CONSUMER MARKETS

Tapping the emerging opportunities in Logistics

A perspective

BUSINESS ADVISORY

What is this document about?

The Logistics sector in India is at the threshold of a rapid transformation While hitherto Logistics was largely considered a non-strategic support function, it is now
emerging as a key strategic differentiator for several industries

KPMG has been tracking this sector and enabling clients to effectively tap this potential and raise
resources for the same

This document lays out KPMGs perspectives on Logistics in India, the opportunities it throws up
for enterprises and how KPMG can partner with forward looking enterprises that see this potential and wish to explore it

2007 KPMG Advisory Services Private Limited, an Indian private limited company and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved.

Contents

The Evolving Logistics Landscape

Opportunities

Tapping Opportunities and Raising Requisite Resources How KPMG can help

2007 KPMG Advisory Services Private Limited, an Indian private limited company and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved.

Contents

The Evolving Logistics Landscape

Opportunities

Tapping Opportunities and Raising Requisite Resources How KPMG can help

2007 KPMG Advisory Services Private Limited, an Indian private limited company and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved.

Logistics costs in India are estimated at over Rs 4.5 trillion, growing at a rate of 8-12%
2/3rd for the overall logistics costs arise from transportation and warehousing

Logistics cost in India equals almost 13% of its GDP

Japan Europe US China India 0% 5% 10% 9%

11% 10%

6% 24%

4% 39%

17% 13% 15% 20%

27%

Transportation Order processing

Warehousing Administration

Inventory carrying

Logistics cost as % of GDP

Source: Cygnus Industry Report, 2005

Components of logistics cost

Source: www.worldbank.com, 2002

Indias logistics cost is amongst the highest in the world (as % of GDP)

2007 KPMG Advisory Services Private Limited, an Indian private limited company and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved.

While traditionally logistics costs have been high on account of inefficiencies, the Government is now demonstrating a strong commitment towards reducing inefficiencies by providing an enabling infrastructure and creating conducive regulations
The government is investing heavily
Non NHDP projects Port Connectivity NS, EW Corridors Golden Quadrilateral 5,846 400 7,300 10,000

and seeking private participation

In airports Kochi, Hyderabad Bangalore, Delhi and Mumbai airports Ports..

Pipavav, Mundra, Dhamra and several other port projects More than Rs 75,000 crores are being invested by private players in NHDP program 14 licenses (national and route specific) for private participation in container movement have been awarded by the Government recently

Roads

Planned road expansion projects (KM)

Source: D Essence Consulting

and Rail

Rationalization of tax structure

Current Structure Post VAT Structure Implication

and other enabling initiatives

Overloading Act

Cascading Sales Tax Structure 20 to 30 C&F agents

No cascading tax structure Consolidation of warehouses Increased complexity and volume of goods handled Reduction in share of unorganized players

Would encourage usage of more efficient high capacity trucks. Would help ensuring good condition of roads. Transparency of transportation trade. An equitable apportionment of liability between the common carrier and the consignor. The development of dedicated freight corridor is expected to increase rail capacity (which is currently constrained by track availability on key corridors)

Carriers Act 1865 Capacity expansion

20 to 30 Warehouses over the country

These changes would incentivize larger, more organized operations

2007 KPMG Advisory Services Private Limited, an Indian private limited company and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved.

In addition, emerging business trends are creating a strong growth thrust for outsourced logistics services
Abolition of trade quota Impact on the industries dominated by global trade (e.g. apparel) Capacity expansion Integration Consolidation Domestic market Evolving base for Contract manufacturing De-risking business

While China still remains a clear leader in contract logistics, Companies are keen to de-risk their business by spreading their manufacturing base to equally cost effective India Apart from manufacturing de-risking, the everexpanding domestic market is also a big attraction for companies to set-up their base in India

Greater-than-ever need for a dynamic, reliable and efficient supply chain! Organized retail boom is expected to fuel logistics outsourcing
$23.0

Demand for world class logistics services Businesses are looking towards rural markets with greater interest

5000 towns
$6.4

Companies are increasingly finding urban markets saturated and hard to penetrate

6,00,000 villages
2006 2010

Rural market offers a virgin territory for the marketers. However, the challenge is to distribute with cost efficiency

Organized retail market (USD billion)

Source: KPMG research

Need for a deeper, cost effective supply chain

Several businesses dont have requisite logistics capabilities to manage the evolving landscape
2007 KPMG Advisory Services Private Limited, an Indian private limited company and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved.

