“This is now a race against growth”
CHENNAI 10 DECEMBER 2010: The logistics sector is struggling – and not really succeeding – to keep up with the dramatic growth of India’s automotive market.
Delegates to the 2010 Automotive Logistics India conference, which has just closed, heard that domestic vehicle sales are some 33% higher than last year. Their discussions re-visited some of the issues that have become familiar in recent years – fragmentation and lack of professionalism among LSPs, an intense cost focus from the OEMs which chokes investment, and a near-total dependency on road transport in a country of poor infrastructure.
Added to those, the conference focussed more than ever before on the ‘soft issues’, including human resources and driver conditions, as well as a lack of trust (“let’s make it less personal and call it an absence of confidence,” said one delegate) between carmakers and providers.
Indian automotive market growth has been among the world’s fastest this year, on pace to reach 2.8m passenger car sales for 2010, along with a 40% growth for commercial vehicle sales and more than 1m motorcycle sales each month.
According to VG Ramakrishnan, senior director of transport and logistics practice at consultancy Frost and Sullivan, growth is expected to nearly double in the next five years, with sales by 2015 set to be anywhere between 4m-5.3m cars per year. And the opportunity for logistics providers is tremendous, with certain services still seeing very low levels of outsourcing. While 95% of transport is outsourced, according to Ramakrishnan, only 38% of warehousing and 20% of value-added services are put in the hands of logistics providers.
The third party logistics providers (3PLs) meanwhile, have a less than 10% share of the overall Indian logistics market, although this may be somewhat higher for automotive. Jasjit Sethi, CEO of India’s leading 3PL, TCI Supply Chain Solutions, noted that his company counts eight OEMs in which it is the sole logistics provider.
Despite this, there is still debate in India over what services are better left in the hands of the manufacturer, and what can be trusted to an outsourced provider. One of the reasons for the question is that the logistics market remains hugely fragmented, particularly on the outbound side. The number of small, unorganised companies is 65% of capacity, though Ramakrishnan expects “many of these will get cleaned out as the market matures”. This fragmentation appears to be reflected in service levels, where Ramakrishnan cited a survey showing that 67% of customers were not happy with the efficiency of their providers, a number he described as “eye-popping”.
As part of the vicious circle of low service/low confidence, Ramakrishnan reported that some 68% of logistics contracts are for one year only, with only 5% lasting three years. “There is a high propensity to switch, and a low incentive from LSPs to invest in and hold quality assets,” added Ramakrishnan. “The OEMs do not want a monopolistic situation with their providers, which is fair enough, but there is a clear trust deficiency right now in the market,” he said.
V. Anand, general manager of sales logistics for Hyundai Motor India, highlighted the inefficiencies that plague the logistics networks in India. Finished vehicle logistics, for example, are characterised by much higher damage rates compared to Europe or China, while the network and route planning appears to be very poorly organised.
Much of this is the result of infrastructure or capacity shortages; Anand estimates that about 20% of fleets are idle as a result of driver shortages, for example. He also pointed out how height restrictions on some roads or bridges have meant that trucks need to detour several hundred kilometres, while heavy congestion has led to more night driving, and hence more accidents. The amount of toll crossings and fees to pay at borders is also staggeringly high, along with the corruption that goes with them.
There is hope that the long-awaited arrival of a centralised value added tax, the GST, will be the solution. Certainly OEMs are “feverishly” hoping that the GST will come, commented Ford’s general manager of material, planning and logistics, Amlan Bose, although its implementation has again been pushed back, this time to April 2012.
Anand also suggested that logistics providers could be much smarter in their planning. According to his data, fleets were being used extremely inefficiently, with many trucks picking up vehicles at Hyundai’s plant only 7-8 times per year, and a large portion of the fleet moving empty for return loads.
The trust deficiency was acknowledged by several carmakers at the event, including Prem Verma, CEO of Tata Motors’ vehicle logistics subsidiary, TML Distribution. “We need to treat our logistics providers as business associates, not just as vendors,” he said. “If you are only looking for arms and legs in the market, then you will get into trouble, as you need to have heads and hearts too.”
