Ci_logic of Logistics 30a9

8/8/2019 Ci_logic of Logistics 30a9

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LOGICOF LOGISTICSThomas Friedman


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Foreword

India's growing foot- prints on the world map,

primarily after liberalization, have positively altered its

economic landscape by opening up a number of

avenues for progress and development. With the

beginning of the twenty first century, the country

witnessed a phenomenal growth in sunrise sectors;

undoubtedly the front runner being IT/ITES sector.

This sector is not only propelling the nation's

economy significantly but also showcasing the progress

of India in front of the world. The next wave for the

country's growth is in the manufacturing and retail

sectors. With the weak investment environment

prevalent across the globe, these two segments are also

facing the heat; however they are expected to

contribute to the GDP significantly in the long run.

The back-end operation in the form of an efficient

logistics support is imperative for the organized

development of the two. Unfortunately logisticsoperations in the country are largely fragmented and

un-organized putting brakes on the growth of retail

and manufacturing sector. With a number of foreign

players entering the Indian Logistics segment and the

domestic giants responding favorably to the

competition, a much awaited change is round the

corner.

Among other Logistics components, Warehousing is

very vital for the country from a real estate investment

perspective as well. While giving a sneak preview of

the current scenario in India, the paper attempts to

inform the stakeholders that if they play their cards

right, Logistics and Warehousing could be one of the

most promising sector of Indian Real Estate.

01Colliers International - Logic of Logistics


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LOGICOF LOGISTICS

warehousing.

transportation. distribution.

inventory.purchasing.


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Contents

Logistics - Joining the Dots for Business Page 4

Logistics Supply Chain Scenario - Where We Stand Today Page 6

Scope for Logistics Companies in the Indian Market Page 8

Emerging Logistics Hubs in India Page 10

Warehousing - An Integral Part of Logistics Page 14

Where We are in Terms of Space Creation Page 16

Options for Warehousing Development Companies Page 18

Precondition for Viability of Warehousing Page 21

Pestle Analysis of Logistics and Warehousing Sector Page 22

Financial Viability Analysis Page 24

Challenges in the Indian Market for Investors Page 25

Conclusion Page 26

ONEI

TWOI

THREEI

FOURI

FIVEI

SIXI

SEVENI

EIGHTI

NINEI

TENI

ELEVENI

TWELVEI


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Logistics- Joining

the Dots

for Business

04Colliers International -Logic of Logistics


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LogisticsSupplyChainScenario-Where We

Stand Today

Growing at a rate of 30-40 percent per annum, the Indian

logistics industry is capturing both domestic and

international players which holds tremendous growth

potential for the growing Indian economy. Efficient

logistics implies the ability to make available merchandise

to the consumer at the right time, in the right place, in the

right quantity and at the lowest cost. The domino effect of

efficient logistics results in increased customer satisfaction

(demand side) and better economics of business for

manufacturers (supply side). This entire process is known

as the supply chain and its complexity depends mainly on

the size of the business and the number of stakeholders

involved. The major elements of a supply chain include

transportation, warehousing, inventory management and

other value-added services vital to the final distribution of

the product. The effectiveness of a supply chain depends

on various parameters such as the estimation of customer

demand, efficient and effective delivery, integration and

collaboration throughout the supply chain, sharing of

vision and information using formal and informal methods,


PredominantlyRoad

,R

ail,C

argoa

ndA

ir

Predom

inan

tlyRo

ad,R

aila

ndAir

Firm/Company

ProductTransportation

Warehousing

DistributionTransporters

Activities Involved

Inventory/Weighing

Un-loading

Storage

Activities Involved

Inventory/Weighing

Un-loading

Storage

Activities Involved

Inventory/Weighing

Packaging/Labelling

Loading

Man Power, Transporters,

Government Bodies

(Border and Custom

Clearance)

Warehousing Owners, Real Estate

Consultants, Brokers and Man Power

Source : Colliers International India Research

"Supply Chain starts at the point when a consumer decides to purchase a product and ends with the fulfilment of his/her

requirement from the supply end."


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Market size and penetration

3rd Wave Outsourcing - Global

SC Management (7 PL Model)

2nd Wave Outsourcing - OrganisedContract Logistics (4 PL Model)

1st Wave Outsourcing Fragmented (3 PL Model)

In-Source

Complexityindistributionn

etwork

anddemandforhighquality

services

Growing at a

rate of 30-40

percent per annum,

the Indian logisticsindustry is capturing a both

domestic and international

player which holds

tremendous growth

potential for the

growing Indian

economy.

along with the use of information and communication

technologies. With a spurt in the growth of the economy,

the overall trade, domestic as well as international, has

increased exponentially in various sectors such as

automotive, FMCG, electronics and pharmaceutical among

others. Increased trade leads to the requirement for

specialised logistics service providers that can offer a range

of services such as transportation, material handling,

storage, warehousing, supply chain management (SCM),

information technology (IT) and inventory management.

