Pestel and Porter Five Force Analysis of Container Line Shipping Industry in India Essay Example For Students

Pestel and Porter Five Force Analysis of Container Line Shipping Industry in India Essay Analysis of â€Å"Shipping Industry† in India Business Group: Container Line Compiled by: Ashok Lalwani Introduction: There are many factors which directly or indirectly affect the present day businesses like government policies, regulations, laws, human rights, competition, technology, international organisations, world trade bodies, child labour, minimum wage, pollution, accidents, risks, violence, security, labour, supplies etc. Therefore it becomes important for every business to determine these various factors and plan their strategies accordingly to survive against all such odds. But practically it is virtually impossible to consider all such individual factors and therefore specific models exists like PESTEL and Porter five forces which are applied available to determine the external and internal environments factors affecting the shipping industry in India, the same are applied here. Overall shipping industry in India is very large in size and volume, therefore â€Å"Container Line† business group has been taken for discussion under this study. Container line business involves hiring, transportation, repairs and movement of containers by exporters, trader or agents for transportation of goods to any foreign destination against agreed freight rates. The reason for choosing this industry as part of study is due to enormous support being given by government of India to promote foreign trade for the economic development, as well as my personal experience of 5 years in shipping industry under AP Moller Maersk Group gave me thrust to explore more about this industry. First we will analyse the overall industry using PESTEL analysis which refers to factors like Political, Economic, Social, Technological, Environmental and Legal factors than; * We will analyse the companies working under this industry using Porter’s Five Forces model which are threat of new entrant, threat of substitution, power of buyers, power of sellers and competitive rivalry. First three main competitors of this industry according to market share are Mae rsk Group (21%), Mediterranean Shipping Company (14%) and American Presidential Lines (9%). PESTEL – Political Factors: Shipping industry in India is administered by central government through â€Å"Ministry of Shipping† with the sole responsibility to formulate policies, programmes and their implementation. Each port is governed under Indian Ports Act’ 1980 and Major Port Trust Act’ 1963 and administered individually by board of trustees under direct orders from central government. Political factors are important here due to immense involvement of government in this industry. Appointment of Custom House Agents: â€Å"Customs House Agent  (CHA)  is a person who is licensed to act as an agent for transaction of any business relating to the entry or departure of conveyances or the import or export of goods at any Customs station†. These agents are governed by â€Å"Customs House Agents Licensing Regulations, 1984† which involve responsibilities like filing bills of entry, shipping bills, submitting documents, helping in examination of goods, payment of duty on behalf of principal, storage and movement of goods. They act as an intermediary between importer, exporter, clearing agent and custom house due to high involvement and technical nature of work involved in connection with clearance of cargo. These agents are appointed after clearing minimum laid criteria’s like minimum qualification as graduation, practical working experience in customs for 3 years, holder of pass in Form G as employee of company, reliability of applicant, financial soundness and completion of oral and written examination with maximum 3 attempts. Infrastructure Development: Maritime Transport is a critical infrastructure for the social and economic development of a country. It influences the pace, structure and pattern of development. 90% of India foreign trade is carried out by sea, in contrast its existing port infrastructure is insufficient to handle trade effectively. In recent years, government has started promoting investments into infrastructure projects based on PPP model with allowance of upto 100% FDI and in return provides incentives of upto 100% tax exemption for maximum 10 years. As a result significant investments have been made by foreign players like Maersk, PO Ports, Dubai Ports International and PSA Singapore in port development and operation activities. Anti Sea Piracy: Government is actively involved in curbing of sea piracy in Gulf of Aden off Somalia coast. Sea piracy has been a big problem in recent time for this industry specially trade and transit between India and counties like Sudan, Saudi Arabia, Djibouti, Egypt and Ethiopia. To protect vessels and crew from such pirate attacks, India has deployed its naval warship in Gulf of Aden since 2008 under informal Contact Group on Piracy off the Coast of Somalia (CGPCS), which is a broad based policy oriented group comprising 22 countries for securing Somalia coast from pirates. Around 21 Indian vessels are hijacked since 2007 till date but none of the seafarers or vessels have been held hostage due to proactive and prompt measures by government. Safeguarding Domestic Market: With enaction of anti dumping and anti subsidy measures in line with WTO