What does Hanjin’s collapse mean for world shipping?

hanjin2The world has just witnessed “by far the largest container shipping bankruptcy in history”, writes the JOC. But the collapse of the South Korean shipping line Hanjin, the world’s seventh-largest container carrier, should not come as a surprise.

The shipping industry is ripe for an overhaul. In the past quarter alone, 11 of the 12 shipping companies to publish results have announced heavy losses. Freight rates have been under pressure for some time, due to a combination of slow global trade and surge in capacity created by new cost-effective mega-ships.

So how can the industry find a route out of the crisis? While alliances between shipping companies have failed to reduce overcapacity, mergers might achieve this goal. Data-based systems, which improve interaction between ship and shore, offer cost reductions of up to 30%. But is it enough to significantly change market dynamics?

This chart shows the alliances created among shipping companies, and their share of worldwide capacity.

hanjin3Image: Thomson Reuters

A lot is at stake: $14 billion in goods are currently marooned at sea on Hanjin ships. Container ships and bulk carriers are being denied access to ports and several vessels have been seized (or are likely to be seized) by charterers, port authorities and other parties. Around the world, Hanjin cargo ships are dropping anchor at sea to avoid losing more ships to creditors waiting on land.

South Korea’s maritime ministry expects cargo exports to be affected for another two or three months.

The collapse comes at a critical moment in the year, as retailers prepare for the holiday shopping season. The National Retail Federation in the United States fears a potential ripple effect throughout the global supply chain that could cause significant harm to both consumers and the US economy. British retailers, too, have voiced concerns about pre-Christmas supply.

Hanjin Shipping filed for bankruptcy protection on 31 August, after a long struggle to raise liquidity and restructure debt. Should shippers have seen it coming? In 2009, the container industry posted operating losses of close to $20 billion, but none of the shipping lines went under.

The shipping industry is a complex network of maritime alliances and relationships. Importers and exporters are currently finding their freight blocked on Hanjin ships – even though they booked with other lines. And Hanjin’s membership of the CKYHE alliance – which includes China COSCO, Yang Ming Marine Transport Corp and Evergreen Marine Corp Taiwan Ltd – has now been suspended. What this situation shows is that globalized trade requires new legal mechanisms to protect carriers, shippers and consumers.

What does this mean for global trade?

Short-term impact on the global supply chain will depend on the time needed to unload Hanjin ships. In the meantime, customers will have to seek alternatives while rolling out their contingency plans. Competitors will take on the additional cargo – but at a price. Hyundai Merchant Marine, for example, will deploy at least 13 of its ships to two routes once exclusively serviced by Hanjin, while the South Korean government plans to reach out to overseas carriers for help, writes Reuters.

Mid-term, the shipping industry might see healthy rates and revenues coming back. Prices have already surged upwards – by up to 50% for a 40-foot container from China to the US. The surge may be partly due to the forthcoming China National Day on 1 October, as well as the number of vessels made idle to reduce overcapacity. However, the Korea Maritime Institute has estimated that, in the near term, shipping rates will rise – by 27% between Busan and the US, and by 47% between Busan and Europe.

In light of these increasing risks and their impact on the global economy, there are two likely outcomes. First, the market and existing legal mechanisms will be left to clean up the failure. Alternatively, the South Korean government will find a way to support its struggling shipping industry.

For decades, South Korea’s shipping lines were engines of the nation’s export-driven economy. Their role going forward might depend on the assessment of their ability to significantly reduce costs and become competitive in the global market.

This blog was originally posted on the World Economic Forum Agenda.

From flying shuttles to rolling robots, automated supply chains are almost here

Emerging technologies prepare the ground for the autonomous world, including the unmanned supply chain with many benefits but also risks to be mitigated. The main challenge and responsibility for the leaders of today is to capture the benefits while finding meaningful activity for all of us.

ASCFrom Amazon’s delivery drones to self-driving cars, autonomous factory equipment to Elon Musk’s 760 mph vacuum tubes – automated vehicles are on the rise.

Even beyond the grounds of private companies, tests of automated transport have been successful. A truck platooning system, in which groups of two or three “smart trucks” travel closely behind one another communicating wirelessly, arrived in Rotterdam in April. The Ministry of Transport in Singapore seeks proposals to develop something similar.

