Infrastructure and Logistics – Prerequisites for Sustainable Growth

A country’s prosperity, and with it its economic and social development, depends to a large degree on the level of productivity of its logistics sector. Today’s economies are unthinkable without the value and supply chains that modern logistics make possible. And there can be no long-term peace without prosperity, as the turmoil in Egypt or the economic endeavours of emerging nations demonstrate. More and more governments are coming to recognise the importance of logistics as an important growth factor and thus are attempting to improve the performance of their logistics sectors. An efficient infrastructure is a prerequisite for efficient logistic platforms, since run-down streets, ineffective seaports, one-track railways, or a lack of freight airports impede the smooth movements of materials and goods and thus economic growth. Therefore, it is vitally important in particular for emerging economies such as the BRIC nations, as well as for developed industrial nations like Germany, to make investments in infrastructure. They are necessary in order to be able to handle increasing trade volumes and to secure or improve the country’s competitive position as a business location. In view of increasing transparency, as well as mega-trends like climate change and the increasing scarcity of resources, the topic of sustainability is also gaining in importance.

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The BRIC nations, Brazil, Russia, India, and China plan significant investments in infrastructure, and business, politics, and society will have to develop new ways of thinking about logistics.

This whitepaper has been published at Transport Intelligence on 8 August 2013.

Brazil: Major investments required to ensure further economic development

With around two million kilometres of roadways, Brazil has the second largest road network in the world. However, only about 200,000 kilometres are asphalt roads, and the streets are often in terrible conditions. Together with the highly outdated railway tracks and inadequate airports, this means that Brazil’s transport infrastructure is the biggest obstacle to economic growth and prosperity. That is the reason why, in 2012, the Brazilian government decided to make major investments in the infrastructure. One such measure was that the government granted concessions to private investors who will lay and operate up to 10,000 kilometres of railway track and build around 7,500 kilometres of roads.

The fact that about 60% of the transport volume is moved by road underlines the importance of these measures. In addition, new intermodal hubs will reduce road traffic in economic and logistics centres like Rio de Janeiro and other major cities (“Brasiliens 66-Mrd.-Dollar-Programm,” Financial Times Deutschland, August 15, 2012).

Furthermore, the country faces challenges in the area of rail transportation, since the system works significantly below American or European standards and network density. The 29,000 kilometre long network is centred on the states of São Paulo, Minas Gerais, Rio de Janeiro, and Rio Grande do Sul. Some of the tracks are in deplorable conditions and the fact that the Brazilian system uses differing gauges also complicates operations. As a result, the Brazilian railways carry only about 25% of the country’s total cargo volume. Investments in a number of freight railway lines are intended to improve this situation. Further improvements are expected from the new East-West and the new North-South link.

The seaports are Brazil’s most important interface to world markets. Insufficient cargo handling capacities, too shallow channels, and poor rail and road connections are major disadvantages. Inadequate parking space for trucks in the ports and poorly qualified employees are further factors causing challenges to shippers and logistics companies alike. Government support and private investments are necessary to bring the Brazilian ports up to world standards and to ensure Brazil’s competitive position in world trade.
Russia: WTO accession leads to investments in the transportation and logistics infrastructure.

Russia, which has further opened to world trade with its accession to the World Trade

Organization (WTO), now needs to step up its investments in infrastructure. Sub-optimal roads regularly cause transport delays and breakdowns. According to Germany Trade Invest (GTAI), rundown streets cost Russia 9% of its economic potential. Of course, the influence of the climate and its effects on the road system are not to be underestimated. Specific investments are being made with the goal of increasing the number of multi-lane highways, which currently account for only 8% of the roads in Russia (Umann, Ullrich: Russland tätigt umfangreiche Infrastrukturinvestitionen).

Some of the large-scale projects in this area include the construction of new motorways, like the link between Moscow and St. Petersburg, the development of the M4 motorway into a multi-lane highway from Moscow to Dzhubga, and investments in the M1 as one of Russia’s most important routes. The M1 links the Russian capital to Western Europe and is also part of the Asian Highway network. This project was initiated in 1959 to improve the road system in Asia and involves collaboration among 32 Asian states and the United Nations (ESCAP). Road construction is being fostered at the communal level, as well. The city administration in Moscow is planning to invest more than €24bn in modernisation by 2017.