Not surprisingly, logistics service providers in India are getting their act together to service the expected growth in demand
UPS has chalked out plans to ramp up its India presence with almost 150 UPS stores across the country over the next three years Semblog India, a wholly-owned unit of the $9-billion Sembcorp Logistics, Singapore has announced plans of investing up to Rs 250 crore over the next three years into a cold chain Gateway Distriparks acquired Indias leading cold chain services company Snowman Frozen Foods recently to capture a slice of the fast growing market for logistics services for organized retail Om Logistics Ltd is planning to invest around Rs 50 crore on expanding its operations in the country. "We will go in for an IPO early next year to raise funds for our projects, Madhukar Singh, Mumbai Regional Head, Om Logistics Ltd Safexpress will be investing about Rs 10 crore in the next six months to add warehousing space in its national infrastructure. DHL acquired Indias first and leading express services company in 2005 Blue Dart In January 06, AMP Capital invested Rs. 90 crore in Gati as private equity, a significant portion of which will be used for warehousing infrastructure Gati will be incurring expenses around $100m in the next three years towards upgrading the infrastructure facilities, setting up more warehouses and introducing better technology - Mahendra Agarwal, MD, Gati. AFL is beefing up its operations and has plans of committing around Rs 100 crore over the next three years towards setting up infrastructure facilities in almost 500 locations and integrating its various services under a single roof. AFL has recently hived off its Cargo division into a joint venture with DACHSER GmbH & Co. KG. one of the largest logistics groups in the world. We are integrating and expanding our surface transport and infrastructure networks and envisage to emerge as a complete logistics solutions provider for our customers - VV Rao, chief executive-logistics, AFL. AllCargo recently acquired the worlds 2nd largest NVOCC company (ECU Line) and has raised USD 18.4mn through a preferential equity allotment to private equity investors, namely New Vernon and Volrado venture partners. The Transport Corporation of India (TCI) is considering a private equity placement to fund its USD 100mn expansion plans (out of which USD 33mn is for warehousing capacity expansion).

Key Global Players

Fedex recently acquired its Indian partner Pafex

Key Indian Players

SICAL recently obtained PE funding for its expansion

Incumbent players are rapidly integrating, scaling up and building capabilities to keep pace 8 with market growth and emerging customer demands
2007 KPMG Advisory Services Private Limited, an Indian private limited company and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved.

Contents

The Evolving Logistics Landscape

Opportunities

Tapping Opportunities and Raising Requisite Resources How KPMG can help

2007 KPMG Advisory Services Private Limited, an Indian private limited company and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved.

Opportunities exist across the spectrum of logistics activities

Range of services Infrastructure provision Transportation

Logistics parks
development Transport hubs development Fleet ownership and hiring

Operations Transportation

Fleet management Carrier Routing Carrier Negotiations Legal Documentation Track and Trace Express services

Warehousing
High quality warehouse
infrastructure development Logistics parks development Transport hubs development

Warehousing

Inventory control Pick & Pack Bar-coding, tagging Storage Order management Customer service

Road

Dedicated freight corridor

development

ICD / CFS infrastructure Multimodal warehouse

infrastructure

Container rail freight

operations

Rail Modes

ICD / CFS operations Freight consolidation Storage

Nature of opportunity Immediate Long term Minimal

Greenfield port

Water

development Port approach channels Breakwater projects

ICD / CFS infrastructure Port based warehousing Tank farms

Freight forwarding Dredging Pilotage and towage Stevedoring Bunkering Ship repair

ICD / CFS operations Container terminals Cargo handling berth Single buoy mooring

Air cargo transshipment

warehouse infrastructure

Express services Freight forwarding

Air cargo transshipment

warehouse operations

Air

2007 KPMG Advisory Services Private Limited, an Indian private limited company and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved.