Also in Singapore, Airbus is pursuing an autonomous air taxi project to deliver parcels to ships in the port. On the water, the cargo ships of the future are expected to be crewless and remote-controlled.

The so-called “last mile”, delivery to the doorsteps of businesses and consumers, is probably the most complex task in the supply chain – especially in busy urban environments full of cars, bicycles and children playing in the streets. Intelligent self-driving vehicles can transport up to 100 pounds. In Paris, two entrepreneurs are building a flying river shuttle that will bypass traffic by travelling above the Seine.

Raw materials can now be extracted in automated mines; they then reach the smart factory 4.0 and are transported from there by wireless truck or delivery drone to the automated distribution centres of retailers or the smart boxes of individual consumers.

The point? The autonomous end-to-end supply chain is almost complete.

Automatic benefit

Automation in the world of logistics will create enormous opportunities when it comes to making the flow of goods safer, more efficient and more environmentally friendly. Self-driving cars alone would reduce accidents by 70%, improve fuel efficiency by 20%, and save about 1.2 billion hours of driving time over a period of 10 years. Less congestion will make the flow of goods and people faster – and those countries with driver shortages, such as the United States, United Kingdom and Germany, will find relief.

The improvements do not come without challenges, however. One key concern is cyber risk. We need to ensure that autonomous units cannot be hacked. Also ethical questions need to be answered – how to decide whom a vehicle is supposed to save in case of an accident, for example. Policy-makers also need to consider the impact on jobs: where to start, where to slow down the autonomous economy to avoid unwanted consequences, starting with unemployment.

ASCGraph

The autonomous movement, which began in the early 1950s, is now in full swing. Of 1,433 consumers surveyed in the US, 70% think they will order the first drone-delivered package within the next five years. The majority of policy-makers (88%) expect autonomous vehicles to gradually become a reality within the next 10 years, based on a recent worldwide self-driving vehicle study by the World Economic Forum.

According to the same survey, 60% of policy-makers expect a ban on private cars in cities over the next 15 years. And this might not be limited to private vehicles: over time cities will further regulate goods deliveries, which are one of the main causes of daytime congestion. Therefore, not only transportation companies, but also shippers need to prepare for an autonomous future.

Capturing the full potential of the automated supply chain requires rethinking entire logistics systems. There will be an evolution from the fixed “collect in the evening and deliver during the morning” approach to a fluid system of continuous movement and supply. Platoons, drones, tunnels, tubes, rolling robots and automated warehouses make the constant flow possible.

But this requires flexibility and innovation on the operator level, as well as investments in technology and infrastructure. It requires close collaboration between not just manufacturers, retailers and developers, but policy-makers and the citizens themselves.

Image: REUTERS/Wolfgang Rattay

This blog was originally posted on the World Economic Forum Agenda.

Is this the key to successful global trade?

“Logistics performance – both in international trade and domestically – is central to the economic growth and competitiveness of countries, and the logistics sector is now recognized as one of the core pillars of economic development.”
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So reads a 2016 report by the World Bank titled Connecting to Compete 2016: Trade Logistics in the Global Economy. The report features the Logistics Performance Index, which ranks Germany as the world champion in logistics. The country scores even higher than it did the last time it topped the index, two years ago.

In today’s interconnected and interdependent global economy, where consumers and citizens benefit from the global flow of goods, we need to collectively ensure that all parts and pillars across the globe can carry the heavy loads coming through the supply chain.


Logistics Performance global rankings 2016


The path to prosperity

Logistics is the key enabler of the world’s supply chains, which bring resources, seeds, fertilizers, materials, parts, machinery and equipment to farms and factories, as well as goods to shops, supermarkets and households.

Without logistics, today’s global procurement, manufacturing and distribution would not exist. Logistics connect sellers and buyers across the globe and provide companies with access to domestic and international markets. Related services influence the cost of goods and determine the competitiveness of economies. Their integration in global trade and value chains adds value to the worldwide networks of procurement, production and distribution so important for job creation, national economic development and wealth.

In short, when logistics function as they should, they are the basis upon which economies are built.