agreement, government seek to provide necessary relief and protection to domestic companies against dumping of goods and articles at cheaper rates by exporting companies of foreign countries. India has been a victim since long against such unfair practices in items like import of chemicals, petrochemicals, pharmaceuticals, textile, steel and other consumer products which were dumped at cheaper rates than offered by Indian companies. Under these anti dumping measures government charges an additional duty on such cheap imported products making it equivalent to price offered by domestic market. Promoting Exports: To overcome shortcomings on account of multiple controls and clearances; absence of world-class infrastructure, unstable fiscal regime and with a view to attract larger foreign investments in India, the Special Economic Zones (SEZs) Policy was announced in April 2000. This policy intends to make SEZs an engine for economic growth, employment opportunities, attract foreign direct investment, infrastructure development with attractive incentives like exemption from central and state taxes, 100% income tax exemption for 5 years, duty free imports, exemption from custom nd excise duties etc. As a result there are presently 105 SEZ units operational in India with continuous growth rate of more than 50% annually. Even during the period of recession when global markets were struggling Indian SEZs were booming with growth rate of 93% and 50% in fiscal year 2007-2008 and 2008-2009 respectively. PESTEL – Economic Factors: Economic factors are as important as political factors which concern not only this industry but every industry in each and every corner of the world. Change in economic conditions at domestic or at international level largely affects the functioning of every industry; following are some of the economic factors which may affect shipping industry. Exchange Rates are required for determining custom and excise duties, valuation of import and export goods, payment of duties etc. These rates are not uniform and fluctuate daily in line with demand-supply factors prevailing in international markets. With respect to shipping industry, government of India informs public involved in shipping trade about uniform monthly exchange rates, through monthly notification. This ensures that dealing and communication between trade bodies and government agencies, in respect of duties and value of goods is uniformed across all ports and across all custom houses throughout India, instead of different rates and different value each day. Rationalisation Measures: Government is promoting trade of medical equipments, construction machineries, renewable sources of energy, bio degradable products, solar energy, export of species, tea/ coffee plantation and agricultural machinery etc with incentives like minimal or zero custom duty. In contrast government demotes import of products like petrol, diesel, precious metals which add no value to the economy as a whole. These rationalisation measures are untaken to improve infrastructure, quality of life of people, better facilities and environment friendly products. Push ‘n’ Pull Factors: Due to global recession since last couple of years liquidity of countries around the world has affected badly and as a result many governments have increased the rates on fixed and saving deposits to pull out money from its people to fund the deficit. This tep was successful to some extent which was further boosted by relaxation in income tax slabs. For i. e. individual in India earning 5 lacs (0. 5 million) or more was paying 30% tax under previous rules which is now decreased to 20% under â€Å"Union Budget 2010-11†. This means saving of Rs 50,000 by way of tax annually which has indirectly increased the buying power of that individual. Tax rebates are also intr oduced if the investment is made in national health care, medical and infrastructure projects. These new procedures and relaxations have provided relief to around 60% of taxpayers by way of savings in taxes. Inflation: Rate of inflation reflects changes in demand and supply conditions in economy. Inflation management therefore involve controlling demand and supply factors by various monetary and fiscal measures respectively. Before global recession wholesale price index (WPI) inflation was high due to increase in commodity and fuel prices, with subsequent y decreased due to meltdown in global economy which has resulted in sharp decline of commodity prices. During the period 2008-09 inflation rate in India was 10. 20% which has reached to 1. 63% in 2009-10 due to above factors. As regards food inflation, the continuous increase in inflation rate from start of 2008-09 to 2009-10 was majorly due to unfavourable monsoon in India which was worst since 1972. Food inflation has reached double digits because of shortage in supply of wheat, rice, pulses, sugar, onions and potatoes. Government initiated several anti-inflationary measures like exempting duties on import of rice, wheat, pulses, edible oils to bring more imports to country and also allowing distribution of rice and wheat to consumers through public distribution centres (PDS). Futures trading, exports have also been suspended for rice, wheat and onions to control increasing prices. However inflation volatility in India was much better and stagnant compared to other countries of world. Below figure shows comparison of inflation between World food and WPI-based domestic food inflation in international markets and in India. Source: India Economic Survey 2009-2010, chapter -4, pp 70. PESTEL – Socio-Cultural Factors: Quick Facts: Indian civilisation can be traced back to 3400 BC during the development of Indus Valley Civilisation.   