Exploding market

COVER STORY/ LOGISTICS

Fast expanding economic activity, combined with competitive pressures on firms to focus on core operations and reduce costs, is producing a rapidly exploding market for logistics services.

The Indian logistics market provides vast potential for local and foreign operators alike. A liberalising market, increasing global trade and foreign direct investments in India, fast expanding manufacturing and retail sectors, combined with competitive pressure on companies to focus on their core operations and reduce costs, are producing a rapidly exploding market for logistics services.

The domestic logistics market is estimated at around $45 billion today. By 2015, it is expected to reach almost $122 billion, growing at a compounded rate of over 11 per cent "" higher than the growth rate of the Indian economy. Cargo is usually segregated on the basis of size (full container load or FCL, and less than container load or LCL) and value (low, medium and high). FCL services are offered to exporters who transport sufficient amounts of cargo to fill an entire container. These goods are containerized and transported to the shipping lines after completion of the requisite customs and other formalities.

There are innumerable small shipments made by companies and traders who do not trade in large quantities; for them, using an entire container for such shipments is not a cost-effective option. A consolidator collects such smaller cargo loads from exporters and consolidates a full container load for each destination and ships it accordingly. Cargo of up to 50 kg is sent by courier services and other cargo is shipped through freight forwarders, consolidators and agents.

The Indian logistics industry is highly fragmented and unorganized, marked by the presence of a large number of small players, including transporters, express cargo movers, courier operators, freight forwarders, container companies and shipping agents. The fragmentation of the logistics industry stems directly from the unorganized nature of the road transport sector, which transports 50 per cent of all goods carried in India.

Vehicle ownership is firmly in the hands of individual truck owners and 67 per cent of them have a fleets of less than five vehicles. As the average fleet size is low, individual truck owners are unable to directly contract their vehicles to companies and hence, freight consolidators and brokers provide truck owners with consignments, taking a commission in the process.

Truck owners lack the bargaining power necessary to negotiate prices, and provide transportation services with minimum profit. Increasing cost of inputs and lower profits affect the ability of truck owners to upgrade and expand their fleets. The poor condition of roads directly translates into higher vehicle turnover, adding to inefficiency. The inefficiencies of the transportation sector are passed on to the logistics industry, with transportation costs accounting for nearly 40 per cent of logistics costs.

Nonetheless, a number of small- or medium-sized, well-established, family-owned companies have emerged in the integrated logistics business "" TVS Logistics, All Cargo Global Logistics, DRS Logistics, Safexpress, Sical Logistics and Transport Corporation of India. Revenues for the third-party logistics (3PL) market in India, estimated at $890 million in 2005, are expected to grow at a compound annual growth rate (CAGR) of 21.9 per cent and generate revenues of over $3.5 billion by 2012, according to Frost and Sullivan.

One of the first sectors to use outsourced logistics services has been the automotive industry. "Time-bound delivery and safety are the two most critical aspects of managing supply chains of automobile companies that would also reduce logistics costs considerably," according to Vineet Agarwal, Executive Director of Transport Corporation of India. The Hyderabad based DRS Logistics, which has a huge fleet of 500 company-owned vehicles, handles the total distribution function for Bridgestone, Hyundai Motors and a host of multinational and Indian companies.

The Chennai-based TVS Logistics Services Ltd, a part of the TVS Sundaram Iyengar and Sons (TVS) group, has made its mark as a niche third-party logistics service provider for the automotive industry. TVS Logistics' list of clients includes Ashok Leyland, Ford India, General Motors, JCB, Mahindra & Mahindra, Royal Enfield, Tata Motors, TVS Motor Company, Pricol, Cummins and the Rane group. The TVS group's parent company, which has been in the logistics business since 1995, spun off the logistics division into a wholly-owned subsidiary in November 2004.

TVS Logistics handles over $1.5 billion worth of parts annually and controls about two million sq. ft. of warehouse space and operations in the UK, Spain, Thailand, USA, Germany and China. The company expects to achieve a turnover of Rs 500 crore within the next three years. TVS Logistics Services has acquired an 80 per cent stake in UK-based CJ Components, as part of its global expansion plan in the auto components supply chain business. The acquisition will provide TVS access to CJC's clients, which include Cummins, Delphi and New Holland.

