CHAPTER 8
Manufacturing and Physical
Infrastructure
Carol Newman and John O’Hagan
1 INTRODUCTION
Chapter 8 discusses the role and importance of the manufacturing sector in Ireland
emphasising: the declining importance of the sector over the last decade in terms of its
contribution to output and employment; the challenges the sector faces in terms of
achieving productivity improvements in a high-cost environment; and the vulnerability
of the sector to world market conditions given its dependence on export markets and
Foreign Direct Investment. Since mid-2008, as with most of the rest of the economy,
the manufacturing sector has faced tough challenges. In particular, maintaining and
improving competitiveness has been and will continue to be difficult. The deterioration
in the public finances has left the government with much less money to spend on
infrastructure and capital investment projects essential to improving the ease with
which business can be done in Ireland and is under increasing pressure to increase
taxes on labour and profits. In this update we take a look at how manufacturing has
been affected by the economic downturn, we discuss the outlook for the sector for the
future and we highlight the most important challenges that need to be addressed to
ensure future recovery.
2 RECENT TRENDS IN MANUFACTURING
In this section the most up to date statistics available on output, employment, exports
and investment in manufacturing are presented and the future outlook in relation to
each is discussed. As well as updating the tables presented in the original Chapter
where new data are available, data drawn from new sources are also presented to help
bring the story more up to date. As in the original Chapter, a distinction is made
between the modern and the traditional manufacturing sectors. The modern
manufacturing sector covers all high-technology multinational enterprises (chemicals;
computers and instrument engineering; electrical machinery and equipment; and the
reproduction of recorded media) with the traditional manufacturing sector including all
other sectors.
1
THE ECONOMY OF IRELAND
Employment, Output and Productivity
Table 8.1 of Chapter 8 highlighted the declining numbers employed in the
manufacturing sector between 1995 and 2005 and a dramatic slowdown in the pace of
growth in output. In 2006, the most recent year for which comparable figures are
available, both output and employment in manufacturing have stagnated. Of particular
note is the slight decline in the output of the modern manufacturing sector coupled
with a slight increase in the numbers employed suggesting that labour productivity
growth in this sector has stagnated. This is in contrast to labour productivity growth of
an average of 7.4 per cent per annum between 1995 and 2005 for the manufacturing
sector as a whole and growth of 9.4 per cent per annum in the modern manufacturing
sector.1 Using OECD data Forfás Annual Competitiveness Report 2009 confirms the
downward trend in productivity growth in Ireland between 2005 and 2008.2
Table 8.1
Net Output and Employment in the Manufacturing Sector in Ireland, 1995,2000, 2005
and 2006
Net Output (€ billions)
Employment (‘000s)
1995
2000
20052
2006
1995
2000
2005
2006
Manufacturing
19.0
52.7
57.9
58.4
221
255
218
220
Modern1
9.4
32.4
34.0
33.3
78
107
89
90
Traditional
9.6
20.3
23.9
25.1
142
148
129
130
Source: CSO, Census of Industrial Production (local units), Database Direct. See www.cso.ie.
Value figures are in 2000 prices adjusted using producer price indices.
1 This excludes NACE 224 for which this disaggregation was not available.
2 Revised since previous edition.
As discussed in the update to Chapter 5, statistics from the Quarterly National
Household Survey reveal that the greatest job losses of the last year have occurred in
the construction sector (see Table. 5.12). Manufacturing, however, has also suffered
with a fall in the numbers employed of 8.6 per cent compared with an overall
contraction in employment numbers of 7 per cent. The ESRI predict that the
unemployment rate in Ireland will increase from 10.2 per cent in the first quarter of
2009 to 16 per cent in 2010 and so the situation is expected to worsen.3 To gain some
more detailed insights into the trends in employment since 2005 Table 8.10 presents
the numbers in full-time permanent employment by sector as published in Forfás’
Annual Employment Survey 2008. The downward trend highlighted in the original
Chapter is also evident in these statistics. Of particular note, however, is the very sharp
decline in employment between 2007 and 2008 following what appeared to be a
stabilisation in levels. Overall employment in manufacturing fell by 7 per cent between
2006 and 2008. Most of this is due to a decline in traditional manufacturing of almost
11 per cent mirroring the poor performance of traditional manufacturing in the output
figures. Also of note is the fact that the decline for Irish-owned enterprises is higher
than for foreign-owned enterprises.