India lies to the north of the equator between 6 °44 and 35 °30 north latitude  and 68 °7 and 97 °25 east longitude. Indias coast is 7,517  kilometres long which consists of 43% sandy beaches, 11% rocky coast including cliffs, and 46% mudflats  or marshy coast India has a GDP of over USD 1. 367 trillion, the 11th largest in the world. It is the 4th largest in the world in terms of purchasing power parity. Its per capita income is USD 1124, 139th in the world. Population in India is second highest in the world. As of 2010, India’s population is estimated to be 1. 18 billion. India ranks 139th globally, under medium human development category according to Human Development Index (HDI). Due to significant changes in economic reforms undertaken during the industrial revolution in 1991, India has transformed itself to one of the fastest growing economies in world. India is also a strong member of Commonwealth of Nations, SAARC, and WTO. India’s strong 55,000 military personnel’s are serving in 35 UN peacekeeping operations across 4 continents. Demographics: India has more arable land than any other country except United States,  and largest water covered area after Canada and United States. Indian life revolves mostly around agriculture and allied activities in small villages, where the overwhelming majority of Indians live. As per the 2001 census, 72. 2% of the population lives in about 638,000 villages  and the remaining 27. 8% lives in more than 5,100 towns and over 380 urban areas. In languages Hindi is used by over 80% of population in India followed by Muslim (13. 4%), Christian (2. 4%) and Sikhs (1. 3%). Muslim population in India is third largest in world after Indonesia and Pakistan. 57% of population in India is between age group 15-59 years while around 35% of population is below 15 years. Literacy rate in India is 64. 8% overall distributed between urban (79. 9%) and rural areas (58. 7%). Cultural Trends: Trends are a manifestation of new enablers unlocking existing human needs which are constantly changing with time. Cultural trend reflects in many tangible aspects ranging from architecture to attire to food to culture which are deeply embedded in the rich historical and geographical elements of the country. In the past two decades, India has seen plethora of change, more so, as an after effect of globalisation. A nation of thinkers has become a nation of doers, eco sensitivity is on the rise, and all this has translated nto a new language of patriotism, and speaks of a rede? ned culture. This cultural shift has de? nite impacts on the Indian work scenario. Start-ups today have fresh innovative concepts and exciting working models which highlights the key socio-cultural trends in India. Businesses are increasingly catering to rational, practical and current cultural needs and are not based only on traditional models and offerings. Indian society is defined by relatively strict social hierarchy because of high degree of  syncretism and  cultural pluralism. Marriage is considered to be a thought for life and therefore divorce rate is extremely low in India. Recent Trends in 2010: Government has started its long awaited prosperous plan to provide unique identification number to every citizen which would be used primarily as the basis for efficient delivery of welfare services. It would also act as a tool for effective monitoring of various programs and schemes of the Government. This program of unique identification will strengthen transparency and accountability. Plans are also underway to improve literacy rate of 60mn females among 70mn illiterate adults through introduction of â€Å"Saakshar Bharat† (Educate India) scheme. Marketing Strategies of Subway EssayThreat of New Entry: Every person would love to do business in India especially in shipping industry due to large profits involved. However this would seem easy but practically it is lot more difficult and virtually impossible to establish in container line business. The problem pertains to large capital investments in form of vessel and container procurements and risk of operating vessels. Therefore there are only two native Indian companies which are involved in this business, others all are foreign players or in other words are multinational companies having their business arm extended in India. Even if we take the examples of biggest companies like Maersk and APL we will see that it had taken more than 100 years for these companies to establish themselves today at this top level. While there can be threat from existing companies to expand into new sectors which would lessen the share of company operating in that region. For i. e. Maersk is generally operating in every part of the world, in certain regions it may be the only player operating in that case its profit margins from those operations would be enormous. However this profit can be severely affected if APL or MSC introduce their service in those regions, or the situation can be vice versa. If there are any new potential companies who would intend to jump into this sector with huge capital than other factors like licensing, government rules, regulations, policies are all secondary. Supplier Power: Suppliers barely make any difference to companies