How I would invest in Logistics Companies (if I had a Private Equity Fund!!) October 18, 2009
Posted by Ramnath Rangaswamy in Emerging Markets, India, Indian Economy, Logistics, Supply Chain.add a comment
The Indian logistics industry is projected to grow at fast clip given the growth in the economy. With GDP slated to grow between 6% and 9% depending on who gave the numbers and when!
Given this growth in the logistics industry, many PE companies want to invest in this space and in logistics service companies.
How does a PE (Private Equity) Investor pick out the companies that will come out winners and will deliver money on the table.
I read this book by Malcolm Gladwell called BLINK. There Malcolm Gladwell discusses a concept called Thin Slicing – predicting something based on just 2-3 criteria or data (literally, in the blink of your eye).
In this writeup, I write of what I think would be the predictors of success, (thin-slicing), in this logistics space.
Infrastructure:
The logistics service provider must own the required infrastructure – trucks, rakes, vessels, warehouses. The logistics service provider cannot depend on the market for trucks or hire rakes from container rake operators. Yes, for some short-term needs or to cater to a sudden peak, the logistics service provider can hire from the market. But hiring cannot be the primary strategy.
The reason, a logistics service provider should own their own infrastructure, is so that the logistics service provider can provide superior service to the customers. By depending on others, the reliability reduces and in turn the logistics service provider’s service level drops.
And to be a winner in this space reliability and service is extremely important.
In my view one of the issues with Reliance Logistics was that they did not invest in infrastructure. Their business model was to depend on the market for trucks. They were not able to provide reliable service and the results are there for all to see.
On the other hand DHL owns it’s aircrafts, trucks, ships and is able to provide reliable service. Blue Dart in India owns aircrafts. Safexpress owns their trucks and warehouses. India Post has now taken aircrafts on lease. India Post already owned trucks and rail cars. By owning, I also include leasing. It is as good as having your own asset.
Many container rake operators have invested in CFS (Container Freight Stations) to have full control of their operations.
End-to-end solution:
The logistics service provider should provide a complete and holistic solution. Companies do not want a warehouse or a truck. Companies want seamless and hassle-free movement of their products and raw materials.
The logistics service provider should be able to load all the raw material or project cargo in China or Europe, bring it on a vessel to India, discharge the vessel, clear all custom formalities and deliver it at the customer’s doorstep.
Or it should be able to take finished product from the assembly line, transport it to a port, clear customs, export it and deliver the bill of lading to the customer.
Or the logistics service provider should bring together different parts from across the globe, assemble the product, customize the product as per the local requirement i.e., put in leaflets and accessories as per the local requirement and then distribute the product in the local markets.
A company will be able to provide this end-to-end service only if it owns the complete supply-chain.
Or if it has strategic tie-ups with freight forwarders, CFS owners, vessel charterers, rake-operators not only in India but across the globe.
Or it should have the wherewithal to form consortiums and offer a single-window solution to customers.
Many logistics service providers bought firms specializing in one part of the supply-chain. This enabled logistics service providers to provide customers across the supply-chain.
Customized solutions:
No two supply-chains are similar. No two customer needs and requirements are the same.
The logistics service provider must be able to provide bespoke solutions to meet the needs of the unique customer needs. One size fits all does not work here.
Examples of such solutions abound; Indian Railways has developed special parcel vans to carry Maruti cars. Adani transports Maruti cars to the south by shipping them in vessels from Mundra. Adani Agri logistics has developed special purpose wagons to carry foodgrains. Adani is planning to import special purpose wagons to carry cars.
The level of customized solutions that the company can provide, separates the men from the boys. It requires a certain confidence, conviction and courage to invest money in infrastructure for customized solutions and then to implement the customized solutions.
Niche:
Some logistics service providers operate in a niche and cater to only certain supply chains.
G4S or CISCO service the cash supply-chain for banks. They replenish the ATMs with cash and transfer cash from and to banks. PN Writer only deals with documents and household goods. Some companies specialize in healthcare and pharma supply chains. Some companies do only reverse logistics. Some companies specialize in spare parts supply chains.
As mentioned earlier , no 2 supply chains are similar. By operating in a niche, the logistics service provider are able to provide superior services to their customers.