In the top 30 of the Logistics Performance Index we find 22 OECD countries and 14 members of the European Union. China moved from 28 in 2014 to 27 in 2016. India, currently the world’s fastest-growing large economy, did not make its way into the top 30 this time but has jumped 19 places to rank at number 38.

Strong nations depend on and benefit from buying and selling in foreign countries. Competition is what drives them, collaboration is what helps a nation to capture its full potential.


Asia rising

Globalization, logistics and trade have had a significant impact on global wealth levels. In 2013, the Economist wrote that in 20 years nearly 1 billion people had been taken out of extreme poverty. In 2015, the World Bank announced that global poverty was likely to fall below 10% for the first time.

This reflected the entry of China, India and other developing countries into the global procurement, manufacturing and distribution system, as increasingly powerful players in the world economy. Still, many developing countries remain on the margins of world markets, requiring helping hands to improve their logistics capabilities.

Between 2007 and 2014 the gap between top and low performers was slowly shrinking – driven by the logistics sector’s continuous improvements in infrastructure and service quality, as well as customs clearance processes. In 2016, logistics performances converge at the top and the gap between high and low performers widens.


Landlocked logistics

How fast the picture can change. Take the Philippines: it ranked 44 in 2010 but has fallen to 71 in 2016. The drop is largely driven by two factors: transport-related infrastructure and the competence and quality of logistics services, including transport operators and customs brokers. The online publication Supply Chain Digital writes: “Stalwarts of the Philippines’ logistics industry have voiced concerns over a series of Bureau of Customs directives instigated in the past year.”

Logistically constrained countries – landlocked nations without direct access to the oceans and global waterways, for example – are regularly struggling with trade and transport facilitation and reforms. Beyond political will, the disadvantaged countries with weaker logistics (often today’s suppliers and definitely tomorrow’s potential customers) require and deserve attention and support from the international community.


Reliability over speed

In high-performing nations, slower global trade after the 2008 global financial crisis, as well as environmental concerns, create a pressured environment for the logistics industry. The sector – itself estimated to contribute 23% of total global greenhouse gas emissions – faces concerns over jobs, land use and urban planning. In the interests of economic inclusion and peace, all nations need to further advance trade and transportation facilitation, whether individually or collectively, while safeguarding the citizens against harmful activities.

According to the World Bank report, “supply chain reliability continues to be a major concern among traders and logistics providers”. And indeed, reliability is more important than speed. And critical for reliability is efficiency at the borders. The current global trend towards disintegration, such as Brexit or the erection of fences at the Hungarian border with Serbia and Croatia, are not helping.

In economies where infrastructure and skills are no longer the key concern, governments might need to invest more money and time in explaining to the citizens the benefits of trade and logistics.

This blog was originally posted on the World Economic Forum Agenda.

What does London’s new mayor mean for Brexit?

London has elected its first Muslim mayor. It’s a development that many see as reflective of the city’s tolerance and capacity to embrace differences. Will the election of the pro-trade and pro-Europe Sadiq Khan ultimately prove a crucial turning point in the Brexit debate?

LondonAndTheBrexit

The city’s citizens have good reason to vote for openness. London is built on trade. Trade has largely contributed to today’s wealth and the rise of many cities, regions and nations. Although trade growth has been moderate since the Global Financial Crises, reestablishing trade barriers might lead to significant negative effects.

The United Kingdom has its own currency and enjoys a high degree of economic sovereignty, which would hardly be enhanced by Brexit. Whether the wave of refugees seeking save harbour in the UK would slow down post-Brexit remains a question mark. What’s more certain is that trade barriers regularly increase the price of imported consumer goods, the prices of materials and parts to local production as well as industrial assets, and consequently the prices for goods produced in-country, for internal consumption or for export.

Four scenarios for Brexit

What would Brexit entail? Answering this means formulating the possible positions the UK could take after an exit from the European Union (EU). The scenarios include: (1) complete independence, (2) loose association with the EU, and (3) broad harmonization with the EU – the exit could also be structured in a gradual and staged way. Finally, (4) the UK could join another zone, such as the North American Free Trade Agreement (NAFTA).

The choice between these options would determine the extent and nature of future trade barriers and the level of impact on society and economy within the UK, in respect to the exchanges of goods with EU members, with countries and blocs the EU has agreements with and finally with other blocs and nations.

