Rail Tale

 In Features, January 2016

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It was two hours into his siege when Vertex Railcar Corp. CEO Don Croteau finally gave up and left central China’s capital city of 10 million people for the long flight back to the United States. It was April 2014 and Croteau had traveled to the Wuhan offices of China Southern Railway to talk the $32 billion transportation giant into a partnership. At the time, Vertex was more of an idea than a business. It had no factory and had never produced a rail car, yet Croteau was convinced Vertex could break into a lucrative market. But first, he needed China.

His most recent work involved building towers for wind turbines and vacuum chambers that eliminate air bubbles for packaging at his Middleborough, Mass.-based Vertex Fab & Design. But he and his investors saw a bigger opportunity in rail cars, especially as Chinese companies step up their foreign investment, which has topped $52 billion in the United States since 2010, according to New York research firm Rhodium Group. China Southern, which dominates the railroad industry in the world’s largest nation, wants to sell a lot of rail cars to transport oil, of which the U.S. is awash because of an explosion in production in recent years.

After more than a year of haggling, Vertex and CSR announced their partnership on June 11. It’s small potatoes for the Chinese company, which was in the midst of its biggest deal ever back home. Also in June, China Southern completed its purchase of China Northern Railway in a $26 billion transaction that left the combined CRRC Corp. Ltd. with more than 90% of railroad assets in the nation of about 1.4 billion people.

But for Wilmington and North Carolina, the Vertex partnership promises a huge economic-development impact on a region that needs a lift. Average weekly wages trailed the state average by 7% in mid-2015, according to federal labor statistics. The number of people working in Wilmington fell faster than state and national averages during the 2007-09 recession and has increased more slowly as the economy recovered, according to a 2014 report by Garner Economics LLC. The Atlanta-based consultants graded the region’s economic development as normal or weak and questioned if various business groups were cooperating.

“There’s just a lot of average in New Hanover County,” Jay Garner told Business North Carolina in November 2014. “You don’t win the economic-development game with average.”

It’s no wonder, then, that Croteau’s promise of more than 1,300 jobs in an abandoned factory have made him a celebrity in North Carolina’s biggest coastal community. Vertex also represents the largest, most complex project the veteran manufacturing executive has ever undertaken.

The partnership didn’t come easy. Back in the United States after his first, unsuccessful visit, Croteau started sending emails to China Southern requesting another meeting. Contacts he had developed from his previous manufacturing jobs had gotten him entry to the Chinese company, but little else. Unfazed, he made two more trips to China in 2014, before a midlevel manager agreed to a 30-minute meeting. The sales pitch didn’t impress the executive, who said no thanks. Croteau returned to the U.S., refusing to give up. He badgered the company with more emails, finally prompting a series of questions vetting Croteau, his idea and Vertex. “They were shocked someone would do this,” Croteau says. “Like everyone else, they didn’t think we’d get to this point.” Vertex answered the questions and arranged a May 2014 meeting at the company’s headquarters. Over the next several months, Croteau made monthly visits to form a partnership, culminating in the June agreement.

Croteau’s zeal shocked the Chinese, who have invested $52 billion in the U.S. since 2010.

Croteau grew up poor in Boston. His father left when he was a child, and his mother, who was often sick, worked part time at Sears and relied on government assistance to keep the family afloat. He showed little interest in college. “I tried to take some evening classes after high school, but the content and groups attending did nothing to stimulate me in any way.” He worked for a grocery store for three years, then spotted a help wanted ad for a shipper-receiver job at Alcatel. He didn’t know it was a giant French multinational, instead thinking it was owned by a Mr. Alcatel. He was hired as the semiconductor boom of the 1970s sparked rapid growth at the company.

“I quickly took the job of production coordinator, and when the manager of the department was fired for not performing, I was asked, because they had no other candidates, to give it a try.” It helped that Alcatel was looking for people who could speak French. Croteau understood enough to get by and worked 70 to 80 hours a week to prove his worth. He managed an Alcatel vacuum-chamber manufacturing plant before turning 29, a reflection of good timing, he says. “The group in the U.S. quickly became the jewel in the crown, so we were given a great deal of power and influence over our destiny.”

