Panalpina's India strategy:

By R.N.Bhaskar

January 2008 (published in the LOG.India of the DVV Media Group - http://www.dvvmedia.com).

Panalpina's India strategy:

-- preparing for a 30% annual growth

Ask anyone on the streets about Panalpina and you are most likely to get a response, “Panalpina? What?? Who???”. But talk to freight-forwarders and they will perk up with respect and attentiveness. Nothing surprising here, because in the world of logistics and freight-forwarders, Panalpina represents the biggest player in air freight and ocean freight. During 2006, Panalpina continued to maintain its leading global position in both air- and ocean-freight. Revenues increased by 8.9% in air and 17.8% in ocean-freight, where the landmark volume of one million TEUs was passed for the first time. Supply chain management posted a growth of 4.7%. And it is impressive not merely in terms of size, but also in its pace of growth (please refer to table on Panalpina's vital statistics).

Table 1

Panalpina's vital statistics (in million CHF; 1 US$=1.15 CHF)

Note: The Ernst Gohner Foundation is Panalpina's major shareholder, with more than 40% of the equity. No other investors hold more than 5%. The company itself holds 0.71% as treasury shares in connection with current employee share-option programs.

Then why is Panalpina not a common household name? “We are not surprised,” says Kurt E Breinlinger, managing director - South Asia Area, Panalpina. “First, like some of the biggest freight-forwarders in the world, we are not asset heavy. Companies that own assets always grab headlines. In fact, we hardly own any assets. Secondly, we confine ourselves to industry customers, and not to the general public.”

A casual look around, and one realizes that most large freight-forwarders have conventionally kept to themselves. The real change began when players like Federal Express (Fedex), DHL, and UPS decided to deal with the shipment of envelopes and letters as well, and hence became retail players for general consumers as well. Some of them became generic names: “please Fedex (or DHL) this for me” is not too uncommon an expression. Otherwise, globally, players like Panalpina, UTI (a US company -- please see page ___ -- not to be confused with UTI, an investment company from India), Schenker and Kuehne + Nagel (K+N) both from Europe, are extremely well-known within industry circles, even if they are relatively unknown among common players.

And most major freight-forwarders have preferred not to own any assets. “Our business depends on the manner in which we manage supply chains, and the innovative solutions we provide.” adds Breinlinger. For Panalpina, moreover, not owning assets is a corporate philosophy. States, Rudolph Hug, chairman of the board of directors, Panalpina, “We have taken a conscious decision not to acquire our own warehouses or fleets of any kind. This gives the group the maximum possible independence and minimizes the risk that comes from having capital tied up, while at the same time maximizing flexibility. It also means that our customers can rely on the best local experts in any market and always benefit from the latest developments. . . Our core competency is the organization and supervision of integrated solutions. If no adequate local resources are available, we develop our own services that are tailor-made for the job at hand.”

The focus on being light on assets was further underscores when Panalpina got a new CEO in Monika Ribar. When asked to comment on her appointment, the outgoing chairman of the board of directors, Panalpina, Gerhard Fischer, stated, “ Monika Ribar was quite simply the best choice. She has been with the company for fifteen years, she's the right age, she has an excellent educational background and broad experience, and she has the stamina necessary to face the future with drive and resolution. She also shares my enthusiasm for the asset-light strategy, which we both spent many years developing and implementing. That makes Panalpina a pioneer in our industry, and I hope my successors will not deviate from such a successful course without extremely compelling reasons.”

As Panalpina's management constantly emphasises, “unlike its chief competitors, who use their own infrastructure to provide most of their contract logistics and are often forced into risky investments, Panalpina consciously minimizes the amount of resources tied up by its supply chain management operations. As lead logistics provider, it focuses on the service aspects of these complex contracts, delegating subtasks, wherever possible, to a select group of first-class supply partners. In successfully implementing this strategy, the Company draws on many years of experience in subcontractor management across all geographical regions. Not only does this flexible approach minimize capital-intensive investments in warehouses, truck fleets etc., it also affords Panalpina a competitive edge by enabling the Company to respond swiftly to market-driven shifts in demand.”

Fischer goes on to explain how during the past 20 years, “the driving forces behind our business have been the outsourcing of production processes and the development of new markets. Panalpina was one of those pioneering transport companies that systematically faced the challenges of globalized industries and services, seeking solutions to the problems emanating from by the increasingly complex goods and data flows of our globally active customers.” Not surprisingly, the company has continued to maintain its global leadership position in both air and ocean freight in 2006.

