The domestic freight industry in India is huge and inefficient. It is extremely fragmented and unorganized. By various estimates, there are approximately 3 lakh registered transporters in India. Most of these are small, regional players. Numerous brokers and fleet owners are also involved in this eco-system. Most of the fleet owners own less than 5 vehicles.
All the above leads to a lot of inefficiencies in the value chain. Some reasons for the same are:
- Lack of information to match the demand and supply
- Trucking is a very working capital intensive industry, and working capital finance from money lenders and private financiers is very expensive
- Under-utilization of vehicles is a big problem. There is significant waiting time at broker locations and loading and unloading locations
- There is lack of information related to service rating of transporters. It is difficult to gauge the quality of a transporter.
An organized freight exchange where shippers, transporters, brokers and fleet owners can participate can attempt to bridge the demand and supply mismatch and increase the efficiency in the entire chain.
However, many freight exchange initiatives in India have failed to take off. Let us try and understand why.
- One important criterion for an exchange to work is the active involvement of both seekers and providers. An exchange can flourish only when there is significant activity (demand signals and matching supply) on it. But achieving this tipping point is not easy and presents a chicken and egg problem. Many exchanges have not been able to attract enough demand which has been satisfactorily filled at costs lower than traditional channels and this has discouraged shippers from using these platforms. Lack of steady demand has seen the supply side also disengage, thus leading to a vicious cycle
- Some exchanges have held the promise of dis-inter-mediation- such as removal of brokers from the transaction, hence improving efficiency. However, this has not succeeded as planned because the role of these intermediaries has not been understood very well and the disinter-mediation has failed. For e.g. A broker today provides certain services to Transporters such as bed-and-board for outstation drivers, relief drivers from the outskirts of the city to inside the city who know city traffic patterns well etc. These are not easily replaced with just technology.
- While internet and mobile technology has significant penetration now, some of the earlier freight exchanges were slightly ahead of their time and could not leverage cheap data effectively. Even today, effective business collaboration is not happening. People tend to use mechanisms like WhatsApp which are not systemic collaboration mechanisms.
- Some exchanges suffered as they were perceived to be non-neutral, being owned/funded by specific players in the value chain
- Shippers still prefer to deal with a known set of transporters and not risk sending consignments through unknown transporters
Exchanges enable collaboration and hence can create synergy. But in our opinion, for any freight exchange platform to succeed, it is important that each participant (Service Providers and Service Users) can derive value from the exchange on a stand-alone basis. It will be a natural extension for companies using exchanges and deriving stand- alone benefits, to participate in an exchange to collaborate with other participants and derive value from network effect.
This realization leads us to conclude that a workable exchange platform must cater for slow adoption and should be sustainable over the adoption time. Therefore, the principles that are critical to establishing such an exchange are:
- Providing benefits on a stand alone basis by means of consolidation, route optimization, effective load tendering and other similar capabilities
- Providing value to participants by simplifying day to day operations and providing a platform to migrate from their current annual contract model to exchange model on an incremental basis
- Rating of service providers based on service quality and not just based on freight charge
- Allowing interested participants to form “private exchanges” and collaborate among themselves in a secure fashion
- Letting private exchanges to gradually evolve into public exchanges.
Technology has transformed the way business is done, and certainly it is going to be a key component for a freight exchange as well. However, technology must be supported by strong operational capabilities to ensure service quality and consistency.
Feet on the ground. Always!!