industry report 1226110139 sec a

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Abstract

Logistics management is increasingly becoming a topic of interest among academicians and practitioners since it may lead to reduced operational costs, improved delivery performance and

increased customer satisfaction levels.

The global logistics industry is estimated to be worth USD 300 billion. Though most of the largeservice providers are headquartered in Europe, the biggest market is the US, which captures

about one-third of the world market. The global logistics industry is characterized by high costsof operations, low margins, shortage of talent, infrastructural bottlenecks, demand from clients

for investing in technology and providing one-stop solutions to all their needs, and consolidationthrough acquisitions, mergers and alliances.

Though, in India, the industry is still in its infancy, there is immense potential for growth. The

Indian logistics industry is currently plagued with low demand, poor infrastructure, high costs,government regulations etc. However, it is going to turn around on the back of robust GDP

growth, globalization, FDI in logistics and increasing government support. This paper highlightsthe current state of the industry, including the dynamics and opportunities for growth, globally,

in general, and in India, in particular, based on findings from surveys of logistics service providers, and users, of India and other countries.

Introduction:

Productivity is about far more than old-fashioned concepts of a plant's unit-per-labour costs. As

competition becomes more global, innovation is moving from a firm-to-firm level to a supplychain versus supply chain perspective. Incremental competitiveness advantage is now achieved

when all the supply chain players are synchronized and collaborating together.

Supply chain management (SCM) encompasses the planning and management of all activitiesinvolved in sourcing and procurement, conversion, and all logistics management activities.

Importantly, it also includes coordination and collaboration with channel partners, which can besuppliers, intermediaries, third-party service providers, and customers. In essence, SCM

integrates supply and demand management within and across companies.

Logistics management is that part of SCM that plans, implements, and controls the efficient,

effective forward and reverse flow and storage of goods, services and related information between the point of origin and the point of consumption in order to meet customers

requirements.

Logistics management activities typically include inbound and outbound transportationmanagement, fleet management, warehousing, materials handling, order fulfillment, logistics

network design, inventory management, supply/demand planning, and management of third party logistics services providers. To varying degrees, the logistics function also includes

sourcing and procurement, production planning and scheduling, packaging and assembly, andcustomer service. It is involved in all levels of planning and execution: strategic, operational and

tactical. Logistics management is an integrating function, which coordinates and optimizes all



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logistics activities, as well as integrates logistics activities with other functions includingmarketing, sales manufacturing, finance and information technology.

The Logistics industry can be broadly divided into ocean freight, air freight, rail freight, truckingand third party logistics (3PL) services. The size of the Indian Logistics industry is pegged at

around USD30 billion. The industry is expected to grow at a 13% CAGR to USD 54 billion by2012.

Industry Segment-Road Freight:

The size of the road freight segment is USD 10 billion. Approximately 65% of the freight is

carried through roads in India. The road freight segment is highly fragmented with more than16,000 trucking players. The large number of small truck operators, increase in fuel prices and

poor quality of roads has led to lower profit margin for the trucking services companies. Theleading trucking com panies in India typically don¶t own the entire fleet but outsource

approximately 75% of their trucks to smaller transporters.

Drivers

Increase in quality of road infrastructure: Investments of USD 14 billion in highway

development is envisaged by the Government including development of the GoldenQuadrilateral connecting the major cities (Delhi, Mumbai, Chennai and Kolkata) and

development of North- South and East-West corridors.

Phase out of Central Sale Tax (CST) and implementation of Value Add Tax (VAT): Currently 3% CST is levied for interstate movements. This had led to preference for statewise

warehousing to enable intra-state sourcing and distribution networks. The phase wise abolition of CST by 2010 would catalyze interstate commerce and consolidate supply chains networks.

Con

solidation

The consolidation of supply chain networks and increasing share of organized retail will shiftmarket share towards organized trucking companies. The consolidation would lead to the

emergence of panIndia players with significant size and better profitability.

Logistics Hubs and Distribution Centers

The abolition of CST would lead to a switchover to centralized warehousing and hub and spoke

distribution network. This would create a demand for larger distribution centers and logisticshubs.This should be an attractive opportunity for companies who would have the skills to

manage these hubs as well as trucking companies looking to forward integrate into the supplychain of their clients.



