The logistics & warehousing sector, expected to be a $200 billion market by 2020, has the potential to offer expansion opportunities not only for logistics players, but also for foreign and domestic institutional investors, says Areef Patel, Vice-Chairman, Patel Integrated Logistics Ltd.
How are you gearing up for the surge in demand for mega-warehousing (for logistics providers) after GST is implemented?
Also elaborate on your growth plans over the next four years to recalibrate your warehousing needs after the new tax regime comes into force.
The warehousing sector has seen minimal growth in India during the past decade or so. However, the last four-five years have been eventful for the sector which has witnessed a tremendous surge in business activities and foreign investments. The logistics & warehousing sector, which is expected to be a $200 billion market by 2020, has the potential to offer lucrative expansion opportunities not only for logistics players, but also for FIIs and DIIs. I believe that the Indian logistics sector has come of age and this is the best time to be in business. We operate three warehouses in the country which are strategically aligned with our geographic reach and business model. Apart from warehouses in Vapi and Bengaluru, we also operate a bonded warehouse in Chennai.
Though our core strength has been in the B2B domain, we are
now majorly getting into the B2C model wherein we need to strengthen our last mile delivery capabilities. Our existing warehousing facilities are equipped to ensure that we honour our last delivery commitments. E-commerce and manufacturing are two core sectors which account for a significant chunk of our business revenues coupled with surface transport backed up by cargo consolidation and air cargo services. We intend to formulate a suitable warehousing policy in the future based on our business performance in the B2C domain. Emphasis on the asset-light business model has paid off well for us and we continue to reinforce our faith in the model.
Is ´Big´ going to be better business as far as warehousing is concerned? Kindly elaborate on this aspect to show how the scale of size of warehouses will impact the warehousing and logistics businesses in India.
Logistics and warehousing are a critical component defining strategic business initiatives of an organisation. As the Goods and Services (GST) Tax would subsume multiple taxes without differentiating between interstate and intrastate sales and usher in a one-tax regime, the need to operate multiple warehouses across states to reduce interstate tax would be rendered redundant. In order to save on administrative costs of running multiple smaller warehouses, warehousing operations would be centralised through building bigger warehouses near key markets and distribution points. This would not only ensure a leaner and highly efficient supply chain, but also lead to higher productivity numbers.
What is holding back agro-warehousing from enjoining with the mainstream industry? How realistic are the caps placed on rental costs and construction costs for warehouses in the agri-sector that are mostly serviced by the government-operated warehouse logistics companies?
Agricultural warehousing caters to the broader agricultural ecosystem. The warehousing market for agricultural produce is largely fragmented, local in nature and characterised by an unorganised format. There has been no uniform adoption or mandatory implementation of national standards in the agri-warehousing sector. Wide regional variation has been observed in the warehousing service qualities provided by Warehouse Service Providers (WSPs) along with differences in implementation of contractual obligations. With an estimated worth of Rs.8,500 crore, 15 per cent of the Indian warehousing market is dominated by agricultural warehousing. State-run entities like Food Corporation of India (FCI), Central Warehousing Corporation (CWC) and State Warehousing Corporations (SWCs) are responsible for operating more than 40 per cent of the warehouses in the agri-sector. Around 30 per cent of these warehouses operate in the unorganised milieu and are controlled by small godown players who lack operational efficacies on scale and quality parameters. Lack of a skilled labour force, inefficiencies in material handling capabilities, obsolete equipment, non-adherence to global standards, insufficient storage capacity and specifications and limited innovative practices and limited technology penetration have marred the execution capabilities of the domestic agri-warehousing sector. Hence, it would not be an exaggeration to say that the caps placed on rental and construction costs of government operated warehouses are hampering the building of additional storage capacities, upgrading warehousing infrastructure and providing for advanced logistics management techniques.
Transportation costs are the crucial component of the logistical aspects of the supply chain side of the manufacturing and e-tail business. While India averages a logistical cost component of 18 per cent, the international average is 8 per cent. How does Indian business go about reducing its logistical costs to improve profitability of the business? Is it a reasonable expectation that logistical costs can be brought down to 12 per cent, as being espoused by many stakeholders?
