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Logistics in India

G LO B AL TRAN S P ORT

Logistics in
India
Part 2

K P MG i nt e r n at i o n a l

2010 KPMG International Cooperative (KPMG International), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated
with KPMG International. KPMG International provides no client services. All rights reserved.

CONTENTS
2

India: Many Investment Opportunities across


Transportation, Storage and Services

Where and How Foreign Investors Can Play in


the Indian Logistics Market

Evolution of Transportation in India

10

Evolution of Warehousing in India

14

3PL: A New Logistics Services Paradigm for India

18

Conclusion

19

Acknowledgements

20

About KPMG

2010 KPMG International Cooperative (KPMG International), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated
with KPMG International. KPMG International provides no client services. All rights reserved.

Foreword

This is the second part of a three-part white paper on the Indian logistics opportunity. In the first
part, we looked at the Indian logistics landscape and its associated complexities and level of
fragmentation.
In this part, we focus on the relative attractiveness of various segments of logistics and a deeper
understanding of key issues and trends in transportation, storage and service elements of the
logistics value chain.
The transportation sector in India is still dominated by the road segment. Over the past 10
years, stung by unchanging industry fragmentation, steadily declining profitability and changing
customer needs, FTL players have veered towards new transportation business segments
such as container rail transportation, Less Than Truck Load (LTL) movement, project logistics,
warehousing, 3PL and cold chain.
Similarly, the modern warehousing industry in India only started to evolve in the early part of this
decade and the last five years, in particular, has seen a noticeable improvement in the quality of
warehousing facilities. Legacy warehouses (or godowns, as they are known in India) have mostly
been basic structures or sheds, and are gradually evolving to world-class standards, with high bay,
modular racking systems, palletization and the usage of automation and information technology.
The services side of logistics is also evolving from freight forwarding dominance to more
evolved plays such as Third and Fourth Party Logistics (3PL / 4PL), whereby many logistics
service providers are promising customers end-to-end cargo management capabilities, while
they attempt to establish asset ownership in key parts of the cargo value chain.
Given this massive need to upgrade infrastructure and know-how, Indian logistics companies are
increasingly looking at forming partnerships with leading global players for expertise, and have
also been accessing private equity and capital markets to fund growth. This presents an excellent
opportunity for foreign companies to engage in the Indian logistics industry.
In the final part of this study, we will look at some of these investment considerations that may
be of relevance to foreign companies keen on tapping into the Indian logistics industry.

2010 KPMG International Cooperative (KPMG International), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated
with KPMG International. KPMG International provides no client services. All rights reserved.

Logistics in India

Attractiveness of Some Key Logistics Sub-segments


Current Market
Size

Sub-segment

Competitive
Intensity

Profitability

Growth Potential

Innovation
Potential

Transportation

Container Rail Transportation


Road Transportation (FTL)
Express Logistics (LTL)
Coastal Shipping
Cold Chain
Project Logistics

Storage

Modern Warehousing
Logistics Parks
Inland Container Depots
Container Freight Stations
Ports

Services

Freight Forwarding
3PL / 4PL
Courier Services

Key:

High

Medium

Low

Source: Industry discussions, KPMG engagement experience

2010 KPMG International Cooperative (KPMG International), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated
with KPMG International. KPMG International provides no client services. All rights reserved.

Overall
Attractiveness

Logistics in India

India: Many Investment Opportunities across


Transportation, Storage and Services

The need to reinvent logistics business models is expected to lead to significant


investment opportunities, across storage, transportation and services. However,
there may be growth opportunities in segments that are seemingly less attractive,
if new business models and niches can be created. For example, in the courier
services segment, logistics companies could look at human organ transportation
services, or in the inland container depot segment, companies could set up third
party shared terminals that could be accessed by multiple rail operators for a lower
access fee than they currently pay.
Significant opportunities exist across every segment of the Indian logistics industry
and several leading international logistics companies have already entered the
Indian market, both through greenfield set-ups and acquisitions. To date, due to
a lack of scale in both supply and demand in the more value added elements of
logistics, entry has often been into segments that have been perceived as relatively
unattractive (such as FTL trucking). However, this can offer geographic network
benefits, along with key customer relationships which have the potential to be
uptraded to more profitable services (such as warehousing).

2010 KPMG International Cooperative (KPMG International), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated
with KPMG International. KPMG International provides no client services. All rights reserved.

