May 4, 2012

PM0011 [Project Planning & Scheduling] Set1 Q5

Q.5. A new railway project is launched in India. Give an example of each project Influencing factors acronym in PESTLE.

PESTLE Analysis in Business Environment: In business PESTLE analysis role is very important. Originally designed as a business environmental scan, the PESTLE analysis is an analysis of the external macro environment in which a business operates. These are factors which are beyond the control or influence of a business, however are important to be aware of when doing product development, business or strategy planning.

PESTLE means:
P- Political, E- Economical, S- Social, T- Technological, L- Legal, E-Environmental

The PESTLE subject should be a clear definition of the market being addressed that is as under:-
    1. A company looking at its market
    2. A product looking at its market
    3. A brand in relation to its market
    4. A local business unit or function in a business
    5. A strategic option, such as entering a new market 
    6. A potential acquisition
    7. A potential partnership
    8. An investment opportunity
Now we see in detail of PESTLE factors/Impact of a new Railway project being launched in India, i.e. opportunities in Rail Logistics Parks in India. It is the study of the Indian context with a focus on Vapi, Gujarat (PESTLE Analysis of Vapi MMLP). 

Political Analysis: India has stepped up its plans in developing its infrastructure requirements and to promote its manufacturing and industrial sectors. The central government has launched ambitious plans to develop these requirements through public private partnerships. Considering the fact that the present government is the only other government to be re- elected after the government of Jawaharlal Nehru, we can assume that there will be stability in the policies brought forward by the present government. However, in a PPP, there is a level of control over the prices of services provided by the government. This might be problematic for a commercial developer in getting business to the park. 

For e.g. The Indian Railways which is under the administrative directive of the Ministry of Railways, heavily subsidise the passenger traffic on their services which they compensate by overpricing the freight traffic. The cost of transportation of steel (ton/km) is three times the one in China. As a result the movement of freight has increasingly shifted from rail to road. (Economic Intelligence Unit 2008). There is also the issue of high pricing of the toll on expressways and national highways for road freight traffic which has added to the costs and/or prevented many truck owners from using these roads for quicker deliveries. Moreover, changes in regulatory policies at JNPT can affect the margins of logistics operators. These policies and pricings can have significant impact on the development of the logistics park and affect growth in the long term.

Socio - Economic Analysis: The road freight industry is growing at 6-8% every year and is currently worth about INR 1.42 trillion. The country’s 4% of roadways carries 60% of the freight traffic. (Cushman & Wakefield 2008) This has not only increased the logistics costs, inefficiencies increase transport time, damage cargo and the increase the need to maintain large inventories. 

The impact to the Government is that there is an increase in the congestion on the roads which leads to more wear and tear and damaged roads resulting in high maintenance costs to the government. (Pankaj & Nimit n.d.) Manufacturers needing storage facilities and other services need to deal with separate agencies catering to these facilities. This has aided to the increase in the costs of logistics. Gujarat has an unemployment rate of 13% (Government of Gujarat 2008) and we know that the development of transport infrastructure is highly labour intensive and the project will help provide employment to people in and around Vapi. (CII, KPMG 2007) Manpower spends amount to 4% of sales against the industry average of 8 - 10%. 

India has a very large population of young workforce, but there is skills shortage especially in trucking and warehousing segment which can be addressed by involving multinational players in the market who will bring their skills and expertise into the Indian business. However, India’s labour regulations are complex and very restrictive which will hamper growth in the manufacturing sector on which the logistics parks are dependent. (Arvis et al. 2007) An MMLP can affect the livelihood of many depending on the trucking industry. However, this will take a long time as organised logistics is forecasted at just 12% in the next 10 years. Skills development and training has to be imparted to these sections to reemploy them in other industry.

Technological Analysis: The Indian logistics sector lacks technological advancement that will hamper the provision of value added services to the customers. Integrated IT systems are necessary to link ports, the customs, and various parks to track shipments. Currently, only a few thousand vehicles out of a total of several millions have tracking system. Multinational logistics operators can bring their technological expertise into the market and will in turn benefit the local operators in optimising efficiency. 

