Introduction
Road transportation plays a vital role in India’s economic landscape, with an annual cost estimated at approximately USD 115 billion, constituting about 3% of the GDP. The sector has seen transformative changes like the introduction of GST and substantial infrastructure development, such as the expansion of highways. These changes have enhanced efficiency and reduced costs in the Indian road transport industry. However, recent surges in crude oil prices, now exceeding USD 100 per barrel, are posing challenges for transport companies. It’s expected that these high oil prices will persist, as major oil-producing countries aim to maximize revenue before renewable energy takes over. This trend will impact industries heavily reliant on road transportation, including commodities and pharmaceuticals.
Understanding the Current Structure
Before we delve into potential shifts, it’s crucial to comprehend the existing structure of the road transportation industry.
The Supply Side
The industry operates more like trading than a traditional transportation service, with most transporters owning only a fraction of the required fleet. Some don’t own any fleet at all. Consequently, companies must source vehicles from driver-owners or brokers, known as market vehicles. These brokers can either have direct connections with vehicle owners or acquire vehicles through other brokers. When multiple brokers enter the picture, costs rise due to layers of commissions.
Transporters must have access to either vehicle owners or brokers with direct connections to owners. Trustworthiness is paramount, ensuring that the broker can provide the right vehicle with the right driver and maintain vehicle quality.
With access to this information, transporters engage in cost arbitrage, securing lower rates from vehicle owners and charging higher rates to users. This arbitrage margin can be substantial, even reaching 15% for standardized vehicle categories and more for specialized vehicles.
Transport companies offer more than just transportation. They streamline vehicle procurement for user industries, provide planning services, and serve as financial intermediaries, offering credit while promptly paying vehicle owners. They also handle customer queries, disputes, and maintain professional interactions.
What is in Demand ?
This industry structure is also influenced, if not driven, by demand characteristics. Logistics procurement departments in Indian companies typically operate as cost centers, tasked with reducing transportation expenses regardless of the company’s strategic focus. This leads to a constant search for lower prices, often within the spot market, focusing on short-term gains.
Transporters lack long-term visibility and incentives for vehicle ownership. This structure discourages collaboration with user industries to reduce costs through efficiency improvements like fuel-efficient vehicles, data analytics, and technology adoption.
The industry remains highly fragmented, as no single transporter can access a significant share of driver-owners and brokers, limiting the benefits of economies of scale
Restructuring is nigh !
To truly revolutionize the industry, structural changes are essential, albeit challenging. Industry associations can play a pivotal role by analyzing the benefits of long-term partnerships with transporters. Such an analysis should offer clear metrics based on various assumptions, including the impact of renewables, technology adoption, and more. The objective is to formulate a strategy for collaborative, long-term relationships that will reshape the road transportation industry for the better.
Conclusion
While other solutions undoubtedly exist, this article aims to ignite discussions, deliberations, and debates about fundamentally reshaping the structure of the road transportation industry. By addressing structural inefficiencies, we can pave the way for a more sustainable, cost-effective, and efficient future for the benefit of users, industries, and the nation as a whole.
