act.
Sincerely,
Scott N. Paul
President
Letter from Lonnie R. Stephenson, International President,
International Brotherhood of Electrical Workers, Submitted for the
Record by Hon. DeFazio
May 15, 2019.
Hon. Peter A. DeFazio
Chairman
Committee on Transportation and Infrastructure, U.S. House of
Representatives, Washington, DC 20515
Hon. Sam Graves
Ranking Member
Committee on Transportation and Infrastructure, U.S. House of
Representatives, Washington, DC 20515
Dear Chairman DeFazio and Ranking Member Graves:
On behalf of the 775,000 active and retired members of the
International Brotherhood of Electrical Workers (IBEW), I am writing
regarding your committee's May 16, 2019, hearing on ``The Impacts of
State-Owned Enterprises on Public Transit and Freight Rail Sectors.``
The IBEW is concerned that Congress may pursue legislation that will
deny federal funds and will directly result in the loss of hundreds of
jobs for our members who are employed by CRRC Sifang America in
Chicago, Illinois and CRRC MA in Springfield, Massachusetts.
Several years ago, the IBEW and the International Association of
Sheet Metal, Air, Rail and Transportation Workers (SMART) began a
working relationship with CRRC, a China-based rolling stock
manufacturer to build railcars in the United States. I had the
opportunity to visit CRRC's work firsthand as a part of an IBEW
delegation trip to China. CRRC made a commitment to manufacture transit
cars in the United States and hire American workers at competitive
salaries and benefits.
This investment has been further shown by the opening of CRRC's
facility near the site of the historic Pullman Company factory in
Chicago's South Side. In Chicago, part of the negotiated package
resulted in historic community benefits agreements that not only
targeted local workers but committed the company to hiring military
veterans, women, the formerly incarcerated and communities of color. As
a result, $4 million in federal funds were awarded to community
colleges, junior colleges and technical training programs, all to build
training for the transportation manufacturing sector where none had
previously existed.
In recent years, dozens of IBEW members have traveled to China to
be trained in CRRC's leading manufacturing practices and bring these
skills back to the United States. Today, our partnership manufactures
world class railcars for several of our nation's largest public transit
systems, including the Chicago Transit Authority (CTA), Los Angeles
County Metropolitan Transportation Authority (LA Metro), Massachusetts
Bay Transportation Authority (MBTA), and Southeastern Pennsylvania
Transportation Authority (SEPTA).
The decline of American manufacturing over the past four decades
has been a major blow to the IBEW and its membership. Forty years ago,
the IBEW had over 400,000 members in the manufacturing sector, proudly
building goods for American consumers and the global market. These
manufacturing jobs provided wages and benefits that would support a
family and sustain communities through the United States. Today, the
IBEW only has 30,000 members in manufacturing, a 93 percent decline.
When CRRC approached IBEW about a partnership to build railcars in the
United States, we saw this as an opportunity to bring manufacturing
jobs back to communities in Chicago and Springfield that have suffered
from years of deindustrialization.
The IBEW hopes to strengthen its relationship with CRRC moving
forward and increase domestic railcar manufacturing made by union
labor. However, we are aware of the criticism by CRRC's competitors and
the increasing attention of CRRC's growing footprint within the halls
of Congress. I want to be clear that the IBEW is sensitive to the
cybersecurity concerns raised by some regarding CRRC transit cars and
has no issue with Congress passing legislation that would ensure the
security of hardware and software components of railcars and other
rolling stock. Adoption of the Transit Infrastructure Vehicle Security
Act (S. 846) or similar legislation, however, would result in the
closure of CRRC's two manufacturing facilities, leading to the loss of
400 family-supporting union jobs at the Chicago and Springfield sites,
without any assurance that future railcar manufacturing will be done
domestically or through a U.S.-owned company.
The IBEW asks that the House Committee on Transportation and
Infrastructure take a comprehensive view of the current state of
domestic manufacturing in the United States and to consider
alternatives before adopting legislation like the Transit
Infrastructure Vehicle Security Act. Furthermore, before the Committee
on Transportation and Infrastructure takes legislative action, we ask
committee members to consider two important questions:
First, if Congress takes action to close CRRC's railcar facilities,
how will the workers at these factories be made whole?
Second, if legislation is enacted to close the CRRC facilities,
what will Congress do to ensure that future railcar manufacturing is
done in the United States by American workers earning family-supporting
wages and benefits? Otherwise, future transit cars will most likely be
made by a different foreign-owned company with no assurance of creating
more or higher quality jobs than what CRRC is already providing.
The IBEW looks forward to working with the House Committee on
Transportation and Infrastructure on this important matter.
Sincerely yours,
Lonnie R. Stephenson
International President
Copy to all Members of the U.S. House Committee on Transportation &
Infrastructure
Statement of the Railway Supply Institute, Submitted for the Record by
Hon. DeFazio
The Railway Supply Institute (RSI) is an international trade
association representing more than 200 companies involved in the
manufacture of goods and services in the locomotive, freight car,
maintenance of way, communications and signaling and passenger rail
industries. RSI members provide critical products to Class I and short
line railroads, shippers, Amtrak, and transit authorities nationwide
and work with these customers to create new products or services that
drive enhancements in safety and efficiency across their networks.
While our members have a strong presence across the United States,
they market their products around the world and have complex global
supply chains that support these manufacturing operations. Our members
are seeing increased government intervention in the global rail
marketplace. Foreign governments sometimes impose technology transfer
requirements--directly or indirectly--as a prerequisite to granting
investment approvals or market access. A Chinese-owned State-Owned
Enterprise (SOE) called CRRC has also identified rail manufacturing as
a strategic market sector and made clear their intention to dominate
the global railway supply and rolling stock market. Here in the United
States, CRRC and its affiliates have leveraged state-backed financing
and below-market loan rates to secure $2.6 billion in railcar contracts
for commuter agencies in Boston, Chicago, Los Angeles and Philadelphia,
with other contracts pending including one in Washington, D.C. The
company has won these contracts by as much as thirty percent below the
next lowest bid, raising significant questions about whether these are
market-based offerings.
Allowing a SOE to continue these activities creates both economic
and national security concerns. These actions are already undermining a
$74 billion dollar \1\ a year industry with current American rail
supply manufacturers concerned that more SOE involvement will lead to a
loss of domestic manufacturing and a reduction in American jobs. This
also has long term national security impacts as demonstrated in
Australia with the complete takeover by an SOE of the Australian
domestic market and its capability to build both passenger and freight
rail cars. America's rail system covers more than 140,000 miles and
carries forty percent of America's intercity freight, including 111
million tons per year of hazardous materials. Allowing a foreign,
state-backed entity to increase direct investment in our nation's
critical infrastructure, particularly projects utilizing federal
funding, creates significant economic and national security concerns.
Therefore, RSI supports H.R. 2739, the Transit Infrastructure Vehicle
Security Act. H.R. 2739 would prohibit transit agencies from using
federal dollars to acquire rolling stock produced by a company that is
owned, controlled, or subsidized by any country with a non-market
economy. In addition, it would ensure that transit agencies develop and
execute a cybersecurity plan.
