Blogs relating to material or product scarcity risks or issues.

China’s Belt & Road Initiative – Blog #15

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(Image credit: srilankabrief.org)

This is the fifteenth Blog in a series based on The Geopolitical Significance of the Chinese Belt and Road Initiative and What it may Mean for Supply Chain Operations Worldwide, a Whitepaper (51 pg, 259 endnotes) researched and written for RAAD360 LLC (raad360.com). The goal is to alert supply chain managers worldwide to the complex risks inherent in BRI. RAAD360 provides RAAD™, a cloud-based supply chain risk management platform.

Worldwide Supply Chain Risk Series

China’s Belt & Road Initiative

Blog #15 – Strategy Becomes Action – With Consequences

 

STRATEGY: PLANNED PATH OF PROGRESS

China envisions “Belt and Road” evolving from a concentration in its early years on infrastructure–particularly transportation, communications, and power infrastructure—to a focus on “softer sectors such as e-commerce, healthcare, education, and financial services.”[1]

China already has jumped to this second phase in a number of Western European countries, typically through the acquisition of existing enterprises.  However, China is quite willing to create new facilities for Chinese companies seeking to enter established markets to challenge local businesses; for example, the AliExpress venture in Poland, certainly will compete with the existing Polish competitor, Allegra.

China’s investments in the Netherlands have been more typical of its “Belt and Road” activity in Europe.  These have been mainly in advanced technology and established global networks.[2]  With the breakup and spin-off of major parts of Royal Philips, China seized the opportunity to snap up pieces that produce semiconductors, chips for cell phone towers, mobile phones, computer monitors, and flat-screen TVs.[3]

China also has a planned path of progress for building upon its network of ports, set forth in what it calls its “Ports-Parks-City” development model.[4]  This involves supporting Chinese companies to “build out  from a port to create transportation channels, an industrial park, a logistics park, and free-trade and manufacturing zones.[5]  These facilities would assist the development of land-side supply chains and provide investment opportunities for Chinese businesses.  They could also jump-start economic growth around the ports in the host countries.

There is one other type of port development that appears in Chinese plans and pronouncements that may not be so benign.   An article from a journal published under the aegis of China’s University of International Relations (a feeder school for China’s intelligence agencies) describes a concept “first civilian, then military” that is corroborated in Chinese military policy and actions, especially by the People’s Liberation Army-Navy (PLAN).  The journal article describes it as follows:

Use main ports as investment points, use local resources, establish an economic development zone, complete steel industry, shipbuilding industry, mineral processing industry [and] make these ports gradually possess the capability for offering logistical support to Chinese vessels and become China’s strategic support points in Southeast Asia to create an advantageous external environment for China’s rise.”[6]

Chinese-controlled ports in Sri Lanka, Pakistan and Djibouti are examples of dual commercial-military ports.  Non-Chinese vessels using such ports should be aware that military considerations may take priority over commercial operations.

 

CONSEQUENCE: FINANCIAL STRESS ON CHINA

It is becoming clear the cost of the “Belt and Road” vision is overwhelming China’s ability to fund it alone.  Chinese banks, who have been the primary lenders so far, have overstretched their balance sheets.[7]

China and its financial institutions are now in a push to bring in non-Chinese funding to keep the initiative alive.  China’s central bank chief has said that “China is keen to work with international organizations, commercial lenders, and financial centres like Hong Kong and London to diversify funding sources for the plan.”[8]  Drawing new investors may become more difficult, as concern for China’s exposure on its large portfolio of high-risk loans associated with the “Belt and Road Initiative” intensifies.  Because of a severe capital outflow in 2017, China instituted restrictive foreign investment and currency controls and increased caution in its own finances.  These actions do not help generate investor confidence in China’s ability to expand risky infrastructure loans indefinitely.

China is increasingly discovering that many of its “Belt and Road’ projects were driven more by politically or militarily strategic reasons than sound economic purposes—Gwadar and Hambantota for example—have large and long-term costs.  When it is clear that the client country cannot meet loan payments, Chinese banks and investors are left with the failures.  Taking over the infrastructure collateral—the ports in the cases of Gwadar and Hambantota—doesn’t automatically restart loan re-payments.

 

CONSEQUENCE: BURDENS ON PARTNER COUNTRIES AND INVESTORS

The financial burdens of the vast “Belt and Road Initiative” are taking a toll on several of the partner countries as well as posing serious risks to the Chinese banks and foreign investors making the infrastructure loans.

Major infrastructure projects are, by their nature, long-term propositions exposed to many risks, including under-financing, political pressures and interference, unexpected supply-chain problems, poorly-conceived planning, and significant time lags between initiation of projects and receipt of the anticipated economic benefits, that would help borrowers pay back the loans.

“Belt and Road” projects in developing countries are especially vulnerable to these risks.  In “Harbored Ambitions,” Mikkal Herberg succinctly describes how “the coercive capacity of Chinese capital, infrastructure loans can lead the recipient country into a debt trap that severely limits policy options.

This is particularly the case if the projects are backed by sovereign guarantees—whereby the recipient country backs the loan to mitigate risk to the investors.  Should a project fail to generate revenue, the government must fulfill the debt obligations of the guarantee; failure to repay this foreign-held public debt has led to sovereign defaults in the past.  Sovereign guarantees are relatively commonplace in infrastructure development.  However, when applied to large-scale projects in recipient countries with high preexisting foreign-held debt-to-GDP ratios, these guarantees can sabotage a country’s economic development and endow its creditor with outsized leverage.”[9]

A recent report by the Center for Global Development identified eight countries at major sovereign debt risk: Pakistan, Djibouti, Maldives, Laos, Mongolia, Montenegro, Tajikistan, and Kyrgyzstan, due in no small measure to overcommitment to “Belt and Road” projects.  The debt situation of these countries is aggravated by the fact that “China’s track record managing debt distress has been problematic, and unlike the world’s other leading government creditors, China has not signed on to a binding set of rules of the road when it comes to avoiding unsustainable lending and addressing debt problems when they arise.”[10]

In April 2018, the Managing Director of the IMF, Christine Lagarde, echoed the report’s warnings and warned against saddling these struggling countries with crushing debt levels.[11]  One “Belt and Road” energy project in Pakistan guaranteed its Chinese investors a 34% annual return, in U.S. dollars for 30 years, a completely unrealistic situation.[12]  Typical “Belt and Road” loan conditions require contracts to be given to Chinese firms and at least 50% of materials, equipment, technology and services be Chinese-sourced.  An example:   the Chinese Exim Bank (an SOE) requires recipients to use its funds to purchase Chinese products and services and to use Chinese labor and raw materials.[13]

The hard lesson that these eight countries have learned is that China’s funding comes with significant costs.  It is not an aid program; it is a Chinese government-directed business program.  Several projects have become Chinese-owned when the host country could not make loan repayments.  Other projects were stalled in various stages of completion with no guarantee of being finished but creditors will still have to be paid.

Questions –

Where does my supply chain intersect with China’s “Belt and Road” transportation network?

What about my supplier’s supply chain?

Can China’s monopoly power increase transportation times in my supply chain?

Can China’s monopoly power increase transportation costs in my supply chain?

____________

BRI Blog next Monday will be:

How China Benefits – Transit Times and Supply Chain Alternatives

_________________

There is a wealth of information in the end notes to each Blog article.  Click the URLs to bring the sources onto your computer screen for review.

[1] Wijeratne, David, et al. Op. cit.  https://www.strategy-business.com/feature/A-Strategists-Guide-to-Chinas-Belt-and-Road-Initiative?gko=a98e0

[2] Van der Putten, Frans-Paul.  “Chinese Investment in the Netherlands:  A Key Role for Acquisitions in the High-Tech Sector.”  ETNC.  Chinese Investment in Europe:  A Country-Level Approach.  December 2017. https://www.clingendael.org/sites/default/files/2017-12/ETNC_Report_2017.PDF

[3] Ibid. https://www.clingendael.org/sites/default/files/2017-12/ETNC_Report_2017.PDF

[4]Thorne, Devin and Ben Spevak.  Harbored Ambitions. How China’s Port Investments Are Strategically Reshaping the Indo-Pacific. C4ADS.  2017.                                        https://static1.squarespace.com/static/566ef8b4d8af107232d5358a/t/5ad5e20ef950b777a94b55c3/1523966489456/Harbored+Ambitions.pdf

[5] Ibid.  https://static1.squarespace.com/static/566ef8b4d8af107232d5358a/t/5ad5e20ef950b777a94b55c3/1523966489456/Harbored+Ambitions.pdfhttps://static1.squarespace.com/static/566ef8b4d8af107232d5358a/t/5ad5e20ef950b777a94b55c3/1523966489456/Harbored+Ambitions.pdf

[6] Zhang Jie.   “SLOC Security and the construction of China’s strategic support points,” International Security Studies, 2, 100-118, 2015.  Cited in Thorne, Devin and Ben Spevack.  C4ADS “Harbored Ambitions.  How China’s Port Investments Are Strategically  Reshaping the Indo-Pacific,” 2017.  P. 24, footnote 80, https://static1.squarespace.com/static/566ef8b4d8af107232d5358a/t/5ad5e20ef950b777a94b55c3/1523966489456/Harbored+Ambitions.pdf

[7] Garcia-Herrero, Alicia.  Blog post.  “China cannot finance the Belt and Road alone.”  The Bruegel Newsletter.  26 March 2018.  http://bruegel.org/2017/05/china-cannot-finance-the-belt-and-road-alone/

[8] He, Huifeng.  “Is China’s belt and road infrastructure development plan about to run out of money?” South China Morning Post.  14 April 2018http://www.scmp.com/news/china/economy/article/2141739/chinas-belt-and-road-infrastructure-development-plan-about-run

[9] Herberg, Mikkal E.   “Introduction.”  Harbored Ambitions.  How China’s Port Investments Are Strategically Reshaping the Indo-Pacific. C4ADS.  2017, p. 21.  https://static1.squarespace.com/static/566ef8b4d8af107232d5358a/t/5ad5e20ef950b777a94b55c3/1523966489456/Harbored+Ambitions.pdf

[10]Center for Global Development.  Press release.  “China’s Belt and Road Initiative Heightens Debt Risks in Eight Countries, Points to Need for Better Lending Practices.”  4 March 2018.  https://www.cgdev.org/article/chinas-belt-and-road-initiative-heightens-debt-risks-eight-countries-points-need-better

[11] Deutsche Welle (DW).  “IMF’s Lagarde warns China on Silk Road debt.”  12 April 2018.    http://www.dw.c om/en/imfs-lagarde-warns-china-on-silk-road-debt/a-43354360

[12] The Wall Street Journal.  “Another ‘Belt and Road’ Hostage.” 21 August 2018.  https://www.wsj.com/articles/another-belt-and-road-hostage-1534717019?mod=searchresults&page=1&pos=1

[13] Eva, Joanna, Qi Lin, and James Tunningley.  Op. cit.  https://globalriskinsights.com/2018/01/chinas-belt-and-road-initiative-regional-outlooks-for-2018/

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© Shirley M. Loveless, Ph.D. 2018

Dr. Loveless is a consultant, author, and educator in transportation systems, supply chain risk analysis, emergency management, and economic development.  She is a Member of the Transportation Research Board of the National Academies of Sciences, Engineering and Medicine, and an appointed member of several TRB Standing Committees.  She works with RAAD360 LLC as a supply chain transportation consultant.

China’s Belt & Road Initiative – Blog #14

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(Image credit: srilankabrief.org)

This is the fourteenth Blog in a series based on The Geopolitical Significance of the Chinese Belt and Road Initiative and What it may Mean for Supply Chain Operations Worldwide, a Whitepaper (51 pg, 259 endnotes) researched and written for RAAD360 LLC (raad360.com). The goal is to alert supply chain managers worldwide to the complex risks inherent in BRI. RAAD360 provides RAAD™, a cloud-based supply chain risk management platform.

Worldwide Supply Chain Risk Series

China’s Belt & Road Initiative

Blog #14 – China-Indochina Peninsula Economic Corridor:  Cambodia, Vietnam & Indonesia

 

Source: ESCAP (From Presentation by Binyam Reja, Ph.D., The World Bank at the 2018 Annual Meeting of the Transportation Research Board, Washington, D.C.)