If the UK stayed largely harmonized or associated with the EU, little change would occur. Under all the other scenarios, procurement, manufacturing and distribution networks would possibly need to be adjusted – immediately or over time, partially or even drastically.

How would Brexit impact business?

Looking at the cross-border movement of goods, the costs of trade to the economy as well as the impact on cost structures and consumer prices depend on the conditions in four key areas of trade facilitation: (1) border administration, (2) market access, (3) telecom and transport infrastructure, and (4) the business environment. Brexit would affect three of the four areas, namely border administration, market access and business environment.

Tightened border administration extends the time goods travel, slowing down deliveries while increasing the cost of transport. In addition, border controls reduce the reliability of the supply chain as the time required for possible inspections is unpredictable. In time-critical industries, this would force companies to hold buffer stocks and re-design logistics systems.

State investments in hyper-efficient customs clearance facilities, combining technology with smart procedures, can smooth away some of the negative effects. These approaches include pre-clearance processes based on pre-submitted customs information, or ensuring goods carry digitally and instantly retrievable information which can be used to let them clear customs while passing the border – probably a longer shot.

A curb on innovation?

The second area affected by the potential Brexit would be market access. Controls and regulations to structure which companies can sell and operate on the national market is often linked to the protection of local industries. This protection eases the pressure on local companies to innovate and drive serious programs to improve competitiveness.

Third, the business environment would be affected too: changes could occur in the area of investment policy and the hiring of foreign workers. The UK government would potentially need to negotiate trade terms and agreements with many partners – a costly process which can take years. In the meantime, the local and foreign companies operating in the UK might be faced with significant uncertainty.

In order to compensate for the cost and price increase, the UK government could consider tax cuts and subsidies to ease the pressure on consumers and manufacturers. Otherwise, the rising cost of production could trigger the gradual migration of UK manufacturing towards lower cost locations and increasing dissatisfaction among consumers and citizens.

Uncertainty, reduced competitiveness and job cuts

Uncertainty, reduced cost competitiveness and potential measures to protect local industries can lead to the gradual retreat of foreign players. Job losses and increasing dependency on imports would be the consequences. Over time, protected UK industries might fall behind the foreign players due to reduced cost optimization and innovation pressure and hence competitiveness.

In the short run, some sectors would be able to reap some short-term benefits. Logistics for example would be under pressure to redesign logistics concepts and build new distribution centers. However, this short-term revenue booster is to be considered economic waste. Instead of making the supply to the local economy and society easier and more fluid, investments would flow into efforts to cope with additional administration, regulation and procedures.

Logistics – in common with many sectors – would suffer in the end. For example, as the customers of the logistics and supply chain service providers put pressure back on suppliers, the effect would be shrinking margins. This is particularly challenging at a time when cash and financing needs for newly required investments would be well on the rise.

Referendum

It remains unclear what position the UK would take in the event of a Brexit. What is clear is that the additional layers of work and cost caused by tightened border administration, regulated market access and a deteriorating business environment would result in additional burdens and disadvantages for companies, and especially for consumers and citizens.

While initially, some industries would reap benefits, soon the negative repercussions risk spreading across all stakeholder groups – government, business and society.

Let’s hope that the election of Sadiq Khan will be followed by more enlightened public sentiment towards globalization, the importance of stress-tested trade blocs and the accomplishment of new agreements like the TPP and TTIP.

This blog was originally posted on the World Economic Forum Agenda.

Can trade change the way we see globalization?

Many voices have been prophesying the end of globalization. Koert Debeuf, political analyst and visiting research fellow, CRIC, Oxford University, writes in the aftermath of the Paris attacks on 13 November 2015: “The world has left the path of globalization and is taking the trail of tribalization.” Are we facing a new trend?

CanTradeChangeTheWayWeSeeGlobalization

Globalization is a multidimensional phenomenon – the interconnectedness, interdependence and integration of cultures, markets and individuals. The emergence and growth of the global net of diverse national economies has brought new perspectives and prosperity to countries, companies and citizens. Although the trade flows are changing and the growth has slowed after the global financial crisis, connectivity is the key enabler of modern life.

