Blog post author: Peter Wells, Head of Logistics and Operations Management Section, Professor of Business and Sustainability, Director of the Centre for Automotive Industry Research, Cardiff Business School.
PARC Insight: Professor Peter Wells shares his views on the impact of China’s Belt and Road initiative on global logistics and geopolitical power, and how the two may need to become much more closely interlinked.
China is redrawing the map of world trade. To do so, it is investing trillions of dollars in infrastructure projects of unprecedented scale and reach. It is an exercise of huge economic, social, and environmental significance that transcends the old practices of gunboat diplomacy and cold-war posturing.
The breadth of vision behind this strategy is truly impressive. It is a calculated attempt to secure the long-term future of China as the epicentre of global commerce. It is construction, both literal and political.
The ‘belt’ refers to the rail linkages between China and other countries in the Middle East, Europe and Asia. The ‘road’ refers to maritime routes and related port facilities, mainly in the Indian Ocean, South China Sea and South Pacific.
It is a means of building access to key resources, land, minerals, and markets while simultaneously bestowing benefits upon participating nations – many of which have hitherto been at the margins of prosperity. As of late 2018 more than 65 countries are involved in the ‘belt and road initiative’ as it sometimes called.
The stakes are high, for China and for participating countries. Many of the countries involved are viewed as financially high risk, with concerns over their ability to service debts arising from the construction projects.
In principle, this is not a new model. Many economically-advanced countries have offered loans to developing countries, which are tied to the purchase of capital equipment and services from the lending country. But never on the scale that China is undertaking. More than 1,800 separate projects come under the banner of the belt and road initiative.
Doubts about the economic viability of some of these individual projects have surfaced. Equally, the Chinese construction industry in general has suffered from the downturn in activity in China itself and has high levels of debt. However, a key facet of the approach adopted by China is speed. It is very much a race against time. Completed projects will mean revenues will start flowing back.
So far countries in Europe and the Americas have been relatively untroubled by the one belt one road strategy. This ambivalence may be misplaced. There is no particular reason to suppose that China will stop once the current framework is in place. Much more could be done to integrate further into Africa, into South America, and into Australia. The Arctic route is becoming a viable alternative for shipping. One belt one road may not be the end. It may just be the beginning.
It is likely given the overall economic context in China, and the shifting position of the major state-owned enterprises, that future investments in logistics projects around the world will be more selective. Recipient countries may also be more cautious, and perhaps less in need, than those that have embraced the strategy so far. But that is not to say that the deployment of logistics as geo-politics is over.
On the contrary, as global economic inter-dependencies increase and as the human pressure on planetary resources becomes ever more intense, so logistics will be central to the future of geo-political relations. Logistics systems will determine who has access to food, scarce metals, and market opportunities.
This strategic initiative will fundamentally shift the centre of gravity of geo-political power. It will secure the status of China as the pre-eminent force at the core of the Asian region that is increasingly expected to be the focus of population and economic growth.
As importantly, the one belt one road initiative puts logistics at the centre of future geo-political relations. As President Trump has made abundantly clear, changes to the terms of trade between countries is a top-level political concern for domestic constituencies.
Participating companies, particularly those from outside China, can envisage huge commercial opportunities in this initiative. Indeed, participation is almost certainly compulsory if current logistics and transport businesses do not want to be excluded from a large and growing market. But there are also huge risks. While the short-term financial viability of some of the projects may be an immediate concern, the long-term strategic risk is that any company can find their investments caught up in a future, unanticipated, geo-political dispute.
This means that it is no longer sufficient to have operational expertise and understanding of the competitive market context. It means that senior management, and investors in logistics businesses, need to be much more attuned to the potential of future geo-political risk – and make careful decisions on how to leverage the greatest advantage from the one belt one road strategy.