Strategy: Can AFL Log Into The Logistics Market?

STRATEGY
Can AFL Log Into The Logistics Market?

Cyrus Guzdar, CEO, AFL As its relationship with DHL gets stronger, AFL is gunning for growth in a sunrise business.

By Radhika Dhawan

It's the one query Cyrus Guzdar can do without. But then, with unfailing regularity, participants at conferences organised by AFL's corporate travel business pop this one to the 53-year-old Guzdar: "Is DHL (the $4-billion global courier service company, DHL Worldwide Express) also in the travel business worldwide?" Well, DHL isn't in the travel business; AFL is. And DHL is, actually, one of AFL's 7 business divisions. "But then, the DHL brand is better-known in this country than ours," says Guzdar, AFL's CEO, smiling ruefully.

Truer words have not been sent by courier. However, after 19 years of unobtrusively collaborating with DHL's international courier services from India, AFL, and the status quo, is about to change. By June, 1999, DHL will acquire an equity stake--of not more than 10 per cent--in AFL. Says Guzdar: "The stake is a signal to the market that we have cemented the relationship." It will culminate in 2004, when a separate joint venture will manage DHL's international courier business from India. AFL, though, will retain management control of that company as it will, probably, hold 74 per cent of the equity.

DHL has no complaints about that. While the company did not speak to BT, there's no doubt it has, thus far, engineered a win-win situation in the country. An accommodating AFL has promoted the DHL brand, incurring all the expenses involved in the required technology investment. For instance, the track-and-trace systems set up by AFL are at par with what DHL uses worldwide. Says Guzdar: "If you ask them what their return on investment is, it's phenomenal. There has been no investment from them in this country. We have been doing all the brand-building so far."

That adds up to a marketshare of 55 per cent in the Rs 500-crore international courier business in India. While marketshares are not available for the fiercely-competitive national courier segment, AFL is close behind market-leader Blue Dart in the pecking-order. All told, the courier business contributes over 50 per cent of AFL's turnover and profits, with a little under half coming from DHL. No wonder DHL is a mite nervous about losing its accommodating partner to its competitors. Global giants like Federal Express Corp. (FedEx), ups, and TNT International are all scrambling for a share of the lucrative international courier market, but with little success so far.

TNT International is on its own, but has managed to garner a mere 8 per cent marketshare. It is no secret that ups' tie-up with Elbee Couriers is on the rocks. And FedEx's on-and-off tie-up with Blue Dart is quiet--for now--but it appears like a marriage of convenience. In fact, the 2 brands are managed separately, with only the packet pick-up staff and infrastructure in common. However, points out Siddharth Triparthi, 27, Senior Marketing Specialist, FedEx: "The fact that we renewed the arrangement with Blue Dart in 1997 for another 5 years is an indication of our relationship."

On another front, DHL is not interested in AFL's domestic courier business at all. Or even in the third-party logistics business that AFL considers to be its future. In fact, DHL does not even have a toehold in the national courier business in any of the 240 countries it operates in. Ergo, the next 5 years will be used to separate the domestic and international courier businesses. While AFL follows DHL's performance appraisal system, the drop zones, the pick-up staff, and some of the track-and-trace systems are common to both concerns. Adds Guzdar: "The level of staff training and the information technology required for the global courier business is more sophisticated."

AFL will, thus, use the grace-period to build its identity. That is ironical considering the fact that it was this private limited company which pioneered the movement business in the country. But it is necessary. Apart from the confusion caused by its linkage to DHL, each of AFL's 7 businesses had its own name, which lent individuality, but not to a group identity. For instance, the cargo division was called ace (Advanced Cargo Service), while the ocean freight business was dubbed AFL Shipping, and so on, causing confusion among clients, and lost synergies.

