The USD 12 bn Opportunity: Increasing transparency in India’s trucking marketplace

Lay of the land: A USD 130-140 billion market

In FY19, the Indian GDP is expected to cross USD 2.7-2.9 trillion in nominal terms. The spend on logistics, largely flat in the last 5 years, is around 13-14% of the GDP. About 50% of this spend is on transportation, which translates to USD 190-200 bn. Almost a similar amount is spent on inventory costs, which includes holding capital costs, warehousing, pilferages, damages and obsolescence.

65% of the annual billion-ton-km (BTKM) moved across the country is by road. Since bulk of the rest of 35% is rail, and given road is almost 1.8 to 2 times as expensive a mode as rail, road freight constitutes almost 75% of the total transportation spend, which is roughly USD 150-160 bn for 2018. Approximately USD 20 bn out of this is the time sensitive and part-truck-load freight market, leaving USD 130-140 bn for regular full truck load (FTL) freight market.

Spot deals or contracts:

What’s more common? It is intuitive to think that bulk of the spend is on contractual agreements between shipper and the transporter. However, reality is that bulk of the bookings are on spot basis. Here’s why.

Agriculture and MSMEs form about 50% of the spot freight (USD 60-70 bn).

Spot trucking can largely be attributed to agriculture and industry, which constitute 38% of India’s GDP (15% and 23% contributions respectively). About 58% of the GVA in the industry sector is on account of manufacturing. 25% of the road freight spend (USD 30-35 bn) in the country is by the agriculture sector. Due to very short shelf lives of the products moved and the seasonality of the industry, almost the entire agricultural produce transportation is done on spot bookings. Rest of the 75% of the road freight is contributed by the manufacturing sector. Micro, small and medium enterprises (MSMEs) contribute 6% to the manufacturing GDP of India by value, but as high as 34% by volume. MSMEs, due to their low relative production volumes and drop sizes, operate on spot markets for freight bookings. Hence, this adds another 25% of the road freight (USD 30-35 bn) spend to spot transactions. In the remaining 50% of spend (driven by large size manufacturing firms), transportation partners typically operate with owned and market fleet to meet client guidelines on service levels. A large sized steel maker can mandate transporters to deliver 30-40% of loads with his owned fleet. Rarely does a transporter have both onward and return leg contractual agreements. Therefore, for large size firms transporters do not have more than 15-20% of total ton-km booked on contractual basis. Hence, conservatively, at least 80% of truck bookings (USD 50-60 bn) in this segment are booked on spot (excluding specialised vehicles such as tankers and dumpers)

This makes India’s road freight industry a giant spot marketplace with USD 110-130 bn trade value growing at 9-10% per year as compared to India’s GDP growth rate of about 7%.

The major players in the game

In this section, various actors in this marketplace are discussed to understand the complexities prevent the freight marketplace from functioning at optimum efficiency.

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Actors in the marketplace

  1. End customer / shipper: Provides loads to be moved on a day to day basis. They could be manufacturers, traders or retailers or any actor which owns the goods to be moved. The loads provided come along with load tonnage, preferred truck type, loading and unloading point(s), an expected freight rate and sometimes loading instructions.

  2. Transporter: Takes the operational and financial risk of moving the goods from the loading to the unloading point. He is responsible for truck placement, paperwork, payments to supplier, tracking of goods, collection from end customer upon submission of proof-of-delivery. If he has entered into a contract (fixed price for agreed lanes usually lasting 6 months to 3 years with fuel price variation clauses) with the end customer, he might be mandated to serve a certain percentage of loads (typically 30-40%) with his owned vehicles in order to ensure placement service levels. The rest of the onward loads and almost all of the return loads are served through the spot markets. Hence, the transporter needs to place his owned as well as market sourced trucks and manage with contracted rates or run the risk of losing the share of wallet of the client in the contract renewal process. Setting the right contract rates early becomes imperative for the transporter to stay afloat.

  3. Broker: Transporters or sometimes end customers directly reach out to these agents to source supply. Usually a single-person shop setup in a truck mandi , the booking agent ties up with or ‘attaches’ himself to anywhere between 20-150 trucks spread across 10-20 fleet owners. Brokerage charged is typically between minimum INR 500-1000 per truck placed or 3-8% of spot rates booked for the specific source, destination and truck type.

  4. Fleet owner / carrier: They own trucks and typically engage 1-2 drivers per vehicle. 75% of India’s trucking inventory is with those who own up to 5 trucks. Only 10% is with fleet operators owning 20 or more trucks. Small fleet owners or single truck driver cum owners are hugely dependent on these agents to provide loads and keep their truck utilization up.

Spot in trucks: How does it work?

