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SUPPLY CHAIN & LOGISTICS DIRECTIONS 2007 TRENDS AND OPPORTUNITIES IN SCM IN INDIA This is where we take a reality

check. Its easy to get overwhelmed by the speed, scale and complexity of the supply chain industry even in a relatively underdeveloped scene like India. So we step back and list a few trends that will shape the industry in the years to come. There can be many more, but here we pick out a few main ones. Today, supply chain management is emerging as a full-fledged discipline in its own right. Careers can be started and made in SCM, departments are being reorganized into Supply Chain, logistics headings and a great deal of strategic vision has come into being. Changes unleashed by Indias increasing integration into the global supply chains are changing the very fabric of business. Here we list some of the key trends that will shape India Incs supply chain management. All are linked to a booming economy and improving infrastructure- two vital factors on which SCM heavily depends for its growth. FROM CARGO TO LOGISTICS TO EXPRESS As a result of industrial and regulatory liberalization since 1991, Indias demand patterns and demographics are changing so rapidly that companies need to fulfill a demand today, not tomorrow. They need to cut time to market like never before in their histories. This compression in time to market has only become more severe these days. This in turn created the need to deliver fast, and more importantly, deliver with a great deal of certainty about its whereabouts. In response, an entire layer of service providers evolved since 1992-93. More truckers rebranded themselves into logistics providers, and when that proved just another form of trucking, and insufficient, evolved further into express- time sensitive, guaranteed delivery- mode sometime around 2000. This shift was considerably assisted by the realization that users were willing to pay a premium for the savings in time and reduction in uncertainty. This premium more than offset the drop in operating margins that hit truckers and distribution providers due to ever rising fuel prices on one hand, and intense price competition on the other, which cut margins down to as low as 5%. By contrast, operating margins of express-mode logistics providers are even today 14-18% and are much less sensitive to cost fluctuations. This trend towards express got another fillip with the advent of global scale giants like UPS, FedEx, TNT and DHL who redefined investment, branding in SCM, technology and systems. This trend towards express logistics is only just gathering pace. Any serious player today projects speed and network- two crucial express prerequisites, and not heritage or prices. Consider some examples. Moving with the demands of the market, Raj Kumar Saboo, Dy MD, First Flight and Subhasish Chakraborty, CMD, DTDC, both courier and package majors have decided to make the transition from envelopes and packages to logistics. Part of their diversification growth strategy, the move is in line with the evolution of third party service providers in India, moving up the value chain, leveraging the network already set up and servicing a demand that is clearly more materials and information oriented than courier oriented. The need for connectivity, scale, flexibility and investments has made the logistics space a hotbed of activity, fired up by a booming economy that needs a rising volume of goods to be transported quickly and efficiently not just in India but overseas. Thats exactly the demand that the two want to tap. Says R K Saboo of First Flight, "There is tremendous potential in the current economy boom in India and making this transition will help us in tapping that opportunity. In fact, entering into logistics is a logical step which will compliment what we do currently." Subhasish Chakraborty, DTDC says, "We are a 4,000 strong franchise network with a turnover of Rs 150 crore. But we have decided that we do not want to remain just a courier company but further expand our services and cater to the growing market." Their timing couldnt have been better. Interest in the sector is not isolated to a few players but is spreading to other industries too, especially the banking / investment community. Coverage of the logistics space by leading equity and research houses is rising steadily as investors begin to understand the industry and the returns it can give over time. A recent study carried out by S S

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SUPPLY CHAIN & LOGISTICS DIRECTIONS 2007 Kantilal Ishwarlal Securities (SSKI) points out, "The Indian logistics industry is gradually coming of age as corporates are realizing the cost saving potential offered by logistics solutions, and more so of integrated services, demand for logistics is picking up. The proposed central sales tax phase out, higher manufacturing outsourcing, and investments into infrastructure and technology are acting as catalysts growth for the industry." Little surprise then why these courier bigwigs are aiming at diversifying into logistics service providers in addition to their existing business at this point of time. But while getting interested is easy, the going will be really tough. Says an analyst, "Both companies have expertise in handling light-weight, huge-volume envelopes but logistics, which includes cargo is going to be a different ballgame altogether and it is not going to be smooth sailing for either of them." The players also agree that branching into logistics, requiring huge warehousing space, different set of work skills and a more advanced technological set-up is not going to be a cakewalk. Says Mr Chakraborty, "It will be risky and challenging task, but we are building up all the necessary requisites like getting the right people, upgrading technology, and strengthening our franchise model." Apart from the mindset and scale shift, both companies are aware of one vital fact- that the transition will require huge dollops of investment and manpower. Says Mr Saboo, "We are aware that more than Rs 100 crore plus investment is required to get into logistics, but we have multiple options before us, either through a strategic investment by diluting some stake or even taking the IPO route. We do not rule out even acquisitions or tie ups with other logistics players to step foot into the new venture." Moreover, both companies are planning to set the wheel in motion from different ends. While Mr Saboo is planning of creating an owned network, Mr Chakraborty has different ideas. He says, " Our logistics operations will be run through our existing 4,000 franchisee offices but we will soon start creating more franchisees, which we had stopped a few years ago." However Mr Saboo is of the opinion that, "Most companies work on franchises set-up which does not give them the leverage First Flight would enjoy, where we own the whole infrastructure - man and material both - and we are hopeful that it will pay us good dividends." And to set all of the above in motion both players have set their eyes on the year ahead. "We are already in the process of selecting the head for this division as COE and other recruitments will fall thereafter within maximum 2 months time. Creation of rest of the infrastructure will begin soon and we intend to initiate this service by the beginning of new financial year or latest by April 07," said Mr Saboo. DTDC has also chalked out a similar target and is eyeing March 07 as its deadline of initiating the service. Something quite different is what TNT Express is charting out in India- its putting its money on network management as opposed to logistics management, which involves 3PL and committed resources. Abhik Mitra, managing director, TNT India, is taking the road less traveled. In India, traditionally players in the supply chain management tend to operate in both third party logistics as well as the express segment. TNT, though, has now decided that unlike its rivals, DHL, UPS and FEDEX, which are busy shoring up their logistics business, it will exit the third party logistics business completely and focus on the express segment. While partly the reason for this change is a new global strategy that dictates exiting the logistics business - TNT Logistics was sold to Apollo for Euro 1.48 billion in November 06 and Freight Management to Geodis for Euro 460 million, Mr Mitra believes that the winner in this supply chain management battle finally will be the firm that can control the 65,569 km of Indian highway turf. The idea at TNT, therefore, is to focus its energies on becoming a major road network operator rather than spread itself thin by focusing on third party logistics as well. The divestment strategy has been a winner globally with margins in express having risen from 3.2% in 2001 to 9.3% in 2006. Says Mr Mitra about the strategy, Our target is to become an express player carrying high value goods. Unlike a third party logistics player, we will not dedicate our assets (trucks or warehouses)

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SUPPLY CHAIN & LOGISTICS DIRECTIONS 2007 to any single company. TNT will enter into a specific contract, which would involve transportation of any material from point A to point B within a particular time frame. What this means is that TNT trucks would carry materials of several customers at the same time thereby ensuring a more optimum utilization. The acquisition of Speedage Express Cargo is in line with this strategy. With 150 branches, 1,100 containerized trucks and 2,500 personnel that came with the acquisition, TNT Express has an instant presence on the Indian road network. A key proposition in acquiring a road carrier something other MNCs havent done so far was the calculation that road transport with the express mode would still be cheaper than air express, given the larger breadth of the road network in India. And as Mr Mitra points out, The road networks will only improve. Moving into the road express segment though now pits TNT Express against players like Safexpress, Gati, TCI and AFL, and to some extent Blue Dart, all of which are established players and TNT will have to fight hard in order to gain market share. And itll cost- all of the Euro 100mn that TNT NV has earmarked for India. Moving to express should translate into reduction of time to market. But has it? The ETIG Knowledge forum in Bangalore on August 22 2006 also revealed some insights. The speakers, all leading logistics managers, noted that while the benefit of using express was clear, the cost-value equation still wasnt favourable. Reliability was suspect; quality of services varied from excellent to the terrible for the same vendor. Much the same issues came out in ETIGs SCM Best Practices Survey 2005- details in this report later. That survey showed that 76% of all respondents used only traditional trucking and cargo. A deeper look at express revealed that 52% of all respondents in that survey say the use of express is rising slowly in India; 14% said the use was rising quickly- these were respondents for whom time was a competitive weapon and they were willing to pay for it.52% of all respondents said they wanted clearly spelt out benefits in cost and time; 29% said they wanted competitive pricing, and 19% noted that they wanted integration with other parts of their supply chain. Clearly, Indian express players have a lot to do. Alls not gloom and doom, though. ETIGs online poll on www.etintelligence.com reveals that 65% of all respondents intend to outsource more of their logistics functions in 2006-07, and 54% of respondents report that third party service providers do offer value for money. ETIGs own research with players shows up increasing investments into ground infrastructure for logistics- a key concern that prevents many customers from handing out to express. Spends on warehousing in 2006-07 are estimated at over Rs 100 crore, ringing major demand centres and creating the first nuances of a hub and spoke system. In general, the ability to move material, funds and IT has considerably improved in India over the previous years. The net result shows up in indirect data. Distribution costs to net sales ratio has either remained flat or risen marginally even as both net sales and absolute distribution costs rose. Net sales between March 05 and March 06 rose 13% but distribution costs rose 11%. This suggests greater efficiency in logistics. Another measure for the enterprise as a whole is return on capital employed (ROCE), which includes many impacts of logistics, like receivables, outstanding and throughput. ROCE in March 05 for most industries rose, even as costs spiraled. For example, ROCE of foods and beverages industry rose to 23% from 20%; for metals from 20% to 33% and for textiles from 9.4% to 9.9%. BOX: What do companies want from express logistics? 1. 2. 3. 4. 5. Reliability Integrated solution Error free delivery Regulatory compliance Flexible service network- can adjust to seasonal and marketing needs

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SUPPLY CHAIN & LOGISTICS DIRECTIONS 2007 6. 7. 8. 9. 10. 11. India specific innovations Value added services without cost padding Approved by the Insurance companies and Indian Banks association. Long term commitment Trouble-shooting ability Non-standard size logistics ability

Trends in Indias express logistics business: 1. Companies with a brick and mortar cargo and trucking business are moving up the value chain into express. 2. Customers are now more willing to pay for value-added services, to a point. 3. The industry faces a dearth of managers formally trained in express logistics.

