GloBal tranSPort Logistics in India - BCubeGlobal Drivers for Logistics in India 10 How India Compares with Other Countries 12 Investments in Indian Logistics Sector 14 Conclusion

Logistics in India 1

KPMG international

GloBal tranSPort

Logistics in IndiaPart 1

CONTENTS

2India — A Complex Logistics Industry Structure

4Inefficiencies in Indian Logistics Set-up

6Growth Drivers for Logistics in India

10How India Compares with Other Countries

12Investments in Indian Logistics Sector

14Conclusion

15Acknowledgements

16About KPMG

This paper, which is the first in a series of three, provides an overview of the Indian logistics industry and what makes it attractive from an investment perspective. Parts 2 and 3 will provide an analysis of how the paradigms in transportation, storage and services in India are changing and an overview of key market entry considerations, respectively.

At 13 percent of GDP, India’s spending on logistics is both significant and inefficient1. These inefficiencies are largely a result of India’s diverse geographic conditions, poor core infrastructure, complex tax policies and supply side constraints — all of which result in high transportation, storage and service costs.

However, India’s logistics story is indeed an attractive one, based on its rapidly growing economy, the increase in outsourcing of logistics, steady supply side changes, significant government investment in core infrastructure projects and landmark changes in tax and regulatory policies.

It is this attractiveness, along with the potential to tide over inefficiencies, that has driven several foreign companies to enter the Indian market and, within a short span of time, gain market prominence in a sector that has historically been highly fragmented and dominated by local players.

Foreword


1 SSKI, 2008

2 Logistics in India

Logistics in India involves a complex chain of activities, spread across multiple modes of transportation and infrastructure points.

Sourcing & IntermediationInbound Cargo Handling &

International ReceiptOutbound Cargo Handling &

Domestic Receipt

Express CargoAgent

Freight Forwarder

TruckingCompany

Customs HouseAgent

Shipping Line

3PL / 4PL Agent

Customs House Agent

TransitAirport

International Airport

CentralWarehouse

Local Warehouse/Pick Up Point

CFS / ICD

Incoming Port

CentralWarehouse

Air CargoCentre

Local Warehouse/Pick Up Point

CFS(Container Cargo)

Outgoing Port

Exporter/Producer Importer

ConsumerLocal Factory Yard/Storage

ICD(Container Cargo)

Key Activities:- Sourcing and Intermediation- LTL / FTL Management- NVOCC Management- Arranging / Broking- Tracking (GPS / IT)- Insurance

Key Activities: - Unloading - Inspection - Sorting - Storage - Consolidating / Bulk Breaking - Stuffing / De-stuffing - Customs Handling / Clearing - Documentation - Loading

Bulk / BreakBulk Cargo

Legend

Transport Mode Transport Mode

Service Providers

Infrastructure Points

End Users

RailRoad

AirSea

Source: Industry discussions (2009), KPMG Analysis


The complexity of the logistics network is further exacerbated by the fact that the industry is highly fragmented, with several small and mid-sized players dispersed across multiple regional pockets, asset types and services, and with few if any players in India able to offer customers true end-to-end services.

Also, in many key logistics-intensive sectors — such as agriculture, food processing, oil and gas, engineering, consumer products, retail, metals and textiles — the source and destination points for cargo are often multiple and located in regions with poor access by any mode of transport.

Rest of Logistics Industry 98%

Cumulative Revenues of Top 20 Logistics Companies in India 2%

Source: Company Websites, Financial Statements, Industry Discussions, KPMG Analysis (2010)

India — A Complex Logistics Industry Structure

The Indian logistics industry is highly fragmented, with market leaders having only a minority market share


Inefficiencies in Indian Logistics Set-up

Estimates2 indicate that India’s logistics and transportation bottlenecks hinder its GDP growth by one to two percent.