Logistics in India

Where and How Foreign Investors Can Play in


the Indian Logistics Market

Irrespective of whether a logistics segment is nascent, growing, mature or


declining, there could be various plays for foreign investors, depending on their riskreturn appetite.
Strategic Imperative

CREATING THE
SEGMENT

GROWING THE
SEGMENT

Role of Foreign
Investors
CHANGING
PARADIGMS IN
MATURE
SEGMENTS

TRANSFORMING
STAGNANT OR
DECLINING
SEGMENTS
Source: KPMG

2010 KPMG International Cooperative (KPMG International), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated
with KPMG International. KPMG International provides no client services. All rights reserved.

Logistics in India

Opportunities for Foreign Investors

Example Segments

Bringing in know-how from foreign


markets
Showcasing proof of concept to
customers and building awareness on the
back of a strong global brand

4PL
Logistics parks and FTWZs
Air cargo complexes
Shipbuilding and shipyards

Developing business plans for expansion


Capital infusion
Providing human resource and
management bandwidth

3PL
Modern warehousing
Project logistics
Cold chain

Improving automation and technology


adoption
Migrating existing services to new
industry segments
Access to new geographies or customers
Streamlining operations

Container freight stations


Courier services
Offshore logistics
Ports

Acquiring leading market players and


leveraging their existing capabilities for
market access or to expand into adjacent
business segments
Process improvement
Cost and profitability management
Divestment or asset lightening

Freight forwarding
FTL trucking
Shipping
NVOCC

2010 KPMG International Cooperative (KPMG International), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated
with KPMG International. KPMG International provides no client services. All rights reserved.

Logistics in India

Transportation

Passenger

4%

Pipeline

5%

Coastal

Long
(More than
800 km)

Medium
(350 to 800
kms)
Cargo

Market segment

<1%

Airways

62%

Roadways

29%

Railways

Transportation
modes

Short
(50 to 350
kms)

Large fleet
(More than
20 trucks)

XPS

Medium fleet
(610 trucks)

LTL

Contract

Small fleet
(1- 5 trucks)

FTL

Spot

Operators

Operations

Transactions

Last mile
<50 miles

Haulage

Source: CRISIL Research - Roads and Highways Annual Review (2009), KPMG Analysis

The most important mode of transportation in India is Road, and this dominance
arises from decades of poor supporting infrastructure development on the coastal,
pipeline and air transportation side. Despite having one of the worlds largest rail
networks, Indias share of cargo transported by rail has declined steadily from
over 85 percent in the 1950s to around 30 percent presently. It is due to the
poor quality of service (including last mile access solutions), driven largely by the
historic monopoly of the government in this vital mode of transportation, as well
as massive investments in road highway projects over the past six decades which
have enabled trucks to reach hitherto unconnected parts.

2010 KPMG International Cooperative (KPMG International), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated
with KPMG International. KPMG International provides no client services. All rights reserved.

Logistics in India

Evolution of Transportation in India

Despite the recent privatization of the container rail industry, road transportation
continues to grow and gain share from rail albeit at a slower pace.
Primary freight movement through road
1,300
1,200

1,122

Increased
share of
Road

Road freight
FY09E

1,280

Increased
freight
movement

Increased
share of
Road

Road freight
FY11P

357

1,100

BTKM

58

150

1,000
900
800
707
700
600

Road freight
FY03E

Increased
freight
movement

Note: BTKM Billion Tonne Kilometre


Source: CRISIL Research - Roads and Highways Annual Review (2009), KPMG Analysis

Despite this growth, the road transportation sector faces many challenges. The
industry is highly fragmented, and with low entry barriers, it has seen significant
commoditization leading to intense competition among truckers who find their
realizations and margins continuing to be squeezed progressively.

2010 KPMG International Cooperative (KPMG International), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated
with KPMG International. KPMG International provides no client services. All rights reserved.

Logistics in India

Truck Ownership

Medium fleet operator


(6-20 trucks)
15%
Small fleet operator
(1-5 trucks)
74%
Large fleet operator
(more than 20 trucks)
11%

