Endgame for Indian logistics?

Thanks to India’s rapid economic growth, our middle class has grown, fueling growth in personal consumption, e-commerce, and data consumption. Meanwhile, the government is investing in infrastructure and may have eased the regulatory environment especially through roll out of a unified tax structure under GST. Looking back, these trends have created an exciting period of expansion for the Indian logistics industry over the past decade. Looking ahead, we believe three trends will define the sector for the next decade.

 

Disintermediation is the process of cutting out the intermediaries from the process of matching demand from users of logistics services, such as businesses, with suppliers. The use of digital technologies and analytics has already started to change the rules of the game. For example, digital freight aggregators do not need to use brokers; they can connect shippers straight to truck owners. New logistics players connect manufacturers directly to retail stores, cutting out dealers and distributors. This de-layering of the value chain will cut costs; it will also require these middlemen either to reconsider their business model or go bust.

 

Platformisation is when shippers can access all the services they need through a single platform. Initially, many digital platforms simply matched supply and demand for long-haul and last-mile deliveries. Now they are moving towards complete digitisation of both the shipper’s and fleet owner’s journeys — from track and trace and digitised bookkeeping to digital payments, order booking, spares purchases, and even fleet maintenance.

 

An implication of this trend is that with the right platform, logistics providers do not need to own all the assets needed to provide quality service at competitive costs. Experience in other countries, such as China, has shown that it is a winner-takes-all market. That’s because massive scale is required to build procurement efficiencies and hence pass on the benefit to the end user. This idea is already gaining traction in India, where fast-growing players in specific sectors are using their clout to add services. It is likely, then, that there will be a shakeout among the dozens of freight aggregators and even food-delivery players.

 

Multi-modal logistics refers to the use of more than one kind of transportation to deliver the goods while improving efficiency and cutting costs. India is investing in large-scale infrastructure projects, and many of these should be finished by 2030 — for example, the dedicated rail freight corridors connecting the eastern mineral-rich states and western ports to production and consumption centers clustered in the north. These projects, when completed, will allow freight trains to more than double their capacity (to 13,000 tonne per rake load versus 5,400 tonne now) while running almost three times as fast (70 km/hour versus 26 km/h) and at prices competitive with trucking. In addition, the Sagarmala and Bharatmala projects will have similar effects on ports and highways.

 

These projects, and others in the works, could transform India’s modal-mix from one that is now dominated by moving goods by road, to one that is more balanced and flexible. For example, the waterways (both inland and coastal) could be used more for slow-moving bulk cargo; high-speed dedicated rail for long-distance freight movement; and the roads for last-mile delivery. This in itself could cut overall logistics costs by 3 per cent per cent of GDP.

 

Few Indian logistics providers are ready to harness this potential, due to either lack of strategic intent or capability to move cargo between different kinds of transport. Those who invest in the necessary infrastructure, such as logistics parks, which allow aggregation, disbursement and trans-shipment of cargo from one mode to another  will have a significant competitive advantage. 

 

Combined, these three trends will translate into greater growth for Indian logistics, which could reach as much as $500 billion in revenues by 2030, compared to $200 billion now. The result is also likely to be lower costs for the national economy; logistics accounts for about 13 to 14 per cent of GDP once you include direct and indirect costs to companies. Efficiency gains are also likely to come from lower indirect costs, such as better inventory management, and less theft and damage. According to our estimates, these now account for almost 30 per cent of the total logistics costs. We estimate that the greater efficiency and better infrastructure that is on the way means that this logistics cost could decline to 10 per cent of GDP by 2030.

 

In terms of the structure of the industry, there could be significant consolidation as new business models emerge. Traditional logistics companies that have built businesses around warehousing operations and owning fleets of trucks may need to re-consider their operating models. It’s possible a whole new set of technology-first players will emerge and scale up fast. There could be newer opportunities, for example, in targeting inefficiencies, such as trucks with empty spaces; digitisation of logistics transaction flows across modes; automated distribution centers to support same-day deliveries; and eventually last-mile deliveries using crowd-sourced platforms that are more efficient and cost effective.

 

The evolution of the India’s logistics sector is overdue. The journey is likely to be difficult, and there will be pain along the way. But we believe that as this chaotic industry becomes more organised and efficient, the gains will be greater.

 

Mundra is a partner at McKinsey & Company, based in Mumbai; Yadav is an associate partner based in Gurugram

 



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