Belt and Road initiative 101 and what’s in it for Finnish companies?

This article provides a brief overview of the Belt and Road initiative (B&R) and illustrates its importance to China and it's trading partners. The article also offers concrete examples of the ways in which Finnish companies should consider B&R as a part of their international business planning.

Summary of what you should know:

  • B&R consists of a number of land and sea routes, connecting China to various parts of Africa, Asia, and Europe
  • B&R will have major global implications and China is committed to it: it covers the majority of the world’s population, is crucial to China’s economic development, and has been included in the Communist Party of China Constitution
  • The importance of B&R has already manifested itself as a dramatic shift in China’s M&A transaction activity
  • Finnish companies should actively seek to benefit from B&R:
    • Finland is now also a concrete part of B&R, with the first freight train departing from Finland to China in November 2017
    • China’s president Xi Jinping visited Finland this year, and the two countries issued a joint declaration to deepen cooperation around innovation and across various industries
    • Finnish companies should proactively investigate ways to utilize the improved logistics routes as well as consider establishing offices in industrial parks along the B&R route as part of their international office expansion strategy to capitalize on increased support for cooperation in high-tech and innovation

What is B&R?

Initially proposed in 2013, the initiative aims to increase cooperation among the participating countries through building land and sea routes, connecting various Asian, European, and African countries. 

There are a total of five routes: The three so-called “Silk Road Economic Belt” routes, consist of 1) from Northwest and Northeast of China to Europe, 2) from Northwest China to the Persian Gulf and the Mediterranean Sea, and 3) from Southwest China through the Indochina Peninsula to the Indian Ocean. The other two routes are called “The 21st Century Maritime Silk Road”, and reach 4) from Chinese ports to Indian Ocean and further to Europe, and 5) from Chinese ports to the South Pacific. 

Areas of improved co-operation along B&R intend to cover the following fields: infrastructure connectivity, trade, production capacity, investment, financial, ecological & environmental protection, cultural, and social.

Why is B&R important to China and globally?

  • It covers the majority of the world's population

Over 50 countries signed co-operation agreements with China related to B&R in 2013, and today the initiative covers over 60 countries. An investment of $1T has been assigned to B&R by China Development Bank. The initiative is estimated to cover 65% of the world's population.

  • China’s economy needs to get global trade back up and the country wants to be on the driver’s seat

After the financial crisis, the world trade, and notably trade in Asia, has been on the decline. China has stated that a key focus of B&R is to develop particularly the western parts of China, which should help boost trade. China is also highly dependent on keeping a high level of investment, with Gross Capital Formation climbing to 45% of GDP in 2011-2015 from 33% in 1991-1995. B&R provides large opportunities for the country to channel these investments.

  • China included B&R to party constitution

The fact that B&R was written down in the Communist Party of China Constitution will essentially make execution of B&R a top priority for China.

Belt and Road M&A activity has overtaken USA

China’s M&A composition is already transforming through B&R

Chinese mainland and Hong Kong M&A transactions totaled $111B in first three quarters of 2017, which was down 35% year over year. Particularly M&A transactions with the USA have taken a hit, declining 77% to $9B. The bright spot in M&A activity was B&R, where transactions were up over 70% year over year, reaching $38B, a whopping four times that of the USA activity.

Thus, from an M&A activity viewpoint, this marked a year when B&R overshadowed the USA in economic importance for China. It now represents a meaningful chunk of the total activity, occupying a third of the country’s total M&A activity as measured in transaction value.

What’s in store for Finland?

In October 2017, the International Silk Road Academy of Science (ISRAS) was founded in Beijing. It includes science and technology organizations of two dozen countries along the B&R routes, and Finland is in the list of members. The organization aims primarily to promote innovation across the routes. 

Deepening cooperation around innovation was also one of the highlights in the joint declaration between Finland and China when Xi Jinping visited Finland in April 2017. Other key areas raised in the declaration were development of elderly services, social assistance and poverty governance, forestry and forest product industry, and circular economy. Following the meeting, Ministry of Foreign Affairs of the People’s Republic of China also echoed the declaration by emphasizing strengthening cooperation between the two countries in telecommunications, intelligent manufacturing, bio-economy, environmental protection technology, energy-saving buildings, and clean energy.

A concrete initiative left the station (literally) early November 2017, when the first train from Finland participating in B&R took off from the Finnish city of Kouvola towards Xi’an in China.

Finnish companies can capitalize on Belt and Road through improved logistics and innovation

How should Finnish companies capitalize on B&R opportunities?

There are two immediate key opportunities for Finnish multinational companies to consider: 1) logistics and 2) growing cooperation through presence:

  1. With the new train connection from Kouvola companies are able to reduce the time required for shipping products from Finland to China compared to sea freight from 45 days to just 10 days, a significant time saving.
  2. Companies should capitalize on increased support for collaboration in high-tech and innovation projects. For instance, Kouvola train’s end destination Xi’an envisions itself to become a central hub for B&R’s innovation, combining both local innovation and global knowledge. Just November 2017, a Global Programmers’ Festival is being held in the city. An estimated 200,000 programmers presently call Xi’an their home. Also some 40 of top 100 Chinese software companies are estimated to have presence in Xi’an. These conditions make the city a prime candidate for an innovation site of a high-tech company looking for future facing alternatives.

Date posted 21.11.2017

Gross Capital formation data: World Bank