Until recently, most industries managed their own logistics

functions such as Warehousing and Management

Information Systems (MIS) in-house as a part of their non-

core activities. However, for industries operating cross-

border, the huge diversity in geographic conditions,

changing consumer habits and infrastructure conditions

posed a major challenge for logistics players to efficiently

manage their supply chain in order to reach all parts of the

country and the rest of the world. The fragmentation of the

supply chain led to a trend where companies started

outsourcing various logistics functions such as

transportation, packaging etc., while retaining the overall

in-house control of logistics, despite the fact that this costs

the company a considerable amount of money. This non-

core activity becomes more difficult when coupled with the

fact that infrastructure is not able to keep up with the

country's economic development.

Multinational companies (MNCs) habitually employ

sophisticated logistics functions and find it difficult to cope

with the inefficient supply chain process in India.

Moreover, due to increasing competition the profit marginsare narrowing, which has resulted in a growing need for

efficient logistics networks and supply chains. Today,

companies have started looking at logistics and the supply

chain strategically, which will enhance the scope for

specialised service providers to carry out these non-core

activities. The trend started with the Indian subsidiaries of

MNCs which started outsourcing a share of their logistics

functions to specialist service providers such as

transportation and warehousing.

The logistics industry has witnessed decent growth in

recent times and has tremendous potential as it facilitates

significant cost reduction and offers manufacturers/retailers

the ability to focus on core activities. However, the use of

other value-added advance services such as customer

support, inbound logistics and reverse logistics, is still very

limited in the Indian context.



"Inspired by the success of these MNC's Indian companies

have also started outsourcing their basic and important

logistics functions"


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After real estate, the manufacturing and retail sectors are

expected to bring the next boom in India. The rapidly

growing market-driven emerging economy with plentiful

labour, a booming retail industry, improving logistics

infrastructure and relaxed regulatory norms will provide

ample opportunity for logistics and transportation service

providers to grow.

According to the World Bank Survey, India is at 39th

position in the logistics performance index, with Singapore

on top, and the UK, the USA and China at 9th, 14th and

30th positions, respectively. When global consumer

product manufacturers initially started outsourcing to other

countries, such as China, production costs were reduced

considerably, making transportation and logistics costs to

be no major concern for these players. Later, China

invested substantially in infrastructure to provide a niche

for logistics businesses in the country. However, high

demand and infrastructure development considerably

increased real estate prices for setting up facilities thus

making manufacturing and logistics activities expensive. In

addition, other factors, such as over dependence on one

economy and monopolisation by any one country, have

compelled global businesses to search for a new destination

for their manufacturing and logistics needs to avoid

country-specific risks.

India, with its growing economy, has the potential to

become the next destination for these global logistics

players as it can provide all the ingredients for a successful

logistics operation, with the additional advantage of

diversification from country-specific risks. In addition,

India has not only proven its efficiency in terms of

expertise in the biotech, finance, accounting and medical

care sectors, but also is growing by leaps and bound in

other industries such as engineering goods, chemicals, and

gems & jewellery.

Currently, logistics costs in India are higher in comparison

to other countries, however, the Government's proactive

approach to the infrastructure and transportation sectors

will bring down logistics costs and, in turn, attract the

interest of developed countries in expanding activities in

manufacturing and distribution. Moreover, with the world's

second-largest population and labour force, and consistent

GDP growth, India will provide much-needed comfort to

foreign investors in Indian logistics.


Scopefor LogisticsCompaniesin the IndianMarket


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Organised logistics facilities are developing in the country

primarily in two forms- Logistics Parks and Free trade

Warehousing Zones (FTWZ) apart from the individual

development of these premises. As per the approval details

from Central and State Governments, a number of

Logistics Parks and FTWZs are in their various

development stages albeit the infrastructure is not up to the

desired level. To date, there are 12 FTWZs in the various

stages - in principle approval, notified and finally approved.

Southern region has maximum of 6 FTWZs followed by

Western and Northern regions with 4 and 2 such zones

respectively. More than 50 Logistics Parks are also in their

various phases of development across the country with

Western region at the top comprising approximately 20

such parks followed by Southern, Eastern and Northern

regions, respectively.

Emerging

LogisticsHubsin India


Northen RegionGurgaon, Faridabad, Kundli, Kanpur

and Ghaziabad. Some of the emerging

locations are Jharsa, Bilaspur, Tawdu,Sonipat and Panipat.

Western RegionMumbai, Pune, Nashik, Nagpur

Ahmedabad, Kandla Port, Bhavnagar,Porbandar, Jaipur and Indore.

