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