This column is authored by Sanjay Bansal – Founder and MD at Aurum Equity Partners LLP
The Indian logistics industry comprising road, rail, air and water is currently estimated to be worth $130 billion and is expected to reach $300 billion by 2020. However, it is the road transportation, which dominates the mix as it carries around 65% of freight traffic as compared to rail, water and air, which account for 32%, 7% and 1% respectively. The road network of India, which is the second largest in the world, moves 7 million goods vehicles worth 1,325 billion ton-km.
Looking at these figures, it isn’t a rocket science to understand that trucks are in heavy demand. Trucks have evident advantages over other networks, especially rails:
- They can deliver cargo to mountainous, rural and other remote areas which remain inaccessible through rail network.
- There is considerable time saving in loading and unloading as trucks provide doorstep delivery. It also results in cost saving associated with transporting the goods from railway station to the warehouse.
- Trucks are available in various sizes and capacities according to the purpose of use (for example, tippers, haulage, trailers, two and three-axle rigid trucks), which makes it convenient for the companies to transport their goods in the quantity they require.
So, undoubtedly, the trucking industry in India has gained immense importance in the movement of goods over the last few years.
The Operational Structure
Trucking is largely unorganized and fragmented industry, mainly owing to its operational model and multiple players. The users (also called manufacturers/shippers) rely heavily on middlemen such as trucking companies and brokers/agents to source the trucks, complete the paperwork, and manage the delivery schedules. Apart from these core tasks, these middlemen are also indirectly responsible for support functions such as financing & insurance, maintenance & repair, and co-ordination with government/regulatory bodies.
Contract Vs Spot Pricing
The trucking industry deploys two types of pricing strategies – contract and spot. The former is a quote that is a pre-determined amount agreed upon to be with the shipper for certain duration, usually a year. A few shippers prefer spot rates as the freight rates fall or rise, according to the demand and load-to-truck ratio. If the demand is low, truck capacity will not be overloaded, resulting in lower prices.
A contractual quote ensures that there are no price surprises and consignment loading can start without any price negotiations. Shippers with sensitive freight needs usually go for this one. The only drawback is that when prices are low, the shipper might be bound to pay higher if the contract says so. In case of spot quotes, the shipper may have to spend several hours bargaining, by the end of which the negotiation may fall through and the shipment gets delayed.
A majority of price negotiations in the trucking industry happens in the spot market. So, it is prone to corruption and lack of transparency. The shippers end up shelling out a huge amount as brokerage fee as well as bribe to the middlemen to get timely loading slots and maintain the delivery schedule on track.
Spot market also feeds inefficiency because most transactions happen via phone calls and personal relationships. There is no digital and regulatory marketplace which can foster fair and transparent pricing.
The drivers are the backbone of the entire trucking industry. If they don’t report to work on time, are on leave, go on a strike the entire logistics can go haywire for that period of time. Lax behaviour and irresponsible driving (speeding or under influence of alcohol) are other major concerns associated with the truck drivers. If they don’t drive proficiently and safely, an accident may happen, having devastating consequences on their own life as well as the property – trucks and goods being carried therein.
The shippers and fleet owners do not have real-time information about the whereabouts of the truck and how far it has travelled as the trucks are not GPS enabled and drivers do not possess/are not provided handsets for communication.
However, from the drivers’ seat, the scenario appears very different. Their jobs are unpredictable; the driving schedule is erratic; they don’t have adequate training on safe driving, tackling on-road regulatory hassles and vehicle breakdown/maintenance; they are compensated poorly (about Rs25,000-30,000 per month) and do not have social security benefits; and have to spend several months on the road away from the family.
Tech-Driven Startups Changing the Game
Middlemen costs combined with driver woes, the operational profitability and business productivity takes a severe hit on the shippers as well as the fleet owners. But, it seems technology may be a solution to all these problems. Several startups have jumped into the sector to make transportation easier for all stakeholders and organize the operations.
Startups such as Blackbuck, Shippr, LetsTransport, Rivigo, Quifers and many others aggregate a huge number of local truck operators to provide on-demand, and transparent online marketplace. The shippers can browse through the list of available trucks in the required locations and then, book a truck against the payment of a commission for every transaction or a time-bound subscription. These truck aggregators are leveraging technology to provide services such as automated demand-supply scheduling, GPS tracking, cloud based documentation, mobile/web app support, and IoT-enabled vehicle safety and maintenance.Some of them even provide trained drivers.
These startups are driving efficiency in the trucking industry by eliminating the interference of middlemen. Looking at the growth potential of logistics sector and associated startups, investors are pouring in funds. In fact, PE investment in logistics has been pegged at $500 million in 2016-17.
Startups Changing the Game, But Uber Freight Set to Disrupt the Industry
The recent announcement by the ride hailing company Uber about launching Uber Freight or Uber for Trucking in the US has jolted the entire trucking industry across the world.
Uber Freight is an app that matches trucking companies, independent operators and professional truck drivers with shippers for carrying loads that need to be transported from one place to another. These drivers are vetted and approved by Uber. The app lists details about the jobs and routes available, what each driver is required to haul, and how much they will be paid. As soon as the drivers agree to carry a load, they will be sent rate confirmation within seconds. The prices are guaranteed and pre-determined, usually based on distance to be covered, type of cargo and location, among a few other factors.
Sounds familiar? Yes, this app works exactly like its app for cab drivers and riders.
Uber is doing away with the middlemen, and replacing conventional brokerage system with an automated system, based on surge pricing model. The shippers and drivers can directly connect, get/give instant quotes, and agree upon the immediate shipment pickup without wasting hours of negotiation. Uber also ensures the drivers regarding the speed of payment, which could take several weeks to months to release. It pays them within a few days, fee-free for every single load, and even for the extra waiting hours.
Essentially, Uber Freight is addressing all pain points of the trucking industry:
- Meets on-demand capacity promptly for shippers
- Lowers operating costs
- Increases revenues
- Brings transparency in prices and processes
- Improves efficiency of vehicle and fuel utilization
- Pays drivers the right price and on time
- Facilitates GPS-enabled freight management
Uber Freight was launched after the company acquired self-driving trucking company Otto in August 2016. Uber expects that its freight business will create a shipping and data network that could be tapped in the future when it shifts towards driverless trucks in the future.
If the model takes off successfully, it is expected to spread its roots to other countries, including India. So, while logistics startups are doing a great job of organizing the sector, Uber Freight will radically change the face of the trucking industry.
Nevertheless, with or without Uber Freight, the Indian trucking industry is set to ride higher on the technology wave to become better and stronger.