“The real value addition will be in terms of handling of goods – how fast can you handle it and at what cost will it be available? How you take away the pain points of shippers will determine your relevance, and that combined with technology will ensure that you continue to remain in the business.”
Let me begin with a very obvious question – COVID-19 has impacted almost every business in our sector, what has been the impact on LCL consolidation? What were the challenges you faced and what is the current scenario?
COVID-19 has impacted different segments within the logistics sector differently. LCL consolidation was the first business we started and it has traditionally been very insulated to market ups and downs, even when we had the global meltdown in 2009, LCL sector was doing OK and then thereafter we have seen global trade moving up and down but the LCL business has been quite steady.
When the economy is down, the full container Load orders get converted into less than container loads and when the economy is up, all the LCLs get converted into FCLs but there are always some new sample orders which are moving in LCL. So, LCL business has been insulated to the global up and downs and COVID has not been an exception to it. Only in the beginning of the pandemic, in the months of April and May when there was a strict restriction on the movement of goods due to the lockdown 1 and 2 within India, we had seen LCL movement going down. In fact, we had virtually no movement in April and it slowly started picking up in May and gradually on the LCL side, we are almost back to the Pre-COVID levels because a lot of FCL orders have been converted to LCL. So, there is always some cargo that is moving through LCL.
How about the other businesses? You are present almost in every segment of the logistics business. Which of them were badly affected?
Amongst all the segments we operate in, the air freight has been severely impacted because there is no passenger movement or it is very limited and because of the travel restrictions, no passenger aircrafts are flying. So, there is virtually no belly capacity. The only air capacity available is on dedicated freighters, which because of the demand and supply situation have seen the freight rates shoot 10 times. Something that moved earlier for Rs.70 or 80/ Kg pre-COVID, the rates went as high as Rs.700 to 800 per Kg. And the businesses just couldn’t afford it because that was not factored into the cost of the goods. So, only essential goods and pharmaceuticals were traditionally moving by air.
Another segment severely impacted was project cargo. Our project cargo division has also been seeing virtually very little business in the pandemic times. In fact, for the last 6 months, we haven’t got any single large order. That’s because everybody has put their expansion plans on hold and when you talk about project cargo movement, it’s basically movement of large plant and machinery, and that actually has not been happening.
Your response gives rise to a lot of questions that I would like to ask. What are the lessons you have learnt during this period? What was your assessment and what is the takeaway?
The biggest learning has been about the human resilience. The second thing that I would like to mention here is about the technology. The advent of technology or the availability of Internet has really done away with the requirement of physical movement or physical presence in offices. So, we have now entered a world of virtual workspaces.
You are one of the early preachers of digitalization, bringing technology to use in our industry. I think you worked hard through the organization FILA to see that this happens. Now, COVID-19 has actually accelerated digitalization. What is your take? How are things on the usage of technology in our industry and what else needs to be done?
One of the biggest impacts of technology is disintermediation, it removes the middlemen. So, middlemen are supposed to do certain functions, in terms of putting a transaction together. But with a good technology interface and a platform, you don’t need a middleman. You just need to go online and do it. That was the reason for the boom in e-commerce. Somehow the shipping industry was staying away from it for various reasons because space was controlled by certain shipping lines. The procurement of the transport was in the hands of certain middlemen. They were not only doing the procurement of transportation but they were also adding lot of value in terms of freight forwarding in terms of 3PL Logistics, 4PL Logistics and various what have you.
So, essentially the disintermediation was not happening in our industry, and I don’t think it is going to happen so soon because the value addition still happens. But there is certain layer of intermediaries who are not adding any value. They are just buying and selling freight. So, shipping lines have realized that why should they be at the mercy of certain intermediaries who are not adding any value. So, why not we try to give good experience to the shipper and give him access to our services. So, all the shipping lines now have come up with their own platform. Starting with Maersk which has always been ahead of the curve, MSC, CMA CGM, Hapag Lloyd and other shipping lines have slowly started offering their services on the platform. And they have ensured that the platform is effectively used by cutting away the other ways of transacting business. They said that if you want to submit an SI, submit it through a platform.
