Third Party Logistics (3PL) in India

The Logistics industry in India is undergoing a change to a system wherein a dedicated player handles majority of a companys logistics operations. These players are referred to as 3PL (thirdparty logistics) players who typically specialize in integrated transportation and warehousing services that can be customized to meet the companys needs. The need for controlling logistics costs and increasing need to focus on core competencies are driving more and more companies to look for such 3 PL players. The contribution of 3PL in the overall logistics market is likely to increase from 1.5 - 2.0% in 2008-09 to 3.5 4 % by 2013-14.

Consequence of FY 12 Budget on Logistics Sector

Few characters which impact on the logistics sector with respect to FY 12 budget is as follows: Tax: The budget has set the ground for the roll-out of the much-awaited goods and services tax (GST), by bringing more goods and services in the tax net and removing exemptions. The government will introduce a bill to facilitate this new tax regime, expected to start from April 2012. The GST will replace a host of indirect taxes, central excise, service tax, and various state-level duties like sales tax and octroi with a single levy. GST is likely to emerge as an efficient system of taxation that works to the benefit of industry, consumers and the government. Roads and Highways: National Highways Development Programs (NHDP) has been introduced with the allocation of Rs 103.40 bn. Full exemption from basic customs duty for specified machinery (including tunnel-boring machines) has been announced which are used in the construction of national highways. Over 11% rise in budgetary allocation on road transport & highways encourage the transportation and logistics sector in India.

Concerns for the sector

Indias spend on logistics activities is equal to 13% of its GDP while it is 10% in Europe and 11% in Japan, it is also higher than most of the developed nations. The main reason for this is the relatively higher level of inefficiencies in the system, with lower average trucking speeds, higher turnaround time at ports and high cost of administrative delays. The required pace of efficiency and quality improvement will demand rapid development of capabilities of logistics service providers. This industry provides lesser pay and progression incentives compare to other industries. The logistics being a service oriented sector, skill development will emerge as a main capability.
The decision by the government to establish a panel to monitor the costs of doing business in India is really welcome. Logistics companies hope that this will lead to bold initiatives to reduce transaction costs of trading across Indias international as well as state domestic borders. The industry was also hoping that announcements would be made to add clarity to the design and the roadmap for the implementation of GST, but the same was not addressed The removal of service tax on testing of agricultural produce will benefit farmers in a huge way by helping in the reduction of costs for those who want to test their produce. It will also lead to the creation on larger testing facilities for agricultural producers.

The Union Budget 2013-14 though has silent on its specific demand of industry status for easy access for finance
and separate regulatory authority for the sector to ensure better coordination between ministries for an integrated policy on the sector, the industry to have some cascading benefits. Budget announcements/provisions NABARD got Rs 5,000 crore to finance construction of warehouses, godowns, silos and cold storage units designed to store agricultural produce, both in the public and the private sectors. The special emphasis on the agriculture sector, including a guarantee of Rs 5000 crore given to NABARD for the creation of additional warehousing facilities, will be beneficial for the sector.

This window will also finance, through the State Governments, construction of godowns by panchayats to enable farmers to store their produce. Budget outlay for Rural Roads (Roads and Bridges) for 2013-2014 is fixed at Rs 21,700 crore and of which Rs 1743.90 crore has been earmarked for North Eastern Region and Sikkim. Corpus of Rural Infrastructure Development Fund (RIDF) operated by NABARD is increased to Rs 20,000 crore for 2013-14. Two new major ports will be established in Sagar, West Bengal and in Andhra Pradesh to add 100 million tonnes of capacity.

In addition, a new outer harbour will be developed in the VOC port at Thoothukkudi, Tamil Nadu through PPP at an estimated cost of Rs 7,500 crore. When completed, this will add 42 million tonnes of capacity. Surcharge on dividend distribution tax or tax on distributed income increased from 5 per cent to 10 per cent. Surcharge increased from 5 per cent to 10 per cent on domestic companies whose taxable income exceeds Rs 10 crore. In case of foreign companies the surcharge is increased from 2 per cent to 5 per cent, if the taxable income exceeds Rs 10 crore. Investment allowance of 15 per cent deduction in addition to the current rate of depreciation for investment of Rs 100 crore or more in plant and machinery during the period 1.4.2013 to 31.3.2015. No change in excise duty on commercial vehicles. Budget impact and outlook The Railway Budget 2013-14 though turnout to be a mixed bag with announcement such as introduction of dynamic fuel surcharge, freight terminals under PPP mode, proposal to set up independent rail tariff authority, which is under inter ministerial consultation stage, the Union Budget has completely silent on its expectations. The budget though largely left the measures to enhance export import to March 2013 end EXIM policy announcement, the removal of export duty on sugar and galvanised steel is a welcome move auguring well for the logistics sector improving cargo volume. Moreover the increased budgetary allocation and continued strong focus on agriculture to augur well for the sector. Similarly the investment allowance of 15 per cent for investment of above Rs 100 crore in P&M is to revive industrial capex. Since this incremental capacity result in additional movement of raw material as well as finished goods that will have cascading effect on the logistics sector with increased cargo volume. Similarly the budgetary allocation of Rs 5,000 crore for NABARD to finance construction of announcement of warehouses, godowns, silos and cold storage units designed to store agricultural produce, both in the public and the private sectors will help the industry players to augment their infrastructure. While the FAC linked freight tariff hike and setting up of independent rail tariff authority though put the road sector at advantage in short-medium term cargo movement the measures to boost industrial capex as well accelerated development of infrastructure is expected to be marginally positive for the industry.

