Written by TY Chin | Updated Feb 28, 2018
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Belt and Road Initiative, setting South East Asia region as central Global Value Chain of the future
In 2016, China companies invested US$14.53 billion in countries along the “Belt and Road”; where the contract value for projects along the routes amounted to US$126.03 billion, with a turnover of US$75.97 billion (Source: Ministry of Commerce, China). A large part of the investment is in South East Asia countries that includes Singapore, Indonesia, Thailand and Malaysia. From 2013 to 2016, the Belt and Road Initiative has created more than 180,000 local jobs, and paid $1.1 billion in tax to local governments.
The Belt and Road Initiative (BRI) is China’s globalization project introduced by President Xi in 2013. It encompasses more than 60 countries, 4.4 billion people and up to 40% of the global GDP. The routes consist of the “21st Century Maritime Silk Road” and the “Silk Road Economic Belt”. The Belt is a land route from China’s western region through Central Asia, extending up to North of Europe. The Road consists of shipping lanes from Western Asia, through South East Asia, Africa and Europe.
The plan opens up new market opportunities for companies along the routes, but also comes with complicated risks and challenges.
Belt and Road benefits China and the countries along the route through shared economic growth. According to the Asian Development Bank, Asia needs to invest $26 trillion by 2030 to maintain its growth momentum. Aside from Singapore, most of South East Asia countries are hampered by infrastructure deficits. China’s investments in infrastructure connectivity will fill in the gaps in economic expectations, and also the possibility of developing the South East Asia region into the centre of a future global value chain.
Chongqing, the Place for the Belt & Road Project
Chongqing is a key location in the Belt and Road Initiative, where much of the Belt and Road actions are happening through its land, air, water transportation hubs, logistics city and free trade zone. Chongqing is situated on the upper reaches of the Yangtze River in western China, linking China to Europe through a network of roads and rails across Central Asia. It is also connected to Southeast Asia through a highway that connects to the port city of Qinzhou in southern Guangxi. The Chongqing-Xinjiang-Europe (Yuxinou International Railway) is a 10,000-km-plus rail route stretching from Chongqing to Duisburg, Germany. As at end of 2015, the railway has handled over US $10 billion worth of freight both ways.
The Chongqing free trade zone connects the new Silk Road to the Yangtze River. Approved in April 2017, it aims to accelerate development in the western region and also to promote Belt and Road activities.
Chongqing is also the base of China-Singapore (Chongqing) Demonstration Initiatives on Strategic Connectivity, in short, Chongqing Connectivity Initiative (CCI). Launched in 2015, this is the third government-to-government project between Singapore and China, and a linchpin of the Belt and Road Initiative. Four areas of collaboration between the two countries are financial services, aviation, transport & logistics, and information & communications technology.
Under the CCI initiative, a total of US$3.22 billion financing deals have been signed as at the end of 2016, leading to savings of RMB 152 million for Chongqing businesses. Through Chongqing, Southeast Asian companies can expand into Western China; likewise through Singapore, Chinese companies can venture into ASEAN (Source: Ministry of National Development, Singapore)
Chongqing is positioned to be a major port for inland logistics that connect to international routes. Under the CCI Transport and Logistics Master plan, the Chongqing Logistics Development Platform (CLDP) and the Multimodal Distribution and Connectivity Centre (DC) are rolled out in Feb 2017. The CLDP is set up to do logistics planning and develop standards for the transport and logistics industry. The DC is a logistics hub that caters to different transport modes, such as river, rail, air and road.
Alongside the encouraging developments thus far, there are also gaps to market entry and business growth in the form of various risks and challenges. The gaps must be addressed as failure will have a multiplying effect on the business entities and the bank that financed the project.
Economic and Political Risks
Countries along the Belt and Road are vastly diverse with various ethnics, cultures and languages. Many countries have their own risk profile. On the macroeconomic level, political controversies in some South East Asia countries have undermined investors’ confidence, prompting prolonged exchange-rate volatility. Other risk factors include volatile energy prices, natural catastrophes with flood and drought, and security with the threat of terrorism and violent demonstrations.
In foreign trade, China has implemented capital control measures earlier in 2017; however, the control is not applicable for China companies participating in the Belt and Road initiative. The projects in Belt and Road are approved by various government agencies and state enterprises. Hence, within the government offices, there should be people who are experienced with due diligence and risk assessments in international projects. The implementation of control measures starts from top down. Approval of the wrong projects could cause taxpayers money for the mistakes.
Singapore, being a global trade and financial centre, is the most stable in the region, yet it faces the problem of low birth rate whereby fertility ranks last among 224 nations in a study by the U.S. Central Intelligence Agency. This poses the risks of impending economic growth and tax revenues.