Source: CRISIL Research - Roads and Highways Annual Review (2009)

threat
of new entrants

threat

s,OWOWNCAPITALREQUIREMENTSANDEASY
AVAILABILITYOFCOMMERCIALLOANSRENDERTHE
INDUSTRYVULNERABLETOEASYSCALE UPAND
INTENSECOMPETITION
s3KILLQUALIFICATIONREQUIREMENTSINTHE
SECTORAREBASIC WITHLOWENTRYBARRIERS
s.OENTRYBARRIERINTERMSOFREQUIREMENTFOR
LICENSINGNEEDS

of substitutes
s4HEINDUSTRYISHIGHLYCUSTOMER
ORIENTEDWITHMULTIPLEVENDOR
OPTIONSAVAILABLETOCUSTOMERS
s4HELACKOFDIFFERENTIATIONBETWEENONE
TRUCKERANDANOTHERMAKESITEASYFOR
CUSTOMERSTOSWITCHLOYALTIES
s6ALUE ADDEDSERVICEOFFERINGSANDHIGH
QUALITYSTANDARDSEG'03 ARE
PROVIDEDBYVERYFEWPLAYERS

bargaining
power of consumers
Forces
Impacting
Road
Transportation

s#ONSIGNERSOFBULKGOODSHAVEHIGH
BARGAININGPOWERDUETOTHEPRESENCEOF
MANYSMALLOPERATORS
s#OMMITMENTSOFLARGECONSIGNMENT
VOLUMESOFTENFORCETRANSPORTERSTO
UNDERCUTPRICES
s!FEWLARGEUSERINDUSTRIESANDCOMPANIES
EGTHEAUTOMOBILEINDUSTRY AREABLETO
SIGNIFICANTLYSQUEEZETRANSPORTERS

bargaining
power of suppliers

RIVALRY
among competitors

s'OVERNMENTINFLUENCEONFUELPRICES
MAKESITDIFFICULTFORPLAYERSTOPREDICT
CONTROLANDPASSTHROUGHFUELCOSTSTO
CUSTOMERS
s&ORTRANSPORTERSUSINGOUTSOURCEDTRUCKS
ITISOFTENDIFFICULTTOGETTRUCKSFROM
OWNERSATAGREEABLEPRICESDURINGPEAK
PERIODSEGHARVESTSEASON WHICH
IMPACTSMARGINSANDCUSTOMERSERVICE

s4RUCKERSALWAYSAIMTOINCREASETRUCK
UTILIZATION OFTENBYUNDERCUTTINGFREIGHTRATES
TOCUSTOMERSnLEADINGTOTREMENDOUSMARGIN
PRESSURESONTHEINDUSTRY
s,ACKOFDIFFERENTIATIONINSERVICESLEADSTO
COMMODITIZATIONANDFURTHERPRICEEROSION
s,ARGEPLAYERSOFFERINGVALUE ADDEDSERVICESSUCHAS
WAREHOUSING CONTAINERMOVEMENT SUPPLYCHAIN
SOLUTIONS ETCAREABLETOINFLUENCETERMSAND
CONDITIONSOFFREIGHTCONTRACTSANDCROSS SUBSIDISEPRICES
THEREBYIMPACTINGSTANDALONETRUCKERSMARGINSFURTHER

High

Neutral

Low

Source: KPMG

2010 KPMG International Cooperative (KPMG International), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated
with KPMG International. KPMG International provides no client services. All rights reserved.

Logistics in India

These challenges have led road transporters to adopt various de-risking strategies,
and this creates an opportunity for foreign players to partner with leading Indian
road transportation companies on this transformation journey.
Key Trends

Diversification by truckers
across the logistics value
chain (e.g. warehousing,
container rail)

Industry-focused 3PL
solution approach (e.g. single
window cargo management
solutions)

Trucking Industry
Transformation

Focusing on higher value


business segments
(e.g. project logistics, cold
chain)

Leveraging transportation to
deliver higher value solutions
(e.g. secondary and tertiary
transportation)

Source: KPMG

Case Study
Transformation of a leading Indian Road Transportation Company
Situation

XYZ is one of the largest cargo transportation companies in Asia and handles over 5.5 million tonnes of cargo
annually. The company operates a fleet of over 3,000 trucks, moving 15,000 consignments daily, and has a
client base of 150,000, which includes a number of top 500 Indian companies.
Complication

XYZ was faced with declining margins in its traditional FTL business and despite its scale and customer
relationships, it was unable to resolve this problem. The company faced intense competition from both large
FTL competitors who constantly negotiated bargains with their larger customers to wean away those accounts,
and from smaller fleet owners whose lower-cost structures and scant regard for regulations allowed them to
undercut prices to smaller and mid-tier customers.
Resolution

XYZ diversified into other segments of logistics which offered higher margins as well as better control over
cargo, leading to improved customer stickiness. The company moved into the express logistics segment and
offered single window, time-bound, door-to-door distribution services to LTL customers across India. It also
ventured into 3PL supply chain solutions, with a focus on key industries, such as automotive, retail, telecom
and pharmaceuticals this allowed XYZ to offer solutions to customers rather than just services. Further, the
company set up a global freight forwarding and customs clearing presence with branches across India and
key international locations and this helped the company originate cargo more effectively. XYZ was also one
of the first entrants into the small but highly profitable businesses of cold chain and coastal shipping in India.
The companys transformation was supported by selective acquisitions across these new business segments
and selective tie-ups with global partners including a leading Japanese conglomerate.

