The use of FTWZs has risen by 20 to 25% every quarter after the pandemic

With close to three decades of experience in setting up logistics parks at ports, across MENA and India, you have seen the evolution of pharma logistics. What are the key drivers for the current transformation of the pharma and medical device logistics sector in India? And where do free trade warehousing zones (FTWZs) fit into these business imperatives? 

Free trade zones fall under the Special Economic Zone Act, which is more than 50 years old in India. The Free trade zone concept was introduced in the last 18 years. So, it’s relatively new as compared to the SEZ policy. 

The concept of free trade zones was specifically promoted by the Ministry of Commerce and Industry to encourage more exports to earn forex, as well as benefit Indian manufacturers to import their raw materials through the free trade zone, and then enhance their manufacturing capabilities, and export to international markets. That has been the concept over the past 20 years. It has been evolving, and as I have been associated with free zones from the beginning when the policy came in, I see a sea of change between 2012 to now.

The Government is very supportive of promoting free trade zones, because they have witnessed a lot of value added to the country, in terms of forex, employment, trade, the MSME and cargo owners. And, more importantly, a lot of overseas investors, traders, and customers are entering India through free trade zones. 

Coming to the pharma sector, India is known as the pharmacy of the world. India manufactures and exports a huge amount of pharma products to the globe. We are one of the pioneers in pharma logistics, and are growing at almost 10 to 12% every year. So, it is a focus area and a large growing business. 

As this business grows, the complexity of handling pharma products, especially storage and transportation, along with stricter government rules and compliances, will come in. It is important and critical that pharma products are handled as per specific guidelines as they touch human life directly, so such shipments need to be prioritised in all aspects. In that respect, the pharma industry needs a different standard of care as far as the supply chain is concerned.

More importantly, there are a lot of intermediaries that are involved. The infrastructure too has to be standardised as per global standards of handling pharma commodities. From the technological side, the need for product visibility, track and trace, temperature control parameters and apparatus, makes the pharma industry supply chain more complex.

This is exactly where FTWZs play an important role. FTWZs mitigate the risk of not having buffer inventory in India to overcome any geopolitical issues. More importantly, they provide world class infrastructure both in terms of storage as well as transportation.

There are limited free trade zones in the country, and we are one of the pioneers. We are the largest free trade zone operator and developer in the country. We have three zones that are strategically located in the country: Nhava Sheva Business Park (NSBP) in Mumbai, Integrated Chennai Business Park (ICBP) in Chennai, and DP World Cochin Economic Zone in Kochi.

Based on our experience of the last four years, which have seen multiple global uncertainties, I can say that free trade (warehousing) zones play a critical role in making pharma supply chains more resilient and agile. Pharma customers are increasingly storing cargo with us to overcome global supply chain disruptions. Further, our end-to-end solutions allow us to transport pharma cargo to and from the port to the free zone to the manufacturing facility in a seamless manner without compromising on safety and specific handling requirements of such products.

So, I can say that free trade zones play an important role in the supply chain of pharma. Earlier, pharma products moved into a standalone cold storage or a bonded facility. But in the free zone, we have cold storage facilities, a bonded facility, and world class technology complete with specific certifications like Transported Asset Protection Association (TAPA), Food and Drug Administration (FDA), Good Distribution Practice (GDP), all under one roof. So yes, FTWZs play a critical role in the pharma supply chain.

How would you differentiate between free trade zones and free trade warehousing zones? 

Free trade zones (FTZs) and free trade warehousing zones (FTWZs) are the same. FTWZs are very similar to SEZs with one big difference: manufacturing is not allowed in FTWZs. You can undertake value added services in  FTWZ as well as light manufacturing.

Pharma companies have been impacted by geopolitical situations, like India’s border tensions with China and the COVID pandemic, as they are heavily dependent on certain countries for key starting materials and APIs. The situation has improved but there are still concerns. Is using FTWZs economically feasible for pharma companies? 

FTWZs started in 2008-09 but they were not very popular. The awareness of FTWZs in the pharma industry was very low at that time. More importantly, the capex involved in developing FTWZs infrastructure was very high as FTWZs required 100 acres of land, along with proximity to ports and terminals. These requirements made the upfront cost of setting up a FTWZ steep. Additionally, the policy was evolving. So, from 2008-09 to 2013-14, FTWZs were not that visible to the market.

However, FTWZs took off from 2014-15, as the Government gave a lot of benefits to manufacturers and traders utilizing FTWZs. However, it was not exactly about promoting any kind of geopolitical readiness of the supply chain at that time.

But the COVID pandemic introduced industry to the real importance of free trade zones. To give you an example, as you rightly said, during COVID because of restrictions in China, movement of APIs were restricted, and they could not be imported into the country. Therefore, India could not manufacture the required quantity of medicines. 

By operating from a free trade zone, APIs could have been imported much earlier, as part of the general supply chain, stored in the free trade zone and supplied to the manufacturer only when required. 