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5. Banks and IT companies are integrating ever more closely with service providers. 6. Rising interest in investing in Indian logistics companies. CUT TIME TO MARKET H G Raghunath, VP- Sourcing and supply chain, Titan Industries, said, Time to market is extremely critical. We are fashion-driven and watches arent something you cant live without. If a customer doesnt find a brand or variant, hell walk out and the sale is lost. New products and variety are Titans strengths- and we feed them to 11,000 outlets and 194 World of Titan showrooms. Theres routine demand, and then theres consumer activation, or promotions that put a spike in logistics systems. At almost one new product a day, Titan has to tightly control inventorywhere express logistics helps. On the supply side, that a watch isnt just a timepiece was amply clear as he began to explain the complexity of his business. There are no less than 3139 variants with 916 cases, 2608 dials, 741 hands, 1199 straps, 102 modules and 91 crowns in Titans portfolio, he observed. All these have to come together at the right time and right place for a watch to be made. In other words, he says, All the agencies supplying their parts to me have to be perfectly aligned with my plans. Even if anyone part is lacking, the watch cant be assembled and sold. Titan has alignment targets for each of the parts in the watch. For example, for crowns, hands and packaging, its 100%- in other words, all vendors must supply these parts at any time. Theres penalty for late delivery, but also rewards for on-time record. Such time-pressure can only be handled by a logistics system that has time-management at its core. Time to market has been cut, he says, by suppliers close to assemblies and assemblies close to customers. Aiding this is multimodal logistics- use rail, road and air. Around 20 % of the lead time is on account of Transportation of Raw material and finished goods, says Raghunath. We take the decision of which mode to use depending on the product and loss expected. For example, for Tanishq, where competition is fierce from local jewelers and the price per unit can be as high as Rs 35000, we would use air; otherwise we would use express surface. The vital point, he says, is that Titan is handling this complexity in logistics at around 1.5% of net sales. The absolute spend has risen, but the share to net sales has remained nearly the same. This has been made possible by using the express logistics methods, which may cost more in individual elements like freight, but lower overall time to market- which means a faster turnover of products and cash cycles.

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SUPPLY CHAIN & LOGISTICS DIRECTIONS 2007 Like Titan, obsolescence is a real danger for Acer India. Says Sudhir Goel, GM-Fulfillment, Acer India, Our challenges are faster Time to Market and a lower Inventory Level- or a right inventory at right place. You cant have both, he acknowledges, but express logistics is the nearest it is to get a balance without quality compromises. Technology changes so fast, he says, for example, in laptops, that if you are left with inventory at the end of the cycle, its a direct bottom line hit. What we ignore in many financial models are the cost of money due to inventory carrying cost for material in transit. The cost of obsolescence specially for products with shorter life cycle, the flexibility of operations for smoother product phase out or product changes and the flexibility to offer newer technology product faster than competitors to command premium and better brand equity. It is these savings which pays for higher costs of express Logistics in IT hardware sector. Acer went in for the fast food model for its logistics, says Goel. There are a few parts that dont change much, like the casings and keyboards, and which provide stable demand. For these we use slower road transport, often trucking. For fast changing, like chips or PCBs, its air logistics. Express Logistics has helped us reduce aging inventory levels and a reduction in inventory write-offs due to price or technological changes. Globally, Bosch is a keen user of express logistics, which reflects in Indian operations as well. 40 % of Micos imports and 55% exports are by air. 90% Inbound materials are by express/dedicated vehicles and 80% outbound are by Express/dedicated vehicles, says G M Govind, GM- corporate logistics, MICO Bosch India. Today, he says, Bosch has pre-carriage from within Europe by express surface, then consolidation of cargo at major gateways like Frankfurt, and then depending on urgency, theres the FAST service next available flight, the A-service, 4-5 days, B Service: 6-8 days and C service 8 days. From the airport, its by dedicated trucks. In the domestic market, says Govind, We have pre-defined carriers for destinations on the basis of their regional strength. Standardized Containers and crates for effective and faster handling, common pool collections and milk runs, use of Express Logistics for arrival at pre-defined times, pre-defined Multimodal practices for best results. Then theres a regular assessment of service providers and a practice called Logistics FMEA for all new routes. All this has translated into lower inventory at Mico end, and greater integration into the global Bosch Production System, which helps Bosch India gain a greater role in global business. Govind says a lot more needs to be done. All cities are not directly connected. Only few airlines operate the cargo aircrafts and mostly goods are transported by Passenger aircraft. Pallets are not sold to Freight forwarders. There must be India-centric solutions, stresses. Companies could encourage consortiums of express providers, which would use transport or returnable pallets and such like to cut costs. But perhaps the most interesting development was discussed by P N Shukla, chief operating manager of the Southwestern railways. Candid and focused, he said, The elements of express logistics were alien to the railways. We were a bulk carrier and lacking all the virtues of an express service provider. We had a 35% share of bulk cargo- nearly Rs 36,000 crore, but a 1.5% of the express market- just Rs 550crore. We had a parcel service, but not an express service. We had to make an earnest effort to participate and provide express logistics if we were to grow market share. So we asked our selves the question: are we a railway bulk carrier, or a transport solution provider? Simple as it sounded, it set off a tremendous strategic shift in railway operations. There werent many service providers like us around, says Shukla. The railways have massive advantages- a network, rolling stock, stations and yards, and fixed schedules 24 x 365 x 7. Our vision for the railway express service better than air, faster than road. Shukla says they target a 10% Market share in 5 years- Rs 5500crore in express revenues. Given the massive constraints placed on the railways- passenger traffic and inflexibility of rates, given the political sensitivity of railways- Shukla says in a major shift, the railways decided to reposition itself by adopting a new policy of alliance with road transporters. This policy now includes leasing of space in trains and allow railway area for Hub and Spoke system plus allowing transporters to use railway facilities. Our main focus now is on volumes and keep competitive pricing. The focus is on service providers and not manufacturers. Shukla says that railways are now moving to the more flexible space booking at market tariffs rather than package booking at fixed rates. The action plan for South western railways, which Shukla heads, was put in place in March 05. Says Shukla, We

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SUPPLY CHAIN & LOGISTICS DIRECTIONS 2007 focused on Cargo Aggregators, identify destinations of higher demands and provided service to larger network of cargo carriers. We also ran scheduled cargo trains Ex Bangalore Delhi, Bangalore Howrah and Bangalore Guwahati. This paid off. South Western railways earned Rs.14.7 Crores in 04-05 and Rs 22.4 crore in 05-06. The groundwork for the railways moves in express are fast getting into place. Shukla sets his targets high, Turn South Western Railway Express Cargo business a 100 Crore business in 2006-07. Include a wider variety of white goods cargo in Express Cargo fold. Introduce Reefer Cargo Services and target 50% annual growth for next 5 years. SPACE MANAGEMENT We could also call it warehousing. Usually seen as a backend job, a necessary evil fostered onto business due to archaic laws that made it more cheaper to put up warehouses in every state, warehousing is now changing into a strategic asset as companies realize that bundling in an efficient re-distribution point with express movement gains them competitive advantage. Crores of investment from Indian companies like Gati, TCI, Safex, AFL and Om is going into refurbishing sheds, getting IT, security, insurance and manpower and average warehouse sizes are increasing to over 60,000 square feet, though far below global standards. Metro markets are being ringed by modern 40-foot ceiling controlled access warehouses that allocate space dynamically depending on demand, price and ageing. MNCs like Exel, Sembcorp and Toll are getting in as well. Warehouse managers now provide much more information to their customers than just stock position; these are increasingly becoming the watchdogs of customers on the ground, alerting for ageing, or lack of space or non-viability proactively. Due to this surge in interest in warehousing, owners of land are now keen to let out space for long term as well with variety of rent/ lease agreements. As value added tax spreads in India, warehousing networks will shift as well: you will have 4-5 large mother warehouses feeding many small, pure reconsolidation warehouses nearer markets. Warehousing will then be determined by business logic, not taxation. Under the new VAT, companies can theoretically eliminate all CFAs and replace them with professional logistics players. The very nature of supply networks will change, but not till central sales tax becomes zero. In its fully implemented state, VAT would replace all state taxes, effectively eliminating trade barriers of taxation within India and at last create one common unified Indian market. The state of India is presently very much like that of the Europe before the Union was formed. After VAT, goods could move from one state to another without, theoretically, stopping and clearing any bills or invoices or taxes. However the implementation wasnt smooth; in the first year, major states like Gujarat, UP and Tamil Nadu stayed out, even as the others joined in. By 06, all except Tamil Nadu and UP have joined, and the reality of a unified market is that much more clearer. For logistics, and warehousing in particular, VAT holds a lot of promise. Ideally, a full-blown VAT would eliminate the need to have large warehouses in every state, since there would be no central sales tax (CST) that would apply on inter-state transfers. A company could work with just one huge mother warehouse, say, in Nagpur, feeding four smaller regional warehouses in each of the four regions. These would, in turn, feed other smaller, city-specific warehouses whose goal is customer service, not storage. The key points are that VAT should eliminate a lot of duplication in storage, thereby simplifying transactions, costs, time, effort and IT systems. It should also create scale -fewer warehouses with larger volume of transactions will attract much more investment in technology to handle volumes, and logistics partners who get scale in their movements. These, in turn, will put up service centres or offices around these warehouses, and we should see the emergence of large warehouse parks in key geographic locations around India. Nagpur is already developing as one, Bhiwandi near Mumbai and Gurgaon near Delhi are other examples. Another key point that a company or service provider will keep in mind is that just because there are no interstate taxes, it doesnt mean you supply all markets from just one factory, say, somewhere in Uttranchal and one warehouse. ETIGs research shows that even with a full VAT,

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SUPPLY CHAIN & LOGISTICS DIRECTIONS 2007 most companies will still retain warehousing ringing major cities like Mumbai or Delhi. These will be purely for feeding the markets just in time and not for stock keeping. In fact, a number of smaller warehouses -- up to, say, 60,000 square feet, have emerged rapidly all around India, with all the latest technology and concepts, and put up by companies like AFL, Gati, Safexpress, Exel and TCI. Investments are slated to touch Rs 100 crore in 06-07. The demand for warehousing space is also rising, with land banks coming into play. Companies now have a lot of requests to hire / buy space for warehousing. The impact of consolidation of warehousing will also be felt on transporters, who will find that having larger trucks between manufacturing sites and mother warehouses are now viable, and smaller trucks for the spokes make sense. Fewer trips of larger trucks and numerous trips of smaller trucks, is how the hub and spoke system will develop. As of now, companies have streamlined their IT and commercial systems to align with the new tax regime. The actual change in networks of warehousing is still some time away, so long as all states dont join in, CST isnt made zero and a national VAT doesnt come into being. Leading companies note that they have not made any changes in physical warehousing yet, and quite a few others are already working with a decreasing number of warehouse locations. Besides, until the present hybrid VAT remains, buyers, especially in industries like auto, durables, electronics, and garments, will be insisting on local supplies. That is, supplies to them from their own state and not direct from the factory in another state. In a scenario where some states dont get into VAT, it makes sense to put up a large regional warehouse in a VAT state, as the outgoing VAT collected on interstate sale is Vatable. With the CST reducing to 2%, the outlines and benefits of changing warehousing are getting clearer. At this stage, companies can begin to re-look at the structure and supplying across state boundaries may not be so very infeasible, though inconvenient and still a hit on the bottom line. Its only when CST is zero that the economic model tips in favour of consolidation of warehousing. Going forward, the biggest change will be in the carrying and forwarding agents. Under the new VAT, these would need to change into third party warehouse managers, not just storekeepers, since companies now could theoretically eliminate all CFAs entirely replacing them with professional logistics players. When and with what severity this happens is still not clear. The very nature of supply networks will change, but not till central sales tax goes to zero. Theres another type of space management that has picked up smartly in the past two years: that of container freight stations and inland container depots (see table Land Banks). Logical development, given that India is fast becoming the factory of the world and goods have to be exported and material imported- and theres increasing containerization (see the chapter on infrastructure later in this report). There are some big players now in the business (see table Space managers and box Real Estate Majors), and with imports outstripping exports, and likely to do so for some time yet, these players project healthy growth, as most of their profits come from ground rent charged to import containers that await delivery. Table: Land Banks Container freight stations in demand SR. NO. CFS 1 2 3 4 5 Gateway Distriparks CWC-DNode MEARSK BALMER LAWRIE CONWARE

