India defies the downturn – it’s a hiccup not a meltdown
At the 2nd Automotive Logistics Conference India, held in Mumbai in January 2009, something strange was going on. There was talk about infrastructure not keeping up with growth. Talk of trailer and truck capacity not satisfying production demand. Talk of a high cost of transport. Talk of too few ports or rail terminals for intermodal transport. Talk of a projected doubling of production capacity within a handful of years. Talk of big growth in the 3PL sector. Christopher Ludwig reports
I pinched myself, wondering if I hadn’t somehow slipped back in time, to a conference in 2006 or 2007. I’d thought the global economic crisis had more or less resolved these issues in one fell swoop, as the drop in car sales was matched only by the drop in oil prices. All of a sudden I’d become used to the idea that governments were the only sponsors of hope these days with rescue packages. Yet there I was, in a city held under siege by terrorists a month before, surrounded by Indian carmakers and service providers, who all spoke of the promise that the Indian car industry held once it got past the current ‘hiccup’.
That what is called a ‘meltdown’ in the West is a simply a blip in India certainly made me appreciate the resilience of the Indian economy. The country has set its sights on being a global hub for compact car production, as well for parts production, and there is no change of plan there.
“We don’t see a long term change, as the fundamentals of the market have not changed,” said VG Ramakrishnan, a transport and logistics analyst for Frost & Sullivan. “2009 will be a flat growth market, and 2010 will pick up. Investment in infrastructure and foreign investment are both strong.”
Not like Kansas
If the cows sitting in their holiness along the choked Mumbai streets didn’t remind me that I wasn’t in Kansas, then the 6% GDP growth expected even in down times should have. No one at the conference was denying that India hadn’t been impacted by the global downturn.
Sales had slipped negative since July 2008, falling by double digits since October. December saw the worst decline across all categories in recent years, as sales dropped 18%, including a 58% drop for commercial vehicles. Passenger car dispatches to dealers dropped by 6% (better than expectations), while retail sales actually rose thanks in part to price cuts and incentives. That was enough to stir some hope, though few believe that a recovery has begun.
“We have not yet seen the bottom,” said Ramakrishnan. “We still see people getting laid off, though it is not in the papers. There is a psychosis that will take at least six to eight months to lift.”
“It’s not that the global economy isn’t having an effect, but the growing middle class of our large population is helping,” said MM Singh, Managing Executive Officer (Production) of Maruti Suzuki, Indian’s largest carmaker. “The Indian economy and consumption is more or less domestic. Let’s hope that we’re going to be safe.”
While it is uncertain how overall sales will fair, and with exports likely to struggle, those words give some sense of why I felt promise in the conference hall. The one billion potential consumers in India, after all, are the industry’s greatest hope.
What the economy means for logistics
On the whole, 2008 was a flat year for the Indian market, as overall sales fell by 0.5%. It may not sound a lot, but after sales growth of 15-20% per year recently for passenger cars, as well as exports in double digits, this drop is significant. For logistics providers, the majority of which are basic transport companies, any volume reduction collapses their already-thin margins.
“Indian costs for trucks are the lowest in world, apart from Pakistan,” said Rajinder Singh, Managing Director for Janta Roadways. “They are already unsustainable.”
Strict labour laws, which make it difficult to sack or lay off drivers in India, mean that truck companies must absorb much of the drop in volumes. “In India, we say that the wheel must always be turning,” said GS Arora, Managing Director of Autocreates, a car dealership and transport company.
As elsewhere in the world, the downturn has raised doubts about the once unchallengeable status of just-in-time and lean production. When the economy is so fragile, it raises the possibilities of failures in the supply chain, from suppliers going bust to labour disputes. “In these days of high insecurity, you cannot only rely on JIT,” commented Jasjit Singh Sethi, Chief Executive of TCI Supply Chain Solutions. “‘Inventory’ is not that bad a word.”
Turn to Plan B
Tata’s Mohan Savarkar, Deputy General Manager for Logistics, pointed out the benefits of having a logistics Plan B in these times. “During a recent transporter strike in India that lasted eight days, I don’t believe a single OEM lost time,” he said. “Our plant is quite lean, but we need backup plans.”
