New Silk Road: China Meets Europe In The Baltic Sea Region, The - A Business Perspective

A Business Perspective

Jean-Paul Larçon

• Publisher: WSPC
• Year: 2017
• ISBN:
  9789813221826
• Topic: Volkswirtschaftslehre
• Subtopic: Internationale Wirtschaftswissenschaften

The "Belt and Road" initiative announced by Chinese President Xi Jinping in 2013 aims at reviving the ancient trade routes connecting China to Europe and Africa: the "21st Century Maritime Silk Road" and the inland "Silk Road Economic Belt". Both maritime and land routes of the New Silk Road meet Europe in the Baltics - a region accounting for some 150 million inhabitants representing 30% of the total EU population. The maritime route enters Europe through the Mediterranean Sea before reaching the largest European seaports of the North Sea and the Baltic Sea up to Saint Petersburg in Russia. The land route starting from West China crosses Central Asia, Russia and Belarus before reaching the shores of the Baltic Sea. This book focuses on the business and economic dimensions of China's initiative: Chinese government objective and policies, the strategies of Chinese and foreign firms along the Silk Road, trade and investment between China and Nordic-Baltic countries, the Eurasia Land Bridge corridors and logistics, the impact of the New Silk Road on the economies of Central Asia, new institutions financing the "Belt and Road", cross-cultural challenges and Sino-foreign joint ventures along the New Silk Road. The direct impact of China's initiative on economic sectors such as logistics services; the shipping, port management and maritime industry; construction and high-speed train; energy and engineering; and e-commerce, information technology and tourism will be assessed. Readers will be provided with an in-depth analysis of the opportunities and challenges for companies and regions along the New Silk Road as well as 17 short case studies focusing on China-led projects currently developed along the "Belt and Road" and 15 maps of the New Silk Road, the Baltic Sea Region and Central Asia to help in understanding China's vision and strategic moves.

Chapter 1

China Meets Europe by the Baltic Sea

Jean-Paul Larçon and Geneviève Barré

HEC Paris

The “One Belt One Road” concept was introduced for the first time by Chinese President Xi Jinping during his visit to Kazakhstan in 2013. This announcement was carefully prepared and very rapidly followed by the first steps of implementation: the negotiation with key foreign partners, and the publication of an action plan on the “principles, framework, cooperation priorities and mechanisms” of the “New Silk Road” initiative (Table 1.1).

1. China’s B&R Initiative and Chinese Companies

Renewing the ancient Silk Road trade tradition, the objective of the “One Belt One Road” (OBOR) or “Belt and Road” (B&R) initiative is to promote the development of the maritime and inland trade roads linking China, Europe and Africa simultaneously: the “21^st Century Maritime Silk Road” and the inland railroad “Silk Road Economic Belt” (Map 1.1).

The Chinese plan calls for “policy coordination, greater connectivity, unimpeded trade, financial integration and strengthening people-to-people bonds”. It focuses on three dimensions: eliminating trade and investment barriers, developing bilateral economic cooperation through joint investment projects, and cooperation in the conventional and renewable energy sector (NDRC, 2015).

Table 1.1Chronology of China’s “Belt and Road” initiative

The B&R routes run through the continents of Asia, Europe and Africa, connecting the vibrant East Asia economic circle at one end and the developed European economic circle at the other.

The “Silk Road Economic Belt” focuses on bringing together China, Central Asia, Russia and Europe (the Baltic); linking China with the Persian Gulf and the Mediterranean Sea through Central Asia and the Indian Ocean. The “21^st Century Maritime Silk Road” is designed to go from China’s coast to Europe through the South China Sea and the Indian Ocean in one route, and from China’s coast through the South China Sea to the South Pacific in the other. The major events in the development of China’s B&R initiative so far are as follows:

September 2013 — The SREB concept was introduced by Chinese President Xi Jinping during his visit to Kazakhstan. In a speech delivered at Nazarbayev University, Xi suggested that China and Central Asia cooperate to build a “Silk Road Economic Belt”. It was the first time the Chinese leadership mentioned the strategic vision.

October 2013 — President Xi proposed building a close-knit China-ASEAN community and offered guidance on constructing a “21^st Century Maritime Silk Road” to promote maritime cooperation. In his speech at the Indonesian parliament, Xi also proposed establishing the Asian Infrastructure Investment Bank (AIIB) to finance infrastructure construction and promote regional interconnectivity and economic integration.

November 2013 — The Third Plenary Session of the 18^th Central Committee of the Communist Party of China called for accelerating infrastructure links among neighboring countries and facilitating the B&R initiative.

