By BOB TITA and JAMES R. HAGERTY CONNECT July 13, 2014 6:49 p.m. ET The Wall Street Journal “Caterpillar Inc. CAT +0.55% has fallen far behind General Electric Co. WABTEC +1.34% in the race to offer a railroad locomotive that complies with stricter emission standards that take effect next year. Caterpillar's Electro-Motive Diesel unit said its freight locomotives probably won't be available until 2017. Caterpillar said it is working to speed up its schedule and could have demonstration models available as early as next year but doesn't anticipate having production units ready until 2017. WABTEC is already testing locomotives that comply with diesel-engine exhaust regulations that take effect Jan. 1. The company has added a pollution-reduction system to its existing locomotive engine and expects full-scale production of emissions-compliant locomotives to start next summer. "We've got units operating so we can demonstrate performance," said Tina Donikowski, vice president for WABTEC's locomotive business. Caterpillar's sluggish engine efforts are a setback for a company that prides itself on building large, high-horsepower diesel engines for off-road vehicles and industrial uses. The freight locomotive market is prone to sharp swings in demand. Sales in North America this year are likely to top $6 billion as railroads expand their fleets in response to congestion and new business, such as hauling crude oil. Railroads also are buying this year because emissions components will add 15% to 20% to a heavy-haul locomotive's price, which averages about $2.5 million. WABTEC has an estimated 60% to 70% of the U.S. locomotive market. Electro-Motive's two-year absence is expected to help WABTEC solidify that lead, especially if WABTEC's locomotive is a hit with the railroads, analysts said. Caterpillar is "definitely going to lose market share for the years that WABTEC will have something ready to sell," said Lawrence De Maria, an analyst for William Blair & Co. Caterpillar played down the significance of the gap, predicting that railroads will delay buying locomotives with the reconfigured engines. "History indicates that the railroads are slow to adopt new technology until it is fully proven in the field," a Caterpillar spokeswoman said. U.S. freight locomotive production typically ranges from about 500 to 1,000 units a year. But orders this year have already reached about 1,300 locomotives, the highest volume since before the 2008 recession, said consultant Sean Graham-White. Caterpillar will rely on overseas sales of Electro-Motive locomotives to sustain the business during its U.S. market absence. Overseas orders make up about 30% of Electro-Motive's overall annual sales, which last year reached $2.5 billion, according to analysts' estimates. When Caterpillar acquired Electro-Motive four years ago for $820 million, the Peoria, Ill., company promised to deliver an "industry-leading range of locomotive, engine and emissions solutions." Electro-Motive was expected to benefit from Caterpillar's long experience in designing and manufacturing engines for bulldozers, mining trucks, ships and electricity generators. Caterpillar said its own diesel engines are being used in passenger locomotives and smaller freight locomotives used for short hauls. North American railroads, though, so far have shown little interest in powering Electro-Motive's long-distance freight locomotives with Caterpillar's diesel engines, according to rail industry analysts. Instead, the railroads continue to prefer Electro-Motive's mainstay 1984 engine model, which has been updated repeatedly over the years. "It's a simple engine that's ultrareliable," said Edward Biggs, president of rail-equipment consulting firm Biggs Appraisal Service in Marietta, Ga., "That's what the selling point of [Electro-Motive] has been for the last 50 years." Despite its popularity, the engine can't be easily retrofitted to meet new federal requirements for reducing diesel soot particles and smog-causing emissions, forcing Caterpillar to come up with an alternative engine. The uncertainty over Electro-Motive's ability to produce a compliant locomotive could entice other locomotive manufacturers to step into the void for a second freight locomotive brand to WABTEC. Wabtec Corp.'s WAB +0.11% MotivePower division builds smaller locomotives for freight and passenger service. A recently formed passenger locomotive venture between Siemens AG SIE.XE -0.15% and engine-maker Cummins Inc. CMI +0.15% also could expand into the freight business. Spokesmen for Siemens and Cummins declined to comment on whether the companies are interested in the freight locomotive market. A spokesman for MotivePower said it had no plans to expand its locomotive line for the long-distance, heavy-haul market.” Write to Bob Tita at robert.tita@wsj.com and James R. Hagerty at bob.hagerty@wsj.com