“One India” – A truly Borderless Paradigm · Supply Chain infrastructure will improve – faster, multi-modal and better 3 Future supply chain Infrastructure in India will be…

July 15, 2015

“One India” – A truly Borderless Paradigm -Strategic Implications of GST on Supply Chain

Ram Kidambi, Automotive, Transportation and Infrastructure (ATI) Practice A. T. Kearney Mumbai

SIAM Conference

A.T. Kearney / Strategic Implications of GST on Automotive Industry 2

Outlook: Supply Chain 2025

Synopsis: Key features of GST

Perspectives: Impact of GST on Automotive Supply Chain

Going forward: Key challenges & long-term trends

Contents

Contents


6 mega trends will shape the supply chain of the future in India

Source: EIU, A.T. Kearney analysis

India in 2025

Supply Chain 2025

Economy

Global Trade

Mega cities

3.5x

5.3x

4.5x

More Mega Cities 1

Better Regulatory

Climate

Improved Supply

Chain Infrastructure

Stronger Global

Connect

Proliferation of

Segments

Affordable

and Accessible

Technologies

2

4

5

6

3


Nearly 18 Indian cities (from four today1) will be Mega Demand Centers

1

Strong growth of ‘mega’ demand

centers...

‘Mega’ Demand centres

(City GDP > USD 20 Bn)

4

~4.5x

~18

Today 2025P

~18 “Chennai’s”

Current ‘mega’ demand centres will

grow ~5 times their current size

4.8X

Mu

mb

ai

(2025P

)

~370-390

Sh

an

gh

ai

(20

13

)

~350

Mu

mb

ai

(20

13

)

~80

5.2X

Delh

i (2

025P

)

~300-320

Beijin

g

(20

13

)

~320

~60

Delh

i (2

01

3)

Ko

lkata

(2

025P

)

5.0X

Gu

an

gzh

ou

(2

01

3)

~48

~250

Ko

lka

ta

(20

13

)

~230-250

1. Figures represent year 2013’s statistics Sources: RK Swamy BBDO, Planning Commission reports, State Government websites, Press search, A.T. Kearney

City GDP

(USD Bn)

Supply Chain 2025: Mega Cities


Organizations will have to re-think their Mega Centre supply chain model

1

Supply Chain Today Supply Chain

Tomorrow Typical Considerations

Hyper / Mega

Centres

Urban

Semi-Urban

Rural – Type A

…

India

Supply

Chain

2025

• High-rise DCs due to land

shortage

• Smaller trucks, common

carrier delivery to deal with

traffic congestion

• Use of electric/ hybrid

vehicles to meet changing

pollution standards

City/Urban

Rural

India

Supply

Chain

Today

Supply Chain 2025: Mega Cities


• More SKUs/Product Options

Increasing Product

Proliferation

Emergence of new

Channels

Consumer, Channel and Product segments will proliferate 2

Ch

ina

To

da

y

~610

Ind

ia 2

02

5P

600

Bra

zil

To

da

y

~250

Ind

ia T

od

ay

~170

Ind

ia 2

00

8

~100

8%

22%

3%

2025P

25%

Today1’s Est.

8% <1%

Organized Retail Online Retail

• Higher consumer

awareness – customized

needs / preferences

• Increasing dispersion in

lifestyle choices, value

system

• Growth of niche segments

like Time-Starved, DINK,

Rurban, Mass premium

Increasing Consumer

Segmentation

e.g. Car Models

Share in Indian retail market

(%)

Supply Chain 2025: Segment Proliferation

1. Figures represent year 2013’s statistics


Customization across the value chain

Deliver Make Source Design

Omni-Channel

servicing

More changeovers

Mix of focused &

flexible lines

Late stage

Customization

Collaborate across value chains

Flexible & agile

Sourcing

Reduce ‘Below the

Skin’ complexity

Handle more

transitions

Shorter, frequent

NPI cycle

Use of

Intermediaries Shelf Ready

Packing

Supply chains will need to handle higher variety and shorter product life cycle – requiring changes across the supply chain

