Foreign Affairs

Even if he could identify suitable suppliers in China or India, Kelly wonders how could he be assured of 100 per cent reliability

GALWAY-BORN Michael Kelly was delighted when his mother phoned with the news that an international medical devices company was setting up in his home town. A graduate of NUI Galway’s school of mechanical and biomedical engineering, Kelly had spent time in the pharma industry in Germany before moving to a junior management position with a medical devices manufacturer based just north of London.

Kelly saw the IDA’s announcement as his ticket home. The company was looking for suitably qualified staff and quickly snapped him up. At 28 years of age he was delighted to land a management position in such an exciting new venture. The company made no secret of its clear career pathway for high achievers and Kelly’s boss had indicated that he was destined for promotion if he played his cards right.

Over the next eight years he was promoted twice within Ireland, gaining experience in sales and marketing and quality assurance, which complemented his original experience in RD and manufacturing operations. He got married, built a house on an acre of land in the picturesque surroundings of Connemara and was thoroughly enjoying family life with two young children. He loved his job and with his mix of experience he had assumed he was in line to take over as managing director when his boss retired.

The offer to take responsibility for setting up a new greenfield manufacturing subsidiary in Mexico came like a bolt from the blue. Kelly realised it was a tremendous opportunity but neither he, nor his wife Catherine, wanted to leave the country with their young family – and certainly not for the unknowns of Mexico.

However, Kelly also knew that no matter how understanding his employers appeared to be, this was a serious blot on his record. He had allowed himself to be groomed as a fast-track manager but then declined an offer he was expected to accept. Kelly’s boss said that while he might buy time turning down the Mexico offer, another would come along as the company was in expansion mode and he was seen as part of the team to lead the growth.

Kelly didn’t want to leave Ireland, but he was still ambitious for the future. His father had been involved in specialised precision engineering for many years and he wondered whether they could combine their knowledge and resources to develop a new company.

Kelly was particularly interested in the market then beginning to emerge for Peripherally Inserted Central Catheters, or PICCs. It was not a product made by his employer, but Michael had sufficient knowledge of the market to see the potential.

Over the next 12 months, father and son developed a detailed business proposal. It involved extensive upgrades to his father’s existing premises to create sterile manufacturing conditions; major investment in retooling; and retraining of most of the staff. Crucially, it also required the support of two sleeping partners to get it up and running.

With a small but excited team assembled, Kelly left his pharma company to throw in his lot with his father and their two partners. The going was tough initially, but the pair had done their homework and they soon found themselves making inroads into a number of European markets as well as Ireland and the UK.

With the benefit of a growing cash flow, the company invested in developing its RD capability. Kelly rightly recognised that as a small specialist company they needed to create a “virtuous circle” in which healthy margins would pay for developing new products, which in turn would earn the margins needed.

Failure to achieve good margins would mean no new high-value products coming on stream, forcing the company to compete as purely a commodity producer as competitors caught up.

The company has gone through two expansions in the past decade, the first involving expansion into purpose-built new premises. The second was a move into a related specialist area of opportunity in the medical devices field.

From the outset, the firm manufactured virtually all of its metal and plastic components itself with the exception of one metal and two small plastic items. Given the experience and skills of its staff, Kelly considers the firm to have core skills and competencies in RD; precision plastic component moulding; and machining and precision metal machining.

While the company also undertakes various other activities, including assembly, quality control and packaging, Kelly does not see these as core. He is, however, acutely conscious that given the specialist market sector his company serves, everything has to be done to the highest possible standard, so he values having all elements under direct control.

Now, however, the company is reaching a crossroads. While it continues to be profitable, its operating margins have progressively tightened over the past three years. Detailed comparative analysis shows that this is mainly due to the costs of doing business in Ireland.

Kelly is proud that he and his father have established an Irish company which now employs 47 people and does not want to let people go. But he is also a realist and recognises that high margins are needed if the business is to remain sustainable.

The two sleeping partners have been genuinely supportive of the company in its various endeavours, always quick with words of encouragement and often providing good advice. Now, however, they believe it is time to at least consider outsourcing as much of the production as possible to a lower-cost economy, such as India or China. They see this as a way of protecting margins and supporting the development of new devices, which is what they consider the true heart of the business to be.

They point out that the company enjoys good relationships with NUI Galway in its specialised field and that it could further exploit these links to grow as part of the emerging knowledge economy. Kelly’s father, now close to retiring, reluctantly agrees with them, but Kelly himself is not convinced.

He is anxious on a number of fronts. Would outsourcing deliver the guaranteed quality of which he is now certain? The company currently carries expensive insurance to protect itself against third-party claims which have not materialised to date. But premiums would almost certainly increase sharply if one or more claim were to emerge due to quality issues.

The company currently has long-standing relationships with three component suppliers, but these are in Europe and would be unlikely to yield the sort of savings that would be possible in an emerging economy. However, Kelly thinks it might be worth seeing if cost savings could be made there before looking at the Far East. His partners, however, disagree. They say the scale of savings required demand more drastic tactics.

Even if he could identify suitable suppliers in China or India, Kelly wonders how could he be assured of 100 per cent reliability? He has no idea of how long it might take to find a supplier and to get production flowing and he has concerns about how the financial aspects of any deal might be structured. He also has major reservations about the geographical, logistical and language gaps should anything go wrong.

Nor is he clear about the tax implications of moving manufacturing abroad. What if the company were simply to outsource more of the component production? That, presumably, would cut costs but leave the tax position unchanged.

However, even that approach would still only address part of the production cost problem, while at the same time undermining morale in what Kelly rightly regards as a small and still enthusiastic team. His head is clearly pushing him in one direction while his heart is tugging him in another.