From silk to sand

The 21st century will witness the emergence of a superpower that most agree is awakening to its potential. Chinese partnerships with like-minded Middle Eastern countries are proving mutually beneficial

Six centuries ago, a mighty armada of Chinese ships crossed the China Sea and ventured west to Arabia and East Africa. The fleet consisted of giant nine masted junks and was escorted by dozens of supply ships, water tankers, transports for cavalry horses and patrol boats. The armada’s crew would total more than 27,000 sailors and soldiers. The largest of the junks was said to be over 400 feet long and 150 feet wide.

Loaded with silk, porcelain and lacquerware, these vessels visited ports around the Indian Ocean, where Arab and African merchants would exchange spices, ivory, medicines, rare woods and pearls so eagerly sought by the Chinese imperial court.

The Middle East-Asian channel of trade is reemerging, based on oil, petrodollars and consumer goods

Seven times, from 1405 to 1433, these treasure fleets set off for the then relatively unknown. These great expeditions brought a vast web of trading links — from Taiwan to the Persian Gulf — under Chinese imperial control. All this took place half a century before the first Europeans rounded the tip of Africa in relatively insubstantial Portuguese caravels, claiming to ‘discover’ the Indian Ocean.

The Chinese have a long, storied history in trade with the Middle East. Overland routes such as the Incense Road and Silk Road established trade initially, but maritime trade routes eventually lead to tremendous growth in commercial activities.

This Middle East-Asian channel of trade is again reemerging, based now on oil, petrodollars and Asian consumer goods. Often termed as the ‘new Silk Road’, trade and investment between the regions has quadrupled in the past decade. According to most experts, this trend will continue to rise.

By 2025, forecasts show, China will import three times as much oil from the Arabian Gulf as the United States. As has been well documented, China will be thirsty for oil, as well as a host of other commodities. The Middle East is perhaps the richest region in terms of natural resources. But the wealth source, oil, is not sustainable. As the new Silk Road is by no means a one way street, Middle Eastern countries are increasingly seeking out greater investment in China.

Middle Eastern leaders are looking for ways to sustain wealth and their countries’ economic growth, by pursuing investments in Asian financial and commercial institutions. Many of the Middle Eastern leaders seem more interested in using their accumulated wealth to buy into other established Asian companies rather than developing Middle Eastern brands.

Consider these recent examples:

• Dubai International Capital (DIC) plans to increase its assets from US$7.5 billion to US$25 billion in the next three years, with ‘a significant portion’ of that going into China. Istithmar, the branch of Dubai World in charge of asset management, has set up an office in Shanghai, after completing its first China investment of US$50 million for a 10 per cent stake in Hans Energy, a Hong Kong listed oil and gas logistics company in Guangdong.
• The Kuwait Investment Authority (KIA) has doubled its investments in Asia in the past two years and is now the largest foreign investor in the Industrial and Commercial Bank of China. KIA also has a 15 per cent stake in the Kuwait China Investment Company (KCIC), created in 2005, which manages US$200 million in assets states its primary goal is “to establish itself as one of the premier investment companies in the Gulf by building its capabilities and knowledge in the dynamic and growing economies of emerging Asia.”
• Qatar Investment Authority (QIA) recently announced that it was looking to invest significantly in financial institutions and consumer-oriented export companies in Asia, with a primary focus on China. Signing on with Singapore’s Keppel Corporation, QIA is providing the initial funding for a 30 sq kilometre ‘eco-city’ in Tianjin, China, meant to serve as a model for sustainable development in other Chinese cities.
• Saudi Prince Alwaleed bin Talal Alsaud made his first hotel investment in China last May, paying US$58 million for the leading hotel in Kunshan, an industrial city near Shanghai and is reported to have earmarked another US$1 billion for similar investments. Alwaleed is looking to purchase properties in second and third tier cities where growth is expected to exceed that of the rest of the economy.

When factoring in the investment protectionism from the US and Europe(remember the Dubai Ports fiasco?), where traditionally Middle Eastern countries might have invested, you have the formula for a fast-growing and increasingly lucrative partnership between China and the Middle East.

The Chinese are keeping the production of container ships ‘in-house’

Dubai, it might be argued, has become the unofficial Middle East capital of this new Silk Road – a gathering place of capital, consumers and traders fuelling the growth.

“We see Dubai as a logical place to be,” says Bill Janeri, General Manager of Global Sources Middle East.

“It is the third largest re-export market in the world after Hong Kong and Singapore. That makes Dubai a critical centre for trade. Plus, on the other side of it, it is a place people want to go to, both from the manufacturer’s point of view as well as the buyers. People are able to easily converge here from places like North Africa, Middle East, Turkey and Europe,” he says.

Those who attended the China Sourcing Fair last month in Dubai, bore witness to China’s desire to promote within the region. Offering a diverse marketplace of Chinese goods, ranging from kitchen utensils to furniture to cell phones, one easily interprets the fair as Shanghai’s version of a 21st century air-conditioned souk. Judging by the crowds of Middle Eastern buyers, eager for the latest China has to offer, traffic on the new Silk Road appears to be bustling.

“Buyers in the Middle East are actively looking for new ways to attract consumers and finding new and interesting products that can deliver reasonable margins is one way they are doing it,” says Janeri.

“The opportunities are huge for suppliers, traders and importers positioned to take advantage of global trade,” he added.

Forget the idea that the rise of Chinese competitors simply means cheap, low quality imitations flooding the markets. Rather, Chinese companies are starting to disrupt global competition by changing the way the game is played. Their tool of choice? Cost innovation. The strategy of using Chinese cost advantage is far reaching, in that it offers customers around the world dramatically more for substantially less.

