Thursday 12 December 2019

Richard Curran: Irish business left reeling from UK's Brexit blindness

Leading light of the Leave campaign, MEP Nigel Farage. Photo: Vincent Kessler/Reuters
Leading light of the Leave campaign, MEP Nigel Farage. Photo: Vincent Kessler/Reuters
Richard Curran

Richard Curran

We have had a couple of days to think about the implications of last week's Brexit vote. Unfortunately, the prognosis doesn't look any better for Ireland.

The most rapid measure of the turmoil came in the stock markets on Friday morning. Share prices tanked immediately. But they may well claw back some of those losses as things settle down in the coming weeks. Traders need to buy or sell on a story. If the story is viewed as bad, they start dumping shares: Sell now, think about it later.

The bigger concern for the Irish economy is in the currency markets. Sterling fell like a stone on Friday morning because currency values are underpinned by real economy fundamentals of trade, supply and demand. The British pound is likely to stay low for quite some time.

It will stay low during the protracted period of negotiation between London and Brussels about the UK exit. That could go on for two years. Trade negotiations with other countries (the UK has around 60 different trade deals that may need to be re-negotiated) could take even longer.

Then there is the longer-term picture of where the currency will sit after Brexit has taken hold, given that the Leave camp failed to come up with a credible economic growth story. The Leave campaign rebuffed the Remain side predictions of an economic apocalypse - but never really said how the UK would grow outside the EU.

As long as Sterling stays low, Irish exporters will suffer. They will lose their competitive advantage exporting into the UK while also probably seeing a contraction in the British economy itself.

This is all bad news for Irish firms. The only reprieve would be if sentiment towards the future stability of the Eurozone drags the euro down in value with it - although it isn't much of a reprieve if bad news is tempered by even worse news.

Of course, in theory, what we lose in indigenous company exports could be replaced by new foreign direct investment (FDI) into Ireland.

The UK hoovers up around 40pc of all inward investment into Europe. We should have a reasonable chance of snagging a slice of that. But even if we do, those FDI investments will be mainly in Dublin or Cork and will never be as embedded in the Irish economy as the profits and employment of indigenous firms dotted around the country.

They are ultimately more transient than indigenous firms and lack impact in many of the regions around the country.

The UK may account for 16pc of Irish exports, but it is the destination for more than 40pc of indigenous company exports.

The currency will also hit Irish tourism. British visitor numbers to Ireland have grown as a strong Sterling made us a cheaper destination. This has helped small and large tourism businesses in most corners of the country.

That tap could be turned off pretty quickly, with the consequent impact on jobs here.

So yes, in theory, everything is the same today as it was last Thursday. The UK is still in the EU until it negotiates its way out. That process will only begin in October and will go on for a long time. But this is such a seismic event, it has already negatively impacted on Irish businesses.


Mr China wants to stay ahead of the curve

It IS not every day that a major Irish company says it is going to let go more than half its total staff through voluntary redundancies - and yet such an announcement made last week attracted relatively modest attention. But Liam Casey's PCH has never courted too much publicity, no matter how it has been doing.

His announcement that 1,500 jobs were to go, mainly from its operations in China, reflected a shift that the supply chain management firm is making in its own business model.

Casey has built up a very successful company by being the 'go-to' guy for major global technology companies, such as Apple, that want to get something made in China.

But the Chinese economy is shifting and the Corkman, christened 'Mr China', is changing with it. PCH referred to tight margins in its statement, something that has become a growing problem for those feeding into the manufacturing sector in the second-largest economy in the world.

Casey has spent a lot of time refocusing the business away from providing services to Western firms that want to mass produce a consumer product, and instead moving it towards helping with the concept, design, engineering and delivery of hardware technology.

He recently talked about an exciting new product his firm was working on for a client in the US and raised the possibility of the end product being made in the US.

PCH is becoming more embedded in San Francisco with high-potential start-ups and helping them move beyond the concept stage for their product ideas.

As the Chinese economy is trying to move further up the value chain into higher margin businesses, so too is PCH.

Chinese wages have risen sharply in the last 10 years and, according to an economist with Bank of America Merrill Lynch, hourly wages in Mexico, in dollar terms, are 40pc lower than in China.

Much of this is due to the value of the Mexican peso, but even the Chinese finance minister recently commented that labour laws designed to protect workers' pay and conditions have damaged the economy.

Much of China's past success has been about cheaper manufacturing on the back of low wages. But as wages rise and working conditions improve in the midst of efforts to shift the economy away from cheap manufacturing, its competitive advantage has been eroded.

The chairman of one Chinese car-maker recently said "the profits of manufacturers' are thinner than a blade."

It is difficult to assess how the shifts in the Chinese economy have affected PCH. Its revenues in 2014 were reported at $1.1bn. However, its Irish group company has unlimited liability and is owned by two companies registered in the Cayman Islands - so there are no publicly available accounts.

Back in 2011, before it went unlimited liability, it reported an operating profit margin of just 2.3pc on $710m of revenues. Clearly PCH has grown a lot since then, and the changes in its business mix may have lifted that margin.

PCH made a number of strategic acquisitions, including the acquisition of the website, as if were preparing the ground for the refocusing of its business model. Nevertheless, when PCH announced 250 job losses in February of this year, Casey ruled out any further job cuts. PCH employs 1,900 staff in Shenzhen and has 200 engineers in China working on product design, Casey said earlier this year.

Liam Casey has built a very successful empire by getting in first and staying ahead of the curve when it comes to China. He now wants to stay ahead of the curve again.


If Hacketts can't hack it any more, then who can?

Boylesports has been tipped as a possible buyer of some of the 18 Hackett betting shops closed through liquidation.

Paddy Power has already had the pick of the Hackett empire, buying 15 shops after Hackett closed a further 26 in a restructuring not that long ago. The remaining 18 shops were the last throw of the dice.

The demise of Hacketts shows the pressure independent bookmakers are under, not only from changes in technology but also from what is on offer in a bookies.

Betting shops don't look like what they used to and punters who frequent them want maximum choice on where they can bet. Plus, if they are going to lose money in a bookies, they want to do it while being as comfortable as possible in what looks more like an executive lounge than a place to stick a fiver on a horse.

If Hacketts couldn't hack it with its long track record and a chain of 56 shops, then what future is there for smaller operators? In just a few years' time we may see the Irish betting shop market carved up between just three or maybe even two players.

Sunday Indo Business

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