international
IRISH FIRMS FIND THEIR NICHE Government-supported strategy of attracting high-value, high-technology industries to Ireland has led to outstanding growth Patricia L. Layman C&EN London
I
reland has progressed from a country with little chemical production and low sales in the years immediately following World War n to a country where chemicals account for sales of $13.6 billion (based on 1997 results). The chemical industry in Ireland has shown probably the highest growth rate over the past decade of any chemical industry in the world. Moreover, it contributes to a healthy positive balance of trade for Ireland, accounting for fully one-quarter of the country's exports. The country has accomplished this by adapting the "niche" concept—specific products designed for specific purposes or markets—for shaping the entire industry. Ireland's chemical industry focuses heavily on pharmaceuticals, fine chemicals and intermediates, and the auxiliary specialty chemicals used in the pharmaceutical industry. Pharmaceuticals—proprietary finished drugs, generic products, and bulk active ingredients—accounted for nearly 12,000 of the country's 21,000 people employed in the chemical industry. Basic industrial chemicals—mostly fertilizersemployed 2,200. And a catch-all miscellaneous category that includes synthetic fibers, textiles, and leather employed another 6,800 workers, an increase of 500 workers over the previous two years. In all, there has been a net increase of 12% in employment from 1995 levels, at a time when chemical-industry employment has been shrinking in most other European countries. Little wonder that the Irish government likes the industry and has taken steps to encourage it. Little wonder that—after a period of hostility in the early 1990s because of environmental problems—the general population has gained at least grudging respect, if not enthusiasm, for the industry. 18 FEBRUARY 22, 1999 C&EN
But little wonder, too, that the industry has developed with the focus that it has. As Bill Prenderville, a divisional director at Bayer in the U.K., who is soon to take over as head of Bayer's operations in Ireland, puts it, "The Irish government has decided to encourage companies in industries where there is not a lot of bulk. Everything has to be imported and exported"—there are virtually no natural resources in the country to support more fundamental chemical operations. Nor is there enough of a local market on which to build a business. The country's population was only 3.62 million in 1996, up from 3.54 million in 1986, according to 1998 statistics from the Organization for Economic Cooperation & Development. Even the booming Irish economy, which is luring home thousands of young Irish expatriates, is not building up the total population to a level that could provide sustained support for a truly "home" market. In fact, "If an industry is not highly profitable, it probably shouldn't come here—there is no big home market," concedes John Lloyd, manager for the pharmaceuticals, health care, and con-
Irish chemical output soared during 1 9 9 0 s Production Index (1990 = 100) 400 r
300
200
100 1990 91
92
93
94
95
96
97
Source: European Chemical Industry Council (CEFIC)
sumer products division at the Industrial Development Agency Ireland (IDA). Those factors were recognized by the Irish government by the early 1960s. Up to that point, the industry was a limited one. The country had a fertilizer industry to support its predominantly agricultural base. There was a small chlor-alkali industry, based on extraction of salts from brine. And—shades of the ethanol for gasoline programs of the U.S. Midwest now—the government-supported Industrial Alcohol Co. produced ethanol, as well as starch and glucose, from surplus potato crops for blending into gasoline. There was even a small oil refinery built near Cork, on the southern coast. In 1963, when it appeared likely that Ireland would join the European Common Market—it finally did in 1973—the government sponsored a report on the chemical industry that identified lack of native raw materials and lack of capital available for investment as obstacles to building a basic chemical industry. The government gave IDA the task of developing a strategy that could sensibly be supported and encouraged by government policies. One of the first such targets was fine chemicals and pharmaceuticals, along with electronics, information technology, and instrumentation. "What you are looking at today" is the sector chemicals and allied products, including fibers and polymers, shaped by IDA, "which determined a strategy of attracting high-value, high-technology industries to Ireland," notes Matthew Moran, director of the Irish Pharmaceutical & Chemical Manufacturers Federation (IPCMF). The Irish government's efforts coincided with the general desire of U.S. companies in particular to expand operations into Europe, Bayer's Prenderville notes. In response to the IDA efforts, Pfizer began construction of a citric acid manufacturing plant near Cork in 1969, probably the first major investment by the pharmaceutical industry in the country. Since that plant came onstream in 1971, the company subsequently built three major organic synthesis plants. Over the past five years, its investment has amounted to about $175 million, and it recently announced another $280 million investment, slated to come onstream in mid-2001, which will boost its total production capacity in Cork by 40%. Other multinationals have followed, first slowly, then at a quickening pace. And they, too, now are at the stage where they are "topping up" their initial invest-
