This is a 2-part blog post about our learnings from building Omnitrack – a freight marketplace in India.
About the Logistics Industry in India
The Indian logistics industry was valued at USD 160B in 2016 and is expected to grow to USD 220 Billion by 2020. Logistics comprises of transport (60% share), warehousing (30% share) and fulfilment (10%). As per McKinsey estimates, India spends close to 13-14% of its GDP on logistics, which is substantially higher than what more developed nations spend. This is primarily due to inefficiencies in the segment. Road transportation is the dominant mode of transportation in India with over 60% share, rail cargo corresponds to ~35% and balance is air and sea cargo. India has a higher modal share for roads, has low levels of containerisation resulting in high freight handling costs and lower capacity of trucks on the road. These reasons are attributable to why logistics costs (on a per ton per km basis) in India are much higher than those in developed nations.
Road Transportation Market
Let’s deep dive into the road transportation market. The transportation market in India is highly fragmented and unorganised. It is estimated that 80% of trucks are owned and operated by fleet owners with less than 5 trucks. As per estimates, there are over 9M commercial vehicles but the truck utilisation levels are low. Approximately 40% of truck are lying idle due to lack of return loads.
A consignor works with large transport contractors to fulfil his load requirements on a contractual basis, where payment cycles vary between 15 days to 90 days. Small Fleet Operators (SFOs) own & operate trucks (truck capacity varies between 1 Ton and 150 Tons); while brokers and commission agents help find loads for them. Transport Contractor may or may not have vehicles of their own. In case they operate their own fleet, they will try to place their own vehicles first before working with commission agents/ freight brokers to place additional vehicles from the spot market.
It is standard practice that the SFO will receive 80% of the agreed invoice as an advance and balance 20% once the delivery has been successfully made. The rates market is segregated into two – contract market and spot markets. Spot market rates are higher and more volatile than contract market rates and dominated by brokers. India is largely a spot market. We estimate it to be 70% of the overall market in India.
In a contract rates market, the transporter will provide the initial advance irrespective of whether it is his own vehicle or some broker’s. In case a broker is assisting him for vehicle placement and he is not able to arrange for funds, he will request the broker to provide the initial advance. In the spot market the broker will insist on part payment from the end customer or will provide the initial advance to place the vehicle successfully.
A broker besides acting as a middle-man, also facilitates other valued added services such as documentation, bill of transportation and ensuring deliveries are made within a specified time window.
Between 2015 & 2017, many logistics startups raised funding based on the promise of being able to successfully dis-intermediate a large fragmented market with hitherto low tech adoption. But, from the experience of providing ops + tech consulting services, we knew it would be not that straight forward – freight brokers or commission agents play a very important role in freight matching. Besides providing documentation and facilitating the transaction by acting as a trusted layer, they bring business to small fleet owners (SFOs) & drivers-cum-owners (DCOs).
While most players were re-intermediating (becoming a technology-enabled broker) rather than dis-intermediating (removing the middle man), Dipankar and I thought “what if we could empower the broker and give him tools to supercharge his business”. We also knew the broker had deep relationships with fleet owners on the supply side and transport contractors on the demand side, operational expertise and knowledge of rates because most of them have been doing this for a long period of time.
We were also inspired by how real estate market in India panned out. The most successful internet companies were MagicBricks and 99Acres which did lead generation for real-estate brokers while charging them a subscription fee for access to demand from home buyers and renters. The only difference between logistics and real estate was the timeline of relationship – real estate is more transactional and a 1-off event, while transport is a regular affair.
What they did in India, Zillow was doing this at a much bigger scale in the US. We wanted to become the “Zillow for trucking industry in India” rather than the “Redfin” equivalent. (Side note: Zillow’s market cap then was 7 Billion Dollars and Redfin was valued at 1.25 Billion Dollars)
Describe your company in 50 characters or less.
We are Zillow for the freight trucking in India.
What is your company going to make?
We connect trusted commission agents and transport contractor on our platform where we empower them with market intelligence and build tools to help them improve their visibility and increase their business. We believe that the existing broker led model works and that there is a need to digitise this process to make it faster, more efficient and provide more revenue for owners and more value for their customers.
Who are our customers ?
Brokers (supply side) and transport contractor (demand side). It gets inverted in certain scenarios
Our thesis ?
Brokers and commission agents are an important stakeholder in the transportation industry today. Besides acting as a trusted third party between the transport contractor (from whom he gets regular business) and the fleet owner (to whom he gives regular business), he also facilitates paper work, keeps track of vehicle status & ETA and ensures delivery schedules are met because he has his skin in the game. He will earn commissions only when the balance 20% payment is received by the transport contractor from the consignor. In all, it takes the broker about 60-90 days from the date of vehicle placement to realise the revenue.