Logistics/ Supply Chain/ Transportation Industry Analysis

- Arjun Satya

0. Introduction:
Logistics in India involves a complex chain of activities, spread across multiple modes of transportation and infrastructure points. The logistics industry in India is evolving rapidly and it is the interplay of infrastructure, technology and new types of service providers that will define whether the industry is able to help its customers reduce their logistics costs and provide effective services (which are also growing). Changing government policies on taxation and regulation of service providers are going to play an important role in this process. Coordination across various government agencies requires approval from multiple ministries and is a road block for multi modal transport in India. At the firm level, the logistics focus is moving towards reducing cycle times in order to add value to their customers. Consequently, better tools and strategies are being sought by firms in order to enhance their decision making. In this paper, we provide a perspective on these issues, outline some of the key challenges with the help of secondary information, and describe some interesting initiatives that some firms & industries are taking to compete through excellence in managing their logistics.
Sub-sectors:

a) Reverse Logistics b) Air Transportation c) Road Transportation d) Rail Transportation e) Marine Transportation f) Express Logistics Industries g) Cold Chain and Cold Chain Storage h) Warehousing

1. Overview/:
1.1) - Logistics and Economic Development

The Indian economy has been growing at an average rate of more than 8 per cent over the last four year putting enormous demands on its productive infrastructure. Whether it is the physical infrastructure of road, ports, water, power etc. or the digital infrastructure of broadband networks, telecommunication etc. or the service infrastructure of logistics all are being stretched to perform beyond their capabilities. This is leading to an emergence of innovative practices to allow business and public service to operate at a higher growth rate in an environment where the support systems are getting augmented concurrently. In 2011, the Indian logistics segment accounted revenues of about $ 82.10 billion, witnessing a growth of about 9.2 percent over the previous year, driven by strong growth of key manufacturing industry sectors.

1.2) - Logistics Market Size and Growth: MARKET SIZE The complexity of the logistics network id further exacerbated by the fact that the industry is highly fragmented, with small and mid-sized players. Small and mid-sized players dispersed across multiple regional pockets, asset type and services with few if any player in India able to offer customer true end-to-end services.

In 2011, the Indian logistics segment accounted revenues of about $ 82.10 billion, witnessing a growth of about 9.2 percent over the previous year, driven by strong growth of key manufacturing industry sectors.

GROWTH

For the era 2010-2020, the Indian logistics market is likely to witness consistent annual growth of around 8-9 per cent and reach to the revenue level of about $190-200 billion by 2020. This target will be achieved with the help of steady growth of the economy and major industries like engineering, pharmaceuticals, automotive, food processing and others.

MARKET CONTRIBUTORS:

1.3)- Industry Structure and Key Players: Industry Structure can be explained this exhibit:

Key Players of the Logistics Sector:

(note the market share percentage and other information is taken while dealing individual sub-sectors.)

Gateway Distriparks Ltd GDL is in the business of owning, developing and managing Container Freight Stations( C F S ) a n d I n l a n d C o n t a i n e r D e p o t s ( I C D ) . T h e c o m p a n y o p e r a t e s c o n t a i n e r f r e i g h t stations (CFS) at Navi Mumbai, Chennai, Vishakapatnam and Inland Container Depot atGarhi Harsaru. GDL is in the process of expanding capacity at its existing CFSs andsetting up a new CFS at Kochi. Shares are listed on the National Stock Exchange and theBombay Stock Exchange

