Russia’s Northern Sea Route: The Superior Course for Maritime Trade in the Arctic

Lynx Global (AI)ssisted-Data-Science™ Dashboard facilitates public and private risk strategy

Advertisements

ABy:  Anthony J. Riddle,  Lynx Global Intelligence

 

The Chinese government intends to redraw the lines of power in maritime trade. In a Chinese-language only report distributed by the Chinese Communist Party (CCP), they signaled their intent to encourage Chinese shipping companies to utilize trade routes in the arctic circle. This will catalyze a paradigm shift in global maritime trade because China is the first major power committed to utilizing the Arctic Circle; setting a new precedent in naval history. Specifically, the CCP prioritizes the increasingly navigable Northwest Passage which crosses through Canadian and American territorial claims. Shortening transit times for maritime shipments is the primary motivation for using emerging Arctic sea routes to link China to European markets. The Chinese Maritime Silk Road ends at the Port of Piraeus, Greece, and leads through the Indian Ocean and Suez Canal. The current route cuts 10 days off the journey to Central or Eastern Europe when compared to routes which lead around the Horn of Africa. [1] Because of this accelerated transit speed “most of China’s $1 billion in daily exports to Europe [now] traverse the Gulf of Aden and the Suez Canal.” [2] The CCP now looks to the Arctic to further expedite shipments to European consumers at a time when China’s “online revenue [is] projected to double to $1.1 trillion by 2020.” [3]

China currently controls fourteen of the top twenty high volume sea ports and has launched the One Belt, One Road Initiative with the intent of establishing new trade routes to bolster its economy and expand its international influence. The maritime component of this initiative initially used a shipping route that ran through the Indian Ocean, the Straits of Malacca, and the Suez Canal. [4] This route, however, forces shipping vessels to transit through three high risk piracy zones which increases shipping costs resulting from the combination of higher insurance premiums and augmented security measures. Costs to shipping companies are increased by $726.1 million a year when transiting just the East African piracy zone because of the additional security merchant vessels require to do so safely. [5] By shifting priority to the increasingly navigable arctic, Chinese shipping companies can effectively bypass these costly and dangerous areas when shipping goods to European markets. China’s Maritime Safety Administration spokesman Liu Pengfei was quoted as saying “Once this [arctic] route is commonly used, it will directly change global maritime transport and have a profound influence on international trade, the world economy, capital flow and resource exploitation.” [6]

The Russian controlled Northern Sea Route will become navigable far sooner than the Northwest Passage according to climate change models; additionally it will have the largest ice free area comparatively to other routes. [7] The Northern Sea Route is also approximately 40% shorter than using the Suez Canal trade route [8] and shortens voyages from Shanghai to Hamburg by 2,800 nautical miles. [9] Such a significant input cost reduction for delivering goods to European markets will be irresistible for shipping companies participating in Chinese trade. An example of how arctic transits create significant savings is “the Nordic Orion, a Danish bulk carrier, [which] saved $200,000 and four days’ transit time by shipping 15,000 metric tons of coal from Vancouver to Finland via the Northwest Passage in 2013.” The Arctic Ocean therefore represents an approximate savings of $50,000 a day in transit costs while simultaneously removing the necessity for Maritime Security teams that are required to safely transit piracy zones. This will drive Arctic and non-Arctic states to compete for access to these lucrative routes that are partly claimed by the United States, Russia, Canada, Denmark and Norway. [10]

122333The Russian government has heavily invested in making the Northern Sea Route navigable for trade to compete with the Northwest Passage. China stated in their 2015 military white paper that they place great importance on “managing the seas and oceans and protecting maritime rights and interests” [11] and, as a result, they made history in 2014 by having the first unescorted commercial vessel transit the Northwest passage which delivered a shipment of nickel ore. [12] This same year China and Russia signed a 30 year and $400 billion dollar deal for GAZPROM to supply China with Russian oil in an attempt to further link Russian and Chinese economies. This deal ultimately was crippled by plunging price of oil from the $100/barrel at the time of the deal and the global supply of Liquid Natural Gas (LNG) which has become more attractive because of the Paris Agreement on climate change. [13] Russia intends to manage their Northern Passage to circumvent western sanctions by taking advantage of Chinese economic growth to repair their own economy and improve Sino-Russo relations. The Chinese decision on which arctic route to rely on will rebalance global relations between the three superpowers.