Total Area Sq. Mtrs. 150,000 195,000 70,000 90,000 107,700

inEstimated (TEUs) 180,000 90,000 90,000 75,000 72,000

Capacity

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SUPPLY CHAIN & LOGISTICS DIRECTIONS 2007

6 7 8 9 10 11 12 13

CONCOR DRT JNP-CWC CWC Distripark Sea Bird MarineService CWC Kalamboli Trans India Maharashtra State Ware Housing Corporation ULA Total

62,000 215,000 125,000 25,000 90,000 70,000 29,010 20,000 1,248,710

72,000 60,000 60,000 50,000 48,000 40,000 36,000 25,000 898,000

New upcoming CFS 1 2 3 4 5 6 7 8 9 M/s Thakur CFS SOL Logistic CFS M/s PNP Maritime- CFS CWC CFS Logistic Park Maersk CFS -D node JWC Logistic Park(ICD) Ameya- CFS Forbes -Gokak- CFS Priti Logistic (ICD) Total Source: JNPT Table: Space Managers CFS companies Gateway Distriparks FY04 Net Sales 59 Net Profit 19 Capital Employed 100 Market Cap All cargo Global FY04 Net Sales 146 Net Profit 6 Capital Employed 30 Market Cap Sical Logistics FY04 Net Sales 1014 Net Profit 13 Capital Employed 594 Market Cap 49 (Rs crore) Source: Capitaline Plus 1,11,289 4,68,406 11,000 3,00,818 56,050 34,000 1,13,000 50,000 40,000 1,488,770 1,39,500 1,15,000 82,000 72,000 60,000 55,000 48,000 40,000 15,000 1,331,000

FY05 96 35 246 840 FY05 227 25 49 FY05 1241 41 536 274

FY06 139 72 601 2340 FY06 267 50 n.a 1357 FY06 993 62 1351

FY06/FY05 %) 44.8 105.7 144.3 178.6 17.6 100.0

-20.0 51.2 -100.0 393.1

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SUPPLY CHAIN & LOGISTICS DIRECTIONS 2007 Box : Real Estate Players ITS not just malls and retail spaces. Real estate firms seem to be equally bullish on warehouses. They see immense business potential, arising from the fact that almost all international retail chains planning to enter Indian retail, including Wal-Mart, Carrefour and Tesco, have simultaneous plans of doing business in the cash & carry format as well. Various Companies operating in the commercial real estate sector, such as DLF, Unitech, Ansal API, Omaxe and TDI, have started talking to retail chains. According to industry estimates, backend activities in the retail sector, comprising warehouses and cold-storage, will require close to 5 million sq ft of real estate space by 2010. Says TDI MD Kamal Taneja: Warehousing and logistics are clearly the backbone for the growth of organised retail in the country and will throw up huge business opportunities, particularly in tier II and III cities. Owing to very limited space in larger cities, retailers will be able to keep the lowest possible stock on shelf. This can only be sustained by a strong backend network. In fact, worldwide, most big scale retailers, including Wal-Mart, thrive on the mantra of smallest possible stock on shelf and a bigger inventory in the warehouse. Omaxe CEO Arvind Parakh says: This is inevitable for any retailer. Setting a warehouse and addressing supply chain issues are critical areas, and need to be firmly in place, before a company goes ahead with its frontend retail plans. In the warehouse development business, some also see a logical extension of the relationship that a mall developer has with a retailer. For the first time, retailing is expected to happen in India at this scale where having warehouses will be mandatory. Its sure an exciting business opportunity for real estate developers, says Ansal API marketing head Kunal Bannerji. According to industry sources, even before the deal is formally signed, representatives of BhartiWal-Mart have started scouting for locations for their warehouses. These warehouses will be part of the companys wholesale cash & carry business, which, apart from Bharti, will sell to other interested retailers as well. Reportedly, other international retail chains, Tesco and Carrefour, which are yet to firm their plans for frontend retail in India, have also evinced interest in the cash & carry business, as this is the only way they can bring equity as they enter the market. According to Euromonitor, a Londonbased market intelligence firm, it makes sense as, when the restrictions on retail in India are lifted, international retailers will be in a prime position to easily convert their cash & carry stores into highly profitable supermarkets and hypermarkets. Mayur Shekhar Jha, The Economic Times, February 27, 2007 BANKING banks were usually seen as providing working capital in the value chain of the company, but over the past two years, banks have started taking a far more active role in every link of the supply chain, moving away from lenders to financial partners. In the earlier mode, the banks looked at each entity on its own merit, and went by fairly standard and rigid permissible bank financing kind of formulae. Now, banks are trying to look at value chains around large manufacturing companies, looking at them like OEMs (see table With you all the way). They are looking to finance the suppliers and distributors of OEMs. They consciously devise solutions such that credit quality of the OEM rubs off on suppliers and distributors, enabling these smaller entities to get required financing at cheaper rates. This helps all parties in the value chain, as production and material movement becomes smoother backed by ready and cheap financing. In practically every industry, we find such partnerships developing and this trend will accelerate in a rising-cost environment such as exists today. The banks, in essence, are moving away from a financial risk to a performance guarantee based line of credit. Because its the bank financing the supply chain, its also in their

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SUPPLY CHAIN & LOGISTICS DIRECTIONS 2007 interest that suppliers be fiscally more prudent, disciplined and deliver on time- crucial prerequisites for preferential financing. Table: With you all the way Role of banks in supply chain financing Function From Credit worthiness Standalone analysis Risk management Financial guarantee Repayment Standalone Information Intermittent market or vendor data Cash management time Many days Source: ETIG research

To Integrated systemic view Performance guarantees Guaranteed by the value chain Sustained, hi-quality data with complete integrity Few hours

Supply chain financing is, in fact, one of the fastest growing segments for banks these days. A more advanced and sophisticated version of the age-old working capital finance that banks traditionally do, supply chain-financing (SCF) covers the entire gamut of financing on both the suppliers and vendors side. Banks started creating this as a separate department within their corporate banking set-ups about three years ago, and now most banks, both Indian and MNC, have such setups. The business is a huge growth area, with banks expecting growth rates of anywhere between 50-100% for FY06 from this. Heres how it is different from traditional working capital financing (see also table Brothers in arms). In the earlier mode, the banks looked at each entity on its own merit, and went by fairly standard and rigid permissible bank financing kind of formulas. Now, banks are trying to look at value chains around large manufacturing companies, looking at them like OEMs. They are saying lets finance the suppliers and distributors of OEMs. The consciously devise solutions such that credit quality of the OEM rubs off on suppliers and distributors, enabling these smaller entities to get required financing at cheaper rates. This helps all parties in the value chain, as production and material movement becomes smoother backed by ready and cheap financing. Extensive geographical reach and IT is essential for this kind of approach to working capital financing. Geographical reach is required for collecting or making payments, and IT is necessary to give the value added service this business demands. IT is really the competitive edge in this business now, and has helped new Indian private sector banks make gains at the expense of other players. The suppliers financing is considered safer for the bank, as suppliers can be decent sized companies (compared to a distributor); and more important the credit risk is in a way backed by the OEM. This is how supplier financing works. A bank opens a line of credit for a supplier in consultation with the manufacturer (call it the OEM), who is the banks customer. This line of credit is very specific to the product that the vendor supplies to the manufacturer. An OEM gives a guarantee to its vendor for a specified off take of parts over the year. On the basis of this guarantee, the vendor approaches the bank- usually recommended by the OEM- and obtains better financing rates and services. In exchange, the bank finances the working capital requirements of the vendor. The recovery of the loan is linked to the vendor supplying to the OEM on schedule. After the vendor supplies, the OEMs payment may be routed through an escrow account, to give further comfort to the bank. That way there is little chance of the vendor diverting funds away somewhere else. In case there is a cash discount to the OEM from the vendor, the bank may even pay the vendor upfront, and collect from the OEM later. All this also involves the bank keeps tabs on production, dispatch, payment, and financial health data of the vendor- and much greater understanding and commitment to supply chain than ever before. There is little financial risk in the whole arrangement for the bank. It is more like a performance risk. Both the vendor and the OEM benefit. The vendor benefits as it gets cheaper financing than it may get from traditional working capital routes, since the OEMs order commitments are known the bank

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SUPPLY CHAIN & LOGISTICS DIRECTIONS 2007 and the OEM is also the banks customer. The OEM benefits in two ways better supply from the vendor, and also the OEM reduces its own working capital needs. Since the vendors finances are more robust now, it can supply closer to just in time, enabling the OEM to keep lesser inventory. In other words, the working capital financing is shifting from OEM to vendors by this route. On the distribution side, IT led banking has allowed them to offer new services to OEMs and their distribution chain. Here again, the bank tries to finance the large distributors of OEM in consultation with the OEM. The bank provides working capital to select distributors allowing them to lift output from the manufacturer. Often there is provision of an escrow account kind of mechanism where the sales of the distributor get credited to an account with the bank. The OEM has access to this bank account, and can make payments to himself from this account. So the OEM now has comfort of getting payment. The bank can monitor sales and receipts of the distributor. So this system is different from earlier systems of OEMs selling against PDCs to dealers, with no guarantee whether the PDC will bounce or get realized. The bank also saves on a lot of charges for collection, processing and security. Banks often add on information service to this, since they have complete records of every single shipment to the dealer. They can even link payment to bill and shipment, thereby taking this processing loads off the accounting departments of the OEM. This information service often works through direct connection between the banks IT system and the ERP systems of the value chain. Today banks can offer their customers data about every product, brand, dealer, margin, dispatches, and payments and so on practically every morning at the start of the day. This in turn basically means that the accounts and MIS functions of the customer are being done by banks another form of outsourcing, in other words. ICICI Bank takes the view that collections and payments parts of the supply chain banking will soon be commodities; however, the third part- assisting companies in reporting and MIS, is what customers will value. Now the emphasis is not on collections, but on the quality of information that can be delivered. An example: Any bank could collect payments from over 5000 outlets or branches across India. However, its only a well integrated, secure, and seamless bank that can report everything- from invoice numbers, to codes, to part payments, product level payments, to sales person handling the sales -a whole range of data that is now increasingly used by marketing also, not just accounts. IT has considerably changed the face of banking in supply chain. Today both the company and dealer both could have an online account with ICICI Bank; the company could seamlessly, instantly transfer payment from the dealers account to its own, subject to validations and cross checks. Similarly, payments from the company to its suppliers could be automated until a certain amount after validation, and money could flow without human intervention. Companies could actually reduce staff without any loss of money flow efficiency. Standard Chartered says it covers both the upstream and downstream Supply Chain partners of MNCs, Large Local Corporate and Mid Cap Corporate which are existing /prospective customer of SCB (termed as Anchors). On the "Sell side" the bank covers recommended dealers, distributors, converters and institutional buyers of these Anchors. On the "Buy side" the Bank offers preshipment and post-shipment financing solutions to the select suppliers of these Anchors. Today StanChart 's Supply Chain Financing portfolio contains a diversified mix of industries ranging from Automobiles, Metals, Tractors, Commodities, Engineering, FMCG, cement, pharma and medical equipment, Fertilizer, Glass. HDFC Bank says the biggest role that banks can play in the supply chain is the automation of the various parts of the chain. The biggest automation can be in money flow- ECS, electronic transfers,