ments. "The entire industry is very modern—everything is totally state of the art," IDA'S Lloyd says. "Even a company with an existing plant will spend [a lot of money] for maintenance—$10 million is not an uncommon amount to spend. All these plants have to perform at top efficiency. The reputation is very important." The industry now, Moran says, is dominated by multinationals, mostly U.S. based, but a significant number are also from Japan. Most produce drugs, both bulk actives and secondary products. But increasingly, they are also producing fine chemicals and performance chemicals such as adhesives. The industry is concentrated around Dublin and Cork, but companies are scattered around the country. The plants sited in Ireland, Moran says, "are for worldwide distribution—they are not just for selling in Europe." A case in point is Pfizer's latest investment in Cork, which will produce all the active ingredient for its wildly successful impotence drug, Viagra. Bristol-Myers now does a significant amount of its worldwide process development in Ireland. "Increasingly, you will see this," Moran predicts. "We are seeing a lot of forward integration going on—companies adding formulations, tablets, and injectables" to their bulk production. Elan, based in Dublin, is the largest Irish drug company. It has just reported sales for 1998 of $677 million, up 74% from 1997, and net profits of $257 million, up 45%. The company has launched an ambitious acquisition program. For example, this month it consolidated a 72% stake in British company Ethical Holdings. It also arranged a credit line of up to $325 million to use for a variety of purposes, including strategic acquisitions and acquiring, licensing, copromoting, developing, and commercializing pharmaceutical products from other companies. The company also is trying to strengthen its position in biotechnology. According to IDA's Lloyd, the pharmaceutical industry now has "critical mass here. It's a comfort factor," he says. "If you are one of the top companies in the world, and your competitors and friends have found something successful somewhere, it is difficult to not look at it." And that is the key to success, Moran says. "When companies go through their operations, analyzing them, following mergers and acquisitions, they think Ireland is a good contribution. We're always competing with other regions—some you win, some you lose, but we've done well." Moran and Lloyd are in agreement on
the major attractions they believe the country can offer: a good educational base and an English-speaking population. There are also, adds one wag, a lot of very good golf courses—a surefire attraction for American and Japanese executives. Lloyd says that in talks with prospective investors, he asks: "What do they have in mind? What ambition—Do they want to be within one-half hour of an airport, a port, a university, or so on?" The most important thing of all: A location has to work. If it doesn't, it's a big loss all around, he adds. For the pharmaceutical industry, EDA also emphasizes the country's stability, Iioyd says. "Political and economic stability have to be the reality. You also have to be sure that what you want to do, you can do." For example, he points out, a company must know that it can buy the land,
build a building to standards it wants, and put the people in it. "All those factors have to be there before you decide" on where to site a plant, he says. Only then, he adds, does a company really look at tax rates: "When everything else is okay, then the tax rate becomes important." And about at that point, it becomes difficult to keep a tinge of smugness from Irish voices as they talk about their corporate tax rate, the lowest in the European Union countries. As Lloyd describes it, it's a flat tax rate of 10%. "With everything else working well, it's hard to beat that." The country has had some discussion with the EU about taxes. But the issue with the EU focused on the fact that under the Irish tax code, manufacturers were paying 10% tax,
Pharmaceutical and chemical facilities in Ireland
Drogheda International Flavors & Fragrances
Dublin Akzo Nobel BOC Evode Forest Laboratories Glaxo Wellcome Intervet Leo Laboratories Loctite Merck KGaA Olin Organon Reneis Schering-Plough Ve Bristol-Myers Squibb Warner-Lambert Yamanouchi Mallinckrodt Medica Helsinn
Limerick Info Lab (Huber Group) Aughinish Alumina (Alcan) Sifa (Schwarz Pharma) Wyeth Nutritional (AHP)
Waterford Novartis Agribusiness Norton (Ivax) Lawter International SmithKline Beecham Rhone-Poulenc Rorer Stafford Miller (Block Drug)
Dungarvan
Cork Archer Daniels Midland Novartis Pfizer Cara Partners Pharmacia & Upjohn Dyno Plaistow FMC Quest (ICI) Henkel SmithKline Beecham Irotec Warner-Lambert Janssen (J&J) Wexport (Leo) Mitsui Note: AHP = American Home Products, J&J = Johnson & Johnson. Source: Industrial Development Agency Ireland
FEBRUARY 22, 1999 C&EN
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international while service industries such as banks and restaurants have been paying a full rate of 32%. That, to the EU, was inequitable. The Irish government agreed and decided to lower the service-sector taxes substantially and raise taxes for manufacturing only slightly. The eventual goal: an industrywide 12.5% tax rate by 2003 and existing manufacturing companies holding the 10% rate until 2010. Ireland is also now a country in the eurozone, having adopted the euro single currency. Few in the industry expect any major impact from the switch-over to the euro, but they all say the euro will help ease business and add stability, particularly for the country's many exporters. The country's industry also knows where it stands on the environmental front. IPCMF was established after a series of environmental protest campaigns centering around waste disposal in the Cork area in the early 1990s. In turn, it supported the government's creation five years ago of what eventually