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Optimism and surprises in learning logistics the ‘Indian Way’

Considerable investment, partnership and patience are all needed for logistics to keep up with market demand which is expected to see car sales double to 6m per annum in the next three years.

CONTENTS OF REPORT 

 

 

NEW DELHI, 9 DECEMBER 2011: Delegates also heard some surprises, with a representative of the Ministry of Railways saying that the idea of private sector operation of autohubs for finished vehicles is “on hold”. 

Government representatives from both the Planning Commission and the Ministry of Railways set out the critical next steps for investing and modernising infrastructure and transport policy. And while there are some encouraging plans –  from large investment in roads to more interest in automotive by the railways –  there are also signs that development and regulatory reform will be slower than hoped. 

In striving for modern logistics, the ‘Indian way’ always applies, delegates heard. That can mean surprising efficiencies, as well as delay and frustration.  The conference discussed the many infrastructural, regulatory, operational and capacity issues which the country faces – and they are substantial. But it also saw users and service providers inching towards collaboration, as well as actions to address the appalling conditions of car-carrier drivers in India. 

Once again, delegates agreed that India’s fast growth in the automotive sector will depend critically on the country’s ability to improve its infrastructure and advance its logistics. Overall there is optimism, which is also the ‘Indian way’. And once again the conference proved an invaluable forum for the key players to meet, discuss and agree how move forward.

Market potential: dramatic shifts within bullish growth

Car sales in India slowed in the final months of 2011, principally due to the influence of the government’s imposition of significant increases in interest rates (to 8.25%) to tackle inflation.  Production and distribution were also hit by labour disputes at India’s largest carmaker, Maruti Suzuki, and by the interruption of the flow of imported parts due to the Japanese tsunami and the Thai floods. Finally, economic worries over the eurozone and North American markets have had an impact on the domestic economy. 

But there seems little question that India’s market retains its huge potential, and medium-term forecasts for car sales remain bullish. Deepesh Rathore, director of India, Asean and Australia for forecasting company IHS Automotive, expects sales for the financial year ending 31 March 2012 to have passed 3m light vehicles. After moderate (by Indian standards) growth in 2013 and 2014, sales by 2015 are expected to have almost doubled to just shy of 6m, with an increase to 8m units by 2019 and 10m by 2024.

Taking into consideration commercial vehicles and the tremendous volume of two- and three-wheeler sales in India, Achal Paliwal, head of commercial and logistics for Honda Ciel, expects the total vehicle market in India to grow from around 18m units per annum today to reach 28m units a year by 2015. He predicts a huge 40m units by 2020.  Back in 2004-05, the annual output was just over 8m units.

A good part of the growth in the production underpinning these forecasts is expected to come from India’s automotive cluster in the north, where Maruti Suzuki already builds around 1.2m cars per year. India’s middle cluster around Pune and the southern cluster near to Chennai are also expected to grow, but at a lesser level. 

The most dramatic increases in output will be in Gujurat, India’s westernmost state with a long coastline to the Arabian Sea. Both Ford, with a second plant to the one in Chennai, and PSA this year announced $1 billion plant investments, with expectations to export as well. The country’s biggest OEM, Maruti Suzuki, is investing there, and GM is expanding. A recently-released study from consultancy PwC expects nearly half of India’s car production capacity to be located in Gujurat within 3-5 years, an output of some 3m vehicles.

As well as growing, India’s car-buying market is also shifting, both geographically and demographically. RS Kalsi, executive officer for parts, accessories and logistics at Maruti Suzuki, told delegates that the share of sales accounted for by India’s rural market has now grown to 25%. Meanwhile, the average age at which an Indian can afford to buy a car continues to fall, from 39 years-old in the year 2000, to 36yo in 2005 and to the early 30s today.

These kinds of sales forecasts of course present a considerable growth in the potential market for logistics services. Paliwal estimates that by 2020 the finished vehicle logistics sector alone (including two-wheelers) will be worth Rs210bn (about $4 billion) per year. It will need 171,000 annual trips, 28,500 road carriers and 80,000 drivers.  That level of hardware and skills is a long way above what is available today.