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3PL

The changeover to a hub and spoke supply chain model will catalyze the demand for 3PL service

providers. Auto and auto component companies have been frontrunners in outsourcing Supplyhain Management (SCM) and have already started the process of consolidating their logistics

services providers. In retail and textiles too there is significant business potential for 3PL.

Cold Chain Warehousing Logistics:

The retail revolution along with the increasing consumption of processed food products presentsgrowth opportunity for the cold chain logistics business in India. There are various companies

trying to enter this high growth sector ± Concor has announced its plans to enter the cold chainlogistics segment through its wholly owned subsidiary called Fresh and Healthy Enterprises;

GDL has acquired 50.1% stake in Snowman Frozen Foods Ltd., a pan-India player in thissegment. Courier and express players: Cost and time efficiency from smoother roads combined

with expected growth in document shipments and high-value products such as mobile phones,network hardware, jewelry and branded drugs will allow the express industry to continue to grow

at 25%-plus rate.

Industry Segment-Rail Freight:

The rails are operated in India by the Indian Railways (IR), a Government undertaking. The size

of the rail freight segment is around USD 11 billion and is expected to grow at 8% year on year.Traditionally, IR has favoured carrying passengers over hauling freight, and as a result, railways

has been steadily losing freight share to roadways. However, the pro industry reforms and greater private sector participation have started to catalyze the growth in this segment.

Drivers

Privatization

of rail con

tain

er operation:

Container Freight Stations (CFS) and InlandContainer Depots (ICD) were privatized in the last decade. In 2006, the government of Indiaawarded fifteen licenses to operate rail container services across all routes in India. Currently,

eight players have already begun their operations. Private players will need to have their ownterminals (ICDs) with rail sidings to load and unload containers. Indian Railways is expecting an

investment of approximately USD 2.5bn over the next two years for the purchasing of wagons,setting up of logistics parks and ICDs by the private players.

Development of dedicated freight corridor: Indian railway has planned an investment of USD

6.25 billion over the next five years to remove all capacity bottlenecks. The projects includestrengthening of the Golden Quadrilateral, strengthening of rail connectivity to ports and

development of multimodal corridors to the hinterland.

Rail Operation

The private rail container operators in India are currently operating with 22 rakes. The private

players are currently not seeing any pressure on pricing and are steadily increasing the marketshare by giving better services than Concor (the freight handling arm of IR). Inland Container

Depots and Warehousing ICDs will benefit significantly from increased containerization of goods and entry of private rail operators. Presence of railway siding would play a key role in



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freight handled and throughput of the ICDs. Another critical success factor for ICDs would beroad connectivity and proximity to industrial belts or SEZs.

Wagon manufacturing:

The entry of private players in rail operation and increased demand from the railways will drive

demand for wagon manufacturers in private sectors.

Industry Segment-Ocean Freight:

The major Indian ports are being stretched to maximum capacity. The total port capacity at major

Indian ports in FY08 was 484mn tons while freight volume handled was 464mn tons. Theincreased domestic consumption and manufacturing growth has resulted in high growth in the

Exim trade in India.

The Ocean logistics industry involves various intermediaries like freight forwarders (originates

freight), customs house agents (offers customs clearing services), multi modal transporters(either shipping companies or freight forwarders that are allowed to transport the cargo by more

than one mode of transport), and inland container depots & container freight stations (providesservices like stuffing, de-stuffing, warehousing etc.)

Concept diagram of the ocean logistics industry

Drivers

Private participation in port infrastructure: One of the key factors for improved portinfrastructure is private participation in port operations and ancillary services. Private operators

are presently operating all major container terminals at ports in India. Also, private ports atMundhra and Pipavav and the upcoming private port at Rewas (owned by Reliance Industries) in

western India are augmenting India¶s bulk and container cargo handling capacity. In addition,numerous ICDs and CFSs are being operated by private players.

Large investments flow into ports: The major ports in India, public and private, are making

large investments in increasing port drafts to accommodate mainline vessels, enhancing thecapacity of their container terminals and improving rail and road links to and from the ports. The

Indian government plans to spend USD 13 billion during FY06 to FY12 for these initiatives.



