1. Executive Summary
- In the years 2014 to 2016, railway transportation of goods between Europe and China was growing at an astonishing pace of around 140% annually, the growth is expected to continue, reaching a planned 5,000 trains in 2020 (compared with 17 in 2011, 1,702 in 2016 and 3,673 in 2017);
- Given the high competitiveness of the automotive sector and the constant need for new logistic solutions, railway investments along the BRI initiative can offer new opportunities for cost reduction for European and Chinese companies alike;
- Further expansion of EU car producers to China is likely to prevail over the expansion of Chinese car producers to the EU, at least in the short to medium run – although not without caveats;
- China is an important export partner of the EU in the automotive sector, although this applies mainly to Germany and Slovakia. Other EU countries, such as Italy, Spain, Poland, Czechia, Romania, and Hungary, shipped a lower quantity of their automotive exports to China, although some of their exports to China occurred indirectly through European value chains;
- Chinese automotive producers remain relatively little known in Europe and the EU is not the primary export destination of the Chinese automotive industry. China is also a much less of an important source of imports for the EU than it is an export destination;
- At the same time, Chinese automotive companies are developing rapidly in terms of expanding their production and development of technology;
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2. What is the tool, what does it do?
Within the context of BRI, the Chinese government supports the development of trans-continental railway connections. By improving railway communication between the EU and China, the Chinese government seeks to decrease the transportation costs and time for delivery of goods. Combined with the BRI initiative, development of railway connections can be viewed, therefore, as a tool to promote further economic integration and expansion of Chinese companies to Europe.
- Where does this tool/thinking/concept originate from/in?
In the period 2014-2016, railway transportation of goods between Europe and China was growing at an astonishing pace of around 140% annually (International Union of Railways, 2017). The rapid increase in the Eurasian railway traffic has been stimulated and coordinated by China, including by (1) bringing a number of individual national operators under a single brand of China Railway Express; (2) heavy subsidisation of the Eurasian railway routes by China, involving the central government, the local (provincial) governments, and logistics companies; (3) the development of infrastructure along the railway corridors (including, for example, the Chengdu International Railway Port in the province of Sichuan in mainland China and the modern intermodal container terminal in Kutno, Poland, on the intersection of train routes connecting the country’s south and north as well as Berlin, Warsaw, Moscow and eventually Beijing; and (4) improvement of customs clearances and other procedures along the railway corridors, possible thanks to increased levels of cooperation between the countries on the railway corridors.
- What can it be used for? / What can it achieve?
Further development of the railway infrastructure can promote several distinct aims: 1) decrease the trade costs and 2) promote the BRI infrastructure initiative 3) increase the EU-China automotive trade, 4) facilitate access to the European market for the Chinese automotive companies (in the long term).
One recent study by the World Bank estimates that the BRI will contribute to the reduction of trade costs. Based on a dataset of BRI infrastructural projects (both completed and planned) and analyses running up to 1,818 cities in BRI economies and 1,000 cities globally, the authors estimate that the BRI may decrease trade costs by 1.1% to 2.2% and shipment time by 1.2% to 2.5% globally. For the countries involved in the BRI, these ranges increase to 1.5-2.8% and 1.7-3.2%, respectively. Finally, for the countries in which the BRI corridors are or will be located, the trade costs and shipment time reductions are expected to be the greatest – of up to 10.2% and 11.9%, respectively.
Railway transportation in particular offers a lead-time advantage of around 20 days compared to sea transportation. This is a substantial time advantage, and it is especially attractive for industries that produce high-value goods, such as high dollar value per kilogram of product weight, perishable goods or goods that require speedy, just-in-time delivery in the context of their input into further production in GVCs - although the latter may be partially negated by possible delays mentioned above. The sectors that use the Eurasian railway connections the most are machinery and equipment (including electrical machinery and electronics) and the automotive sectors. Together, they account for 88% of exports and 86% of imports.
In particular, the development of rail corridors through Eurasia may be an impulse for automotive trade, with railway transit already accounting for 9.5% of EU exports to China and for 3.3% of Chinese exports to the EU in 2017 in the sector. These numbers are significantly higher than the average share of 2.1% of railway in trade across all sectors, suggesting that this mode of transport is relatively advantageous to trade in this kind of products.
EU countries have generally made cars that enjoy a good brand name and are in high demand in China, which could give them a clear competitive advantage over China in the automotive industry - especially on the global/EU market. For example, in contrast with the EU’s overall trade balance with China, the value of the EU automotive exports to China was over four times larger than the value of Chinese automotive exports to the EU, at EUR 36.9 billion vs. EUR 8.7 billion in 2017. Narrowed down to goods shipped by railway, the difference was almost twelve fold (EUR 3.5 billion vs. EUR 0.3 billion). Chinese automotive producers remain relatively little known in Europe and the EU is not the primary export destination of the Chinese automotive industry. China is also a much less important source of imports for the EU than it is an export destination.
3. How is railway investments integrated into the strategy of China?
Given the clear competitive advantage of European car manufacturers over the Chinese ones, why would the Chinese government invest in the railway infrastructure which seems to favour the European producers? There are two important reasons behind the promotion of railway connectivity in relation to the automotive sector: 1) to increase the share of Chinese exports to Europe when it comes to supply of parts and components and 2) prepare the logistic platform for an export expansion of finished vehicles.
For some time now China has been an important player in global production of cars and supply of parts and components. Almost all large car manufacturers have joint-ventures with Chinese firms. The country now also hosts almost all the world-leading auto parts manufacturers, and it has indigenous producers of tyres, glass, and audio products (Deloitte, 2013), with prominent examples including Germany’s Continental or France’s Valeo (Shih, 2018). With the components goods in Chinese automotive exports accounting for 80% of exports (with a decrease 39% when narrowed down to railway transportation) an increase of the railway communication would be a clear advantage for the Chinese companies.
