Can India's Logistics Industry Deliver a Better Model for Transporting Goods?Published: September 10, 2009 in India Knowledge@Wharton
In October, G.R. Gopinath, who revolutionized air travel in India by starting Air Deccan, the country's first low-cost airline, will take to the skies once more. This time around, though, he'll be transporting cargo, not passengers. With his new express transportation and logistics venture, Deccan 360, Gopinath is looking to redefine the industry.
"Deccan 360 will change the way deliveries are made all over India," Gopinath says. "At present, next-day connectivity is limited to the metros and a few cities. My goal is to connect 75 cities in India to each other on a 24-hour delivery schedule within the next year." If he delivers on his promise, Gopinath could well change how companies big and small look at their supply chains and run their businesses. He began air cargo operations from India to the Middle East and Southeast Asia a few months ago and plans to integrate domestic and international operations over time.
When Gopinath launched Air Deccan in 2003, only 1% of Indians traveled by air. By the time he sold his venture to industrialist Vijay Mallya in 2007, the figure had jumped to 5%. Why is Gopinath, a former army pilot and farmer, venturing into the logistics space now? "Many entrepreneurial decisions are taken at a subterranean level," he says. "The idea of starting a logistics business was both instinctive as well as fueled by my own frustrations."
Gopinath notes that many times in Air Deccan's early days, a flight cancellation could be attributed to the lack of adequate logistics services in India. A spare part would come from somewhere in the world to Mumbai within 24 hours, but then, within India, several days would be needed to complete the journey. More often than not, Gopinath wouldn't know how long it would take for the part to arrive. Once it took seven days to move a spare engine from New Delhi to Kolkata; it was cheaper to transport it via Singapore.
Gopinath's experience largely sums up the state of the logistics industry in India: inefficient and expensive. Industry players and analysts say logistics costs in India are among the world's highest -- accounting for 13% of GDP, according to a report by KPMG. That is far greater than in the United States (estimated at 9%), Europe (10%) and Japan (11%). Outside of the metros and a few cities, the timing of deliveries is uncertain.
Logistics is still a nascent and fragmented industry in India. It is estimated that while outsourced logistics accounts for 54% of total logistics spending in India, organized players have only 10% of the pie. In road transportation, which accounts for the biggest portion (36%) of logistics spending, 74% of operators are small-time players owning a single vehicle. In outsourced warehousing, 92% of players are from the unorganized sector. Even among the organized logistics players, few have offerings across multiple modes (air, water, rail and road) and services (transportation, warehousing and value-added services such as packaging, cold chain and customs clearance).
A lack of adequate infrastructure and complex taxation and regulations are big hurdles. For example, most domestic airports don't have adequate cargo terminal facilities. Blue Dart, the leading express logistics player in India, set up in 1983 and now owned by the global player DHL, started cargo airline operations in 1996. In most airports, Blue Dart operates from the same amount of space first given to it by airport authorities. "In this business, turnaround time is critical," notes Anil Khanna, managing director of Blue Dart Express. "If one does not have the right facilities in terms of size and site within an airport, it is a huge challenge." Blue Dart is the only logistics player in India with dedicated cargo aircraft (just seven). Other logistics companies typically turn to the belly space in passenger airlines, something even Blue Dart does occasionally, depending on the load.
Moving cargo by road has its own set of problems. National highways form only 2% of India's road network, but they handle more than 40% of road freight traffic. This naturally leads to traffic jams. Regulatory requirements and cumbersome documentation also compromise speed. "On average, a commercial vehicle in India runs at a speed of 20 miles per hour. In Western Europe and the USA, the average speed is over 60 miles per hour," notes Vineet Kanaujia, general manager at Safexpress, which has a fleet of 3,500 vehicles.
Moreover, India's tax system is complex. To avoid multiple taxation, companies typically have warehousing operations in every state. The result is a large number of small warehouses across the country that lack the latest warehousing processes and technologies and don't offer economies of scale.
According to Narayanan Ramaswamy, executive director at KPMG Advisory Services who follows the industry closely, "Infrastructure constraints and a piecemeal approach have resulted in non-conducive policies and avoidable hurdles. What the country needs is integrated logistics planning." N. Viswanadham, executive director at the Center for Global Logistics and Manufacturing Strategies at the Indian School of Business in Hyderabad, adds: "The planning problem with Indian logistics is the lack of [an] 'ecosystem' outlook in building facilities, attracting investments and building up stakeholder groups."
Betting on Hub-and-spoke
Yet not all is gloom and doom. Despite the limitations, industry players see strong potential. Several initiatives and projects are under way to boost development of roads (including the Golden Quadrilateral, North-South and East-West Corridors), ports (Pipavav, Mundra and Dhamra), and airports (Bangalore, Hyderabad, New Delhi and Mumbai). The complex central sales tax is expected to be phased out in coming years. The emergence of India as a manufacturing hub, growth of the organized retail industry, increased domestic consumption, and multinationals bringing in global best practices are all expected to boost the logistics industry.