In privatizing the operations of container traffic through rails, there might be problems faced by new entrants to secure the rolling stock and specialised storage containers e.g reefer containers because of limited manufacturing capacity and technical know-how. This will result in firms to import wagons at high cost. All these factors will increase the entry barriers for the private operators. (Pankaj & Nimit n.d.) Technology is constantly evolving and the sustainability of the social, economic and environmental factors is proportional to the technological advancement. Rail infrastructure is a long term investment, planned for a life of 30-40 years; therefore any changes in technology will be implemented only at a later stage. This might reduce the competitive advantage of rail freight. In a survey conducted among different companies operating in India, It was found that 63.04% of the respondents felt the most important value added service is access to information about their consignment movement.

Legal Analysis: All operators and commercial developers of a MMLP are bound by the Indian legal framework mainly by two laws. They are:
    1. Multimodal transportation of goods act: Multimodal transportation of goods in India is governed by an Act called the Multimodal Transportation of, Goods Act; 1993. The Act primarily deals with the multimodal transportation of goods, from any place in India to a place outside India, on the basis of a multimodal transport contract and for matters connected therewith or incidental thereto. All parties carrying out business in multimodal transportation has to be registered under this act. The act deals with regulations regarding the registration of the service, responsibilities if the consignor/ consignee and the liabilities involved in the service.
    2. Foreign Trade Act: Since multimodal logistic park operators have to handle goods exporting from and importing to India the operators are covered under “Foreign Trade (Development and Regulation) Act, 1992”. The act deals with, apart from other issues, the licensing requirements of the foreign trade, Power of Central Government to make Orders and Announce Export and Import Policy, Director General of foreign trade and his functions, issue of Importer-Exporter Code Number and Licence, power of the central government to Search, Seizure, Penalty and Confiscation of items traded/ premises of the trader etc. Though there is an exhaustive legal framework protecting the interests of the operators and the customers, the legal system is very slow and can be a barrier for an operator or developer in this field. In an interview, one of the trading directors of a large UK multinational revealed that the Indian judiciary, in his experience was a legal maze and it would be difficult to carry on with business as usual when the procedural framework makes it difficult for a project to kick start in the first instant.

Environmental Analysis: The Dedicated Freight corridor has an enhanced loading capacity in comparison to the existing facilities in the Indian railways. It has more width, height and an increased train length which will enable a load carrying capacity of 15,000 tons from the current capacity of 4000 tons. (Indian Railways 2007) In an interview, one of the senior executives of UK’s largest multi-modal logistics companies said that the market for CO2 reduction transportation is limited, especially in the recession where everyone is trying to reduce costs and are not willing to pay a premium for the service. However, he said that there is a market of retail giants like ASDA and TESCO who are interested in rail based logistics transport as it is more carbon friendly.

Conclusion: As the Indian markets are getting more competitive in the coming years, demand for multi-modal logistics services including value added services is huge. Policy changes like the abolishment of the CST and opening of free trade and warehousing zones are deciding factors for more companies to outsource their logistics services to third party contractors.

The traffic projection is for the Vapi project and does not reflect the overall demand of logistics parks in India. One the largest consumer for such service in the UK is the retail segment. Taking a cue from the UK market, we can assume that developing a logistics park in urban locations near to cities like Bangalore, Mumbai, and Chennai can capture greater traffic generated by both industrial as well as retail customers. To make this an even more attractive business proposition, value added services like ICT, software support, packaging, testing and quality control, postponement in manufacturing, etc can be provided in the logistics parks.

Limitations: Though the data for the traffic flows and demand have been taken in good faith, there are limitations to the figures and it is necessary to consider different factors influencing the data collection. The traffic forecast is calculated by taking into consideration the shift of traditional traffic flows (road transport) into rail. This can be achieved only when there is a cost advantage for the customer. The shift of traffic to the MMLP is dependent on the number of competitors in the area. The projections are forecast based on the assumption there will not be any other MMLP in this region. Though this might be a possibility in case of a rail based logistics park as the Indian Railways have a monopoly on the operation and development of this infrastructure, we have to take into consideration that other MMLP can be developed in the coming years depending on the demand. If a competitor can offer cost advantage with better service, this might directly affect the traffic flow to the Vapi MMLP.

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