India: Asia's New Frontier

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Global pioneers are peeking around China's corner and beyond the Himalayas into Asia's next major logistics hotspot—India.

As China's economic dynamo continues to spin circles with near double-digit annual GDP growth, reinvestment in infrastructure closing in on 50 percent of GDP, and U.S. offshore interests expanding, the horizon looks discernibly red for many U.S. outsourcers.

But some cautious observers look at the current trade imbalance between the United States and China through a more objective lens. Concerns about relying too much on one country have many U.S. businesses eyeing India as the next frontier for global outsourcing.

China remains a strong area of opportunity for U.S. companies looking to expand globally, but important questions about its long-term benefits and risks still need to be addressed.

"What happens to the global economy if there is a hiccup in China? What will be the political and economic ramifications if a downturn occurs?" asks Brooks Bentz, associate partner with Accenture's supply chain management practice.

It's only natural for executives to play out "what-if" scenarios in corporate boardrooms, especially given the recent SARS scare, the 2004 tsunami that ravaged the coasts of southeastern Asia, and the threatened Asian bird flu pandemic.

Manufacturing activity along China's developed coast has also become increasingly expensive due to growing demand, compelling businesses to seek out locations further inland or outside the country to find the lowest total landed cost.

When global consumer products manufacturer MASCO Corporation first began outsourcing in China, it saved so much on the production end—up to 50 percent—that transportation and logistics costs were a secondary concern.

"Now, the logistics piece is becoming important as we source from suppliers across the country and margins become skinnier," says MASCO's Brian Smith.

Strategically, logistics-savvy enterprises are moving toward multi-source strategies, pre-distributing product at point of origin to bypass congested U.S. ports and potential disruptions, and proactively managing the inbound movement of cargo to create a more flexible and reactive transportation and distribution network.

But they are also looking beyond the here-and-now challenges of managing their supply chains in established areas such as China and exploring new frontiers where they can make inroads for the future. Many are leveraging the resources and expertise of global 3PLs and transportation service providers to help navigate potential expansion opportunities elsewhere in Asia.

If these global pioneers are any indication of shifting sourcing trends—as they often are—U.S. businesses will be following their lead and peeking around China's corner and beyond the Himalayas into Asia's next major global logistics hotspot: India.

A Rising Star

Since gaining its independence from Britain in 1947, India has grown up in the shadow of the Red Dragon. Its population and labor force rank second in the world to China, and it is fourth globally in terms of GDP purchasing power parity—$3.7 trillion—trailing only the United States, China, and Japan.

But as China's aggressive economic policies and government control over infrastructure investment command the attention of global businesses looking for abundant cheap labor and sourcing opportunities, India is taking a different tact. The government has been quietly building a foundation for its own economic revolution with a laissez faire, "wait-and-see" approach to reform—for better or worse.

India's measured strategy reflects its historical and cultural transformation from a British colony to a republic—one that eschewed violent upheaval for passive reform.

The very colonialism that Mohandas Gandhi resisted so ardently in the 1940s has paradoxically given India a cultural edge as its global economy evolves. While Hindi is the country's official tongue, English has become the language of commerce and trade.

Many U.S. companies outsource telecommunications and business processes to India because of its well-educated, English-speaking labor pool. Industry experts anticipate this trend will continue.

Cutting Red Tape

"By 2015, 30 percent of traditional professional IT services jobs will be delivered by people who come from emerging markets.

Increasing demand for India's coveted talent pool will drive prices, and by 2008, labor rates for application-related services in India will rise 40 percent to 60 percent above 2004 rates. However, through 2008, differences in pricing for professional services between developed and emerging markets such as India will remain and be a factor in more than 70 percent of deals," according to Gartner Inc.'s Five Hottest IT Topics and Trends in 2005.

As India's infrastructure and transportation capabilities evolve, U.S. interests are primed to expand activities there beyond software and IT to manufacturing and distribution as well.

"India holds great potential to replicate for manufacturing the outsourcing success it has had in software," says Divay Goel, senior executive at Drewry Shipping Consultant's India office. "But it will take time because of restrictive labor laws and large-scale bureaucracy in germinating industries."

Even still, 56 percent of respondents to an Inbound Logistics reader poll confirm they are involved with some type of procurement or export activity in India. Many U.S. businesses have already developed a comfort zone there, making it easier to extend that existing footprint into other industrial activities, despite the impediments.

"India is fast becoming world-renowned for biotech, financial, accounting, and medical care expertise," says Jacques Creeten, managing director, sales and marketing for India, Middle East, and Africa, FedEx. "And the growth doesn't stop at the service sector. Engineering goods, chemicals, and gems and jewelry are the fastest-growing sectors; manufacturing in India is expected to grow by 9.4 percent in coming years.

