Rising debt to the dollar


27 Nov 2003

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The marked improvement in the US economy in the last quarter must have been greeted with great sighs of relief in the corridors of power in Leinster House and Wilton House, home of IDA Ireland. While the general public has only a hazy recognition of the contribution US companies make to the Irish economy, our politicians and senior civil servants are acutely aware of it.

Anyone doubting this should take note of the IDA’s own statistics on the subject. These figures confirm that the US is the largest source of inward investment into Ireland, directing no less than one quarter of its total European foreign direct investment towards the Republic. A total of 510 companies/hubs have been established here by US investors, which directly employ 89,400 people (67pc of total IDA-supported employment) and account for three quarters of the total exports from IDA client companies (€45bn out of €60bn). This investment, moreover, has fuelled a hefty trade surplus with the US: the value of exports to that country being more than double imports (€16.9bn versus €8.5bn)*, a bilateral trade that accounted for 18pc of Ireland’s exports in 2002.

The investment is dominated by two sectors: information and communications technology (ICT) and pharmaceuticals. Taking the latter, 14 out of the top 15 pharmaceutical companies have plants in Ireland, including US firms Pfizer, Glaxo SmithKline (GSK) and Schering Plough while another US pharma giant, Wyeth, is putting the finishing touches to its US$1bn biopharma campus in Clondalkin, Dublin.

On the ICT side, the roll-call of names is no less impressive and, again, dominated by US corporations. Companies such as IBM, Microsoft, Oracle, Apple, Xerox, Dell and Intel rule the IT landscape in Ireland and internationally. While the collective contribution they make to the Irish economy is immense, even individually they can pack a powerful punch. Xerox, which employs 2,000 in Ireland, has invested upwards of three quarters of a billion dollars in its Irish operation over the past five years while Dell accounts for 7.8pc of total Irish exports (see panel below).

This is the visible footprint of US firms in Ireland but the US influence is also felt in other more subtle ways. For example, over the past 20 years, a whole cadre of Irish managers has matured under the protective umbrella of US multinationals and many of them have reached senior positions within these organisations both at home and ‘back home’ in the US. Many of them work within the multinational sector still but others have flown the nest and used their contacts and experience to set up spin-off companies in Ireland.

“Today in Ireland you have every conceivable opportunity to improve your management skills and experience of multinational environments,” notes Joe Browne, general manager of Xerox Ireland. “You can now join an organisation in Dublin, Galway, Athlone or Ballina that has multinational links which gives you all sorts of exposures and experiences that just was not here 15 years ago…I see it is a hugely under-documented benefit of the multinational investment.”

Another little talked-about benefit is the complex network of suppliers and sub-suppliers that has evolved to serve multinationals, from construction companies to caterers. At one time, the multinationals were criticised for their poor ‘linkages’ with the Irish economy (and occasionally still are) but this criticism is outmoded, Browne argues.

“I’ve never supported that line. This them-and-us argument is nonsense; it belongs to decades ago. Taking our manufacturing operations in Dundalk, I don’t think I’d be going to far when I say that there are scores of suppliers in the north east whose livelihood depends on Xerox continuing to be successful. It would be the same for the Dells and the Microsofts. I think you could say that there are thousands of business, if not tens of thousands, that are fuelled by [multinational] investment. My very strong view is that multinationals presence very strongly stimulates local businesses and start-ups.”

Paul Kavanagh, a director of Lionbridge Technologies, a US technology firm with operations in Dublin, Galway and Mayo, wholeheartedly agrees. “The number of spin-off companies that have resulted from the US multinationals being here is tremendous. We have over 1,000 indigenous software companies now and that would never have happened without the multinationals,” says Kavanagh, who was also responsible for the Digital Hub in inner-city Dublin as well as an advisor to former Taoiseach Charles Haughey.

Yet another way the US helps stimulate the Irish economy is through the influx of venture capital. A decade or two ago, Ireland barely had a VC industry but the boom years have fostered an industry that has been supplemented by cash from overseas investors eager to get their share of the action.