---------------------------------------------------------------------------
\1\ Tracking the Power of Rail Supply, The Economic Impact of
Railway Suppliers in the U.S.: 5. September 2018
---------------------------------------------------------------------------
During the hearing on May 16, there was discussion regarding the
``lack of a U.S. manufacturer'' of passenger railcars and that all
manufacturers are foreign-owned. As you may know, there are thousands
of U.S.-based employees who work for foreign-owned companies that
manufacture passenger railcars or their components here in the U.S. in
full compliance with Buy America requirements. In September 2018,
Tracking the Power of Rail Supply: The Economic Impact of Rail
Suppliers in the U.S. was released as a major new study that quantifies
the economic and workforce impact of the products and services produced
by the railway supply industry in the U.S. RSI, partnering with the
Railway Engineering-Maintenance Suppliers Association (REMSA), Railway
Systems Suppliers, Inc. (RSSI) and Railway Tie Association (RTA)
commissioned Oxford Economics to develop the report. It highlights the
importance of the industry to the U.S. economy in terms of jobs, tax
revenue, and gross domestic product (GDP) on both the state and
national level. The economic contribution of the railway supply
industry in 2017 amounted to more than $74.2 billion in GDP, as well as
$16.9 billion in taxes to local, state and federal governments. Workers
in the industry are highly productive, and wages reflect this at
$78,800 annual income on average, placing them well above the median
income earners in most states. In total, the railway supply industry
directly employs more than 125,000 people in manufacturing, repair,
maintenance, and leasing, among others. In addition, for each worker
directly employed by the railway supply industry, a further 4.2 jobs
are supported in the wider economy, either in the supply chains of
railway suppliers or through the wage spending of those employed by the
firms themselves or in their supply chains. On average, these indirect
and induced jobs pay an average annual salary of $63,980.
This study solidifies that the U.S.-based domestic rail supply
industry delivers well-paying jobs across the country. In the passenger
rail sector, much of this is possible because of the Buy America
program, which was created to promote U.S. manufacturing and help the
domestic economy by creating jobs for Americans. Several of the foreign
owned companies employing these manufacturing jobs here in the U.S. are
finding it very difficult to compete against a SOE that receives
significant support from their government and often are only assembling
(versus manufacturing) their railcars here in the U.S. By design, Buy
America laws were written to ensure that public transportation funds
are used to create American jobs constructing and manufacturing our
public transportation systems, rail cars, and buses here in the U.S.
RSI member companies have played by the rules and built their business
models to comply with Buy America, however having one SOE dominate the
market and establish a heavy foothold that spans the United States has
raised many red flags. The U.S. DOT should be directed to ensure that
strict enforcement of existing Buy America provisions is occurring to
help ensure that public investments in passenger rail lead to domestic
jobs. It is critical to the continued health of American manufacturing.
Finally, several members of the committee highlighted the
importance of robust, consistent federal funding for passenger rail,
both to improve the efficiency and productivity of the nation's rail
network and incentivize companies that follow Buy America requirements
to invest in the United States. We agree. Increased public investments,
coupled with policies that incentivize private investments, could
relieve major bottlenecks and chokepoints and increase track, tunnel,
bridge and station capacity across the passenger and freight rail
system.
Thank you for consideration of our comments. We look forward to
working with the House Transportation & Infrastructure Committee as we
continue to look for ways to innovate, enhance and promote investment
in rail infrastructure.
Letter from Jeffrey D. Knueppel, General Manager, Southeastern
Pennsylvania Transportation Authority, Submitted for the Record by Hon.
DeFazio
May 22, 2019.
Hon. Peter A. DeFazio
Chairman
Committee on Transportation and Infrastructure, U.S. House of
Representatives, Washington, DC 20515
Hon. Sam Graves
Ranking Member
Committee on Transportation and Infrastructure, U.S. House of
Representatives, Washington, DC 20515
Dear Chairman DeFazio and Ranking Member Graves:
The House Transportation and Infrastructure Committee hearing last
Thursday on The Impacts of State Owned Enterprises on Public Transit
and Freight Rail Sectors provided Congress an opportunity to continue
evaluating how best to balance the needs of transit agencies to replace
aging vehicles together with domestic manufacturing interests. Given
the Southeastern Pennsylvania Transportation Authority's (SEPTA)
significant rail vehicle replacement needs, we appreciate the
Committee's thoughtful consideration of this important subject, and I
respectfully request that the following information be added to the
hearing record.
With a consistently constrained capital budget, access to a broad
marketplace for rolling stock, materials and services has been critical
to ensuring the best product at the most competitive price for SEPTA
and its funding partners, including state and federal taxpayers. SEPTA
is proud to rely on the skill and expertise of hundreds of American
businesses--large and small--to ensure safe and efficient mass transit
service for the one million riders who depend on SEPTA every day. Over
the last five years, alone, SEPTA's domestic procurement has exceeded
$3.5 billion, including more than $1 billion from Pennsylvania
companies.
SEPTA's railcar procurement needs are significant. More than 37
percent--roughly $1.7 billion--of SEPTA's $4.6 billion state of good
repair backlog is earmarked for vehicle replacement and related
activities. SEPTA has a need to replace 231 Silverliner IV railcars--
approximately two-thirds of the Regional Rail fleet--that were built in
the mid-1970s and are more than 40 years old. SEPTA will also replace
all of its trolleys, which are nearly 40 years old and do not meet ADA
requirements.
Following an open and competitive process in 2017, SEPTA awarded a
contract to CRRC MA for 45 multi-level coach cars to be assembled at
CRRC's Springfield, Massachusetts facility. The multi-level coach cars
will meet or exceed FAST Act Buy America requirements and include parts
and materials from domestic manufacturers from across the country. The
contract also includes an option for 10 additional cars, which SEPTA
has not yet exercised.
The number of transit railcar manufacturers worldwide is very
limited, and there are currently no domestically-owned transit railcar
manufacturers. Acquisition costs are a substantial obstacle to
replacing aging rail vehicles, and future railcar procurements will
benefit from competition generated in a robust marketplace. As Congress
continues to evaluate important considerations related to rolling stock
procurement, it is our hope that already executed contracts, including
options, will be preserved, while efforts to develop and incentivize
domestic production will reinvigorate a dormant industry and create
increased competition.
Strengthening and securing America's transportation infrastructure
is a vital national interest. We are grateful for the Committee's work
on this important matter and look forward to continuing to support
initiatives that grow and enhance the nation's public transportation
systems.
Sincerely,
Jeffrey D. Knueppel
General Manager
cc: Pasquale T. Deon, Sr., SEPT A Board Chairman
The Honorable Brian K. Fitzpatrick
The Honorable Lloyd Smucker
Letter from John Samuelsen, International President, Transport Workers
Union of America, AFL-CIO, Submitted for the Record by Hon. DeFazio
June 5, 2019.
Dear Representative:
On behalf of more than 150,000 members of the Transport Workers
Union (TWU), I am writing to encourage you to cosponsor the Transit
Infrastructure Vehicle Security Act (H.R. 2739). This important piece
of legislation is an essential part of ensuring American workers and
companies have a level playing field to compete against state-owned and
subsidized enterprises.
Until August 2018, rail cars for transit agencies across the
country were manufactured in Philadelphia, PA. Over 300 TWU members
lost their jobs and livelihoods when the plant that did that work was
closed. These jobs disappeared after their company was underbid by
CRRC, the Chinese state-owned, highly subsidized rail car manufacturer.