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SUPPLY CHAIN & LOGISTICS DIRECTIONS 2007 online approvals of credit lines, online support and so on. All this cut out many days from the cash to cash cycle, thereby saving interest costs. Since their money is at stake, banks also tend to be far more rigorous in assessments, checking, due diligence and data maintenance- all of which result in a far cleaner supply chain than before. Given that there are many vendors in a supply chain for whom due diligence is not possible, banks increasingly tap their existing customers to integrate more of their supply chain with the bank. Offering complete end to end It-driven financial solutions to their existing customers locks them in even more and gets newer customers in their fold as well. As the business expands, so do the banks gain. So, in essence :IE+CMS+MIS. That sums up the solutions that banks offer for supply chain management today. Internet enablement (IE), cash management (CMS) and Management Information Systems (MIS) together provide automated payments, faster and seamless money transfer with reliable MIS, reduction in order processing costs and so on. Todays net-enabled banks can also link into the companys ERP to seamlessly flow financial information into the companys balance sheet as well. Apart from the banks, service providers themselves have financing arms. UPS Capital and FedEx Trade services are the financing and facilitation divisions of UPS and FedEx respectively. Most service providers have linked up with banks to assist companies in paying for their services. The range of services that these provide now could well compare with those of banks. For example, UPS Capital now offers Credit Insurance where you could insure your receivables against slow or non-payment of your dues. Such products are yet to take off in India. These companies would tie up with leading finance providers, like GE Capital or Shriram Group in turn to finance the business. The Shriram Group in fact claims to have disbursed up to Rs 6,000 crore in truck finance of which Rs 2,000 crore would be for other banks like Citibank or UTI Bank. Again, the more a company looks to take services from its existing bank; more the supply chain financing takes off. Unlike the broader concept of the supply chain financing, there are already large players in logistics a narrower segment of the overall value chain. In fact, practically every automobile company in India has a finance arm- Tata Motors, Ashok Leyland, Sriram Group, TVS Motors- all of these finance purchase of new and second vehicles for customers, thereby locking in a lot of customers with them and reducing the overall cost of operations. Perhaps the most famous remain Ford Capital and GMAC- the finance arms of these two auto giants are now making more money than the core auto divisions. Table: Brothers in arms Working capital v/s supply chain financing through the supply chain Raw materia l Workin g capital financi ng (WCF) Supply Chain Financ ing (SCF) Purch ase Vendor Transporter Warehouse Factory Warehouse Transporter Distributo r Industry norms control credit Informat ion controls credit flow Informa tion flow Retailer

Negotiat e

Point to point

Operation al

Operation al Strategic relationship s reduce cost of transformati on

Operation al

Point to point

Sourc e

Procure and enforce complia nce

Service level agreement

Strategic: minimize inventory Outsource to 3PL

Strategic: minimize inventory Outsource to 3PL

Service level agreement

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SUPPLY CHAIN & LOGISTICS DIRECTIONS 2007 Source: ETIG INTERNATIONAL IMPACTS India is now increasingly impacted by global mergers and acquisitions, and the trend will only intensify. Two trends will drive this: as more MNCs source from India, they ask their logistics providers to tag along; eventually in order to grow, these acquire local players or their existing offices are merged. Secondly, companies now see India and China as the two major drivers of trade globally and struggle with an eye to acquire create networks within India as a strategy. DHL bought out Blue Dart in late 04, and took started the integration of Exel into itself in June 06 in India, creating one of Indias largest such providers. Toll of Australia bought out Singapore-based Sembcorp, which has warehouses in India as well, though Toll has no plans to change in India as yet. Linfox, another Australian company is also looking at India for warehousing, as it feels the need to globally expand and create scale. The recent controversy of Dubai Ports was felt in India as well. Australias AMP Capital also bought into Gati in early 06, while UPSs acquisition of Menlo worldwide in the US would also change the structure here in India. C H Robinson, a large USbased freight forwarder, also entered India acquired Chennai based Triune Logistics (see investment discussion later in this chapter). Global giants are increasingly looking to provide seamless connections into and out of India, and we should see changes on this front accelerating in the later half of this decade as well. Ever since China allowed MNCs to acquire their local partners, UPS and FedEx have done so quickly, getting control over the entire chain- that trend should be more visible in India as well. Globally, till date, there have been already 33 M&A deals globally in the broad category of transportation, which includes logistics, express and shipping, against 53 in the whole year of 2005. The value of the 20 deals in 2006 for which data is available with Bloomberg, is US$ 1.62 billion, while the 25 deals with deal size available in 2005 were worth US$1.2 bn. Check out a few in the table Making their moves. Table: Making their moves M&A activity globally Announcement Target company date 5-Mar-07 J E Bernard 1-Mar-07 Warrior Services Inc 1-Mar-07

Acquirer SDV Logistics Celadon Group

Investment NA (merger) US$8.3 mn US$400 mn

FedEx-DTW International Priority FedEx express joint venture (50% stake buyout)

28-Feb-07 23-Feb-07 21-Feb-07 20-Feb-07

Friakin Group (properties sold) GEOCOMtms Jung & Leyener GmbH Birkart Globistics Chile S.A.

WP Carey

US$68 mn

RedPrairie Corporation NA Gruber Logistics Thiel Logistik NA NA

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SUPPLY CHAIN & LOGISTICS DIRECTIONS 2007

13-Feb-07 13-Feb-07

Saltire Integrated Shipping BAX Global, CPI Transport, StarTrans International (meger)

Samskip and Schneker

NA NA

9-Feb-07 2-Feb-07

AFL Cargo (50% stake) Brunner Railway Services GmbH

Dascher

NA

Railion Deutschland AG NA

24-Jan-07 22-Jan-07

Swift Transportation Co Elsen Internationale Spedition

Jerry Moves Hellmann Logistics

US$2.74 bn Worldwide NA

17-Jan-07 15-Jan-07

WhereNet Time: matters (Lufthansa subsidiary)

Zebra Technologies Buchanan Partners

NA

Capital NA

12-Jan-07

Terion Inc

GE Equipment Services NA

10-Jan-07

BAX Global Japan K.K. (merger)

Schenker-Seino Co. Ltd NA ( merger) , Japan

10-Jan-07 8-Jan-07 5-Jan-07 5-Jan-07

Expresso Mercrio S.A. Transportgruppen, Lynden Air Freight (JV) Vfw AG (DPWN subsidiary)

TNT Post Denmark Kerry Logistics (JV)

NA NA NA

Monitor Clipper Partners NA

4-Jan-07

Pro-Am Transportation Services, Inc

BNSF Logistics, LLC

NA

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SUPPLY CHAIN & LOGISTICS DIRECTIONS 2007

21-Dec-06 11-Dec-06 Dec-06 3-Oct-06 3-Aug-06 10-Jul-06 14-Jun-06 Jun-06 21-Dec-05 16-Nov-05 17-Oct-05 1-Sep-05 27-Feb-05

Transaxiom Vector SCM ANC (UK) Lynx (UK) ABX Logistics (Belgium) DX Services Dematic (Germany) ECU Line Frans Maas BAX Global ACR Logistics Exel Logistics USF Corporation

4S ( Four Soft) General Motors FedEx UPS 3i Candover Triton All Cargo Global DSV Deutsche Bahn Kuehne and Nagel Duetsche Post Yellow Roadway

US$10 mn US$ 84.8 mn US$240 mn US$97 mn NA GBP 348 mn NA Euro mn 22.5

Euro 225 mn US$ 1,100 mn Euro 440 mn GBP mn US$ mn 3,700 1,370

Source: company websites, Sembcorp offer document, press releases, and presentations, Transport Intelligence The key trend visible is the increasing activism of venture capital / private equity firms. These usually buy into the company, especially in robust growth industries, turn it around and incubate it enough to raise resell value. PE activity ramped up globally in 2006, and Asia was no exception, given that this region has India and China as the two biggest growth engines in the world and offer enough opportunity to get high returns on capital. UEM BHD bought into Gapima SDN BHD in Malaysia, which specializes in project cargo logistics for US$0.48 mn. In India, investor activity is steadily increasing. Anil Dhirubhai Ambani Group took a 40% stake in courier major DTDC, for Rs 70 crore and Australian venture capital AMP Capital bought into Gati, in February 06, investing well over Rs 100 crore into it. Both companies have shown healthy top line growth and margins better than their counterparts in Asia. PE activity was strong elsewhere. Europes 3I Group, a private equity group bought UK-based ABX Logistics from Belgian company SNCB Holdings in August 06. While SNCB is a railway company, ABX Logistics, with 2005 revenues of GBP2.5 bn, operates in transportation and warehousing logistics. Lincolnshire Management (LMI), another US PE firm, bought into Amports, one of the largest automotive ports and logistics companies in the US in May 06 for US$108 mn. Amports handles the imports chain for cars and vehicles into the US through six ports, and has all the global majors as customers. JTM Acquisition Corp took over the US operations of Stonepath logistics International Services in October 06, and will sell its Germany operations as well this year to JTM, taking the total deal size to US$ 18 mn. In this case, the sell out reduced Stonepaths debt substantially. JTM, in turn is receiving the finance for this deal from another PE, The ComVest Group in the US. Its a matter of time before PE start looking at India closely, either as themselves or as vehicles for other companies, or incubators, as it were. The logic put forward during ETIGs meetings with

