India’s forwarders need to buckle up in a softening market

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Freight forwarders in India must cease acting as ‘mom-and-pop shops’ as they face industry disruption from ocean carrier consolidation, automation and a tax system overhaul. Forwarders are working hard to manage the obstacles and leverage the opportunities. Many are increasingly offering robust integrated solutions, facilitating end-to-end cargo delivery processes, enabling exporters to focus on their core competencies. The long-term impact of Amazon and E-commerce in general remains top of mind for most airfreight forwarders.

Lead-in

The current modal mix for cargo transportation is sub-optimal and skewed towards roads, which accounts for about 60-65 per cent of the total freight transported. Growth in freight traffic has almost plateaued at 0-1 per cent, with the rail modal share declining to 30 per cent.

Indian ports have a freight handling capacity of over 1,700 mn tonnes. Of the total freight handled at ports, major ports account for a 57.19 per cent share, while non-major ports account for a 42.8 per cent share. Air freight contributes a mere 1 per cent in the total cargo movement in India, moving around 35 per cent of the total shipment value.

Coastal and inland waterways lack dedicated infrastructure and thus remain largely untapped for movement of freight. With just 0.6 per cent of India’s freight transported through the inland waterway route despite vast network of rivers across its geographical corner that form about 20,000 Km of navigable waterways, the need for developing additional National Waterway is essential.

Market Forecast

The industry structure overall is highly fragmented, with unorganised players accounting for the largest share of business. A shift from pure transportation business to end-to-end service providers has emerged, thereby facilitating growth of third-party logistics (3PL) and supply chain management industries in India.

The rising scale of freight transportation has further encouraged a trend towards outsourcing non-core activities like logistics, warehousing, and associated activities to integrated players which has increased the share of the organised segment.

Six major projects in roads, ports, inland waterways and railways – Bharat Mala, Setu Bharatam, district connectivity, Sagarmala, port-rail connectivity, 106 national waterways development – have been announced by the government, which will directly benefit the freight industry in future.

The Ministry of Railways has also identified additional dedicated freight corridors – North-South Corridor (Delhi-Chennai); East-West Corridor (Kolkata-Mumbai); and East Coast Corridor (Kharagpur-Vijayawada) – for implementation in the coming decade.

The overall outlook of the freight industry in India is very bright. However, to handle the growing traffic, significant investments need to be made for expanding, moderniising and upgrading infrastructure, deploying advanced equipment and technology, and setting up of new storage and transit facilities.

Changing Trends

Trends in the global airline industry also impact the Indian airfreight forwarding market. One is the shrinking number of wide-body planes. Large-size wide-body airplanes accounted for 11 percent of the in-service fleet in 2016, down from 36 percent in 1995, according to Boeing’s Current Market Outlook, 2016-2035.

Many freight forwarders are fighting for space in the same narrow-body planes. For instance, rolls of carpet that would fit easily on wide-body passenger planes now move via cargo planes. That’s a concern, as most airlines’ flight routes are determined by passengers, rather than cargo. In addition, when shipping a large volume of goods, keeping all units together is preferable. That becomes more difficult on narrow-body planes.

Airline consolidation also impacts the Indian airfreight forwarding industry, as it usually leads to fewer routes. That cuts cargo space and has prompted some shippers and airfreight forwarders to rely on multiple carriers and stock inventory in different places.

K Narayanankutty, Head- Airfreight – India, DHL Global Forwarding says, “The declining trend in the number of freighters in circulation over the past few years is well-known. The impact of this has been significant on transporting heavy engineering, large electrical components, airplane engines and medical equipment like full body scanners. The dwell time of these goods at origin and destinations have significantly gone up because they need to wait for the day when there are freighter operations. At times, such situations demand these goods to be trucked to certain ports from where freighter operations are available.”

Besides, the challenge for India, with no direct or very limited freighters to many countries, is also dependent upon freighter capacity between all ports the line haul is transiting through. “The composition of exports from India has less freight compatible to a freighter. Most of India’s airfreight exports include generic pharmaceuticals, garments, leather goods, and these can be transported using wide bodied passenger airplanes,” expresses Narayanankutty.

Stating a relevant issue, Narayanankutty says, “We have had to move some metro coaches from Mexico to Chennai, we had to make arrangements to transship this freight from Hong Kong between two different airline operators.”

“The approach of airlines to use wide-bodied aircraft to feed cargo to their hubs to consolidate them on to freighter and transport it to the main gateways is another approach being taken, but it comes with limitations. These situations have increased the dwell time of freighter cargo, increased the transit time and cost of transportation. At times, within intra-Asia, ocean freight is considered to mitigate these impacts,” adds Narayanankutty.

Freight forwarders had been ‘squeezed on both sides’: a reduction in the number of shipping lines and strengthening freight rates.

Customers are still not willing to shell out on the increased freight levels and shipping lines are reluctant to drop prices, so yields have come under significant impact. This is very challenging in India and has led to many businesses folding – companies that had been in operation for 50 years or more have not been able to survive with such low yields.