2010 KPMG International Cooperative (KPMG International), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated
with KPMG International. KPMG International provides no client services. All rights reserved.

10

Logistics in India

Evolution of Warehousing in India

Until a decade ago, warehousing in India was a synonym for basic four-walled
structures with sub-optimal sizes, inadequate ventilation and lighting, lack of racking
systems, poor hygiene conditions and lack of inventory management or technology
solutions such as Warehouse Management Systems (WMS). Although modern
warehouses have begun to develop across the country, there is still a significant
growth story that remains to be played out in India.
Comparative Analysis of Key Variables in Warehousing Space
Parameters

India

China

USA

Market Maturity (Fragmentation by


contribution of key players to the
total industry cost)

Unorganized, fragmented
warehousing industry

Highly fragmented, top 20


companies contribute to 7% of
revenue

20 largest companies control


less than 30 percent of the
market

Warehouse Infrastructure:

Godowns with approximate size of


<10,000 sq.ft
Multiple warehouses, one in every
state
Poor infrastructure
High pilferage and loss

Market is fragmented in terms of


operator's geographical presence
Average level of infrastructure
with small godowns

Warehousing companies operate


a single facility of 200,000 sq ft
Excellent infrastructure

Labour available but with poor


training

Labour available but with poor


training

Highly skilled trained labour

Size
Centralisation of warehouses
Infrastructure
Value Added Services
Level of outsourcing
Skilled Labour

Technology used
Consolidation:
Level of usage of Large scale
logistics parks and Free Trade &
Warehousing Zones
Very poor

Neutral

Excellent

Poor

Good

Source: KPMG in Hong Kong Report on Transport in China (2008), Industry discussions

Although large, most of the warehousing space in India lies with unorganized
players largely on the domestic side.

2010 KPMG International Cooperative (KPMG International), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated
with KPMG International. KPMG International provides no client services. All rights reserved.

Logistics in India

Structure of the Indian Warehousing Industry (2008)


85%

367 mn sq. ft.

Domestic

8%
433 mn sq. ft.

High Quality
Private sector
owned

Indian Warehousing
Industry
15%

36 mn sq. ft.

Godown-like and run by


small C&F agents

Organized

66 mn sq. ft.

92%

EXIM

398 mn sq. ft.

27%

29%

Unorganized
Medium to low
quality

107 mn sq. ft.

Unaccounted supply
117 mn sq. ft.

Public sector
44%

173 mn sq. ft.

In-house warehousing

Source: KPMG Analysis

The industry is experiencing a number of supply and demand side changes,


including the following:
i)

Resurgence of the Indian Economy and Demand-Supply Gap after a


subdued 2008 09, India is again witnessing a surge in the need for storage
space. According to KPMG in India estimates, an additional 120 million square
feet of warehousing space is needed by 2012 to bridge the demand-supply
gap (after accounting for announced projects), and this translates to a massive
opportunity for private investment.
India Warehousing Market Opportunity by 2012
120

MN SQFT

800
600
400

433

55

52

74

734

615

200
0

Supply from
Existing Supply Supply from Key Supply from
(2008)
Players' expansion proposed
proposed
plans
development of development of
various Logistics various FTWZs
Parks

Expected
Untapped Market
Projected
Supply (2012)
Opportunity
Demand (2012)

Source: C
 ompany reports for Arshiya, MJ Logistics, DRS Warehousing Corp and others
C&W Report - Logistics Industry: Real Estates New Powerhouse (August 2008), KPMG Analysis

2010 KPMG International Cooperative (KPMG International), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated
with KPMG International. KPMG International provides no client services. All rights reserved.

