Could Ireland be in a for a manufacturing renaissance in the coming decade? It might sound optimistic to think of moving manufacturing plants over here, given our high wages and lack of deep manufacturing networks, but only 30 years ago Ireland had no pharmaceutical or tech industry.
Today, due to ongoing multinational investment, we have a generation of local managers schooled in the most up-to-date manufacturing processes. Such management talent is a critical advantage.
Ireland had no right to compete in pharma, medical equipment or computers when you contrast our legacy “beer and biscuits” industrial base with the more technical manufacturing traditions of other countries. Yet Ireland “acquired” high-tech, high-productivity industries using our tax system.
With legitimate cause, some criticise Ireland’s tax relationship with multinationals. However, small countries without an inherited manufacturing base have little choice but to use tax as a tool of industrial strategy. Our local market is too small to acquire any scale. If you can’t engineer scale, you acquire it. Otherwise the country will be left behind as many have been.
Every successful region deploys some advantage. In Silicon Valley, start-up companies have the huge advantage of subsidised capital. When a region has a committed venture-capital culture, where losing lots of money is part of the investment calculation, the winning companies subsidise the capital for the up-and-coming disruptors. The investment community is looking for “the next Google or Facebook”, so the trailblazers make it easier for the next generation.
As a result, the cost of capital in the valley is negligible. That’s its subsidy. Ireland’s is tax arbitrage.
Looking forward, there are a few reasons to be optimistic that manufacturing will be a significant driver of dynamism here.
The first is that the Covid pandemic has reinforced just how vulnerable are the supply chains of many global companies. The image of western leaders queueing up to buy essential personal protective equipment from China last March underscored this exposure and should ensure this will never happen again. There is no way western countries – and by extension western companies – will again risk being so powerless and in peril. Covid has called time on that world.
For the past three decades, the business model for manufacturers all over the world was to source stuff as cheaply as possible in whatever region necessary. Over time, as supply chains became more and more extended, companies knew less and less about where they were sourcing material. As long as the price was right, the deal was right.
Vulnerability
The pandemic has exposed this supply-chain vulnerability. Companies now want to know where they are sourcing their material. It is too risky to depend on a region, especially the more remote it is, and therefore supply chains will truncate. Supply chains will come closer to the source and will be located in countries that are allies.
As the Biden administration reinforces its ties with the European Union and keeps its distance from China, American supply chains will invest more aggressively in the EU, specifically Ireland.
It is in our interest to enthusiastically offer tax breaks to manufacturing companies looking to set up global supply-chain nodes, for a number of reasons. Manufacturing jobs are of themselves highly valuable and are usually highly skilled and productive positions. Manufacturing skills are organisational skills these days quite distinct from the assembly-line image of the old-school factory. Manufacturing plants tend also to demand more local input than service companies, amplifying the possibility of extra demand for small Irish companies to feed into the global supply chain.
In addition, having manufacturing substance in Ireland answers some of the critics who, rightly, claim that much of the services activity here is not activity at all but is merely tax-driven window dressing (eg Apple). Making physical stuff here would render those arguments less accurate.
It’s not just supply chains, because the Brexit effect will be palpable in the years ahead. Political risk is a huge factor in determining investment flows, and the UK has embarked on an extraordinary exercise in self-harm. Manufacturers will not look kindly on a country with third-country status outside the EU. Free trade is not a patch on a single market.
The very act of leaving the single market will mean the UK is problematic for investors. It will have no agreement on standards, education equivalence or all sorts of tricky harmonised legislation that make investing in the EU so attractive. There’s also the added possibility that the UK will be faced with recurring currency and balance-of-payments problems as the usual British boom-bust cycle reasserts itself.
Then there is the not insubstantial issue of managing the break-up of Britain if or when the Scots go their own way. Every twist on this road will make Ireland more attractive for manufacturing investment, particularly American corporations.
Innovation
High-end manufacturing also tends to be innovative, where value is added at every stage in the process, making those plants incubators of learning, leading to innovation and an enterprise culture within the companies and without.
Many people argue that Ireland is already too dependent on foreign companies and this is a valid point. However, in manufacturing it is not hard to conclude that building from scratch is difficult and we are too far behind on every metric. The quickest way to build scale is to import it, rather than create it.
Furthermore, it is critical that an economy is blended, alongside a healthy service sector, a dynamic SME sector and a vibrant prestige manufacturing sector, offering employment and career opportunities to a range of citizens in a variety of locations around the country. Service-sector jobs tend to cluster in urban areas but this is not the case for manufacturing. Manufacturing can be part of regional strategy, delivering well-paid positions in parts of the country that have been lacking these positions in the past decades.
This is the opportunity for Ireland delivered by Covid and Brexit. Small countries are locked in a constant battle with the tyranny of geography and the limitations of size. Every now and then, luck delivers an opportunity. The past few months have delivered two unique opportunities for Ireland – 2021 is the year to seize them with both hands and not look back!