China’s One Belt One Road (OBOR), also referred to as the Belt and Road Initiative (BRI) has a head-turning list of projects involving more than 60 countries and an eye-popping, estimated budget exceeding U.S.$1 trillion. Its goal is to redraw global transportation routes and reshape logistical practices across the entire Eurasian land mass.
Says Nicholas Kwan, director of research for the Hong Kong Trade Development Council: “the number of participating countries is not the issue. BRI forms the basis of China’s globalization trade strategy.”
The ‘Belt’ portion will modernize the historic overland Silk Road trading routes connecting China and Europe via Central Asia and the Middle East. The ‘Road’ section will update numerous harbours, port facilities and canals along sea lanes linking China, Southeast Asia, South Asia and Africa. Resulting ship traffic will then feed into European ports via the Suez Canal.
One OBOR element—its rail link to Europe—is currently up and working. The first-ever, direct freight train service between China and the U.K. arrived in London in early January of this year after a 17-day journey. It carried 34 containers filled with clothes and other consumer goods valued at C$57 million. During its 12,000-kilometre trip, it passed through 10 countries including Kazakhstan, Russia, Belarus, Poland, Germany, Belgium and France. A customs agreement involving the European Union, Kazakhstan and China has eliminated inspections at each border crossing along the way. Once the goods clear customs at the China-Kazakhstan border, except for three stops to accommodate different track gauges, the train speeds on to Europe.
Demand for the Eurasian rail link continues to grow. London is the 15th European city on the list of delivery points for China’s rail cargo. In 2016, 1,702 freight trains made the voyage to Europe, more than doubling the 2015 figure.
OBOR’s ribbon of steel can serve as a “back-door” shipping link for E.U.-based Canadian manufacturing facilities and partners to customers in emerging Middle Eastern and Central Asian markets. “Geographically we are on the wrong continent to be directly involved,” says Bob Armstrong, a Lindsay, ON-based logistics consultant, who planned on attending the 7th Asian Logistics and Maritime Conference in Hong Kong in November. “The recently signed Canada-E.U. CETA treaty, further simplifies such deliveries.”
Serious talk about establishing such a link has recently surfaced. Canadian auto parts giant, Magna International Inc. founded by entrepreneur Frank Stronach, an Austrian émigré, has recently joined a consortium led by BMW AG and others to develop a self-driving vehicle platform to serve multiple auto makers. Magna has been assembling BMW vehicles in Austria for the past decade. Many industry observers foresee first-generation, Magna-developed and assembled electric vehicles (EVs) serving as back-haul cargo for the Yiwu-London train service.
More important, beyond simply boosting global supply chain efficiency, such experts also believe that OBOR can add muscle to China’s innovation strategy to market electronic vehicles (EVs) by 2025. According to the Bloomberg News Energy Finance (BNEF), the world’s largest economies—China, the U.S. and Europe—will be driving demand for battery powered cars over the next 25 years
Khorgos East Gate, a dry container port next to the border with China is key to Kazakhstan’s hopes of recreating the Old Silk Road. Here Chinese trains will unload their containers for transhipment to Central Asia and Europe.
That complements China’s latest industrial goal of leapfrogging foreign car makers at home and then expanding production to meet export demands. Its “Made in China 2025” blueprint for dominating cutting-edge industries includes controlling at least 70 per cent market share for homegrown plug-in vehicles by 2020.
At a recent future-of-energy conference in Austria, executives predict that besides simply boosting global supply chain efficiency that OBOR will add muscle to China’s innovation strategy enabling it to meet its 2025 target.
In addition, they also fear that China’s longer term manufacturing strategy sees developing EVs as the first step to competing directly with traditional European competitors. OBOR’s role in this grand plan is create a faster, cheaper and more efficient supply chain for delivering future Chinese innovative products to eager buyers and consumers from Asia to Africa.
After attending the recent Hong Kong Belt and Road Summit as a member part of the Canadian Mission, Joe Lam believes that it is still early days for OBOR. Lam, a retired Delcan International Corporation senior executive is an experienced “Asia hand.” He earned his stripes by developing and implementing major traffic control and surveillance systems for Hong Kong’s impressive network of tunnels and bridges. He says, “The Chinese vision is great. But so far, execution details are still missing. Organizers need to explain what both the Chinese and international partners need to do.
“Also, Canadian engineering and consulting firms must stop being shy about participating in major international projects.”
Toronto-based Hatch Ltd., a global management, engineering and development consulting firm has stepped forward to accept Lam’s challenge. According to David Small, a company director currently on assignment in Brisbane, Australia, some of the OBOR-related projects it is pursuing include a commuter rail and mining projects in Kazakhstan, a Beijing-to-Singapore high-speed rail link with focus on a Kuala Lumpur transport hub as well as alumina and steel projects in Indonesia.
