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Future Of CEP Business In India: Perspective With Global Trends

India has tremendous headroom to grow in terms of volume in spite of significant gap in per capita income of both countries

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Growth of efficient Logistics plays significant role in promoting economic growth of a nation. Logistics help in significant macro contributions to economy by way of employment, investment and GDP. Logistics Industry in a broader sense includes all activities of the supply chain like transportation, inventory management, information flow, order processing, warehousing, packaging etc. Out of these transportation commands major share in terms of activities and revenue both. In a country like India, most part of transportation is still with unorganized hands excluding few exceptions like express logistics, railways and Inland waterways. In line with the global logistics sector landscape, Express has been most hyped and blue-eyed boy of financial investors of the sector. Some of the obvious reason for this is linked to growth, tech adoption and high ROCE.

Express logistics market, which is also referred as CEP (courier, Express and Parcel) market is estimated to be around $5Bn in India for last financial year. This comprise of largely B2B (Parcel Cargo) and B2C (e-commerce) shipments, C2C and courier are relatively small component of this market. In past decade express industry has registered healthy growth rate in range of twenties and the driver for this was e-commerce evolution and GST implementation. But going forward outlook also seems to be very robust in spite of some taper down in growth rate of eCommerce industry. The positive driver seems to be social commerce, e-invoicing and make in India.

Growth journey of express has been very interesting so far and is expected to be more challenging for the players in coming days. While plotting future outlook for the industry, we need to take consideration of CEP (courier, express and parcel services) growth trajectory in other countries specially those who are ahead of India in evolution of CEP market. Two of the largest market for CEP are US and China. US and other developed economies are quite mature and are having two or three players, which control overall market. Apart from number of player and market evolution, the consumption and industrial pattern of these country is also different from developing countries. While on the other hand Chinese logistics market can be a good precedence for Indian CEP industry.

On a broader perspective, we are more than a decade behind China in term of volumes handled by CEP industry, although we may be at par with Chinese market in terms of technology adoption for the industry. Chinese market has also evolved over period of time. As per Statista data, A decade back in 2012 China was having 5.8 bn parcel, which has grown to 108 bn parcels by 2022, While Indian logistics sector handled 408 million parcels in 2012 and which has grown to 2.8 bn by 2020. Majority of growth in both markets has been driven by e-commerce shipments. As population and growth rate of both economies are quite comparable, India has tremendous headroom to grow in terms of volume in spite of significant gap in per capita income of both countries.

In the growth journey of last 15 years of CEP volume, Chinese market has gone through phase of consolidation. As of now 5 major players: ZTO Express, YTO Express, Yunda Express, STO Express and SF Express jointly command almost 72 per cent of Chinese express market. If we also exclude share of China post in CEP, other fragmented players have only 18 per cent market share. In Chinese market further consolidation is expected. All the major players have capability and service offering for serving omni channel. Chinese CEP market also has two segments identified as e-commerce market and the commercial & personal market almost same as we define B2C and B2B segment. As per certain Chinese reports of 2016, approx. 71 per cent parcels were from e-commerce market and remaining parcels were from commercial & personal market. One major player has emerged in each of these segments: ZTO in e-commerce market and SF commercial & personal market.

On the other hand, India being a much smaller CEP market with significantly high number of service providers. In B2B segment there are 5 major players and few other mid-sized relatively small players. B2C market has 4 major player, 2 captive players and few other small players. Out of this complete list of more than 10 large players only 2 offer full pledge services in omni channel (B2B + B2C) capabilities. Some other global players are also looking to expand their presence in Indian CEP market with sound investment plans. Such a scenario will clearly pave the way for possible consolidation in Indian CEP market. As per our analysis India will have 4-5 major CEP players in next one decade and these players will be having omni channel capability. Some of the early signs of consolidation have been witnessed in last two years by acquisition of Gati and Spoton. Few days back there was an unconfirmed news about possible acquisition of a large B2C player.

Chinese largest e-commerce retailer Alibaba has a subsidiary - Cainiao Smart Logistics Network. Cainiao Network is a digital platform for logistics which adopts a collaborative approach by integration of existing logistics resources to connect partners with a data platform. Cainiao Network has become collaborator to all major CSP service provider instead of becoming their competitor. Cainiao provides highly efficient one-stop cross-border storage and delivery services with more than 50 global partners. Cainiao has become one of the major players in cross border segment. In Indian market both major e-commerce players have their own captive logistics service arm, which mostly serves the captive volume of e-com market place. Absence of collaboration and competition by captive players will have its own challenge in long run, when these captive players will have intense competition in open market with other CEP players and captive arm of other market place.

Another interesting aspect for future outlook will be asset ownership model and pricing / profitability. Currently pricing in Chinese e-commerce market is hovering around $1.4 - $ 1.5 parcel vs less than $1 per parcel in India in spite of low volumes. Same service gets offered in developed market like US for $9 per parcel. Once we compare cost model and other drivers of Indian Vs Chinese player, we don’t find much scope of price reduction in overall CEP (B2B and B2C) market. Any price war and rate cut will lead to poorer balance sheet.

In spite of strong growth and increasing competition pricing pressure seems visible on both the markets. Many challenges are also similar like increasing labor cost and availability of skilled human resources to support the growth. Which can be addressed only by reducing manual interventions through upgrade of technology and automation. In coming years more and more investment will go in automation of transshipment, sorting, fulfilment centers and control tower. Such massive investment capability will be with few large organized players. Such massive owned infrastructure will create an entry barrier for new players in longer run (might be a decade). Few new entrants may plan to enter with partner model in CEP business, instead of complete ownership model, but that also does not work as transshipment center, sorting center and line haul require ownership. At most first and last mile can be outsourced to partners similar to Tongda Operators in Chinese CEP market.

To conclude we can say that when CEP volumes are growing rapidly, more numbers of players will witness M&A for acquiring market share. But once the growth rate will taper down in next 5 years or more, CEP market will lead to next wave of intense price competition and optimization of operating resource wastages as happened in China. At that time M&A / consolidation will be more in of upstream and downstream side to improve efficiency.

The author is Founder, Aviral Consulting

Disclaimer: The views expressed in the article above are those of the authors' and do not necessarily represent or reflect the views of this publishing house. Unless otherwise noted, the author is writing in his/her personal capacity. They are not intended and should not be thought to represent official ideas, attitudes, or policies of any agency or institution.

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Courier Express and Parcel Services

Vikash Khatri

The author is Founder, Aviral Consulting

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