Interview with Ravichandran Purushothaman, President, Danfoss Industries Pvt Ltd
Due to the lack of infrastructure and supply chain efficiency the sector has seen a setback. Primarily, we need to work on providing proper and adequate infrastructure for food storage, processing and cold chain logistics. The government must take measures to provide adequate facilities that streamline the process for a better output, states Ravichandran Purushothaman, President, Danfoss Industries Pvt Ltd in an interaction with Supriya Oundhakar...
Please take us through Danfoss journey in India.
We started our operations in 1999 in India primarily as sales company selling global products in India. We have come a long way since and have witnessed a steady growth. We have also evolved into a full-fledged facility with a manufacturing unit for catering to India and also exporting to other countries, a strong R&D team which develops products for India and global and a complete supply chain to meet the requirements. What was initially a $7 million company with 30 people is now an 800 people strong organization with a turnover of around $120 million. When we began operations, we used import 100 per cent, now close to 25 per cent comes from within India. We have created a strong ecosystem of supply base and as a result, India has now become a sourcing point and our target is to increase sourcing five times over the next three years. We can proudly point that while the general trend is to import from China, across sectors, we are exporting to China.
India is one of the most important markets for Danfoss and this was reinforced in 2012 with the 100-million-dollar investment for the manufacturing, R&D and administrative facility in Chennai (Oragadam) which when inaugurated in November 2014 was perhaps the biggest milestone for Danfoss India till date. In line with our vision on energy efficiency and our own climate strategy, the plant also includes a solar power plant which generates 1MW of electricity, which is currently taking care of up to 15 % of electricity requirements of the campus. Since our entry into the market, over the last 2 decades we have worked closely at the grassroot level and have enabled and enhanced profit earnings of farmers in the field of dairy, agriculture and horticulture by means of energy efficient technologies especially in the area of cold chain.
The Government has plans of setting up 100 new cold chain projects with investments of Rs 12,000 crore to Rs 13,000 crore. So, what kind of opportunities do you foresee for Danfoss in India?
More than 400 million tons of perishables is lost every year. But India, as the rest of the world, also loses 100% of the food produced that it cannot handle. India in its quest to become the “World’s growth engine” is looking for best practices, improved capabilities and technology transition around the globe. Danfoss has the capability and the solutions required to cater to this. “India has a need for having the right and most efficient infrastructure, and I believe the cold chain can become a gamechanger for the farmers in the future.
With these investments into cold chain we expect an increase in storage and transportation demand for meat, milk, dairy products, horticulture, supermarkets selling processed foods and the need to meet food safety standards. Also, at the farm-end, farmers realisation that they get much better prices for their products when they invest in in cold chain storage. Many farmers can come together and invest in such storage solutions. Danfoss, a global evangelist for energy conservation in the food sector offers a range of automated customisable solutions aimed at energy efficiency for the entire cold chain network spanning from farm to fork. This makes the cold chain sector a more viable investment destination in the eyes of investors and also enables cold room owners to earn better opex margins.
Energy cost is the largest operating cost for operating cold storage-upto 40-60 per cent of operating cost. With electricity costs going up, people understand the value of saving energy costs and our products help save energy by up to 20 per cent. Ninety-nine per cent of our customers who have bought a product from us want a second one.
What are the trends in Indian cold chain segment? What is the penetration level of temperature controlled cold storage in India?
Cold chains are not only about preserving produce but to connect the grower with the market that will help in increasing production. About 40 per cent of the food in supply chain is wasted due to lack of infrastructure and cold storages. According to a report by the Federation of Cold Storage Associations of India, the cold storage industry annually grows by 12-15 per cent in bulk storage capacity.
The cold chain system integrates consumption with production, hence, assessing both supply and demand for any product (passing through the cold-chain system) is important for estimating the requirements of cold-chain infrastructure. Cold Storage (Bulk) and Cold Storage (Hub) numbers may vary depending upon the average static holding size of each unit. It is to mention that actual size and capacities will vary depending on business model and market dynamics. In case of bulk cold stores, though designed for holding a single crop for one cycle a year, enterprising operators can reoccupy vacated space with other goods by redesigning for multi commodity and this is observed to be in low volume. Ripening units, as with Cold Hubs can vary holding times to buffer last mile demand.
Ready to Cook (RTC) and Ready to Eat (RTE) segments of food industry are fastest growing segments due to rising demand from Modern Retail (MR) and Quick Service Restaurants (QSR). These products require specialised equipment at factory-gate like blast freezing lines and IQF processing lines. In order to assess the cold-chain requirement for these in a realistic manner, district-wise number of units and their operational capacity together with the captive infrastructure created by various private industries in the country will be required.
