Market boom, but where are the 3PLs?
PUNE 2-4 December 2009: As delegates assembled in Pune, India’s car sales figures for November were released – and they made startling reading. Growth is back in India: market leader Maruti Suzuki saw sales jump 60% over the same month in 2008 (though only 17% up on 2007); Tata Fiat was up 55%; Hyundai up 93%; GM up 65%; and Mahindra more than doubled at 102%.
The figures confirm that late 2008 was just a brief pause in the upward trajectory of car production and sales.
But logistics is groaning under the strain. Both speakers and delegates lamented the low cost/low investment logistics model which exists in the automotive sector in India. OEMs called for a significant increase in the low level of involvement from sophisticated 3PLs
Sense of urgency as low investment model threatens growth
Small cars are selling well to India’s fast-growing middle class, and even exports – often overlooked – outstripped China’s for the first time this year.
The huge escalation in demand and production was reiterated throughout the 2009 event, and although many of the same logistics concerns and challenges had been raised in the previous conferences in India, this year there was a genuine sense of urgency about fixing them. All delegates wanted to make the most of the demand, and get cars to the right place, at the right time, in the right condition and at the right cost.
In a week in which his ultimate boss had been sacked, and GM announced that its joint venture with China’s SAIC will be producing small cars in India, the headline speaker Robert Strain is in a company which is still going through considerable change.
But as GM’s Director of Logistics and Supply Chain for Asia Pacific, he kicked off the conference in a presentation emphasizing GM’s interest and commitment to becoming a “major player” in the region. The company is already building the Spark in its new plant in Pune, with parts sourcing from India and across the world. The distribution of the finished cars, however, is complex. ‘Outbound in India is a huge opportunity to grow and change,’ he said.
That change is needed. No less than 98% of outbound movements are done by road transport, and the challenges this presents are significant limitations to growth. The infrastructure is inadequate (half of India’s roads are not paved), road tolls and state taxes are prolific, and drivers face harassment at state border crossings.
There is a shortage of good capacity in the market, partly because of the structure of fleet ownership – companies often own few vehicles (two thirds own less than five, a proportion set to increase as the market grows) – and there are few 3PLs operating in the finished vehicle business.
In addition, conference attendees bemoaned the slow turnaround times at plants and ports, leading to the capacity that does exist being under-utilised. This is made more acute by fluctuations in demand for vehicles both from the beginning to the end of the month, and from season to season, which has made fleet companies unwilling to invest in assets they may have to idle.
Jorg Mosolf, chief executive of the company which bears his name, acknowledged that the 3PL model is a solution to some of the capacity problems. Multi-brand yards and transport, combined with a hub-and-spoke delivery system, would bring efficiencies and more capacity into the supply chain, he said. Mosolf announced two new joint ventures for his company in India, demonstrating that perhaps some global 3PLs are getting serious about business there.
Fiat India’s Kalpesh Pathak confirmed that OEMs want to see this kind of initiative when he called for collaborative use of cross docks. ‘I think the way forward is in this direction,’ he said.
Rail is still lagging
There is intense interest in India in using rail for finished vehicle logistics, but a mixed view at the conference about whether progress was being made to achieve that.
Maruti Suzuki’s General Manager of Logistics, Deepak Sharma, described the efforts that SIAM (the OEMs’ trade association) has been making to develop a strong business case to present to the new Minister for Railways. ‘The share of rail use is indicative of the maturity of the market. It is 2% in India now. When we become volume driven, we simply cannot produce bulk volumes without developing rail,’ he said.
And he expressed real optimism. ‘Within one month you will see some progress on rail, and within three months trains will run with cars,’ he predicted.
Other speakers, however, were dismissive of rail as a viable option in the near- to medium-term. RS Kalsi, Chief General Manager of Sales at Maruti Suzuki, revealed that during the peak season he had virtually no access to rail. ‘And the vehicles I did get did not arrive in the right shape,’ he cautioned.
