The Silk railroad

SILK, spices and camels are succeeded by computers, car parts and horsepower as an increasingly integrated rail network shortens the distance between Europe and China.

O European! If you only knew what your laptop went through to reach you. From its mother factory in Central China, your shiny new hardware was postnatally incarcerated for a week in an overflowing truck (and possibly tortured with leaded petrol fumes) before being catacombed in a container ship at a southern Chinese port. From there, it spent a month suffocating through the worlds shipping bottlenecks: the Straits of Malacca, the Suez Canal, and then depending on whether you are of Germanic, Latin or Slavic descent, perhaps the Strait of Gibraltar or the Bosphoros. Your bundle of joy was 35-40 days old before you removed its swaddling packaging.

For the businessmen who brought your laptop into existence, this world tour is a hassle. These shipping lanes are extremely congested and support 60 percent of world shipping. Freight prices are usually high but vary wildly and unpredictably. Piracy is also a problem – the International Maritime Bureaus Piracy Reporting Center records 421 attacks last year, 231 of which occurred off the Somali coast.

Meanwhile, EU-China trade relations continue to grow. At present, the EU is Chinas largest trading partner and China is the EUs second largest after the U.S. It is estimated that by 2030, non-energy exports from the EU 25 to China will have tripled while EU imports from China will have grown by a factor of two to three. Capacity shortages and costing issues on shipping routes are only set to worsen.

A perfunctory glance at a globe suggests this circuitous shipping route makes little sense – straight lines drawn from Chinese factories to European consumers are thousands of kilometers shorter. Luckily, such straight lines do exist – they come in parallel pairs and are made of steel.

Cognizance of rail transport to Europe as a viable alternative to deep-sea routes is growing in China. This has happened as the Chinese government has been pushing for stronger economic growth in the countrys traditionally poorer northern, central and western provinces. Export growth from Chinas landlocked hinterlands has averaged 25 percent per year for close to half a decade now. This growth has piqued interest in existing rail routes to the old continent as a more logical option than sending goods overland to Chinas coastal ports, often in precisely the opposite direction to Europe, before having them double back around Eurasia on ship.

For Chinas inland provinces, the “Europe express” emits five percent of the carbon of air transport and is quicker, should be simpler and could be cheaper than the inter-modal alternatives based on shipping. Freight along this Silk Railroad is starting to gather steam, albeit slowly. So why arent we seeing more hanzi at the Hauptbahnhof?

Changing Track

In the past, freight rail between China and Europe, while technically possible, was sufficiently burdensome to render it uneconomic. The Sino-Soviet split in the 1960s meant that until 1990 only three tracks connected China to its northern neighbor and on to Europe – one single line through Mongolia and two tracks representing the termini of the old China Eastern Railway as it reaches and leaves Chinese territory at Manzhouli and Suifenhe. These routes still exist today and link up to the 10,555 km Trans-Siberian Railway that serves as a land bridge between Moscow and Vladivostok on Russias Pacific coast. While minor Sino-Soviet border trade did take place, red tape and low capacity ensured these tracksirrelevancy to trans-Eurasian trade.

On September 16, 1990, a new track opened across the barren northwestern border of Xinjiang Uygur Autonomous Region through Alashankou connecting Chinas rail network with Kazakhstan and potentially Russia and Europe. While promising, complex gauge changes, lengthy delays at the border and burdensome customs procedures together with a lack of demand for the route meant it was little used initially. Then Chinas growth story happened.

In the 1990s, ports along Chinas coasts gave businesses in its littoral provinces access to world markets and capital while the countrys inland regions languished. Around the turn of the millennium, the Chinese government recognized the need to tackle growing income inequality between the countrys prosperous coast and less-fortunate hinterlands. This culminated in the “Develop the West” Program, commencing in 2000, a key part of which has been to encourage inland foreign investment and export production. Chongqing, in the very belly of the dragon in far western Sichuan Province, cogently illustrates the success of this program.

Chongqing has been the fastest growing city in China for the last five years. In 2011 it set Chinas highest provincial GDP target at 13.5 percent and managed even to exceed this, registering 16.4 percent growth. Total exports continue to jump 160 percent year-on-year and in the last 10 years this mega city of 31 million people has become Chinas inland high-tech capital. Acer, HewlettPackard and Foxconn, the worlds largest contract electronics supplier, have all set up plants there. Last year the city sold over 15.74 million laptops abroad, accounting for one fourth of the citys total export revenues. Many of Chongqings electronics exports end up in Europe, the traditional route to which includes a month of shipping preceded by an awkward thousand-kilometer overland journey to the nearest Chinese port, Shekou. Chongqings exporters have been looking for a more direct route. Enter the trains.

Little progress was made toward China-Europe freight utilizing the ChinaKazakhstan Alashankou route until the latter half of the last decade. In 2007, railway administrators from Germany, Poland, Belarus and Russia agreed to German-Russian block train freight documentation valid in all countries. With Kazakhstan railways intimate ties to Russias network, the tracks were suddenly clear for ambitious companies to re-establish the overland route between Europe and Asia that had been severed as the Silk Road succumbed to shipping in the middle ages.

