The CPA forecasts that by 2019 UK construction output will increase 17% to approximately £154 billion. To do this, the UK must have a strong, local manufacturing supply chain which avoids the need to rely on imports. In the short-term, UK construction product manufacturers can satisfy this demand for materials and products. In the long-term, however, this growth may be hindered without additional investment here in new manufacturing capacity and skills to increase production volumes and improve productivity. To illustrate this, the CPA’s ‘Product Manufacturing Capacity Utilisation’ report predicts that, without additional investment in capacity, there could be a pinch point in product manufacturing as early as 2019 Q4.
One of the major challenges faced today by both the UK government and business leaders is ensuring that this country is viewed as a favourable location to invest. Such an assessment involves many factors; e.g. corporate tax rates, investment in infrastructure, labour force efficiency and flexibility, open access to markets, political stability and monetary policy.
Two factors which more directly impact CPA members are energy and regulatory risk. Energy is a key component of manufacturers’ operations, so its cost, stability of supply and security are very important, especially when comparisons to other countries suggest UK companies may be at a competitive disadvantage. Similarly, the sheer number and complexity of UK and EU policies and regulations, together with the need for harmonisation both externally and internally (and increasingly with devolved UK regions) has proven to be an impediment to those companies wishing to invest here.
Taken together, these concerns have already begun to directly affect decisions about future investments in the UK. The CPA’s Study of the Factors Underpinning Investment in the Construction Products Industry analyses these further and also surveys our members to gauge how they feel about the long-term prospects for their industry in the UK.
[In its Study of the Factors Underpinning Investment in the Construction Products Industry the CPA identified 132 current and pending UK and EU policies and regulations impacting the industry and mapped these according to classification and region.]
In its Study of the Factors Underpinning Investment in the Construction Products Industry the CPA undertook to analyse the factors which can increase business risk and hence can inhibit investment, innovation and resources. This report demonstrates that there are many positive reasons to invest in the UK compared to other countries. In certain sectors, however, regulatory and policy risk is very real and already hindering investment despite the recovery in the construction market.
Most of our manufacturers will have investment timeframes for a typical new facility of between 10-30 years. With this in mind, to help reduce their risk and foster confidence that will encourage long-term investment, innovation and growth, the report recommended that government should:
- Ensure that regulations are clearly defined, measured by performance and target-driven, but not prescriptive. Policy and regulation should be clear and unambiguous with minimal administrative burden.
- Consult early and regularly with industry and across all relevant government departments to identify problems, review measures, provide solutions and evaluate results.
- Provide certainty by publishing a long term plan – not just over five-year parliamentary cycles – with clear goals to allow time for industry to prepare and plan investment.
- Avoid making unplanned changes once a policy is implemented.
- Cross-party consensus should be sought in advance for policies which are key market drivers (e.g., housing and infrastructure) to prevent harmful changes occurring due to party politics.
Industry also needs to demonstrate leadership and play its part in helping develop effective policy and regulation. This can be done by working together to establish a consensus and:
- Speaking as a supply chain with a consistent voice to government.
- Providing government with high-level, outcome-focussed, strategic input which avoids commercial differences.
- Supporting well-considered, effective regulations with credible, practical solutions that are fact and evidence-based.
In September 2015, the CPA published its latest ‘Capacity Utilisation Update’, which followed the original 2014 research to determine capacity utilisation in the construction product manufacturing sector over the past six years. The report also provided a projection of construction output to 2025 to indicate future long-term demand.
The original analysis highlighted potential pinch-points from increases in construction activity over the next decade. In addition, it showed the necessity for new investment in UK product manufacturing, without which the UK construction industry would be increasingly reliant upon imports that are, in turn, subject to issues of supply and security. The latest key finding include:
- Construction activity is projected to rise 2.2% per year on average to 2025 in the central scenario
- Without additional investment, there could potentially be a pinch-point in product manufacturing capacity as early as 2019 Q4
- Imports of construction products as a percentage of construction output have remained stable in the past 30 years, but without investment in UK product manufacturing the trade deficit will deteriorate further
“Our weak productivity shows we don’t train enough or build enough or invest enough.”
(George Osborne, Chancellor, 2015 Budget speech)
Productivity is a measure of output per person, and ultimately shows the amount produced by a company (or industry, or nation) after costs have been removed. The more productive the company, the higher its output per hour. Productivity is particularly important as it reflects a company’s ability to make its operations as efficient as possible, usually through investment in new plant and tools, new processes and new skills for its workforce. A nation may improve its productivity by investing in the kinds of infrastructure (roads, rail, energy, broadband, etc) which enable business and society to operate effectively. In the end, it is only with improved productivity that a company can remain competitive and profitable. For CPA members, the success of their efforts to improve productivity can be viewed from two perspectives; as manufacturers and as part of the wider construction supply chain.
Although only 10% of the total UK economy, the manufacturing industry has historically supported above-average levels of productivity through higher incomes, skills and advances in technology. The construction products sector, comprising approximately 10% of all UK manufacturing, has witnessed this same contribution. The sector is capital and R&D intensive, and therefore particularly benefits from investments to modernise factories; for example, with improvements in energy use, new materials, digital technology, cloud collaboration and robotics.
The UK construction industry, by comparison, has seen (according to ONS statistics) stagnant levels of output per worker for nearly two decades. The industry is very labour-intensive, and yet has attracted little concerted investment in attracting the next generation of workforce or up-skilling the existing one. Nor has the industry acted en masse to adopt technology which could offer labour or time-saving alternatives such as modern methods of construction or on-site automation.
Still, the construction industry is showing signs of recognising this investment potential. Support for Building Information Modelling (BIM), for example, has increased to such a degree across the supply chain, from architects to manufacturers to builders, that the UK is now considered a global leader in the technology. Furthermore, while few in the industry would dispute that it lags other sectors, the simplistic way which productivity is measured can obscure the important advances in quality, standards and health and safety which have occurred over the past 20 years.
Finally, the construction industry as a whole has also begun to recognise one of the key obstacles – long familiar to manufacturers typically basing investment decisions on 10-30 year time frames – to attracting further investment for improved productivity: the lack of certainty around the future pipeline of work. This uncertainty exacerbates the inherent cyclicality and volatility of construction business cycles. Industry has addressed this by successfully petitioning government to provide help through publishing the National Infrastructure Plan. Industry and the UK government have also worked in partnership to study how large project pipelines can be coordinated to make the most effective use of labour and production capacity.
In order to identify the extent to which political and regulatory risk affects businesses’ investment decisions, the CPA surveyed its members and the wider industry (see A Study of the Factors Underpinning Investment in the Construction Products Industry). Specific examples are highlighted in the case studies below:
- The Impact of the Help to Buy Scheme
- The Impact of the National Infrastructure Plan
- The Impact of the EU Emissions Trading Scheme
- The Impact of Part L on the Boiler Industry
- The Impact of Part L on Glass Manufacture
- The Impact of ECO and Previous Schemes on Insulation Manufacturers
- The Impact of the Green Deal