Iain Parker considers strengthened supply chains in the face of US-China trade wars, impending Brexit tariffs and an ongoing pandemic - plus the need to cut carbon
The topic of supply chains in construction has always been a talking point, but over the last few months it has been thrust into the spotlight for a few reasons: US and China trade-wars, tariffs as a consequence of Brexit, the increasing criticality of carbon and, oh yes, a global pandemic. Given all of this, it is a fair assumption that supply chains will remain a crucial issue for some time to come.
When orders are placed with contractors, which then travel to sub-contractors, and then perhaps sub-subcontractors, and then suppliers, who in turn use other multiple manufacturers, it’s easy to see how the multiple-layering of international trade can create complex supply chains which are often impossible to fathom.
There are, of course, more straight-forward routes to market but the truth is that most construction elements are reliant on the performance of multiple organisations and countries.
Manufacturing nations are generally those who score well on key criteria such as low labour costs, large labour pools, favourable tax structures, good infrastructure, efficient regulation, low energy costs and, where appropriate, effective skills and training regimes.
We may find that Eastern Europe emerges as an area of growing importance with its lower input costs
While China has been the ‘world’s factory’ for a while, it has started to lose ground to other countries in the region such as India, Thailand, Cambodia, Indonesia and Vietnam. However, for the UK construction industry, we may find that Eastern Europe emerges as an area of growing importance with its lower input costs and good access to Western Europe. Places such as Ukraine, Serbia, Hungary and the Czech Republic have the potential to become attractive manufacturing hubs.
At the end of the year the UK will leave the EU and its associated free trade relationships, leaving many concerned about the additional cost of importing construction goods. A few months ago the government issued a list of tariffs which will be applied to some 12,000 commodities if there is no agreed trade deal in place, and given that recent trade talks have been reportedly unproductive, this gives us at least a glance at what could be coming down the track.
The tariffs are largely combined into three sections - liberalised, simplified, or no change - giving the impression that all tariffs have been reduced. However, it is important to acknowledge that unless the new tariff for a product previously sourced in the EU is zero-rated, any change will represent an increase from the current free-trade agreement with the EU. Of greatest concern is that some commodity groups attract high tariff levels and could disproportionately affect some trade packages, but we will have to see how the next few months play out.
Putting the cost of imports to one side, key challenges of embracing a new supply chain model and alternative manufacturers include the unknown (a resistance to trying something new), nervousness over quality, market acceptance by funders and occupiers and satisfaction over client or contractor corporate governance. The other perhaps more interesting challenge is the extent to which architects and engineers can, and would want to, design to suit an efficient supply chain model. In short, is it possible to start to reverse the traditional way of doing things so that supply chain capability and efficiency starts to influence the design of the building? I know that there are some developers who believe that each of their buildings should have a significant inventory of standardised products, which would benefit from bulk buying cost savings, certainty of design solution and performance and easier maintenance regimes as products are replaced from spares stored in the ‘portfolio warehouse’.
Turning to the opportunities, there are several good reasons to support the simplification of supply chains. Simplicity often leads to efficiency, and this often leads to strong performance, or as others would say: quicker and cheaper. It is not just the layering and multiple touchpoints between contracting parties that needs simplifying, but also the geographic foot print of these parties – not to mention the complexity of the components that are being manufactured. The increasing focus on embodied carbon should be driving the sourcing of products as close to home as possible, which in turn should be reducing the risk of failure in delivery, a win win.
Over the last few decades, the UK has moved away from a manufacturing nation, and our imports have grown as we have become reliant on other countries to supply our construction materials. However, it is clear that effective and sustainable supply chains for our industry need a thorough review as the risks and opportunities of off-shoring v near-shoring v home-shoring need to be carefully considered. After all, a sensible balance needs to be struck between price point and robustness against future disruptive events.
Iain Parker is a partner in Alinea