Has Ireland Inc lost its grip?

28 Apr 2005

When the technology downturn occurred three years ago, the media — in previous years highly supportive of tech start-ups and floated companies such as Baltimore Technologies — turned on the industry with the zeal of a starving rottweiler. It went from boom to gloom and much of the negative publicity rightly focused on overvalued, underperforming former darlings.

However, the local industry overall was wrongly cast in a negative light that ultimately served to dissuade two to three years’ worth of IT and science students from pursuing technology careers, a situation that may exacerbate a looming skills shortage.

“The reality is Ireland fared better during the tech downturn than any other competing country, with fewer jobs lost per capita due to innovative, highly capable management,” a spokesperson for IDA Ireland told siliconrepublic.com.

IDA’s strategy to attract technology companies started with a trickle in 2003 with Google and moved on to other wins last year such as IBM, Bell Labs and Hewlett-Packard (HP). 2005 has got off to a roaring start with major wins such as that of Yahoo! and Microsoft, which are both establishing European HQs in Dublin and creating 400 and 100 jobs respectively. In fact, it is already evident that 2005 could yield double the number of IT jobs created last year. In 2004, approximately 1,853 IT-related jobs were created in some 20 projects. Four months into 2005 and already approximately 1,263 technology jobs have been announced for 10 projects.

However, overseas observers can be forgiven for thinking a volatile situation again exists in Ireland following the recent spat between the Irish Government and the European Commission over a proposed €170m grant for Intel’s new microprocessor plant in Leixlip, Co Kildare. Many feared the situation could result in the loss of a much-valued gem in Ireland’s technology crown. Rather than challenging the commission’s decision to block the grant, it has been suggested Intel feared a legal battle would result in sensitive business secrets reaching competitors.

In fact Ireland is still an attractive proposition to Intel for further investment, driven primarily by the 12.5pc corporate tax rate. At a recent presentation to US President George Bush’s Advisory Panel on Tax Reform, Intel CEO Paul Otellini said the company’s decision on where to locate a US$1bn fabrication facility would be influenced by corporation tax, trade barriers and being close to market. He cited Ireland with its 12.5pc corporate tax rate and Israel with a 20pc tax rate as competitive locations.

John Conlon, manager of IDA Ireland’s ICT division, explains the value of the 12.5pc tax rate, which the Enterprise Strategy Group’s recent Ahead of the Curve report recommended be retained. “It is still one of our competitive advantages. It has longevity and stability as far as overseas investors are concerned. It is not a tax holiday or a tax break. It is effectively a low corporate tax environment that investors know is not going to go away any time soon and they can rely on it. That’s a great comfort to companies that want to be sure they will not be messed with going into the future.

“In terms of the technology companies we back — there are some 220 companies in our portfolio, representing 40,000 people and exporting €50bn worth of goods annually.”

On the question of Ireland losing its competitive edge in the eyes of overseas investors, Conlon argues the contrary. “When we lose our competitive edge, we simply find new ones. When Apple set up in Cork in 1977, it was purely manufacturing. It has 1,000 people in Cork now, with 800 involved in areas such as group treasury, supply chain management, web support and financial shared services.

“Dell in Limerick is now producing four times the volume in half the space, with fewer people than it had three years ago. The company can turn over its inventory 99 times a year and at the same time ship 40,000 units a day.

“Analog Devices has its most advanced manufacturing facility in the world in Limerick. Out of 1,200 people, some 400 are engaged in cutting-edge R&D,” he says.

Conlon also points to the high-calibre local management that has grown up in world-class companies in Ireland. “Robby McAdam is a senior vice-president of Analog Devices and is based out of Boston. Denis Kennelly is vice-president of engineering for storage giant EMC,” Conlon says.

Another good example of how local Irish managers are rising in their respective environments is the recent appointment of Kevin Cooney to the role of chief information officer of Xilinx, who will run its global IT operations from its European headquarters in Citywest Business Campus in Dublin, where the company employs some 500 people. In the midst of the technology downturn in 2003, Xilinx unveiled a €52m expansion of the company’s Dublin operations.

On Ireland losing its edge, Cooney argues: “I wouldn’t buy into that analysis. Competitiveness is a different issue today from what it was 10 years ago. There is no doubt that if we want to secure the roles that will continue to grow Ireland Inc, then we definitely need to be at the high end of the value chain. We compete at a different level today than we did a decade ago. Manufacturing is flowing to lower-cost environments such as Asia and we need to be targeting higher-end R&D and financial roles.”

Unlike the rest of the IT industry, Xilinx took the unusual step of not making layoffs and continued with its investment rollout on the assumption that the clouds of gloom in 2002 would eventually clear. “We lost half our revenue in the space of nine months. When revenues are down it is a cost-base issue — simple mathematics — why not get rid of 500 or 600 people. We chose not to because we believed in the business model. We believed in a rebound and took a hit on profit margin. We rode out the storm and took advantage when the rebound kicked in.”

Cooney fears that a skills shortage is now in effect and that it could be offset by a more progressive attitude to immigration. “Ireland used to be an emigration economy. Today, it’s an immigration economy.”

Conlon believes a more progressive attitude to immigration, especially to non-EU nationalities, should be pursued and that a green card system could be explored. “If you go the US and visit any of the R&D labs there you will see nations from all over the world represented. All the PhDs don’t have to come from Ireland. We need to create an environment whereby people would like to live in Ireland from a lifestyle perspective.”

IBEC’s ICT Ireland director Kathryn Raleigh warns that the focus should not be taken off costs. “ICT companies that choose to locate in Ireland are certainly getting value from their investment but an alarming rise in costs could erode such gains and could in effect contribute to that negative perception.”

According to a recent report by ICT Ireland, the cost of doing business for ICT companies has risen by 20pc since 2002. An area of particular concern is the cost of energy, which the industry says rose by more than 22pc since 2002 compared with 12.5pc for average customers.

Joanne Richardson of the American Chamber of Commerce Ireland, which represents some of the 570 US companies that employ more than 90,000 people in Ireland, also believes Ireland has retained its competitive edge. “US companies unveiled some 72 investment projects valued at more than €5bn last year. Half of those were expansion by an existing base of companies. That’s very encouraging. These included companies such as Bell Labs, Dell, IBM, HP, Intel and Microsoft that all expanded in the past six months. When you put that in context of a global economy, Ireland is competing globally.

“The tax edge we have is very important and other countries may have no corporation tax, but put 12.5pc to all trades and coupled politically and economically, it creates the stable environment ICT companies are looking for,” Richardson says.

In conclusion, Ireland succeeded against all odds in doing what seemed like the impossible in the dark days of 2002, a factor attested by the fact that we kept a seemingly vulnerable ICT industry largely intact and primed for growth. Going forward, the country’s maturity as a nation will be tested by the Government and the Irish people’s ability to develop immigration and labour structures worthy of this great achievement. This will be our competitive edge in the long run.

By John Kennedy