China high speed rail GETTY IMAGES
With more than 12,000 miles of track laid of high-speed rail, China has more such track than the rest of the world combined. Now Beijing plans to build HSR networks connecting China with all of Southeast Asia.

China Flexes Its Global Logistics Muscle

China aims to extend its logistics reach from the Pacific to the Atlantic through its One Belt, One Road initiative.

Like the country itself, China’s ambitions are massive. The sheer size of the country’s “One Belt, One Road” logistics initiative, for instance, calls into question the true objective of the regional infrastructure plan.

Announced in 2013 by Chinese President Xi Jinping, the plan would link China’s Silk Road Economic Belt Project in Central Asia—which was aimed at connecting with Europe via Central Asia to increase trade between the Asia-Pacific region and Europe—with its Maritime Silk Road stretching from the South China Sea to the Indian Ocean. These two plans become the “One Belt, One Road” plan (OBOR).

The expansive plan covers roads, rail lines, ports and airports that will link East China through Southeast, South and Central Asia extending to Europe. The plan consists of six economic corridors:

• China-Mongolia-Russia

• Eurasian Land Bridge

• China to Central Asia and Western Asia

• China-Indochina peninsula

• China-Pakistan

• Bangladesh-China-India-Myanmar.

But to really understand the scope of the trade route is to recognize the economic impact it will have on the global economy. This route will encompass one-third of the world’s GDP, 65% of the world’s population and 25% of all the goods and services of the global economy.

“This is truly a brilliant plan on China’s part,” explains David Gonsalvez, CEO of the Malaysia Institute for Supply Chain Innovation, which is part of the MIT Global Supply Chain and Logistics Excellence Network. “They are really taking a broad perspective. They have the cash, they have the expertise in building infrastructure projects, especially high-speed rail, and they have excess labor.”

Gonsalvez sees nothing but a positive outcome for China by pursuing this grandiose plan. The routes they build within their country, he notes, are greatly needed to transport goods domestically. And when building outside of China, they are setting up a favorable financial structure. While they provide upfront funding for roads, airports and seaports necessary to connect the routes, each country is obligated to pay China back for these efforts.

Viewing this initiative in terms of global power, Foster Finley, head of the Transportation & Infrastructure practice for consulting firm AlixPartners, thinks this effort has more to do with politics than it does business. “I don’t think logistics is the only thing on China’s mind. This is the continuation of China emerging as both a dominant player and one that wants to shape the region.”

Influence over neighbors translates to regional power. And what better way to do that than to basically control the foundation of the economy—the logistics infrastructure, Finley explains.

While many have compared this plan to the Marshall Plan, Finley doesn’t share that view. “That plan focused on giving control back to stable governments. This is about China being able to have continuing and lasting influence over a region.”

And that influence is already in place. For example, China is Malaysia’s top trading partner. And India and China currently have close trading partnerships. “China’s influence over the area will continue to grow,” says Gonsalvez. “There will, however, be challenges as how to align custom statutes as well as basic operations and processes in order to keep trade flowing smoothly.”

How Will the U.S. Benefit?

While Chinese companies are already busy building projects, $50 billion of OBOR-related investments have also been launched in the 65 countries that are included in the initiative. And in fact, some U.S. companies are already seeing benefits. The opportunities come as companies become suppliers to the project, and when utilizing the improved infrastructure as a way to move more products to different markets.

For instance, Rachel Duan, industrial conglomerate General Electric’s chief executive in China, told the New York Times that she sees manufacturing in the area increasing when “the roads are built, the ports are built and the power plants are built.” At that point, she believes, “other opportunities will come.”

One company that is already using the China-Europe rail service, part of the larger initiative, is high-tech manufacturer HP, which was one of the first companies to start using the Pireaeus port in Greece to access markets in Europe, according to Forbes.

Another industrial conglomerate, Honeywell, has also been involved in the project and is a good example of how a U.S.-based company with operations in China can benefit from OBOR.

Cheng Wei, Honeywell’s EPC (engineer, procure and construct) export sales leader in China, spoke to MH&L about their involvement in the project. Wei notes that OBOR offers a very broad prospect for energy and infrastructure development, especially in the field of oil & gas and petrochemical.

“Honeywell is well-positioned to support OBOR through its China growth strategy and portfolio,” Wei explains. “Under our ‘East for East and East to Rest’ strategies, we follow the growth, proactively advocating locally developed innovation and partnering with leading Chinese companies to explore the opportunities in high-growth regions across the globe, especially in international infrastructure development.”

