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HAMISH MCRAE: The fatal flaw in cheap supplies

HAMISH MCRAE: Governments must think about consequences of legislation – if shelves are empty over Christmas they will be blamed


We have to create a more robust economy. In the past few days, we have had more small energy companies go bust, a huge surge in gas prices, warnings of a rise in food prices at Christmas from Tesco, BP petrol stations running out of fuel and warnings of food shortages. 

We have also had fears there won’t be enough fireworks for bonfire night or enough Christmas trees and, to cap it all, two crumpet factories having to shut down because of the shortage of CO2. 

This is ridiculous. It is all very well to talk of our electricity industry being hit by several problems at the same time: the rise in global gas prices, a fire that has put one of the connecting cables with France out of action, too little wind, nuclear plants undergoing maintenance and so on. 

Rethink: If the shelves really are empty over Christmas, Government will get the blame

However, that begs a string of questions, such as why have we not built more gas storage? Is it really a good idea to import so much power from France? Why are delivery drivers not paid more? And, so on. Besides, we all know that the wind sometimes does not blow. 

It was all very well to try to introduce more competition into the gas and electricity industries but the way it has been done is to allow lots of tiny enterprises, often with inadequate financial backing, to offer cut-price deals to gullible customers, only to go under when things turn tough. 

And it is all very well to blame the shortage of HGV drivers on supply problems, but this is a longstanding problem as not enough young people have been taking up licences. Maybe they should be paid more. 

This is not just a matter for Britain. All around the world there are supply-chain issues. German car plants have had to cut production because of shortages of computer chips. 

Bank of America has just warned about the problems in the US, saying that ‘Christmas for retail will very much be about empty shelves’. 

One of the reasons why Russia is restricting its gas exports to Europe is that it has to rebuild domestic stocks first, as they have been run right down. 

So what’s to be done? 

Companies all over the world have spent 30 years and more focusing on squeezing down costs rather than building security of supply. 

So small local plants have been shut in favour of some giant factory on the far side of the world. Warehouses have switched to just-in-time operations, and stocks have been minimised. 

The UK has been particularly hard hit, with the relentless rundown of manufacturing for a generation, but we did not realise how fragile things were until the pandemic struck. 

Now the mood has changed. There are three main ways in which companies are trying to reorganise themselves. One is to buy locally. 

Of course, there are some products we will always have to import. You can grow pineapples in a heated greenhouse in UK, but it makes more sense to import them from somewhere warmer. 

But there are lots of products that are made here and one of the side-effects of Brexit disruption has been to encourage local suppliers. 

A second way of tackling one aspect of the problem, labour shortages, is to invest in more automation, something made easier by 5G telecom networks. 

A third is for companies with any spare logistical capacity to sell that to other enterprises, making the whole distribution system more efficient. 

All this will take time and cost money. Greening the economy is admirable, but that takes time and costs money too. 

A whole generation of managers who have spent their careers trying to screw down costs have to learn the new trick of creating a more robust, and more local, network of suppliers. 

There will be winners, including firms that manage their logistics skilfully, and specialist suppliers of top-end products. And there will be losers, companies that can’t cope. It won’t just be the third-rate energy companies that go under. 

The really big message here for businesses is that globalisation, the dominant force driving the world economy, is changing direction. Things had started to go more local before the pandemic struck, but now the shift has massively speeded up. 

The big message for governments is that they need to think about the consequences of every bit of legislation they bring in: does this make our economy more robust or less so? If the shelves really are empty over Christmas, they will get the blame too.

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