2023: Adapting to the New Normal

The year of 2022 offers a perfect illustration of how the vagaries of the ocean freight and air freight market are constantly shaping China-EU rail freight. Entering 2023, some conditions that recently generated changes are likely to dissipate. Air freight connections between China and Europe will gradually resume following the reopening in China. The ocean freight rates are falling to pre-pandemic levels, along with improved reliability. All these factors suggest that the China-EU rail freight market is set to adapt to a new normal.

Macro Factors

At the macro level, China’s reopening could inject some volume back. However, growth is likely to be more discernible from the second half of 2023, as inflation and curbed consumer confidence will continue to hamper the demand in Europe at the start of the year. In the meantime, the escalation of the war means the geopolitical tensions in 2023 will be a factor that may constantly challenge shipper confidence on this route.

Under the changing economic and political circumstances, the emergence of a more fragmented global supply chain could also have a long-term impact on rail freight volumes between China and the EU. According to the latest Business Confidence Survey by the German Chamber of Commerce in China, localization - "in China, for China" - and supply chain diversification are the two prevailing strategies adopted by German companies to cope with the previous Zero Covid policy and ever-growing geopolitical tension.

Apart from the impact of the macro-economic scenario, there are two issues that may influence rail freight operations that merit particular attention.

Cross-border E-Commerce

The consecutive growth of the China-Liege route shows an essential role of e-commerce in the China-EU rail freight market. The agreement between Cainiao and DHL, concluded in February 2023 to establish a distribution network in Poland indicates a sustained interest of Chinese investors in cultivating this market. However, this will be confronted with two factors that may overshadow the market.

Chinese cross-border e-commerce will have to cope with regulatory and logistics challenges. In response to its flat growth rate in 2022 in the EU market, AliExpress cites the VAT regulation that entered into force in 2021 and the logistics disruptions (cost and bottlenecks) due to the war as the leading causes. With no clear end to the energy crisis and inflation, these challenges seem to have become a permanent fixture.

Changes in buying behaviour show that consumers are increasingly supportive of domestic e-commerce. Indeed, according to the International Postal Corporation's 2022 Cross-Border E-Commerce Shopper Survey, when asked about future e-commerce intentions 74% of respondents will be favouring domestic e-commerce and 58% from neighbouring countries. In contrast, only 38% are willing to buy more from China in the future.

Electric Vehicle transport by rail

Finally, when discussing the prospects for 2023, the long-awaited green light from the Chinese government to ship electric vehicles (EVs) by rail is unmissable. Particularly as further policy documents have been issued by Chinese authority in January 2023 that support these exports. EVs are no longer labelled as dangerous goods along with other export facilitation measures.

In the last three months of 2022, we can already observe the start of EV shipments Westbound via rail freight, though the volumes remain very modest (232 TEUs)[4]. Rail freight now serves as one pillar to support Chinese ambition to conquer the global EV market. The current tight RORO ocean freight capacity could create a similar diversion effect towards rail freight that we observed in the second and third quarters of 2022. However, we need to keep in mind that large Chinese automotive manufacturers focus more on developing various ocean freight solutions, such as purchasing their own RORO ships or shipping via containers. A question worth asking is that, besides the policy endorsement, to what extent can rail freight continue to be an attractive solution when the ocean freight capacity becomes more available?

Chinese subsidies for new energy vehicle purchases ended in 2022, this may offer some opportunities for imported EVs to compete in the Chinese market, therefore, injecting new demand Eastbound. However, one needs to be aware that the Chinese imported vehicle market has been shrinking over the years. According to the China Automobile Dealers Association, in 2017, China imported 1,216 thousand vehicles, and in 2021, it was down to 940 thousand units. While the disruptions of the automotive supply chain curtailed the imports, a burgeoning consumer preference for domestic brands also contributed to the drop in imports. According to the China Association of Automobile Manufacturers, in 2022, domestic brands constituted almost half of the sales of passenger vehicles in the Chinese market.

In this article, we have chosen to focus only on the Northern Corridor. However, it should be remembered that, of course, the growing investment from major players in the logistics industry in the Middle Corridor as well as China's flagship rail freight project to Europe (China-Kyrgyzstan-Uzbekistan railway) that will bypass Russia, will continue to shape the China-EU rail freight market.

Article source: Ganyi Zhang Upply