Collaboration was called for in other sectors of logistics too. A significant feature of the conference was networking and open discussion in all its forms, from the open Q&A at the end of speaker presentations through to the private discussions during the introductory cocktails, the tea breaks, and at the relaxed offsite business dinner held on the middle evening of the event.
Discussions were also factored into the conference programme, with attendees able to join round-table sessions dedicated to specific subjects. As a direct outcome, some of the transport companies present decided to form an LSP forum to meet with SIAM and government representatives to give the logistics providers’ input.
Packaging was both the hottest specific topic – the round-table had to be moved to a separate room to accommodate all the participants – and the one which made most concrete progress (see separate conference report).
Challenges, challenges…and opportunities
The logistics challenges in India are numerous, but so are the opportunities. This year, India’s export of cars overtook China for the first time, and Bryan McCausland, Regional Head of Logistics for ocean carrier Wallenius Wilhelmsen Logistics, who is based in China, reminded delegates of the need to establish a good ro-ro port.
He emphasised the urgent need for action, given the long lead time and high investment needed to develop infrastructure projects like this.
As with many things in this region, time-scales for projects are hard to predict. The long-awaited standardisation of multiple local taxes, the national Goods & Service Tax (GST), is due to come into force in April 2010. As well as simplifying tax collection, it is also hoped that it will remove much of the high-delay bureaucracy at each state border. But many conference participants were sceptical, and thought 2011 a more realistic date for it to start.
The change could have a dramatic impact on the logistics landscape, as the current tax structure encourages suppliers to have small warehouses near the plants they supply. With GST, economies of scale and larger operations would be possible, and it would also enable the development of a hub-and-spoke system of delivery for outbound movements.
Transport Corporation of India (TCI) claims to move 2.5% of India’s GDP by value, and its Chief Executive Jasjit Sethi summed it all up: “Put India in context. India is not a country, it is more like a continent.”
The problems for logistics may be great, but the opportunities for logistics providers in India are greater.
Starting from close to zero
Unglamorous but extremely destructive when not done properly, packaging was a subject which generated intense interest at the conference. With a panel of five speakers for the formal presentations, it pulled such a crowd at the round-table discussion session afterwards that the group was upgraded to its own dedicated conference room.
The round-table had the effect of putting many OEMs, including Tata Motors, Mahindra and Mahindra, Toyota Kirloskar, Maruti Suzuki, Mercedes-Benz, Honda Siel and Daimler, in the same room as the packaging companies from the formal session, which led to some practical agreements. They will collaborate on standardising packaging on some high volume items, such as headlamps, and established a working group to move that project forward
It was Volkswagen India’s extensive preparation and testing which was described in the formal conference session on packaging, by its Head of Logistics Marco Weinstock. Talks by Chep, Schoeller Arca, Montara and CKDpack followed. They contained nothing which was new to logistics operations in more developed markets, but they did show that there was much to do in India.
More transport than needed
The country has no standards and a limited stock of re-usable packaging, said Witold Orlowski, Regional Director of Schoeller Arca in Asia, and the returnable packing which does exist is not suitable for automation. Christopher Dimer, President of Montara India, noted that supplier parks are not fully developed at India’s principal automotive manufacturing clusters, meaning even more transport is involved than would anyway be required over the large distances and poor roads of India.
As Tier 1’s are called upon to provide increasingly more complex pre-assembly, the challenge for packaging will become even greater, he said.
Chep’s Director of Sales for India, Vineet Mehrotra, highlighted a statistic given several times during the conference, that a great majority of the country’s road transport hauliers have less than five trucks, with complete lack of standardisation hampering the use of common packaging.
However, even though packaging providers need to start from where India is now, rapid payback and then big savings can be delivered from investment in this activity, said Arun Modgil, Chief Executive of CKDpack. The prize, in his words, is to become the ‘A R Rahman of packaging suppliers’, mischievously challenging the Europeans present to say who that is. (Rahman is a film composer, record producer, musician and singer dubbed by Time magazine ‘the Mozart of Madras’ and included within its 2009 list of the world’s 100 most influential people).
