Scroll has an article from from a CEO of a multinational company in India who prefers to remain anonymous (perhaps fearing trolling).
He is in the logistics business.
I am the Chief Executive Officer of a multi-national corporation, and I am still reeling under the demonetisation policy announced on November 8, 2016. I will neither disclose my name nor my company’s, lest there is a blowback. But the figures and facts that I will cite are all from our books or mentioned in our in-house discussions. It will give the reader a sense of the disruptive consequences of demonetisation.
The business I head is engaged in transporting containers packed with finished goods or raw material for export and import. Readers must have seen these containers, in colours of blue, violet, grey and white, loaded on trailer trucks groaning down the highway.
Containers arrive at seaports, and my company loads them onto trains to transport them to dry ports. Here, after custom formalities are completed, containers are unpacked and goods are dispatched on trucks to importers. At times, we undertake this last-mile delivery as well. Obviously, we also take containers from exporters and move them by rail wagons to seaports, from where these are shipped out.
The trains we use are our own, each of which has 45 wagons. We handle 10,000 containers a month, or 2,500 a week, to and fro from the hinterland to seaports. We pay a haulage charge to Indian Railways for using its facilities to run the wagons on its rail-tracks. This charge constitutes a substantial chunk of our operations cost.
Our rates, therefore, comprise operations costs plus our margin. Our profit before tax hovered around 2.5% of our revenue, obviously, before demonetisation took the fizz out of the business.
The CEO says their profits halved despite they following cashless transactions for a while. Why? Cash has been king in India and hits you bottoms up.
Obviously, readers may wonder why a business not dependent on cash has taken a hit because of demonetisation. To this, I cite the cliché: “A [business] chain is as strong as the weakest link in it.”
In the chain of our business, there are links which are dependent on cash – and, therefore, susceptible to any cash crunch.
Take the business of metal scrap, imported in high volumes by traders in India. They sell the scrap to foundries, where it is melted and the metal extracted. A percentage of the imported metal scrap is pre-booked at a fixed price. The rest is retained for speculative purposes, and sold at a higher price to make a killing. This portion of scrap metal is bought and sold in cash. With no cash around, the demand for scrap metal contracted sharply, prompting traders to cut down on their imports.
Since the volumes of imported scrap metal dipped, we had fewer containers to handle. Demonetisation did not slash us in November because containers were already at different points of transportation. But the cash-crunch of November affected us severely in December.
Then again, as I have already mentioned, the last-mile transportation is by trucks. Few in India have large fleets of trucks. It is only they who are engaged in cashless transactions. All others insist on cash payments. Because of the cash crunch the truckers jacked up their rates, not least because their payments were to come in invalidated currency notes that would need to be converted into new ones at a discount.
Since the rate for transportation zoomed up, the cost of goods inclusive of freight charges increased. To keep intact their profit margins, the importer-exporter took to harrying us for a discount. After all, in popular imagination, multi-national companies can absorb lower rates. On many occasions, we gave in. It is better to keep your clients than to have them run to your competitors.
One is surprised how it took us so long to figure this bit..