The Belt and Road Initiative
Impact on European logistics
What is that in the East? Is it an investment policy, a state aid programme? The Chinese Marshall Plan? No it is the Belt and Road Initiative.
- What is it?
- What are the opportunities?
- Will it shift the current market balance
- Do the risks outweigh the benefits?
- Going forward
Nearly 70 countries and international organizations have signed up for the mega infrastructure project: the Belt and Road initiative. Proposed by Xi in 2013, this program is a massive infrastructure investment that spans 60-plus countries across Asia, the Middle East, Europe, and Africa. A large part of the investments are focused on Europe and generate a set of opportunities across the wider transport and logistics sector. This article will help you to identify these opportunities and make you aware of the risks and considerations that need to be taken into account when pursuing Belt and Road investments
What is it?
Depending on who you ask the Belt and Road Initiative (BRI) has many forms and intentions. Some see it as the many-headed dragon of the East, intended to flush our transport market with cheap capital and Chinese steel, others see it as a welcome opportunity and the renewal as China in the role of Economic engine of the Northern hemisphere. The uncertainty surrounding the Belt and Road Initiative has been fostered by numerous Beijing policy changes, low transparency in the ongoing projects and name changes of the initiative itself. But no matter how you look at the initiative as a whole, it remains pertinent that it is a portfolio of projects that has not seen the likes to this day. Four years after BRI was launched, two aspects are clear: Firstly, BRI is a journey, not a series of one-off infrastructure projects; and secondly, it is much more than an outbound investment program.
Impressive by its numbers alone, the Belt and Road Initiative comprises of 2 main routes, a sea and land route, 6 main corridors (of which the East-West corridor is of most importance to the EU), 101 cooperation agreements signed with 86 countries and organizations and 900 billion investment overall. It bears particular similarities to the ancient version of the Silk Road, both in its workings and underlying risks and opportunities. Just as the traditional Silk Road, the Belt Road Initiative is comprised of several smaller routes that connect various parts of China and the Middle East to Europe. Overall no merchant travelled the route alone, just as today the logistics ecosystem works together to maximize supply chain optimization. Where the risks in the past were multiply safety and security, today we see a more diverse risk pattern, with political, social and economic risks. And finally the opportunities go beyond making money, the traditional road transferred both goods and culture, just like today’s initiative which aims to bridge the East-West cultural gap.
But what does this initiative entail for the different actors in the European logistics sector. Should governments chase Chinese investment? Should logistics providers start Europe-China services? Let’s look at the facts.
What are the opportunities?
We can distil three main opportunities for the European Logistics sector based on the Belt road goals.
1. A source of capital
The resources required to develop BRI are vast, with estimates between $2 trillion and $3 trillion per year. Financing occurs primarily in the form of equity finance for acquisition of shares in, ports, railway organisations and airports. These are 97% brownfield since greenfield tends to require mostly debt financing (where for EU projects, loans tend to be provided by EU-based financial institutions).
Structuring of this capital financing is through a variety of financial institutions (big-4 commercial banks, China Development bank, Export Import Bank of China, Silk Road Fund, Asia Investment Bank, New Development Bank, etc.)
If we look at where this capital flows we see that the most prominent sectors up until today were ICT, automotive, industrial machinery, real estate hospitality and transport. Going forward, President Xi announced a further $124 billion for BRI, including $14.5 billion for the Silk Road Fund, and special lending schemes for the China Development Bank and the Export-Import Bank of China, worth around $36 billion and $19 billion, respectively. With the more ‘hard’ infrastructure in place we will see investments in manufacturing and trade, as well as softer investments in tourism and culture. The highest growth sectors of the past year(s) have been industrial machinery, ICT Entertainment, and consumer products and services.
As for the location of the (identifiable) projects we see that the majority of the capital influx occurs in Germany, France and the UK and South West Europe. In the East, the entry points into the EU of the rail corridors seem to receive the most Chinese attention.
2. Reduction of transport costs
When you invest (correctly) in infrastructure, transport costs will go down.
Today the BRI is still a story of train vs. ship. For e.g. the Zhejiang - London train connection in 18 days vs. 30+ by sea. This entails that the BRI rail connections are only feasible for a select segment of cargo, which is too time sensitive to be transported by ship but not expensive enough to be transporter by air.
