GST Impact on Logistics and Transportation: Pain before Gain

24 May 17 GST Impact on Logistics and Transportation: Pain before Gain

logistics and transportationNews headlines suggest that logistics and transportation companies will derive enormous benefits from the implementation of GST in India. Some random headlines:

  • “Logistics firms will be GST’s biggest beneficiaries”
  • “GST Boost for Logistics”
  • “GST will help logistics firms cut costs”

 

The accepted opinion is that GST will be a big boon for logistics and transportation players. However, we believe that benefits will not be uniformly distributed – and pain will be combined with the gain.

To understand this, let’s first understand why everyone is so bullish.

  • Efficiencies due to GST are expected to boost GDP by 1.5-2%
  • Logistics and transportation costs for manufacturers could fall by 20%
  • GST rate for transportation is at the lowest slab of 5%
  • Not having to build warehouses in every state means fewer (and larger) warehouses in strategic locations, leading to economies of scale
  • A hub and spoke model will enable optimized transportation – eg. larger trucks on select routes
  • Lower waiting time at state borders will improve truck profitability

I’m sure you can find a few more factors to add to the above. There is no doubt that GST could revolutionize logistics in India and provide substantial benefits to the economy. So then – why am I sounding skeptical?

First of all, most of the efficiency benefits will flow to manufacturers/brands in consumer goods. No doubt, better scale and productivity could result in improved margins for logistics companies. However, these gains will accrue in the medium term, maybe a couple of years down the line. In the interim there will be considerable turmoil. Why?

  • The transition to GST will have its own costs and uncertainties.
  • Consolidation of warehouses (from 29 states to say 8-10 strategic locations) will make many existing warehouses redundant.
  • The need to scale up capacity at select locations means significant Capex
  • The likely focus on “strategic” locations near consuming centres (eg. NCR, Mumbai-Pune, etc) could drive up land prices in already expensive locations.
  • A restructuring of trucking capacity – large vs. small trucks will also mean redundant capacity for some. Added to this, the necessity of buying new trucks to remain cost-competitive
  • To stay in the game, logistics companies will have to invest substantially in IT

If you consider all these factors, sure – there are big gains to be had in the medium and long term. But in the short run, logistics and transportation companies will have to spend large sums on re-aligning their capacity, and investing in whatever is needed to stay competitive. So while there will be substantial winners… there will also be many losers as the industry consolidates.

Categories:
Blog
Arun Jethmalani
Arun Jethmalani

Arun is one of the founders of ValueNotes. Apart from trying to build a high-quality research business, he has spent the last 27 years researching, analyzing, and dissecting companies and industries. He has worked with clients of all shapes and sizes, from all parts of the world – in providing them insights that make a difference to their business.

Prior to ValueNotes, he was an equity analyst/advisor, and wrote extensively on investing – including a column titled “Value for Money” which ran for 10 years in the Sunday edition of the Economic Times. To this day, he remains an avid “value” investor.
He has also been published in several other publications, and is a regular speaker at events related to technology, investing, competitive intelligence, business process management, Internet, etc. See: Valuenotes Events
He has been instrumental in developing a community of research and intelligence professionals in India, and is the founder and current chairman of the SCIP (India) Chapter.
Arun holds a B Tech from IIT, Bombay and an MS from Duke University, NC, USA.
LinkedIn Profile

No Comments

Post A Comment

*

Show Buttons
Hide Buttons