11

12

Logistics in India

ii)

Implementation of Goods and Service Tax currently, owing to multiple


and differential state-level taxes, companies in India have set up multiple
warehouses, often one per state (to minimize intra-state movements and
associated taxation), servicing various parts of the country. This is highly
inefficient and leads to higher unit and inventory carrying costs. Effective April
2011, the Indian government plans to introduce a uniform Goods and Service
Tax (GST)1, which is expected to level these state taxes and obviate the need
for multiple warehouses. As a result, there is expected to be a significant
reorganization of warehousing space in India, with large hubs being developed
in key locations, coupled with smaller spoke warehouses nearer to production
and consumption centers. This reorganization is likely to lead to significant
investments in modern warehousing infrastructure, and is expected to be the
largest driver for warehousing industry in the past several decades. Several
leading companies and logistics services providers have already set up these
large warehouses, but many more are in desperate need of capital and knowhow from foreign investors to capitalize on the opportunity.
))

GST driven Warehousing Reorganization

Several
distributed
warehouses

Fewer consolidated
warehousing
clusters

Source: KPMG Analysis

iii) Development of infrastructure the development of key infrastructure


projects related to ports, highway and rail projects such as the Golden
Quadrilateral or GQ project, North-South-East-West or NSEW project and
the Dedicated Freight Corridor or DFC project is expected to result in the
creation of new warehousing hubs aligned to these infrastructure points. Of the
US$350 billion infrastructure investment planned by the Indian government, as
per the 11th Five Year Plan (2007 12), an estimated US$75 billion will be spent
on airports, ports, road and railway projects, which is expected to significantly
improve the quality of supporting backbone infrastructure for logistics activity.

Source: Government of India press release (2010)

2010 KPMG International Cooperative (KPMG International), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated
with KPMG International. KPMG International provides no client services. All rights reserved.

Logistics in India

Key Infrastructure Points in India

New Delhi
Gorakhpur
Jaipur

Hajipur

Gauhati

Mundra
Ahmedabad

Kandla

Jabalpur
Bilaspur

Pipavav

Kolkata
Haldia

Bhubaneswar

Paradip

JNPT
Mumbai

Pune

Mormugao

iv) Emergence of new storage models


several players in India such as Multi
Modal Logistics Parks (MMLP), Mega Food
Parks (MFP) and Free Trade Warehousing
Zones (FTWZs) have announced nextgeneration storage models2. These largescale projects are expected to significantly
improve the quality of warehousing and
storage space in the country, while allowing
customers to reduce costs through
economies of scale, government incentives
offered and optimal usage of multiple
modes of transportation.

Vishakhapatnam
Secunderabad
Hyderabad

Hubli

GQ

Bangalore

NS Corridor

Chennai

New Mangalore

EW Corridor

Major ports
Major airports
Zonal railway HQs

Railways DFC

Ennore
Cochin
Tuticorin

Source: KPMG Analysis

Case Study
Building Out Modern Warehousing Infrastructure across India
Situation

ABC is a 20 year-old logistics company and started with the business of relocation services. It thereafter
expanded into the transportation business through an acquisition and also began offering 3PL services. The
company, with 850 trucks, has a turnover of US$100 million and is growing 20 25 percent per annum.
Complication

ABC was constrained by the lack of quality warehousing facilities in key locations across India, to support its
core transportation and 3PL business. This led to poor storage services being offered to customers which
reduced their stickiness to ABC.
Resolution

ABC realized that the only way to become an integrated logistics player was to invest in warehousing assets
themselves. Using Special Purpose Vehicle (SPV) structures, ABC separated the warehousing asset business
from the services business. Through each SPV, ABC set up warehouses in key regions, often with the help
of private equity funding. The company initially set up 1 million square feet of warehousing space across four
prime locations in North India at a capital expenditure of US$50 million with private equity backing from a
leading global fund. The company is currently planning to double its warehousing capacity in North India with a
proposed investment of US$50 million to expand into more locations. Recently, ABC also set up another SPV
which will invest US$70 million to add 2 million square feet of warehousing space across three locations in
South India. The company is expected to get private equity funding for this SPV soon.
With a planned footprint of 4 5 million square feet, ABC is today one of the largest modern warehousing
players in India. Its warehouses have features, such as racking systems, temperature control, fire and seismic
resistance, leak proof structures, water harvesting, round-the-clock security, adequate office space and
integrated retail operations. Currently, the company services leading clients across industries such as retail,
consumer products, chemicals and petrochemicals.
2

Source: Industry discussions, news releases (2010)


2010 KPMG International Cooperative (KPMG International), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated
with KPMG International. KPMG International provides no client services. All rights reserved.