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Opportunities

CFS and ICDs

Standardization of containers promotes a mechanized form of cargo handling. Containerisation

as also led to demand for services of ICDs and CFSs for stuffing/de-stuffing of containers and

also custom clearance away from the ports. The rationale for market players to set up CFSs andICDs is to offer complete bouquet of services to their customers. There seems to be a danger of overcapacity in the sector because of unplanned growth. The ability to control traffic flow is the

key for operating a CFS. A CFS/ICD that operates its own container terminal, freight forwarder or shipping line is well positioned to benefit from the surge in ocean freight.

Integrated logistics companies

Companies in the business of consolidation are moving towards owning assets in the form of CFS/ICDs and container trains. Going forward it will be essential for a container logistics

provider to have a presence across the entire value chain from point of origination to finaldestination. This would entail having an international presence or tie-ups with overseas logistics

companies.

Multimodal transport operators

Another growth area would be Multimodal transportation, driven by growing international tradeand expanding domestic demand for efficient supply chain systems for the retail and

manufacturing industries. Multimodal transportation in India is governed by the MultimodalTransportation of Goods Act and requires a license by the Government of India to operate.

Project cargo handling

Handling of project cargo involves transportation of equipments and products on a turnkey basis.

The turnkey logistics for project cargo comprises of over-dimensional (ODC) and over-weightcargo (OWC). The scope of work begins from packaging of the cargo at the factory point anywhere in the world, to delivery of the same at the project site. It involves ocean and land

transportation, customs clearance, route survey, documentation, obtaining of NOC and other permissions from Government departments and arranging heavy lift equipment and inland

transportation to its ultimate destination. This would see a good growth with increasinginvestments in oil and gas and the power sector.

Equipments form a critical part of the infrastructure for ports. Equipment manufacturers of

reach stackers, forklifts, tractor trailers, cranes etc. will see huge demand from the CFSs and ports.

Competitive dynamics and other issues :

The following problems existing in the Indian logistics industry make it unattractive for

investments and also create entry barriers.

� Logistics is a high-cost, low-margin business. The problem of organized players is

compounded by unfair competition with unorganized players, who can get away without paying



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taxes and following operating norms stipulated in the Motor Vehicles Act such as quality of drivers andvehicles, volume and weight restrictions, etc.

� Economies of scale are absent in the Indian logistics industry. Even the organized sector thatcontributes slightly more than 1% of the logistics cost, is highly fragmented. Existence of the

differential sales tax structure also brought in diseconomies of scale. Though VAT (Value AddedTax) has been implemented since April 1, 2005, failure in implementation of a uniform VAT

structure across different states has let the problem persist even today.

� Apart from the non-uniform tax structure, Indian LSPs have to pay numerous other taxes,octrois and face multiple check posts and police harassment. High costs of operation and delays

involved in compliance with varying documentation requirements of different states make the business unattractive. On an average, a vehicle on Indian roads loses 24-48 hours in complying

with paperwork and formalities at different check posts en route to a destination. Fuel worthUSD 2.5billion is spent on waiting at check posts annually. A vehicle that costs USD 30,000

pays USD7,500 per annum in the form of various taxes, which include the excise duty on fuel.This is why freight cost is a major component of the cost of a product in India.

� There is lack of trust and awareness among Indian shippers with regard to outsourcing logistics.

The volume of outsourcing by Indian shippers is presently very low (~ 10%) compared to thesame for the developed countries (> 50%, sometimes as high as 80%). The unwillingness to

outsource logistics on part of Indian shippers may be attributed to skepticism about the possible benefits, perceived risk, and losing control, of sensitive organizational information, and vested

interests in keeping logistics activities in-house.

� Indian shippers expect LSPs to own quality assets, provide more value-added services and act

as an integrated service provider, and institute world-class information systems for morevisibility and real-time tracking of shipments. However, they are unwilling to match the same

with 6 increased billings; even pay little attention to timely payments that leave LSPs short of adequate working capital.

� Indian freight forwarders face stiff competition from multi-national freight forwarders for

international freight movement. MNCs, because of their size and operations in many countries,are able to offer low freight rates and extend credit for long periods. Indian freight forwarders, on

the other hand, because of their smaller size and lack of access to cheap capital, are not able tomatch the same. Moreover, clients of MNCs often want to deal with a single service provider and

especially for FOB (Free on Board) shipments specify the freight forwarders, which most of thetime happen to be the multi-national freight forwarders. This is sort of a non-tariff barrier

imposed on Indian freight forwarders.

