Poland & CEE: the buckle on the Belt & Road?
Two experts disclose what the investment could mean for the region.
It’s just over five years since the Belt & Road Initiative was launched by China’s President Xi Jinping, but it’s still unclear whether Poland and the wider Central & Eastern Europe region will truly benefit from it, or if the area will be consigned to ‘corridor’ status between China and the ‘Blue Banana’ part of Central-Western Europe. Ahead of Poland Today’s major new conference in Warsaw about what the initiative means for Poland and CEE, we talk with two renowned experts on global transport and logistics to find out what Poland must do to be a leader, not a bystander.
It was in Germany’s inland port city of Duisburg in 1585 that Flemish cartographer Gerardus Mercator published his new collection of maps – the first global atlas – known as the ‘Mercator Projection’. This publication revolutionised the way maritime navigators of the time saw the world and helped them in the never-ending quest to get goods from source to destination in the quickest time possible.
Despite the almost-infeasible advances in global connectivity since then, the essence of trade has changed little. It’s still a matter of getting cargo from A to B as fast as possible, at optimum efficiency, and at lowest possible cost. Modern Duisburg has now asserted its role as a lynchpin in the global supply chain, particularly that of the 21st century ‘Silk Road’. The port, which lies on the junction of the Rhine and Ruhr rivers, is the first European stop for about 80% of trains from China.
Poland could learn a lot from Duisburg, says Wolfgang Lehmacher, former Director and Head of Supply Chain and Transport Industries at the World Economic Forum – and keynote speaker at the upcoming Warsaw conference in June: “Duisburg has re-established itself as a hub,” he states. “In the same way, the benefits from Belt & Road for Poland lie in the opportunity to become an important hub.” Frank Schuhholz, a logistics expert with a particular interest in the Belt & Road Initiative – and another keynote speaker at the conference – agrees: “Duisburg has managed extremely well not only from the hard perspective, in that the city has well-developed infrastructure, but also from the soft perspective,” he says. “The Germans were in China very early talking about their infrastructure, their location and their connectivity towards other European regions whilst serving as a key hub for trains connecting China with Europe and vice versa. This led directly to President Xi Jinping visiting Duisburg to open the first official corridor between Chongqing and Duisburg.”
Poland, Schuhholz points out, is roughly 1000 km closer than Duisburg to China, and should be the more obvious choice to be a logistics hub supporting distribution and supply concepts. “Poland has to step up and show that it is not only a transit country, which it is at the moment, but that it can be the important node connecting north to south and east to west,” he says. “There is not much value in just being a corridor,” adds Lehmacher. “The real value is in becoming an intelligent and well-connected node in the flow. The CEE’s prosperity could be significantly accelerated with better north-south connectivity. There is no reason why trains couldn’t stop in Poland first.”
Overcoming local rivalries
So, what should Poland do to ensure that it becomes this ‘connecting node’? There are several elements, according to Lehmacher. “It needs good infrastructure – not just hard infrastructure like roads, ports and rail links, but also digital infrastructure. It also needs qualified personnel – people who can work in logistics. And it needs smart relationships with its neighbours – both soft and formal. For example, Katowice is a very industrial region. What relationship does it have with the industrial regions of the Czech Republic, Slovakia, Hungary and Romania? These kinds of things are important to build a strong industrial cluster and ecosystem that requires major logistics hubs.”
Both Lehmacher and Schuhholz strongly agree that it’s essential that local competitors put aside their rivalries and work together and build an aligned position, especially when facing the monolith that is China. “Poland is very well situated between the western European countries and the Asian nations plus Russia,” states Lehmacher. “It has strong economic growth – stronger than more established EU countries – and still has a lower cost base. Therefore, it is a favourable place to set up operations and manufacturing. There, we have seen the transport, logistics and warehousing market prospering over the last decades. However, between the 12 or so countries of Central & Eastern Europe, connectivity is not so well developed – not only in respect to road, rail and air links, but also digital connectivity.”