13

Logistics in India

The Indian 3PL market is estimated to grow rapidly, as customers increase the
level of outsourcing, encouraged by the ability of 3PL companies to provide quality
services. This growth is expected to be further augmented by the penetration of
3PL services in India, which still lags many countries of the world.

RO
L

Evolution of the Indian 3PL Market

CO

NT

Domination | Full global / national supply chain management and control

TY
A

ND

Innovation | Deep supply chain ownership and improvement proposition

EX
I

Adoption of Customers | Industry focus and end-to-end logistics service capability

CO

PL

Beginnings of 3PL | Limited value addition, cargo control and asset ownership

AS
IN

Exposure to Global Models | Bringing in global models and technology paradigms

CR
E

Limited Innovation | Multimodal transport solutions and warehousing


Achievement of Scale | Companies growing regional / national presence

IN

14

Basic Logistics Need Fulfilment | FTL trucking and godowns


Source: Indiastat, KPMG Analysis

Share of 3PL Logistics Market


Japan

80%

US

57%

40%

Europe

India

As compared to the developed nations 3PL


contribution in overall logistics activity in
India is still at a nascent stage

9%
0%

20%

40%

60%

80%

Source: Indiastat database, KPMG Analysis

2010 KPMG International Cooperative (KPMG International), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated
with KPMG International. KPMG International provides no client services. All rights reserved.

100%

Logistics in India

3PL: A New Logistics Services Paradigm



for India

The penetration of 3PL and the propensity of customers to outsource have been
most pronounced in transportation, followed by warehousing, as these have
been historically easy-to-implement point solutions that most service providers
can readily offer to customers. Customers still retain, in-house, the highest valueadding activities, such as production process alignment, invoicing and spare parts
management, as 3PL vendors often lack the capabilities to deliver full supply chain
solutions. Recently, some 3PL vendors have begun offering customers limited
value added services centered around transportation and warehousing such
as packaging solutions within warehouses, tertiary transportation, production line
feeding, spare parts testing and minor repairs.
Propensity to Outsource to 3PL

67%

Transportation
33%

Warehousing
16%

Production
12%

Spare-parts Management
Invoicing

6%

Order Processing

6%

Inventory Management

4%
0

10

20

30
40
% respondents

50

Source: Managing 3PL relations, B.S. Sahay, Int. J. Integrated Supply Management, Vol. 2, Nos. 1/2, 2006

2010 KPMG International Cooperative (KPMG International), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated
with KPMG International. KPMG International provides no client services. All rights reserved.

60

70

15

Logistics in India

R E T A IL

INFRASTRUCTURE
EQUIPMENT

CHEMICALS AND
INDUSTRIAL PRODUCTS

PHARMACEUTICALS

IT HARDWARE TELECOM

LOW

MEDIUM

HIGH

However, this level of 3PL activity has been limited to only a few industries such
as automotive, IT hardware, telecom and infrastructure equipment with adoption
across other mainstream industries such as consumer products being restricted
due to limitations in the customers ability to pay, and the lack of logistics vendors
ability to deliver high service levels at low cost.

Growth of Sector

16

CONSUMER PRODUCTS
LOW

AUTOMOTIVE

MEDIUM
Profitability of 3PL

HIGH

Current 3PL Penetration


High

Neutral

Low

Size of the bubble indicates the logistics spend for that segment (not to scale)
Source: KPMG Analysis

As companies increasingly focus on costs and asset returns, while focusing on


their core business and building customer-centric business models, the share of
3PL is expected to rise further.
From a 3PL service providers perspective, there are several critical success
factors to be considered while offering end-to-end industry focused solutions
to customers, and many of these can be delivered only with the assistance of
international experts.

2010 KPMG International Cooperative (KPMG International), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated
with KPMG International. KPMG International provides no client services. All rights reserved.

Logistics in India

Relationships

s,ONGTERMCONTRACTSWITHCUSTOMERSENSUREREGULARANDPREDICTABLEVOLUMES
s#ROSS REFERRALSFROMCUSTOMERSINTHESAMEINDUSTRYAKEYVALUEDRIVER

Industry specific
value-added solutions

s0,ISHINGEDAROUNDOFFERINGINDUSTRY CUSTOMSUPPLYCHAINSOLUTIONS EGTESTINGINSPECTION


LINEFEEDINGFORAUTO REVERSELOGISTICSFORRETAIL
s4HEABILITYTOHELPCUSTOMERSRE ENGINEERTHEIRSUPPLYCHAIN DIFFERENTIATESONE0,FROM
ANOTHER EGHELPINGCUSTOMERSMIGRATEFROMROADTORAIL PROJECTLOGISTICSMANAGEMENT