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SUPPLY CHAIN & LOGISTICS DIRECTIONS 2007 private equity managers is that logistics, unlike the dot-com bubble of the 1990s, needs to be backed up by assets on the ground, which can be verified, and valued fairly consistently across companies. While overseas asset-light is the mantra, here in India, with many companies in the development stage, owning and controlling their chain is important to maintain standards of service. In turn, this needs money- and thats where PE steps in. PE firms have started involving logistics industry in their portfolio since 2003, when industry demand began to grow and MNCs put in their money here. INFORMATION DRIVE IT is literally the lifeblood of SCM, and Indian providers are realizing it. Even within the past five years, IT awareness and spends have risen. Investments have shifted from just pure business software to operations hardware, disaster recovery, database management, ERP, SCM planners, dynamic planners, and track and trace. Even though the penetration of GPS and RFID remains low, companies and service providers are fully aware of their uses and benefits, and experimenting as well. The fact that latest servers, drives, software and programming arrives in India almost the same time as in the US points towards SCM being a major IT growth segment. Indian majors like Infosys, Satyam and Wipro have started up divisions to focus on SCM software in India, alongside their US/ Europe focus. Open source like Linix is being experimented with in companies like Om Logistics. The nature of IT investment and application is changing and this trend bodes well for IT and software in India. ETIGs survey of select leading supply chain service providers shows that they have started moving to a higher share of pre-programmed software than before. The main reason is that beyond a certain size, in-house programming becomes too much for staff to handle without significantly expanding staff numbers and skill level and both can be expensive. Packaged software also comes with support and upgrades. Says Vineet Agarwal, executive director, Transport Corporation of India (TCI), All our software packages have been developed in house. However, in the next 3 years, we think more than 50% of the software will be packaged/outsourced. Says Anil Syal, VP-marketing, Safexpress, Almost all the work is initiated by the business team and hence it is beneficial to see the application getting developed nearby. Plus our team now knows our business inside out and we save lot of time by getting the job done in-house. However, he adds, The percentage of in-house work in percentage terms is reducing with more and more advanced applications coming in. We still lead the show even if the application is developed outside. A lot of times it becomes easier to buy the box rather than develop oneself. Gati has also developed its ERP in-house. All these are checking out integration with ERPs like SAP and Oracle as well. Theres another view as well. Pradipt Varshney, marketing head, Speedage, at the moment sees no need to go for packaged software, though. Akash Bansal, head logistics, Om Logistics, also echoes a similar view, 100% of our ERP is developed in house. We have a fully equipped IT team for the same and have no plans of outsourcing any module of this ERP. Linux is another software that companies are aware of, but not many use actively. Agarwal of TCI says, We currently have a limited usage of Linux and are looking at further implementation in Regions Syal of Safexpress adds, We have linux applications in our company operating, more strategic than anything else actually. Speedage and Gati have no Linux, while the only company to be a leader in using Linux remains Om Logistics.Says Bansal of Om Logistics, We have been operating with linux as operating system since last 4 years now. We did this transition from windows to Linux in just 6 months through out the country. Bansal says the company cut its IT software development costs radically even as the business developed. The other change happening is that overall skill levels are beginning to increase. Agarwal of TCI says, We have an IT Executive/ Officer at all our Regional offices as well as Controlling offices (more than 150). They are supported by the IT team (around 25 members) in the head office. We do seek an MCA/ BE but if the person has relevant job exposure, a lesser qualification will suffice

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SUPPLY CHAIN & LOGISTICS DIRECTIONS 2007 and will be placed accordingly. Internally we conduct regular training programs to educate the new joiners on the company systems and requirements. Apart from that, we also send our IT teams for higher training in courses necessary for future software and hardware developments. Syal has a team of 25 engineers and 100 computer operators with who have B Tech or MCA qualifications. Specialized qualification is necessary for development team like J2EE, VB, etc. Most of these are young guns with 2-4 years experience. Our project manager has over 5 years and our VP IT has more than 25 years experience. TCI and Safex estimate a spend of several crore just on tracking technology; Om Logistics at around Rs 15-18 crore over the past three years, while Gati spends several crore on warehousing. This money is partly going for equipment, but a lot of it is also going for training and talent. There are several other impacts visible as well- jobs in supply chain are increasingly well-paid, strategic in nature. Senior persons of ranks of directors head the SCM department. Innovations are beginning to emerge all across- from planning to delivery to operations. Infrastructure is improvingthats a trend that can only be beneficial for India Inc. OPPORTUNITY: INVEST IN LOGISTICS. MAY BE WORTH IT The booming Indian logistics industry continues to attract investments with announcements in different logistics segments- totaling to well over Rs 34 bn in various aspects (see table Funds flow). Australia-based venture capital group AMP Capital, with assets of $88 billion under management, committed nearly $19 million (Rs 85 crore) in its largest ever investment in Indias logistics industry. This investment was done via its India-specific fund, The Infrastructure Fund Of India (TIFI) in mid February 2006. The investment is in two stages- the first yielding Rs 67 crore, and the next stage, 18 months later, another Rs 17 crore. Since February, a total of nearly Rs 200 crore has been infused into Gati, and a GDR issue is under consideration as well, which will take total infusion to over Rs 400 crore. Speaking from Singapore, Mahendra Agarwal, MD, Gati, says, Funds will be deployed in upgrading and acquiring new infrastructure, physical distribution mechanization to carry more volumetric load and time definite distribution, acquiring new SCM / LOG technologies and to modernize the material handling equipment to meet the market demand. He adds, In India, Gati would be focusing on warehousing, SCM / Logistics Solutions and packaging solutions and consolidation, utilizing surface express distribution network with multi-modal air, sea and rail connectivity. In Asia Pacific, we will initially focus on India centric Business and then on worldwide distribution utilizing alliance strength with Gati offices. Adds Agarwal, We have the expertise to run the business. AMP would bring-in change in outlook, their global contacts and more focus on International Business. Says Krishnan Sehgal, AMP Capital from Singapore and who led the team, our investment in Gati is our largest investment in a logistics company in Asia. This investment is from a private equity fund that we manage and which invests exclusively in India. As a fund manager, we will continue to look at future opportunities in the logistics space in India but we are also mindful of making sure that there are no conflicts in terms of what we are doing in Gati and what we will do elsewhere. The outlook on Indias logistics industry remains rosy, a fact that attracted AMP Capital. Says Sehgal, I do believe that the Indian logistics industry is fast developing. The changes that I see happening are a greater role of organized logistics industry in the Indian supply chain space. There is also a greater recognition by the Indian industry that specialized logistics industry adds considerable value and savings to the manufacturers, leaving them room to concentrate on their

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SUPPLY CHAIN & LOGISTICS DIRECTIONS 2007 core competence. As Indian industry feels the pressure to become more competitive, it will need to rely on the specialists doing this job. Apart from this, says Sehgal, There will also be greater play for the logistics in the agro related industries, which need significant improvements. AMP Capital also factors in developments in Blue Dart, the domestic express major, plans to induct a third Boeing 757 to its existing fleet of seven dedicated charters in India. The Boeing 757 is expected to be inducted by May, 07. Blue Dart already owns a fleet of five Boeing 737 and two Boeing 757 freighters. We have got the go ahead from our board. At present, we are in the negotiation stage, said Nitin Gupte, managing director & CEO, Blue Dart Aviation. Currently, both the existing Boeing 757 have been leased in from the European Air Transport, an airline based in Brussels. However, the decision whether the third freighter will be leased or purchased is still being worked on by the company. This third 757 will ply Bangalore- Delhi and with a rejig of the network, the capacity of Blue Dart for daily uplift will exceed 300 tons. The emergence of a vast number of SEZs and clusters of manufacturing bodes well for an express company, said Mr Gupte. Even if 10% of these want air connectivity, Blue Dart with its network could do it well. Tulsi Mirchandani, Sr VP, Marketing and Projects said Blue Dart had projected touching pre-B757 load levels of 80-85% within six months; but by September 06, the company had already achieved 81.5% - within the six months planned. Mumbai based First Flight Couriers leased three ATP turbo prop aircraft to move into air express mode, while the Small Industries Development Bank (SIDBI) Venture Capital (SVCL) put in Rs 10 crore into Mumbai based Direct Logistics, one of the few freight forwarders in India to receive private equity participation. Table: Funds Flow Investments in logistics sectors Sector Container trains CFS / ICD Warehousing Trucking / express Offshore Miscellaneous Total (Rs bn) Source: Edelweiss research

Capex 16.3 5.4 2.0 3.8 2.5 4.0 34.0

The basis of both investments is the India growth story. While First Flight projects demand for air express rising sharply as a result of sharp competition in time sensitive industries like IT, Direct Logistics projects Indias increasing sourcing from China and exports to the rest of the world as reason enough to expand at this point. First Flights aircraft make it the second player in Indias air express industry, after Blue Dart. Says R K Saboo, Dy MD, First Flight, We estimate that over 75% of our present load of 900 tons a month, which earlier went by commercial airlines, will now shift onto our three ATP aircraft from July 06 onwards. This shift will straight away start us up with a 60-65% load factor. The average age of the ATPs is 14 years. He says breakeven for the aircraft operation costs will occur at 80% load factor, a figure he targets within the first year of operations, as these aircraft will help First Flight improve services and increase customers by offering fixed time and faster deliveries. The ability to service more high yield cargo from IT, pharma and textiles will also help. That in turn should allow them to get a premium on existing and new offers. All this is factored into the 30% top line growth that he projects for 2006-07, from last years Rs 240 crore sales.

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SUPPLY CHAIN & LOGISTICS DIRECTIONS 2007 One aircraft will be based at Amritsar, another at Bangalore and the third at Chennai- all on key demand centres for First Flight. The route will be from Chennai at 10pm to Hyderabad, Bangalore, Mumbai, Delhi and then Amritsar by morning. Simultaneously, the Amritsar aircraft follows the same route to Chennai. The third aircraft will ply from Bangalore to Amritsar. Hyderabad will be hub where re-consolidation will take place for all cargo. The next phase of expansion will depend on how the services take off, but tapping East India 20% of First Flights load presently- is on the cards as well. Direct Logistics, a freight forwarder and NVOCC, had a turnover of Rs around Rs 16 crore in 04-05 and 39.5 crore for 05-06, but that hasnt prevented Captain Sunil Devrani, CEO and MD, from projecting revenues for 2006-07 at Rs 147 crore, Rs 251 crore for 2007-08 and Rs 318 crore for 2008-09. . These figures were a tad aggressive for Ajay Kumar Kapur, CEO, SIDBI Venture Capital (SVCL), but Devrani prevailed. We had come so far without any external funding, but going forward, to accelerate growth, we had to get funding, says Devrani. He says, By 2012, China could be Indias largest trading partner. We have six offices in China since the past year, and 60% of our investments will go into Mainland China and Hong Kong to expand there. Direct Logistics is also one of the major freight forwarders for Afghanistan, Kazakhistan and Russia amongst others. Devrani basis his aggressive sales targets on his ability to manage both the high growth potential and the various risks of those regions. Hes also looking to expand services in key industrial clusters like Tirupur and container freight stations set up is on the cards, but later. Kapur says SVCL looked at all this, business segment prospects and a clear exit route when they decided to invest Rs 10 crore from the Rs 500 crore SME growth fund for a minority stake and a seat on the board. Devrani says they will need another round of funding as well, and targets an IPO three years down the line. In January 06, AMP Capital invested Rs 86 crore in Gati as private equity, also with a seat on the board of Gati. These underline the increasing interest in private equity investors to invest into Indias logistics industry. Putting in the money Investments in India Type Target Company Investment Investment Investment Investment Acquisition Acquisition Acquisition BLR India Gati DTDC

