Asia-Europe dedicated block trains could offer new options for global shippers
China’s bold plans for the New Silk Road, a transcontinental rail system linking the entire Eurasian landmass, will redraw global trade routes, as did its fabled ancestor. The 21st century version will replace caravan trails with modern railroad tracks.
Parts of the Asia-to-Europe pipeline are already delivering goods. The first train to complete the world’s longest rail journey from China to Spain returned home in February after a 25,750-km journey. It carried a backhaul load of olive oil, wine and cured ham to Yiwu (a city near Shanghai). It passed through France, Germany, Poland, Belarus and Kazakhstan. The 82-container cargo train originally arrived in Madrid in mid-December laden with Christmas toys and power tools. The line is 724 km longer than the Trans-Siberian Railway.
The trip took 16 days vs. 45 days or longer by sea. Travelling overland is also one-tenth the cost of air cargo. Shippers and forwarders foresee dedicated block train services, i.e., ones booked by a single client, carrying everything from fresh fruit to auto parts. The project is merely the latest in China’s mad dash to expand its domestic rail network and connect it with European cities. Earlier links include the 9,826-km line between Chengdu in Sichuan Province and Lodz, Poland, which opened in 2013. Another is the 10,800-km link between nearby Chongqing to Duisburg, Germany established in 2011. The latter’s annual freight volume in 2012 of 2 million metric tons is expected to peak at 15 million metric tons. Then there is also the 10,214 km Zhengzhou-Hamburg connection that takes 18 days. Zhengzhou is strategically located at the confluence of China’s east-west, north-south national rail lines.
These ribbons of steel are the 21st century equivalent of the iconic Orient Express that connected Paris and Istanbul. Only these Europe-Asia trains carry cargo, not tourists. With more in the pipeline, these projects will far exceed the exploits of 19th century U.S. and Canadian railway barons.
As a result of the recent experience of its Full Container Load (FCL) rail solution on the Chengdu-Zhengzhou-Europe route, UPS can outline real-world advantages to Canadian firms operating global supply chains. According to Nikkol Zezza, Mississauga-based manager, Public Relations & Social Media UPS Canada, Canadian companies sourcing or manufacturing goods in East Asia and exporting them directly to the European market now have lower cost options. It will also benefit Canadian companies that partially manufacture goods or inputs in Asia and then ship them to Europe for further work prior to delivery within Europe and/or export back to North America.
Indirectly, the New Silk Road could also provide additional benefits to Canadian companies after the Canada-EU Comprehensive Economic and Trade Agreement (CETA) comes into force. Lower Canadian duty rates may apply to EU imported products sourced in China and other parts of Asia depending on their level of EU value-added content. As well, the service may encourage Canadian companies to shift their Chinese operations further inland where production costs are lower.
Since the New Silk Road is in its early days, many Canadian firms are still weighing their options. Says Sarah Kutulakos, Toronto-based executive director of the Canada China Business Council, “For the most part, we are not paying attention to this in a big way. It is up to individual companies to decide whether they want to get involved. Since a lot of it is about building infrastructure, Canadian construction and engineering firms may see opportunities. Many of the business relations we have with China involve our expertise in services. Canadian firms were active in the huge Three Gorges dam project.”
China is extending its long logistics arm by planning, financing and ultimately building major infrastructural projects wherever they are needed including in Central and Eastern Europe. For example, China, Serbia and Hungary recently signed a memorandum of understanding to build a new 402-km rail link between Belgrade and Budapest. The upgrade will speed up China’s plans to expand Piraeus, Greece’s main port, into a regional trade hub. A Chinese firm, Cosco Pacific, which operates two of the port’s three container quays, will spend US $285 million (CAD $350 million) to build a fourth quay. It will increase annual capacity to more than 6 million TEUs, up 62% from current levels.
Domestically, China’s “one belt, one road” strategy will establish a new framework for regional economic development within China. To finance such infrastructure projects linking its domestic markets to three continents the government recently set up a US $16.3 (CAD $20.6) billion Silk Road Fund.
Among other things, China’s Go West infrastructure policy simplifies moving bonded goods within China. Now, such products made in Sichuan are shipped in sealed containers eastward down the Yangtze River to Shanghai. By sidestepping Shanghai, the world’s busiest container port, shippers, carriers and others save time and money while avoiding red tape.
Speaking of red tape, since Kazakhstan is part of a customs union agreement with Russia and the European Union, once block trains are cleared in a matter of hours at the Kazakhstan border there are no more inspections or delays until they reach their European destination. Besides speeding up the journey, eliminating border-crossing checkpoints also removes the nuisance of bribes and facility payments that plague international trade in this part of the world.