Infrastructure deficit and the ‘trillion-dollar dream’

RS Kalsi from Maruti Suzuki called for greater investment in road and rail infrastructure in India

All the forecasts of growth in car sales hinge critically on India’s ability to update and modernise its infrastructure, which Maruti Suzuki’s Kalsi described as already being “in deficit” at today’s volumes. He pointed out that while India has the world’s second largest road network at 3.3m km, some 80% of it is rural and often unpaved.  The country has only 600km of expressway-grade roads, and just 10,000km of 4-6 lane divided highways, which combined make up less than 1% of the total network.

Equally critical, the proportion of automotive freight moved by the Indian Railways is woefully inadequate. For finished vehicles, the estimate is 3.8%, according to Suhas Kumar, a freight management advisor to the Ministry of Railways.

The infrastructure and railways issues saw lively debate at the conference, thanks to the participation of Kumar and of Dr Manoj Singh, an adviser to the government’s Planning Commission. The governmentrole is significant, not least as April 2012 will see the country’s 12th five-year plan begin. The two government officials spoke in positive terms about the importance of the automotive industry and the need for infrastructure, and of the railways’ wish to meet the growing needs of the sector.

“Logistics is very important to the development of the automotive sector and for India to help develop its manufacturing base to the appropriate level,” said Singh. “Unless we have the right logistics framework, the automotive industry won’t be able to grow as much we expect it to.” He pointed to a “very solid footing” of investment plans for road building. He also recognised the need for a major shift of freight traffic from road to rail, and the need to develop coastal shipping. “We are waiting for a dedicated freight corridor for rail, which will substantially lower transit times,” he added. 

He also noted the anticipated introduction of a national Goods and Service Tax (GST), which will allow for larger, multi-brand distribution centres serving several states as well as speedier road transport. But he left unsaid the ability of government to act; the start of GST has been consistently delayed by parliamentary opposition over the past several years, and meanwhile delays, bureaucracy and corruption at state borders continue.

Kumar from the Ministry of Railways also affirmed support for the automotive industry, noting that the ministry made an official commitment back in 2009 to move more finished vehicles by rail. Adding to the almost universal agreement among conference delegates, Kalsi said: “If you want to improve on logistics efficiencies in India, the railways will have to play a big role.” 

Dr Manoj Singh from the Planning Commission: government is seeking 40% of private investment in infrastructure development, or about $1 trillion over the next five years

This is the amount of private funding that the government is hoping to attract in public-private partnerships, and represents 40% of the total investment planned.  This might be expressed to potential investors as a significant opportunity, but there are real questions of how India will be able to fully and efficiently encourage that level of private financing, particularly if the global economy takes another turn for the worse. 

But funding for all the infrastructure investment needed will depend crucially on the private sector. Plans outlined to conference delegates by the government Planning Commission advisor Dr Manoj Singh, call for road-building in the 5-year plan starting in April 2012 to be realised via the ‘4 lahk crore (or $1 trillion) dream’. 

Private investment is also expected to carry too large a share of future rail investment  in the eyes of some carmakers and logistics providers. Anand Venkateswaran, general manager of sales logistics for Hyundai India, said that private companies would be reluctant to invest the amounts needed without having much control over operations, which Kumar affirmed would remain firmly with the railways. 

Private sector spend doubtful as Indian Railways keeps tight control

Suhas Kumar, advisor on freight management at the Ministry of Railways: autohub policy put on hold

The expectation had been that a series of aggregation centres which feed into the rail network, so-called autohubs, would be developed and operated by private companies on unused railway land. But Kumar told the Automotive Logistics India conference: “The railways has set the autohub policy on hold because it is the railways’ belief that no private companies should be operating railway terminals in India.” It was the first that providers had heard the news. Railways Ministry advisor Suhas Kumar has given what seems to be a crucial rebuff to a key area of potential private investment in the country’s rail infrastructure for moving finished vehicles. 

She acknowledged that the requirement for investment appears to have prevented OEMs and logistics providers from “taking the plunge”. She added that she had seen a drop off in interest in rail from carmakers in 2011 as a slower market had eased some of the immediate pressures. 