“Product variety, reliable suppliers and cost effective products have become even more important in this year of rising inflation,” says Janeri. “Global trade ultimately benefits consumers who enjoy an unprecedented range of quality products at very competitive prices,” he adds.

Shipping With the amount of goods either leaving or destined for the shores of China, it makes sense that the Chinese are keeping the production of container ships ‘in-house’. The China Shipbuilding Industry Corporation (CSIC) oversees most domestic production and recently has been given some large orders to fill.

Companies, including China Shipping and China Cosco Holdings Co., are buying more vessels as global trade is forecast to grow 5.6 per cent this year, according to the International Monetary Fund. About 90 per cent of those shipments will be made by sea.

China Cosco, the country’s biggest container line, said recently that it will spend US$1.34 billion for construction of eight vessels, each able to carry 13,350 boxes, for delivery in 2012 and 2013. They are the largest dry bulk carriers in China and one of the largest dry bulk shipping operators worldwide. In addition, the group is the largest liner carrier in China.

China Shipping Container Lines Co., the country’s second-largest cargo-box carrier, ordered eight container vessels for US$559.8 million recently to meet demand. They said in a statement, “The purchase of the vessels will expand the fleet size for foreign trade and strengthen shipping capacity in the Europe, Middle East, and North America markets.”

The Chinese railway network is the busiest in the world, moving 24 per cent of global rail traffic with just six per cent of the world’s tracks

Rail transport is the most commonly used mode of long-distance transportation in the People’s Republic of China. The Chinese maintain about 20 principal domestic railway routes with a total length of 76,600 kilometres. It is the busiest railway network in the world, moving 24 per cent of global rail traffic with just six per cent of the world’s tracks.

The freight forwarding and logistics service company, STL, has just recently unveiled plans to build bonded warehouses and an intermodal container terminal at the Kazakhstan town of Khorgos, on the China border. The intermodal hub is due for completion by 2010 and complements the Kazakhstan government’s US$500 million investment to upgrade rail and road infrastructure throughout the country in order to meet demand for booming cargo volumes from China to Central Asia, CIS and Russia.

“We estimate that rail freight volumes to and from China will grow by 300 per cent during the next four years,” says Erlan Dikhanbayev, Managing Director, STL.

China is aware of the benefits of producing planes itself

STL has grown rapidly during the last 12 months opening offices in Singapore, India, Iran and Dubai as trading booms with the resource rich CIS and Central Asia.

“There is demand to expedite transit cargo by rail and road between China and Europe. The upgraded infrastructure and streamlined customs procedures will mean faster transit times between China and Europe,” says Dikhanbayev.

Aviation Between 2007 and 2026, China is predicted to require some 2,800 new passenger and freight planes. China’s aviation industry has learned a lot from developing increasingly sophisticated parts for Boeing and Airbus over the past 20 years, and is eager to put it to use.

With Boeing and Airbus outsourcing as much as they do, China is reaping the intellectual rewards. Currently, China makes doors and some wing parts for the Airbus A320. It is also expected to build around five per cent of the airframe of the new A350. Boeing sources not only doors and tailfins for its 737 from China, but also the rudder of its new 787 Dreamliner. To meet the demand generated by its booming economy, China has acknowledged the benefits in producing the planes themselves, for themselves.

Launching May of this year in Shanghai, China Commercial Aircraft Co (CACC) has grand ambitions. With an initial US$2.7 billion working capital, the state owned manufacturer hopes to be playing ball with the big boys, mainly Airbus and Boeing, within the next 15 years.

“The Chinese people must use their own two hands and their wisdom to manufacture internationally competitive large aircraft. It is the will of the nation and its people to have a large Chinese aircraft soar into the blue sky,” says Wen Jiabao, China’s prime minister at the launch of CACC.

The ARJ21, or Advanced Regional Jet of the 21st century, will be China’s introduction into the aerospace race. With room for 90 passengers (up to 105 in a stretch version), “the ARJ21 will prove China is striving to become a world class aircraft manufacturer,” says Wang Yawei, Vice President of the ARJ21’s financier, the state-run China Aviation Industry Corporation I (AVIC I).

“There’s never been more demand than right now,” says Luo Ronghuai, President, AVIC I Commercial Aircraft Co. Ltd. (CCAC), which oversees the ARJ21 programme.

CACC has inherited the existing ARJ21 regional-jet programme from AVIC I, a state-owned aviation firm that is one of CACC’s main shareholders. The smaller 70-seat jet, which will take to the air for the first time later this year, has already won 170 orders, nearly all from domestic Chinese airlines. CACC sees the ARJ21, and especially the forthcoming 90-seat variant, as a bridge to building a 200-seat rival to the single-aisle Airbus 320 and Boeing 737.

“China’s first jumbo jet is expected to fly by 2020 if everything goes smoothly,” said Wu Guanghui, Deputy General Manager, CACC.

“The government still controls fleet purchases,” says Richard Pinkham, an industry analyst at the Centre for Asia-Pacific Aviation, a Singapore-based consultancy. “That will provide a big boost to marketing efforts.”

So how do the duopolistic aerospace powers feel about this? Boeing says the inevitable competition will be good for business, and an Airbus spokesman describes it as “a natural ambition” for a country of China’s size to make big jets. As both Boeing and Airbus increasingly rely on global supply chains and risk-sharing partners, some of which are involved in the design stage to produce not just components, but entire sections of planes, no country is better positioned to gain from these developments than China. And the Chinese make no attempt to hide their delight over what they have learned and expect to learn, while Airbus regards the inevitable transfer of intellectual property as a necessary cost of doing business.