Rise in wage cost af­fect­ing auto prod­ucts

Achal Pali­wal, for­mer Head-Lo­gis­tics and Ex­ports at Honda Cars In­dia Ltd talks about the cur­rent sce­nario pre­vail­ing in the au­to­mo­tive in­dus­try, hur­dles and op­por­tu­ni­ties. Cost pres­sures, de­clined ca­pac­ity util­i­sa­tion and fi­nan­cial over-lever­ag­ing is badl

Cargo Talk - - Expert View -

The last few years have been very chal­leng­ing for the lo­gis­tics sec­tor, pri­mar­ily due to ei­ther stag­nancy or re­growth in de­mand for au­to­mo­tive prod­ucts and ris­ing in­put costs spe­cially fuel and en-route ex­penses.

On one side, the pe­riod wit­nessed seven to 14 per cent de­cline in de­mand of cars and two wheel­ers, on the other side, prices of diesel and other pe­tro­leum prod­ucts have been ris­ing sharply and con­sis­tently as a part of gov­ern­ment poli­cies. As this wasn’t enough, cur­rency fluc­tu­a­tions and ris­ing in­put cost have left no scope for au­to­mo­tive com­pa­nies to in­crease freights in pro­por­tion to ris­ing op­er­a­tional ex­penses. The sit­u­a­tion has fur­ther been ag­gra­vated by a sharp rise in in­fla­tion and wages.

Ex­treme cost pres­sures, de­clined ca­pac­ity util­i­sa­tion and fi­nan­cial over-lever­ag­ing has almost bro­ken the back­bone of lo­gis­tics ser­vice providers. This not only re­sulted in post­pone­ment of ex­pan­sion or re­newal of their fleet and other equip­ment, but also com­pelled them to take the ex­treme step to stop serv­ing a few car man­u­fac­tur­ers in South and West In­dia for two-three weeks in 2013-2014, when mount­ing losses went beyond con­trol. Ser­vices could be re­sumed only after 14-18 per cent freight re­vi­sions and with­drawal of four-six per cent com­mis­sion charged by few cap­tive 3PLs for pro­vid­ing re­turn business

With a new gov­ern­ment at the Cen­tre and its pro-business meas- ures, the au­to­mo­tive mar­ket has re­turned back to the growth path. This will peak dur­ing fes­tive sea­son and in sub­se­quent months. OEMs have been en­hanc­ing their ca­pac­ity for do­mes­tic as well as ex­port mar­kets, for which new plants are com­ing up in Gu­jarat, Ra­jasthan and Andhra Pradesh. Ex­port-fo­cussed plants of Ford, Maruti, Honda will be op­er­a­tional in Gu­jarat within next two years.

A rough es­ti­mate sug­gests that au­to­mo­tive lo­gis­tics in­dus­try will need to meet at least 15-18 per cent year - on - year (YoY) rise in de­mand in next five years, in fin­ished ve­hi­cle lo­gis­tics alone. Ris­ing trend of out­sourc­ing in-plant and out­bound lo­gis­tics to 3PL part­ners and ex­pec­ta­tion of GST roll­out by April 2016 will cre­ate more ware­hous­ing and dis­tri­bu­tion re­lated op­por­tu­nity for 3 PLs.

The au­to­mo­tive lo­gis­tics in­dus­try needs to pre­pare on 3 Cs - Ca­pac­ity, Ca­pa­bil­ity and

Com­mu­ni­ca­tion. The en­hanced de­mand for prod­ucts will re­quire ad­di­tional trans­porta­tion and ware­hous­ing ca­pac­ity. Re­duc­ing and age­ing fleet may not be suf­fi­cient. LSPs may need to re­think on fu­ture ex­pan­sion bal­anced with as­sured util­i­sa­tion learn­ing from past ex­pe­ri­ence and OEMs will need to en­cour­age al­ter­nate trans­porta­tion means e.g Rail and coastal shipping. To meet the de­mand, op­er­a­tions of pri­vately owned Auto Trains per­mit­ted un­der new AFTO poli­cies need to be expe- dited. Joint in­vest­ment by OEMs and 3PLs will cre­ate a mu­tu­ally as­sur­ing at­mos­phere for growth in num­ber of trains as well as op­er­a­tors, which is now limited to one each.

As ex­port-spe­cific pro­duc­tion is in­creas­ing and is con­cen­trat­ing in East and West coasts, poor con­di­tions at ports need im­me­di­ate at­ten- tion and in­vest­ment. Mumbai and Chen­nai ports nei­ther have space nor fa­cil­i­ties to pro­vide ex­port con­duc­tive en­vi­ron­ment of au­to­mo­tive ex­port. Their sole de­pen­dence on pri­vate in­vest­ment and po­lit­i­cal will makes it a dis­tant pos­si­bil­ity. Some ex­ist­ing and few emerg­ing pri­vate ports e.g. En­nore, Mun­dra, Pi­pavav etc will have op­por­tu­nity to ex­pand their ca­pac­ity to meet the in­creas­ing de­mands of Auto OEMs. Col­lab­o­ra­tion among shipping com- pa­nies, LSPs and Auto OEMs will be a wel­come move to cre­ate world-class ex­port in­fra­struc­ture at In­dian ports.

Joint in­vest­ment on train­ing and de­vel­op­ment of man­power, by LSPs, OEMs and their in­surance part­ners will not only make lo­gis­tics safer, but will also en­hance de­liv­ery qual­ity.

The third as­pect is in­vest­ment in IT in­fra­struc­ture, man­age­ment sys­tems and trace-and-track mech­a­nism. This will im­prove op­er­a­tional as well as fi­nan­cial ef­fi­ciency, per­for­mance man­age­ment and ca­pac­ity util­i­sa­tion.

I am sure that the au­to­mo­tive lo­gis­tics in­dus­try will be able to meet emerg­ing chal­lenges and will emerge as a win­ner, in spite of many odds.

Achal Pali­wal For­mer Head-Lo­gis­tics and Ex­ports at Honda Cars In­dia Ltd

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