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Why Singapore and friends cannot ignore the new Silk Road

Why Singapore and friends cannot ignore the new Silk Road

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At the recent briefing looking at China’s One Belt One Road strategy and Myanmar opportunities, held in Yangon, attendance was good and the discussion robust. Delegates from companies representing countries such as Japan, Singapore, Australia, China, Malaysia, the US and India were in attendance.

The briefing included an overview of the important transport corridors that have been identified in the Asia and Southeast Asian region, the intent behind the strategy and potential threats and opportunities to countries such as Myanmar and Singapore. Myanmar has an important role to play in the One Belt One Road (OBOR), particularly when one considers the already close ties with Yunnan Province. Yunnan province’s role in the OBOR is to co-ordinate, integrate the Asia / SE Asia economic region that is home to 600m people and a market size of $2.6trn. In an earlier article written for Myanmar, I highlighted the importance of Myanmar in providing a west coast marine access that assists bypassing the Malacca Straits as well as the provision of labour for manufacture (It is ironic to think that a country with a population the size of China, is experiencing labour shortages).

However, the main debate focussed on two issues: is the OBOR in fact a strategy or just a recent part of the dialogue, and secondly, is Singapore as a maritime hub really at threat because shipping a container will always be cheaper than rail. I will deal with these two issues separately as both are based on assumptions that we in the West would do well to question.

Is the OBOR / new Silk Road strategy, a myth or ad hoc?

When having this debate, what is lost is the notion that this is a debate based more on semantics rather than substance. It also reflects a poor understanding of the Chinese cultural context around which China views the world. In simple terms, the West sees strategy as direct action based on well-articulated plans and roadmaps. The Chinese on the other hand have an indirect approach, based on ambiguity and deception – but with a clearly understood end point. In a sense, the Chinese concept would have a better fit with the notion of an “initiative” – but it is strategic in nature and intent.

By way of example, when Sun Tzu and Mao Tse Tung spoke of military action they spoke more of deception and manipulation than military doctrine. When looking at Chinese literature, such as “The Sage” we see the use of “cunning” to manipulate and conceal motives, the art of being invisible and denial of world leadership ambitions. When thinking of the concept of “hiding in plain sight”, one gets a real sense of what underpins the strategic thinking behind the OBOR and what it is all about. The overall direction of China, that includes the OBOR is based on the desire to restore China to, what they see, is its rightful place. These pieces and intent have been put in place in works such as “The Under Heaven System “ and continued in “The China Dream” and sets out a 100 year program to restore China’s dominance by 2049. The importance of the OBOR to this was clearly made Xi Jiping used the words “Chinese Dream” when announcing the OBOR in 2013.

Further evidence of the strategic role / nature of the OBOR are last week’s announcements in China that all SOE outbound investment will be centrally funded only if it fits within the OBOR framework. Private investments will also get central government support if it can be shown to bring about a piece of the OBOR. This is why I would claim that Myitsone Dam in Myanmar may well be a private initiative started “before” OBOR has become a bargaining chip to try and secure a China west coast presence, a key element in OBOR.

Singapore and the OBOR – nothing to see?

With all the activity around key infrastructure and economic co-operation in the region, there have been a number of questions raised as to the impact this will have on Singapore. This is particularly relevant when one looks at the following recent developments:

· First rail delivery between China and London
· Bangladesh – China – India – Myanmar corridor, focus on transport, energy and facilities
· Kolkata – Dhaka – Mandalay – Kunming corridor
· Chongqing set up as logistics centre for high-end manufacture
· Railway project “Yuxin Ou” linking China to Germany via Kazakhstan/Russia/Poland
· Thai / Kra Canal in Thailand back in focus and China will pursue as new King supports initiative
· Port Klang new terminal complex
· Malacca Port complex.

The Singapore government and business has responded to these, with what I would call, a naiveté that does not appreciate the Chinese approach to strategy described in the first part of this piece. In the first instance, the argument revolves around the notion that the OBOR is land based and linked to rail and nothing really to do with maritime. Whilst technically correct, the initiatives to date have been by and large land based, the OBOR also talks of the maritime Silk Road. What may not be obvious to many, is the OBOR is an integrated transport and logistics network to link and grant participants greater access to Chinese, Asian, African and European markets. It will redefine the economic model and means by which goods are distributed, that will see a rebalance of shipping and rail methodologies. The economic modelling around logistics is undergoing a fundamental change, and one could argue a paradigm shift.

The Singapore economic model is based on “big is beautiful” as seen in their responses of – we can handle larger container volumes than others, etc. This makes shipping cheaper and more cost effective. However, this approach, by and large, was driven by poor supply chain visibility and lack of infrastructure to transport. The model itself is inefficient and ignores cost fundamentals.

