A land of opportunity

The rate of economic growth in India is attracting attention from logistics companies. However, as John Manners-Bell of Transport Intelligence writes, the country’s infrastructure and regulations are in need of vast improvement.

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By  John Manners-Bell Published  August 3, 2005

|~||~||~|The Indian market has become of prime interest to logistics, express and mail companies, and some see it as even eventually rivalling China in terms of opportunities. DHL is already in the process of buying its way to market leadership, whilst rival FedEx has stated that after China, India will be its next major frontier. One of the prime reasons for the interest is that forecasts predict that India will take over from China as the most populous country in the world within 15 years. This will lead to huge domestic demand for parcels and logistics services, especially given recent trends towards liberalisation of the economy. The economy is growing quickly. Latest figures show that India’s gross domestic product is increasing at 7.4%, only slightly less than that in China. Industrial output is also strong, with year on year growth figures in high single digits. To facilitate the country’s economic development, the government has plans to invest $17 billion in transport infrastructure by 2010. At present bottlenecks and delays are endemic within the country’s road, air and sea networks, hindering investment by foreign companies. As far as seafreight is concerned, booming imports and exports have led to congestion at India’s docks. It can take up to three and half days to turnaround a ship at the country’s 12 major ports and plans to overcome these problems include new container terminals at several locations throughout India. There is also an ambitious project afoot to dredge the channel between Sri Lanka and India, thereby significantly cutting down transit times for ships with a draft of more than 12.8 m. The government is also building 10,000 km of new roads as it is estimated there are more than 66 million vehicles on India’s road, and road building has failed to keep pace with demand. However, although major express and logistics companies are already lining up to take advantage of the growth market, the full benefits will not be apparent for many years. Economic reform is not moving as fast as in China, and the government’s focus has been more directed towards the service sector, such as IT and call centres, rather than manufacturing. This will mean that although there will be economic growth, the volume of freight moved will not grow as quickly as in China. Challenges ahead The transport and logistics services sector in India today faces a formidable challenge in meeting India’s heightened aspirations for a significant economic role on a global basis. The development of a robust and responsive transport market is not only key to the projected growth of the economy, but it also has important bearings for improving the quality of life for people and the integration of a multi-lingual and multi-cultural Indian society. The rapid growth of international and domestic trade cargo volumes and the pressures exerted by the explosive demographic growth of urban centres have already over-strained the transport system in terms of size, capacity and connectivity. According to a World Bank estimate about 800 billion tonne kms of freight and 2300 billion passenger kms is presently handled by the Indian transport system, with the total transport demand growing at about 10% a year for the last ten years. The doubling of demand for passenger and freight services has, however, not been met by commensurate growth in transportation and cargo handling capacities. This underlines the critical role that private sector players would have in the future evolution of transport sector.||**|||~||~||~|Key Issues in Transport Economy Some of the key issues that will determine the future course of the development of transport sector and the role of private sector in particular include: Regulatory Framework The success of a ‘public-private partnership’ strategy and the increased private sector investment in projects depends on how soon the government is able to put in place appropriate and credible regulatory mechanisms and empower operational-level management to take appropriate and timely decisions. To attract further large scale investments into the sector, there is a need for greater clarity and definition of the government’s intent as to how and where it wants the private sector to involve itself in the transport sector. Technology Changes The global transport industry has seen sweeping technology transformations that have redefined the notion of the transport function in the total economic value chain. Typically, the share of transport costs in the total shipment cycle have tended to diminish, with growing cargo throughputs, larger parcel size of cargo movement and an increasing operational focus on freight management and delivery. The average unit cost of freight has also tended to come down with increases in vessel sizes (especially, as in container shipping trade), large throughput capacities of modern container terminals and automated container-handling methods. Lowering freight costs is sure to have a positive correlation with cargo throughput volumes in India, a fact borne out by increased levels of containerisation of ocean cargo. India is still in the initial phases of introducing greater technological sophistication to the management of its transport assets and other infrastructure services, and there is great potential and promise to explore further intensified use of technology tools. The transport sector in India also has much to gain from the competitive advantage the country has already gained in the globally benchmarked IT-enabled services (ITeS) sector. Investment The transport sector demand for new investment is estimated at over $10 billion up to 2010 and is about twice the level of total foreign direct investment (FDI) the country has been able to attract so far. A large part of this investment will have to come from the private sector, which calls for urgent measures for building an investor-friendly environment, institutional guarantees of reasonable returns on investment and the creation of a trouble-free operating environment. Several mega infrastructure projects, including in the road, port and airport sectors, have the potential to attract leading global operators and developers to India. Major project areas where investment funds are in demand include developing new airports, seaports/terminals, cargo warehousing complexes and air cargo complexes, deepening draft in existing seaports, and creating high density road corridors, flyovers, over bridges, sea bridges, by-pass roads, inland container depots and Container Freight Stations. Industry Consolidation A characteristic feature of the industry structure in India is the strength of the many large unorganised players. This is particularly evident in the express and logistics segments, where there are large numbers of players offering homogenous services. Consequently, there is near commoditisation of services, especially in the express document business where demand is price-sensitive. The top end of the market is controlled by a handful of multi-nationals and large domestic players. The industry structure is reflected in the heavy freight market (both domestic and international segments), which is equally fragmented and with the bulk of the freight demand coming in less than critical payload sizes. Domestic freight consolidators, especially in airfreight, therefore have an important role to play. The airfreight consolidation market is protected and large foreign players have been barred from directly operating domestic airfreight consolidation services. However, industry consolidation is starting to occur. DHL has acquired local express major Blue Dart Express and in the port terminal business, Maersk and P&O Ports have consolidated their position by acquiring controlling stakes in private container port terminals in Gujarat. The pace of mergers and acquisitions (M&A) activities will most certainly develop in the years to come as the market is progressively liberalised. Integrated Logistics Services The integrated logistics service concept has rightly shifted the business focus to functional elements of how transportation and logistics services generate real value for shippers. There is a large potential to improve logistics efficiency and this can be customised to shipper demand and the shipper’s willingness to pay more. Though logistics and supply chain management functions are still rarely outsourced to third party contractors in India, there is a definite growing trend. Some industry experts believe that the 3PL services market in India can be potentially as promising as in Europe. Future outlook It is now widely acknowledged that efficiency in the transport sector will have major consequences on the competitiveness of both goods and services. An efficient transport system will not only boost trade, but it can also create demand for investment. In an emerging business context, where transport and logistics services are slowly being outsourced and managed on a turnkey contract basis, the first mover advantage can accrue to any player who is willing to, and capable of, taking a lead in value-adding to existing supply chains. Integrated 3PL players in India as elsewhere would have to create this value by re-structuring the existing supply chains. Mere synchronisation of freight demand with freight carrying (carriage) capacity will be an inadequate response. While India’s international freight, as well as domestic freight demand, is set to grow rapidly in the years to come, the current policy and investor focus on creating cargo handling capacity and cargo fleet capacity may eventually fall short of the requirement for greater focus on logistics optimisation and supply chain integration in the economy. Transport Intelligence has just published India Transport & Logistics 2005, which provides comprehensive intelligence on the Indian market. For more call +44 1793 850025 or visit www.transportintelligence.com.||**||

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