Comparison on key parameters: India vs. Global

Logistics Efficiency Indicators India Global

Road Transportation

Average truck speed (in kmph) 30 – 40 60 – 80 (including China)

Four lane road length (in kms) 7,000 34,000 (China)

National highway length (in kms) 66,590 1,900,000

Average surface freight (in cents/ km) ~ 7 3.7 (Japan)

Average distance travelled by a truck per day (in kms) 200 400

Air Transportation

Airport waiting time – Exports (in hours) 50 12

Airport waiting time – Imports (in hours) 182 24

Aviation turbine fuel as a % of operating cost 35 – 40% 20 – 25%

Ports & Sea Transportation

Turnaround time at ports (in hours) 84 7 (Hong Kong & Singapore)

Annual container handling capacity 8.4mn TEUs 60mn TEUs (China)

Containers handled per ship, per hour (maximum) 15 25-30

Throughput density (maximum) 45,000 TEUs / hectare 170,000-220,000 TEUs / hectare

Warehousing

Average inventory days 33 24 (China)

Others

3PL share of logistics 9 – 10% 57% (USA)

The above inefficiencies are leading to the emergence of new business models and paradigms, one of which is the entry of experienced and more efficient foreign players into the Indian market.

Source: Cygnus Business Consulting & Research, KPMG analysis

Source: Cygnus Business Consulting & Research, KPMG analysis

2 Industry discussions (2010)


LOGISTICS SECTOR INVESTMENTS

AND NEW BUSINESS MODELS

RAPID GROWTH IN CARGO

MOVEMENT THROUGH RAIL

MORE EFFICIENT TRUCKING

EFFICIENCY IMPROVEMENT AT AIRPORTS

BETTER INVENTORY MANAGEMENT IN

WAREHOUSES

EMERGENCE OF 3PL

ENTRY OF GLOBAL PLAYERS AND PRIVATE

EQUITY

PRIVATEINVESTMENT IN PORTS /

CFSs AND CAPACITY ADDITION

Logistics Sector Investments and New Business Models


There are several strong and fundamental growth drivers for the logistics industry in India, as follows:

Growth in Indian economy, key logistics sectors and Exports-Imports (EXIM)

The growth in India’s GDP translates directly into growth in the logistics sector, there being a ~2x relationship between growth rates of GDP and the logistics industry. The post-recession resurgence of domestic sectors such as retail and manufacturing is expected to drive volume growth again. Based on industry discussions, EXIM is estimated to grow at over 15 percent per annum, and this will have a direct impact on port-oriented logistics.

ForecastActual

5.3

1.4

5.45.7

6.4

7.3

8.0

4.3

6.76.4

4.4

5.8

3.8

8.5

7.5

9.49.6

9.0

6.77.4

8.49.0

0

2

4

6

8

10

12

FY91

FY92

FY93

FY94

FY95

FY96

FY97

FY98

FY99

FY00

FY01

FY02

FY03

FY04

FY05

FY06

FY07

FY08

FY09

FY10

FY11

CL

FY12

CL

GD

P G

row

th R

ate

%

Source: International Monetary Fund, World Economic Outlook Database (2010)


Growth Drivers for Logistics in India

Source: CSO (2006), KPMG Analysis (2006)

Rising outsourcing and consolidation

Companies in India currently outsource an estimated 52 percent of logistics, but many more companies are increasingly considering outsourcing and Third Party Logistics (3PL) models as they seek to reduce costs and focus on their core businesses. Logistics is a highly fragmented industry, and with this rising outsourcing trend, the industry is also consolidating.

52%

90%

60%

48%

10%

40%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Logistics IndustryOverall

Transportation Warehousing

Oursourced In-house

Many manufacturing companies in India have legacy in-house logistics set-ups, which have historically been perceived as a support function and, as a result, have grown unwieldy and cost-inefficient over time. Also, as companies seek to focus on their core businesses, improve customer satisfaction levels and become more nimble in managing and expanding their logistics needs (often complicated further by multimodal or international requirements), they are realizing that working with external logistics experts is often the best or only way to achieve these objectives.


80.6

76.0

71.3

68.2

60.6

46.1

35.9

24.5

0 10 20 30 40 50 60 70 80 90

Cost Reduction

Focus on Core competence

Improved customer satisfaction

Improved return on total assets

Increased inventory turns

Flexibility in operations

Expansion into newer regions

Reduced capital investment

% of respondents

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

Rapid supply side changes are helping to drive awareness and demand

Significant private investment in modern warehousing and a dramatic improvement in transportation systems — along with the widespread adoption of warehouse management systems, GPS-enabled trucks and other technology — is leading to many more logistics end users moving away from legacy ‘store-and-transport’ mindsets to true supply chain management, with a focus on cost and efficiency.