In Boston, Chicago, Los Angeles, and, finally, Philadelphia itself,
CRRC offered a price well below any of their competitors not because of
any efficiencies, but rather because their shareholder (the government
of China) had given them a directive to conquer the U.S. market.
TWU members are not the only ones whose jobs are being threatened
or destroyed by unfair competition from state-owned enterprises.
China's ``Made in China 2025'' initiative directs all of their state-
supported corporations to increase their market share across the globe,
regardless of profitability. In the U.S., this is leading to massive
turnover in transit manufacturing, with thousands of jobs potentially
at risk.
H.R. 2739 directly addresses this issue and ensures that workers
building and assembling transit cars are competing in the free market
rather than against foreign governments. Corporations from non-free
market economies would become ineligible from receiving federal funds.
Additionally, the bill would increase cybersecurity protections for our
transit vehicles--an essential component of our 21st century
infrastructure.
The TWU believes H.R. 2739 is essential for ensuring that American
workers can compete on a level playing. We urge you to cosponsor this
legislation by contacting @mail.house.gov in
Representative Harley Rouda's office. Please contact (
@ .org) at - - if you have any
questions.
Sincerely,
John Samuelsen
International President
Report, ``Assessing How Foreign State-Owned Enterprises' U.S.-Based
Operations Disrupt U.S. Jobs,'' Oxford Economics, June 2019, Submitted
for the Record by Hon. DeFazio
[This report is retained in committee files and is available online
at https://www.oxfordeconomics.com/recent-releases/assessing-how-
foreign-state-owned-enterprises-us-based-operations-disrupt-us-job.]
Statement of Ian Jefferies, President and Chief Executive Officer,
Association of American Railroads, Submitted for the Record by Hon.
Graves of Missouri
Thank you for the opportunity to provide a statement for the record
regarding the impacts of state-owned enterprises on the public transit
and freight rail sectors. AAR's railroad members account for the vast
majority of U.S. freight rail traffic, employment, and revenue. AAR
Associates include many firms that are suppliers to freight railroads,
including several railcar builders and many firms that supply
components to railcar builders.
Some have expressed concern that, among other things, increased
state-owned penetration of the U.S. freight and passenger railcar
markets could lead to increased cybersecurity risks. The purpose of
this statement is to briefly describe the many ways that freight
railroads are addressing cybersecurity risks, no matter their source.
Through multi-faceted cybersecurity plans and programs guided by
internationally recognized standards, kept up to date by recurring
assessments, and supported by specialized cybersecurity staff,
railroads are constantly analyzing potential cyber threats, identifying
potential vulnerabilities, and developing and implementing effective
countermeasures.
railroads are addressing the cybersecurity threat head on
Railroads use computers and information technology in every aspect
of their operations. Consequently, railroads know the importance of
guarding against cyberattacks.
The rail industry's cybersecurity efforts are unified,
multifaceted, and proactive. The Rail Information Security Committee
(RISC) leads the way. The RISC is comprised of the chief information
security officers and information assurance officials of major U.S.
railroads, augmented by AAR staff and representatives of other industry
groups.
The RISC was formed in 1999--meaning the rail industry had already
established a forum for consultations and coordination on enhancing
cybersecurity well before such vigilance became common across many
different industry sectors.
Railroads enhance their cybersecurity in a number of other ways,
including:
Maintaining an industry information sharing and analysis
center that collects, evaluates, and disseminates cyber threat alerts
and advisories, with recommended protection actions drawn from diverse
sources.
Defining and periodically reviewing and updating specific
intelligence requirements with government entities in the United States
and Canada to ensure timely awareness, understanding, and action to
address prevailing and emerging cyber threats.
Regular participation in classified presentations and
discussions on cyber threats and incidents with the Department of
Homeland Security (DHS), including the Transportation Security
Administration (TSA), the Federal Bureau of Investigation (FBI), the
National Security Agency (NSA), the Department of Transportation, and
other government agencies.
Engaging directly with various federal cybersecurity
readiness and response teams to ensure continued cyber threat
awareness.
intelligence sharing is crucial
Even the most effective cybersecurity plans and procedures will
falter if useful information on cyber threats is not shared. That's why
timely intelligence and information sharing is essential if
cybersecurity efforts are to succeed, and it's why a key element of
railroads' cybersecurity efforts involves working with public sector
partners to share information on cyber threats and effective
countermeasures. The focus is on sharing tactical intelligence on what
perpetrators are doing and how they are doing it.
As a recent Congressional Research Service (CRS) report on
cybersecurity points out, information sharing allows one party to
bolster the knowledge of its partners. Information may provide
opportunities for organizations to learn from one another, reduce their
vulnerability to hacking, and quickly adapt to changing conditions.
Successful information sharing occurs when an organization receives
information, has the capability to process it, knows how to use it, and
makes a change to its practices to better secure itself. The advantage
to sharing information is realized when the result is a valuable change
in behavior because of the information shared.
Unfortunately, as the CRS points out, some organizations may miss
critical information, lack the expertise to understand it, lack the
resources to take action, or otherwise not change their behavior. A
major goal of the RISC is to make sure this does not happen.
The Rail Intelligence Working Group (RIWG) is a key element of rail
cybersecurity efforts and information sharing. The RIWG is a public-
private partnership, comprised of experts from the federal government,
transit, freight and passenger rail industries, that reviews threats
and produces rail-focused intelligence analyses that are widely
disseminated among security and law enforcement professionals in
industry and government. These materials provide reliable, accurate,
and timely intelligence along with recommendations on appropriate
actions to take in response to real and perceived threats.
Other steps the rail industry has taken to enhance timely
information sharing, in coordination with partners at DHS, including
the TSA, the FBI, and other agencies, include:
Deploying secure telephone equipment to connect major
railroads, the AAR, and government officials. This capability ensures
timely sharing of classified intelligence and related security
recommendations.
Sharing classified information with authorized Canadian
railroad officials, thereby harmonizing cross-border security awareness
and preparedness. Canadian authorities have hosted classified threat
briefings for U.S. railroads.
Establishing a classified information sharing network
with TSA, enabling authorized rail industry personnel to access secure
TSA facilities and review relevant materials in dozens of metropolitan
areas nationwide.
Participating in a multi-industry initiative with DHS to
establish a secure video teleconference network that simultaneously
links more than 40 U.S. metropolitan areas. This capability is
available for use by industry security coordinators, law enforcement
officers, government officials, and others. Classified briefing and
discussions focused on cyber threats, led by analysts from DHS,
including TSA, the NSA, and the FBI have been provided through this
network.
As a result of these collective efforts, which reflect exceptional
cooperation between government and industry, what had formerly
sometimes required weeks or even months of effort (e.g., arranging in-
person briefings or meetings in Washington, D.C. or at regional
locations) can now often be accomplished in a matter of hours. This
greatly enhances the ability of everyone involved to identify and
effectively respond to cyberthreats.
The industry's cyberthreat intelligence priorities emphasize
tactical analysis of successful cyber intrusions and blocked attempts
that have targeted private sector and governmental entities. This focus
draws upon the experience and knowledge of experts at the DHS, the FBI,
and elsewhere in analyzing cyberattacks and assisting affected
organizations.