Contracting a third-party logistics (3PL) provider can go a long way in streamlining the transportation management for logistics companies and reducing their operational costs. 3PLs know the pulse of the market and can optimise the freight network capacities of companies ensuring timely and efficient deliveries. Working with multiple carriers enables 3PLs to leverage their transportation capabilities and get the best deals on the same. They also possess state-of-the-art tracking technology facilitating the tracking of cargoes and submission of queries in real time and offering secure access and unhindered visibility to clients.
Consolidating shipments can also help largely in mitigating transportation costs by engaging the services of transportation companies who collaborate with freight consolidation services and combine small shipments from multiple companies which need to be transported to the same destination.
Setting up Key Performance Indicators (KPIs) which are key to achieving transportation strategies of logistics players can also bring down transportation costs significantly. High-value KPIs can include crucial factors like invoice accuracy, transportation cost per shipment or order, inbound and outbound cost to serve, on-time pickup and on-time delivery. Implementation of these measures could considerably lower logistics cost of an organisation to 12 per cent, from the present cost component of 18 per cent.
How does the industry react to the tariffs levied by the government - port congestion tax and haulage charges - that are detrimental to the profitability of doing business? Again, are there adequate turnaround time operational dynamics in place in Indian ports to justify these levies?
The tariffs imposed by the government in the form of port congestion tax and haulage charges seriously hinder the operational capabilities of players with a significant burden placed on their profit margins. These will lead to unwarranted cost escalations, logistical problems and obstructions in honouring delivery schedules. Though measures have been initiated by the government to reduce turnaround time in terms of measures like infrastructure advancement at ports, Indian ports have yet to attain global benchmarks in terms of reduced turnaround time, increase in cargo-handling volumes and efficiencies across other relative parameters.
The business cost of delays on the transportation side of businesses is pegged at $ 6.6 billion per year due to truck stoppage time. What needs to be done to rectify this? Is reduction in these costs likely after GST comes into force?
The implementation of GST will simplify the intrastate and interstate transportation of goods by transcending various octroi and check points resulting in reduced transport time and lower costs. This, in turn, has the propensity to bring about a 30 per cent to 40 per cent reduction in supply chain inventory and logistics cost. It will lead to a larger number of bigger trucks on the road and a fall in the number of overall vehicles with the anticipated greater adoption of the hub-and-spoke model in segments such as warehousing, cold chain, container freight stations and inland container depots. Logistics firms may need to reframe their transport linkages or increase their capacities in tune with anticipated patterns in future traffic movements, as greenfield and brownfield logistics hubs become the norm in the future. Heeding the need to make the logistics sector more competitive, policymakers need to place emphasis on constructing wider roads to provide enhanced accessibility to the hubs or build new rail networks for wider connectivity.
The manufacturing sector is being encouraged with many initiatives by the Indian government. Can it scale up operations to increase its contribution to GDP to a share of 25 per cent as is ambitiously being propounded?
From an annual share of 16 per cent presently to the Gross Domestic Product, the Government of India has ambitious plans to raise the share of the manufacturing sector in GDP to 25 per cent by 2025. With the ´Make in India´ initiative, India is widely being promoted as a global manufacturing hub and a business friendly country to attract foreign companies to set up their manufacturing bases in the nation. The government has also envisaged an ambitious plan to facilitate the local manufacture of around 181 products. This endeavour has the capacity to scale up the manufacturing capacities of infrastructure segments of the economy like power, oil & gas and automobiles which require a huge capex. Along with the formulation of the Smart City initiative, the government has also placed emphasis on developing industrial corridors on a pan-India basis. These moves are broadly meant to facilitate the creation of a favourable environment for industrial advancement and usher in advanced manufacturing practices.
What are the actionable imperatives for the logistical players in India post GST in keeping with the unravelling dynamics on the side of transportation, distribution and storage, failing which their business would not be able to keep pace with the developmental blueprint launched in India?
The domestic logistics industry is highly fragmented with organised players forming a relatively small chunk of the sector. With GST in place, unorganised players would be required to team with the organised segment to achieve economies of scale. Warehouse consolidation would have to be on top of the agenda of major logistics players for creation of mega logistic hubs and increased investments in infrastructure in which the government has allowed 100 per cent FDI. Warehouse operators and e-commerce players would need to set up mega-warehouses at strategic locations near manufacturing hubs and closer to distribution points for cost optimisation and reduced lead time. They would also need to re-jig their commercial relationships with vendor partners, categorising them as long or short term based on their sourcing strategies. They would also have to evolve a distribution network which would comply with GST guidelines.