And just what are these cost fundamentals that will place pressure on Singapore’s future? Firstly some facts:

· Rail is faster than shipping, thereby getting product to market quicker
· Rail at the moment is more expensive per container, however the World Economic Forum has shown that rail freight per kilometre per standard container has dropped significantly from 2011 to date, with the gap narrowing from a ration 1: 0.5 in a dollar to 0.6 : 0.5 in the dollar.
· Double stacking rail containers, according to the World Economic Forum, is cheaper than shipping.

The other cost savings to be enjoyed by a new rail/shipping framework:

· With improved speed from manufacture to market, translates into lower inventory and warehousing costs
· Improved IT allows for better planning and inventory management assisting just in time manufacturing
· Reduced costs associated with slow / delay deliveries
· Reduced costs associated with port fees and charges due to need for larger facilities
· Reduced costs associated with LCs and value of goods on board whilst in transit on lengthy sea voyages.

All this reflects Singapore’s weakness when they argue that the size of their container terminals and port facilities give them a competitive advantage – the paradigm is changing, and quickly, where smaller becomes king as there is improved and efficient transhipment and access to markets. This will not happen overnight, but if one considers that the OBOR is part of a 100 year marathon started in 1949, it is getting closer to the 2049 delivery.

In conclusion, whether the One Belt One Road initiative is a strategy or not, is a semantic debate at best and a theoretical nonsense at worst. The OBOR will change the way business is conducted in the region as it rewrites the transport / logistics /supply chain model. This will open opportunities for new nodes to emerge and will place existing nodes / hubs at risk, particularly the likes of Singapore.

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Andre Wheeler

CEO of Asia Pacific Connex with more than 20 years’ experience in international business, with a diverse network throughout the USA, Asia, SE Asia , Africa and the United Kingdom. Holding a B. Science (Hons) degree and an MBA, he is currently working towards his Doctorate on the Impact of the China One Belt One Road initiative. Andre has expertise in oil/gas, construction, marine services and mining.

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3 Comments

  1. Dominic Chia
    January 31, 2017 at 1:58 am

    Dear Andrew

    Your article summarizes what has been written in the media. It is no doubt that China OBOR will open opportunities to many developing countries and a threat to traditional trade route but I believe that there is plenty of trade to go around. Even today, Singapore is not the sole beneficiary to the international trade. She will remain the gateway to Asean and Asia. The published New Silk Road still runs through Singapore up the Straits of Malacca to Sri Lanka.

    We all know that opening new route will facilitate growth and promote trade.
    We also know that raw materials are required to manufacture the goods for trade.
    We also know that knowledge is required to drive business and IT facilitates this process.
    We also know that not all trade route ends in China albeit it is the largest consumer of raw materials.

    Whilst your article send a subtle warning to Singapore, it also conjures a doom and gloom image for Singapore. And I think Singapore is not just Singapore but all the other Asean countries cut off the OBOR development.

    With the right fundamental investments albeit road, rails, sea and manpower. I think that the new OBOR will enhance growth opportunities for all ASEAN, including Australia.

    Last but not least, God is greater than man. Nonetheless, your article was an interesting read.

  2. Andrew Craig-Bennett
    January 31, 2017 at 12:48 pm

    Dear Andre,

    Thanks for a thought provoking article.

    I am fascinated by the WEF’s calculations of rail freight vs sea freight per kilometre for a standard box. Many years ago, I drove myself quietly nuts trying to do these and similar sums and had to abandon the attempt. The costs of wear and tear on rolling stock may be calculated, but the costs of wear and tear on the permanent way are practically impossible to compute in a way that allows them to be
    recharged accurately, given the host of variables, as may be seen from the British Government’s abandonment of its privatisation of the permanent way in the UK.

  3. Andy Lane
    January 31, 2017 at 2:35 pm

    Dear Andre.

    An excellently articulated piece, and very insightful, especially from the cultural aspects. I do agree that OBOR is often misunderstood, which might also have something to do with the (cunning) name.

    I have many cost simulations relating more specifically to Asia-USEC, all-water versus land-bridge, and under very few scenarios is class 1 rail less expensive. But it is certainly faster.

    The existing Asia-Europe rail link involves multiple transhipment between varying rail gauges, and whereas I have not attempted to TCO this out, those additional costs I would believe will tilt the balance more in favour of all water. Takign into full consideration also the additional costs of inventory.

    The main issue here is maybe not costs or speed, but capacity. Increasing rail capacity over thousands of kilometers is certainly not cheap, although cost awareness is maybe not always present when we think OBOR. The existing capacity however cannot handle any more than 3-5% of the existing sea-born trade.

    So whereas it might have some impact on Malacca water volumes, it will also be relatively modest. Although 3-5% today might be significantly higher in the future as supply chain patterns evolve. China will potentially become a nett importer by the time 2049 arrives.