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Connectivity is transforming Indian logistics (but there’s plenty of room for growth)

Various factors have led to a low adoption of telematics technology in India – but new technologies and services could quickly take off, and there is significant room for growth. By Wilfried G. Aulbur, Jeffry Jacob, Frank Pietras, Norbert Dressler of Roland Berger

Competition and disruption have become the new normal in the global trucking industry. Already faced with market volatility, companies and their associated value chains must also understand and define their positioning in the face of a range of new, disruptive technologies – a range that includes autonomous driving, connected vehicles, the sharing economy, the rise of e-commerce, automated manufacturing and Industry 4.0, workforce skilling and requirements, and the emergence of non-traditional competitors. The range and dynamism of these new factors is straining corporate resources and challenging management teams.

Holding on to existing customers has become the OEMs’ new mantra. Total lifecycle customer approaches are key, with customer retention a major focus. To achieve the same, OEMs are looking actively at extending the value they generate for their customers by extending services and creating new tailored solutions to optimise total cost of ownership (TCO).

From vehicle-centric to connected services

So far, OEMs, beyond selling the truck itself, have focused on offering vehicle-centric products and services, with OEM activities and strategies to date built around financial services, rental solutions, spare parts sales, service and repair solutions, and fleet management. Now, however, strategies are being developed around the generation of additional revenue streams, such as driver training and maintenance contracts. Increased data capture and simulation tools allow for cost savings in the development process, for example in the areas of vehicle testing and warranty. Efforts to understand driver behaviour and demand and to leverage these for either further vehicle optimisation or the development of new services are mostly in their infancy. Integrated and connected solutions (e.g. location-based services) that are based on a systematic mining of the automotive industry’s “new gold” – namely, data – are even less prevalent.

An aggressive and pro-active leverage of truck connectivity allows, in principle, extended value chain coverage for the OEMs. Solutions around vehicle management, load monitoring, driver management, operations/logistics management and time/legal management have a transformative effect on global trucking as well as on the way truck OEMs access profit pools. Vehicle management solutions currently centre around activities such as remote diagnostics, maintenance planning, break down calls and vehicle protection. Load monitoring solutions include temperature management, a factor of key relevance in particular in countries such as India, where cold chains are notoriously weak. Load detection and monitoring allows the matching of capacity and demand and ad hoc load optimisation. Driver management focuses on performance analysis, emergency call and driver entertainment; operations/logistics management focuses on order management, trip recording and reporting, as well as smart navigation; and time management applications currently focus on speed management.

Truck connectivity solutions are driven by customer demand, especially in developed countries where operators need to protect margins. In addition, as sensors have become cheap and ubiquitous, as high-bandwidth communication technologies, Cloud-based services and new data analytics approaches have become available, technology has ceased to be a limiting factor. Machine-to-machine (M2M) communication has reached a significant level of operating maturity, with dedicated short range communications (DSRC) used for time-sensitive and mission-critical functions and commercial wireless technologies deployed for non-safety applications. Body area networks can even connect bio-sensors implanted into drivers to provide driver health monitoring.

The value of connectivity

Vehicle connectivity is also driven by legal initiatives. For example, estimates put the macroeconomic benefits of telematics in Europe at about €4.4bn (US$4.9bn) due to the avoidance of traffic congestion, at €3.5bn due to increased logistics efficiency, and at €2.0bn due to the sale of additional apps and services. Integrated and connected traffic systems, inter-vehicle communication and intelligent traffic warning systems simply make life easier, safer and more environmentally friendly. They also make a positive economic impact which will motivate regulators to drive enforcement.

Furthermore, OEMs are slowly recognising the value of data. The realisation that their business models may be at risk not due to traditional competitors but due to the innovative power of Google, Facebook, Uber, and other non-traditional competitors is driving significant investments and activity around data-based business models and approaches.

India – significant room for growth

India’s telematics landscape offers significant room for growth. Historically, India has shown a low acceptance for telematics, which has kept market penetration low. Price sensitivity among operators whose margins are constantly squeezed, and a lack of low cost solutions, are behind this low penetration. So too are challenges in terms of infrastructure, such as data networks, and the level of connectivity of local authorities and business partners. India’s transportation sector is also still largely driven by small fleet owners who operate fewer than five trucks and account for about 68% of the total fleet (2012 data). Medium fleet owners (5-20 trucks) and large fleet owners (>20 trucks) account for a modest 20% and 12%, respectively. While medium and large fleet owners have become more important in the overall mix (small fleet owners accounted for 84% of all trucks in 1994), their volumes are too low to result in significant telematics penetration.

Awareness of and interest in telematics solutions has increased significantly for medium and large fleet owners. According to Roland Berger research, Indian MHCV owners in these categories focus on three main features of telematics solutions: productivity, efficiency and cost savings/TCO optimisation. Security solutions are important, but not as critical as cost and margin related aspects.

In addition, the globalisation of supply chains and demands by global customers for higher service levels is forcing a professionalisation of Indian fleet operators. Cost escalations put pressure on margins and drive fleet owners to focus on TCO optimisation rather than the initial price of telematics solutions. Government efforts, e.g. the initiative to enforce the use of GPS in state-run buses, also increase the awareness and penetration of telematics solutions.

