95025 China Transport Topics No. 12 March 2015 Customer-driven Rail Intermodal Logistics Unlocking a New Source of Value for China Luis C. Blancas, Gerald Ollivier, Richard Bullock The World Bank, Washington D.C. Rail intermodal logistics—the movement of containerized cargo from origin to destination where a portion of the journey takes place on rail—have gained significance in North America over the past 10 to 15 years based on cost and operational efficiency. In China, however, the story has thus 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. We find that the binding constraints behind the low incidence of rail intermodal services in China are most likely to be found on the supply side, not the demand side of the equation. Specifically, the regulatory and institutional environment, which regulates freight tariffs and provides little or no flexibility for China Railway Corporation (CRC) to tailor services to customer needs, is at the root of this challenge. This note outlines the success of railways in North America in (a) tailoring rail intermodal service offerings based on customer needs and willingness to pay; and (b) collaborating with other logistics service providers so as to concentrate on their core (rail transportation) competency, while leaving other segments of the end-to-end intermodal supply chain to those most efficient in those segments. The current policy and economic environment facing CRC seems favorable to pursuing reforms towards adopting similar practices. The growth of China’s freight transportation Yet when looking at the composition of China’s activity over at least the past 15 years has been freight transport demand over the past several breathtaking.1 In the 15 years between 1998 and years, a clear picture emerges: it has primarily 2013, total freight ton-kilometers transported been facilitated by the highway (primarily) and grew at an average annual rate of 10.4 percent, waterway (secondarily) sectors at the expense faster than the rate of growth of the economy as of the rail sector. Between 2008 and 2013, the a whole (9.7 percent2). In volume terms, both most recent period for which official statistics exports and imports grew at double-digit levels are available utilizing the same measurement over the same period (15.5 and 15.0 percent, methodology, China’s freight ton-kilometers respectively, per year2), generating significant transported over the road grew at an average transport demand in the process. Not annual rate of 16.7 percent—nearly double the surprisingly, estimates show that between 1990 rate of growth of the economy and nearly three and 2008 the exports sector contributed times the rate of growth of rail freight ton- between 15 and 30 percent to China’s GDP kilometers, which stood at a comparatively low growth.3 The freight transport sector has been 5.8 percent. While in 2008 the rail sector instrumental in enabling China’s trade- and accounted for 22.8 percent of all freight investment-led growth model. transport activity, by 2013 this had dropped to 17.4 percent. Conversely, over the same period 1 Unless otherwise noted, all freight volume statistics cited the highways’ share of freight activity increased in this note were obtained from the National Bureau of from 29.8 to 33.2 percent, as did that of the Statistics of China. The Bureau adjusted the method of calculation of road transport statistics in 2008, making waterways, from 45.6 to 47.3 percent; that is, some of the numbers not fully comparable over the period. nearly all market share lost by the rail sector 2 International Monetary Fund (2014). between 2008 and 2013 was gained by the 3 Guo and N’Diaye (2009). highways (3.4 percentage points) and the China Transport Topics No. 12 2 The World Bank, Washington D.C. waterways (1.7 percentage points) 4 . A long- estimate8), and lax safety regulation, industry standing lack of capacity in the rail network to practitioners have reported that rail accommodate more freight traffic has been a intermodal—defined as the movement of key determinant of this shift in mode share. containerized cargo from origin to destination where a portion of the journey takes place on Historical trends in China’s infrastructure rail—is typically uncompetitive with trucking on development bear out a road-dominant a full distribution cost basis.9 This is partly a pattern, particularly relative to the result of the sizable investments made in transportation of containers on rail. For improvements to China’s highway infrastructure, example, between 1998 and 2013 the length of which can mask, to a considerable degree, expressways in China grew at a remarkable 18.0 shortcomings in service delivery. It also reflects percent per year, compared to 7.0 percent for the government’s policy to preserve rail capacity the length of electrified railway lines and a mere for long distance transport of non-containerized 3.0 percent per year for the length of overall cargo, like coal and grain, as a priority. tracks in operation. More strikingly, by 2010 only about 10 Chinese ports nationwide were As a result of the above effects, and despite engaged in rail-waterborne transport intermodal economic geography features that would logistics operations, out of approximately 135 suggest the opposite, China’s containerized government-approved ports. 