What role can organized retailers play in building cold chains in India?
The cold chain sector although being fragmented has a huge potential for retail to grow. India has about 6,300 cold storage facility with the capacity of 30.11 million metric tonnes, which are only able to store about 11 percent of the country’s total perishable produce. About 60 percent of this capacity is spread across states of UP, West Bengal, Gujarat and Punjab. But still situation is severe in the south of the country where the cold hubs are not as per the requirements and the climate is hotter and far more humid. Retailers can tap this opportunity and set up facilities in south. It is true that setting up cold chain involves high cost and higher infrastructure cost for operations, but given the expected growth in grocery retail to $ 847.9 billion by 2020 from $ 500 billion in 2012, there are some changes expected by the industry as a whole to ensure the significant areas of handling food collection, storage and transportation be more cost effective for retailers.
What are the stumbling blocks faced during setting up of cold chain logistics infrastructure? How do you overcome these challenges?
There is a lot of potential for the cold storage industry in our country which is still untapped. Due to the lack of infrastructure and supply chain efficiency the sector has seen a setback. Primarily, we need to work on providing proper and adequate infrastructure for food storage, processing and cold chain logistics. The government must take measures to provide adequate facilities that streamlines the process for a better output. Also, the technical standards followed in India are mostly unsuitable for Indian conditions, which results in lower performance of standard refrigerated systems.
There is a need to set standards and protocols in construction and operation of facilities. Secondly, there must be proper training that has to be provided to the laborers in the sector. There cannot be any compromise on the quality of the product, hence training programs play a major role. For corporates, the high level of initial capital required to construct a cold chain unit continues to be the biggest challenge. But if the government pitches in with a clear plan and promotes more PPP initiatives in this field, we could see a momentum growth in the cold chain industry in India.
India is one of the largest producers of agricultural products and one of the global leaders in the pharmaceutical sector. Yet, it is known to have fledging cold chain, which results in supply chain losses of food and other resources. So, what are the solutions offered by Danfoss in order to stop these losses?
At least 25 per cent of the vaccines go waste even before reaching the doctors and patients while many lose their efficacy by the time they are administered due to lack of quality supply chain and logistics management system. This is posing a major challenge for the government as well as public health agencies working to expand the immunisation coverage, mainly, in the hinterland where supply chain logistics and infrastructure are in poor shape.
When you look at it from a technology perspective our solutions for cold chain are available from -30 deg to + 20 deg and these can be used across spectrum with higher efficiency.
The Government of India launched ‘Make in India’ campaign in order to make the country manufacturing hub. So, what are the products that the company manufacturing in the country? Do you have any expansion plans?
We kick started our own ‘Make in India’ initiative two years ago in Danfoss. There were two key aspects that triggered this initiative – the tremendous potential for growth and thrust given by the government for the manufacturing sector.
Danfoss has a three pronged approach to make in India: First is to make in India for the Indian market, second is to make in India for the rest of the world, and third is to make components in India for application in global innovations. It thrives to make India the manufacturing hub for energy efficient solutions.
In India, Danfoss is constantly engaged in improving skilling across the refrigeration and air-conditioning sectors in India as there is a huge skill gap that exists here. Aiming to improve the skilling scenario in the country, Danfoss has set up refrigeration and air-conditioning and advanced drives laboratories across various colleges in India including YMCA Faridabad, VIT College, College of Engineering Pune, etc. to give hands on approach to future talent.
Having built a strong ecosystem of suppliers, we are evaluating more products to be made in India. Increased demand for processed and frozen food has edged us on to Make in India for India and for the world. Key market trends such as rising export demand for processed and frozen food has edged us on to Make in India for India and for the world.
Cold storages are dependent on steady supply of power. Apart from this, fuel constitutes a major portion of operating costs. So, what are measures taken by the company to make them energy efficient and superior?
Cooling or cold chain infrastructure can account for close to one third of the total energy consumed running into heavy operational expenses. This expense, when added to the installation cost of corrective technology is often the reason why the quality of optimal preservation gets compromised. However, with the right technology, engineered by Danfoss can save up to 33 % on the energy bill without compromising on food safety. With the wide range of control products from Danfoss, one can achieve the required flexibility to configure the most reliable and energy efficient solutions for every food store in your chain- A win-win situation for both the retailer and the consumer who only gets food in finest quality.
