Pricing ourselves out of the market

12 Nov 2003

In the past year, some 60,000 IT jobs were created in India. That’s almost double what was created annually in Ireland at the height of the long-gone economic boom. Even in the US, IBM chairman Sam Palmisano has expressed his concern for jobs in America. Other economies such as the UK and Australia are taking note of the rise of lower cost locations.

With generous tax concessions and a vast pool of highly-skilled IT workers, India has moved from a niche position as a location for cheap offshore application development to the first choice low-cost offshore location for a wide range of IT services, including the burgeoning business process outsourcing market.

“All I hear about these days is how Ireland must move up the value chain and away from manufacturing to higher value-add roles like R&D,” says a perplexed Phil Hogan TD (pictured), Fine Gael spokesman for enterprise, trade and employment. “In the absence of any clear strategy on how this will be achieved, do people not realise that one cannot go without the other? Dell in Limerick is regarded as the most efficient manufacturing location for the company in the world and can compete with low-wage economies. Some 35pc of all foreign direct investment (FDI) internationally is manufacturing.”

Talk of moving away from manufacturing altogether is “naive and dangerous”, Hogan states. “R&D will follow leading manufacturing nations. If the newly formed Enterprise Strategy Group doesn’t realise that and fails to devise a strategy that safeguards manufacturing as well as provides for innovation, then we are sowing the seeds for failure of R&D and the future of the hi-tech base in Ireland,” he warns.

As the opposition’s spokesman on enterprise, trade and employment, it is Hogan’s job to be the nemesis of Tánaiste Mary Harney TD in her role as Minister. Global shifts in IT trends have resulted in significant IT resources being moved to lower cost locations such as China and India. Microsoft and Oracle have in the past year created thousands of new jobs in India alone, and the latter company has begun to open software centres of excellence in Poland, Hungary and the Czech Republic while at the same time cutting 100 jobs in Dublin.

Analysts predict that a total of two million jobs will migrate from Western Europe by 2008, resulting in a 75pc reduction in wage bills. The Indian IT industry churns out some 300,000 IT graduates per annum and the average salary is €2,500 a year. Over-confident observers have suggested that such locations couldn’t compete in terms of quality with locations like Ireland, but realists know that it is only a matter of time.

“We have a slim opportunity to get our act together,” says Hogan, “and to do this we must slash costs and offer high value. Over the past two years, most indigenous and multinational companies in Ireland have had a wage freeze in place and yet costs in the Irish economy are still rising.”

Hogan’s major bugbear is insurance and he says that liability insurance to business has increased more than 150pc in the past three years. “Indigenous firms are feeling this acutely and it is something I’d expect multinationals to be making noise about in no time. The only way to get around this is to get the single European market involved and allow businesses to shop around Europe for more competitive insurance, instead of the current four or five operators. Surveys show that insurance is the biggest cost for an employer in Ireland today. We are seeing no significant decisions being made by the government on the rising cost base and how we must proceed to win R&D projects.”

Hogan points to recent OECD research, which showed that Ireland is 51st in the world in terms of investment achievement. “With the Budget looming, the poor state of infrastructure such as broadband and transport on offer to FDI firms and indigenous companies should be addressed and my colleagues and I believe that the government must get serious about borrowing to fund infrastructure projects. If they don’t want to borrow from an international bank, then look at borrowing from the National Pension Fund or revise the benchmarking process. Benchmarking was supposed to be performance-related, yet we are seeing absolutely no improvement in performance in the public sector, which accounts for up to 50pc of the rise in inflation and will cost us €1.3bn in taxpayers’ money.

“Competing economies for R&D like Canada and Israel have been revising their investments in hi-tech and biotechnology. Our level of investment in R&D is far from satisfactory. While I agree with initiatives like Science Foundation Ireland, there is a significant gap in the national strategy whereby we need to convert a lot of our investment into R&D projects among graduates in our universities.

“There is also a conceit that we have one of the best corporate tax rates in Europe. The fact is that the 11 new countries joining the EU have equal or better tax regimes for FDI than Ireland. Lithuania, for example, has a 0pc corporate tax rate.”

Unless Ireland hammers costs out of the economy and tackles issues like rising insurance costs, Ireland’s competitive will only worsen, Hogan grimly warns. “Ireland is in danger of pricing itself out of business.”

By John Kennedy