From Meerut to Madrid: Logistics lessons India can port from China

An efficient supply chain forms the bedrock of any industrialised economy. The
importance of supply chain has been demonstrated in both India and China —
the two growth engines of Asia. The two neighbouring economies are often
compared on various aspects. However, it would be an unfair comparison if a
host of factors aren’t considered.

While India got its independence in 1947, the Communist Party seized power in
China in 1949. The path the two nations chose for themselves around the same
time yielded a distinct set of cost-benefits to both. Experts say it was easier for
China to introduce, execute and popularise key industrial policies. Industries
were encouraged to ship overseas most of their production. Thanks to this
approach, which still catalyses the growth of China’s industries, the country has
earned the reputation of being the “world’s factory”.

At the heart of China’s growth is a port-led logistics network — a strategy that
aims at achieving economic growth by focusing mainly on exports and imports
via ports This game plan has made China’s products cost-effective vis à vis
competitors.

The East Asian giant boasts of a significantly superior infrastructure. It also
enjoys a decent ranking of 26 on the World Bank’s most recent ranking Logistics
Performance Index. India ranks 44th. Seven of the world’s 20 largest ports are in
China, says PwC report Transportation & Logistics 2030. In 2020, the world’s
second-largest economy added 22 new cities to a list of 23 logistics hubs
announced in 2019. Its National Development and Reform Commission
reportedly plans to identify 150 logistics hubs in five years, states a report by US
real estate giant CBRE. According to Alibaba, while the number of logistics orders
on Double 11 — an e-commerce shopping festival — in 2020 was over 33 times
that of 2012, the time required to deliver these logistics orders in 2020 was just
one-fifth of that in 2012, states the CBRE report.

India, while formulating its important industrial policies, did not adopt such a
strategic approach. Recent trends from India’s logistics landscape show that
things are moving in such a direction now. But if you have to ship goods from
Meerut to Madrid, freight challenges are substantial. “We are competitive with
China when it comes to cost of manufacturing, but when you throw supply chain
issues in the mix, it is a huge problem. We are based in Meerut and 1500 km away
from a port, which means we are automatically 10% more expensive when the
goods reach the port,” Pranav Kohli, Vice-President, Stag International said at the
recent ETRise Top MSMEs Conversations.

India should, therefore, take a leaf out of China’s playbook in order to straighten
out the many things that would give the country a strong supply chain backbone.

Eliminating bottlenecks, improving intermodal connectivity and ensuring timely
implementation of projects is what China did, says Ravi Jakhar, Chief Strategy
Officer of Allcargo Logistics. Massive investments in logistics infrastructure
drove growth, he says. “We are getting there with the National Logistics Policy
(NLP), the dedicated freight corridors and by focussing on digitisation of the
supply chain,” he says.

The NLP essentially aims to replicate the success of countries such as South
Korea and Germany in streamlining the country’s logistics sector. Pawan
Agarwal, former special secretary at the commerce ministry’s logistics division,
told ET Digital in June the much-awaited framework would be launched soon.
The logistics department had not responded to ET Digital’s latest queries at the
time of publication of the story.

Experts say the NLP will hopefully iron out the inefficiencies in India’s logistics
industry. Chiefly, it should make computerisation the norm.

What’s Ailing the Nation’s Lifeline
Logistics is not just about moving goods from one place to another. A typical
logistics value chain includes activities such as procurement, transportation,
container management, packaging, and warehousing. Unlike the Chinese players,
Indian logistics service providers have not taken to automation in a big way to
make this process smooth. This limits their performance, experts point out.
A significant number of carriers still bank on traditional strategies, says Soham
Chokshi, founder and CEO of logistics platform Shipsy. These are manually
driven and cause downtime in the processes, leading to a decline in service and
an increase in investment in repetitive tasks. It also creates systems prone to
financial malpractices.

Most of these issues exist because the country’s logistics domain is largely
informal. Sushil Rathi, Chief Operating Officer, Mahindra Logistics Ltd, says the
industry is also too fragmented. “Over 90% of our truck owners have a small fleet.
The same is the case with warehousing. If we have to be a world-class logistics
player, we need to find economies of scale by leveraging larger fleets and
operating multi-user, large-format warehouses. Another key factor would be
automation of warehousing operations to reduce processing cost,” says Rathi.

Small Operators, Big Problems
For most small fleet owners (SFOs), who represent a significant chunk of the
logistics ecosystem, capital expenditure and operating expenditure are issues
that throttle growth. Rathi says SFOs often don’t even have the personnel to
secure business on their own. They do it through transport brokers. The
unorganised industry and the inherent uncertainties in the logistics ecosystem
make the risk burden too heavy for most small players. Larger companies might
be better placed to deal with delays and disruptions in the chain, but smaller
players cannot sustain a long-term loss. In some cases, they can’t even stay afloat, says Rathi.