OEMs face a big bill
New developments in the market include the recent launch of Logistics Network Partners (LNP) in India, a consortium of four German and one French packaging suppliers, including Montara, which bring different areas of specialist expertise. Montara’s Dimer also made a call for the abandonment of the current standard for pallets in favour of 1330 x 1330mm dimensions which, he claimed, made space utilisation in 40ft containers more efficient over the combination of inward and return legs.
So OEMs and LSPs face a big bill for investment in packaging if they are to tackle the estimated 10% proportion of overall logistics costs which is made up of losses.
The prize, however, may be more than musical. According to Dimer, even in Germany ‘you can’t put a VW pallet on top of one from Daimler, or a Daimler pallet on top of one from BMW’. Applying the basics, he said, could allow India to leap over the 30 years of hard-won experience in European.
‘We can’t find answers,’ so open invitation sent to 3PLs
When logistics comprises up to a quarter of total product cost, which is double the level in the US, any spending on improvements is likely to be handsomely returned. But government, customers and suppliers in India seem to be trapped in a low cost/low investment model, and nowhere does that apply more than in the overall management of the supply chain.
‘We are in a big, big vicious circle,’ said Rajesh Mittal, Volvo Eicher’s Director of Supply Chain. ‘OEMs want high quality but don’t want to pay for it. We are still working in the old traditional way.’
Part of the problem is the simple absence of expert 3PLs, put off by the low-price environment in which they are undercut by local transport operators, usually running over-loaded trucks, and the inadequate regulatory and bureaucratic environment, often including low-level corruption.
But the demand is there. Satkar Grewal, Manager in the Production Division of Maruti Suzuki, summed it up: ‘How do we shift from a low cost internal 2PL model to a complex and competitive 3PL model? We have been studying this for 2-3 years and no-one in India can offer it; we are searching and can’t find answers.’
At the simple level of road transport, India is suffering badly. ‘Improvements in infrastructure are pathetically slow,’ observed Sameer Khatri, Chief International Business Officer for Indian service provider Gati International. Which is part of the reason why fuel makes up typically 50% of road transport costs, compared to 25% in China and just 10% in the US, which each have comparative continental distances. ‘India is wasting its cheap labour on the inefficient use of fuel – lots of idling,’ said Mittal.
Asked by Jutendra Goyal, Manager of Demand and Supply Logistics for Toyota Kirloskar, to declare which of Volvo’s modern trucks would be introduced to the market – ‘it’s very important all of use the same kind of truck to reduce cost’ – Mittal could only respond: ‘Modernisation will take some time. The market is very price sensitive, which puts a limit on modernisation. It all depends on progressive customers like (Toyota). If you’re willing to put in the money, everything is possible.’
As an OEM itself, Mittal said that there is much improvement to be gained inside the manufacturing facility. He also noted that 60% of logistics costs come from suppliers in Tier 2 right down to Tier 8 (or whichever level was used). ‘You have to go down to your suppliers’ warehouses, their handling etc if you want to reduce your cost. If a Tier supplier makes money, he will give you money,’ he declared.
Design it right
Setting out how it should be done was Sudhir Gupta, Vice President for Supply Chain Management for Tata AutoComp Systems, and a former Director of Purchasing for GM India. He outlined a single window IT system which gives visibility to all aspects of the supply chain, including finance, regulatory approval and other support functions as well as the suppliers and the physical elements of logistics like transport and warehousing.
He also referred delegates to the classic case study on supply chain design from the telecoms market. When a fire at the Philips’ Mexico plant in year 2000 stopped the flow of essential microelectronic chips to mobile phone producers Nokia and Ericsson, the latter worked with Philips to resume supply. Nokia did the same, but also built a whole new supply chain from scratch with another vendor. As a result, Nokia got into production again much more quickly, and made significant market gains.
The lesson was clear, said Gupta: ‘It’s not enough to have an efficient supply chain, it’s also got to be flexible.’
It’s not as though India’s supply chain professionals do not have enough challenges.