"The logistics industry in India is transforming from a conventional storage-transportation concept [to] being perceived as a better way of managing the supply chain and a strategic tool for growth and competitiveness," says Anurag Mathur, managing director of real estate services firm Cushman & Wakefield India. "This presents strong opportunities for logistics players."
Gopinath, for one, is betting big. He is creating India's first hub-and-spoke distribution model for express logistics. A 100-acre state-of-the-art cargo handling facility in Nagpur in central India will serve as the hub for his operations and will connect the metros as well as tier two and tier three cities through an air and surface network. Deccan 360 will begin operations in October with three Airbus aircraft and a network of 30 franchisees (for surface transport, warehouses and collection points). At first, Deccan 360 will offer next-day connectivity to 30 cities in India. Within a year, Gopinath plans to increase the air fleet to five Airbuses and four aircraft from French-Italian manufacturer ATR, ramp up the franchisee network and offer next-day connectivity across 75 cities.
Will this connectivity carry a huge price tag? No, Gopinath says. "No logistics player in India has the hub-and-spoke model that we are setting up. Like in the case of Air Deccan, I am establishing a different model ... that will both increase the reach and bring down the cost for the customer."
It may not be all that simple. The hub-and-spoke model, though new for India, was introduced years ago by the global major FedEx. It is a tried-and-tested model the world over. Yet in India, Blue Dart, which holds 43% of the air express market, does not follow this model. Instead, it flies three different routes: crescent (Chennai to Kolkata via Bangalore, Mumbai and Delhi), zigzag (Hyderabad to Mumbai via Ahmedabad) and direct (Bangalore to Delhi).
Blue Dart studied the hub-and-spoke model closely before starting operations. It even had a sales alliance with FedEx at the time. Despite the close association, Blue Dart chose a different model. According to Blue Dart's Khanna, "We found that that this model works well when you have a large fleet of aircraft. If you have only a few aircraft, you end up losing capacities. We restudied this model once again a few years ago, and again found it to be unfeasible."
Others who tried running cargo airlines gave up. Gati, a multimodal player with more than 4,000 vehicles and six marine vessels, is among them. Mahendra Agarwal, managing director and CEO, attributes the decision to "commercial bottlenecks." Gati, he says, initially wanted to have its own cargo aircraft. However, faced with regulatory issues and a lack of expertise in running cargo aircraft, it chose to outsource two freighters from Air India. "We had a successful operation of these two freighters regularly on the Chennai-Delhi route," he says. "While operating [them], we realized certain commercial bottlenecks and therefore decided to close the operation for the time being."
For now, Agarwal has other priorities. He is expanding his range of value-added services, focusing on small and mid-size enterprises and key retail markets, creating deeper inroads into city and tertiary distribution, and developing industry-specific expertise.
Others have made their own moves. In 2007, Blue Dart earmarked a five-year investment of US$250 million for aircraft acquisition and strengthening its air and ground infrastructure. Last year, to mark the company's 25th anniversary, Khanna announced 25 initiatives to upgrade the product range and improve quality.
At TNT India, managing director Abhik Mitra is working toward expanding the reach and strengthening TNT's network in tier two and tier three cities. "We also want to invest in the infrastructure in our hubs and depots and take them to the next level of efficiency," he says. TNT was the first multinational express distribution company to enter the Indian market with a direct subsidiary. TNT came to India in 1994 for international operations. Over time, it realized that the domestic market was a much bigger part of the pie. In 2004, TNT made its domestic foray, and in 2006 it went a step further, acquiring road express firm Speedage Express.
Safexpress, meanwhile, has zeroed in on warehousing. The company has more than 5 million square feet of warehousing space across the country and is planning to set up 32 state-of-the-art logistics parks and add another 5 million square feet in the next two years. Five of these parks are already operating. Says Kanaujia of Safexpress: "With the phasing out of the central sales tax, we expect to see a huge demand for world-class warehousing in the country."
Redington, a leading distributor of IT products, is also eyeing the logistics space and is setting up a state-of-the-art automated distribution center in Chennai. Spread over 11.6 acres with the latest very-narrow-aisle technology, it is one of the most advanced distribution centers in India. Managing director R. Srinivasan plans to set up similar distribution centers in New Delhi, Kolkata and Mumbai and a network of slightly smaller distribution centers across 10 other cities in India. Srinivasan plans to first approach his own vendors for business. Over the next 12 months, he aims to spin this off as a separate and neutral logistics company and secure other IT distributors as customers. But Srinivasan's ambition is not limited to IT distribution and warehousing. Redington buys products from vendors and sells to a vast network of channel partners. Srinivasan wants to leverage this expertise and become a third-party logistics service provider across industries.
Analysts say industry players' attempts to expand their reach, offer industry-specific solutions and work toward more integrated operations are moves in the right direction. Meanwhile, what role Gopinath plays in transforming Indian logistics remains to be seen, but his entry into the segment will no doubt accelerate the pace.