The growth for local as well as export demand out of India is making the need for supply chain improvements a must. While progress is slow, Namrita Chow finds some hope on the horizon, from tax reform to an increase in returnable packaging
Demand for passenger and commercial vehicles within India continue to soar while small car exports from the country to mature markets are also on the rise. According to JD Power’s Automotive Resources Asia, light vehicles sold in India are up 34% in the first quarter of this year compared to last year. Exports are up close to 50%.
The increase in exports is attributed to the demand for small cars and government incentives in Europe, says Mohan Bhambani, senior trade and investment adviser for India’s airports, ports, railways and automotive sectors at the British Deputy High Commission in Mumbai.
“The growth is also an indicator of India moving closer to becoming a manufacturing hub for global players–Ford, GM, Toyota, Hyundai and Suzuki have all been present in the Indian market for over a decade now. New players who are establishing their base in India include Volkswagen, Nissan, Renault and BMW,” says Bhambani.
As sales rise and more players enter the arena, effective supply chain logistics become crucial for OEMs looking for ways to maximise profits and minimise waste of resources and costs. But bad roads, inadequate port facilities and slow lead times are holding back the industry. India is still a long way off from global best practice delivery standards, despite considerable progress in the last decade.
“Automotive parts, components and finished vehicles have come a long way in the past few years, however there is still a long way to go,” says Kalpesh Pathak, assistant VP of corporate supply chain at Fiat India Automobiles.
Pathak calls for consolidation amongst service providers, improved infrastructure along with better transit times and warehousing. “The first major change I would like to call for is the consolidation of the logistics industry, which is essential to take the business model to the next level, along with businessfriendly policy interventions from the government to reduce hurdles in goods movements across the country,” he says.
Other OEMs echo that opinion, particularly concerning confusing taxation systems across India, which tend to create bottlenecks especially when moving goods across states.
“The current taxation structure makes movement of goods across state borders a bottleneck,” says V Anand, Hyundai Motor India’s general manager for sales logistics. But Anand sees light at the end of the tunnel. “This [bottleneck] is likely to be overcome with the introduction of the Goods and Service Tax (GST) expected to be implemented by April 1st 2011,” he says.
The GST system was originally expected to be implemented by 2010, but has been delayed to next year with the expectation that policymakers will be able to agree on whether the GST is to be imposed at a central or state level, or only at the final destination. Various different taxes implemented at different stages in the supply chain currently give rise to a cascading tax effect.
The principal broad-based consumption taxes that the GST would replace are the Cenvat and the Service Tax, which are levied by the central government, and the VAT, levied by the states. These are all multi-stage value-added taxes. The Cenvat is levied on goods manufactured in India, which creates confusion as to where in the supply chain products should be taxed, whether as components or as finished vehicles.
Another major contributing factor to tax cascading is the Central Sales Tax (CST) on inter-state sales, collected by the origin state and for which no credit is allowed by any level of government.
With all of these various tax regimes, calls for the single GST system are well founded. “A well designed value added tax on all goods and services [GST] is the most elegant method of eliminating distortions and taxing consumption,” says a report on the Goods and Service Tax website. “Under this structure, all different stages of production and distribution can be interpreted as a mere tax pass-through, and the tax essentially ‘sticks’ on final consumption within the taxing jurisdiction.”
Infrastructure needs upgrading: ports
The main issues that need addressing in India’s automotive logistics scenario relate to infrastructure, says Wallenius Wilhelmsen Logistics’ Michael Doran, general manager for business development in India, namely ports, roads and rail. Until recently Mumbai and Chennai ports were the only ports with terminals to handle automotive exports, says Bhambani of the UK trade commission. “Pure car carriers operated by NYK Line, Mitsui OSK Line and K-Line have been regularly calling at these ports,” says Bhambani.
WWL will also begin serving ports at Mumbai and Chennai from this year. “WWL has chosen Chennai and Mumbai as these ports are closest to India’s automotive manufacturing hubs as well as to other industries. Our customers’ manufacturing bases are located close to these ports,” says Doran.
WWL’s sister company, Eukor, operates out of Chennai and Mumbai. “WWL will commence services later this year out of Mumbai to the US and from Chennai to Singapore, Jakarta, Laem Chabang and to destinations in North Asia. From Singapore there will also be connectivity to other parts of the world,” says Doran.
However, two more ports are emerging as strategic players– namely the private Mundra Port in Gujarat and the Ennore Port in Tamil Nadu.
Ennore Port is constructing a car terminal with an investment of $25m, says Bhambani. The terminal will have 175,000m2 for storage, and is likely to be ready this August.
Bhambani says that this port has signed a strategic alliance with Nissan to export around 110,000 car per year for the carmaker by 2011.
The Mundra Port has had an initial investment of $22m, of which 60% will be used for the ro-ro terminal and 40% for the PDI centre, according to Bhambani.
