Making the connection

A series of government-led initiatives aimed at boosting connectivity between Asia, the Middle East, Europe and Africa could help increase trade and power economic growth, but only if theoretical goals and practical realities can be meshed.

For more than a year, China has been pushing forward the idea of rejuvenating trade along the ancient Silk Road, both overland and by sea. A key goal is to create a more integrated economic belt that would include just about every economy — from the Philippines, across East Asia, through Central Asia and into Europe and Northern Africa, all the way to Portugal at its furthest point.

"China has already taken the initiative in launching the New Silk Road for Asia,” said Zhou Li, publisher and editor-in-chief of China Daily Asia Pacific, speaking in Hong Kong on Nov 19 during a forum titled Redefining the New Silk Road: Strategic Regional Initiatives to Improve Connectivity in Asia and the World.

The China Daily-sponsored roundtable session was held as part of the two-day Asian Logistics and Maritime Conference, which opened in Hong Kong on Nov 18. “Both the public and private sector will undoubtedly benefit from these discussions,” Zhou added.

China’s financial commitments to this and similar efforts to date have risen to $100 billion. Among these pledges is an offer of loans worth more than $20 billion to support the construction of regional infrastructure.

At the end of the Asia-Pacific Economic Cooperation (APEC) Summit 2014 in Beijing earlier this month, China’s President Xi Jinping pledged $40 billion for a Silk Road Fund, to invest across the region.

The Asian Infrastructure Investment Bank (AIIB), largely funded by China and supported by a range of countries, is moving forward as is the so-called BRICS Bank to bring together Brazil, Russia, India, China and South Africa. The proposed Free Trade Area of the Asia Pacific will help develop the software to go along with the hardware.

The idea is to “give more muscle” to the links that are underdeveloped. Sri Lanka, where China is backing the construction of a modern port, is the first beneficiary of these loans.

The Sri Lanka project is the latest but certainly not the only infrastructure project China is involved in, said Zhou. The country is working with neighbors and trade partners to build more infrastructure and telecom systems in the region in order to further integrate trade systems and push forward agreements reached during the latest APEC summit, he added.

Last year, Xi announced China’s plan to drive forward the Silk Road initiatives and build a Silk Road economic belt. The aim of the various related projects such as One Belt, One Road or the Maritime Silk Road is to increase connectivity, within Asia and with other regions.

As well as the AIIB and BRICS Bank, also pushing forward these goals is the five-year-old China-ASEAN Investment Cooperation Fund (CAF), which invests largely in infrastructure projects in the 10-strong Association of Southeast Asian Nations. The bloc’s member countries, both jointly and individually, are key components of the Silk Road.

"China has a lot of initiatives to drive regional development,” said CAF chief executive Li Yao. “For any economic growth, for any industrial cooperation, connectivity is very important ... Five years ago, we set up this fund to focus on connectivity.”

So why does China want to do this? “To build the Silk Road and share the prosperity,” said Li. “In this way, China can play a positive and constructive role in regional development.”

But while governments typically respond positively to the idea of more investments, the key to moving these projects forward is execution. This includes connecting the various modes of transportation involved in logistics.

"The faster the trade barriers can be lowered, the faster Asian economies can grow,” said Vivien Lau, managing director of Hong Kong Air Cargo Industry Services, a subsidiary of Hong Kong Air Cargo Terminals, the largest air cargo terminal operator in the world. The company’s main goal is to drive Hong Kong as a hub for the global flow of cargo.

"This new Silk Road strategy is very high profile at the national level,” said Lau. “This initiative is very much in line with the APEC initiative about connectivity.”

Two hurdles remain, though, to linking the region more efficiently: One has to do with physical infrastructure and the other with the software required to make the best use of the physical links.

Despite huge investments, Asia still has some way to go in terms of physical infrastructure. Although places like Hong Kong, Singapore, South Korea and much of the Chinese mainland have spent a lot to build up infrastructure networks, for other places there is an urgent need for new and improved roads, airports, water ports, telecom networks and energy grids.

Asia has relatively fewer airports and paved runways than other parts of the world, particularly North America, said Lau. Creating an economic belt to span three continents will require efficient road, rail, sea and air route connections, she explained.

"The efficient use of intermodal freight and transportation is becoming more and more important,” said Lau.

Along the Silk Road regions, most goods are moved through sea routes, which take around 45 days. More rail links, roads and even airports could speed this up significantly.

"The underlying principle is connectivity,” said Lau. “Connectivity does not only mean the hardware network … but it encourages the movement of goods and people between markets.”

Hong Kong is one place that has done connectivity well and has emerged as one of the biggest trade and logistics centers in the world.

"In Hong Kong, we can pride ourselves on being number one in the world in terms of air cargo because of connectivity,” she said. The city’s air routes connect it to 180 countries globally and it is located just five hours away from half of the world’s population.

But development in Hong Kong is slowing while it is speeding up in the Chinese mainland. An illustration of the slow pace is the proposed construction of a third runway at Hong Kong International Airport, which has been under discussion for years. By 2018, said Lau, Hong Kong’s airport will be operating at capacity but it could take until 2023 for the new runway to be opened.

Meanwhile, nearby Shenzhen and Guangzhou in southern China have built new terminals and added runways.

"The question to ask is how we can position ourselves to leverage these opportunities?” said Lau. It is up to the industry to put together the various piece of this puzzle.

Elsewhere in Asia, particularly in some Central or South Asian countries, there are not enough logistics infrastructure or services to facilitate connectivity, said Gordon Lam, chief representative and general manager for Southern China with Li & Fung Development.

Lam, who also co-authored a book on the development of the Silk Road published in China this year, said a case in point is rail, which often operates on different track gauges in different countries.

"To build a Silk Road economic belt, we need to solve a lot of these issues,” he said. “There should be very big investments in software and hardware to complement these developments.”

Investment from both the public and private sectors is likely very worthwhile.

"Logistics standardization is actually the core among all these things,” Lam added. “The combined market is actually huge.”

Taking advantage of “huge opportunities” may require a shift in attitudes toward investment and policies as business, trade and supply chains now move much faster than ever before. The lead time for product sales, for example, has dropped from more than a year to just a few weeks in some cases.

Supply chain management can help connect the world, said Lam, while helping companies grow by providing more value-added services.

Providing such services has helped Lam’s employer, Li & Fung, grow into a global player by not only managing supply chains but also by providing services and benefiting from the increasing connectivity that exists regionally as well as globally.

"We should tap these opportunities to source more products from these countries and sell them back to China and Asia,” said Lam. “In the past we used to source in the East and sell to the West, but now we are also sourcing in the West and bringing these good things to the East.”