Madhav Thapar, Vice President – South Asia, C H Robinson is of the opinion that increased operating costs and dropping yields were some of the economic drivers that led to carrier consolidations. “Some view the consolidations as creating supply constraints and higher freight rates, on the other hand, it could bring a greater capacity to invest in technology, operate larger vessels, and offer more predictable schedules,” says Thapar.

“From the freight forwarder perspective, opportunity lies in providing comprehensive solutions through end-to-end logistics,” believes Thapar.

Vipin Vohra, Chairman, Continental Carriers Pvt Ltd believes that the rapid unpredictability in shipping trade occur in the form of fluctuation of available shipping capacity and price.Vohra says, “Before and during peak trading season, there is a huge demand for space on ships which in turn will increase ocean freight rates. Similarly, during low demand, there is excess availability of space which causes freight rates to drop.”

However,with local shippers experiencing gradual increases in ad-hoc freight rates, one potential side-affect – and an upside for forwarders – is the trend towards long-term contracts.

“One can always be in a win-win situation by understanding business need as it can help a great deal in terms of which type of freight contracts and rate negotiations one must enter into with the shipping service provider,” asserts Vohra.

Real-time Challenges

With initiatives such as Ease of Doing Business, Make in India, Digital India, Single Window Clearances, etc., is the Indian freight forwarding sector actually receiving any relief? It is well understood that freight forwarders from the nation have had challenging times before due to many reasons. However, efforts thrown in by private and public unit players have promised inputs for exports and imports, which shall smoothen functioning of freight movements in future.

Despite the progresses in India’s freight forwarding industry of logistics, we cannot fail to notice the major problems that currently plague it.

Lack of Infrastructure– Even in the Union Budget 2019-209, a lot many initiatives were introduced for honing logistics infrastructure. However, it is true that such projects are time-intensive and by the time these are completed, the freight forwarding agents and companies succumb to the deficiency of infrastructure. The major concern is shortage of connectivity to airports, roadways, terminals, freight stations etc

Earlier this year, Bibek Debroy-led Logistics Development Committee has suggested creation of an independent logistics department within commerce ministry entrusted with the responsibility to develop a national logistics plan with a long term perspective (five to 10 year) and yearly operational plans with constant review and monitoring.

The committee had asked the Government to reduce rail freight tariff structure (both slabs and absolute tariff rates) and rationalise at least on select pilot routes like Delhi-JNPT, Delhi-Mundra, etc. and facilitate running of time-tabled freight trains for some select pilot rain routes to provide trade superior rail transport services and arrest the fall in its freight modal mix.

Outlining the need for supporting the truck industry, the committee had suggested the government to amend the existing regulations to make road transport experience seamless and efficient and incentivise trucking industry to move towards formal and organised operators. The committee has asked the government to introduce the one nation, one permit, one tax system and amend the provisions of the Motor Transport Workers Act to incentivise trucking industry to increase its scale and size.

Inadequate Use of Technology- Though traditional forwarders have become adept at juggling details, they are unable to provide the same level of visibility as those offering a digital experience. For customers who truly prefer a manual system, accommodation may be made, but it’s far easier to go backward on occasion than refuse to go forward for the majority.

A recent survey by online freight-marketplace provider Freightos revealed that just 1 of the top 20 global freight forwarders could provide an instant quote online for an anonymous prospective client.

From load boards to Big Data-enabled route or rate calculators, new technologies promise to improve access, reduce delays and increase visibility for those who choose to use it.

“Most of the forwarders lack an overall vision and compelling plan for digital adoption. However, various players from across the spectrum (including both traditional logistics players and new entrants) are adopting digital technology to provide seamless, end-to-end services,” says Sam N Katgara, Partner, Jeena & Company. “If the business model of these forwarders succeeds, competitors run the risk of losing direct contact with some of their most profitable customers, primarily the small and midsize freight forwarders,” believes Katgara.

“Most of the multi-national forwarders are looking at making acquisitions in 2019 to increase their market share and improve their freight tech solutions as they look to benefit from the wave of digitisation. Most other small to medium forwarders will need to tie-up with digital freight market-places to ensure they can accelerate into the future or be risked being left behind,” expresses Katgara.

Excise Policies and Customs– Differences in excise policies and customs harshly affect both importers and exporters. If this can be improved, then function of freight forwarding agents will ease down. Due to stringent regulations at various stages of cargo movements, time and money are wasted, and greater are the complaints from traders, customers, etc

Highlighting the challenges pertaining to trade facilitation at the border, Bibek Debroy-led Logistics Development Committee suggested doing away with physical examination, to be resorted only in exceptional cases, and shift towards fully facilitated ‘trust-based’ clearance process. The committee had asked to create a fully automated paperless trade environment, set up a single window digital portal integrating all stakeholders and monitor key outputs across all major trade gateways.