To successfully attract Chinese shipments, Russia maintains forty icebreakers and has another eleven icebreakers on order to improve the viability of this emerging shipping lane. Additional signs of Russian commitment to controlling arctic trade are found in their four active Arctic combat battalions, recently established dedicated Arctic command, and creation of sixteen ports in the arctic circle. [14] Russia’s State Commission on Development of the Arctic Regions also founded a single company to boost the development of these new shipping routes and will oversee all logistical operations in the area. [15] The Northern Passage has already experienced a 30% increase in commercial traffic from 2008 to 2010. [16] Companies interested in participating in a region that is quickly becoming viable for trade, a first in recorded history, require both familiarity with the agreements between states in the region and to establish a dialogue with new partners already established there.

We are experiencing a paradigm shift in global trade. One that can be capitalized on if effectively managed through careful analysis of real-time competitive intelligence. Companies wishing to take advantage of this development require a dedicated team of subject matter experts who are familiar with the political forces affecting global supply chains. They will also require a network of professional partners who are firmly established in these expanding markets. Without a carefully constructed strategy to mitigate potential risks created by the geopolitical pressures between states, the subsequent volatility could cause irreparable damage to a company’s supply chain.

By introducing an Artificial Intelligence (AI) driven analytical dashboard to assist a diverse team of experts, Lynx Global Intelligence is uniquely positioned to provide the services necessary to successfully emerge from this transition ahead of the competition.

 

 

[1] http://unctad.org/en/PublicationsLibrary/rmt2016_en.pdf

[2] http://www.huffingtonpost.com/joseph-braude/why-china-and-saudi-arabi_b_12194702.html

[3] http://unctad.org/en/PublicationsLibrary/rmt2016_en.pdf

[4] http://unctad.org/en/PublicationsLibrary/rmt2016_en.pdf xi, 21

[5] http://oceansbeyondpiracy.org/reports/sop/summary

[6] http://af.reuters.com/article/commoditiesNews/idAFL3N17N1JK

[7] Scott Stephenson, University of Connecticut, https://www.newsdeeply.com/arctic/community/2016/02/10/scott-stephenson-the-future-of-arctic-shipping

[8] http://www.gallois.be/ggmagazine_2013/gg_02_03_2013_90.pdf

[9] http://www.scmp.com/news/china/society/article/1937327/china-wants-its-shipping-use-faster-arctic-route-europe-opened

[10] http://www.maritime-executive.com/article/rival-claims-to-the-changing-arctic

[11] http://thediplomat.com/2016/04/going-blue-the-transformation-of-chinas-navy/

[12] http://www.latimes.com/world/asia/la-fg-china-ships-alaska-20150902-story.html

[13] http://www.reuters.com/article/us-russia-china-gas-exclusive-idUSKCN0UT1LG

[14] SEN PERDUE (R-GA): Senate Armed Services Committee Holds Hearing on U.S. Southern Command and U.S. Northern Command Witnesses: Gen Lori Robinson (CDR USNORTHCOM) PG 25

[15] http://e360.yale.edu/features/cargo_shipping_in_the_arctic_declining_sea_ice

[16] https://www.afsc.noaa.gov/publications/misc_pdf/iamreport.pdf PG 16-17

China’s Craft Beer Revolution is Under Way

The time is ripe to invest in China’s growing market.

By:  Conner Murphy, Lynx Global Intelligence

 

Background

The craft beer market is going to get a lot bigger as small and medium sized competitors gain traction across China. The time is ripe for China’s craft beer revolution.

According to a recently released report from Drink Sector[2], a beverage industry research organization, China’s beer market is set to become the world’s largest in value by 2018. This shouldn’t come as much of a surprise – China is, after all, a very big country, and has long been the world’s largest consumer of alcoholic beverages (China surpassed the United States in 2011).  However, tastes have been shifting across the country. Traditional liquors such as baijiu, a sorghum based liquor, have dwindled in popularity, while red wine and beer are becoming increasingly popular alternatives. Though beer has always been readily available in China, traditional options such as Tsingtao and Budweiser do not quite appeal to the young, internationally minded, growing middle-class. For a generation raised on designer brands and the newest iPhone, domestic beer just doesn’t make the cut. Drinking cultures and tastes are changing. As put by a local beer representative in a recent CCTV report[3], younger generations prefer to drink until you are satisfied, not drink until you are full (ie. drunk). Enter craft beer.

China’s Beer Market at a Glance

Beer is not new to China – domestic names such as Tsingtao (青岛啤酒), Harbin 哈尔滨啤酒, and Snow雪花啤酒) have long dominated the market, and remain favorites from restaurant goers to the bar crowd. Large international breweries also have a strong presence in the country, with Budweiser and Heineken readily available from Shanghai to Chongqing.  However, while beer production is at an all-time high, revenues have been on the decline since 2013[4]. The market is changing, and consumers are demanding something different from the watered–down lagers of the past century. Small breweries in Beijing and Shanghai that were once exclusively frequented by expats are now full of locals looking to experience the craft beer craze that has exploded across the US and Europe.

