Revisiting Close Produce: Leap In Production Methods Based On Freight Cost Comparison – Analysis

By Zhao Zhijiang

It is generally believed that the railway network has more advantages than the road network. This is because railway transportation costs are low while road transportation costs are high. Therefore, there is a strong advocacy for the vigorous development of railways and high-speed railways when it comes to freight and logistics. Numerous research reports, papers, and feasibility studies are based on this premise, primarily focusing on the cost advantages.

Yet, field observations conducted by ANBOUND's founder Mr. Kung Chan have provided several results that conclude not everything is as straightforward. During the Gilded Age of construction, the United States had already possessed the world's most developed railway network, peaking at nearly 410,000 km. As of 2023, the total length of the U.S. freight railway network is approximately 150,000 km, still ranking first globally. However, the U.S. has actually long abandoned its railway network in favor of a larger and more developed road network. Data shows that the total road mileage in the country is about 6.6 million km. In comparison, China's railway network spans 159,000 km, with high-speed rail operating over 45,000 km. China's total road mileage reaches 5.27 million km.

Today, trucking has solidified its position as the primary mode of freight transport in the U.S. According to the Transportation Statistical Annual Report 2023, in 2022, trucking's freight volume was 8.1 times that of rail, ranking it first among transportation modes. It is noteworthy that the transportation cost for railways in the U.S. remains significantly lower than for road transport, approximately USD 70.27 per ton for railways compared to USD 214.96 per ton for roads, nearly a threefold difference. For example, RSI Logistics, an American logistics website, illustrates that transporting bulk goods from Houston, Texas to Cleveland, Ohio, a distance of 2,100 km, costs about USD 5,159 per load for truck whereas railway transport costs USD 6,676 per car. However, when comparing the costs of railway and truck transport, a 1:4 ratio must be used, meaning one railcar is equivalent to the volume of four truckloads. It is clear that the cost advantage of U.S. railway freight transport remains significant.

One obvious question arises: why have American enterprises, who advocate competition and economic efficiency, seemingly irrationally shifted towards a more expensive mode of transport?

The answer to this question is not as simple as one might assume, as it relates to close produce and production methods. Typically, we might focus more on the price advantage of railways due to their cheaper transport costs. Another aspect of the issue is that where the road network surpasses the railway network is in its end-to-end transport flexibility. Although railways and intermodal transport can solve some problems, they cannot compete with the convenience of a developed road network and container truck transport. Consequently, the concept of "transportation" itself may be outdated and overlooked as significant changes have occurred in the organization of major production methods. Mr. Kung Chan believes that the reason railways, despite their low transport costs, have lost their competitive edge lies in the shift towards close produce and production methods.

Methods of production have continually evolved for millennia. The transition from manual production to tool-based production marked a leap, followed by another leap from tool-based to mechanical production, and then from mechanical production to digital production. There may be even greater leaps in the future, such as those driven by artificial intelligence. Efficiency and competition are the driving forces behind these transformations. In an era of deglobalization, to mitigate risks, enhance production efficiency, and respond promptly to market and customer demands, these changes are necessary. It is for these reasons that American enterprises choose the method of close produce, or at least actively move towards it.

Mr. Kung Chan's concept of close produce has in fact highlighted five main characteristics:

1. Emphasizes and relies on an "end-to-end" production approach, achieving systematic and rigid connections in production organization.

2. The concept of "transportation" has long been replaced by the concept of "logistics". Under the concept of "close produce", this equates to significantly extending internal production lines and integrating logistics within them to provide production support and services.

3. "Close produce" revolves around a production center that controls the core of brands, technologies, and operations, forming a large system of modern production methods.

4. The market is no longer the center of "close produce", nor are assembly plants. "Close produce" represents a large production system where the importance of assembly plants is increasingly diminished, occupying only a tiny fraction of total costs.

5. The production of critical components is more crucial in "close produce", and they are organized systematically within this production approach.

It is worth noting that the characteristics of close produce mentioned above have long been overlooked by multinational corporations. In fact, many multinational enterprises have been aware of similar production models such as nearshore production and outsourcing, but they have prioritized cheap labor and short-term profits, thereby neglecting the evolution, advancement, and leaps in production methods. With the advent of the era of deglobalization, especially after the enormous challenges posed to global supply chains due to the COVID-19 pandemic, the concept of close produce is being rediscovered and redefined. As a new production method, it is being reorganized and gradually rising to have a significant impact.

For instance, the withdrawal of foreign automotive companies from China, often attributed to geopolitical influences, is also a result of the emergence of close produce. They no longer need to adhere to the traditional "market for technology" concept in China but are restructuring their production methods around production centers. Tesla, facing geopolitical risks, is investing in a megafactory in China for similar reasons, where traditional assembly plants solely responsible for final product assembly are becoming less important.

As it stands, the reorganization of close produce and production methods has also ushered in a leap in manufacturing techniques. Production lines of enterprises no longer need to be constrained by factory limits and can theoretically extend indefinitely, placing critical production nodes anywhere. These nodes are then connected using an end-to-end supply chain to construct a large system that embodies close produce. By comparison, China and other countries exhibit generational gaps in this, with organizational forms of production still rooted in the past. The enduring appeal of perceiving railway transport as cost-effective is a testament to this.

From the perspective of the leap in close produce and production methods, China's current railway investments are seen as excessive. Data shows that in 2023, the country's national railway fixed asset investments reached RMB 764.5 billion, a 7.5% year-on-year increase, with 3,637 km of new lines completed, including 2,776 km of high-speed rail. Once China undergoes a restructuring and shift in production methods, such as locating production layouts in Western China and Southeast Asia, the obsolescence of these railway investments due to the leap in production methods will become more apparent. This relative risk of excessive investment will then become increasingly evident.

Noteworthily, many years ago, Mr. Kung Chan foresaw that in the future, truck freight transport in China would inevitably surpass that of the U.S. China could then indeed be described as a "nation on wheels". This day has already arrived, and in the future, truck drivers in China may become the most important and valuable consumer group in the real economy. Therefore, China's future policies are likely to further shift towards investing in highways and improving the highway system to better adapt to these new circumstances.

Final analysis conclusion:

In the United States, the high-cost road network has triumphed over the railway network in competition, due to the evolution of close produce and production methods. The end-to-end nature of the highway network is essentially an extension of factory production lines, which may render China's investments in railways excessive. In fact, as manufacturing production methods undergo significant changes, this should be given serious consideration.

• Zhijiang Zhao is a Research Fellow for Geopolitical Strategy programme at ANBOUND, an independent think tank.