MBTA May Halt $190m Hyundai Rotem Rail Car Order

(from the Boston Globe newspaper, 1/11/13)

By Eric Moskowitz

Chronic delays and concerns about shoddy workmanship by the company building a fleet of double-decker coaches for the MBTA’s commuter rail line have prompted executives to threaten cancellation of the $190 million contract and possibly seek a new firm for the work.

In a letter obtained by the Globe, state transit officials express deep frustration with the South Korean company building the 75 rail cars, Hyundai Rotem, declaring that “this seriously troubled procurement is at a point of crisis.”

That letter, dated Dec. 21, details a litany of woes, including faulty chassis and wires damaged by errant drilling on 10 of the first coaches to be built.

“I am writing this letter to you to convey my profound disappointment for Hyundai Rotem’s seemingly lack of commitment to improve its chronically unsatisfactory performance,” Jonathan R. Davis, the T’s chief financial officer, wrote. He cited materials shortages and workmanship at plants in South Korea and Philadelphia that “has degraded at an alarming rate.”

The Massachusetts Bay Transportation Authority declined to make officials available for interviews Thursday but confirmed the letter’s authenticity. In a brief statement, T spokesman Joe Pesaturo indicated that the letter caught the attention of Hyundai Rotem, with company leadership traveling to Boston this month to work out solutions short of termination.

“While some progress has been made, certain areas of concern remain,” Pesaturo said via e-mail. “It’s important that [Hyundai Rotem’s] leadership team not only understand the procurement’s ongoing issues, but also take the corrective actions necessary to address the shortfalls.”

A spokesman for the company said Thursday that Hyundai Rotem’s relationship with the T had improved markedly in the three weeks since the letter was sent.

“The communication now is much more positive, obviously, than the letter would point out,” said Andy Hyer, a US spokesman for the company. “They need their cars, and we want to give them to them. [But] it’s been a challenge to get them out quicker.”

In the December letter to Hyundai Rotem, T executives were explicit in what the consequences would be if the company doesn’t improve its performance. “Unfortunately, Hyundai Rotem inaction, inattentiveness, and generally poor performance have forced the MBTA to a final decision point relative to the declaration of default based on a material breach. Failing dramatic improvement and immediate corrective measures designed to remedy these defaults . . . the MBTA must consider terminating the contract for cause.”

When the T awarded the contract in early 2008, the first four cars were scheduled to arrive by October 2010, and all 75 were supposed to be carrying commuters in and out of Boston by the end of 2012. Instead, the first four coaches — currently going through extensive testing — did not reach the ­MBTA until two months ago.

Hyer said the company is addressing material shortages and is poised to hits its stride, with 24 Korean-built shells now being outfitted and finished for the T in Philadelphia. Four more empty shells should arrive next week, he said.

Hyundai Rotem made a bold entrance into the US market a decade ago with attractive promises, well-placed connections, and prices that beat experienced competitors.

Some in the industry considered it a risky bet, given that Hyundai Rotem had yet to open an assembly plant on American soil, a requirement under federal law, or demonstrate experience negotiating the stricter safety standards and other requirements that have bedeviled several large international corporations trying to break into the US transit and passenger rail market.

“North America is the most difficult market. It is the graveyard of car builders,” said Jonathan Klein, a global transportation consultant and former executive and chief mechanical officer at multiple large rail and transit agencies; he has not worked on the Hyundai Rotem deals but can see the company’s plant from his Philadelphia office.

Klein, who previously likened the T’s contract to Donald Rumsfeld’s wishful thinking on Iraq, said the MBTA now has two choices, neither of which would deliver coaches to riders as quickly or cheaply as originally planned. It can continue to try to coax Hyundai Rotem through cooperation or threat, or it can terminate the deal, seek damages, and begin the process of finding a contractor all over again.

Hyundai Rotem built its domestic assembly plant in Philadelphia because local job creation was part of the pitch to win its first major US deal, 120 coaches for Philadelphia’s transit authority. That order is finally nearing completion, though only after the company fell far behind amid materials shortages, quality-control problems, and labor strife.

“The T has dug a hole, and it’s going to be very expensive to fill that hole,” he said.

Hyundai Rotem sought the MBTA contract soon after it won the Philadelphia deal, bidding nearly 20 percent below industry veteran Kawasaki on price and receiving high technical marks from MBTA staff reviewing the bid.

T management glossed over Hyundai Rotem’s lack of US experience and encouraged the MBTA board to approve the contract quickly, given the needs of the T’s aging fleet, according to meeting minutes and materials prepared for the board.

Some members who approved the deal were livid when they later learned that a former high-ranking Boston and Philadelphia transit executive whose son remained a T manager had been hired to help Hyundai Rotem win the Pennsylvania contract. But the T said the father and son were not involved in the Boston bidding and that the son also informed the state Ethics Commission that he was recusing himself.

Though it soon became clear internally that Hyundai Rotem was falling far behind, MBTA and Department of Transportation management did not tell the board overseeing the T until a year ago — when they asked the board to approve $4 million more on top of $10 million already committed to an engineering firm hired to provide expertise and help the T ride herd on the increasingly complicated order.

Angry board members summoned Hyundai Rotem’s chief executive, M.H. Lee, to appear before them last June. He apologized for what he deemed a corporate embarrassment and said Hyundai Rotem would redouble its efforts, promising to make up lost time without compromising quality.

The T indicated in September and November that things seemed to be improving, but Lee died unexpectedly in mid-November. The letter from Davis suggests Hyundai Rotem once more put the T on the back burner after that.

Jim LaRusch, chief counsel and a vice president for the American Public Transportation Association, could not comment on the MBTA contract but acknowledged that equipment purchases are expensive, time-consuming, and potentially fraught with pitfalls.

They start with thousand-page technical specifications that incorporate federal standards and guidelines for safety and accessibility, as well as the unique needs of that transit agency, with its array of existing locomotives and coaches and varying types of stations. Bidders must be evaluated on price and ability. “Then the fun starts,” he said, meaning years of back and forth over development, production, and testing.

“It’s a pretty complex process,” LaRusch said. “It’s not like buying a Toyota.”