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New Silk Road Part 2: How China Will Win

Business, China, Company Strategy, Europe, Oil & Gas, Polyolefins, Technology, US

Here is the second part of my thinking on what China’s New Silk Road means for the global chemicals industry. Part One appeared last Thursday.

Yunnan4

 

By John Richardson

PER capital GDP in Yunnan province in China’s southwest was just Yuan 25,083 ($4,050) in 2014, which made it the 29th poorest of the country’s 31 provinces. In comparison, the number one ranked province, Tianjin, had per capita GDP of Yuan 106,795.

An insurmountable difference? No, not at all. Not when you have a new generation of political leaders that are planning for the very long term.

They know that if they build the right kind of infrastructure in Yunnan, this will encourage manufacturers to relocate there from China’s developed provinces, where labour costs are much higher.

So, no less than US$24.17 billion has been allocated for 2014-2015 to build 1,500 kilometres of new highways within the province.

Geographical isolation from the rest of China is another problem for China’s inland, poorer provinces in general.

Thus, $64.12bn is being spent on improving railway and other transportation links between six provinces (Gansu, Guizhou, Qinghai, Shaanxi, Sichuan, and Yunnan), five autonomous regions (Guangxi, Inner Mongolia, Ningxia, Tibet, and Xinjiang), and one municipality (Chongqing).

The next phase for Yunnan is opening the province to the rest of the world – and this where the New Silk Road comes into play.

Yunnan has the advantage that it is closer to Singapore and Thailand than China’s eastern seaboard – and from Singapore and Thailand Chinese manufacturers gain access to international sea lanes.

So let’s think how this is going to work in the future:

  • A smartphone manufacturer, which importantly makes all of its components from scratch, cannot afford the labour costs in his home province of Guangdong, which is in eastern China.
  • Bur he is able to build an assembly plant in Yunnan, with the support of government tax breaks and excellent new local road and rail links.
  • The phones are then moved internationally, again by road or rail, to ports in Singapore and Thailand before they reach the final customers in Europe and the US.  These international links are part of the New Silk Road.
  • This will allow the manufacturer to undercut Western smartphone manufacturers by providing products that are “good enough”, if not as good, as those made by Apple etc. There will be a crying need for the Guangdong manufacturer’s products in Europe and the US because of the impact of demographics on income levels.
  • And crucially for keeping jobs in China, government policies will have prevented the phone maker from moving overseas in search of lower labour costs.
  • Meanwhile, economic growth and thus per capita incomes will have been raised in Yunnan.

Let’s broaden this out.

In late 2013, China announced the founding of the Asian Infrastructure Investment Bank. The bank is spending $100 billion on financing infrastructure projects in 21 countries including Pakistan, India, Bangladesh, Malaysia, Singapore, Mongolia, Myanmar, Uzbekistan and Kazakhstan.  Much of this investment will be connected with the New Silk Road.

Entirely overland routes, which are again part of this New Silk Road, will pass through countries such as Kazakhstan, giving China’s manufacturers quicker and more cost effective rail access to European markets.

And this is certainly not just one-way traffic. In 2006, for instance, Kazakhstan and China opened a 3,000 kilometre oil pipeline from the Caspian Sea to Xinjiang province in China. China’s CNPC is also a major investor in Kazakhstani energy companies.

China is thus importing raw materials from its less-developed neighbours and re-exporting finished products. Bilateral trade between China and Kazakhstan, for instance, saw double digit growth in 2012 and 2013.

So you can again see how this is going to play out:

  • China will increasingly buy basic raw materials, such as oil and gas, from its less-developed neighbours.
  • It will then re-export finished or semi-finished goods, such as chemicals and polymers, to these neighbouring countries.
  • When you supply, say, oil to China – and the same country has built many of your bridges and roads – you are much more likely to buy your chemicals and polymers from that some country.

We know China is already in surplus in several chemicals and polymers and is moving towards surpluses in other product, including even polyolefins.

But China’s producers will have little problem in placing these surpluses, thanks to the kind of long-term government planning that chemicals companies in Europe and the US can only dream of.