Schuhholz concurs: “Up to 90% of current cargo flows traveling by rail between China and Europe and vice versa go through Poland, so other EU and CEE countries see the country as a competitor to their own ambitious plans and go directly to China to show themselves as the future hub for the Chinese,” he claims. “China notes all this, gathers the information, and then uses it for its own advancement. It’s important for these countries in the CEE region to get together to coordinate their policies and approaches towards the Chinese. Whilst I understand the underlying motivation for each country’s representatives, I feel that it’s not good for these countries to develop separate plans. A more coordinated approach would reap more benefits,” he says.
Lehmacher agrees: “Many in the region consider countries like Poland, Slovakia, Hungary and the Czech Republic as small entities. I say, these countries are only small if they see themselves in isolation and not as part of the EU, one of the largest economic blocs in the world,” he asserts.
From enthusiasm to pragmatism
Lehmacher is, in broad terms, positive about Belt & Road. “It’s the largest area development project of all time,” he says. “We have gone through various stages since I wrote my article for the Financial Times back in September 2015, ‘Hurdles along the New Silk Road’. Back then the world was trying to understand the idea. What does ‘One Belt One Road’ (the original name of the initiative. ed.) actually mean? We were impressed by the numbers: [An initiative] covering countries totalling more than 50% of the world’s GDP, more than 70% of the world’s population and about 25% of global trade. This is a great resource and potential growth engine. Then we moved to being impressed that China set up the investment vehicles and put the initiative in motion. More than 60 countries committed to the concept and signed on for a long list of investment projects. I call this the phase of enthusiasm. Then in 2017 we entered the phase of pragmatism. Countries realised that although there were cheap loans available, sound analysis of costs-versus-benefits and thorough business plans are needed to ensure a win-win situation in the long run, and that the debt can be repaid.”
Lehmacher and Schuhholz identify two main challenges regarding the Belt & Road concept in relation to Poland, the CEE and, in fact, the whole of Europe. One is infrastructure, and the other is the balance of trade – or rather, its imbalance. “The west has to figure out what else the Chinese can buy, and make the proper value propositions,” states Lehmacher. “This needs to be factored into an economic development plan to make the initiative more beneficial for the transportation sector and countries along the Belt & Road.”
Building a two-way street
Schuhholz picks up the thread. “Looking at it from a rail and logistics perspective,” he continues, “back in 2008-2009 the first regular trains were going from China to the Czech Republic, for example, full of goods, but there were no backloads. It was a one-way corridor with a total imbalance of trade due to the fact that at that time the silk route was not as well-known as it is today. But 10 years on and we still see this trade imbalance. From this point of view rail is no different to deep sea maritime transport, but on a much smaller scale. We as Europeans have to look at it from a pragmatic point of view: can we make the business case work? In other words, can we establish east and westbound rail products which are able to cover their costs and still generate profits? Will these connections be sustainable in the future? Will the partners along the transport chain be able to make logistics work so that customers from various industries can rely on fast and stable transit times? It is expected that the funding of trains by the Chinese authorities will disappear at some point in time, most probably in 2021-2022, and we have to see if service providers will be capable of offering economically sustainable pricings to make the business case work by then. And for it to work, we have to see trade not only from China to Europe, but the other way around as well.”
To the question: ‘Can Poland and CEE be the buckle on the Belt & Road?’ Schuhholz states emphatically that it’s all about “infrastructure, infrastructure, infrastructure. We see bottlenecks at the eastern border of Poland. We see that the railway network is not yet developed to the stage where seamless flows of cargo by rail are possible. At the moment the cargo is stuck at the various border points because of customs issues, change of gauges and the lack of high-performing, efficient terminal infrastructure. And on top of that there are still missing sufficient north-south connections.”
It seems clear that there is still a long way to go until the Belt & Road initiative is truly a two-way street, and that Poland and CEE countries still have much improvement to make before the region can present itself as a true transit hub. But the rewards, if this improvement can happen, are potentially significant.
