State's tech sector losing out on cost

The decision by US-based technology company Honeywell to relocate 63 jobs from a subsidiary in Waterford to a plant in India has not escaped the notice of senior executives at IDA Ireland, writes Jamie Smyth

The company cited the higher cost of labour in the Republic as the primary reason for the relocation, which will result in the closure of HAS Ireland. But, unlike some other high-profile plant closures in the past two years, Honeywell's applied software centre could hardly be described as a low-skilled operation sensitive to wage pressures.

"We lose 5 to 7 per cent of all multinational jobs annually and a large proportion of these go abroad," says IDA spokesman Mr Colm Donlon. "There is not really anything we can do about losing jobs to India but if we started to lose cost competitiveness against Holland or England that would be another issue."

Skilled software developers are available in India for as little as $125 (€118) per week compared to a typical Irish wage of more than €1,000, says Mr Donlon. But he says moving software development centres to India can create problems for companies.

"Our software sector is still holding its own and we are doing in Europe [attracting software hubs and shared services centre\] exactly what India is doing."

The presence of many of the world's top 10 software vendors in the Republic, including Oracle, Microsoft and SAP, supports the IDA's view.

But recent economic data will cause concern at Government level and suggests other key sectors of the economy will not perform as well as software.

The Annual Competitiveness Report 2002, published last November by Forfás, highlights a deterioration in the Republic's competitiveness, especially in relation to rising wage rates. The report estimates Irish average nominal wages per full-time employee was 3.6 per cent above the euro-zone average in 2001. This is forecast to rise to 13 per cent above the euro-zone average by 2003.

The report also concludes that recent falling productivity trends in the Republic suggest that wage inflation will have to ease if low unemployment and competitiveness are to be sustained. This must be accompanied by reductions in consumer price inflation.

In an interview published today in The Irish Times, Xerox global chief executive Ms Anne Mulcahy also expresses concern about the Republic's spiralling inflation rate. She highlights a need for the public sector to keep costs under control.

Her comments will strike a chord with IDA management following Xerox's decision to outsource a large part of its manufacturing operations last year, which resulted in the loss of about 500 jobs at Xerox's Dundalk facility.

The global contract manufacturer Flextronics is now manufacturing its office equipment at a plant in Hungary, one of the IDA's biggest competitors in the European marketplace.

The trend to outsource manufacturing operations has gathered pace during the economic downturn as firms attempt to cut costs and focus on core activities.

Mr Mike Stenson, general manager of Manufacturers Services Limited (MSL), one of the biggest specialist outsourcing firms based in the Republic, says firms are increasingly making outsourcing decisions in the current climate.

"Companies want to reduce their invested capital so they transfer elements of their operations to people like ourselves who can do it more efficiently."

But contract manufacturers have not been immune to the downturn and two of the biggest,Solectron and Celestica, have cut back in the Republic. More capital is shifting toward low-cost regimes in Eastern Europe and Asia, says Mr Stenson.

"Low-margin volume-based manufacturing does not have a future in the Republic. It is not cost competitive. We've got to try to adapt, be flexible and responsive to customer needs," Mr Stenson adds.

MSL has restructured its Athlone and Galway sites, which employ 550 people, to focus on high-value activities such as manufacturing medical devices and fixing electronic equipment. Mr Stenson hopes this will save MSL's operations from extinction but there are no guarantees.

On a more positive note, the Republic is a centre for high-end business outsourcing firms such as HP, IBM and Accenture, which can manage the IT functions and business processes of business.

Low-cost locations such as China, India and eastern Europe should find it more difficult to lure these operations abroad because they typically rely on very high skills.

But another sector of the Irish economy that will come under significant pressure is the shared services centre and call centre market.

Last week British Telecom caused a storm of controversy when it said it would create 2,200 jobs at Indian call centres. But big Irish call centres, including those run by Japan Airlines, American Airlines and Hertz, are all likely to reassess their options over coming years.

The only question remains is whether we can replace these jobs with higher-value activities?

Right-sizing: In the second of a three-part series, Jamie Smyth looks at outsourcing and insourcing by Irish technology companies