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Innovations and investments behind China-Europe rail freight transport

More than 45 years ago, in an article for Harvard Business Review, Theodore Levitt considered that the decline of railways was caused by their marketing myopia. Railway companies failed to properly define what business they were in, missing on existing growth opportunities in favor of other transport modes. Railway companies positioned themselves in the railway business, not the transportation one. They were labeled as being more railway oriented, than transport oriented, more product oriented instead of customer focused. Levitt’s marketing lesson is still actual for many sectors, but have railway companies learned it?

We are witnessing a revival of the entire railway system leveraged not only on technological innovation, but also on new business models and services, new approach to customer care and operations. For China-Europe rail freight transport, it is the efficient integration in the international logistic supply chain and the identification of a market niche, the high value-added products niche, representing up to 40% of the total cargo turnover China-EU. This niche opens new opportunities for rail service providers to attract an estimated additional estimated market share of 12% from air & sea transport. According to Transcontinental Infrastructure needs to 2030/2050 OECD report, the maximum freight container volumes that could be handled along the rail route from Asia to Europe would probably be in the range 0.5 to 1 million TEUs per annum, small by comparison with current maritime volumes on Asia to Europe sea routes that total around 20 million TEUs per annum. Shorter lead times (13/19 days to Germany, 21 days to Spain) compared to sea transport, lower costs compared to air transport and lower CO2 emissions have determined manufacturing companies in various high value-added sectors to shift towards rail transport services.

As a result, an impressive number of pilot container block trains has been launched to serve China – Europe route during the last years. Currently, 13 Chinese cities have established rail freight services to Europe. The success story of intercontinental rail freight transport starts in 2011 with 14 trains on Chongqing-Duisburg route, continues with 228 trains on various routes in 2014 and over 800 trains last year. This growing trend will continue since most operators have already announced additional regular train services for 2016. Rail transport development was encouraged by a large number of initiatives in the field of economic cooperation, trade and transport, cross-border agreements, ambitious initiatives like China’s “One Belt One Road” and Kazakhstan’s “Nurly Zhol”, and rail transport development national strategies e.g The Railway Transport Development Strategy of Russia for 2030.

The value of import/export goods transported on China-Europe rail routes in 2014 reached USD 4.862 billion, according to China’s General Administration of Customs. Chinese manufacturers and European companies that have localised their production in in-land China use rail to transport to European countries high value products like automotive and electronics. On return to China, a much lower number of containers are loaded with food, pharmaceuticals, chemicals and agricultural products.

Empty containers represent the main challenge to making rail transportation between China and Europe more successful, considers Hans Reinhard, President of InterRail, one of China – Europe rail freight transport pioneering companies. “Despite the fact, that we managed to increase eastbound trains to China to partly already about 30% of westbound, we are still considerably challenged to find solutions to return the equipment. As contrary to deep sea with mainly one round the world carrier involved, railway transport depends on a cooperation chain of diffrent railway undertakings and private companies thus they cannot simply agree to one strategy to return empties free of charge. As long as bilateral transport to CIS, especially Kazakhstan, was still running on high level (due to low oil price, import activity of Kazakhstan has been reduced by 40% in 2015), we as InterRail used manifold to use incoming China containers to return with bilateral cargo to Kazachstan where the remaining empty positioning to China was a short stretch at the end. This option is at present rarely available, thus we have and had intensified our efforts to allocate cargo on eastbound routing. This also has been understood by our Chinese partners well and they also try to pay more attention to establish eastbound trains. Of course, the same challenge we and the operating railway undertakings do face with its rolling stock which same as the containers, has to be returned at least to the next commercial region where it can be used for bilateral export towards China resp east”, Reinhard explains.

“As far as technical challenges are concerned, we together with our Kazakh partners from KTZ Express have started to use 45′ reefer containers for temperature sensible cargo – as we have no 90′ platforms yet available on CIS stretch, this will become a challenge and investment scenario for new future”, he adds. Indeed, considering that most transported products are temperature-sensitive, the time was right for an innovation at container type level. In 2014, the Dutch company UNIT45 launched a 45ft combined diesel-electric refrigerated container that can be used for journeys up to 10,000 km by rail carrying temperature-controlled goods from Europe to China and vice versa for up to 20 days. KTZ Express, subsidiary of Kazakhstan Railways, purchased such 200 reefer container units following a EUR 30 million contract with UNIT 45.

A major step in the development of China-Europe rail freight transport was the successful adoption of the model of collaborative innovation networks by rail freight operators. Companies teamed up, started developing joint ventures with logistics service providers, established 3PL subsidiaries, strategic alliances and identified or became agents. With the new business models rail operators managed to cover the logistics services client requirements and to provide new services, which along the way developed from full container load (FCL) to less-than-container load (LCL) solutions, attracting more customers. “Core is collaboration”, states Darryl Hadaway, CEO of Silk Route Rail, a new Asia and Europe block train independent carrier, moving containers through a hub and spoke operation. “The different countries you travel and particularly China and ex Soviet Union countries are evolving in many ways. Requires some excellent existing relationships and knowing who to deal with and how – and in our case making sure you are credible and transparent also to your stakeholders. Again some great stories on how these are evolving, but I must say China leadership on the topic is extremely important. Honestly it is no different to many businesses these days – collaboration is becoming more important. The difference here is the multiple cultures and expectations you need to deal with (and sometimes take some difficult decisions on)- challenging but the winners will get it right”, he explains.