2

Supply Chain 2025: Segment Proliferation


• Standardization of Pallets,

Trucks

• Higher Containerization

• Reliability of modes

• Automated Material

Handling

Better… Wider… Faster…

Supply Chain infrastructure will improve – faster, multi-modal and better

3

Future supply chain Infrastructure in India will be…

Sources: Twelfth Five Year Plan, Dedicated Freight Corridor Corporation of India, United Nations Environment

Programme , US Department of Transportation, Press search, A.T. Kearney analysis

Supply Chain 2025: Infrastructure

Truck Train

IN – ‘12 35 25

CN – ‘12 50 40-45

US – ‘12 75 45

IN – ‘25 ? ?

Avg. Speed

(KMPH)

Share of Rail in Indian Freight Traffic (% NTKM)

33%

2025P 2012 2008

38% 36%

2001

40%

1991

60%


Improved infrastructure will drive scale and encourage consolidation

3

Scale

Handsets

Cement

FMCG Durable

Pharma

Industrials

Apparel

Co

ns

oli

da

ted

E

co

sys

tem

D

isp

ers

ed

Small Large

Manufacturing Landscape – Illustration Case Example: China – Bonded

Logistics Parks

• Easy access to expressway,

airport and port

• Express customs clearance,

FTZs

• Consolidation with other cargo

for shipment

Supply Chain 2025: Infrastructure


Information explosion: Internet, Social

Media, Mobile, Big Data in India

Enhancing scale will make SC

technologies affordable

2020P

0.4 $/GB

Current

1.6 $/GB

1.0 $/tag

Current

0.1 $/tag

2020P

Cost of Data Storage down by 75% globally

Cost of technologies like RFID down by 90% in India

Internet

Social media

Big data

Mobile

1. 1 Petabyte = 1015 Bytes Sources: Cisco VNI, International Telecommunication Union, Press search, A.T. Kearney analysis

2025P

1,200 – 1,500 mn

2014

1,105 mn

500-600 mn

100 mn

750-800 mn 270 mn

40,000 petabytes

2.5-3 mn petabytes

Innovations in technology and information explosion will continue

4

Supply Chain 2025: Technology


Decisions will be supported by superior visualization and analytics

4

Typical applications Key Imperatives for Organization

Develop data capture &

visualization tools

Develop process &

analytical capabilities

Big Data & MPP driven inventory

reduction

Collaborative optimization based

sourcing

Real time information inputs for

improved service level

Supply Chain 2025: Technology


…and a larger number of

FTAs(1)

…with a higher share of

trade in GDP…

India will have a larger

share of global trade…

Supply Chain 2025: Global Connect

India will be more connected globally, making organizations prepare for multi-country Supply Chain challenges

5

1. FTA is free trade agreement 2. Based on ongoing discussions Sources: EIU, Department of Commerce - GoI, A.T. Kearney analysis

Global Trade – Size & Share

(USD Bn., %)

India – Import & Export

(% of GDP)

Number of countries India has

Trade Agreements with

5,670

1,065

4,475

China Today

India

Today

5.3x

India

2025P

2.4% 10% 6%

2001

12%

26% 13%

2025P

40%

2014

24%

41% Export Import

116

13

Reduced

Duty

50(2)

Zero Duty

2025(P) Today


India will be more connected globally, making organizations prepare for multi-country Supply Chain challenges

5

Other implications Changing Manufacturing Footprint

• Traceability – across

product life cycle

• Quality and policy

compliance

• Risk management –

supply chain disruptions

Now 2025: India – a manufacturing hub?

Supply Chain 2025: Global Connect


Regulatory changes are certain to happen, however timelines remain a question

Changing Regulations

GST

Sustainability

/ Activism

Fiscal

Incentives

• Incentives ending in existing areas – new areas

may come up (e.g. Seemandhra?)

• Free trade zones for warehousing / manufacturing

etc.

