The scale of government support that makes services on the China-Europe rail network viable is beginning to emerge, with Chinese state, provincial, or municipal officials believed to be providing average subsidies as high as 60 percent per FEU.
Although there are no official figures on the subsidies, forwarders offering services on the route estimate that the real cost of transporting an FEU by rail from China to Europe, terminal to terminal, is about €8,000 ($9,430), with average subsidies per container of €5,000.
Rates on China-Europe rail being offered by the forwarding market were built around the remaining €3,000 per FEU, according to Ivo Aris, vice president of global forwarding for C.H. Robinson Europe. “As a user, we see the €3,000, but the real cost is closer to €8,000,” he said. ”The question is how long these subsidies will last. How long will China invest that kind of money?”
It’s a legitimate question with no real answer. The Chinese government last year indicated that it planned to draw down the rail subsidies with a view to having the China Railway Express, as the vast network is being called, operate on a purely commercial basis.
But another question without an answer is whether an end to subsidies would push up freight rates. With 60 percent of the transport cost per container covered by subsidies, an end to the government support would surely prove disastrous to rail as a shipper option.
However, Andre Wheeler, director of Wheeler Management Consulting in Perth, Australia, said there was unlikely to be a sudden withdrawal of subsidies. He said as shippers and forwarders increased their use of the rail option, it might even become financially sustainable, although he added that China would only stop supporting the network when its leaders were 100 percent sure it would stand up commercially.
“At present the westbound trains are pretty full and forwarders are already complaining about securing slots, eastbound trains are getting busier, and it is claimed that the current network could actually now function without subsidies,” he said. “It is argued that this would only be sustainable when 10,000 trains a year [is] achieved, and currently there are approximately 7,000 in operation.”
Wheeler has been conducting research on Beijing’s Belt and Road initiative, a trade strategy that appears to encompass the rail link as well as every other global trade route China is involved in on land, sea, or in the air. What he found was a complex web of rail subsidies in three layers: those provided by the central government, the regional government, and the city of origin or destination of a train.
“Those subsidies vary from point to point,” Wheeler said. “They are different for each operator, and they are also different depending on each region and each city.” Some provide subsidies by train, while others by container. It’s reasonable, Wheeler said, to consider that on average every container gets subsidies of more than $4,000 per TEU for on the European Union-China route, and $1,500 for China to Russia and Eastern Europe. This isn’t public information, he noted, and some commodities receive no subsidies, so the onus is on the train operator to get the optimal mix of shipments to make the entire freight train profitable.
“But when Beijing removes the subsidies, there is the question of whether the regions and the cities might still give subsidies in order to be more competitive than neighboring cities,” Wheeler said. “Who knows? It is not written yet.”
China's city governments compete for trains
Chinese city governments compete fiercely to increase the numbers of trains on the route as they seek the associated economic benefits from the Belt and Road policy of the central government. Collectively, local government targets are for 5,000 trains to transit the route in 2018, although operators believe a number between 4,000 and 4,500 is more realistic. That would represent a 25 to 40 percent year-over-year increase in the number of trains over 2017.
Typical commodities from China to Europe include electronics and consumer goods with a medium to high value, and from Europe to China are chocolates, wine, baby formula (Germany), car parts (Germany), luxury goods, and pharmaceuticals run by third-party logistics providers (3PLs), according to Don Miller, vice president of global sales and marketing for Globe Tracker International, a Copenhagen-based provider of cargo visibility solutions.
Rail services between China and Europe, Miller said, will grow faster than other routes via Russia because most of the provinces are trying to become traders themselves to attract and increase volume to and from their own regions.
“China’s investments are increasing every year, as it depends currently on volume but also because of China’s external political issues,” he told JOC.com. About 200 block trains currently operate via Kazakhstan from China to Europe, with approximately 80 block trains on other routes through Kazakhstan, Miller said.
Rail services between China and Europe have registered strong growth during the past half-decade; according to China Railway Corporation, 6,300 block trains, westbound and eastbound combined, traveled between the two continents between 2011 and 2017, including, 3,200 trains in 2017 alone.
Most global forwarders are now active on the land route, with new services being announced almost weekly. C.H. Robinson this month launched a trans-Eurasian rail freight service between China and Europe that connects nine origin terminals in China with eight destination cities in Europe. Each freight train requires 18 to 20 days for the journey, and full block train, single or multiple containers, less-than-containerload shipments, and oversized cargo are available options.
Just this week, China’s largest retailer JD.com added a block train to its Europe-China rail options, booking the entire train from Hamburg 10,000 kilometers (6,214 miles) to Xi’an, the capital of central China’s Shaanxi province, where JD operates its main distribution hub for cross-border imports.
The difference in JD.com’s offering is that the train functions as a mobile warehouse — as soon as goods are logged and loaded onto the train in Germany, they can immediately be listed for sale on JD.com’s e-commerce platform in China. That means consumers can place orders for the products even while they are in transit, shortening wait times for consumers while further reducing warehousing costs and increasing stock management efficiency for brands and retailers, the retailer said.
Reducing the cost of capital is a key benefit for shippers using the China-Europe rail services. Even with congestion at both ends of the network, the 17-day to 20-day transit is still half that of ocean transport and 80 percent cheaper than air freight. Wheeler said this will see the debate gradually shifting from subsidies to that of total cost of door-to-door delivery as opposed to port to port, with transit time the focus because it allows for lower inventory levels and improved cash flow.
The problem is that rather than improving efficiency, infrastructure shortcomings are steadily increasing transit times and undermining one of the main advantages of shipping on the rail network in the first place. “The transit time advantage is still there, and the services are still competitive, but it is being reduced due to capacity constraints on the primary rail corridor into Europe,” said David Smrkovsky, head of rail logistics with JUSDA, the 3PL company owned by Foxconn, the world’s largest electronics contract manufacturing company.
“Reliability in terms of on-time delivery is absolutely critical, he said. “This is why BCOs [beneficial cargo owners] are willing to pay a premium on top of ocean rates. If the transit time advantage goes away, then we will not see any more growth.”
Smrkovsky — a former strategic procurement manager with Hewlett-Packard, one of the first multinational companies to ship large volumes of product via the land bridge to Europe from its manufacturing operations in western China — said average transit time between the central Chinese city of Chongqing and Duisburg, Germany, has increased from just 11 days in 2014 to 17 days today.
In theory, the terminal-to-terminal transit time could be done in 10 to 12 days, but in reality it was a journey of 18 days to 20 days, C.H. Robinson’s Aris said. “The product has become more popular so there is some congestion in Kazakhstan and at the Polish border, with a change in track width, and that creates bottlenecks,” he said.
The rising volume is also being felt at the German rail hub of Duisburg. Thomas Schlipköther, chief operating officer of the Duisburg Port Authority, told JOC.com that the Duisburg rail terminals were surrounded by the city. “It is growing around us. We generate 16,000 to 18,000 trucks per day with 40,000 moves coming in and going out. It is a problem if we are not able to grow with our terminals,” he said.
But Schlipköther said with physical growth limited, the inland port was focusing on optimizing terminal cargo flows and cutting the average dwell time from the current 3.45 hours to half of that. “We found that if you are able to reduce the empty crane move of two cranes, you can increase the activity with those two cranes by 20,000 moves a year.”