But Tata’s Prem Verma, head of the carmaker’s distribution and logistics arm, reaffirmed that the automotive industry “was not a fair-weather friend to the railways. We want to use the railways by design and not by default, and even in some tough conditions in recent months we made the decision to continue to use the railways.”

“I fear that perhaps this polite language of autohubs being ‘on hold’ could mean it is a policy dead in the water,” Hyundai’s Venkateswaran, general manager of sales logistics for Hyundai India, told Automotive Logistics after the rail session of the conference. “We could see rail development delayed another 4-5 years as a result.”

An area that Kumar did concede the railways should relinquish is wagon design. She acknowledged that the three types currently used by the railways are inadequate. “Any of the designs that the Indian Railways has previously done itself have been rotten, frankly,” she said. “We understand about rail wagons, but nothing about automotive, so why should we design these ourselves?”

She made clear that new designs would need to be approved by the railways, and said that while she had heard a lot of potential plans about prototypes, including one design from a Vietnamese manufacturer, she had yet to be presented with anything concrete. 

Venkateswaran worried that the typical approval process could take years. “Normal protocol for the government to approve a wagon could be up to 3-4 years, which will further delay the development of rail,” he told Automotive Logistics. Meanwhile Maruti Suzuki’s Kalsi said that his company was working on deciding a wagon-prototype with providers.

So will the private sector step forward to invest in rail? A question posed during the public conference session to a panel of carmakers and providers, including Mahindra & Mahindra and Honda as well as Mercurio Pallia, one of the largest Indian vehicle logistics providers, about whether they were willing to “take the plunge” was left unanswered.

One of the panels dedicated to outbound logistics, where Mahindra, Mercurio Pallia, BLG Logistics and Honda Siel joined the Railway Ministry to discuss capacity.

Afterwards, however, Maruti Suzuki’s Kalsi told Automotive Logistics that the carmaker was looking carefully at these investments, although it was possible they would be made with or through a logistics provider. Tata’s Prem Verma also said that the stance of the railways was “workable”, but added that it would entail costs that carmakers currently do not face. 

Umesh Bhanot, vice president at Adani Logistics, pointed out that the railways were likely to allow private companies to load and unload wagons for a fee, a procedure currently allowed for containers at a charge of Rs160,000 (about $3100) per container. “It is reasonable to expect a similar charge for wagons,” he said.  

Overall, however, the industry is unlikely to see a significant rise in the use of rail logistics. It will have to, in the words of Hyundai’s Venkateswaran, “make do and improve what we already have”. 

Reusable packaging on the move, but with uniquely Indian constraints

Although the Indian automotive sector has been slow to develop standards and implement returnable packaging, there appears now to be a wider shift towards improving both packaging efficiency and reducing packaging waste. 

Perhaps most critically for Mahindra and the wider automotive sector, Wadke said that the company was converting from expendable to reusable packaging. The reasoning was both a reduction in cost and waste, and improved protection against damage as a result of plastic packaging being stronger than cardboard.

Milind Wadke from Mahindra and Mahindra: switching from expendable to returnable and reusable packaging.

Milind Wadke, deputy general manager at Mahindra & Mahindra, who since last year has been head of a newly-created packaging division, revealed how the carmaker had redesigned and implemented new methods for packaging and pallets to increase cube utilisation. Trolleys at the factories and in warehouses have been redesigned to allow pallets to be stackable, and packaging redesign has increased cube utilisation for some truckloads from 74% to more than 90%. 

Pranil Vadgama, president of packaging pooling provider Chep India, reported that the company has had considerable success in the four years since entering the Indian market. It currently sees pooling solutions, where manufacturers share containers, at around 150 tier suppliers as well as at several OEMs, including Maruti Suzuki, Mahindra & Mahindra and Fiat. Pooling is used because the capital expenditure for containers is beyond the means of many tier suppliers and even carmakers, he said.  

