Hopes return challenges remain

Automotive sales and confidence are returning with Indian logistics executives seeing brighter days ahead. While many are looking to the Modi government for reforms, especially his pet programme ‘Make in India’ for manufacturing, challenges are more or less the same in the industry. The priority is to adress them immediately.

Excitement has pervaded the Indian landscape since the national elections in May that made Narendra Modi and his National Democratic Alliance into form the government at the centre. And while the administration may have yet to transform the Indian economy, its promises have helped to jolt businesses following several years of stagnant growth. GDP grew 5.7 percent in the April-June quarter, exceeding expectations. The latest announcement of Modi’s pet programme ‘Make in India’will focus on enhancement of manufacturing sectors in the key 25 sectors and auto sector being one of them. The growth is visible and the auto been no exception. While sales declined in the last financial year to April for the first time in more than a decade, passenger vehicle sales increased moderately in the first quarter of the financial year following a cut in excise duty, rising nearly three percent, according to Vishnu Mathur, Director General of Indian carmaker’s association, SIAM (Society of Indian Automobile Manufacturers). Sales in August was stronger for India’s top three passenger car OEMs, as Maruti Suzuki, Hyundai and Honda registered double-digit gains. Although exports were flat in 2013-2014 at around 547,000 passenger cars, they have risen nearly four percent between April-July this year. According to one of the logistics service providers of automobile, Vipul Nanda, Chairman and Managing Director, Mercurio Pallia, the country’s exports are forecasted to grow steadily for the rest of the decade, approaching one million vehicles by 2020. “The worst is over,” avers Gur Prasad Kohli, country head of Wallenius Wilhelmsen Logistics (WWL) India, pointing to the fundamentals of India’s economy – a young, aspirational population, and low car ownership – that are likely to lead to more car purchases. Moreover, Kohli is also upbeat about the current government and the industry’s outlook. “The government will definitely work on the infrastructure bottlenecks. They will come out with the right policies to help the manufacturing sector and with that, growth will happen.” Expressing similar hopes for the new government, Sushil Rathi, Senior Vice President, Mahindra Logistics, said, “The new government has taken up the agenda of infrastructure development on priority and I hope that this pace will be maintained in the days to come. Development in this area has to be not just in terms of reducing the infrastructural bottlenecks in metros and Tier-I cities, but also in terms of developing a transportation network across all Tier-II and Tier-III towns.” “Apart from development of infrastructure, it is also important to allocate funds for its maintenance. Another imperative is that communications infrastructure like internet connectivity be made more accessible, reliable and affordable. Development of automobile logistics parks, hubs will have to be looked into as well,” he added. Not everything is rosy in India. If you look at the the sales of many OEMs, including Mahindra, Tata, General Motors and Ford, along with commercial vehicles, the recovery is slow. For logistics, India faces the same perennial issues of the past decade, including a small, fractured supply base, a lack of equipment standards, poor roads and ports – especially for Ro-Ro (roll-on/roll-off) – and an extremely low utilisation of rail freight. For Kohli, the port problems are particularly irksome. Mumbai port, for example, is positioned to capture growing exports out of the automotive cluster in Pune, however it lacks proper Ro-Ro facilities. Bringing in worldwide experience of inland logistics for finished automobiles, Ro-Ro and break-bulk cargo, WWL made its foray into India (in Chennai) in 2009 with a contract with Nissan for providing yard management services and inland transport for vehicles destined for the domestic market. “We have a very dynamic logistic system capable of adapting to changing market trends to adjust to delivery schedules .Our forecasting and planning are tuned to such changes. Logistic preparedness to any changing market trends is crucial to our operation,” added Kohli. Efficient supply chain and logistics practices, according to Nanda, will help the global and Indian auto and auto components industry practices to balance costs, improve service levels and increase product diversity amidst this slowdown environment. However, an end-to-end approach needs to be adopted. This involves providing assistance for purchasing, production planning, order processing and fulfilment, inventory management, transportation, distribution and customer service etc. “The automotive logistics industry will have to keep pace and grow hand-in-hand with the automotive industry and accommodate all the challenges in order to ensure the success of this industry in India.” Rathi averred, “Demand planning to final delivery, logistics has a critical role to play. The speed to market and safe delivery to end customer bring a lot of complexity. This means that optimizing the