End customers post their loads to transporters close to the market closing hours (usually one day before the loading date), depending on which part of the country they are in. Transporters in turn start communicating with booking agents and share truck requirements for the next day. Each transporter has 5-15 broker partners he reaches out to. In turn, brokers reach out to 8-12 fleet owners for every full truck load.

Most loads require that a broker confirm the truck details within 1-3 hours of request, even if the loading is scheduled many hours away or on the next day. This leads to a tricky situation for both demand and supply sides. While waiting longer gives time to negotiate for better rates, it also increases the chances the load or truck will get booked by the time a satisfactory price is found, as each spot order comes with an urgency.

As a result, the entire marketplace becomes a collection of close walled mini-marketplaces of 20-100 players where no single party can stake claim to know the best estimate of

Count of available loads and trucks Either party’s willingness to pay, and Spot rates across more than a few lanes

The transaction costs: USD 8-16 billion value waiting to be unlocked

The industry bears the brunt of these inefficiencies in the following ways.

  1. Brokerage cost (A): Brokerage fees are typically 3-8% of the spot rate. About USD 3-6 bn is spent annually on facilitating these transactions. This amount underscores the importance brokers play in the freight marketplace, especially in getting loads to small fleet owners who have no other trustworthy means of accessing loads. Contrast this with equity brokerage firms who charge anywhere between 0.01 to 0.5% brokerage fees or in real estate where 1% of deal value as brokerage is the norm.

  2. Inventory holding cost (B): On and above the one-day planning time already built in, delays in getting the load or the truck, irrespective of the price, adds to the delays. On the demand side, costs for 0.5 to 1 day of additional inventory are to the tune of USD 2-4 bn.

  3. Truck underutilization cost (C): Currently, spot market listed trucks clock 5000-7000 km per month on an average, assuming they run on 22-26 days in a month against 4-5 loads. A delay of 1-2 days in getting loads would mean 4-8% increase in fixed costs apportioned per trip. This translates to USD 2.5–5 bn of additional fixed cost loading on FTL rates.

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Hence, the industry ends up paying about USD 8-16 bn as transaction costs (A, B and C). This is at least 7-14% of the entire trucking spot market in the country.

Additionally, there are costs related to information asymmetry on pricing. In order to immune oneself from spot rate swings, both demand and supply sides end up leaving value at the table. The willingness to pay on the demand side is typically 2-4% on the higher side and suppliers are often willing to work with 2-4% discount in case trucks are heading towards their base locations on a return leg. Almost 4-8% of deal value or USD 4-10 bn is lost on account of lack of price transparency.

The clock is ticking as the industry is growing at 8-10% per year. This problem can be addressed through a trustworthy freight exchange which removes the information asymmetry at scale. The exchange should reflect day to day movement in prices across majority of lanes and truck types in the country, empowering even the smallest fleet owner in the remotest of mandis.

The lack of price transparency not only affects the parties directly involved in spot transactions but also policy and decision makers across government bodies, financial institutions and manufacturing industries impacted by the performance of the freight industry. Until now, there has been no composite index which reflects the performance of the spot market in the country, that is available for all and at all times. Information is disparate, disseminated only with press releases, limited to few key lanes, marred with lack of specificity and gathered through select sources where the risk of a sampling bias is high. The industry needs an equivalent of a NIFTY or a Baltic Dry Index or a Wholesale Price Index.

A freight exchange and a freight index: Two-pronged solution

Multiple use cases arise when the composite index is tracked over time and compared with other macro-economic indicators such as fuel rate. For example, simplistically, if the spot rate index suggests that rates have fallen over the last two quarters by 10% coupled with a rise of 5% in fuel prices, it would be evident that the freight industry profitability is in stress.

  1. CV OEMs can cut down their forecasts and focus on after sales for the next quarter
  2. NBFCs can tune down their spreads for few quarters
  3. Government can relax toll taxes for a quarter across major highways
  4. Large transporters can pushback purchases by a few quarters till the over-supply subsides

For these reasons, the Rivigo Rate Exchange (RRE) was created. Further, the National Freight Index (NFI) has been launched based on the prices reflected in the exchange. While the Rivigo Rate Exchange (RRE) gives a live spot rate on over 7 million lanes (origin, destination pairs) and vehicle type combinations in the country, the NFI is a barometer of the road freight spot market, offering an aggregated picture of both, live rates and historical trends of spot prices across 150 different combinations. The index is represented in two main forms. Firstly, in terms of actual freight rates condensed to INR per ton-km, and secondly in terms of relative movement with respect to a base period.

Both, the index and the exchange, are based on machine learning and economics powered pricing algorithms which are continuously learning and improving. The rates on the exchange and the indices are computed using millions of data points from historical transactions, proprietary sources and crowdsourced data with the ultimate purpose of giving a fair and honest representation of the state of the spot market in the country.