But at the same time Verma pointed out the areas where logistics providers needed to improve if they are to build stronger relationships with carmakers, and eventually gain longer contracts and more outsourcing in areas beyond mere transport.
“LSPs need to be seen as a game changer,” he said. “We have to ask of them, do they have the ability to offer multi-modal options? They need to bring radical changes in every facet of OEM business, and have to provide end-to-end solutions.
“A logistics providers’ forte cannot be only size and quality of fleet,” Verma added, “as unfortunately an LSP must have more than that. The litmus test is: whether or not it is willing to go beyond being a glorified transporter.”
He called for more added value and inovation, including investment in IT, and warned against providers trying to under-price competitors while over-promising to customers. “Don’t commit to a champagne taste on a beer budget,” he advised.
Verma added that he was open to new ideas and was not simply looking for a provider that followed orders. “We shouldn’t expect our providers to follow orders blindly. I would rather have a good fight which can spark creativity and innovation.”
Andreas Ginkel, director of logistics for General Motors International Operations, agreed, advising logistics providers to be more proactive, and not simply wait for tenders to bring new ideas or service offerings to the carmaker. “As OEMs we will drive certain requirements, and we will ask for proposals, but don’t just wait until we issue you with a tender to bring new ideas.”
Both Ginkel and Verma sent a challenge to global logistics providers, who they feel still have not yet engaged with the market in sufficient force. “I don’t think that the current fragmented state of the logistics sector can sustain the growth in India, and we need global, professional players,” Ginkel said. Later, he added: “I want to remind global players not just to bring intelligence to India, but to bring assets too, because we need them here.”
But there was also optimism about the progression of logistics in the Indian market. Mahindra & Mahindra’s vice president of demand chain management, SK Krishnan, detailed the progress that his company had made in focusing on order-to-delivery systems, including a daily ordering system from dealers that enabled the carmaker to better plan its supply chain. He also noted that “logistics was increasingly being considered at board levels,” and said that his own CEO was very interested and proactive in dealing with the company’s logistics challenges.
On the provider side, TCI’s Sethi said that he didn’t believe that India was as far behind its global competitors as was sometimes imagined. He pointed to a host of added value services that TCI was increasingly providing, including just-in-time/just-in-sequence delivery, kitting, tyre assembly, warehousing and packaging solutions. He pointed to companies such as Toyota, GM, Volkswagen, Baja, Hero Honda and JCB as the leaders in outsourcing logistics.
“We are catching up in India,” he protested.
On the outbound side, Mercurio Pallia, a joint venture between Italy’s Mercurio Group and India’s Pallia, revealed that it was investing heavily in its fleets, with an upgrade rate of about 30% per year. Umesh Bhanot, from the large logistics group Adani, also described how its car terminal at Mundra port – India’s most modern, dedicated facility – was now handling more than 100,000 vehicles per year. The company runs one of India’s few rail services for automotive, with about 30,000 Maruti Suzuki cars moved to the port by rail during the first six months of the financial year.
Bhanot was optimistic that by the time India reached 4m-5m vehicle sales per year, it would see a more mature and developed network, with more PDI and accessory services, as well as an increasing share of rail transport.
For outbound services rail (or the lack of it) dominated many of the discussion. According to Bhanot, the current proportion of vehicles that move by rail in India is about 5%, compared to a global average of 25%. For India to make this leap, Bhanot said that it would need an investment of at least INR 2 billion (about $45 million) for 100 trains.
There was some hope expressed that the Indian Railways – which is 100% government owned – would make moves to increase automotive rail. Bill Villalon, vice president of global automotive logistics for APL Logistics, suggested that when the GST tax came into force it will encourage the use of larger, regional distribution warehouses, and so rail lanes would actually make much more sense.
Delegates were also told that Indian Railways has made some steps towards encouraging automotive rail. It now allows for some private investment in its rolling stock, as there is currently very limited rail wagon capacity in India, and has identified 10 auto hub areas around the country to be served by rail, the first in Kolkata.
