Jun 2016 COVER STORY – Through the Complexities of OBOR

The “One Belt, One Road” (OBOR) initiative is one of China’s most sizeable and ambitious commercial undertakings in recent times and is poised to add fuel to the steady rise of the “Silk Road” region as the world’s center of economic gravity. Ben Simpfendorfer, Founder and Managing Director of Silk Road Associates and previously a senior China economist at RBS and JP Morgan based in Hong Kong, explains the commercial implications and how your business can be a partner of a national strategy in response to real market opportunities

By Wilson Lau and Kenny Lau


The “One Belt, One Road” (OBOR) initiative, or simply Belt and Road, is one of China’s most sizeable and ambitious commercial undertakings in recent times. It is an intercontinental business strategy across a plethora of different countries with significant commercial implications, and “it will add fuel to the steady rise of the ‘Silk Road’ region as the world’s center of economic gravity.”

“The strategy will drive China’s commercial and political relations with its near neighbors, from Asia to Europe, over the coming decade,” says Ben Simpfendorfer, Founder and Managing Director of Silk Road Associates, an advisor on commercial strategy and business intelligence for multinational corporations operating across Asia.

“The strategy is still evolving, and it has created some uncertainty in the business community,” he points out. “But, in short, if you partner, supply or compete with Chinese companies in the region, then the strategy matters.”

“There are two key reasons that the strategy has real business implications,” Simpfendorfer believes. “The first is that Chinese companies have been increasing their investments in the Silk Road region for almost a decade in response to real market opportunities. In other words, Belt and Road is underpinned by market forces.”

“Secondly, Beijing’s financial and policy backing will only accelerate the change,” he adds. “There will be plenty of policy misfires and parts of the strategy may fail outright. But the country’s sheer commercial scale and the tendency of Chinese companies to align themselves with official policy will result in a meaningful impact on the region.”

The strategy – which makes a historical reference to an ancient network of trade routes connecting China with the Middle East, Central Europe and as far as parts of Africa – comprises the “Silk Road Economic Belt” and “21st Century Maritime Silk Road,” and is collectively known as “Belt and Road.” It covers more than 60 countries and 62 percent of the world’s total population, including Asia, the Middle East, and East Africa as well as Europe.

“Chinese President Xi Jinping has made the strategy a centerpiece of his policy, so it has support at the highest level,” Simpfendorfer explains. “Beijing’s policy support for the strategy is still evolving, but leading Chinese companies can be expected to enjoy greater support for any commercial activity that falls inside the country’s Belt and Road strategy.”

“The strategy is not a trade agreement,” he says. “It is best viewed as a mission statement describing China’s commercial and political engagement with its neighboring countries.”

2Commercial implications

Belt and Road can be considered China’s re-focus on its investment flows when opportunities here in Asia have somewhat been overlooked due to the overshadowing rush to Africa. “The commercial belt which runs from China to Indonesia, India and Turkey accounts for 35 percent of the world’s urban spending,” Simpfendorfer notes. “That’s the real commercial prize of the next decade, and Belt and Road recalibrates China’s focus on that prize.”

“As a specific set of policy initiatives, it’s President Xi’s timely reminder of the opportunities in countries closer to home. It does not set any new precedent,” he says. “For instance, I was in Dubai recently and met with 45 Mainland Chinese companies; all argued that that they had been there even before the initiative was announced, and they’ll remain in Dubai whether Belt and Road is successful or not.”

“To put it another way, the initiative taps into a strong free-market dynamic and the return of the Silk Road economy,” he explains. “Chinese companies have been making money on this economy. Belt and Road simply formalizes their activities by providing policy support.”

Although critics have argued that Belt and Road is China’s solution to the problem of industrial overcapacity, it is not entirely a case of simply selling excess supply. “China’s GDP growth has slowed to its lowest rate in 20 years, and Beijing is trying to rebalance the domestic economy and find new markets for overall growth,” Simpfendorfer explains. “The Silk Road countries can be part of the solution as they account for 42   percent of the world’s economy.”

“The Silk Road countries are also near some of China’s least developed provinces in the southern and western regions. By developing trade and transport links with Central and Southeast Asia, China can further spur growth in those regions,” he says. “I am less optimistic, however, that the strategy will cushion domestic GDP growth from slowing much below its current rate. That might have worked in the 1990s, but not today, because China is simply too big.”

Five provinces of China – Guangdong, Jiangsu, Shandong, Zhejiang and Henan – are already big enough to rank among the Silk Road’s ten largest economies; only India, Indonesia, Korea, Turkey and Saudi Arabia are on the list. The province of Guangdong alone has a GDP of some US$1,060 billion – it is larger than 60 other economies of the Silk Road region, Simpfendorfer points out.
3

“If Guangdong can’t solve China’s overcapacity problems, it’s tough to see how exporting the country’s excess automobile or steel products, for instance, to smaller economies such as Kazakhstan (GDP of US$195   billion) or Pakistan (GDP of US$270 billion) will,” he says. “Even some Chinese companies might find that foreign markets, while profitable, just aren’t large enough. The Belt and Road region itself is large, but marketing and distribution to so many individual countries are a challenge even for foreign MNCs.” But individual Chinese companies, he says, will be able to benefit from an additional source of revenue, and a number of Chinese global champions will likely emerge as they learn to identify viable joint venture partnerships and to market and distribute their products across emerging markets. “So far, some leading state-owned firms are good at doing these, but it is a small number. The policy will encourage the pool of capable firms to go international.”

