Wheels of Change
July 8, 2020
Siddharth Agarwal, Chief Strategist at seven-year-old logistics start-up Ecom Express can bet anyone to name a street or even a paan (betel leaf) shop in the congested lane of a small town where his firm cannot deliver a packet. If someone were to name Jhumri Telaiya or Pulwama to put Agarwal in a spot, he is going to lose the bet. The start-up covers over 26,000 pin codes in the country.
Most start-ups have been growing at breakneck speed, multiplying their revenues year-on-year. The common factor is that they all leverage technology to achieve scale and efficiency, issues that have been plaguing the highly-fragmented logistics sector for decades.
"As you move into the future there would be even more investments in technology. There will be newer channels and ways of delivery. If I talk about last-mile delivery, although it is still at an experimental stage there are countries like China which are trying to leverage drones," Agarwal said.
Agrees Ashim Sharma, Principal and Division Head, Business Performance Improvement (Auto, Engineering and Logistics), Nomura Research Institute Consulting & Solutions. "Compared to developed markets, technology application is still at a nascent stage in India. These start-ups have realised that this is the gap in the logistics sector. Each one of them is focussing on technology solutions. That forms the backbone of the logistics sector," he says.
With gaps in the supply chain offering business opportunities to start-ups, private equity and venture capital have chased them. Around $3 billion has been invested in tech start-ups and third-party logistics (3PL) service providers in the last five years.
Flushed with cash, tech-powered logistics start-ups such as Delhivery, Rivigo, Ecom Express, BlackBuck and GoBolt are set to drive consolidation in the $200-billion logistics sector.
The Tech Fix
The sector is a laggard when it comes to adopting new technology, and this gives the newbies an edge over incumbents. The road transport sector, the main freight mover, is dominated by mom and pop truckers, with almost 80 per cent operators having a fleet of less than five trucks.
Even top logistics players such as Transport Corporation of India (TCI) and Mahindra Logistics have annual gross revenue of less than $1 billion, suggesting scope for consolidation in the market.
Since the transport sector is dominated by small players, the freight market has had a large number of middlemen connecting shippers with carriers. Start-ups such as BlackBuck, Rivigo and FR8 are fast eliminating the role of such agents through the freight e-marketplace. More participants on the platform ensures competitive pricing for shipments, while real-time updates on apps improve services and help avoid empty run by truckers. Not surprisingly therefore, BlackBuck, launched in 2015, has on-boarded almost 400,000 trucks to date.
These start-ups use technology for predictive analysis, performance monitoring, real-time cargo monitoring and smart automation to improve efficiency and reduce costs. There is application of blockchain for error-free tracing, while big data analytics is being used to derive insights out of complex and large data sets. App-based freight service providers such as 4TiGO, Vaahika and FarEye have already improved asset utilisation for transporters, while raising their earnings.
"We have planned to deliver 30-40 per cent cost savings for some of our customers. On an average we have achieved 15-20 per cent efficiency in terms of warehousing, operations and transportation costs. We bring efficiency at every level," says Sumit Sharma, Co-founder of GoBolt.
Machine learning and artificial intelligence (AI) are being used to manage fleet and warehouses. With growing fleet size and shipment volume, there is a growing need for advanced technologies to deal with the challenge. For example, AI is widely used for route optimisation. Given that trucks cover long journeys, normally more than a week, there is a need to know the time taken to cover various stretches. AI matches earlier data with the current traffic situation to give an estimated time of arrival. This also helps in increasing fuel efficiency.
At warehouses, especially large ones spread over a few lakh square feet, advanced IT systems help in sorting out various items and their placements. It also alerts operators to replenish stocks. Warehouse managers can plan loading and unloading by tracking real-time movement of trucks, which has been an issue for long. It leads to better management of inventory through optimal use of space, like placing a particular item on a certain shelf.
"There will be ever more investments in operations centres to mechanise them to handle more volumes. If the degree of automation is x per cent currently, it will be 2x, 3x in the future to ensure that the turnaround time, from the moment a parcel enters the facility and when it exits, is the least," says Ecom Expresss Agarwal.
So, adoption of technology has not only reduced freight movement costs in real terms, but has also helped to track consignments better.
Due to the e-commerce boom and a rise in post-order service levels, customer expectations have already been growing. The new-age tech start-ups are in a better position to address these concerns.
"Over the next three to five years, we believe end-users would be a lot more demanding regarding service level agreements (SLAs), and would look for service providers who can provide end-to-end logistics services (from plants to customers)," says Siddharth Jain, Partner, AT Kearney.
Logistics service providers are developing capabilities to meet customer requirements. Those able to provide end-to-end services will emerge as winners.
The Road So Far
The start-ups growth in revenue and reach has largely followed the e-commerce expansion. Over the past few years, they have emerged as the leading players across categories, especially in short-distance distribution of parcels, followed by bulk cargo on longer routes offering full truck load (FTL) and less than truckload (LTL).
