Article Dated: 9/21/2006
International logistics players are eyeing opportunities created in the Indian logistics market, mainly due to the macro economic reforms. The manufacturing sector will receive a boost by the Special Economic Zones (SEZs) being launched in India. (A Special Economic Zone (SEZ) is a geographical region that has economic laws different from a country’s typical economic laws. Usually, the goal is an increase in foreign investment. Special Economic Zones have been established in several countries, including the People’s Republic of China, India, Jordan, Poland, Kazakhstan, the Philippines and Russia.
With greater demand for logistics and the basic level of logistics available in India, international players are actively planning their entry strategy. Setting up of SEZs in India would work as an incentive for international manufacturing units to enter India. Foreign firms are evaluating their entry strategy to gain first mover advantage in the midst of sudden surge expected in the Indian economy, led by SEZs.
The Government of India is keen on promoting India as a global hub for manufacturing—creating hot pockets of manufacturing zones. In line with this objective, it announced the Special Economic Zone Rules in May 2006. Proliferation of SEZs in India would boost international trade and trigger new demands for logistics with more value added and bundled services. India now expects to attract an investment of close to $22.6 billion by domestic companies by 2008. Exports from SEZs during 2004-05 were close to $ 4 billionrepresenting an annual growth of over 36 per cent.
The government has so far approved the setting up of 117 SEZs, which includes three Free Trade Warehousing Zones. The SEZs would be spread across 15 states and two Union Territories in India. Most of the SEZs are at various stages of implementation, while seven are fully functional.
Parallels in the Indian and Chinese markets
There are several common characteristics in the logistics markets in India and China, one being the creation of SEZs. Chinese economic growth had accelerated due SEZs in the ’90s. Now, it is expected to have a similar economic boom in India if the government offers similar, attractive concessions like its Chinese counterpart. The biggest impediments to Foreign direct investment (FDI) in India have so far been high tariffs and taxes, bureaucratic red tape, and stringent labor regulations.
India, nonetheless, enjoys a more flexible bureaucratic environment than China, has fewer international entrants, and is experiencing a rise in entrepreneurship among its domestic players. This gives the Indian logistics market a distinct edge over its Chinese counterparts, especially in terms of low entry barriers.
The other similarity lies in the fact that both the countries have been able to attract a high inflow of FDI. New international manufacturing units are entering both countries. The level of logistics offered by domestic players in both the countries is lower than international standards in terms of services and network optimization. Conversely, the demand for logistic services both from domestic and international market in India and China is on the rise.
A majority of the LSPs in India do not provide the entire range of value-added services. The complete outsourcing of logistics as 3PL/4PL is yet to kickoff in India. However, shippers in India realize that Indian LSPs are not yet equipped with the systems and procedures required to handle the same efficiently. Indian logistics players are far from implementing risk and reward sharing business models. There are no joint ventures or joint operating models (JOM) between shippers and LSPs in the country.
Entry strategy for international logistics players
The entry strategy of foreign logistics players will mainly focus on their logistics expertise, captive power, technology, and marketing capabilities. Indian logistics service providers (LSPs) lack captive power besides suffering from a considerable cash crunch. There are not many deep pockets to fund state-of-the-art warehouses. LSPs do have asset bases in terms of offices but they are not managed efficiently. They do not have sufficient security measures to support hi-tech or high value goods transportation.
Shippers in India are not satisfied with the quality of logistics services being offered. Contractual arrangements are not rigid enough to ensure quality performance. Indian LSPs also lack strong strategies in terms of leveraging their contract on a Pan-India, Pan-Asia or global basis. LSPs do not offer VAS, like SPL, customer services, and intermodal services. Moreover, there is not yet enough collaboration between internal and external partners of the supply chain.
SEZs are propelling the logistics market
The new 117 SEZs are driving the logistics market in India with a heavy inflow of FDI, new manufacturing units setting up shop, and an increased domestic and international trade with relaxed tax structures. The 3PL market is growing largely in India, wherein carrier services form the largest market share.
Indian logistics market offers many opportunities, like 3PL value-added services, SPL, intermodal logistics, state-of-the-art warehouses, a secured and specialized transportation system. There are very few contracts for Pan-India, Pan-Asia and global logistics services.
New international logistics players should enter the Indian market, mainly banking on their captive power, logistics expertise, technology and efficiency, and marketing capabilities.
IBN is an international market research company headquartered in India, Pune serving Fortune companies globally in the logistics domain. IBN’s portfolio of services includes custom research, multi-client reporting, industry abstracts, and competitive intelligence on a global scale. http://www.ibnsolution.com/research