5 China’s overall supply chains today make scant use of rail lack of on-dock rail capabilities is particularly intermodal logistics. According to Liu et al. concerning given the country’s track record of (2013), in 2010 only 1.3 percent of China’s rapid growth in trade in general and in container maritime port container throughput was moved throughput in particular, especially in recent to/from ports via rail. By comparison, 85 years. Just between 2003 and 2009, for example, percent of all containers handled entered or left port container throughput in China grew at a the ports mounted on truck chassis on the rate of 16.3 percent per year,6 most of this off highways, while the remaining 14 percent used rail tracks, as further elaborated below. the waterways. At the port of Shanghai, the world’s largest port by throughput, only 0.5 Developments in service delivery are also percent of containers are moved in and out via consistent with an environment of sustained rail, even as the use of multimodal itineraries via market share losses for the rail sector vis-à-vis the waterways has accounted for as much as 20 the roads. A recent assessment of China’s freight percent of Shanghai’s container throughput in mobility by the U.S. Department of recent years. In other words, there appears to be Transportation7 noted that “the movement of ready demand for multimodal transport on the containers receives low priority on China’s rail part of containerized freight shippers and their network, following military, passenger, energy, logistics service providers, consistent with and food movements.� And while the trucking China’s economic geography features regarding, sector also faces service delivery challenges, primarily, lengths of haul. This suggests that the including industry fragmentation, a persistently binding constraints behind the low incidence of high incidence of empty backhauls (on at least a rail intermodal services in China are to be found third of all truck trips, according to one on the supply side, not the demand side of the equation. Inadequate rail intermodal capacity— 4 Since 1990, the rail, waterway, and road sectors have along the infrastructure and service provision collectively accounted for at least 98 percent of China’s dimensions—seems to be the critical limitation. freight ton-kilometers transported. 5 Liu et al. (2013). 6 Ibid. 7 8 Cole et al. (2008). The Economist (2014). 9 Szakonyi (2013). China Transport Topics No. 12 3 The World Bank, Washington D.C. Rapidly rising production costs along China’s many cases on a dedicated basis) and placed CRC Eastern seaboard, coupled with explicit in a position to manage freight capacity relative guidance and policy by the State Council and to demand, rather than simply making capacity other relevant departments in support of available in an environment of seemingly shifting some of the industrial activity towards constant under-capacity; and (b) on-going western and central provinces, make an even reforms at CRC, and broader economic reforms stronger case for China to fully develop the rail in China, which have called for the market to intermodal sector as a priority. According to play a decisive role in the allocation of resources, government data, manufacturing wages in urban are thoroughly consistent with the type of settings nationwide grew at an average annual reforms that allowed the North American rate of 14 percent between 2003 and 2013. intermodal sector to modernize. Wage pressure in the main production markets in coastal provinces has been even higher, due to labor shortages and the increasing cost of Intermodal Services in North America: 30 Years living in large coastal cities. 10 This has led of Customer-driven Transformation domestic- and foreign-invested manufacturers to The most salient driver that allowed the North either outright relocate or at least consider American intermodal network to become facility location decisions away from China’s arguably the most competitive rail intermodal coast. Such shift, which increases lengths of haul, system in the world is a focus on the customer, favors rail-based logistics, other things being which was enabled by partial—but decisive— equal. This will further add to the already deregulation.11 Prior to 1980, rail transportation existing—and likely considerable—pent-up of freight in the U.S. was heavily regulated, demand for rail-supported containerized supply particularly with regard to government- chain solutions for both domestic and mandated rates (tariffs) and service routing. This international itineraries. resulted