But there was considerable scepticism over whether India could actually make the leap to 25% rail movement within any foreseeable time. Hyundai’s Anand was among the strongest doubters. He pointed out that rail was used almost exclusively for export legs, and that the share of rail for domestic distribution was less than 1%. High prices meant that rail is currently used only as an overflow mode when there were no trucks available, he said, and not for any economic or service benefit.
He pointed out the myriad of current problems from very poor lead times, inefficient routing and timings, and to prices which meant that a breakeven point that could only be achieved on routes greater than an absurdly long 2,800km.
He also suggested that the current moves made by the Indian Railways were still woefully insufficient. The investment for rolling stock was intended to come entirely from carmakers or logistics providers, and few were willing to spend that money. Meanwhile, the so-called auto hubs would be leased to operators, and not only was there currently little clarity on the availability of the land, but Anand estimated that the cost would be prohibitively high, at around INR 800m (about $18 milion).
“I sincerely believe that it would be a miracle if rail could be increased to 25% in three years,” he said.
The conference focused more this year on the human aspect of automotive logistics. This was most visible in a stirring presentation by Ramesh Kumar, the India correspondent for Automotive Logistics in India who is as an editor for the locally-published Logistics Times. Kumar spent eight days in November travelling 2,800km from Chennai to Gurgaon in a Mercurio Pallia car carrier, observing first hand the challenges of road transport in India.
They include squalid conditions faced by drivers on the roadside, corrupt officials at state borders, all of which required bribes, and threats which range from hi-jacking and robbery to AIDS. A full report on Kumar’s journey is published in the January-March 2011 issue of Finished Vehicle Logistics.
His views met with general acceptance from participants. Maruti Suzuki’s executive officer for sales and distribution, RS Kalsi, said that his company had seen the toll taken in its human capital. A recent survey showed that as many as 70% of drivers had some form of health issue.
He believed that the carmakers had a positive role to play in improving the situation, and said that Maruti had recently set up health and training centres in an effort to help drivers. Hyundai’s Anand also called for a “save our driver” campaign. Both saw the link to improving driver conditions as a means to improving the overall quality of delivery and service.
Kumar challenged the industry to “wake up” and think about what it was doing to its drivers. He appealed to the industry’s humanity, as well as warning that a country already facing a driver shortage will get itself into deep trouble if fewer young people want to enter the profession.
Kalpesh Pathak, assistant vice president of corporate supply chain at Fiat India, said that recent surveys had revealed that fast market growth had not applied to human resources, whether in employee training, skills or development. He called for manufacturers and logistics providers to increase their investment in people.
“India started its progress in engineering, and then manufacturing, while the next breakthrough will be the supply chain,” he said. “But to achieve that we need to invest more in our people.”
India’s path towards being a major car market and important production hub continues to accelerate, with considerable optimism across most manufacturers. One voice of warning, however, came from Dr Rakesh Singh, director of the Durgadevi Saraf Institute of Management. He cautioned the audience that “growth is not going to be linear” and that carmakers and providers would need to step up their forecasting and risk assessment to avoid “bullwhipping your capacity by over-investing”.
He pointed out that India’s overall economic growth was in some ways uneven, or distorted by subsidies such as the Natural Rural Employment Guarantee Scheme, which pays rural workers a guaranteed amount if they are unemployed. He also reminded the audience that the government national debt was more than 10% of GDP. But his warnings were not meant to discourage the current outlook: “I too believe in the growth of India,” he said, “but we must not forget about macro-economics in our forecasts.”
For logistics, the clear message from the conference was to step up and get ready for the continuing rise in car sales. Most of all, logistics service providers and supply chain executives need to improve their processes, pay attention to their human capital, and update their equipment, in spite of any ongoing limitations from India’s infrastructure.
GM’s Ginkel perhaps summed it up best: “Where we are now with logistics is not sustainable for our ambitions. This is now a race against growth.”