Sunday, December 17, 2017

Mittelstand learning to profit from China’s new Silk Road


DECEMBER 16, 2017 AT 2:30 PM CET

I know I can! I know I can (make it from Zhengzhou, China to Europe)! Source: DPA

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As the joint owner of Hellmann Worldwide Logistics, Klaus Hellmann has strong business ties with China. But the relationship is also personal: Mr. Hellmann’s wife is Chinese, and his family-run firm ran roughly 100 freight trains between Europe and Asia over the past year. On their way east, some 22,000 containers are loaded to the brim with electronics, cars, machine parts and chemical products; on the way back, they’re transporting mainly textiles and raw materials.

It takes about 18 days for the 10,000-kilometer trip through Kazakhstan, Russia, Belarus and Poland, about half as long as a ship needs to go from Europe to China. “The railway route offers German firms a great chance to connect with new markets,” Mr. Hellmann says. Other members of the Mittelstand, the small- and medium-sized companies that form the backbone of the country’s economy, are getting on board, too.

The train link is part of China’s “One Belt, One Road” project, which aims to establish a new Silk Road connecting parts of Asia, Europe and Africa. Industrial parks, logistics centers, power plants and pipelines are sprouting up all along the route, and not just in land-locked areas. A Chinese shipping company now controls the Piraeus port in Athens, a crucial hub for its “Maritime Silk Road.” And just this month, China and Russia launched the Yamal liquid natural gas plant as part of its “Silk Road on Ice.”

China plans to pump €900 billion ($1 trillion) into One Belt, One Road, and it is looking to Western companies to help expand the project. “Hardly a week goes by where Chinese firms don’t reach out to German companies,” says Helmut Naujoks of the World Public Diplomacy Organization. And that outreach translated to an €86 million contract for a subsidiary of GP Günter Papenburg to build a 50-kilometer stretch of highway in Uzbekistan. That’s just one example.

Feeling (natural) gassy on the Silk Road on Ice. Source: Reuters

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The Mittelstand, with its “enormous know-how and its international experience,” is perfectly matched for these kinds of infrastructure projects, says Volker Treier, who as deputy CEO of the DIHK Association of German Chambers of Industry and Commerce, focuses on international business strategy. In addition to logistics companies, mechanical and plant engineering firms – as well as suppliers of specialized equipment in the energy, rail and port expansion sectors – stand to profit from the new Silk Road.

China’s trade initiative isn’t uncontroversial: Some critics fear that the project could create a monster out of the world’s second-largest economy in the form of a hegemon that routinely ignores environmental and social standards, while others worry that the bidding process will lack transparency. Yet Germany’s foreign minister, Sigmar Gabriel, doesn’t appear to be concerned. He argues that closer trade ties will bring the two sides together and said China’s project is an example of the country’s “farsighted” approach.

Mr. Naujoks urges German firms to embrace potential partnerships in Asia, but warns that there’s no such thing as a quick deal. “In China, nothing happens in a hurry,” he says. “One has to have a lot of discussions before there’s something firm on the table.” The Mittelstand may well have other concerns, however, particularly that stronger ties with China will weaken links to the US. Having imposed sanctions on a number of Chinese companies, President Donald Trump’s administration isn’t thrilled at the thought of Europe cozying up to its main economic rival. It’s a consideration that has some German companies questioning their Silk Road plans. “They are afraid of losing customers,” says Hans von Helldorff, spokesman for BVDSI, a German federal association that supports the One Belt, One Road initiative.

Considering the size of the new Silk Road project, only Mittelstand firms that work together will have a chance.

Johannes Diemer 
DXC Technology


Mittelstand companies may find it easier to take on such projects together. Kourosh Pourkian, a consultant who caters to small- and medium-sized businesses, points to a €20-million contract for a new poultry processing plant in Iran’s Mazandaran province. A group of German companies – including Baader Linco, Huber, Multivac, Poly Clips and GEA Group – won the bid over rival firms from Asia “because they offered a complete package,” Mr. Pourkian says. “The expansion of infrastructure is opening up completely new economic regions.”

Construction companies and their suppliers are embracing the approach by bundling their services via online platforms, a strategy that strengthens their market position, according to Johannes Diemer with DXC Technology. His company worked with the Fraunhofer IPA research institute to develop the “Virtual Fort Knox,” a secure IT system for manufacturing companies. “Considering the size of the new Silk Road project, only Mittelstand firms that work together will have a chance,” he says. In digital, Mr. Diemer sees an advantage for German firms over their Chinese competitors. But it’s only a temporary trump card: “The window certainly won’t be open for long.”

Jürgen Hoffmann is a freelance reporter for Handelsblatt focusing on financial issues. To contact the author: hoffmann@redhoffmann.de

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