There is considerable diversity across traditional manufacturing both in terms of enterprises and sectors. Enterprises in traditional manufacturing range from large Irish- and foreign-owned multinationals to thousands of small enterprises employing less than fifty people. The following discussion first examines the food industry, by far the largest sector within traditional manufacturing, and then makes a set of observations concerning the remaining (diverse) sectors.
The Food Industry
The food industry represents around 20 per cent of total manufacturing employment and generated around 10 per cent of gross exports in 2006. In view of its substantial purchases from the domestic economy and low profit outflows, each euro of its exports has a bigger impact on the economy than of other manufacturing exports. Forfás data show that expenditure in the Irish economy (wages, raw materials and services) by the food industry was 63 per cent of sales in 2005 compared to 32 per cent for all manufacturing and 29 per cent for internationally-traded services. In the case of Irish-owned food companies, expenditure in the Irish economy was 78 per cent of sales compared to 67 per cent for all Irish-owned manufacturing. In recent years there has been strong output growth by the food industry with total real output for food and drinks growing by over 4 per cent annually between 2000 and 2006. However, as mentioned, when the effects of cola concentrates are separated out, the other sectors are seen to have grown at slower rates. Exports of food and drink (excluding cola concentrate) have grown by an annual average of 3.3 per cent in nominal terms between 2000 and 2007. This has been affected by CAP reform but, in effect, represents slow export growth. There was stronger growth in the most recent years, with food exports increasing by 10 per cent in 2006 and 5 per cent in 2007 (in nominal terms). The level of food exports in 2007 was c8.6 billion.
The four main sectors of Irish food exports are dairy products (27 per cent of export value in 2007), prepared consumer foods (21 per cent), beef (18 per cent) and beverages (17 per cent)4. The dairy sector has experienced particularly strong growth in the past two years, with exports up 6 per cent in 2006 and 13 per cent in 2007 (in value terms). The diary sector has benefitted from stronger dairy markets. An interesting feature is the strong growth in exports to Asia, with around 50 per cent of the growth in Irish dairy exports in 2007 coming from Asia. Prepared food exports include chocolate, frozen ready meals and pizza. The industry is under pressure from rising costs but managed to increase exports by 10 per cent in 2006 and 6 per cent in 2007. The value of beef exports increased by 14 per cent in 2006 but fell 2 per cent in 2007, due to weaker prices. Beverage exports showed a large increase of 26 per cent in 2006 and there was a further increase of 5 per cent in 2007. The large increase in 2006 was due to the success of cider exports (i.e. Bulmers/ Magners) while the increase in 2007 was due to growth in liqueurs, whiskey and beer exports. It can be seen that the growth of Irish food exports in the last couple of years is based on the performance of a range of products.
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As with other sectors of manufacturing, there is a need for increased investment in marketing and R&D. The stronger commodity markets might be seen as obviating the need for increased investment in marketing. However, in relation to the dairy sector, Pitts (2005) has pointed out that Ireland’s competitors have considerably larger scale, which is important for competitiveness in commodities and higher investment in marketing and R&D.
Restructuring is needed in parts of the food industry to secure long term viability. Competition policy should take into account the need for adequate scale to secure viability. In the case of the beef industry the Competition Authority has challenged legally the plans by Enterprise Ireland to support rationalisation of the industry. The case of the Competition Authority was unsuccessful in the High Court but the judgement has been appealed in the Supreme Court. The Supreme Court in turn referred the issue to the European Court of Justice (ECJ) as the case involves interpretation of European competition law. The Council’s view is that competitive advantage is an important consideration in the food industry and that restructuring of Ireland’s processing capacity, small in the EU internal market context, seems necessary to secure the long term viability of the industry.
Under Towards 2016, a Food Industry Committee, consisting of senior representatives of the industry, was established to identify issues impeding the development of the food and drinks sector and to develop appropriate strategies. In addition an Agri- Food Research Group was established to identify high level research priorities. A positive characteristic of the food industry is that it includes some of Ireland’s largest Irish-based multinationals, including Kerry, Glanbia, IAWS and Greencore. These companies have been very successful internationally and continue to have substantial presence in the Irish economy. Of the top ten indigenous exporters in Ireland, seven are food companies5.