In April 2011, Germanys stateowned railway company Deutsche Bahn(DB) sent its first train from Chongqing through Kazakhstan, Russia, Belarus, Poland and finally on to Duisburg, Germany. The train carried laptops and LCD monitors and took 15 days to cover 11,179 km, the equivalent ship route for which takes at least 35 days. Soon after, monthly trips began and freight time was reduced to 13 days. In November last year, a daily service was inaugurated and from 2013 twice-daily departures are planned. Since April 2011, over 1.3 million laptops and 250,000 computer monitors have been transported along the track.

Much effort has gone into ensuring smoothing out kinks in the transEurasia railway as it passes through six national networks. Customs procedures have also been simplified within China itself. According to Ma Zhongyuan, chief of Chongqing customs, containers arriving from Kazakhstan through Xinjiang only require customs declarations once they reach Chongqing, greatly reducing border delays at Alashankou. Ma says this realizes the aim of “one declaration, one inspection, one journey” for the train through China.

The Bear Upstairs

The economies of Chinas three northeast provinces (Liaoning, Jilin and Heilongjiang) have also benefited from regional economic growth initiatives and today rank among the countrys top growth performers. The block registered a GDP increase of 12.9 percent year-onyear in the third quarter last year and exports were up 25 percent. Freight on existing railways across Chinas frigid northern border to Russia, having fallen by as much as 55 percent during the financial crisis, is again on the rise – Heilongjiangs garment exports to its ursine neighbor jumped 70 percent in 2010.

For exports to Europe, the default route from Chinas northeast has been by truck or rail to the ports of Tianjin or Dalian before slow-boating the length of Chinas coast and on round Eurasia. Although the trans-Siberian railway should halve travel time, the modernization of Far East Russias creaking railway infrastructure has progressed much slower than hoped.

The Trans-Siberian route suffers from high, inflexible freight rates, unfavorable customs rules and corruption at borders, shortages of platforms, bottlenecks and delays along low capacity tracks and outdated technology. Government owned Russian Rails wagon inventory is rapidly deteriorating, and today the average wagon has been in use for 22 years. If modern technology is to be brought in, upgrading this aging wagon inventory is necessary.

At last years APEC summit in Honolulu, a study presented by the Marshall School of Business on APEC supply chains ranked Russias logistics infrastructure in second-last place among the forums members. Only Papua New Guinea performed worse.

In the last few years, Russias Far East authorities have glowered down at the development of the Chongqing-Germany route and realized they may have “missed the boat” on train freight from China to Europe. In 2005, the Russian Ministry of Transport approved policies to modernize and integrate its network, and efforts have slowly got begun. Of particular sig-nificance to Chinas northern exporters, work to reconstruct and electrify existing rails to China is underway. Last year Russian Rail ploughed 5.6 billion rubles(US $186.6 million) into reconstructing part of the route that connects the Trans-Siberian at Chita to Manzhouli at the Chinese border. An additional railway line to connect the Chinese border town of Tongjiang to the Trans-Siberian network is also in the works. But all this may be a case of too little, too late.

Russian Railroads needs to invest at least 400 billion rubles (US $12 billion) in improving its train network before 2015 to transport an additional 230 million tons of freight, said the former Vice President of Russian Rail Vadim Mikhailov in June 2011. Last year, Russian Railroads reported limited capacity on 7,000 kilometers of its network, meaning in five years of active efforts bottlenecks have been reduced on only 1,500 kilometers of rail.

A recent report by Hong Kong Logistics Research Center says the main problem in trans-Siberian transit is low capacity bottlenecks near ports, and that Russian Railroads is not investing enough to deal with current levels of freight, let alone to build for future in trans-Eurasian freight. According to the official report published on Russian Railroads website, a full 30 percent of Russias rail has never been upgraded since its original construction between 1891 and 1917. Modernization projects underway often come with significant delays. By the end of 2011, major rebuilding projects were overdue on 20,110 kilometers of track – 16.2 percent of the length of Russias arterial routes.

Deutsche Bahn, for one, still sees potential in Trans-Siberian freight. In November last year, the company announced a daily service from Leipzig to Shenyang, Liaoning Province, to transport auto parts and components to BMWs plant in the Chinese city. The company didnt say which goods would fill its wagons on the return leg.

According to Trans-Siberian Railway expert Hisako Tsuji, cost, not time, is the most important determining factor in the viability of railway freight. When deepsea freight prices are low, ships remain in favor. When high, rail provides a costeffective alternative. Accordingly, as deep-sea charges rose after the recession, freight on the Trans-Siberian line picked up – registering 52 percent increase in the first half of 2011.

Chinas economy continues to grow. Despite tough times for exporters last year, trade with Europe is still set to grow substantially. Railway networks need to cut red tape and continue to be modernized and expanded especially in bottlenecks. China continues to plough billions of US dollars into its railway infrastructure every year, and countries along the China-Europe route, especially Russia, need to increase capacity to bring costs down and realize rails great potential. Trains wont replace ships, but theres no reason they shouldnt provide a viable, clean and reasonably priced alternative. The Silk Road lives.