HBP Product ID: ST96

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UST096

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RONALD LAU
ALBERT HA
GIANNE WONG

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KTZ Express: Operating the Largest Dry Port in the World
We will make every effort to ensure further development of rail transport in Kazakhstan and
to meet the needs of stakeholders.
—Christian Kuhn, chairman of the board of directors, KTZ

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National Company Kazakhstan Temir Zholy Joint-Stock Company (NC KTZ JSC or KTZ) was the
national railway company of Kazakhstan. It operated the largest dry port in Khorgos, Kazakhstan, via one
of its wholly owned subsidiaries, KTZ Express Joint-Stock Company (KTZE or the Company), which
provided logistics services and multimodal transport using its network of warehouses, terminals, and airport
infrastructure. The dry port was designed to serve as a logistics hub between China and Europe that allowed
sorting cargo coming from different origins to its destination by train.
op
With the introduction of the Belt and Road Initiative (BRI), Ms. Gaukhar Akasheva, managing
director of KTZE, had seen a major increase in the company’s business in Khorgos since 2015. However,
only 136,000 TEUs (twenty-foot equivalent units of standard-size containers) were handled in the Khorgos
dry port in 2018. This was still far below 540,000 TEUs, the designed capacity of the dry port, and the
momentum of traffic growth had slowed from previous years. Gaukhar was exploring how the dry port
could possibly impact supply chain management in the region. Would it be able to change the pattern of
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logistic flows between China and Europe for some industries? To firmly establish Khorgos as the major
logistics hub in the region, Gaukhar needed to devise an action plan for attracting new traffic and business,
and to develop an operating model to optimize the utilization of the facility in the next four to five years.

The Khorgos Gateway

Although trade began more than 2,000 years ago along the Silk Road across the Eurasian
supercontinent, further major development to facilitate commerce had been slow and insignificant.
No

Movement of goods between Asia and Europe was dominated by sea freight, followed by air. Not until
2008 did the first train with goods between Beijing and Hamburg launch.

This case was prepared by Professor Ronald Lau, Professor Albert Ha, and Ms. Gianne Wong solely as a basis for class discussion.
The case received research support and co-originated within the frame of the HKUST-SKOLKOVO EMBA for Eurasia. The
authors have disguised certain data to protect confidentiality. Cases are written in the past tense; this is not meant to imply that all
practices, organizations, people, places or facts mentioned in the case no longer occur, exist or apply. Cases are not intended to
serve as endorsements, sources of primary data, or illustration of effective or ineffective handling of a business situation.
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For inquiries regarding ordering and permission to reproduce the case and its materials, please write to [email protected] or visit
cbcs.ust.hk.

© 2021 by the Hong Kong University of Science and Technology. This publication may not be digitized, photocopied or otherwise
reproduced, posted, or transmitted without the permission of the Hong Kong University of Science and Technology.

Last edited: 19 March 2021

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 HKUST Business School Thompson Center for Business Case Studies

Following China’s announcement of the BRI in 2013, Khorgos, a border town in Kazakhstan,

t
became an important link in the New Silk Road in this development. Although located in one of the world’s

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most remote regions, far away from any ocean, Khorgos represented the major transit corridor between
China and Europe [see Exhibit 1].

Kazakhstan broke away from the Soviet Union in 1991 and had since become the biggest and
richest country in Central Asia. Its government had always looked for opportunities to sustain the country’s
economy. With the BRI, the Kazakhstan government realized Khorgos’ potential and established the

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Khorgos Gateway—the Eastern Gate Special Economic Zone (SEZ). To attract business, the Kazakhstan
government provided many unique advantages at the SEZ such as tax and customs privileges, a simplified
employment procedure for foreign nationals, and free land for project implementation for selected SEZ
participants, and so on. To support Khorgos as the major logistics hub in the region, a new town, Nurkent,
was built to help attract and relocate the people operating the dry port there. During the initial phase of
development, the government provided free housing to about 1,200 residents, consisting of railway workers,
crane operators, custom officials, and their families.