• GST – potential expectation by April 2016

• Revamped distribution footprint, evolved logistics,

tailored after-market

• Rising consumer activism may drive regulations e.g.

water conservation, recyclable materials, etc.

• Pro-active sustainability efforts by companies / self-

governance

6

Supply Chain 2025: Regulatory

Focus of today’s discussion






Contents

Contents


In India, the evolution of indirect tax reforms started couple of decades ago

Introductory Reforms 2nd Level Reforms GST Introduction

Source: CBEC, Finance Ministry, Empowered Committee reports, A.T. Kearney

Evolution of Key Indirect Tax Reforms in India

2000 2004 2005 2007 2008

MODVAT

Sales VAT

CENVAT

1986

• VAT introduced

• Selected commodities covered

• Reformed to CENVAT

• Included all commodities

• VAT (in lieu of Sales tax) introduced in some states

• 550 commodities covered

CST Phase-out

• CST reduced from 4 to 2% (2007-09)

• Was proposed to be phased out by 2010

1999 2010

GST till 2011

• 2009: Empowered Committee issues 1st Discussion Paper

• 13th Finance Commission Task Force submits report

• Finance Minister commits to introduce GST in Apr’11

2009 2011

• Constitutional amendment

• Service tax added to CENVAT

Service Tax

• Sales tax structure harmonized

• Uniform floor rates initiated

Preparation for VAT

Sta

te

2014

Cen

tral

• GST bill tabled in Lok Sabha, likely by Apr’16

• Inclusion of Petroleum products, alcohol & tobacco still under discussion

• May’15: Centre announces possible implementation from Jan’16

GST today

2015

GST: Journey so far


Comprehensive wider coverage of set off

Ease by giving equal treatment to goods & services

Removal of tax cascading

Revenue gain for Centre and State

With GST ..

India’s taxation structure, however, has several shortcomings that can be addressed by GST

•Cascading effects due to multiplicity of taxes

•VAT credit not available to service providers

•Burden of CST on interstate transactions

•Cumbersome documentation requirements

Shortcomings of existing tax regime in India

GST: Shortcomings addressed


Current GST proposal clearly defines Central and State boundaries – however, is subject to revision

Excise Duties including the

additional excise duties

Excise duty under MTPA

CST

Service tax

Cesses and surcharges

levied by Union

VAT/ Sales tax

Entry tax not in lieu of octroi

Entertainment tax (unless

levied by the local bodies)

Luxury tax

Cesses & surcharges levied

by States, related to supply

of goods & services

Subsumation

of taxes

Central GST State GST

Additional duties of customs

(ie CVD and ACD)

Taxes on lottery, betting and

gambling

• Basic Customs duty, Anti Dumping Duty, Safeguard Duty expected to continue

• Petroleum products to be subsumed in phased manner

GST: Key Features


Although there is low clarity on actual GST directive, key features of GST include…(1/4)

Structure

Expected rates

Input credit mechanism

Imports and exports

Dual Structure:

Central GST (CGST) and State GST (SGST)

Import and inter-state transactions subject to Integrated GST (‘IGST’)

Every transaction of ‘Supply’ of goods / services to attract tax (except exempted goods)

Destination based consumption tax

Source: Empowered Committee of State Finance Ministers announcements, A.T. Kearney

GST: Key Features



Structure

Expected rates


Imports and exports

• Likely two-rate structure (lower rate for necessary items, standard rate for others)

• Special rate for precious metals and exempted items

• Exempted list under VAT regime may be retained in initial years

• GST rates yet to be finalized - Combined CGST and SGST rate expected to be 20 – 27%

• Additional 1% on inter-state sales to be paid in originating state in initial years


GST: Key Features




Imports and exports

Structure

Expected rates

More comprehensive and wider coverage of input tax set-off and service tax set-off

Taxpayer to track input credits and utilization separately for IGST, CGST and SGST

Cross utilization of credit between goods and services would be allowed


GST: Key Features



Dual Nature

Simple tiered rates


Imports and exports


• Both CGST and SGST to levied on import of goods and services (SGST in state of consumption)

