Insight

The Year of the Metal Rabbit: China's High-Speed Rail Network


It is now the Year of the Rabbit in China. Indeed, it is actually the Year of the Metal Rabbit, as it is a year in which the Chinese earth element Metal aligns with the Chinese zodiac symbol Rabbit, a rare occurrence that typically marks historic moments.

The upcoming year will be a truly historic one for China because its fleet of "metal rabbits"—its bullet trains—and their network of tracks will begin to race across the full expanse of the nation, pulling China forward into the next phase of its blindingly fast progression.

It is staggering to think that China already has more than 5,000 kilometers (3,106 miles) of high-speed rail in operation. The trouble is that these rail lines are in various segments, and to date they have not linked together the country's most well-known cities. In 2011, however, this will change dramatically. In the months ahead, China will progressively unveil many of the key links to form a true bullet-train network stretching across the nation.

The 105-kilometer Guangzhou-Shenzhen line will open in May, followed by the 1,318-kilometer Shanghai-Beijing line in June. By December, the opening of the 1,107-kilometer Beijing-Wuhan line will complete the north-south route between the Hong Kong border and Beijing (and which, by January 2012, will continue another 684 kilometers north to Shenyang). Also by December, the final links of the epic east-west route between Shanghai and Chengdu will also be operational—a 2,078-kilometer route that punches through mountain ranges and river valleys as it stitches China's commercial capital to the ancient city of poets.

While other countries debate high-speed rail, it is already a reality in China. Over the next four years, Japanese bank Nomura projects the Chinese government will spend $113 billion per year on railway infrastructure and rolling stock. The new high-speed line connecting Shanghai to Hangzhou, opened in late October 2010, cost $4 billion and took just two years to build—an astonishingly rapid rate, given the glacial pace at which grand infrastructure projects proceed in most nations.

Infrastructure Investments

Despite years of talk, it will be many years—if ever—before ground is broken on America's first bullet-train project, linking San Francisco to Los Angeles. And politicians are threatening to scuttle other lines. Economists, meanwhile, still debate whether America's stimulus plan made much of an impact.

But while the U.S. ponders which strategic investments will propel its economy forward, China shows no such hesitation. There are, of course, observers who question whether China's ambitious high-speed rail program will pay off—especially given the relatively high cost of train tickets for the average Chinese traveler. And it must be acknowledged that China's penchant for going big and fast can have its downsides: For example, its rapidly constructed national network of coal-fired power plants has draped the country in thick smog, and the rush to build heavy industrial capacity has left it glutted with unprofitable and inefficient steel mills.

But the critics overlook several positives.

One positive is that major infrastructure projects typically boost productivity throughout the economy. In essence, China's big infrastructure networks are platforms upon which new industries are layered, greatly multiplying the economic value of the projects themselves. They create new markets by making it easier to reach consumers and stimulating new customer needs and behavior. And they redraw the economics of operating in China, reducing shipping costs and making new locations more attractive for business.

Another positive is this: China's grandiose instincts tend to pay off.

When Gordon Wu, a Hong Kong tycoon, built a superhighway through the Pearl River Delta in the early 1990s, it was regarded as a road to nowhere. It took years before the toll roads generated enough traffic to become profitable. But, ultimately, this expressway helped connect China's huge labor and land resources to Hong Kong's ports, integrating the mainland into the global economy.

Economic Transformation

The economic impact of the high-speed network promises to be just as far-reaching and transformative.

It is sure to drive up productivity. Pulling slow passenger trains off the existing rail networks will free up capacity for freight and ease current bottlenecks. Reducing passenger travel times will allow the reconfiguring of the national holiday calendar—which currently consists of several long "golden week" holidays designed to enable migrant workers to make long train journeys home. Connecting Chinese markets and people will open up new opportunities: For example, Beijing businesses will be able to tap the sizable talent pool in the metropolis of Tianjin, just a 30-minute ride away by high-speed rail. And the greater availability of freight capacity will make more feasible the task of shifting work to factories in China's interior and introducing just-in-time manufacturing practices.

Multinational companies stand to benefit from this investment—just as they have in the past with other major infrastructure projects in China. For example, the rapid expansion of China's airports and carriers triggered huge sales for Boeing (BA); Motorola (MSI) and Cisco (CSCO) played a large role in building China's telecom networks; General Motors (GM) now sells more cars in China than in the U.S.; and Pfizer (PFE), GE Healthcare (GE), and Merck (MRK) have seen revenues grow as China has expanded its network of public hospitals and clinics.

Of course, keeping up with the pace of change brought about by infrastructure megaprojects is a daunting challenge to multinationals that aren't accustomed to moving at China's speed. Major new industries and business opportunities arise before CEOs know what hit them; old industries are swiftly transformed. And more big infrastructure networks are arriving at breakneck speed, from a major build-out of wind power and charging stations for electric cars to new biotech R&D campuses. Multinationals can question the economic logic of China's big splurges on infrastructure. They would be wiser to seize the moment rather than miss the opportunity.

David_michael
David C. Michael is a senior vice-president and director with the Boston Consulting Group's Beijing office. He started in BCG's Shanghai office in 1992 and has more than 13 years of China and Asia experience. He is the leader of BCG's operations practice in Asia.

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