4The scope of business

It is no doubt that the engineering and construction sectors, especially those of China, will be heavily involved in projects initiated under the Belt and Road strategy. More importantly, there will also be a significant amount of activities in the finance sector in supporting many of the initiatives through capital-raising and partnerships among financial institutions on a global scale.

Demand for fund management services, for example, is likely to increase, and a growing number of Mainland Chinese financial institutions will seek to tap into the pool of capital and funds across Asia Pacific and beyond, Simpfendorfer notes. And the Asian Infrastructure Investment Bank (AIIB), a multilateral financial institution which supports the building of infrastructure across Asia.

“Chinese firms have been very competitive providers of the type of construction and engineering services for projects under Belt and Road; it won’t be a surprise if Chinese firms are involved in many of the deals,” he says. “However, it isn’t just about China, and we should not forget about Japan or the US. They are also very competitive providers and may get involved in some of these projects, even though they are not Belt and Road countries. What’s important is that they can win deals.”

In other words, China isn’t the only country which will benefit from the region’s rise despite all of the global headlines about Belt and Road, Simpfendorfer stresses. “Indeed, many countries have their own well-established Silk Road strategies. Japan is the best example. Its corporate sector is already well entrenched in many Silk Road countries, and Japanese Prime Minister Shinzo Abe has been a regular visitor to the region over the past two years.”

“This is especially true in Southeast Asia where Japanese companies are often the dominant foreign player,” he continues. “And Japan isn’t alone. Turkey has strong ties with Central Asia, and Turkish construction companies already contest fiercely with their Chinese peers. Korean companies are similarly tough competitors – just consider the US$20 billion nuclear deal a Korean-led consortium won in the UAE in 2009.”

“Such deals are often overlooked, but they are equally impressive and underscore that foreign businesses shouldn’t be focused on Belt and Road at the expense of the broader Silk Road opportunity,” he adds. China’s own Silk Road Fund, although smaller in scale compared with AIIB, also has a global mandate. “It is ready to fund such deals as those of China National Chemical Corporation) in Europe and others in Pakistan; banks in China, particularly the big four state banks, will try to do much of the funding for these deals,” Simpfendorfer says. “The businesses I met in Karachi confirmed that China’s banks are funding deals.”

And there is a role for Hong Kong professional services providers, he adds. “Many Chinese companies are not familiar with countries of the Silk Road region including Pakistan. When it is government-to-government deals, they are fine. But matters in private deals are equally complicated, and I foresee rising demand from Chinese companies for good professional advice.” The challenge for Hong Kong-based companies and MNCs, he says, is how they can develop good strategic alliance across these markets. “For instance, how do they get their colleagues in Indonesia or Kazakhstan to be aware of Belt and Road, be sufficiently interested to source intelligence and share that with their offices in Hong Kong. As many MNCs are geographically siloed, it presents a real challenge in terms of how they conduct business and their ability to connect with colleagues across these distinct markets.”      

5 (new)Hong Kong’s role

Belt and Road can be a window of business opportunities for companies from a diverse range of sectors in Hong Kong – building and construction, financial and banking services, transportation and logistics, real estate development and other professional services. The large professional services firms with presence in multiple countries are particularly well-positioned to access the untapped markets of the Belt and Road region.

“For one, Hong Kong stands to benefit from a more internationalized Mainland China, its overseas investments as well as foreign direct investment into China,” Simpfedorfer believes. However, companies are advised not to look so far as countries like Kazakhstan because “most Hong Kong companies have limited experience in these remote countries. They would mainly be government-to-government deals.”

“Hong Kong companies can set their sights on their own backyard, in particular the Mekong Region covering Thailand and Vietnam,” he says. “As an economic unit, the Greater Mekong is the largest part of Belt and Road.   Its supply chain has already been tightly integrated with the manufacturing base in southern China which is a massive exporter of trim products, including buttons and zippers, as well as electronic components.  Samsung’s factory near Hanoi in Vietnam is one of the world’s largest mobile phone facilities where most components assembled into phones come from China.” Infrastructure projects in Vietnam including the Hanoi light rail, Mong Duong power plant and Yun Zhong Industrial Park “are all examples of business opportunities for Hong Kong services providers, from engineering to advisory,” Simpfendorfer says. “The Mong Duong project is especially illustrative as there are three parties involved, namely Chinese, American and South Korean.”

“While Kerry Logistics has been transforming road transport in the Greater Mekong region and the supply chain in connection with the Greater China region, a Hong Kong-based recruitment firm is involved in finding engineering talent for Saudi Arabia’s North South Railway project,” he says. “This is the way forward for Hong Kong companies.”

Because Belt and Road covers a politically complex region, Chinese companies may find it more operable by being a part of an international consortium, especially in strategic projects like ports and railways, Simpfendorfer suggests. “Even if there are no political tensions, Chinese companies will benefit from a partnership with international parties who are well-experienced in the Belt and Road countries and can deliver best-in-class practices.”

“And Hong Kong has a unique role to play because most countries in the region are happy to deal with Hong Kong, which is considered a neutral, international operator,” he highlights. “Even if it is a Chinese company working through a Hong Kong-listed entity, it makes a difference. Similarly, many companies are happy to sign contracts here because Hong Kong is a designated international arbitration hub.”

Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s