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
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