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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 fol- lowing World War n to a country where chemicals account for sales of $13.6 bil- lion (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, ac- counting 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 indus- try. Ireland's chemical industry focuses heavily on pharmaceuticals, fine chemi- cals and intermediates, and the auxiliary specialty chemicals used in the pharma- ceutical industry. Pharmaceuticals—proprietary fin- ished 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 fertilizers- employed 2,200. And a catch-all miscella- neous category that includes synthetic fi- bers, textiles, and leather employed an- other 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 employ- ment has been shrinking in most other European countries. Little wonder that the Irish govern- ment 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. But little wonder, too, that the industry has developed with the focus that it has. As Bill Prenderville, a divisional direc- tor 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 coun- try's population was only 3.62 million in 1996, up from 3.54 million in 1986, ac- cording to 1998 statistics from the Orga- nization for Economic Cooperation & Development. Even the booming Irish economy, which is luring home thou- sands of young Irish expatriates, is not building up the total population to a lev- el 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 1990s 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 in- dustry, based on extraction of salts from brine. And—shades of the ethanol for gasoline programs of the U.S. Midwest now—the government-supported Indus- trial 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 Com- mon 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 govern- ment policies. One of the first such tar- gets was fine chemicals and pharmaceu- ticals, along with electronics, informa- tion technology, and instrumentation. "What you are looking at today" is the sector chemicals and allied products, in- cluding fibers and polymers, shaped by IDA, "which determined a strategy of at- tracting high-value, high-technology in- dustries to Ireland," notes Matthew Mo- ran, director of the Irish Pharmaceutical & Chemical Manufacturers Federation (IPCMF). The Irish government's efforts coincid- ed with the general desire of U.S. compa- nies in particular to expand operations into Europe, Bayer's Prenderville notes. In response to the IDA efforts, Pfizer began construction of a citric acid manu- facturing plant near Cork in 1969, proba- bly 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 mil- lion 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- 18 FEBRUARY 22, 1999 C&EN

IRISH FIRMS FIND THEIR NICHE

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internat ional

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 fol­

lowing 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 fertilizers-employed 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.

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 1990s 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 Mo-ran, 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-

18 FEBRUARY 22, 1999 C&EN

Page 2: IRISH FIRMS FIND THEIR NICHE

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 injecta-bles" 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

Limerick Info Lab (Huber Group) Aughinish Alumina (Alcan) Sifa (Schwarz Pharma) Wyeth Nutritional (AHP)

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

Dungarvan SmithKline Beecham Stafford Miller (Block

Drug)

Cork Archer Daniels Midland Cara Partners Dyno FMC Henkel Irotec Janssen (J&J) Mitsui

Waterford Novartis Agribusiness Norton (Ivax) Lawter International Rhone-Poulenc Rorer

Novartis Pfizer Pharmacia & Upjohn Plaistow Quest (ICI) SmithKline Beecham Warner-Lambert Wexport (Leo)

Note: AHP = American Home Products, J&J = Johnson & Johnson. Source: Industrial Development Agency Ireland

FEBRUARY 22, 1999 C&EN 1 9

Page 3: IRISH FIRMS FIND THEIR NICHE

internat ional wm^gtu'r-,'

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 eu-rozone, 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 pri­

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

% change 1997 from 1996

$13.6 billion 32.9% 21,000 6.6

$13.4 billion 40.0 $4.9 billion 23.3 $8.5 billion 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 fall-off 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."^

20 FEBRUARY 22, 1999 C&EN