Other Indian firms are also looking to expand abroad. All Cargo Global Logistics Ltd, which has emerged as a leading logistics service provider involved in multi-modal transport operations, owning and operating container freight stations, handling project cargo and airfreight, has recently acquired a 100 per cent stake in the Belgian firm, ECU Hold NV, the holding company of the ECU Line Group. "The group's business spans from consolidation to project movements to container freight stations and from Antwerp to Tokyo and Johannesburg to Mumbai, while maintaining our neutrality in the marketplace," said Shashi Kiran Shetty, Chairman of All Cargo Global Logistics.

In September 2006, Chennai-based Sical Logistics, a leading provider of multi-modal logistics services for all kinds of bulk and containerized cargo, acquired the Singapore-based Bergen Offshore Logistics Pte Ltd, a provider of specialized logistics for offshore oil and gas exploration, for $96.9 million (around Rs 445 crore). The acquisition was seen as a logical extension of Sical's existing offshore logistics business, which operates and manages 17 offshore supply vessels for India's leading energy exploration company, ONGC Ltd. "With Bergen's acquisition, Sical has taken its first firm step towards achieving a global presence in offshore logistics," said Ashwin Muthiah, Chairman, Sical Logistics.

Logistics service providers are looking forward to the newly emerging retail sector. As the share of organised players in the total retail market increases dramatically with the entry of Bharti Retail, Reliance, Lifestyle, RPG and Aditya Birla Group, opportunities are exploding for logistics providers. DRS Logistics has tied up with Reliance Retail and Lifestyle retail to organise logistics and inventories. The company has raised Rs 100 crore from Kotak Mahindra Bank's private equity arm and intends to use the funds for development of 1.5 million sq ft of third-party logistics space.

Other growing users of outsourced logistics services are the electronics and hi-tech industry, particularly semi-conductors, textiles (where, with the lifting of the textiles quota by the US in line with the WTO framework, the market in India is expected to experience huge growth), pharmaceuticals and chemicals. Lenovo, which develops, manufactures, and markets high-quality PC products, has aligned with Menlo Worldwide to manage a 4,000 sq ft facility supporting manufacturing operations in India. Menlo runs the vendor-managed inventory (VMI) hub facility, where it oversees operations and sourcing and procurement of computer parts from Lenovo's suppliers for use in its India manufacturing plant.

Another area for future growth is infrastructure. Global logistics major Schenker, a subsidiary of Stinnes AG, the transport and logistics management company of Deutsche Bahn AG, was awarded the contract for importing and transporting rail coaches from Korea for the Delhi Metro.

Not surprisingly, therefore, some transportation majors "" Maersk, NOL, Kuehne and Nagel "" have committed huge investments in India. Maersk Logistics India, one of the most prominent logistics providers in the country, has set up a total logistics centre near Gurgaon in Haryana to meet the growing demand from the northern states for cargo. In India, Kuehne + Nagel of Switzerland operates 12 bases in all major industrial areas of the country, and employs more than 250 forwarding and logistics experts.

The UK-based Bertling Logistics, a global project forwarding company, also hopes to tap the infrastructure sector. In June 2007, Bertling announced the launch of its 100 per cent-owned Indian subsidiary, Bertling Logistics India. "The company, with its rich heritage, combined with its global network, will bring to India some of the best practices in the field of project forwarding," said Shanker Chaterjee, Managing Director at the launch. Foreign players have been eyeing the integrated logistics services market in India since the early nineties.

One of the earliest entrants was Sembawang of Singapore which, in 1996, formed a joint venture, Sembawang Shriram Integrated Pvt. Ltd, with the Shriram group holding 49 per cent equity. However, in 2000, Shriram pulled out of the venture by disinvesting its holding in favour of the Singapore partner "" SembCorp Logistics "" for an undisclosed premium. Consequently, the joint venture company became a 100 per cent subsidiary of SembCorp Logistics and was rechristened SembCorp Logistics (India).

