Outsource dilemma

This month's case study looks at the options open to the Irish management of a multinational engineering company, when head office starts talking of redundancies and outsourcing to Asia

LIAM MELLOR KNEW the moment he accepted the promotion to managing director at Moscon that there would be difficulties ahead. However, he never expected the problems to come so quickly.

He was only three days into his new role at the Austrian firm's Irish operation in Kilkenny, when news spread that lay-offs were due in the next few months. The company could no longer ignore the fact that its position as market leader was under threat from a low-cost rival.

For years Moscon's most popular tool in its builders' range was produced, packaged and boxed in the warehouse at a total cost of €12.

That was a very competitive price and the sales department was able to add on delivery, sales and marketing costs without driving the product out of its dominant position.

However, about 10 years ago a Chinese firm, AcuGrand, entered the market in Europe. Everyone in the industry could see the potential threat, but preferred to spend time ridiculing the poor quality finish of its products and the way they were simply dumped onto the market with little spent on sales or service.

For the first year everyone dismissed AcuGrand as a bit player in a market where customers were seeking far more sophistication than the rudimentary efforts of some Asian sweatshop.

But slowly the Chinese brand started to make in-roads on the market. Some independent traders had taken on its entire range of tools and were prepared to offer in-store service on them. With the Irish building trade booming during the late 1990s and early 2000s, the engineering sector was growing rapidly too. It seemed that Moscon - or any of its rivals - were on the gravy train.

Order books were full, the Austrians were happy and its main customer - the building trade - was hiring new staff on a daily basis. In most cases, new staff meant new tools.

Mellor, who at that stage was production manager, had been concerned that amidst all the growth, Moscon's percentage share of the market was slipping. However, the odd time he raised this with any other managers in the firm, he was told there was more than enough business to go round. And so it seemed.

Yet the AcuGrand products were improving all the time. The speed at which the Chinese had developed their tooling and production was phenomenal.

Trade magazines occasionally featured visits by journalists to the plants in Shanghai and, even if the glowing reports were to be taken with a degree of scepticism, the photos said it all.

To the uninitiated there was simply a long line of yellow towers operated by hard-hatted workers. To those in the business, these towers were without doubt the latest tooling machines from Germany. They far surpassed the machines Moscon had been operating in Kilkenny for the last decade.

Meanwhile the market was turning. AcuGrand was fast becoming the most recognisable brand in hardware shops while Moscon started to appear out-dated.

Its financial situation was not looking good either. Moscon was now operating on profit margins of just two per cent, while Mellor had it on good authority that AcuGrand's operation in Naas, Co Kildare was taking in at least twice that.

What's more it was a smaller, leaner outfit that simply imported the tools compared to the rather heavily staffed Moscon division in Kilkenny.

The most telling indicator of the future of the market was that whereas Moscon's best-selling product was delivered to the factory warehouse for €12, AcuGrand was getting it all the way to the shop shelves for €15. That was after delivery and all the sales,administration and marketing expense.

Given the tight margins, Mellor could see no simple solution. The products were now on a par in terms of quality, but the new machinery in China suggested that things might turn in favour of AcuGrand.

Moscon would have to invest in new technology. A revamp of the current line in Kilkenny was going to cost at least €20 million. But the Austrians were baulking at the idea of investing any more in the Irish plant.

According to rumours from head office over the past week, several senior executives thought they should follow AcuGrand onto its home turf and move Moscon's production to China. They could even outsource the production and become simply a marketing agent for the products.

This morning it became official. Executives in Vienna told Mellor and his deputy in a conference call that they were planning a gradual withdrawal from Ireland.

They intended to use the Kilkenny plant to run the production of several less popular products until they became obsolete or uncompetitive. During that time it was hoped the workforce would be reduced through "natural wastage", such as retirement, so the numbers due for redundancy when they closed would be manageable.

The figures from head office looked sound. Moscon could develop a plant in China with local government assistance and grants. The entire cost of the new plant and operation would be about €300 million, but it would include the latest technology.

All going well, they would be able to increase production by nearly 20 per cent, yet cut the cost of reaching the shop shelf to €16 an item for the most popular tool, just one euro more than AcuGrand was spending on its version.

Mellor knew it was up to him to fight to keep the operation in Ireland.

The lack of investment over the years was not the fault of the employees here, but they were the ones who would suffer.

He had family ties to the plant: his father had worked in it and so had his uncle. He also had pride.

He didn't want his new job to be simply managing the plant out of business. How would that help his career? It's hardly the sort of thing that screams "successful businessman" on a CV.

The options as he saw them were: a management buy-out of the Irish operation, with support from private equity investors; cornering the market in the older products, cutting costs and possibly rebranding them in order to protect the Moscon name; accepting the inevitable and start increasing his marketing base and cutting down on production.

The management buy-out seemed like a pipedream, as he did not know anyone remotely interested in taking over an ageing production plant in Ireland.

Meanwhile he needed to brief staff as soon as possible, to quell the wilder rumours that were spreading and disrupting work.