If you want to do a booking, come to our platform. Now, all these days, even the rates were away from the platform. Now they said, you want rates, with Maersk Spot rates and other shipping lines also offering something similar, we have to go to a platform. So, they have tried to do away with intermediaries by ensuring that the services are accessible to shippers.
But intermediaries still hold relevance in our industry because intermediaries are not only buying and selling freight services, they are also adding value in terms of transportation, warehousing, labelling, packing, customs clearance etc. So, that’s how the technology is playing its role. What we have also seen that customs is becoming very technology savvy. They have come up with faceless examination, they have been upgrading their platforms. Now, online custom clearance is available. The shipping bill is not available in physical format anymore, it’s just available in PDF format.
So, what we are seeing is the value addition in Customs clearance by an intermediary is slowly reducing. Now, the real concentration of value addition will be in terms of handling of goods – how fast can you handle it and at what cost will it be available? What value additions are you giving in terms of maybe warehousing, labelling; how are you taking away the pain points of a manufacturer or supplier and a buyer. So, that will determine your relevance, and that combined with technology will ensure that you continue to remain in the business.
In this shift towards maturity in use of technology, where does the customer stand? Are we taking him also into consideration and then evolving?
The customer is very much being taken into consideration. I think he is being empowered. Similarly, a lot of shippers are sometimes at the mercy of their intermediaries because they don’t have the knowledge or they don’t have the access to the suppliers. So, I think technology is making supply easy or access to supply easy and that’s how you are empowering the shippers more.
Let us talk about operational issues. I understand from the market that there is a huge imbalance happening between exports and imports, putting pressure on equipment, non-availability of boxes. So, in your line of business, what do you see?
We are into various lines of business – LCL consolidation, full container forwarding, coastal – wherever the containers are required. It has affected us equally and because of the gap in demand and supply the freight rates have gone up and it has directly impacted the cost of transportation of goods. Shippers sometimes have been beneficiaries of the freight rates going down and there they have saved money. Unfortunately, today there is a situation in which the freight rates have gone up, and it’s not going to be permanent; it is only going to be for the next couple of months till the inventory or the empty inventory is repositioned back to India and there are enough containers available to take care of the demand here.
So, yes, the cost has gone up and we are having difficult conversations with customers explaining them the increase in cost and ensuring that the integrity of supply chains is still maintained which is a challenge because sometimes, in today’s scenario, it is not only availability of equipment but also availability of space because during the pandemic a lot of services were closed. Shipping lines thought that the pandemic impact on global trade is going to stay for a longer time and that is the reason, they rationalized the capacities, they merged certain services, so that’s how the capacity also got reduced. Today a shipper may be ready to pay higher cost in terms of the ocean freight but he may still not get the space so that’s another challenge.
You mentioned about project cargo not picking up because of stagnation. Expansion of projects is on hold and new projects are not coming up. Now government is infusing a lot of money into the market to improve the manufacturing, promote exports, and also this Make in India slogan slowly looks like taking shape, the geopolitical factors are also pushing us to generate more exports, more manufacturing and sourcing is happening in India. How do you see more cargo generating out of India?
Because of Make in India, some production capacities will shift to India. But currently, its only on a discussion phase. In the initial phases, we saw a lot of mobile manufacturing happen in Modi era 1.0. A lot of focus was on electronic goods, shifting of them to India, through play of import duties, manufacturing locally was made attractive. We saw a huge mobile manufacturing shifting to India, and few other industries. But for manufacturing of electronic goods, you don’t require large machineries – what you require is assembly lines, essentially workers and some electronic spare parts that are normally moved by air so that really did not help the project cargo transportation.
Project cargo transportation industry benefits when we see setting up of large petrochemical plants, hydroelectric plants or car manufacturing. There has not been a single large car manufacturing assembly line that has come to India except for the Kia Motors which came into Andhra Pradesh couple of years ago. Otherwise in the last 10 years, we have not seen any major assembly line coming in. We have not seen any large hydroelectric projects being erected because everything is moving to solar. And solar panels are essentially moved in containers. So, large industrial units are still not being erected, where odd dimensional plant and machinery is required. So, project cargo will still be slow for a few years.
