Trucks and Central Asia

I have to admit, I wasn’t always excited about Central Asia. The region’s economy is no bigger than Singapore’s, but spread over a land mass the size of Europe. It has oil, but mostly concentrated in Kazakhstan. It’s also land-locked without easy access to ports. For an economist, it isn’t a compelling story.

But that was before I spoke with Umberto De Pretto. We met at last month’s Fikr conference in Kuwait, while speaking on a panel on Arab economic integration.

De Pretto is the Deputy Secretary General of the International Road Transport Union. He naturally spends much of his time thinking about the future of road transport. He is also genuinely excited about Central Asia, and believes that the region might yet resurrect its role as a trade link between China and Europe.

After listening to what he had to say, I can only agree.

Why? Trucking goods by road from China to Europe costs 3 to 4 times more than shipping goods by sea. But transit times are only 19 days against 28 days. That matters. It’s important to get high-value goods, such as notebook PCs, into the hands of consumers as fast possible. Until then, they are simply expensive inventories.

It’s a point that will appeal to many CEOs. Over the past decade, European companies, much like their American counterparts, have gone on a crash-diet. They have squeezed inefficiencies out of their supply chains in a determined effort to reduce the inventories kept in warehouses from Birmingham to Dusseldorf.

China has played an important role in this process. The country has invested billions of dollars in its ports sector. Most ports are equipped with the latest machinery, operate 24-hours a day, and are not subject to labor unions. As a result, goods can be shipped rapidly and reliably to anywhere in Europe.

If by sea, why not by road?

Well, most of China’s export factories were located in the coastal provinces, often just miles from a port. So it made more sense to ship goods by sea, rather than road. But, rising wage and land costs have forced a growing number of export factories further inland where costs are generally cheaper.

If the trend is sustained, and I believe it will, then China’s export factories will find it increasingly compelling to ship goods by road to their customers in Europe. We might just look back on this as the new Silk Road’s defining moment─the day when the old land route between China and Europe was resurrected.

Ok, there are still a few problems. De Pretto forwarded me a feasibility study, commissioned by the U.S. Chamber of Commerce, which does a good job of laying out the challenges.

First, it takes 19 days to truck goods from China to Europe, travelling via Kazakhstan and Russia. But this assumes only 1 day clearing customs between China and Kazakhstan. In reality, 4 days are more usual.

Second, foreign trucks are not yet permitted to enter China. This means loaded containers have to change vehicle while in transit between China and Kazakhstan adding to the transit time.

Third, diesel costs must not spike. This is perhaps the greatest challenge, as while customs delays can be dealt with, diesel prices may yet jump as global demand recovers and if peak oil theories are to be believed.

Yet, it helps that the road infrastructure between China and Europe is improving all the time, not least thanks to Chinese construction companies. And if the Chinese government decides there’s good reason to link the country’s inland economy to Europe by road then expect some serious cash to be thrown at the problem.

So, I’m watching the changes closely. It’s certainly the most convincing story I’ve heard so far as to why Central Asia might yet participate in the rise of the new Silk Road.