How OEMs can succeed in digitized rail infrastructure

The global rail-infrastructure-technology industry, a global market of approximately €36 billion each year, has its signals set for stable growth until 2025. Yet, we also see considerable change to come in the industry’s three core segments: train control and signaling, electrification, and digital customer solutions. Nine key trends will significantly shape the future of the global rail-infrastructure-technology industry over the coming decade along the three dimensions of industry dynamics, customer landscape, and technological change (exhibit). In addition to their effect on the industry as a whole, these nine trends will have a direct and significant impact on each industry segment.

Over the past year, McKinsey has conducted in-depth research, including more than 50 interviews with industry experts representing a range of rail-infrastructure manufacturers to rail operators as well as scientific institutions and digital ventures. We have used our findings to create a comprehensive picture of the current and future state of the industry, and to sketch a strategic road map for rail OEMs to respond to the opportunities and challenges ahead in rail-infrastructure technology. This article is an extract from our new report, Signals set for growth—How OEMs can be successful in a digitized rail infrastructure, which summarizes what we learned.

Prospects in the sector's main segments

The trends, challenges, and opportunities are likely to play out differently in each of rail-infrastructure technology’s three segments:

• Train control and signaling. The rollout of the European Train Control System’s advanced-signaling-upgrade program across Europe presents a solid growth outlook for rail players with an aggregate market potential of around €35 billion until 2030. Software solutions enabling real-time train-to-train and train-to-network communication together with infrastructure components for autonomous-driving technology are advancing both technology development and overall growth. However, product standardization and intensified competition on a global scale are also pressuring established rail players to reassess their strategic positioning as scale becomes ever-more important to remain competitive against players from lower-cost environments, especially China. Global revenues are set to grow to approximately €19 billion a year until 2025 in real terms, up from around €17 billion a year today.
• Electrification. Traditional rail-electrification technology is fairly mature, and selected smaller new-built initiatives are scattered across several regions, providing for low but stable growth. Yet, alternative propulsion technologies such as battery-powered rail solutions or fuel-cell technologies could become relevant, especially for urban transit. As these enable increasingly higher performance at lower costs, players should prepare to complement their urban infrastructure portfolios with, for example, advanced battery-powered rail solutions. Like the observable dynamics in the train control and signaling segment, achieving sufficient scale can help rail-electrification players to remain competitive in the future amid intensifying global competition. Global electrification revenues are set to grow to about €10 billion a year by 2025 in real terms, up from approximately €9 billion a year today.
• Digital customer solutions. Digital B2C solutions mark the strongest growing segment for rail players over the years to come. Global revenues are set to grow significantly, to more than €15 billion a year by 2025 in real terms, up from around €10 billion a year today. Fueled by all-encompassing connectivity, data availability, and an ever-increasing demand for information, end-to-end mobility solutions and other use cases around the passenger interface create significant new business opportunities in B2C. Consequently, multiple players from the rail ecosystem and beyond are expected to compete for the passenger interface as the basis for future revenues. Hence, developing a strong stance in these digital solutions with access to the passenger interface needs be at the heart of the rail-infrastructure-technology industry over the coming decade.

Path forward

These developments present several opportunities for growth but require rail players to act now if they wish to succeed in an increasingly digitized rail infrastructure. These industry-level developments are happening in the context of two broader trends. First, as rail infrastructure becomes increasingly connected, cybersecurity becomes a more and more important issue. Industry players must build adaptive, responsive organizations to stay ahead of evolving cyberthreats. Second, rail operations are on the path toward becoming fully autonomous, particularly in urban transit. Industry players hence need to complement their portfolios with solutions enabling autonomous train operations as these have several positive implications for network capacity, safety, and cost of operations.

There is certainly no standardized approach to adapting the current business model of established rail players so that they can capture the new growth potential effectively. However, our observations of players in the rail-infrastructure-technology industry—and in adjacent industries that have successfully adapted their business model to tap into new revenues pools, particularly those including technological disruption—reveal a set of approaches and perspectives that have proved effective. Specifically, we have identified actions in five areas that aspiring OEMs might consider taking:

• Cost consciousness. To strengthen future competitive positioning, sufficient scale, design-to-value initiatives, and low-cost locations could be the key to reducing costs, particularly in procured parts, R&D and engineering, and manufacturing.
• Customer and project-centric organization. More global market accessibility and a significant uptake in urban rail developments have made the customer landscape more complex and demands a more tailored sales setup.
• Value-chain positioning in B2C. Looking beyond their traditional B2B orientation, OEMs need to decide on which value-chain parts they want to operate for the largest growth segment in the infrastructure-technology industry—digital solutions for the passenger interface.
• Innovation and technological standards. To successfully capitalize on the disruptive technology trends around advanced signaling, automated operations, battery technologies, and digital customer solutions, innovation is key and requires sufficient internal, and possibly external, capabilities.
• Partnerships. OEMs should evaluate opportunities for further cooperation across and beyond the industry to form scalable ecosystems and profitable alliances. The viability of individual partnership options depends on each player’s starting point.

Download Signals set for growth—How OEMs can be successful in a digitized rail infrastructure, the full report on which this article is based (PDF–16.6MB).