Lastly, India has a number of aftermarket players that offer relatively low-cost solutions. Combined with the need to optimise cost in light of thin margins, such solutions drive adoption.

These trends have translated into a rapid growth of telematics installations as shown in Figure 1. With a CAGR of 19%, the installed base has increased from 144k units in 2011 to 293k units in 2015.

Entry level solutions – such as basic fleet tracking, monitoring of fleet utilisation, fuel efficiency and productivity – dominate the field with 68% of all installed applications, followed by mid-tier applications (31%). High-end solutions that can be found pre-dominantly in Western markets are hardly relevant, with a fitment rate of about 1%.

Most of the fitments (84%) are aftermarket fitments rather than OEM fitments. While all Indian OEMs offer telematics solutions, these services have not found too many takers. This is a very different scenario from that of Europe where truck OEMs such as Daimler, MAN, Scania and Volvo are among the leading providers of telematics solutions. In India, suppliers such as Trimble, Arya Omnitalk, CMC Technology and e-Logistics (see Figure 2) seem to be more efficient in offering entry and mid-range solutions to fleet owners. As a consequence, significant current and future profit pools are not accessed by Indian OEMs. This is an area of concern, as India’s OEMs may not be able to harness customer data. While competition in the segment is fierce and driven by price as well as technology adoption, the  presence of Indian OEMs is desirable and indeed crucial in the mid- to long-term.

OEMs have much to gain in India – and much to do

Innovative, technology-based approaches exist in India and are gaining visibility. Take Rivigo as an example: Rivigo is a startup that introduced the “relay model” in the Indian logistics space. The company operates a fleet of over 800 trucks (which is constantly growing) as well as 40 pit-stops across India. The basic idea is to switch trucks at pit-stops, i.e. a truck that is supposed to go from Delhi to Chennai is driven, for example, as far as Jaipur. In Jaipur, the truck driver hands the truck over to another driver who made the journey with a truck from a pit-stop further south up to Jaipur. The Delhi truck continues on its journey south, while another Delhi-bound truck is driven by the Delhi driver back to the city. Rivigo claims that operating the relay model allows trucks to run up to 800 km (500 miles) per day rather than the typical 280 km per day which reduces transit times by 50-70%. In addition, the drivers’ quality of life is dramatically improved as they are normally back home after 24 hours. Clearly, for this model to function effectively, the company has invested heavily in telematics and advanced data analytics to optimise logistics flows. Sophisticated built-in intelligence modules help Rivigo to plan vehicles, have real time vehicle visibility, optimise routes, incorporate information about tolls/borders, driver behaviour, performance history, etc.

The road ahead for OEMs is interesting. OEMs can choose between different business models. On the one hand, they can limit themselves to generating data via their telematics solutions. Key requirements of vehicle access and user trust as far as data protection is concerned are typically given for truck manufacturers. On the other hand, truck OEMs can and should look at opportunities that arise out of data analytics, i.e. they should structure data and analyse it using appropriate algorithms (using the Big Data approach). Besides domain knowledge about vehicles and use cases, this requires OEMs to build up capabilities in analysing structured and unstructured data sets. Subsequently, OEMs have a unique chance to improve existing services (e.g. fleet management) or to offer new services (e.g. sell anonymised truck driver profiles to retail outlets along truck routes, etc.). Entering this element of the value chain not only requires detailed customer understanding, it also requires organisational changes to ensure that these ideas can be driven successfully and with the necessary sense of urgency. Lastly, OEMs have the option of a spin-off, i.e. set up a new business that provides information-enabled activities to the OEM, its competitors and other companies that can leverage customer insights.

The last two steps will require changes in the way OEMs do business. They need to move away from “perfect plan” to “fail early, fail cheap”. A possible way to incubate these types of businesses successfully is to leverage services such as the Roland Berger ‘Startup Factory’. Trying to start these businesses within the framework of an established organisation will prove to be difficult and cumbersome.

The opportunities offered by telematics are exciting and attractive. However, OEMs cannot take success for granted. A qualitative comparison of OEMs with competitors across various parameters such as ensuring data access, exploiting data, and providing services (see Figure 3) highlights OEM weaknesses in the crucial last two categories. ‘Over-the-top’ providers such as Google and Apple, global IT leaders (IBM, Microsoft, Oracle, etc.) and potential IT service providers such as Deutsche Telekom have substantial assets that are relevant for telematics and can provide solid competition in this space. And as India’s example has shown, aftermarket players are not to be forgotten either.

OEMs globally and in India need to take seriously the new telematics-based products and services on offer or being developed. They need to identify where they want to play in terms of range of functions and geographies; they need to understand implications for pricing, system characteristics and application scope; and they need to close critical knowledge gaps quickly, either internally, via acquisition or via partnering, e.g. in the context of startup factories. Technology is changing global trucking, and it is time to think and act.

 

This article appeared in the Q3 2016 issue of Automotive Megatrends Magazine. Follow this link to download the full issue.