in limited economies of scale in operations due to fragmentation in service The challenge for China is how to modernize delivery,12 combined with over-capacity. Lack of and develop its rail intermodal sector in a way innovation prevailed. By the end of the 1970s, 21 that matches the remarkable performance percent of installed tracks nationwide were improvements attained by the highway and operated by railroads in bankruptcy, and the container terminal handling sectors (and, on rate of accidents associated with track or the passenger side, by high speed rail). In this equipment failure was nearly four times what it respect, the experience of improving intermodal had been a decade earlier.13 Amid this backdrop, rail services in North America can be a useful in 1980 the U.S. Congress passed the Staggers parameter, not least because, for a significant Rail Act, which deregulated many, though by no share of China’s containerized exports, the North means all, aspects of rail transport infrastructure American rail intermodal network is a development and service provision. In particular, continuation of the same supply chain. the Staggers Act (a) eliminated government- regulated tariffs where modal competition China, and its national railway operator China 11 Railway Corporation (CRC), are in the midst of a The U.S. rail intermodal network is also the most particularly favorable environment towards comparable to China’s among major rail markets around reforming the rail intermodal sector. This is due the world from the point of view of scale and lengths of haul. to the fact that (a) massive high-speed rail 12 In 1970, there were 71 major railroads in the U.S., investments over the past several years have for compared to seven today (including two Canadian the first time freed up freight rail capacity (in operators with operations south of the U.S.-Canada border). 13 10 Accenture (2011). Ellig (2002). China Transport Topics No. 12 4 The World Bank, Washington D.C. existed; (b) allowed for confidential contracts to than the rate of growth of U.S. imports of goods be negotiated between rail carriers and their over the same period. After crisis-driven volume customers on the basis of supply and demand as declines in 2007-2009, U.S. intermodal volumes well as service level needs; and (c) allowed recovered smartly, growing at 7.1 percent per carriers to discontinue services to financially year during 2009-2012. While U.S. containerized non-viable (i.e., unprofitable) lines. To protect import volumes have not grown as fast since the “captive shippers� dependent on rail access financial crisis as they did during 2000-2006, rail provided by a single carrier, the Staggers Act intermodal has until very recently benefited kept in place a regulatory agency tasked with from an environment of elevated diesel prices, assessing and ruling on cases of potential rent- combined with trucking sector capacity seeking behavior by carriers on the basis of constraints due to increasingly restrictive hours- market dominance. of-service regulation and a shortage of long-haul drivers. These trends, which China may also face Routing, operational, and pricing deregulation in the future, have made U.S. intermodal in the U.S. rail transport sector resulted in itineraries increasingly attractive relative to significant gains for shippers, carriers, and the truck-based logistics. economy. Since deregulation, revenues per ton- mile among U.S. Class 1 railroads14, a proxy for Taken as a whole, the competitive provision of pricing, have reduced dramatically in real terms, rail intermodal services in the U.S. has down 44 percent over the past 30 years. At the contributed to lowering logistics costs, reducing same time, productivity (ton-miles per inflation- emissions of greenhouse gases (GHG) per ton- adjusted dollar of operating expenditures) has kilometer, and alleviating congestion on more than doubled, annual ton-mile volumes highways, while enabling international trade have doubled, and the train accident rate has and domestic manufacturing activity. With fallen by 82 percent. The majority of the regard to logistics costs, while rail intermodal is financial benefits borne out of these productivity neither a panacea nor the most cost-effective improvements, equivalent to US$20 billion per logistics solution for all commodities and all year by 1996 according to one estimate,15 were shippers, it provides lower total logistics costs— passed on to customers in the form of lower that is, taking into consideration not only rates. For the rail intermodal (i.e., containerized) transportation costs but also inventory carrying portion of the market in particular, these costs—for an increasing array of commodities, services have grown rapidly, particularly since particularly over long distances, in an the manufacturing network shift to China took environment of capacity constraints in trucking. hold at the end of the 1990s. Between 