Costs not the only reason for shutdown

Seagate's citing of the high cost of production in Clonmel compared to plants in other parts of the world is at best only a small part of the story behind its decision to close the Clonmel plant, according to Irish experts. Lower production costs in the Far East are unlikely on their own to have led to any major investment decisions, although the chance to benefit from recent currency devaluations in the area will not have gone unnoticed by Seagate's board. The key reason for the closure is simply that Seagate has excess production capacity and has to cut back.

According to Mr John FitzGerald, research professor at the ESRI, labour costs in many parts of Asia are in fact higher than in Ireland. This is true of Japan and Singapore and until very recently, Korea. Other countries, like the Philippines, do have lower labour costs, but much of the labour is relatively unskilled. However, if the reported £180 to £200 a week average pay in Seagate is correct, then this would point to a large amount of unskilled labour at the Clonmel plant. "If that is true it is not surprising that they had to close here," Mr FitzGerald said. "Ireland's added value is usually in the higher-skilled areas."

Mr FitzGerald added that the closure is very similar to developments in the dairy industry here. "When sterling was low, the dairies shifted spare capacity to the North and Britain and when it strengthened production was shifted back here," he noted. Overall, it is not sensible for business to have spare capacity.

The chance to shift to the Far East will not be an investment decision, but merely the chance to minimise losses over the short term.

Analysts say the decision to close the plant now is surprising. "There have been pricing pressures for over six months," one analyst said. "But these were expected to be corrected as demand picked up in the run-up to Christmas."

The banking and markets collapses in Asia - and the consequent currency devaluations - would only have been one factor in Seagate's decisions. Most analysts are agreed that the core problem is simply one of oversupply in the industry, rather than reducing demand. The industry as a whole is expected to ship 27 million extra units this year, but more than four million are from new suppliers. Seagate's market share has been falling. In 1997 the company had a 24 per cent market share, compared to 27 per cent a year earlier. Companies such as Fujitsu have more than doubled their shipments over the past three months. And in a low-margin high-volume business these sort of figures do hurt the big players.

As a result, many of the companies resorted to price-cuttings which were greater than cost reductions and profitability began to fall.

A similar problem beset the memory chip manufacturers earlier this year. "We only missed that fall-out because we had not managed to attract any memory chip plants here," Mr FitzGerald noted.