� Poor physical and communications infrastructure is another deterrent to attracting investmentsin the logistics sector. Road transportation accounts for more than 60% of inland transportation

of goods, and highways that constitute 1.4% of the total road network, carry 40% of the freightmovement by roadways. Slow movement of cargo due to bad road conditions, multiple check

posts and documentation requirements, congestion at seaports due to inadequate infrastructure, bureaucracy, red-tapeism and delay in government clearances, coupled with unreliable power

supply and slow banking transactions, make it difficult for exporters to meet the deadlines for their international customers. To expedite shipments, they have to book as airfreight, rather than



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seafreight, which adds to the costs of shipments making them uncompetitive in internationalmarkets. Moreover, many large shipping liners avoid Indian ports for long turnaround times due

to delays in loading/unloading and hence Indian exporters have to resort to transshipments at ports such as Singapore, Dubai and Colombo, which adds to the costs of shipments and also

delays delivery.

� Low penetration of IT and lack of proper communications infrastructure also result in delays,

and lack of visibility and real-time tracking ability. Unavailability and absence of a seamlessflow of information among the constituents of LSPs creates a lot of uncertainty, unnecessary

paperwork and delays, and lack of transparency in terms of cost structures and service delivery.For example,a shipper has to pay a higher freight rate if it cannot ensure return load. At present,

there is no realtime process by which a shipper may know about the availability of trucks andgoing rates at the destination market. Therefore, it has to pay more. Had the market information

been available to both the shipper and the service provider, the service provider¶s cost structurewould have been transparent to the shipper and it would have ended paying the actual market

rate. Another example would be that LTL (Less than Truckload) shipments cost more than FTL(Full Truckload) shipments. Now, when a shipper books a LTL shipment, it has no idea about

the status of its shipment after it leaves the warehouse at the origin and before it reaches thewarehouse at the destination. The service provider may still convert this LTL shipment into a

FTL shipment at its own warehouse before delivering at the destination. So, the shipper ends up paying LTL rates for a FTL shipment. Had there been visibility during delivery, this problem

would not have occurred.

� Since most of the LSPs are of relatively small size, they cannot provide the entire range of services. However, shippers would like service providers to offer more value-added services and

a single-stop solution to all their logistical problems. The inability of service providers to go beyond basic services and provide value-added services such as small repair work,

kitting/dekitting, packaging/labeling, order processing, distribution, customer support, etc. has

not been able to motivate shippers to go for outsourcing in a big way.

� Service tax levied on logistics service fees (currently 12.36% with educational cess) may make

outsourcing costly and outweigh the possible benefits.

� There is lack of skilled and knowledgeable manpower in the logistics sector. Management

graduates do not consider logistics as a prime job. To improve the status of the industry, service providers have to move beyond the level of brokers and truckers to attract and retain talent.

Drivers

The growth in the industry is driven by:

� Increase in trade: The India¶s foreign trade has been growing at 25% CAGR over the past fiveyears and is expected to continue its impressive growth on the back of emergence of India as amanufacturing hub for garments, engineering goods, electronic hardware and other goods.

Moreover, the high growth in domestic consumption and manufacturing outsourcing will further drive trade.



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� Reforms in Government policy: The reforms in government policy and pro-industry initiativeslike abolition of CST and private participation in rail, air and port freight services is driving

growth in logistics.

� Increased Government spending in infrastructure: The Government plans to invest USD 44

billion in improving infrastructure across roads, ports, railways, and air transport by FY12. Theincrease in Government spending on infrastructure will lead to an increase in efficiency and

catalyze the growth of the industry.

� Rise in domestic consumption and retail: Driven by changing lifestyles, strong income growth,and favorable demographic patterns, Indian retail is expanding at a rapid pace. The Indian retail

market is expected to grow from the current USD 350 billion to USD 427 billion by 2010.Thiswould drive the growth in logistics industry as the goods would need to be delivered from

production centers to consumption centers.

� Containerization: Containerization is a growing trend in India because of the need for intermodal transport. This has resulted in low handling costs and reduced pilferage and

breakage. Though containerization of cargo is occurs predominantly in foreign trade, thechangeover to containerization is expected to occur in domestic trade as well. In FY07, bulk

cargo grew at 8% while containerized cargo increased at 18.5%, reflecting the growing demandfor containerized cargo.