But OEMs and logistics providers still complain of inadequate services at ports in India.
The Chennai Port boasts some of the best facilities in India, but OEMs say there are shortfalls. “Storage facility currently exists for about 4,500 cars,” says Hyundai’s V Anand. “This is inadequate but plans are there to have a multi-level car parking facility in about three years.”
And facilities for pure car carriers at Chennai and Mumbai ports leave a lot to be desired. “There is an antiquated ro-ro terminal at both Chennai and Mumbai–the facilities are very outdated,” says Doran of WWL. “There is inadequate storage and warehousing facilities. There are also problems related to fallout such as coal dust in the case of the Chennai Port as the coal berth is in close proximity.”
The use of rail by the automotive sector is limited in India. “We use rail only for emergency shipments but this is miniscule as compared to overall volume,” says Fiat’s Kalpesh Pathak. “Rail is more commonly used for finished vehicles than components but even for finished vehicles the share is miniscule.”
Tata Motors and Hyundai echo the verdict. “Hardly any car parts use rail service. Rail is not seen as cost effective,” says Mohan Savarkar, deputy general manager for logistics and new projects at Tata Motors.
Hyundai uses road to transport most vehicles as rail freight rates are more expensive, says Anand. “Hyundai moves over 99% by road without any transhipment to dealers across the country,” he says. “Rolling stock rail transportation is obsolete, too few in number and placements are not very predictable. The freight rates charged by the Indian Railways make it more expensive.”
But there are calls to increase the use of the railways for movement of components and vehicles, though this would require improvements in infrastructure. “We in the automotive industry are working together with the Ministry of Railways to increase the use of rail in the future,” says Fiat’s Pathak.
But Pathak is not very optimistic about immediate improvement. “In my opinion the share of rail movement will increase marginally going forward. It will take some more time for a rapid increase due to many issues involved with infrastructure,” he says.
Car carrying trailers and trucks lack standardisation in India leading to the flouting of safe practices. Roads have inadequate assistance facilities for breakdown services and resting places en-route. Global best practice systems such as tracking using GPS are also far off, as is electronic communication between tier suppliers and LSPs. But as demand for Indian-made vehicles rises, this will accelerate development of the logistics framework in the country. Standardised packaging, for example, and the use of reusable packaging between tier one suppliers and OEMs, is now increasing.
“Reusable packing is catching up. In our new project we have about 87% of assembly parts in reusable [packaging],” says Tata Motors’ Savarkar. Tata Motors usually uses pallet and bin sizes of 1,000mm x 1,200mm. This standardisation is seen to be reducing inefficiencies.
“Standardisation of pallets reduces loading and unloading time. It also helps in reducing the turnaround time of vehicles,” says Savarkar.
“Most OEMs and suppliers are already following returnable packaging where both the companies are closely located between 50-200km,” says Fiat’s Kalpesh Pathak.
However returnable packaging is not used for suppliers farther away as the cost of returning the packaging is too high. For track-and-trace systems, carmakers are keen to insist on visibility in the supply chain but are aware of lagging infrastructure that curtails the use of GPS services within the country.
“Fiat insists on visibility of material in transit but does not insist on any specific system used,” says Pathak. “The main reason for this is that commonly used track-and-trace systems in developed countries are GPS-based, which is still not successful in India. Most of the tracking is based on mobile phones with truck drivers,” he says.
But the trucks themselves are often outdated and not made specifically for the industry. The Central Motor Vehicle Regulation (CMVR) came into force in 1989 for all vehicles made in the country. However, OEMs say they fail to address car carrying vehicles.
“The technology of vehicles used is pretty much outdated and flouts all safety norms,” says Hyundai’s Anand. “The car carriers and dimensions are not clearly defined by the CMVR guidelines and therefore trailers of up to 23 meters in length can be seen. Even the height and width dimensions are flouted,” he says.
Local providers used but global expertise needed
The knowledge of the hidden complexities in the Indian logistics scenario gives local services providers the edge over foreign providers keen to enter the playing field.
“Generally for global movements, global players are doing a better job,” says Pathak. “But when it comes to services which are related to logistics activities within India involving the local workforce, Indian players are better off due to the knowledge and understanding of the country.”
He adds that foreign players are stepping up their game and competition is heating up.
“Focus is required in the areas of packaging improvements, standardisation across suppliers and OEMs, CMVR clarifications, hassle-free movement of goods across the country, efficient methods of tax recovery, improved road side assistance for truck drivers and resting facilities and improving the skill and knowledge level of the logistics industry professionals,” says Pathak.
Indeed, these are views shared and voiced across the industry. Tata Motors’ Savarkar calls for the improvement of roads, making rail transport a viable option and tax reforms that allow efficient bulk and break-bulk operations. Carmakers, suppliers and service providers are increasingly aware that the logistics network in India is in need of major improvements, and are getting hungrier for supply chain experts to make a change.