2
MANUFACTURING AND PHYSICAL INFRASTRUCTURE
Table 8.10
Recent Trend in Employment 2000-2008
2000
2002
2004
2006
2007
2008
Manufacturing 188.6
170.1
161.5
163.5
161.9
152.4
Traditional
101.7
92.0
83.3
81.3
79.5
72.1
Irish
68.6
63.6
59.1
59.1
58.7
52.4
Foreign
33.1
28.4
24.2
22.2
20.8
19.7
Modern
86.9
78.1
78.2
82.2
82.4
80.3
Irish
15.2
14.7
14.6
16.4
16.6
15.8
Foreign
71.7
63.4
63.6
65.8
65.8
64.5
Source: Forfás, Annual Employment Survey 2008, Forfás, Dublin, March 2009
(available
at
http://www.forfas.ie/media/forfas090306_annual_employment_survey_2008.pdf).
These figures are for permanent full-time employment in agency-assisted companies.
Recent trends in output reveal a more muddled picture. The ESRI’s Quarterly
Economic Commentary for Summer 2009 highlights very large swings in output of the
manufacturing sector in the latter half of 2008 and the first half of 2009. In the last
quarter of 2008 manufacturing output fell by 12.9 per cent but grew by 11.3 per cent in
the first quarter of 2009. This upswing was entirely due to the modern sector where
output grew by 9 per cent. The poor performance of traditional manufacturing is
evidenced in the fact that the level of output in this sector was 15 per cent lower in the
first quarter of 2009 compared with 2008. The ESRI predict that output of the
manufacturing sector as a whole will contract by 0.5 per cent in volume terms in 2009.
With a 9 per cent contraction predicted for the economy as a whole this can be seen as
a very strong performance.
Exports and Investment
This story can in part be explained by looking at recent export data. Table 8.2
illustrates the proportion of total gross output attributable to exports of manufacturing
firms in Ireland, disaggregated by modern and traditional sectors and updated to
include data from 2006.
Between 2005 and 2006 there was a slight increase in the proportion of exporting
manufacturing firms in both the modern and traditional sectors, however, there was a
decline in the proportion of output exported, although, for modern manufacturing, the
proportion of output exports remains extremely high at 95 per cent. In 2006, 81 per
cent of output in the manufacturing sector was exported. In terms of the destination of
exports, the share going to the UK has continued to decline in all sectors. The UK still
remains an important destination for exports for the traditional manufacturing sector
with one quarter of all exports going to the UK market. The weakness of sterling over
the last year will have made exporting to the UK very difficult, in particular for
traditional manufacturers who continue to struggle to compete on the UK market.
Between 2005 and 2006 there was a sharp increase in the importance of USA as a
destination for exports of modern manufacturing firms.
3
THE ECONOMY OF IRELAND
Table 8.2
Percentage Contribution of Manufacturing to Exports and Export Destinations for
Ireland, 2000, 2005 and 2006
Firms
Output
UK
Manufacturing
Modern1
Traditional
62.7
75.6
60.0
79.0
93.9
59.2
Other EU
2000
19.0
50.4
15.6
49.5
27.8
52.2
Manufacturing
Modern1
Traditional
49.2
72.6
43.8
82.8
96.2
64.0
17.2
13.3
26.4
USA
Elsewhere
13.9
17.2
5.6
16.7
17.7
14.2
13.5
15.8
8.6
15.4
16.2
13.6
2005
53.9
54.6
52.2
2006
Manufacturing
49.6
81.3
17.1
51.1
17.8
13.7
Modern1
73.3
94.8
13.1
51.2
22.1
13.6
Traditional
44.3
63.2
25.3
52.0
8.9
13.8
Source: CSO, Census of Industrial Production, Stationery Office, Dublin 2000, 2005 and 2006.
1 This excludes NACE 224 for which this disaggregation was not available
Since 2006, the major contraction in world trade has placed significant pressure
on Irish exporters. Depressed demand on export markets due to global economic
recession coupled with the high costs associated with producing in Ireland place many
firms located in Ireland at a competitive disadvantage. As reported in the ESRI’s
Quarterly Economic Commentary for Summer 2009, the OECD estimate that world
trade fell at an annualised rate of 32 per cent between the fourth quarter of 2008 and
the first quarter of 2009 with some stabilisation since. This has left the manufacturing
sector very exposed. Merchandise exports experienced a contraction of almost 1 per
cent during 2008 predicted to rise to 3 per cent for 2009. Irish manufacturing,
however, has performed better than many of our trading partners due to the
composition of the sector. In the early part of 2009 over half of total merchandise
exports were chemicals and chemical products (which form part of the modern
manufacturing sector) where exports grew despite the downturn. Internationallytraded services have not fared so well. Chapter 8 highlighted the growing importance
of this sector and emphasised its potential for growth in the future (see Chapter 9). The
international banking crisis, however, has had a very significant effect on the export of
internationally-traded services from Ireland, due to the important role played by
financial services within the sector. The ESRI predict a fall in the volume exports of
internationally-traded services of 5 per cent in 2009. Thus, the exporting
manufacturing sector represents a real opportunity for Irish recovery. Crucial for the
continued success of the sector is that firms can remain competitive on world export
markets.