yo
In addition to the Eastern Gate SEZ, Khorgos was also strategically tied to many supporting
infrastructure projects:
 Western Europe—Western China (WE-WC) Highway: Stretching 8,445 kilometers from the
Yellow Sea coast of China to the Baltic Sea at St. Petersburg, the WE-WC expressway would pass
through Khorgos and help integrate the rail and road systems to provide a comprehensive
multimodal transport network.1
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 Nur Zholy Gate: A new cross-border checkpoint between China and Kazakhstan that could hold a
capacity of 2,500 trucks per day. As this border checkpoint was less than 10 kilometers from
Khorgos, Chinese trucks could easily drop off cargo at Khorgos and return with cargo from other
countries.
 The International Center of Boundary Cooperation (ICBC): Residents and visitors from both China
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and Kazakhstan could enter the ICBC area without visas to purchase duty-free goods within a
limited value and quantity. Both countries aimed to develop the area into a leisure zone with hotels,
shopping malls, and restaurants for tourism and economic development along the shared border.

The SEZ and the Dry Port

The Khorgos Gateway focused on soft and hard infrastructure development to support multimodal
No

transport links between China and Europe. The most important part of this SEZ, which consisted of 4,500
hectares,2 was a major logistics hub or a so-called dry port. A dry port referred to a terminal without water
that handled cargo for road transport rather than for sea transport. The Khorgos dry port included a container
yard to allow cargo from different origins to be sorted and sent to different destinations in one dedicated
hub. In addition to the dry port, the 600-hectare, first-stage business development also included a logistics
zone for warehousing and an industrial zone for manufacturing and assembling certain kinds of goods
coming from either Central Asia or China.
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1 http://english.scio.gov.cn/videos/2018-10/09/content_65404328.htm, accessed 25 October 2019.

2 One hectare equals to 2.471 acres.

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The main operations of the dry port were to allow consolidation of cargo from different origins and
destinations and to provide a rail interchange between the Chinese and Russian rail gauges. Railway lines

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in China had railway gauge of 1,435mm, which was the same as the western European standard.
Kazakhstan, as a former member of the Soviet Union, used the wider 1,524mm Russian standard. Cargo in
or out of the China/Kazakhstan border had to be transferred to different wagons [see Exhibit 2].

The total cost for constructing the dry port was about USD426mn, 48% of it funded by the
government and the rest from NC KTZ. The dry port had the capacity to process 540,000 TEUs a year,

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operating with six berths where multiple trains could be handled simultaneously. A container yard was
available with a capacity for 18,000 TEUs. There were three standard gauge and three broad gauge
loading/unloading tracks, each with a length of 1,050 meters, sufficient for accommodating complete 50-
wagon container trains. In addition, two rails connected warehouses, each with an area of 5,000 square
meters, and temperature-controlled chambers with total area of 700 square meters.

The stations on both sides of the border station were linked by a road and railway line of about 12

yo
kilometers. Trains arriving in Khorgos from the China side would first clear the Chinese border control and
were then hauled by diesel traction to the Kazakhstan side for the Kazakh border control and customs
clearance [see Exhibit 3].

Opportunities and Challenges for KTZE

Founded by the government in 2002 and headquartered in Astana (renamed Nur-Sultan in March
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2019), KTZ’s main objective was to develop, operate, and maintain railway transportation in Kazakhstan,
which included freight, multimodal, and passenger transportation. It was one of the largest companies in
Kazakhstan, with a group of 64 organizations and 143,000 employees. One of its fully owned subsidiaries,
KTZE was responsible for operating the Khorgos dry port.

KTZE provided all routes logistics services using its operating network of warehouses and
terminals. It operated supply chains to provide door-to-door logistics services to domestic and international
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companies. KTZE offered regular container service running between China and Europe on more than 15
international routes from the main points of consolidation of cargo with a delivery period of 12 to 15 days,
and multimodal logistics service from China to Europe with a delivery period of 6 to 7 days. It also operated
a two-hectare Kazakhstan-Chinese terminal in the port of Lianyungang, China, a key transit port for
transshipment of cargo to and from various ports in China as well as Central and Southeast Asia.3

Competitive Positioning
No

If everything went as planned, the Khorgos dry port could reshuffle global transport routes from
the sea to the rail. Shipping time between China and Europe would significantly be reduced from seven
weeks by sea to less than three weeks by rail. That would be an attractive option for transporting high-
value goods such as computers or other electronic products from China. Existing products transported
through Khorgos included household appliances, furniture, prefabricated goods, artificial grass, and
consumer electronics, manufactured or assembled in China and shipped by companies like Foxconn.
Companies such as Hewlett-Packard and Toyota also used this rail route. European companies such as DB
Schenker and BMW had shown interest in dedicated block train services (point-to-point freight trains
Do

without an intermediate stop) to Asia for their automotive products.

