Future Gazing - introduction and key findings
In this report we explore the sectors and locations which could benefit from reconfiguring supply chains.
7 minutes to read
Introduction
Some locations will be better poised to take advantage of any reshoring of manufacturing operations. The locations to benefit are likely to be determined by existing trade links and industry, making use of existing infrastructure and skills. Growth sectors will be those where the UK has an advantage in terms of production and access to a sizable consumer market for the produce. A desire to make critical supply chains less reliant on international cooperation may also result in growth for critical sectors such as energy, food, defence or biomedical technologies.
The logistics sector has seen a boom over the past two years, with growth driven by discretionary consumer spending along with greater adoption of online shopping platforms. As we enter the next phase of the economic cycle and perhaps a new era, logistics investors and operators must look for opportunities and assets well-positioned to provide stability. Stability for their operations and for returns.
Through the past three years we have experienced a supply-side crisis. A global pandemic, along with economic and political turmoil, rapid inflation, rising energy scarcity and a need to transition to low-carbon energy have rocked global supply chains. Simply restoring the old order is unlikely to solve the crisis and provide much needed resilience amidst a shifting geopolitical landscape.
The current (or perhaps old) world order established a globally interconnected world, built on the back of factor-cost arbitrage and an opening up of global trade. However, geopolitical tensions and protectionist policies are on the rise, while cost differentials are dissipating, as more capital-intensive production and logistics operations offer promise of reduced risk, shorter lead times and lower operational costs.
Rather than turning the back the clock on globalisation, reshoring or greater domestic sourcing strategies should be considered as part of a broader reorganising of global supply chains. It is not yet clear what this will mean for global supply chains, infrastructure and logistics. But as supply chains evolve and manufacturing hubs move, there will be new requirements for the logistics sector – in terms of locations and specifications. This will mean opportunities.
10 Key Points
- First Mile logistics, assets are focused around key import and export locations including ports and airports, freight terminals as well as key road junctions. Demand for these assets and locations is determined by the volume of goods flowing through these nodes. Higher levels of production and trade, or an increased need to hold more stock, all drive up demand for these First Mile logistics assets. Investment in infrastructure and logistics may be necessary to increase the flow of goods through a specific node or port and this may offer opportunities for firms and operators to move, improve or change their supply chains.
- Investors are becoming increasingly aware of the opportunities in the First Mile of the supply chain. First Mile markets allow distribution firms to build and maintain a secure and responsive supply chain for their end users. This demand will continue, with the potential to create attractive opportunities for investors looking to deploy capital into assets underpinned by strong structural tailwinds.
- Numerous events have driven a breakdown of First Mile (and Middle Mile) logistics across the global supply chain in the past few years, and the impacts have been severe. Companies can now expect supply chain disruptions lasting a month or longer to occur every 3.7 years, and the most severe events can have a major financial impact (McKinsey Global Institute).
- There are various ways that businesses and countries can look to protect their supply chain infrastructure, to lower the risk of shocks and improve resilience. Broadly speaking, these fall into three categories, they can improve existing supply chains, through investment in technology or infrastructure, they can move or diversify their production bases, or they can change their supply chain or distribution model, this may mean holding more stock or moving their distribution base.
- Improvements may mean building in redundancies or holding more inventory. Trade tensions, labour shortages and COVID-related shutdowns and shipping disruptions have weakened the case for just-in-time strategies. Firms are increasingly adopting a “just-in-case” approach. This could have a significant impact on storage space requirements, particularly for sectors with long, lean supply chains where lead times spiked dramatically over the past couple of years.
- Additional warehousing costs, coupled with the costs and risks associated with ordering and holding more stock, may lead firms to consider moving or diversifying their supplier base in order to reduce lead times and limit uncertainties. As manufacturers move their facilities, or add additional production bases, they also have the option to upgrade their facilities, automate more of their production and operations and invest in smart and green technology. Firms looking to invest heavily in technology and automation will be less reliant on low-skilled, low-cost labour thus eroding any cost advantage from locating offshore.
- Port-centric supply chains can reduce the number of handling stages during storage and distribution and improve the environmental resilience of a supply chain. A port-centric model may incorporate storage, distribution as well as manufacturing and production facilities. Developing port-centric logistics depends upon the several factors: The accessibility to major consumer markets, regional markets and infrastructure, the availability of land for logistics, the availability of labour and investment incentives.
- We have developed a scoring model to investigate which of the UK’s ports offer the best potential. We have scored and ranked 41 ports across the UK, using weightings based on broad, generalised requirements. Despite only ranking top for one individual metric, Liverpool ranks top overall. It ranks highly in terms of capacity (4th) and in terms of expected exports growth (1st) and import growth (4th). It also scores well for the size of logistics market (4th) as well as availability of land (3rd), access to consumer markets (3rd) and skilled labour (3rd), and it benefits from Freeport status.
- Firms across a range of industries are talking about reshoring. Pharmaceuticals and healthcare related industries top the list but there are also automotive firms, including those focused on alternative fuel vehicles. There are technology and biotech firms, as well as batteries and semiconductor firms.
- The ability of the UK to capture the growth in global high tech industry and to attract manufacturing to (or back to) the UK will depend on various factors, including: labour costs, availability of skilled labour, infrastructure reliability and connectivity, investment incentives, corporate tax rates, political and economic stability, access to markets (trade agreements) as well as regulatory efficiencies, the rule of law and the level of state intervention in investment and financial processes.
Conclusions
Global economic growth is slowing, with heightened levels of uncertainty and rampant inflation is impacting household purchasing power. These factors are likely to weigh on the UK economy and the industrial and logistics sector. However, while cyclical factors may dampen prospects for the short term, the secular rise in the need for resilience does pose some longer term opportunities, along with challenges for the sector.
The reconfiguration of supply chains, the need for some firms to hold additional stock and the reshoring and the broader growth potential for UK manufacturing will necessitate a dynamic and evolving the UK industrial and logistics sector and this means opportunities, for investors and for logistics operators.
A need to improve the resilience of domestic infrastructure, supply chains and logistics will mean a need for increased investment in ports and in rail freight. New terminals, or locations undergoing upgrades and particularly new multi-modal hubs are likely to appeal to logistics operators as they look to improve efficiencies. The need to hold additional safety stock may simply mean they look for more efficient ways to hold stock within their existing facilities but some firms close to capacity may need to bring forward expansion plans.
Shifting global supply chains and changing global production bases will also have implications for the UK, both as an opportunity to grow its manufacturing and logistics base and changing trading relationships will mean shifts in terms of location preferences. The reshoring of production could lead to an increasingly diverse occupier base, with demand coming from high value, advanced manufacturing firms and others who will have different requirements in terms of facilities, locations and labour etc. These producers will also have distribution requirements, further impacting demand.