involved in shipping line business in India, especially who are leading players in this business while it may affect to certain extent to small players who are struggling to establish within the industry. Many supplies are such which are borne directly by customers but arranged by shipping lines like fumigation, pesticide, wooden pallets, container repairs and truck transportation due to corporate contract or link ups of companies with service providers. While there are cases when these same services are borne by shipping lines but then these charges are included in freight rate which would be higher if the supplies were not arranged by company. Literally speaking suppliers of these services hardly make any difference to shipping line, financially as well as socially. If we consider supply of ship stores, food stuffs and other supplies in ships, than there are many suppliers of these supplies in market today while in contrast the demand is much less. Therefore the price factor remains weak in favour of suppliers here. Another supply which is related to loading of containers on third party vessels is very important here because this is the only supply where shipping lines have to face the brunt of suppliers. Not all shipping lines own the vessel and therefore they hire the service of other companies, to load their containers for different destinations. For i. . Maersk is the largest container operator in Kandla port but its own vessels are not operating from Kandla due to drift problem and therefore they hire the services of third party feeder vessels to load its containers till JNPT port in Mumbai, from where Maersk mother vessels are operating across continents. In this case Maersk may have to pay some extra money if demanded by ship operators. W hile this is not the case with MSC which has its own small vessels operating from Kandla to different gulf locations but if we move to location like JNPT port in Mumbai, the situation is totally different. Maersk vessels are the biggest here operating among other carriers and those small carriers are using slot on Maersk vessels for transporting their cargo. There are other supplies like stevedoring, loading/ unloading of containers from vessel, movement of containers to CFS (container freight station) and vessel towing which are provided by port authorised suppliers and companies don’t have to arrange separately. Port authority charges fixed amount towards these handling from shipping lines and shipping lines charges the same from customers after adding their profit margin. Buyer Power: Buyer is one the strongest factor in shipping line business. Buyers may be in form of importer or exporter, clearing agent, freight forwarder or manufacturer of goods. Sometimes manufacturer himself acts as an exporter or importer, if not than trader acts on behalf of manufacturer of goods. Container line business in India is based on two core factors viz price and quality of service. Price refers to freight rate at which one container is decided by shipping company to transport from one place to another. Due to much competition in this sector and limited number of operators, bargaining power of buyer has increased in relation to freight price. For i. e. almost all shipping lines have service to Jebel Ali (an important transit hub) from India and customer are sure to get very competitive rate for this location from market. For such locations customer are virtually like king but when it comes to transporting cargo to far Europe or America than this power is transferred to companies operating in those regions. Therefore companies like Maersk, APL and MSC strategise their businesses in such a way to get maximum profits from service to odd or far reaching areas and make normal profits from operation to common areas like Jebel Ali. Another factor Service refers to fast processing of documents, bill of lading and prompt loading and movement of containers etc. It is rather difficult for customers to get better quality of service than getting competitive freight rates. In this world of technology every company is trying to adapt to new technology in their day to day businesses like e-processing of documents and fastest data entry to name a few. For i. e. Maersk is so technologically advanced in this field that all its data processing is being done electronically by back office and customers are able to access all information relevant to shipment though dedicated space available on company website. Examples electronic processes are shipping bills, vessel certificates, freight invoices and bill of lading in encrypted format once the payment is done by customer either electronically or at Maersk local office. These advancements have decreased the paper work considerably and had increased the efficiency of work between company and customer. Companies like APL and MSC do have electronic processing systems but are not fully fledged and as a result much of the work is still being done manually. Other section of buyers which may affect container line business are freight forwarders or clearing agents, with rapid expansion of shipping industry and import/ export businesses in India, many agents acting as freight forwarders have came up in market to share the profit in form of commission. These agents earn commission by way of collecting excess freight from exporter than charged by shipping lines. It is relatively easy for shipping lines to entertain these agents as they bring big lot of containers