After a decade with the French company, Croteau helped start Vertex Fab & Design, whose clients included NASA and the GE Hitachi Nuclear Energy plant in Wilmington, he says. Vertex Fab, which isn’t tied to the rail-car company, filed for liquidation in March and later reported debts of more than $2 million. But it was there he got the idea to make rail cars, hinging on a plan that a new entrant could succeed because federal regulations are forcing an estimated 200,000 cars to be either mothballed or retrofitted. Lawmakers have pushed for safer oil-tanker cars after a string of accidents and fires, including the June 2013 crash in Lac-Mégantic, Quebec that killed 47 people. Vertex’s future depends on demand for tanks that meet new standards and its ability to meet demand more quickly than entrenched competitors. Annual revenues could exceed $60 million by 2017, Croteau says.

But crashing oil prices are making Vertex’s challenge more difficult. Orders for rail cars overall declined 83% during the third quarter of 2015, the biggest decline in more than 25 years. The Washington, D.C.-based Railway Supply Institute said there still is a backlog of about 122,000 cars.

The company’s first order involved $25 million for 300 of the less-complex hopper cars, which transport sand to fracking sites and coal to power plants. Croteau declined to reveal the buyer, for competitive reasons. “We just picked up [hopper cars] last August because the market was interested in them.” The order was a milestone for Vertex, now a business and not just an idea. More orders for hopper cars will keep his nearly 300 employees in Wilmington busy through mid-2016, he says.

Vertex is investing $60 million at a 559,000-square-foot former Terex crane plant near the Port of Wilmington, where it hopes to build as many as 5,000 rail cars a year. The factory, built in the 1950s to make boilers, had been dormant since 2011. Many designs and improvements come from Vertex’s new Chinese partners, who helped configure manufacturing bays to produce more cars in less space. “From the very beginning, I presented a blended company that let the world know we stand together,” Croteau says. But, that doesn’t mean both sides were always in agreement.

June’s announcement of Vertex’s joint venture with China Southern and Majestic Legend Holdings Ltd. was the end of a long road that included 15 trips to Wuhan and ended in a Wilmington Hampton Inn. At the initial negotiations during Croteau’s third trip to China in July 2014, he arrived in the conference room to find a man whimpering in the corner. The Chinese asked Croteau to ignore him, but after a few minutes he asked why the man was in the room. Because he had failed at previous negotiations with potential U.S. partners, Croteau was told. As punishment, he was forced to watch the negotiations. “He sat there the whole day.”

Seven months later, in March 2015, a China Southern delegation flew to Wilmington to negotiate the agreement. For 15 hours a day over three weeks, they discussed everything from factory configuration to employee compensation in a conference room next to the manufacturing floor. Two days before the Chinese executives planned to depart, negotiations broke down. CSR wanted Croteau and his dozen employees to take a pay cut. Croteau refused and ended the talks.

“It is time for you to go,” he remembers telling the Chinese. “You’ve been telling me for two days my baby is ugly. I’ve had enough of it. These people matter to me. If you want me to start treating people badly, it is not going to happen.” The Chinese packed up their briefcases and walked stone-faced to a waiting van. The most senior delegate asked Croteau if he could call later. “Only if it is good news,” Croteau told him.

An hour later, Croteau’s phone rang. CSR wanted to meet again. “I knew they were going to call,” he says. “They needed a signed agreement before they left. I didn’t have a lot of leverage, but I knew they needed this.”

The next morning, Croteau waited in the delegate’s hotel breakfast area for an hour as the executives haggled with their bosses in China. Finally, an assistant arrived with the 70-page agreement — without pay cuts. The Chinese delegation set up a table and started to shoot photos and video for a document-signing ceremony. When Croteau noticed other hotel guests staring at the scene, he pulled the interpreter aside. “If you don’t want this all over YouTube in 20 seconds, we need to go.” Under its agreement, Majestic Legend, part of the same holding company that controls computer maker Lenovo, has a 45% stake of Vertex, while Croteau’s group has 33% and China Southern 22%.