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While individual opportunities abound in each segment of logistics, integration across services and modes is a big opportunity in itself
Range of services Infrastructure provision Transportation
Logistics parks
development

Operations Transportation

Fleet management Carrier Routing Carrier Negotiations Legal Documentation Track and Trace Express services

Warehousing
High quality warehouse
infrastructure development

Warehousing

Inventory control Pick & Pack Bar-coding, tagging Storage Order management Customer service

Road

Transport hubs
development Fleet ownership and hiring

Logistics parks
development

Opportunity to tap individual opportunities like

provision of warehousing infrastructure, express transportation, freight forwarding etc. as well as

Transport hubs
development

Dedicated freight corridor

development

ICD / CFS infrastructure Multimodal warehouse

infrastructure

Container rail freight

operations

Rail Modes

ICD / CFS operations Freight consolidation Storage

Opportunity for integrating across the types of

logistics services viz. warehousing, transportation and value added services to provide end-to-end services

Greenfield port

Water

development Port approach channels Breakwater projects

ICD / CFS infrastructure Port based warehousing Tank farms

Freight forwarding Dredging Pilotage and towage Stevedoring Bunkering Ship repair

ICD / CFS operations Container terminals Cargo handling berth Single buoy mooring

Air cargo transshipment

warehouse infrastructure

Express services Freight forwarding

Air cargo transshipment

warehouse operations

Air

Opportunity to tap integration across modes and services to

become an integrated third party logistics (3PL) service provider
Integrated 3PL services

Opportunity to tap individual opportunities like

provision of road, air and now rail freight transportation / warehousing as well as Opportunity to tap opportunities in multi-modal transportation and warehousing
Domestic supplier

Suppliers FG warehouse

Road transport

Road transport

Transportation and warehousing in the retail channel

International buyer

s Illu

e tiv ra t

Rail transport ICD / Manufacturer RM warehouse Air transport

Manufacturer

Rail transport Manufacturer FG warehouse Air transport Distribution channel warehouses

Port

CFS Water transport Water transport

End users

International supplier

Inbound

Outbound

2007 KPMG Advisory Services Private Limited, an Indian private limited company and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved.

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Contents

The Evolving Logistics Landscape

Opportunities

Tapping Opportunities and Raising Requisite Resources How KPMG can help

2007 KPMG Advisory Services Private Limited, an Indian private limited company and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved.

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Our established framework for assisting clients in exploring and tapping market opportunities is designed to assist you all along your growth roadmap from identification of opportunities to developing a business model to tap opportunities up to raising resources for actioning the chosen business model
Market Assessment Identification of opportunities Mode of entry decision Go to market strategy

Which segment of the logistics value chain / opportunity is large enough to meet your growth needs? Is the segment growing fast enough? Is it likely to grow sustainably? What are the key drivers of growth? Are these growth drivers sustainable? Which customer segments are relatively larger / growing faster? What are the emerging trends in customer needs by segment? What new products/ technologies are emerging? What will be the pace of new product adoption? What is the number and relative size of existing industry players? What is the profile and performance (margins) of key players? What are their strategies? How has the competitive landscape changed over time? How is it expected to change in the future? What are the critical success factors and business risks for players in this industry? Is the supply (manpower, raw material) scenario favourable? How do regulation, taxation and legal aspects impact entry into the industry, its growth and profitability? How are these aspects likely to evolve? What specific opportunities in the target industry are most lucrative given size of the opportunity, competitive scenario, regulatory aspects and fitment with your aspirations and capabilities?

