Sinolytics Primer China’s growing logistics footprint in Europe – seeking cooperation and bracing for competition

June 2020

Contact Markus Herrmann │ Director [email protected] Dr. Jost Wübbeke │ Director Jost. [email protected]

Sinolytics GmbH / www.sinolytics.ch Sinolytics – a European research-based consultancy entirely focused on China

Profile Key expertise areas Approach

Founded in 2017, Sinolytics is a client- • Policy/regulatory analysis, monitoring & forecasting (e.g. Primary source and Chinese- serving, research-based consultancy SCS, sustainability, cybersecurity, industrial policies) language research with offices in Berlin, Zurich and Beijing China’s digital transformation with focus on Blockchain, Problem-solving and developing • Uniquely blending in-depth research digital currency, e-Commerce and Insur/FinTech tailored solutions with management consulting approach to problem solving Cooperation/partnerships (e.g. tech-transfer/partnerships, Flexible delivery formats: • Operating at the nexus of business subnational/city-partnerships, trade associations) strategies, reports, workshops and policy and analyzing China’s political economy, Sinolytics advises companies from across business The Belt and Road Initiative – with focus on challenges and Depth in content, while strong opportunities for foreign logistics, finance and EPC sectors sectors and functional areas in contextualization

• More than 40 clients, including some China’s innovation and technology policies impacting Extensive expert network and of the largest and most respected corporate strategies and offering cooperation research partners foreign companies operating in China opportunities

2 1 The BRI driving China‘s global logistics ambitions

2 Impact on key European logistics sectors

3 Sinolytics value proposition

3 Significant Eurasian connectivity gaps persist

Logistics Performance Index*

4.0 – 4.5 *The WBG LPI ranks countries on six dimensions of trade (including 3.5 – 3.9 customs, infrastructure and timeliness of shipments) based on a survey of logistics professionals. 3.0 – 3.4

2.5 – 2.9

> 2.5 • Several countries along the BRI have large gaps in trade-related infrastructure Source: World Bank Group Key • Improving their logistics performance could increase trade as well as integration in points international logistics chains.

4 BRI’s “Maritime Road” and overland “economic belts” address these connectivity gaps

2

1

3

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6+1 Economic Corridors 1 China-Mongolia-Russia Economic Corridor

2 New Eurasia Land Bridge Economic Corridor China-Central Asia-West Asia Economic 5 3 Corridor

4 China-Pakistan Economic Corridor 6 Bangladesh-China-India-Myanmar Economic 5 Corridor 6 China-Indochina Peninsula Economic Corridor 1

1 Maritime Route

5 China’s global logistics ambitions bolstered during COVID-19 with manufacturing-logistics nexus…

April 2020: «Opinions on promoting deep integration of express delivery industry and manufacturing» Key policy ambitions

• Global and integrated supply 支持制造企业与快递企业签订中长期合同，建立互利 chains and logistics network: 共赢、长期稳定的战略合作关系. Global supply chains seen as key area of China’s future “Support manufacturing companies and courier companies to establish mutually beneficial and long-term stable strategic competitiveness cooperative relations” • Advancing vertical integration of purchasing, manufacturing 支持制造企业联合快递企业研发…技术装备，加快推 and logistics especially for 进制造业物流技术装备智慧化. automobile, consumer goods, electronics, biomedicine “Support manufacturing and courier companies to develop technical equipment and accelerate the intelligentization of • Forming manufacturing logistics technology equipment” supply chain service capabilities covering the purchase, production, sales and 支持快递企业与制造企业加强国际发展战略对接，强 after-sales 化境外资源共享，伴随出海、协同发展. • Risk management strategy “Support courier and manufacturing companies to strengthen dealing with potential new their international development strategy and overseas resource challenges after the current sharing and accompany their overseas development” global pandemic

• via Jointly published by the Ministry of Industry “Study to accelerate improvement of international High tech application and Information Technology (MIIT) and the freight capacity and ensure the smooth flow of supply chains State Post Bureau in April 2020 the international logistics supply chain.” - Li Xiaopeng, Minister of Transport

6 … building on existing multi-layered policy tool-box – implemented with four key pillars

Key policies Policy objectives 4 key pillars

• Outlining framework, key areas of cooperation and cooperation Vision and Actions on mechanisms regarding BRI Jointly Building Silk Road Economic Belt • On land, focusing on jointly building a new Eurasian Land Bridge and National champions contribute to and 21st-Century setting up key economic industrial parks; at sea, focusing on high growth rates of logistics industry Maritime Silk Road connecting major see ports along BRI and extend global networks.