Despite all connectedness and convergence, the world remains diverse. And that diversity is a major source of creativity; it drives innovation and progress, growth and prosperity. Connections and interactions within and among groups with a multitude of races, ethnicities, genders and sexual orientations are driving creativity and innovation in companies and across geographies. Competition makes us focus and keeps us contributing to economic growth.

However, diversity and competition are also leading to anxiety and conflict.

There is a need to strike the right balance between growth and prosperity on the one hand and preservation and protection on the other. What are the specific roles governments, businesses and resources play in this respect?

Borders aren’t always barriers

In the wake of the 9/11 attacks in New York, and more recently in Paris and Brussels, governments have attempted to protect citizens by raising the barriers at their borders. The intentions are good, but the practice risks burdening the economy or even excluding their own consumers, investors, brands and manufacturers from the many benefits and opportunities created by international trade and globalization.

However, today’s governments may not have the mandate to make this decision themselves. One of the deep-rooted desires of humanity is to exchange with other people and travel the world. As we see in the ongoing “hacktivist” challenges to the national firewalls, people will not give up on finding ways to access what is kept away from them – even if they simultaneously fear losing the security provided by national borders.

Borders do not need to be barriers. Modern technology has reached a stage where both security and fluidity is possible. Despite open borders, local cultures persist – as many examples show. Nations should continue to set the rules based on local codes, interests and needs, while regional and international bodies, such as the ASEAN and the World Trade Organization, help to prepare, negotiate and execute international frameworks and implement tested tools for secure borderless flow of goods and people, capital and data.

This often challenged but widely used model requires from the various actors – mainly governments and international organizations – empathy, creativity, diplomacy and pragmatism.

GlobalExportsTradeAgreements

Small businesses with global goals

Multinational companies have been developing the capacity to thrive in global commerce for some time. Thanks to internet, small and mid-sized companies have also gained access to the global markets. Although the physical supply chain still struggles to overcome the various hurdles to make international commerce easy and truly a reality, many online platforms and sites already exist to serve sellers and buyers, independent of location.

On the back of international agreements and with the help of supply-chain service providers, global brands have built global sourcing, manufacturing and distribution networks. The diverse range of companies competing in today’s worldwide markets do not only design, manufacture and provide us with the goods we enjoy – but also offer jobs in the many countries in which they operate.

Therefore, not only are global companies likely to object to regulation that significantly restricts their ability to manufacture and sell abroad, but smaller players, employees and consumers might well join the effort to maintain access to resources, products and customers in the digital global market.

Global solutions to global problems

On the one hand, the planet needs preservation and protection: if we do not act there will be more plastic than fish in terms of weight in the world’s oceans by 2050. On the other hand people need food, shelter, healthcare, education and jobs: in 2015, 836 million people around the world were living on less than $1.25 a day. While there are grave concerns about the effect of industrialization and consumption on resources and the environment, there is no doubt that poverty should be eradicated. And as the poor often live on the most affordable and hence vulnerable land, one obstacle to ending poverty is climate change.

We can observe that no barrier, no net, no firewall is large, long or strong enough to keep pollution, micro-plastics, terrorists and other threats away. Considering the magnitude of today’s environmental threats, there is a need to act fast and collectively. The world needs a cross-disciplinary and cross-industry effort, not only to effectively respond to the global environmental and resource challenge but also to other crises, such as pandemics, conflicts and the refugee challenge.

COP21, the Bali package and many other initiatives and agreements show that governments and enterprises are willing to stand together to develop more effective global frameworks and mechanisms. We need to strengthen the global platforms of collaboration and impact on which international organizations and governments, businesses and academia can co-create the most effective and balanced global solutions.

Ultimately, globalization is not an on/off exercise but the ongoing responsible management of global conventions and national codes, global markets and diverse economies, global commons and inclusive global growth. This requires confident and capable actors with strong identities not afraid to open up and willing and able to respect the different cultures while complying with international treaties and law. Even more so, globalization should be the golden path that connects and lifts the diverse global community to the next level of prosperity.

Image: REUTERS/Edgar Su

This blog was originally posted on the World Economic Forum Agenda.

