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
A.T. Kearney / Strategic Implications of GST on Automotive Industry 3
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
A.T. Kearney / Strategic Implications of GST on Automotive Industry 4
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
A.T. Kearney / Strategic Implications of GST on Automotive Industry 5
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
A.T. Kearney / Strategic Implications of GST on Automotive Industry 6
• 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
A.T. Kearney / Strategic Implications of GST on Automotive Industry 7
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
A.T. Kearney / Strategic Implications of GST on Automotive Industry 8
• 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%
A.T. Kearney / Strategic Implications of GST on Automotive Industry 9
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
A.T. Kearney / Strategic Implications of GST on Automotive Industry 10
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
A.T. Kearney / Strategic Implications of GST on Automotive Industry 11
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
A.T. Kearney / Strategic Implications of GST on Automotive Industry 12
…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
A.T. Kearney / Strategic Implications of GST on Automotive Industry 13
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
A.T. Kearney / Strategic Implications of GST on Automotive Industry 14
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
A.T. Kearney / Strategic Implications of GST on Automotive Industry 15
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
A.T. Kearney / Strategic Implications of GST on Automotive Industry 16
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
A.T. Kearney / Strategic Implications of GST on Automotive Industry 17
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
A.T. Kearney / Strategic Implications of GST on Automotive Industry 18
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
A.T. Kearney / Strategic Implications of GST on Automotive Industry 19
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
A.T. Kearney / Strategic Implications of GST on Automotive Industry 20
Although there is low clarity on actual GST directive, key features of GST include…(2/4)
Structure
Expected rates
Input credit mechanism
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
Source: Empowered Committee of State Finance Ministers announcements, A.T. Kearney
GST: Key Features
A.T. Kearney / Strategic Implications of GST on Automotive Industry 21
Although there is low clarity on actual GST directive, key features of GST include…(3/4)
Input credit mechanism
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
Source: Empowered Committee of State Finance Ministers announcements, A.T. Kearney
GST: Key Features
A.T. Kearney / Strategic Implications of GST on Automotive Industry 22
Although there is low clarity on actual GST directive, key features of GST include…(4/4)
Dual Nature
Simple tiered rates
Input credit mechanism
Imports and exports
Source: Empowered Committee of State Finance Ministers announcements, A.T. Kearney
• 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
A.T. Kearney / Strategic Implications of GST on Automotive Industry 23
• 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
A.T. Kearney / Strategic Implications of GST on Automotive Industry 25
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
A.T. Kearney / Strategic Implications of GST on Automotive Industry 26
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
A.T. Kearney / Strategic Implications of GST on Automotive Industry 27
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
A.T. Kearney / Strategic Implications of GST on Automotive Industry 28
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
A.T. Kearney / Strategic Implications of GST on Automotive Industry 29
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
A.T. Kearney / Strategic Implications of GST on Automotive Industry 30
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
A.T. Kearney / Strategic Implications of GST on Automotive Industry 31
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
A.T. Kearney / Strategic Implications of GST on Automotive Industry 32
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
A.T. Kearney / Strategic Implications of GST on Automotive Industry 33
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
A.T. Kearney / Strategic Implications of GST on Automotive Industry 34
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
A.T. Kearney / Strategic Implications of GST on Automotive Industry 35
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
A.T. Kearney / Strategic Implications of GST on Automotive Industry 36
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
A.T. Kearney / Strategic Implications of GST on Automotive Industry 37
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
A.T. Kearney / Strategic Implications of GST on Automotive Industry 38
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