Russia’s rail network is another major construction project. Because of the sheer size of the country, railways play an important role for both passenger and freight transportation. The Trans-Siberian Railway and the Baikal-Amur main route between Siberia and the Khabarovsk region, as well as numerous secondary lines, ensure that the country has well-developed east-west connections. Thanks to these, cargo only takes 16 days to get from Busan to Helsinki, compared to 47 days on the sea route. Rail connections have gained further importance since Russia joined the WTO. Consequently, the government decided to invest in two high-speed lines: Moscow-St. Petersburg and Moscow-Yekaterinburg.

The freight lines to and from the major seaports are also being improved. For valid reasons: goods like crude oil and petroleum products are exported via the ports in St. Petersburg, Kaliningrad, Novorossiysk, Sochi, Vladivostok, Nakhodka, Magadan, and Petropavlovsk-Kamchatskiy. The (North) Atlantic port of Murmansk, which is kept ice-free all winter, is also a major export hub. Ocean transport accounts for a total of 85% of Russia’s foreign trade. Inland waterway transport is also carrying increasing tonnage and showed a growth rate of 20% in 2011. Seaports are the focal point of expenditures in the area of port development, which is intended to reduce dependency on cargo handling capacities in the Ukrainian and Baltic States’ seaports. In addition, investments are being made in the ports of Taman, Tuapse, and Novorossiysk, as well as Olya.

India – Massive investments in infrastructure are needed for progress towards an industrialised economy

India is well on the way to becoming an advanced economy, but the road is still a bumpy one. The subcontinent is already one of the leading nations for chemical production. At €76bn, its sales volume in chemicals ranks number eight worldwide and is ahead of Italy and Great Britain. It is expected that India will be able to improve this position even more in the future. According to experts, India will be one of the major growth markets for the global chemical industry. Well-trained employees are a major advantage, but high costs for raw materials and energy, as well as low productivity, are the challenges that India is facing. However, it is India’s infrastructure which is the key bottleneck on its way to becoming an economic leader, since it is responsible for high transport costs and regular delays in exporting goods and products (“Indiens Chemieindustrie schafft Anschluss an die Weltspitze,” Chemanager, January 16, 2012; http://www.chemanager-online.com/news-opinions/nachrichten/indiens-chemieindustrie-schafft-anschluss-die-weltspitze). Almost all transport modes are affected. Investment is needed in roads, railways, air traffic, and shipping.

Around 70% of India’s cargo is transported by road, some of it under very difficult conditions. Only about half of the approximately 3.3 million kilometres of roads are asphalted. The National Highways, which account for 65,000 kilometres and connect the major cities, generally only have two lanes and some of them are in terrible shape. In addition, the more than 130,000 kilometres of State Highways do not have unified standards. In the poorer states of India some of these are only one-lane roads.
The railways handle the other 30% of India’s cargo transport. With a total of 64,000 kilometres of track, India’s rail network is the second largest worldwide, following China. However, outdated technology and a low level of electrification, as well as four different gauges of track, prevent efficient use of the Indian rail system. Investments are planned in electrification, double-track main lines, conversion of metre gauge to broad gauge tracks, and modernisation of the technical equipment.

At the same time, the Subcontinent needs to invest in water and power supply. Power blackouts and gaps in the water supply are still common throughout large parts of the country – with all the negative economic consequences. Without electricity, production is impossible, completion of products is delayed, and thus agreed deadlines and contractual obligations cannot be fulfilled. This all leads to losses, in some cases even to contractual penalties. This is one of the key reasons why manufacturing has only been able to contribute a relatively small share to India’s economic growth thus far.

The Indian government is well aware of these circumstances and therefore has announced that it is aiming to spend a total of a trillion US dollars on infrastructure development. A major part, but not all, of this package has been included in the five-year plan for 2012-2017.

China – need for sophistication in logistics in the world’s second largest economy

China has set the goal of putting €124bn into road, highway, and airport construction (“China pumpt Milliarden in die Infrastruktur”, Financial Times Deutschland, September 7, 2012). This budget will cover the costs of up to 30 infrastructure projects that will ensure economic growth and social prosperity. Thirteen highways and ten city street projects, as well as five seaport projects are planned. In addition, two inland waterways are to be improved.

While China’s urban areas have traffic systems that are up to European standards, in the more remote regions of the country, which covers over 9,571,302 square kilometres, transportation is often still below par. Furthermore, cargo volumes have been increasing rapidly over the last years. For example, freight haulage by the railways grew from 535 billion metric ton-kilometres in 1978 to 2,482 billion metric ton- kilometres in 2008. This represented a major challenge for the Chinese rail network and led to transportation bottlenecks. Therefore, the government began setting rail transport contingents. The planned 4+4 PDL rail grid, which is made up of high-speed rail corridors, is intended to bring relief. China’s high- speed rail network, with a total length of 50,000 kilometres, aims primarily at speeding up passenger travel, but along some stretches mixed use with freight trains is possible.

