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THE ECONOMIC SQUEEZE
Despite Britain’s economic climate being a somewhat uncertain one, it can often feel like big companies will come out of the recession relatively unscathed. But what will the repercussions be for smaller businesses?
Professor Edwards Professor Holt
The ongoing economic downturn is unfortunately causing quite severe problems among construction business supply chains; especially for small-to-medium sized enterprises (SMEs) that rely on mechanised plant and equipment to carry out their work. Professors Gary Holt and David Edwards, from the Centre for Business Innovation and Enterprise at Birmingham City Business School, even suggest that the broader ramifications of this have implications for the UK economy at large and they have been researching the effects of poor macroeconomic conditions on SMEs and their business relationships, among construction supply chain members.
They point out that smaller construction businesses often hold significant levels of investment in plant and equipment, as a way of improving their productivity and sustaining higher output. But, physical assets require high levels of utilisation to justify such investment and for many
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firms, and this is no longer possible due to downturn in demand. What is more, there is little profit to be made from work that is currently available. According to both Professors, the result has a very direct effect on the future existence of these firms.
Professor Holt said: “Ongoing negative economic pressure is causing financial instability among smaller construction businesses and equally, putting strain on supply chain relationships as firms fight it out in a cutthroat market, to try and secure work and maintain cash-flow. We have discovered that many firms who rely on plant and equipment to execute their work activities are in some instances not even charging the use of this to clients, in an effort to trim tenders to the bone and win contracts.” This, the professors are keen to emphasise, is an unsustainable situation.
They suggest a two-pronged remedy to help address many of these plant utilisation and supply chain issues. Firstly; increased government investment in roads, schools and other forms of public infrastructure, and secondly, through improved corporate tax incentives for new plant and equipment purchases. Another point they make is
that, regardless of the present economic climate, the UK needs infrastructure investment if it is to remain a strong economic player into the 21st century. “So in that case, let’s do it now and help these struggling businesses.” Professor Holt argued, also suggesting that their remedy would buoy up construction demand, help bring profitability back to the sector and encourage investment in mechanisation.
Professor Edwards said: “This may seem a contradictory standpoint in the face of present austerity measures. But the alternative is to continue to witness a sector of the UK economy that is ripping itself apart, losing highly skilled people from its workforce and is, in many ways, going backwards rather than enhancing its future ability, in part through mechanisation, to produce its products efficiently and at best value.”
The professors’ data also indicates that nine out of the top 10 selling off-highway plant items within the UK witnessed a severe decline in new sales following the onset of global financial crisis and subsequent UK recession circa 2007. But they point out that construction’s business problems exceed this lack of investment in mechanisation
alone. They also highlight that clients are ‘using’ the present economic conditions to get construction work done for absolute minimum capital outlay. But, the resulting pressure on subcontract SMEs to reduce tender sums encourages shorter project durations, leads to corners being cut in terms of quality of constructed products and poorer health and safety conditions for construction workers.
In short, the professors argue that to ignore these problems now, especially the issue of declining investment in construction mechanisation, will be at the peril of our national economy later. “Declining investment in plant and machinery among construction businesses – not only in terms of new products but also regarding the maintenance and upkeep of existing fleets – means that as a nation, our future ability to apply mechanisation to enhancement of productivity is weakened. This really does not bode well for UK plc in the longer term and if broader economic recovery were to be swift, it will certainly hold the sector back.” Professor Holt concluded.
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