Nestled between Thailand and Vietnam, with a coastline across the Gulf of Thailand not far from the potential site of the Kra Canal, Cambodia has become an investment magnet to China.  Along with Laos and Vietnam (and Myanmar), Cambodia has a rapidly-growing economy (over 6% in 2014)[1] and low wage rates.  Chinese investors have found the seaside village of Sihanoukville very attractive and have developed casinos and resort properties, pushing real estate prices into the stratosphere.[2]  Chinese interests in Cambodia go well beyond such real estate.  One of China’s largest real estate investment companies—R&F Properties—is engaged in a $2 billion massive project called R&F City.[3]  This full-fledged city, with retail and recreational amenities, is aimed at the growing population of Chinese investors and workers as well as upward-striving Cambodians.

Source:https://www.firstpost.com/india/thailands-kra-canal-project-is-chinas-masterplan-to-secure-beijings-interests-assert-influence-in-asean-indian-ocean-region-4420647.html. (Image courtesy: kracanal-maritimesilkroad.com)

Chinese investments in Cambodia also center on much-needed infrastructure projects.  A 2016 visit to Cambodia by Chinese President Xi Jinping yielded 31 signed economic agreements that included $237 million in soft loan projects and cancellation of $89 million in Cambodian debt.[4]  With a $7.3 billion stake in Cambodia’s energy sector (hydroelectric), China is Cambodia’s largest foreign investor.  Several major dams are in the works or already under construction but there have been problems.  Several of the dams have failed to meet international standards, created serious environmental issues (such as blocking fish migration routes, thereby threatening fisheries upon which much of the population depends), displaced thousands of Cambodians—often without compensation, entailed controversial land concessions, and charges of human rights violations.[5]

China has funded contracts for transportation projects, including bridges, highways, railways and ports.  The Sihanoukville Autonomous Port, the country’s sole deepwater port, has received some upgrades by the Chinese and, adding a little international competition in infrastructure investments, Cambodia is negotiating with the Japan International Cooperation Agency (JICA) for funding for further expansions.  Plans include a new $200 million container terminal that will more than double the port’s capacity.[6]  If the Kra Canal in Thailand were to be built, Sihanoukville is in a position to benefit hugely.

Geographically, Vietnam is important to China’s plans for Southeast Asia in the “Belt and Road Initiative” but it has few “Belt and Road” projects.  One of the few “Belt and Road” projects is the northern port of Haiphong in Vietnam.  This port will receive a major facilities upgrade.  Its geographic location is important because it is at the nexus of two major trade routes:  one, connects Nam Ninh, Lang Son, Hanoi and Haiphong, and the second connects Kunming in China, to Lao Cai, Hanoi and Haiphong.[7]

The reasons for the dearth of “Belt and Road” projects in Vietnam are probably mainly political (Vietnam and China are engaged in heated controversy over islands in the South China Sea/East Sea and Vietnam is very wary of China’s heavy influence), but also economic.

Vietnam’s strongly growing economy has made it a competitor of China’s for a range of export manufactured products that China used to dominate, such as textiles and clothing, and in recent years, information and communications products, automotive, and medical devices.[8]

Labor costs in Vietnam are about 50% of those in China, and the country has a rapidly-growing, “inexpensive, young, and increasingly highly skilled” workforce.[9]  The government has adopted a number of successful initiatives aimed at attracting foreign investment and companies who want to do business in Vietnam.  Samsung, for example, has invested over US$10 billion in Vietnam, with the intent of turning Vietnam into a “global manufacturing base for its products.”[10]

At the same time, Vietnam’s burgeoning consumer market is a magnet for Chinese exports.  China accounts for nearly a third of Vietnam’s imports,[11] though there has been a growing shift in both imports and exports to South Korea and Japan since the Trans-Pacific Partnership was signed (even after the U.S. withdrew).[12]  However, China surely will continue working to develop the routes and markets it needs for its exports, and Vietnam will be vital to that.

Indonesia, with its extensive coastal exposure to the Java Sea, the Timor Sea, Arafura Sea, Banda Sea, the Sulawesi Sea, Sulu Sea, the Indian Ocean, and most especially the South China Sea—and critical maritime chokepoints—the Straits of Malacca, Sunda, and Lombok—is an important player in the maritime world and the world of power politics.  China is keen to invest in (and control) key ports in Indonesia, such as Tanjung Sauh on the island of Batam, and build rail lines.

Indonesia chose to partner with China, over Japan, which also expressed participatory interest in the high-speed rail link between Jakarta and Bandung, but Indonesia appears to be consciously trying to contain Chinese influence by engaging other countries in its infrastructure investment, such as India.  India has had a major role in developing the port of Sabang,[13] strategically located in a collection of islands off the tip of Aceh province in Sumatra, in the Andaman Sea and at the entrance to the Strait of Malacca.

Indonesia has offered Chinese investors a “deliberately ‘limited’ portfolio of projects” in which they would be allowed to invest.[14]  Indonesia Investment Coordinating Board Chairman Thomas Lembong indicated an Indonesian preference for concentrating on maritime projects dealing with transportation, telecommunications, tourism, industrial estates, energy and power.[15]  While this ‘wish list’ may seem broad, China’s funding commitments to Indonesia to date have been modest, $5 to $6 billion, as of 2017, while it has invested over $62 billion in Pakistan and $32 billion in Malaysia.  Indonesia is eager for foreign help in funding its large infrastructure needs but it is cautious about how much control to concede to China.

China has sought to tie “Belt and Road” with Indonesia’s ‘Global Maritime Fulcrum’ vision, in which Indonesia gives top priority to development of the maritime sector.  What this means is unclear so far as the ‘Global Maritime Fulcrum’ policy is very vague.  Mainly, China seems to be currying favor with the Indonesian government to get a favorable response to Chinese projects that are put under the “Belt and Road” umbrella.[16]  However, Luhut Panjaitan, Indonesia’s Coordinating Minister for Maritime Affairs has said: “We don’t want to be controlled by the Belt and Road…We are also promoting our Global Maritime Fulcrum…It is to balance the One Belt, One Road (emphasis added).”[17]

Indonesia and China have sparred over claim to the Natuna Islands in the South China.  These islands are actually outside of China’s “Nine-Dash Line” that virtually claims the South China Sea and everything in it for China.  The Nine Dash Line would, however, include the territorial waters of the Natuna Islands and their exclusive economic zone and Indonesia has been firm in its claim to the islands[18]  An uneasy standoff exists.

Questions –

Where does my supply chain intersect with China’s “Belt and Road” transportation network?

What about my supplier’s supply chain?

Can China’s monopoly power increase transportation times in my supply chain?

Can China’s monopoly power increase transportation costs in my supply chain?

____________

BRI Blog next Monday will be:

Strategy Becomes Action – With Consequences

_________________

There is a wealth of information in the end notes to each Blog article.  Click the URLs to bring the sources onto your computer screen for review.

[1] Chen, Irene.  Op. cit.  https://www.rsis.edu.sg/wp-content/uploads/2017/08/Monograph33.pdf

[2] Murdoch, Lindsay and Kate Geraghty.  “The next Macau?  China’s big gamble in Cambodia.”  The Sydney Morning Herald.  20 June 2018.  https://www.smh.com.au/world/asia/the-next-macau-china-s-big-gamble-in-cambodia-20180615-p4zlqg.html

[3] Meng, Siv. “China giant R&F pushing ‘Belt and Road’ initiative in Cambodia.  Phnom Penh Post.  14 August 2018.  https://phnompenhpost.com/supplements-post-property/china-giant-rf-pushing-belt-and-road-initiative-cambodia

[4] Lin, Qi.  “Money talks:  China’s belt and road initiative in Cambodia.”  Global Risk Insights.  7 January 2018.  https://globalriskinsights.com/2018/01/money-talks-chinas-belt-road-initiative-cambodia/

[5] Ibid.  https://globalriskinsights.com/2018/01/money-talks-chinas-belt-road-initiative-cambodia/

[6] Chan, Sok.  “Port unveils $200m expansion.”  Khmer Times.  https://www.khmertimeskh.com/news/38014/port-unveils–200m-expansion/

[7] Chan, Dr. Markus Patrick.   “China’s One Belt One Road Initiative—Invest Vietnam Chapter.”   Medium.  9 September 2017.   https://medium.com/@markuspatrick/chinas-one-belt-one-road-initiative-invest-vietnam-chapter-c29f5d1dd8c8

[8] Mai, Dam Thi Phuong and Edward Barbour-Lacy.  “An Introduction to Vietnam’s  Import & Export Industries.” Vietnam Briefing.   3 February 2015.   www.vietnam-briefing.com/news/introduction-vietnams-export-import-industries.html/

[9] Mai, Dam Thi Phuong and Edward Barbour-Lacy, Op. cit.  www.vietnam-briefing.com/news/introduction-vietnams-export-import-industries.html/

[10] Ibid.  www.vietnam-briefing.com/news/introduction-vietnams-export-import-industries.html/

[11] Observatory of Economic Complexity/MIT Media Lab.  https://atlas.media.mit.edu/en/profile/country/vnm/ (Accessed 15 August 2018)

[12] Ahn, Phan.  “Vietnamese firms turn their backs on China for Japan, S. Korea:  report.” VN Express International.  9 April 2018.  https://e.vnexpress.net/news/business/vietnamese-firms-turn-their-backs-on-china-for-japan-s-korea-report-3733354.html

[13] The Wire.  “Indonesia’s Balancing Act:  A Road with China, a Port with India.”    30 May 2018.   https://www.thewire.in/diplomacy/indonesia-china-india-modi-belt-and-road

[14] Devonshire-Ellis, Chris.  “Indonesia Targets Maritime in OBOR Investment Push.”  Indonesia Briefing.  23 May 2017.  www.indonesiabriefing.com/news/indonesia-targets-maritime-obor-investment-push

[15] Ibid.  www.indonesiabriefing.com/news/indonesia-targets-maritime-obor-investment-push

[16] Supriyanto,  Ristian Atriandi.  “The Indian Ocean and Indonesia’s Global Maritime Fulcrum: Relevance To ASEAN”. ASEAN and the Indian Ocean:  The Key Maritime Links.   P.56.  https://www.rsis.edu.sg/wp-content/uploads/2017/08/Monograph33.pdf

[17] The Wire.  Op. cit.  https://www.thewire.in/diplomacy/indonesia-china-india-modi-belt-and-road

[18] Yu, Miles.  “Et tu, Jakarta?”  The Washington Times.  19 November 2015.  https://www.washingtontimes.com/news/2015/nov/19/inside-china-china-concedes-natuna-islands-to-indo/

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© Shirley M. Loveless, Ph.D. 2018

Dr. Loveless is a consultant, author, and educator in transportation systems, supply chain risk analysis, emergency management, and economic development.  She is a Member of the Transportation Research Board of the National Academies of Sciences, Engineering and Medicine, and an appointed member of several TRB Standing Committees.  She works with RAAD360 LLC as a supply chain transportation consultant.

China’s Belt & Road Initiative – Blog #13

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(Image credit: srilankabrief.org)

This is the thirteenth Blog in a series based on The Geopolitical Significance of the Chinese Belt and Road Initiative and What it may Mean for Supply Chain Operations Worldwide, a Whitepaper (51 pg, 258 endnotes) researched and written for RAAD360 LLC (raad360.com). The goal is to alert supply chain managers worldwide to the complex risks inherent in BRI. RAAD360 provides RAAD™, a cloud-based supply chain risk management platform.

Worldwide Supply Chain Risk Series

China’s Belt & Road Initiative

Blog #13 – China-Indochina Peninsula Economic Corridor:  Laos & Malaysia

 

Source: ESCAP (From Presentation by Binyam Reja, Ph.D., The World Bank at the 2018 Annual Meeting of the Transportation Research Board, Washington, D.C.)

Malaysia is having serious second thoughts about its “Belt and Road” involvement.  The newly elected government canceled the high-speed bullet train project between Kuala Lumpur and Singapore in May 2018, because it believes the costs outweigh the benefits to Malaysia.

On July 4, 2018, it was announced that work on the 688 km East Coast Railway Link had been suspended. The project’s costs had soared to nearly 50% more than the original estimate.[1]  The loans for the project are a heavy debt burden for Malaysia.  The planned line, which has strategic significance for China, but less so for Malaysia, would “connect the South China Sea at the Thai border in the east with strategic shipping routes of the Straits of Malacca in the west.”[2]  Malaysia is insisting that the deal be renegotiated before it will allow it to proceed.