Direct Logistics Blue Dart Express Pafex Triune Freight and Logistics Acquisition Speedage Express Acquisition Snowman Frozen Foods Source: companies, ETIG

Acquirer / Investor Reliance Capital AMP Capital Anil Dhirubhai Ambani Group SIDBI DHL Express FedEx Express C H Robinson TNT Express Gateway Distriparks

Amount 31% stake Rs 89 crore Rs 70 crore Rs 10 crore Rs 760 crore Rs 138 crore NA Rs 200 crore NA

Date January 07 February 06 February 06 June 06 December 04 November 06 November 06 September 06 December 06

Where companies are involved, divestment has occurred because of shift in strategy. In India, FedEx bought out 100% of Pafex, its long time agent in India, for Rs 138 crore in November this year, while TNT Express did the same with Speedage, for a sum around Rs 200 crore in September 06. DHL holds 81% of Blue Dart since December 04 already. Gateway Distriparks in December 06 bought 50.1% of Snowman Frozen Foods, looking to offer integrated cold chain solutions, for Rs 48 crore. In all cases, control over the entire chain was the focus. Elsewhere, TNT, the Dutch logistics major, is getting out of logistics worldwide in order to focus on express. It sold its logistics business in France to Groupe Malherbe, a French transport company. DHL, on the other hand, wants to be a giant globally integrated supply chain major. Its parent Deutsche Post acquired

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SUPPLY CHAIN & LOGISTICS DIRECTIONS 2007 Polar Air Cargo, from Atlas Air Holdings, for US$150mn as one more component of the global conglomerate its piecing together. The need for scale is causing even freight forwarders to hunt for acquisitions. US$2.8 bn UTi Worldwide, which also recently became Indias largest IATA agent in revenue terms (Rs 239 crore in 05-06), acquired NewLog of Israel in July 06, expanding UTi Worldwides footprint in that region. INVESTING IN LOGISTICS STOCK: MAKE HASTE SLOWLY Investing into assets of logistics is one thing: that has long gestation time and is fraught with uncertainty: this fuzziness in business potential may be less now that Indian demand is booming, but betting on logistics stock itself is now becoming more viable. Check out ET Logistics Index, which ETIG launched in late 2006. This takes into account the top ten logistics stocks as per market cap, and being rated equally, creates an index. To cut a long story short, if you had invested Re 1 on the ET Logistics Index on January 1 2003, that would be worth Rs 16 on December 22 2006, three years hence (see chart Up and Away!). Its been on a steady rise over this period, nothing spectacular, but taking the ups and downs of the BSE Sensex in its stride as well. It broke the 10 barrier in July 2005- more than two years after we started tracking the index. After having risen to as high as 19 times in May 2006, it actually fell to a low of 12 before stabilizing at 16.7. Not many global indices can deliver such returns over a relatively short time frame of three years. For instance, the NYSE Transportation Index had a good bull run for most of 2003-04, but when good GDP numbers came in for the US economy in 2005-06, the index didnt move up drastically, quite unlike the high variation seen in the ET Logistics Index: that suggests there is arbitrage possibility in Indian logistics stocks. The full index with daily updates is online on www.etintelligence.com . Chart: Up and away! Performance of ET Logistics Index
ET Logistics Index 17013.54

Index

4902.3 794.3 Mar 31 2003 1191.4 mar 31 2004 Mar 31 2005 Mar 31 2006

Year ended

Source: ETIG ; www.etintelligence.com The index reveals an overall bullishness on the industry, but on a company basis as well, analysts uniformly expect strong sales and profit growth (see table Going places) . That seems to reinforce the feel that as India progresses, this industry will get its limelight much more. Even today, analyst coverage of listed logistics companies remains sketchy, and restricted to a few equity research houses or companies. Much more detailed insight, the way it is for companies in auto or other sectors, is needed to bring perspective to the investor. Table: Going places Estimates of financial performance Company Sales

Net profits

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Change FY08 FY08/FY07 Concor 31,222 37,600 20.4 TCI 10,202 12,223 19.8 Gati 5,428 6,775 24.8 Gateway 1,758 2,378 35.3 All Cargo 16,725 18,730 12.0 SICAL 10,065 10,813 7.4 Sales and profits in Rs mn; change in % Source: Analyst reports, ETIG FY07 OPPORTUNITY: LOGISTICS MODES

FY07 7,118 236 313 954 948 483

Change FY08 FY08/FY07 8,365 17.5 440 86.8 436 39.3 1,198 25.6 1,235 30.3 757 56.8

If you were an investor in any decent logistics firm anywhere in the world, you would certainly look to find India listed as a key focus region in your companys annual report. Theres just no escaping it now, and the companies that entered before and stuck it out, are now in a position to align their growth with that of India. There are several compelling reasons why the logistics and air cargo business in India should attract investors of all hues, Indian or otherwise. The well known reasons may be listed at once: a booming economy is fueling demand for goods now, and just in time; an ever-increasing mass of consumers demanding more higher value goods; the retail boom which is aligning supply chains into time sensitive from being volume-sensitive and of course, far more relaxed regulatory and taxation climate that ever before. IATA, in its 2005-2009 freight forecast, also projects a steady growth of nearly 8.5% a year on key routes like within Asia Pacific and middle east, areas where India can hold a strategic advantage. IATA also estimates Indias AAGR (Average Annual Growth Rate) in cargo demand at 9.7%, against Chinas 14.4%; but both these countries are expected to grow far faster than many developed nations like US, Europe and Japan. IATA further states that while the peak growth for air cargo worldwide is now past, several regions and flows like India/ China- US/ Europe will continue to hold good. Check out air cargo, where customs revenues in Mumbai doubled in the past five years (see table Revenue from air cargo, Mumbai). All airports in India are seeing a surge in air cargo handled. Industries most aggressively tapping air cargo are textiles, machine parts, gems and jewellery, pharma and electronics. Says Chandrasekher Pitre, head, marketing, DHL Express, The Indian market is growing at 16-17%, twice the rate of economic growth. This positive trend will continue till 2010 -15. How the cargo mix is changing also points towards the way of the future. A visit to the Blue Dart hub in Chennai, for instance, shows a full pallet consisting of LG LCD TVs, each worth over Rs 70,000 being loaded into the Boeing 757; and thats been happening almost every night. Then there are mobile phones and chips imported through Chennai port and flown to Delhi. Says Tulsi N Mirchandaney, Sr. Vice President Marketing & Projects, Blue Dart Express, The current market size of the organized domestic air express market is about Rs 1,100Cr and growing at a rate of 20%. Blue Dart has a 40% share of this market. Most of the segments are showing double digit growths, amongst them Telecom, Consumer Durables, Drugs and Pharma, IT and Electronics. Six of the top ten exporters from India by air are pharma companies, flying out drugs and vaccinesagain a relatively new segment that is moving to centre stage. Table: Revenue from air cargo, Mumbai Source: Air cargo customs, Mumbai Period (Rs. in Crores) 2003-2004 3463.27 And such growth is going to attract investors as well. Says 2004-2005 3496.92 Mirchandaney, We have already been witness to a few foreign 2005-2006 3764.87

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SUPPLY CHAIN & LOGISTICS DIRECTIONS 2007 players making their foray into the Indian market and we anticipate further investments from foreign and domestic players in the country. This will result in growing distribution needs as India relies heavily on domestic consumption. This has also resulted in foreign logistics players entering the Indian market. Pitre of DHL elaborates, With major foreign players investing in the retail sector, overall efficiencies levels would increase tremendously. Costs would considerably come down. There would be a significant increase in competitiveness leading to better pricing and an increase on customer support. This would, in turn create ample scope for new business models with increased focus on a fluid system of supply chain management with rise in speed to market products. Smaller players in the local logistics sector could come drastically under the scanner with limited resources being the major hindrance. Both these players are bullish on the industry with some riders, says Mirchandaney. The volatility of ATF prices are always a concern as they have a direct impact on costs, and so is disruption to our operations, as capacity is highly perishable and space inventory has no shelf life. Improvement in infrastructure would be welcome as it would support growths, reduce costs and improve service quality further. Blue Dart operates in the express segment, whose users place more value on time and security than cargo. But its not just the air express that will drive deep gains into Indian logistics. Its air cargo that has to pull its weight as well, especially as India integrates more and more into global supply chains where air cargo plays a pivotal role. Here again, the industry is bullish. Says Vijay Kondath, Secretary, air cargo agents association of India, speaking to ET earlier, The international freight handled for the period April- March 2004-2005 was 803,503 in freight tonnes. For the same period in 2005-2006 a total of 900,751 of international airfreight was handled, up by 12.1%. There certainly is a good mix of air cargo in the last few years from the traditional garments, leather & leather products to more value added items such as automobile components, engineering goods, computer peripherals, electronics, mobiles, laptops, software form IT companies, gems, jewellery. Electrical machinery tops the import list in 2005-06 as well (see table import duty revenue from top five commodities), and pharma tops the top ten exporters of air cargo from Mumbai airport (See table Top ten exports by duty paid.) Table: import duty revenue from top commodities . Commodities 2004-05 1 2 3 4 Electrical Machinery & 1025.83 Equipments Machinery Excluding Machine 896.61 Tools Instruments 385.84 Chemicals 292.06 78.67 2005-06 1177.15 926.29 441.46 313.68 93.54

5 Misc-Articles of Base Metals (Rs crore) Source: Mumbai air cargo customs

Table: Top exports by duty paid (table11) Name Of Commodities 2004-052005-06 Pharmaceutical Products 2027 2887.35 Organic Chemicals 2032.57 2481.55 Electrical Machinery & Equipments 1164.7 1696.12 Article of Apparel and Clothing Accessories, not knitted or crocheted 1602.45 1673.99 Nuclear Reactors, Boilers, Machinery and Mechanical Appliances, 1048.1 1520.36 Parts