Malaysia economy’s manpower needs over the past decade has been largely supported by foreign labour taking up jobs that the locals will not do. Foreign labours are consistently at a shortage. However, the government has implemented measures to reduce reliance on them, resulting in higher operational costs for companies who have to import skilled labours.
Risks face by China companies investing abroad
More than $250 billion in China’s overseas investments failed between 2005 and 2015, according to the China Global Investment Tracker.
A research report by the Centre for China and Globalization points out that for China companies expanding in the belt and road routes, their main concern is political risk whereby two thirds of the sixty over countries have debts burden classifying them below investment grades.
Other challenges encountered by Chinese enterprises investing overseas include low participation in existing international standard establishments, lack of professional managers with international experiences, miscommunication between Chinese enterprises and international Non-governmental organizations, misunderstanding of foreign trade unions, difficulties in promoting Chinese brands internationally, and low ability in facing legal and political risks.
Detrimental effects of poor investments
Poor infrastructure investments that end up as white elephant or abandoned projects cost more over the long term, incurring interest payment and underutilization cost. The risks commonly associated with megaprojects are overrun in timeline and budget. Bent Flyvbjerg, the most cited scholar in the world in megaproject management at Oxford’s business school, estimated that nine out of ten megaprojects go over budget. The cost overruns anything between 50% and 1900%. One example of failed megaproject is the 2004 Olympic Games in Athens, which became a contributing factor to Greece debt default in 2011. In such instances, governments with tax payers’ money will have to pay for the failed projects.
International Arbitration in ASEAN
With the risks associated with going global, disputes between business partners are also inevitable. Arbitration is one way to resolve high value cross border disputes. The Hong Kong International Arbitration Centre (HKIAC) and the Singapore International Arbitration Centre (SIAC) are the two most popular jurisdictions by numbers of cases handled. Other centres include The China International and Economic Trade Arbitration Commission and The Kuala Lumpur Regional Centre for Arbitration (KLRCA).
According to the International Chamber of Commerce (ICC) 2015 Report, Singapore has been the number one seat of ICC arbitration in Asia for five years running, as well as being the fourth most preferred seat globally. The other two dispute resolution institutions in Singapore are the Singapore International Mediation Centre (SIMC) and the Singapore International Commercial Court (SICC).
In Jan 2018, China announced the formation of three arbitration courts dedicated to settling Belt and Road disputes. The headquarter is located in Beijing, the court in Xian would settle commercial disputes in the land routes (Belt), and the court in Shenzhen would focus on disputes in the sea routes (Road). According to Xinhua News, the new institutions will be based on Beijing’s existing judiciary, arbitration and mediation agencies.
Despite the growing popularity, arbitration has its challenges and disadvantages. According to Matthew Gearing of Allen & Over:
– there is a propensity for court intervention in certain Asian jurisdictions;
– courts in certain jurisdictions have refused to enforce arbitral awards on grounds which go beyond the terms of the New York Convention; and
– the pool of suitably experienced arbitrators based in the region is comparatively small compared to Europe.
Navigating through the gaps of doing business in Belt and Road
The challenges are real, so are the vast market opportunities. Even though it is impossible to completely work out all the major risks with their subsets of secondary risks, it is still viable to navigate through the right framework and strategy in both government and private sectors, driven by one common agenda.
As a safety measure, a third party business and HR advisory with links in China and trading countries helps to shorten the learning curve. They can assemble a team together, cut through the noise on cultural gaps and cushion on tensions when it arises. An advisory body works out the teething problems in the starting phase and is part of the implementation team. Aside from facilitating cross border collaboration, their role is to minimize costs from mistakes.
Once the link is established, there needs to be human capital that can deliver long term business objectives and also contribute to social and economic growth of the area. Mega projects could take up to 10, 20 or even 30 years to build; therefore there needs to be a committed team with long term vision. Also, the steering team needs to work hand in hand with local authorities to drive social benefits for the area. This includes control of air pollution and waste management.
On the state level, state administrative bodies need to establish one set of common quality standards and best practices in each sector of cooperation, and monitored by a joint management body. An example of this is the Chongqing Logistics Development Platform set up to develop standards and best practices for the transport and logistics industry.
Collaborative risk management between government and private enterprises; rather than a one sided approach is more efficient as each side has their own authority and expertise that can be utilized when faced with different type of challenges.
The Belt and Road projects may mean different things to different companies; but undoubtedly, it is an economic growth engine that will develop emerging markets in Asia as centre of global value chain in the near future. As companies’ growth hit a bottleneck; there are always opportunities outside their existing market. Navigating the gaps of growth might seem challenging, but when done with the right timing, speed, agility and high standards, the rewards are priceless.
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