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The Logic of Qatar’s Logistics Ambitions

Qatar

The Logic of Qatar’s Logistics Ambitions

Put simply, logistics is a global mega-business. Its processes are time-sensitive, quality-centered, customer-driven and efficiency-bound. An array of functional, operational and legal instruments shape the flow of a genuinely 24-hour industry. In response, the powerhouses of the corporate logistics sector – some of whom have been around for centuries – have near-constantly adjusted and innovated business strategies to stay at the top of their industry, typically for the good of all stakeholders.

However, logistics is not only about companies and their business activities. Superior logistics capabilities have become an important strategic asset for states aspiring to play a more prominent role in an increasingly interconnected world. In this respect, China has become something of a role model. Beijing identified early in the country’s economic development the need for facilities capable of inserting its output into the global marketplace. Since then, China’s logistics know-how has evolved to the extent that newer infrastructure projects such as Ningbo Port are on a par with more established hubs like Singapore.

Most Gulf States have factored the buildup of logistics facilities into their respective National Visions. These programs focus on reducing reliance on energy exports as the primary source of national income and diversifying economies beyond the exploitation of natural resources. As things stand, however, some states more than others are in a better position to become major global logistics centers with facilities to match. These include Qatar, for at least three key reasons.

First, since the start of the 2017 blockade by several Gulf Cooperation Council (GCC) states and others, Qatar has held the moral high ground by not responding in kind. Rather than cutting off supplies to blockading states, Doha has continued to fulfill its contractual obligations. The country has also called on allies and international organizations to help resolve the dispute with its neighbors. In doing so, Qatar has sent a strong signal to multinational companies seeking effective logistical hubs that their businesses will not suffer in the face of ongoing regional tensions.

Second, the blockade has demonstrated Qatar’s remarkable ability to adjust supply chains rapidly to meet the needs of the state and its 3million+ citizens and residents. Prior to the crisis, several now-blockading countries accounted for over 90% of Qatar’s milk and dairy supplies. Imports of these products collapsed almost overnight. However, in the space of just 4-6 weeks, Doha had made up for this shortfall by sourcing almost 90% of its milk and dairy products from 20 countries. Qatar’s ability to diversify its global supplier base at breakneck pace would not have been possible without effective resilience planning and adaptive logistics capabilities.

Third, Qatar is not only determined to become a global trading hub but also to attract the type of foreign direct investment that will take its logistical capabilities to the next level. Such ambitions require a more intensive network of international partners collectively doing business in and out of Qatar with relative ease. To assist, a radical overhaul of customs processes and systems to support future growth in these areas is now underway. Streamlined legal frameworks are also widely expected to attract greater foreign interest in the country’s logistical capabilities.

Qatar’s recently-established free zones perfectly highlight the country’s logistical strategies in action. Located close to Hamad International Airport and Hamad Port, both are designed to attract companies seeking a stronger regional presence and infrastructure that serves trading routes between Asia and Europe. In keeping with free zones around the world, they also offer a range of benefits, including zero corporate tax, seamless administration, and unrestricted capital repatriation. However, financial (and related) incentives are by no means the only tactics employed to attract and retain business.

A defining feature of the most successful free zones is their ability to encourage innovation from the companies that make their facilities home. For example, DHL Express’s relocation to the airport free zone at Ras Bufontas will be accompanied by the development of a new product that brings express bulk logistics process capabilities to Qatar and upper Gulf region. In an effort to enhance maritime logistical capabilities, the second free zone at Hamad Port’s Um Alhoul will develop a chemical cluster to encourage innovative logistics approaches relevant to this important process industry.

Taken together, Qatar’s stealthy response to the blockade and determination to become a global logistics hub chimes with its historical reputation for accepting and taking calculated risks. When Doha decided to construct Ras Laffan Industrial City in order to exploit Qatar’s vast natural energy resources, it did so knowing that its development would irreversibly change the economic structure of the country. This required a level of courage that many larger countries remain unwilling to demonstrate on the global stage. The same rule of thumb also applies to Qatar’s determination to increase its global connectedness via high-quality logistics capabilities.