As more multinational companies and logistics service providers increase their scale of operations in India, there is a rising demand for world-class logistics infrastructure and services — even among domestic corporates.

Regulatory changes are helping to drive private participation and efficiency improvements

Key regulatory changes in recent years are creating an enabling environment for growth in the logistics industry, as follows:

The impending introduction of a goods and service tax (GST) in April 2011, •aimed at bringing in a uniform tax regime across all India’s states, is expected to lead to widespread rationalization of warehousing space in India (such as a reduction in the number of warehouses from one per state to one per region), and the reorganization of resulting transportation options. This is likely to result in fundamental structural changes in the industry.


Government incentives to infrastructure developers — in the form of tax breaks •and incentives — are expected to further improve supply-side efficiencies. Government incentives to food processing parks and cold storage centers are some recent examples.

The privatization of the container rail segment and private-public partnership •(PPP) programs in key sectors such as ports and airports have opened up new logistics segments for private participation.

Significant government spending on infrastructure

The Indian government has earmarked over INR14,000 billion (US$300 billion) of infrastructure investment in its 11th Five Year Plan. Around 27 percent (~INR3,750 billion or US$80 billion) of this investment is expected to be in roads, rail, aviation and port projects. For example, INR281 billion (US$6 billion) has been allocated for the 2,700km-long Dedicated Rail Freight Corridor project.

1,520

1,100

370

760

1,974

4,812

1,226

2,201

0

1,000

2,000

3,000

4,000

5,000

6,000

Roads Railways Aviation Ports Urban Infra Power Telecom Oil & Gas

INR

bn

Source: Edelweiss Industry Research Report (2007)


How India Compares with Other Countries

Due to the many demand and supply side constraints, India is yet to achieve a level of logistics development commensurate with its economic strength.

SwedenSwitzerland

BelgiumNorway

DenmarkAustria

Str

eng

th o

f Lo

gis

tics

Sec

tor

Small Medium Large

Low

Med

ium

Hig

h

Japan

ItalyThe Netherlands

SpainCanada

United StatesGermanyAustraliaFrance

South KoreaUnited Kingdom

ChinaTurkeyBrazilIndia

Mexico

Russia

HungaryVietnam

QatarRomania

PeruUruguay

Bangladesh

AzerbaijanEgypt, Arab Rep.

GeorgiaNigeria

IranPakistanMongolia

Size of Economy

SingaporeLuxembourg

FinlandIreland

Hong Kong SAR, ChinaNew Zealand

United Arab EmiratesCzech Republic

South AfricaMalaysia

IsraelBahrainPortugalThailand

KuwaitIceland

PhilippinesCyprusChile

Panama

PolandSaudi Arabia

Argentina

GreeceIndonesiaVenezuela

Source: World Bank, KPMG Analysis (2010)


However, when compared with other large economies, India has an advantage as far as foreign investment in the logistics sector is concerned, given the following factors:

A stable and democratic political climate, enabling the continuity of policy and infrastructure investment initiatives

A relatively higher share of consumption in GDP, leading to real demand-led growth as against supply-driven anticipated growth

A judicial system that safeguards the rights of companies, without being arbitrary

A large, diversified and growing base of manufacturing that is not heavily dependent on a few sectors

Significant thrust by the government and private sector in improving core logistics-related infrastructure

A large and young population, a significant proportion of which is English-speaking and therefore employable by the logistics sector

A flexible set of investment and tax policies are foreign investor-friendly


A wave of mergers and acquisitions (M&A) and greenfield investments have driven growth in the Indian logistics sector between 2006 and 2009.

Roa

dR

ail

Wat

erA

ir

Transportation Warehousing

Asset heavy Asset light

Asset-heavy investments have mostly been PE and asset-light, strategic M&A

Mo

des

Range of services

Medium

Level of Investor Activity*

* Based on announced deals over 2006-09

LowHigh

• Cold chain• 3PL and 4PL• VA services - packaging, track

and trace, JIT, insurance• Relocation services • Courier services• Reverse logistics

• Freight consolidation (LCL / FCL)• Container stuffing / de-stuffing• Customs handling• Rail-led 3PL services

• Customs clearance• LCL consolidation (NVOCC)• Container stuffing / de-stuffing• Buffer yard storage• Pre Delivery Inspection (PDI)• Port-led 3PL services