Manpower

s!VAILABILITYOFSKILLEDMANPOWERnBOTHMANAGEMENTANDOPERATIONALnISAKEYCONSTRAINTFORTHE
0,INDUSTRY ANDACQUIRINGRETAININGTALENTISACRITICALDIFFERENTIATOR
s+EYPERSONNELALSOBRINGCUSTOMERRELATIONSHIPSANDINDUSTRY SPECIFICLOGISTICSKNOW HOWTO
ORGANIZATIONS

Ownership / control
over assets

s%ND TO ENDCONTROLOVERCARGOISCRITICALINQUALIFYINGASA0,COMPANY ANDMANY0,PLAYERS


AREBEGINNINGTOOWNASSETSSUCHASTRAILERSANDWAREHOUSES TOENSURETHIS
s$EVELOPINGRELATIONSHIPSWITHKEYVALUECHAINPARTNERSSUCHASFREIGHTFORWARDERS DOMESTICALLY
ANDINTERNATIONALLY ISNECESSARYINGIVINGCUSTOMERSCOMFORTTOOUTSOURCE

Systems and processes

Efficient operations

s%FFECTIVEPROCESSESARENEEDEDTOTIGHTLYCONTROLOPERATIONS EGBACKHAULMANAGEMENTAND
ROUTEOPTIMIZATION
s#OUPLEDWITHTHIS CUSTOMERSAREINCREASINGLYDEMANDINGTECHNOLOGYENABLEMENTIN0,
SOLUTIONS EG'03 2&)$ANDREAL TIMECARGOUPDATES
s3ERVICELEVELSARECRITICALFOR0,PROVIDERS WHENATTEMPTINGTOWEANAWAYCUSTOMERSFROM
UNORGANIZEDLOGISTICSSEGMENTSSUCHASTRUCKINGAND@GODOWNSTORAGE EGTIMELYPICK UPAND
DELIVERY HYGIENICWAREHOUSES CALLCENTREMANAGEMENT

Source: KPMG

Case Study
Using 3PL to drive growth
Situation

PQR started business as a mid-sized regional FTL company several decades ago. The company currently has
a fleet of over 100 owned and leased trucks and is focusing on the automotive sector.
Complication

Driven by the need to maintain or marginally grow vehicle prices, while facing significant price increases on the
component side, Indian automotive companies began squeezing logistics vendor margins in order to control
their own profitability. Automotive companies also began dissociating various parts of the value chain be
it transportation, storage or services and offering these to multiple vendors, often on a lowest cost basis.
PQRs inability to invest in assets, on the back of this uncertain demand, also affected their growth. As a result,
the company started losing business to smaller, unorganized players.
Resolution

PQR decided to focus on a two-pronged strategy to win back and retain customers. Firstly, the company
began following an asset light model, whereby it leased trucks and warehouses on short-term contracts, which
helped it avoid spot rate variations while allowing it the leverage to grow supply in conjunction with demand.
PQR followed this up with back-to-back matching duration contracts with key customers, while passing on
some of the price gains from sourcing.
Secondly, the company decided to add warehousing and services to its portfolio. It leased a handful of
warehouses near automotive clusters and began performing basic value-addition activities in these warehouses
such as component unpacking, testing, minor repairs, packing, loading and direct line feeding to the plant
which improved customer stickiness, differentiated it from point service providers and helped it improve its
margins significantly (at times, two or three times its margins on the transportation side).
Currently, PQR is positioned as an automotive 3PL player, with a predominantly asset light scalable model. The
company has significantly higher profitability than many of its FTL peers, and serves some of Indias leading
automotive clients who have been its steady customers for the past two years.
2010 KPMG International Cooperative (KPMG International), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated
with KPMG International. KPMG International provides no client services. All rights reserved.

17

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Logistics in India

Conclusion
In this paper, we have seen that there are various segments of
logistics which differ in their levels of attractiveness, and that
there are several niche sectors where there is an opportunity for
foreign investors to participate.
We have seen how road has been the dominant mode of
transportation in India but, faced with threats to business models
and profitability, how trucking companies are transforming
their business models to play across the broader logistics
value chain in segments such as warehousing, multimodal
transportation, project logistics and 3PL. The warehousing
market in India, which is currently highly fragmented, is likely to
get increasingly organized, with the evolution of new business
models such as modern warehouses and logistics parks. Lastly,
the 3PL market in India, though nascent, is rapidly evolving as
customers in industries such as automotive, IT hardware and
telecom use outsourcing to control cost.
In the next part of this white paper, we will be covering key
aspects around the main investment themes that foreign
investors could focus on in India, as well as the associated risks
and regulatory processes that they need to be aware of in order
to participate in the Indian logistics growth story.

