The Hindu Business Line : Logistics providers must innovate to retain their edge

India has become a strong manufacturing base for exports, and many global companies are moving to the country. There are also huge FDI flows into the automotive, capital goods, electronic, retail and telecom sectors.

T.E. Raja Simhan

The size of the Indian logistics industry will nearly double, to around Rs 500,000 crore by 2010. This is good news for logistics service providers. But, for Indian companies, the high logistics cost is a concern in staying globally competitive.

India’s logistics cost of 13 per cent of the gross domestic product (GDP) is among the highest in the world as a percentage of GDP. This is compared to 11 per cent in Japan; 10 per cent in Europe and 9 per cent in the US. The Indian figure, however, is better than China’s 17 per cent. Two-thirds of the overall logistics costs arise from transportation and warehousing, says Mr R. Narayanan, Director, KPMG Advisory Services.

Customised solutions

The Indian logistics industry, which nearly employs around 40 million people, is yet to get industry status, making it difficult for companies to get financing. Such a status will also help the industry to be more organised, he said at the recent ‘Logistics 2007’ seminar organised by the Confederation of Indian Industry.

While improving things across the logistics sector may be too wide a canvas, a theme paper authored by two IIM professors suggested that attention could first be paid to a few sectors, with customised logistics solutions. These sectors could become role models for other areas, according to the paper presented at the seminar.

The paper, authored by Mr Janat Shah of IIM Bangalore and Mr G. Raghuram of IIM Ahmedabad, said that by focussing on a specific sector, it would be possible to speed up the process of logistics excellence. “Lowering logistics costs and improving services is not an option but an imperative,” they said.

Logistics costs can be classified as direct (transportation and handling); indirect (inventory, losses within a system); hidden (costs borne by other systems such as infrastructure wear and tear, safety) and opportunity (foregone sales transactions).

Sustaining the edge

Companies can sustain their competitive advantage when they innovate, or can provide improved services. Take the outbound logistics for cars in the automobile industry. The logistics cost is Rs 5,000 to Rs 7,000 per car. This is significant for a vehicle costing around Rs 3 lakh. But for low-cost cars proposed by the Tata and Mahindra group, this kind of transport cost will not be acceptable.

The paper proposed extensive use of rail and water as other viable modes of transport; setting up institutions to provide professionals manpower and certifications in warehousing, transportation. According to Mr A. Balasubramanian, Principal, Advisory Services, Infrastructure Development Finance Company (IDFC), logistics costs will fall in the future, following improvements in infrastructure. There are over 140 ports; 65,000 km of national highways; 14,000 km of inland navigable waterways; 63,000 km of rail networks and 7,000 km coastline. Massive investments are expected in all these sectors, he said.

India today serves as a good base for manufacturing for exports, such as automobile components and pharmaceuticals, and most of the global companies are moving to the country. Second, the size of the domestic market is getting larger. In addition, there is strong foreign direct investment in the automotive, capital goods, electronic, retail and telecom sectors. There will be increased market opportunities for logistics service providers in India.

PPP model

There is now wider recognition of the PPP (private-public-partnership) model for infrastructure-led growth. The PPP investment will increase across all sectors — ports, airports, rail, road, highways, container freight stations and inland container depots. But there are challenges in financing infrastructure projects. For instance, in highway projects there is a focus on Central projects due to the huge market size, traffic density and predictable contractual framework.

In the case of State government projects, to mitigate political and contractual risks, investors focus on commercially important States/stretches and consider inducting a local partner who can manage the environment and outsource contracts to local contractors to drive down costs and stay competitive, says Mr Balasubramanian.

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