Cultivating Chinese collaboration

by Mike Kroll

The next time you are impatiently waiting at one of the many Galesburg area train crossings take a moment to look at the train passing before you, take a careful look. The vast majority of trains you will see are intermodal trains, basically flat-bed cars carrying large metal containers that can easily be moved from ship to train to truck without the need to load or reload the material contained within. In the past most train cargo was loaded and unloaded into railroad-owned box cars requiring that both shipper and receiver be situated near a rail line or spur but today the origin and destination of intermodal cargo can literally be hundreds or thousands of miles removed from the nearest rail line. Furthermore, most of the intermodal containers are owned by shipping or trucking lines rather than the railroads themselves and many of these containers reflect the huge foreign trade with China in their ownership by Chinese or other far eastern foreign businesses.

According to government figures the United States imported nearly $179 billion from China during the first eight months of 2006 and nearly $243.5 billion in calendar year 2005. Meanwhile, total U.S. exports to China were a mere $35.6 billion January through August 2006 and totaled $41.9 billion in 2005. That's a combined trade imbalance (in China's favor) of $344.8 billion over the period January 2005 – August 2006. That's also a lot of containerized freight traveling to and from China by ship to American west coast ports for subsequent rail shipment east. Today a huge portion of those containers are carried by the BNSF or Union Pacific railroads and transferred from rail to truck in the Chicago area. Local economic development officials would like a chunk of that business to be relocated to the Galesburg area through development of a modest to mid-size intermodal facility locally. And that has been the principal aim of a recent China trip arranged by the Galesburg Regional Economic Development Association (GREDA).

“We very much want to bring an intermodal operation to Galesburg,” says GREDA boss Greg Mangieri. “I believe that there is a lot of cargo that could trim days off its transit time by being loaded or off-loaded here in Galesburg rather than in the much more congested Chicago metro area. Additionally, Galesburg is situated between two large companies actively trading in China, John Deere in the Quad-cities and Caterpillar in Peoria, plus some of the world's most productive farmland. This means that we are in a position to not only import cargo from China and the far east but also to provide much needed export cargo as well.”

Mangieri and Galesburg Mayor Gary Smith just returned from a trip to China where they were joined by GREDA consultant Andy Sze as they met with political and business figures and even conducted a graduate-level university symposium at Beijing Jiaotong University. “The point of this trip is to begin developing relationships between Galesburg and both government and business people in China,” explained Smith. “This wasn't what most people would consider a sales call where you make your pitch and ask for an order-- that approach just wouldn't work in this instance. Instead we are making contacts with targeted business and government leaders who are in a position to eventually partner with us.”

A huge amount of Chinese imports go to a single U.S. company, Wal-Mart, where the cost advantages of Chinese manufacturing permits Wal-Mart to (very) profitably sell at low prices goods that would have cost much more were they still produced by American workers and factories. Extremely low labor cost is China's biggest economic asset because it permits the sale of very low-cost goods in either final form or as parts and sub assemblies. The opportunity for Galesburg is in the latter instance according to Mangieri. “While there are good jobs to be had simply through operation of an intermodal facility and the required trucking operation the real opportunity is in related businesses.”

One such example cited by Smith and Mangieri is the assembly of shipping containers themselves. At the onset of intermodal shipping entire regular semi trailers were loaded aboard trains and ships but that proved inconvenient and problematic. Next came development of twenty foot long steel box containers that could be hoisted from truck to train to ship and neatly stacked three or four high. As the container ships became larger it became possible to use forty foot long containers and they have become the new standard. Today highways in the U.S. permit semi trailers up to 53 feet long and container shippers want to take advantage of this extra space.

“The problem is that these 53 foot long containers are too big to fit within the holds of the ships,” explained Mangieri. “They need to be stacked above deck. Jindo, a South Korean manufacturer of marine containers is the largest such manufacturer in the world today but facing the prospect of growing Chinese competition. With higher labor costs in Korea Jindo has taken the drastic step of closing all of its South Korean manufacturing operations and moving manufacturing to China. While we visited Shanghai we met with Jindo officials to discuss the possibility of them importing pre-manufactured container components to Galesburg for final assembly here. We touted the former Butler facilities as an ideal location for Jindo's planned U.S. operation and Jindo's deputy managing director J.K. Kim has plans to visit Galesburg as part of his next trip to the U.S.”

If Galesburg is to get an intermodal facility it will require at least three prerequisites. First, GREDA must be able to assure the BNSF of sufficient cargo volumes to obtain commitments to service the facility with trains. This means a daily average of hundreds of containers at a minimum. Second, Galesburg officials would need to convince a trucking firm with experience operating intermodal facilities to construct and operate such a facility here. And third (and most importantly) a steady stream of cargo in and out of the facility must be assured. The last part is where the Chinese come in. Mangieri, Smith and Sze met with Chinese shipping companies who already handle trade with U.S. ports on the west coast but are interested in expanding to interior U.S. ports.

Wan Hai is the largest and most profitable intra-Asian ocean carrier and interested in scouting for locations in the central U.S. to establish container operations. Mangieri and Sze met with Tony Chow of Wan Hai to tell them about Galesburg and the extensive BNSF rail facilities available here. “We believe they were very interested in Galesburg as a potential site after we visited with them and I hope we are high on their list of American locations when they send representatives to the U.S.” At this point no such Galesburg visits have yet been scheduled but Smith and Mangieri believe they will happen in the future.