2010 KPMG International Cooperative (KPMG International), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated
with KPMG International. KPMG International provides no client services. All rights reserved.

Logistics in India

Acknowledgements
For the purposes of this study, we relied on KPMG industry
knowledge and prior engagement experiences. We also spoke
with a number of logistics industry participants, who we would
like to thank for their time and insights.
This white paper has been authored by Sankalpa Bhattacharjya.

2010 KPMG International Cooperative (KPMG International), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated
with KPMG International. KPMG International provides no client services. All rights reserved.

19

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Logistics in India

About KPMG

To meet the challenging demands of the transportation industry, KPMG member firms
deliver a range of global Audit, Tax and Advisory services geared to industry needs. Think
of KPMGs global Transportation and Logistics practice as an extra resource one that
aims to be available as and when you need it. We understand the financial and operational
drivers of the transportation and logistics sector and can assist clients in dealing with
current and emerging issues.
The Indian industry, as a whole, faces a fiercely competitive and volatile business
environment. It must fund high levels of ongoing investment to overcome infrastructure
constraints and accommodate technological innovation, as well as changing customer
demands. Few transport entities possess the resources to manage all these issues. This
is where KPMGs Transportation & Logistics practice can help. Our professionals can
complement in-house capabilities, contribute to improved business decision making and
performance, help reduce business risk and enhance management confidence as well as
peace of mind. KPMG professionals can assist you with the following:
Planning an India market entry
KPMGs Strategic and Commercial Intelligence (SCI) practice advises international
companies on their India market entry plans, by helping them evaluate the attractiveness
of various segments of the logistics industry (in terms of size, growth drivers, competitive
landscape, profitability and returns), and assists them with the development of their
strategy and business plan for the Indian market. KPMGs Tax practice, in parallel, can
help companies devise an optimal tax and corporate structure for market entry.
Creating value through transactions
KPMGs global Finance and Transaction professionals help realize the potential of mergers,
acquisitions, divestments and other capital transactions. If you are seeking to acquire a
company in India, we can help you find suitable targets, evaluate them, negotiate and
close transactions, and even assist with post-merger integration services.
Driving the audit further
KPMGs independent insight and robust audit methodology aims to provide high quality
audit opinions.
Managing tax strategically
KPMGs Tax practice advises clients on effective tax management and compliance.
Managing risk to create value
KPMG firms can help organizations adopt an enterprise-wide approach to identify,
prioritize, manage and monitor risk.
Enhancing internal controls
Internal audit is the foundation of a comprehensive assurance framework. KPMG firms can
increase existing internal capabilities, either on a project basis or on a continuing basis.
Improving performance
KPMG firms can help organizations enhance their strategic and operational performance.
Responding to regulatory change
KPMG firms assists organizations in transforming regulatory compliance from just
another cost and management issue to an important business value driver.
Funding infrastructure
KPMGs Advisory professionals work with public and private infrastructure providers to
create funding strategies.
2010 KPMG International Cooperative (KPMG International), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated
with KPMG International. KPMG International provides no client services. All rights reserved.

Logistics in India

Contact Us

Dr Ashley Steel
Partner
Global Chair - Transport
KPMG in the UK
+44 20 7311 6633
ashley.steel@kpmg.co.uk

Justin Zatouroff
Partner
Global Head of Logistics
KPMG in the UK
+44 20 7311 8415
justin.zatouroff@kpmg.co.uk

Manish Saigal
Executive Director
National Industry Leader - Transport & Logistics
KPMG in India
msaigal@kpmg.com
Tel: +91-22-3090 2410

Sankalpa Bhattacharjya
Associate Director
Strategic and Commercial Intelligence
KPMG in India
sankalpab@kpmg.com
Tel: +91-124-334 5089

2010 KPMG International Cooperative (KPMG International), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated
with KPMG International. KPMG International provides no client services. All rights reserved.

21

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International), a Swiss entity. Member firms of the
KPMG network of independent firms are affiliated with
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Publication name: Logistics in India
Publication number: 173083
Publication date: November 2010