Powered by advanced technologies, these start-ups have cornered a big share of the pie, challenging traditional players. "The logistics sector in India has been fragmented. We see consolidation happening in the near future. Whether there would be 20 big players catering to the majority of the market, only time will tell. But what is certain is that consolidation will happen. Players will follow a platform approach to the business in creating efficiency in operations and better utilisation of assets. The future of logistics will be technology enabled," says Mohammad Athar, Partner, Infrastructure and Urban Transport, PwC India.
Tech start-up Delhivery sees scope for further efficiency in the logistics sector, considering India spends 13-14 per cent of its GDP on goods movement, compared to 8-10 per cent globally. About 75 per cent of goods vehicles in the country are 2-axle (two wheels in the front axle and four wheels in the rear), with an average capacity of 9 metric tonnes (MT). In European countries, bulk of the goods trucks are 5-axle, with average load capacity of 40 MT.
"The cost of logistics can further reduce by 10 per cent with improvements in motor transport laws that will enable businesses to invest in high-capacity trailers, which are more cost-effective," says Amit Agarwal, Chief Financial Officer, Delhivery.
Since the last four to five years, these start-ups have been doing a lot of data mapping - regarding routes, average speed, consumer behaviour and costs. Now, established players are also taking note. "We always thought that the services we are providing are good. But when new players came, we felt the need to invest a lot more in data analytics. So, I think that it has accelerated digital transformation," says TCI Managing Director Vineet Agarwal.
These companies are also building their tech capabilities either in-house or by investing in new-age firms. TCI has invested in some start-ups to ensure that it has access to new-age technology.
Fund Flow From Investors
"Investors are very excited about logistics for a variety of reasons - changing landscape post-GST implementation paving the way for the creation of large-scale supply chain service providers, predictable unit economics, formalised job creation, and overall cost of goods coming down with high-quality logistics," says Delhivery's Agarwal.
While most industry veterans remain bullish on start-ups and their ability to attract funds, there is also apprehension that the number of deals could be limited in the short-run due to Covid.
Sandeep Upadhyay, Managing Director (Infrastructure Advisory), Centrum Capital, said the mobility and logistics space has historically witnessed bloated valuations, but one expects this to correct to more reasonable levels. "Post-Covid, I foresee all that flab will go away and valuations would be more realistic and sustainable. In terms of the availability of capital, there may be some reluctance in the near future, but investors are likely to be back in the reckoning over the next six to nine months as the impact of Covid subsides," he adds.
"Physical retail will suffer, at least for the next 12 months. As a result, we expect the express logistics market to grow significantly over the next couple of years owing to the rapid adoption of e-commerce," says Saahil Goel, CEO and Co-founder of Shiprocket, which has managed to raise a total of $26 million so far.
Adds Ratnesh Varma, Founder of last-mile logistics service provider Pidge, "Investments follow opportunities and returns. If the opportunity is great, returns are good and fundamentals are good, investments will follow."
Other than express logistics, industry veterans see the next big innovation happening in the warehousing space. Warehouse operators have largely managed their spaces using Excel. This kind of data entry takes time, with stock counting and truckloads of items coming into warehouses and exiting.
But application of robotics and advanced conveyor systems can reduce the time significantly. Warehouse managers are now relying on automation to reduce downtime. Products are bar-coded so even before trucks enter the gates bar-code scanners can identify the goods. Significantly, inventory is a major component of logistics and at 6 per cent of GDP it is higher compared to developed countries (2-3 per cent). The assets on the storage side of logistics are considered highly unutilised since they are not on a common platform and visible to those who need to lease them. As technology gets widely used in warehousing, there is a possibility of tech companies aggregating demand and supply on one platform. Digitisation of warehousing is also set to bring down costs through optimisation of available space. Use of robotics and investments in conveyor systems is expected to make warehousing contactless. Companies are also looking to stock inventories in multiple or alternative locations to avoid the risk of the inventory getting stuck at one place in case of a problem.
"Warehousing companies need to start thinking differently. To take advantage of this shift in strategy and attract new customers, they should use technology to lease and utilise space more efficiently," says Juzar Mustan, a logistics industry veteran.
"Today, majority of warehouses are letting out space to their own limited set of customers. I think technology can help in this area. Digitising available warehouse space on a single platform is needed. This will increase visibility of available space and allow faster and flexible contracting. The outcomes will be less idle space, lower costs and lower risk for all partners," he adds.
The biggest problem is that the logistics sector is very fragmented and therefore it has been difficult to bring in scale and efficiency. Small players run their businesses the old way and the general apprehension is that the adoption of technology is an expensive proposition. Transport firms also face shortage of trained manpower, which is a big hurdle in adopting technology. So, even if the transporter brings all kinds of systems to optimise routes and monitor fuel efficiency, the truck driver still has to control it.
"India's logistics market is highly sub-scale, and hence the competition, while intense, is low quality. The largest 3PL company in the US is about 180 times larger than India's largest 3PL, while the US economy is only about seven times larger than ours," says Delhivery's Agarwal.
One thing is certain. The logistics sector is looking at a major shake-up ahead.