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

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

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

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

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

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

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

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

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

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

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

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

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

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

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