• Setting annual 8% growth rate for logistics industry Medium- and long-term plan for logistics • Forming large-scale logistics firms via shareholding, M&A, reorganization e-Commerce giants benefit from industry (2014-2020) • Developing international maritime hubs, integrating railway station and favorable policies to build out logistics ports and improving efficiency of logistics hubs and railway connectivity.

Cross-border • The number of pilot areas has been increasing every year since 2018, e-Commerce pilot currently amounting to 105 pilot areas Intensive and ambitious government areas • Building up logistics special lines targeting key countries guidelines set targets for the high- tech development of the logistics • Meeting the increasing logistics demand between China and Europe industry. Guideline for because of the trading boost along BRI „Intelligent Shipping” • Infrastructure construction: railway, logistics hubs Comprehensive and effective • Developing intelligent shipping as a new business model commercial diplomacy is promoting China Railway Express • Improving intelligent level of ports and navigation the internationalization of Chinese development plan logistics companies. • 2025 plan: finish initial framework, regulation and standards system

7 Pillar 1: COSCO’s policy-backed sprint to becoming a global integrator for container logistics

COSCO as national champion COSCO’s business portfolio: 3 priority businesses leveraging Chinese BRI policies

COSCO‘s rise to a world-class shipping company is the result of a political strategy by Business Shipping &port Logistics Shipping Finance the Chinese leadership. lines • Container shipping • Top 1 logistics provider • Top 3 global container capacity 300 million TEU in China leasing service 1 SOE consolidation: • Investments in 51 • Business covering 200 The government-backed merger of container ports worldwide ports globally COSCO and China Shipping has created one of the largest national champions. NDRC: Action plan of MOT: Opinion of high- MOT: Opinion of 2 Ambition of intelligent shipping: New western sea-land quality shipping modern shipping corridor industry development service industry COSCO participates in government- Chinese • Shipping liners • National champions • Variety of financing funded technology projects, such as the policies 5G smart port in Xiamen and the national connection along BRI are key players of BRI modes intelligent shipping satellite • Financial support for supply chains • Creation of shipping communication platform. port constructions • Intelligent shipping finance products and sustainability 3 Strength of BRI network: COSCO leverages China’s BRI network, shipping 1.72 million TEU of freight along the BRI by May 2019. 4 SOE Cooperations: • The global business of COSCO is strongly benefitting from supporting policies and strategic plans of Chinese government authorities Horizontal cooperation with Chinese • Compared to other integration container logistics strategies, COSCO is mainly focusing on global supply SOEs, such as China Railway Group, chain build-up and infrastructure constructions, in line with the Chinese government’s BRI ambitions opens up business opp. for COSCO.

8 Pillar 2: at the core of Alibaba’s ambition to build a global logistics network

High ambition levels Cainiao’s Global logistics network

National logistics ambition: Global “123” networks First mile Pickup • “1-day delivery within China, 2-day Global E-commerce platform , TMALL Global Expanded first mile pickup network to to neighboring countries and 3-day AliExpress over 33 countries and 142 ports across world” Central gov. investment fund for Logistics Infrastructure logistics infrastructure construction Six e-hubs of smart logistics network Coverage • Hangzhou, Hongkong, Kuala Bonded warehousing Alibaba’s ambition: - 200+ Cainiao integrated Lumpur, Dubai, Moscow and Liège logistics service parters Largest bonded warehousing Building China’s smart logistics • Digital center + logistics center network in China network - 220+ countries and regions • 6 global eHubs serving Global “123” networks and BRI European specific transportation Cooperation with Chinese logistics network Overseas warehousing players in global expansion - 2 charter flight delivery routes 14 GFCs in US, Russia, France, • Cooperating with LOGINK, a - 2 China-Europe Railway Express Spain, Malaysia, Australia, etc governmental logistics platform routes • Gradually buying stakes from five Chinese major express companies • Signing framework agreements with local governments Europe as priority: Key intercontinental Cainiao routes are connecting Europe and China Cainiao mission in line with national policy: 24h delivery anywhere in China, 72h delivery globally

9 Pillar 3: Chinese tech applications competitive and present across key logistics sectors

Technology Description

Chinese terminals are leveraging 5G technology to develop smart ports Smart ports • Electronic data collection and exchange on freight traffic • Real-time monitoring of freight and automation of operations, electronic shipping orders

Warehousing is rapidly becoming automized Warehousing • In 2018, Cainiao launched its first fully automated warehouse, equipped with over 100 automated guided vehicles solutions