Beyond that, Chinese car manufacturers are preparing to launch a wide scale export expansion of ready vehicles. They include Geely (which created the brand Lynk & Co for the Western markets), Great Wall Motor (which eyes a launch of electric vehicles in Europe in 2020 or 2021 ), and GAC Motor (which plans to enter the US market in late 2019). However, those companies are facing a daunting challenge. On the one hand, price competition may not be a viable business strategy for China any more, given that the labour costs in the country at USD 3.60 per hour are now higher than those in nations like Brazil or Mexico, at, respectively, USD 2.70 and USD 2.10. The labour costs are particularly high in China’s coastal, industrialised regions. On the other hand, product differentiation, a business strategy alternative to price leadership, requires time and innovativeness. It takes a long time to build a brand name, which is indispensable to compete in the highly differentiated automotive sector, as the example of Japanese and Korean producers has shown.
4. What are the opportunities and threats of its use for our stakeholders?
- The BRI related railway infrastructure could mean a doubly positive effect of increasing productivity and growing sales markets for the automotive sectors. Due to the EU's overwhelming advantage when it comes to final goods, at least for the medium term, EU car manufacturers would have easier access to Chinese market without a serious competition along the same sector within the EU;
- Reducing transportation costs, European car manufacturers could have more incentives to keep their production within Europe, thus preventing technological transfer to Chinese companies. Branstetter (2018), for example, argues that in the auto industry, China’s foreign ownership restrictions and high import tariffs force foreign firms to form joint ventures in which they are prevented from holding a controlling interest and that they are pressured to turn over sensitive technology to their joint venture partners who may later compete with them in China and other markets. On the margin, to the extent that transport cost enter the calculation to invest abroad, the possibly lower costs of rail transport due to the BRI would be expected to have a mitigating impact on these investments;
- Another important benefit is the Chinese supported investments in the railway infrastructure in the CEE region, as it was the case with the container terminal in Kutno, Poland, these types of investments help build important railroad hubs that connect EU railroad system to the Asian (including Russia) railway system. This in turn can ensure a wider market access for the European car manufacturers.
- Judging from the structure of current trade, increasing railway communication with China could be a threat for producers of parts and components and of mid-range cars already successfully produced by Chinese competitors – who arguably represent less advanced segments of the EU auto supply chains. To the extent it is possible to generalise, this could expose some less advanced and smaller producers in the EU13. One mitigating factor is possibly a higher demand for parts and components by EU leading firms impacted positively by the BRI. Another mitigating factor is that EU13 auto firms tend to benefit from the rail EU-China transport corridors more than their Western partners.
- The unclear scope and nature of the BRI is another important threat to a long term strategy of European companies. Unsure of when the Chinese subsidies for railroad transportation would stop or which route would Chinese prefer to invest, European car manufacturers lack a platform for long term strategic planning and are left in a decision-making limbo.
- The geopolitical challenge is another important factor to account for. Both the northern and the southern route pass through countries with authoritarian regimes (Russia, Belarus, Turkey, Kazakhstan) which could pose a serious threat to the European supplies to China and vice-versa. Given the higher costs per kg for the railroad cargo, the security of supply becomes an important challenge to be considered.
5. A shorter case study or a possible list of typical actors using this tool
There are already a series of important actors that use the railroad system to transport their products across the continent, amongst which: Decathlon, Hewlett Packard, and Volvo (Goh & Goetting, 2018). Also, the UN (2016) identifies the following sectors as particularly suitable for long distance railway transport in the literature: pharmaceuticals, electronic products, IT products, fashion products, footwear, automotive components, tires, specific construction materials, timber and wood, chemicals, fertilisers, white goods (e.g. refrigerators, washing machines), pipes, particular agricultural products, machinery.
6. Forecast of possible future strategy moves or outcomes of strategy
Given the uncertain nature of BRI final aim, we can expect that the railway connection initiative will follow the same flexible and adaptable logic. In this respect, further infrastructure development along the BRI countries will be conditioned on Chinese immediate and long-term interests. With regard to the automotive sector, railway development will continue to favour both parties (EU for the car exports and China for the parts export), however due to the subsidized nature of the railway transportation there is a high degree of uncertainty for the European companies.
Future investments in the railway infrastructure will also depend on the perceived benefit for the Chinese part, in case such investments could threaten the Chinese automotive and high-tech industries, we can expect Chinese government to slow down their support for the railway development.
7. Possible strategy options for local/EU companies and decision-makers
The best strategy for firms facing competition from China and other BRI countries is to invest in maintaining and furthering the competitive advantage in hi-tech and protection of intellectual property rights, this refers especially to the automotive market where European companies have a clear competitive advantage. Firms currently active in low tech and mid tech segments, i.e. European producers of auto parts, would be well advised to engage in higher value added processes, at a limited scale initially but with increasing exposure. The diversification up the value chain entails necessary investments related to capital expenditure (e.g. new machinery), developing human capital, and engaging in a learning process, which are costly in the short term, but should pay off in the longer run.
Along the value chain, pre production and post production have become the stages with a particularly large potential for value creation. Activities such as design, product customisation, marketing, and customer support have become more profitable than production of goods themselves. European automotive companies have experience and expertise in those activities and can use it as sources of competitive advantage, especially that the learning curve in this case may be less steep than in the case of manufacturing.
EU car manufacturers and business associations should actively approach the EU and Member State authorities in order to establish a unified position on opportunities and risks associated with the BRI.Footnotes  de Soyres et al., 2018 Jian, 2018 Shirouzu, 2017 China Economic Review, 2017 cf. Dunne, 2017 cf. Winton, 2018
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