In fact, this is precisely what Panalpina has done in India as well. It has continued to repose tremendous confidence in the Indian market, has assiduously chased it, and has continued to grow it, convinced that this is where the future lies. It set up offices in this country almost nine years ago, certain even then, that this market was bound to grow. True, it recognises India as a challenging market for logistics companies, as it requires a high degree of innovation and flexibility. But it has seen the way China has moved (the liberalization of trade services in China paved the way for Panalpina to obtain the license for a wholly owned enterprise in Shanghai in 2004). China used to be where Breinlinger used to be based before he shifted to India to 'grow' this market as well, and he sees the same signs here: “India is today where China used to be nine years ago, but the lead is narrowing rapidly.”

And his efforts have paid off. For instance, even though his company ranks way down in the IATA listings of air-freight operators from India, Panalpina today accounts for one plane load of cargo taking off from Chennai to Africa every week. Since these Boeing 747 aircraft are chartered for the loads that Panalpina carries for its clients, they don't figure on IATA's data sheets. This development alone accounts for 52 planeloads of cargo a year! Not small for a market that is still nascent, though growing at a furious pace. More interestingly, Panalpina has just begun operating yet another chartered cargo flight per week – once again from Chennai to the African continent. If this additional air-freight business stabilises, Panalpina could see almost 100 planeloads of cargo taking off from India.

The Africa-China connection is important. After all, the last six years have seen Panalpina witness a growth in China's trading volume with Africa to hit a record USD 50 billion in 2006, a figure that its management believes will double by 2010. This now makes China the African continent's third-largest trading partner, after the USA and France, underlining the growing importance of this trade route. Panalpina's decades-old African branch network enables it to offer its Chinese customers a wide variety of attractive forwarding and logistics services, and the company has possibly begun using its expertise in these markets to grow the Indian market as well.

And who would these clients be? Breinlinger shakes his head chucklingly. “I am not in a position to disclose the names of clients or their business dealings.” All he will say, though, is that they are big players in the pharmaceutical sector, and from the oil and gas industry. Panalpina also has some of the top five telecom hardware players as its major customers.

Even globally, Panalpina has remained the market leader in the provision of freight forwarding services for the oil and gas industry globally and also maintains leading expertise and capabilities in the forwarding markets for the automotive, hi-tech, retail and fashion, and healthcare sectors. It operates through around 500 offices in 90 countries (that collectively represent over 90% of the global GDP, points out Panalpina's management), and has additional representation in 60 countries with partner companies. The company thus operates one of the largest networks in air and ocean freight forwarding globally. As a group, Panalpina's management lays stress on the fact that it utilizes its global network, best-in-class technology systems, well-tried relationships with transportation providers and complementary logistics services to assist over 100,000 customers with the management of their global supply chains. The group serves a large and diverse base of global and SME (small and mid-sized enterprises) customers, many of which operate in industries that the Group believes will experience above-average growth. And the reason for the focus on SME is quite evident – almost 80 per cent of Panalpina's net forwarding revenues are derived from SMEs, with global accounts accounting for around 20 per cent). This has also helped the company mitigate its exposure to any individual global account.

As for India, Breinlinger let out that air-freight accounts for almost half his business in India, while ocean-freight accounts for a lower 30%. “The rest of the money comes from special projects, including oil and gas” he adds. In a way, this business segment breakup is not too different from Panalpina's global operations, where air-freight continues to account for 48% of the company's net forwarding revenues (see table 2), though its Indian ocean-freight business is a bit lower than the global 37%. But that could be also because air-freight does offer several advantages in a country where India's sea-ports have often proved to create huge bottlenecks either in terms of clearance procedures, or in terms of providing rail and road linkages to the destination point.

Breinlinger himself acknowledges this indirectly. “We have been extremely innovative, especially where air-freight is concerned. That is why we are the best and the largest freight forwarder in the world in the air-freight business. We see globalisation pounding at India's door. And while we reckon that the freight-forwarding business for us will continue to grow at over 30% year on year, the last three months have seen demand soar so tremendously that our travel budget alone for India has jumped to seven digits in terms of Euros, not rupees.”

Table 2

Is India profitable? Breinlinger believes it is, and could become even more profitable. “But then, you cannot measure profits in just one way. Take air-freight charges between Mumbai and Fronkfurt where the average tariff per kilo per kilometer is just around Rs.42 while that between Mumbai and Lagos is anywhere between US$3 and 5”. But India is where the industry is moving to, and freight-forwarders will always go where industry goes”.

In fact, a careful reading of Panalpina's annual reports indicates that Asia has been more profitable than most regions. Its margin on revnues is close to 24 per cent compared with 21 per cent for Europe and 18% for North America (please see table 3). Where these countries appear to have done better than Asia is in respect of contribution of revenues and margins on a per employee basis. Average revenues per person have been higher in regions like North America and Europe, and so have contribution to gross profit margins.

