by Asia Perspective

The New Silk Road

April 2, 2013

Increasing labor costs close to the large freight harborsand improved collaboration across key land borders resulting in a decrease in the fright time, is making rail freight from China to Europe an attractive alternative to air and ocean freight.

Companies in search of cost savings for their production facilities in China are looking further and further away from the coast to locate their manufacturing base. However, moving to a remote location, while achieving for instance labor cost reductions, will have other adverse effects on transportation costs as soon as one moves away from the main shipping ports. This has pushed forward the search for alternative routes from China to the west. Large transportation companies such as DB Schenker and DHL turned their focus towards the railway connection some years ago, and have recently announced more frequent rail freight services along the route. According to Bloomberg, large German auto-manufacturers such as BMW and Volkswagen are already using the rail link to transport auto parts to their factories in China. BMW alone sends three to seven trains a week from the German city of Leipzig to their Chinese assembly plant in Shenyang.

Railway connections from China to Europe have existed for many years, however for a long time it has been bureaucratically demanding to cross some of the borders with freight. The new focus on the rail route has forced the governments in the area into rethinking some of the customs processes. This rethinking, combined with a closer cooperation between the Eurasian governments in general – especially through the Shanghai Cooperation Organization – have recently made it easier to cross some of the borders, specifically the China-Khazakstan and the Khazakstan-Russian border.

The advantage of railway freight is time. The freight time is around two weeks from China to Europe on rails, about half that of ocean shipping. The cost is however less favorable due to a price being approximately twice that of ocean freight. This factor makes the rail freight less interesting, especially for goods with long or no expiration date. However, it is still lower-priced compared to air freight, which is only one third, and as companies seek  greener options, trains are an interesting alternative compared to air freight as it leaves a carbon footprint thirty times less per container.

One of the drivers of the shift in transportation methods is the increasing development of industry in the Chinese inland city of Chongqing. Chongqing has recently become one of the fastest growing Chinese cities for consumer goods manufacturing, starting when it was chosen to be the fourth municipally city in 1997. Chongqing was chosen as an attempt to narrow the gap between rural and urban areas, and in 2007 the city was by the State Council chosen as a pilot reform city. The laborin the middle of China is cheaper than around the traditional areas of production – situated around Shanghai, Guangzhou and Beijing – by having a minimum wage, which is around 29% lower than the traditional areas. Chongqing have received increased attention, especially, the production of advanced technology has been moved towards this city lately. It is in particular this high-tech industry, where transport time is an important factor that has helped to push forward the usage of trains. Electronic giants such as Hewlett-Packard, Acer and Foxconn have already established factories in Chongqing, and according to Bloomberg, HP has already transported more than 4 million notebook computers along the overland route. As said by the mayor of Chongqing, Huang Qifan, rail freight offers a major shortcut to the more traditional ocean freight, decreasing travel timefrom Chongqing to Europe to the half. The main route from Chongqing goes through the Xinjiang Province into Kazakhstan, through Russia, Belarus and Poland and end up in Duisburg, Germany. The first train completing this 11,179 km route, carrying laptops and LCD screens, left Chongqing late June 2011 and arrived in Duisburg 15 days later. Trains now operate daily on the route, and twice-daily services are planned to kick off later this year.

Even with the positive outlook, there are still difficulties that Chinese exporters need to overcome along the rail-link. Especially the size of the train gauges is a time consuming issue. Most former USSR countries still use a different rail-system with larger gauges. As most countries in the world use 1 435mm gauges, Russia and the other former USSR countries use 1 520mm gauges. This means that the freight coming from China has to either change trains, or change wheel sets twice, first before entering Kazakhstan or Russia, and then changing back when entering Europe. This operation is time consuming and adds to the cost of the rail freight. If this issue could be overcome, the rail freight could become even more attractive in the future.

The origin of the overland trading route from China to the west dates back more than 2000 years. At that time, the west had a large demand for Chinese silk which quickly became the most important goods traded along the road. The route – called the “Silk Road” – is considered an important reason for early cultural interchange and development of both eastern and western countries. Carrying goods from China to Europe has ever since been an important part of the continuous progress in the world, however, the once predominant overland route has in modern times been overtaken by sea transport. The railway link can now help turn this situation back around and continuously increase the foundation of foreign companies based in China, by developing new opportunities through faster delivery, lower salary and by giving the company a greener profile.