Arun Modgil, the president of Ckdpack, described how his company been able to lower overall costs to carmakers even while using packaging that costs some Rs 60,000 (about $1200). In some cases he was also able to use returnable packaging for long distances, not only within India but also internationally, though this is not the norm. Importantly, he said that many manufacturers in India hide the true amount of damage that poor packaging is causing in their supply chains, which makes the benefit of returnable packaging harder to see. “Don’t hide your damages,” he urged.

Impressively, he also said that the ratio of missing containers in India is very low, considering that lost assets are a significant problem in the US and Europe. In India they are around 455 per 1m containers, and most were not lost but simply out of the current loop. “There has been a good discipline for controlling these assets since we started in India,” he told delegates. “However it must also be said that the level of palletisation in India is very low. And it is pallets which have a tendency to go missing.”

There is still a long way to go for returnable packaging in India. “We are just scratching the surface here,” said Chep’s Vadgama. But he added some of the Indian context which pervaded many presentations at the conference. “The reason is a lack of standards. But also, more simply, at many factories the containers might be purchased from one of the manager’s family members, and so introducing [returnable packaging] efficiency is not easy.”

Tier ones improve visibility 

As India sees more global tier one suppliers produce in the country, supply chains are being modernised due to them being connected to the US and Europe, as well as to other regions in Asia Pacific.

Delph’s Hitesh Thakkar: improving visibility across its supply chain with a centralised SAP-based IT system

Hitesh Thakkar, India logistics manager and Asia Pacific process manager at Delphi, revealed how the supplier’s use of a centralised SAP system across its supply chain had helped to improve visibility and efficiency for both Delphi’s global imports to India as well as for its domestic logistics. 

As an example, the company imports 100 containers a month from the German port of Bremerhaven. To better align its supply chain towards a pull system, and ensure higher utilisation levels and delivery speed, SAP is used to send information between its 3PLs and its own suppliers, both internationally and in India. “We provide this information and then outsource the network optimisation to the 3PLs. We believe that they should know better than us whether or not the freight should be moved less-than-truckload, through an organised milkrun or in full truckloads,” said Thakkar. 

He added that implementing such a system for domestic moves in India was initially difficult, but a concerted effort of training and compliance for suppliers meant the system had reached 96% utilisation by Q2 of 2011. “We consider our LSPs to be our eyes and ears,” he said, and added that better communication had allowed for container utilisation in India to improve from an average of just 58% in 2009 to around 75% today.

Tier one suppliers including Delphi, Continental, Tenneco and Visteon discussed how they were dealing with variations in demand

Anoop Arora, head of logistics India for Continental, said that the supplier’s biggest current challenge in India was in dealing with demand fluctuations. With volumes uncertain, OEMs were tending to look to increase their buffers and were pushing more consignment stock on to suppliers. Not all OEMs share information about their forward production plans and changes, he said. “The OEMs could help suppliers by sharing more of this information, because they understand better than we do what changes they are likely to implement.”

Ford’s Vinodha Jeyanthilal: questioning tier suppliers on their performance in delivering service parts not spare parts

In an interesting exchange about service parts, Ford’s Vinodha Jeyanthilal, head of Asia Pacific for this business, challenged tier suppliers about their performance in delivering what she said were “service parts not spare parts”. The simple response was again absence of forecasts of demand. And in this case, Visteon’s Jatinda Kumar, deputy general manager for supply chain management, noted that tier suppliers do not track vehicle sales, and have no data on the volume or age of India’s car parc, both of which might help predict demand. In a live example of business connections being made at the conference, both parties were set to confer after the session.

Anil Sharma, head of supply chain management at Tenneco, agreed that uncertain demand is one of his biggest challenges. And he gave delegates a very practical presentation of how he tackled uncertainty of delivery for inbound parts. “Maruti runs many of its high-value parts according to the principle of e-nagare, which allows for just one hour timeframes for delivery,” he explained. In response Tenneco had analysed its logistics route and processes, and determined the longest average time taken to move material to the OEM’s plant in Gurgaon. “We found that if we moved back our supply chain processes by one hour, we are able to comply with the requirements. We have seen very good results so far,” he said. 

