BSN Network / Mumbai
Monday, February 22, 2010

India’s ascending fortunes in the manufacturing sector over the last few years has opened several windows of opportunities for the logistics market, and this trend is likely to gain pace as the wave of global economic slowdown is gradually receding and India is emerging as one of the earliest major economies to recover from recession.

This fast-paced growth of the industrial sector, coupled with the more sturdy progress of the agricultural sector, has necessitated extensive supply chains across the country to facilitate sourcing and distribution of production.

New analysis from Frost & Sullivan, Strategic Analysis of Indian Logistics Market, finds that the market earned revenues of $75.19 billion in 2009, representing about 6.2 percent of the country’s GDP. The market is expected to reach $120.42 billion in 2014, witnessing a CAGR of 9.9 percent between 2009 and 2014.

Transportation segment accounts for close to 62.0 percent of the total market reiterating the fact that it is the most important logistics function for all industries. Further, agricultural sector accounts for slightly over half of the total logistics market in India, owing to the extensive storage and transportation activities associated with agro products within the country.

Distribution networks of most industries in India involve numerous retailers across the country, and multiple levels of intermediaries. Since companies will be hard pressed to serve such an intricate network, logistics service providers (LSPs) will fancy their chances of finding a firm foothold in the Indian market.

“Apart from the steady expansion of operations by large domestic industrial groups, an increasing number of global majors in industries ranging from automotive and electronics to pharmaceuticals and cement have been targeting a spot in the highly lucrative Indian market,” says Frost & Sullivan Industry Analyst Srinath Manda. “While foreign companies need to engage logistics service providers since they are not conversant with the culture, government policies, or distribution landscape of the country, domestic companies are outsourcing their logistic activities to organized third-party logistics (3PLs) to focus on their core competencies.”

Most manufacturing industries such as automotive, cement, minerals, oil & gas, pharma, food processing, and fast moving consumer goods (FMCG) need multimodal transportation services as they have a widespread consumer base but limited production bases. Industries such as FMCG, pharma, and food processing apart from the agricultural sector also have considerable requirements for integrated logistics parks owing to their higher need for warehousing activity. These industries are the leading contributors in the 25.7 percent share accounted by warehousing segment within the total Indian logistics market.

Multimodal transportation solutions are becoming possible with the development of inter-connected transportation infrastructure facilities, especially dedicated freight corridors by the railways and improvements in coastal shipping facilities. Similarly, the construction of massive state-of-the-art logistics parks at key distribution hubs are helping to meet the specialized warehousing needs of industries. These developments are encouraging companies to increasingly outsource logistics functions.

Both manufacturers and logistics companies are hampered by the problem of poor infrastructure connectivity in rural areas. The hardest hit by the inadequate transport connectivity are likely to be the FMCG, food processing, pharmaceuticals, and consumer durables industries, which have a huge potential consumer base in these areas. The former two industries are also affected on the sourcing side since they are highly dependent on the raw materials sourced from rural areas.

“Apart from the development of dedicated railway freight corridors, focused development of inland waterways and the strengthening of road networks through the national highway development program are expected to improve the market reach of most industries,” notes Srinath. “Owing to these efforts, professional logistics services can be extended up to rural areas, leading to a higher scale of logistics activities outsourcing.”