India industry: Weak infrastructure is constraint on logistics market
India’s transportation and logistics market holds potential for both domestic and foreign companies, and is expected to reach US$20bn in revenue by 2009
It is fragmented and unorganised, but India’s transportation and logistics market presents huge potential for both local and foreign operators. Valued at US$14bn in revenue in 2004, the market is expected to grow at a compound annual growth rate (CAGR) of about 7% and to reach US$20bn in revenue by 2009.
There are several factors driving this growth. For a start, customers have become more demanding, thereby forcing companies to improve their on-time delivery. In addition, greater globalisation has led to a higher volume of trade. But most importantly, companies increasingly are outsourcing their logistics requirements to specialist services providers in India.
As a result, revenue for third-party logistics, estimated at US$250m in 2003, is expected to grow at a CAGR of 20.4% over the period 2004 to 2009 and to generate revenue of US$1bn by 2009. Although this is just a fraction of the overall projected logistics revenue of US$20bn by 2009, third-party logistics is the fastest-growing segment.
Currently, companies in the automotive, information-technology (IT) hardware and fast- moving consumer goods sectors are the largest users of third-party logistics services. But users are also emerging in the textiles, retail and pharmaceuticals industries. Among the automotive companies that outsource their logistics needs: the Indian subsidiary of General Motors, which manufactures cars in western Gujarat state. It uses Menlo Worldwide, which operates a 44,000-square-foot spare parts distribution centre, also in Gujarat.
For its part, the Indian subsidiary of Samsung of South Korea has joined hands with Bax Global to distribute its electronic goods within India and overseas. And Bajaj Auto, a leading manufacturer of two- and three-wheeled vehicles, recently advertised for tenders from providers of logistics services for deliveries from its plants to depots/dealers and customs agencies.
The burst of activity in the market is expected to translate into mergers and acquisitions. India has several medium-sized, family-owned logistics companies—TVS logistics, Allcargo Global Logistics, Safe Express, Gati, Air Freight and Elbee Courier, to name a few—that are ripe for picking by larger domestic and international logistics companies keen to expand. Take for example, the acquisition by Reliance Private Equity for Rs650m (US$14.2m) of a 44% stake in DTDC Courier and Cargo, a courier and express delivery firm based in Bangalore, in southern Karnataka state. Reliance Private Equity belongs to the stable of companies run by Indian tycoon, Anil Ambani.
Foreigners move in
Foreign logistics companies have been around in India for a while, but mainly in express delivery, for which the market in India is estimated at Rs25bn, with parcels accounting for Rs15bn and letters Rs10bn. The foreigners, such as UPS, Federal Express (FedEx), TNT and DHL, initially entered India through alliances with domestic firms, leveraging off their strong distribution network. DHL tied up with Air Freight, FedEx with Blue Dart Express, UPS with Elbee Courier, and TNT with Skypack.
As the market evolved, companies that had concentrated on delivering small packages now took on delivery of packages of up to 25 kg. The industry became technology-savvy and operations were streamlined using e-tracking. As intense competition strained existing ties, foreign companies forged new domestic relationships, decided to go it alone, or bought stakes in their Indian partners.
DHL, for example, in 2004 acquired a majority stake in Blue Dart, a major air-express carrier and logistics services provider, by buying out the stakes of Blue Dart’s founders and of its investor, Schroder Capital Partners, for US$163m. Since then, DHL has been reinforcing its infrastructure and business in India. It has invested US$250m over the past few years to build a service that offers a one-stop solution for express and logistics needs in India.
DHL offers companies in India international express services, Blue Dart offers them domestic access, while DHL Danzas Lemuir, DHL’s venture with Lemuir of India, offers air and ocean freight services. DHL, Blue Dart and DHL Danzas Lemuir together reported revenue of more than Rs10bn in 2005. DHL first introduced its services in India in 1979.
DHL’s archrival, FedEx, began operations in India in 1984, and 13 years later became the first express company to launch an all-cargo flight to India. In 2002 FedEx parted ways with Blue Dart, with which it had had an agreement since 1984. It then formed a new partnership with a little known company called Prakash Airfreight.
The arrangement with Prakash differs fundamentally from that with Blue Dart, as Prakash was not part of the Indian network of FedEx and would operate with FedEx technology and brand. In October 2005 FedEx unveiled new service expansions in India, connecting 4,348 cities and towns across the country to the world.
Since the mid-1990s, the foreign express-delivery companies have been joined in India by a steady stream of freight forwarders, and ocean and air transporters. Several of them—Maersk, Schenker, Kuehne and Nagel, NOL, Sembawang, GeoLogistics and Bax Global—have committed huge sums of money in India.
Kuehne and Nagel of Switzerland, for example, was the first foreign freight-forwarder to get government approval to set up a wholly owned subsidiary and attain the status of a clearing house to receive and remit foreign-exchange payments. The company has since expanded, set up a container freight station, and employs more than 250 forwarding and logistics experts. For its part, Schenker of Germany has opened a new corporate office near the international airport in Delhi and has launched new industry-specific products that cover the automotive, electronics and high-technology, textiles, pharmaceuticals and chemicals sectors.
Dangers in the market
There are many risks for Western logistics companies in India, however. The industry suffers from congestion, over-regulation, a weak transport network, complex tax laws and insufficient technological aids. The fragmentation of the logistics industry is a serious obstacle, and stems from the unorganised nature of road transport, which accounts for half of all goods carried in India.
Vehicle ownership is firmly in the hands of individual truck owners, of whom 67% have a fleet of less than five vehicles. As the average size of the fleet is small, individual truck owners are unable to directly contract vehicles to companies. Freight consolidators and brokers therefore provide truck owners with consignments, and take a commission in the process. Truck owners lack the bargaining power to negotiate prices and thus get minimum profit. The increasing cost of input and lower profits ultimately affects the ability of truck owners to upgrade and expand their fleet.
As the condition of roads is poor, and this translates into higher vehicle turnover, adding to the inefficiency. These inefficiencies in turn are passed on to the logistics industry with transportation accounting for nearly 40 % of logistics costs.
Moreover, India’s creaking infrastructure remains a major bottleneck for the growth of logistics services. The government is trying to improve things: it is expanding port operations, investing in highway projects, and improving the rail network. It has announced plans to spend US$17bn in transport infrastructure by 2010. Progress, however, remains slow and uneven.