Since a November 2014 ceremony in which Gov. Pat McCrory announced Vertex’s arrival, Croteau has been a fixture at  Wilmington business gatherings. He threw out the first pitch at a college baseball tournament in August. While showing off his plant, which received approval to start manufacturing in October, Croteau displays a charismatic energy, stopping to greet employees by name. His bald head stays covered by a blue hard hat as he drives a golf cart around the site.

Croteau’s enthusiasm captured the imagination of local leaders. North Carolina, New Hanover County and the City of Wilmington invested $1.5 million to extend Raleigh Road, the main route into the facility. An additional $500,000 in state funds will restore a rail crossing and spur near the plant.

Vertex didn’t seek state incentives because the company had already committed to Wilmington and didn’t want to delay progress. “Playing states against each other is not my style,” Croteau says. “I am impatient and tend to make decisions very quickly, and we had picked Wilmington.”

Vertex is proof that area governments can cooperate to bring more jobs to the Wilmington area, says New Hanover County Manager Chris Coudriet, a veiled rebuttal to the Garner Economics report. “I think when a business is not here and chooses to come and brings 1,300 jobs with it, it is hard not to measure it as a win.”

Known mostly for its tourism appeal, access to beaches and University of North Carolina system campus, Wilmington is pressing for jobs that pay more than most service-industry positions, which make up a majority of its employment. “It is a pretty good marker that all new jobs aren’t all going to be tech jobs,” Coudriet says. “There is still a lot of manufacturing that needs to be done in this country.”

New Hanover’s average weekly wage ranked sixth of North Carolina’s nine largest counties as of December 2014. Among the higher-paying local employers are nuclear-reactor maker GE Hitachi, pharmaceutical research firm PPD LLC and Castle Branch Inc., an employment-screening company.

While Croteau’s timing proved effective in attracting the Chinese investment, he’s had a tougher experience with the U.S. government. New federal tank car safety regulations were supposed to take effect in December 2014, perhaps spurring purchases. They were delayed until May, and Vertex didn’t produce its first car until October. The shift cost Vertex a chance to jump into the tank-car market when it was booming and oil prices hadn’t slumped.

“The timeline is our one black mark,” Croteau says. “The market wanted us to start sooner rather than later. As you get into these things, we realized we don’t control some of the market pressures like the price of oil and the regulatory drag.”

Market projections, which had supported Vertex’s plan, have moved in the wrong direction since a June 2014 market analysis by San Francisco-based Blueshift Research LLC suggested there is “no expected oversupply of tank cars for at least the next five years.” Tank car orders “remain robust, with sources expecting new orders of up to 35,000 or more per year” and backlogs remain lengthy, the report noted. But the market has shifted over the last 18 months, says Tom Williamson, owner of Overland Park, Kan.-based Transportation Consultants Co.

“Right now, it is going to be a very difficult time for them to compete,” he says. “Demand for tank cars has fallen on hard times.” Lease rates for tank cars are below $1,000 a month, falling from about $2,400 a year before. Railroads still want to retrofit older cars, but lower oil prices will stunt new car sales, Williamson says. “Everybody in the industry is talking about cutting back on production at time when [Vertex] is talking about bringing on new production.”

Croteau says Vertex is positioned to capitalize on the rail-car market, regardless of the type of car. “We quoted $170 million worth of tank cars this morning,” he said in August. “There are still a lot of people out there that need them.” The next major goal is to close an order for 500 tank cars. At year-end, the company was still looking to sell its first tanker car. “We’re doing one car a day now,” Croteau said in late October. “We’ll be at two cars a day in three weeks and three to four in six weeks.”

In December, Vertex delivered the first 80 hopper cars from its initial order of 300. An additional 3,600 cars have been ordered, Croteau said at a Dec. 15 ceremony.

As Croteau drove around the plant in late fall, it had the air of a victory lap. The finished car, painted tan, was proof that Vertex is a brand new rail-car manufacturer. No more sieges. No more waiting for the feds to finish their regulations. His focus now is building rail cars.

“We are pretty confident that if the market allows, by this time next year,” Croteau says, “we’ll be producing 32 cars a day, five days a week, 50 weeks a year.”

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