Time savings of Thai/Kra Canal compared to alternative routes

Source:https://www.firstpost.com/india/thailands-kra-canal-project-is-chinas-masterplan-to-secure-beijings-interests-assert-influence-in-asean-indian-ocean-region-4420647.html. (Image courtesy: kracanal-maritimesilkroad.com)

Other Chinese infrastructure developments in Malaysia include a port complex in Malacca—the Melaka Gateway port on the Strait’s northern shore and the Kuantan port on the South China Sea.[3]

The Melaka Gateway port project is very important both to China as a means of protecting its interests in the Strait of Malacca and to Malaysia as a potential challenger to Singapore’s commercial and maritime supremacy in the Strait.  The project includes one artificial island and three reclaimed islands.

One island will have a container and bulk terminal, shipbuilding and ship repair facilities, and a ‘maritime industrial park.’[4]  But, with nearby Port Klang planning to double its capacity, the need for another port (Melaka Gateway) is questionable.  Indeed, a World Bank study concluded that “there was no need for a new port on Malaysia’s west coast because existing facilities had not reached capacity.”[5]

The ownership and control of the project have already raised concerns.  It has been reported that “the reclaimed islands would allegedly be given freehold status while the port would allegedly be granted a 99-year concession,” conditions called “rare and generous.”[6]  Recently, Malaysia has indicated that it is reassessing the project before it allows it to proceed.[7]  Having Chinese-owned islands sitting in the middle of a strategic major international maritime passageway poses serious reasons for concern.

China appears to have a liking for artificial islands as development sites.   Private Chinese investment in Malaysia includes a noteworthy magnet for Chinese capital and the creation of overseas residential real estate development.  Located in the middle of the vitally-important Strait of Johore that separates southern Malaysia and Singapore and well within Malaysia’s territorial waters, is the first of four planned artificial islands of the $100 billion Forest City project.

This is to be a high-tech, futuristic, ultra-‘green’ master-planned new city, with a state-of-the art security surveillance system.[8]  It is intended to be a largely autonomous Chinese outpost in a foreign land.  Sales by the Country Garden Pacificview joint venture—between Country Garden, a powerful Chinese real estate developer and a company controlled by Sultan Ibrahim Sultan Iskandar—to Chinese buyers were booming until Beijing became alarmed at the degree of private Chinese capital flight it was experiencing.

Over the last decade, an estimated $3.8 trillion in Chinese wealth flowed out of the country, a substantial portion into offshore real estate.  In 2017, Beijing instituted sharply restrictive capital transfer controls that essentially shut off further purchases by Chinese nationals.[9]  The remaining properties are being marketed to foreigners from other countries, such as Dubai, Thailand and Japan.  Long-term visas and paths to citizenship incentives that had been offered to Chinese buyers have caused a backlash in Malaysia and became a campaign issue in recent elections in which a former prime minister, who opposes such incentives, was elected.

Laos has strategic location for China as a land bridge between China and the mainland Southeast Asian states of Myanmar, Thailand, Cambodia, and Vietnam.  In its “Belt and Road” scheme, China regards Laos as a key transshipment node for commerce and a generator of electric power for the region.  Thus, “Belt and Road” projects in landlocked Laos have been concentrated in energy development (hydroelectric dams) and transportation.  Both the Laotian “Belt and Road” transportation and energy projects build upon projects begun in the 1990s under the Asian Infrastructure Bank (AIB), as opposed to the Chinese-created Asian Infrastructure Investment Bank (AIIB).[10]

Laos is part of a $6 billion (also estimated at $7 billion) rail project to link eight Asian countries.[11]  The Pan Asian Railway will run from Kunming in southern China to Singapore.  From Singapore, plans call for the railway to go north through the Malay Peninsula into Thailand.  When the line reaches Bangkok, it will split into three routes, all going to Kunming, China, one through Myanmar, one through Cambodia and Viet Nam, and the third (Kunming-Vientiane) going through Laos.[12]  The portion passing through Malaysia may be in jeopardy, as the government elected earlier this year has put the brakes on most planned or in-process Chinese projects.  The Kunming-Vientiane link “will be paid for by the Laotian government with concessionary loans from China, with Laos’ mineral wealth as collateral.“[13]  Construction in Laos has been slowed by mountainous terrain necessitating bridges and tunnels for more than 60% of the line and clearing land mines left over from the Vietnam War.

The benefits to Laos are diminished by the fact that the labor force is almost entirely Chinese and much of the construction material is brought in from China or made in on-site Chinese factories, such as the cement required for tunnel construction.[14]  A Chinese feasibility study confirmed that the railway would run at a loss for at least for the first eleven years.  The project costs are running at nearly half of Laos’s GDP and are putting the country at sovereign debt risk.  Government debt, mainly due to Chinese project loans, accounts for about 70% of the country’s output.[15]

Questions –

Where does my supply chain intersect with China’s “Belt and Road” transportation network?

What about my supplier’s supply chain?

Can China’s monopoly power increase transportation times in my supply chain?

Can China’s monopoly power increase transportation costs in my supply chain?

____________

BRI Blog next Monday will be:

China-Indochina Peninsula Economic Corridor:  Cambodia, VietNam and Indonesia

_________________

There is a wealth of information in the end notes to each Blog article.  Click the URLs to bring the sources onto your computer screen for review.

[1] South China Morning Post.  Diplomacy & DefenceBelt and Road Initiative. “Chinese engineering firm told to suspend US$20 billion East Coast Railway Link in Malaysia.”4 July 2018.  https://www.scmp.com/news/china/diplomacy-defence/article/2153801/chinese-engineering-firm-told-suspend-us20-billion-east

[2] EurasiaReview/Benari News.  “Malaysia Reviews China-Backed Rail Link, Scraps Bullet Train Project.”  30 May 2018. https://www.eurasiareview.com/30052018-malaysia-reviews-china-backed-rail-link-scraps-bullet-train-project/

[3] Eva, Joanna, Qi Lin, James Tunningley.  Op. cit. https://globalriskinsights.com/2018/01/chinas-belt-and-road-initiative-regional-outlooks-for-2018/

[4] Negaraku, Bangkitlah.   “Malaysia and China ink $7.3 bn Melaka Gateway project.”   Najibrazak.com.    3 September 2016.  https://www.najibrazak.com/en/international-news/malaysia-and-china-ink-7-3bn-melaka-gateway-project/

[5] Free Malaysia Today.  “Analyst: Is RM43b Melaka Gateway for China trade or military? “   14 November 2016.    www.freemalaysiatoday.com/category/nation/2016/11/14/analyst-is-rm43b-melaka-gateway-for-china-trade-or-military/

[6] Ibid.   www.freemalaysiatoday.com/category/nation/2016/11/14/analyst-is-rm43b-melaka-gateway-for-china-trade-or-military/

[7] Mahorm, Ardi and Roshidi Abu Samah.  “Melaka Gateway project being reassessed.”  The Star Online.    2 June 2018.  https://www.thestar.com.my/news/nation/2018/06/02/melaka-gateway-project-being-reassessed/

[8] Larmer, Brook.   “A Malaysian Insta-City Becomes a Flash Point for Chinese Colonialism — and Capital Flight.”  The New York Times.  13 March 2018.  https://nyti.ms/2GkOE4p

[9] Ibid.   https://nyti.ms/2GkOE4p

[10] Lim, Alvin Cheng-Hin.  “Laos And The Silk Road Economic Belt – Analysis.”  The Eurasia Review.  30 July 2015.  http://www.eurasiareview.com/30072015-laos-and-the-silk-road-economic-belt-analysis/

[11] Perlez, Jane and Yufan Huang.  Op.cit.  https://www.nytimes.com/2017/05/13/business/china-railway-one-belt-one-road-1-trillion-plan.html

[12]Lim, Alvin Cheng-Hin and Yufan Huang.  Op. cit.  http://www.eurasiareview.com/30072015-laos-and-the-silk-road-economic-belt-analysis/

[13]Lim, Alvin Cheng-Hin and Yufan Huang. Op. cit.  http://www.eurasiareview.com/30072015-laos-and-the-silk-road-economic-belt-analysis/

[14]Perlez, Jane and Yufan Huang. Op. cit.   https://www.nytimes.com/2017/05/13/business/china-railway-one-belt-one-road-1-trillion-plan.html

[15] Emont, Jon and Myo Myo.   “Chinese-Funded Port Gives Myanmar a Sinking Feeling.”   Wall Street Journal.  15 August 2018.    https://www.wsj.com/articles/chinese-funded-port-gives-myanmar-a-sinking-feeling-1534325404?mod=hp_listc_pos1

————————————————————————————————-

© Shirley M. Loveless, Ph.D. 2018

Dr. Loveless is a consultant, author, and educator in transportation systems, supply chain risk analysis, emergency management, and economic development.  She is a Member of the Transportation Research Board of the National Academies of Sciences, Engineering and Medicine, and an appointed member of several TRB Standing Committees.  She works with RAAD360 LLC as a supply chain transportation consultant.

China’s Belt & Road Initiative – Blog #12

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(Image credit: srilankabrief.org)

This is the twelfth Blog in a series based on The Geopolitical Significance of the Chinese Belt and Road Initiative and What it may Mean for Supply Chain Operations Worldwide, a Whitepaper (49 pg, 243 endnotes) researched and written for RAAD360 LLC (raad360.com). The goal is to alert supply chain managers worldwide to the complex risks inherent in BRI. RAAD360 provides RAAD™, a cloud-based supply chain risk management platform.

Worldwide Supply Chain Risk Series

China’s Belt & Road Initiative

Blog #12 – China-Indochina Peninsula Economic Corridor:  Thailand

 

Source: ESCAP (From Presentation by Binyam Reja, Ph.D., The World Bank at the 2018 Annual Meeting of the Transportation Research Board, Washington, D.C.)

Both state-owned and privately-owned Chinese-controlled or affiliated businesses have made extensive investments in Thailand.  Hutchison Ports, a subsidiary of CK Hutchison Holdings Ltd. (Hong Kong), is undertaking a major port expansion and renovation at Laem Chabang.  When complete, it will feature a fully-remote-controlled container terminal that will add 3.5 million TEUs to the port’s capacity.[1]  The newly installed technology is expected to reduce labor needs by 25%, which is actually a benefit to the Thai economy that is currently experiencing a labor shortage.  The port upgrades should position the port well for the projected increase in trade stemming from the “Belt and Road Initiative”.[2]

A major, planned “Belt and Road” infrastructure project is the Kra Canal (also called the Thai Canal) which would provide China with an alternative to using the Strait of Malacca, by connecting the Gulf of Thailand with the Andaman Sea.[3] (See map below). However, it is uncertain as to when this might be realized.

Discussions and studies of a potential canal across the Thai peninsula have gone on for more than three centuries.  While the concept looks good on maps, the economic, political and technical realities pose major roadblocks.  Nevertheless, China’s persistent push to get work started seems to have paid off, although Thailand has made a guessing game about whether work has actually begun.  Earlier this year, Thai officials stated that the Kra Canal project was “not a priority” and it was still “under review.”[4]

Technically, the canal poses significant engineering challenges.  A long, granite mountain ridge runs down the center of the peninsula; its height varies from 250 to 4,600 feet above sea level.  Digging through this would be a massive undertaking, but the alternative of building a series of locks increases the canal cost prohibitively 10 to 20-fold.[5]  The amount of excavation material, whether the canal is at sea-level or uses locks, poses a huge, environmentally-hazardous disposal problem.  The problem would continue with a sea-level canal, due to the constant dredging that would be required in this location, which is subject to siltation and monsoons.

Politically, the project is charged as it would definitely upset the status quo and create ‘winners’ and ‘losers’ in the maritime arena, change national military advantages, and raise fears about growing Chinese dominance in all of Asia as well as the Middle East.

Singapore could lose nearly a third of its share of sea traffic between the Indian and Pacific Oceans.[6] Ports in other countries in the region would also see changes in their traffic, some more, some less.  Assuming the canal is built to widths and depths to accommodate the largest ships, the canal could draw a sizable share of post-Panamax vessels.   The Strait of Malacca is a true bottleneck, being just 2.7 km wide at its narrowest point and a minimum depth of only 25 meters, insufficient for the larger ships.  These mega-ships have had to go the long way around the Indonesian archipelago.[7]

Economically, the canal could be a large boon to the Thai economy—if Thailand retains control and administration of it and can charge transit rates that cover costs, including loan servicing, and yield a profit.  That is not a sure thing at this point.  The cost of construction has been estimated to be around US$28 billion, not including the cost of creating facilities to provide the ancillary shipping services to make it competitive with Singapore, such as drydocks, repair, and resupply facilities.

