Where do the opportunities lie for investors when it comes to China's Belt & Road Initiative? How would the evolving circumstances surrounding the Initiative affect the way it grows? Ben Simpfendorfer, Founder & CEO at Silk Road Associates, shares his insights.
China’s Belt & Road Initiative has started to gain traction. In the past 24 months, I have conducted due-diligence visits to over 15 Belt & Road countries, including Kenya, Ethiopia, Kazakhstan, Kyrgyzstan, Indonesia, and the Philippines, as well as to regions across China, as part of my consulting work. And it is increasingly clear that the initiative is having a real commercial impact at the ground-level in multiple sectors.
It’s also fair to say that the initiative faces emerging challenges. New governments in Malaysia and Pakistan are reconsidering their commercial ties to China even as concerns grow about rising debt in smaller countries. These are real issues that should be taken seriously. But neither will they result in the Belt & Road initiative’s failure. The initiative will in instead evolve, and is indeed already evolving, increasingly focusing on profitable commercial opportunities. In the process, the opportunities for foreign investors will also grow.
1) The Belt & Road initiative is evolving fast
Indeed, the most striking observation from my trips and conversations across the Belt & Road region is how rapidly Chinese firms are adapting in response to the operating challenges they face. Projects signed five years ago are not necessarily a good indicator of what is happening today. Chinese companies are increasingly focusing on real-world commercial opportunities, including non-infrastructure related projects, rather than high profile government-to-government deals. Industrial parks, logistics, and technology are all growing areas of focus.
2) The Digital Belt & Road is a major opportunity
Chinese technology and ICT firms have already enjoyed significant success in the Belt & Road countries, many entering market years before the initiative itself was announced. Huawei and ZTE have been building mobile networks across the region for over a decade; Oppo and Xiaomi have captured significant market share in most Belt & Road countries; Alibaba and Tencent are making acquisitions of Indian and Pakistan tech firms, among others. Look for the digital Belt & Road to provide significant commercial opportunities in the coming years.
3) Look to the Belt & Road’s 10 largest markets
Our Belt & Road data analytics indicates that Chinese firms have enjoyed the greatest success in the region’s mid-sized economies where GDP ranges between $100bn to $300bn. But the same firms have found it harder to win deals in the region’s Top 10 economies by GDP, excluding China. These economies, including India, Brazil, Russia, and Indonesia, account for over 70% of the region’s GDP. Unless Chinese firms start to enjoy success in these larger economies, they will remain stuck in smaller markets where it is difficult to scale.
4) Southeast Asia offers the greatest opportunity
Southeast Asia, and Indonesia especially, are the Belt & Road’s real opportunity. The region has significant scale (GDP of $2,950bn) and purchasing power. Our retail data analytics underscores the sheer depth and spread of the region’s modern retail sector, especially in Malaysia and Thailand. Chinese firms also already enjoy strong supply-chain linkages to Southeast Asia’s manufacturing hubs, whether that is Vietnam’s Ho Chi Minh or Thailand’s Eastern Economic Corridor. The China-Laos railway, under construction will further strengthen ties.
5) Don’t forget about Korea and Japan
Global attention is focused on China’s Belt & Road initiative. Yet, Korean and Japanese firm have significant commercial interests in the same region and are dominant players in key countries, especially in the larger more competitive markets. We estimate that core Belt & Road projects will be worth less than $400bn in the coming decade. By contrast, projects associated with Korean, Japanese, Indian, Turkish, as well as other local players, will be worth significantly more on an aggregate basis and just as impactful.
6) Belt & Road will face challenges, especially big-ticket projects.
Media reports are understandably focused on the growing debt and political challenges facing big ticket projects in Malaysia, Pakistan, and Sri Lanka. Malaysia’s East-Coast Rail or Sri Lanka’s Hambantota Port are just two of more high-profile case. Look for Chinese government policy towards big ticket projects to change as a result. But also don’t focus exclusively on such projects. Our Belt & Road Data analytics identifies 1,000+ projects around the region. Many are commercial ventures. All are changing the business landscape.
Ignore the headlines, and focus on what happens at the ground-level
The upshot is that it is critical to see the Belt & Road initiative as an input into a broader regional opportunity. The initiative itself isn’t going to change the commercial outcomes for entire countries. But it will impact key manufacturing hubs and surrounding cities. The initiative is part of a broader regional dynamic where governments are investing in infrastructure and manufacturing is growing in response to rising domestic demand or the relocation of supply-chains. And that’s good news for investors looking for opportunities in Asia, Middle East, and Africa.