Another early entrant was the Miebach Logistics Group of Germany, which started its consultancy business in India in 1996. In 2001, it set up its second office in Gurgaon. Among its clients are Tata Chemicals, Hindustan Lever, Escorts, Dabur, Marico, SmithKline Beecham, Mahindra & Mahindra and the RPG Group. Miebach has formed an alliance with IT consulting and services provider Satyam Computers Services Ltd to offer one-stop-shop supply chain solutions covering strategy, process, engineering and technology to customers in the Asia-Pacific across industry sectors.

In March 2007, DHL, which considers India a strong growth market, and Lemuir Group, pioneers in the Indian logistics industry, announced plans to consolidate their joint venture "" DHL Lemuir Logistics Private Limited "" in India. Deutsche Post World Net will hold 76 percent stake in the joint venture with 24 per cent being held by Lemuir.

The consolidated joint venture will combine the businesses of DHL Danzas Lemuir Pvt. Ltd. and Exel India Private Limited, which recently acquired the contract logistics and customs house brokerage operations for general cargo from Lee & Muirhead Pvt. Ltd. It will position DHL as the leader in international freight forwarding, supply chain management and customs brokerage in India. BAX Global India, a 100 per cent subsidiary of Bax Global Inc. USA, provides complete freight forwarding services as well as supply chain and logistics services in India and has tied up with the newly launched Kingfisher Airlines, to set up the logistics infrastructure including warehouses and IT systems for the latter's cargo initiative.

In August 2004, Menlo Worldwide won approval from the Foreign Investment Promotion Board to offer vendor managed inventory services for India. Among the activities and business processes Menlo supports in conjunction with customers are spare parts forecasting, order scheduling, procurement (imports as well as locally manufactured goods), order rejection and claims handling, and vendor payment follow-up. The approval opened the door for Menlo Worldwide, which offers a wide range of international multi-modal transportation services "" including air and ocean freight "" as well as supply chain, warehouse and logistics services through Menlo Worldwide Forwarding India Private Limited (MWFI), to expand its logistics and supply chain service offerings in India.

In March 2006, Neptune Orient Lines announced that its joint venture had received 'in principle' approvals from the government to run freight rail services. UTI Worldwide is considering the expansion of its service portfolio by entering into contract logistics and value-added warehousing for its customers in India. The company's Indian subsidiary is planning on investing in the warehousing segment as part of its effort to provide end-to-end solutions for its customers.

The branded express market in India "" estimated at Rs 2,500 crore, with parcels accounting for Rs 1,500 crore and letters for Rs 1,000 crore "" is going through a process of consolidation as foreign players seek to expand their operations through acquisitions. Left in the fray are a handful of global players and a few Indian companies "" First Flight, Elbee Express, DTTDC, SafeExpress and XPS Cargo.

All the foreign companies "" UPS, FedEx, TNT and DHL "" initially entered the Indian market through alliances with Indian players, hoping to leverage the strong distribution network of their domestic partners. DHL tied up with AFL, Fedex with Blue Dart, UPS with Elbee, and TNT with Skypak. Both Elbee and Skypak were strong domestic players and leveraged their networks to garner business for their foreign partners. With the changing market, players who had previously concentrated only on the small packages now started delivering packages of up to 25 kg across countries. The industry became technology-savvy and streamlined its operations using e-tracking.

As the market grew, competition intensified and business changed, the existing ties floundered and the foreign companies forged new ties and looked for new acquisitions, even as they announced major investment and expansion plans. DHL, the world's leading express and logistics company, offers express and logistics services in India. In 2004, it acquired a majority stake in Blue Dart Express Limited, South Asia's largest integrated air express, courier and logistics company, for Rs 720 crore by buying the stakes of the founding shareholders of Blue Dart and Schroder Capital Partners.