3 Kazakhstan Temir Zholy, https://www.railways.kz/en/logistics/, accessed 18 November 2019.

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The potential of the trans-Eurasian railway corridor was undisputable. The SEZ had already

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attracted around 558bn tenge (USD1.45bn) of investments from investors. The Kazakhstan government
was trying to combine the SEZ and other facilities in the surrounding area, such as the dry port and ICBC,
to achieve better synergy in operations and to attract more private investment for further development.

Issues Impacting Business Growth

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There currently exist strong competitions from other border crossings like Dostyk-
Alashankou port,4 and local competitive transshipment terminals such as Cosco Shipping
Port in Lianyungang.
—Gaukhar Akasheva, managing director, KTZE

Time and Cost Trade-off

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The key determining factors for shippers in choosing their transport modes were cost and time.
Major cost elements included transportation costs and inventory carrying costs, which could be further
broken down for inventory costs during transit as well as at the source (plant) and destination (field). A
time element affected products like perishable and fashionable goods, which were time sensitive.

Journeys via the 10,000 to 12,000km long routes normally require 12 to 16 days. This
includes loading the containers several times onto wagons with different rail gauge.
op
—Dieter Fockenbrock5

Rail freight was considerably cheaper than air freight and faster than sea freight [see Exhibit 4].
One key reason was that the land route greatly shortened the traveling distance: trains traveled no more
than 11,000 km to reach Europe, while a container ship needed to travel 24,000 km to the same destination.6
Companies sourcing high-value, time-sensitive products from China had seriously considered the use of
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rail.

Another problem was that currently China exported more than it imported. This caused a mismatch
that indirectly increased the route cost, as trains that passed through Khorgos could potentially return to
China with little on board. To keep the trains running and encourage businesses to locate their
manufacturing facilities in western China, local governments responded to the rail-cost issue by offering
generous subsidies ranging from USD1,000 to USD5,000 for each FEU (40-foot equivalent unit) container,
No

up to almost one-half the total shipping cost.7 Government subsidies were required for rail to be price
competitive.

4 Dostyk-Alashankou port is a port of entry by highway and railroad between Dostyk, or Druzhba in Russian, in Kazakhstan's
Almaty Region and Alashankou, in China’s Xinjiang Uygur Autonomous Region.
5 Dieter Fockenbrock, “China Trade:From Silk Road to Silk Rail,” Handelsblatt Today, 30 December 2016,

https://www.handelsblatt.com/today/china-trade-from-silk-road-to-silk-rail/23543732.html, accessed 12 December 2019.

6 “Freight gain: New rail routes between China and Europe will change trade patterns,” The Economist,

https://gbr.businessreview.global/articles/view/59c4739f80e7d6e415233d88, accessed 11 December 2019.

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7 Keith Barrow, “China-Europe rail freight: in it for the long-haul,” International Railway Journal, January 2018,

http://www.railjournal.com/index.php/freight/china-europe-railfreight-in-it-for-the-long-haul.html. See also: Eugene Gerden,

“China may heavily subsidize container rail shipments to Russia,” https://www.joc.com/rail-intermodal/international-
rail/asia/china-may-heavily-subsidize-container-rail-shipments-russia_20160129.html, JOC.com, January 2016,

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Despite China’s generous subsidies and state media promotion that featured direct rail services as

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a major part of the BRI, rail was involved in less than 1% of the trade between China and Europe by volume
and just over 2% by value.8 In contrast, maritime shipping, the dominant transport mode, carried 94% of
the trade by weight and 64% by value.9
Capacity and Frequency of Services

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While a train can only load 60 containers, a container ship can handle 10,000, meaning a
locomotive would have to make almost 170 trips to move the same amount of goods.
—Jeremy Gray and Christoph Schlautmann10

