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Logistics - India 2017

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Logistics - India 2017 Industry Report Logistics - India 2017 Research Conducted by Sector Report Logistics – India 2017 In this issue 1 / Logistics Sector – Global View 2 / Logistics Sector – India 3 / Key Drivers & Trends 4 / M&A Transactions 1 / Logistics Sector - Global View Logistics is an integral activity for economic Technology is being applied and implemented in growth as it involves the management of different formats; physical automation for flow of goods from place of origination to trucking and warehousing; automated place of consumption. The sector comprises documentation and booking of parcels, online shipping, port-services, warehousing, rail, marketplaces for comparing price and services, road and air freight, express cargo and other etc. All these technological enhancements have value added services. The global logistics provided benefits in the form of market currently generates over USD 8 disintermediation of services, cost trillion annually and represents around 11% rationalization and curbing inefficiencies. of global GDP. 2. Shifting of Trade Centers The growth of the logistics sector is linked to Demographic profiles of Asian populations growth in international trade flows and the coupled with economic growth has triggered robustness of the economic environment. demand-led consumption. In Africa, critical World Trade (% of global GDP) positioning and access to natural resources is 70 incentivizing investments in the region. 60 Population density and ever-increasing 50 aspirational requirements are leading large 40 30 World trade impacted scale producers to migrate to these regions to 20 due to Financial Crisis of build infrastructure and production facilities. 2008-09 10 Accordingly, trade movement has been - increasing towards these regions to meet the growing demand and investments. Source: World Bank Estimates 3. E-Commerce Wave Trade was severely affected during the The growth of e-commerce has given way to financial crisis of 2008-2009. Since then, specific logistics channels handling only last global trade had been recovering and has mile deliveries. These channels ensure faster returned back to 2009 levels in recent years, delivery and provide assured reverse logistics. i.e. around 60% of global GDP. They also insure for the consignee collection of The following key trends are being observed payment. This model is a true 3PL (third-party in the logistics sector across the globe: logistics) service offering. With the complexity involved and the level of automation required, 1. Digitization and Automation big e-commerce companies like Amazon and Digitization in the logistics sector is currently others have set up their own last mile delivery in a nascent stage with most processes yet services and are now entering as full fledged to be automated. The current structure of the 4PL logistics service providers. logistics sector involves intermediaries, which lead to leakages in the value chain and hence, higher costs for consumers. 2 / Logistics Sector in India The size of the logistics sector in India is Going forward, the trend towards integration of estimated to be USD 260 billion. Unlike global logistics service providers is expected to continue trends, the logistics sector in India has been and new players/business models are expected growing at a healthy rate of ~14% over the last 5 to emerge amid the digitization and automation years on strong demand drivers. Over the last two of business processes, implementation of the decades, the Indian logistics sector has evolved new GST (goods and services tax), and expansion from mere transportation services to fully in the 3PL/4PL service landscape. integrated service providers. Evolution of Logistics Sector in India Before 1990s 1990s to 2000 2000 to 2014 Beyond 2014 ▪ Limited to ▪ With port ▪ Growth in trade ▪ Digitization of outsourcing of modernization, volumes & logistics services to transportation discharge & loading regulations has led increase activities for operations at port to emergence of transparency movement of goods became efficient CFS/ICD operations resulting in through warehouses disintermediation of ▪ Custom clearance, ▪ Third-party logistics services. ▪ Mainly annual freight forwarding, service providers contracts and inventory needed to handle ▪ Market demanded ▪ Due to complex management movement of cargo total integration of excise tax and other became more across the logistics logistics services and duties the focus was structured, restricted value chain outsourcing to to operations in 3PL/4PL service on cargo movement ▪ Higher outsourcing periphery of port providers for reducing and more value inventory and ▪ Focus on integration added services ▪ Efficiency and cost distribution costs of