Europe Finally Wakes Up To The New Silk Road, And This Could Be Big
Wat could happen if Eurasia reconnects.
“They humiliated me a year ago,” began Karl Gheysen, the then-CEO of the Khorgos Gateway dry port on the Kazakh/China border, in November of 2015.
He then told me a story about a talk that he attempted to give to an audience of senior executives of big rail companies at a conference in Europe a year earlier.
“I started talking about Khorgos and Kazakhstan, and the general of the executives interrupted and said, ‘We've heard this before, for the last 15 years we've heard Kazakhstan this and Kazakhstan that. We've all heard about the Silk Road. Go back to your playground and make something, and when you have something come back here and show me the volume!’”
That about summed up the general attitude in Europe at that time towards the emerging network of economic corridors that had been dubbed the New Silk Road. Since the late 1990s, the governments of Central Asia along with a few upstart investors and think tanks had been promoting a vision of a reconnected Asia, but what had actually been developing on the ground was haphazard at best — a nascent dry port here, a new highway to nowhere there.
The dry port in Lodz, Poland where Hatrans Logistics processes China-Europe rail cargo. Image: Wade Shepard.
Then in 2013 Chinese President Xi Jinping announced the trillion-plus dollar Belt and Road initiative, and the dormant Silk Road concept was suddenly awakened. Countries like Kazakhstan, Azerbaijan, Serbia, Poland, and Georgia rapidly began doubling down on their investments in trans-Eurasian infrastructure, building ports, special economic zones, highways, railways, and commercial centers in preparation for China showing up with their bags of money.
At the end of 2016, Silk Road development is booming. In addition to billions of dollars worth of new infrastructure rising up throughout Eurasia, the necessary political, economic, and financial frameworks are also being established. What once seemed to be the delusional dreams of Central Asian despots is now a raw reality that’s putting a geographic realm that covers 70% of the world’s population, 75% of energy resources, and 70% of GDP on the same economic trajectory.
Gheysen ended his story with a wry grin on his face. “Nobody believed it," he said. "Nobody, nobody, nobody believed it.”
Part of the problem with China’s Belt and Road initiative and the broader New Silk Road endeavor in Europe was the lack of institutionalization. There was no clear power structure, no defining architecture, no overarching legal regime. It wasn’t a trade pact, it wasn’t a treaty organization, and it wasn’t a customs zone. It was basically a loosely adjoined, multifaceted array of bilateral and multilateral partnerships interlinking the EU, the Eurasian Economic Union, Eastern Europe, the lower Caucasus states, Iran, and ASEAN with China that would be held together by a newly enhanced transportation and energy grid. It was just a network, and as is the case with just about any network, defining it is about as easy as squeezing a drop of mercury between your fingers. It was something European policy makers had never seen before, and many were skeptical.
“Initially,” began Moritz Rudolf from the MERICS institute in Germany, “the main debates within Europe were focused on the question, ‘What is OBOR?’ OBOR, as a flexible vision, without being embedded in an institutional framework, as well as the multi-level approach by the Chinese government to promote the Silk Road Initiative, was very difficult to grasp among European policy makers."
Now, few are laughing about the New Silk Road in Europe.
“The biggest reason for that [the change in mentality] is that on the westbound the trains are running,” Kees Kuijken of New Silk Way Logistics explained. “It's obvious that the Chinese government wants the Silk Way connection overland into Europe, including Russia, and if the Chinese government really wants something, most of the time it really happens.”
To obtain this paradigm shift many European companies had to work feverishly to convince the market that this new connection actually worked, was secure, and reliable.
“The biggest challenge in the past was to get rid of some rumors,” recalled Nicolai Noeckler from Trans-Eurasia Logistics. “In the past, some people said ‘Oh no, come on, I don't want to ship my cargo via Russia.’ They heard stories from a couple of decades ago and they were not really ready to do business via Russia. So the reliability of the railway product itself was the main task in the past, and it will be also the main task in the future to tell clients that to use rail on a really long distance [transport] is as safe as using a vessel or an airplane.”
Far from being a pipeline solely designed to dump Chinese products onto the European market, the New Silk Road is offering European manufacturers a new way to get their products to the booming consumer markets on the other side of Eurasia. Taking advantage of this opportunity was a key ambition for the city of Lodz, in central Poland.