Mostly, however, the downturn adds up to higher inefficiency, something that already plagues Indian logistics. While labour and transport rates are low, waste in the Indian supply chain means that total logistics cost is much higher than in Europe or North America at 13% of GDP.
According to Maruti Suzuki’s Singh, poor logistics are costing the Indian economy an additional 1-2% of GDP growth, and this cost is not only because of poor infrastructure. India’s fragmented road and truck legislation means that crossing the country involves a patchwork of tolls and taxes. One estimate put the number of tolls between Delhi and Chennai at 73.
Also, poor infrastructure means: that trucks move at an average speed of 35kph versus a global average of 80kpg; that container handling in ports is 40 per hour versus 100 in Singapore; and that turnaround time for ships is 1.8 days versus 0.5 days in Hong Kong.
The economic situation is, in fact, compounding bottlenecks rather than easing them. “Because volumes have dropped, logistics becomes more fragmented, as we struggle to balance and consolidate loads,” said Singh.
OEMs which struggle to forecast their production requirements even in the best of times, have left logistics providers scrambling from month to month.
“Even Toyota, which was typically the most accurate, has gone haywire in the last three months,” said Sanjay Sinha, Managing Director for Mahindra Logistics. “If the customer says 40% deviation, then you plan for 80%,” he explained.
Still seeing positive numbers
Despite these troubles, there was nevertheless plenty of talk about growth at the conference. Before the downturn the component industry grew more than 20% a year to surpass $18 billion or output in 2008, and even in slow times could grow slightly from there, according to Vimal Manchanda, a consultant for Mothersonsumi Infotech and Designs, an IT and Tier One supplier. “We’ve been seeing positive growth figures despite the downturn,” he said.
OEMs have already planned to expand production by 800,000 units per year over the next four years, while Frost & Sullivan’s Ramakrishnan, looking ahead to recovery, predicted that capacity would double from 2.1m in 2008 to 4.3m in 2015.
India continues to develop into a hub for small car production, led by Hyundai in Chennai and the start of the Tata Nano production. And the halving of excise duty to 12% is buoying the sale of small cars. (The cut is valid for cars or four metres or less length with engines at 1.2 litres for gas or 1.5 litres for diesel).
Infrastructure is also a focus of growth, as road freight is projected to rise 10% per year. The road network, despite being the world’s second largest at 3.3m km, is still being expanded, as currently 80% of road freight moves along the mere 6% of roads that are state motorways.
The government is also investing in the rail network, currently at 64,600kms and carrying 30% of freight (although less than 2% for automotive). According to Manoj Goyal, General Manager of Logistics and Material Control for Volvo Eicher Commercial Vehicles, investment in logistics parks has reached $1 billion, and $500m will be put into warehouses by 2012.
Goyal also showed figures that predicted the logistics industry will grow 15-20% over the next five years. And Ramakrishnan identified third-party-logistics provider penetration, particularly for inbound, among the defining trends for the automotive sector.
Whether or not this optimism is inflated might be beside the point. Conference speakers agreed that logistics costs – which can outweigh the benefits of Indian carmakers’ ultra-low labour rates – represent an opportunity for both manufacturers and LSPs, and particularly for 3PLs.
The 3PL cometh
Third party services that include transport and warehousing, but which also include consolidation, milkruns, sub-assembly, kitting, returnable packaging and invoicing among others, are starting to make headway in India.
“The 3PL should not be a mere executioner,” said SK Krishnan, Senior General Manager for Supply Chain Management at Mahindra and Mahindra. “They must do end-to-end transport, warehousing, material feed, as well as supplier follow up, which means they go to the supplier on our behalf.”
In 2007, the automotive logistics market in India was valued at around $400m, with the 3PL element occupying less than 17%. Several carmakers have kept logistics in-house, using vendor-managed logistics, according to Ramakrishnan. In this model, the cost of logistics is billed directly into the part. This mechanism is used predominately by Maruti, Hyundai and Hero Honda Motors.
For outsourced logistics, the most common model is still to use non-3PLs, especially for outbound and aftermarket logistics.
But Ramakrishnan said that the growing trend is for carmakers to outsource to 3PLs, a market which Frost & Sullivan estimates to grow above 20% to reach $100m in 2009, and to surpass $250m in 2013.