This ambition has not only had a profound impact upon Qatar’s economy but also its higher education sector. Academic programs in Logistics and Supply Chain Management (LSCM) are under development at several academic institutions across the country. Their emergence in turn reflects Qatar’s growing demand for expertise in the fields of logistical planning, strategic supply chain management and operational management. To this end, course offerings by Hamad Bin Khalifa University’s (HBKU) Division of Engineering Management and Decision Sciences (EMDS) are among the most advanced, with alumni already developing promising careers in the country’s burgeoning logistics sector.

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Frank Himpel is a faculty member of the Engineering Management and Decision Sciences division at College of Science and Engineering at Hamad Bin Khalifa University in Qatar. Prior to moving to Qatar with his family in 2018, Frank served as a professor of business administration and logistics in Germany, where he also received his academic degrees. His research into aviation and air transportation management has taken him to several countries around the world.

 This article is submitted by the HBKU Communications Directorate on behalf of the author. The views expressed are the author’s own and do not necessarily reflect the University’s official stance.

Hamad Bin Khalifa University (HBKU), a member of Qatar Foundation for Education, Science, and Community Development (QF), was founded in 2010 as a research-intensive university that acts as a catalyst for transformative change in Qatar and the region while having global impact. Located in Education City, HBKU is committed to building and cultivating human capacity through an enriching academic experience, innovative ecosystem, and unique partnerships. HBKU delivers multidisciplinary undergraduate and graduate degrees through its colleges, and provides opportunities for research and scholarship through its institutes and centers. For more information about HBKU, visit www.hbku.edu.qa.

silk road

Can the New Silk Road Compete with the Maritime Silk Road?

China’s president Xi Jinping refers the Belt and Road Initiative, aka the New Silk Road, as the “Project of the Century” and according to a recent Bloomberg article, Morgan Stanley anticipates Chinese investments will total 1.3 trillion US dollars by 2027. In addition, more than 150 countries and international organizations have committed to invest in the project as well with infrastructure enhancements, such as roadways and power plants. But will this New Silk Road ever really compete with the firmly established Maritime Silk Road?

Following is a comprehensive analysis by Bernhard Simon, CEO of Dachser, an international logistics solutions provider, Mr. Simon outlines the benefits and challenges associated with the New Silk Road as well as its position as a potential competitor to the Maritime Silk Road.

Over the last few years, the more I hear and read about the New Silk Road, the more grand the expectations.  Politically speaking, the trade corridors between China and Europe, as well as Africa, seem to be China’s key to becoming a leading global power in the 21st century. Logistically speaking, it would seem that infrastructures and networks are emerging on an entirely new scale, taking a gigantic economic area—often described as representing 60 percent of the world’s population and 35 percent of the global economy—to the next level. The New Silk Road could be a kind of high-speed internet for the transport of physical goods.

As with most narratives, it is worth taking a critical look at the facts. I would like to do this now for certain logistical aspects of the Belt and Road Initiative (BRI), as the New Silk Road is officially known.

First, let’s consider the overland connection between China and Europe: the possibility of bringing Chinese consumer goods to us on the east-west route via rail. This transcontinental route was not the brainchild of China’s President Xi Jinping, who made the BRI a national doctrine in 2013.

In fact, goods have been rolling along the Trans-Siberian route from China to Europe since 1973 (with some interruptions due to the Cold War). Today, there are two routes out of northern China, which head via Mongolia, Kazakhstan and Russia to terminal stations such as Duisburg’s Inner Harbor or Hamburg. China’s western region, home to the megacity of Chongqing and its 30 million people, is also connected to the northern routes. This route allows cargo from the west to no longer need to be transported the many miles to China’s coasts.

 High Costs of Rail Freight vs. Ocean Freight

How significant are these rail links for logistics between Asia and Europe? In 2017, 2,400 trains moved about 145,000 standard containers between China and Central Europe. This corresponds roughly to the cargo of seven large container ships. The International Union of Railways (UIC) expects this to grow to 670,000 standard containers—equivalent to 33 container ships—in ten years’ time. Despite this forecast growth, the existing rail links between China and Europe are likely to remain logistical mini-niches. Steve Saxon, a logistics expert from McKinsey in Shanghai, summarizes it nicely: “Compared to sea freight, the volume of goods transported to Europe overland will always remain small.”

