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By Patrick Burnson, Executive Editor

Vietnam and India continue to offer long-term growth potential for companies willing to risk supply chain expansion in these immature, but quickly developing markets. One huge question remains: Is transport infrastructure growing at a sustainable rate?

he export-driven economies of Vietnam and India have created millions of jobs and generated billions of dollars in earnings in recent years. However, at this stage in the game, many manufacturers as well as major carriers and logistics providers are concerned about the potential for shipping delays and supply chain-related challenges on the horizon.

Recent research finds that with more foreign and local infrastructure investment, the situation could continue to look very bright indeed for these two emerging nations. However, any future success may depend on how much will be spent and how long those critical transportation and logistics improvements might take.

Vietnam: Change on the horizon

According to a new market research report from Transport Intelligence (Ti) entitled Vietnam Logistics 2009 , high logistics costs are responsible for holding back the development of the Vietnamese economy. And while Vietnam seeks to come to terms with the global economic slowdown, weak infrastructure and high inventory levels are proving to be a significant drag.

'Logistics costs are estimated to be as high as 25 percent of Vietnam's GDP, far higher than those in developed economies such as the United States and higher than in other developing economies such as China,' says Ti analyst John Manners-Bell. 'These excessive costs have hampered Vietnam's efforts to take advantage of its cheap labor resource and develop the national export economy.'

According to the Ti report, this is due to a combination of an over-stretched and ageing transport infrastructure (including ports, airports, roads, and rail), inefficient bureaucracies (e.g. customs clearance delays), and the unwillingness of Vietnamese manufacturers to outsource to foreign 3PLs.

While Vietnam's vast network of inland waterways transport goods efficiently throughout the country, an inadequate road network (less than 20 percent paved) and limited railway capacity have prevented Vietnam from meeting its full transport potential. Furthermore, the report finds that a substantial proportion of Vietnam's logistics costs can be attributed to high inventory holdings.

However, this situation is gradually changing. The Vietnamese government has invested billions of dollars in the country's infrastructure and is encouraging foreign development income in projects such as the Cai Mep Container Port near Ho Chi Minh City in the Mekong River Delta, and the new Long Thanh airport that's projected to be completed by 2015.

One of the most obvious logistics-related benefits coming from increased investment in infrastructure has been the enhanced road links with its neighbors. The Kunming-Hekou-Hanoi-Haiphong Corridor has enabled road freight operators to connect the country to its regional ground networks, bypassing ports and airports and thus reducing international freight costs by up to 30 percent.

'Overall, it can be said that the speed of infrastructure development in Vietnam is much slower than that in its neighbor and rival, China,' says Manners-Bell. 'Once the world claws its way out of the current recession, high inventory levels and slow moving supply chains will delay Vietnam's economic recovery.'

With nearly 900 logistics companies listed in Vietnam registries, demand for services continues to ramp up, industry experts say. But even though strong inbound and outbound growth is steady, it accounts for only 4.4 percent of the nation's total GDP. Analysts for Spire Consultants, an international construction consulting firm, note that in Thailand and Singapore the logistics sector earns almost 15 percent of the GDP.

Vietnamese logistics companies can only meet 25 percent of domestic demand, with the greater part of market share held by foreign firms including Maersk Logistics and APL Logistics, say analysts. Planned government investment of $17.5 billion to develop infrastructure is expected to change this scenario soon. But until that happens, local logistics companies are fighting to stay competitive. Nike is using Schenker Logistics to ship and source in Southeast Asia, but some local Vietnamese 3PLs are driving partnership deals that may soon add value.

Gemadept, a major domestic freight intermediary, recently announced that it has cut a deal with Schenker to set up a logistics center promising to meet international standards in southern Binh Duong Province. Gemadept has an annual turnover of 1 trillion dong ($60.2 million), and may prove to be a shining example of what smaller firms may achieve in the future, says a spokesman for the Vietnam Freight Forwarders Association (VIFFAS).

Considering that 80 percent of Vietnamese logistics firms have registered capital of less than 1.5 billion dong ($90,000), one can easily understand why joint partnerships make sense. Eckhart Dutz, general director of Cartridge World Vietnam-a leading supplier of laser printer ink products-has issued just such a forecast, noting that local firms will soon bond with multinationals with global reach.

None of this can happen too soon for officials at the World Bank, who note that Vietnam's airport, roadway, port, and telecommunications services-the infrastructure required for a logistics network-rank fourth in the region behind Singapore, Malaysia, and Thailand.