The forecast is for the majority of the 3PL market to be for inbound logistics management (69%), with 17% for aftermarket logistics and 14% for end-to-end supply chain management. Key users of the 3PL model for inbound include Tata Motors, Ford and GM, while Toyota Kirloskar uses it for finished vehicles, and Volvo, GM and Ford use 3PLs for spare parts.
“The shift is going to happen for inbound logistics,” said Ramakrishnan. “The milk-run system will come into place more quickly.”
“We see that the competent manufacturers are moving to performing inbound logistics more and more by milk run,” added Goyal of Volvo Eicher.
Some see the rise of the 3PL and milk-run system as the Indian industry’s chance to move toward more sustainable logistics, both from a cost and environmental point of view, since it increases collaboration among OEMs. “The lack of a strong 3PL makes it difficult to build standards and cut carbon emissions” said Rajesh Uppal, Chief General Manager of Maruti Suzuki. “To make OEMs talk, there has to be a strong 3PL.”
How to cut cost but add value
But there are many stumbling blocks for 3PLs to overcome in order to gain market share in India. The 3PL market is consolidated, leaving only a few providers of high competence. Also, the fluctuation in car sales makes the 3PL vulnerable, while the disproportionate amount of production in the north of the country means it is difficult to balance loads.
The market is also extremely cost conscious, and the willingness or ability to invest is somewhat limited. The local, Indian LSPs have few assets and even less margin. “India has a unique, low cost, in-house logistics model,” said Maruti Suzuki’s Satkar Singh Grewal, manager for the production division. “It’s a frugal model, and there is a general perception that the 3PL companies will offer these solutions at a higher cost.”
He added that Maruti Suzuki is doing some trials for milk runs, as its production, based in the north near Delhi at Gurgaon and Manesar, comes 70% from the local region. “We’re also trying a container pooling system with CHEP, and finding out a lot of interesting things. But it’s difficult to compete on price with the local providers,” he added.
Autocreates’s Arora, speaking on behalf of a car carrier, said that the local LSPs would like to improve their service too, but that they struggle to invest. “We are working at rates that are at the margins abroad,” he said. “We’re leaving an era when the transporter would send his truck and forget it. The problem is that nobody is making money. We have a driver training school, and we would like to put in the right system, but the costs need to be visited.”
A need for transparency and trust
Mahindra Logistic’s Sinha, however, reminded delegates that the “cheap” cost of Indian providers was actually a miscalculation, since the total percentage of logistics cost for carmakers is higher in India than elsewhere. The basis should not be a low cost per kilometre, but rather a reduction in total cost. “The 3PL process has actually reduced GDP spend elsewhere,” Sinha said. “There are infrastructure problems, but also process and capability limits in India. Here, a truck moves 300kms per day, while in Australia it moves 1,000kms. The 3PL has a large role to play in overcoming this.”
Goyal said that the 3PL’s part in improving processes was even greater than adding value, and therefore cost. “Much of the cost of Indian logistics is waiting time,” he said. “We must improve small processes, like how much turnaround time does a truck make in a plant, the visibility of movements or the efficiency of invoices. A great help will also come from IT.”
Tata’s Mohan Savarkar, Deputy General Manager for Logistics, said that milk runs and 3PLs were not a medicine for all ills. “The value of a 3PL is not always financially justified,” he said. “They are popular in the US and Europe, but not so much in Korea or Japan, where they prefer to have vendors next door. We are going for something in between, where we start with the 3PL, but eventually have supplier parks and logistics centres close by. That will be an even better solution.”
For carmakers in India to outsource to a 3PL, Mahindra’s Kirshnan emphasised that there would have to be trust and transparency. “For the collaboration to work, the customer has to feel that by using the 3PL they gain a strategic advantage, true partnership, quality, service and cost,” he said. “If not, the relationship will not last.”
Packing and loading
One area that could be improved by LSPs and carmakers in India is loading and unloading, relating to both handling and packaging. Until now, there has not been much focus on pack densities and returnables, although with the rise of the 3PL market and entry to the market of specialist packaging providers, a positive trend is developing. Already, Maruti Suzuki has said it is doing trials with CHEP for a container pool, and has also developed dunnage with MJ Systems.
“There is a lot of waste we can eliminate, particularly in packaging. So I’m glad to see packaging specialists here at the conference,” said Maruti’s Singh.