• Air cargo and courier services• Freight forwarding• Customs clearance

• Godowns• Modern warehouses• Express cargo hubs • LTL transshipment centers• Road-linked Logistics and food

parks (e.g. MMLPs)

• Inland Container Depots (ICD)• FTWZs• Rail-linked MMLPs • Bulk cargo terminals• Custom bonded warehouses• Yards and covered warehouses

• Container Freight Stations (CFS) • Port-based yards and covered

warehouses• Tank farms for POL• Shipyards (build / repair)• Custom bonded warehouses

• Air Cargo Centres (ACCs) • Express cargo hubs

• Trucking–FTL, LTL• Project logistics (e.g. ODC)• Last mile services• Express cargo• Equipment management

(e.g. trailers, cranes)

• Container Train Operations (CTO)• Bulk and break-bulk transport• Passenger train cargo (e.g. SLR)• Infrastructure and ancillaries (e.g.

DMIC, wagon production)

• Shipping – container, bulk cargo• Ports and port management (e.g.

dredging, berthing) • Port services (e.g. pilotage, towage,

stevedoring)• Coastal shipping

• Air cargo operations• Related infrastructure like airports

and aircraft

Value added services

Source: Mergermarket, Deal Curry, VC Circle, KPMG Analysis (2010)


Investments in Indian Logistics Sector

However, many of these investments have been driven by private equity (PE), with very few strategic investments and even fewer foreign investments. Also, investors have historically been drawn to asset-heavy sectors such as transportation and warehousing, and largely ignored opportunities in services.

It is these opportunities that foreign entrants can most effectively tap to forge a market entry into India, either on a standalone basis or through partnerships with established or upcoming logistics companies.

ConclusionIn the next part of this white paper, we will cover many of the key aspects of the changing paradigms in transportation, warehousing and services in India.


AcknowledgementsFor the purposes of this study, we relied on KPMG firms, 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.



About KPMG To meet the challenging demands of the transport sector, KPMG member firms offer a range of audit, tax and advisory services tailored to the sector’s needs. Think of KPMG’s 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 transport sector, 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 resolve these issues. This is where KPMG’s Transportation & Logistics practice can help. Our professionals can complement in-house capabilities and assist you with the following:

Planning an India market entry

KPMG’s 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. Our tax team, in parallel, can help companies devise an optimal tax and corporate structure for market entry.

Creating value through transactions

KPMG firms, finance and transaction professionals can 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, as well as assist with post-merger integration services.

Audit

KPMG’s objective audit methodology aims to provide high quality audit opinions.

Strategic tax advice

KPMG’s Tax practice advises clients on effective tax management and compliance.

Adopting an enterprise-wide approach to risk management

KPMG can help organizations adopt an enterprise-wide approach to identifying, prioritizing, managing and monitoring risk.

Enhancing internal controls

Internal audit is the foundation of a business’ assurance framework. KPMG can help companies improve existing internal capabilities, either on a project basis or on a continuing basis.

Improving performance

KPMG can help organizations enhance their strategic and operational performance.

Responding to regulatory change

KPMG assists organizations in transforming regulatory compliance from being just another cost and management issue to an important business value driver.

Funding infrastructure

Our advisers work with public and private infrastructure providers to create funding strategies.

Contact Us

Manish SaigalExecutive Director

National Industry Leader - Transport & LogisticsKPMG in [email protected]: +91-22-3090 2410

Sankalpa BhattacharjyaAssociate Director

Strategic and Commercial IntelligenceKPMG in [email protected]: +91-124-334 5089

Dr Ashley SteelPartner

Global Chair - TransportKPMG in the UK+44 20 7311 [email protected]

Justin ZatouroffPartner

Global Head of Logistics KPMG in the UK +44 20 7311 [email protected]

kpmg.com

The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.

© 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. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved.KPMG and the KPMG logo are registered trademarks of KPMG International Cooperative (“KPMG International”), a Swiss entity.Designed by Evalueserve.Publication name: Logistics in India Part 1Publication number: 173082Publication date: September 2010

GloBal tranSPort Logistics in India - BCubeGlobal Drivers for Logistics in India 10 How India Compares with Other Countries 12 Investments in Indian Logistics Sector 14 Conclusion

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