Table 3

Panalpina's per employee contribution towards revenues and profit margins
Sector	Revenues*	Gross Profit margins* (% in brackets)	No. of employees	Avg. net revenue/ employee	Avg. GP/ employee
Europe/Africa/Middle East/CIS	4,416.69	917.80 (20.78)	7,629	0.58	0.12
North America	1,701.70	307.53 (18.07)	2,241	0.76	0.14
Central & South America	679.91	137.03 (20.15)	1,988	0.34	0.07
Asia Pacific	943.67	231.04 (24.48)	2,546	0.37	0.09
* Revenues are given in million CHF (one US$ = 1.15 CHF

And there could be several reasons why Breinlinger's optimism may be justified. Unlike the past where India was 'centralistic', the country has become more and more 'federalistic' during the past decade. More projects are being cleared at the state level, spurred on by local entrepreneurs. The sheer increase in the number of ports is likely to be followed by a dramatic increase in the number of airports as well (most states and entrepreneurs are taking a cue from the privately owned air-cargo hub that Gautam Adani has started at Mundra, making it the first port to have an air-cargo hub as well). Add to that the increase in urbanisation caused both by the new highways being constructed, and the consumer demand spurred on by the telecom and business sectors, and India could see an incredible and unprecedented surge in consumer and industrial demand followed by production centres. Housing, production centres and increased urban needs will provide the inevitable fillip to companies focussed on logistics.

Currently, most market watchers see more cargo coming into the country than going out. “But give it three more years, and we believe that the total volumes going out of India will exceed the volumes coming in,” says Breinlinger. His major concern is to find more people (“of the right kind, which is proving to be quite difficult”) to augment the 300 strong workforce he currently has in India. And he continues to talk to government officials to work out ways in which the regulatory infrastructure could become bit more trade friendly, so that the story of India Inc., could be visible even at the seaports and airports from where the goods flow into India and also at the checkposts on India's roadways that sometimes tend to slow down India's economic growth. “Quite often, government officials have very good reasons for doing things, everywhere. But if the trade is consulted, better ways could be found to do the same things, achieve the same goals and yet remain industry friendly,” says Breinlinger.

Currently, even though most logistics players believe that the cost of logistics in India is around 14-18% of GDP, Breinlinger believes that these costs could be a lot higher – closer to around 30% -- if the invisible costs of doing business in India were to be taken into account. “The free flow of supply-chain is not as free flowing as it should be,” he adds. But we believe that with better trade ties between India and China, the growth could be phenomenal. And if ties between India and Pakistan could improve the growth could be sensational.

But even if these two developments are slow in shaping up, Breinlinger isn't complaining. And while he will not disclose the amount of money he earns from doing business in and with India, he does admit that it is significantly important for headquarters to take a close look at this country's operations than it did a few years ago.

“We have been innovators, and have helped and benefitted from the growth of developing countries. India for us is not just another such country. It is significant. And we hope to keep it that way,” he adds.

Box item

Triptych

Panalpina has three main activities:

PanAir freight forwarding

Through its own offices and partner companies, the Panalpina Group provides air freight forwarding services in 150 countries. In 2006, air freight forwarding services accounted for approximately 48% of the Group's net revenue. The Group operates a system of hubs and gateways (e.g. Frankfurt, Luxembourg, Paris, Chicago, Huntsville, Los Angeles, Miami, Dubai, Macao and Singapore). Approximately 65% of the total air transport capacity utilized is contracted in advance; approximately one-tenth of that amount represents commitments valid for six to twelve months and approximately nine tenths represent commitments valid for less than six months. The other 35% of total air transport capacity is purchased in the spot market. This mix ensures a certain amount of controlled capacity at peak times, while providing the Group with the necessary flexibility to adapt capacities to actual demand.

Ocean freight forwarding

The Group itself provides ocean freight forwarding services in 90 countries and, through its partner companies, in an additional 60 countries. Ocean freight forwarding services accounted for 36.5% of the Group's net revenue in 2006. The Group has tailored its services to the transportation needs of its customers. For customers who transport full container loads, it offers FCL (full container load) services. In contrast, for customers who ship smaller consignments, the Group offers a competitively priced consolidation product with its LCL (less than container load) service. As customers can combine these products with standardized service options, such as door-to-door, door-to-port, port-to-door and port-to-port deliveries, the services the Group offers in the ocean-freight area can easily be tailored to each customer's needs.

Supply chain management

In 2006, supply chain management services accounted for 15.5% of the Group's net revenue. The Group offers a whole range of services and logistics solutions designed to improve its customers' supply chain management. For customers who run supply chain management in-house, the Group offers consulting services related to both the planning of logistics processes and the selection and management of logistics service suppliers. For clients who outsource supply chain management, the Group also provides warehousing and distribution services, including order-fulfillment, invoicing and reporting. In this way, the Group combines its traditional forwarding services with logistics services tailored to customers' needs, offering customers complete supply chain solutions.