How the cloud makes central planning a reality

Imagine the delivery of the hairdryer you ordered 18 hours ago was planned in a center 5,000 kilometres away – roughly the distance between Warsaw in Poland and Kashgar in China. Impossible? In fact, this is not a far-fetched fiction but soon to come reality.

Since the 1980s, the personal computer has helped businesses to plan and control many activities locally – from sending mass mailings to local customers to the managing of inventories and orders. The decentralized planning has helped to make products cheaper and more adapted to the local situation. For example the Spanish subsidiary of a global transportation company has replaced the 9am global service by a 10am local delivery option, as more people are expected to be in the office at that time. However, these local advantages pose major challenges to the international standards multinational customers expect from global brands. Therefore, global brands require central planning and control, which is back on the agenda – thanks to the internet and the cloud.

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How can the cloud bring the planning back to the center? While the personal computer helped create enormous efficiencies in almost each and every unit of a business, the cloud will surpass its abilities and ease the work of those charged with ensuring global standards and organisational efficiencies. The cloud is the place where all relevant data, information and applications can be stored available for all – locally and at the center – who have the necessary access rights. With easy to access storage capacity provided by providers like Amazon and IBM, the cloud offers an almost unlimited range of tools and databases – not only to the large but also to the small and mid-sized enterprises. This brings enormous advantages to the world of the so-called global supply chain.

It is the supply chain bringing the goods, ranging from food and medicines to the above mentioned hairdryers, to the supermarkets and stores, as well as everything that is needed to factories and other businesses and organizations. Thanks to the road and rail systems, water ways and air corridors, bilateral and multilateral trade agreements, this chain of continuous flows spans across borders and continents, cuts across international manufacturing networks and multiple distribution hubs and centres.

Today materials and parts are treated and transformed – in various stages and different locations on the globe – into an unprecedented variety of products. These goods are delivered globally, whether to consumers in the metropolitan areas like New York and Mumbai or to factories in the South African city of Uitenhage and in the province of Bac Ninh in Vietnam. This highly proliferated, and at the same time dense, global labyrinth of flow of goods is also exposed to many potential risks and disruptions.

The more precisely this supply chain is understood, i.e. described, analysed and planned, the higher the chance of smooth delivery and proper responses to market dynamics and unexpected shocks. Although the cloud allows the collection of data from stations, customers and situations all over the world, whether in the most distant corner of sub-Saharan Africa, the tip of South America or the tiniest island in the Philippines, only a central team closely collaborating with the country organisations might be capable of capturing the trends, threats and opportunities to determine quickly the most appropriate response.

How does the central way of supply chain planning and management work in practice? Each time when, for example, delivery plans are needed, the order requirements for customers are uploaded to the cloud. There, a powerful computing unit, utilising multiple parallel processors – called the optimisation engine – generates delivery plans satisfying the many constraints imposed by weather and climate, geographic and traffic situation, as well as the delivery location, which could be on the 45th floor in a high rise in Hong Kong or at a tiny farm on an island in Indonesia.

The optimisation engine evaluates alternative ways of transport and determines the best options for delivery. These optimized plans are then transferred to computers or tablets at decentralised warehouses where the orders are loaded to reach the buyers by road, boat or planes. In real-time and constantly the data about the moving of these goods can be collected and analysed to preserve the highest level of central control and chance of an on-time delivery. Furthermore, all data and analysis – including information about the status of production in the factories of possibly thousands of suppliers, as well as the actuals versus the sales plans of the many employed or serviced third-party sales teams – can represent valuable input for upcoming planning cycles.

The benefits of central planning are more than obvious: compliance with global standards, better forecasting, cost and carbon optimized routes, reduced hiring and training costs, and higher customer satisfaction and lower recovery costs through better quality control and more appropriate and timely responses to irregularities and disruptions.

Therefore, the next revolution in the supply chain will be the central orchestration team which collaborates closely across entire organisations to establish full visibility and ensure well informed decision-making. Applying predictive analytics and artificial intelligence will enable manufacturers, traders and logistics companies to receive clear predictions in respect to potential disruptions and even more so recommendations to store hairdryers at specific quantities and the perfect location – possibly long before we even thought about placing the order 18 hours ago.

This blog was originally posted on the World Economic Forum Agenda.