This is primarily a matter of cost. Transporting a standard container between Shanghai and Duisburg by rail costs between $4,500 USD and $6,700 USD; compare that to the cost of sending a similar container from Shanghai to Hamburg by ship: currently around $1,700 USD. This difference is simply too great for railway transport to be truly competitive against ocean transport, even though they move the cargo at about twice the speed. Efficiency improvements will not have a big enough impact to shift from ocean transport to rail.

Another factor is that at the moment, China heavily subsidizes these international rail connections. Once that support ends in 2021, competitiveness will erode further. It is not clear whether rail transport will be self-sustaining without subsidies.

Also, in most cases, anyone needing a shipment quickly and flexibly typically sends it via air freight, even if this option costs around 80 percent more than via railway. Thus, freight transport by rail is (and will remain) caught between economic (by ocean) and fast (by air).

Would adding more train routes change the situation?

China is planning an additional railway line in its southern region, which will move cargo to Europe via Central Asian countries, as well as Iran, and Turkey, bypassing Russia entirely. Indeed, a railway line has connected China with Iran since 2018. This route is, geographically speaking, very similar to the “old” Silk Road, a trade route for camel caravans that crossed Central Asia on its way to the eastern Mediterranean. If this railway line is completed one day, it will raise a number of questions from a European perspective: How can safety, punctuality, and reliability be guaranteed? How can delays caused by customs clearance be minimized? What effect will international sanctions have, for example, on transit through Iran? How can the misuse of containers for smuggling immigrants be avoided? In other words, many issues need to be addressed before a railway corridor south of Russia can be established.

There are two more routes in China’s BRI strategy. One is in Southeast Asia: a 2,400-mile railway line from Kunming to Singapore plus a branch to Calcutta. The other is a rail line that starts in China’s far west, then runs through Pakistan to the port of Gwadar on the Arabian Sea. Crossing over various passes in Central Asia, this technically challenging project is expected to cost $62 billion USD. However, both routes have only a very indirect connection to freight traffic between China and Europe.

So the situation will remain much the same into the future–some 90 percent of world trade will go by ship. Rail transport via the New Silk Road will not change this. If all this freight suddenly started rolling along the Silk Road, the route would be like an endless conveyor belt loop—the idea is completely absurd.

And what about the Maritime Silk Road?

More important than Eurasian railway routes is the so-called Maritime Silk Road, i.e., the transport of cargo from China to Europe by sea. As soon as Portuguese sailors opened up China for trade by sea in 1514, the old Silk Road began to fade from memory.

Today, more than 50 percent of global trade takes place on the Maritime Silk Road between China/East Asia and Europe. The world’s largest container ports are on this route: Shanghai, Singapore, Shenzhen, Ningbo-Zhoushan, Busan, and Hong Kong. The development of the Maritime Silk Road needed no Chinese master plan; logistics infrastructure arises wherever corresponding investments pay off.

China has numerous plans for these established shipping routes, including port expansions. Its shareholdings in around 80 port companies—including Piraeus and more recently Genoa and Trieste—support its plans and ensure investments. Why should we take issue with China for pursuing these goals leveraging its position as a leading global economic power? It is not the first country to promote its economic interests with direct investments and financing. Europe, too, should pursue a strategy of developing an enhanced infrastructure to transport freight to and from China/Southeast Asia in order to ensure a reciprocal exchange.

And China’s plan to step up the use of the maritime corridor through the Suez Canal, which shortens transport between China and Central Europe by at least four days compared to the route around Africa, is reasonable and less complicated. The Frenchman Ferdinand de Lesseps completed the Suez Canal in 1869 with precisely this goal in mind.

Conclusion

Nobody denies that the diverse projects of the New Silk Road hold great economic potential; that they would improve the network of connections between Asia and Europe; and that Beijing has a geopolitical interest in pursuing them. China is creating an enhanced infrastructure that will benefit all participants in the global economy. Nevertheless, it would be advisable to evaluate the logistical opportunities with the necessary dose of reality. I would caution against being dazzled by the beautiful visions and the fascinating narrative as it could cloud your vision and lead to using poor judgment and making risky investments.

 

Bernhard Simon is the CEO of Dachser Logistics