In particular, the rail industry seeks analyses that highlight
tactics that are most commonly employed to gain illicit access to
computer systems; vulnerabilities most commonly exploited; indicators
of illicit activities most often noted in post-incident analyses that
were missed or disregarded; and protective measures that could have
made a difference.
regular testing of cyber-response capabilities
The rail industry helps ensure maximum sustained effectiveness in
the face of evolving cybersecurity threats through the use of recurring
exercises that simulate emergency situations. Lessons learned from
these exercises and from actual security-related incidents inform
reviews and updates and assure that railroads' plans continue to evolve
to meet changing circumstances.
Railroads and industry organizations also conduct comprehensive
cyber risk assessments based on realistic threat scenarios drawn from
intelligence analyses, including ``penetration testing'' that simulates
an attack from malicious outsiders.
Insights gained from risk assessments and cyber threat advisories,
as well as experience gained in drills and exercises, enable railroads
and industry organizations to incorporate a variety of effective
safeguards and protective measures into their business and operational
practices. Railroads know that, going forward, cyber awareness must
remain a fundamental component of their day-to-day operations.
Appendix
----------
Questions from Hon. Henry C. ``Hank'' Johnson, Jr. for Scott N. Paul,
President, Alliance for American Manufacturing
Question 1. Your testimony expresses clear concern that the CRRC is
taking intentional action to dominate our nation's transit rail sector.
With the completion of several U.S. public transit projects already,
CRRC has postured themselves to be a noteworthy competitor in our
transit manufacturing industry.
(a) Will CRRC make a gradual impact on our rail sector, or can we
expect swifter action?
Answer. With the seemingly endless backing of a foreign, non-market
economy government and the stated goal of dominating the U.S. rail
sector, CRRC poses a grave danger. A look at the Australian market
offers perspective. In just the last decade, CRRC undertook a similar
campaign leading to the obliteration of that country's rail
manufacturing sector. CRRC's ambitions are sizeable, that is to
establish a substantial foothold into our public procurement market as
a means of expanding into private sectors such as the freight rail
market--a sector that not only supports 65,000 manufacturing jobs but
is also responsible for moving 40 percent of all goods in the United
States.
(b) What will be the economic impacts of CRRC as a sudden and
significant competitor in our rail market?
Answer. Established firms in the U.S. rail manufacturing space are
already facing unprecedented economic pressure to stay afloat. And,
high-wage jobs throughout the domestic rail manufacturing supply chain
are at risk of being displaced by workers operating under harsh
conditions and little pay in China. With the financial backing of
Beijing, CRRC is systematically working to drive established
competitors out of the market and to achieve a monopoly in transit rail
car production. If successful, this would be a disaster for taxpayers
and for transit providers that are looking for legitimate, fair and
broad competition for their contracts. Once established competitors are
driven out of the U.S. market, it is reasonable to assume that the
lowball bids of CRRC will disappear and U.S. customers will be at their
mercy in terms of pricing.
Question 2. CRRC benefits from state subsidies that allow them to
offer lower bids on rolling stock contracts than many of their
competitors. This presents the threat of market shrinkage--if transit
agencies can save hundreds of millions of dollars from contracts with
CRRC, they may be unlikely to shop around.
(a) How do we engage with transit agencies to further consider
contracts with established competitors?
Answer. I urge Congress to pass the bipartisan Transit
Infrastructure Vehicle Security Act, which has been introduced in the
House and Senate. This bill would prohibit federal funds from being
used by transit agencies to purchase rail cars or buses manufactured by
foreign-government-owned, controlled, or subsidized companies.
America's tax dollars should not be used to support Chinese SOEs
seeking to undermine legitimate competition. It is necessary to apply
further pressure to transit systems that aim to employ clever
accounting as a means of using non-federal resources to award contracts
to these Chinese SOEs. Transit agencies should not be permitted to
allocate ``non-federal'' resources for the procurement of rail cars
from CRRC when they also receive large sums annually from the federal
government. Additionally, there is a role for the federal government to
educate and provide guidance to local transit agencies regarding the
economic and national security threats posed by state-influenced
entities such as CRRC.
(b) Do you think transit agencies are likely to favor market impact
over exceptionally low bids?
Answer. Left to their own devices, many transit agencies will award
contracts based on price alone. And, on a local level, it is
understandably a positive outcome that CRRC is establishing assembly
operations and hiring American workers--in many cases, skilled, union
workers that deserve our utmost respect. However, it is the duty of
Congress to examine how these firms are systematically destroying the
competitive national landscape for U.S. rolling stock manufacturing.
With the seemingly endless backing of a foreign, non-market economy
government and the stated goal of dominating these sectors, these firms
pose a grave danger to established competitors. And, because their U.S.
assembly operations are merely a supply line for imported components,
ultimately the jobs of millions of American workers throughout our
domestic supply chains are at risk. Thus, because transit agencies are
required to adhere to federal programmatic requirements as a condition
of receiving federal assistance, it is the duty of Congress to enact
policies that result in a favorable market impact and to prevent the
destruction of the competitive landscape for rolling stock
manufacturing.
Questions from Hon. Peter A. DeFazio for Brigadier General John Adams,
U.S. Army (Retired), President, Guardian Six LLC
Question 1. General Adams, your testimony provides a list of
expanding technological capabilities that are being deployed on the
rail system, such as onboard freight car location and asset health
monitoring sensors, and you reference the national security challenges
associated with them. The vulnerability of these types of connected
technologies to intrusion is echoed in Mr. Cilluffo's testimony.
General Adams, do you believe that, once granted access to our rail
network, state-owned enterprises would share information gained from
connected technologies with the company's home country? Could this be
done even without the company's knowledge?
Answer. China routinely spies on and engages in cyber espionage
against the United States and other nations. For example, in September
2016, the Department of Defense released an intelligence report which
made clear that computers manufactured by Lenovo, a Chinese company,
could potentially insert malware to compromise the Pentagon's supply
chains.\1\ Couple this with the recent presidential national emergency
declaration on Huawei, and it is certain that China seeks
vulnerabilities in critical American systems.
---------------------------------------------------------------------------
\1\ Bill Gertz, ``Facebook and Lenovo'', The Washington Times, June
6, 2018,https://www.washingtontimes.com/news/2018/jun/6/facebook-
lenovo-put-cybersecurity-at-risk/
---------------------------------------------------------------------------
The average life of a freight car is about 30 years. Transit cars
can have a similar lifespan. The technology in these cars is incredibly
sophisticated and future upgrades will only enhance their complexity.
We can surely anticipate that the Chinese government will exploit these
opportunities and do so surreptitiously.
There are serious national security risks to the United States in
giving a Chinese State-Owned Enterprises (SOE) access to such critical
equipment as transit and freight cars which carry passengers,
commodities, military equipment, and dangerous toxic substances. Aside
from the cars themselves, China would have access to rail lines through
critical tunnels, ports, and military bases, and gain access to
sensitive data including, but not limited to, the timing and location
of sensitive deliveries.
It is absolutely possible that cyber vulnerabilities could be
exploited without a company's knowledge. China has strong espionage and
national security laws. The two pieces of Chinese legislation that
allow cyber vulnerabilities to be exploited are the 2017 National
Intelligence Law and the 2014 Counter-Espionage Law.\2\ The first law
states, ``any organization or citizen shall support, assist, and
cooperate with the state intelligence work in accordance with the law''
while the second law states, ``when the state security organ
investigates and understands the situation of espionage and collects
relevant evidence, the relevant organizations and individuals shall
provide it truthfully and may not refuse.'' We are well-aware that CRRC
is 100 percent government-owned and is thus mandated by Chinese law to
provide any and all information to the government.