Of course, it goes without saying that these strategies should be supported by able, experienced, intelligent and smart people who have the capability to understand the customer’s supply-chain needs, develop a solution to meet the customer needs and then run the supply-chain.
IT solutions and support – RFID, GPS, ERP- would be a key support required to deliver the supply-chain and logistics solutions.
I hope this helps you “thin slice” the logistics service providers and PE you invest your money in the ones that will succeed.
As the theory of thin slice quotes, “ a little knowledge goes a long way”!
Adani and Reliance – Ant and the Grasshopper story! September 6, 2009
Posted by Ramnath Rangaswamy in Emerging Markets, India, Indian Economy, Logistics, Railways, Supply Chain.2 comments
In the week of India’s independence day there was a lot of news about agricultural supply-chains in India. The fare was mixed- some good some bad!
The bad news first; there was the news of Reliance abandoning it’s project of setting up agricultural rural mandis in Punjab.
The good news was that
Adani had set up a complete end-to-end agricultural supply chain and LN Jain Group planned to setup an agricultural supply-chain.
Good news – Adani Agri Logistics
The Adani end-to end supply-chain is a wow as far as supply-chains go! It is as close to an ideal supply-chain as is practically possible. Adani has taken care of the complete supply-chain from grain storage to transportation to the last mile connectivity.
Adani has built grain silos where grains will be stored depending on the grade. Here different grades of grains can be stored. It reduces loss due to rodents and insects. The silos have rapid loading facilities to load wagons rapidly.
Adani got custom made wagons, BCBFG, to carry grains. These wagons are like covered BOBRN wagons. They are covered on top and they have bottom opening doors for rapid discharge into a hopper.
They have built smaller silos in the cities where the grain has to be distributed. These are akin to depots or RDCs.
Bad news – Reliance Retail
Reliance announced with a lot of fanfare and bluster on how they will setup mandis across the country and change the face of rural India. The called it the farm to fork project.
But they did not think about how they will store the foodstuff, how they will efficiently transport it and how they will distribute it. In short Reliance did not invest anything in setting up the supply-chain and logistics.
The difference
Adani did exactly what Reliance never did. Adani understood the importance of the supply-chain and ensured it built the supply-chain backbone. Reliance ignored the supply-chain and the results are there for all to see.
Most industries and companies in India ignore the logistics and supply-chain element while setting up factories. Plants are setup without any planning on how raw material will come in, how finished goods will be taken out.
Innovations in supply-chain (like the Adani example) are very few and far between.
The best thing is that Adani just reapplied ideas from other supply-chains. Coal is loaded by rapid loading systems into specialized wagons (BOBRN), transported by rail and unloaded into specialized hoppers that take the coal by conveyor belts to the power plant. Petroleum products already follow this model.
Adani’s model can be replicated for other products. Other liquids, like acids, edible oils can use this model. Tanks could be setup in Ports, specialized railway wagons can transport the material from source to destination i.e port to plant or customer. Similar supply-chains can be setup for other raw material in liquid or powdered form – silo storage, specialized railway wagons and distribution systems.
So this was a repeat of the classic ant and the grasshopper story.
May we see more innovations in India’s supply-chain, like Adani Agri’s!
HUL’s rejigged rural distribution network March 15, 2009
Posted by Ramnath Rangaswamy in Business, Consumer Goods, Emerging Markets, India, Indian Economy, Logistics, Supply Chain.9 comments
There was a news item, sometime in January 2009 about HUL (Hindustan Unilever) rejigging it’s rural distribution network.
Distribution networks are modified and tweaked to be in line with the market reality and company goals. When growth in urban areas was tapering, FMCG companies started concentrating on rural markets. In line with this, FMCG companies modified their distribution structure to be in line with this strategy and increase rural distribution.
Similarly, when Modern Retail chains were setting up shop in India companies modified their distribution strategy to serve them.
Companies will modify their distribution channels when VAT is implemented and CST% goes below 2%. When CST is reduced the necessity of maintaining a depot in each state vanishes. Companies will then rejig their distribution networks.
This latest change by HUL, in my view is to make the distribution channel more efficient and reduce costs.
HUL has removed one layer called the Star Stores.
HUL has also reduced the margins of the Rural Distributors by 2% from 6.76% to 4.76%.
What is the change in the distribution network.
Before the change the distribution network might have worked like this.