As discussed in Chapter 8, Ireland has the most FDI-intensive manufacturing
sector of all countries in Europe but in recent years there is some evidence to suggest
that Ireland is losing out as a location for investment to more low cost locations in
Asia and Central and Eastern Europe. Chapter 8 also suggested that positive inflows
4
MANUFACTURING AND PHYSICAL INFRASTRUCTURE
may have returned in more recent times due to the increasing number of investments in
higher-tech manufacturing sectors and services. Up to date figures comparable to those
presented in Table 8.3 are not available, however, Ernst and Young’s most recent
Attractiveness Survey confirms this trend showing that FDI into Ireland grew at a
faster pace in 2008 than in recent years previous.4 The most important sectors
attracting investment continue to be in high value-added manufacturing such as
electronics and pharmaceuticals as well as services such as business services and
software. Since these sectors are the most export-intensive it further emphasises the
need to reduce the cost of doing business in Ireland to allow these firms, old and new,
to excel on world export markets.
3 FUTURE CHALLENGES
Ireland continues to rank 7th in the world in the World Bank’s 2009 Doing Business
survey just behind Denmark and the UK, however, Ireland remains an expensive place
to do business.5 Chapter 8 called for the future competitiveness of all sectors of the
economy to be pushed to the forefront of the policy agenda and highlighted, in
particular, the need to strengthen the competitive advantages of Ireland’s industrial
base by creating a more competitive business environment. Given the current
economic situation and the outlook for the manufacturing sector, rising to this
challenge is all the more pertinent. There are some signs to suggest that Ireland is
doing just that. While Ireland continues to lag behind the European average in terms of
R&D expenditures, 2007 saw an increase in the level of R&D expenditure by Irish
enterprises (all sectors) from €1.3 million in 2005 to €1.6 million in 2007. 6 Despite
the downturn expenditure on R&D is predicted to increase again in 2008, although by
a small amount. The recent introduction of the tax credit scheme for R&D
expenditures is a welcome development in this regard. The Forfás Annual
Competitiveness Report 2009 highlights other competitive strengths including our
young well educated work force and our history of attracting FDI into Ireland. 7 The
importance of export-led sectors, both in manufacturing and services, in driving
Ireland’s economic recovery remains paramount.8 The need to keep labour costs low,
to effectively up-skill and re-skill displaced workers from the construction and other
manufacturing sectors, to continue to support third-level education to produce highly
qualified graduates, and to ensure enterprises continue to have access to affordable
credit will all be important steps in achieving this. Moreover, reducing the cost of
doing business in Ireland, in terms of improving competition in locally traded markets
(discussed further in Chapter 9), delivering on core infrastructure projects and
reducing the cost of key business services such as electricity supply will be a crucial
part of this process. Chapter 8 provided a detailed overview of the state of national
infrastructure in Ireland highlighting many of the key bottlenecks in the transport,
energy and information and communication technology sectors. Since the publication
of the 10th edition the situation has not changed, however, government funds to deliver
on targets set out in the National Development Plan 2007-2013 are much more
limited. With scarcer resources, bringing public infrastructure up to the standards of
5
THE ECONOMY OF IRELAND
Northern European countries will be an even greater challenge, although the falling
cost of infrastructural projects associated with the collapse in the construction sector
will help to ease some of this burden.
Endnotes
1
2
3
4
5
6
7
8
6
See C. Newman and J. O’Hagan, in J. O’Hagan and C. Newman (editors), Economy of
Ireland, Chapter 5, Gill & Macmillan, Dublin 2008, for further discussion and references.
National Competitiveness Council, Annual Competitiveness Report 2009, Forfás, Dublin,
August 2009 (available at: http://www.forfas.ie/publications/index.html).
Barrett, A., Kearney, I. and Goggin, J., Quarterly Economic Commentary, Summer 2009,
ESRI, Dublin 2009.
Ernst & Young, Reinventing Everything We Do: Ernst & Young’s 2009 European
Attractiveness Survey. Ernst & Young, June 2009.
World Bank, Doing Business 2009, World Bank, International Finance Corporation and
Palgrave MacMillan, 2008.
Central Statistics Office, Business Expenditure on Research and Development 2007/2008,
Central Statistics Office, Dublin,
National Competitiveness Council, Annual Competitiveness Report 2009, Forfás, Dublin,
August 2009 (available at: http://www.forfas.ie/publications/index.html).
National Competitiveness Council, Annual Competitiveness Report 2008, Forfás, Dublin,
January 2009 (available at: http://www.forfas.ie/publications/index.html).