A special economic zone complementing the canal, would cost an additional US$22 billion.  Plans describe it in ambitious terms:  The new zone includes the “addition of cities and artificial islands, which will enhance new industries and infrastructure in the region.  This would make Thailand into a ’logistic hub’ and link Thailand to countries from all over the world.”[8]

How much the Thai economy would benefit from the construction of the canal is open to question.  Longhao, a Chinese construction company likely to be a project lead, anticipates bringing over 30,000 Chinese workers to build the canal.  This would account for the large workers’ community shown on the map below.

Chinese proposal for Kra Canal

Source: IIMS, “The Kra Canal Project.” (http://www.iims.org.uk/wpcontent/uploads/2015/01/kra-canal.png)

China reportedly has proposed to make $28 billion in loan funds available for the Kra Canal project, but Thailand also has been soliciting funding from other sources, including Japan, South Korea, India, and other ASEAN countries.[9]  The lessons of what happened to Hambantota in Sri Lanka and Gwadar in Pakistan with entirely Chinese loans have not been lost on Thailand.  It would be unacceptable if China were to be the primary lender, Thailand defaulted, and China took control and ownership of the canal.

The shipping time and cost savings proponents of the canal see are shown in the second map below.   They are significant and could become all the more important as the Malacca Strait reaches maximum throughput capacity, projected to occur in just a few years.  Over 84,000 ships per year pass through now, and with expectations of economic growth, that number will rapidly increase.[10]

Another big “Belt and Road” infrastructure project in Thailand is a high-speed rail line that will link Thailand’s border with Laos to ports and industrial centers in eastern Thailand.  This is part of China’s great scheme to link eight Southeast Asian countries with China and key access points to the Maritime Road.  The project has been off to a rocky start as Thailand balked at China’s first price tag of $16 billion for this rail link and negotiated the cost down to $5 billion.[11]Other points of contention arose over design issues and terms of the contract, such as interest rates.[12]

Time savings of Thai/Kra Canal compared to alternative routes

Source:https://www.firstpost.com/india/thailands-kra-canal-project-is-chinas-masterplan-to-secure-beijings-interests-assert-influence-in-asean-indian-ocean-region-4420647.html. (Image courtesy: kracanal-maritimesilkroad.com)

 

Questions –

Where does my supply chain intersect with China’s “Belt and Road” transportation network?

What about my supplier’s supply chain?

Can China’s monopoly power increase transportation times in my supply chain?

Can China’s monopoly power increase transportation costs in my supply chain?

____________

BRI Blog next Monday will be:

China-Indochina Peninsula Economic Corridor:  Laos and Malaysia

_________________

There is a wealth of information in the end notes to each Blog article.  Click the URLs to bring the sources onto your computer screen for review.

[1] The Maritime Executive.  “Remote-Controlled Terminal to Open in Thailand.”  10 May 2018. https://www.eurasiareview.com/30032018-south-asia-and-maritime-silk-road-far-from-plain-sailing-analysis/

[2] The Maritime Executive/ MAREX.  “Remote- Controlled Terminal to Open in Thailand.” 10 May 2018. https://maritime-executive.com/article/remote-controlled-terminal-to-open-in-thailand#gs.syvzOHQ

[3] Gamage, Rajni.  “Bay of Bengal:  What Implications for ASEAN?”   Op.cit.  P. 66. https://www.rsis.edu.sg/wp-content/uploads/2017/08/Monograph33.pdf

[4] The Straits Times.  “Proposed Kra Canal not a priority for  Thai govt.”  13 February 2018. https://www.straitstimes.com/asia/se-asia/proposed-kra-canal-not-priority-project-for-thai-govt

[5] Micallef, Joseph V.  “The Geopolitics of the Kra Canal.” Military.com.  10 April 2017.  https://www.military.com/daily-news/2017/10/04/geopolitic-kra-canal.html

[6] Lay, Belmont.  “Thais called to support S$38.2 billion Kra Canal construction that will bypass S’pore ports.”  Mothership.   10 August 2017.  https://mothership.sg/2017/08/thais-called-to-support-s38-2-billion-kra-canal-construction-that-will-bypass-spore-ports/

[7] Stratfor/ Worldview.  “Avoiding Dire Straits in Southeast Asia.” 17 November 2017.  https://worldview.stratfor.com/article/avoiding-dire-straits-southeast-asia#/entry/jsconnect?client_id=644347316&target=%2Fdiscussion%2Fembed%3Fp%3D%252Fdiscussion%252Fembed%252F%26title%3DAvoiding%2BDire%2BStraits%2Bin%2BSoutheast%2BAsia%26vanilla_category_id%3D1%26vanilla_identifier%3D285409%26vanilla_url%3Dhttps%253A%252F%252Fworldview.stratfor.com%252Farticle%252Favoiding-dire-straits-southeast-asia

[8] Menon, Rhea.  “Thailand’s Kra Canal:   China’s Way Around the Malacca Strait.”  (Op. ed.)  The Diplomat.  6 April 2018.   https://thediplomat.com/2018/04/thailands-kra-canal-chinas-way-around-the-malacca-strait/

[9] China Daily Mail.  “China to build Kra Canal across Thailand to bypass Malacca Strait.”  https://chinadailymail.com/2018/04/08/china-to-build-kra-canal-across-thailand-to-bypass-malacca-strait/

[10] FirstPost.  “Thailand’s Kra Canal project is China’s masterplan to secure Beijing’s interests, assert influence in ASEAN, Indian Ocean Region.”  6 April 2018.  https://www.firstpost.com/india/thailands-kra-canal-project-is-chinas-masterplan-to-secure-beijings-interests-assert-influence-in-asean-indian-ocean-region-4420647.html

[11] Reuters.   “Thailand, China agree on $5 billion cost for rail project’s first phase.”  21 September 2016.  https://www.reuters.com/article/us-thailand-china-railway-idUSKCN11R0Q1

[12] Hunt, Luke.    “Construction of Thailand-China Railway Finally Gets Underway.”  The Diplomat.  28 December 2017.    https://thediplomat.com/2017/12/construction-of-thailand-china-railway-finally-gets-underway/

————————————————————————————————-

© Shirley M. Loveless, Ph.D. 2018

Dr. Loveless is a consultant, author, and educator in transportation systems, supply chain risk analysis, emergency management, and economic development.  She is a Member of the Transportation Research Board of the National Academies of Sciences, Engineering and Medicine, and an appointed member of several TRB Standing Committees.  She works with RAAD360 LLC as a supply chain transportation consultant.

China’s Belt & Road Initiative – Blog #11

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(Image credit: srilankabrief.org)

This is the eleventh Blog in a series based on The Geopolitical Significance of the Chinese Belt and Road Initiative and What it may Mean for Supply Chain Operations Worldwide, a Whitepaper (49 pg, 243 endnotes) researched and written for RAAD360 LLC (raad360.com). The goal is to alert supply chain managers worldwide to the complex risks inherent in BRI. RAAD360 provides RAAD™, a cloud-based supply chain risk management platform.

Worldwide Supply Chain Risk Series

China’s Belt & Road Initiative

Blog #11 – Bangladesh-China-India-Myanmar Economic Corridor

 

Source: ESCAP (From Presentation by Binyam Reja, Ph.D., The World Bank at the 2018 Annual Meeting of the Transportation Research Board, Washington, D.C.)

Myanmar and Bangladesh may get heightened interest from China in the near future, due to recent discovery of major mineral deposits in pretty much all of the waters surrounding these countries, and in the Kaveri, Godavari, and Krishna basins off the east coast of India.  Nickel, cobalt, iron, and sulfide deposits of manganese, copper, iron, zinc, silver, and gold have been found on the seabed and titanium, zirconium, tin, zinc, and copper in Indian Ocean sediments.

The Indian Ocean is also a very rich fishing ground, accounting for about 15 % of the world’s total catch.[1]  Chinese fishing fleets have long operated here as they have in waters around the world, often illegally (poaching), using predatory techniques that threaten to exhaust fish stocks.[2]

The Sri Lankan port of Hambantota, strategically located on the Bay of Bengal in the middle of the Indian Ocean, is a massive project financed with Chinese loans.  The debt burden was more than Sri Lanka could manage and so it was forced to sell a 70% stake (also reported as 80%[3]) in the port to a Chinese SOE for 99 years.[4]

The other major Chinese port project in Sri Lanka is the $500 million Colombo South Container Terminal, in the port of Columbo, on the opposite Sri Lankan coast.  The Colombo Port City project, now known as the Colombo International Financial City to reflect the expanded role China has for it, has had a rocky history.

As it became more concerned about the degree of Chinese influence, the Sri Lankan government suspended project work in 2015, in line with its ‘rebalancing’ foreign policy strategy towards India, Japan, and the West.

Hard economic realities following the country’s balance of payments crisis in early 2016, forced the government to rescind the ‘rebalancing’ policy and to re-engage the China Harbour Engineering Corporation to finish work on the project.[5]  China’s strong interest in Sri Lanka will likely increase as Chinese trade with East Africa grows.  The country is equidistant from the east coast of Africa and Indonesia.[6] Having secure and adequate port capacity to provide for the transshipment of goods from Africa is essential to the efficiency of the “Belt and Road Initiative”.

China has made several large infrastructure commitments to Bangladesh but it has encountered competition from Japan and India in infrastructure funding and political influence, and some political resistance from the Bangladesh government.  India, in particular, is anxious to contain Chinese influence in the region, and has extended a $2 billion line of credit to Bangladesh.[7]

The $8.7 billion, Chinese-funded Chittagong port project in Bangladesh is continuing, but the Bangladesh government shelved the plans for a new deep-sea port at Sonadia in mid-2016.  It is possible that it may be resurrected later.[8]

Major upgrading of the Chittagong port is essential.  Chittagong, through which about 90% of Bangladesh’s exports and imports pass, has been plagued by extreme port clearance delays for more than the past two years.  The reasons for these delays are both on the seaside (insufficient feeder vessels for lightering and local tugs to navigate the tricky port access channel, a tidal basin that limits access to high tides and constantly changing sea bed at the port’s entrance) and on the portside (a variety of infrastructure deficiencies).

Container vessels have had to stay 7 to 10 days and cargo ships 25 to 30 days in the outer anchorage and then face further delays portside, due to inadequate berthing facilities to handle the crush of vessels. Complicating the situation is the fact that two gantry cranes were out of commission for a lengthy period, following an accident.[9]

The under-capacity of container-handling facilities (the shortfall of container storage was more than 10,000 TEUs in April 2018)[10] forces the port to give priority to moving containers and ships as fast as possible but that complicates efforts of port management to get necessary channel and port dredging done.  Chittagong’s port is located by the estuary of the Karnaphuli River and is constantly clogged by silt.

Other Chinese-funded infrastructure projects in Bangladesh include a 1,320-megawatt power plant, highways, railways, and information technology development.[11] It is likely that China will take up Bangladesh’s offer of exploration rights to confirmed reserves of 200 trillion cubic feet of natural gas at Barakpuria.[12]  Should studies show extraction of these reserves economically feasible, it is likely that China will move quickly to make production a reality.

China’s SOE CITIC, is taking a 70% control position of the $7.3 billion deepwater port of Kyaukphyu, Myanmar, on the Bay of Bengal, and an adjacent special economic zone.  Chinese development of Kyaukphyu into a port able to handle 4.9 million containers a year has been in the talking and planning stage for years.

Outside observers have questioned the value of this facility to Myanmar, which would have to make burdensome loan payments on the 30% of the loans covering the government’s share.  It is distant from Myanmar’s commercial capital of Yangon and therefore, land transport costs to and from the port are significant.

The benefits to China are obvious—the port is intended to connect to China’s landlocked southwestern Yunnan province.  It is also already a terminal for oil and gas pipelines that could guarantee China a way to get 10% of its needed energy imports.[13]  However, the gas pipeline has operated at only one-third of capacity since it was opened in 2013.[14]  Myanmar is pressing China to re-negotiate the terms, “anticipating a potential debt default, which could lead to losing control of Kyaukpyu,”[15] a scenario that has been repeated in several countries with Chinese port investments.

 

Questions –

Where does my supply chain intersect with China’s “Belt and Road” transportation network?

What about my supplier’s supply chain?