Michael Murphy, chairman of the Irish Venture Capital Association, estimates that €150m to €200m in investment capital has come from US sources over the past five years.

“Multiple rounds of funding are required to push businesses forward into the international arena and what’s happened is a lot of American providers of funding have come in on the later funding rounds. They are a very important access point into the markets they serve. Anecdotal evidence suggests that for every euro invested by an Irish venture capitalist two to three euro are invested by international investors, a fair proportion of which would be US based.”

To cap it all, it could be argued that US investment has also given a welcome boost to the Government’s laudable but problematic National Spatial Strategy. US firms are not always enticed by lucrative regional incentives, as Ebay’s decision to choose the capital as its base earlier this year demonstrated, but the IDA has acknowledged that US firms are central to its regionalisation policy.

Taking all of this evidence, it is easy to see why Government ministers and officials place a huge importance on the health of our economic relationship with the US, now and in the future. But what is the outlook for that relationship? After a decade of almost uninterrupted growth, the economic stagnation of the past three years has put strains on this relationship and caused some to question the wisdom of continuing to rely on the US as the engine of our economy. Even if the US economy does bounce back, will Ireland benefit in the way it has done in the past?

One person who thinks not is Mike Galvin, country manager of Cisco Ireland. “There’s still an expectation that we’re looking to the US recovery to get back to where we were during the high-growth years. In reality, that’s never going to happen. The big manufacturing projects are not going to go to Ireland but to other lower-cost economies,” he says.

Cisco itself was one of those high-flying tech firms that had invested in Ireland but had to let some people go as business conditions worsened. It still has a 50-strong workforce split between a national sales unit and pan-European financial operations, but at one stage the company was planning to open both a manufacturing plant and an research and development (R&D) facility in Ireland. Galvin says those plans have been put on hold and are unlikely to be resurrected now due to the changed circumstances.

The thing that has changed most is that Ireland has become much more costly. As a result it will struggle to preserve sectors such as the call centre industry in the face of cut-price competition, he maintains. “Call centre activity is moving to India. The people there are just as skilled but cost only a fifth of what we do here,” he says.

He believes that to stay competitive Irish firms will need to start using technology to transform the way they do business. He notes that Cisco itself has outsourced its call centre activities to Hewlett-Packard and made substantial savings in the process.

“The reality is that this has become a high-cost economy now. The only solution is either to do something different or to boost productivity,” he says.

Browne agrees that competitiveness remains the single most important issue. He believes that while Ireland cannot compete with the likes of India and China and the emerging countries of Central and Eastern Europe in terms of basic productivity – cost per unit of production – if it had a relatively low-cost base it would at least be it in the frame for investment dollars.

“My point is that at long as you have a very cost-competitive base, it doesn’t matter that you’re more expensive than China or India. But you’ve got to be competitive; then you’ll get into the consideration zone and be able to fight the broader business case.

“There’s no doubt in my mind that Ireland can evolve and be a player in areas such as R&D, advanced software development and supply chain management but unless we have the fundamentals of our cost structures right, no business can put a case forward,” he says.

Browne adds that while the operational cost of doing business is a crucial factor for any investor it would be wrong to conclude that multinationals will quit Ireland in droves simply because costs have risen here. “Large multinationals don’t just uproot an operation and move it because of cost per head. They look at the whole range of pros and cons.”

This view is supported by Kasra Ferdows, Professor of Global Manufacturing at Georgetown University’s McDonough School of Business in Washington DC, who presented to the IMI Management Conference in Killarney earlier this year. Having conducted an analysis of the global manufacturing landscape, Ferdows concluded that Ireland, far from being a lost cause it could carve out a new niche for itself as a high-value manufacturing location. He argued that many multinationals are moving to a model, he termed “high valued-added manufacturing networks”, the main principle of which is that different sites contribute different things to a company’s overall manufacturing strategy. He cites Intel, which is currently investing US$2bn in a new plant at Leixlip, as an example of a company that has adopted this model. “At Intel, each site has a high level of expertise and they working closely together to increase know-how,” he says.