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SUPPLY CHAIN & LOGISTICS DIRECTIONS 2007 (Rs crore) Source: Mumbai air cargo customs Certainly, airlines now have included India in their global routes. Apart from the express majors, TNT, UPS and FedEx all of whom have daily flights touching India, passenger airlines have also stepped up activity. And inevitably, China features. Theres no denying that China is the factory of the world, and Indian companies have joined, rather than fight the dragon. The clearest indicator of this is from Cathay Pacific Cargo, based in Hong Kong and more linked to China than possibly any other airline. In August 06, the airline announced 16 additional flights out of India and it would run turnaround flights to and from India, rather than just fly-by. That means nearly 2.5 times more capacity and the recognition of India as an origin-destination market. Announcing the flights, Rupert Bray, country manager, Cathay Pacific Cargo noted that, earlier, while flights from Hong Kong came in full, they went back relatively empty. These days, he says, the load is balancing on both sides. Scanning the market, Bray says, The cargo market is sluggish and the market is price sensitive at present. As Cathay Pacific operates capacity out of Chennai, Mumbai and Delhi, we are able to balance our loads however yields are stagnant. For us, the top five sectors are Hong Kong, China, Dubai, Japan and Europe. He remains bullish in the face of several negatives though. There is good opportunity for export growth in the next 2-3 years and we expect an approximate growth of 8-10% each year. The retail courier and express products are prime targets to generate higher yields and we expect this segment to grow faster. The market is highly competitive and we see the Indian logistic companies as well as the MNCs heading towards the direction of full supply-chain-management. As usual, the key concerns are airport infrastructure, like cargo handling facilities and x-ray machines. Air Cargo Data Cargo tons/day Airline 2005-06 2004-05 2003-04 Indian Airlines 267 255 Alliance Air 37 32 Jet Airways 288 275 241 Blue Dart 180 180 120 Tons per day 468 759 648 Tons / year 170,817 277,035 236,520 Source: Airlines annual reports, DGCA, ETIG analysis Data for 2005-06 is YTD Coming to the crux: airport infrastructure. A lot has been said about it, but changes are afoot as well. In typical Indian fashion, changes creep up upon you; witness the Mumbai-Pune expressway, which got ready even as the clamour for such roads was ongoing. The privatization of Mumbai and Delhi airports by themselves represent a positive change that investors should note. Master plans for both are now out; while passenger movement remains the focus as of now, cargo will certainly benefit. Talking about the Mumbai master plan, G V Sanjay Reddy, MD, Mumbai International Airport (MIAL), said he expected cargo tonnage capacity to cross 1 million tons, from the present 0.45 million by 2010, and with the cargo complex going on stream, as per plans, by 2020, a lot of bottlenecks could go. The new cargo complex could well be four-stories tall with lifts and hoists; but for the present, MIAL plans a temporary extension to the existing facility at Sahar, Andheri, Mumbai. Delhi, fortunately, has almost no such issues of space or encroachment. Debottlenecking would be crucial for Mumbai aiport; a little push could really increase growth dramatically. Already, freight ton-km flown, a measure of capacity and demand, is up 4% domestically, and 10% internationally (see table frt-ton km) Table: frt-ton km Freight tonnes-km flown Mar-05 Mar-06 06/05 growth %

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Domestic scheduled operations International scheduled operations (000 tons) Source: CMIE Business Beacon

228,991 508,658

238,388 4.1 560,260 10.1

With 5,000 acres to play with, Delhi could well overtake Mumbai in air cargo operations quickly as infrastructure develops there faster under the DIAL (Delhi International Airport) master plan. But thats a long time away. For the time being, MIAL is cutting the flab from its present operations. MIAL says it takes just 6.05 hours to clear cargo ready for customs clearance from the actual time of arrival (ATA) of the cargo aircraft. Thats as good as Singapores Changis 5.5 hours and better than Hong Kongs HATCL 8-hour standards. Cargo above 20 tons are cleared in 4.4 hours, says MIAL, against 37 hours before MIAL took over. And this was done chiefly because now there was just one agency doing the ground clearance, not two (Cambatta and AAI) as before; processes have been streamlined and MIAL is attempting to drive down unnecessary work. The easy wasteremoval may be through now, and future gains will come at much greater pain and cost; but a beginning is made. For instance, the clearing agents and customers have to streamline themselves as well and customs operations made smoother- more a process and mindset issue than anything else; today it is possible to see all data about cargo and its status online and file duties by EDI and online banking; however, its still to be widespread enough to see significant drop in costs of air cargo operations. But its getting there. Logistics is going to be key gainer from the booming Indian industry. Theres no doubt revenues will rise. But the questions that investors should ask, and look for closely, are related to profitability and network. Latest September 2006 quarter results show that while net revenues are up in double digits, net profits arent so strong. This could mean a structural realignment: most are investing heavily into their physical networks, plus cost of manpower has risen as a result of attrition. In addition, investors should track how networks are being formed and what would be their impacts on cost of operations. In the short term, logistics, like hotels, dont yield returns. Its only in the medium to long term that logistics business makes money. OPPORTUNITY: DEDICATED FREIGHT CORRIDOR TRAIN No. 5645 UP/NTT Guwahati is quite unlike any other. It doesn't belong to the railways and is arguably the fastest goods train in India. The train belongs to Hindustan Unilever Ltd (HUL) and is run by Indian Railways. It runs from Nagpur to Tinsukia, carrying raw materials to make toothpastes and shampoos, and covers the distance in three days. There is a good reason why HUL runs this train. "It takes us almost 22 days by road to transport raw materials from Nagpur to our Assam plant. Such were the inefficiencies that we had no choice but to run a dedicated train," says HUL vice-chairman MK Sharma. Other companies should be as lucky or resourceful. But the cold reality is that the logistics system in the country is a disaster. Goods arrive at ports and then lie in heaps for more than six days. There are 10-km truck queues outside ports to take the goods out. Once out, the goods take close to a week to reach the hinterland, where markets, or manufacturing plants, exist. This can change, if railway minister Lalu Prasad Yadav, who will present the Railway Budget on February 26, is able to flag off the dedicated freight corridor (DFC) with some major initiatives. As descriptions go,the corridor is merely a set of two railway lines, one running along the western edge from Mumbai to Delhi and the other running east from Delhi to Kolkata. But it is more than that. For the first time in the post-Independent era, Indian Railways will be adding more than 3,000 km of railway line at one go. It is also the first time that freight trains will have their own rail lines, promising a three-fold increase in freight speeds. Manufacturers estimate that transit time to Indias key port Mumbai will be halved and their supply-chain cost will be reduced by 15-20%. For instance, Mr Sharma will be able to cut his working capital needs by 50% if the dedicated freight corridor becomes a reality. The sectors that will benefit are steel, iron ore, coal

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SUPPLY CHAIN & LOGISTICS DIRECTIONS 2007 and even pharma and hardware. Before you get excited, heres a sobering thought all this is on paper, just a dream, albeit a compelling one. As with all things sarkari, even if its a dream, it has to be submitted in triplicate. The paperwork for the project has begun. The paperwork will take at least two years while the execution period should be wrapped up in another three years, says Indian Railways chairman JP Batra. Batra is an old hand in the railways and knows the cruel paradox. Freight brings in 60% of the revenues and helps the government subsidise passenger trains, which lose Rs 7,000 crore every year. The problem is that freight the cash cow is on the verge of a nervous breakdown. All its major routes are handling far more trains than they can. A key route like Mumbai-Delhi is running at 150% over the specified capacity and 15% of the trunk routes are carrying 65% of the traffic, says Mr Batra. This is unsettling for exporters and manufacturers who want to use the railways to transport goods. As railways cant guarantee delivery time, it is tough for them to keep their word on export commitment. Consider Moser Baer. For them, it takes 15 days to ship a container from Mumbai to Europe (Rotterdam, Germany) but to transport a container from their plant (Delhi) to the vessel (Mumbai) takes an average time of 5.7 days, and sometimes 8 days. It is no wonder then that Ratul Puri, ED, Moser Baer, really wants DFC to come about. With almost 40% of our logistics movement taking place on the JNPT-Delhi route, these are the inefficiencies that we have to bear. With DFC, we expect to save on both costs and transit time, which eventually will result in higher exports for us, says Mr Puri. His pain is shared by Maya Sinha, deputy chairperson, JNPT. The success of our planned fourth terminal depends entirely on DFC, she says. Spread over 2,701 km and costing Rs 28,000 crore, this is the single largest infrastructure project in the country. There are two parts to DFC: the Eastern and Western Corridor. The 1,469-km-long dedicated western freight corridor, which will link Jawaharlal Nehru Port (JNPT) to Dadri near Delhi, is likely to be completed in five years for Rs 11,446 crore. This corridor, which will be fit for double stack containers. See box Update for the latest after the Rail Budget 2007-08 on February 26 2007 Ashish Kumar Mishra , The Economic Times Box : Update: Freight gets a push The Rail Budget 2007-08 pushed for freight growth this time. It laid heavy emphasis on infrastructure, with the minister pointing out at length the gains in freight performance- all at no extra investments or costs- and more importantly, at no pains to the passenger side of operations. Briefly, freight performance, at incremental loading of 60 mn tons in 2006-07 was up 17%, beating passenger growth at 14% in the same year. In 2005-06, freight tonnage growth was 10% and revenue growth 18%. This growth is in line with the growth in several bulk commodities like steel and cement, whose local use and exports both have risen in 2006-07. The better part of the story is the reduction in classes from 220 to 210 and from 170 to 160 for ores and minerals. Wagon load class rates for commodities up to class LR1: reduced from class150 to class 120. This makes classification, and hence paperwork easier for major players all around, especially heavy industries. Were not splitting the hair very fine now, in other words. But a lot more simplification is needed. Freight trains came in for a lot of attention this time. Freight operators may get a discount as well. The budget 2007-08 proposes 1. Discounts up to 40% on incremental loading of bagged consignments in open Wagons in empty flow direction.

2. Discount of 20 per cent during lean season and 15 per cent during peak season
Two Leg Freight

under

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SUPPLY CHAIN & LOGISTICS DIRECTIONS 2007 3. Discount Scheme for covered wagons in up and down directions. 4. Distance between unloading points in Two Points Rake Scheme to be increased from 200 to 400 kms during lean season.

