LSP’s Expand their Presence on the ‘New Silk Road’

At the start of last month, DHL Global Forwarding signed an MOU with Kazakhstan Temir Zholy Express designed to ensure greater connectivity between Europe, the CIS and China.

This is an aim that is becoming increasingly familiar in the freight forwarding sphere; CEVA, SNCF Geodis and others have launched overland trade between Europe and China, with the market for services growing steadily.

So why is this happening? In a word, China.

In September 2013, during a state visit to Kazakhstan, Chinese President Xi Jinping announced that China was to begin a large scale investment programme to create a ‘New Silk Road Economic Belt’ and a ‘21st Century Maritime Silk Road’. Together, these were termed the “One Belt One Road” initiative (OBOR), and were set out as a strategic priority for China, to be funded by the newly-formed Asia Infrastructure and Investment Bank (AIIB).

The OBOR initiative, underpinned by the AIIB, is essentially a foreign policy tool deployed by China as a means of gaining access to markets and raw materials, whilst also developing its Central and Western regions. By developing the means to connect its western region with rail and pipeline networks to Russia, Europe, and South to the Indian Ocean, China is attempting to overcome strategic choke points in its supply lines, such as the crowded straits of Malacca.

Some of the most significant beneficiaries of this have been companies operating in construction and primary industries, such as mining and oil & gas. For example, in January 2015, Schlumberger announced that it had agreed to take a minority stake in Russia’s largest onshore drilling firm for $1.7bn, despite tensions between Russia and the West. Much of the company’s potential advantage from this deal is increasing connectivity between Russia and China, where much of the former’s energy is destined to be headed over the next few years.

The infrastructure boom associated with such developments presents a big opportunity for logistics on the new Silk Road, and comprises expansions and additions to port and airport facilities, in addition to railways and pipelines. Notably, China has invested significant resources into the development of ports in Greece (Piraeus), Pakistan (Gwader), and Sri Lanka (Colombo). It has been railway lines, however, which have attracted the most interest, with several companies well positioned as a result of anticipating growth on the trade route prior to Xi’s 2013 speech.

DB Schenker has arguably one of the most comprehensive overland service offerings between China and Europe. The company established its first service, between Chongqing and Duisburg, in April 2011, before adding another in September, a Leipzig – Shenyang service carrying automotive components for BMW. In August 2013, the company began its first multi-customer service on the route, and has expanded to eight regular intermodal services on the route as of 2015.

Other companies are also active on the route. As mentioned, DHL is developing its cooperation with the local rail company in Kazakhstan, having added a service between Zhengzhou and Hamburg in June, running twice a week, whilst UPS has established regular rail services from rail service from Chengdu to Lodz in Poland, and from Zhengzhou to Hamburg. CEVA is another large player operating along the route.

These services do rely on local companies, however, as illustrated again by the DHL example. Rail providers in Russia, China and Kazakhstan are in control of the actual delivery of goods, and this has prompted some fears that, particularly in the case of Russian Railways, the service will be used as a political tool, in the same way as the country has exploited its neighbours’ reliance on Siberian energy.

Even so, whilst rail forwarding along the new Silk Road represents a growing and potentially lucrative market for logistics activities, it is important to bear in mind that the transportation of goods along this route represents a means of supplementing, rather than supplanting seaborne trade routes. Though rail freight remains a faster option than carrying cargo by sea, it is many times as expensive, and as such, companies will tend to reserve the option to ship by rail when air freight is too costly, and ocean freight too slow.

Nonetheless, the new Silk Road offers much promise to shippers and forwarders alike, with the development of infrastructure also offering an economic boost to the countries along the way. At present, the most popular vertical goods for rail forwarding between China and Europe are high tech, automotive, industrial and consumer/retail. Many of these industry verticals make use of airborne shipment options, and an interesting side effect of the OBOR initiative is the potential damage that will be dealt to air freight, with the market already under assault from volatile rates and capacity issues.

Only time will tell, but it may well be prescient that DHL, the largest air freight forwarder in the world, appears to be bedding in for the long run.

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