Wolfgang Lehmacher, who will be the keynote speaker at Poland Today’s June conference on the Belt & Road Initiative in Warsaw, is a thought leader in global transport, logistics and supply chain. Until recently the Head of Supply Chain and Transport Industries for the Geneva-based World Economic Forum, Lehmacher now works as a non-executive board director and strategy consultant who, as his LinkedIn profile puts it, is an ‘industry and technology evangelist and polymath, offering advice and support to stakeholders across the global supply chain ecosystem – ranging from start-ups, to investors, to Fortune 50 companies’. Lehmacher has written for the Financial Times, Forbes and Fortune magazines and speaks at leading business schools and conferences around the world.
Frank Schuhholz is a global expert on logistics, with a particular focus on the Belt & Road Initiative. Passionate about the pan-European rail freight industry, he has been tracking Chinese activities and interests in Europe since he saw the first regular container trains coming into Europe from China over 10 years ago while working for the A.P. Moller Maersk Group. In 2016 he set up FMS Advisers in order to assist business leaders who believe that rail can play a far more important role within their company’s supply chains in the future then it does today. Frank is a co-organiser of the June conference in Warsaw, as well as a keynote speaker.
About the Belt & Road Initiative
The Belt & Road Initiative (BRI), originally known as One Belt One Road (OBOR) and sometimes referred to as ‘The New Silk Road’, is a $1tn global development strategy conceived by the Chinese government to better link China – and Chinese goods – to the rest of the world, involving infrastructure development and investment in countries in Europe, Asia and Africa. The ‘belt’ represents overland corridors (including roads, rail and bridges) while the ‘road’ – somewhat counter-intuitively – refers to maritime shipping lanes. Announced by China’s President Xi Jinping at the end of 2013, the aim of the initiative, according to China, is “to enhance regional connectivity and embrace a brighter future.” Sceptics see it as an attempt at ‘economic imperialism’, a projection of 21st century China’s power and a counter-balance to US global influence.
According to the UK’s The Guardian, “Beijing’s multi-billion-dollar Belt & Road Initiative has been called a ‘Chinese Marshall Plan’, a state-backed campaign for global dominance, a stimulus plan for a slowing economy, and a massive marketing campaign for something that was already happening – Chinese investment around the world.” It is believed that Chinese companies have secured more than $340bn in construction contracts along the Belt & Road at the expense of local contractors in partner countries. Compounding this atmosphere of mistrust is the ongoing deterioration in trade relations between the US and China, and the exclusion of Chinese companies from the 5G rollout due to concerns about security exposure. It’s in this environment that the Belt & Road Initiative operates, adding to the challenge of successfully implementing the project.
The biggest challenges facing the transport & logistics industry today, according to Wolfgang Lehmacher:
- Global uncertainty around international trade caused by trade tensions and Brexit
- Digitisation: how to harness the potential of the Fourth Industrial Revolution to establish end-to-end visibility and design new business models
- Cyber risk: this moved to the CEO agenda when APM Terminals and TNT were hit by NotPetya in 2017
- Insufficient and poorly maintained transport infrastructure, including roads, railway networks and ports
- Shortage of labour, for example truck drivers and pilots
- Customs clearance: a diverse landscape of customs regulations across the world
Sectors and types of business that could benefit from the Belt & Road Initiative, according to Frank Schuhholz:
- E-commerce companies, using their location in Western European markets to link their operations with Chinese supply and distribution markets
- Automotive sector: the supply and distribution of finished vehicles to and from Europe
- Logistics Service Providers, which can benefit from the increasing volume streams to and from Asia by rail in form of warehousing and value-added services
- Commercial Real Estate companies: the need for more state-of-the-art infrastructure in the form of warehouses or freight villages to satisfy the needs of growing trade being routed via rail between Europe and China, plus the additional consultancy and brokerage-related services.