"Thanks to the Internet and the growing importance of economies of scale, many small markets and cities now engage in global trade," Creeten adds.

Another interesting growth area is agricultural exports. "Some Indian companies are planning to acquire large agricultural tracts of land and convince farmers to shift from growing cash crops—wheat, rice, maize—to more profitable fruits and vegetables that can be exported to destinations such as Europe," notes Goel.

Perhaps even more telling, IL readers identify corporate-level executives and supply chain/logistics managers as the most actively involved in managing India trade operations. This suggests that businesses are melding corporate growth strategies with supply chain demands as they target India for long-term expansion opportunities.

Another indicator of India's emerging importance on the global logistics scene is the growth and expansion of logistics service providers in the country.

Global third-party logistics companies such as Menlo Worldwide, and expediters including FedEx are quickly making strategic moves to develop and evolve their service networks and operations in India. These services help early adopters piggyback on their resources and make a seamless transition into the Indian market.

Global 3PLs have been visible and aggressive in building their networks and service capabilities in India. In 2004, for example, Redwood City, Calif.-based Menlo Worldwide announced it was expanding its operational presence in India by nearly 50 percent to meet growing demand, particularly in the automotive and apparel/textile industries.

Menlo India-Wide

Menlo Worldwide offers multimodal transportation services—including air and ocean freight—as well as supply chain, warehouse, and logistics services in India. In addition to three logistics centers, Menlo Worldwide operates service centers in Bangalore, Chennai, Mumbai, Cochin, Ahmedabad, Calcutta, Hyderabad, New Delhi, and Coimbatore.

General Motors India/Halol (Gujarat) outsources its automobile manufacturing and service parts operations to Menlo, which operates a 44,000-square-foot spare parts distribution center at the Halol location. This facility serves a regional warehouse as well as dealers throughout India.

"Among the activities and business processes Menlo supports in conjunction with the customer are spare parts forecasting, order scheduling, procurement (imports as well as locally manufactured goods), order rejection and claims handling, and vendor payment follow-up," says James Hsu, managing director, Asia Pacific region for Menlo Worldwide. Menlo also performs warehouse management, returns and warranty handling, and dealer sales order processing.

Purchase, N.Y.-based Lenovo, which develops, manufactures, and markets high-quality PC products and value-added professional services around the world, has found similar success aligning itself with Menlo Worldwide to manage a 4,000-square-foot facility supporting manufacturing operations in India.

Menlo runs the vendor-managed inventory (VMI) hub facility, where it oversees operations and sourcing/procurement of computer parts from Lenovo's suppliers for use in its India manufacturing plant.

Menlo also performs purchase order management, inbound freight and customs clearance, inbound transportation and storage, sales invoicing, and outbound transportation to the Lenovo factory.

Among the primary advantages of working with a third-party provider in India is the ability to leverage the 3PL's global expertise and industry knowledge across multiple customers and industries.

"This provides cost advantages from shared systems and facilities already in place and deployed by the 3PL," notes Hsu.

"It also gives U.S. companies the ability to draw on and implement best practices based on lean warehousing methods, value stream mapping, visualization and simulation, safety, security, and other business processes where the 3PL has established competencies," he says.

The Place to Be

To meet increasing demand from customers, transportation companies are also expanding in India. Memphis-based FedEx, for example, began operations in India in 1984 and 13 years later became the first express company to launch an all-cargo flight to India. In October 2005, FedEx Express unveiled new service expansions in India, connecting 4,348 cities and towns across the country to the world.

As part of this effort, FedEx added five new weekly flights from Delhi westbound, bringing the total number of weekly flights to 16, and making it the first express carrier to have two gateways in India—Mumbai and Delhi.

"India is the place to be," says Creeten. "It is a fast-growing, market-driven economy. As India emerges as an economic superpower, the elements critical for success on the global scene will continue to be speed to market, quality, cost, and efficiency."

In turn, India offers logistics and transportation service providers ample opportunity to tap into an emerging marketplace. Key customer segments in India include pharmaceuticals, fashion, gems and jewelry, engineering goods, and precision tools—most of which require special shipping provisions.

The apparel industry, by example, is turning to India's textile mills for better quality, higher-value fabric. To meet the distinct needs of Indian garment exporters, FedEx created its Solutions for the Fashion World offering.

It also provides an International Priority option for valuable goods, which offers secure custodial control and time-definite, airport-to-door service from India to key destinations around the world. This type of service is key for apparel manufacturers and their trendy customers.

Obstacles to Growth

Like most countries in transition, India is not without obstacles to growth. Ongoing political strife with Pakistan over the Kashmir border is cause for concern among foreign investors, as is overpopulation and its impact on environmental sustainability and social welfare.

But perhaps India's greatest impediment is its inability to quickly and efficiently move product from inland facilities to its ports, a problem directly linked to dated and disconnected transportation infrastructure.