Tenneco has also consolidated its imported container shipments into India. The supplier ships about 30% of its material from the US and Europe, mostly from northern Europe, and has previously used different freight forwarders for each country. “We have now switched to using one freight forwarder for all of Europe, and we combine material for several of our plants at one port in Belgium. This allows us to send one full container per week that we then deconsolidate in India,” said Sharma. 

Overall, however, the use of technology in the supply chain is key. Asked to identify his three biggest challenges, Delphi’s Thakkar said simply: “Visibility, visibility and visibility.”

Taking better care of drivers

A focus on improving driver conditions was ignited at last year’s Automotive Logistics India conference, held in Chennai, by our India correspondent Ramesh Kumar. His report of a journey aboard a car carrier is now described in his book 10,000 kilometres on the Indian Highways, a copy of which was given to each delegate by his host for the trip, Mercurio Pallia. Driver conditions are revealed in it as appalling.

At this year’s conference, Honda’s head of commercial and logistics, Achal Paliwal, described how conditions continue to be bad.  He said drivers typically face lack of sleeping and health amenities, and high levels of theft and violence, as well as a low salary, no social security and little job security (only 3% of drivers are employed directly by OEMs). “There is a total lack of trust among the driver community, as they continuously face abuse by police, burglary and bribery,” he said. “Many existing drivers do not want their children and the next generation to join the trade.”

But, as Paliwal pointed out, there will in future be a huge demand for truck drivers, and the industry could suffer from a significant shortage. “We should use drivers as our brand ambassadors, and invest today for a better tomorrow,” he urged.

Vipal Nanda, chairman of Mercurio Pallia, now a member of the Gefco group and one of the India’s largest vehicle logistics providers, responded to the call by pointing out how the company is offering training, sleeping and health care amenities to its drivers in an effort to improve both their quality of service and of life. “Training of our manpower has been the focus of this joint venture virtually since it came into existence,” he said. “We are offering in-house training, medical checkups, entertainment and yoga.”

But this is a broad area in which India clearly has a long way to go. Prem Verma, chief executive officer for TML Distribution, the vehicle logistics arm of Tata Motors, pointed out that it was not only drivers who faced poor conditions and a lack of training. “Across the entire logistics industry in India, not just automotive, only around 10% of employees have formal training, and this is an industry that is projected to employ 50m people,” he said. “It’s going to be a big problem. We need to train drivers, warehouse managers, port handlers, and employees at every level across this industry.”

Building long-term partnerships…on one-year contracts

A common theme across nearly every Automotive Logistics conference, and they are held in North and South America, in Europe, in Russia and in China as well as in India, is the manufacturer-LSP relationship. Thomas Blank, regional director of sales and marketing for Geodis Wilson, echoed the comments of many providers when he said that “manufacturers in India need to move away from treating logistics at a transactional level” if they want to move to the next level of quality.

And the sentiment is no different from the OEMs and tier suppliers. Many of them at the conference also said they wanted more partnership – a sharing of words that could suggest India is moving towards a more collaborative phase for logistics (or that its executives have a gift for inclusive and complementary language). 

Kalpash Pathak, vice president of supply chain management at Fiat India, told delegates that relationships need to be long term and sustainable. “We have moved away from one year contracts and try to go with at least three year agreements to help Fiat and LSPs work more closely together to find synergies,” he revealed.

(from left): Fiat’s Kalpesh Pathak, APL’s Rinaldy Sudyatmiko and Thomas Blank from Geodis all emphasised that OEMs and LSPs need to build long-term partnerships

That is not the universal policy, however. Right at the start of the conference, Frost & Sullivan’s Subir Shah, senior director of the firm’s transportation and logistics practice, outlined the results of a 2011 survey of the sector in which ‘safety of goods’ (from damage or theft) and ‘quality of labour handing of goods’ were the top two concerns. He told delegates that some 65% of end users think service collaboration is for logistics providers to initiate, yet 62% of logistics contracts in the Indian market are for one year. 

APL Logistics’ Rinaldy Sudyatmiko, head of automotive for Asia Pacific and Europe, later agreed that manufacturers and providers must work, and even invest, together to move forward. This particular, applies to rail services, he said, something in which APL has invested for container movements to the port of Mundra.