Let’s talk about your company, Mr. Kele. It is exactly I think about 15 years ago you started this company. When you look back, when you travel down the memory lane, how do you feel? Have you achieved your goals, are you on track for what you have planned and what are your plans for the coming years?
See, I will be brutally honest and frank with you. As an organization, I think we have achieved more than what we had set out for. We started by offering a small bouquet of services of LCL car consolidation, inbound and outbound, and some FCL forwarding. But once we were in business, we realized that a professional approach and adherence to quality has fast acceptance by customers. So, we said since we have set up a shop, why not we look at growing out business into various verticals not only in terms of segments but also in terms of geographies. So, that’s how, slowly, as and when we have seen opportunities, we have expanded geographically and we also expanded in terms of various business segments.
So, that has been our journey so far. If you ask me about broad milestones about our organization, I think we started our air freight division way back in 2008 when we saw an opportunity in air freight business. Then we started our own office in North India which is a very tougher place to do business because of its competitive nature. Then we started our East Africa offices in 2012, then we started our CFS division in 2014 through our first inorganic growth acquisition in your home city of Hyderabad. We opened our own office presence in Bangladesh in 2015. We started our own first green CFS in the country at Nhava Sheva in 2017. We started coastal forwarding division in 2018, and I think our latest expansion has been acquiring of Chandra CFS in Chennai in late 2019.
Your presence in Bangladesh and East Africa – I think both are very challenging as well as very prospective regions to look forward to grow and expand. So, what is your perspective on these two countries?
I think Bangladesh has got much more opportunities because firstly, it is one of the largest suppliers of garments globally; I think 14% of the global garments are manufactured in Bangladesh. The nation’s per capita income is more than India. So, Bangladesh has opportunities in terms of offering professional logistics services. Currently we are offering our products of LCL consolidation only there, and we are seeing whether there is an opportunity to expand into other segments of logistics.
East Africa is a mixed bag because the markets that we are present in Kenya and Tanzania. Of course, there is a local economy and then there is a lot of transit cargo that moves into central Africa through these countries. Africa is dependent on 3 factors: (1) They are still an agrarian economy – so the economy depends on the local crop that happens every year. (2) The international aid they receive, and (3) The political stability. All these three factors are very dynamic and every year one of them is always at play.
So, although it’s a very prospective geographical area to be, but the growth opportunities are little. But it is good to be present there and have your operation going, and prepare yourself for some large operations that may come your way. So, that’s how I would like to explain our East Africa operations.
Finally, we are looking at COVID-19 vaccine coming in soon and the economy also seems to be slowly reviving. So, what are you looking forward to? When will things really be business as usual?
When the vaccine comes in firstly, logistically, the challenge is how do you reach the vaccine to every member of the population in every country, globally. It’s still an area that remains unexplored and there is not enough data available on it and there are not enough approaches but everybody is thinking as to how best to do it.
Of course, there are certain cold chains which are existing, not designed for vaccine movement but probably designed for food products, maybe ice creams or chocolates or wine and there are storage areas. So, in 6 to 12 months these existing cold chain capacities will have to be used for vaccine, giving them predominance over food items. This is purely my guess as to how it will play because there is no point in developing dedicated supply chains only for movement of vaccine because after one year of extensive vaccination program, those capacities may not be of any use, and cold chain capacities don’t get created overnight. It requires dedicated efforts and huge investments before they get created. So, I guess this all play is going to happen in the year 2021. Traditionally, India has been one of the largest vaccine manufacturing areas.
So, I think there will be huge evacuation by air from India. So, whatever vaccines that get manufactured in India, though the patent will be with some other international company, but manufacturing may still happen in India. So, there will be huge air freight opportunities which will be available. Now that’s on the logistics side and specifically in the Indian context. And then locally we have to distribute it – so we will have to figure out a way as to how locally these vaccines will be administered to our population, and as I mentioned to you, there are existing supply chains – we will have to see whether they can superimpose vaccine distribution using those supply chains.
