Around 1,400 jobs will be lost in the UK since Bombardier (TSX: BBD.B), a Canadian company, does not have facilities to build steel carriages in its train factory in Derby, central England.

According to the Department for Transport, the company could have saved more than 1,000 jobs if it won the 1.5 billion pound contract to build 1,200 train carriages for the Thameslink commuter service to London, which is about 130 miles from Derby.

According to the BBC, Bombardier doesn’t have the facilities at its central England plant to carry out the work it has been invited to do by the British government. The plant is only equipped to handle aluminum. Industry experts expressed that upgrading the factory to handle steel is commercially unviable.

The financing element was vital for Bombardier to win the contract, and potentially provide a shelter to nearly 1,500 jobs. The tender called for bidders to build, maintain, and crucially finance 1,200 carriages for over 30 years. Bombardier lost to Siemens, a German company, as the preferred bidder to build 1,200 carriages for the route between Bedford and Brighton.

Limited financial credibility of the company would have heavily increased the cost of borrowing, which caused Bombardier to lose to Siemens. Bombardier’s debt has been rated by credit rating agencies to BB+, along with other bidders, such as Alstom and Hitachi, whereas Siemens debt is rated at A+, a difference of six notches.

Investment bankers familiar to the deal said that each notch difference presented a lost opportunity. That means Bombardier may have lose an extra 0.25 percent if funded by the debt. On the surface, Bombardier’s failure the result of two undeniable reasons: the technological snag that can’t be neglected and financial incredibility.

The company doesn’t have adequate financial resources that can bring in the desired makeover to the plant so that it can handle steel manufacturing. Bombardier’s Derby plant currently manufactures subway cars for London’s underground system, trains for National Express, and turbostars for Chiltern and Midland.

Bombardier was in unfortunate financial absurdity, making it impossible to win over the contract. On the contrary, a consortium led by Siemens enjoyed financial elasticity of having a much greater or higher credit rating. The essential idea is that the chances of winning a contract relied much more on financial feasibility of Bombardier, since bringing a massive makeover in an existing plant to manufacture steel was really a big element.

The British government has set up a task force to mitigate the economic impact of job losses in the East Midlands. The Department of Transport said Siemens will be hiring 650 people in Britain to build trains.

Image Courtesy of   http://www.flickr.com/photos/portoftacoma/

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About the author

Muhammed Faraaz
Post-graduate in Economics from India, unfolding complexities and policies. Proponent of Classical Economics.