Government can act to use downturn to its advantage

 

Corporate diversity and Government investment in infrastructure are the key ingredients to future economic success, writes Sean Quinn 

SINCE I started in business in 1973, there have been many periods of so-called crisis and panic in the economy. Some of these were precipitated by political events over the years but more were as a result of the natural cycle that is inherent in a free and increasingly global market.

The western world downswing over the past year is turning out to be particularly severe. Its extent and duration and its impact on the Irish economy has been startling.

With our over-reliance on construction, perhaps we should have seen it coming, but clearly the situation today is creating significant pressure for a lot of Irish businesses, not just in the construction sector.

The way in which Irish stocks, for example, have been tossed in the wind of international events has illustrated for me more than ever before the extent to which our economy is influenced from outside the country.

This will pass, however, and I feel that we have the capacity to take some advantage from the current situation. Conditions such as those we are experiencing now are important in weeding out inefficient and wasteful practices in all sectors. Organisations that emerge will be stronger and more resilient after this downturn and I expect that work practices and productivity will improve as a result, so increasing our competitiveness and attractiveness for future investment.

This is a most important and positive aspect of our current situation. The Government should not miss the opportunity presented now to introduce fairly radical reform and productivity improvement in the public sector as well.

Our own group has a significant level of exposure to the construction sector given the products we produce and is clearly affected by the downturn. While overall building product sales increased in 2007, in 2008 we have noted reduced demand for products related to domestic house-building.

Cement sales, however, have remained remarkably resilient mainly driven by ongoing infrastructural programmes. At the same time, we have seen some increase in insulation product demand as homeowners work to reduce heating and energy bills.

This is not the first time that a construction slowdown has occurred since our business started in 1973 and clearly periodic correction is necessary to realign property values and supply levels.

It is important to note that as a direct result of increasing energy costs, cement prices, for example, will require substantial double-digit percentage uplift in 2009.

This, combined with a more than 100 per cent increase in the price of coal and steel over the past 12 months, will undoubtedly increase the value of existing property in the next two to three years.

As a direct result, I believe this increase can stimulate renewed growth in the building sector. After all, the next generation will need homes and if we are not building any new ones at the moment, those that exist will become more valuable in the future, so generating further supply opportunities.

With the exception of the hospitality sector, which I feel is oversupplied, I remain confident that property overall will see significant asset value appreciation and renewed vigour in a two to three year timeframe.

Related to that, and in an effort to give further stimulus to the overall recovery, I would be in favour of the speedy introduction of a common taxation structure for the whole of the island. I think that this would drive far-reaching benefits to the all-Ireland economy in the medium term.

Diversity has always been an important byword for the Quinn Group and clearly this is of critical importance to us now. Many strategists emphasise a concentration on core competency. While perhaps having some advantages, clearly single product or sector concentration can leave individual organisations vulnerable.

Diversification has certainly been to our advantage over the years and this is demonstrated most clearly again today.

In the past year, our group has opened a number of very important new profit centres which thankfully are now proving their worth in the context of a construction downturn.

Our international property portfolio, particularly in the developing markets of Ukraine, Russia, Turkey, the Czech Republic, Poland, Bulgaria and India, is performing extremely well with very positive trends in the commercial real estate sector where we have some very good exposure.

The renewable energy division, within which we added a further 54MW wind-farm earlier in the year, is also now fully operational. The increasing price of electricity in the wholesale market holds significant positives for that part of the business.

A new food packaging division, which was commissioned last year, is also relatively recession proof and the increased efficiency associated with the new plant is obviously very important in maintaining margins.

Equally the glass container division in both Ireland and Britain is performing at an all- time record, while the recently commissioned bottle-filling capacity is adding significantly to the overall profitability of the division.

Efficiencies associated with the replacement of four old and inefficient radiator plants with one new one in Wales are also proving very effective in preserving margins in a slowing market.

Quinn Insurance, along with Quinn Healthcare, continues to trade at record levels with the associated low-cost model and pricing structure clearly positioned to take full advantage of a general belt-tightening economy.

These relatively new and expanded profit centres within our group will more than make up for any downturn within the traditional building products and manufacturing businesses this year and next and I know this will continue in the future.

Not unexpectedly given the significant stock market downturn since mid-2007, the Quinn Group and my family have suffered equity losses. While this is not pleasant, it is not the most important thing to me.

I am more interested in ensuring that our 8,000 employees are part of an efficient, robust and sustainable organisation that can compete internationally at all levels. I want to make sure that all our staff will enjoy job security well after I have retired. That is what is most important to me and my family.

At Government level, I would encourage continued investment and channelling of resources into key infrastructural improvements in roads, rail, communications and energy. These areas are what will be important 20 years from now and if necessary, I would be in favour of borrowing to ensuring their completion.

Just look back at some of the most successful projects in the State in the last century, starting with the Shannon hydro electric scheme in the 1920s, the IFSC in the 1980s, the Dart in Dublin and more recently the Port Tunnel.

Many were envisaged and implemented during times when money was tight. Subsequent generations, however, have reaped the rewards many times over. We should never be afraid to do what is right.

The M50 is another good example of positive government action. However, I would now propose the construction of a new ring-road, perhaps including light rail, behind the airport linking Louth, Meath, Kildare and Wicklow as I feel this would facilitate a smoother circulation around the city and the suburban commuter areas for the longer term.

I also think consideration should be given to the construction of a new airport to the south of the city, somewhere in Kildare or Wicklow. To me this makes sense as it would take all the southern airport traffic away from the M50 and it can be planned with current and future volumes in mind.

The plan within the Quinn Group during these testing times is to continue to do what we have always done. We will continue to offer quality products and services at competitive prices. We will continue to invest in new technology and drive efficiency at all levels. We will continue to diversify and build the strength of our management team.

I will be making sure that our team learns from both our successes and our failures in the past and I will be working to sustain our tradition of growth through innovation. We will continue to reward performance and we will take advantage of any new opportunity that presents itself.

Seán Quinn is chairman and managing director of the Quinn Group of companies which has interests in building products, financial services, energy, plastics, packaging, glass, hotels and property in Ireland and Britain and 11 other European countries.

Tomorrow: Derek Quinlan, chairman of Quinlan Private, the international property investment and advisory group.