MJ System’s VP of Industrial Sales, Tariq Marfani, said that in India the savings that a good pack density bring were simple; with such long distances to travel, often across creaky infrastructure, getting more product safely in a container meant lowering the cost of transport per kilometre. “Getting those travel savings is more important in India than in Europe, and will make the industry more competitive,” he said.
Arun Modgil, the President of CKDpack, which provides packaging of CKD and very specialised parts, has only entered the market recently, despite Modgil being born and raised in India. He showed a slide of a nailed, wooden crate that cost 1,600 rupees ($33) beside a specialised, re-useable container that cost 22,000 rupees ($450) and asked which was more expensive? Accounting for re-use and reduced damaged, he said that the higher quality would be cheaper. “But the so-called ‘cheap’ packaging is our biggest threat because it has a 95% market share,” he said. As far as handling is concerned, TCI’s Sethi explained that many plants in India, particularly for parts suppliers, were not well planned. “They were not built with initial parks where someone can come and put up a plant and everything is hunky dory,” he said. “We don’t have large areas for a trailer to dock in, and many don’t have dock-levellers or even forklifts.”
He also noted that in India, because of a lack of standards, it is necessary to customise a truck so as to be able to fit two pallets side-by-side. But though It might cost more to customise the truck, the savings will pay off since it carries less air.
Anand Singh, Chief Executive of Lohr, which builds carries and trailers, said that he had seen a trend toward improvement and awareness for packaging and loading. “Ford and Toyota are using mega-trailers and doing side-loading now, for instance,” he said. “We have been requested to make some prototypes, and these innovations are being made available in India now for both inbound and outbound.”
But while the room for process improvements for carmakers and LSPs is large, many speakers bemoaned India’s regulatory infrastructure above even the physical. There was a laundry list of changes for the Indian government to consider. As well as the latticework of tolls and taxes, speakers noted the difficulty with Indian Customs.
“We are in a fight 24/7 with Customs,” said Kurt Brienlinger, Managing Director for South Asia of Panalpina. “At any point, there is $5-$10 billion of inventory in ports and airports. This money, with interest, is part of production costs, because somebody has to pick up the bill.”
Tata’s Savarkar cited what he called a “funny” situation in India. “If you have to repack a truck en route, it is considered a manufacturing operation, and so an LSP needs a license. Doing away with this would help us all.”
TCI’s Sethi also explained how varying legislation was hurting the efficiency of truck fleets. He noted that Indian plants often see a range of vehicles for delivery, from three-wheelers to an LCV to a Tata Ace. The reason is because the policy for trailers varies in each state of the country, so bundling concepts are different in India. What would be a less-than truckload shipment in Europe could be a full truck in India, because of the different sizes. Furthermore, this pattern restricts flexibility between trailers.
“In the US scenario you can have 50 prime movers, and 500 trailers,” he said. “You simply put the trailers in front of the cross-dock or plant and let it be. In India the prime mover stays with it, you can’t unhitch it.”
Savarkar said he hoped to soon see benefits from the introduction of Value Added Tax, which bundles some of the many separate taxes together. But the VAT proposal is already several years old, and just the at tip of the bureaucratic pile which needs to be tackled.
Be creative and collaborate
During the conference ideas were floated and considered which ranged from the far-fetched – like combining inbound and outbound logistics on rail – to the obvious but severely lacking, such as inter-coastal shipping around the vast sub-continent.
In fact rail is one of the areas where there was a meeting of minds at the conference, especially during a roundtable discussion on increasing rail distribution for finished vehicles (read the report in the online version of Finished Vehicle Logistics magazine Apr-Jun 09 issue page 14). Maruti’s Uppal noted that present at the table was the talent needed to design, build, buy and ship the solutions by rail. By the end of a discussion, it was agreed that a meeting would be set up to take talks farther.
“I’m hopeful that we’ll have a very good collaborative effort for railways, but we need better co-operation overall” Uppal noted. “We are competing on sales, but we are not competing on logistics.”
As an overall summary of proceedings, the experience of 2007’s Automotive Logistics India conference was reinforced. Most delegates came ready to learn and ready to change. And while the outlook for 2009 will depend on the economy, carmakers and LSPs saw the value of sitting down together in one room. There is much to do.