---------------------------------------------------------------------------
\2\ Murray Scot Tanner, ``Beijing's New National Intelligence Law:
From Defense to Offense'', Lawfare, July 20, 2017, https://
www.lawfareblog.com/beijings-new-national-intelligence-law-defense-
offense
---------------------------------------------------------------------------
Furthermore, as stated in my testimony, ``CRRC's bylaws direct that
the company seek guidance from the Communist Party of China on
significant matters affecting the company's operations.\3\ Three of
CRRC's current board members previously held high-level positions at
several state-owned defense companies including, Aviation Industry
Corporation of China (AVIC), which produces fighter and bomber
aircraft, helicopters, and unmanned aerial vehicles for the Chinese
Army, and China Shipbuilding Industry Corporation (CSIC), which
produces submarines, warships, and other naval equipment for the
Chinese Navy. Furthermore, two former CRRC board members held positions
at AVIC and China North Industries Group Corporation Limited (NORINCO),
a state-owned defense company that supplies tanks, aircraft, missiles,
firearms, and related products for the Chinese military.''
---------------------------------------------------------------------------
\3\ ``CRRC Corporation Limited Articles of Association,'' CRRC
Corporation Limited, at 70.http://www.crrcgc.cc/Portals/73/Uploads/
Files/2018/6-4/636637164457871915.pdf
---------------------------------------------------------------------------
Questions from Hon. Eleanor Holmes Norton for Brigadier General John
Adams, U.S. Army (Retired), President, Guardian Six LLC
Question 2. Brigadier General Adams, as you noted in your
testimony, the China Railway Rolling Stock Corporation (CRRC) has
increased its presence in the U.S. mass transit market through its
successful bids for railcar manufacturing contracts in several major
cities such as Boston, Chicago, Los Angeles, and Philadelphia. And now,
given CRRC's expected participation in the Washington Metropolitan Area
Transit Authority's (Metro) ongoing procurement for its new 8000 series
railcars, the challenge of how to respond to the risks posed by state-
owned enterprises has landed right on our doorstep here in the nation's
capital.
You noted a number of potential vulnerabilities that could arise as
a result of state-owned enterprises manufacturing U.S. infrastructure
components. These vulnerabilities range from the theft of information
for espionage or computer network exploitation, to the mapping of
infrastructure, to physical attacks.
Metro is unique among transit agencies because many of its stations
are located near critical hubs of legislative, defense, and
transportation operations such as the U.S. Capitol, the House and
Senate office buildings, the Pentagon, and Ronald Reagan Washington
National Airport.
(a) What security risks could arise from having CRRC build railcars
for our Metro system here in the nation's capital?
Answer. The security risks that could arise from CRRC winning and
building transit cars for the Washington Metropolitan Area Transit
Authority (WMATA) are both numerous and alarming. WMATA is a unique
rail system for several reasons including the fact that it is located
near critical hubs around Washington, D.C. including the Pentagon and
United States Capitol. Modern day transit cars are complex and possess
technologies such as Wi-Fi, passenger counters, cameras, and vital
sensors, among other critical components. These could be easily used to
track American citizens and more specifically targets of interest to
the Chinese government, as well as, monitor conversations and data
transmissions, and confiscate sensitive materials such as military
plans or national security secrets.
China is already tracking its own citizens. Using over 200 million
cameras and widely deployed facial recognition software, the Chinese
government is giving each citizen a social credit score.\4\ By
monitoring behaviors and allegiance to the government, citizens are
either rewarded or punished. Punishments are believed to be as severe
as being placed in reeducation camps. If China is capable of keeping
such a watchful eye on their own citizens, it seems entirely plausible
that they would also surveil American citizens, especially those living
and working in our Nation's Capital.
---------------------------------------------------------------------------
\4\ Paul Mozur, ``Inside China's Dystopian Dreams: A.I., Shame and
Lots of Cameras,'' The New York Times, July 8, 2018. https://
www.nytimes.com/2018/07/08/business/china-surveillance-technology.html
(b) What steps should our region's Metro system take to minimize
the risks associated with the potential purchase of railcars from CRRC?
Answer. Zero tolerance is the best decision for WMATA when it comes
to SOEs. In other words, WMATA must not engage in any activity with
CRRC, or other similar SOEs, and that includes executing contracts with
them. After all, trusted sources of transit cars are available from our
allies. Moreover, even if WMATA believes that it could mitigate against
the possible cyber-security and other risks posed by CRRC today and in
the future, WMATA seems woefully unprepared to do business with CRRC,
only recently amending its request for proposal for new cars to include
cyber security protections.
It should be acknowledged that there are no American-based
manufacturers of transit cars. That said, the foreign companies that do
manufacture cars in the United States are trusted friends and allies of
the United States including France, Germany, Switzerland, Canada,
Japan, and South Korea. Equally important, these countries employ
thousands of Americans and source their products locally, unlike SOEs.
In sum, WMATA has many ready options from which to procure new
transit cars. The most recent generation of metro cars are Kawasaki, a
Japanese company, that manufactures the cars in Lincoln, Nebraska. CRRC
may offer cheap transit cars, but that cheap price includes the latent
cost of serious risk to the economic and national security of the
United States.
When doing business with a trusted foreign ally, the United States
can count on the protection of over 650,000 American jobs, and $74.2
billion dollars in GDP according to a September 2018 report from the
Railway Supply Institute.\5\ This is in addition to the 65,000 jobs
that could be impacted in the freight industry should CRRC gain stable
footing and attempt to take over that market.\6\
---------------------------------------------------------------------------
\5\ Railway Supply Institute, Tracking the Power of Rail Supply:
The Economic Impact of Rail Suppliers in the U.S, September 2018, at 5
\6\ Oxford Economics, Will We Derail US Freight Rolling Stock
Production? May 2017, at 5
(c) What steps should Congress take to minimize the security risks
associated with CRRC railcars in operation throughout the country?
Answer. Congress has awoken to the threat of CRRC, as clearly
demonstrated by H.R. 2739, the Transit Infrastructure Vehicle Security
Action (TIVSA). Passing commonsense legislation like TIVSA would deny
federal transit funds from going to CRRC contracts. Congress should
also enact robust cyber security measures aimed at protecting freight
and transit rail in the United States; support Administration proposals
that put economic pressure on China; and further educate federal,
state, and local officials on the predatory nature of Chinese SOEs.
Questions from Hon. Peter A. DeFazio for Hamilton Galloway, Head of
Consultancy for the Americas, Oxford Economics
Question 1. In your testimony you explain that the core purpose of
state-owned enterprises (SOEs) is to fill a social or economic need
within their home country's economy, yet in recent decades SOEs have
increasingly been used to expand into foreign markets.
In your opinion, is it fair to conclude that SOEs are being misused
when they break into, or gain a significant share of, foreign markets?
How concerned should countries be by the growing presence of SOEs?
Answer. It is a very fair conclusion that state-owned enterprises,
especially those in the People's Republic of China, are using
anticompetitive practices and state-subsidies to gain unfair economic
advantages in foreign markets. These practices and business activities
do not represent market economy business activities. In the United
States alone, companies like CRRC underbid competitors by up to
hundreds of millions of dollars. A 2019 Oxford Economic report found
that CRRC undercut the next highest bidder by 7-21 percent for certain
transit contracts.