Southern RegionChennai, Coimbatore, Madurai,

Hyderabad, Vishakhapatanam.

Vijaywada, Bangalore,

Mysore and Kochi.

Eastern RegionKolkata, Durgapur,

Muzzaffarpur-Hajipur

and Darjeeling.

"Mumbai, Chennai and Kolkata are the three prime cities that are considered as the hub of Logistics and Warehousing activities

due to the association of inherent advantage in the form of their location with respect to the major ports of the country."



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NCR - Manesar

NCR - Bhiwadi

NCR - Bilaspur-Tawdu

NCR - Sonepat

Chennai - Sriperambudur

Chennai - Red Hills-Madhavaram

Pune - Chakan Talegaon

Pune - Nagar Road

Bangalore - Nelamangala

Bangalore - Devenhalli

Ahmedabad - Aslali

Hyderabad - Medchal

Mumbai - Ahmedabad Highway

Mumbai - Bhiwandi

Nagpur - Amravati Road

Nagpur - Vardha Road

Mumbai - Panvel

Industrial

Industrial

Agricultural (Convertible to Industrial)










Agricultural (Urbanisable zone)





32

15

5

3

6

5

9

6

6

10

2.5

5

4

5.5

2

3

7

45

2

12

3

9

8

12

10

8

11

3.5

8

6.5

7.5

3.5

5

12.5

60

30

15

6

12

12

14

12

12

8

5

12

9

10

5

7

17.5

60

30

13

5

9

10

12.5

10

10

7

4

10

7.5

9

4

6

13

16-20

10-12

15-18

8-10

20-24

16-20

20-28

18-24

8-12

NA

10-12

10-15

12-16

16-20

10-13

12-15

18-22

16-20

8-10

13-16

8-10

18-22

14-18

18-25

16-22

08-12

15-25

10-12

10-15

10-14

14-18

10-13

12-15

16-20

Location Land Rate INR Mn/Acre*Zoning Built Up SpaceRentals INRSq Ft/Month#

2007 2008 Proj 2009 2008 Proj 20092006


Sirsa Fatehabad

Hisar

Jind

Kaithal

Kurukshetra

Karnal

Panipat

SonipatSonipat

Rohtak

Rohtak

Kundli

Bhiwani

Mahendragarh

JhajjarJhajjar

FaridabadRewari

Gurgaon Gurgaon,

Manesar, BilaspurMewat

Yamunanagar

Panchkula

Ambala

Panipat

JAMMU&

KASHMIR

HIMACHALPRADESH

PUNJAB

HARYANA

UTTARPRADESH

RAJASTHAN

GUJARAT

MAHARASHTRA

KARNATAKA

ANDHRAPRADESH

ORISSA

BIHAR

ASSAM

SIKKIM

NAGALAND

MANIPUR

MIZORAMTRIPURA

ARUNACHALPRADESH

JHARKHAND

CHHATTISGARH

WESTBENGAL

MADHYA PRADESH

TAMILNADU

KERALA

UTTARKHAND

MEGHALAYA

Devanhalli

Nandi HillsS.S.Ghatti

Dod Ballapur

Gadigarpa

Dodbele

Chandapura

Harohalli

Byramangala Attibele

MalleswaramKodugad

Kadashivana

Sathnur

Mekedala

Shimshapura

Halaguru

Halli

Mullahalli

Sangam

Bidadi Sarjapur

Sidlaghatt

Vijayapura

Dodjala

Yelahanka

Hoskote

Devanakund

Hosur

Anekal

Malavalli

Thymagondal

Nelamangala

Dobbasapete

Shivganga

Huliyurdurga

Ramanagaram

Bevooru

Channapatna

Kanakapura

Kodamballi

Honganuru

KudurSolur

Magadi

ChikBallapur

TUMKUR

Faridabad

Rewari

Virar

Vasai

Bhiwandi

NaviMumbai

Ulhasnagar

Ambarnath

Panvel

KhalapurKarjat

Khopoli

PenAlibag

Kalyan

DombivaliMira Bhayandar

Uran

Thane

Taloja

Mumbai

MumbaiSuburban

Thane,Wagle

Ambernath

Taloja

Panvel,Rasayani

Bhiwandi

BANGALORE

MUMBAISUBURBAN

HARYANA

NH-7 (Bellary Road)Devanhalli

Old Madras RoadHosakote, Whitefieldand Mahadevapura

Tumkur RoadPeenya, Dobaspet,Doddaballapur andNelamangala

Dasarahalli

Chakan,Wagholi

Shikhrapur

Ghatghar OturTo Bote

PurShivneri

Ambegaon

Ghod

Junnar

Rajgurunagar

Wadgaon

PUNEMulshi

Welhe

Bhor

Sasvad

Sirur

Daund

SOLAPUR

SATARA

AHMADNAGAR

THANE

RAIGARH

Baramati

Indapur

Purandhar

Ojhar

Narayangaon

Kalamb

MancharoKurvandi

Bhimashankar

Wada

Ambhu

Karli

Lonavale Bedsa

Bhaja

Waki

Dasave

Torna

Apli

AmbaodeVichitragarh

Rajgarh

Shirwal

To Surul To Tombhurni

Jejuri

Wadgaon

Morgaon

RavangaonBhigvan

Kumbhargaon

Lasurne

Malegaon Nimbgaon Ketki

Narsingpur

Baura

Supa

AlandiAlandi Chorachi

Loni Kaibhor

Loni Kand

Narsapur

PimpriKhadki

Dabhade

Chakan

Shikrapur

Talegaon

Khondhapuri

Rahu

Mandavgaon Pharata

KoragaonChinchvao

Paud

Bhambourda

Hadapsar

Kharakvasla

MalhargarhSinghgarh

ChasMalegaon

Ausari

PabalMalthan

Belhe

RajuriAleo

PUNE

Takwa

NethersoleDam

Talegaon

Kolvan

Kathivakkam

Thiruvottiyur

Manali

Madhavaram

AvadiAmbathur

Thiruverkadu

PoonamalleeMadhuravoyal

Valasaravakkam

Alandur

Tambaram Pallavaram

Mambakkam Solinganallur

Semmaneherry

Anakaputhur

CHENNAI

Manali

Madhavram

Pozhal

CHENNAI

Poonamalli

Sriperumbudur

Chromepet

Maraimalinagar

PUNE

BANGALORE



Prime Industrial/WarehousingLocations In India

Chromepet

Pozhal


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14Colliers International -Logic of Logistics

Warehousing- An Integral Part

of Logistics