Can China’s monopoly power increase transportation times in my supply chain?

Can China’s monopoly power increase transportation costs in my supply chain?

____________

BRI Blog next Monday will be:

China-Indochina Peninsula Economic Corridor:  Thailand

_________________

There is a wealth of information in the end notes to each Blog article.  Click the URLs to bring the sources onto your computer screen for review.

[1] Gamage,  Rajni.   “Bay of Bengal:  What Implications for ASEAN?” In ASEAN and the Indian Ocean:   The Key Maritime Links.  P. 66.  https://www.rsis.edu.sg/wp-content/uploads/2017/08/Monograph33.pdf

[2] Hong, Soon-do.  “Chinese Illegal Fishing Threatens  World Waters.”  Asia Today/Huffington Post.    6 December 2017 (updated).    https://www.huffingtonpost.com/asiatoday/chinese-illegal-fishing-t_b_10425236.html

[3]Ibid.  https://www.rsis.edu.sg/wp-content/uploads/2017/08/Monograph33.pdf

[4] Eurasia Review. RSIS.  “South Asia And Maritime Silk Road: Far From Plain-Sailing – Analysis”.  30 March 2018.

[5] Gamage, Rajni.  “Bay of Bengal:  What Implications for ASEAN?”  Op.cit. .  P. 66, footnote 9  https://www.rsis.edu.sg/wp-content/uploads/2017/08/Monograph33.pdf

[6] Eva, Joanna, Qi Lin, James Tunningley.  “China’s Belt and Road Initiative:  Regional Outlooks for 2018.”  Global Risk Insights. https://globalriskinsights.com/2018/01/chinas-belt-and-road-initiative-regional-outlooks-for-2018/

[7]The Maritime Executive.  Reuters.  China Set to Offer Bangladesh Port Funding.  14 October 2016.      https://maritime-executive.com/article/china-set-to-offer-bangladesh-port-funding#gs.tVWINA0

[8] Gamage, Rajni.  Op.cit.   P. 66. https://www.rsis.edu.sg/wp-content/uploads/2017/08/Monograph33.pdf

[9] Hussain, Anwar.  Dhaka Tribune.  “Chittagong  port congestion may result in huge losses for businesses.”  20 July 2017.  https://www.dhakatribune.com/business/2017/07/20/businesses-fear-loss-vessel-congestion-hits-chittagong-port/

[10]Barua, Dawaipayan. The Daily Star.  “Ctg. Port choked by container congestion.”  18 April 2018.  https://www.thedailystar.net/business/ctg-port-choked-container-congestion-1563988

[11] The Maritime Executive.  Reuters. “ China Set to Offer Bangladesh Port Funding. “ 14 October 2016  https://maritime-executive.com/article/china-set-to-offer-bangladesh-port-funding#gs.tVWINA0

[12] Eva, Joanna, Qi Lin, James Tunningley.  Op. cit.  https://globalriskinsights.com/2018/01/chinas-belt-and-road-initiative-regional-outlooks-for-2018/

[13] The Economist.  “Gateway to the globe.”  26 July 2018.  https://www.economist.com/briefing/2018/07/26/china-has-a-vastly-ambitious-plan-to-connect-the-world

[14] Fickling, David.   “Soviet Collapse Echoes in China’s Belt and Road.”  MSN/Bloomberg Opinion.     12 August 2018.    https://www.msn.com/en-us/news/msn/soviet-collapse-echoes-in-china’s-belt-and-road/ar-BBLOpUL#image=4

[15] ANI.  “Myanmar keen not to lose Kyaukpyu Port to China.”12 June 2018 (updated).  https://www.aninews.in/news/world/asia/myanmar-keen-not-to-lose-kyaukpyu-port-to-china201806121807450001/

————————————————————————————————-

© Shirley M. Loveless, Ph.D. 2018

Dr. Loveless is a consultant, author, and educator in transportation systems, supply chain risk analysis, emergency management, and economic development.  She is a Member of the Transportation Research Board of the National Academies of Sciences, Engineering and Medicine, and an appointed member of several TRB Standing Committees.  She works with RAAD360 LLC as a supply chain transportation consultant.

China’s Belt & Road Initiative – Blog #10

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(Image credit: srilankabrief.org)

This is the tenth Blog in a series based on The Geopolitical Significance of the Chinese Belt and Road Initiative and What it may Mean for Supply Chain Operations Worldwide, a Whitepaper (47 pg, 241 endnotes) researched and written for RAAD360 LLC (raad360.com). The goal is to alert supply chain managers worldwide to the complex risks inherent in BRI. RAAD360 provides RAAD™, a cloud-based supply chain risk management platform.

Worldwide Supply Chain Risk Series

China’s Belt & Road Initiative

Blog #10 – China-Pakistan Economic Corridor

 

Source: ESCAP (From Presentation by Binyam Reja, Ph.D., The World Bank at the 2018 Annual Meeting of the Transportation Research Board, Washington, D.C.)

The China-Pakistan Economic Corridor is important to China for both economic and geopolitical reasons.  The proposed corridor projects have been valued at $62 billion. They include plans for energy infrastructure (pipelines), roads and railroads to connect Kashgar in the underdeveloped Xinjiang region in China to the port of Gwadar on the Indian Ocean coastline of Pakistan.  China’s vision of a connection through Pakistan to the Indian Ocean precedes the “Belt and Road Initiative”, originating well before 2010.[1]

Gwadar has great geopolitical importance—it is a key node in China’s overall “Belt and Road” network and gives China access to the Indian Ocean and the Arabian Sea, and proximity to the Strait of Hormuz and Iran.  This is discussed below.  The massive port upgrades and expansions confirm the importance China is according this once-sleepy, backwater.

China is providing the funding for about 80% of the cost of the port development.[2]  In a break with its funding practices in other “Belt and Road” countries, China is making some sizable grants ($500 million) to Pakistan to pay for other projects like drinking water infrastructure and other community needs, including a hospital, college and airport.[3]  However, the vast portion of China’s investments in the China-Pakistan Economic Corridor is in the form of interest-bearing loans to a degree that Pakistan cannot afford.

This financial exposure has become an international concern.  The International Monetary Fund (IMF) has expressed concern about the level of Pakistan’s debt to China and IMF contributing nations, such as the United States, have communicated opposition to use of its IMF contributions to “bail out” Chinese investors.[4]

Port enhancements include new breakwaters, new berthing areas and channel dredging.[5]  The port expansions will enable Gwadar to accommodate not only giant container ships and tankers but also large warships, which makes Pakistan’s neighbors in the region nervous, particularly India.

The deal with Pakistan reportedly includes providing China with a naval base.[6]  An industrial zone is also developing around the port that is intended to support port operations and to generate commerce for the port.  So far, the port has attracted little traffic.  Even though the port is unprofitable now and will be for the foreseeable future, China intends to double down on its port investment by committing to an interest-free loan to fund a much-needed road to connect the port to Pakistan’s existing road network.[7]

The land connections and development within the Corridor are also critically important.  The Gwadar-Kashgar rail line is an incredibly ambitious project, as it will traverse extremely difficult terrain.  It is a key to completion of China’s overall plans for the Corridor as the road connections are inadequate for much commercial use.  Part of the year the existing road is impassable, due to weather conditions.[8]

The plans for the highway from Kashgar in China’s Xinjiang province to Gwadar have been at least temporarily stymied.  Parts of it have been built but timing of the completion of the rest is highly uncertain.  Another Chinese-funded rail project, the Lahore metro project (Orange Line) was meant to be a symbol of modern urban transportation.  Instead, this USD 2 billion project has become an albatross that cannot operate without large subsidies.[9]

The China-Pakistan Economic Corridor’s energy infrastructure plans are central to Pakistan’s desire to diversify its energy sources and to reduce its reliance on oil and LNG imports, unfortunately with a heavy focus on coal-fired electricity generation—more than half of the money China has promised Pakistan for the CPEC is meant for this means of energy generation.  This puts China in the position of supporting the development of non-green energy at the same time that China striving to “go green” itself.[10]

Government instability and general lawlessness in Western Pakistan have proved to be serious impediments to progress on energy and transportation infrastructure, as well as to development of the Gwadar port itself.[11]  The uncertainties and risks caused by the political upheaval, terrorism and other disturbances have made even the Chinese nervous.  Pakistan has had to commit to the Chinese to secure Gwadar with a large number of armed troops.

The pipeline is important to China’s energy security.  Once completed, China expects that 70%-80% of its oil imports from the Middle East and Africa can be diverted from passage through the Strait of Malacca, with a significant saving in both time and cost,[12] and also allaying China’s fears of a blockades and piracy that would deprive it of vital oil and gas imports.

 

Questions –

Where does my supply chain intersect with China’s “Belt and Road” transportation network?

What about my supplier’s supply chain?

Can China’s monopoly power increase transportation times in my supply chain?

Can China’s monopoly power increase transportation costs in my supply chain?

____________

BRI Blog next Monday will be:

Bangladesh-China-India-Myanmar Economic Corridor

_________________

There is a wealth of information in the end notes to each Blog article.  Click the URLs to bring the sources onto your computer screen for review.

[1] AsiaNews.   “Kashgar-Gwadar railway line would give Beijing a window on the Persian Gulf.   12 July 2010.  http://www.asianews.it/news-en/Kashgar-Gwadar-railway-line-would-give-Beijing-a-window-on-the-Persian-Gulf-18908.html

[2] Shahani, Imran.  “Gwadar vs Chabahar—Op Ed.” Eurasia Review. 9 February 2018. https://www.eurasiareview.com/09022018-gwadar-vs-chabahar-oped/

[3] The News/Reuters. “China  lavishes aid on Pakistan’s Gwadar.”   17 December 2017.                https://www.thenews.com.pk/latest/257224-china-lavishes-aid-on-pakistan-town

[4] Shah, Saeed and Bill Spindle.  “U.S. Seeks to Avoid a Pakistan Bailout That Would Repay China.”  The Wall Street Journal.  31 July 2018.  https://www.wsj.com/articles/u-s-seeks-to-avoid-a-pakistan-bailout-that-would-repay-china-1533056638,

[5]Bennett, Mia.  “Will All Roads Lead to China ?” The Maritime Executive.   3 December 2017.   https://www.maritime-executive.com/magazine/will-all-roads-lead-to-china#gs.gFN7ZOE

[6] Shahani, ImranOp. cit.

[7] Thorne, Devin and Ben Spevack.   C4ADS. “Harbored Ambitions.  How China’s Port Investments Are Strategically Re-Shaping the Indo-Pacific.“ 2017.  p. 35.  https://static1.squarespace.com/static/566ef8b4d8af107232d5358a/t/5ad5e20ef950b777a94b55c3/1523966489456/Harbored+Ambitions.pdf

[8] AsiaNews.   “Kashgar-Gwadar railway line would give Beijing a window on the Persian Gulf.   12 July 2010.http://www.asianews.it/news-en/Kashgar-Gwadar-railway-line-would-give-Beijing-a-window-on-the-Persian-Gulf-18908.html

[9] Page, Jeremy and Saeed Shah. Op,cit  https://www.wsj.com/articles/chinas-global-building-spree-runs-into-trouble-in-pakistan-1532280460?mod=searchresults&page=1&pos=1

[10] Herberg, Mikkal E.  “Introduction:  Asia’s Energy Security and China’s Belt and Road Initiative.” In Asia’s Energy Security and China’s Belt and Road Initiative.   National Bureau of Asian Research.  NBR Special Report #68.  November 2017.  http://www.nbr.org/publications/element.aspx?id=969

[11] Kugelman, Michael.  “The China-Pakistan Economic Corridor: What It Is, How It Is Perceived, and Implications for Energy Geopolitics.”  Hong Kong Trade and Development Council.  8 May 2018.  http://beltandroad.hktdc.com/en/insights/china-pakistan-economic-corridor-what-it-how-it-perceived-and-implications-energy

[12] Travel China Guide.  https://www.travelchinaguide.com/china-trains/pakistan/ Accessed 31 May 2018

————————————————————————————————-

© Shirley M. Loveless, Ph.D. 2018

Dr. Loveless is a consultant, author, and educator in transportation systems, supply chain risk analysis, emergency management, and economic development.  She is a Member of the Transportation Research Board of the National Academies of Sciences, Engineering and Medicine, and an appointed member of several TRB Standing Committees.  She works with RAAD360 LLC as a supply chain transportation consultant.