Considering that the annual volume of China-Europe rail cargo is expected to reach 1 million TEU by 2030, along withe the big opportunities in this niche also came competition. The newest market entrants are large freight forwarders like UTi Worldwide and DHL Global Forwarding. “As this railway transport opportunities for transit cargo ex China to Europe and vice versa is still relatively new and many freight forwarders rail operators do seek any new market niche to participate in, we presently rather see competition then collaboration activities so far. This however does not count for European stretch where at least we as InterRail do try to enter into such collaborative networks and first attempts did proof successful although I see much more options to be followed in future”, says Reinhard.

ywu-madridInterRail’s portfolio has developed during the last years and now includes container block trains, open trains to be loaded with single containers or container groups and a regular LCL line from China to Germany. In 2014, Interrail courageously approached the small consumer goods segment and launched, in cooperation with Chinese Railways and DB Intermodal, the first container block train between Yiwu (East China) and Madrid (Spain). The company’s flagship project marked the longest distance traveled in the China-Europe overland traffic, a 21 days 13,000 kilometer route via Kazakhstan – Russia – Belarus-Poland – Germany – France. At the time, many questioned the commercial feasibility of the service. In 2015, 17 block container trains carried 1488 TEU on this route and in the first months of 2016 already 11 trains transported 958 TEUs, a spectacular increase of 556% compared to the same period last year, according to the Chinese service operator Yiwu Tianmeng Industrial Investment Co Ltd.

This achievement is also a sign that China’s economic downturn is not affecting the development of this market niche for railways. “As the breakthrough of Trans-Siberian /Trans-Kazakhstan Rail corridors was very much related with Chinese policy of NEW SILK ROAD, respectively ONE BELT ONE ROAD including subsidizing railway transport from China to Europe and vice versa which was implemented only few years ago, I consider we are still at the start of using rail option thus the numbers of containers so far carried by rail on transit is still negligible although meanwhile many Chinese regional state platform companies have started to lance trains. However based on the actual carried transports, we cannot face any affect of China’s economical slow down – contrary. However, sanctions on Russia by EU and vice versa do have a (very small) effect as indeed some few commodities are banned (such as milk-powder which is banned where as baby milk-powder is not under ban)”, opinions Reinhard.

The latest intercontinental rail freight container train launched, which connects Wuhan, the capital city of central China to Lyon (France) belongs to (TEL), a joint venture between Deutsche Bahn (DB) and Russian Railways. The first China – France 42-container train reached Vénissieux Saint-Priest intermodal terminal, near Lyon on the 21st of April, after completing 11,300 km in 15 days. The train crossed through Kazakhstan, Russia, Belarus, Poland and Germany.

TEL is also one of the main China-Europe rail freight service operators. In 2008, TEL operated its first Beijing – Hamburg train, the Trans Eurasia Express. Two years later, after intensive testing, TEL launched first company trains on Chongqing –Duisburg and now operates over 400 connections /year. “TEL is the in-house operator of Deutsche Bahn Group when it comes to trains between Europe & China v.v. As an independent railway operator we offering services to more than 24 destinations inside of China, with 5 trains per week for large, medium and small size logistics companies around the globe”, says Nicolai M. Noeckler, TEL Director Business Unit Asia & Pacific. In 2014, TEL transported USD 8 billion worth of goods on this route.

The “Chinazug” (Chinatrain) intense activity is a result of an innovative business model implemented by DB, starting with 2012. The “Netzwerkbahn” business model involves the replacement of wagon load system with a combination of both individual wagon and block train systems, obtaining competitive prices and improved transit times. DB expects a three fold increase in the number of containers transported, from over 30,000 in 2015 to 100,000 by 2020. In order to reach this objective, DB and China Railways signed a memorandum of understanding on cooperation in the area of rail freight transport between China and Germany.

Vienna-based company Far East Land Bridge, part of UTLC is one of the first logistic companies to provide railway services between Europe and Asia. Starting to 2013, the company has introduced a speed fright train from Suzhou to Warszawa, with a guaranteed 14th days arrival. At the end of 2014, a first speed train service from Europe reached to Suzhou l after only 12 days. In April this year, FELB launched the first train from South China to Europe and CIS. The departure terminal is an excellent position to serve the southern regions in Asia. The westbound train from Shilong terminal reaches Malaszewicze, Duisburg, Hamburg and Moscow, with a transit time varying between 17-19 days.

The company plans to cut down China-Europe rail transport time to only ten days. One of the technical innovations that could help reach that objective is the entering into service of the 120km/h freight wagon developed by Altaivagon. The new freight wagon will enter TransContainer’s rollling stock fleet to service the Trans-Siberian Railway.

All these operators and service providers have as objective to extend their time and price competitive advantages even further. “We already have achieved very fast transit times of 13 days from the Chinese origin station to the German destination and I am sure, there is still place to further accelerate to around 10 days. Secondly, after the customs union states of Kazachstan, Russia and Belorussia have brought a UTLC placed at the market (the railway NVOCC owned by each mentioned state by 33%), we consider this as a big step ahead to better coordinate both rolling stock and train quantities and this again will for sure lead to lower rates”, says Reinhard. The environmental competitive advantage of rail transport does not weight as much as the previous two in the decision of becoming a customer of China-Europe rail transport. “Specially European importers and mainly stock listed ones do always ask for respective CO2 datas which correspond very much with those of deep sea carriage. Still, I have not yet encountered any company which made the decision purely on environmental benefits. As the rail transportation options between China and Europe and vice versa are more to be considered a good supplement and less a replacement of deep sea due to speed and punctuality of rail transportation, the environmental benefit does not count that much as to similar to deep sea. However, as the rail option becomes more and more a strong competition to air/sea and airfreight, this argument will certainly become more important”, he says.

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