CTC FREIGHT CARRIERS PRIVATE LIMITED: This company is known for Freight Transportation Services and Transportation Warehousing Service. Also this company possess trucks and LCVs for carrying goods and ODC consignments. Transocean Express Logistic : The company is a Logistics and Supply Chain management company and is promoted by Indian logistics professionals. DHL : This company is one among the major logistics companies in India. It is a market leader globally in overland transport,air freight and international express. The company ranks No.1 in the world in contract logistics and ocean freight. The biggest logistics and express network in the world has a network in about 220 territories and countries,72,000 vehicles,350 Aircrafts,36 hubs and 4,700 bases. GLOBAL EXPRESS SERVICE : This company deals in international logistics and offers a robust, wellrounded suite of services to companies doing business in Asia, Europe, the Middle. Blue Dart : This logistics company is South Asia's top integrated expresspackage Distribution and courier company. The domestic network of the company covers about 21,340 locations and provides service to 220 countries by the company's sales alliance with DHL. Gati : The company is a key leader in then arena of express cargo delivery and a significant one in the supply chain management solutions and distribution in India since the year 1989.The company provides services like the WareHousing,Express Cargo etc. Safexpress : It is one of the largest express company in India. The company offers the best and integrated logistics solutions. In 2002 the Limca Book of Records declared the company as the Largest Logistics service Provider in India. The company has a network over 550 locations in 28 states and 7 countries. DTDC :The biggest Domestic Delivery Network Company is DTDC. The company offers high class delivery service in about 3700 Indian locations and 240 international places. Ashok Leyland : The leading provider of logistic vehicles for the India Army is this company. It is a key

leader in the tractor-tailers and multi axle trucks. The company manufactures buses,trucks,engines and special application vehicles in India. It is promoting a new company called Ashley Transport Services Ltd. Agarwal Packers and Movers: This popular Indian logistics company provides logistic services like the home shifting,car packing etc. across India. The company believes in keeping technology and people and of course heart and soul in the movement of the individuals respective items. 1.4)

Growth Drivers
Rising Outsourcing and consolidation:

Companies in India currently outsource an estimated 52 percent of logistics, but many more companies are increasingly considering outsourcing and Third Party Logistics (3PL) models as they seek to reduce costs and focus on their core businesses. Logistics is a highly fragmented industry, and with this rising outsourcing trend, the industry is also consolidating. As companies seek to focus on their core businesses, improve customer satisfaction levels and expand their logistics needs which can be achieved by working with external logistics expert.

Rapid supply side changes are helping to awareness and demand:

Private Investment in modern warehousing and a dramatic improvement in transportation systems is leading to many more logistics end users moving away from legacy 'store-and transport' mindsets to true supply chain management. As more MNCs increase their scale operations in India, there is a rising demand for world-class logistics infrastructure and services.

Regulatory CHainges are helping to drive private participation and efficiency improvements - The impending introduction of a goods and services tax (GST) in April 2011, aimed at bringing in a uniform tax regime acroos all India's state will lead to wide spread rationalization of warehousing. - The government incentives to infrastructure developers are expected to futher improve supply-side inefficiencies. - The privitization of the container rail segment and private-public partnership (PPP) programs in key sectors have open new logistics segments for private Participation.

Significant government spending in infrastructure The government has earmarked over INR 14,000 billion of infrastructure investment in its 11th five year plan. Around 27 percent of its investment is expected to be in roads, rail, aviation and port project.

1.5) Global Comparison:

1.6) Investment Opportunity: Major Investments are driven by private equity (PE), with very few strategic investments and even fewer foreign investments. Investors have historically invested in asset-heavy sectors as transportation and

warehousing.

Foreign Investors can tap to forge a market entry into India with Local Logistics Company. This exhibit gives the level of investor activity in the sector.

2. Fiscal Policies and Developments in 2011-12 : KEY FISCAL INCENTIVES TO INVESTORS SND OPERATORS:

2.2) Extent of FDI allowed in the sector:

2.2) Impact of key upcoming fiscal reforms:

3. Market and Investment Opportunities: 3.1) Role of Investors:

3.2) Investors Activity:

3.3) Return on Capital employed for selected Players:

3.4) Private Equity and Mergers and Acquisitions in the industry: Private Equity:

Mergers and Acquisitions Deals:

NOTE: The data for 2011-12 will published by Venture Intelligence, VC circle in October,2012 3.5) Challenges :

4) Reverse Logistics: 6.1) Overview:

Reverse logistics potential has been realized only recently in India, it is at a very nascent stage and is expected to grow rapidly in the future o It has been estimated that 14% of Indian companies are expected to outsource their reverse logistics functions Indian reverse logistics industry is pegged at INR 1.2 bn o Globally reverse logistics is pegged at INR 56 bn o Furthermore, 7% of an enterprise's gross sales are captured by return costs o It has been estimated that 1.2% of GDP is lost to supply chain inefficiencies Advantages of having a well functioning reverse logistics system include: o Expected reduction in supply chain costs by over 2% o Increase set recovery by over 3.1% o Improve productivity by over 9.2% o Provide complete customer satisfaction

6.2) Infrastructure:

7) Air Transport: 7.1) Introduction: Aviation holds a small share of India's freight market.

