Global Logistics—September 2009
Demand and Strategy Drive India's Retail Trade
India's retail industry is enjoying boom times as its economy continues to develop. As the country's second-largest employer after agriculture, retail is estimated to reach US $590 billion in the next two years, growing at a 13-percent clip between 2007 and 2012.
India's consumer reckoning is largely a result of changing social behavior and market dynamics, as well as freer access to capital. This trend will sustain further growth in the retail and logistics sectors as overseas brands penetrate the country's expanding middle class and domestic vendors ramp up their own efforts to capture demand.
Already, the country has become fertile ground for both domestic and foreign business. The government currently limits foreign direct investment in the retail trade to single-brand product retailers such as Nike, Sony, and Marks & Spencer—all of whom have made their presence felt.
Multi-brand sellers, banned from direct investment but allowed to operate in a wholesale capacity, are also making an impression. Australia's Woolworths, for example, has partnered with Infiniti Retail, owned by Indian industrial conglomerate Tata Sons. Walmart, too, has had a successful entry with its wholesale cash-and-carry stores.
Not to be outdone by foreign dollars and incursion, India's domestic retailers are leveraging this competition and economic pressures to reduce costs and stir their own interests. Leading players such as the Future Group, Aditya Birla Retail, Spencer's, and Reliance Retail are pooling supply chain resources to streamline back-end costs. The retailers have formed a coalition to align sourcing operations and rationalize private labels, logistics, warehouses, and hiring details on a transactional payment basis to share markets and cut costs.
Given the lingering impact of a global recession, India's retailers are hoping to improve operating margins by sharing back-end resources. One tactic is exploring opportunities where they can piggyback on peer assets while using their own for others; selling other retailers' power brands, but not necessarily competing store brands; and using alternate sales channels to liquidate inventory.
Such collaboration marks a watershed change in how Indian companies capitalize on supply chain management to empower the enterprise. On average, supply chain costs account for 12 to 50 percent across product categories.
Mexican Customs Gets a Makeover
How bad is security and theft in Mexico? So bad that Customs is starting from scratch. The government recently replaced all 700 of its customs inspectors with 1,400 newly trained agents to detect goods smuggled into the country to avoid import duties.
The shake-up—part of a broader effort to root out corruption and improve vigilance at Mexican ports with new technology—doubles the size of Mexico's customs inspection force, according to Pedro Canabal, Mexico's Tax Administration Service spokesman.
The government hopes to improve its tax collection with the new system, Canabal says, noting that more than 40 percent of Mexico's value-added tax is collected at customs. The primary benefit, however, will be stopping the flood of pirated and cheap goods that undermine Mexican industries.
The new agents, more than 70 percent of whom are university educated, underwent a strict selection process that included psychological and toxicological checks, as well as criminal background checks. They are trained in legal aspects of foreign trade and taught to use new equipment installed at border crossings. Dogs trained to sniff out drugs and other banned goods are also being added.
Previously, Mexico had been checking only 10 percent of the 230,000 vehicles that cross the border each day, according to the federal Attorney General's Office. Now, with new technology, agents weigh and photograph every car and truck that crosses the border and run license plate numbers through a database of suspicious vehicles in the hopes of catching more hidden contraband.
Red Manufacturing In the Black
Even with foreign demand for consumable goods largely dented by a global recession, China's economic engine continues to fire on all cylinders. The country can thank its ever-expanding middle class for the spark.
Production accounts for more than 40 percent of China's economy, which has been hit hard by evaporating demand for its products in key export markets such as the United States and Europe.
Even still, manufacturing in China hit a 12-month high in July 2009, according to a leading independent index, thanks in great part to government stimulus and domestic demand. The CLSA China Purchasing Managers Index, or PMI, rose to 52.8 last month, the highest since July 2008, when it stood at 53.3. A reading higher than 50 means the sector is expanding; a reading lower than 50 indicates an overall decline.
Domestic demand was the principal driver behind new-order growth, while external demand remained lackluster in July, despite rising for a second successive month.
The independent reading confirms official data suggesting that the recovery trend of the key sector is consolidating. The China Federation of Logistics and Purchasing's figures show the sector expanded in July for the fifth consecutive month to 53.3, up from 53.2 in June.
The official index tends to be more optimistic because it attaches greater weight to state-owned enterprises, which usually follow government directions and benefit first from stimulus policies.
To point, Beijing announced a US $585-billion stimulus package last year in a bid to prop up growth in the country by boosting investment in infrastructure and other government-backed projects. Beyond positive manufacturing data, China's economy expanded by 7.9 percent in the second quarter, up from 6.1 percent in the first quarter, mainly as a result of this government spending.
Demand for renewable energy sources worldwide is precipitating a global gale-force storm, and the forecast for the wind industry is pretty clear: steady long-term growth with periods of calm. Wind component manufacturing is now showing its long-promised growth and market development, with record levels of capacity under construction, according to UK-based analyst Douglas-Westwood's latest World Offshore Wind Report 2009-2013. The industry's growth is stimulating economic development as well as the need for transportation and distribution infrastructure and resources to facilitate increasing demand.
Deployment rates will grow in the near term, with levels of installed capacity peaking in 2011, and declining slightly in 2012 and 2013, the firm anticipates. Capital expenditures through 2013 will amount to US $31 billion as 6.6 gigawatts (GW) of new capacity are installed globally. With 1.5 GW of capacity currently online, this represents significant market growth and will lead to an annual capital expenditure of more than US $9 billion at peak.
In terms of specific markets, Douglas-Westwood reports:
- The United States has made great progress in establishing the necessary mechanisms to develop offshore wind projects. Supply chain development must now follow suit, and work is needed in procurement, installation, and logistics support.
- The United Kingdom is dominant, with three GW of new capacity forecast by 2013—a market worth US $15 billion. Long-term prospects are good, with round three of offshore wind licensing underway. Recent changes to the Renewables Obligation Certificate mechanism—a green certificate issued to an accredited generator for eligible renewable electricity generated by suppliers and distributed to customers within the UK—have projects finally moving forward. This temporary boost will, however, have a mixed effect and drive up costs throughout the supply chain.
- New projects off Denmark currently under construction and tendering will see the country add 857 megawatts of new capacity in the five-year outlook. Longer-term potential is strong as the country benefits from good wind resources in shallow waters.