How is the current scenario in the logistics industry - in terms of different transport modes (road, rail, air, and water), technology adoption, etc?
Infrastructure continues to be weak and a big challenge area in India. The Indian logistics sector is largely skewed towards roads as an essential transportation mode with other modes like rail, air and water remaining largely unutilised, resulting in an adverse modal mix. With the highly affordable transport management system (TMS) to applying Bluetooth technology for seamless tracking of product movements, technology has become a highly inherent component of the shipping process and a great enabler for the logistics sector. Going ahead, logistics players would need to invest significantly in automation to achieve economies of scale.
The manufacturing sector is still struggling to show high growth and exports are dwindling. How has this affected the logistics sector?
The continuing weak performance of the manufacturing sector has significantly impacted the Indian logistics sector. The fall in exports has resulted in reduced international and national freight traffic and considerably affected the bottom lines of logistics players. However, with the government easing the doing of business sentiment in the country and the strong fundamentals of the Indian economy, it is not long before the logistics sector recoups and witnesses a surge in growth and development.
How is the third party logistics (3PL) market in India? What are the growth drivers and inhibitors for the logistics market in India?
The third party logistics (3PL) market in India is at a nascent level. The multiple taxation structure in the country has largely hindered the functional potencies of 3PL players and it is highly expected that the introduction of GST will give a huge boost to 3PL players. Regulatory measures from the government, investment in infrastructure by policymakers and momentum of private sector investment will prove to be key drivers/inhibitors determining the forward movement of the logistics sector.
How will the move of this government to focus on infrastructure benefit the industry? What is your opinion about this year´s budget?
A well-developed infrastructure network is the foundation on which the logistics framework of a country is based. Increased allocation of resources to the development of infrastructure can go a long way in boosting the strengths of the logistics industry. Roads need to be given special preference as a majority of the in-country goods movement is through roads. The rail network in the country, which is witnessing a surge in transport of goods, needs to be strengthened through increased capital expenditure.
Do you have any plans for expansion/diversification in the near future? How is your international business panning out?
We are an evolving logistics player, and our focus is mainly on leveraging new-age business potencies. Though we have strengthened our service delivery capabilities in the B2B space over the last 3-4 decades, we understand the changing pulse of the present business environment and for the last two years, we have started delivering for Amazon India and other e-tailers. We foresee tremendous opportunity in the e-commerce segment which remains largely nascent and under-penetrated and is yet to reach the Tier-II and Tier-III cities in full swing. Early in the year, we have raised `19 crore from a Mauritius-based PE firm for business expansion activities on a pan-India basis. We will have two more rounds of funding which will be utilised to strengthen our domestic business capabilities. Along with expanding our footprint in the domestic market, we see a huge potential in the Gulf Cooperation Council (GCC) countries where the logistics sector is highly unorganised like India. We have formed a JV with the Saudi-based Nationwide Group for setting up a strong logistics infrastructure in Saudi Arabia. We intend to have a presence in the GCC countries through our partners to leverage emerging business opportunities even as the GCC region shifts from traditional business domains and increasingly focuses on new-age business sectors.
Finally, how is the demonetization exercise likely to impact the logistics and warehousing sector? Is there a high level of cash-based operations that have been impacted?
Following the government´s decision to demonetise high value currencies of Rs.500 and Rs.1,000, there has been a 20 per cent fall in the e-tailing revenue of e-commerce companies accruing from cash-on-delivery (COD) shipments. With companies foregoing the ´COD surcharge´, their bottom lines are going to be impacted significantly.
Around 60 per cent of the consumption basket in India, including food, transport, real estate and restaurants, is driven by cash transactions. The motor-transport business, 80 per cent of which is cash-based, has been impacted the most. The delivery of essential products like milk, vegetables and food-grains has been hit the most as bulk purchases in markets has almost halted and truckers have been forced to stop intrastate and interstate ferrying of goods on account of drastic shortage of liquid cash.