Future prospects:

� Many large Indian corporates such as Tata and Reliance Industries have been attracted bythepotential of this sector and have established logistics divisions. They started providing in-

house logistics services, and soon sensing the growth of the market, have started providing

services to other corporates as well.

� Large express cargo and courier companies such as Transport Corporation of India (TCI) and

Blue Dart have also started logistics operations. These companies enjoy the advantage of alreadyhaving a large asset base and an all-India distribution network. Some large distributors have also

forayed into the logistics business for their clients.

� Since logistics service can be provided without assets, there is growing interest amongentrepreneurs to venture into this business.

� Indian shippers are gradually becoming more aware of the benefits of logistics outsourcing.hey are now realizing that customer service and delivery performance are equally important as

cost to remain competitive in this global economy.

� The Indian economy is growing at over 9% for the last couple of years (compared to the worldGDP growth rate of 3%), which implies more outputs and more demand for specialized logistics

services.

� The Indian government has focused on infrastructure development. Examples include thegolden quadrilateral project, east-west and north-south corridors (connecting four major metros),



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Free Trade and Warehousing Zones (FTWZ) in line with Special Economic Zones (SEZ) with100% Foreign Direct Investment (FDI) limit and public-private partnerships (PPP) in

infrastructure development. It is expected that infrastructure development would boostinvestments in the logistics sector.

� In India, 100% FDI is allowed in logistics whereas in China, until recently, foreign investmentwas not allowed in domestic logistics. Almost all large global logistics companies have their

presence in India, mainly involved in freight forwarding. For domestic transportation andwarehousing, they have tie-ups with Indian companies. As the Indian logistics scenario looks

promising, these MNCs are expected to play a bigger role, probably forming wholly-ownedsubsidiaries or taking the acquisition route. The latter may be the preferred route of investment

since the target company is readily acquired with its asset base and distribution network, and theneed for building everything from scratch can thus be avoided. The benefits for the acquired

company include the patronage of an MNC and access to the MNC¶s global network. As anexample, DHL Danzas, the biggest logistics company in the world, has taken over Blue Dart.

The logistics service sector can be segmented into three sub categories:

Asset-Based Transportation Services Asset-Based Non-Transportation Services

Non-Asset Based Logistics Services

Each of these sub categories has a different level of value added, potential for exports as well asimpact on other sectors of the economy.

The Asset-Based Transportation Services:

The asset-based transportation services sub sector is composed of transportation service providers focussing on transport of goods only. Logistics users generally outsourced

transportation. The sub-sector is stable and starting to have some differentiation factors due to just in time (JIT), Smart Border and enhanced client demands regarding technology integration.

The Asset-based Non-Transportation Services / Third Party Logistics (3PL):

3PL service providers carries out physical logistics operations and manages systems to track

shipments on behalf of the client. The value added 3PL company provides additional servicesincluding managing complex operational handling (comanufacturing and co-packing), managing

administrative operations (billing ordering), managing information management systems(tracking-tracing), custom broker services, international freight forwarding and providing

logistics and SCM consulting.

The industry is growing through the strategic buy out of portions of companies which are

divesting their logistics related operations, which are not their core business. These newinvestments result in new companies which often have ready-made longterm service contracts,infrastructure, technology, workforce and collective agreements.



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The 3PL sub-sector is a value added sector with 14 % of total industry revenues and 5 % of theemployment of the global logistics industry.The 3PL market expected growth is 10-15%

annually over the next five years globally.

The Non-Asset Based Logistics Services:

Companies in this sector are characterized by the quasi-absence of their own physical facilities.Companies integrate the services of different sub-contracting companies (transport, storage,operations«) and coordinate and control them through management of the associated

information flows.

Players in sub sector include: The 4PL (virtual 3PL), management consulting in supply chain andlogistics, fleet management, supply chain and logistics information systems, shipment

consolidators, carriers selection and logistics procurement services, rate negotiation, inventorymanagement applications, distribution control, freight forwarding and customs clearance and

brokerage. An emerging sub sector is the 5PL firm attributed to logistics service providerswho plan, organize and implement logistics solutions on behalf of a contracting party (mainly

information systems) by exploiting the appropriate technologies (conceptual level). Expectedgrowth for the next five years is expected to be from 10-15% annually.

Submitted by,

S.HAVISH

1226110139 SEC A

industry report 1226110139 sec a

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