The main corridor of interest for the European logistics sector today is the East-West corridor, where the bulk of the Chinese-European investments are concentrated. However we must not forget that the European infrastructure developments are also underway. For e.g. the Baltic-Adriatic Corridor is one of the most important trans-European-road and railway axes in Central Europe. It could complement the maritime leg of the Belt and Road Initiative, opening up the African continent.
3. Opening of new markets
The final opportunity of the BRI is the opening of new markets. Looking at Asia alone, forecasts show that Asia-Europe trade flows will double by 2030 with 43% rail freight increase in the Baltic region and a 140% maritime increase. An add-on is that the BRI is more than China alone, the East-West corridor gives direct connection to growth economies like Russia, Kazakhstan and Mongolia with a potential GDP of 250 billion.
Overall the BRI connects 86 countries and organizations, with 101 cooperation agreements which jointly account for 38,5% of global land area, 62,3% of population, 30,0% of GDP and 24,0% household consumption. The increased transport infrastructure, both originating from the Chinese and European investments will make a lot of this area accessible to European firms.
Will it shift the current market balance?
A common question is if the Chinese investments will topple the current logistics hubs of Europe like Antwerp and Rotterdam. We can say with a large degree of certainty that they won’t, for a multitude of reasons. As we stated before this is still a question of rail vs. shipping. Shipping is still less expensive (and more environmental friendly ) than rail, the new infrastructure and trade agreements will foster growth in the intended BRI rail hubs, but will not displace current large scale transport flows.
The opportunities of the BRI are mostly centred on the generation of NEW cargo flows, meaning that the countries in (South) Eastern Europe and the Baltics, where the corridors enter the Union might benefit and grow at a faster rate. But the existing large scale movements will hardly be impacted by these developments. The largest potential is present for inland logistics developments near the rail corridors and for seaports located near the entry points and servicing their own respective captive hinterlands.
Do the risks outweigh the benefits?
As with any large undertaking there are risks involved. The risks linked to the BRI can be classified as follows:
The lack of commercial imperatives behind BRI projects means that it is highly uncertain whether future project returns will be sufficient to fully cover repayments to Chinese creditors.
Presence of political uncertainty, trade embargos, infrastructure impediment and corruption, especially amongst the developing nations.
Chinese dominance in rail transport, or control of the entire logistics chain, may significantly increase its market power in respect of EU trade.
As China shifts its overcapacity to the countries along the Belt and Road, there could be a reduction in jobs, and the closing down of plants and factories in affected countries.
Infrastructure projects may be implemented because Chinese funding is available, with little focus on the demand for, or sustainability of, the services that they are intended to support.
These risks are fairly similar to traditional capital and infrastructure risks and can be managed by proper risk management and planning. From a firm perspective risk management and solid financial management can mitigate most of the threats linked to BRI projects. From a government perspective solid regulation and (socio) economic impact assessment will solidify local trust and allow for a maximization of the trickle down effects of any investments.
So, now what? It is important to note that we are still closer to the beginning of its journey than its end. This means that it is early to quantify the BRI impact on global trade. Even though the true impact and scope of the BRI remains unclear, the potential for the logistics sector is present.
Three main opportunities exist for the European logistics sector
- Highest inflow of capital ever recorded offers large investment opportunities
- If you get infrastructure right, it does have a genuine multiplier effect
- Over half of the population will be accessible via the trade network
Tapping in to these opportunities means being aware of the risks and mitigating them BEFORE acting. BRI projects provide a range of stakeholders with which clients could consider partnering: from national, provincial and local government agencies (National Development and Reform Commission, Ministry of Commerce, State Owned Assets Supervision and Administration Commission, Ministry of Finance) to SOEs, Chinese and foreign POEs, other MNCs and professional firms.
Professional services firms can help navigate local regulations such as tax and labour requirements, as well as contracts and insurance, and can manage the various types of risk through due diligence. They can also assist in ensuring that projects meet corporate social responsibility (CSR) requirements.
But before starting on a project, prospective BRI partners’ first step must see them investigate and prepare properly. The second step includes buying risk and accident insurance.
The third is actively working to minimise risk during the project’s life and, in the event something goes wrong, dealing with it promptly. Also vital is a written plan that incorporates different solutions according to experience.
More information on The impact of the Belt and Road Initiative?
Do you want to know more on the impact and opportunities of the Belt and Road initiative for the maritime industry? Please contact Indra Vonck.