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Warehousing is an age-old concept used by almost all

manufacturers, importers, exporters, wholesalers, transport

businesses, customs, etc. for storage purposes. With the

modernisation of the logistics supply chain, warehousing

became a critical function and today, warehouses not only

provide safe custody for goods, but also offer value-added

services such as sorting, packing, blending and processing.

The key economic benefit of good warehousing is storage of

excess stocks, which in turn results in regular supply and

prevents a supply-demand mismatch. In addition, they

prevent the manufacturer from distress sale. However, most

of these units do not provide state-of-the-art facilities and

infrastructure.

Warehousing, despite being the most critical element of

the supply chain accounts for 9 percent of total logistics

costs in the country and continues to face ignorance from

Indian logistics players. To date, in the absence of large

warehousing facilities, small warehousing units with the

primary function of storage are prevalent in India. There is

no system to measure the performance of these facilities,

although, in developed countries such as the US, there are

more than 20 parameters to measure a warehouse's

efficiency.

With the

modernisation

of the logistics

supply chain,

warehousing became acritical function and today,

warehouses not only provide

safe custody for goods, but

also offer value-added

services such as

sorting, packing,

blending and

processing.

The current paucity of modern warehouses is resulting in

the colossal waste of farm produce, reckoned at between

20- 40 percent of the harvest, as well as a constraint on the

growth of futures trading in farm commodities. This

shortage shows that there is huge potential for a large

amount of quality warehousing space. With the rapid

growth of organised retail and industrial sectors, the need

for warehousing is increasing.

For instance, retail giants such as Wal-Mart, Carrefour and

Tesco are marking their entry into the Indian retail sector

with a major focus on wholesale trading as they have

entered the country via 100 percent FDI using Cash &

Carry route. Thus, their back-end operations specifically

warehousing will play a key role. In addition, ordinary

warehousing facilities will not serve their purpose and

hence the demand for warehouses with world-class

standards and specifications will rise.



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WhereWe Are InTerms ofSpaceCreation

Warehousing is an integral part of the logistics industry and

is mostly a disorganised business in India. According to the

KPMG-CII 2007 report, India has a total warehousing

space of approx 1,800 million sq ft, of which only 8 percent

(144 million sq ft) is in the organised sector. Until now, the

public sector has played a prominent role in providing

warehousing facilities across the country as the

development of these facilities were considered very costly

due to high initial investment and low returns. Further,

there were very few growth drivers to generate lucrative

demand. Due to this, the private sector was not keen todevelop these facilities and hence, in order to cater

demand from agro-based industries and others, the public

sector had to intervene in this segment. The organised

warehousing industry has been driven primarily by the

Government in the form of public sector units. Three

public sector agencies the Central Warehousing

Corporation (CWC), the Food Corporation of India (FCI)

and State Warehousing Corporations (SWCs) are

responsible for building and maintaining large-scale

warehousing/storage capacities in the country.The

Government established Central and State Warehousing

Corporations under the Warehousing Corporation Act,

1962. In addition, the MCX-owned National Bulk

Handling Corporation is becoming a serious player in the

industry, followed by the NCDEX-managed National

Collateral Management Services. FCI manages storage

capacity of 25.2 million tonnes, while the CWC manages

10.3 million tonnes. The CWC also has a 50 per cent stake

in State warehousing corporations that manage 25 million

tonnes. However, with the growing importance ofwarehouses in logistics, the Indian Government has also

taken various initiatives in the form of infrastructure

development and investment in this specific component.