2000 and One of rail deregulation’s most beneficial 2006—a period of rapid acceleration of China- impacts from the perspective of shippers and originated import freight flows into the U.S. prior beneficial cargo owners is the reduction in to the onset of the 2007-2009 financial crisis— transport costs that it spawned. This is U.S. rail intermodal volumes (containers and significant given that one commonly espoused trailers moved) went from 9.1 million to 12.3 rationale for rate regulation is precisely to million annually, a rate of growth (5.2 percent) “protect� end-users from unreasonable rate approximately twice as fast as that of both the increases. With regard to GHG emissions, on a U.S. economy as a whole and U.S. exports of per-ton-kilometer basis rail intermodal produces goods over the same period, and slightly faster one-third of the emissions produced by truck transport, according to the U.S. Environmental 14 These are the largest rail carriers in North America by Protection Agency (EPA). And with regard to revenue. highway congestion, the mobilization of a single 15 Transport Research Board of the National Academies (2007). double-stack unit train, typically carrying 200- 300 containers, is roughly equivalent to China Transport Topics No. 12 5 The World Bank, Washington D.C. displacing 280 trucks out of the highways per intermediary has emerged to primarily serve the service. domestic segment of the rail intermodal industry: Intermodal Marketing Companies The most fundamental change brought about (IMCs). IMCs act as intermediaries between Class by freight rail deregulation in North America 1 rail carriers and asset-based truck carriers on was a paradigm shift from a focus on the one hand, and shippers and other retail guaranteeing service availability to a focus on customers on the other. IMCs do not operate providing services to customers. By allowing “heavy assets� like trains or trucks. Instead, their carriers to divest low-density routes, prioritize assets are in the form of IT and human resources service level improvements at high-density (primarily), and intermodal equipment such as routes, and enter into individual contracts with containers and chassis (secondarily). IMCs add customers (while keeping protections in place value to shippers by securing blocks of rail for “captive shippers�), deregulation paved the linehaul and truck drayage17 capacity, including way for market segmentation, tailored services, at peak periods, at rates and/or at times that and, eventually, higher returns on capital retail customers would not be able to access employed despite significantly lower rates and individually. IMCs do this by entering into long- higher levels of privately-funded capital term contracts with rail and truck carriers and by investments. This, in turn, facilitated innovation. having access to a wide array of carriers. The growth of large North American IMCs like Hub A key enabler of innovation and customer Group and Pacer International has allowed Class responsiveness in the provision of freight rail 1 rail carriers to largely exit intermodal retail services in North America has been sales and focus instead on their core specialization—particularly for the rail competency: providing linehaul (i.e., ramp-to- intermodal segment of the market. The fast- ramp) container on flat car (COFC) and trailer on paced, cost-focused, complex nature of flat car (TOFC) transportation in a way that containerized supply chain management has maximizes returns on capital employed. In given rise to a global industry of freight transport addition to IMCs, many North American asset- intermediaries who have taken over the based truck carriers 18 have developed sizable shipment origination/retail segment of the intermodal businesses and compete head-to- intermodal transport value chain through head with IMCs for retail business. Examples of specialization. Specifically, these nimble firms asset-based truck carriers with large intermodal specialize in the use of technology to optimize businesses include J.B. Hunt, Swift freight shipments across carriers’ networks and Transportation, and Schneider National. North fleets on behalf of individual beneficial cargo American non-asset based trucking companies, owners. Collectively known as third-party also known as truck brokers19, firms like C.H. logistics service providers (3PLs), such Robinson and Landstar, have also entered the intermediaries include, inter alia, freight intermodal intermediation business. By selling to forwarders, truck brokers, asset-based trucking 17 companies, and non-vessel operating common Truck drayage, sometimes referred to as pre- and on- carriers (NVOCCs). In North America, while much carriage, is the portion of the intermodal value chain where containers are picked-up and delivered at origin or of the flow of international (i.e., marine ISO16) destination by local trucks over relatively short distances containers on rail is originated by freight compared to the main (i.e., “linehaul�) portion of the forwarders/NVOCCs and the container shipping journey, which takes place on rail. 18 lines themselves, a particular type of Trucking companies who lease/own all or most of the trucks they operate. 