Bulk Distributor Nov/Dec 15 | Page 5

Intermodal November/December 2015 BULKDISTRIBUTOR Chinese puzzle 5 China is a similar size to the USA, with a much larger population and phenomenal growth in freight traffic. So why hasn’t intermodal transport really taken off? R ail intermodal logistics has gained significance in North America over the past 10-15 years based on cost and operational efficiency. In China, however, the story has so far been different. Considering the length of haul and commodity characteristics of China’s manufacturing sector, the country has a persistently low incidence of rail intermodal participation in domestic and international supply chains. A report* by the World Bank has found that the binding constraints behind the low incidence of intermodal services in China are most likely to be found on the supply, rather than demand, side of the equation. At the root of the challenge is the regulatory and institutional environment which regulates freight tariffs, and which provides little or no flexibility for China Railway Corporation (CRC) to tailor services to customer needs. The growth of China’s freight transport activity over at least the past 15 years has been breathtaking. Between 1998 and 2013, total freight tonkilometres transported grew at an average annual rate of 10.4 percent, faster than the rate of growth of the economy as a whole (9.7 percent). In volume terms, both exports and imports grew at double-digit levels over the same period (15.5 and 15 percent, respectively, per year), generating significant transport demand in the process. Not surprisingly, estimates show that between 1990 and 2008 the exports sector contributed between 15 and 30 percent to China’s GDP growth. The freight transport sector has been instrumental in enabling China’s trade and investment-led growth model. Yet when looking at the composition of China’s freight transport demand over the past several years, a clear picture emerges: it has been facilitated primarily by the road and, second, the waterway sectors at the expense of rail. Between 2008 and 2013, the most recent period for which official statistics are available using the same measurement, China’s freight ton-km transported over the road grew at an average annual rate of 16.7 percent, nearly double the rate of growth of the economy and nearly three times the rate of growth of rail freight ton-km, which stood at a comparatively low 5.8 percent. Road is king While in 2008 the rail sector accounted for 22.8 percent of all freight transport activity, by 2013 this had dropped to 17.4 percent. Conversely, over the same period road’s share of freight increased from 29.8 to 33.2 percent, as did that of the waterways, from 45.6 to 47.3 percent; that is, nearly all market share lost by the rail sector between 2008 and 2013 was gained by the highways (3.4 percentage points) and the waterways (1.7 percentage points). A longstanding lack of capacity in the rail network to accommodate more freight traffic has been a key determinant of this shift in mode share, says the report. Partly, this has been due to China spending mega-amounts on new highways to make road haulage faster and cheaper. But developments in service delivery are also to blame. A recent assessment of China’s freight mobility by the US Department of Transportation noted that “the movement of containers receives low priority on China’s rail network, following military, passenger, energy, and food movements.” As a result, China’s containerised supply chains today make scant use of rail. According to another study, in 2010 only 1.3 percent of China’s maritime port container throughput was moved to/from ports via rail. By comparison, 85 percent of all containers handled entered or left ports mounted on truck chassis on the highways, while the remaining 14 percent used the waterways. The challenge for China is how to modernise and develop its rail intermodal sector in a way that matches the remarkable performance improvements in the highway and container terminal sectors (and, on the passenger side, by high speed rail). In this respect, the experience of improving intermodal rail services in North America can be a useful parameter, the World Bank report suggests, not least because, for a significant share of China’s containerised exports, the North American network is a continuation of the same supply chain. China and CRC as its national operator are in the midst of a particularly favourable environment towards reforming the sector. This is due to the fact that massive high-speed rail investments have for the first time freed up freight rail capacity (in many cases on a dedicated basis) and placed CRC in a position to manage freight capacity relative to demand, rather than simply making capacity available in an environment of seemingly constant under-capacity. In addition, on-going reforms at CRC, and broader economic reforms in China, which have called for the market to play a decisive role in the allocation of resources, are thoroughly consistent with the type of reforms that allowed the North American intermodal sector to modernise. The World Bank argues that the most fundamental corollary of the North American freight rail modernisation experience, including intermodal, is that there is a mutually reinforcing relationship between pricing and service-level flexibility, market segmentation, and ‘customer centricity’. China’s freight demand has been met primarily by road transport Customer service In the view of some industry observers, one of the primary reasons why rail intermodal penetration in China remains strikingly low is that CRC, while technically competent, has not developed fullyfledged customer service and customer responsiveness. Yet, is this cause or symptom? The report maintains that the true root cause is more likely to be CRC’s regulatory and institutional environment, which regulates freight tariffs and provides little or no flexibility for the rail giant to tailor services to customer needs. In other words, the North American experience has shown that rate and service-level flexibility is a pre-requisite of customer cen G&