Hurdles ahead along the “New Silk Road”

In October 2012, Wang Jisi – professor at Beijing University – urged China to re-open its ancient commercial trade routes with the West. In 2013, China’s President, Xi Jinping proposed to its neighbors the “One Road, One Belt” initiative. China’s aim? To achieve $2.5tn in additional annual trade with the nations along the proposed routes over the next 10 years.

Trade_SilkRoad

What is the current state of the project and how likely is it to succeed?

The private sector, for one, has started reinforcing the connectivity between the East and the West. In 2011, supply chain operator DB Schenker started weekly trains between China and Germany. It carried 40,000 TEU containers (20 foot equivalent unit) from 2012 to 2014.

In 2015, the Port of Rotterdam welcomed its first containers by rail from China. This route shortens the delivery time of goods from around 60 days by sea to about 14 days by land. In the future, trains from Chongqing in China to Duisburg in Germany transiting 10,800 km (6,700 miles) are expected to reduce delivery time to 10 days. Companies such as Hewlett Packard are connecting European customers with the factories in China through the new route. Returning containers are filled, for example, with western luxury cars.

The result is that the modern caravan has started rolling. Thus, the “New Silk Road” development project – which embraces an area that is home to about 70 per cent of the world’s population, produces about 55 per cent of global GDP and has about 75 per cent of known energy reserves – has been taken its first steps. Of course, challenges remain.

The ambition requires efficient and effective collaboration between the 40 countries located alongside the historic silk routes, both those that went overland from China to Europe and those that went by sea. China has taken the initiative to start aligning the participants, signing partnership agreements related to the initiative from 2013 onward with Russia, Kazakhstan and Belarus.

The project requires significant funding – an estimated $8tn between 2010 and 2020 alone. The China government announced several commitments including a $40bn Silk Road Fund to be focused on projects in the Central Asia region, a $50bn Asian Infrastructure Investment Bank (AIIB) and a $10bn BRICS-led New Development Bank. Some sources suggest that Beijing is prepared to support the projects to the tune of between $160bn to $300bn. The China Development Bank and the Maritime Silk Road Bank are set to reinforce such support.

The New Silk Road project needs to overcome technical and regulatory challenges. The trains require at least two changes of gauge – as China and Europe use the standard of 1435 mm gauge while Belarus, Russia, Mongolia and Kazakhstan use the broad gauge of 1520 mm. Many borders need to be crossed. Customs clearance processes need to be standardised – advanced information technology and digitisation might help. Ideally, the New Silk Road will become a free-trade corridor.

Each country needs to understand what to contribute, such as what infrastructure and policies to launch, how to finance the initiative and what benefits to be expected from the investments. A well-designed business model which features a plan outlining how the Silk Road will work is critical to ensure that additional value – new businesses, new industries and new jobs – is created along the entire value chain and not merely at both ends (China and Europe).

Imbalances in economic strength and the flows of goods – China exports are traditionally stronger than those of most of its trading partners – and seasonality like slow months and peaks need to be factored in the model.

The success of the New Silk Road depends as well on clear governance rules and mechanisms. This includes the answer to the question of whether this project requires an independent organisation or can handle strategic decision-making and dispute resolution in a bilateral or multilateral way.

The incentive to get this right is huge. The participating countries will be able to tap in a new source of growth and need to balance spending with progress. Currently, China is carrying the lion share of the investment. In return, Asia’s leading economy expects significant stimulus for its market and favourable ties with countries along the belt.

The private sector will leverage the potential and increase investments proportional with the improvements in infrastructure and processes. If successful, the reboot of the ancient Silk Road will without doubt bring additional growth opportunities to business and nations, and provide also better access to no less than 66 per cent of the world’s middle class, which is expected to live in China by 2030.

Other sources:
ECFR. (2015). One Belt, One Road: China’s Great Leap Outward. European Council on Foreign Affairs

This article was first published in The Financial Times.

Author: Wolfgang Lehmacher is head of supply chain and transport industry at the World Economic Forum. Victor Padilla-Taylor is community lead, supply chain and transport at the World Economic Forum.

Image: Kayakers take in the last of the day’s light as they paddle past a ship anchored off Cape Town. REUTERS/Mike Hutchings.