19 16 These firms generally do not own the trucks and other An ISO container is a standard container used in the transport assets used to move the cargo they originate. international transportation of cargo. ISO containers are Instead, they act as intermediaries between truck owners typically defined by their length—20, 40, and 45 feet. and shippers. China Transport Topics No. 12 6 The World Bank, Washington D.C. intermediaries like IMCs, truck carriers, and domestic supply chains. The specialization and truck brokers, as well as more traditional core-business focus of this model has led to wholesale customers like container shipping meaningful productivity improvements across lines and freight forwarders, Class 1 rail carriers the supply chain. It must be noted, however that have been able to concentrate on their core task this has not eliminated risks, as supply chains are of managing their fixed networks and delivering exposed to weakness in any one of their (linehaul) rail transportation services. component links. For example, as rail carriers have invested record amounts (to the tune of Outsourcing and specialization in intermodal US$8 billion per year or more) over recent years services by North American Class 1 railroads is in expanding their networks and improving not limited to retail sales. For example, BNSF, a service levels, and as container shipping lines large Class 1 carrier, outsources most operations and container terminal operators have invested at its intermodal facilities, including yard in larger vessels and more capable handling management, gate management, and repair equipment, perhaps the drayage portion of the services, while retaining ownership of the North American intermodal supply chain remains infrastructure. This arrangement allows BNSF to its weakest link. This is a sector still plagued by deploy best-in-class services, where it may not fragmented, undercapitalized carriers constantly have a competitive advantage, while focusing on exposed to significant delays due to the nature the core railroad competencies of infrastructure of their operations, often involving moves in provision and linehaul operations.20 Similarly, by congested inner-cities and in and out of exiting the shipment origination (i.e., retail sales) congested port terminals. Modernizing the segment of the intermodal value chain, Class 1 drayage portion of the intermodal network is railroads in effect outsourced the container one of the biggest challenges facing the logistics drayage segment of the value chain, as IMCs, sector in North America at present. truck brokers, and asset-based trucking companies are in a much stronger competitive position to provide these services. Some Class 1 Implications from the North American railroads, notably BNSF, though by no means all, Experience for China and CRC have even exited the container and chassis The most fundamental corollary of the North management (ownership/leasing, deployment, American freight rail modernization experience, maintenance, repair, and scrappage) segments. including intermodal services, is that there is a These practices have further allowed Class 1 mutually reinforcing relationship between railroads to focus on their core value-added pricing and service-level flexibility, market functions. segmentation, and customer centricity. In the view of some industry observers, one of the The above suggests that behind the competitive primary reasons why rail intermodal penetration delivery of end-to-end rail intermodal services in China remains strikingly low is that CRC, while in North America there is an ecosystem of technically competent, has not developed a full- specialized service providers that both compete fledged customer service and customer and collaborate. Container shipping lines, responsiveness capability.21 Yet, to the extent marine terminal operators, independent drayage that this observation is accurate (and the above- operators, Class 1 rail carriers, IMCs, asset- and shown volume and market share statistics non-asset based trucking companies, and freight certainly support this assertion), this should best forwarders all participate in the various be seen as a symptom, not a root cause. The operations involved in door-to-door intermodal true root cause is more likely to be CRC’s itineraries, whether in intercontinental or regulatory and institutional environment, which 20 Van Hattem (2006). 