• Full set-off to be available on GST paid on import

• Comprehensive setoff of input goods and services resulting in reduced cost of locally manufactured goods and services

• Increased competitiveness of Indian goods and services in the international market

GST: Key Features


• States want commodities like Petroleum and Alcohol outside

purview of GST

• Taxation rates need to be aligned to make states revenue neutral

• Minimum business turnover threshold for GST inclusion under

discussion

• Constitution of GST council, dispute settlement & compensation

mechanism need to be finalized (joint Working Group may

address disputes & advance ruling)

While the finer details of the GST regime are being finalized; roll out is expected by early 2016

Goods and Services

Tax (GST)

GST seeks to replace a multitude of indirect taxes with one,

removing barriers to movement of goods and services across state

boundaries and turning the country into a single market

Key contentions

GST: Supply Chain Trends and Implications

? Roll out of GST

expected by early 2016






Contents

Contents


Strategic implications will emerge across the value chain

Tailored OEM supply chains

Revamped logistics play

Reduced inbound logistics cost

Cash flow management for exporters

Tailored after market supply chains

Alteration in sourcing models with ease of expansion of vendor base, where needed

Shift from tax arbitrage to operational efficiency; stock transfer to pre-determined order play

Shift from multiple levies to borderless one market with improved lead times Shift from ad-hoc need-based footprint to scale driven warehousing

Shift from export exemption based to simplified refund regime Competitive advantage to Indian manufactured products

Shift to revamped distribution to ensure higher availability & service levels

Re-aligned footprint

Manufacturing units will consolidate once excise benefits are removed

6

1

2

4

3

Impact of GST on automotive supply chain

5


Front end stocking is likely to witness consolidation - ‘Hub and Spoke’ model with large consolidated stockyards likely

1a

• Major automotive distribution hubs

may emerge in close proximity to

demand clusters.

• Hubs are likely to stabilize at zonal

level serving multiple states. Potential

hubs include – Faridabad, Indore,

Nagpur, Kolkata, and Bangalore

• Large freight corridors likely to emerge

between these cites

• Likely emergence of multi-modal

transit points

• Huge cross docks catering to a

number of sectors


Dealer 3, state A

Dealer 1, state B Dealer 2, state B

Plant in state A

Tailored dispatch models are likely to emerge 1b

Tailored dispatch models can emerge due to pre-determined orders & elimination of

stock transfer

Milk runs to small & medium dealers

Direct Dispatch to large dealerships

Plant in state A

Dealer 3, state C

Dealer 1, state A Dealer 2, state B

Invoicing at dealership


Furthermore, there is potential for large multi-user stockyards 1c

Collaborative multi-user stockyards may emerge at zonal level

•Primary stocking points (close to demand

clusters) can potentially evolve into multi-user

stockyards

•Emergence of Innovative pricing models

•3PL leadership - increase in VAS


Logistics industry will benefit from the transition to evolved supply chain models, but will need to change their strategy

Impact

• Time spent by trucks at administrative boundaries for tax clearances is likely to go down by 50-60% resulting in an increase in the average km covered by inventory on wheels per day,

• Improved lead times & lower inventory

• Consolidation of supply & storage points, emergence of well-defined freight routes, and investment in larger warehouses and stocking facilities is likely to emerge

Key Scenarios

2

Large Scale Warehouse Assets

Inventory Reduction

Technology Enablement

Reduction in OTD


Inbound automotive supply chain will see marginally lower logistics costs

3

Suppliers supplying JIT parts and large volume to weight trucks will continue to be based close to manufacturing plants

Production involving setting up mega-capacity facilities will continue close to RM base

Suppliers of Technology driven, high value add proprietary components will continue out of current base

Quality of incoming parts and cost considerations (material & logistics) will continue to be the primary drivers of supplier selection

What will remain….. …..what may change

• Increased cross state

sourcing on a selective

basis specially from

neighboring/ adjacent

states

• Larger warehouses

catering to manufacturing

units across neighboring

states.

