Tho’ much is taken, much abides

Recent terrorist attacks cast a long shadow across the world and our thoughts are with all those affected. It is impossible to sum up all we have lost and make instant assessments of how much will change – and we’re not going to attempt that here. This is obviously a fluid situation and there will be change and significant challenges ahead, but much will endure.   It seemed right to us in that vein that we stick to the topics we’d pencilled in for this week: the changing nature of work, construction challenges and the brightening outlook for India.

The future of work

The world of work is changing. In the UK, self-employment is a 40-year high. Terms like ‘gig economy’ and ‘sharing economy’ are being used to describe the different ways people approach employment and how they use private assets to make money.  You might have seen some recent research from McKinsey , which examines how likely jobs are to be automated. You can check the likelihood of a robot taking your job here. Bank of England research suggests that 15 million jobs in the UK could be at risk of automation – including 95% of accountants. Although we’re not quite ready to welcome our new robot overlords at EY, this clearly isn’t a trend any company can ignore.

The impact on the ground is mixed. Analysis from the New Policy Institute suggests that  whilst the number of self-employed might have increased to record levels, the amount of business generated by companies with zero employees has remained static since 2008.  This means turnover by business has declined, given the rise in numbers. There will be so many factors at play here. Global competition from lower-wage economies has squeezed freelance income in areas like copywriting  If there is a rising ‘gig economy’, it may be that part of this rise in self-employment isn’t so much a rise in people running their own business as taking on a patchwork of roles created by disruptive businesses –  like Uber.

David Pouffle, an Uber strategist, recently noted that: “For most people, driving on Uber is not even a part-time job …it’s just driving an hour or two a day, here or there, to help pay the bills.”  Some people choose and enjoy this form of working; but the rise in insecure income streams certainly raises questions for consumer-facing businesses, including lenders.

As we’ve mentioned before, we may also need to reassess what we mean by ‘investment’ in this new economy. Technology and changing working practices have already seriously muddied the waters between consumer and capital spending. Employees now use personal phones, tablets, laptops and Wi-Fi in a business context.  Individuals are effectively using privately owned cars and spare rooms as businesses, without these showing up on any capex figures. This isn’t just an academic challenge. Companies need to think about how they compete and differentiate against new low-capex, nimbler models. As more people turn to self-employment – through choice, or perhaps because all or part their job is now obsolete –  a potential new army of workers also emerges to fuel the disruptive economy to uncertain effect. Who have thought that waffle houses could disrupt parcel delivery in the US?

How can companies adapt?  They obviously need to put their clients are the heart of this discussion, looking at how they can serve them better and learn lessons from the disruptors. It’s interesting to note the growing number of taxi companies now who offer online booking and tracking. They’ll need to see the world as the client sees it – i.e. without barriers. If consumers want cars with inbuilt Wi-Fi capability, manufacturers will need to buy technology and form alliances to make this happen. Clearly some companies will need to rethink their asset and staffing models, reassessing  how much they’ll like to ‘rent’ in both cases.  Companies can also use technology to better utilise assets and staff and create communities amongst freelancers and contractors.  If you want to read more on this, Uschi Schreiber, EY’s global vice chair for markets, has explored the issues for professional services firms – but with clear lessons for other industries.

Constructing success

Betting against the UK housing market has to be somewhere up there with betting against the Fed in terms of bad ideas.  The market obviously took a hit during the financial crisis, but has risen back strongly since.  UK house prices grew 6.1% in the year to September, up from 5.5% in August – a six-month high and the 41st consecutive month of growth.  But, how do we square this rise in prices – and buoyant reports from house builders – with four recent profit warnings blaming a sluggish housing market?

The first thing to note is that this doesn’t look like a lack of demand. House builders say their houses are selling like hotcakes –albeit subsidised hotcakes. These warnings seem driven by a lack of supply in the secondary market, given their focus in estate agents and the DIY-exposed. These groups thought the pre-election slump was the aberration, but volumes haven’t really picked up, lowering their forecasts for the year.  Estate agents cite factors like a slower central London market and the impact of higher stamp duty at the top-end as part of the reason for the slowdown. Price is obviously also a factor – as it has been for a long time. It’s not just first time buyers who are finding the first move out of reach. Often the next move up the ladder has moved out of reach – and this stalls the market.

The outlook for construction as a whole remains mixed.  House builders are obviously in the pink, but official figures released at the end of last week show construction output as a whole contracting for a third month in September. This contrasts with other survey data, which suggests a slightly brighter output; but, in any case, it is margins that remain the real issue, especially for contractors, who are struggling to achieve figures over 2%. The sector’s fragmented structure encourages a highly competitive bidding process, generating contracts that leave little or no room for error. We believe the sector needs to see a 50% reduction in top-tier contractors and for the group of 15 top contractors to drop to as few as five. This would create the necessary operational and investment advantages of scale and meet demands for larger projects and an international footprint.  A handful of high-quality operators could lead the consolidation, although Sovereign Wealth Funds and continental European and South East Asian companies have also expressed interest.

The emerging exception?

The term ‘emerging market’ or similar is obviously too broad – and becoming dangerously so.  The country that brings this home is India, which looks set to be the fastest growing major economy in 2015. Our latest annual attractiveness survey highlights how well recent reforms have been received by business leaders, who found India’s macroeconomic stability, FDI policy and ease of doing business more attractive compared to 2014. Work is still required in infrastructure, transparency, taxation and implementing economic reforms; but it looks like India will stand out as one of the ‘emerging market’ exceptions in 2016.


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