Despite the high hopes, these projects still face numerous challenges. The most obvious is the need to offload containers and reload three times because of different railroad gauges along the route.
The trains will require special equipment. The Wall Street Journal recently cited comments from Darryl Hadaway, a senior consultant for Kazakhstan’s KTZ Express, who expects at least 50% of the containers to be reefers, even in summer. The company is about to take delivery of 200 45-foot reefer containers to meet shipper demand.
He says, “Even in summer temperatures get up to 40°C and winter temperatures fall to minus 50°C. By year-end, we should have about 900 reefer containers on our books.”
Geography also poses engineering and construction problems because the route must wend its way across the “roof of the world”-raging rivers and other desolate terrain.
But the greatest challenges will likely arise from the centuries-old rivalries involving countries in the various regions sitting between China and Eastern Europe. These include South and Central Asia, various small republics in the former Soviet Union as well as the Middle Eastern hornets’ nest. While Afghanistan leaps immediately to mind as a trouble spot, India and its neighbours, Pakistan and Bangladesh, among others, must put aside their age-old political, ethnic and religious differences to work cooperatively so they all can benefit fully from the new opportunities.
Although China has the money, engineering expertise and experience, not to mention the determination to carry out these plans, many recipient countries are still concerned over what strings are attached to China’s generosity. For example, the newly elected Sri Lankan government has halted work on the US $1.4 (CAD $ 1.72) billion Colombo Port City megaproject. The incoming prime minister said that the deal lacked transparency.
To allay such fears, China is actively reaching out for global as well as regional partners. A top priority is setting up the new US $50 (CAD $61.53) billion international financial institution, the Asian Infrastructure Investment Bank (AIIB). So far, more than 50 countries including the United Kingdom, France, Italy and Germany have applied to join. However, several major powers-Japan, the U.S. and Canada are still making up their minds. More importantly, major international financial institutions (IFIs) such as the World Bank and the International Monetary Fund have expressed interest.
One of the emerging regional players is the Central Asia Regional Economic Cooperation (CAREC). Besides China, the other members include Mongolia, Pakistan, Afghanistan and six so-called former USSR “stans” Azerbaijan, Kazakhstan, Kyrgyz Republic, Tajikistan, Turkmenistan, and Uzbekistan. Six major multilateral financial institutions have signed on. CAREC’s avowed goal is to “mainstream” regional cooperation in the areas of transport, trade, and energy.
To date, it has designated six specific corridors in the New Silk Road, i.e.,
(1) Europe with East Asia, (2) the Mediterranean region with East Asia, (3) the Russian Federation with Middle East and South Asia, (4) the Russian Federation with East Asia, (5) East Asia with the Middle East and South Asia and (6) Europe with the Middle East and South Asia.
Corridor 1, the rail–land bridge between China and the European Union via Kazakhstan and the Russian Federation is currently up and running.
A complementary, ocean-going version of the New Silk Road, often called the “string of pearls”, will connect traditional ports such as Yangon and new ones such as Dawei and Kyaupyuin in Myanmar with others in South Asia that include Kolkata (Calcutta) in India, Dhaka and Chittagong in Bangladesh and Colombo in Sri Lanka. From there, ships can reach ports in East Africa or pass through the Suez Canal.
This initiative also has firm roots in China’s history following in the wake of the Ming dynasty admiral, Zheng He, who made seven voyages to the Bay of Bengal in the 15th century. His travels to the region took place before the arrival of Portuguese, Spanish, Dutch and English explorers in the region.
A recent report by China’s National Development and Reform Commission (NDRC) report stressed “infrastructure connectivity” acceleration with Pakistan, Bangladesh, India and Myanmar as part of China’s Silk Road Economic Belt and 21st Century Maritime Silk Road initiatives.
It will provide alternative routes for China’s western and central manufacturing powerhouses in Wuhan, Chengdu, and Chongqing etc. to ship products more directly to European customers. As well, it creates another pipeline for moving goods and raw materials in and out of the rapidly expanding ASEAN (Association of South-East Asian Nations) marketplace to take pressure off Singapore.
Last fall, Chinese president Xi Jinping announced that such plans require building or expanding ports and industrial parks across Southeast Asia and in places including Sri Lanka, Kenya and Greece. More recently, he said that he expects China’s annual trade with countries along the Silk Road will surpass US $2.5 trillion within a decade.
China’s leaders are now inviting other countries to come along for the ride as China carves out new trade routes that will reshape geography and rewrite history.
Ken Mark is a veteran technology expert, who has covered supply chain management since it was called distribution and has documented its legitimization as a critical business function. He holds an MBA from York University.