business came into play like rationalization through physical functions to manage in-plant through adaptation distribution supply chain, mostly management, and automation of management multimodal reverse logistics etc. technology on back including open yard of easing regulations ▪ Focus on integrating management supply chain, service providers to meet customers distribution needs 2 / Logistics Sector in India India's logistical costs as a percentage of GDP is Current Issues and Challenges on the higher side: 13.0% vs. global average of The main issues currently faced by the logistics 11.7%. Logistics in India are plagued by an sector in India are as follows: inefficient system, lagging infrastructure, lower 1. Connectivity Congestion average trucking speeds, congestion and bottlenecks in surface transportation, etc. India is ranked 35th in the Logistics Performance Index (LPI) by the World Bank Logistics Costs (% of GDP) which benchmarks efficiency of trade logistics across nations. India's low ranking is due to 13,50% 13,00% 11,90% slow transit time for the movement of cargo 9,20% 8,20% through road and shipping networks. In terms of transportation through shipping channels, transit time is affected due to lengthy custom clearance processes and the number of United Europe Asia Pacific South India intermediaries required for bringing products States America in/out of the country. The road logistics Source: CIA, World Bank, Armstrong & Associates network is affected due to poor infrastructure as national highways constitute only 2% of the In terms of the relative composition of overall road network. In addition, toll collection, transportation and logistics costs, transportation inter-state checkpoints and other stoppages costs in the US and China are high due to lead to higher transit times. widespread geography. Interestingly, costs are 2. Lower Standardization also high in India but due to a combination of factors including vehicle quality, stressed drivers, India's logistics market has been impacted by overloading, poor road infrastructure, and low lower standardization of cargos and average speeds. In addition, costs are higher due containerization of logistics traffic, hampering to excessive taxes and toll expenditures. the overall speed and thus increasing cost of movement. Transportation Warehousing Container traffic as % of overall traffic Inventories Others (incl. losses) 70% 71% 73% 54% India 35% 9% 25% 31% 50% 51% 51% 52% 53% China 50% 25% 15% 10% US 49% 9% 24% 18% Source: KPMG Analysis Source: KPMG Analysis 2 / Logistics Sector in India 3. Unfavorable Modal Mix 4. Tax Structure and Regulatory Cargo movement in India is skewed towards Inefficiencies road networks. India boasts the world's fourth India is currently in the midst of a transition largest railway network and is cheaper than from a historical state-wise tax regime to a roads, but suffers from under investment centralized Goods and Service Tax. At present, resulting in capacity constraints, redundant India has different applicable tax rates within 29 railway sliding, inadequate rolling stocks, and states and multiple taxes levied are by both non-availability of cargo hubs in proximity to Central and State governments when goods industrial hubs with a large work-force. Inland move across the state borders. This leads to waterways, despite being green and cost higher cost and inefficiency/delays on account effective, are affected due to inadequate transit of inadequate documentation and necessary gateways between inland waterways and clearances while goods are transiting across linkages to coastal shipping. Air is the fastest multiple state borders. The planned dual GST transportation mode but continues to have model (central GST and state GST) proposes to replace around 29 state and federal taxes with miniscule (1%) share in the transportation pie a single tax regime at the point of sale. and suffers from limited connectivity and an absence of designated cargo terminals. The inability to provide last mile connection leads industries to prefer the road as mean of transportation of goods. Modal Mix - Transportation (in %) Rail Road Water Air 1 1 1 1 8 14 46 43 37 60 30 46 48 31 23 10 India China US Europe Source: CII & CARE 3 / Key Drivers & Trends Despite the challenges, the logistics sector in India warehouses closer to consumption centers. is expected to grow at a healthy rate of close to Currently, small warehouses are operated for 12%-14% going forward. The growth is expected distribution by carry & forward agents to link along with a transition of the sector from high cost movement of goods for the ease of taxation. to a leaner cost alternative through rationalization This leads to inability to achieve scale with of expenses, elimination of intermediaries and pilferage at multiple levels.
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