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A fast route to European nations

Jennifer Lo in Hong Kong
Updated: Nov 24,2014 11:29 AM     China Daily

Trains along the New Silk Road offer alternative, but high costs may see them play second fiddle to sea transport

In recent years, DP World has been actively operating in the landlocked town of Khorgos, where the nearest ocean is hundreds of miles away. This may seem like an unlikely location for DP World, one of the world’s largest port operators with 65 marine terminals across six continents, but its presence here is not without strategic calculation.

A remote Chinese town bordering Kazakhstan, Khorgos is set to become a visa-free special economic zone with simplified customs regulations.

With an inland container port under construction, the plan is to turn it into a logistics hub serving eastbound and westbound cargo for global companies such as Toyota along the overland New Silk Road, as China tries to improve inland connectivity between the country and Europe.

The historical route stretches from Xi’an and Urumqi in western China via Central Asia to countries such as the Czech Republic and Germany in Europe. The plan was rebranded by President Xi Jinping during a State visit to Kazakhstan last year.

“One of the oldest trade links in the world, the land route between Europe and Asia is not used to its full potential for large-scale intercontinental trade,” says Mohammed Sharaf, CEO of DP World, which has branched out to become an operator managing different types of transport hubs including inland container depots and logistics parks.

Since last year, DP World has been providing management advisory services for developing Khorgos SEZ.

The revived Silk Road could well shake up conventional supply chains and open up new routes for Asian companies to access markets in Central Asia and Europe, although this ambitious roadmap will take time to realize.

In olden days, it would take months for Chinese silk traders to reach Europe on camels and caravans through the vast steppes of Central Asia, in exchange for spices, herbs and precious metals. Today, that journey is just 15 days - about two-thirds the time required for ocean freight, thanks to the Iron Silk Road.

The Chongqing-Xinjiang-Europe railway, the first to connect inland China to Europe, is seen as an essential part of the New Silk Road.

Since this year, trains have been running three times a week from Chongqing through Khorgos in Xinjiang to Kazakhstan, Russia, Belarus and Poland, winding up at Duisburg in Germany. The service is operated by Trans Eurasia Logistics, a joint venture between Deutsche Bahn and Russian Railways.

The 11,000-km “Iron Silk Road” is more than a land route with a rail option.

“Rail will clearly be the backbone, but we are learning to integrate other modes of transport such as air, sea and road,” says Darryl Hadaway, former executive director of KTZ Express, a subsidiary of state-owned railway company Kazakhstan Temir Zholy.

KTZ Express is actively involved in building a freight network to improve connectivity with neighboring countries. On the ground, some $3 billion will be invested to improve rail infrastructure in Kazakhstan, a move to diversify the country’s oil-reliant economy.

Kazakhstan is situated at the crossroads of Central Asia and is home to the longest section of the ancient Silk Road. The volume of transit goods passing through Kazakhstan is estimated to reach 170 million metric tons in 2020, up from the current 117 million tons.

KTZ Express will inject an additional $100 million to build a freight and logistics center in Lianyungang, a port in Jiangsu province, on China’s eastern coast.

The absence of a centralized port for cargo consolidation in China has long frustrated shippers, particularly those carrying smaller volumes.

“Since different companies are using different ports in Shanghai and Tianjin, it can take up to one month to wait until sufficient cargo volumes are received to fill a container,” says Kanat Alpysbayev, vice-president of logistics at KTZ Express.

On completion, the 21-hectare logistics center is expected to quicken the entire process. It will handle 500,000 TEUs (20-foot equivalent units), or standard-size containers, every year, and help shippers from Japan, South Korea and Southeast Asia to move cargo to Kazakhstan by rail.

KTZ Express President Sanzhar Yelubayev describes this as a “very exciting development”. Currently, Asia has to rely on ocean freight to Europe and then truck or rail to Central Asia.

Toyota has been one of the first Asian companies to tap into the overland Silk Road. The Japanese automaker used to ship cars and auto parts to Europe by sea through the Suez Canal, a process that takes 70 days, says Takuya Ichihashi, Toyota’s chief representative in Kazakhstan and Central Asia.

Besides Toyota, dozens of electronic firms and carmakers from East Asia and Europe including BMW and Mercedes-Benz have switched to the overland route to accelerate the logistics flow for high-value, time-sensitive products, including high-tech and luxury goods.

Chinese high-tech companies such as Xiaomi Corp and Huawei Technologies Co Ltd are also using this route, says Norio Yamamoto, a United Nations Silk Road adviser and president of the nonprofit Global Infrastructure Fund Research Foundation, based in Japan.

A pioneer of using the overland route is Hewlett-Packard. The technology giant has set up factories in Chongqing to manufacture notebook computers. Since 2011, it has transported some 2,500 containers and 5 million products to Europe using the route.

Part of it has to do with investors’ “go west” strategy. In recent years, a number of transnational companies operating in China have shifted their production base further inland from the eastern coast in search of low-cost labor. For instance, Foxconn from Taiwan, which makes products for Apple and Acer, also has factories in Chongqing.

However, the prospects for business on the overland Silk Road are not all that rosy.

Maritime transport still dominates over 95 percent of intercontinental trade. Of the 100 million tons of goods transported from China to Europe every year, the overland route accounts for less than 1 percent of the total, says KTZ’s Alpysbayev.

One consideration is the higher cost of using rail, which makes it a less popular option for bulk shipping.

To ship a standard 20-foot full container from China to a major European port by sea costs $2,500 on average, according to a United Nations Economic Commission for Europe report published in 2012. Shipping it by rail would increase the cost to $8,900.

“It’s all about economics and trade-offs,” says the UN’s Yamamoto, adding that it is unlikely that global companies will abandon the maritime route anytime soon.

“It all depends on whether this small part you try to ship is valuable enough to justify the higher transport cost. It is like using a courier service. “

In short, the overland Silk Road is more of an alternative than a substitute for the maritime route.

Adding to the cost is the relatively small traffic volume of goods. It is not uncommon for the Chongqing-Xinjiang-Europe trains to leave for Europe hauling 50 full containers and return to China empty. The train line is still in search of a profitable business model.

“The return trips can target luxury products such as wine and food, which has a growing demand in China,” says Henry Christensen, chairman of the China Logistics Club, a network of small and medium-sized logistics companies and freight forwarders.

Developing a niche service may be a way out. Apart from auto and IT goods, the industry is looking at a service to transport temperature-sensitive products, including medicines.

Logistics giant DHL began to offer temperature-controlled containers on the rail service between Chengdu and Poland in January, according to media reports.

Looking ahead, railway operators hope to increase the market share of the overland route to at least 7 percent by 2020, from the current 1 percent of the cargo flow between China and Europe.

“It appears to be a small number, but that’s a huge market for us,” says Alpysbayev.

A mission impossible? “Well, it is very hard but achievable. There are people who aren’t aware an alternative route like this exists,” he says.