'Due to infrastructure constraints, freight costs are disproportionately high in Vietnam, running at around 30 percent to 40 percent of total costs, compared to around 15 percent in other countries,' says World Bank spokesman Michael Peskin.

India: Mounting challenges

Transportation infrastructure (or rather, lack thereof) is a key concern for shippers sourcing from India. While manufacturing still contributes only about 16 percent of India's GDP now, analysts say multinationals will increase their sourcing dramatically in the near future.

Noha Tohamy, an analyst with AMR Research, noted in a recent study that India has been making forays into the manufacturing sector with companies like Moser Baer, Bharat Forge, Bajaj, and Larsen & Toubro working hard to change that nation's reputation as a low-quality manufacturing center. And like Vietnam, India is looking to use its skilled and highly educated resource pool to differentiate itself in the global marketplace by focusing on skill-intensive design and manufacturing outsourcing. But that may be a tough task, she adds.

'From unreliable electricity supplies, to dilapidated roads, to congested seaports and airports, India's infrastructure preparedness pales in comparison to many other established 'emerging world' countries,' says Tohamy.

According to Rohit Pattnaik, an analyst with Drewry Shipping Consultants Ltd. in London, the economic pressure being placed on India's seaports can be mitigated by allowing more private investment. 'Steel, oil, mining, and cement industries could benefit from the government's plan to unveil a new policy whereby private companies will be allowed to develop captive berths at all major ports,' he says.

Under the new policy, captive berths are to be given on the basis of minimum guaranteed cargo and after payment of royalty on a per-ton basis. While the captive berths will be exclusively used by their operator, companies may also be given the freedom to offer the infrastructure for use to a third party after getting permission from the port authority.

'In this case,' says Pattnaik, 'the operator may have to pay certain charges to the port authority. The government's change of heart is the result of lobbying by port authorities that have been under pressure from domestic steel and mining companies.' The government, at the same time, is augmenting port infrastructure needed to handle the growing cargo traffic.

The U.S.-India Business Council (USIBC) agrees that seaports need such funding, but also emphasizes that weakness in other parts of that nation's ailing infrastructure need mending. 'This presents an enormous opportunity,' says USIBC president Ron Somers. 'Models of public-private partnerships will need to be tested and proven to develop India's airports, ports, roads, and railways,' he says.

These models, adds Somers, must include guarantees against the political risks of changes in contracts and government levies. Meanwhile, India's railways are also in need of an upgrade, says Somers, to ensure safety and efficiency. 'The Ministry of Shipping will be encouraged to embrace the implementation of the National Maritime Development Policy with an eye toward active involvement of the private sector,' he says. 'Development of viable models, demonstrating returns on investment, will need to be profiled and successfully promoted.'

Air transportation is particularly crucial as well. USIBC seeks to support the Government of India's desire to develop world class cargo facilities consistent with the goals embodied in the historic U.S.-India 'Open Skies' agreement.

FedEx Express is among the carriers taking advantage of this new relationship. 'India's GDP is growing at a rate of 7 percent per year, making it one of the fastest growing economies in the world,' says Robert Elliott, president of FedEx Express Europe, Middle East, and Africa. 'This growth represents huge potential for our customers in terms of market expansion and global trade.'

FedEx has expanded its market position by increasing flight frequencies in and out of India and improving connectivity between key export centers and regional hubs, resulting in improved service, especially for customers in Delhi and north India. The company also added capacity to move shipments of greater weight and size to key global markets within 24 to 48 hours.

Shippers have also been working closely with Menlo Worldwide Logistics, which provides a wide range of domestic 3PL services for the entire subcontinent. Among the company's offerings in the region are warehousing (dedicated, multi-client, and in-plant); transportation management; facilities; and supply chain offices. 'We pride ourselves in using our proven experience in solutions for India-based logistics with strong capabilities in many of the region's dominant industries such as automotive, consumer electronics, high-tech, and industrial, notes spokesman Gary Frantz.

Shippers use Menlo to leverage a global platform that is integrated with a regional service portfolio including far-flung operating locations in Chennai, Delhi, Mumbai, and Vadodara. But as to whether other major global logistics players will enter the fray in India is still a matter of conjecture. Analysts agree that without rapid development of a distribution network, U.S. companies will take a cautious approach.

Patrick Burnson is Executive Editor of Logistics Management
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Publication:Logistics Management (Highlands Ranch, Co.)
Geographic Code:9INDI
Date:May 1, 2009
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