Small points out some of the current bumps in the road to signing contracts. “There is a general lack of experience in completing the task at hand given the newness of the OBOR initiative and the incredible breadth of project type and geography. As a result, these corporations [Chinese state-owned enterprises—SOEs] face a steep learning curve on many fronts—culture, organization structure, systems, tools, standards, et cetera.”
Looking on the bright side, Small concludes, “This is both a problem and a huge opportunity, if you can position your firm as a trusted advisor to help Chinese clients navigate their way past both the external (international standards and regulations.) specific to their OBOR projects and the internal (relentless evolution of Chinese priorities, rules and procedures) pressures they are facing.”
Fulfilling its OBOR vision will also spur encourage China’s leaders and economic planners to think in grander terms. They realize that OBOR will play a major role in achieving China’s dream to overtake the U.S. and become the world largest economy by 2050. In turn, that will help usher in the Asian Century. Under that banner, economists forecast that countries in the region will leverage the work ethic of their young population, untapped natural resources and strategic location to create a vast market of middle-class consumers. Their success will drive global prosperity in the 21st century.
Up-to-date, modern infrastructure is crucial for realizing that vision. China can make it happen since it has developed the capacity to design, finance, build and, if necessary, operate the proposed OBOR projects. Beyond simply boosting its own political and economic power within Asia, Chinese leaders are also likely aware of the greater fame and glory arising from completing such grandiose projects.
In the past, besides significantly reducing the shipping times and distances between continents, the Suez Canal which France designed and built in the 1870s and which Great Britain later managed as well as the U.S.-built Panama Canal in the early 20th century affirmed their status as world powers.
In more practical terms, with its OBOR initiative, China, alone among the global major economies, understands the long-term, economic value of investing in modern infrastructure. Currently, most advanced economies have adopted a policy of “If it ain’t broke, don’t fix it.” They have reduced, if not eliminated such strategic infrastructural spending in favour of austerity and balanced budgets.
For example, Canada and the U.S. continue to drag their feet on the Gordie Howe International Bridge between Detroit and Windsor. Germany, despite its booming trade surpluses, has slashed government maintenance budgets which led to the brief closure in 2013 of the critical Kiel Canal, the world’s most heavily trafficked man-made shipping lane, linking the Baltic and North Seas. As well, many carriers complain that the government continues to ignore repairing the nation’s high-speed autobahn network.
Financing for OBOR projects are starting to emerge. One of the newest players is the China-led Asian Infrastructure Investment Bank (AIIB) a 57-member lending authority that includes most of the major European economies but not the United States or Japan. Canada recently joined as a second-round member contributing about one per cent of the AIIB’s shares. The AIIB has recently appointed Hatch as a consultant to complete due diligence and feasibility assessments for their OBOR portfolio.
Says Linda Seymour, Toronto-based executive vice president and country head of commercial banking, HSBC Bank Canada: “Recent reforms in China are making it easier for foreign companies to invest in China. Today, foreign companies will find it easier to access funding in China, and they are now subject to the same licensing rules that apply to local companies. For Canadian companies, these reforms have made it easier than ever to establish and grow their business in China.
“With the public sector so far providing more than 90 per cent of Asian infrastructure investment there is limited room for increased public involvement. Private investors will commit large-scale, long-term financing only if contracts are based on incentive-driven risks and returns with a solid legal framework that helps mitigate political threats. We believe a market-oriented, multi-tier system of financing is the way to provide sustainable funding for cross-border Belt and Road infrastructure projects.”
OBOR involves enormous risks. Potential investors and others are now starting to look behind the good-news headlines. Since most of the recipient countries are single-party authoritarian states, many of them have had an inconsistent record of repaying meeting loans from international development banks or defaulting on or missing payments on private sector loans and bonds. As well, even though China is now the world’s second largest economy after the United States, many experts contend that it lacks the economic muscle to finance the hundreds of billions of dollars-worth of overseas projects on its own.
As well, since many of the economies, political systems and civil societies of the recipient countries are not yet stable, fears of corruption, revolutions and political upheaval raise further doubts. At the same time, concerns over the high level of China’s current high national debt and deficit levels make potential foreign investors feel uneasy. There is now growing awareness that the biggest roadblock may be basic demographics. China, like most other of the world’s prosperous economies including Canada, are running out of millennials to replace retirees.
Finally, the ultimate concern about OBOR is its economic viability as a global supply chain. Although the Yiwu-London link is up and working, critics point out that many of the containers are returning empty to China. While rail is faster—18 days versus 30 days or more by sea, ocean freight is cheaper and offers higher capacity. The logistics challenge is finding suitable consumer products other than Scotch whisky that benefit from the train’s speedier but more expensive delivery.
The ultimate success of the One Belt, One Road network may rest upon transporting yet-to-be-built innovations such as electronic or driverless vehicles to middle-class consumers across the Eurasian land mass and beyond.