5. Facility for loading less than block rakes under Empty Flow Direction Scheme.
6. Empty Flow Discount extended to all commodities except coal, coke and iron ore. 7. Empty Flow Direction Freight Discount will be given at 30 per cent throughout the year for traffic lead of more than 700 kms. All the above will help in reducing operational hassles- and basically ease time to complete formalities. Milk and vegetable vendors and retailers get special coaches in trains, which should make a lot of budding retailers and supply chain managers happy. Wagon manufacturing rose 10% in 200607, against 25% last year. The railways continues to find ways to load more on the same wagon; for instance, in the 2005-06 budget, Mr Prasad had noted that loading 4-8 tons more per wagon would yield Rs 5,000 crore more- that effort seems to have paid off. And, for whats its worth, Rs 30,000 crore has finally been set aside for the dedicated freight corridors, which are slated to start in 2007-08. On the container front, the ministry targets 100 MT of containers by 2011-12, up from the 55 MT in 2006-07. The government is already looking at running 3-tier container trains on the diesel routes and double stack trains on the electric routes. The funds allotted to the freight corridors this time is Rs 1,330 crore. Source: Sachin Baxi, www.etintelligence.com , February 26 2007. OPPORTUNITY: JOBS THE supply chain people are short on the supply of people. When not managing logistics businesses for their customers. logistics companies are busy poaching each others staff. From delivery boys to service executives to the top management everyone is fair game. With the industry growing at 20% a year the limited pool of trained manpower and the immense pressure on service providers to step up quality and reach, poaching ready-made managers is inevitable. Industry experts noticed the trend four to five months ago when a slew of job changes happened across all levels of the industry. We lost a lot of people from delivery boys to service agents, and even top management, confirmed a Gati official, based in Hyderabad. According to the official, it was primarily because Gati, at that point of time, was undergoing organizational restructuring. The company was in a flux because of internal issues and service repositioning. Around the same time, as a result of a strategic repositioning of AFL into a fullfledged third party logistics player, it needed people who could hit the ground running. AFL, say industry watchers, grabbed the opportunity that the industrys growth and flux offered and recruited across the spectrum. We did take people from Gati but the trend is there to stay, said a senior AFL executive. While the initial signals were clearly visible, poaching actually took off soon after that, with almost every player witnessing the trend irrespective of size or operating segments; large or small, express or cargo. We have lost quite a few people especially in the last few months or so to competition,

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SUPPLY CHAIN & LOGISTICS DIRECTIONS 2007 new or old, said Anil Syal, vice-president of marketing, Safexpress. Says Pradipt Varshney, corporate head-marketing, Speedage. Attrition level is very high in the industry and it is happening with all logistics companies starting at the ground level and then continuing up the ladder save the top management personnel, Apart from rapid growth, the other factor driving attrition is the lack of training schools for this industry. People first join at the junior levels in any company and pick up operations knowledge on the job. Later, as they realise theres a booming job market, they bargain for better salaries and join other companies. In some cases, salaries have shot up 100% within a year. Thats unheard of for an industry where margins are low and remain under pressure. Some of this pressure shows up in personnel cost as a share of net sales, which appears to show an upward trend (see table payout). The pressure also appears to be seen on job sites, where listings have risen over the past year (see table Come on in) Table: Come on in Online job listings Site Listings Naukri.com 2764 Monster.com 1000+ Timesjobs.com 1593 Source: websites; search words- logistics Practically every logistics company is nothing more than a training ground, and a direct offshoot of poaching has been a dramatic rise in pay packages. While a few years ago, wage bills never figured as a cost in our books, generally maintenance and infrastructure being the priorities. Today, they have become a major burgeoning component, said RK Saboo, chairman, Express Industry Council of India. Experts believe since entry point salary levels are quite lower as compared to many other industries, offering double pay is a sure shot means to get the man. We often look for people who for some reason have stagnated at their jobs, but have a sufficient work experience. We offer them either a raise to a higher designation or an increase in pay, said the AFL executive. Right now, the attrition has not had a huge effect because there is enough business to go around. A leading industry player believes, there are a few companies which are distorting the market structure with absurd salary packages and perhaps in the long run, the industry might end up creating job-hoppers rather than true professionals. Table: Payout Personnel cost/ Net sales

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Personnel cost / Net Sales

10.2 9.3 8.7 8.3 7.8 7.0 8.1 8.5 7.7 8.4 9.3

6.6 % mar04

jun04

sep04 dec04 mar05

jun05

sep05 dec05 mar06

jun06 sept06 dec06

Quarter ended

Source: CMIE prowess, ETIG analysis OPPORTUNITY: INDIA IN FOCUS DHL creates new South Asia Region: underlines Indias importance to DHL Express Indias in the limelight again: DHL Express has carved out a new region, South Asia, from its Asia-Pacific region. This will be its fifth region within APAC, and includes the SAARC nations. DHL says this recognizes the region- and India, which is the biggest chunk of it- as the future growth engine. Also, there is a lot of intra-region trade between the SAARC/ South Asia countries, which will now get increased focus. The headquarters of the new region are in Mumbai, closer to the market. Earlier DHL Express India used to report to Singapore. Malcolm Monteiro, formerly MD of Blue Dart Express, has been elevated to the post of Sr VP and area director, DHL Express South Asia, to oversee the strategy and overall growth direction for the new region. He will also handle Blue Dart Express and Blue Dart Aviation. He will also sit on the APAC management board as well Indias voice on it. In Mr Monteiros place, Anil Khanna, an old Blue Dart hand, has been appointed MD of Blue Dart Express. Mr Monteiros targets are fairly clear, a fact that Scott Price, who heads DHL Express Asia Pacific made no bones about. Today, China is the largest market for DHL Express, followed by Japan, Korea, Hong Kong and Singapore. Says Mr Price, Now it will be Malcolms job to put India in the list of the five largest markets for DHL Express. Hes quite bullish on India: a young population, high GDP growth and spending more, improving infrastructure, plus DHL is the only express MNC with its own domestic air express network and so on.

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SUPPLY CHAIN & LOGISTICS DIRECTIONS 2007 We will look at all options to grow the business. Says Mr Monteiro. We are the only ones who can provide a one-stop solution involving all aspects of express and logistics. His job will also be to focus on the trade lanes going through India, bringing in products and solutions that would drive growth. DHL has put inUS$300mn already into India so far, of which around US$10-15 mn came in 2006, for gateways, people and so forth. As a region, DHL has put in US$1.7 bn in APAC infrastructure. This is simply another chapter in a series for the Indian logistics market. In January, Fedex elevated Jacques Creeten to VP-Operations India, from MD- India in recognition of Indias importance in the Fedex world. Mr Creeten will head the new region which remains part of the EMEA (Europe, Middle East, Africa) region, but within EMEA the elevation gives India a greater focus, and possibly freedom to grow. Fedex purchased Pafex, its erstwhile distribution partner last year for Rs 138 crore. For TNT Express as well, India remains a key market. India is one of the few markets where it focuses on logistics, angling to become a large surface/air network player, unlike in many parts of the world where TNT NV is getting out of logistics completely. TNT got into the surface network model in a big way when it bought Speedage express cargo last year. POSITIVE TRIGGERS FOR SCM IN 2007-2008 1. Economic growth: 8% GDP growth appears well within reach for the next several quarters at least, driven by global demand for Indian made goods, and internal demand as well, as services put more money in the hands of one of the worlds youngest populations- bigger than the population of most countries in Europe. With infrastructure construction apace, a lot of demand is being fueled for logistics- trucks, inland waterways, ships for bulk, equipment for controls and so on. Witness the bumper performances of companies like Tata Motors, ABB, or Gati for that matter. 2. Roads: much maligned, 2007-2008 may see large swatches of the highway/ expressway network coming into operation: that in turn will connect many more parts of India much better, and may crack open hitherto difficult markets say in the east or deep north. 3. Air cargo: the rising number of passenger planes forecast to fly in Indian skies in 2007-2008 will provide much more belly space to Indian logistics players; in addition, more capacity will be online- Blue Dart and First Flight, but others are waiting as well. 4. Freight corridor: some time away, but it has the potential to make rail transport very viable and attractive by cutting time to market, faster turnarounds and possibly competitive pricing. 5. Space management: both warehousing and container yards will be hot in 2007: already finance is being raised to expand land banks: if GDP growth proceeds as forecast, space will soon be at a premium. Space management will soon become a real-estate play. Have money, will put up. 6. Investments: 2007 would see the start up of new plants / facilities by MNCs across India : BPO, auto, steel, garments, electronics, telecom. All of this will need logistics for movement of material, manpower and money: investments in ground facility will be needed to be supported by SCM services too- and thats a demand that can be profitably catered to. Global service providers are already cajoling: witness the flux over Nokias contract for phones Gati, DHL, UPS, TNT-Speedage- everyones vying for it- can be worth over Rs 240 crore for the guy who wins it all.

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SUPPLY CHAIN & LOGISTICS DIRECTIONS 2007

7. Retail: this made the headlines in 2006- Reliance, Wal-Mart, Tesco, Bharti, Carrefour. Adding to the big guns already here- Pantaloon, Metro, Shoppers Stop, Trent. Retail is an absolute supply chain game: front ends are easy to make, and maintain; filling the shelves 24 x 7 x 365 with just the right amount and type of merchandise with long and flexible supply chains are not. ETIGs interaction with almost every logistics service provider suggests that they are catering just about to the Indian retail chains; catering to the huge demands of giants like Reliance and Wal-Mart may just be out of their present capability: but retail remains a key driver for 2007-08. 8. Special zones: in the rush to cut costs, and take advantage of tax-free havens across India, almost every major company, from auto to steel, to FMCG to durables, has now set up plants in the far north like Himachal and Uttranchal, even though key markets are in the west, south or lower north. That means more longer lead times, more transportation, more costs: and that in turn means more innovative solutions for logistics: co-optition may not be out of the question! The number of SEZs and special zones is all set to rise in 2007-2008. NEGATIVE TRIGGERS FOR SCM IN 2007-2008 1. Fuel price: The initial fears of galloping oil price (crude) appear to have receded for 2007, with US$100 per barrel not likely. However, for the average logistics player in India, fuel prices have already caused havoc, raising operating costs by over 50% over 2005. But fuel price at the pump is something that the industry will watch closely- and which can put a spanner in the works. 2. Finance: Interest rates are already edging up, which will eventually dampen the rush for goods and capex; the dampening may not be as severe as in the past when rates were raised, because now the pool of disposable incomes coupled with booming demand from overseas is reducing the intensity of impact of interest rates for financing. 3. Disruptions: these can be terrorist or natural: in both cases supply chains stretch and flex and with Indias increasing integration into world trade, most companies are still not up to speed on their data and business continuity strategies, though some beginning has occurred. 4. Infrastructure bottleneck: something new? But these bottlenecks take on a different hue when you see the speed at which India is becoming the hub for much production of goods and services. It will be ironical if demand cant be serviced: in fact, most economists feel a lot more demand can be captured if there are incremental improvements in connectivity of all kinds. 5. Policy: while it may never happen, but the move by India Post to restrict FDI in courier to below 49% and to provide the Post with monopoly of letters / packages up to 300 g may in fact put a spanner in the works for many SMEs- leading to chaos, service overload for post and possibly withholdings of investments by global majors. 6. Manpower crunch: while companies can operate with staff pulled from various functions like stores or warehouse or dispatch, beyond a scale and complexity, trained manpower cuts through the faff and gets the work done. More importantly, it gives the customer a sense of control and command much better than otherwise. But manpower of the quality and quantity desired is far from available: colleges are ramping up, but it will be some years before a cadre of trained personnel who look at logistics as a science and skill rather than just operations develop.

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SUPPLY CHAIN & LOGISTICS DIRECTIONS 2007 7. Security concerns: while security of the chain will have to built in from the design stage, many companies will be spending much more and fast- on security of material, information and assets. That could dampen medium term profitability, especially for those with large US exposures. CONCLUSIONS supply chain management analysis is a complex systems approach, where factors that appear remote today can suddenly become crucial in the near term, which in turn needs considerable effort to overcome. This chapter only lists a few of the factors, but as India increasingly integrates into global trade flows, India Inc has to keep an eagle eye on international events as well. A lot of domestic issues are being solved, but many more are getting into mission-critical state: nevertheless, the SCM growth story appears set to continue.

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