India’s supply chain and logistics costs account for 14% of the country’s GDP,
compared with the global average of 8%, according to a report by Arthur D. Little
India and the Confederation of Indian Industry. This high cost is largely due to
the heavy reliance on highways to move cargo.

Three-fifths of transportation in the country happens through roads, says Harsh
Vaidya, founder and CEO of logistics startup WareIQ. This significantly increases
operation costs and creates a capacity crunch.

The logistics sector’s fate is closely tied to that of the infrastructure sector. In
India, this relationship causes more pain for logistics. Standard & Poor estimated
the loss due to poor infrastructure at 4-5% of GDP. Transportation infrastructure
has overwhelming capacity constraints, it added.

The key inefficiencies Indian players need to overcome are centred around
infrastructure and technology, says Vivek Juneja, founder and Managing Director
of warehousing & logistics company Varuna Group. Most logistics service
providers are apprehensive about investing to ramp up infrastructure because of
a lack of long-term business commitment from customers. The right investment
push will remove a major hurdle, he adds.

Underutilised Tech Link
Globally, supply chains are adopting Industry 4.0 trends, such as agile networks
and disruptive technologies. Two more trends that are catching up fast are Just-In-Time inventory management and “Amazonization”, which refers to ecommerce giant Amazon’s way of disrupting sectors. Both these systems can
exist only if there is a strong warehouse and logistics network to ensure raw
materials can reach a factory quickly and on time. Along with this, acceleration in
technology adoption is also mandatory, experts argue. Building a tech backbone
on a strong logistics network will go a long way in spurring industrialisation.

“The lack of technology adoption in India has proven detrimental to the
industry,” says Rathi. “Digital fitness will be a prerequisite for success.”

WareIQ’s Vaidya points out that players such as Alibaba & JD.com are the gold
standard in e-commerce fulfilment as 90% of their orders reach customers in 24
hours, and 57% within 12 hours. What lies at the heart of it is a fairly
sophisticated fulfilment network that acts as a circulatory system of e-commerce
in China, he points out. On top of this fulfilment network is a powerful
intelligence layer that allows them to predict the right inventory in the right
location. This allows them to offer faster shipping at fairly controlled price points,
says Vaidya.

Indian players have made significant headway on this front, but it is not
adequate.

Need of the Hour
A seamless supply chain has played a key role in advancing China’s port-led
economic growth. India’s logistics landscape hasn’t been able to replicate China’s
template despite having a coastline of around 7,516 km with 12 major ports. The
industrial hotspots in China, even if landlocked, are known for their seamless
forward and backward linkages with export-oriented manufacturing units in the
smaller towns. This ensures goods efficiently reach the ports and airports. It also
reduces freight and logistics costs. India still lags here.

China, which has 34 major ports, took advantage of its 14,000-km shoreline, most
of which is accessible round the year, says Shipsy’s Chokshi. The Liner Shipping
Connectivity Index, which scores ports based on integration with global shipping
networks, hails Chinese ports as the most connected in the world, adds Chokshi.
Indian port authorities need to invest in platforms that drive system
interoperability across disparate logistics segments, say industry observers. This
will allow supply chain stakeholders to get a holistic view of all the moving parts
in a port ecosystem and immediately address inefficiencies. Digital control
towers should be set up so that executives can get greater visibility of ground-level port operations by accessing dashboards that pull data from a central
repository, says Chokshi.

Increased use of such tech can also lead to a significant reduction in another
menace: cargo theft. India accounted for 64% of Asia’s cargo theft in 2019, states
The BSI & TT Club Cargo Threat Report 2020. China’s share was just 16%.

Transformative Role
India can take solace from the fact that lately, logistic startups have spearheaded
the transformation of the sector. This is one segment where India is ahead of
China. There are 437 logistics tech startups in China; India has 1,775 such firms,
says research firm Tracxn. Players like Delhivery, BlackBuck, Rivigo are known to
have transformed the supply chain landscape here. The country needs more such
players and rapid mainstreaming of such tech-enabled models, say stakeholders.
However, India cannot match the financial muscle seen in China. Citing Tracxn
data, Rohit Bhayana, co-founder of Supply Chain Labs, says China’s supply chain
technology spending for the last three years is $11.34 billion, against $2.5 billion in
India. Of course, China’s GDP is also 5x that of India’s. So, while the digital spend
is in line with China’s, the physical supply chain isn’t, says Bhayana. “Till India
catches up, it will continue to throw an eclectic mix of challenges to budding
supply chain startups. If they can conquer these today, they can thrive globally as
well,” says Bhayana.

The country’s logistics sector faces stiff challenges, but overcoming these will
lead to lucrative opportunities. While the government can do some hand-holding, the sector would have to learn and evolve on its own by looking at global
examples.