21 Szakonyi (2013). China Transport Topics No. 12 7 The World Bank, Washington D.C. regulates freight tariffs and provides little or no its weakest link ensures that participants have a flexibility for CRC to tailor services to customer vested interest in strengthening not only their needs. In other words, the North American own performance but that of the chain as a experience has shown that rate and service-level whole. This yields several useful implications for flexibility is a pre-requisite of customer China, including the following: centricity. The recent National Development and Reform Commission (NDRC) Notice No. 2928 a. CRC need not control the end-to-end (2014) offers an opportunity to start introducing intermodal chain in order to be a successful flexibility in China’s railway sector. This could participant in China’s rail intermodal ecosystem. include the introduction of railway pricing Instead, CRC may choose to participate in those reform in a manageable yet meaningful segments where it has a core business rationale manner.22 (e.g., infrastructure provision, network management, rail linehaul service delivery, As for service-level flexibility, which goes hand- wholesale marketing and sales) and consider in-glove with pricing flexibility, one option is whether and to what extent to remain in the use of service differentiation on the basis of segments where the competitive advantage customer segmentation. For example, North rationale may be weaker (such as retail American rail carriers typically offer “hot box� marketing, operation of intermodal terminals, services that give specific containers expedited and delivery of local drayage services). treatment through their networks, at a cost premium. It is also well known that domestic The process of exiting segments need not take (53-foot) containers 23 are given preferential place simultaneously, but sequentially and in a treatment at rail intermodal terminals due to the responsible, feasible manner. For example, pilot long-standing relationship between Class 1 rail projects may be utilized to test out and allow carriers and domestic less-than-truckload and third-party service providers (say, maintenance ground package carriers. This service-level operations at intermodal terminals) to develop differentiation has, inter alia, given rise to the service capabilities consistent with the level of rapidly growing and increasingly mainstreamed quality CRC seeks to provide for its customers. transload segment of the intermodal market24. CRC could similarly tailor service offerings on the A thorough operational efficiency analysis, basis of customer logistics needs and willingness including the use of international benchmarks, to pay. would help assess the rationale for CRC to retain participation in those segments deemed to be The second lesson from the North American “non-core.� For core segments, it would mean experience is that door-to-door/port-to- embedding in CRC’s on-going practices door/door-to-port intermodal itineraries are operational efficiency and management with a delivered by an ecosystem of (public and focus on customer responsiveness and private sector) firms and regulators, rather than optimization of returns on capital employed. a single dominant firm. Within this ecosystem, the fact that a supply chain is only as strong as b. Being part of an ecosystem also means that CRC would be incentivized to collaborate 22 Scales, Ollivier and Amos (2011). and reach mutually beneficial agreements with 23 Not to be confused with “marine� ISO containers, partners in most segments of the rail intermodal typically 20- or 40-foot in length and the mainstay of international container shipping. value chain, just as U.S. Class 1 railroads 24 This refers to the practice of shifting (“transloading�) currently do with shipping lines, asset and non- cargo from international (e.g., 40-foot) containers to larger asset based truck carriers, and consolidation- domestic (53-foot) containers in order to reduce transport deconsolidation service providers. In the case of and other operating costs. CRC, it has been reported that a lack of China Transport Topics No. 12 8 The World Bank, Washington D.C. agreements with shipping lines as to the customers, to act as a form of quality handling, maintenance, and repair of containers certification. inland from maritime ports is particularly impeding broader penetration of rail intermodal Standardization of intermodal equipment. One of into western China supply chains, for example. the greatest strengths of the North American The collaborating and partnering function intermodal value chain, which is often taken for becomes essential in rail intermodal operations. granted, is the ubiquitous use of standard equipment across carriers and service types. In c. “Deregulation� does not mean absence addition to the already accepted global standard of regulation. On the contrary, regulating of ISO marine containers, this includes domestic intermodal markets is essential to their containers and trailers, drayage trucks (known as competitive performance, and in this respect “day cabs� in the U.S., as they typically lack a China’s intermodal sector may benefit from new