Ovum on: Economic Development Agencies Must Learn from the Closure of Dell’s Irish Assembly Plant

by Eamonn Kennedy, principal analyst at Ovum

Dell's announcement that it is to cease assembling computers in Ireland, with the loss of 1,900 jobs, is a major blow to the local economy and the individuals affected. Once the local politics move on and the recriminations fade into the background, IDA Ireland, and similar development agencies worldwide, must learn from this. This is a clear example of why such agencies must step up their efforts to continually develop existing investments by ICT companies, in addition to attracting new investors. They need to play the crucial role of ensuring that their country or region can continue to offer what these investors need as their business requirements change.

Closing the manufacturing plant is an unsurprising move

The local importance of Dell to Ireland and the Limerick region is difficult to overstate. Dell is the country's largest exporter and its second-largest employer, accounting for around 5% of total Irish GDP. Of its estimated 4,300 employees in the country, 3,000 are based in Limerick, with a further 1,300 based in its sales and support center in Dublin. The number of additional jobs supported by Dell's presence in the country is estimated at between 6,000 and 10,000.

The announcement by Dell that it is to cease assembling computers in Ireland, moving production to Poland and to third-party manufacturers instead, could hardly be described as a surprise. Ever since the company announced Lodz, Poland as a new manufacturing location in 2006, the option of transferring all EMEA production there has been viable and much rumoured. Dell's build-to-order manufacturing model has long been considered a differentiator for the vendor, but it comes at a unit cost disadvantage compared to the inventory-based model of most PC manufacturing. Poland is cheaper as a manufacturing centre, but Dell is also expected to make greater use of contract manufacturers to build standard configurations for inventory-based selling through retailers and resellers.

Nonetheless, Dell's 18 years of manufacturing in Ireland had created a sense of permanency, one that was finally broken only when this announcement was officially made on 8 January 2009. Even a high-level government delegation flying out to meet Michael Dell in Texas before Christmas did not ring everyone's alarm bells. It should also not come as news to any of the stakeholders involved that the current economic recession will impact the investment decisions of such companies. In this particular instance, Dell's decision is one part of a programme it has underway to realise a $3 billion cost reduction.

Dell is to continue with product development, engineering, procurement and logistics functions in Limerick. The company's Global Innovation Solutions Center and EMEA Command Center continue to be based in Limerick, while the sales, marketing and support operations in Dublin are unaffected by this announcement. The transfer of operations to Poland is due to be completed by January 2010.

The world has not ended; competition for investment must continue unabated and in tune with investors' changing requirements

On the day that Dell's announcement was made public, local politicians made some regrettable accusations about a company that continues to be a major employer and investor in the country. There were also partisan calls for future investment to be directed to the Limerick region. Limerick or Ireland generally, just like any other locations, do not hold a special entitlement to inward investment by ICT companies – every such investment needs to be won competitively in the face of serious competition from other locations.

Dell continues to be a major reference for Ireland's Industrial Development Agency (IDA). From its initial investment in 1990, Dell had developed Limerick as its sole manufacturing operation for the EMEA region – a remarkable achievement for which IDA Ireland should be awarded due credit. Dell has not only grown its headcount and contributed greatly to the local economy during that time but has also acted as an encouragement to other technology companies to locate in Ireland. Intel, IBM, Yahoo, Adobe, Microsoft, Oracle, HP, Apple, Google, eBay and Amazon are all significant investors in Ireland's ICT sector.

Dell is far from the only company in its industry that needs to reduce its cost structure. In Dell's particular case, this decision comes at a time when the company is also revising its wider strategy. While Dell will continue to sell a lot of hardware, it recognises that its future requires a more diversified revenue base that will include increasing its services and software businesses. It is these types of shift in strategy that development agencies need to keep abreast of. With sufficient foresight, based on a real understanding of investors' changing strategies, they can be in a position to favourably direct future investment in support of new requirements that may be unrelated to initial or previous investment decisions.

Western governments and their development agencies have been fully aware of the move towards services-led economies for a long time. This is a further reason why the closure of a manufacturing facility should be seen as a natural development, albeit one that should have been properly prepared for.

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