The Government is emphasising construction and the

renovation of rural godowns. Not only the Government,

but also banking institutions are slowly recognising the

importance of this industry and have started giving credit

to warehouse receipt-based finance.



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In order to encourage large warehousing facilities, the

Government has taken various measures, such as phasing

out the Central Sales Tax (CST), incorporating Value

Added Tax (VAT), and creating free trade warehousing

and logistics parks, among others. According to a recent

report by brokerage firm Macquarie Research, the Indian

Government has plans to spend US$24 billion over the

coming eight years on supply chain infrastructure.

Private investment in warehousing is currently limited to

port areas. However, with the emergence of the 3PL

industry, many international players have started taking an

interest in developing warehousing projects in India.

Various players, such as TATA, K. Raheja Corp and

Reliance among others are entering this sector aggressively.

A few examples of which are as follows.

Tata Realty and Infrastructure Ltd (TRIL) has signed a

50:50 joint venture (JV) agreement with Jebel Ali Free

Zone (Jafza) International of Dubai to develop 27 business

and logistics parks across India, with an estimated

investment of INR 10,000 Crore. According to their plans,

the parks will be developed on huge tracts of land and in

various phases, with each park likely to take six to seven

years to complete. K. Raheja Corp has joined hands with

the US-headquartered industrial real estate developer

ProLogis to develop warehousing and infrastructure at the

pan-India level. The 50:50 JV aims to start developing

these facilities from West Bengal with an investment of

INR 2,300 Crore. After this, the JV plans to develop

facilities in Karnataka, Tamil Nadu and Maharashtra. The

company is planning to acquire land parcels of 50-140 acres

for proposed projects in cities such as Bangalore, Chennai,

Kolkata and Mumbai. For the development of facilities in

Kolkata, the company has also signed a Memorandum of

Understanding (MoU) with the West Bengal Industrial

Infrastructure Development Corporation (WBIIDC).

Allcargo Global Logistics is in line to make an investmentof INR 340 Crore to set up ten logistics parks across the

country. These parks are likely to be in cities such as

Mumbai, Hyderabad, Kolkata, Bangalore, Ahmedabad,

Nagpur and Delhi.

Reliance Logistics Ltd (RLL) is planning to set up logistics

parks in all its forthcoming SEZs in Navi Mumbai, Haryana

and Jamnagar, among others. The parks will serve the

requirements of companies in the SEZ.

Warehousing is

mostly a disorganised

business in India.

According to the KPMG-CII 2007 report, India has a

total warehousing space of

approx1,800 million sq ft, of

which only 8 percent (144

million sq ft) is in the

organised sector.



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Optionsfor Warehousing

Development

Companies

There are basically two ways to fulfil the needs of

warehousing, first is to own a facility and the second is to

lease one. The choice of occupancy-ownership or leasing

depends on a number of parameters, such as cost of land,

type of lease, legal framework in the form of taxes,

Development Control Rules (DCRs) and other applicable

restrictions/ regulations.

One can own a warehouse in various ways, such as

purchasing build-to-suit (BTS) premises from a

development company or buying land and developing a

warehousing facility. The preferred option prevailing in the

Indian market is to buy land and develop the facility as this

offers flexibility in operations and the freedom to develop

the facility according to one's own preferences. Secondly,

in a booming real estate industry, this method provides

higher yields in the long term due to the escalation in land

prices. However, this option suffers from the prime

challenge of acquisition of land and its consolidation.

Further, the ability to make a change in land use (if the

current use is not warehousing) is critical. Thus, to avoid

practical difficulties in land acquisition and development,

logistics companies have been forced to go for a

regional/national tie-up with developers that can bring

expertise in handling local issues.



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The long-term players are now starting to experiment with

vacant land, converting it into warehouses as this can

prove to be a cash cow over the long term, given the

booming logistics sector and the escalation in land prices

over a period of time. Short-term players avoid this option

as the initial investment is very high and the payback

period is long.

Developing a BTS option for sale is not common among

large real estate developers, although this option is

catching up fast among small developers. However, the

constraints with small developers are in the form of the size

of the facility. In anticipation of demand in the near future,

this option might gain impetus among large players as well.

