India’s third-party logistics (3PL) market is all set to experience a period of explosive organic growth, judging by independent market analyst Datamonitor’s latest research. The Datamonitor report, “India Logistics Outlook 2007,” predicts high double-digit growth rates for both outsourced and contract logistics in India.
With India’s gross domestic profit (GDP) growing at over 9% per year and the manufacturing sector enjoying double digit growth rates, the Indian logistics industry is at an inflection point, and is expected to reach a market size of over $125 billion in year 2010.
“Strong growth enablers exist in India today in the form of over $300 billion worth of infrastructure investments, phased introduction of value-added-tax (VAT), and development of organized retail and agri-processing industries”, say Praveen Ojha, Logistics analyst, Datamonitor and author of the study. “In addition, strong foreign direct investment inflows (FDI) in automotive, capital goods, electronics, retail, and telecom will lead to increased market opportunities for providers of 3PL in India.”
However, as a result of the under-developed trade and logistics infrastructure, the logistics cost of the Indian economy is over 13% of GDP, compared to less than 10% of GDP in almost the entire Western Europe and North America.
“As leading manufacturers realign their global portfolios of manufacturing locations, India will have to work on such systemic inefficiencies, in order to attract and retain long-term real investments,” added Praveen Ojha.
Consumer markets to lead growth in outsourced logistics
3PL/outsourced logistics is the outsourcing of a company’s logistics operations to a specialized firm, which provides multiple tactical logistics services for use by customers as opposed to the respective company having a business unit in-house to oversee its supply chain and transportation of goods.
With increased geographical distribution of incomes in India, the consumer markets are extending beyond the five metros of Mumbai, Delhi, Bangalore, Chennai and Hyderabad. However, rather than being pre-emptive, the companies are only following with new distribution outlets. As such, the increased competition across industry verticals is forcing firms to focus on product distribution, and logistics outsourcing is gaining further momentum with this.
According to Datamonitor, outsourced logistics, at just above one-quarter of the entire $90 billion Indian logistics market, is slated to grow at a compound annual growth rate (CAGR) of over 16% from 2007-10.
The fragmented industry structure: Opportunity for 3PL integrators
The Indian logistics industry is characterized by dominance of a disorganized market. Transporters with fleets smaller than five trucks account for over two-thirds of the total trucks owned and operated in India and make up 80% of revenues. The freight forwarding segment is also represented by thousands of small customs brokers and clearing & forwarding agents, who cater to local cargo requirements.
In order to reduce logistics costs and focus on core competencies, Indian companies across verticals are now increasingly seeking and using the services of third-party logistics service providers (3PLs).
Realizing the potential in the contract logistics market, 3PL service providers are expanding their basket of services as companies are now looking for more than just transportation of their products and raw materials. Trucking and courier companies are now leveraging their network to provide express distribution and warehousing. Similarly, freight forwarders are moving towards owning assets in the form of Container Freight Stations (CFS), Inland Container Depots (ICD) and container trains.
Furthermore, 3PLs are also increasing investments to become end-to-end integrated players. As per the investment plans of the leading 3PLs in India, the logistics industry’s capital expenditure is progressively increasing to almost match its revenue growth, a strong indicator of both 3PLs desiring to become integrated service providers and the industry enjoying investment-driven growth.
Infrastructure congestion: the key challenge According to Datamonitor, the logistics industry in India is currently hampered due to poor infrastructure such as roads (over 70 % of freight transportation in India is via roads), communication, ports and complex regulatory structures.
The National Highways (NH) form only 2% of the entire road network in India, but handle over 40% of the national road freight traffic, putting enormous pressure on the highway infrastructure. Also, on an average a commercial vehicle in India runs at a speed of 20 miles per hour (mph) compared to over 60 mph in the mature logistics markets of Western Europe and the USA.
In addition, the twelve major ports of India handle volumes higher than their full capacity, resulting in pre-berthing delays and longer ship turn-around time compared to even the East Asian counterparts like China and South Korea.
Phased introduction of VAT – A supply chain boon
The amount of time spent in complying with inter state tax requirements and at transport check points affects the cost and competitiveness of both 3PL providers as well as their customers. VAT, which is expected to replace a plethora of state and central government taxes, is likely to enhance the efficiency of the logistics industry in India. Given the current thrust on infrastructure investments in India, the implementation of VAT is likely to boost the efficiency for these stakeholders by lowering transit times and the associated paper work.
Praveen Ojha concluded: “With the collective economic interaction of growing per capita disposable incomes, fast growing manufacturing and organized retailing sectors, increasing external merchandise trade, infrastructure investments by the government and 3PL capex plans, both India’s logistics industry and the 3PL sector of this market are set to witness explosive growth in the next five years.”