Author: Srinath Manda, Industry Analyst, A&T – APAC
Article Dated: 4 July 2006
Logistics in India
India spends about 13.0 percent of its total Gross Domestic Product (GDP) on logistics, as per 2005 estimates. The major logistics functions for the Indian industries include Transportation, Warehousing, Freight Forwarding, and other Value Added Operations including Management of Information Systems (MIS). Of these functions, transportation and freight forwarding have been traditionally outsourced to external service providers with relevant expertise and infrastructure. The warehousing and MIS functions have been mostly managed in-house by industries.
But the huge diversity in geographic conditions, consumer habits, and infrastructure conditions across the country make it a major challenge for Indian industries to efficiently manage their supply chain to reach all parts of the country. Additionally, India’s retail network is very vast, estimated at about 3.3 million outlets in 2005. The highest priority of all industries in India is to achieve a consistent presence of their products across maximum possible section of this vast retail network. This could be achieved through a well knit end-to-end logistics process managed efficiently by a professional logistics service provider.
Nevertheless, the logistics industry, providing services to fulfill these major logistics needs of the Indian industries is highly fragmented. The transportation service provider segment is completely dominated by small trucking companies and individual truckers. The freight forwarding service provider segment is also represented by thousands of small customs brokers and clearing & forwarding agents. Similarly, there are a huge number of participants in the warehousing service segment and MIS service segment also. Few service providers have the capability to provide more than one service and it is very rare that a single service provider has the capability to provide all the logistics services. Such fragmentation had lead Indian industries to outsource packets of individual logistics functions to different service providers while retaining the overall control of logistics in-house, despite incurring heavy administrative and infrastructural costs.
Third Party Logistics – An Overview
Third Party Logistics (3PL), the concept of a single professional logistics service provider managing the entire logistics functions of a company, had originated in the developed economies of Europe and America, to relieve industries from huge logistics costs apart from the hassles of dealing with multiple in-coherent logistics service providers. It proved to be immensely successful in improving logistics efficiency of majority of industries and quickly gained popularity, spreading across the globe. In the process, several professional logistics service providers offering that kind of services have emerged to be leading 3PL providers with operations in multiple continents.
In the initial stages, 3PL providers offered only basic logistics services such as warehousing and transportation. But with growing logistics needs of organizations to remain competitive in globalized economies, 3PL providers have evolved to offer several other value added services ranging from packaging to supply chain planning.
Advent and Growth of 3PL Industry in India
3PL industry’s origin in India can be traced back to mid 1990s. The industry was pioneered by global logistics majors as a part of extending these services to the Indian subsidiaries of multinational companies in automobile, electronics and FMCG sectors. Indian subsidiaries of multinational companies in these sectors took cue from their parent companies and began to outsource a share of their logistics functions to these specialist service providers. Though insignificant in the first few years, Indian 3PL industry is experiencing a rapid growth after year 2000. The number of participants in this industry had grown to be more than 400 by year 2005.
The Indian 3PL industry can be divided into three distinct tiers – National Major 3PL companies with nationwide presence, Regional 3PL companies with strong presence in one or two regions, and Small Remote 3PL companies.
3PL Market in India – Poised for a Remarkable Growth
The 3PL market in India is still in a relatively nascent stage, with multinational companies in all industries being the predominant users of these services. However, domestic major companies in leading industry sectors have also begun to follow the footsteps of their multinational counterparts, starting with outsourcing their basic logistics functions. Realizing the significant cost reductions and several other benefits gained by these companies, the large numbers of small to medium companies in all the industries are gearing up to use 3PL services in their logistic functions, resulting in a tremendous potential market for the 3PL market in India.
The opportunities for growth of 3PL usage could be varied among different types of companies. The multinational companies that are already using 3PL in basic logistic functions might graduate to outsourcing value-added advanced services such as customer support, inbound logistics, and reverse logistics. Whereas, the domestic major companies might increase their 3PL usage in the basic logistic functions and occasionally experiment with the value-added advanced services. On the contrary, the small and medium companies could just begin to use 3PL services for their basic logistic functions.
Nevertheless, considering that the most important logistics functions for Indian industries still are transportation and warehousing, which are likely to be outsourced to 3PL in increasing share, a high level of growth is estimated for the Indian 3PL market in the next 5-7 years. The Indian 3PL market, estimated at about US$890.3 billion in 2005, is expected to grow at a compound annual growth rate of 21.9 percent to reach US$3,556.7 million in 2012.