China’s Belt & Road Initiative – Blog #9

, , , ,
(Image credit: srilankabrief.org)

This is the ninth Blog in a series based on The Geopolitical Significance of the Chinese Belt and Road Initiative and What it may Mean for Supply Chain Operations Worldwide, a Whitepaper (47 pg, 241 endnotes) researched and written for RAAD360 LLC (raad360.com). The goal is to alert supply chain managers worldwide to the complex risks inherent in BRI. RAAD360 provides RAAD™, a cloud-based supply chain risk management platform.

Worldwide Supply Chain Risk Series

China’s Belt & Road Initiative

Blog #9 – Central and Southeast Asia Connection with New Eurasia Land Bridge

 

Source: ESCAP (From Presentation by Binyam Reja, Ph.D., The World Bank at the 2018 Annual Meeting of the Transportation Research Board, Washington, D.C.)

In Central and Southeast Asia, China is using the drop-downs from the New Eurasia Land Bridge Economic Corridor shown in the map above—the China-Pakistan Economic Corridor, the Bangladesh-China-India-Myanmar Economic Corridor, and the China-Indochina Peninsula Economic Corridor—to focus its investments in the countries falling within them.  All of the Southeast Asian countries are members of the Association of Southeast Asian Nations (ASEAN), an organization that “promotes Pan-Asianism and intergovernmental cooperation and facilitates economic, political, security, military, educational and socio-cultural integration amongst its members and other Asian countries, and globally.”[1]

Member states see the organization giving them more weight in protecting their interests vis-à-vis China; China sees things somewhat differently.  The geographical proximity of these ’burgeoning‘ economies presents a ripe opportunity for China to link them into the “Belt and Road”, to some of China’s poorer interior provinces.  The ASEAN countries, with the exception of Singapore and, to a lesser extent, Malaysia, have very inadequate infrastructure and lack sufficient internal finance to build it but they are eager to acquire it.  Economic ties between China and the ASEAN countries have mushroomed, with the advent of “Belt and Road”.

Before the end of 2016, China had funded more than 300 enterprises in 26 economic cooperation zones in eight ASEAN countries, an investment totaling $1.77 billion.[2]  ASEAN’s response to the “Belt and Road Initiative” to date, has been measured.  The organization has been discouraged from trying to engage China in a multilateral way because China’s modus operandi so far has been to deal with the countries individually in bilateral negotiations and agreements.

The “Belt and Road Initiative” has been described as having immense potential for the ASEAN countries.  Peter Wong, deputy chairman and chief executive of the Hongkong and Shanghai Banking Corporation Limited, characterized it as follows:

“The formation of the Asean Economic Community in 2015 is bringing Southeast Asian economies together as a single market and production base.  The belt and road initiative will offer further integration by developing physical infrastructure and a robust trade regime. The region will be ideally positioned to sit at the centre of global value chains.”[3]

This begs the question of whose “global value chains” and thus, who are the prime beneficiaries?  The results so far have been mixed for China’s ASEAN member partners as well as for other Asian nations.

Dealing with less-developed countries with primitive financial sectors, high existing debt, little to no experience in undertaking and managing big infrastructure projects, outsized expectations, unstable and corrupt governments and local bill-paying attitudes (as in Pakistan where the government has “fallen behind on payments for electricity from new Chinese power projects . . . because of longstanding problems getting Pakistanis to pay their bills),”[4] has proven to be a challenging learning experience for China.

Several large projects have been abandoned or significantly delayed.  Pakistan pulled out of the huge, $14 billion Dimer-Bhasha dam project because of its discomfort with the deal’s financial terms, and Nepal terminated a planned $2.5 billion hydroelectric dam deal with a Chinese SOE, because of what was characterized as the lack of openness in the tender process.[5]

Chinese companies have been accused of insensitivity to local norms and customs and of “poor business practices, such as undercutting local suppliers, failing to honour contracts and to comply with local regulations, while delivering inferior quality and reliability, such as plagued Chinese-built power plants in Indonesia.” [6]

These conditions pose risks to foreign investors and to both internal and external supply chains.  This is not to say that there haven’t been some remarkable successes in the developing countries, too, such as “Belt and Road” rail projects, in Malaysia, Thailand, Laos, and Indonesia, in Southeast Asia, and Kenya in Africa, but even these projects have had their difficulties.  The map below shows key planned infrastructure, as of December 2015.  Numerous new projects have been added to the drawing board since then.

 

Questions –

Where does my supply chain intersect with China’s “Belt and Road” transportation network?

What about my supplier’s supply chain?

Can China’s monopoly power increase transportation times in my supply chain?

Can China’s monopoly power increase transportation costs in my supply chain?

____________

BRI Blog next Monday will be:

China-Pakistan Economic Corridor

_________________

There is a wealth of information in the end notes to each Blog article.  Click the URLs to bring the sources onto your computer screen for review.

[1] Wikipedia.  https://en.wikipedia.org/wiki/Associ.ation_of_Southeast_Asian_Nations .  Accessed 24 May 2018.

[2] Wong, Peter.  “How China’s belt and road is transforming Asean.”   South China Morning Post.  8 January 2017. (updated 1 May 2017).  https://www.scmp.com/print/comment/insight-opinion/article/2059916/how-chinas-belt-and-road-transforming-asean

[3] Ibid. https://www.scmp.com/print/comment/insight-opinion/article/2059916/how-chinas-belt-and-road-transforming-asean

[4] Page, Jeremy and Saeed Shah.  “China’s Global Building Spree Runs into Trouble in Pakistan.” The Wall Street Journal.  22 July 2018.  https://www.wsj.com/articles/chinas-global-building-spree-runs-into-trouble-in-pakistan-1532280460?mod=searchresults&page=1&pos=1

[5]Wijeratne, David, Mark Rathbone, and Gabriel Wong.  “A Strategist’s Guide to China’s Belt and Road  Strategy + Business, Issue 90, Spring 2018. p. 9.  https://www.strategy-business.com/feature/A-Strategists-Guide-to-Chinas-Belt-and-Road-Initiative?gko=a98e0

[6] Lim, Linda. RSIS.   Op.cit.   http://www.eurasiareview.com/30032018-chinas-belt-and-road-initiative-future-bonanza-or-nightmare-analysis/

————————————————————————————————-

© Shirley M. Loveless, Ph.D. 2018

Dr. Loveless is a consultant, author, and educator in transportation systems, supply chain risk analysis, emergency management, and economic development.  She is a Member of the Transportation Research Board of the National Academies of Sciences, Engineering and Medicine, and an appointed member of several TRB Standing Committees.  She works with RAAD360 LLC as a supply chain transportation consultant.

China’s Belt & Road Initiative – Blog #8

, , , ,
(Image credit: srilankabrief.org)

This is the eighth Blog in a series based on The Geopolitical Significance of the Chinese Belt and Road Initiative and What it may Mean for Supply Chain Operations Worldwide, a Whitepaper (47 pg, 241 endnotes) researched and written for RAAD360 LLC (raad360.com). The goal is to alert supply chain managers worldwide to the complex risks inherent in BRI. RAAD360 provides RAAD™, a cloud-based supply chain risk management platform.

Worldwide Supply Chain Risk Series

China’s Belt & Road Initiative

Blog #8 – China-Central Asia-West Asia Economic Corridor

 

Source: ESCAP (From Presentation by Binyam Reja, Ph.D., The World Bank at the 2018 Annual Meeting of the Transportation Research Board, Washington, D.C.)

A key project in this corridor is the Khorgos Gateway, which connects China by rail, to a ‘dry’ port (not on any body of water) in Kazakhstan.  Kazakhstan, in turn, is a major link to Europe and Khorgos is critically important to the rail network between China and Europe.  This facility is where the rail system deals with rail gauge differences.  Using large cranes, the containers are lifted from one train on one track gauge to another train on a different rail gauge.  (As a former Soviet republic, Kazakhstan has a wider gauge track than Chinese rail and Western rail.[1]  When trains reach the Belarus-Poland border, the procedure has to be repeated in reverse).[2]  Supply chains using rail systems going between China and former Soviet countries or between Western countries and former Soviet states must be aware of possible delays that can occur if rail traffic is heavy and beyond the facility’s capacity to move train cargoes quickly.  The huge facility also includes factories and warehouses and lots of land for expansion to accommodate expected economic development and rail traffic.[3]

Khorgos also has a vital position in other important rail networks. From Khorgos to Almaty in Kazakhstan, the rail line goes to Tode Bi, where one line goes north to Western Europe (London is the endpoint) and one line goes west and then south and west again to Iran.[4]  These both build upon legacy railways dating from when Kazakhstan and the other countries along the path that were part of the Soviet Union.  These long-distance rail lines are discussed below.

Again, as has happened in other countries with major “Belt and Road” projects, Kazakhstan has ended up selling a significant share of the Khorgos Port to China, in this case, to COSCO Shipping Corporation and Jiangsu Lianyungang Port Co, each of which each now owns 24.5%.[5]

China is Kazakhstan’s major trading partner in an exchange pattern that follows most of China’s trade with less-developed countries.  Most of Kazakhstan’s exports to China are oil and minerals.[6]  China expects this corridor to be a major route not only for its exports to Kazakhstan but also for goods bound for Europe.  China has also become a major direct investor in Kazakhstan with its 2005 purchase of PetroKazakhstan, which controls the second-largest proven oil reserves in the country.[7]

Becoming part of the “Belt and Road Initiative” has brought a flood of loans, grants, investments, and technical assistance to Kazakhstan, not just from China directly, but also from sources such as the World Bank, the European Bank for Reconstruction and Development, and the Asian Development Bank.[8]  These funds will greatly help Kazakhstan continue toward its goal of becoming a major regional player.  Kazakhstan has signed an agreement with the OECD that it will foster government transparency and improvement of the investment climate for foreigners.  Kazakhstan hopes association with the OECD will assist it in achieving its development goals.[9]

Another major infrastructure project in this Corridor—or rather several projects, including ones going back to when Kazakhstan was part of the Soviet Union—is the Central Asian Gas Pipeline.  The original pipelines connected Russia via Uzbekistan and Kazakhstan to Turkmenistan’s Dzharkak field in the Amu Darya Basin.  Before the “Belt and Road Initiative” (in 2006), China contracted with Turkmenistan for a long-term supply of natural gas.  It expects to import 65 million cubic meters per year.  Four pipelines are now operational.  China is seeking reliable natural gas supplies to enable it to meet more of its energy needs with cleaner natural gas instead of petroleum.[10]

The train lines referenced above are major parts in the “belts” of the overall “Belt and Road” strategy.  The train line from China to Iran continues from Tode Bi in Kazakhstan to Arys and then south to Tashkent in Uzbekistan and west to Samarkand and Bukhara.  From here, it crosses into Turkmenistan, continuing to Bayramaly and then to Mashhad in Iran.  The endpoint of the 10,400km journey from China is Tehran.  The journey takes 14 days,[11] at least twenty days shorter than a sea-land journey between the two countries.[12]

The China to London route is the other major transnational railway that runs through Khorgos.  This 12,000 km. line runs from Yiwu in the far East of China through Central Asia and Eastern Europe and the Eurotunnel into London, England.  The journey takes 18 days and passes through some of the most challenging terrain on earth, including the Gobi Desert and the Qilian Mountains.[13]

Both of these rail lines represent breakthrough connections between China and Iran and China and Europe and greatly reduce transit times, compared to any other land or sea alternatives.  However, the areas through which the lines pass and in some places the lines themselves, are not without significant risks to supply chains, in the form of political unrest, local corruption, various types of infrastructure risks—including substandard roads and communications, legal and regulatory risks, and foreign trade and payment risks.[14] [15]

As one observer has noted, “For China’s global ambitions, ‘Iran is at the center of everything.’”[16]  Iran has been a trading hub in East-West trade for centuries going back to the original Silk Road.  China’s involvement with Iran has changed over time, in response to economic considerations as well as geo-political ones, but China has been a relatively reliable trade and development partner with Iran throughout all of the political upheavals of the last half century.  With the departure of the U.S. from the Iran nuclear agreement and the re-imposition of sanctions, Iran will increasingly turn to China.  China is the largest importer of Iranian petroleum already and Beijing has indicated that it might not yield to the threat of U.S. sanctions and will continue its imports from Iran.  In addition, many expect that as Western companies yield to the sanctions and shut down their Iran operations, the Chinese will step in and take them over.[17]

Beyond trade, China has been very important to Iran’s economic development, especially during periods when Iran has been treated as an international pariah and has lacked both capital and technical assistance from other countries.  Iran’s road and rail networks are sparse and still antiquated overall, but China has had a major role in providing what is there.  Also, over the years, Chinese engineers have built bridges, roads, dams, tunnels throughout Iran and the metro (subway system) in Tehran.[18]

China has invested in rail infrastructure leading to Iran, as noted above.   The Mashhad-Tehran line, part of the “Belt and Road” railroad line running from Khorgos through Almaty in Kazakhstan and then west and south, has been operational for freight for a couple of years now. (See below).

