Aug 3rd 2017

“MUTUAL benefit, joint responsibility and shared destiny,” sings a choir of enthusiastic schoolgirls in a music video called “The Belt and Road, Sing Along” from Xinhua, a news service run by the Chinese government, that mixes shots of cranes and shipping containers with people enjoying foreign landmarks. Western firms are scarcely less optimistic. Launched by China in 2013, the One Belt, One Road policy, known as OBOR, has two parts. There is a land-based “belt” from China to Europe, evoking old Silk Road trade paths, then a “road” referring to ancient maritime routes.

OBOR will span 65 countries (see map), and China has so far invested over $900bn in projects ranging from highways in Pakistan to railway lines in Thailand. Western multinationals, spotting a bonanza, are selling billions of dollars of equipment, technology and services to Chinese firms building along it.

America's General Electric (GE) made sales of $2.3bn in equipment orders from OBOR projects in 2016, almost three times the total for the previous year. John Rice, the firm's vice-chair, expects the firm to enjoy double-digit growth in revenues along OBOR in coming years. Other firms, such as Caterpillar, Honeywell, and ABB, global engineering giants, DHL, a logistics company, Linde and BASF, two industrial gas and chemicals manufacturers, and Maersk Group, a shipping firm, rattle off lists of OBOR projects. Deutsche Bank has structured eight trade deals around it and has an agreement with the China Development Bank, one of China's policy lenders, to fund several OBOR schemes.

All the activity has confounded early sceptics. They noted that in the past 15 years as China industrialised, the country's companies ran construction projects over an expanse approximately equivalent to the built area of all Western Europe with very little help from foreign firms.

Yet OBOR has highlighted that Chinese groups have little experience abroad, and that their Western counterparts offer a technological edge and thorough knowledge of local conditions across the OBOR region, from Tajikistan to Thailand. Partnering with Western multinationals also gives Chinese companies credibility, particularly with financial institutions. One Western executive admits that Chinese companies make liberal use of his firm's name in OBOR project presentations to raise finance even though it is only marginally involved.

Below the belt

Some executives worry that OBOR may have its downsides in the longer term. China wants to open up new markets for Chinese firms in sectors that are currently dominated by Western companies, across industries ranging from engineering and telecoms to shipping and e-commerce. Western firms are profiting handsomely from OBOR itself, but Chinese ones even more so. A database of open-source information collated by the Reconnecting Asia Project, run by the Centre for Strategic and International Studies, a think-tank in Washington, DC, shows that 86% of OBOR projects have Chinese contractors, 27% have local ones and only 18% have contractors of foreign origin.

Chinese firms are moving beyond contract work to become operators of projects and investors too. Their Western competitors may win lots of business in the OBOR countries only for as long as their technological advantage lasts. That lead in turn will be eroded as Western companies work with Chinese partners on OBOR. In 2016 alone, ABB did business with more than 400 Chinese enterprises, helping them adjust for huge differences in construction and engineering standards across countries. Such firms will learn and advance in the process.

Yet for now, Western companies are focused on the opportunities. Jean-Pascal Tricoire, the Hong Kong-based chief executive of Schneider Electric, a French energy-services firm, says that for his company OBOR is one of the most important plans of the early part of this century. Honeywell has recently formed a team called “East to Rest” that manages sales and marketing to mainland firms that are expanding abroad. As a goateed singer in Xinhua's music video promises Chinese viewers, “when Belt and Road reaches Europe, Europe's red wine is delivered to the doorstep half a month earlier”. For years to come, OBOR looks likely to be the toast of Western boardrooms, too.

This article appeared in the Business section of the print edition under the headline "Where the twain shall meet"

Source: https://www.economist.com/