Honeywell offers a wide range of Chinese-made solutions, in such areas as automation controls, energy efficiency, safety and security. The company has very strong local teams across the region, with 3,200 workers in 20 local offices along the route of the OBOR, ensuring that Honeywell can provide the necessary long lifecycle guarantees for overseas projects.

According to statistics published by the Chinese Ministry of Commerce, Chinese companies signed 8,158 contracts for EPC projects worth a total of US$126 billion, with 61 countries along the route in 2016. And Honeywell has been involved in some of these. Back in 2009, Honeywell was selected for the Uzbekistan-China Gas Pipeline Line A & B Project by Asia Trans Gas to provide its advanced automation control system. In 2012, Honeywell was once again selected for the Line C Project. Honeywell process system is designed to help increase operators’ access to information and help them make faster, better-informed decisions to promote the integrity and safety of the pipeline.

In May 2017, Honeywell UOP (Universal Oil Products) signed a partnership agreement with Wison Engineering Ltd., an EPC company in China, to jointly provide methanol-to-olefin technologies and EPC services for customers outside of China, particularly in Russia, Middle East and Southeast Asia.

Growth in the region, partially spurred by OBOR, will be strong for Honeywell. “Over the next five years,” Wei notes, “we expect the whole EPC overseas business will grow to account for around 30% of our total solutions business in China.”

Managing OBOR Projects

With other companies likely to join the initiative over the next decade, Wei offers some advice. “A strong and experienced management team is very critical to win and execute overseas business, which can involve more potential risks compared with doing business domestically.”

Try to avoid risks via the adoption of optimal business operations, he recommends. “Of course, there are other issues, such as currency devaluation,” he adds. “Think comprehensively about all parties involved in the process of business negotiations and contract signing. The key point is to properly manage and mitigate risks.”

Honeywell has also been building relationships in the region. In June Honeywell and the China International Contractors Association jointly hosted a high-profile meeting with more than 20 leading Chinese engineering procurement and construction contractors in Macao. The event showcased support for the initiative that aims to build cooperation among ASEAN, Central Asian and European countries and regions to redirect China’s overcapacity and capital toward development of regional infrastructure and improvements of trade and relations.

Future for U.S. Companies

“Construction, engineering and finance firms are attempting to provide the OBOR project with sophisticated American goods and services,” explains Wei. “U.S. companies that have subsidiaries along the routes will benefit from this. The initiative will bring new opportunities to foreign firms like Honeywell that are deeply rooted in China.”

Wei offers three specific steps for U.S. companies who wish to bid for projects:

• First, your company needs to be familiar with the overseas project operation specification and be acquainted with the local regulations, policies and other special needs of various countries.

• Second, you need to have a sound understanding of China’s technology and standards.

• Third, owning local talent and experience is a must. For instance, Honeywell is a company that combines the concepts of global management with its practice in China. In the meantime, Honeywell has its management teams in the key countries along the Belt and Road Initiative, such as Uzbekistan and Russia.

The U.S. government is trying to make sure that U.S. companies get a piece of the pie as well. The pie currently stands at $900 billion in projects which are planned or already underway. Most of the funding will come from China’s policy banks, the Export and Import Bank of China, China Development Band and its largest commerce banks.

While the U.S. government is not an official member of the initiative, a delegate was sent to the May meeting of the countries that are part of the OBOR framework. “U.S. firms have a long and successful track record in global infrastructure development,” explains Matthew Pottinger, East Asia director on the National Security Council.

Finley is not quite sure how well the U.S will be able to compete for these projects, given the current economy reality of China, with its ample labor and  pent-up capacity, as well as many manufacturing companies with expertise. Preference will be given to Chinese companies.

That’s not to say that U.S companies won’t become more involved. “The OBOR effort has not gotten the degree of attention it deserves,” says Pieter Bottelier of John Hopkins University, in a recent article in [email protected] “I am concerned that its significance is underrated in the U.S. and in the West in general. It is a very positive initiative and major vision of how China can collaborate with countries in its neighborhood, Europe, Latin America and Africa in a way that is in the long-term interest of China and the global economy.”

While that might be an optimistic view of the project, the reality is that this project, which will continue over the next decade, offers a great deal of opportunity, even as the end goal might be to garner a strong political foothold in the region and the world. 

TAGS: MHL Magazine
Hide comments

Comments

  • Allowed HTML tags: <em> <strong> <blockquote> <br> <p>

Plain text

  • No HTML tags allowed.
  • Web page addresses and e-mail addresses turn into links automatically.
  • Lines and paragraphs break automatically.
Publish