What is great about operating in the United States is that fair and
open competition reigns supreme. However, a state-owned company
significantly reduces fairness and risks pushing out market
competition. This has negative consequences on long-run prices and
competitiveness, moving more toward monopoly-like economic distortions.
Thus far, CRRC has won four major contracts in the United States
for transit rail by underbidding competitors by hundreds of millions of
dollars. Moreover, a number of these contracts use American taxpayer
dollars to financially benefit the already subsidized state-owned
enterprise.
In a recent June 2019 report released by Oxford Economics, we found
that state-owned enterprises do not face the same budget constraints as
other manufacturers and thus have a greater ability to engage in anti-
competitive strategic pricing behavior. Furthermore, CRRC touted
American job creation with the establishment of two final assembly
facilities in the U.S. (Springfield, MA and Chicago, IL). However, our
analysis shows that the United States actually loses between 3.5 to 5.4
jobs for every job created by a Chinese state-owned enterprise, given
documented assumptions about offshoring the U.S. supply chain. This
amounts to a net loss of more than 5,000 middle-class American jobs for
every $1 billion in contracts won by Chinese SOEs.\1\
---------------------------------------------------------------------------
\1\ Oxford Economics, Assessing How Foreign State-Owned
Enterprises' U.S. Based Operations Disrupt U.S. Jobs, June 2019, at 3.
---------------------------------------------------------------------------
Other countries that have existing privately-owned railcar
manufacturers should be concerned. China's Belt and Road Initiative
impacts 152 countries around the globe. If SOE impacts are as
significant here as they have been elsewhere in the world, Chinese SOEs
have a serious, if not insurmountable economic advantage.
I have attached our newest analysis to this response in case you
have additional questions.
Questions from Hon. Eleanor Holmes Norton for Hamilton Galloway, Head
of Consultancy for the Americas, Oxford Economics
Australia's Experience
Question 2. Why were state-owned enterprises able to eliminate
Australia's freight railcar manufacturing industry? How long do we have
before the same happens in the U.S.?
Answer. The Chinese state-owned enterprise, CRRC (previously CNR
and CSR), was able to fully displace the Australian freight railcar
manufacturing market in less than a decade. This stemmed from state-
subsidies, below-market rate bank loans, and an aggressive, anti-
competitive entry into an unprepared market.\2\ Australia's economic
dependence on China--especially during the Global Recession--provided
further leverage to China's state-owned enterprises to disrupt and
distort Australian businesses across the energy, natural resource
extraction, construction, railcar manufacturing, and other
manufacturing industries.
---------------------------------------------------------------------------
\2\ Oxford Economics, Will We Derail US Freight Rolling Stock
Production?, May 2017, at 5.
---------------------------------------------------------------------------
The United States is at risk of following the same trajectory as
Australia. Thanks to strong action by Congress, including legislation
and important hearings like the one I had an opportunity to testify at,
that window has likely been pushed back. That being said, it is vital
to keep the pressure on Chinese SOEs, their unfair practices, and their
negative impact on the United States.
Question 3. In your opinion, what would be the most effective way
to ensure that state-owned enterprises do not eliminate the United
States' freight railcar manufacturing industry?
Answer. In my personal opinion, there are a number of measures that
will help to protect the economic integrity of the freight (and
passenger) railcar manufacturing industry. These measures include: 1)
passage of key pieces of legislation like H.R., 2739, the Transit
Infrastructure Vehicle Security Act; 2) enacting robust cybersecurity
measures aimed at protecting freight and transit rail in the United
States; 3) supporting Administration proposals that put economic
pressure on the People's Republic of China to abide by market economic
principles; and 4) further educating federal, state, and local
officials on the predatory nature of Chinese SOEs. Long-run policy
measures should focus on pressuring and promoting privatization of
globally expanding Chinese SOEs.
Question 4. How can we monitor state-owned enterprises that have
already established operations in the U.S. to ensure they aren't taking
over the industry?
Answer. We can monitor state-owned enterprises in the United States
by increasing transparency and oversight on existing contracts
including those in the cities of Los Angeles, Chicago, Philadelphia,
and Boston--all cities that are currently under contract with the
Chinese SOE, CRRC.
Further educating local, state, and federal officials on the
economic and national security impacts of SOEs in the United States is
also vital to protecting American industries and our broader homeland.
Supply-chain and origin audits should also be conducted by the
transit authorities or an authorized objective third party--especially
where Buy America provisions apply. This will enable better monitoring
of upstream industry displacement effects.
Questions from Hon. Henry C. ``Hank'' Johnson, Jr. for Hamilton
Galloway, Head of Consultancy for the Americas, Oxford Economics
Question 5. The presence of state-owned enterprises can inhibit and
shrink competitive markets. CRRC and numerous other SOEs eye competing
aggressively in ours, and we must consider its effect on the presence
of American jobs in transit and rail manufacturing.
(a) Anti-competitive behavior in the market may threaten the
presence of manufacturing jobs--can you provide examples of this in the
freight rail sector?
Answer. In a recent June 2019 report released by Oxford Economics,
we found that state-owned enterprises do not face the same budget
constraints as other manufacturers and thus have a greater ability to
engage in anti-competitive strategic pricing behavior. Furthermore,
CRRC has attempted to use the false narrative of American job creation
when our analysis shows that the United States actually loses between
3.5 to 5.4 jobs for every job created by a Chinese state-owned
enterprise in the passenger rail sector. This amounts to a net loss of
more than 5,000 middle-class American jobs for every $1 billion in
contracts won by Chinese SOEs.\3\
---------------------------------------------------------------------------
\3\ Oxford Economics, Assessing How Foreign State-Owned
Enterprises' U.S. Based Operations Disrupt U.S. Jobs, June 2019, at 3.
---------------------------------------------------------------------------
Currently, CRRC has won four major passenger transit contracts
across the United States in the cities of Los Angeles, Chicago,
Philadelphia, and Boston.
A similar story has played out before. In the mid-late 2000s, CRRC
entered the Australian rail market--seemingly on the heels of the
Chinese-Australian Free Trade Agreement (ChAFTA). Much like CRRC in the
United States, it started to win transit railcar manufacturing
contracts in key cities. Once those finite orders were completed, CRRC
switched its facilities to freight railcar manufacturing and completely
decimated a robust domestic market in less than a decade.\4\
---------------------------------------------------------------------------
\4\ The Australia experience is based on interviews of railcar
manufacturer executives and backed by data. Further information can be
found at: Oxford Economics, Will We Derail US Freight Rolling Stock
Production?, May 2017
---------------------------------------------------------------------------
CRRC has attempted to gain a foothold in the freight rail market in
North America twice--the first through a joint venture in Wilmington,
North Carolina, called Vertex and the second through a partnership
called American Railcar Systems in New Brunswick, Canada. The Vertex
facility closed due to lack of orders and the launch of the company in
Canada appears to be suspended.\5\
---------------------------------------------------------------------------
\5\ Buckland, Tim. Vertex closing: Rail car maker shuttering
Wilmington plant. StarNews Online. October 26, 2018. https://
www.starnewsonline.com/news/20181026/vertex-closing-rail-car-maker-
shuttering-wilmington-plant Accessed 6/21/2019.
