Silk Road subsidies undermine rail link
While rail links offer viable alternatives for European-China trade, cost and other challenges remain
Amand Song picks up one of her two mobile phones. At the other end of the line is a potential customer from Ningbo, a large, east coast port city, inquiring about the cost of sending a container from Chengdu, the capital of Sichuan province, to Europe by train.
Song, a former air freight agent, now works for YHV Chengdu Hatrans Intermodal Logistics, a Chinese-Polish-Italian joint venture providing rail freight services from Chengdu to Lodz, in Poland.
YHV is one of the several "platform" companies in central and west China, each providing similar services from their home cities to different destinations in Europe. They are in the vanguard of China's Silk Road strategy, which is attempting to unshackle the world's second-largest economy from reliance on sea lanes through the Suez Canal when it trades with Europe.
But while Beijing may have written the score, different inland cities are increasingly playing out of tune, undercutting one another in the race to subsidise multinational manufacturers.
"Competition is getting tough," Song said.
Despite being marketed as the optimal logistics solution - cheaper than air freight but quicker than ocean freight - rail freight forwarders are struggling to find enough cargo to fill trains at prices that make money.
Local governments in Chongqing, Chengdu, Wuhan and Zhengzhou have offered subsidies to lower freight costs and make such services more appealing to customers who are used to cheap, seaborne transport.
Song said Chengdu's city government gave YHV 30 million yuan (HK$37.8 million) in subsidies a year, less than what Chongqing, Wuhan and Zhengzhou offered freight forwarders based in those cities.
The other cities declined to disclose their subsidy levels, but industry sources said Zhengzhou and Wuhan each splashed out 200 million yuan a year, equivalent to US$4,000 to US$5,000 per 40-foot container and enough to cover the price gap with ocean freight.
A Chongqing government spokesman confirmed the existence of subsidies but said they were being cut back as rail freight operations moved towards self-sufficiency.
The variety of subsidy levels has fuelled a battle for cargo coming from the industrialised Yangtze and Pearl river delta regions. Chongqing-based Yuxinou Logistics, founded just two years ago and now the market leader, with the biggest shipment volumes, said more than half of its westbound trains were filled with goods from outside southwest China, including car parts, machinery, apparel and toys.
"Since Wuhan and Zhengzhou set up their services, some of our cargo has been siphoned away," Yuxinou general manager Zhou Shulin said. "Regional competition has become a real issue. I hope the central government can regulate the market, coordinating the various service providers."
In an attempt to stop the scramble for market share, China Railway Corp held a meeting with the platform companies in August, calling for cohesive and consistent marketing and branding. But actual improvement is yet to be seen.
Ronald Kleijwegt, the head of logistics for Europe, Middle East and Africa at Hewlett-Packard, said the key to making the China-Europe rail link commercially viable and independent of subsidies was to fill eastbound trains with exports from Europe to China.
The US-based personal computer maker has been championing use of the 11,179km rail link, which passes through Kazakhstan, Russia, Belarus and Poland before reaching Germany.
Yuxinou ran 80 dedicated block trains from Chongqing to Duisburg for HP between March 2012 and November last year. The service did not open to other manufacturers until July.
One of the biggest obstacles to bolstering the rail freight route is the weather. In winter, temperatures can drop to as low as minus 50 degrees Celsius, damaging high-value-added cargoes such as laptops and car parts, the two biggest cargo types by volume currently moved westwards.
In the past two years, HP had to take winter breaks between November and March, switching shipments back to the traditional seaborne route through the Suez Canal.
Such blackouts prevented manufacturers in other industries from adopting the rail route. "If the temperature-control problem is resolved, more companies will start using it," Kleijwegt said.
KTZ Express, the operating arm of Kazakhstan's national railway company and a Yuxinou shareholder, is investing US$100 million in diesel-fuelled, temperature-controlled containers.