Ferdows revealed another important finding: that more R&D is being done in multinationals’ foreign subsidiaries than ever before and that this was having a major impact in many countries especially Ireland. More high-tech products are made in foreign subsidiaries where this occurs and those subsidiaries send a larger share of their output to sister companies. Intriguingly, he concluded that a reliable way to increase R&D is to build stronger manufacturing base and said the best thing Irish managers of local affiliates could do is upgrade their strategic role so that their units are seen as leaders by the parent company rather an outpost of their manufacturing network.

But how long will this transition take? Kavanagh worries that Ireland will not have the time to reposition itself and will feel the heat of competition from China and India sooner rather than later. He argues that, in the face of such competition, Ireland urgently needs to articulate a new strategy – a new and concrete vision of where it wants to be. “The knowledge economy is a bit like talking about the internet 10 years ago: it means different things to different people and it’s too vague. We have to delve down and say what is it we have within the knowledge economy that is unique, that is way up the value chain and something that we can build on for the next couple of years to get ourselves to the next stage.”

This strategy should not include reducing our dependence on US firms, he insists. As does Ferdows, he advocates changing the role of the subsidiaries of US multinationals so that they focus less on manufacturing and more on project management, shared services type roles and so on. Above all, he warns, Ireland must retain those big names in the country. “If you let those people go and relocate in Eastern Europe and other low-cost economies, you’ll never get them back again.”

Kavanagh takes a darker view. He believes the Irish technology sector is extremely vulnerable to low-cost competition from China and India in particular and will feel the effects sooner rather than later. He argues that, in the face of such competition, Ireland should articulate a new strategy, a new and concrete vision of where it wants to be. “The knowledge economy is a bit like talking about the internet 10 years ago: it means different things to different people and it’s too vague. We have to delve down and say what is it we have within the knowledge economy that is unique, that is way up the value chain and something that we can build on for the next couple of years to get ourselves to the next stage.”

This strategy should not include reducing our dependence on US firms, he insists, but changing the role of the subsidiaries of US multinationals so that they focus less on manufacturing and more on project management, shared services type roles and so on. Above all, he warns, Ireland must retain those big names in the country. “If you let those people go and relocate in Eastern Europe and other low-cost economies, you’ll never get them back again.”

By Brian Skelly

* €16.9bn was the value of exports in 2002. €8.5bn was the value of imports in 2001 (IDA Ireland figures)

Computing Dell’s value to Ireland

With the possible exception of Intel, Dell is the jewel in the crown of Ireland’s ICT industry and a prime example of what a well planned and targeted inward investment policy can achieve.

A recent study undertaken by Goodbody Economic Consultants quantified for the first time the true value of Dell to the Irish economy. Dell’s contribution is truly remarkable, especially considering the company has only been in Ireland since 1989, a bare 14 years.

The main findings of the study, as reported on www.siliconrepublic.com earlier this month, were that in 2002 Dell accounted for 7.8pc of total Irish exports, paid €135m in taxes and PRSI (equating to 3pc of total corporation tax receipts), spent €113m on salaries, €128m on products and services from Irish suppliers and €4.2m on employee training and development (2001-2002).

There is more. Dell’s revenue was equivalent to 5.8pc of total gross domestic product in 2002. Exports from the Dell Limerick’s facility doubled from €3.2bn to €7.2bn between 1997 and 2002, and unit production quadrupled from one million to over four million units in the same period. In sectoral terms, Dell accounted for 25pc of the output of the entire electrical/electronic equipment sector in 2000.

While other ICT companies have been struggling to make productivity gains in the face of sharply rising costs, Dell recorded a 22.9pc productivity hike between 1997 and 2002.