Contractual biz in logistics goes up as firms gear up for GST

Rising business also partly helping commercial vehicle sales

The share of contractual business in the overall trucking business in the country has gone up to 30 per cent, compared with five per cent in 2005, as companies try to align their manufacturing and supply chain with the goods and services tax (GST).

Once GST comes, manufacturers don’t need to maintain warehouses in different states. They can bill from the place of production. So, instead of transporters, they’ll look for third-party logistics companies that will not only transport but also distribute goods as well as collect money from customers.

“Customers are asking about the age, dimension and tonnage of vehicles, which is also partly fuelling the demand for new vehicles. People are seeking particular types of vehicles that meet their requirement – containers, fully built-up trucks, refrigerated vehicles, etc,” says a senior executive with a logistics firm.

Akash Bansal, director at Om Logistics, estimates the share of contractual business to be higher than 30 per cent. ‘‘All our business is contractual. Managements prefer it as they don’t like freight rates to fluctuate. Smaller operators having less than five trucks are not able to service companies and keep them updated on a real-time basis. Bigger companies like us are investing in new vehicles to meet the demand.”

Despite a sluggish economy, sales of medium and heavy commercial vehicles (5-49 tonne trucks) grew 20-22 per cent for 21 months and touched 278,000 units in the year ended March 2016. This is largely attributed to the base effect as sales had touched a low of 180,000 units in the year ended March 2014, after touching a high of 352,000 in the year ended March 2012. Rising contractual business is also helping commercial vehicle sales.

Companies want to move goods in a specific manner; they don’t want damages or scratches, so they are asking for product-based requirement. Manufacturers are asking for specific types of vehicles for specific usage. Earlier, customers would say they need to move a consignment from a factory to a warehouse or a town; they did not care if the same was being transported in a 10-year-old truck.

Now, they say: “I want a particular, closed-body aluminum type vehicle.” Some ask for refrigerated vehicles or vehicles that have better load distribution and allow you to spread the load, which are used for transporting TVs or washing machines. Similarly, customers seek specific vehicles for moving sponge iron or medicines.

Customers also expect the transporter to maintain timelines, invest in GPS, and tamper-free locks.

Now, customers are willing to enter into long-term contracts with transporters - three- or four-year contracts against one-year agreements earlier. A four-year contract gives transporters the confidence to go for a new vehicle as it will take care of his interest costs; a four-year contract also comforts a bank to extend a loan.

A lot of business in India happens in cash and under-invoicing of goods is common. “People are moving their business from loose ends to legal ends. They want to get business on the books and preparing for the legislation,’’ says S P Singh, senior fellow and coordinator at the Indian Foundation of Transport Research and Training, which also tracks freight rentals.

Once GST comes, experts feel the contractual business could go up to 50 per cent. Not everyone thinks it is going up. ‘‘There’s no dramatic change; it’s been always high. We mostly do contractual business,’’ says Vineet Agarwal, managing director, Transport Corporation of India, one of the biggest players in the business. He says there are many multinationals that still invite bids for six-monthly contracts.

Agarwal says commercial vehicle sales are rising despite a sluggish economy as drop in diesel prices has made operations viable. Also, interest rates have come down. Industry was at the bottom of the replacement cycle as transporters had postponed purchases in view of the drop in resale prices and there’s some anticipation of growth.

WHAT’S DRIVING CONTRACTUAL BUSINESS IN TRUCKING

• The share of contractual business in the overall trucking business is going up as companies try to clean up and align their supply chain with GST
   
• Customers are asking for particular age, dimension and tonnage of vehicles, which is also partly fueling the demand for new vehicles
   
• Smaller operators with 3or4or5 trucks are not able to meet stiff service conditions. Bigger companies are investing in new vehicles to meet unmet demand
   
• Customers willing to sign long-term, 4-year contracts with transporters, which gives him the confidence to go for a new vehicle and also comforts banks