Further infrastructure projects include new long-distance corridors in the west, upgrading existing single- track lines throughout the nationwide network, and the provision of additional capacity for freight transport. Among other things, the current coal transport routes will be improved and further corridors added. In addition, a new 16,000 kilometre long container train network will be constructed.

The Chinese government recognised the importance of infrastructure for the country’s prosperity early on and has made it an integral part of economic growth packages. With its centralised planning, China was able to implement infrastructural programmes quickly and extensively and thus set up the prerequisites that enabled the country to catch up with the leading economic powers in the world. However, logistics expertise in China is still under-developed. Therefore, entrepreneurs like Jack Ma, the founder of the e- commerce giant Alibaba, have been investing in logistics development and are intensifying their efforts to bring China up to world-class standards in logistics, as well. Otherwise, companies like Alibaba will struggle in certain areas to continue growing at the targeted pace.

Germany: increasing investments in maintenance and sustainability

The industrial nations are also showing increasing needs for investments in the infrastructure. In Germany, for example, numerous bridges and roads are in bad repair and need to be renovated. Therefore, the Federal Parliament’s Finance Committee approved an addition of €750m to the transportation budget in 2013.

This sum will be invested primarily in the number one mode of transport, roads. But this will not only benefit cars and trucks; at least €10m are to be invested in bicycle paths along federal highways. All in all, the budget will provide €570m for investments in the road networks.

In comparison, the €40m dedicated to the railways seem marginal and this money is to go to a new noise control package. Another €25m is available for railways that do not belong to the federally owned system. This is the first time that the independent railways will benefit from such stimulus. Another €140m will be invested in waterways, bridges, locks, and dams.

A fresh look at logistics and infrastructures

Many countries throughout the world are making significant investments in infrastructure. However, this alone is insufficient. In view of the global mega trends, such as worldwide population growth, mass mobilisation, scarcity of resources and land, climate change and the increasing awareness of environmental impacts, continuing globalisation, tightly integrated and thus increasingly complex and risky supply chains, it is essential that we re-think logistics infrastructures and systems. Infrastructure and logistics planning, both at domestic and international level, needs to be grounded in a comprehensive understanding of the economy and society, and the logistics sector must increasingly live up to its role as a key enabler for growth and prosperity.

We need to develop fresh ways of thinking which can help ensure that transport and handling hubs contribute to the growth and prosperity of individual countries, regions and the world economy. Concepts are required which not only promote economic growth, but also help improve the common good. Concepts are needed that not only serve individual interests, but also aim at maximising value for the entire system. Development of clear local competitive advantages and of services that increase productivity and improve business conditions for manufacturers and logistics service providers alike must go hand in hand with measures to ensure sustainability.

Modern seaports can serve as an example for the way infrastructure can be shaped in future. Ports have to be viewed from a global perspective and as an integral part of the region; which has to be considered in the planning process. The starting point is a clear understanding of what all the stakeholders expect and need. For example, ports are expected to provide a broad range of services starting with warehouse capacity for all kinds of goods including dangerous cargo, foodstuffs and other temperature-sensitive goods, as well as container leasing, repair, and cleaning, up to comprehensive security plans on-site. These reduce the risk of theft as well as potential terrorist activities. Environmentally sound disposal of oily wastes, ships’ waste water, or solid waste and chemicals is also an essential part of a modern port’s range of services, as are noise reduction measures and traffic safety systems that ensure safe and efficient waterside and landside operations in the port. In an increasingly transparent world, there will be rising demand for competitiveness and sustainability. The concept of a smart seaport pays attention to sustainability, while at the same time increasing productivity through the use of state-of-the-art technology, embedded in a holistic concept. Such ideas can also be applied to other areas, for instance inland ports and airports, as well.

Those responsible can make good use of the digital interconnections between the economy and society in implementing these and other added value services. For example, real-time data on ship movements can be leveraged to coordinate landside processes more efficiently. When docking and unloading times are known well in advance, logistics service providers can optimally plan and schedule their operations so as to reduce costs and optimise the utilisation of resources. Increasing digitalisation in logistics and the continuing spread of RFID makes processes more efficient and safe, since containers, pallets, and wire mesh containers can be tracked worldwide, thus boosting productivity and security. Furthermore, it is possible to simulate alternative contingency plans. In this way, service providers can find optimal solutions and respond quickly in case of unexpected events such as accidents or natural disasters.