The RDs would have placed orders on depots and would have been delivered stocks from the depots. The RDs would have then supplied the Star Sellers based on a fixed route schedule. The Star Sellers in turn would have serviced the retail outlets in each village.
What will now happen is that the RDs will have to service the retail outlets previously serviced by the Star sellers.
How will the RDs cope the situation?
Here is how the RDs will cope with the situation.
- RDs will start milk runs: What this means is that the RDs vans will start from a base town (the town in which the RD is located) loaded with stock. It will travel on a particular route selling to retail outlets on that route (these retails outlets would earlier have been serviced by the Star Sellers). The route will typically end at the base town itself.
- For village clusters that are faraway from the base town, the RD may retain the Star Seller, replenishing the Star Seller’s stocks on a regular basis (once a week or once a fortnight). The Star Seller would continue to service the retailers as before.
- Wholesellers might be appointed. Instead of Star Sellers, the RD may sell to wholesellers in that area. The retail outlets would come to the wholeseller to buy their stocks/supplies.
- The RD may have his seller who takes visits retail outlets for 3-4 days and takes orders. These orders are conveyed to the RD who despatches to the seller, the stocks. The seller then spends the balance of the week 2-3 days supplying the stocks and collecting the cash.
- Some retail outlets will be dropped from coverage. The dropped outlet will have to depend on the wholeseller and buy from him.
Where and how is the value being unlocked in this whole rejig of HUL’s rural distribution network?
How will the RDs manage with lower margins?
- It can be reasonable assumed that the RDs will give a better quality of coverage to the rural outlets. This is because they would be covering the outlets directly. The calls on the retail outlets will be more reliable (i.e. same day every week), credit would be given to the retail outlets, quality of execution of promotions will improve and visibility and stock weights will improve. With better coverage, business will increase. This will help the RD get more margin money (on an absolute sense) and reduce the fixed costs per call.
- Also, RDs will have a larger area and hence the fixed cost of distribution will be distributed over a larger number of stores. This would reduce the cost of coverage per store.
One thing you can be sure of.. this is not the last distribution rejig you have seen!
Chinese Railways versus Indian Railways! December 14, 2008
Posted by Ramnath Rangaswamy in Emerging Markets, India, Logistics, Supply Chain.16 comments
All of us have repeatedly heard about the “success” of the Indian Railways under the stewardship of the current railway administration. So much so that the “success” of the Indian Railways has become a fashionable case study in Harvard Business School and the subject of lectures in IIM, Ahmedabad , INSEAD and Harvard Business School.
No doubt the Indian Railways has made progress. But the progress is relative- compared to other government agencies and departments in India– which is not to say much!
But how does the progress of the Indian Railways compare on a absolute scale?
To take an objective look at the “success” of the Indian Railways, let us compare the Chinese Railways and Indian Railways. After all, everyone and everyone’s analysts are comparing China and India.
Let us start at the beginning…..
The first Chinese Railway train was operated in 1876, from Shanghai to Woosung (15 miles) nearly a quarter of a century after the first train in India was run in April 1853 between Bori Bunder and Thane (21miles)
In 1945, China had 27,000 km of rail, of track. In 1947, when India got independence, India had 53596 Route kms of track- thanks to the British! Net, net China had just about ½ the route kilometres of India in the mid- 1940s. And that too for a much larger area.
How do they compare today? Chinese Railways today has 78,000 route kilometres, overtaking India sometime in the mid 1990s making only the rail networks in the USA and Russia larger in size. The total track length is 154,600km. By contrast Indian Railways has stagnated at 63,327 route kilometres of network.
The Indian Railways has suffered from the same neglect and apathy towards creating a solid foundation of infrastructure, as our roads, power, irrigation, airports.
As of 2007, Chinese Railway owned about 578,000 freight wagons, 44,000 coaches and 18,300 locomotives. India had 225000 freight wagons, 45000 passenger coaches and 8300 locomotives.
This vast difference in the number of freight wagons and locomotives explains why Indian railways carries less than a quarter, ~22%, of the freight carried by the Chinese Railways.
In 1950 Indian Railways carried 44 billion freight tonne km, against 39 billion in the case of Chinese Railways.
Last year, India moved 750 Million MT of freight last year while China moved 4. 5 times that i.e 3300 Million MT of freight.
