Localisation of major construction supply chains likely to accelerate

Overall, more than half (56%) of respondents said they anticipated a shift away from globalised construction supply chains and towards more local and domestic procurement. This expectation was found to be particularly strong among respondents located in the UK (62%) and Europe, the Middle East and Africa (58%).

Localisation of supply chains

This turning point in the deglobalisation of massive construction supply chains has been prompted in large part due to the implementation of a raft of protectionist policies by major trading blocs like China, EU and the US, where president Biden is using up to $1 trillion of subsidies to boost its domestic production of microchips and climate technology.

Localisation is causing a noticeable shift in investment in supply chains – a trend that will likely accelerate over time as other nations react to US efforts to onshore manufacturing. In Germany, for example, economy minister Robert Habeck suggested in March that the federal government could soon impose export restrictions on China to prevent it gaining a technological edge over European manufacturers.

While there is no strong evidence of decoupling between US and China yet, there are now much greater trade barriers globally. In this climate, and while supply-chain disruption resulting from Covid remains in our memories, efforts to boost their own resilience have forced dozens of nations to push for stronger localised supply chains.

While deglobalised supply chains come, in large part, as a response to the unprecedented disruption that nations struggled to weather during the Covid-19 pandemic, there are also increasing requirements placed on firms to reduce their carbon emissions. The construction industry, which accounts for high levels of CO2 emissions across its value chain, is not immune to these seismic shifts.

The EU Carbon Border Adjustment Mechanism

From 2026, the EU Carbon Border Adjustment Mechanism (CBAM) will require EU importers to buy carbon certificates corresponding to the carbon price that would have been paid, had the goods been produced under the EU's existing carbon pricing rules. If a non-EU producer can show that they have already paid a price for the carbon used in the production of the imported goods in a third country, the corresponding cost can be fully deducted for the EU importer.

The plan is part of the EU’s ‘green deal’, designed to reduce net greenhouse gas emissions by at least 55% by 2030, compared to 1990 levels. It follows a resolution from the European parliament in March 2021 advocating for the introduction of a WTO-compatible CBAM. A proposed transitional period for the CBAM from 2023 to 2025 would see importers required to report emissions embedded in their goods but not have to pay anything.

CBAM will eventually apply to carbon-intensive products including cement, steel, aluminium, and other commonly used construction materials. This will mean near-shoring of production and, inevitably, much higher costs of production as firms avoid importing cement and steel from China and other low-cost production centres associated with higher-carbon intensity.

The Inflation Reduction Act

The Inflation Reduction Act (IRA), passed by US lawmakers in 2022, is fuelling an investment boom in manufacturing and clean energy industries in the US.

The IRA includes a $370bn fund to encourage domestic manufacturing, but these efforts are also attracting huge sums of private investment for both manufacturing and infrastructure. As a result, the US tech manufacturing industry has essentially become a magnet for global capital, draining investment away from traditionally lucrative territories like the UK and the EU.

The IRA is fuelling a boom in US non-residential construction – everything from clean tech and energy production, EV battery plan and wafer fab plants, where the US share of global semiconductor manufacturing capacity has decreased from 37% in 1990 to 12% in 2021, according to the Semiconductor Industry Association. This comes at a time when the US construction sector, along with many other developed countries, is experiencing a down cycle in residential construction as Fed and other central banks raise interest rates.