Air Freight is very expensive in India in comparison to road and rail. India accounts for meagre 3% of the global air cargo market. As per an expert estimate, Indian air cargo industry is going to be double by the year 2012.
7.2) Market Size and Growth: According to the Planning Commission, Indias air cargo movements would grow at over a CAGR of 11.5% from 2007-08 to 2011-12. Foreign Direct Investment (FDI) limit in cargo airlines having been raised by the Government from 49% to 74% is attracting major overseas players to expand their Indian networks and capacity. Air Cargo business has overtaken the ocean freight & rail freight market by expanding at nearly 19% in the last 3 years, as against 10.3% growth registered by ocean freight and 9.2% by railways.

Domestic air cargo traffic has been growing at CAGR of 12.80% from 2007-08 to 2011-12, whereas international air cargo traffic has been moving at CAGR of 13% during the same period. Riding high on export of gems and jewellery, special chemicals and high value pharmaceuticals, international air cargo traffic at all Indian airports has been growing rapidly.

7.3) Challenges:

7.4) Key Players:

Blue-Dart, the only dedicated freight carrier in domestic sector. Air India plans to increase cargo revenue from current 10% to 15-20% in 3yrs.

 Jet Air, GoAir, Kingfisher Airlines charting out plans to play bigger role in Indian domestic air cargo. International Airlines-Cathay Pacific and BA increasing cargo capacity to and from India.

8) Road Transport: 8.1) Introduction:

The most important mode of transportation in India is road, and this dominance arises from decades of poor supporting infrastructure development on the rail. Despite having one of the worlds largest rail networks, Indias share of cargo transported by rail has declined steadily. It is due to the poor quality of service (including last mile access solutions) driven largely by the historic monopoly of the government and the resultant overbearing focus on passenger services as well as massive investments in road highway projects over the past six decades that have helped position roads as the most significant, even if suboptimal, means of transportation.

8.2) Market Size and growth: The following exhibit will explain the market size and growth of Roadways

NOTE: The y-axis is in BTKM (billion ton kilometre) The growth pattern has been given up to FY11 The increased share of road give the market size of the road transport. 8.3) Trucking Industry:
The trucking industry is highly fragmented, and with low entry barriers. It has seen significant commoditization leading to intense competition among truckers who find their realizations and margins continuing to be squeezed progressively.

Trucking industry faces threats that are similar to road ways that has been covered in separate section.

8.4) Issues and Threats: - Threats faced due to new entrants:

- Threats faced due to substitutes:

-- Threats faced due to bargaining power of consumers:

- Threats faced due to bargaining power of suppliers:

- Threats faced due to rivalry among competitors:

8.5) Road Freight Trends: These threats have led road transporters to adopt various de-risking strategies. This creates Opportunities for investors and operators to invest in and partner with leading road transportation companies on this transformation journey.

8.6) Major Players: Transport Corporation Of India Patel Integrated Logistics Gati Delhi Assam Roadways Corporation

9) Rail Transport: 9.1) Introduction 9.3) Market Size and Growth The Indian Railways boasts of being the worlds 2ndlargest rail network spread over 81,511 km and covering 6896 stations. The freight segment accounts for roughly two thirds of railwaysrevenues. The tonne/kilometre costs for Indian rail freight at three timesthat of China. [Tata Iron & Steel]. Rail services have been liberalized since 2006. 9.2) Key Freight Players

Container rail business opened up to private freight operators:

Indian Railways (IR) opened up the container rail business to private operators in 2006. Since then, 15 new players, besides the incumbent Concor, have joined the fray.

Private players have already made huge investments in the business and have further plans to scale it up. The entry of private players in the segment has intensified the competition in the segment and improved efficiency.