So, in February, 1999, a brand-building exercise was launched to announce the company's change of name from Air-Freight to AFL, and declare its core competency in the business of movement. All the businesses were re-grouped under the new name. So now, AFL has, apart from DHL Worldwide Express (the international courier business), freight-forwarding services (AFL Cargo), logistics management (AFL Logistics), corporate travel (AFL Indtravels), infotech solutions for movements (AFL Infotech), and an electronic commerce and money-transfer business in association with Western Union (AFL Elcom). Only AFL Indtravels, which has a marketing tie-up with the $10.60-billion Carlson Wagonlit, will be converted into a 50:50 joint-venture, AFL Carlson Wagonlit.

AFL wants to be a Rs 1,000-crore company by 2002. Make no mistake: the courier business is expected to drive the company towards that goal. However, AFL is also pinning its hopes on growing AFL Logistics, which accounts for just 4 per cent of its turnover at the moment. The company plans to approach clients as a solutions-provider, with the expertise to manage the entire distribution-chain. The idea is to use the logistics division to draw business to its other divisions, like cargo, corporate travel, and infotech solutions. After setting up AFL Logistics in 1994--when McDonald's entered the country and approached AFL to be its third-party logistics supplier--the company reorganised internally to form teams to address customer needs at each level of the supply-chain.

Says R.J. Rajadhyaksha, 45, General Manager (Logistics), AFL: "We changed from a product-orientation to a solutions-orientation." Thus, the search for partners. For instance, McDonald's brought in the cold-chain expertise. And a tie-up with the $160-million logistics management company, F.X. Coughlin, brought in expertise in automobile spare-parts logistics management. Adds Rajadhyaksha: "The logistics business is coming of age in this country, and we have to be ready." Companies are increasingly looking at outsourcing non-core activities, like transportation, warehousing, or even Customs and port clearances. In fact, AFL Logistics grew by an impressive 44 per cent last year.

Moving up the value chain is crucial for AFL's long-term competitiveness. The plain-vanilla movement business no longer offers sky-high margins. Prices in the domestic courier and cargo businesses (air and sea) fell by 20 per cent across-the- board last year, leading to a halving of AFL's profits to Rs 6 crore in fiscal 1999. For instance, trucking-services could fetch Rs 14 per kg of goods transported 2 years ago; this year, AFL is finding it tough to get Rs 10 per kg. Reason: the proliferation of smaller regional entrants, who are undercutting prices. E.g., Gati Cargo Management Services, the country's largest surface transport company, charges Rs 8 per kg for trucking services.

AFL has an advantage of being an early entrant in the logistics business while most other companies are still at the starting-block. Admits Triparthi of FedEx: "We are still finalising our plans for third-party logistics." To grow its logistics management unit, AFL plans to set up 100 franchisees over the next 5 years. This will ensure faster penetration into the rural markets. In the meantime, AFL will soon get into what is termed as 4th-party logistics, and set up a joint venture for logistics consulting with a management firm.

All this will require heavy investment in infotech. While the front-end of the technology would be the franchisees' investment, most of the technology infrastructure will be AFL's responsibility. Whilst Rs 50 crore has been spent on systems in the last few years, PricewaterhouseCoopers has been engaged to determine the investments necessary for the next 5 years. While a figure is not available, it can be safely assumed that it will be a tall order for the closely-held company.

Traditionally a debt-oriented company, AFL has shunned the equity route. As a result, its debt-equity ratio has been unusually high, and touched a worrying 1.35:1 in 1997-98. Its interest outgo increased by 28 per cent that year to touch Rs 12.80 crore. That's why, in July, 1998, AFL had to part with 10 per cent of its equity--a first in 53 years--through a private placement offer to Bankers Trust. Part of the Rs 22 crore from the sale will be used to reduce the debt-equity ratio to 0.5:1 in 1998-99.

Explains Socosio Barraquiacs, 40, Managing Director, Bankers Trust: "Hiving off the DHL business will allow AFL to be more focused. We invested in AFL because they are well-positioned to compete effectively and grow in the business." Adds Guzdar: "I would rather have a few large shareholders to manage than millions of smaller ones." Logistically speaking, that makes sense--as AFL knows full well.

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