In fact, this option is more favourable in a practical sense,

but unavailability is compelling logistics players to opt for

developing a warehouse from scratch.

The option

prevailing in the

Indian market is to buy

land and develop the

facility as this offers flexibility

in operations and the

freedom to develop the

facility according to

one's own

preferences.


OWNING

Location Identification

Purchase of Selected Land

CLU

Construction of facility

if land use is industrial

Land Owner Real Estate

The facility can be developed

on Fixed Rent /Revenue Sharing/

Profit Sharing Basis

PROS1. Flexibility in Operations

2. No worry for lease renewal/termination

3. Fetch higher yield over long term due to

escalation in land prices

4. Time saving as there is no need of land

consolidation

CONS

1. High initial Investment

2. Difficulty in getting large size facility

3. Payback period is high

PROS1. Flexibility in Operations

2. No worry for lease renewal/termination



4. Advantageous for large players with long

term plans

5. Freedom to develop facility as per own

preferences

CONS

1. Prime challenge is to acquire and

consolidate the large land parcels

2. Land Use conversion is critical due to

uncertainty

3. High Initial Investment


PROS1. Responsibility for land acquisition/

consolidation and CLU, building license

etc. will be with the other party

2. Construction will be facilitated by the

developer in JV/SPV with realty player



CONS

1. Choosing and convincing a reliable

partner is a concern

2. Difficult to form a SPV/JV until/unless

logistic player is big and reputed


Forming JV/SPV With Land

Owner/Real Estate Developers

If land use other

than industrial

Purchase of BTS Facility



21/30

The option to own a warehouse involves high initial

investment so a number of companies prefer to lease to

meet their warehousing needs. As with leasing option, one

can select either a BTS premises from a development

company on a long-term lease or leasing land on a long-

term basis and develop a facility. However, the option to

lease land and build a facility is the least preferred option as

the construction of a large facility for leasing is not feasible

in the Indian context and there are no assets remaining at

the end of the lease period. Moreover, land consolidation

for lease is a difficult task, especially for small owners. This

option is, however, feasible and advantageous for large

logistics players who want to set up large facilities with

lease terms of at least 15-30 years.

As with leasing option,

one can select either

leasing a BTS premises

from a development

company on a long-termor lease land on

long term basis

and develop

a facility.


LEASING

Location Identification

Leasing BTS Facility

Own Contract

PROS

1. Low initial Investment2. Easy relocation

3. Less liabilities

4. Lower Risk

5. Infrastructure availability

CONS

1. Condition of the facility

2. Rentals might be high

3. Size constraints due to non availability of

bigger BTS facility

4. High maintenance cost

5. Absence of high-tech facilities

PROS

1. Can develop facility as per requirement2. Low Maintenance Cost

3. Incorporation of sophisticated

technologies

4. Due to long term land lease no eviction

worry

CONS

1. Difficult to get land on long term lease

specially from small land owners

2. Land Consolidation problem

3. Construction ( limited/no expertise in

construction)

Leasing Selected Land

Construction of Facility

Lease period

of 15-30 years



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Preconditionsfor Viability of

Warehousing


Location and physical infrastructure are the two main

components for making a warehousing facility successful.

In addition, resource availability complements the overall

development in a comprehensive manner.

Warehousing facilities should preferably be located close to

major roads, highways and bypass roads, and offer good

connectivity to railway stations. Export/import-oriented

warehouses should be close to ports and airports. Approach

roads to the facility should be wide enough to

accommodate heavy vehicles, preferably at least 18 metres

wide. Along with this the land should have favourable

topography to support loading and unloading i.e the terrain

should be flat with minimal undulations. The facility does

not require a huge amount of labour but the required

manpower should be skilled and technically equipped. An

uninterrupted power supply is also required, with no or

minimal power shut downs. However, the other two key

components of physical infrastructure viz. water supply and

sewerage are not extensively required.


23/30

PESTLEAnalysisof Logistics and

Warehousing

Sector

The viability of Logistics and Warehousing does not

depend only on location, infrastructure and resource

availability but also depends on other factors which are

beyond the control or influence of a business, but are very

important to be aware of before any strategic planning.

These include political, economical, social, technological,

legal and environmental (PESTLE) parameters. The

PESTLE analysis helps to evaluate the key political and

economic factors, the cultural aspects, the technological

innovations, and the current and impending legislation

that may affect the industry.

Political - For any industry to flourish, the political climate

plays an important and decisive role. Political support,

both from the Central and State Governments, is a critical

factor for the logistics industry to grow. The following are

essential for boosting the development of the logistics

industry:

4 Stability of the Government, with no or minimal

uncertainty with respect to its existence.

4 Proactive approach of the Government in industrial and

retail development to give an impetus to the logistics

business.