Deferment of import duty is another advantage of operating out of a free trade zone. When APIs are imported into India, import duty has to be paid upfront, but if the cargo is stored in a free trade zone, import duty can be deferred by two years. Therefore, the manufacturer can order API requirements in advance keeping in mind any global disruptions that may be on the horizon and store it in the free trade zone. This would be like storing it at their own premises but with the option of deferred duty payment, freeing up working capital.

There is no upfront cash flow from the pharma company’s side, so this can be stored at the FTWZ as a just-in-time inventory and can be sent once the plant is ready to receive it.  This became more visible during the post pandemic era as a requirement of the entire supply chain, spanning exporters, buyers, and suppliers. FTWZs will play a big role during disruptions like pandemics, or wars, or any kind of uncertain situation. Thus, post pandemic, the use of FTWZs has risen by 20 to 25 per cent every quarter.

The basic difference which is the USP of FTWZs is that this is a platform where raw materials or import consignments can be stored without having a registered entity in India, duty deferment for importers 100% ownership benefits that provides security to the businesses storing cargo at FTZ. 

So FTWZs add to the resilience of the pharma supply. But, what about the cost of using FTWZs? As per an AT Kearney-OPPI joint study, supply chain costs of India’s best-in-class pharma is 8 percentage points higher than both the best-in-class global FMCG firms and best-in-class global pharma.  As per other estimates, Indian pharma companies spend one-third of their revenue on supply chain management (SCM) activities due to inherently poor transportation infrastructure. What is the reason for this disproportionate spend on supply chain costs and how much will supply chain upgrades like the switch to FTWZs add to these costs?

Compared to consumer goods or FMCG products, pharma products require certain certifications regarding specific standards of cold storage, certain standards of cold chain vehicles required to transport the cargo, etc. So naturally the capex for storing and handling pharma commodities is increased for pharma companies.

Secondly, the opex of running a cold storage with electricity from the grid required on a continuous basis adds to the cost. Therefore, when it comes to pharma logistics, the investment is very high. It is higher in India, as the studies you mentioned pointed out, due to unorganised transportation and fragmented services, which result in damages and rejections. 

For example, if a cold van is taking pharma products from point A to point B with a constant temperature requirement of 8 degrees, there may be a 12-15 hour delay, due to a van breakdown, or poor road conditions. If the consignment cannot be maintained at 8 degrees during this delay, the whole consignment is rejected, adding to the cost of transportation. 

Thirdly, warehousing standards are evolving. Conditions in India have improved, but generally speaking, not all service providers meet the minimum standard certifications like FDA, GDP, TAPA. Only a few selected warehouse providers have all the requisite certificates. The absence of these certifications leads to cost escalations, as buyers reject consignments if these certificates cannot be shown.

The fourth aspect is the cost of electricity. In some cases, this amounts to 1/3rd of revenue. Running the whole course from the power grid results in a very high opex cost but a combination of grid and a renewable power supply, like a solar power system, can reduce the opex.  

Keeping that in mind, DP World has taken many steps to reduce the cost of power that can benefit the supply chain. For example, our Nhava Sheva Business Park is powered by 1.5 megawatts and our Chennai Economic Zone is powered by 1 megawatt of solar energy. The warehouses have been designed in such a way that 75 per cent of the solar power is diverted to cold storage and the remaining to dry storage as the former requires more power. That’s how we reduce our opex. 

Additionally, our warehouses are insulated both from outside and inside, so if the temperature requirement is 10 degrees, then the insulation allows us to be at minus 4 degrees. This leads to better efficiency as the real power requirement is much less, resulting in lower opex.

Further, all required certifications are taken care of right from the design stage of the warehouse. All materials are procured in line with pharma requirements. In this way any big brands coming to us with a checklist for quality are assured of total compliance, giving them the adaptability and assurance of cargo integrity, while offering reduced costs, because the insurance cost is reduced when they keep the cargo with warehouses who have the required certifications and are compliant. 

 

How can pharma companies de-risk their supply chain to future proof it against disruptions like pandemics and geopolitical events?

This is very critical, because disruptions due to geopolitical events or pandemics hit pharma supply chain/consignments very hard. As you know, India is one of the largest producers and exporters of generic drugs globally, and COVID-19 gave us many lessons. 

One lesson is specific to the storage of perishable cargo in general and pharma in particular. So, if anybody wants a very secure, flexible, and predictable supply chain, which is what most pharma companies specifically need, it is very critical to de-risk and have the right infrastructure. We have taken care of these aspects right from the beginning. 

Our facility started post COVID in 2021-22. Therefore, we took all the lessons from COVID and implemented modifications keeping in mind our pharma customers, as well as perishable cargo customers. 

To ensure this, we started integrating the digital supply chain, with visibility for pharma companies using our FTWZs. We realised that these companies need their whole inventory to be visible so that they can position their strategic ingredients in particular strategic locations so that they can release it to the global supply chain. 

So, we have integrated our warehousing management system into the pharma clients’ inventory management system. This gives our customers visibility into the exact quantity of , stock, or cargo at our FTWZ facility. 