Attention now is on developing an electrified line between Mashhad and Tehran and links from Tehran to Turkey, connecting to Europe in the future and enabling faster transit times.[19]  The contract for this work is with China National Machinery Import and Export Corporation (CMC), with two-thirds of the cost underwritten by the Chinese government and the balance by Chinese insurer China Export and Credit Insurance.[20]

Until recently, China has focused its port development in the Persian Gulf/Gulf of Oman/Arabian Sea region in Gwadar, Pakistan, even though another port on the Gulf of Oman across the border in Iran may be in a better geographic location to serve China’s “Belt and Road” needs, with potentially shorter distances to  various parts of “belt and Road” network.[21]  China has avoided this port—Chabahar—because it is a project sponsored by China’s Asian arch-rival, India.  That may be about to change.  Iran has sought faster progress on the port projects and, earlier this year, invited both China and Pakistan to participate in the port development, much to India’s consternation.  What India’s response might be if China steps in is unclear.  “Indian officials have repeatedly said the port is crucial for India as it will allow India to bypass Pakistan in accessing Afghanistan and central Asia.”[22]  More than that, Chabahar is a vital factor in India’s maritime strength and a counter to China’s growing dominance of all of the oceans and seas from the Pacific Ocean through the Indian Ocean to the Red Sea.

Chabahar has problems other than the China-India rivalry—Saudi opposition to development of the port and its surrounding area (apparently because of potential competition to Saudi oil, among other reasons)[23] and aggressive U.S. efforts to isolate Iran again, following the withdrawal of the U.S. from the Joint Comprehensive Plan of Action (JCPOA—Iran nuclear agreement).   What happens next for Chabahar in this highly-charged political atmosphere is anybody’s guess.

RAIL ROUTE FROM XINJIANG PROVINCE, CHINA TO TEHRAN

Source: Financial Tribune, “Iran, China Team Up on New Silk Road Project”, https://financialtribune.com/articles/domestic-economy/66450/iran-china-team-up-on-new-silk-road-project

 

Questions –

Where does my supply chain intersect with China’s “Belt and Road” transportation network?

What about my supplier’s supply chain?

Can China’s monopoly power increase transportation times in my supply chain?

Can China’s monopoly power increase transportation costs in my supply chain?

____________

BRI Blog next Monday will be:

Central and Southeast Asia Connection with New Eurasia

_________________

There is a wealth of information in the end notes to each Blog article.  Click the URLs to bring the sources onto your computer screen for review.

[1] South China Morning Post.  Chapter 5—Belt and Road Initiative.  “Khorgos:  the biggest dry-port in the world.” http://multimedia.scmp.com/news/china/article/One-Belt-One-Road/khorgos.html.   Accessed 17 July 2018.

[2]Ibid.  http://multimedia.scmp.com/news/china/article/One-Belt-One-Road/khorgos.html

[3]Rapoza, Kenneth.  “Kazakhstan Bets Big on China’s Silk Road.”  Forbes.   18 July 2017.  https://www.forbes.com/sites/kenrapoza/2017/07/18/kazakhstan-bets-big-on-chinas-silk-road/#25827a685805.  .

[4] South China Morning Post.  Chapter 3:  Belt and Road Initiative.  “Iran is a key access point to the Middle East.”  Accessed July 17, 2018.  http://multimedia.scmp.com/news/china/article/One-Belt-One-Road/iran.html.

[5] Rapoza, Kenneth. Op.cit.   https://www.forbes.com/sites/kenrapoza/2017/07/18/kazakhstan-bets-big-on-chinas-silk-road/#25827a685805

[6] Runde, Daniel.  “Kazakhstan:  the Buckle in One Belt One Road.” Forbes.  29 June 2015.  https://www.forbes.com/sites/danielrunde/2015/06/29/kazakhstan-buckle-one-belt-one-road/#205394ee6b5b.

[7] Ibid.   https://www.forbes.com/sites/danielrunde/2015/06/29/kazakhstan-buckle-one-belt-one-road/#205394ee6b5b

[8] Ibid.  https://www.forbes.com/sites/danielrunde/2015/06/29/kazakhstan-buckle-one-belt-one-road/#205394ee6b5b.

[9] Rapoza, Ken.  Op.cit.  https://www.forbes.com/sites/kenrapoza/2017/07/18/kazakhstan-bets-big-on-chinas-silk-road/#2cc1c0658053.

[10] South China Morning Post.  Chapter 4.  Belt and Road Initiative. “The Central Asian gas pipeline”.   Accessed 17 July 2018.  http://multimedia.scmp.com/news/china/article/One-Belt-One-Road/gasPipeline.html

[11] South China Morning Post.   Chapter  3.   Belt and Road Initiative.  “The railway to Iran.”  Accessed 17 July 2018.  http://multimedia.scmp.com/news/china/article/One-Belt-One-Road/iran.html

[12] Noack, Rick.  “China’s new train line to Iran sends a message to Trump:  We’ll keep trading anyway.”  The Washington Post.  11 May 2018.  https://www.washingtonpost.com/news/world/wp/2018/05/11/chinas-new-train-line-to-iran-sends-message-to-trump-well-keep-trading-anyway/?utm_term=.9e88fecc4506

[13] South China Morning Post.  Chapter 1.  Belt and Road Initiative.  “Plugging China into Europe.”   Accessed 17 July 2018.  http://multimedia.scmp.com/news/china/article/One-Belt-One-Road/europe.html

[14] South China Morning Post.  Belt and Road Initiative.  “The Railway to Iran.” Op.cit    http://multimedia.scmp.com/news/china/article/One-Belt-One-Road/iran.html

[15] South China Morning Post.  “Plugging China into Europe.”  Op.cit. http://multimedia.scmp.com/news/china/article/One-Belt-One-Road/europe.html

[16] Erdbrink, Thomas.  “For China’s Global Ambitions, ‘China Is at the Center of Everything’” The New York Times.  25 July 2018.  https://www.nytimes.com/2017/07/25/world/middleeast/iran-china-business-ties.html

[17] Taylor, Guy and Dan Boylan.  “China moves to cash in after Trump exits Iran nuclear deal.”  The Washington Times.   7 June 2018.  https://www.washingtontimes.com/news/2018/jun/7/china-steps-business-iran-after-trump-exits-nuclea/

[18] Harold, Scott and Alireza Nader.   “Occasional Paper.  China and Iran.  Economic, Political and Military Relations.”  RAND Corporation, Center for Middle East Public Policy.  2012.  Pp. 11-12.  https://www.rand.org/pubs/occasional_papers/OP351.html

[19]Erdbrink.  Op. cit. https://www.nytimes.com/2017/07/25/world/middleeast/iran-china-business-ties.html

[20] Jalili, Saeed.   “Iran, China Team Up on New Silk Road Project.”  Financial Tribune.   14 June 2018.  https://financialtribune.com/articles/domestic-economy/66450/iran-china-team-up-on-new-silk-road-project

[21]Erdbrink. Op. cit.  https://www.nytimes.com/2017/07/25/world/middleeast/iran-china-business-ties.html

[22] The Times of India.  “Iran says it has offered Pak, China participation in Chabahar’s port project.”  14 March 2018.  https://timesofindia.indiatimes.com/india/iran-says-it-has-offered-pak-china-participation-in-indias-chabahar-port-project/articleshow/63292150.cms

[23] Financial Tribune.  “Rivalry at Iran’s Chabahar Port”.  2 July 2018.  https://financialtribune.com/articles/economy-domestic-economy/89034/rivalry-at-iran-s-chabahar-port

————————————————————————————————-

© Shirley M. Loveless, Ph.D. 2018

Dr. Loveless is a consultant, author, and educator in transportation systems, supply chain risk analysis, emergency management, and economic development.  She is a Member of the Transportation Research Board of the National Academies of Sciences, Engineering and Medicine, and an appointed member of several TRB Standing Committees.  She works with RAAD360 LLC as a supply chain transportation consultant.

China’s Belt & Road Initiative – Blog #7

, , , ,
(Image credit: srilankabrief.org)

This is the seventh Blog in a series based on The Geopolitical Significance of the Chinese Belt and Road Initiative and What it may Mean for Supply Chain Operations Worldwide, a Whitepaper (45 pg, 230 endnotes) researched and written for RAAD360 LLC (raad360.com). The goal is to alert supply chain managers worldwide to the complex risks inherent in BRI. RAAD360 provides RAAD™, a cloud-based supply chain risk management platform.

Worldwide Supply Chain Risk Series

China’s Belt & Road Initiative

Blog #7 – China-Mongolia-Russia Economic Corridor

 

Source: ESCAP (From Presentation by Binyam Reja, Ph.D., The World Bank at the 2018 Annual Meeting of the Transportation Research Board, Washington, D.C.)

The China-Mongolia-Russia Economic Corridor, first proposed by Chinese President Xi Jinping in September 2014, emphasizes development of interconnected rail systems that will fully integrate Mongolia with its neighbor to the south—China—and its neighbor to the north—Russia.  The infrastructure development follows the characteristic “Belt and Road” model of connecting ports and foreign markets to extractive industries.  The map below shows Mongolia’s major coal basins and coal mine locations.  Existing rail lines connect the port of Tianjin to Mongolia and to the famed Trans-Siberian Railway which extends to Khabarovsk and the port of Vladivostok in far-eastern Siberia, and to the Trans-Manchurian secondary line, to Harbin, China.  Mongolia’s rail policy envisions two major north-south lines that will pass into Russia.  A link under construction will connect the north-south rail lines through southern Mongolia and another planned one will connect the north-south lines in the north.[1]

President Xi envisions Mongolia as a ‘transit corridor’ linking the Chinese and Russian economies and, along with President Putin, he regards the economic ties and integrated infrastructure as means of weakening Mongolia’s bonds with the U.S.[2]  (Since the late 1980s, the U.S. and Mongolia have had close bilateral defense arrangements).  Development plans also include the creation of a transnational power grid.

The connectivity benefits to Mongolia are obvious.  The benefits to China of better access to mining sites in Mongolia are also obvious.  The port-to-port connections between Vladivostok in far-eastern Siberia to Tianjin in China may be less obvious but are also important, particularly to Russia, which may find access to Tianjin shortens some key commercial routes for its own trade.

EXISTING AND PLANNED RAIL ROUTES IN MONGOLIA

www.unuudur.com/wp-content/uploads/20150731-Project-Location-and-Rail-Policy.jpg, Accessed 9 August 2018

 

Questions –

Where does my supply chain intersect with China’s “Belt and Road” transportation network?

What about my supplier’s supply chain?

Can China’s monopoly power increase transportation times in my supply chain?

Can China’s monopoly power increase transportation costs in my supply chain?

____________

BRI Blog next Monday will be:

China-Central Asia-West Asia Economic Corridors

_________________

There is a wealth of information in the end notes to each Blog article.  Click the URLs to bring the sources onto your computer screen for review.

[1] Wikipedia.  “Mongolia-United States relations.   https://en.wikipedia.org/wiki/Mongolia–United_States_relations . Accessed 9 July 2018.

[2] The BRICS Post “China, Russia, Mongolia to create economic corridor.”  21 September 2014.  www.thebricspost.com/china-russia-mongolia-to-create-economic-corridor/#.W0J6D_ZFxRQ

 

————————————————————————————————-

© Shirley M. Loveless, Ph.D. 2018

Dr. Loveless is a consultant, author, and educator in transportation systems, supply chain risk analysis, emergency management, and economic development.  She is a Member of the Transportation Research Board of the National Academies of Sciences, Engineering and Medicine, and an appointed member of several TRB Standing Committees.  She works with RAAD360 LLC as a supply chain transportation consultant.