The point was also picked up by Tata’s Prem Verma, who reminded delegates that short-term relationships would discourage providers from investing in rail wagon design or distribution centres.

Visteon’s Jatinder Kumar, deputy general manager for supply chain management, spoke at length about the need to build trust between manufacturers and LSPs, as well as between tier suppliers and OEMs. “We need to forge strong links in the supply chain and we can only do this through strong trust,” he said. 

Kumar added that this would sometimes mean sacrifices for one another, and gave the example of Maruti Suzuki’s labour disputes this year. Many suppliers, including Visteon, had suffered from a lack of volume and higher inventory. “A short-term view would have been to try to punish Maruti and extract compensation from them,” said Kumar. “But we believe it is necessary to take a loss sometimes for your customers.”

Verma echoed this point as well. “The automotive business is extremely cyclical. We are going to have booms and busts, and sometimes we are going to lose money. The point is to be able to sustain each other through the good times and the bad.”

Jasjit Sethi, chief executive of TCI Supply Chain Solutions, offered a more real-world observation on these dynamics. “The automotive industry believes it is wrong to punish your customer during a crisis. However, it seems to think it is acceptable to punish your supplier or provider when things go wrong. If a provider or supplier stops a line, for example, it is murder. Should we sometimes treat the supplier with the same respect as a customer?”

Contending with these each day underlines the unique nature of the Indian experience of automotive logistics, and throws up the challenge of a market due to grow substantially over the next decade. Carmakers, tier suppliers and logistics providers at the Automotive India Conference discussed the many infrastructural, regulatory, operational and capacity issues they face – and they are substantial – but observers also pointed out that local and socio-cultural understanding is essential for doing business in the country.  Whilst striving for world-class logistics is a must, so too is some appreciation for what might be termed ‘the Indian way’. 

Satkar Grewal, senior manager for production from Maruti Suzuki, for example pointed out that while infrastructure investment is an obvious need, the solutions that work in one market do not always work in India. He noted that new expressways are promptly drowned under water during the rainy season. Likewise, India has built Asia’s second largest toll plaza, at 36 lanes, near to Maruti Suzuki’s factory in Gurgaon. But rather than allowing a smooth crossing, it often leads to chaotic congestion during rush hour periods. 

“Logistics development cannot be separate from a country’s model of development, governance and socio-cultural aspects,” he concluded. It was a point picked up by Jasjit Sethi, chief executive of TCI Supply Chain Solutions, who said that measuring India by the standards and processes of other markets does not always apply. “In North America and Europe, for example, it is common to talk about full-truckload or less-than-truckload services, and to measure optimisation between them,” he said. “But in India, we have trucks that are 10ft, 20ft, 30ft and 70ft, and so there is sometimes less meaning in LTL or FTL. We can optimise between the length of the truck we use and fill it as needed, and in many cases it actually means we have lower logistics costs than many other markets.”

The Indian way

Anyone travelling the roads in India gets an immediate insight into the logistics challenges that are as revealing as they are banal.. For example, a motorway, that contains an equal array of cars, motorbikes, bicycles, rickshaws, lorries of differing lengths, mules pulling wagons and meandering cattle, all drifting from one side of the road to the other with little obvious care for lane markers or signalling.    

That appreciation for the local does not, of course, exclude the market’s need for logistics and infrastructure development. But the subtext from speakers from government indicates that investment and reform need to come as part of the ‘Indian way’, or in this case not very quickly.

Major use of railways for finished vehicles, for example, or of coastal shipping, appears a long way off. Likewise, the introduction of GST, which is widely expected to smooth transport and trigger larger, multi-brand distribution centres, remains stuck in political gridlock.

“Nevertheless, “the fact that the GST is being spoken about means that it will probably happen, eventually,” says Tata’s Prem Verma, perhaps with a typically Indian brand of optimism. In India, it’s essential to have patience,” observed Grewal, with a smile and nod of the head.

No one in the conference room at Automotive India 2011 would have disagreed with him.