9.3) Market Size and Growth:

India has a large freight market estimated at 3.7 bn tonnes in volumes, which have been expanding (8% CAGR over the past three years, source:IR/Industry) in line with the rapid economic growth. Interestingly, only 30% of this cargo is estimated to be handled by the railways despite rail being a cheaper, faster and more efficient mode of freight movement against roads due to lack of focus by IR on aggregation of cargo. Indian railways are trying to address the loss of market share through containerized operations.

9.4) Infrastructure:

9.5) Issues and Threats: Issues: The domestic segment is extremely fragmented with limited penetration of containerized rail movement, which is estimated to be 1% (~6m tonnes) currently. Penetration of container rail is relatively higher in port volumes (Exim cargo) with 30%, or ~2m TEUs, being transported by rail. Currently, the container rail industry has a capacity of ~300 rakes, of which Concor accounts for 220 rakes with the remaining being with private players.

Threats in Indian Rail Freight: Exim segment congestion on key routes (JNPT-NCR)

With the everincreasing number of rakes (by container rail operators and for bulk cargo) to service the growing cargo at these ports and locations, the route has become saturated as no new railway tracks have been added. Moreover, double stacking is not possible on the routes connecting the ports to NCR as they are largely electrified. Consequently, we believe the congestion for connectivity to the western ports will impact turnaround time of rakes on the Exim route. We believe turnaround time of rakes can improve substantially once the dedicated freight corridor is operational. The IR is addressing this by setting up a Dedicated Freight Corridor (DFC), which is currently under implementation. We believe once the DFC is operational, it will significantly improve the turnaround time of rakes. Dealing with the Indian Railways (IR) -Erratic increase in haulage charges -No turnaround time guarantees -Initial movement of bulk cargo by container rail operators -Absence of a regulator 9.6) Infrastructure To grow the container rail market and drive a shift in volumes from road to rail, operators should possess the ability to provide reliable and cost-effective solutions.

10) Marine Transport: 10.1) Introduction

While roads continue to remain the dominant mode of transportation for domestic freight movement in India, maritime transportation is yet to realise its full potential with respect to ports, coastal transportation and inland waterway connectivity. The over-7000 km long Indian coastline has 12 major ports and about 187 minor ports.

India's West Coast ports handles almost 70% of traffic.

10.2) Market Growth, Trends and Major ports:

India now has the largest merchant shipping fleet among the developing countries India ranks 17th in the world in shipping tonnage. Indian share of maritime transport services is 1% of world market. The container traffic has registered an impressive growth of 15 per cent over the last five years.

Major Ports In India:

10.3) Key Players:

Port traffic to grow to a level of 650 Million Tonnes Per Annum by 2008-Ministry of Shipping. Port Privatization is picking up momentum--USD1.39 billion worth projects approved. Private Players ---P&O, PSA, Maersk, Gammon India, CWC and the Dubai Port Authority. Major Players' Profiles: Chennai Port Trust, Cochin Port Trust, Ennore Port, Jawaharlal Nehru Port Trust, Kandla Port Trust, Kolkata Port Trust, Mormugao Port Trust, Mumbai Port Trust,New Mangalore Port Trust, Paradip Port Trust, Tuticorin Port Trust, Visakhapatnam Port Trust, Non-Major Ports.

10.4) Issues and Concern:

Given capacity expansion limitations within major ports, focus has increasingly shifted towards development of private greenfi eld ports or expansion of minor ports mainly in the west and south east of India. The state of Gujarat leads the pack consistently retaining over three-fourth majority share on account of highest number of operational minor ports and business-friendly regulatory environment.

