Asia’s growth as a global manufacturing powerhouse was enabled by efficient logistics links. Traditionally, those links have been dominated by two transport modes, and choosing between them was a simple tradeoff between time and cost. Price-sensitive shipments traveled by sea container, time-sensitive ones by air freight.
In recent years, however, European companies have enjoyed a third option. Rail freight links between China and Europe offer an intriguing middle ground, faster than ocean, but cheaper than air.
East-west rail links across Asia have existed for a long time. The Trans-Siberian Railway was completed just over 100 years ago, for example, but it is only in the last decade that these long-distance railways have played a significant role in modern global trade as an increasing number of companies recognize their value. “The first companies to make large-scale use of rail between Europe and China were automotive and high-tech players with company block trains,” says Thomas Kowitzki, Head of Multimodal, DHL Global Forwarding. “They were the front runners and realized the potential quite early.”
For companies from these industries, the railway served primarily as a cost-effective substitute for air freight. High-value goods, short product lifecycles and unpredictable demand place a premium on speed, while aggressive pricing and intense competition created an appetite for a cheaper alternative to flying.
Other industry sectors have followed in the meantime. DHL started the first scheduled open weekly rail freight service between Chengdu in China’s Sichuan province and Poland in 2013. The service gave companies the flexibility to ship smaller volumes, since they no longer always needed to book a full train. Today, says Kowitzki, there is a broad range of regular rail connections between Chinese and European cites, thanks to increased interconnectivity between the European and Chinese intermodal systems. Westbound cargoes cover the whole gamut of manufactured products including chemicals, automotive parts, apparel and consumer goods.
According to Zafer Engin, Head of Value Added Services, DHL Global Forwarding China, that broadening of interest comes from multiple factors, not least among them increasing confidence that rail freight actually works. “At DHL, we’ve been interested in long-distance rail freight links since 2008, when we established a project group to look at their potential,” he says. The company spent time talking to customers, experts and customs authorities along the main trans-Asian rail routes, eventually designing and piloting its first services in 2011.
“In the early days, the biggest challenge was a lack of confidence among our customers,” says Engin, “We found plenty who were willing to trial the service but only with one or two containers.” Feedback from those early customers was positive, however, given the constraints of the low-volume service. “Our first customers told us they were happy with the quality and security of the service, which had both been key concerns, but the lack of stability was a problem,” says Engin. The lack of stability was driven by train operators delaying departure until they could assemble a full train, which resulted in extra travel time and unpredictable schedules. “For the service to be most effective, you need a block train, that’s at least 41 containers,” says Engin.
One Belt, One Road
Seventeen trains made the journey from China to Europe in 2011. The following year, that number had risen to 42. Then, in 2013, the Chinese government made a decision that would transform the market, announcing the official adoption of it’s “One Belt, One Road” (OBOR) policy, designed to promote connectivity and economic links among the countries bordering the ancient silk routes between Europe, the Middle East and Asia. OBOR involves a bewilderingly ambitious set of infrastructure investments, including gas pipelines, power lines, roads, bridges, marine terminals – and rail links. China plans to spend $150 billion a year on projects linked to OBOR, and some estimates put the total value of planned projects at $900 billion.
The railways have been early beneficiaries of the OBOR policy. The Khorgos “dry port” on the border between China and Kazakhstan was little more than empty desert five years ago, for example. Today, the spot hosts a $250 million rail freight terminal, and plans are underway to invest a further $600 million in new warehousing and manufacturing operations.
Improved infrastructure is already making rail links slicker and more efficient. Railways in former communist bloc countries use a different gauge than those in China or Europe, so containers need to switch railcars at least twice on their east-west journey. “In 2013, the journey from China took 14 to 16 days,” says Engin. “Now that is down to 11 days.”
Those improvements, together with direct subsidies and support from the Chinese authorities, have put rail freight growth into overdrive. More than 300 trains made the journey from China to Europe in 2014. By 2016, the number had passed 1,700. It is expected to double every year until at least 2020. Prices have fallen further as volumes have increased, and ongoing developments are set to make rail freight even more competitive with other modes.
Today, says Engin, DHL is investing in rail services and working with national railways along the major routes between Europe and China. “We have strategic business agreements and memoranda of understanding with Kazak, Belarus, Russia, Azerbaijan and major local governments in China. The aim is to create a sustainable transport system along Road and Belt Policy countries.” That policy of close partnership and strategic cooperation is already bringing direct benefits to customers, he adds, for example by cutting the time taken to cross international borders, enabling the creation of longer block trains and facilitating performance guarantees that ensure trains travel at least 1,000 to 1,200 kilometers per day.
Space on the way back
If it was exports from China that drove the dramatic growth in rail freight, it is exports from Europe that stand to benefit particularly as capacity expands. Rail wagons that arrive in Europe from Asia need to go back, and their owners would rather take them full than empty. The imbalance in trade volumes between China and the West means there is plenty of spare capacity, however, and that makes prices highly competitive. Zafer Engin notes that west-east traffic has risen steadily in recent years, as European exporters catch on to rail freight’s potential. “In 2013, before OBOR, there were no open eastbound trains, only company-owned block trains,” he says. “In 2014 there were 28 and in 2016, 265.” Eastbound freight volumes are now doubling every year, but they remain significantly smaller than westbound volumes.
The nature of many products supplied by European companies to customers in China makes them particularly good candidates for the rail freight option. Things like industrial machinery, specialty chemicals or car parts headed for Chinese assembly lines are often bulky and heavy but also high in value and sensitive to lead time. Rail’s combination of speed and cost is especially useful for these kinds of products. It also makes sense for many of the high-end goods that Chinese consumers enjoy. In April 2017, the first direct train to leave the U.K.’s London Gateway bound for China was carrying whiskey, soft drinks, vitamins and pharmaceuticals.
Another factor driving increasing interest in rail freight, says Engin, is the container shipping industry’s struggles to match supply with demand. After an extended period of low prices, shipping lines have reduced sailings on many Asia-Europe routes. The resulting squeeze has pushed prices up and made securing space on vessels difficult, especially at peak times. The narrowing price gap, combined with readily available capacity, makes rail a real alternative to sea freight for many shippers.
There are few barriers to adoption of rail freight as an alternative to air or sea, adds Thomas Kowitzki. “There are additional customs checks on overland rail services, so it is important that shippers ensure documentation is complete and accurate, but that’s an area where we are always ready to provide support and advice.”
And rail links to China don’t just work for goods destined for the market in that country. “Multimodal services that reach China by rail are a good way to access many of the important surrounding markets, like Japan, Vietnam, Taiwan and South Korea,” says Kowitzki. There are plenty of other export opportunities along the way. The countries along China’s One Belt One Road account for 65 percent of the world’s population and a third of its GDP. That’s a vast potential market, waiting at the end of the line. — Jonathan Ward