from different small exporters which would be difficult if shipping company approaches those 10 different exporters for business instead of only one agent. Competitive Rivalry: Rivalry exists in every field be it business, science, space, technology, education etc; actually speaking it is part and parcel of day to day usinesses. It is sometimes bad because companies have to share hard earned profits with competitors and sometimes good because it gives opportunities to one company to stand in line with another in terms of quality of service, business strategy, job satisfaction etc. Considering the rivalry in shipping industry in India, will be held valid due to enormous margins of available profits combined with continuous growth of around 14% since last couple of years. If we consider the rivalry between our top of the table players (Maersk, MSC and APL) we will find that all these players are good in some and bad in some and therefore stiff competition exists between them. Maersk dominates the market due to its wide area coverage, better connectivity, best business practices, and cost controlling measures while it is outcry for many due to its strict and non flexible policies and highly technological advancement at very base levels which is not digested by people working in lower educated market. MSC on other hand has balance of advantages and disadvantages. It has done well in recent times in attracting business due to its competitive pricing model and better connectivity of services. In contrast it has failed to control administrative, operational and higher output costs. It has been seen practically at Kandla port location where Maersk is having higher outputs compared to MSC but staff recruited to control that output and time for completing the tasks was almost double compared to Maersk. APL on other hand has much controlled costs measures and highly technological advanced processes as in Maersk but it doesn’t have far reaching connectivity like Maersk and MSC and therefore relies on third party services in certain regions. Also it has lagged behind in attracting customers due to non availability of killing marketing strategies. Threat of Substitution: Substitution factor is foremost important especially when something is going wrong in organisation and competitors are waiting to catch that opportunity for their benefit. We have discussed above how competitive the market is in India and the core factors like price and service which affects the buying behaviour of customers. Substitution threat is the result of change in buyer behaviour towards competitor or against company. Substitution may also result because of change in quality of service, increase in freight rates and increase in transit time. From view point of switching costs, buyers are not affected at all due to higher number of suppliers and freight forwarders available in market. While it may affect the company to certain extent as they have to start new search of customer, establish strong relations and educate them on company policies and systems. Switching costs become even more at times of downturn due to decrease in supply of business from customers. Cost factor is primarily responsible for substitution while service specification comes secondary. Conclusion Container line business is a flamboyant industry not only in India but in whole world. Due to rapid economic development since recent past, trade between India and developed countries has increased significantly and India is being seen as export making country from its traditional tag of import specific country. As a result of this development shipping industry is progressing at average rate of 10% during the last 3 years. It is also essential that government of India and â€Å"Ministry of Shipping† in particular should take more proactive steps like setting up automated container terminals, developing more dry cargo berths, liberal regulations in free movement of foreign exchange and international trade, easing export/ import duties to make this industry work more freely and contribute even more to economic development of country. Companies at same time should adapt more technology to make easy and efficient work environment for customers and employees. Appendices Critical Evaluation of Analysis Techniques: Two techniques, macro and micro environment are used here to determine the strategy of overall industry and that of firms operating within the industry. In simple terms it is an in-depth analysis of external factors affecting industry and analysis of internal factors affecting firms within that industry. Macro environment factors are determined with application of PESTEL model, an extended model f PEST with addition of Environment and Legal factors affecting industry. It takes into account all the main factors on which the industry is dependant and can determine the merits and demerits of industry based on result of this analysis. For determining the micro environment factors, Porter’s five force analysis model is used which measures the forces affecting the profitability and ability of company to perform in competitive environments. These forces are an extension of SWOT analysis. Some academics like Downes’ believe that today’s markets are more influenced by technological innovations and other forces like, digitalization, globalisation and deregulation which are not taken into consideration in Porter’s five force analysis. 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