Intermodal is still in early stages, but expanding Intermodal • RFID-based port access and container pick-up for trucks and trains solutions • Open data exchange platforms between shipping companies, ports, and logistics

Chinese railway companies invest heavily in R&D Railway • Chinese companies offer railway technology in areas such as energy efficiency, augmented reality, localization technology technology, shared mobility, and cybersecurity

Tracking and Beidou has become a competitive alternative to GPS • Beidou navigation satellite system consists of 54 satellites covering the globe and is used in sectors such as public navigation security, transportation, smart cities and mass market applicatins

Chinese government promotes blockchain application in logistics Blockchain • Pilots for applications in customs have been started in Xiamen and Quanzhou • China Merchants Group builds blockchain platform for supply chains

Supported by central government policies, Chinese companies are offering 10 cutting-edge and innovative technologies for the logistics sector Pillar 4: Comprehensive and effective commercial diplomacy – example of Piraeus

Key Chinese official engagements in Piraeus leading to commercial results

Sister-city-partnerships Piraeus is twinned with the two port cities of Shanghai and Qingdao

Government-to-government agreement China and Greece signed the 2020-2022 Cooperation Plan on Key Areas in April 2019, which includes Piraeus as top priority

High-level meeting President Xi and Greek PM visit Piraeus Port, hailing BRI cooperation in Nov 2019

Translating into concrete commercial results

Cruise Terminal Expansion Feb 2020, COSCO announced development plan for Piraeus Cruise Terminal project

Continuing investment project from COSCO COSCO’s €600 million investment to further boost role of Piraeus as a hub has been announced in Nov 2019

COSCO’s success has translated in opportunities for other Chinese companies Piraeus Port Authority SA assigned the project of modernizing its network Infrastructure to Huawei in Nov 2018 11 1 The BRI driving China‘s global logistics ambitions

2 Impact on key European logistics sectors

3 Sinolytics value proposition

12 Four key impacts in Europe from China’s international logistics ambitions…

Chinese companies‘ investments and activities

Port operations

Terminal operations

Warehouse operations Improved rail connectivity 4 offers new shipping routes

China improves warehousing 3 and distribution capacities

Intermodal connectivity from 2 South to North improves

China increases capacity and 1 throughput in Med ports

13 … all simultaneously creating cooperation opportunities and competition for European logistics

Impact Description Exemplary firms impacted Exemplary CN partners

1 • Chinese port operators have acquired significant stakes in major European ports in Northern Europe as well as in the Mediterranean • Chinese shipping giants are re-directing their shipping lines Port operations through Chinese-controlled ports • Chinese acquisitions strongly focused on Mediterranean, potentially challenging the dominant position of Northern European ports

2 • Major intermodal hubs are built and operated by Chinese actors Intermodal within Europe connectivity • Chinese shipping carriers are increasingly integrating vertically, incorporating intermodal transport into their business

3 • E-commerce is major source for growing cross-border trade between EU and China E-Commerce • Chinese e-commerce firms increasing their European footprint and are moving into warehousing and last-mile delivery

4 • EU-China rail freight substantially increased over last few years EU/Europe- • As part of the BRI, Chinese companies are China constructing and in Eurasia, controlling a railfreight operating various railway lines significant share of trade routes to the EU/Europe

14 Cooperation or competition? Companies need to assess specific nature of impact 1 COSCO’s acquisition of Med ports is reshaping European maritime trade

Chinese port acquisitions in the Mediterranean are changing traditional shipping routes Key findings

With the acquisition of major ports, Through Chinese investments COSCO has build a strong 1 and activities, Mediterranean presence in the Mediterranean. has become an important logistics hub. COSCO is directing most of its shipping lines to its owned ports, Construction of supporting 2 using Piraeus as shipping hub. infrastructure in Med ports increases their competitiveness Med ports have seen sharp and shortens transit times. increase in activity and capacity since COSCO‘s acquisitions. Increasing capacity in ports 3 possibly diverts Northern Red indicates COSCO share shipping routes to Mediterranean.

COSCO-controlled Med ports are quickly increasing connectivity integration and throughput capacity Implications for key logistics sectors Growth of top ports in Med vs Northern Europe (2007-2016) 100 Port Liner Shipping Port and terminal operators 90 Connectivity Index* 300% +2.8 need to prepare for increasing 250% competition from South 80 Rotterdam 200% Europe. 70 150% Antwerp +5 60 100% Hamburg Freight forwarders can 50 50% World average cooperate with Chinese Bremerhaven 0% 40 companies to increase Valencia -50% services through 30 Piraeus 2013 2014 2015 2016 2017 2018 2019 Mediterranean.