Big breweries, wary of the competition they are facing abroad, are hoping to take advantage of the changing demands as quickly as possible. Tsingtao has been rebranding itself across wealthier cities, spreading its Tsingtao 1903 brand as a premium alternative to its typical party-go happy image. Small taprooms have sprung up in Beijing and Shanghai, serving beers such as Tsingtao IPA and Tsingtao Stout.

china 1

[5] Tap options at Beijing’s Tsingtao 1903 SoHo Taproom.  The Beijinger

china 2

[5] Tsingtao Standard with Tsingtao Stout. The Beijinger

Meanwhile, AB-InBev has increased imports of it’s The High End line of beers into China. Beers such as Goose Island IPA and Elysian Jasmine IPA are readily available across Beijing taprooms, and continue to increase their foothold as premium beer staples. Meanwhile, AB has begun targeting local operations, and in March acquired Boxing Cat Brewery[6], one of Shanghai’s most well-known craft breweries.  These trends signal two things: First, opportunities in China’s craft beer market are readily available. Second, it is crucial to enter the craft beer market before large brewing companies gain a stronger foothold.

china 3

At Beijing’s Home Plate BBQ, AB InBev’s Goose Island now tops the draft beer list. Photograph by Mark Leong, Fortune[7]

Opportunities

Partnering With a Local Craft Brewery

This is by far the most direct method of entering China’s craft beer market. Partnering with a local startup is a great way to make your brand known, develop a robust local market, distribute directly to the customer, and maintain a strong understanding of your business operations. Small craft breweries are popping up across China, and while capital is readily available, know-how is in short supply. Entrepreneurs are seeking foreign partnerships and brew masters to assist in creating strong competitors, premium internationally supported brands, and sound business strategies.

china 4

The Next Generation of Chinese Brew masters – Graduates from the China National Research Institute of Food & Fermentation Industries. Photo provided by Jeff Li, Graduate

Collaboration Projects

Less direct than a direct partnership, opportunities exist for collaboration projects in beer production. For example, a brew master guest-training program could be arranged between US and China partners; a US brewery provides the knowhow and helps to create a collaborative collection of beers. While this option provides less control over ground operations, it does represent a chance to make strong connections on the ground, gain a better understanding of the market, and help make your brand known in specific locales. This would also open the door for future opportunities, and provide an opportunity to test the waters of a future partnership with local breweries.

Import

Finally, exporting to China remains an option. The current trade climate appears positive, with the government steadily removing trade barriers on everything from agricultural goods to natural resources[8].This means the cost of exporting to China will go down. However, while this represents an easy inroad, it is also the least likely to bring future success. The trick is not to sell beer in China, it is to spread brand awareness and become a leading presence in the future beer market. This is both incredibly difficult and risky without a local presence.

Risks and Hurdles

As with any business practice, risks exist. Foreign and domestic competition will only continue to grow, highlighting the importance of early entry into the market. Marketing and branding strategies need to be adjusted on a locality-by-locality basis – what works in Shanghai may not work in Beijing. Open and frequent communication with local partnerships will help to ease the localization of your brand. Government regulations concerning the production and distribution of alcohol are constantly changing, and differ from city to city. Local partnerships again represent the best method for overcoming regulatory hurdles, as partners have the know-how necessary for meeting local compliance standards. Finally, intellectual property rights infringement represents a leading risk across China. Recipes and trade secrets should be kept secret unless absolutely necessary, and an on-the-ground presence is essential.  Distribution channels and retailers must also be monitored, and supply chain disruptions cannot go unnoticed. These risks, while prevalent, represent hurdles, not barriers. With an on-the-ground presence and a strong understanding of Chinese business practices, success in China’s craft beer revolution is possible.

 

 

[1] China’s taste for craft offers fizz for global brewers. Reuters. March 7, 2017. http://www.reuters.com/article/us-china-beer-idUSKCN0W813B

[2] China Craft Beer Market Report 2017. Drink Sector. January 2017. http://www.drinksector.com/reports/china-craft-beer-market-report-2017

[3]央视关注精酿啤酒啦!好消息?坏消息?。 爱啤酒。September 17, 2015. http://mp.weixin.qq.com/s/rFk4C6dCn–fxMy6JpdFYw

[4]Annual Report, 2016. Tsingtao Brewing CO., LTD. December 2016.  http://quote.morningstar.com/stock-filing/Annual-Report/2016/12/31/t.aspx?t=:TSGTF&ft=&d=475f0936590f75fc5557807a2271822e

