Profitability eludes China’s rail operators

Despite the Chinese government’s investments in its railways, rail cargo volume continues to fall. The latest data for October notes a 7.5% decline in terms of volume per 100m ton-km compared to October 2013. Year-to-date, volume is down just over 5.0%.






Even though domestic volumes have declined, the number of rail routes connecting China to Europe is on the rise. The latest route, inaugurated in November, connects the Eastern Chinese city Yiwu to Madrid, Spain, 6,200 miles – the world’s longest rail route. In total, there are eight rail routes connecting China to Europe and there are plans for even more.

Rail transport remains lopsided as more goods travel from China to Europe versus Europe to China. In addition, the rail routes are heavily subsidized by local Chinese governments and as such, combined, the rail routes are operating at a financial loss.

A few initiatives are underway to try to improve profitability of rail freight services. For example, according to the China Times newspaper, the national rail operator, China Railway Corporation is drafting a plan to present a “unified brand” for all rail freight services between China and Europe and better arrange routings so as to improve speed and reduce costs. According to a Vice President of CRCT, a subsidiary of China Railway Corporation, this unification will also allow the rail freight services greater bargaining power when negotiating with foreign railway operators for use of their network.

Meanwhile, according to the China Times, the rail freight operator in Chongqing has teamed up with China Railway Corporation and rail operators in Russia, Germany, and Kazakhstan to form a logistics company to solicit business in these countries along the rail link in order to improve profitability.

What does this mean for such international logistics providers as DHL, DB Schenker and UPS that are now offering services involving the railroad between China and Europe? Probably higher rates which will likely then be passed down to the customer. On the other hand, the potential increased efficiencies of a “unified brand” could mean improved delivery times. As such, shippers will need to weigh the growing available transportation options – road, rail, air, sea and combinations of each. This increasing complexity of options will bode well for logistics providers who will be able to serve in an advisement role and provide customized transportation solutions and perhaps rationalize any increases in rates.

And finally, the dilemma of how to fill up the railcars from Europe to China. According to the publication, Want China Times, a growing number of local Chinese authorities are suggesting the import of vehicles and scrap materials by rail as a likely solution. Earlier this year several, mostly inland, cities requested the central government to approve measures to allow these entities to become a point of entry for vehicle imports. A good idea but then an increase in vehicle imports could further pressure an already struggling domestic automotive manufacturing industry which enjoys a certain bit of protection from the central government. Also, until Asia’s economy expands further and domestic demand picks up, filling up the railcars from Europe to China will continue to be an issue and profitability may continue to elude China’s rail operators.

For more information on Chinese rail freight please visit the Ti Dashboard.