was established as Ireland's Environmental Protection Agency (EPA). Lloyd says that the pharmaceutical industry was in fact the first industry brought under the Irish EPA's aegis. "These are top-quality companies: They could afford it, even though the standards are very high. Four years later, it is totally accepted that compliance with regulations is now part of the cost of operating. People may not stand up and say 'we love it,' but it is not such a bad thing." "The chemical sector is the cleanest sector in Ireland," Moran says flatly. Before the establishment of EPA, he notes, "environmental regulations were controlled by local authorities, and they didn't necessarily have the expertise that was needed. It is useful for companies to know the regulatory environment they have to work in. And it is important to have an independent agency. We have our differences, but we also have a good working relationship." Moran recalls that the environmental protests earlier in the decade basically concerned the industry around Cork. "There was a huge mismatch between perception and fact. There were some nuisance problems, but never any major mess, such as buried toxic wastes. "Our initial work at IPCMF was on communications," he says, "particularly with local governments and the local people, to get across the point that we are an environmentally concerned industry. We still take a little flak," he acknowledges, "but people would now pri20 FEBRUARY 22, 1999 C&EN
marily think of the industry that we are a good employer." According to Lloyd, the major environmental issue now facing the industry is incineration. In the worst case of the decade, he recalls, it took two years for a company to obtain an incineration permit. Because of that case, the government put in certain time limits, and it now generally takes seven to eight months to receive approval for a permit. About half a dozen such incinerators have now been licensed. "The process is pretty predictable now," he says. "You know what can be done and what is allowed." Outside the pharmaceuticals sector, "chemicals" are finding particular success in supporting other growing high-tech areas such as information technology and electronics. For example, Prenderville says that spe-
High-value exports drive Irish chemical industry
Sales Employment Exports Imports Chemical trade surplus
1997
% change from 1996
$13.6 billion 21,000 $13.4 billion $4.9 billion $8.5 billion
32.9% 6.6 40.0 23.3 51.6
Source: European Chemical Industry Council (CEFIC)
cialty polymers producers like Bayer are benefiting from demand for such compounds from the information technology industry. Specialty plastics are needed, he points out, by producers such as Apple, Dell, and Hewlett-Packard. "The plastics industry's marketing growth owes a lot to servicing that business," he says. Bayer, for example, has a staff of 55 in its Bayer Ltd. marketing and distribution unit in Ireland, another 12 employees with Agfa photo and imaging, and some 269 employees in its Diagnostics division, a medical devices company acquired with Bayer's acquisition of Miles Laboratories years ago. IPCMF is also lobbying, with another organization, Bioresearch Ireland, to encourage the Irish government to take a positive stance on biotechnology. Bioresearch Ireland wants to commercialize R&D in universities and institutes. "There's money around," Moran says. "Putting the idea to the money is the problem—and helping companies to go
from employing five or 10 people to employing 50." With the dominance by multinational companies, the industry conceivably could be very vulnerable to corporate decisions to close plants or sites, as offshore locations are generally the first to suffer in restructuring programs. However, Lloyd suggests, the opposite is happening: The Irish sites are becoming increasingly more secure in the multinational structure. For example, government policy is encouraging research and development in the country. Moreover, changing world conditions are driving companies to invest in finishing facilities, Lloyd points out. "For a long time, finishing was done elsewhere," he says, primarily for geographical and political reasons. "But that is no longer the case: The European Union works pretty well as a common market." The result is that in the past five years, more finishing plants than bulk plants have been built in Ireland. "We try to make these more than just overseas plants—these are profit centers, not just cost centers." On the other hand, many managers throughout the industry acknowledge that what does pose a potential problem, far more than multinational whim, is the availability of staff. According to Moran, availability of employees has the potential to be a limiting factor. IPCMF established a skills group in 1997, initially devoted to working on information technology and word processing. "We have had to work on this," he says. He and Lloyd see the problem as part of the general European problem of a falloff in the number of students in the sciences. Business-link schemes with local schools to promote careers in science are among the efforts the industry is taking up. "It is not a critical issue yet," Lloyd says. "We are trying to work on it before it is a critical issue. There are some warning signs, some strains on the system." Those strains are being echoed by strains on the country's infrastructure—traffic on the country's roads, rapidly rising house prices, and so on—as it copes with the demands put on it by a booming economy. And that demand is both indigenous and from incoming investors. As one returning expatriate manager puts it, "In this day and age, to attract good managers, there has to be a good quality of life for themselves and their families. That plays no small part in Ireland's success."^