"These special containers are a true game changer," KTZ Express president Henrik Christensen said. "For the first time, there is no winter break this year in the service between Chongqing and Dusiburg."
A recent study by the Flanders Institute for Logistics in Belgium showed enormous interest from pharmaceutical, chemical and food industries in exporting their goods to China by train. The Transpharma Express Report, which polled a dozen multinationals including pharmaceutical producers Pfizer and MSB and chemical companies BASF and Eastman, concluded there would be enough eastbound volume to run five trains a fortnight.
Westbound containers, on average, currently contain goods worth US$200,000 to US$400,000 and each wagon carries between 41 and 50 containers. If the forecast eastbound flow materialises, the rail route could carry up to US$2.6 billion in exports from Europe to China a year, gradually reducing the need for subsidies.
Kleijwegt declined to disclose the amount of subsidies HP received from Chongqing's government but admitted the firm "cannot build a logistics solution on government subsidies".
Niklas Swanstrom, a director of the Silk Road Studies Programme, a joint venture between John Hopkins University and Stockholm's Institute for Security and Development Policy, said different national interests had managed to converge on the rail link, despite a plethora of geopolitical issues.
"Trade between Europe and China is growing so fast that neither side cannot afford to exhaust all possible transit options," he said. "Russia now needs the trans-Kazakhstan route to work more than it did in the pre-Ukraine crisis age. US and EU sanctions have forced Russia to shift eastwards, getting more reliant on Chinese imports of industrial and consumer goods."
Kazakhstan, landlocked between its two powerful neighbours, also needs closer economic ties with China as leverage against Russia, he added.
The country is putting US$32 billion in public and private investment into transport and logistics infrastructure. Dubai-based port giant DP World is building a container terminal in Khorgos, as part of a free-trade zone on the Chinese border.
Construction is being wrapped up and Premier Li Keqiang is expected to cut the ribbon for the pendulum service when he visits Kazakhstan later this month.
Ulf Schneider, the founder and managing director of Moscow-based Russia Consulting, which advises foreign investors in Russia, said US and EU sanctions imposed on Russia as a result of the Ukraine crisis had so far had minimal impact on the railway trade, since no Russian railway companies were targeted by the sanctions.
With the Eurasian Economic Union of Russia, Kazakhstan and Belarus coming into force from next year, Schneider said logistics operations would see significant improvement.
"Within a single market, goods will be delivered faster and safer [between China and Europe via the union]," he said. "This economic integration is a very positive step forward that helps improve peace and stability in the whole region."
Still, the fledgling route is not free of problems. Freight forwarders, the middlemen between cargo owners and a carriers, fret about cargo safety and the enforcement of possible insurance claims, said Chong Ik Wei, a partner at law firm Clyde & Co.
Typically, there is back-to-back insurance coverage for shippers and carriers in the transport of goods. Shippers and cargo owners take out cargo insurance. Carriers are insured by forwarders' liability insurance.
In the event of cargo loss or theft, it was very likely that claims would eventually be made down the chain against China Railway, Chong said.
"There are concerns among international logistics and freight forwarding companies participating in the rail freight link that such claims may be difficult to pursue and realise," he said.
Such concerns were echoed by the China manager of a leading Western transport insurance firm, which is processing several claims for its freight forwarding clients after cargo thefts in eastern Europe.
"Those were organised crimes done in a smart way," the manager said. "For example, only goods worth several hundred US dollars were stolen in a container valued at tens of thousands of dollars. Police were called to the scene but no official investigation was launched."
He added that the current legal and regulatory framework on the mainland was insufficient. China's Railway Law, the main governing law, was promulgated in 1990.
"Unlike sea freight, where there is a set of international common standards after hundreds of years of practice, the documentation for rail freight is incomplete and irregular," he said.
Back in Chengdu, Song is waiting for the prospective client to fax back the freight order forms from Ningbo.
"YHV made a loss last year," she said. "This year, a loss is expected again."