---------------------------------------------------------------------------
CRRC has sought to penetrate both the transit and freight car
industries in the United States. These industries directly and
indirectly support the jobs of 650,000 Americans and contribute $74.2
billion dollars in GDP according to a September 2018 report by Oxford
Economics for the Railway Supply Institute.
(b) How can we mitigate state-owned enterprises trying to
manipulate competitive markets so that we don't ultimately suffer
significant job loss?
Answer. It is all about leveling the playing field in the United
States. We are a country that embraces competition to ensure a robust,
free, and competitive market. It is vital that the United States
protect American jobs and taxpayers by acknowledging that state-owned
enterprises do not play by the same rules as private companies. One can
try to find ways to mitigate SOEs manipulating competitive markets, but
the most strategic way to avoid any job losses in the United States is
through risk avoidance, which means not purchasing rail cars from CRRC
in the first place--at least not until CRRC conforms to market economy
standards.
The Railway Supply Institute estimates that over 650,000 American
jobs are directly and indirectly tied to the rail industry. Freight
railcar manufacturing industry in the United States alone is
responsible for employing over 65,000 Americans, according to a 2017
Oxford Economics analysis.\6\ To protect these jobs, it is vital that
the United States publicly acknowledge the unfair practices of SOEs and
institute commonsense solutions to rebalance the playing field.
---------------------------------------------------------------------------
\6\ Oxford Economics. Will We Derail US Freight Rolling Stock
Production?, May 2017.
(c) If we can mitigate anti-competitive behavior in the market,
will this promote the health of our transit and rail manufacturing
industries?
Answer. In principle, yes. If the United States, through the work
of Congress and the Trump Administration, can mitigate Chinese SOE
anti-competitive advantages, including ceasing state-subsidies, below
market-rate loans, and predatory practices, the United States can
ensure that its rail industry remains a strong, family-sustaining wage
job creator, and helps bolsters U.S. GDP.
According to an Oxford Economics report for the Railway Supply
Institute, the rail supply industry supports over 650,000 jobs through
direct, indirect and induced activities. These jobs contribute almost
$74.2 billion to the GDP of the United States. It is these jobs, value
and economic health that effective policies will both promote and
preserve.\7\
---------------------------------------------------------------------------
\7\ Oxford Economics. Tracking the Power of Rail Supply: The
Economic Impact of Railway Suppliers in the U.S. September 2018.
---------------------------------------------------------------------------
Questions from Hon. Peter A. DeFazio for Frank J. Cilluffo, Director,
McCrary Institute for Cyber and Critical Infrastructure Security,
Auburn University
Question 1. General Adams' testimony provides a list of expanding
technological capabilities that are being deployed on the rail system,
such as onboard freight car location and asset health monitoring
sensors, and he references the national security challenges associated
with them. The vulnerability of these types of connected technologies
to intrusion is echoed in your testimony, Mr. Cilluffo.
Mr. Cilluffo, do you believe that, once granted access to our rail
network, state-owned enterprises would share information gained from
connected technologies with the company's home country? Could this be
done even without the company's knowledge?
Answer. Response was not received at the time of publication.
Questions from Hon. Eleanor Holmes Norton for Frank J. Cilluffo,
Director, McCrary Institute for Cyber and Critical Infrastructure
Security, Auburn University
Question 2. Mr. Cilluffo, as you noted in your testimony, the China
Railway Rolling Stock Corporation (CRRC) has increased its presence in
the U.S. mass transit market through its successful bids for railcar
manufacturing contracts in several major cities such as Boston,
Chicago, Los Angeles, and Philadelphia. And now, given CRRC's expected
participation in the Washington Metropolitan Area Transit Authority's
(Metro) ongoing procurement for its new 8000 series railcars, the
challenge of how to respond to the risks posed by state-owned
enterprises has landed right on our doorstep here in the nation's
capital.
You noted a number of potential vulnerabilities that could arise as
a result of state-owned enterprises manufacturing U.S. infrastructure
components. These vulnerabilities range from the theft of information
for espionage or computer network exploitation, to the mapping of
infrastructure, to physical attacks.
Metro is unique among transit agencies because many of its stations
are located near critical hubs of legislative, defense, and
transportation operations such as the U.S. Capitol, the House and
Senate office buildings, the Pentagon, and Ronald Reagan Washington
National Airport.
(a) What security risks could arise from having CRRC build railcars
for our Metro system here in the nation's capital?
Answer. Response was not received at the time of publication.
(b) What steps should our region's Metro system take to minimize
the risks associated with the potential purchase of railcars from CRRC?
Answer. Response was not received at the time of publication.
(c) What steps should Congress take to minimize the security risks
associated with CRRC railcars in operation throughout the country?
Answer. Response was not received at the time of publication.
Intelligence Gathering
Question 3. Your testimony states that the economic impacts state-
owned enterprises pose to the transportation sector are intertwined
with national security. For instance, you indicate that CRRC's entrance
in the transit supply chain provides China a wealth of intelligence.
(a) Is it possible for a foreign actor to use a state-owned
enterprise as an unknowing conduit for malevolent actions?
Answer. Response was not received at the time of publication.
(b) If yes, has this already happened? Can you share an example?
Answer. Response was not received at the time of publication.
Questions from Hon. Henry C. ``Hank'' Johnson, Jr. for Frank J.
Cilluffo, Director, McCrary Institute for Cyber and Critical
Infrastructure Security, Auburn University
Question 4. The integration of CRRC technology into our transit
network is intertwined with national security. With the implementation
of GPS, safety features, Wi-Fi systems and numerous other nuanced
technologies, China gains considerable access to gather intelligence.
This requires hyper-vigilance from our intelligence community.
(a) Should CRRC make its entry as a powerful rail market
competitor, how can we work with transit agencies to safeguard against
malicious intent?
Answer. Response was not received at the time of publication.
(b) Are you seeing evidence of malicious intelligence gathering in
sectors other than transportation?
Answer. Response was not received at the time of publication.
(c) What does a coordinated U.S. response to malicious intelligence
gathering look like?
Answer. Response was not received at the time of publication.
Questions from Hon. Peter A. DeFazio for Zachary Kahn, Director of
Government Relations, North America, BYD Motors LLC
Question 1. Mr. Kahn, in your testimony, you state BYD buses are
exceeding Buy America requirements.
(a) Does BYD import their chassis, shell, electric motors, or the
drive train?
Answer. Yes. To clarify, the shell arrives in five pieces and is
built in Lancaster and put onto the chassis in a labor intensive
welding and riveting process. The front axle is imported, but from
Germany.
(b) How much of the bus uses Chinese steel?
Answer. There is steel in the chassis which represents 3% of the
total cost of the vehicle. It should be noted that BYD's C10, 45, coach
bus uses stainless steel in its chassis, sourced from the U.S. and
Canada.
Question 2. Mr. Kahn, when the Committee invited you to testify, it
did so on the belief you would be testifying on behalf of BYD as a
whole. Your testimony and Truth in Testimony statement indicated you
are testifying on behalf of BYD Motors. BYD Motors is the sales team
subsidiary of BYD US Holdings. Another subsidiary, BYD Coach and Bus,
makes the buses.
The House mandated Truth in Testimony statement asks all witnesses
to ``list any contracts or payments originating with a foreign
government related to the subject matter of the hearing.'' You answered
no on behalf of BYD Motors. What would have been your answer if you
were testifying on behalf of BYD US Holdings or BYD Coach and Bus?