China’s Belt & Road Initiative – Blog #6

, , , ,
(Image credit: srilankabrief.org)

This is the sixth Blog in a series based on The Geopolitical Significance of the Chinese Belt and Road Initiative and What it may Mean for Supply Chain Operations Worldwide, a Whitepaper (40 pg, 193 endnotes) researched and written for RAAD360 LLC (raad360.com). The goal is to alert supply chain managers worldwide to the complex risks inherent in BRI. RAAD360 provides RAAD™, a cloud-based supply chain risk management platform.

Worldwide Supply Chain Risk Series

China’s Belt & Road Initiative

Blog #6 – New Eurasia Land Bridge Economic Corridor

The avowed aim of coordinating development policies with partner countries has not always been obvious in Chinese actions. Project contracts sometimes look to be geared more to the advantage of Chinese companies than to the development needs of the supposed target countries.

A case in point:  The recent Chinese foray into the European e-commerce market through a major new logistics hub to be built on the Polish border with Germany.  The plan ties to the concept of Economic Corridors.  The location of the hub in Poland is described as being in “the primary land conduit between China and the mega-markets of Europe, particularly Germany’s 81-million strong consumer base.”[1]  An announcement of the project by HKTDC (Hong Kong Trade and Development Council) calls it  a “major new AliExpress logistics centre, serving its host country as well as online shoppers in neighbouring Germany and the Czech Republic.”[2]

The logistics center is a tri-partite venture involving AliExpress, (an e-marketplace like Amazon), Worldwide Logistics Group (based in Shanghai), and ATC Cargo (a Polish multi-modal freight delivery company).[3]  The beneficiary is AliExpress (owned by the Chinese mega-business, Alibaba), at the potential expense of the existing Polish e-commerce marketplace site, Allegro, and Amazon, which is in the process of building its own logistics hub in the Polish city of Szczecin, also close to the German border.

Poland already has robust rail and road networks, though the road network in the eastern part of the country has a lower density and level of service than the western portion.  China anticipates that the “Belt and Road Initiative” will substantially increase the volume of trade passing through Poland.[4]  The EU has and is financing major upgrades and additions to the Polish transportation infrastructure–the EU recently made a loan of 650 million euros to upgrade Poland’s rail network and more will be forthcoming.[5] But, if China is correct in assuming the new logistics hub will attract much heavier traffic, will the EU-financed infrastructure improvements be sufficient?  If not, who will pay? The impact of much heavier volumes on existing infrastructure is likely to cause disruptions in other supply chains in or passing through Poland.

Source: ESCAP (From Presentation by Binyam Reja, Ph.D., The World Bank at the 2018 Annual Meeting of the Transportation Research Board, Washington, D.C.)

In Belarus, China’s investments have been more in the form of direct investments in manufacturing businesses—notably electronics, electrical equipment and home appliances—than in transportation infrastructure, in spite of Belarus’s key geographic location between Russia and Poland on two heavily-traveled pan-European corridors (Berlin-Moscow and Helsinki-Greece) and eight rail container routes passing between China and Western Europe.  An exception to this trend is the planned China Gansu International Corporation for Economic and Technical Co-operation (CGICOP) transport and logistics complex in the Grodno region, close to a major cargo and passenger border crossing point, on the western border with Poland.[6] Rail transshipment facilities are imperative because of the need to accommodate the transition between broad gauge and standard gauge tracks. Additionally, transshipment hubs are needed for repackaging, sorting, and transshipping Chinese goods arriving in Belarus in large shipments into smaller, market-targeted shipments.

Manufacture of Chinese goods within more developed countries, including Eastern European ones such as Belarus, is becoming more common.  Production in Belarus allows China to access highly-trained tech labor at lower prices than in Western Europe and closer proximity to the ultimate Western European markets for these goods.  China has also taken advantage of Free Economic Zones that offer “preferential arrangements on corporate income, real estate and land taxes” and Industrial Parks (e.g., the Free Economic Zone Minsk) and industrial parks that offer agglomeration opportunities, such as the China-

Belarus Industrial Park (also known as the Great Stone Industrial Park), co-founded by the Hong Kong-based China Merchants Group.[7]  Tenants in this industrial park include ZTE, Huawei, Zoomlion, YTO Group Corporation, Xinzhu Corporation, Lotusland Renewable Energy and CGICOP.[8]

Chinese investments in some EU countries are not so much directed to projects to build infrastructure or business facilities as they are to purchasing control of existing firms in EU countries and improving China’s competitive position in the global economy. This is true for investments by SOEs (state-owned enterprises) but also for Chinese private investors, such as Anbang Insurance Group, which are dependent upon government approval and support—Anbang received a $10 billion bailout to keep it from collapsing and was then taken over by the government.[9]

In Belgium, which has received modest Chinese investment to date, two noteworthy acquisitions included the Belgian division of Delta Lloyd Bank by Anbang, a large Chinese insurance group, and Punch Powertrain, a high-tech producer of vehicular powertrains.[10]  The bank acquisition is thought to be a ‘trojan horse’ for Chinese investments in other EU countries, using the bank’s established connections. The Powertrain purchase possibly complements other Chinese vehicle-related acquisitions, such as Saab and Volvo.  One investment in Belgium clearly relevant to China’s OBOR/BRI plans is the 2017 acquisition by COSCO of the entire container terminal at Zeebrugge.[11]  This facility can accommodate the largest container ships, is directly across the English Channel from England, and is near the main shipping routes in northwestern Europe.  The Port of Zeebrugge  also includes the Fluxys terminal, the largest LNG terminal complex in Europe.[12]  Fluxys provides China with a link in Western Europe for LNG brought in by ice-class tankers from the Yamal gas fields in the Siberian Arctic, in which China has a major financial stake.[13]  The Yamal LNG will then be trans-shipped to destinations in Asia as well as in Europe.

COSCO also owns 25% of the Port of Antwerp’s container terminal facilities, purchased in 2004.  Antwerp’s port facilities are second in size only to Rotterdam’s in neighboring Netherlands.  Between container shipping capacity in Zeebrugge and that in Antwerp, China has acquired a large share of container shipping capacity in Belgium.  China’s investments in Antwerp appear to favor that port over Rotterdam for shipping, but Rotterdam is still the Western European endpoint for surface transportation using the Silk Road belt’s rail lines from China.

In the Czech Republic, China, through its state-owned enterprise, CRRC—the largest rolling stock manufacturer in the world–is seeking to take over Skoda Transportation, the largest train and locomotive producer in Central and Eastern Europe and license holder for the EU market. This would allow CRRC into the EU rail transportation space.[14]   Also on China’s shopping list in the Czech Republic are the largest Czech telecom firm—O2 CR—and TSS Cargo—the largest railway transporter in the Czech Republic.  The latter, would, of course, complement the acquisition of Skoda[15] and strengthen the rail links between China and Europe.  Again, these are acquisitions of existing assets, not the creation of new ones.

The recent in-depth study of the “Belt and Road Initiative” financial and investment relationships by the European Think-tank Network on China (ETNC), concluded that Chinese investments within the EU are driven by aspirations to gain:

  • Technology, to include established high-tech assets, emerging technologies and know-how
  • Access to the European market, for Chinese goods and services
  • Access to third markets via European corporate networks, especially Latin America and Africa
  • Brand names to improve marketability of Chinese products both abroad and the Chinese market
  • Integrated and global value chains in production, knowledge and transport
  • A stable legal, regulatory and political environment, particularly in context of global disruption and political uncertainty
  • Political/diplomatic influence in a region that in aggregate terms remains the second largest economy after the US.[16]

The EU-China relationship is not entirely one-sided.  From the perspective of the EU countries, “Chinese investment serves to create and/or maintain jobs, to provide capital for research, development and innovation, generate wealth and tax revenue for cash-strapped governments, create new market opportunities for European firms both in China and in third markets, build and improve infrastructure and even introduce technology and innovative business models into Europe”,[17] but, these positive expectations are tempered by general concerns about:

  • The role of the Chinese state in the economy
  • A lack of reciprocity and fair competition
  • National competitiveness and technological leadership
  • Uncertainty about security-related critical infrastructure and sensitive technologies
  • Investments as a source of political and geopolitical influence, and divisions within Europe
  • Broader regulatory concerns
  • A growing “promise fatigue[18]”

 

Questions –

Where does my supply chain intersect with China’s “Belt and Road” transportation network?

What about my supplier’s supply chain?

Can China’s monopoly power increase transportation times in my supply chain?

Can China’s monopoly power increase transportation costs in my supply chain?

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BRI Blog next Monday will be:

China-Mongolia-Russia Economic Corridors

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There is a wealth of information in the end notes to each Blog article.  Click the URLs to bring the sources onto your computer screen for review.

[1] Dowgiallo, Anna. Poland Designated as Home to New BRI East European Logistics Hub.” Belt and Road.  HKTDC.  16 April 2018.  http://beltandroad.hktdc.com/en/insights/poland-designated-home-new-bri-east-european-logistics-hub

[2] Ibid.  http://beltandroad.hktdc.com/en/insights/poland-designated-home-new-bri-east-european-logistics-hub

[3] Ibid.  http://beltandroad.hktdc.com/en/insights/poland-designated-home-new-bri-east-european-logistics-hub

[4]  Encyclopedia of the Nations. “Poland:  Infrastructure, Power and Communications.” http://www.nationsencyclopedia.com/economies/Europe/Poland-INFRASTRUCTURE-POWER-AND-COMMUNICATIONS.html.   Accessed 28 July 2018.

[5] Railway Pro.  “Eur 650 million for Polish railway infrastructure.”  20 November 2017.  https:// www.railwaypro.com/wp/eur-650-million-polish-railway-infrastructure/

[6] Hong Kong Trade and Development Council (HKTDC)   “Belt and Road Initiative:  The Role of Belarus.”  20 April 2018.  http://beltandroad.hktdc.com/en/insights/belt-and-road-initiative-role-belarus/

[7] Ibid.  http://beltandroad.hktdc.com/en/insights/belt-and-road-initiative-role-belarus/

[8] Ibid.  http://beltandroad.hktdc.com/en/insights/belt-and-road-initiative-role-belarus/

[9] He, Laura.  Anbang Insurance gets US$10 billion rescue bailout from Beijing after ex-chair Wu Xiaohui admits fraud.”  South China Morning Post  4 April 2018. http://www.scmp.com/business/companies/article/2140250/china-rescues-anbang-insurance-us10-billion-bailout-after-ex

[10] Renard, Thomas.  “Business vs Security:  The Conundrum of Chinese Investments in Belgium.” ETNC,  Chinese Investment in Europe .  A Country-Level Approach.  A Report by the European Think-tank Network on China. Eds.:   John Seaman, Mikko Huotari, Miguel Otero-Iglesias. p. 10.  December 2017 p. 34.  https://www.clingendael.org/sites/default/files/2017-12/ETNC_Report_2017.PDF

[11]Ibid. p. 35.  https://www.clingendael.org/sites/default/files/2017-12/ETNC_Report_2017.PDF

[12] Wikipedia.  “Zeebrugge.”   https://en.wikipedia.org/wiki/Zeebrugge .  Accessed 28 July 2018.

[13] Port of Zeebrugge.  “Zeebrugge receives first LNG load from Yamal.”  9 April 2018.  https://www.portofzeebrugge.be/en/news-events/zeebrugge-receives-first-lng-load-yamal

[14] Furst, Rudolph.  “The Czech Republic:  Receiving the First Relevant Chinese Investments.”   Op.cit. ETNC, pp. 43-44.  https://www.clingendael.org/sites/default/files/2017-12/ETNC_Report_2017.PDF

[15] Ibid.  https://www.clingendael.org/sites/default/files/2017-12/ETNC_Report_2017.PDF

[16] ETNC, “Introduction:  Sizing Up Chinese Investments in Europe, “p. 10.  https://www.clingendael.org/sites/default/files/2017-12/ETNC_Report_2017.PDF

[17] ETNC, op.cit. “Introduction,”p. 11. https://www.clingendael.org/sites/default/files/2017-12/ETNC_Report_2017.PDF

[18] ETNC,  “Introduction,”p. 12  https://www.clingendael.org/sites/default/files/2017-12/ETNC_Report_2017.PDF

 

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© Shirley M. Loveless, Ph.D. 2018

Dr. Loveless is a consultant, author, and educator in transportation systems, supply chain risk analysis, emergency management, and economic development.  She is a Member of the Transportation Research Board of the National Academies of Sciences, Engineering and Medicine, and an appointed member of several TRB Standing Committees.  She works with RAAD360 LLC as a supply chain transportation consultant.