11) Express Logistics: 11.1) Introduction: Express industry in India offers distribution services of documents, small packages and freight on time definite basis carried by fleets of fully owned or dedicated aircraft, trucks, trains and delivery vans both in domestic and overseas. The industry is highly fragmented with large number of domestic players from unorganized segment and few global players. 11.2) Market size and Growth:

The express industry handles two types of consignments, i.e. documents and non documents. Documents accountfor~60% of the total organized sector revenues while non-documents constitute only 40% of the market. Given their extensive networks and high service standards, organized players have captured 65% of the express business, while unorganized or semi-organized players account for ~25% of the total market. The remaining 10% is serviced by EMS Speed Post. However, within the domestic sector, unorganized players offer a price advantage over organized players. As a result, organized sector has only 45% share of the market with unorganized player shaving comparable41% share. The remaining 14% market share lies with EMS Speed Post
11.3) Key Players:

12) Cold Chain and Cold Chain Storage : 12.1) Introduction: India accounts for 10% and 13% of the world fruit and vegetable production. 35-40% of the perishable food produce in India is spoilt before reaching the end customer. This wastage is more than the total production of fresh fruits and vegetable in Great Britain. Use of very low level technology results in high electricity use. Average utilization: 6 months a year. COLD CHAIN STATUS IN INDIA:

12.2) Cold Chain Equipments in India: Refrigerated Warehouse Modified atmosphere Warehouse Refrigerated Transport Warehouse Mobile pre-cooling vans

12.3) Market Size and Growth: Cold Chain Market In India : Market can be divided into segments: 1. Surface storage: consists of refrigerated warehouses for storage. 2.Refrigerated Transport: involves usage of refrigerated transport for transportation. 12.4) Key Players: Refrigerated warehouses for perishable food: Cochin International Airport Mumbai INternational Ariport Delhi INternational Airport Greenfield International Airport 13) Warehousing: 13.1) Introduction: Cold chain market is in nascent stage and fragmented and unorganised. Estimated size around INR 80-1000 Billion and the industry is growing at 22% per annum. Estimated growth to INR 400 Billion by 2015.

A warehouse is a commercial building for storage of goods. Warehouses are used by manufacturers, importers, exporters, wholesalers, transport businesses, customs, etc. They come equipped with loading docks to load and unload trucks; or sometimes are loaded directly from railways, airports, or seaports. They also often have cranes and forklifts for moving goods, which are usually placed on ISO standard pallets loaded into pallet racks. The direction and tracking of materials in the warehouse is coordinated by the WMS, or Warehouse Management System, a database driven computer program. Warehousing in India has been marred by very low penetration of automation, technology and other effi ciency-enabling facilities. Its highly fragmented nature has prevented optimal space utilisation and the much needed infrastructural investments. As high as 92 percent (of the overall 433 mn sq. ft.) of the Indian warehousing industry is unorganised, characterised by medium to low quality infrastructure and services.

13.2) Types of Warehousing: Private Warehouses - The warehouses which are owned and managed by the manufacturers or traders to store, exclusively, their own stock of goods are known as private warehouses. Generally these warehouses are constructed by the farmers near their fields, by wholesalers and retailers near their business centres and by manufacturers near their factories. The design and the facilities provided therein are according to the nature of products to be stored. Public Warehouses - The warehouses which are run to store goods of the general public are known as public warehouses. Any one can store his goods in these warehouses on payment of rent. An individual, a partnership firm or a company may own these warehouses. To start such warehouses a licence from the government is required. The government also regulates the functions and operations of these warehouses. Mostly these warehouses are used by manufacturers, wholesalers, exporters, importers, government agencies, etc. Government Warehouses -These warehouses are owned, managed and controlled by central or state governments or public corporations or local authorities. Both government and private enterprises may use these warehouses to store their goods. Central Warehousing Corporation of India, State Warehousing Corporation and Food Corporation of India are examples of agencies maintaining government warehouses.

Bonded Warehouses - These warehouses are owned, managed and controlled by government as well as private agencies. Private bonded warehouses have to obtain licence from the government. Bonded warehouses are used to store imported goods for which import duty is yet to be paid. Incase of imported goods the importers are not allowed to take away the goods from the ports till such duty is paid. These warehouses are generally owned by dock authorities and found near the ports. Co-operative Warehouses - These warehouses are owned, managed and controlled by co-operative societies. They provide warehousing facilities at the most economical rates to the members of their society. 13.3) Market Size and Growth:

India is again witnessing a surge in the need for storage space. According to KPMG estimates, an additional 120 million square feet of warehousing space is needed by 2012 to bridge the demand-supply gap (after accounting for announced projects), and this translates to a massive opportunity for investors and operators. The Indian government plans to introduce a uniform Goods and Service Tax (GST), which is expected to level these state taxes and obviate the need for multiple warehouses. As a result, there is expected to be a significant reorganization of warehousing space in India, with large hubs being developed in key locations, coupled with smaller spoke warehouses nearer to production and consumption centers.