sleeper berth, typically classified as Class 7 or and/or enhanced regulation—and its Class 8 according to engine power), adjustable enforcement. New or enhanced regulation is chassis, double-stack capable articulated well needed in the following two priority areas of cars, and terminal handling equipment like China’s rail intermodal value chain: rubber-tire gantry cranes and straddle carriers. In contrast, logistics operations in China— Trucking sector barriers to entry, in the form of whether mono-modal or multi-modal—make improved design and enforcement of trucking use of a wide array of non-standardized safety regulations, coupled with support for equipment, which makes common practices like compliant service providers. Like in many other drop-and-hook or the management of container developing Asian countries, China’s truck sector and chassis pools difficult or even unfeasible. features over-capacity, cut-throat competition While the GoC has already issued regulation of based on rates alone rather than service levels, various kinds to promote the use of standard chronic overloading, under-capitalized carriers, equipment in the logistics industry, this effort is and under-developed intermediation between still in its early stages and would be worth shippers and carriers. While these challenges are extending and accelerating. Greater availability true across all trucking segments, they are of credit and/or tax incentives to service further exacerbated in the truck drayage portion providers wishing to standardize their fleets are of the market—a key component of intermodal possible options for doing this. moves—because players in this space tend to be even more fragmented and less exposed to the A final lesson is that the rise of IMCs and truck use of IT and other modern tools than long-haul carriers was instrumental to the growth of rail and regional truckload and less-than-truckload intermodal in North America—and something operators. The reliability, predictability, and cost similar could happen in China. Much of the effectiveness of intermodal services is partially discussion of rail intermodal growth in North dependent upon a well-functioning drayage America has centered on the shipment of sector. The GoC and, where relevant, CRC, could international ISO containers. Sometimes referred promote consolidation in the trucking industry to as inland point intermodal (IPI) moves, these by better enforcing safety regulations like axle itineraries are typically originated by container load controls, vehicle roadability inspections, shipping companies and freight forwarders. But and driver training and licensing, and by the origins of rail intermodal transportation in providing access to credit to well managed North America, and much of the more recent operators with credible business plans for fleet growth in traffic, resulted from the shipping of expansion. CRC could develop a roster of domestic equipment (containers and trailers) “preferred� drayage carriers to share with its facilitated by origination from IMCs and truck carriers. As China transitions to an economy China Transport Topics No. 12 9 The World Bank, Washington D.C. more reliant on domestic consumption rather The service delivery and capacity expansion than exports, providing cost effective logistics initiatives in rail intermodal currently solutions for purely domestic supply chains will undertaken by CRIntermodal, a joint venture become increasingly critical—particularly for between CRC and four private sector partners, long haul routes linking western and eastern is a step in the right direction, but more of this provinces. The GoC could consider policy options will be needed. CRIntermodal is developing a to spur the development of logistics network of 18 rail intermodal terminals intermediaries specialized in the domestic nationwide and is a full-fledged logistics service market, akin to the role played by IMCs and provider offering terminal handling, intermodal truck carriers in the U.S. Such options could unit train operations, and value added logistics include support for joint ventures between services to/from major domestic markets. These North American IMCs and Chinese 3PLs; operations are an innovation in China’s freight knowledge exchange between Chinese and rail space in that (a) they offer integrated, door- international 3PL firms, logistics experts, and to-door services across the entire intermodal policy makers; and a formalization of the role of value chain; and (b) are an example of CRC this type of freight intermediation in domestic collaborating with other members of the rail regulation. Such efforts would have to be intermodal ecosystem. complemented by, and timed with, reforms at CRC to allow for the outsourcing of the shipment While these are welcomed developments, three origination segment of the rail intermodal value key factors are likely to be critical going forward: chain. (i) the extent to which the