KEY PLAYERS

Shipping Lines
APL Ltd.
A.P. Moller Maersk
Compañía Sudamericana de Vapores
Wan Hai Lines Ltd.
K Line (America) Ltd.
Hanjin Shipping Co. Ltd

Domestic Freight Forwarders
AFL Ltd.
Alpha Cargo Express
Air & Sea Cargo Systems
Container Carriers International
Countrywide Express
Express Freight Forwarders

International Freight Forwarders
Geologistics
Kuehne + Nagel
Exel
Bax Global
Panalpina World Transport

While DHL Express offers international express services, Blue Dart caters to the domestic market. Blue Dart's operations are supported by a fleet of five Boeing 737 freighters and 3,429 ground vehicles. In 2004-05, Blue Dart handled 42.02 million shipments in India and 0.53 million shipments internationally. "India is one of the fastest growing markets for DHL Express in the Asia Pacific region. We have aggressive expansion plans for India as part of our vision for growth in the region. We have made significant investments in expertise, technology, knowledge transfer, infrastructure and distribution networks in the region", said Scott Price, CEO, DHL Express, Asia Pacific.

In September 2006, the Netherlands based TNT Express, which was the first multinational brand in India to offer both international and domestic services using an integrated air and road network, acquired Speedage Express Cargo Services, a division of Mumbai-based ARC India Ltd, for Rs 200 crore as part of its strategic objective to become the leading provider of express deliveries in India. TNT is investing 100 million euro ($121 million) in the Indian market over the next five years.

In 2002 Federal Express, which began operations in India in 1984 and 13 years later became the first express company to launch an all-cargo flight to India, parted ways with Blue Dart, with which it had an agreement since 1984, and formed a new association with little-known Prakash Airfreight. In July 2007 Federal Express made an unsuccessful bid to acquire Safe Express, a home grown company that was started by Pawan Jain in 1995 and has grown to be one of the largest logistics companies in India, which has over 3,000 vehicles, 3 million sq ft of warehouse space and delivers over 2.5 million packages a month.

CONTAINER FREIGHT STATIONS

KEY PLAYERS

Chennai
Container Corporation of India Ltd.
Gateway Distriparks Ltd.
Central Warehousing Corporation
Sanco Trans Ltd.
Balmer Lawrie & Co
Binny Ltd.
Gateway East India Private Ltd.
Continental Warehousing Corporation

JNPT, Mumbai
Maersk India Private Ltd.
Gateway Distriparks Ltd.
United Liner Agencies of India Private Ltd
Transindia Logistics Park
Seabird Maritime
Balmer Lawrie & Co.
Punjab State Warehousing Corporation Ltd. (CONWARE)
Container Corporation of India Ltd.
DRT
Central Warehousing Corporation

Mundra
Mundra CFS Private Ltd.
Mundra International Container Terminal
Central Warehousing Corporation
Forbes Gokak
Parekh Marine

As the domestic players seek to expand they have attracted the interest of private equity funds. Anil Ambani's Reliance Private Equity, a division of the listed Reliance Capital, has acquired a 44 per cent stake in DTDC Courier and Cargo Ltd, a large Bangalore-based courier and express player, for Rs 65 crore. First Flight, India's second largest courier company, which handles over 85 million consignments through its network of 700 offices, is looking to garner investment of over Rs 100 crore from private equity firms.

It plans to invest these in setting up 14 warehouses in key cities and acquire larger aircraft. Elbee Express, which offers an integrated express service network for the distribution of consignments, documents, parcels and commercial goods covering 11,600 locations in 1,645 cities and 643 towns in India, has invested significant resources in state-of-the-art customer service centres and staff training, to ensure high and efficient service levels.

Conclusion

There are many risks and obstacles for companies attempting to enter the market "" the industry suffers from congestion, fragmentation, over-regulation, a weak transport network, inadequate infrastructure, complex tax laws and insufficient technological aids "" but all this hasn't prevented a host of logistics operators from establishing a growing presence in the market.

"India risks missing out on an additional one to two percent of annual GDP growth led by its emerging manufacturing sector unless the country can improve transport connections to meet the just-in-time requirements of complex international supply chains," warns a recent study, Connecting India: Transport Challenges and Opportunities, authored by Drewry Shipping Consultants in concert with NOL Group. Aware of this, the Indian government has announced plans to spend $17 billion on the transport infrastructure by 2010.