In order to put such concepts into practice, it is necessary to have a high-performance infrastructure and also transverse platforms that are often developed and implemented not by just one stakeholder, but by collaboration among diverse stakeholders. Modern logistics concepts often require not just foresight and openness to change, but also the ability to cooperate with various stakeholders. Many companies and governments will have to shift their way of thinking and acting away from concentrating on competition and differentiation towards looking for common interests and joint activities.

Facilitating continuous dialog with stakeholders

Large parts of the population in general will have to change their ways of thinking as well since they often over-emphasise the negative aspects of infrastructure and logistics projects. The most common arguments that logistics facilities and service providers face involve concerns such as high land consumption, increased traffic, more noise pollution, and environmental impact. Such worries are often fed by a lack of knowledge or by uncertainty. Many citizens and local residents do not consider the whole picture. People tend to focus on isolated issues, neglecting the economic and social benefits and advantages of the overall system. Large parts of the public often oversee that the area-wide supply of food and other goods would be impossible without warehouses and commercial traffic. Modern life needs logistics systems, which at the same time benefit the community and have very limited negative impact. In order to raise the understanding and acceptance throughout the population and to avoid resistance and failure of logistics projects, the logistics sector has to facilitate a continuous dialogue with all relevant stakeholders. In this light, it is important to take concerns seriously and to inform the public continuously about respective measures for risk mitigation and about the importance of logistics for the economy and society. The connections between logistics and economic and social welfare need to be stressed constantly.

This can be achieved if technological, environmental, and social aspects of logistics are integrated into national, regional, and global strategies. These need to be grounded in appropriate regulatory frameworks and developed by the logistics industry. Thus, the logistics industry must develop master plans for its sector and contribute to area development initiatives. These plans should aim at creating holistic logistics systems that are embedded in macro-economic strategies. The logistics concepts and plans must respond to the concerns of all stakeholders and at the same time provide efficient supply chain solutions and systems for businesses and the population as a whole.

China: Yesterday, Today and Tomorrow

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Over the last three decades, the relentless rise of China’s export-driven economy has changed the face of world commerce. But China is now in flux as its economy transitions into a new stage of development, rendering the assumptions of yester-year obsolete. Tomorrow’s China will be a very different place, creating new opportunities, with new risks for manufacturers, traders, banks as well as supply chain and other service providers.

This whitepaper has been published at Transport Intelligence on 20 September 2013.

 

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CVA – Corporate Value Associates, a global strategy boutique, tracks critical trends in consumer and customer behaviour, companies, capital markets, infrastructure investment, government and social policy. CVA uses this information to help evaluate and forecast economic growth, and identify and capture opportunities by designing strategies and implementation plans that create value for companies around the globe.

Bruno Salle, Managing Director (Asia-Pacific) at CVA, believes the current slowing of GDP growth is part of a natural, needed rebalancing of China’s economy. “China is moving from an economy where growth was overly reliant on investment and exports to one where internal, private consumption is becoming one of the key drivers of growth,” he says. “This is a major structural transformation. Exports are – and will remain – an important contributor to China‘s economy. But the focus of growth is shifting from construction and manufacturing to more services, innovation and consumerism”.

First and foremost, China’s next stage of economic evolution will mean slower GDP growth rates. Reliance on exports and foreign investment will decline and the economy will be rebalanced to reflect the spiralling number of middle class consumers. These buyers will continue to grow in confidence and sophistication, driven by quality of living rather than just price. “The current slowdown isn’t the end of Chinese growth,” explains Salle. “It’s the start of growth that is not primarily bound to exports and heavy industry. But this is a process still in its infancy and it is important it is viewed in this context. It will take some time until a clear picture of China emerges, but there are clear trends evident already.”
Certainly, government policy makers are already leaving more and more decisions to the market. We also expect to see the rise of large private enterprises, the quality of suppliers of most products and services to broaden, and more determined steps taken to tackle corruption. The winning state-owned enterprises will need to learn to be more market driven as competition becomes increasingly fierce and government more transparent. Logistics value chains will largely be shaped by China’s inland development, the embrace of e-commerce and evolving international trade flows, particularly on intra-Asia lanes as China’s trade with neighbouring emerging markets continues to grow. Together, these three trends will bolster the logistics and supply chain business in China.

