China’s Belt & Road Initiative – Blog #20

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(Image credit: srilankabrief.org)

This is the twentieth 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 (52 pg, 262 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 #20 – How China Benefits – What to Watch, What to Do

WHAT TO WATCH

‘What to Watch’ depends on the impact you are striving to understand.  This Whitepaper seeks to inform and alert supply chain managers worldwide to the complex risks inherent in ‘Belt and Road.’  It is intended to be a primer for those with little understanding of the “Belt and Road Initiative”.

Deciding ‘What to Watch’ requires that the supply chain manager understand in detail and ideally with contemporaneous updating of the supply chain intersections of his/her organization with ‘Belt and Road,’ both directly and indirectly.  This includes suppliers and sub-suppliers of ingredients needed to produce its product(s) and entities between the organization and the end-users of the organization’s product(s).

The first 27 pages (179 endnotes) are intended to develop basic information about the “Belt and Road Initiative” and provide extensive endnotes for the reader to conduct further research and to identify the information sources used in this Whitepaper.  The balance of the pages (83 endnotes) make a variety of observations about the potential consequences of actions by China and key benefits to China.  Beware – this information is changing constantly.  The information sources for this Whitepaper were collected in the last 10 months but relevant news and information emerge almost daily.

The structure and the components of the ‘Belt and Road’ serve Chinese economic and political interests first.  However, they can and often do simultaneously benefit the other participating countries. These benefits are often ancillary but still important.  In many cases, infrastructure is provided to less-developed countries which they could not otherwise afford.  These countries also may benefit from being located in an Economic Corridor that puts them into the path of growing trade flows using the applicable infrastructure.

Unfortunately, there is a downside.  When a recipient country does not have the financial ability to repay its infrastructure loan(s), it has sometimes lost control of the infrastructure assets, particularly when the infrastructure is collateral for the development loan.  This financial jeopardy also can adversely impact suppliers of goods to such a country should a project be terminated, fail or be significantly delayed.  This has already happened in several places (Indonesia, Kazakhstan, Bangladesh[1] and others) and, as noted earlier, at least eight ‘Belt and Road’ partner countries are in sovereign debt default danger.  Suppliers to entities in such countries must be constantly aware of applicable credit risks.

Political instability in some major ‘Belt and Road’ ports, such as Gwadar in Pakistan, and in certain other countries with major Chinese-backed infrastructure projects, such as the Central Asian nations, also creates high supply chain risks. Pakistan has had to provide security forces for its ‘Belt and Road’ ports to quell threats of violence, kidnappings, sabotage and other dangers to port users.  Gwadar (Pakistan), Hambantota (Sri Lanka) and Doraleh (Djibouti) also have the risk of military priority being given over commercial shipping. Preference for Chinese companies in cargo handling and berth assignments in Chinese-controlled ports is another possible problem.  Supply chain managers worldwide need to understand the exposure of their supply chains (end to end) to such political instabilities and risks.

Looking to the future, as ‘Belt and Road’ evolves non-Chinese manufacturers, suppliers and shippers, both within and outside of the Economic Corridors, may find they are ‘second class citizens’ in access priority not only to ‘Belt and Road’ ports, but also to rail shipping systems, logistics hubs and other key supply chain infrastructure.  This could affect transportation times and costs, directly and indirectly through third parties providing goods or services to the supply chain or delivering products for the supply chain who are reliant on ‘Belt and Road’ infrastructure.

If ‘Belt and Road’ countries give priority to meeting the needs of Chinese-financed projects and industries within them or to the Chinese economy, as has happened in the case of rare minerals such as cobalt and energy resources including coal and LNG, export-oriented manufacturing supply chains in other countries may need to be re-aligned to access other input sources for businesses to stay competitive.

The reduction in land transport time between China and Western Europe is a game-changer.  U.S. based manufacturers who ship goods to Europe primarily trans-ocean, may find Chinese competitors can reach those European markets faster and cheaper than they can if they use current means of goods transport and shipment points. Companies may have to look for possible new manufacturing or assembly locations in Western Europe to close distance gaps.  Japanese businesses are already shipping or selling “automotive parts and electronic devices to manufacturing bases in Europe.”[2]

The “Belt and Road Initiative” has already enhanced Chinese efficiency in acquiring and extracting critical raw materials, such as cobalt and copper—vital components of batteries in electric vehicles—by augmenting infrastructure in the Republic of Congo between mines and ports for shipment to China.  China now has a near monopoly of both minerals.[3] It is in a market control position that poses serious threat to manufacturers and their supply chains around the world, and automotive manufacturers will need to understand the degree this affects them and what the alternative response strategies are.