*LSCI is based on 1) number of ships, 2) their container-carrying capacity, 3) maximum vessel size, 4) number of services, 5) number companies Indicates planned capacity growth in million TEU 15 +x 2 End-to-end: Chinese shipping carriers are moving into intermodal connectivity from four nodes

COSCO aims to become a provider of comprehensive container logistics services Key findings COSCO share COSCO shifts to vertical integration as PEARL is a Greek rail operator that Chinese carriers increasingly consolidation wave in shipping is nearing end. offers weekly trains from Piräus to 1 move into intermodal The company has invested in integrated logistics Central Europe. connectivity, capturing more providers as well as rail operators. of the value chain. Oceanrail Logistics is a COSCO Since COSCO’s investments, intermodal subsidiary building an integrated throughput from Southern to Central Europe has Chinese control over critical intermodal logistics platform in Europe. 2 steadily increased. connectivity nodes potentially reshapes Europe‘s logistics networks. COSCO owns or operates several intermodal terminals in crucial connectivity nodes China‘s development of land- 3 sea route via the Balkans is a method to increase its share • COSCO is building Europe’s largest inland in EU-China maritime container terminal in Duisburg container freight. • Will operate rail from Southern/Central Europe

Implications for key logistics sectors

Entrance of COSCO in Bucharest • BILK is important node in South/North conn. railway operations might cut • COSCO plans to develop terminal into into market share of European logistics hub established intermodal companies.

Piraeus

• The Zaragoza Rail Terminal is located in Spain‘s biggest logistics area 16 • COSCO plans to significantly expand capacity 3 Chinese cross-border e-commerce is rapidly expanding footprint in Europe Chinese e-retailers are the first choice for European USPs team up with Chinese logistics Europeans‘ abroad companies to serve as ‚gateway‘ to Europe Key findings Survey results: Countries from which Growth of international Europeans have shopped online parcels in EU27 (in million) Magyar Post (HU) started JV with 70% ZTO Express (CN) to set up a 1 Demand from Chinese e-retailers 160 has become a significant growth 60% AliExpress is top European logistics base. marketplace in 7 140 driver for international parcel 50% EU countries 120 services in EU. CAGR +27% Omniva (ES) launched JV with SF 40% 100 Express (CN) to shorten delivery time Chinese e-commerce giants are 80 2 30% from China to EU. building out their European 60 logistics network from 20% 40 PostNL (NL) and AliExpress have warehousing to last mile. 20 10% established „PostNL Gateway to 0 European USPs increasingly 0% 2014 2015 2016 2017 2018 Europe“ as single entry point for 3 CN UK USA GER FR NL parcels destined for EU. tailor their services to parcel 2014 2019 deliveries from China.

To support increase in demand, Alibaba is building out EU logistics network supported by Chinese gov. policies Implications for key logistics sectors

AliExpress has become the second most popular European couriers and USPs cross-border online retailer in Europe with 16% of need to increase cooperation market share after (23%). with China to capture growth of Chinese parcels. Alibaba has significantly increased its warehousing capacities across Europe through greenfield investments European online marketplaces, and acquisition of logistics companies, guided by like Zalando, will have to government support to build overseas warehouses. rethink their business strategies as Chinese players Alibaba is moving into last-mile delivery, investing in are moving to Europe. Chinese couriers such as ZTO Express, STO Express, YTO Express, and is rumored to take stake in Hermes. Cross-border e-commerce trade with 17 China grew to €17.6 billion in 2018 4 Direct rail freight connectivity from China is opening up new trade routes

Share of rail freight still comparatively low... …but volumes are rapidly increasing Key findings EU-China Rail Cargo Throughput (thousand TEU) China-driven expansion of Modal split of EU-China 350.000 1 railway connectivity has 1,9 700 Trade (million tonnes) increased rail freight to 300.000 600 101,7 1,0 EU/Europe. Rail 250.000 500 Air 200.000 400 Forecast International freight forwarders Maritime CAGR 100.42% CAGR 14.7% 150.000 300 2 already capitalize on creation 100.000 200 of new trading routes. 50.000 100 0 0 Rail freight remains highly 2011 2013 2015 2017 2016 2027 vulnerable to Chinese policy Rail Rail shifted from sea Rail shifted from air 3 changes in subsidies for freight trains running from Europe to China. China is improving Eurasian rail connectivity International freight forwarders are partnering up Implications for key logistics sectors along New Silk Road with Chinese companies Continuing expansion of rail DHL offers several rail services in connectivity on BRI is cooperation with Chinese companies, cutting down transit time significantly. opportunity for rail operators to improve their services. DB Cargo opened three offices dedicated for rail freight services in Eurasia and Monitoring of Chinese policy operates several trains in cooperation with changes necessary for freight China Railway Express. forwarders to maintain their RCG has signed several cooperation services. agreements with Chinese firms to implement further high-frequency connections. 18 1 The BRI driving China‘s global logistics ambitions

