India’s automotive industry is expected to emerge as the third-largest in the world by 2020. Production volumes are expected to increase from 20.7 million units in 2013 to 36.4 million units by 2020, an annual growth of eight per cent.
But, the industry is bogged down by the escalating costs of supply chain operations. The cost of logistics has a big impact on supply chain because of Indian’s predominant use of the road transport for moving vehicles.
Logistics costs as a per cent of sales are at least 30 per cent higher in India as compared to China and other large automotive markets. This is because of inefficiency and high inflation rate, which is expected to escalate. The industry will need to contain costs to protect margins, says a report by A.T. Kearney in association with the CII Institute of Logistics.
No alternative
Driven by rising fuel prices and unavailability of drivers costs in the logistics sector are anticipated to increase by 10-15 per cent year-on-year. Further, because of stiffer competition, automotive companies will find it hard to pass these increases on to buyers. Proactively managing costs will help protect margins, the report said.
And, manufacturers do not have any choice but to live with the high logistics costs as poor connectivity to the port, lack of railway connectivity and poor use of inlan0d waterways are affecting the movement of vehicles from the manufacturing plant to various locations.
For instance, Ford India’s Executive Director, Manufacturing, Tom S. Chackalackal, said that in Chennai a car carrier can make only one trip from the company’s plant in Maraimalai Nagar, which is south of Chennai, to the Chennai port in the north. “Ideally, the vehicle should make at least two trips,” he said.
Issues like poor road conditions and restriction in trucks entering the city during the day are affecting the supply chain. Trucks cannot enter the city between 6 am and 10 pm. It takes nearly two hours for the vehicle to come to the port from the plant, and the vehicles need to wait for four to five hours. After that the vehicles cannot go back to the plant due to the restriction. This means, the vehicle is stranded for nearly eight hours, said Deepak Ramaswamy, Managing Director, International Clearing and Shipping Agency, a leading end-to-end supply chain solutions provider.
If two trips are made, the transportation cost for the manufacturer will reduce by half. For operators, the vehicles are idling most of the time, he said.
With lack of proper rail connectivity from plants to ports or to reach the customers in other parts of the country, road is the only option. In the US, nearly 50 per cent of cars are moved by trucks. In Europe and China, the inland waterways are used to transport automobiles, Ramaswamy said. With regards to railways, there is a short supply of specialised wagons — ordinary passenger coaches converted into car carriers — to transport vehicles, forcing manufacturers to use roads, he said.
According to R. Gopal, Global Vice-President, Transportation and Logistics Practice, Frost & Sullivan, transportation and storage constituted 6.3 per cent of India’s gross domestic product.
Within transportation, land transport constituted 57.7 per cent, followed by water with 9.2 per cent and air with 4.1 per cent. “We are heavily dependent on land transport,” he said.
Talent shortage
The A.T. Kearney analysis pointed out that the supply chain industry is constrained by the availability of supply chain professionals. To make matters worse, the industry struggles to attract and retain talent, regardless of pay level, because many prospective employees find the fast-moving consumer goods industry more attractive.
This talent shortage is expected to become even more acute given the expected growth in the scale of operations for major automobile manufacturers and suppliers.
The report said automobile manufacturers will need to spearhead collaboration efforts to help make the supply chain more agile. Better collaboration among value chain partners will be required in three areas — joint planning across multiple horizons to address volatility, establishment of win-win relationships and joint goals for long-term plans and enhancement of manufacturer-supplier partnership.