"India risks missing out on an additional one to two percent of annual GDP growth led by its emerging manufacturing sector unless the country can improve transport connections to meet the just-in-time requirements of complex international supply chains," notes a recent study, Connecting India: Transport Challenges and Opportunities, authored by Drewry Shipping Consultants in concert with NOL Group and its operating businesses in India, APL, and APL Logistics.

"India's ability to attract foreign direct investment for its manufacturing sector is highly dependent on a transport sector capable of getting high-value products to global markets on time, and at an acceptable cost," says NOL Group Deputy President Cedric Foo.

Cargo transportation expenditures in India are among the highest in the world, accounting for 11 percent of total landed cost, the report notes. As a result, foreign direct investment over the past two years has been stifled.

Most industry insiders point to India's lax attitude toward economic reform—especially compared to China—as the primary reason for its sluggish response to these problems.

"India is still underdeveloped in terms of basic infrastructure to support industrial growth, compared to China," says Goel. "While China is a more centrally controlled economy, India is a democracy, with its own advantages and disadvantages, especially when it comes to project implementation, land acquisition, environmental clearances, and labor laws.

"In particular, India needs to progress on labor reforms, as most laws are based on socialist ideologies and not capitalism, which is discomfit for potential foreign investors who might want to set up efficient manufacturing bases in India," he adds.

Still, India's existing inland transportation network, albeit flawed, is considerably more developed than China's. Its 39,289 miles of railroad track rank fourth in the world closely behind China—despite the fact that China is three times larger in total land area. Also, India's 2.4 million miles of roads more than double China's total.

The Indian government is quietly amending its economic policies, reducing trade barriers, and inviting more private sector investment to help alleviate these transportation gaps and create better synergies between its ports and inland transportation networks.

The impact of global enterprises such as Menlo Worldwide and FedEx similarly cannot be understated. Continuing innovation and expansion on their part will help India expedite its learning curve in much the same way China's government has leveraged foreign expertise and investment to fuel its economic engine.

In turn, Goel sees ample growth opportunities for large integrated global logistics providers to come in and support the booming retail market in India as 3PL providers for inbound and outbound logistics to manufacturing industries.

"A number of small integrated logistics players operate in India, but none currently are large enough to have processes that could be globally benchmarked," Goel says. "In fact, a number of large international logistics companiess are keen to expand into India by taking a management stake in small or medium- sized, well-established, family-owned logistics businesses that have potentially reached the limit of their scale and expertise."

Innovation vs. Growing Pains

Global businesses ultimately are attracted to countries that take an innovative approach to developing the requisite transportation connects and technology infrastructure necessary to expedite cargo movement. India has a leg up on competing countries given its pedigree in the business process outsourcing sector and its English-proficient labor pool.

For many outsourcers and investors, India's potential as a pivotal link in the global supply chain far outweighs its current growing pains.

India at a Glance

Economy

  • India's GDP has grown at an average of 5.6 percent per year since 1990.
  • India's exports have almost doubled since 1990, and its share of world exports has risen from 0.6 percent in the mid 1990s to 0.9 percent in 2004.
  • Another 80 million people will enter the country's workforce by 2010.
  • Agriculture in India absorbs 62 percent of the working population, but accounts for only 21 percent of GDP.

Infrastructure

  • China's recent investment in infrastructure has been eight times that of India in absolute terms.
  • The lead times for Indian exports to China averages six to 12 weeks, compared with a two- to three-week average for exports from China to USA.
  • The costs associated with moving cargo in India are some of the highest in the world at 11 percent of landed cost, compared with a global average of 6 percent.

Ports and shipping

  • Indian container traffic has increased at an average annual rate of 13.4 percent over the last decade, reaching 4.39 million TEUs in 2004, and is projected to reach between 8.4 million TEUs and 10.8 million TEUs in 2012.
  • India's container terminal capacity has the potential to more than double from 6 million TEUs in 2004 to 15.2 million TEUs in 2012.
  • India's West Coast ports handled almost 68 percent of traffic in 2004.
  • Thanks to increased volume with China, India's westbound trade grew by around 30 percent in each of the past two years, compared with eastbound (export) growth of only six to eight percent.
  • An estimated 45 percent to 50 percent of India's imports and exports are carried on direct call, main line vessels.

Road, rail, and air

  • India will soon allow full ownership by foreign private entities in the trucking and warehousing sectors, and this will help generate both operating and cost efficiencies.
  • The provision of rail services is being liberalized, with the Indian government ending Concor's monopoly on moving containers by rail in 2005.
  • Only four airports, Mumbai, Delhi, Chennai and Kolkata, are licensed to handle international airfreight.

Source: Connecting India: Transport Challenges and Opportunities, Drewry Shipping Consultants

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