13.4) Key Players:

Central Warehousing Corporation, Gateway Distriparks, Container Corporation of India, Food Corporation of India, Sical Distriparks, Balmer Lawrie and Company, Allcargo Global Logistics

13.5) Issues and Concerns:

14) 3PL (Third Party Logistics) 14.1) A new logistics services paradigm for India:
The Indian 3PL market is estimated to grow rapidly, as customers increase the level of outsourcing, encouraged by the ability of 3PL companies to provide quality services. The penetration of 3PL and the propensity of customers to outsource have been most pronounced in transportation, followed by warehousing, as these have been historically easy-to-implement point solutions that most service providers can readily offer to customers. Customers still retain in-house the highest valueadding activities, such as production process alignment, invoicing and spare parts management, as 3PL vendors often lack the capabilities to deliver full supply chain solutions. Recently, some 3PL vendors have begun offering customers limited value added services centered around transportation and warehousing such as packaging solutions within warehouses, tertiary transportation, production line feeding, spare parts testing and minor repairs. 14.2) The evolution project tree:

14.3) Propensity to outsource to 3PL:

1 4 . 4 ) A t t r a c t i v e S

14.4) Attractive Segments for 3PL:

14.5) Critical Success Factors for 3PL vendors:

15) . INDUSTRY-WISE DEMAND(only the role of supply chain in other concerned sectors across the globe) :

15.1) Automotive Industry:

The solutions provided by the logistics in automotive industry is given by the above exhibit. The major improvement comes in the modularity of the conveyor, pallet and control system. Major role is to get materials to production lines on time, Manage national Supply Chains, Improve availability of replacement parts and optimize and simplify fleet operations. Core services include warehousing, in-plant services and Transportation Management. 15.2) FMCG Industry Overview:

National structure of Logistics in FMCG Industry:

15.3) - High Tech Electronics Industry Overview and Structure of the industry:

High-tech industry supply chains span the globe and often include thousands of suppliers, manufacturers, logistics companies, and other participants. Product variety is also high, ranging from build-to-stock, fast-moving consumer electronics goods sold through retailers such as Best Buy, to engineer and configure to order high-end systems sold through a lengthy, consultative process. Matching supply and demand in each market and product segment, while balancing costs with customer service objectives, is an extremely complex activity. Sales and operations planning may now include teams of geographically and organizationally. 15.4) Pharmaceutical Industry Overview and structure:

The role of logistics in Pharmaceutical industry:

Logistics is regarded as a crucial part of the pharmaceutical industry since the activities are highly time sensitive. In addition, pharma products need temperature-controlled storage and distribution. From the beginning of its evolution, the pharmaceutical industry in India has been focusing on the development of innovative activities like high quality products, research and development, etc. The most important supply chain factors in pharmaceutical industry are inventory reduction and reduction of order cycle time. This is because, operational performance could be directly linked to logistics costs, while inventory reduction and the demand to decrease order cycle time are related to just-in-time deliveries and supply chain speed.

15.5) Retail Industry Overview, Introduction and role:

The role of supply chain in Indian organized retail is very significant for on it depends the growth of this sector. The Indian Supply Chain Council have been formed to explore the challenges that a retailer faces and to find possible solutions for India. The role of supply chain in the organized retail sector in India should be a shelf- centric partnership between the retailer and the manufacture for this will create supply chains that are loss free. This will also give rise to top and bottom line growth. In the organized retail sector in India the presence of fresh produce (vegetables and fruits) is very small. This is so for the nature of supply chain is very fragmented. This shows the important role of supply chain in the organized retail sector in India. In the organized retail market in India, the role of supply chain is very important for the Indian customer demands at affordable prices a variety of product mix. It is the supply chain that ensures to the

customer in all the various offerings that a company decides for its customers, be it cost, service, or the quickness in responding to ever changing tastes of the customer.

15.6) Textile Industry