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India is set to become the 5th largest global economy this year, and the second largest APAC economy by 2025, overtaking Japan. One central part to India’s economy is logistics and warehousing; the cost of which was estimated to account for up to 17% of India’s GDP. As a result of India’s growing economy and economic reform, expanding middle-class and surge of eCommerce, the warehouse automation industry in the country could be set for rapid growth.
In April 2019, Daifuku acquired local material handling systems provider, Vega Conveyors, to strengthen its local Factory Automation and Warehouse Automation (FA&WA) division. Bastian Solutions, another global warehouse automation systems provider, also has a footprint in India. Furthermore, several start-ups have emerged from India including Addverb Technologies, Falcon Autotech and most notably, GreyOrange.
What’s driving India’s booming logistics industry?
Although the country and economy remain somewhat fragmented and ‘disorganised’, and labor rates are extremely low, several drivers are in place that could create a substantial warehouse automation market in India.
According to a report from the Retail Association of India, the eCommerce market in India will surge from $24bn in 2017 to $84bn in 2021, making it the 4th largest online market in the world. To support this massive growth, online (and offline) retailers are investing in logistics infrastructure to better service the demand:
Goods and services tax (GST)
Described as the most important economic reform India has introduced since its independence, the Goods and Service Tax (GST) provides a simplified single tax regime making it easier to transport goods across state borders. One consequence of this tax reform could be the consolidation of smaller warehouses to create larger, centralised distribution and fulfilment centers which service bigger regions. This structural shift could promote the uptake of more automation solutions, both because of the increase in greenfield sites, and also the scale to leverage costly automation equipment.
Analogous to China’s Made in China 2025 initiative, India has its own initiative designed to boost its domestic manufacturing base called ‘Make-in-India’. Launched in 2014, the initiative aims to increase manufacturing’s contribution to national GDP from its current 15% up to 25%, transforming India into a global manufacturing hub. Having a strong domestic manufacturing base required sophisticated supply chains and advanced logistical networks. The policy could also lead to a flock of new domestic warehouse automation vendors and we’re already seeing a slew of companies emerge.
What does this mean for the Indian warehouse automation market?
Whilst a strong warehousing and logistics industry forms the foundation from which the warehouse automation market can flourish, several key factors could limit the extent to which warehouses adopt automated technologies. Firstly, with the unemployment rate among young people in urban areas reaching 23.7% in December 2018, the warehousing industry will face no shortages of staff. Furthermore, very low wages mean that the RoI for automation equipment is much harder to achieve than an equivalent project in the US which has far higher wages and a record low unemployment rate.
In addition, the operating conditions present a new set of challenges for the automation equipment market. High levels of dust and particulate matter coupled with regular electricity supply outages can often lead to equipment failure and major disruptions to business operations. Automation equipment in India will therefore have to be able to cope with the harsh operating conditions.
Whilst the Indian economy has been one of the fastest growing economies in the world, there has been some cause for concern as India’s GDP grew ‘just’ 5.8% year-on-year in the first three months of 2019; the slowest it’s grown in 20 quarters. Indian businesses have been urging president Modi to adopt ‘faster and bolder’ reforms of India’s land, labour and capital markets to match the growing population and to limit unemployment.
SMEs could drive adoption
Whilst it’s clear that the Indian warehouse automation market faces strong headwinds, one particular group of companies could drive investments. As well as the larger retailers looking to automate their facilities, SMEs may try to gain a competitive advantage and invest early in automation as they build out their infrastructure. One example is BigBasket – an online grocery start-up and India’s latest unicorn – which is investing heavily in its warehousing and logistics network as well as automation technologies. As SMEs grow and look to compete with established players in the market, automation could be a means to increase their productivity and competitiveness. Incumbent players have been slower to adopt automation technologies and the abundance of cheap labour has given them little incentive to do so. That being said, if SMEs are able to successfully disrupt the market with the competitive advantage that automation offers then larger companies will likely follow suit.
Although fully automated solutions may be a few years away in India, the use of conveyors and other simple mechanical equipment is gaining traction. Structural changes such as India’s economic tax reforms and the rise of e-commerce have the potential to drive the warehouse automation market, however, cheap and abundant labour and harsh operating conditions have prevented large investments thus far. Further economic reform to reduce unemployment and increase wages could be the necessary catalyst for the warehouse automation market to truly take off.
Contact Rueben Scriven at Rueben.Scriven@interactanalysis.com to learn more about the Warehouse Automation Research.