Limerick Facility Gave Region Boost; A Shift to PolandDell Inc.'s plan to sell its assembly plants could pose problems for cities that count the tech giant as a major employer. Nowhere have worries been greater than in Limerick, Ireland, where a Dell facility with about 3,000 workers helped revitalize the economy.
"It would be dreadful news if something were to happen to Dell," said John Gilligan, who earlier this year became the 812th mayor of Limerick, a city of almost 91,000.
Dell opened its plant in Limerick, Ireland, in 1991, but rising labor costs have diminished the country's attractiveness as a manufacturing hub.
Mr. Gilligan, whose son-in-law works at the Dell plant, said the city hasn't received any recent word from Dell on the plant's future.
There's reason for concern: Dell has approached contract computer manufacturers with offers to sell its plants, according to people familiar with the matter. One person briefed on the strategy, which was reported in the Sept. 5 Wall Street Journal, said some factories Dell doesn't sell could be closed.
As for Limerick, Dell executives have privately discussed closing the plant for two years, said two people with knowledge of those discussions. One of those people said Dell executives early last year decided to close the factory, though they didn't establish a firm timeline.
This person said the goal is to move production capacity from Ireland to Poland, where Dell opened a factory early last year -- though the company is moving cautiously to limit any disruption of manufacturing and defections of sales and operations staff Dell wants to retain. In addition to factory workers, Dell has more than 1,000 office workers who will likely remain in Ireland, that person said.
A Dell spokesman declined to comment on the future of the Ireland plant. "It's clear from our regulatory filings that we're continuing to evaluate and optimize our global manufacturing and distribution network," said spokesman David Frink.
Dell, of Round Rock, Texas, is trying to cut manufacturing costs because of increasing pressure to improve its profitability. While Dell's factories in India, China, Brazil and Malaysia should be relatively easy to sell, these people said Dell may simply close facilities in the U.S. and Ireland, where high labor costs make them less desirable to buyers. Dell already closed a plant in Texas earlier this year.
Dell opened its Ireland plant in 1991, joining a wave of U.S. tech companies that needed a base in Europe to avoid import tariffs and control costs for transporting finished goods. Many chose Ireland because of a low corporate tax rate -- estimated by the country's Industrial Development agency at 12.5% compared with 30% in Germany and 39.5% in the U.S. The Irish government also gave Dell grants totaling €55 million ($78.2 million), according to a spokeswoman for the development agency.
Limerick saw the benefits. In addition to factory jobs, companies supplying components to Dell have provided several thousand more jobs, said Mr. Gilligan. Limerick -- once-known as "stab city" for its high crime rates -- has begun redeveloping its decrepit public housing, and the city recently approved a €350 million downtown redevelopment project, he added.
Local uncertainty has grown in recent years, though, as rising labor costs have diminished Ireland's attractiveness as a manufacturing hub. Dell, meanwhile, ran into its own problems as a company that grew around sales of commercial desktop computers shifted to consumer laptops, particularly used Dell laptops.
While Apple Inc. and Hewlett-Packard Co. saved costs over the past decade by selling many of their factories and shipping some computers directly from contract manufacturers' plants, Dell produced laptops through a two-step process in which a contract manufacturer partially builds a PC and ships it for completion to a Dell factory like the one in Limerick. Many of these laptops are then later sold as used Dell notebooks and discount Dell notebooks.
The company's problems led Michael Dell, its founder, to return as chief executive early last year. He subsequently hired Mike Cannon, the former CEO of contract PC manufacturer Solectron Inc., to head Dell's manufacturing, and ordered a review of the company's production system.
Executives working with Mr. Cannon decided the company should sell as many of its plants as possible, said people briefed on those plans. But that process could take years, they said. So in the meantime, Dell has considered shorter-term solutions.
Closing or scaling back the Ireland plant could help, those people said, because the factory in Lodz, Poland, is large enough to absorb much of the laptop production being done in Ireland -- and PCs can be built in Poland less expensively.
Chris Van Egeraat, a researcher at the National University of Ireland who studies the PC industry, said Poland also has a low corporate tax rate and easy shipping routes to much of Europe, but its labor costs are much lower following recent rises in Ireland. "Ireland is not the same economy it was when these plants arrived," he said.
Recently, though, Ireland's growth has faltered amid a slowdown that could tip the 15-nation euro zone into recession. In addition to global financial turmoil and high commodity prices, Ireland faces a collapsing housing market. House prices, which quadrupled over the past decade, have been falling since last year and slipped 9.4% in July from a year earlier, according to the most recent permanent tsb/ESRI house-price index.
Since construction accounts for 10% of the 4.4 million-person Irish economy, the real-estate crash has had an outsize impact. Irish unemployment in August rose to 6.1%, its highest since November 1998 and up from July's 5.8%. Recent surveys predicted continued slowing in Ireland's manufacturing sector.
By: Justin Scheck and Joellen Perry
Wall Street Journal; September 15, 2008
