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China’s Belt Road Initiative and supply chains in Asia

China’s Belt Road Initiative and supply chains in Asia

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The Belt Road Initiative (BRI) is an industry wide phenomenon that all in the logistics and supply chain sector needs to be aware of. As highlighted previously, the BRI is an emerging and fluid initiative as adjustments are made to meet challenges that arise, these include responses to security issues. Until recently, an infrastructure and ge-political gap has limited the impact of this change. This was addressed in 2013, when Xi Jinping of China announced the BRI strategy: a plan to realign sea and land based transport corridors. In a sense, this is a reformulation to a new Silk Road. The grand plan is to build key infrastructure that allows greater access to markets in the East and West, with production and commercial activity being located in remote, low cost areas. Included in this plan are ports (dry and wet), railways, special economic zones, electricity, IT connectivity, health and education.

A further complication is the introduction of counter initiatives, such as India/Japan’s ‘Freedom Corridor’ (FC). This adds complexity in deciding the most effective and efficient logistics modality to transport goods between major markets in the East and West. Both the BRI and FC are building major pieces of connectivity infrastructure, and overlap in geographic regions, such as Myanmar and Bangladesh. What we now have is new inland rail corridors connecting inland markets to each other as well as to new maritime ports. Previously, inland regions such as Yunnan, now have access to markets. The improved connectivity is driven by China’s desire for trade and energy security, with the FC based on the USA partners need reduce China’s influence in the region. Business must adjust current practises to these new transport corridors lose key markets in the region.

The new transport corridors have altered the industrial landscape in Asia by changing trade and production patterns, resulting in significant socio-economic and geo-political power and logistical changes. There is disruption in logistics and supply chain between West and East. Whilst this type of change is not new to the region, the old Silk Road provided an inland trade routes, the BRI is a response to two mega-trends, first the shift in manufacturing based economies, secondly improvements made to the maritime industry. There is a reversal of the trend to coastal based economic activity back to inland based options, made possible by better rail access to markets and ports. The current economic shift is characterised by the relocation of low cost producers from China to alternative destinations in Asia where wages and manufacturing costs are lower.

The relocation of production capabilities produces challenges to organisations as they work to adapt to the new economic order. By way of example, transport / distribution / logistics are in the process of changing as China moves from bulk shipping of cheap products to a mix of transport modes that meet the new supply chain requirement of ‘just in time’ delivery for high cost components. China has also built its capability in high tech manufacturers, reportedly accounting for 40% of world trade in electronics goods. This change in capability calls for a new logistical mix of sea, rail, road and air. This is particularly relevant when one considers that electronic goods have a higher value and best suited to rail transport for reasons of speed and inventory value.

What are the drivers for organisations to take action? First, the implementation of China’s BRI is already well under way, with $900bn in projects that have been identified and are in the process of being funded. Secondly, the BRI has the potential to yield considerable economic and political gains for those who want to access a region that has a profile as follows:

  • The population of participating countries is 4.4bn
  • BRI covers 62% of the world’s population
  • Combined regional GDP is $23trn
  • Trade volume between China and BRI countries is $3trn.

The BRI requires a logistics solution that optimises access to these markets. In particular the logistics mix comes down to whether new rail infrastructure allows for a more efficient solution or will maritime shipping still be the most effective mode. Those with shipping interests would argue that when using energy performance indicators, economies of scale in maritime are evident. As stated earlier, with China moving to high value manufacture, the choice of transport mode depends on what is seen as the more efficient. For example, a report from the USA Department of Transportation, using “energy used” as a measure, argues that shipping is more efficient. Their formulation, shows that one ton of cargo using 1kWh of energy can be transported 55 km by sea /water as against 20 km by rail. However, if using a ‘cost per ton per mile measure’, as used by Richard Torian, and data from the US Department of Transport, rail is the most efficient form of transport. This measure shows rail costs $0.03, maritime $0.1, and road $0.37 per mile.

Whilst a recent World Bank report suggests that rail is the most effective mode of cargo transport, the emerging BRI introduces complexity. Infrastructure constraints as well as other initiatives introduced by China, complicate decision making. However the BRI is addressing these, and in doing so, will change logistics and supply chain practice.

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Andre Wheeler

In mid 1997 Andre established Wheeler Management consulting which in 2014 became Asia Pacific Connex. His key industries are oil, gas, construction, EPCM, marine services and mining. He is particularly experienced at project management and business development that focuses on financial return, customer solutions and innovative process design. Based in Perth, Andre spends considerable time with clients throughout Asia, and is a specialist advisor to five different fund managers.

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