2 Impact on key European logistics sectors

3 Sinolytics value proposition

19 Sinolytics’ Service Portfolio for European logistics firms and concerned public sector actors

• We analyze the Chinese government’s policies aiming at expansion of the Eurasian logistics footprint of Policy Chinese firms; by considering geopolitical/geo-economic factors we contextualize specific projects and research & analyze risks and opportunities analysis • We analyze interlinkages between these policies and company-level strategies and initiatives of Chinese logistics actors

• We conduct research and gather relevant information to understand Chinese logistics companies’ strategies, Market business models, ownership structures/key personnel, investments and flagship projects with relevancy to the intelligence European logistics landscape and individual firms

• We co-develop business strategies with our clients for strategic China-related factors affecting their business Strategies • We screen, assess and qualify potential Chinese companies relevant for general or project-specific cooperation and partnership, and we co-develop tailored and effective negotiation strategies

Investment • We support strategic due diligences, political assessments and target analysis for investment and M&A & M&A projects in conjunction with Chinese logistics assets

Hands-on • To execute these strategies and assessments, we offer practical negotiation facilitation support and provide support outreach- and communication-support to engage with identified potential Chinese cooperation partners

20 Sinolytics’ expert team on Chinese logistics

Dr. Jost Wübbeke Markus Herrmann Martin Catarata Sishi Xie 龙信鑫 陈瑞华 丁字涵 谢思诗 Director Director Analyst Analyst MD Switzerland

Jost is an expert for the activities Markus is an experienced advisor Martin tracks Chinese Sishi tracks and analyzes Chinese of Chinese logistic companies in to European corporate and public investments along the Belt and central and provincial policies Europe. He advises corporate sector clients with special focus Road Initiative and analyzes relating to China’s global logistics clients especially in the areas of on the Belt and Road Initiative for geopolitical and socio-economic ambitions, deriving insights on the shipping, ports and intermodal finance, EPC and logistics, as well shifts it causes. He has worked interlinkages of Chinese policies transport and provides support to as on negotiation and partnership extensively on projects evaluating and company activities on the build partnerships with Chinese structuring involving Chinese strategic opportunities and risks of ground. Prior to Sinolytics, she companies. Before joining actors. Prior to Sinolytics, he the BRI for European companies, gained working experience in both Sinolytics, he was Head of worked as a Government Affairs & especially in the logistics sector. manufacturing and logistics Economy and Technology at the Advocacy Director with Bayer Currently, he is finishing his M.A. sectors. She worked in Asia-Pacific Mercator Institute for China MaterialScience (now: Covestro) in European and East Asian purchasing team of BOSCH Studies and put a focus on BRI. in China and as Management Governance at Trier University Thermotechnik and marketing team He has a PhD from FU Berlin on Consultant with Boston Consulting and is about to start a dissertation of HMM China HQ. She also China’s industrial policy. He also Group in its Shanghai, Hong Kong on the topic of China’s maritime gathered consumer service holds degrees in International and Zurich offices, focusing on connectivity advised by Prof. experience from Maersk and DB Relations and China Studies from financial services and industrial Heilmann. He holds a B.A in Schenker in Shanghai during her Berlin and Bochum and was a goods. Markus holds a MLaw Sinology and Political Science undergrad. She is currently research fellow at Tsinghua from the universities of Bern and from Trier University and studied finalizing her M.Sc in Economics at University. Geneva focusing on international the Chinese political system and University Trier and holds a B.Sc of public law and WTO law and a Chinese language at Sichuan International Economics and Trade CAS in Public Policy from ETHZ. University. from the Shanghai Maritime University.

21 Contact Dr. Jost Wübbeke │ Director Jost. [email protected] Markus Herrmann │ Director [email protected] Martin Catarata │ Analyst [email protected] Sishi Xie│ Analyst [email protected]

Sinolytics GmbH / www.sinolytics.ch