Uberization of the Core Sector

Uberization allows sources of demand to be matched with sources of supply through digital means; for the core sector it would mean a large swapping tool that makes allowance for as little distance to be moved for goods as possible throughout the country so that cost could be minimized. It would mean swapping of things that are far distant to you but in a planned manner. For the whole economy this would ordain central planning.

India moves so little per capita, despite the country being so large, this is where the growth story is stymied as the cost is prohibitive due to lack of planning, optimization, congestion and lack of infrastructure, which creates enormous wastes. Different ministries have little or no knowledge of the underlying logistics costs, the same as a large organizations with different parts.

Himachal apples find it difficult to reach Chennai than from New Zealand, or some companies end up importing coal as their input from Chile and exporting their final produce to Mexico as sea freight looks appealing than the inland. 

Coal moves from Port to the furthest hinterland while the coastal plant is served from a mine remotely interior in the country. When mines are auctioned the one near the source never ends up winning the bid, such are the woes of auctioneering, from coal to any other commodity, including waste, that is put under the hammer.

Swap arrangements to usher a low logistics cost environment is never in scope. It needs central planning on a grand scale.

Logistics costs cannot be the balancing piece, it must be the central piece of the puzzle for the core sector; this would ordain central planning from usage of wastes and recycling to the sharing of fixed and mobile infrastructure across a range of industries. Gone are the days when logistics cost was subsumed in other costs, in fact time is ripe for other costs to be subsumed in the logistics cost; logistics cost should be the driver of business decisions in the core sector. This would also include mapping the entire logistics landscape from ports, mines, agricultural clusters, ICDs, to name a few.

The core sector is logistics heavy, to give a comparable example, think of aluminum (15% of total cost) and the inbound and outbound cost puzzle unfolds quite brutally. The same is true for Steel (12%) and Cement (26%). But more than the cost, it seems further growth in these sectors is becoming challenging already, given that infrastructure is the limiting factor. Without the presence of a vibrant core sector the economic development of the country is also not possible.

If the logistics plan was drawn from scratch, all these costs could have been a fraction of the current one and further growth could be orchestrated as well. Is it too late to reconfigure this, well no, but it would ordain a proxy of central planning, which can only come from public & private partnership on a grand scale.

For every ton of aluminum output, you need 11 tons of coal as an input for power generation, 6 tons of bauxite from which 2 tons of alumina and half a ton of calcined coke has to move as well as the major inputs while creating 4 tons of fly ash and 4 tons of red mud as waste, which also has to move over short to medium distances; so the mass balance equation takes us to total almost 28 tons of material movement over distances for every ton of aluminum production ranging from 1000 kilometers to a few kilometers depending on the item we are talking. Thus the variability of cost is huge.

When India is producing four million of aluminum today, this means the aluminum sector alone would be moving 28X4=112 Mio Tons of materials.

This is not the end of the story, the real story starts when you connect these tons to the kilometers each commodity moves. Some of the consumption centers are far away and some of the inputs could be as well. There is this classic example of buying coal from Chile to export the final product back to Mexico. Sometimes different parts of the organization are not even aware of this puzzle, the same is true for the ministries in India.

Some of the wastes actually could be picked up by the industries provided the logistics costs allow such movements; sometimes government notifications help to make this possible. Poland did this way back in the last century thus creating new policies on waste usage, they legitimized usage of fly ash in cement thus eliminating the need to store fly ash completely. The others followed much late and by then the footprints were decided not on the basis of logistics but on other cost considerations.

But more importantly, the central planning of the core sector which makes allowance for all such movements on a country wide scale can only solve the puzzle of optimization of logistics movements.

This actually has been done by China and on a massive scale. Failure to do this has prompted many of the consuming industries to stop their production and move elsewhere, the best example is Europe, where power costs moved up so much that in the continent it became impossible to produce aluminum. The entire recycling industry and the usage of wastes as input started from Europe, no wonder, because otherwise just because of the wastes it was impossible to run industries, forget about expansions.

Again going back to the aluminum example, China produces 40 million tons of primary aluminum, which amounts to  1.1 Billion tons of material movement. But this has been done with such precision planning at the central level that the distances have been minimized to a large extent and usage of wastes have been so allowed that logistics costs could be taken as a central piece of the puzzle, not the balancing piece. When China started to modernize its western part, it brought its core sector to the western part, not keeping it at the old base in the east. So the core sector could actually serve the purpose of your economic advancement, whereas if you do not bring the core sector closer, you could actually move stuff over long distances, but you would lose on the advantage of logistics, a sheer waste.

Thus logistics planning is important as it could be of value or be wasteful if it is not considered as the central piece of the puzzle.

India therefore cannot ever produce 40 million tons of aluminum with coal as an input for power, unless there is central planning. To give a comparable example, the entire goods movement of current railways would have to be dedicated for one single commodity, aluminum, if we have to achieve this feat.

The same is true for Cement. China with its more than 2 billion tons of cement output would move 5 billion tons of materials, which also includes limestone over shorter distances, but the sheer number is staggering and India would struggle to do this with whatever new infrastructure we may think for the future.

So where does this take us, it takes us to the most despised subject, Central planning, where we have to be mindful of the fact that for the greater good we may have to sacrifice individual good not only by way of regulations, but also by way of local economies versus global economies of scale for the whole country as a whole.

For supply chain planning, central planning is at the core of success. Central planning would take importation, port, inland movement, exports out of port, mine pit head to consumption center and all intermediate movement including movement of all kinds of wastes. It would look at infrastructure as a limited resource, fixed and mobile included and calculate the overall cost economics. It would create policies that attract industries so that the net overall cost comes down.

In Poland or Germany, there is no way that solid fuels can be used for cement making. In fact the land filling laws are so strict that wastes cannot go for land fill. This changes the entire dynamics of movement.

How much waste does India generate, it will be several hundred million tons. U.S. could recycle 70 million tons of municipal waste alone. This replaces a large part of the solid fuels that we use. But this cannot be orchestrated without central planning.

State planning and state incentives, including policies that attract core sector dynamics, must be played out looking at the overall regional and country gains.

GST is just one piece of the puzzle, the infrastructure as the limiting factor opens up new horizons for growth. Growth is a no-brainer, if only we could solve this piece together.