Carillion's liquidation reveals the dangers of shared sourcing
- Carillion, the second-largest construction company in the United Kingdom, announced liquidation — an event that could trigger even more bankruptcies in the U.K. construction industry, according to data from RapidRatings, an independent research and analytics firm that rates companies' financial health.
- The Telegraph reported that Carillion owes up to 30,000 businesses around £1 billion in unpaid costs, putting thousands of jobs and pensions at risk. Before liquidating, Carillion had extended payment terms to 180 days, according to RapidRatings, which means the firm's suppliers may also be at risk for bankruptcy, insolvency and/or liquidation.
- Many U.K. construction companies, including Carillion, share the same suppliers, so combined with tight competition, the industry is extremely volatile.
While Carillion's situation may be isolated to the U.K., it does bring to light a bigger issue in supply chains around the globe: the construction industry's sharing of suppliers. Carillion's liquidation could be the first domino in a series of bankruptcies and liquidations for the industry, as many companies have poor financial health ratings (FHR) and share suppliers that may be at risk, especially following Carillion's downfall.
According to RapidRatings data, the average FHR for the top 10 U.K. construction companies is 40.5. A rating below 40 is considered high risk, and more than half of the top 10 companies have ratings below 40. In addition, three have an average risk level and only one is low risk (Morgan Sindall Group), the data show.
It's still uncertain how the U.K. industry will recover from Carillion's liquidation. "I think this is going to be a story of who has the ability to raise capital and who doesn't," RapidRatings CEO James Gellert told Supply Chain Dive. "We’re going to see a separation in these names: those who win Carillion business that the government has to reallocate and those who don’t.
"Those who do will get some relatively good business fairly quickly; those who don’t will have even stronger competition and a more volatile market," he added. "As the market is shifting over the next year to two years, we’re likely to see a harder refinancing market and companies that have debt to refinance will be in a tougher position."
In any industry with tight competition and a limited set of key suppliers, there is the potential for major industry disruption. All it takes is one bankruptcy to drag the whole system down.
Supply Chain Dive
At the same time, Gellert thinks U.K. construction companies should be evaluating their supply chain risk and vetting suppliers that worked with Carillion.
"Those suppliers are weakened by the Carillion failure, and they may not be receiving cash they expected at all," he said.
At its core, this is a systemic supply chain problem common to all industries. In any industry with tight competition and a limited set of key suppliers, there is the potential for major disruption, and one bankruptcy or liquidation could drag the whole system down.
The Carillion situation isn't an isolated event, and it's not just a story about a liquidation — it's a warning to companies about supply chain risk.
"A lot of companies don’t do sufficient supply chain risk evaluations, they don’t know where there’s concentration risk," Gellert said. "The supply chain risk process is disrupted by the lack of transparency and companies not asking the right questions and getting the right data from their suppliers. I think you’re going to see that there are problems that arise from this, that some of these construction companies don’t know about these problems at all, except now they’re going to have to ask suppliers if they were exposed to Carillion."
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