Greenfield strategy

OR

Acquisition/ alliance strategy

Mode of entry decision

Which customer segments should you target immediately, in What are the key criteria which a potential the near term and in the long term? target must satisfy for it to be considered suitable for acquisition/alliance? Which location would be most suitable for setting up operations? What is the subset of players that satisfy these criteria? Who are the key players that would constitute direct competition in these segments? What will be the best negotiation strategy for each potential target? What are the strategies of these competitors and what are their competitive differentiators? What are the regulatory, taxation and legal aspects to be kept in mind while pursuing What size of initial investment would be optimal? How should potential targets? it be scaled up? What would be the optimal operating structure? What is the valuation that would serve the aspirations of the target and acquirer most What key capabilities are required to set up operations? optimally? Which key revenue and cost components need to be considered for business planning? What are the reasonable estimates of projected figures on each of these components (business plan development)? What local socio-political-economic environment and related risks must be accounted for? What are the tax and legal aspects specific to this industry that need to be accounted for? What payback period / IRR can be reasonably expected on planned investment? Does the nature of regulation encourage a particular mode of entry? Are your strengths relevant for the Indian market and / or transferable to the Indian context? Are there any players in the market who are looking for a buyout? What are the strengths of these players? Are these strengths complimentary What is the quantum of investment envisaged for entry? to yours (is there a good potential for synergies)? How much lead time is acceptable before operations must be up and running? What is the trend in valuations of incumbents? What extent of strategic and operational control is desired?
2007 KPMG Advisory Services Private Limited, an Indian private limited company and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved.

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KPMG is uniquely positioned to assist you in defining your growth plan by leveraging our deep capabilities in the Logistics sector; as well seamlessly advise you on practical inorganic opportunities and financing options
Indian logistics advisory experience 1. Conceptualization and establishment of financial feasibility of a concept based around provision of integrated warehousing and transportation services at hubs located across the country for a leading Logistics Group Business strategy for developing an integrated Logistics Park near a major Eastern Region port for a Leading Business House of India Market entry strategy for an international 3PL company Business Process Reengineering and implementation of Activity Based Costing for a Leading Courier and Cargo company Global Logistics Advisory Experience 1. Conceptualization and assistance in implementation of new methods of distribution for products for a financial services company Logistics strategy for an auto parts chain Logistics strategy for a Canadian toy company Logistics strategy for a worldwide apparel chain based at Stamford, UK Redesign of logistics processes for a leading global chemicals company 1. 2. 3. 4. 5. 1. 2. 3. 4. 5. Transportation structure redesign for a leading auto component manufacturer Development of vision and business plans for Mumbai, Kandla and Jawaharlal Nehru Ports Channel strategy for a leading global medical equipment manufacturer Entry strategy for a leading cargo management services provider Assistance in achievement of growth aspirations for the logistics business of a $3bn Indian conglomerate Relevant Corporate Finance experience Transaction advise to Blue Dart Express Limited in its sale to DHL Singapore Financial advise to DHL Distribution Holdings (UK) Limited on the sale of Fuelserv Limited to ReD plc Financial advise to DPWN AG on the acquisition of Williams Lea Group Limited Financial advise to shareholders of Tuffnells Parcel Express on its sale to management and the Bank of Scotland Advise to Exel Group in the acquisition of Sodilog, a logistic operator for pharmaceutical products in the UK
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2.

3. 4.

2. 3. 4. 5.

2007 KPMG Advisory Services Private Limited, an Indian private limited company and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved.

Sample Case Study I

Conceptualization and establishment of financial feasibility of a concept based around provision of integrated warehousing and transportation services at hubs located across the country
Client situation Client benefits

A leading logistics group in the country wanted to set up state-of-the art warehousing and transportation hubs at key locations across the country The client had developed an initial draft of the concept covering a gamut of services and had carried out basic research around the same The client had been attempting to crystallize the concept and assess its feasibility for over an year but was not able to make much headway Faced with inordinate delays in finalization of the concept and its rollout, the client approached KPMG for assistance

Revision of the clients initial concept to make it significantly more attuned to market needs Demonstration of financial feasibility of the project for implementation of the project Roll out plan (including proposed locations for the hubs) Development of operating structure for the venture

KPMG approach
Development of overall value proposition and business model Development of business plan and implementation roadmap

Appreciation of client aspirations

Assessment of target markets

Critical evaluation of overall concept

Meetings with client counterparts to understand overall concept Collation of existing documentation created around the concept Visits to prospective locations for setting up facilities