December 2013 — Xi urged strategic planning of the B&R initiative to promote connectedness of infrastructure and build a community of common interests at the annual Central Economic Work Conference.

February 2014 — Xi and his Russian counterpart, Vladimir Putin, reached a consensus on construction of the B&R, as well as its connection with Russia’s Euro-Asia Railways.

March 2014 — Premier Li Keqiang called for accelerating B&R construction in the government work report. The report also called for balanced development of the Bangladesh-China-India-Myanmar Economic Corridor and the China-Pakistan Economic Corridor.

May 2014 — The first phase of a logistics terminal jointly built by China and Kazakhstan went into operation in the port of Lianyungang in East China’s Jiangsu province. The terminal, with a total investment of 606 million yuan (US$98 million), is considered a platform for goods from Central Asian countries to reach overseas markets

October 2014 — 21 Asian countries willing to join the AIIB as founding members signed the memorandum of understanding (MOU) on Establishing AIIB. As agreed, Beijing will be the host city for AIIB’s headquarters. The AIIB is expected to be formally established by the end of 2015.

November 2014 — President Xi announced that China will contribute US$40 billion to set up the Silk Road Fund. During the Beijing APEC meetings, Xi announced that the fund will be used to provide investment and financing support for infrastructure, resources, industrial cooperation, financial cooperation and other projects in countries along the B&R.

December 2014 — The Central Economic Work Conference sketched out priorities for the coming year, which include the implementation of the B&R initiative. Earlier in the month, Thailand approved a draft MOU between Thailand and China on railway cooperation.

January 2015 — The number of AIIB founding members, many of which are important countries along the Silk Road routes, rose to 26 after New Zealand, Maldives, Saudi Arabia and Tajikistan officially joined.

February 1, 2015 — At a special meeting attended by senior leader Zhang Gaoli, China sketched out priorities for the B&R initiative, highlighting transportation infrastructure, easier investment and trade, financial cooperation and cultural exchange.

March 5, 2015 — Premier Li, in his government work report, again highlighted the initiative, saying China will move more quickly to strengthen infrastructure with its neighbors, simplify customs clearance procedures and build international logistics gateways.

March 8, 2015 — Chinese Foreign Minister Wang Yi dismissed comparisons of the initiative to the US-sponsored Marshall Plan. The initiative is “the product of inclusive cooperation, not a tool of geopolitics, and must not be viewed with an outdated Cold War mentality,” Wang said, adding that China’s diplomacy in 2015 will focus on making progress on the B&R initiative.

March 28, 2015 — The National Development and Reform Commission, Ministry of Foreign Affairs and Ministry of Commerce jointly released an action plan on the principles, framework, and cooperation priorities and mechanisms in the B&R initiative after President Xi Jinping highlighted the initiative the same day while addressing the opening ceremony of the 2015 annual conference of the Boao Forum for Asia (BFA) in the coastal town of China’s southernmost island province of Hainan.

Source: Xinhua (2015, March 28).

The B&R initiative is based substantially on huge investments in overseas infrastructure projects such as roads, railways, seaports, airports, pipelines, logistics hubs, as well as information and communications technology (ICT). The initiative, which is extremely ambitious, serves several major Chinese objectives simultaneously: developing Chinese exports and international investment, promoting Chinese technology internationally, contributing to the economic development of West and Central China, increasing China’s economic and political influence in Central and Eastern Europe, Central Asia and Africa, and accelerating the internationalization of the renminbi (RMB). The B&R initiative can be viewed as a great leap forward, a “new round of opening to the outside world” (Godement and Kratz, 2015).

Map 1.1The “Silk Road Economic Belt” and the “21^st Century Maritime Silk Road”

Source: Xinhua (2015).

The B&R initiative is a major move in terms of both foreign affairs and internationalization of the economy. It is also a major move for Chinese companies which have the opportunity to go a step further in their internationalization process. This process already differed in the past from the one of former US, European and Asian multinationals: Chinese companies did not wait to enter into foreign markets for the accumulation of clear competitive advantages over their foreign competitors. On the contrary, it is their internationalization which helped them to build or acquire the missing strengths or capabilities. Their internationalization process was based on four key factors (Larçon, Ed., 2008):

• The size of the Chinese domestic market, giving national champions a unique competitive advantage in terms of volume;

• The relative cost advantage linked to the cost of manpower;

• The experience of internationalization in the mainland itself through sino-foreign joint ventures, giving Chinese engineers and staff the opportunity to learn from their foreign partners and develop their own managerial best practices and innovation capabilities; and

• The massive support of the Chinese government in terms of Research and Development (R&D) investments, financing large projects and international diplomacy supporting the presence of Chinese firms.