4 Political will and a strong decision-making attitude.


Proactive and

reform based

approach

Progressive

Indian

economy

Prejudice and

reluctance

towards the

economic

liberalization

Adaption and

acceptance of

new

technology

User friendly

framework

Increased

awareness

ECONOMICAL SOCIAL TECHNOLOGY LEGAL ENVIRONMENTPOLITICAL


"Certain States may not be very sound economically but the proactive attitude and political will of such States have shown

them the way to become the hub of Logisitcs activities in the near future. "


24/30

The PESTLE

analysis helps to

evaluate the key

political and economic

factors, the culturalaspects, the technological

innovations, and the

current and impending

legislation that

may affect

the industry.

Economical - Strong economic backing leads to a rise in

interest and builds trust among domestic and international

logistics players, encouraging them to be a part of the

economy as it provides:

4 Assurance to logistics players with respect to the

required infrastructure development.

4 Expectance of more fiscal incentives from states in

addition to from the Central Government.

4 Major physical infrastructure in the form of continuous

electricity supply.

Social - The social strata of any particular area and the

flexibility of its denizens in adapting to new practices and

models help to attract domestic and international

companies. Similarly, the attitude of the people towards

new ideas of work also plays a major role.

Technology - Old technologies and methodologies are still

prevalent in India; however, tech-savvy states have the

advantage due to their technological advancement in the

form of GPS enactment. Zero wastage and zero error is only

possible if the supply chain is managed or equipped with

newer, high-end and user-friendly technologies, which are

considered as the backbone of any system.

Legal-

Central Level

4Incentives in the FTWZ in terms of FDI and other

tax-related incentives, similar to that in SEZs.

4CST - the waiver of Central Sales Tax (CST) has

proved to be a critical decision in encouraging largewarehousing units. This also promotes the 3PL model in

the country.

4Incorporation of Value Added Tax (VAT) has resulted

in greater transparency and less ambiguity in the system.

State/City Level

4Cities with favourable development control rules

(DCRs) especially in the form of higher FSIs, encourage

warehouse development.

4Similarly, the states/cities that have adopted a Single

Window Clearance strategy are also enjoying an increased

interest by logistics players.

Environment -

Environmental/Ecological issues

4 Hitherto, the logistics sector has not achieved the zero

waste fundamental, which means that a huge amount of

waste accumulates at the source or distribution centres,

(warehouses). These facilities in turn dump this waste,

more often in a non-ecological/environmental manner.

Thus, logistics players with an eco-friendly attitude are

preferred by most states.

4 Environmental regulations - there are no strict oruniform environment regulations across the country, which

gives an undesirable benefit and liberty to many logistics

players.

Business environment

4 Management style - most logistics players, especially in

the unorganised segment, still practice the old business

model of in-sourcing. However, many of these players have

adopted the 3PL model, predominantly with the entry of a

few international players and some domestic giants.



25/30

The financial viability of building a warehousing facility

and renting it for a certain period of time depends primarily

on the permitted FSI, achievable rentals and land prices. A

higher FSI, higher rentals and low land price are the keys

for success of any warehousing project. In various state the

FSI for warehousing varies anywhere from 0.35 to 2.0. Two

exercises of sensitivity analysis have been done; one by

assuming FSI and Rentals as flexible variables and another

with Rental and land price as flexible variables. Other

factors such as cost of capital, construction cost, inflation

and occupancy rate etc have been kept as constant

variables. The matrix given below shows the variability in

results with various combinations. Assuming a 100 acre

plot with a land cost of INR 1.0 crore per acre and rentals

of INR 18 per sq ft per month, the internal rate of return

varies from 24-37 percent, depending on FSI. Similarly,

assuming a fixed FSI of 0.5 and variable rentals, the IRR

varies from 19-38 percent.