Congolese copper and cobalt pose another potential global supply chain risk by reason of their labor input.  Workers in this dangerous enterprise are locals, including children, a notable exception to the Chinese practice of bringing in Chinese workers.  Because of these labor practices and unsafe conditions, there is a growing international campaign to put both minerals on the “conflict minerals” list; U.S. companies could be barred from using these minerals and/or could suffer huge fines, if the minerals are imported from the Republic of Congo.  Companies would have to check their supply chains, including second and third-tier suppliers, to ensure they are in compliance with U.S. regulations.[4]

In the long run many producers may need to look to alternative markets and suppliers.  In the short term, businesses may need to take supply chain detours, change shippers, or implement other defensive actions in supply chain operations to keep costs and pricing competitive. This will require foreknowledge of potential risks and close attention to rapidly developing economic, political and policy changes (in both the public and private sectors) in both input and output chains and operational resiliency to be able to respond rapidly and effectively.

What to Do

This Whitepaper is a primer on the “Belt and Road Initiative”.  It is not a primer on supply chain risk management (SCRM) planning.  However, some general SCRM thoughts may be helpful.

The Economist Intelligence Unit (EIU) has a downloadable report “Prospects and Challenges on China’s ‘one belt, one road’: a risk assessment report” which offers a useful risk taxonomy.[5]  It sets forth ten general risk categories:  security, legal and regulatory, government effectiveness, infrastructure, political instability, foreign trade and payments, macroeconomic, financial, tax policy, and labor market.

While the EIU risk classifications may seem more geared to investment or contract considerations, they are nonetheless relevant for general supply chain risk analysis.  If a company is directly involved in ‘Belt and Road’ projects as a supplier to a project or to companies to be served by a project rather than as a business simply transporting goods through a project country, it will need to understand and evaluate these risks.  Many, if not most ‘Belt and Road’ projects, are located in countries lacking solid, formal economic structures and sound governance.  Accordingly, risk analysis should go beyond a company’s ability to fulfill its ‘Belt and Road’ project contract obligations.  It must also consider what potentially adverse events and circumstances might do to the rest of its operations.

A company doing business in a ‘Belt and Road’ country will need to do a thorough risk evaluation of the entire country and look at that country’s links to the rest of the world, including the country’s supply chains, particularly those associated with key industries and resources.  It will need to review the financial status of the country, the general financial climate and market conditions (including emerging trends, prices, supply disruptions, etc.).

If a company is not involved in a ‘Belt and Road’ project but has supply chains that cross through a country in the “Belt and Road Initiative”, it must still evaluate how conditions in that country affects risks to its supply chains.  Any hope of having operational and managerial flexibility and the capacity for dynamic supply chain adaptation will require such analysis.

If there are risk points in the routes used by the Company’s supply chains, especially choke points, such as congested and delay-prone ports and airports, overburdened roads, tight and/or dangerous passages like the Strait of Malacca, lane reductions into heavily-used transportation facilities, areas with impaired communications, infrastructure failures and shortcomings, (e.g., weight limits on roads or bridges), areas with conflicts and political instability, they can be identified, evaluated and mapped well ahead of an adverse occurrence.

The business should have a company-wide written SCRM plan which starts at each production level and builds up the management chain.  It should set forth detailed responsibilities at all personnel levels for risk assessment and ranking of the company’s risks in order of magnitude and likelihood.  ‘Belt and Road’ risks should be imbedded in this master SCRM plan.

The SCRM plan can be most effective when it is connected to contemporaneous supply chain source data maintained in the company’s ERP system.  Non-ERP data can be used but must be religiously updated.  Risk assessment and planning for the impact of events on a supply chain that is stale has significantly reduced value.

If the SCRM plan has contemporaneous electronically sourced supply chain data, effective mapping becomes possible.  Mapping based on electronic contemporaneous input permits the company’s supply chain to be seen (schematically and geographically), managed and interacted with by authorized personnel at all levels of the business on a real time basis.  This combination of people and technology is fundamental to an effective SCRM plan.

Finally, if the SCRM plan is electronically based, copies of supply chain data can be made for “what-if” or “war-game” scenario planning purposes.  This permits a company to be ready for events that have not yet occurred and to understand alternatives available if needed.  This also permits time to develop alternatives if none are currently available.

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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This is the final post in the “China’s Belt & Road Initiative” Blog Series.

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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] Yamada, Go.  “Is China’s Belt and Road working?  A progress report from eight countries.” Nikkei Asian Review.  28 March 2018.  https://asia.nikkei.com/Spotlight/Cover-Story/Is-China-s-Belt-and-Road-working-A-progress-report-from-eight-countries

[2] Masuda, Yuri.  Op.cit.  https://asia.nikkei.com/Business/Business-Trends/Japan-companies-board-the-Belt-and-Road-train

[3] Goldkorn, Jeffrey.  “How China controls cobalt in the Congo, and what that means for electric vehicles.” SupChina.   12 February 2018.   https://supchina.com/2018/02/12/china-controls-cobalt-congo-means-electric-vehicles/

[4] “Cobalt mining, China, and the fight for Congo’s minerals.” Lima Charlie News.  4 February 2018.     https://limacharlienews.com/africa/cobalt-mining-congo/

[5] Economist Intelligence Unit.  “Prospects and challenges on China’s ‘one belt, one road’:  a risk assessment report.”  2015.  https://www.eiu.com/public/topical_report.aspx?campaignid=OneBeltOneRoad

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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.