Frost & Sullivan’s research identified that the largest end-user industry for 3PL services as of 2005, is the auto industry. A lot of multinational automobile makers, like Suzuki, Honda, and Ford, have set up manufacturing bases in India, and have been major users of 3PL services. Expansion of manufacturing facilities by most of these companies indicates huge potential for 3PL services in this industry. Other sectors that have shown substantial contribution to 3PL market and significant growth potential include the information technology (IT) hardware and electronics, Fast Moving Consumer Goods (FMCG), and retail sectors.
A Few Challenges to be addressed for Maintaining the Momentum
Geographic diversity of India needing varied logistics expertise for each region is a major challenge to be addressed by 3PL service providers. India has a diverse geographic scenario coupled with a diverse consumer habit scenario in each of its 25 states. Logistics operation in each state requires a suitable model that facilitates the effective storage and transportation of goods mostly sold in that state, making it very difficult for adopting a uniform logistics model. 3PL service companies interested in serving a particular company would have to offer multiple solutions to fulfill the nationwide logistics needs of that company.
Infrastructure limitations in India, which limit the scope of logistics services package are another concern for 3PL service providers. The congested roadways and ports resulting in significant delay in movement of goods, affect the performance of 3PL service providers. Similarly, lack of sufficient warehousing and specialized storage facilities beyond major cities of the country result in 3PL service providers to restrain from offering warehousing services across the country, hence resulting in their failure to become the complete logistics service providers for clients. Building own warehousing facilities in strategic geographic locations that would serve as hubs for specific regions, could address this problem.
The complicated tax structure, deep-rooted corruption and high bureaucratic control are some other hassles faced by 3PL service providers in providing the best of logistics solutions for their clients. However, despite the existence of challenges, several factors are driving the growth of Indian 3PL market.
Some Factors That are Driving Indian Logistics towards 3PL
Value Added Tax (VAT), the Indian Government’s proposed uniform tax regime, is expected to drive Indian industries towards using more 3PL services. Introduced partially in 2005, a full implementation of this regime is expected to necessitate having centralized large warehouses in regional hub cities, to achieve best efficiency in logistics. Since building such large warehouses requires huge investments, most Indian companies are likely to outsource the warehousing function, creating immense potential market for 3PL service providers. Leading companies in major industries have already started planning for the new scenario and the required warehousing capacity to be outsourced. Others are expected to follow them soon.
The government of India’s increased focus on improving logistics infrastructure is expected to have a huge positive impact on 3PL market. The government has invested US $17 billion to upgrade highway networks, with the implementation of two major projects, namely the Golden Quadrilateral network and the North-South-East-West (NSEW) Corridor. Apart from this, in a remarkable infrastructure related decision, the government has opened up rail freight operations to private players, thereby creating opportunities for cheaper and faster movement of goods. Transportation by rail is definitely cheaper than by road, as trains are faster and have lower costs per unit distance traveled. This is expected to enable 3PL service providers in offering more cost-effective services to clients, thereby increasing the 3PL usage by all industries.
Apart from these factors, the increasing list of multinational companies starting operations in India is expected to fuel the growth of 3PL market. Entry of giants like BMW, Flextronics, and Wal-Mart are expected to contribute to considerable growth of 3PL usage in their respective industry sectors. The opening up of the Indian economy to foreign investments is expected to attract more companies into the country, thereby adding momentum to 3PL market growth. The wide-spread information technology awareness and expertise in India is also expected to help 3PL companies in offering several value added services using IT such as Fleet Management Systems, Warehouse Management Systems, and integrated Supply Chain Management systems.
The Indian 3PL market is set to grow tremendously in the next 5-7 years, spearheading the growth of logistics market. Several factors including government’s support are instrumental in this growth. Though certain challenges remain to be addressed, the general trend is highly positive. With scenario highly favorable for them, the onus is now on 3PL service companies to offer quality services at affordable pricing, and delivering consistent results to maintain the momentum. For now, surely 3PL is the way forward for Indian Logistics Market.
The article is based on Frost & Sullivan’s upcoming research service – Strategic Analysis of Third Party Logistics (3PL) Market in India.