automotive outbound logistics process is a serious challenge today for the manufacturers, who either manage the transportation process themselves (fully or partially), or outsource it to third-party logistics service providers (3PLs). The current emphasis upon reducing cycle times and developing pull inventory systems and flexible manufacturing makes the role of logistics even more critical.” The cost of logistics has a big impact on the supply chain because of India’s predominant use of road transport. Logistics costs as a percent of sales are about 1 to 1.5 percent higher than in other Asian markets. Fuel and wages, which drive up road transport costs, are expected to increase. “The key challenge for the supply chain going forward will be the ability to manage costs,” said Kohli. “There is an almost 10 to 15 percent anticipated year-on-year cost increase in logistics, driven by rising fuel prices and driver unavailability.” Because of stiffer competition, automotive companies will find it hard to pass these increases on to buyers. Proactively managing costs will help protect margins. “In most cases rail can be an excellent long haul option, but only 2-5 percent of the finished vehicle shipments are transported through rail. The lack of rail infrastructure - from sidings, to customized rolling stock, to yards and break bulk facilities - prevent rail from being a viable long haul option. The revision of the rail policy to allow private wagons, dedicated freight corridors, etc are positive steps in that direction,” Rathi expressed. The quality and inadequacy of infrastructure coupled with the modal skew towards roadways have by far been the biggest challenge in the transportation of finished vehicles. The lack of car carrier drivers is the second largest challenge. The automobile industry has been plagued with the problem of shortage in the number of automobile carriers for outbound activities, especially for return loads since a long time. The adoption of technology in most supply chains in India is still very much in its infancy. Companies, till date, are unwilling to invest in technology and share data with their logistics service providers. So, these challenges need to be handled. Few individuals or companies get the opportunity to start over, let alone a country of more than 1.2 billion people. But, at least for the automotive supply chain, it’s no exaggeration to say that economic reforms and infrastructure investments, combined with global vehicle platforms and rising exports are leading to a ‘re-set’ for the industry in India. “On the logistics side, recent rail reforms specific to automotive are already bringing in new investments. Also the Goods and Services Tax (GST) – the real big bang for logistics that has been so long anticipated – has been fast tracked by the new government and could be implemented much sooner than expected,” Mathur from SIAM said. “Today’s CEOs and COOs view the supply chain as a strategic function that should deliver a competitive advantage. These new expectations, coupled with evolving industry dynamics, are triggering a transformation,” he added. “While the automotive industry already has high levels of collaboration across the value chain, it is time to evolve to the next level. OEMs will need to lead efforts to achieve common goals and develop long-term win-win partnerships with other stakeholders. Enhanced collaboration will be required in three areas: improved supply planning across multiple horizons to address volatility, increased leverage of OEM-supplier strategic relationships to improve time to market and faster product scale-up, and evolved OEM-supplier partnership models to optimize inventory and throughput,” Nanda said. “Evolving government policies and regulations such as the GST, regulations on recall management, and sustainability initiatives will affect the supply chain. The industry needs to be prepared to invest in and redesign its supply chain to drive efficiencies after the GST is in place and conform to any legislations that focus on recall management and sustainability,” said Mathur. Rathi, citing example of Mahindra Logistics, said, “We use information technology to deploy and optimize the fleet according to the changing delivery schedules. This enables us to offer flexibility and accuracy in operations through vehicle traceability and route and fleet optimization. The traceability is provided through deployment of GPS in the trucks. The system of ePOD facilitates faster information retrieval and can capture any kind of damage details.” “One trend which we are very glad to have tracked over the past few years is the reducing damages trend. This fact has been largely driven through several initiatives taken by Mahindra Logistics. The first one is our collaboration with our business partners, so that carriers are modified as per our requirements and fitted with the correct safety equipment,” Rathi continued. World-class automotive supply chains are essential sources of competitive advantage. The impact of such supply chains is felt not only in containing the traditional elements of logistics, warehousing, and administrative costs, but also in minimising the costs of inventory holding, lost sales, and obsolescence. Encouraging more public-private partnerships and investments will certainly prove to be beneficial.