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The state-owned company also confirmed it will not build or assemble locomotives in New Zealand, after a review found it could cost 70% more to get the job done locally than in China.
Hillside Engineering workers were yesterday told China CNR Corporation (CNR) will build the first 300 of 3000 container flat-deck wagons KiwiRail wants to replace its ageing fleet.
Hillside's was third-best of nine tenders but it was still 25% more expensive than the tender prepared by CNR, the company contracted to build KiwiRail's new fleet of DL locomotives.
Hillside-based Rail and Maritime Transport Union national president Jim Kelly said the tender announcement was a devastating pre-Christmas blow for the about 160 workshop workers.
It was the second time this year they have been knocked back by KiwiRail: in May, the company rejected a New Zealand build of its $500 million contract for electric trains for Auckland.
"So to not get the tender when it is bread and butter to us - we built the wagon prototype, for goodness sake - and to be told that we didn't compete for wages with the Chinese, it's just another slap in the face," Mr Kelly said.
"If we can't build wagons at a manufacturing workshop, then what is the point of us being in existence. It's gut wrenching."
KiwiRail chief executive Jim Quinn said the difference between the tenders was too great and Hillside looked unlikely to meet the mid-year delivery deadline.
He confirmed the tender process had raised the possibility of Hillside assembling wagons from imported components - an idea that was suggested could make the workshop cost-competitive.
KiwiRail would look at local assembly options early next year, but Mr Quinn cautioned against offering "false hope" in the face of a 25% disparity.
The examination would not include looking at building locomotives in Dunedin. A re-checked price from CNR showed it would cost about 70% more to build them in New Zealand.
Mr Quinn said Hillside had a full work programme for the next year, regardless of the tender, but Mr Kelly said he was worried about the year after that.
"We know KiwiRail is looking at the future of the whole mechanical division, but you don't have to be Einstein to see if we are bringing in new wagons, and scrapping the old ones, that there will be an effect on our work," Mr Kelly said.
"There's still the contract to build the rest of the wagons, but there's no indication we can rely on getting that."
Dunedin South MP Clare Curran called the announcement a "possibly terminal" blow to the future of the embattled workshops.
The hope that Hillside might assemble wagons from imported parts was sorely tempered by the need to close the cost gap with China, she said.
Otago Chamber of Commerce chief executive John Christie said the focus must shift to Hillside building the remaining 2700 wagons.
It might also be time for the Government to use some of the tools it used to help the film industry to help keep rail manufacturing jobs in New Zealand.