Structural Conduct and Performance Study - Executive Summary
Objectives of the study
Over recent years, the UK's building products sector has experienced
major structural changes including consolidation in the market, changes in
the relative power of buyers and sellers, and new relationships within the
sector and between the sector and its customers. In view of these changes,
the then DETR in close cooperation with the Construction Products
Association (CPA) decided to commission this study in order to:
- increase its understanding of the building materials sector;
- help the understanding and interpretation of short-term developments
by putting them in a longer-term structural text;
- provide a benchmark against which to assess concerns and representations
made about the sector and by the sector;
- help the understanding of the interaction between the building materials
sector and the rest of the construction industry;
- provide information on how the sector might develop and cope with the
demands made on it over the medium to long term.
Sector overview (chapter 4)
The building products sector comprises around 15,000 producers, of whom
up to 7,500 actively promote themselves as suppliers of construction
products. The sector is, however, characterised by diversity - with more
than 30 industries producing products for construction use. In addition,
there are just under 15,000 intermediaries, which reduce to around 7,300
when agents and retailers are excluded.
Enterprises with a turnover of less than £5 million account for around
20% of the production of the sector but about 85% of the number of firms.
The industries involved in the manufacture of building products employ
approximately 400,000 people. In common with many other sectors, there is
considerable merger and acquisition activity.
Annual domestic production of building materials is about £30 billion.
In terms of the value added by companies, it creates approximately £15bn
- around 2% of GDP. Approximately two thirds of production is distributed
through builders merchants.
Key issues (chapter 5)
Key issues identified in the research for this study and ranked by companies
and trade associations in the sector are:
- competitiveness, including efficiency/productivity;
- competition, consolidation and globalisation;
- industry improvement, including innovation, supply chain logistics
and partnering;
- IT/e-commerce;
- environmental issues and broader issues of sustainability;
- management style/respect for people, including training and employee
development;
- the role of government including competition policy, regulation and
taxation;
- quality and coverage of the information base for the sector.
Strengths and weaknesses (chapter 5)
Particular strengths and weaknesses referred to by interviewees included:
Strengths:
- innovation in production methods;
- relatively traditional materials and technologies (brick, concrete,
glass and steel).
Weaknesses:
- an excessive susceptibility to cost pressure;
- a lack of knowledge or understanding of how products are incorporated
into buildings and how site practices may affect value;
- poor relationships between the construction industry and material producers;
- a lack of innovation at product level;
- too much choice and too little standardisation;
- limited recycling of materials;
Relationship with government (chapter 3)
In respect of their relationship with government, the primary concern of
the building products sector has been a sense of remoteness from the DETR (
at the time of the report the Construction Sector Unit was in the DETR, it
is now in the DTI. The DETR is now the Office of the Deputy Prime Minister
and the Department for Food and Rural Affairs), particularly by comparison
with contractors. This is compounded by a perception that the sector's views
are not fully appreciated on some issues, such as legislation and
regulation. Small firms, in particular, consider the overall effect of the
administrative burden of legislation and the specific effect of certain
regulations to be disproportionately onerous.
Relationship with the City (chapter 5)
The building materials sector is poorly regarded by the City, and this
leads to low share valuations - which in turn tends to deprive companies
of capital for acquisition, and makes them vulnerable to hostile takeover.
This is currently a general problem for "traditional" industries,
but the building materials sector is seen to have additional problems including:
- a lack of companies with real scale;
- limited prospects for significant future growth; and,
- a perception that the industry is backward in innovation.
Responses to this, as suggested by City representatives, include:
- further consolidation, accompanied by a continuing concentration on
core business;
- more customer focused research and innovation leading to improved products;
and,
- better communication with the financial sector.
If companies continue to be under-valued, then there is likely to be an
increasing pressure for de-listing, with companies taken private either
by their management or by specialist funds.
Traditional building material distributors face new competition from "big
shed" DIY retailers; and a threat of disintermediation as a result
of suppliers keen to deal direct with their customers, new working practices
and e-commerce. The major distributors are responding by increasing their
national coverage; seeking partnering arrangements with major customers;
seeking closer relationships with producers; developing their own brands;
and seeking to bring added value in the areas of product knowledge, logistics
and customer service. Amongst the majors, responses are leading to increased
concentration.
Move to globalisation (chapters 4 and 6)
Globalisation is a real force in building materials, and is set to continue
at an accelerating pace. Although the figures could be affected by one major
acquisition, current foreign assets, investments and earnings by UK companies
very substantially exceed holdings by foreign companies in the UK. There
are, however, signs that this position could change as Continental companies
become increasingly international in their outlook, and with a strengthening
trend in the value of the Euro. The perception is that Continental companies
are at an advantage in a consolidating market because of the different nature
of shareholdings and business practice on the Continent. Indications are,
however, that these differences are reducing.
Research and development (chapters 4 and 6)
The low priority given to research and development is reflected in the
low R&D spend by the sector (at 0.6% of sales) by comparison with other
industries/ sectors (for example, automobiles at 3.6%). Opportunities for
improvement and innovation in products include: improved design quality;
improved lifecycle characteristics; a reduction in waste and defects; and
greater acknowledgement of the needs of sustainability. Opportunities for
innovation and improvement in processes include: increased prefabrication
and off-site assembly; reduction of waste and on-site re-working; new products
which provide additional utility or which assist the speed or economy of
the construction process itself.
IT/e commerce (chapter 6)
Information technology will be the source of significant change in the
near future. Change will be accelerated by three developments: the use of
object modelling in computer-aided design; the impact of e-commerce; and
the electronic exchange of project information. The price transparency and
worldwide reach of e-commerce is likely to lead to an ever-increasing downward
pressure on prices, reinforced by greater ease of foreign sourcing. E-commerce
also poses the threat of disintermediation of companies whose function is
essentially the management of a transaction without the provision of value-adding
services. E-commerce also creates opportunities, particularly in a reduction
in businesses' own transaction costs, in reduced prices in their own supply
chain and in increased industry integration through improved communications.
The following work is recommended to take forward the findings of this
report:
- further research into the sector's productivity against other sectors/industries'
and other countries' performance;
- further research into the ramifications of increased consolidation
and globalisation on the sector's performance;
- devising a strategy for sector improvement including close links with
construction industry improvement initiatives,
- innovation, partnering and the establishment of key performance indicators;
- research into the opportunities and threats to the sector from innovations
in IT and e-commerce;
- research into the opportunities and threats to the sector from the
construction industry demanding more sustainable and pre-manufactured
construction products;
- devising a strategy for pushing forward 'respect for people' issues;
- reviewing the effectiveness of the fora where legislation and Government
policies which impact on the sector are discussed;
- a review of data need and data availability should be undertaken to
include an examination of how to exploit ONS data using aggregations of
companies rather than the standard industry analyses.
Particular study is recommended of different industries within the sector
which would be diagnostic of the different challenges facing large and small
and medium sized companies.
For an electronic copy of the study please send an e-mail to: materials1@dti.gsi.gov.uk
