‘India spends around 14% of its GDP on logistics’

Inadequate draft prevents some ports from handling bigger ships

Allcargo Logistics, an integrated logistics multinational, headquartered in India, operates across 90 plus countries through 200 plus offices globally.

ShashiKiran Shetty, Founder & Executive Chairman – Allcargo Logistics talks about his company’s role in the Indian logistics sector, growth prospects for logistics and warehouse sectors in the country.

Shashi Kiran Shetty

Shashi Kiran Shetty

Excerpts from the interview:

What is the current scenario across the logistics industry in India?

The logistics industry currently continues to remain challenging as the global economy is still sluggish. India currently spends around 14 per cent of its GDP on logistics compared with developed countries where this percentage is around 8-9 per cent and the industry on the whole is very fragmented and unorganized.

However, the freeze of infrastructure projects along with trade woes have led to some consolidation in the sector starting last year. In spite of all the impediments, India has come a long way ahead from the traditional godowns to multimodal transport, container freight stations, inland container depots, cold-storage and supply chain management.

Regarding M&A deals in the industry, local deals have historically been very popular but recently we are seeing more international deals and an integration of Indian logistics companies with global biggies to enhance footprint in other major markets.

What is the expected growth across the logistics and warehousing sectors?

The growth of logistics sector is directly proportional to overall economic growth of India. Logistics being the backbone of our economy will surely grow by around 3 to 4 per cent in coming years consistently as it is pegged to India’s GDP growth.

Taking into account country’s immediate priorities to build infrastructure logistics will be a key medium to execute and implement these projects pan India, especially project logistics which involves movement of mega size over dimensional cargo destines for a power plant, refinery etc. Urban infrastructure development such as Metros across India’s cities also will need efficient project logistics. With road and rail having its own challenges as medium of transportation, coastal shipping will lead the way as the most timely & efficient medium of transportation within India.

More and more Indian companies are realizing the benefit of outsourcing supply chain and warehousing services to create efficiencies in their businesses. Thus warehousing in India has tremendous potential. With GST coming sooner than later, this industry will see positive growth very soon.

What are the new business models emerging in the logistics space?

The focus of companies both domestic as well as international is to leverage the cost effectiveness of India, especially in terms of imports, exports as well as manufacturing. Thus cost rationalization across logistics value chain as well as value addition to existing services is what is emerging as a trend. Thus integrated logistics is the new norm of the industry, wherein a single service provider, provides end-to-end logistics services not only covering India, but also through international network. This enhances the efficiency and productivity of logistics as function as a whole and directly contributes to saving all around. Thus integrated logistics is the new trend in the industry not only in India, but also globally.

What kind of investments do you see in the logistics sector, especially by PE funds etc?

With more globalization of India’s economy, more and more investment will be made in the logistics industry. With the success of Allcargo as a benchmark, other players as well will see a renewed interest from PE as well as other global investors. The industry is just warming up to its potential; the present investment is just the tip of the iceberg.

Are you seeing a capacity crunch, especially at the ports? Do you see a near term solution?

Indian ports have been facing the problem of capacity crunch since a very long time. Even though expansion is taking place, the pace is relatively slow owing to a variety of factors.

The Ministry of Shipping, is looking to increase the capacity of major ports by 250 million tonnes in this financial year, has already completed 102 million tonnes capacity in April-December 2013 and aims to complete the balance in the next three months.

In the last two years, the trend in traffic handled by India’s major ports is very much in line with the world’s top 20 ports where cargo movement has been largely flat. Investment towards building India’s port capacity has more than doubled in the last five years, but the traffic growth during the period has grown by a meager 25 per cent, indicating a substantial idle capacity in the sector.

Indian ports have improved in terms of different productivity parameters but, the existing levels are a little below those of most of the world’s biggest ports. One of the biggest problems facing Indian ports is draft – inadequate draft prevents some of the ports from handling bigger ships.

Positive development in this sector has been the increased participation by private players. Expansion in the form of hub ports seems like an ideal solution. Hub ports can be developed along both the coastlines of India with deep drafts that would help to tackle the cargo load significantly. Though, the Planning Commission has announced an addition of 250 million tonnes new capacity per annum at major ports in the 12th Five Year Plan, industry officials do not see it happening by FY17.

What are your views on the Tax regime?

Complex taxation and the use of different road permits/documents in different states impose additional constraints on the movement of freight by road. One of the biggest concerns apart from demand and infrastructure gaps is the issue of service taxation. The best alternative to reduce transit costs and implement a world-class hub and spoke model in India would be to immediately introduce GST, which will act as major fillip to the sector.

What are the factors that could boost the industry? Tell us about the main barriers in this business?

Logistics industry is rightly called the backbone of Indian economy. The government should take a few initiatives to boost this industry by getting a fast track approach in infrastructure projects which will help to get more transparency and implementation of GST will be of some help. The public sector undertaking should increase their investment in the logistics sector. Key economic indicators including 100 per cent FDI in logistics shows a healthy outlook for the Indian economy. Last two years have been the toughest for India’s economy in terms of economic growth. These are further enhanced by the global economic slowdown and monetary crunch.

All the key economic variables like domestic manufacturing, exports & imports, fuel, inflation etc. have been under great pressure. Major barriers are that the cost of relocation needs to come down for Logistics infrastructure. Investments in warehouses are very low which needs to be taken up seriously. Several critical projects are either stuck at the planning or implementation stage. This has stopped our economy as a whole to grow and develop across all sectors. Severe steps needs to be taken to address these issues.

What is your key focus for the next five years?

The year 2013 has been remarkable for us as we have closed two successful back-to-back acquisitions in US and Netherlands respectively. Now, our focus highly remains on reaping benefits of the investments made in the past and plough back the profits for organic growth. We are already big in LCL business. Going forward, we plan to strengthen other businesses like FCL and Project handling which have immense potential and pricing power.

What was the business strategy for acquiring US based Econocaribe Consolidators and Netherlands based FCL Marine agencies?

With the US acquisition we have completed our presence in the global network. Econocaribe Consolidators is one of the largest non vessel operating common carriers (NVOCC) in the US, with nine offices across Americas. This will help us to get access to the world’s largest economy and will give us an opportunity to serve some of the big clients. Currently manufacturing in US is likely to gain momentum, which is positive for us as exports will grow from there.

Acquisition of Rotterdam based FCL Marine Agencies, was our step towards consolidating our leadership in FCL (Full Container Loads) services as well. These two acquisitions will help growth of our business and market share, as a leader in NVOCC business globally.

 

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