While in Beijing they took a side trip to recently developed Jintang Port which is partially owned by the city of Beijing (which is well inland itself) and expected to become one of China's top ten ports within five years according to Mangieri. Sun Wen Zhong is president of Jintang Port and is planning to visit the U.S. during 2007 along with the mayor of Beijing. They are looking to establish relationships with American shipping interests for the purpose of mutual referrals and Zhong promised to include Galesburg on their itinerary. Like many of the those Smith and Mangieri visited while this may have positive results down the way such relationships even if developed are unlikely to generate near-term economic development.

When Mangieri was previously working with the Chinese rail industry he developed a relationship with the Chinese Ministry of Railways (MOR). The Galesburg delegation met on multiple occasions with MOR officials involved in engineering and construction as well as railroad technology to discuss possible alliances with Galesburg. One example is that MOR manufactures rail construction materials that could be imported to the U.S. and sold to American railroads, perhaps through a distribution center in the Galesburg area.

One large Chinese supplier of rail materials is China Rail Materials and Supplies Corporation. “They are a highly diversified Chinese company,” noted Mangieri, “and one of their chief products are concrete rail ties. They are the largest manufacturer of such ties in the world. Here in the U.S. we make much more use of treated lumber rail ties such as those manufactured by Koppers in Galesburg. There may be a market for such concrete ties in the U.S. and who better than Koppers to partner with to establish a U.S. presence?” Mangieri met with Zhang Wei, executive director of China Rail. “He was impressed with Galesburg's location and the convenience of the nearby BNSF but is still trying to determine if there is a real market opportunity for his products in the U.S. He made clear to us that it is extremely important to build relationships and establish trust with any Chinese company before we can expect to do business.”

In China there is a close relationship between rail and highway transportation. As part of the modernization of the country a major effort has been begun to construct an integrated network of highways and rail across China. The highway system is modeled somewhat after the interstate highway system begun here by President Eisenhower in the post-World War II years. The massive Chinese program was begun in 2003 according to Mangieri and is scheduled to be largely completed in the next five years. “The Chinese are also building extensive intermodal infrastructure across the country with 18 strategically located major terminals and 40 smaller terminals,” said Mangieri.

Attracting Chinese businesses to come to Galesburg and setup operations was one of the goals of this trip. In the city of Hangzhou (6.6 million population) they met with Ms. Xu Feng Juan, deputy party secretary of the city, at a dinner that also involved economic development officials from Massachusetts Office of International Trade and Investment. Key government officials met with both American delegations who in turn touted their advantages to attract investment by Chinese businesses. Mangieri is realistic and notes that this is but a first step in developing a relationship between Galesburg and Hangzhou.

As the capital of the wealthy Zhejiang province Hangzhou is home to many very successful Chinese businesses and the Chinese government is actively encouraging businesses there to expand operations into the U.S. and Europe. City official Zachary Zhou agreed to assist Galesburg in developing a sister city relation with a district of Hangzhou to promote bi-lateral economic development. Exactly what this will ultimately amount to, if anything, is unclear at this time but a commitment was made for Smith to return to meet again with city officials there.

Some of the Chinese businesses that Smith and Mangieri met with include Zhejiang Railway; Boneng (gear manufacturers); Huari (household and commercial refrigerator manufacturer); Kema (manufacturer of hand tools, vacuums and light power tools); Zhijiang Grain Group (imports grain to China); Zhejiang Cereal, Oil and Foodstuffs Import & Export Company (importer of grain and exporter of processed foods). According to Mangieri many of these companies expressed an interest in further discussions about Galesburg opportunities. Representatives of Boneng have already scheduled a visit to Galesburg this November and the potential to create an export market for corn and soybeans with the two grain companies has potential promise as well.

Toward the end of the trip the GREDA delegation spent a couple of days at Beijing's Jiaotong University, reportedly a top Chinese school tailored toward training business managers and related professionals. With over 19,000 students and 2500 faculty and staff BJTU was one of the first universities in China to be permitted to offer masters and doctorate degrees and established as a training point for faculty for other Chinese universities. After decades of communist rule the Chinese are today working hard toward developing their own form of capitalism and training business people and plant managers in modern production, inventory and sales techniques.

Professor Rhong Zhang, former government official and now key faculty member in business at BJTU, brought together more than forty graduate students to meet with the Galesburg delegation. Smith spoke about doing business in America and promoted Galesburg while Mangieri explained intermodal shipping and the importance and benefits of time-sensitive shipments. There was also discussion of the American political system and the different roles played by government in business in the U.S. versus in China where government is much more directly involved in business.

The GREDA delegation only visited three Chinese cities but all were substantially larger than Galesburg, the smallest be about 3.6 million in population. In China the mayor of a city is a very important man and the inclusion of Smith on this trip enabled the group to access a larger and greater variety of groups than would have been possible without the mayor. It also meant that the group was treated first class. “I could really get used to treatment like that back here in Galesburg!” joked Smith. “But it also made clear to me how important my participation must be in this process. Developing a relationship between Galesburg and groups in China will be a long-term project and will probably require my traveling back to China twice annually with Greg but it is an investment I trust will bear fruit eventually if we work at it.”

“The Chinese are essentially following the same model as the Japanese in developing business in the U.S.” explained Smith. “First, they want to establish a direct sales and marketing presence here. Today most Chinese manufactured goods are sold as low-cost commodities to American retailers and distributors like Wal-Mart who reap the value-added profits. The Chinese want to establish their own brand name recognition just as the Japanese and Koreans have done. The next step will be to handle U.S. distribution directly to retailers with higher value products reaping bigger profits. Finally, the Chinese will begin importing components and sub-assemblies to the U.S. to be assembled here not unlike the Japanese auto manufactures do today. That will be the point of greatest U.S. investment by the Chinese and we want to position Galesburg to win some of that Chinese investment.”