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Indian logistics sector: An overview - Views on News from Equitymaster
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  • May 13, 2009

    Indian logistics sector: An overview

    The growth prospects of the logistics sector are closely linked to economic growth and foreign trade. Booming retail trade was expected to provide a fillip to the growth of the logistics industry. While growth of organized retail trade has slowed down, the sector has not lost steam.

    India has a vast territory and hence, implementing a smooth supply chain model poses a challenge. Consider the case of food products in India. The Indian supply chain for food products is characterised by extensive wastage and poor handling. The wastage occurs because of multiple points of manual handling, inadequate packaging and cold storage facilities. The physical wastage is one component of the inefficiency in the supply chain. There are other problems as well, in terms of the deterioration in quality and the cost of intermediation in the food chain. To avoid all this, there is need to have appropriate infrastructure for storage and transportation.

    Thus, logistics plays an important role in any economy. As per the CII 2007 report, the US$ 90 bn (2007) industry is expected to reach a size of US$ 125 bn by 2010 on account of expanding domestic economy. This translates into a growth of nearly 12% per annum.

    The logistics segment can be broadly categorized into three segments– transportation, warehousing and value add services.

    In this article, we will briefly touch upon each of these segements and in subsequent articles, discuss in detail the scope and prospects of the same.

    Transportation: By providing transport facilities one earns freight as revenues. Transportation can take place through surface that is by road and rail, or one can use air or water transport depending upon urgency and cost feasibility. Transportation accounts for almost 40% of the logistics cost.

    • Road freight industry is highly fragmented with single truck owners accounting for over 75% of trucking companies.
    • Rails are operated by Indian Railways, a government undertaking. Till 2007, Container Corporation was the only player who operated container trains. But in 2007, container rail freight services were privatized but still Concor, a government undertaking, is the dominant player.
    • Ocean or Sea freight has recently been witnessing robust growth with increase in foreign trade. Olympics and booming emerging economies like China and India supported growth of this segment with increase in transportation of iron ore, coking coal, steel etc.
    • Air freight segment accounts for a small pie of India's freight market but is growing at a fast pace. Liberalisation and globalization has given a fillip to the growth of this segment. Sophisticated machinery components, pharmaceutical dyes, fruits, vegetables, flowers, fish and meat form part of air cargo.

    Warehousing: Warehousing is nothing but storage of product and goods to be transported whether inbound or outbound. The size of the segment in 2006 was estimated at Rs 1.2 trillion. warehousing facility needs do change depending upon the mode of transport.. Privatisation of container rail transport is expected to drive growth of Container Freight Stations (CFS) and Inland Container Depots (ICD). Such warehouses are used for transshipments. There are different types of warehouses such as multimodal, port based, air cargo transshipments etc to cater to the needs of different modes of transport.

    Warehousing has also been dominated by small players who lack scale, handling and stacking technologies. In general, warehousing and packing losses account for little over 25% of total logistics costs.

    Value added services: Apart from transportation and warehousing, logistics industry comprises of other related services such as packaging, labeling and assembling, express services, tracking and tracing, cold chain, third party logistics etc. Again, depending upon mode of transport, service requirements differ. In case of rail transport, service such as stuffing, de-stuffing, rail container services are required. On the other hand, in case of water and air transport, services such as custom clearances, freight forwarding are provided.

    To conclude…
    India fares poorly on the logistics front as compared to developed and developing economies. The distribution costs not only increase on account of several layers in supply chain but also due to poor infrastructural facilities. In developed countries like the US, logistics costs comprising transportation costs account for 7% to 9% of the cost of the final product, warehousing cost accounts for about 1% to 2% and inventory holding costs account for about 3% to 5%. In developing countries, logistics costs are estimated to be higher at around 15% to 25% of the final cost of the product due to lack of adequate logistics system. In India, logistics cost is around 13%, comparatively higher than the developed countries. (Source: Indo-Italian Chamber of Commerce). To stay competitive, companies need to cater to the consumers' demand on timely basis without compromising on quality. The growth of this sector is not just driven by the need to transport goods and services efficiently but also on account of companies increased focus on core competencies, which has resulted in outsourcing functions like logistics to third parties.



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    Dec 6, 2010


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