Having once served as an epicenter of textile manufacturing, Lodz had recently fallen upon rough times — most of its factories have long closed down and its population is in decline, with nearby Warsaw sapping the city of its prime cuts of human capital. Being located at the crossroads of key north-south and east-west transport corridors, Lodz began looking for ways to rebuild its economy by leveraging its geographic position.
“Before the trains started coming to Lodz, I visited a Forbes fair in Guangzhou. That was in the year 2010,” recalled Witold Stepien, the marshal of Lodz region “This is where out fascination with China started.”
At this Forbes convention, Stepien saw an exhibit by China’s western Sichuan province, was impressed by what they were developing, and subsequently engaged in a partnership with the province’s government.
These formal relations led to one of the first regular rail lines between China and Europe being established in 2012. The train would run from Chengdu, the capital of Sichuan province, to Lodz, and its creation was driven by a joint partnership between the two local governments, Dell, and a Lodz-based freight forwarding firm called Hatrans Logistics. This rail line essentially connected Dell’s manufacturing operations in Chengdu with those in Lodz, and presented one of those much coveted "win-win" scenarios.
“Many people in the beginning said, 'You will see, it will never go. It will be just two weeks, one month,' something like that,” Stawomir Knap of Hatrans Logistics said. “But now it's been more than two years. It's working, oh yeah, it's working.”
But Lodz was not content with just being a transshipment depot for trans-continental goods.
“When the trains started arriving we realized it was a great opportunity for our region for further development,” Stepien said. “Last year, 50 trains filled with foodstuffs from our region went to China. Foodstuffs like sweets, alcohol, and dairy products. The plan for the next year is that 500 trains from China will come to Lodz and 500 trains from our region will go to China.”
Apart from local food products — which are severely hamstrung by Russian sanctions — Lodz has established a textile manufacturing operation, which specializes in high-end fashion for the Chinese market, as well as a plant that produces televisions which sends its wares eastbound.
This ambition to develop more equitable trade relations with China by increasing eastbound volumes along the corridors of the New Silk Road gave birth to a company called New Silk Way Logistics, a joint venture between three of Europe's largest freight forwarding companies, Essers, Wagenborg, and KLG Europe.
The idea for this joint venture was put forward by Ronald Kleijwegt of HP, who developed the first regularly scheduled train between China and Europe in 2012, pushed Unit 45 to innovate a new type of self-supporting shipping container specifically for extreme long distance rail freight, and has been the main architect behind the trans-Eurasia rail product.
HP is currently the largest rail shipper of products going westbound from China to Europe, but filling the returning, eastbound containers has always proved problematic. According to New Silk Way Logistics, less than 10% of westbound containers are reloaded with cargo for their return trip east. Solving this problem was essential not just because of the obvious political ramifications of a trade imbalance but also because transporting empty shipping containers across a continent is an additional expense and, to put it simply, a waste. So Ronald and HP began providing the political support necessary for New Silk Way Logistics to pack containers full of European products and get them back to China.
According to Kuijken, European pharmaceutical, chemical, automotive, luxury, as well as agriculture and food companies are jumping in.
“So three competitors of each other are putting things together and they will make one dedicated joint venture together for the Silk Route,” said Karl Gheysen. “If these things start happening -- a joint venture here, a joint venture there -- it's going to explode, it's going to go massive.”
Karl Gheysen has not rested since he successfully set up the Khorgos Gateway dry port in Kazakhstan. He is now working for KTZ, Kazakhstan’s national railway, on a new mission to be the brand’s flag bearer in Europe. It may sound like history repeating itself, but after spending three years building one of the predominant stations of the New Silk Road in the east, he is now doing the same in the west.
“The China side has been activated,” Gheysen said. “The hardware, the dry port, and rail links in Kazakhstan are done. Now the next step we need to focus on is Europe. We're going to build the backfill from Europe to China, north and south, and then you start connecting all these dots, and all these dots will align.”
Xi Jinping has also been busy weaving Europe into his traveling Belt and Road jamboree, recently visiting Serbia, Poland, and the Czech Republic, signing billions of dollars worth of bilateral trade deals, while Chinese Premier Li Keqiang was recently in Latvia for a meeting of the 16+1 and Russia, further laying down the political foundations of this pole-shifting initiative.
“The moment is there to start pushing for Europe,” Gheysen declared. “Ronald from HP said, ‘Karl, now we have what we've been hoping for for years. Now suddenly everybody is listening to us. Suddenly, everybody woke up.’"