Transportation and Logistics market in Emerging economies like India - Glocalization approach needed
Logistics costs in India are estimated to be around 13% of the GDP, which comes to around US$94 billion in 200506.Transport sectors contribution to Indias GDP is estimated to be around 7.6% in 2006 -07, and road transport has a dominant role in this contribution with a share of 4.7% in Indias GDP.Currently, the market is extremely fragmented and dominated by unorganized sector. Most of the organized players are using their home grown operational TMS system for managing their day to day work. But the key issues with their legacy TMS or logistics applications are: * Absence of scalability and robustness * Inability to provide real time supply chain solution to key stakeholders * Planning and Optimization processes are manually intensive. As a result; customers are not getting the benefit of incremental freight savings across multiple modes and geographies * The entire freight settlement and audit processes are manually intensive and as a result pretty error prone But at the same time, every market has its own processes and own macro-economic and micro economic challenges. Like Indian transportation market has the following * Issues of Non-standardized vehicle types * Cumbersome taxes like service tax/toll tax/Octroi * Requirements of multiple operational documents * Procedure of payments to carriers for executing the shipments and the subsequent implications for tax settlement * Painful Change management requirements * Crippling Infrastructure issues in terms of both hard (Road /Rail/Port conditions/network connectivity etc) and soft infrastructures( skilled manpower/business practices/cumbersome Govt policies etc ) So,where there is a huge potential for growth for advanced Transportation Management systems, at the same time the need of the hour is strong localization approach from the advanced TMS systems from established ERP vendors. TMS best practices prevalent in advanced economies are not applicable and not required too now, in these markets in absolute terms. Products need localization approaches with features relevant for the respective market to address these requirements LSPs/3PLs/Manufactueers/Retailers know and understand the strategic and operational benefits of these systems but not sure how these systems will fit into the requirements of Indian market conditions. They are clamoring for Glocalization approach- Global Products but local execution approach which will only cater to their requirements. Ultimately the total cost of ownership of these systems are quite high too, they are really looking for reasons to justify this to their Top Management.
Posted by Nilabja Dey on March 31, 2009 11:54 AM

Logistics - The future

By Amit Maheshwari, CEO, Softlink
Mr. Amit Maheshwari, CEO, MD, Softlink Logistic Systems, talks about how India has become the prime destination for logistics service providers all over the world. How the demand for logistics services in India has been largely driven by the remarkable growth of the economy and the future of logistics in india. India has become the prime destination for logistics service providers all over the world. The demand for logistics services in India has been largely driven by the remarkable growth of the economy. The growth is being projected at 9-10 per cent in next few years, with the CAGR (compounded annual growth rate) expected to grow at a rate of 7-8 per cent. This growth is expected to gain greater momentum due to the exponential growth of the Indian economy. India is also experiencing a big retail boom as the buying capacity of the middle and upper middle segment of the population has scaled new heights. Many large multinationals from the retail industry are planning to set up operation in India and large local retailers are also planning to expand their operations. But with the infrastructure largely under-developed and incapable of catering to a growing economy, logistics management in India becomes too complex. The poor condition of infrastructure directly translates to higher turnover, pushing up the operating costs and reducing efficiency. There are other problems such as complex regulatory compliance and limited adoption and utilization of technology, which has resulted in increased paperwork and inability to communicate effectively with customers. In spite of dismal infrastructural scenario, the hopes of the logistics sector are kept up by the various upcoming infrastructural projects like logistics parks and hubs and other initiatives by public and private sector. The future of the logistics sector depends not only on the continued development of infrastructure but also on the capability of the service providers in adapting themselves and making optimal utilization of technology.

India

Emergence

of

global

manufacturing

hub:

The demand for FMCG and electronic products in India has been growing at a very fast pace. Several multinational companies from diverse industries have shown growing interest in setting up world-class manufacturing facilities in India to cater to the domestic market as well as for the export market. Establishing manufacturing facilities in India has been a strategic move to reduce their manufacturing costs and cater to the expanding Indian market. The Indian automotive Industry is well on its way to being one of the world's major automobile manufacturing hubs. Since the deregulation and opening up of the automotive industry, the industry has witnessed tremendous changes and experienced a great boost. As an outcome of the growth in the automotive industry, the automotive components industry has also witnessed significant growth with the country becoming home to many world-class auto component suppliers. Another industry which is seeing an upward swing is gems and Jewelry. India has been one of the leading exporters of gems and jewelry next only to countries like Belgium and Israel. Moreover Indian exports constitute about 55 per cent in terms of value of the world's polished diamond market. The IT Hardware industry is catching up with IT software and over the past couple of years India has slowly emerged as a manufacturing hub for IT hardware as well. Today India is well poised to emerge as a global manufacturing hub.