Answer. No.
Questions from Hon. Peter A. DeFazio for Phillip A. Washington, CEO,
Los Angeles County Metropolitan Transportation Authority
Question 1. Mr. Washington, your goal of a truly U.S. rail
manufacturer has my full support. What do you need from Congress to
move forward on developing this proposal into reality?
Answer. Thank you for your support Mr. Chairman and for the
opportunity to provide a detailed response as to how Congress can
support our goal to establish a U.S. based industrial park where bus
and rail rolling stock could be manufactured.
I believe there are several areas that Congress can focus on to
help achieve the Los Angeles County Metropolitan Transportation
Authority's (Metro) goal of creating a rolling stock manufacturing
facility--a transportation center of excellence--that allows for the
full manufacturing, rather than just the assembly, of rail and bus
rolling stock.
First, in order to enhance our goal of creating rolling stock
manufacturing facilities in the United States I believe Congress should
focus on Buy America laws. To achieve the goal of creating an
environment necessary for U.S. rolling stock manufacturers to emerge,
Congress should consider further changes to the Buy America rules
relating to minimum U.S. content by value for all rolling stock
procured with federal funds. The current Buy America rules of 70%
minimum domestic content creates an environment that makes large
capital investments in rolling stock engineering, design and
manufacturing challenging for new U.S. entrants to rail car and bus
manufacturing. In addition to increasing the 70% threshold for domestic
content, I believe that specific changes need to be made with respect
to systems and components used for rolling stock vehicles.
Mr. Chairman, you referenced this issue during the committee's May
16, 2019 hearing, when you raised the example of how a foreign
manufacturer of system components can be Buy America compliant if the
finished product's sub-components equal 70% of the total value of the
finished product and the finished product has its final assembly and
testing done in the United States. The current Buy America sub-
component rule distorts the true U.S. domestic content value of
finished rail cars and buses.
Second, I believe that Congress should work to reinstate a program
to allow for geographic hiring preferences and also for geographic
preference for contractors to occur when using federal funding for the
purchase of rolling stock. In the case of Metro, we provide a majority
of the funding for most of our transit projects, including the purchase
of rolling stock, through local and state funding. We believe with this
change from Congress, it will give transit agencies the tool necessary
to attract companies that are willing to invest in the communities that
they are supplying with vehicles. Further, Congress should also require
the use of the U.S. Employment Plan which is a contractual provision
that incentivizes companies to create U.S. jobs through facilities
investment.
Lastly, we believe Congress should provide direct funding to give
local efforts the extra push needed to become successful in
establishing a domestic rolling stock manufacturing facility--a
transportation center of excellence--that allows for the full
manufacturing, rather than just the assembly, of rail and bus rolling
stock.
Specifically, we recommend altering an existing authorized federal
transportation program or creating a newly authorized program that
would provide grant funds to assist transportation agencies in the
development of rolling stock manufacturing centers of excellence.
Similar to other innovative discretionary grant programs for various
transit pilot programs, it would be very helpful to have the Federal
Government's involvement as a funding partner in standing up facilities
that could host a rolling stock manufacturer.
Questions from Hon. Greg Stanton for Phillip A. Washington, CEO, Los
Angeles County Metropolitan Transportation Authority
Question 2. In your testimony you discuss the lack of domestic
manufacturers of mass transit railcars and the need for fostering an
environment where manufacturing of this stock can happen in the United
States. And I appreciate the example you shared of the Apache
helicopter that is manufactured in Mesa, Arizona.
You outline your vision to create a transportation industrial park
in Los Angeles County and in the future--transportation industrial
parks in other places across America--to manufacture, not just
assemble, mass transit railcars. And most importantly, this vision is
focused on making sure the significant investments the transportation
authority will make over the next few decades stay local and benefit
the local economy.
(a) What are the key barriers you see ahead that will pose the
biggest challenge in realizing this endeavor?
Answer. In my considered opinion, there are a number of barriers
with respect to moving ahead with the development of a domestic rolling
stock manufacturing center of excellence. These issues include, but are
not limited to, matters related to increasing federal Buy America
content requirements, restoring local hire reforms and securing federal
funding for such a center of excellence. I will expand on these topics
in response to your second question.
Locally, the first barrier we have faced--thus far successfully--is
working to identify an appropriate location for such a manufacturing
center and dedicating sufficient local resources to ensure its future
success. This has required working cooperatively with several levels of
local government, including with the County of Los Angeles.
The second barrier we anticipate, after finding the appropriate
location for such a facility and working with the appropriate local and
state officials on a package of incentives, is going to be building a
manufacturing center that would attract a manufacturer to build their
rolling stock in Los Angeles County. With respect to this barrier, it
is most likely that we will need federal support to ensure that our
agency and others committed to developing domestic rolling stock
manufacturing centers of excellence, have the resources needed to build
such a center.
(b) What steps could the federal government take to help support
these types of efforts?
Answer. I believe there are several areas that Congress can focus
on to help achieve LA Metro's goal of creating a rolling stock
manufacturing facility--a transportation center of excellence--that
allows for the full manufacturing, rather than assembly, of rail and
bus rolling stock.
First, in order to enhance our goal of creating rolling stock
manufacturing facilities in the United States I believe Congress should
focus on Buy America laws. To achieve the goal of creating an
environment necessary for true U.S. rolling stock manufacturers to
emerge, Congress should consider further changes to the Buy America
rules relating to minimum U.S. content by value for all Rolling Stock
procured with federal funds. The current Buy America rules of 70%
minimum domestic content creates an environment that makes large
capital investments in Rolling Stock engineering, design and
manufacturing challenging for new U.S. entrants to rail car and bus
manufacturing. In addition to increasing the 70% threshold for domestic
content, I believe that specific changes need to be made with respect
to systems and components of rolling stock vehicles.
Chairman DeFazio mentioned, during your committee's May 16, 2019
hearing, the example of how a foreign manufacturer of system components
can be Buy America compliant if the finished product's sub-components
equal 70% of the total value of the finished product and the finished
product is final assembled and tested in the U.S. The Buy America sub-
component rule distorts the true U.S. domestic content value of all
finished rail cars and buses.
Second, I believe that Congress should work to reinstate a program
to allow for geographic hiring preferences and geographic preference
for contractors to occur when using federal funding. In the case of
Metro, we provide a majority of the funding for most of our transit
projects, including the purchase of rolling stock, through local and
state funding. We believe with this change from Congress, it will give
transit agencies the tools necessary to attract companies that are
willing to invest in the communities that they are supplying with
vehicles. Further, Congress should also require the use of the U.S.
Employment Plan which is a contractual provision that incentivizes
companies to create U.S. jobs through facilities investment.
Lastly, we believe Congress should provide direct funding to give
local efforts the extra push needed to become successful in
establishing a domestic rolling stock manufacturing facility--a
transportation center of excellence--that allows for the full
manufacturing, rather than just the assembly, of rail and bus rolling
stock.
Specifically, we recommend altering an existing authorized federal
transportation program or creating a newly authorized program that
would provide grant funds to assist transportation agencies in the
development of rolling stock manufacturing centers of excellence.
Similar to other innovative discretionary grant programs for various
transit pilot programs, it would be very helpful to have the Federal
Government's involvement as a funding partner in standing up facilities
that could host a rolling stock manufacturer.
[all]