Air shipment provided the most flexible shipment option, as shipment size could be small and the
frequency of flights was high. Yet it was also the costliest option. The capacity of trains was considered
limited compared to container ships. A mega container ship could carry more than 18,000 TEUs, an

yo
equivalent of 220 freight trains (i.e., each freight train had only 0.5% of the capacity of a large container
ship). Even if all routes for China-Europe’s rail freight reached their throughput capacity, the total quantity
could still not exceed that of four mega container ships traveling between China and Europe [see Exhibit
5].11 On the other hand, the downsides of sea freight included the low frequency of port calling and delays
caused by bad weather. Both rail and sea shipment required a fully loaded container to be the most
economical.
Operational Issues
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The challenges that Khorgos dry port faces include a lack of a special platform for reloading
cargoes from narrow gauge to wide gauge tracks. The construction of two-railway tracks for
one-time reloading operation may be necessary.
—Gaukhar Akasheva, managing director, KTZE
tC

Rail freight needed to deal with more countries along the way in comparison to air and sea freight.
Border-crossing delays were reported as the key issue impeding the achievement of competitive travel
times, an issue that could not be improved only through infrastructure development. Rail freight from China
to Europe (or vice versa) involved the complexity of moving goods across borders (e.g., customs,
documentation, and verification of data, etc.), which was made complicated in Khorgos due to the use of
different track gauges. Transit times were slower and less predictable at the change-of-gauge stations where
containers were loaded from one train to another. At Altynkol station, the average dispatch time of
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containers was around 3 hours 55 minutes.

http://www.joc.com/railintermodal/international-rail/asia/china-may-heavily-subsidize-container-rail-
shipmentsrussia_20160129.html, accessed 25 October 2019.
8 Vladimir Kosoy, “A Future of EU-EAEU-China Cooperation in Trade and Railway Transport,”

https://www.unece.org/fileadmin/DAM/trans/doc/2017/wp5/WP5_30th_session_Mr_Kosoy.pdf, accessed 25 October 2019.

9 Ibid.
10 Jeremy Gray and Christoph Schlautmann, “The Freight Game: How China put Duisburg back on the trade map,” Handelsblatt
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Today, 15 August 2018, https://www.handelsblatt.com/today/companies/the-freight-game-how-china-put-duisburg-back-on-the-

trade-map/23583018.html?ticket=ST-31977974-2g1HDfr9oWHOMh6QRTf0-ap1, accessed 11 December 2019.
11 “China’s landlocked port in Kazakhstan doesn’t need water to succeed,” Hellenic Shipping News Worldwide, 11 January 2018,

http://www.atimes.com/article/chinas-landlocked-port-kazakhstan-doesnt-need-water-succeed, accessed 25 October 2019.

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Many rail freight delays were due to human factors or by intention. Corruption and bribery had
been a common and widespread business practice in the region. Kazakhstan dismissed three heads of its

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customs service for corruption between 2011 and 2012. China was said to have conducted a similar
crackdown on its side of the border.12 Such delays also increased the risk of theft and made it impractical
to transport refrigerated goods.13

Other reasons, such as the incorrect execution of carriage and commercial documents, untimely
provision of cargo consignment by empty rolling stock, technical and commercial errors, problems of

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customs processing, malfunctions of infrastructure, and problems with regulatory documents, also led to
cargo detention at borders.

The need to harmonize border crossings, customs, safety, security, and maintenance requirements
were necessary to achieve cost-effectiveness and competitiveness in railway transport in the trans-Eurasian
corridor. Customs used different information systems, resulting in an increase in bureaucracy and the
number of documents needed to be exchanged. All freight forwarding companies were required to submit

yo
documents by EDI (electronic data interchange, a standard electronic format for sharing data between
business partners) for cargo moving from Kazakhstan to other central Asian countries, but not in China. As
the international framework of customs and commerce had been changing very rapidly, efficient
cooperation between EU and Asian customs was necessary to rationalize, simplify, and improve customs
controls.