Stronger international demand for commodities has led to increased commodity prices and the strong demand is expected to persist in the medium term. Irish dairy companies will benefit from strong commodity demand. There has been some fall in dairy prices from the peak reached in late 2007. Higher commodity prices benefit farmers but also mean increased raw material input prices for food processors. These increased costs are distributed among processors, retailers and consumers. The experience to date seems to be that processors are passing on higher costs to consumers. A significant exception to this is meat where increased costs of corn have not been passed through to meat prices. As an agricultural and food exporter Ireland can be expected to be a net beneficiary of the rise in agricultural prices. Output in the dairy sector in the EU is at present managed by the dairy quota system. It is the intention to eliminate the quota by 2015; in the interim period there will be a 2 per cent milk quota increase in 2008 and this is likely to be followed by modest further increases in quota in advance of its elimination. It is probable that Irish dairy production could expand when the quota is abolished. If the Irish dairy sector is to avail of the potential opportunities from quota removal and the growth of global dairy markets, there are a number of strategic issues that need to be
addressed. Investment is needed to update existing processing plants and to create the additional capacity to process future increases in milk output. Ireland’s seasonal milk production naturally lends itself to commodity production so that a radical shift to higher value-added consumer products is unlikely. However, there is need to consider the best product mix, having regard to future market opportunities and Ireland’s competitive advantage.
World Trade Organisation (WTO) and the Food Industry
The WTO negotiations will affect the prospects of the food industry. These negotiations are not yet finalised but the direction is clearly towards greater liberalisation. There were substantial reforms made to the Common Agricultural Policy (CAP) in advance of the WTO negotiations. The latest proposals on the WTO are set out in a paper by the Chairman of the Agriculture negotiations in the WTO, Crawford Falconer. The Falconer proposals envisage very substantial reductions in agricultural tariffs in sectors of most concern to Ireland, the beef and dairy sectors. There are also substantial proposed reductions in tariffs for other products produced in Ireland including lamb, pigment and poultry. Export subsidies would be halved by 2010 and eliminated by 2013. The current proposals are being analysed by the Food and Agricultural Policy Research Institute (FAPRI)-Ireland Partnership within Teagasc but this analysis is not yet available6.
If implemented, the Falconer proposals would have significant effects for the Irish agricultural and food sector. The most significant effects would be for the beef sector. Without a WTO agreement the beef sector is under considerable pressure. There is a very large gap between EU and world prices. The large reductions in tariffs (of around 70 per cent) would significantly affect the economics of beef production in Ireland7. Ireland’s beef exports go mainly to the EU market at present. Both prices and volume of production would fall. The production of sheep meat would also fall. The Falconer proposals would also have negative effects on the dairy sector. The reduction in tariffs would reduce prices and the value of production and exports. In the event of a successful WTO agreement, the overall effect would be to increase the exposure of agriculture and associated processing sectors to global market pressures and volatility. A possible WTO agreement would significantly affect Irish food exports. The Council reiterates the view expressed in its 2006 Strategy that it is important that the ‘European Model of Agriculture’ is not undermined and that the EU has a key role in ensuring that the process of globalisation is accompanied by sufficient international governance to achieve both stability and respect for social and environmental goals.
6. The material presented here is informed by discussions with economists in Teagasc who are not responsible for the views expressed here.
7. There is the possibility that beef would be designated as a ‘sensitive’ product in the negotiations. This would mean a lower tariff cut but the quid pro quo would be that increased access to the EU market through what is known as the ‘tariff rate quota’.
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Other Sectors
There is considerable diversity across the enterprises in all the other traditional manufacturing sectors, and there will invariably be job losses in some of them. However, the trends in output and employment presented above do not indicate that these sectors are subject to long term decline. The findings of the European research study on low-tech manufacturing discussed above found evidence that manufacturing in what are labelled low-tech sectors display remarkable stability and a continuing high share of employment in manufacturing in advanced countries. Proximity to markets provides a continuing source of advantage for some traditional manufacturing activity.