Again, it can also give visibility to how much cargo is to be stored, at which locations, keeping in mind the local and overseas demand. We also provide customers with track and trace capabilities since we offer an end-to-end supply chain solution right from our terminal, because we own all these assets. 

We have built a track and trace digital platform for pharma clients to get a real time report of their cargo from the terminal to our own reefer trucks, from our reefer trucks to our cold warehouses, and then last mile delivery. This feature gives customers a real time report, so that they know the exact location of their cargo and the time it will take to reach the desired destination. 

This helps them in two ways.  One is their just-in-time inventory management, so that they don’t end up having more inventory than required and they know exactly what they need, the kind of storage they want, and how soon they can replace it. That is the major requirement. 

The second part is customs clearance, since it involves export and import of products. Sometimes, if they are going to a CFS or bonded facility, then the customs authorities get the cargo to the facility, open the consignment and take a sample, send the sample to the laboratories or get the custom officer to inspect it and then pay import duties. This process might take time and it could happen that the cargo gets rejected or damaged during the unloading/sampling process. Sometimes the container is left open to atmospheric elements like heat, moisture, and air during the sampling process, affecting the quality and value of the cargo. 

At DP World, the whole cargo is sent to the cold storage area immediately from the reefer container. We maintain the same temperature, for example, 8 degrees, so if the customs official is delayed by any chance, then the cargo is maintained at 8 degrees at all times, so there is no question of any atmospheric elements disturbing the container in an open space. 

 

All our three Free Trade warehousing zones have inhouse customer agents positioned for businesses to get seamless clearance. This reduces bottlenecks and enhances India’s competitiveness in global trade. Pharma companies also want to inspect  that the staff handling the cargo on ground are adequately trained. Most standalone service providers do not have trained resources, especially for handling pharma cargo, because recruiting pharma trained supervisors costs more. We have looked at pharma as an integral business pillar,so we have trained executives dedicated to handling pharma cargo. These executives are responsible for pharma cargo, so that nothing gets rejected, there are no misplacements, there is no mislabeling, etc. 

The other risk I have seen is rejection. For example, when pharma companies import products, they have to pay duty and take the cargo. However, if they find the order is incorrect or doesn’t meet the specifications after it reaches the plant, they still have to return it and claim a duty drawback since the duties have already been paid. This is a long, complex process, and the cargo may also risk getting spoiled or damaged during this interval. 

But this can be avoided in the case of FTWZs as pharma companies can send their supervisors to the FTWZ, inspect the consignment, and only take possession if they are satisfied that the cargo is as per the specified order. . After this process they pay the applicable duty and take the cargo. That is the flexibility offered by FTWZs. For example, if the cargo does not align with their order, the duty has not yet been paid, thereby avoiding any impact on cash flow. The cargo can be sent back to the original supplier, as duty has not been paid. But if duty has been paid, and then the order is rejected, the reverse supply chain and duty drawback process add to the complexities of the process and lock the working capital of the supplier. There’s a lot of risk mitigation of this kind that can be facilitated through a free trade zone.

What are going to be the escalations in supply chain costs for pharma companies over the next few years? 

Compliance demands will increase in the coming 1-2 years.  All governments will implement strict rules. Not just India, but all governments of importing countries like America, are also putting a lot of restrictions on APIs. They are telling service providers to maintain facilities in a neat, clean, and hygienic manner. All these compliance requirements need investment and anything we do to meet those requirements will have a cost attached to it. 

So, at DP World we have inbuilt those infrastructure requirements specific to the pharma sector right from the beginning. Our customers know that our FTWZs and cold storage facilities are as per pharma specific global standards and are actually an extended arm of their own storage facility at their plants. But to do that there is a cost involved. I can say that our customers appreciate these initiatives when they compare our solution and services  with the other solutions like bonded facilities. 

For example, a big brand pharma company which used a bonded facility for the last 15-20 years shifted all their bonded facility cargo to our facility by paying one and a half per cent more. The company is willing to pay as long as it sees that there is value in the quality of the way we manage their cargo. At the end of the day, the rejections, bad name in the market, and the cost of reverse logistics for incorrect deliveries are mitigated. So, they know the value of a FTWZ as compared to a standalone bonded or any other warehousing facility. Designed for pharma excellence, our FTWZs incorporate fire fighting systems, renewable energy, and compliant infrastructure to meet industry and regulatory demands.  As more companies start using FTWZs, quality will improve, and the rate will mature. The cost will increase for another 1-2 years, as capital expenditure on improving warehouses, building cold storage facilities specifically for pharma is increasing. So, there will be a cost increase to some extent, but after 2-3 years it will be industry standard.

What percentage of DP World India’s FTWZs currently service the life sciences sector? 

In our Mumbai FTWZ, out of 10,000 pallet cold storage positions, pharma has almost 25 per cent, whereas in our Chennai FTWZ, it’s about 20 per cent of pharma products compared to other segments. 

viveka.r@expressindia.com

 vivekaroy.3@gmail.com