LONGREAD: the silicon Silk Road

Just over two thousand years ago a Chinese government representative headed west, exploring unknown lands, building alliances and finding new markets for trade.

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That official, Zhāng Qiān, is credited with charting the legendary route known today as the Silk Road. He laid the foundations for a trading network which profoundly influenced the history of the world. 

"Trade, finance and logistics have shaped China as much as philosophers, warriors and emperors.”

Not long after Zhāng Qiān’s seminal journey, China introduced the world to paper. We well know the profound impact of paper on the capture and transmission of knowledge across civilisations but it was also an invention that had a profound influence on the evolution of the global trade-finance-logistics ecosystem.

Inventions and trade went hand-in-hand in ancient China. During the Song dynasty, for example, two developments transformed China into a mercantile nation. With the invention of the compass and the emergence of paper money, transportation and finance expanded China’s ambitious trading ambitions.

Trade, finance and logistics have shaped China as much as philosophers, warriors and emperors.

This chapter of China’s rich history reminds us the opportunities before us today are similar to the adventures faced by our counterparts over the millennia. It’s an ageless question for business: how can we find new markets and how do we get there?

Just as ageless is the essence of how successful businesses work. They value partnerships, they seek alliances. They constantly strive for new and better ways to sell and move their wares, just as we continue to explore new technology to improve the efficiency of global trade.

But we are now moving beyond the age of paper. As we used to track, measure and record everything on paper, we are now beginning to create and store trillions of terabytes of information about trade, finance and logistics digitally.

Western Triangle

It is little coincidence banking in China, and particularly the invention of paper money, was born in the Western Triangle along with the charting of the Silk Road.

Early banks facilitated payments, allowing money to be transferred via book entries in branches. Trade was enabled by road, river and sea connections, allowing merchants to bring fortune to a city.

We are looking to the future but it’s important to consider the legacy of the past - and in terms of documentation, across both banking and logistics, not much fundamentally changed in the last 1,000 years. Today it needs to. Paper-based documentation is one legacy we can do without.

At ANZ we are well advanced in helping our clients and partners make this transition. For example, the distributed ledger technology (DLT), the basis of blockchain, has a key role. Take food safety, a huge concern. We teamed up with Cisco to use DLT to enable Australian farmers to sell their grain to merchants in Asia.

The DLT transaction provided an efficient, documented, verified, and trusted process, removing concerns about the quality and origin of the grain. Similarly DLT can verify and guarantee goods shipped from here in Chongqing are certified in terms of quality and authenticity.

You can see how this would enrich and preserve Chongqing’s brand as a leading manufacturing and logistics hub globally.

The People’s Republic of China (PRC) plans to build a ‘digital Silk Road’ along the same corridors as its Belt and Road Initiative (BRI). President Xi Jinping has said this would involve helping other countries build their digital infrastructure and internet security to “create a community of common destiny in cyberspace”.

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Source: CSIS

Despite its enormous value, the trading routes of the old Silk Road paved over centuries have become beset with processes and systems that are cumbersome, inefficient, time-consuming and riddled with vulnerabilities.

The challenge then is to facilitate a vast ecosystem stretching halfway across the world, with every participant able to operate in a seamless, standardised, secure and hyper-efficient environment.

The paper of yesteryear is the digital of today

Technological change is accelerating. After four decades of exponential increases, we are now doubling an already immense amount of processing power in every two-year period, leading to astonishing leaps forward in technological capabilities.

Add to this the megatrends of globalisation and changing demographics and you can already see the fundamental nature of trade is structurally transformed.

It is little wonder China’s largest logistics investors, as well as the largest payments providers, are actually young tech giants, like Alibaba and Tencent, with a business model centered around data from their e-commerce core.

If we take the lead from these disruptors, it’s clear ‘old industry’ players are likely collateral damage as the new trade giants provide a greater, more efficient, user experience.

Data is their vehicle for creating winning experiences.

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Source: TeleGeography

It’s all about the data 

It may be all about data but there is good data and poor data. And the latter can exact a hefty price – as much as 30 per cent of operating budgets.

Experts say there are more than 20 billion documents still in circulation supporting global trade. This is clearly unsustainable.

Digitising paper is how we’ll capture the information already out there but the quantum leap also happening is data nativity –  meaning digital processes from the start. 

The monetary authorities in China, Hong Kong and Singapore, working with financial institutions such as ANZ, are building trade platforms to do just that. Using new technology such as blockchain, these platforms will modernise how we oversee, facilitate and expedite trade and finance.

The partners in one project – HKMA, ANZ, Bank of China, The Bank of East Asia, DBS Bank, Hang Seng Bank, HSBC, and Standard Chartered - have also defined a business model and governance framework to advance the digitisation of physical and financial trade supply chains.

Now in the production phase, the platform is designed to digitise trade documents and automate trade finance processes, reducing risks while increasing the banking industry’s financing capabilities by leveraging DLT’s unique features.

MSA is building a National Trade Platform to replace its earlier trade and logistics portals. The National Trade Portal (NTP) will deliver ‘industry-level transformation’ via a trade and logistics IT ecosystem. It will connect businesses, community systems and platforms, and government systems.

The project is estimated to generate $S600 million of man-hour savings each year for Singapore firms while helping SMEs trim costs and streamline processes tied to trade.

To realise these outcomes, Singapore is encouraging banks to connect to the platform, even funding their integration.  

These authorities aren’t just looking at their own patches – they’ve already put the building blocks in place for a multinational Connectivity Network that will go live in early 2019 in the Hong Kong – Singapore corridor.

This amazing initiative will pave the way for a single, smart, connected trade finance network covering half the planet - a silicon road as much as a silk road.

Smart cities

We shouldn’t forget trade takes place between people, companies and towns and cities. The physical infrastructure needs to transform as well.

Efficient resource management is one of the key pillars of a smart city, from using green technology such as renewable energy, self-powered vehicles and machines, to sustainable food and other ecosystems.

To achieve green and smart cities, pollution, air quality, traffic congestion, and living standards will need to be addressed alongside logistics modernisation, advanced supply chain management systems, intelligent warehousing, and autonomous vehicles.

Obviously this comes with a price: According to the World Economic Forum, China will need $US6.4 trillion to $US9.4 trillion to finance its transition to a greener economy, with more than RMB 73 billion for the new smart cities.

For Chongqing, already a designated smart city, sustainability will feature heavily as it furthers its ambitions to become a global logistics hub. Logistics and the other industries identified for growth require significant energy and water resources, which creates opportunities for investing in alternative sources such as wind energy.

In the global logistics industry, the winning cities will be efficient and fast. They will be cost-competitive and easy to use. They will replace paper with digital data to enable smart technologies and verified, visible end-to-end processes. And they will provide secure and transparent connections to other parts of the world. None of these things works in isolation, each needs the other for the whole ecosystem to function at its full potential.

We are moving into a fast- changing world fueled by data and to win we need to build a data capability and culture that is adaptive, rather than try to predict the future.

Then - like the merchants of two thousand years ago and like ANZ's purpose, we can shape a future where people and communities thrive.

This is an excerpt from the research paper entitled “Getting Chongqing from logistics to a digital supply ecosystem” presented by Farhan Faruqui, Group Executive, International at ANZ to the Chongqing Mayor’s International Economic Advisory Council in China on September 16, 2018. This is the 11th year ANZ participated at the annual meeting and the theme this year was “Chongqing’s pursuit of smart development: Strategies and Initiatives”.   

The views and opinions expressed in this communication are those of the author and may not necessarily state or reflect those of ANZ.

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