Global Business Scenario– India’s export-import trade has taken an impact due to weakened demand in key developed markets such as that of the US and Europe. Because of economic challenges and political instability in European Union (aggravated by Brexit), has somehow also affected the logistics front of India. The freight forwarding business has thus become fragile in a way that hardships in emerging markets has slumped the trade.

Challenges faced by New Players

The challenges faced by new players in the Indian freight forwarding market are many. “Basically, from finding skilled man power to build a team of talented individuals, determining the best option with best rates- the most time-consuming exercise, documentation, delays, safety and tracking of the shipments, and surging fuel prices, tops the list,” says Vohra.

Thapar jots down four key quantifiers:

  • Differentiation– Today, many customers question what differentiates a company from the rest. Continuous innovation and evolution have become imperative to stay pertinent in the industry. As a corollary, commoditisation of the standard products has made the differentiation question even more relevant.
  • Volatility– Trade wars, economic policy shifts, political developments, and security incidents have increased volatility in the freight market place. Despite unpredictability in the industry, many customers are increasingly looking for stability and predictable costs.
  • Human Resources – The industry is still under resourced in terms of qualified talent.
  • Building a Network –Many shippers have high expectations of on-time freight arrival, or it could cause a ripple effect of disruptions in their supply chain. There is an increasing focus on delivery and not just dispatch, and this is where established organisations with a global network have an edge.

Here, Katgara feels that, besides, the basic issues of infrastructure, differences in excise policies and customs procedures, and inadequate use of technology, large credits being given and rampant bad debts are the complex hurdles that the new players are facing in the freight forwarding segment, as the market already has been spoilt in this respect.

On the Move

One of the major factors behind un-competitiveness of Indian products in the international markets is huge logistics cost due to high transaction time and transaction cost. Undoubtedly high logistics cost makes domestic goods costlier in the international market. The cost of logistics in India is 14 per cent of its GDP and it is quite high as compared to other countries.  It has been calculated that a 10 per cent decrease in the cost can give boost to 5-8 per cent of exports.

“The ‘National Air Cargo Policy Outline 2019’ has commendably addressed these key issues that make our air freight very expensive. To ensure faster, smooth, time bound and transparent cargo operation the ‘Policy Outline’ has intended to fix responsibilities in the value chain (both private and government organisations), end-to-end,” explains S Ramakrishna, Chairman, Federation of Freight Forwarder’s Associations in India (FFFAI).

“As announced in the Cargo Policy, reduced dwell time of cargo at airports, replacing paper interaction with digital transactions by optimising and digitising each of the process within and across stakeholders, embracing global e-cargo, shifting towards fully facilitated ‘trust-based’ clearance processes through state-of-the-art RMS with robust scanning and identification methodology, development of off-airport infrastructure/facilities, etc. would definitely address the perennial issues to a greater extent,” believes Ramakrishna.

“Establishment of off-site air freight stations is certainly a way forward to reduce costs involved in air cargo operations,” feels Vohra.

Meanwhile, Narayanankutty expresses that the new air cargo policy should have adopted a lot more from how logistics are conducted world over, especially from the matured markets. “The policy still retains the large scope of the forwarding part within the perimeters of the airports, which is disappointing. The new policy needs more liberalisation to empower freight forwarders to tender cargo ready for uplift to airlines,” adds Narayanankutty.

Futuristics Solutions

Looking ahead, forecasts are mixed, though the overall outlook of India’s freight forwarding industry seems to be bright. However, to handle the growing demand, significant investments need to be made for expanding, modernising and upgrading infrastructure, deploying advanced equipment and technology, and setting up of new storage and transit facilities.

“The industry in India is still fragmented, and some companies do not have a national or global presence. Encouraging the growth of the organised sector within the market will help improve the overall profile and efficiencies,” feels Thapar.

Further, Thapar says that it’s important for freight forwarders, to focus on internal efficiencies and productivity through operational excellence, technology, and innovation. The offering to the customer must be built around complete solutions backed by visibility and IT.

Narayanankutty believes that new policies of the Government are creating a conducive environment for manufacturing and ease of doing business, which in turn is demanding imports of capital goods and exports of finished goods. This demands a very agile supply chain for which freight forwarders need to have great capabilities of digitisation, giving visibility to shipment status and reaching goods within the promised time. This will mean that forwarders have captive capacity and the ability to scale their capacity up or down and still make their services reliable, predictable and consistently dependable.

Narayanankutty feels that the ability of forwarders to eliminate waste from the logistic expenditures will enable lowering the cost of transportation. To reach these high standards expected from forwarders, startup forwarding organisations will have to make significant investments and operate between two point pairs on a common platform.

Going ahead, steps must be taken to enhance the training models for IT professionals involved in freight forwarding and logistics sector. Using appropriate balance sheet potency to obtain niche players in vital locations and routes will be crucial objective. Another key factor will be to encourage better understanding of customers; needs and then respond to those with advanced logistics solutions.

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