On a global basis, China’s rail transport volume is one of the world’s largest, having six percent of the world’s operating railways, and carrying 25 percent of the world’s total railway workload.
China regularly runs heavy-haul freight transportation speed limit to 120 km/h. The highest speed notched up for a freight train, on the Indian Railways is 100 km/h (62 mph) for a 4,700 metric tonne load.
The Chinese Railways plans to spend US$ 292 billion ~ 15 lakh crore [ 1lakh = 0.1million = 100000, 1crore = 10million = 10000000] over 10 years. This translates to Rs 1.5lakh crore per year spent on the Chinese Railways for Capital Expenditure. In contrast the Indian Railways spends just a quarter (1/4) of what the Chinese Railways spends. The proposed investment for the 2008-2009 fiscal year is Rs. 37,500 cr, which in itself 21% more than for the previous fiscal year.
And passengers? Indian railways moved 6.2 billion passengers while China moved 1.4 billion passengers. What is to be noted is that out of the 6.2 billion passengers that Indian railways carried, 1.1 billion are Mumbai suburban passengers which are short lead passengers and can be considered a different subsidiary.
However the quality of passenger travel in the Chinese Railway is far superior. Chinese has express trains with speeds of 300kms/hr. Maximum speed of a passenger train in India is about half of the Chinese Railways at 160kms/ hr. The pictures of the Chinese High-Speed Railway (CHR) will give you an idea of the qualitative difference in passenger rail travel between China and India.
The Chinese Railways depended on steam locomotives till the 21st century while India phased out their steam locomotives ahead of the Chinese in 1990s. In December 2005, the world’s last regular revenue mainline steam train finished its journey on the Jitong Railway marking the end of steam era. Nevertheless, there are still some steam locomotives used in the industrial railways in China.
The Chinese Railways are organized in a more modern and business-like manner. Five major railway corporations — one each for rolling stock, railway construction, goods and materials, civil engineering, signalling and telecommunications — have been separated from transport enterprises and made autonomous, although state-owned. A number of passenger and freight transport companies have been created to operate on a competitive basis. These enterprises will finally be regrouped into three to five larger, separate companies.
The government has encouraged local authorities to build and operate their own railways up to 2,000 km. By the end of 1999, there were approximately 75 local railways with a total route-length of 4,800 km. About 20 more such projects, totalling 1,800 km, are under construction. To attract foreign capital, Chinese rail enterprises are encouraged to issue stocks on overseas stock markets. In 2001, their ministry of railways (MoR) also approved foreign participation in rail freight transport.
In contrast, as with most things in this country- education system, justice system, government (IAS, IPS …), we have just taken what the British have given us and using them without Indianizing and modifying it to the changing needs and requirements. We have the Railway Board, under the Ministry of Railways – the same structure that the British setup more than 100 years ago!!
Employees Chinese Railways employs 3.18million people while the Indian Railways has employs 1.6millionemployees. This translates to a productivity of 1308 MT/ employee on the Chinese Railways, double that of the 652MT / employee on the Indian Railways.
The Chinese Railways has already linked itself to the Europe and runs regular container trains. This is an alternative to the sea-route to Europe. This is part of the Pan-Asia rail network plan.
The railway to Tibet makes Chinese logistics and supply lines so accessible in case of a conflict with India. While India is just now built a part of the railway line in Kashmir and is just now planning a railway to Sikkim. A railway to Arunachal Pradesh is nowhere close to planning.
So to summarize, here is a table.
|
|
Indian Railways |
Chinese Railways |
|
Route kms (1945/1947) Route kms (current) |
53396 63327 |
27000 78000 |
|
Freight Carried (Billion MT per year) |
750 |
3300 |
|
Passengers carried (billions/year) |
6.2 billion |
1.4 billion |
|
Investment per year (Rs Cr) |
37500 |
150000 |
|
Number of Locos Freight Wagons Passenger Coaches |
8300 225000 45000 |
18300 578000 44000 |
|
Employees |
1.7 |
3.18 |
|
Maximum Speed (kms/hr) Freight Trains Passenger Trains |
100 160 |
120 300 |
Reminds you of the Hare and the Tortoise story! Except that here, the Hare is way ahead of the Tortoise. And the Hare is moving ever faster all the time while the Tortoise is falling behind!!