Warehousing:
Warehousing has become one of the major segments contributing to a rapidly growing Indian logistics industry. The growth in international trade and a rapid rise in containerization levels have led to high demand for warehouses and a tremendous opportunity for the private sector. The demand for specialized services is expected to further drive the growth in the market. There has already been a sizeable impact on the industry, in terms of market size, growth and the infrastructural resources. The numerous investment options in the warehousing market have heightened the interest of players entering the market, which is already evident from the growing number of players in the warehousing market. Several initiatives have been taken by the government towards the development of warehousing sector. The introduction of Goods & Services Tax (GST) regime and Warehousing Act 2007, investments in logistics parks and free trade warehousing

zones (FTWZs) have aided in the development of infrastructural facilities. The change in tax policy has had significant impact on investments by the logistics providers in warehousing segment and has opened the gates for large scale investments. There is tremendous competition between major private and public players in the market. The continued development of warehouse infrastructure will go a long way in providing the necessary support to the logistics industry. The infrastructure development in the warehouse segment is expected to get further fillip with the introduction of new regulatory and development bill.

Indian Logistics: Future Trends:

There have been several key indicators to the future trend in the Indian logistics sector. The demand for logistics services has been largely driven by the remarkable growth of the Indian economy. Logistics spend in India is estimated to be around 13% of the GDP, which is comparatively higher than other developed countries. The air transport sectors contribution has been around 0.2 per cent of the countrys GDP, while the transport sectors contribution to the GDP has been growing over the last c ouple of years. Indias air cargo is predicted to grow at over CAGR of 11.5 per cent in the next few years. The contribution of the marine transport sector has also been around 0.2% to the countrys GDP. The sectors contribution to the GDP has been increasing mostly because of the growing economic developments in the country. The role of the shipping industry in the growth of Indian economy has been very significant. Major ports in India together have handled around 500 million tonnes of cargo in the past two years and this figure is growing significantly. The Indian railways has realised the necessity to improve the infrastructure provide better service. The plan to develop Logistics Parks or hubs has the potential to streamline and optimize the supply chain and reduce the costs. Currently around 80% of the goods in India move by road, the railways has to essentially devise plans to divert this traffic to the rail. Indias logistics sector attracted huge investments, leaving behind some of the major sec tors including aviation, metals, and consumer durables. The growths in the retail and manufacturing industry, commodity markets and development of SEZs have been key factors in the growth of Indian logistics industry. Recent studies have indicated that the Indian logistics industry is expected to grow annually at the rate of 15 to 20%. A number of infrastructural projects involving warehouse and logistics parks are being undertaken are expected to be operational in the next 2-3 years. The setting up special economic zones (SEZs) has led to increased logistics activities around them. Several logistics parks have come up at locations like Mumbai, Kolkata, Chennai and Hyderabad because of their excellent port, rail, and road connectivity and are witnessing significant investment in infrastructure. Many of the large logistics players are in the process of setting up warehouses, container freight stations (CFS), inland container depots(ICD), logistics parks, distribution centers and other facilities to leverage the abundant opportunities. Increase in foreign trade is expected to further accelerate the demand for logistics services. The future of the Industry is very bright and is sure to witness exponential growth in the coming years. The increased participation of both public and private sector is crucial for developing logistics and improving supply chain management. Not only do the logistics companies need to create efficient business to thrive in the logistics sector, but they also need to explore ways for investing energy, costs and time to grow a strong logistics system.

UNION BUDGET 2 LOGISTICS & WAREHOUSING 013-2014

Industry Snapshot
Indian Logistics industry is highly fragmented and can be classified into seven broad categories rail freight, Container Freight Stations/ Inland Container Depot, Multi-modal Transport Operator, coastal shipping, trucking, warehousing and express logistics. However, over the past few years, the concept of third party logistics (3PL) has evolved, which involves bundling of various logistics services such as warehousing, inventory management, transportation, freight - forwarding and packaging. The domestic logistics industry is growing at 10%-12% per annum and is currently estimated at USD 100-125 billion. The warehousing segment which forms an important constituent of logistics value chain is dominated by small players with limited capacity. As of March 2011, India had a warehouse space of around 1,800-2,000 million sq ft. However, most of the warehouses in India are small in size- between 5,000 and 25,000 sq ft with 80% being less than 10,000 sq ft as compared with 250,000 to 1 million sq ft in the US or Western Europe. The overall cost of the logistics in India is estimated to be approximately 13% of GDP. This is on the higher side as compared with approximately 5%-7% of the GDP in other developed nations of the world. The reason for the same being structural inefficiencies resulting from poor infrastructure, inconsistent tax system, high rail haulage rates, wastages in truck transport due to congestion, Octroi duty on truck transportation and no tax incentives. The major growth drivers for the sector would be increasing investment in warehousing, CFS/ICD and Multimodal Logistics Park, reduction of documentation and introduction of Goods and Service Tax (GST), uniform toll policy, granting of infrastructure status to the sector as a whole etc.

IMPACT OF UNION BUDGET 2013-2014

Duty Structure