At the 2016 Annual Meeting of the World Economic Forum in Davos, the Governors of the Supply Chain and Transport community mandated a study to understand the challenges and drivers of the New Silk Road. In many ways the New Silk Road serves as a living example of a key message that Forum reports have delivered in the past years as part of the Enabling Trade initiative: that countries can achieve significant trade benefits by reducing supply chain barriers. As the global economy continues to slow and the world searches for new growth engines, the Silk Road Economic Belt and the 21st Century Maritime Silk Road (aka One Belt One Road) offers a major development framework and opportunity for connectivity, international trade, and economic development. This year in collaboration with Bain & Company, the World Economic Forum prepared a concise document summarizing the improvements that advanced technology can bring to the New Silk Road initiative.
The ancient and historic trade route between China and Europe is coming back to life as one of the biggest infrastructure projects of the 21st century, with major implications for economies around the world.
One Belt One Road (OBOR) is an all-encompassing effort to restore old trade routes and streamline the transport of goods from Asia to Europe. It’s a wide-ranging endeavour that stands to create a significant economic boost to more than 60 countries that represent 70 percent of the global population, more than half of global GDP and 24 percent of global trade.
China has invested over US$51 billion and more than 100 countries have signed on — with free trade, collaboration agreements or other partnerships — in a project that involves more than 12,000 engineering contracts. When completed, OBOR could result in the creation of 70,000 new jobs, improving the economies of such countries as Kazakhstan, which already is receiving significant sums in foreign direct investment. It could open the doors for small and medium enterprises from both Asia and Europe to enter new markets which may not be easily accessible today.
OBOR has great potential, but it faces difficult problems, primarily in the speed and cost of shipping goods. Getting the trains running smoothly has been a big start, but it’s just the start. For example, consider that when companies ship by air, they only need to deal with customs red tape and inspections at the beginning and end of a journey. Ground transport is less expensive, but it stalls each time you cross a border.
Products not only move more slowly but also are subject to increased costs and may have to move from one truck or train to another. There are also tariffs, arbitrary delays and possible system manipulation. However, if OBOR operated with a single unified customs system and effective methods of tracking the products onboard, shipments could move smoothly across boundaries.
Fortunately, opportunities exist to help OBOR reach its full potential with technologies that improve infrastructure inefficiencies, connect people and create new opportunities. For example, companies could achieve real-time supply-chain visibility by deploying low-cost satellites accessible by iPhone or other handheld devices. Companies like Amazon have pioneered the use of satellites. Another move that could dramatically help would be for Asia-Pacific Economic Cooperation to introduce a standard customs procedure for OBOR freight by consolidating requirements and developing a common IT platform. These are moves that ensure basic data — also informally referred to as “small data” — is readily available.
Addressing pain points
For OBOR countries, this path to an efficient and cost-effective New Silk Road begins by systematically addressing four digital supply-chain pain points. We’ll look at them one by one.
Speed is the first of these obstacles. Even though advances have improved the time it takes to move goods between multiple points in China and Europe, there are still major drawbacks. For instance, the lack of state-of-the-art warehouse and inventory management systems results in poor use of manpower and resources.
A second roadblock is inconsistency. Inefficient customs clearance procedures cause irregular and slow service. It’s a problem that can be tackled by upgrading the IT infrastructure in all countries along the Silk Road. The answer may be simple, but the effort and cost are substantial.
Costs are the third major pain point. While the overall costs of operating the rail route from China to Europe have dropped dramatically, there still is much room for improvement. For example, last mile delivery costs, especially in rural and sparsely populated areas, can be reduced through real-time optimization of delivery routes and even with crowd-based pick-up and delivery. IT infrastructure advances and innovative new digital capabilities could significantly help lower labour and other direct costs for companies.
Meanwhile, warehouse automation, which requires a long-term capital investment, can reduce the high indirect costs that result from shipment delays while also increasing the overall supply-chain resilience. Transparency into potential disruptions is an ingredient for scenario planning and modelling, a major approach to risk management. Such systems also will help to reduce the direct and indirect costs such as lower onboard insurance.
A final obstacle is the lack of visibility of goods along the supply chain once they enter the New Silk Road. Despite efforts aimed at generating improvements, visibility still is woefully poor.
There’s a scarcity of real-time tracking information, and what information is available tends to be unstructured. Information is not transmitted along with the cargo, so it’s difficult for the many stakeholders to know when a shipment will arrive and plan operations in advance.
This situation could be vastly improved with distributed ledger technology (DLT). DLT allows for distributed and real-time multi-party tracking, management of letters of credit, and visibility of assets and liabilities.
The decentralized ledger keeps a record of each transaction that occurs across a network. With this technology, end-customers would, among many other advantages, be able to track a shipment in real time, viewing progress live on a single electronic map. Today’s e-commerce consumers are now accustomed to having such visibility; OBOR shippers should have the same level of expectation. Companies like Flexport are pioneering the use of integrated document services to make shipping across regions much easier. As such technologies emerge and set new standards, they could make customs delays and long wait times a thing of the past.