Acre

INR ps ft

INR/Acre

Months

100

800

10,000,000

5%

10%

12

13%

8.0%

8.0%

1.5

20.0%

12.0%

33.7%

8.0%

1.0

14.0%

100.0%

13%

4.00 26.2% 29.2% 32.0% 34.6% 37.2% 39.7%

168 192 216 240 264 288

6.00 23.5% 26.2% 28.7% 31.1% 33.4% 35.6%

8.00 21.2% 23.8% 26.1% 28.3% 30.4% 32.4%

10.00 19.4% 21.8% 24.0% 26.1% 28.1% 29.9%

12.00 17.8% 20.1% 22.2% 24.2% 26.1% 27.8%

15.00 15.8% 18.0% 20.0% 21.8% 23.6% 25.2%

20.00 13.1% 15.1% 17.0% 18.7% 20.3% 21.8%

mn/acre Lease Price INR/sq.ft/year

14 168 19% 22% 26% 27% 28% 29% 30%

16 192 22% 25% 29% 30% 31% 32% 34%

18 216 24% 27% 31% 33% 34% 36% 37%

20 240 26% 30% 34% 36% 37% 39% 40%

24 288 30% 34% 39% 41% 43% 44% 46%

28 336 33% 38% 43% 46% 48% 50% 52%

12 144 17% 19% 23% 24% 25% 26% 27%

0.35 0.50 0.80 1.00 1.25 1.50 2.00

INR/sq.ft

/month

INR/sq.ft

/year

FSI

Used

Sensitivity

Analysis IRR

Sensitivity

Analysis IRR

Sensitivity Analysis Using Variables

- FSI & Rentals And Rentals & Land Values

LeasePrice

Costof Land

Acre

INR ps ft

INR/Acre

Months

100

800

10,000,000

5%

10%

12

13%

8.0%

8.0%

1.5

20.0%

12.0%

33.7%

8.0%

1.0

14.0%

100.0%

13%

Sensitivity Analysis Using Variables

- FSI & Rentals And Rentals & Land Values

Financial

Viability ofWarehouses



Financial Viability


26/30

Challenges

in the IndianMarket forInvestors


The Indian logistics sector is heading towards an era where

it might enjoy magnificent growth in the near future if it is

able to meet the following challenges:

1. Land woes - this is the prime concern for logistics

players/developers looking to set up a warehousing facility

in the country as it poses a variety of challenges, among

them:

a. Availability of land in the required quantum coupled

with a lack of contiguity in parcels.

b. Prevailing land costs are very high for developing

warehousing facilities:

4High prices for road-front land parcels.

4Low prices for internal parcels with the approach

road narrower than 18 metres.

c. Acquisition of land has become a major concern

because:

4Many states do not allow private companies to

purchase agricultural land.

4The procedure for the conversion of land use

varies from state to state.

4Moreover, the conversion of another zone to an

industrial zone is also a tedious process.

2. Infrastructure - although the Government is taking a

number of steps to streamline the physical infrastructure

across the country, still the inadequate logistics

infrastructure is impeding the growth of this sector in

India. Transportation woes are evident from the whopping

cost of transportation, which accounts for 40 per cent of

the total logistics cost. Various ports and air hubs do not

possess the desired state-of-the-art facilities and/or

technologies to meet world-class standards.3. Unorganised sector - warehousing is predominantly a

ball game for small players in India, which leads to a

number of issues, such as the small capacity of these

facilities, poor handling and a lack of employment of newer

technologies. The supply chain in the country needs to

adopt the basic fundamental of zero error with minimal

wastage.

4. Inadequacy in the number of facilities available - the

sector is dominated by Government - owned bodies as

private players were earlier shy of the sector as there were

no short-term advantages associated with the development

of such facilities. Due to this, the facilities have not been

developed at the required pace causing a mismatch in the

current demand and supply.

5. Unavailability of state-of-the-art warehouses - owing

to the dominance of disorganisation in the sector, high-

tech facilities are not readily available across the country.

In addition, there are very few cold storage spaces available

and this has become a major concern, especially for the

FMCG segment. The supply chain does not incorporate

such advanced technologies as GPS/GIS, which arecommonly used in other countries.

6. Taxation - there seems to be no link between the

taxation policies of various states and it has become quite

difficult for logistics players to figure out these complicated

structures. However, with the Government's intervention

in simplifying the taxation structure, some complications

have been resolved, although many are still in limbo.


27/30


28/30


29/30

Author

Surabhi Arora

Senior Manager, Research

Tel : 91 11 2335 6620

Fax : 91 11 2335 6624

Email : [email protected]

Alankrita Pagare

Asst. Manager, Research

Tel : 91 11 2335 6620

Fax : 91 11 2335 6624Email : [email protected]

Sources

www.ciilogistics.com

www.rreef.com

www.inboundlogistics.com

www.cewacor.nic.in

www.ftwz.com

www.mapsofindia.com

India Logistics Outlook 2007

"Skill gaps in the Indian Logistics Sector": A white paper by KPMG and CII

Indian real estate- shifting gears - a report E&YTrade Logistics in the Global Economy - World Bank Report

DisclaimerThis report and other research material may be found on our website at www.colliers.com/india. Questions related to inforamtion herein should be directed to the Research

Department at the number indicated above. This document had been prepared by Colliers International for advertising and general information only. Colliers International makes

no guarantees, representations or warranties of any kind, expressed on implied, regarding the information including but not limited to, warranties of content, accuracy and

reliability. Any interested party should undertake their own inquiries as to the accuracy of the information. Colliers International excludes unequivocally all inferred or implied

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independently owned and operated companies.

Special thanks to the Colliers India Land Sales Team for their efforts and valuable contribution towards putting this entire report together.

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