There is potential for ODI to contribute to successful development across many traditional manufacturing sectors. While this will lead to job losses in some cases, as discussed above there is evidence that it can lead to net employment gains for the enterprises concerned and the Irish economy. For those indigenous companies that have strong brands, ODI can be used to enhance the economic return on these brands.
Innovation is a critical requirement for survival and success in traditional manufacturing. Innovation can involve new products, entry to new markets and improvements in organisation and process. For some traditional manufacturing, R&D is an important source of innovation. For example, in building materials, R&D provides the basis for new products that are in demand to meet the needs of enhanced energy efficiency. In much of traditional manufacturing innovation is based more on reconfiguration of available information and process improvements than on recent scientific knowledge.
Examples of Successful Strategies in the Traditional Manufacturing Sector Glen Dimplex is a company that began as a small Irish manufacturing company in 1973 and expanded into a major global supplier of domestic appliances. The company now employs around 10,000 people worldwide and turnover is approaching c2
billion. Through the development of its original brands and a strategy of acquisition internationally, the company now has a portfolio of well-known brands. There are manufacturing operations in Ireland, the UK, Continental Europe, the US, Canada and New Zealand and its products are marketed on five continents. In the late 1990s, sourcing offices in China were opened to develop an Asian supplier base for the company’s worldwide operations. The corporate headquarters for this global business is located in Dunleer, Co. Louth.
Design and innovation are core aspects of corporate strategy. There are 500 design and development engineers employed across its global operations. In 2007 the company announced the establishment of a new research centre in Dunleer to develop energy efficient products. In announcing the establishment of this centre the company referred to climate change and stated that it was seeking to enhance its market position through the development of innovative, energy efficient products. This centre is to employ 20 researchers and engineers.
The scale of the global operations of Glen Dimplex makes it very distinctive in the Irish manufacturing sector. Dubarry Shoes is an example of a small company that has been successful in finding profitable tasks in a traditional sector. The company
was established by community leaders in the 1930s to create employment and served the protected home market in its early decades. The company no longer undertakes manufacturing in Ireland but its head office continues to be in Ballinasloe where product development and marketing functions are based. The company has had considerable success in marketing its products in the Irish market. In relation to international markets the company took the view that it lacked the financial resources to establish itself in the general footwear market. The company developed technical expertise in producing marine footwear, initially as a subcontractor to a Danish company. Its marine shoes incorporate patented technology in the form of a non-slip rubber outsole. In international market it concentrates on niche areas of marine and outdoor footwear.
The growth in beverage exports from Ireland was referred to above. A key factor underpinning this growth has been substantial investment in developing international brands. Baileys has been remarkably successful in global markets. It is sold in 130 countries and sales exceed 7 million cases annually. Baileys is ranked as number 25 among spirit brands worldwide. Jameson is also a strong international brand. Sales have doubled in the past decade and now exceed 2 million cases. The most recent major branding initiative for an Irish beverage brand was the launch of Magners in the UK. This achieved remarkable success; a new market for premium cider was created in the UK but the brand now faces strong competition.
The textiles, clothing and leather sectors have experienced long-term decline in their output and employment levels and the likelihood is that this will continue. However, here too there is scope for ODI to underpin higher value-added employment in Ireland. As noted above the textiles industry in Ireland has experienced a high level of ODI and an increase in the proportion of skilled employees. Diamond Designs in Monaghan is an example of an Irish clothing firm that has successfully used offshoring in its business strategy. This company designs and markets uniforms for nurses and beauticians from its Monaghan base using French fabric and outsourced manufacturing. Another example of a successful small enterprise in the clothing sector is Horseware Products in Dundalk. This company designs and produces high quality horse rugs and equestrian clothing for global markets. Manufacturing takes place in Ireland and North Carolina. The company has been affected by rising costs and Asian competition. It has responded with capital investment, acquisition of technology and training to increase efficiency across its business. Magee is another company in a traditional sector that has offshored its manufacturing operations. This has facilitated the company in continuing to be competitive in the high-quality clothing market.
These examples illustrate that notwithstanding considerable pressure on the traditional manufacturing sector in Ireland, there are opportunities for profitable tasks in these sectors to be based in the Irish economy, while using the opportunities presented by globalisation.
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