January 2020 | Commentary | Global Logistics

Can the New Silk Road Compete with the Maritime Silk Road?

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The more I hear and read about the New Silk Road, the more grand the expectations. Politically, the trade corridors between China and Europe, as well as Africa, seem to be China's key to becoming a leading global power in the 21st century. Logistically, infrastructures and networks are emerging on an entirely new scale, taking a gigantic economic area—representing 60% of the world's population and 35% of the global economy—to the next level. The New Silk Road could act as a high-speed internet for transporting goods.

Bernhard Simon, CEO, Dachser, 954-524-0264

As with most narratives, it is worth taking a critical look at the facts pertaining to certain logistical aspects of the Belt and Road Initiative (BRI), as the New Silk Road is officially known.

First, consider the overland connection between China and Europe: the possibility of bringing Chinese consumer goods to the United States on the east-west route via rail. This transcontinental route was not the brainchild of China's President Xi Jinping, who made the BRI a national doctrine in 2013.

In fact, goods have been rolling along the Trans-Siberian route from China to Europe since 1973 (with some interruptions due to the Cold War). Today, there are two routes out of Northern China, which head via Mongolia, Kazakhstan, and Russia to terminal stations such as Duisburg's Inner Harbor or Hamburg.

China's western region, home to the megacity of Chongqing and its 30 million people, is also connected to the northern routes. Using this route, cargo from the west no longer needs to be transported the many miles to China's coasts.

High Costs of Rail Freight versus Ocean Freight

How significant are these rail links for logistics between Asia and Europe? In 2017, 2,400 trains moved about 145,000 standard containers between China and Central Europe. This corresponds roughly to the cargo of seven large container ships. The International Union of Railways expects this to grow to 670,000 standard containers—equivalent to 33 container ships—in 10 years.

Despite this forecast growth, the existing rail links between China and Europe are likely to remain logistical mini-niches. "Compared to sea freight, the volume of goods transported to Europe overland will always remain small," says Steve Saxon, a logistics expert from McKinsey in Shanghai.

This is primarily a matter of cost. Transporting a standard container between Shanghai and Duisburg by rail costs between US$4,500 and US$6,700; compare that to the cost of sending a similar container from Shanghai to Hamburg by ship—currently around US$1,700.

This difference is simply too great for railway transport to be truly competitive against ocean transport, even though cargo moves at about twice the speed. Efficiency improvements will not have a big enough impact to shift from ocean transport to rail.

Another factor is that, at the moment, China heavily subsidizes these international rail connections. Once that support ends in 2021, competitiveness will erode further. It is not clear whether rail transport will be self-sustaining without subsidies.

Also, in most cases, anyone needing a shipment quickly and flexibly typically sends it via air freight, even if this option costs around 80% more than shipping via railway. Thus, freight transport by rail is, and will remain, caught between economic (ocean) and fast (air).

Would More Train Routes Change the Situation?

China is planning an additional railway line in its southern region, which will move cargo to Europe via Central Asian countries, as well as Iran and Turkey, bypassing Russia entirely.

Indeed, a railway line has connected China with Iran since 2018. This route is geographically similar to the "old" Silk Road, a trade route for camel caravans that crossed Central Asia on their way to the eastern Mediterranean.

If this railway line is completed one day, it will raise a number of questions from a European perspective:

  • How can safety, punctuality, and reliability be guaranteed?
  • How can delays caused by customs clearance be minimized?
  • What effect will international sanctions have, for example, on transit through Iran?
  • How can the misuse of containers for smuggling immigrants be avoided?

The bottom line is many issues need to be addressed before a railway corridor south of Russia can be established.

There are two more routes in China's BRI strategy. One is in Southeast Asia: a 2,400-mile railway line from Kunming to Singapore plus a branch to Calcutta. The other is a rail line that starts in China's far west, then runs through Pakistan to the port of Gwadar on the Arabian Sea. Crossing over various passes in Central Asia, this technically challenging project is expected to cost US$62 billion. However, both routes have only an indirect connection to freight traffic between China and Europe.

So the situation will remain much the same into the future—some 90% of world trade will go by ship. Rail transport via the New Silk Road will not change this. If all this freight suddenly started rolling along the Silk Road, the route would be like an endless conveyor belt loop—the idea is absurd.

What About the Maritime Silk Road?

More important than Eurasian railway routes is the so-called Maritime Silk Road, i.e., the transport of cargo from China to Europe by sea. As soon as Portuguese sailors opened up China for trade by sea in 1514, the old Silk Road began to fade from memory.

Today, more than 50% of global trade takes place on the Maritime Silk Road between China/East Asia and Europe. The world's largest container ports are on this route: Shanghai, Singapore, Shenzhen, Ningbo-Zhoushan, Busan, and Hong Kong. The development of the Maritime Silk Road needed no Chinese master plan; logistics infrastructure arises wherever corresponding investments pay off.

China has numerous plans for these established shipping routes, including port expansions. Its shareholdings in around 80 port companies—including Piraeus and more recently Genoa and Trieste—support its plans and ensure investments.

Why should we take issue with China for pursuing these goals leveraging its position as a leading global economic power? It is not the first country to promote its economic interests with direct investments and financing. Europe, too, should pursue a strategy of developing an enhanced infrastructure to transport freight to and from China/Southeast Asia to ensure a reciprocal exchange.

And China's plan to step up use of the maritime corridor through the Suez Canal, which shortens transport between China and Central Europe by at least four days compared to the route around Africa, is reasonable and less complicated. Ferdinand de Lesseps completed the Suez Canal in 1869 with precisely this goal in mind.

A Dose of Reality

Nobody denies that the diverse projects of the New Silk Road hold great economic potential; that they would improve the network of connections between Asia and Europe; and that Beijing has a geopolitical interest in pursuing them. China is creating an enhanced infrastructure that will benefit all participants in the global economy.

Nevertheless, it is advisable to evaluate the logistical opportunities with the necessary dose of reality. I would caution against being dazzled by the beautiful visions and the fascinating narrative, as it could cloud your vision and lead to using poor judgment and making risky investments.

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