proposed terminal network will provide adequate coverage and A Promising Road Ahead sufficient capacity relative to market demand, including connections to international gateways Current conditions favor regulatory, operating, like maritime ports; (ii) the extent to which these and ecosystem improvements in China’s rail terminals are developed in conjunction with intermodal sector. The transformations complementary logistics service facilities such as underway in China’s economic geography caused warehouses, container depots, and terminals for by increasing manufacturing activity inland from other modes; and (iii) the extent to which CRC the country’s Eastern seaboard, coupled with will customize intermodal service delivery to road congestion in some urban markets and the match divergent customer needs based on cost impact of highway tolls, low service levels in factors like willingness to pay, commodity type, trucking, and environmental degradation from volumes tendered, supply chain routing, and the heavy truck emissions, are all favorable like. conditions for a surge in rail intermodal demand in China. In fact, much of this demand has likely The combination of these three factors—supply- already materialized, but is unable to be fulfilled demand balance, integration with other service due to supply-side constraints. The low incidence providers, and responsiveness to divergent of containerized rail transportation in China is at customer needs—sums up what this note has odds with the freight modal mix of countries referred to as customer-centric rail intermodal with similar economic geography features, such logistics. A focus on these drivers by CRC, in as the U.S. And as the development of high collaboration with other partners in the sector, speed rail has in effect freed up capacity for are likely to bring meaningful benefits to China- freight rail at key portions of China’s rail based freight stakeholders and to the overall network, CRC is increasingly in a position to Chinese economy, just as they have in North undertake supply management measures such America over the past three decades. Having as those espoused in this note. been formally requested to operate differently by China’s central Government, including the China Transport Topics No. 12 10 The World Bank, Washington D.C. Premier, in a policy shift announced in June Van Hattem, Matt (2006), “Inside Willow 2013, CRC finds itself not only in a favorable Springs�, Trains Magazine, July 6, 2006. economic environment for reform, but also with the mandate to do so. ********** Luis C. Blancas is a Senior Transport Specialist in References the Transport & Information and Accenture (2011), Wage Increases in China, Communications Technology Global Practice at Accenture. the Washington D.C. Office of the World Bank. He is the main author of this note, with Cole, David, et al. (2008), Freight Mobility and contributions from Gerald Ollivier, Senior Intermodal Connectivity in China. U.S. Infrastructure Specialist at the Beijing Office of Department of Transportation: Washington DC. the World Bank, and Richard Bullock, Railways Ellig, Jerry (2002), “Railroad Deregulation and consultant to the World Bank. Customer Welfare.� Journal of Regulatory Economics, 21:2 143-167. Kluwer Academic This note is part of the China Transport Note Publishers: The Netherlands. Series to share experience about the transformation of the Chinese transport sector. Guo, Kai and Papa N’Diaye (2009), “Is China’s For comments, please contact Luis Blancas Export-Oriented Growth Sustainable?� IMF (lblancas@worldbank.org) or Gerald Ollivier Working Paper Series. International Monetary (gollivier@worldbank.org) from the Beijing Office Fund: Washington DC. of the World Bank. International Monetary Fund (2014), World Economic Outlook Database, October 2014. Any findings, interpretations, and conclusions International Monetary Fund: Washington DC expressed herein are those of the author and do not necessarily reflect the views of the World Liu, Bing-lian, Jian-hua Xiao, Zhi-lun Jiao, Shao-ju Bank. Neither the World Bank nor the author Lee, and Ling Wang, editors (2013), guarantee the accuracy of any data or other Contemporary Logistics in China: Transformation information contained in this document and and Revitalization. Current Chinese Economic accept no responsibility whatsoever for any Report Series. Springer-Verlag: Heidelberg. consequence of their use. Scales, John, Gerard Ollivier, and Paul Amos (2011), “Railway Price Regulation in China: Time for a Rethink?� China Transport Topics, No. 01, December 2011. The World Bank: Washington DC. Szakonyi, Mark (2013), “Intermodal on Slow Track in China,� Journal of Commerce, December 18, 2013. The Economist (2014), “The Flow of Things�, July 12th, 2014. Transport Research Board of the National Academies (2007), Rail Freight Solutions to Roadway Congestion—Final Report and Guidebook. Transport Research Board: Washington DC.