[5] Tsingtao Opens Its Own Bar in Galaxy Soho With IPA (Occasionally) on Tap and Export Quality Bottles. The Beijinger.  https://www.thebeijinger.com/blog/2016/07/20/tsingtao-opens-its-own-bar-galaxy-soho

[6] China’s taste for craft offers fizz for global brewers. Reuters. March 7, 2017. http://www.reuters.com/article/us-china-beer-idUSKCN0W813B

[7] China’s New Craft-Beer Bully. Fortune. Mar 16, 2017.  http://fortune.com/2017/03/16/china-craft-beer-ab-inbev/

[8] Cheniere Circles China After Trade Deal Portends Gas Export Boost. The Wall Street Journal. May 12, 2017. https://www.wsj.com/articles/cheneire-circles-china-after-trade-deal-portends-gas-export-boost-1494619903?mod=e2fb

China in the Year of the Rooster

While many worry about President Trump and rising protectionism in The West, the mood across China is optimistic.

 By: Conner Murphy, Lynx Global Intelligence

 

This week China celebrates the year of the rooster, and in a week hundreds of millions will return to work, eager to see what the future brings. While many worry about President Trump and rising protectionism in The West, the mood across China is optimistic. Here’s why:

The Trump Question

What is President Donald Trump going to do next? This is the question on everyone’s mind, and indeed, nobody seems to know the answer. Mr. Trump’s executive actions (not to mention tweets) over the past week have certainly increased the likelihood US and China will experience increased trade friction. Mr. Trump has recently proposed a 20% tariff on all goods made in Mexico, and could potentially propose such a tariff on Chinese goods as well. Meanwhile, congressional leaders are floating a plan to tax imported goods on consumption, effectively implementing an import tax across the board, regardless of country-of-origin.[1] Such broad trade barriers are unlikely, as backlash from China would be swift. While Trump’s goals are unknown, Congress will act to prevent an all-out trade war; this would be detrimental to the American people, business interests in China, and national security objectives.  

Instead, barriers will most likely be imposed on specific product categories produced by the steel, electronics, and agriculture industries. This will disrupt some supply chains and place several large companies in Trump’s crosshairs, forcing them to choose between US or Chinese interests. If you are a shareholder in Apple, this may be worrisome, but it presents opportunities for smaller companies hoping to expand in the Chinese market, as they will be able to avoid most new regulations. Nonetheless, the future remains unclear, and it will be critical for companies hoping to succeed in Chinese markets to keep a close eye on developing relations and policies, and remain well-informed as to how any potential changes may affect their business interests.

Xi Jinping, the new champion of globalization?

Chinese president Xi Jinping recently made headlines when he attended the Davos World Economic Forum, where he gave a speech defending the merits of globalization in the face of growing protectionism in The West[2]. He emphasized the importance of global cooperation and held up China as a beacon of opportunity, listing off China’s planned reforms, infrastructure projects, and free trade zones in the works. Chinese Premier Li Keqiang echoed this message recently in a Bloomberg op-ed[3], in which he sought to sooth the fears of international investors. He emphasized that China is, “opening new sectors of the economy to investment and widening access to many others,” and further explains that to attract investment and increase domestic demand, China will be focusing on compliance oversight, tax reform, infrastructure development, entrepreneurship, and innovation. This is great news.

Like leaders everywhere, the Chinese leadership will always paint a rosier picture than exists, and the substance of these comments should be taken with a grain of salt. For example, while China has moved to promote investment in certain sectors, it has also taken serious action to further regulate internet access and protect domestic tech industries. The government has also used a heavy hand in financial markets over the past year, actively working to avert a collapse of the RMB and prevent a nationwide economic crisis. Most regulations and laws remain murky, and compliance is difficult across many sectors.

Regardless of these issues, reforms are underway, and global events will likely accelerate them. As many Western economies enter a new era of protectionism, China appears keen to stand out as a hub for global investment. With slowing economic growth, rising wages, and explosive urbanization, China is ready to tap into the potential of international investment and domestic consumer demand. The Chinese government does not like to shock the system, so these reforms will not happen overnight. However, the Chinese government clearly strives to stand out as a champion of globalization – and when the Chinese government really wants something, they tend to get it.

 

[1] More on the congressional tax plan:  Reuters. Breakdown: Border tariff vs. border-adjustment tax.

[2] Xi’s speech transcript [English Translation]: World Economic Forum. President Xi’s speech to Davos in full

[3] Li Keqiang’s full Op-ed: BloombergBusinessweek. China Premier Li Keqiang: ‘Economic Openness Serves Everyone Better’