From helping banana farmers in Theni triple their profits to enabling grape growers in Nashik make world class produce by adopting the right cooling technologies, today as a trusted knowledge partner to state governments and institutions working relentlessly towards addressing the issue on food safety, Danfoss India for the last two decades has been working closely with policy makers and stakeholders in the cold chain at the centre and in several states towards ensuring that we develop a sustainable cold chain infrastructure.
What are the technological innovations that you would like to bring in your company to make the operations of cold chain logistics more efficient?
As indicated earlier we have made a 100-million-dollar investment in India of which a significant part is in R&D in the last 30 months since inaugurating the plant we have made significant progress especially in reverse engineering where global products have been engineered for better application in India.
Energy efficiency is at the core of our energy system development and one must understand that it has a direct impact on our GDP. Psychrometric (PSR) lab at our campus, which tests products for energy efficiency standards, has the potential to redefine manufacturing and designing of energy efficient products in India, thereby, meeting global standards of quality and reliability.
What will be the impact of GST on Danfoss’ cold chain business in India?
GST will be one of the significant moves for cold storage logistics and the transport sector. It will certainly enable cold storage investments. I’ll tell you why. If you take any infrastructure, we have a mindset in India that the internal rate of return (IRR) should be 26-27 per cent. That mindset is prevalent because of GST not being there.
Once GST is a law, people will be able to see that they can settle down for an 18-19 per cent IRR because they have a strong cash flow coming in. The cash is also getting locked in to the system, right? The cash will get released and investors will feel far more confident enough to put in their money.
The other side of the coin is that, lets’ say, you are shipping bananas from Tamil Nadu to Delhi. The whole logistics chain (intermediaries, aggregators, etc.) will now have one way of doing things, so you’ll have far lesser impact of cost escalation. In my view, GST would also have a significant impact on inflation; because it will be a derived spin off effectively that you will see moderating prices. People investing in cold storages, will of course benefit because as I mentioned earlier, one needs about 39 different approvals. Even to keep your record books, you need to file your taxation. It will get much more simplified in my view.
What are the growth drivers for Cold Chain Logistics? Which sector does generate the maximum demand?
With the advent of technology, the world is globally connected. Increasing interest in healthy food, are pushing cold chains for globalization. Globally, the focus now has shifted from increasing the production to better storage and transportation of food produce. Cold Chain now has become an integral part of the supply chain management for the storage and transportation of temperature sensitive goods. Utilization of cold chain logistics includes both the cold storages as well as refrigerated transportation and is used to increase the shelf life of food produce.
Ready to Cook (RTC) and Ready to Eat (RTE) segments of food industry are fastest growing segments due to rising demand from Modern Retail (MR) and Quick Service Restaurants (QSR).
What is your outlook for the sector for the fiscal 2017-18?
2016 was a landmark year that saw the Central Government has made some bold moves to better ensure transparent governance. We can reflect and laud on the milestones, in addition GST and demonetization took the nation by as much surprise and acceptance, setting the tone for a promising 2017. It should, therefore, be the year of reviving productivity, improving quality of production, conserving the food, building capacity and creating local and international market that can open avenues for the farmer community to double their income by gaining improved access to consumers through improved infrastructure.
The single gravest issue that needs quick redressal is that of the dwindling profit margins. With cash, the primary mode of transaction in the agricultural sector, having taken a hit with demonetization, farmers although the country achieved remarkable economic growth, growth in productivity has stagnated over time affecting the farmers. To revive this, the government should reduce excessive reliance on exports to developed economies by shifting to a development approach. In order to boost agricultural productivity steps must be taken to empower farmers through knowledge transfer on best irrigation practices, post-harvest food conservation measures across farm to fork and enable them with technology that can raise the bar in creating produce of global export quality. This will help curtail food losses; improve profitability and control inflation.
What are your expectations for the sector in order to bring the sector on growth trajectory?
Government should adopt, assess and implement programs from other sectors that has proved to be a best practice in optimizing utilization and minimizing waste. Government should consider linking the production centres to the consumption centres through cold chain grids. These if synchronized between producers and suppliers can connect key production areas with centralized distribution channels that ensure last mile delivery of the produce in the desired quality – For eg. There are a few flowers which can be harvested four times a day and have a demand both locally, mid distance markets, long distance markets and export markets.
By knowing the markets and timing the harvest the producers can meet the demand and have a higher share of wallet with reduced loss. This would, however, need an efficient cold chain network criss crossing the country. These networks for eg will connect Theni and Chennai in Tamil Nadu, Cochin to Coimbatore and Chennai to Bangalore etc. This network of well-equipped efficient cold storage facilities can serve as a warehouse for movement of perishables.