Collection of information already gathered by client Identification of gaps in information available Primary and secondary research to understand size, growth, trends in target markets Visits to major transportation hubs

Critical analyses of existing state of each target market Identification of risks and challenges for client in each target segment Development of viewpoint on attractiveness of each market for the client

Finalization of offerings and relative attractiveness of each Preliminary concurrence on key parameters like facility area, pricing philosophy, target capital structure etc. Identification of cost, revenue and investment heads Selection of MR Agency for gathering detailed information on target locations

Development of projections on each revenue, cost and investment head Development of projected P&L for each center & overall corporate P&L and Balance Sheet Establishment of financial feasibility (payback, NPV/IRR) Development of implementation roadmap, critical success factors and identification of risks 15

2007 KPMG Advisory Services Private Limited, an Indian private limited company and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved.

Sample Case Study II

Assistance in achievement of growth aspirations for the logistics business of a $ 3bn Indian conglomerate

Client situation

KPMG approach

Client benefits

A large Indian conglomerate wanted to grow its logistics business exponentially both in terms of top line and bottom line The client had logistics capabilities across the group which were functioning independently There were opportunities of operations improvement across its logistics business which the client wanted to tap

Identification of initiatives required to achieve growth aspirations Undertaking an organizational transformation exercise

Identification of initiatives required to achieve growth aspirations Competency based organization structure that leverages logistics / SCM capabilities across the organization to offer end-to-end solutions to customers Detailing of initiatives into action plan and implementation assistance on the same

Identification of logistics competencies across the group Developing and implementing a plan for leveraging these competencies and tapping synergies across them

Undertaking an operational improvement and enhancement exercise spanning vehicle tracking, barcoding, smart cards, billing process realignment etc. Undertaking a organizational human resource capability building exercise Developing and implementing a shared services strategy to enhance focus on core operations

2007 KPMG Advisory Services Private Limited, an Indian private limited company and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved.

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Sample Case Study III

Development of vision and business plans for Mumbai, Kandla and Jawaharlal Nehru Ports
Client situation Client benefits

The Ministry of Shipping, Road Transport and Highways (MOSRTH), has mandated that each of the twelve major ports should:

Identification of projects required to achieve vision through a proprietary integrated capacity assessment model. Conversion of projects into action plan for the port including milestones, critical success factors and broad level time lines Development of the business plan including financials based on the projects and financing strategy.

Develop a business plan that is in line with its competitive advantages and capabilities and can be implemented without government financial support and Install a process for monitoring and reporting progress in achieving results and provide the capability to annually update the plan

KPMG approach
Development of opportunity landscape Development of commercial and financing strategy

As-Is Assessment

Competitor Analysis

Development of Vision

An As-Is assessment of all the ports across various elements including operations (equipment age, crane productivity etc), IT infrastructure, Environmental scenario, Expansion opportunities, Customer profile, process evaluation, development plans and hinterland connectivity

Competitor analysis through interviews with port users to identify strengths and weaknesses of the port vis--vis current and future competitors.

Development of opportunity landscape across export import cargo, transshipment cargo and other related areas including traffic projections and opportunity assessment

Development of vision based on competitor analysis, as is assessment, global trends and opportunity landscape.

Development of commercial and financing strategy for the port Transition ownership of the business plan to port personnel.

2007 KPMG Advisory Services Private Limited, an Indian private limited company and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved.

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Thought Leadership by KPMG in Supply Chain and Manufacturing

Indian Supply Chain Benchmarking Report

Indian Automotive Supply Chain Discussion Paper

Indias Manufacturing Policy Draft

In addition, KPMG team publishes articles and white papers in seminars and business publications on supply chain management

2007 KPMG Advisory Services Private Limited, an Indian private limited company and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved.

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Please contact: Arvind Mahajan / Aman Khanna KPMG Advisory Services Private Limited Phone number: +91 (22) 39835526 Email: arvindmahajan@kpmg.com / amankhanna@kpmg.com www.in.kpmg.com

2007 KPMG Advisory Services Private Limited, an Indian private limited company and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved.

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