China‘s relatively strong road, rail, air and communication networks, large and flexible labour force and manufacturing know-how, particularly in the area of mass production, will remain major draws for producers of all shades. But the high cost of land and rising cost of labour on the coast, allied to growing domestic demand, will accelerate the shift inland of non-premium manufacturing. “The government is promoting the development of middle and western China, so foreign investors will face diminishing preferential policies in coastal areas,” expects Jian Lou, Partner (China) at CVA. “As businesses adapt to higher costs, new innovative business models will emerge.” China will transfer best practices to hinterlands, take more control of its own production standards and make greater efforts to protect intellectual property rights. However, Chinese refinements of western researched, designed and manufactured products will remain a concern.

China’s restructuring will have a major impact on logistics needs and demands. The market will, for example, become more specialised by industry sector and mode. Consolidation can also be expected, and logistics companies will be forced to continue expanding networks as markets move to Northern and Western China. The more balanced manufacturing landscape in China will bring more balanced flows and should therefore result in better capacity utilisation and lower costs for carriers, logistics companies, shippers, as well as buyers and consumers in China and worldwide. But extracting the full benefits and value of making this transition will require new skills and ways of operating transportation businesses and networks.

E-tailing is a standout Chinese success story. Massive investments in e-commerce businesses and IT has opened new markets beyond the tier one and two cities in China. E-commerce has also driven demand for Chinese products in other parts of the world, such as Russia and Brazil. This is creating vast new internal and international distribution requirements and is having a major impact on the logistics value chain. Backing up this success within China will require higher delivery standards and more efficiency. In international markets, e-commerce companies and logistics providers are facing major challenges in customs clearance and finding the appropriate delivery platform. These trade and business obstacles also need to be overcome. “The transfer and adaptation of best practises from the West will be as important as bridging the gap in business practises and culture between the different markets,” says Lou. “Leveraging the knowledge of experts and companies experienced in this field will be critical to success.”

The renminbi (RMB) is gradually being internationalised, paving the way for even more efficient commerce, particularly between Asian countries. Indeed, intra-Asian travel and trade is expected to prosper, not least as ASEAN member countries create a new free trade area from 2015. China will not only seek to bolster its regional influence, but look as well to emerging markets in Africa, South America and the Middle East, where it has already forged relationships through its huge consumption of commodities and investment in infrastructure. Logistics players focusing on intra-Asian flows and emerging markets will benefit from these developments.

A paradigm ‘thought’ shift in China among citizens and policy makers will be a key driver in a gradually growing embrace of environmentalism and Corporate Social Responsibility by individuals and State. This, in conjunction with the increasing enforcement of laws and operating standards, will impact the choice of equipment and the way logistics players operate. Companies need to be aware of all the trends and changes and need to assess the relevance of these developments for the future operating requirements and business plans.

All participants in the logistics value chain need to adjust to the changing landscape. The attractiveness of the logistics offer to shippers and supply chain customers is a function of all components of the logistics value chain, including information, security and inland transport to, for example, ports in respect of price, time and quality. Logistics companies will look for the optimal value proposition at river ports, seaports and airports and will go where they can make the best margins when serving their customers in an increasingly competitive market. While larger logistics players will act strategically to serve their more sophisticated buyers, smaller transportation and logistics companies will go wherever they get the best offers from brokers and consolidators.

Overall, increasing sophistication in the logistics value chain can be expected, which represents a major opportunity for those players which prepare best, and a major risk for those who do not. It will be a challenging journey for all participants and much of the path remains unclear. What is clear, however, is that companies wishing to win and grow in China need to deeply understand China’s international economic dependencies and interdependencies of internal markets, including government views and plans. For example, expanding business or moving production into China’s interior requires a deep knowledge of different cities, verticals, customers and competitors – local and foreign – if all options are to be properly assessed and the no regrets and best value option moves identified and successfully executed.

China will remain an opportunity to diversify business portfolios and overtake even larger competitors for companies which have the necessary insights. For those who do not, it will be a harsh proving ground.

“It might take time for China‘s economic output to shift from growth in manufacturing and construction to economic growth built on services and innovation and domestic consumption,” says Salle. “What should be remembered is that China has been able to weather and overcome huge economic, social and political challenges and manage far reaching reforms throughout its history, including over the last three decades.” There is no reason to think it will not be able to do so again and again.