Barré (2016), examining the key success factors of the international strategy of Chinese multinationals such as Haier (home appliance), Huawei (telecom and IT), and TCL (multimedia), identifies a unique combination of factors:

• Accelerated internationalization process and business strategies based on the acquisition of knowledge, the emphasis on new products and advanced technologies, and the investment in human potential; as well as

• Government support for both innovation and investment abroad.

These key factors explain the success of companies that have not only been catching up with their foreign competitors, but also become leaders in their industry. They have done so by developing a successful presence in both emerging economies and developed markets such as the European market, either by acquisition or organic growth.

With the B&R initiative, Chinese multinationals will benefit from even better conditions to develop their exports and investments to Europe. The initiative will also open the door to Europe to a new wave of Chinese national champions specialized in the area of energy, logistics and infrastructure, such as oil and gas, construction, engineering, shipping and railway companies. China’s national champions at the forefront of Chinese investments along the B&R will mostly be state-owned giants, such as China National Petroleum Corporation (CNPC) in the oil industry, China Merchants Group and China Ocean Shipping (Cosco) in port management and shipping, or China Railway Rolling Stock Corp (CRRC), the world’s largest rail company, created in 2015.

2. China, Europe and the Baltic Sea Region (BSR)

China and Europe trade more than 1 billion Euros a day. The European Union (EU) is China’s biggest trading partner and records a significant trade deficit with China. China is the second most important EU trading partner behind the United States, accounting for 14% of total extra-EU trade in goods in 2014, and China is one of the fastest growing markets for European exports.

The EU and China have been negotiating a comprehensive EU-China investment agreement for progressive liberalization of investment and the elimination of restrictions for investors since 2013. The rise of Chinese foreign direct investment (FDI) in the EU sparked a debate about the control that China may be seeking to take over European economies (Nicolas, 2014). Granting China market economy status was still in question in 2016: it would boost Chinese exports to the EU by 3.9% to 5.3% in volume (Bellora and Jean, 2016). The EU Commission proposed, among key objectives for a new EU-China policy, that the EU should: “Drive forward infrastructure, trading, digital and people-to-people connectivity between Europe and China based on an open rules-based platform with benefits for all the countries along the proposed routes” (EU Commission, 2016).

Thus the perceived mutual benefits of the new B&R projects in Europe will have a direct influence on the outcome of these negotiations. In any case, China’s B&R initiative, as well as China’s foreign investment policy, are likely to accelerate Chinese investments in Europe and especially in Germany (Hanemann and Huotari, 2015).

China’s official announcement of the B&R initiative is quite recent, but the first investments in terms of transport infrastructure are already producing very tangible results. Along the “Maritime Silk Road” (MSR), Cosco has invested in terminal infrastructures in Piraeus, the port of Athens, regularly from 2009 to 2015 and finally acquired a 67% stake in the Port of Piraeus for 368.5 million Euros in 2016. These investments contribute to saving between four to ten days of transport if alternative ports of Northern Europe such as Hamburg (Germany), Rotterdam (The Netherlands) and Antwerp (Belgium) are used instead. It creates the opportunity for Greece and Southern Central Europe countries to build their comparative advantage for attracting China-Europe transit flows. It also demonstrates the direct influence of Chinese investments in the framework of the B&R initiative on the trade routes between the EU, China and East Asia (Van der Putten and Meijnders, 2015).

Along the inland railroad, the “Silk Road Economic Belt” (SREB), which ranges from China to Western Europe through Central Asia, Turkey and Russia, is also creating new opportunities and challenges. The Yuxinou Railway, the freight rail route connecting Western China to Germany, stretches 11,000 kilometers (km), running from Chongqing to Duisburg via Kazakhstan, Russia, Belarus and Poland in fourteen days — a much shorter journey than the maritime way. Thanks to international customs cooperation, this rail operates a “one-stop declaration, inspection and release” system all along the route. Kazakhstan railways (KTZ), which is also a Yuxinou shareholder, is investing massively in infrastructure and manufacturing. Alstom, one of the leaders in the market of heavy freight electric locomotives, is manufacturing, with its Kazakh partners in Astana, electric locomotives which will contribute to make the journey even faster: less than ten days.

The Baltic Sea Region

The BSR refers geographically to the nine coastal states bordering the Baltic Sea: three Nordic countries (Denmark, Finland and Sweden), the three Baltic States (Estonia, L...