• Milk-run loops can also

lead to lower inventory

levels at depots &

warehouses

Potential sourcing hub across states


Manufacturer exempted tax on goods for export

Exporters will need to manage cash flows 4

Key changes in export taxation

Exemption Based Tax

Regime

Refund Based Tax Regime

Manufacturer/ exporter will be refunded tax on

export

GST will simplify the tax structure, reduce complexity & make it easier to do business for export focused manufacturing hubs

Overall cost benefits may make products manufactured in India more competitive in

international markets

Organizations, particularly merchant exporters, will have to plan cash flows

better


Aftermarket storage & distribution network will reap the benefits 5

Key challenges in After-market

SKU Complexity

• Evolution of CDC/RDC’s to cater to large regions . Potentially closer to consumption centers

• Consignment stock transfer models will evolve towards tailored supply chain models - large dealers/distributors supplied directly potentially; rest through optimized milk runs

• Consolidation of stock-points will necessitate investments in technology and IT enablement of warehouses

Sophisticated Storage & Warehousing

Retail Penetration & Availability

Fu

ture

Tre

nd

s


Operating efficiency, rather than taxation, will drive manufacturing location

Factors determining location of new manufacturing units:

• Proximity to demand centers

• Availability of resources

• Warehousing & Transportation

• Consolidation of suppliers

• Consolidation of manufacturing capacity

Post-GST Pre-GST

Manufacturing units

Gujarat,

Maharashtra are

raw material

supply regions

Manufacturing locations

like Baddi have thrived

due to state exemptions

on excise etc.

Impact on investments in

Baddi

Green-field locations

to move towards

supply & demand

clusters

Illustration

6

Suppliers






Contents

Contents


Automotive players will need well-

thought transition planning

As the industry plans its transition to the new tax regime, organizations will need to face multiple challenges

… difficult to anticipate intricacies of the new

taxation scheme fully

Apprehensions about seamless implementation

… potential inventory pile up

… challenges with capacity scale up

… delay in remapping footprint

… a negative impact on cash flows

Low clarity of GST directives

… ‘red tape’ remains a major concern

Turbulent transition period

Industry’s concerns …

Key Challenges


Changing trends will sketch the future of automotive industry

… shift towards ‘made-to-order’ vehicles, just as in developed

geographies like Europe

… end to end tracking of customers’ orders, thanks to CRM

technology & pre-determined orders, taking customer

relationship to a new level

… consolidating sourcing and distribution networks ….

even manufacturing footprint in the long run

… reduction in channel inventory resulting in better working

capital management

Automotive industry could see …

Long Term Trends


Americas Atlanta

Calgary

Chicago

Dallas

Detroit

Houston

Mexico City

New York

San Francisco

São Paolo

Toronto

Washington, D.C.

Asia Pacific Bangkok

Beijing

Hong Kong

Jakarta

Kuala Lumpur

Melbourne

Mumbai

New Delhi

Seoul

Shanghai

Singapore

Sydney

Tokyo

Europe Amsterdam

Berlin

Brussels

Bucharest

Budapest

Copenhagen

Düsseldorf

Frankfurt

Helsinki

Istanbul

Kiev

Lisbon

Ljubljana

London

Madrid

Milan

Moscow

Munich

Oslo

Paris

Prague

Rome

Stockholm

Stuttgart

Vienna

Warsaw

Zurich

Middle East

and Africa

Abu Dhabi

Dubai

Johannesburg

Manama Riyadh

Ram Kidambi

A.T. Kearney Limited,

Future Capital House, 1st Floor

Peninsula Corporate Park

Lower Parel

Mumbai 400 013

India

Phone: +91 22 4090700

Mobile: +91 98334 18799

Fax: +91 22 4090725

www.atkearney.com

Documents

“One India” – A truly Borderless Paradigm · Supply Chain infrastructure will improve – faster, multi-modal and better 3 Future supply chain Infrastructure in India will be…