Use of new technologies and practices that facilitated the crossing procedures had to be considered
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so that control systems at border-crossing stations could connect with various data sources from local and
interstate authorities. For example, implementation of the paperless transport was essential for the
elimination of administrative delays at borders. In addition, custom controls had to be undertaken only at
the origin and destination points to reduce repeated inspection and border time delay. In the end, it was up
to the countries and national authorities to decide whether to cooperate and how to proceed.
Geopolitical Issues
tC

The future of rail freight highly depended on the development of the BRI’s Central Asia land route,
which involved five countries—Kazakhstan, Kyrgyzstan, Tajikistan, Turkmenistan, and Uzbekistan—in
addition to the development of western China. Commitment from and investments in these countries were
important elements for the success of BRI and, hence, rail freight development. Yet these countries were
politically unstable, which might discourage investment in the region. With the huge lending from China
to support the BRI in involved countries, some worried whether China was committed to promote the BRI
No

under such a large debt burden. On the other hand, some western countries accused China of using such a
huge debt as a diplomatic strategy to trap borrowing countries. Many countries along the BRI were also
facing economic and political influences from the US against the BRI.
Other Issues
The weather in Khorgos was another challenge for operations. A freight train traveling along the
route crossed through several countries with very different climate conditions. Winter in some regions could
plunge to minus 40 degrees Celsius, a temperature that could damage electronics. Such a problem, as the
responsibility of the national authorities or companies managing their part of the network, could increase
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12 Ibid.
13 https://www.csis.org/analysis/rise-china-europe-railways, accessed 25 October 2019.

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the overall travel time unless weather conditions were considered in an integrated manner along the entire
route.

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Most of the railway companies in Europe and Asia were state owned or state controlled.
Liberalization of the railways might mean splitting up freight and passenger operations, as well as
infrastructure activities and operations. This could lead to simplified general transportation conditions,
significant reductions in rail freight rates (40% to 70%), reduced railway transit time periods, and the
operation of cheaper, faster, and more-flexible rail maintenance companies.14

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The Way Forward
One of the major constraints is that there is no agreement between China and Kazakhstan on
allowing the entrance and declaration of goods carried by trucks from China to the dry port.
Some goods, such as timber, are also not permitted to enter from Kazakhstan to China.
—Gaukhar Akasheva, managing director, KTZE

yo
The dry port commenced operations in July 2015. It handled around 136,000 TEUs in 2018, and
Gaukhar expected the utilization would increase from 200,700 TEUs to 267,200 TEUs between 2020 and
2023. This was still far below the designed capacity of 540,000 TEUs. The current traffic was mostly
boosted by China’s government subsidy—meaning that the current utilization would not be sustainable in
the long run. The recent trade war with the US and a fear of debt traps among many countries participating
in infrastructure projects had created a level of uncertainty not seen a few years ago on the future of China’s
op
BRI.

Gaukhar needed to devise a plan for how to boost business activities in Khorgos. She had to identify
new value-adding services, especially those that could complement the logistics and industrial zones next
to the dry port. Would adding warehouses in the SEZ, for instance, allow more trucks from China to pick
up goods arriving from Europe by train, such that the efficiency for the entire journey increased? Would
tC

deploying the latest technologies speed up the border-crossing process? She had to consider how to prepare
the dry port’s resources for the best optimization.
No
Do

14 A. Schmidt, “What is the Liberalization of the rail transport in the EU? What does this mean for the East-West railway
transportations?” Presentation in 3rd NEAR2 Project Workshop, Shanghai, China, 2014.

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EXHIBIT 1: STRATEGIC LOCATION OF KHORGOS

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Source: https://carnegieendowment.org/2018/05/04/kazakhstan-must-look-beyond-belt-and-road-pub-
76266, accessed 25 October 2019.
op
tC
No
Do

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EXHIBIT 2: ONE RAILWAY, TWO SYSTEMS

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yo
op
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No
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Source: http://multimedia.scmp.com/news/china/article/One-Belt-One-Road/khorgos.html, accessed 25

October 2019.

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EXHIBIT 3: RAILWAY EXCHANGE STATIONS IN THE REGION

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Source: “Chapter 5: Belt and Road Initiative,” South China Morning Post,
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https://multimedia.scmp.com/news/china/article/One-Belt-One-Road/khorgos.html, accessed 22
November 2019.

EXHIBIT 4: SHIFT IN TRANSIT COST AND TIME, 2006 TO 2017

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No
Do

Source: https://www.csis.org/analysis/rise-china-europe-railways, accessed 25 October 2019.

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EXHIBIT 5: CAPACITY BY TRANSPORT MODE

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yo
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Source: https://www.csis.org/analysis/rise-china-europe-railways, accessed 25 October 2019.
tC
No
Do

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