Posted on Wednesday 17 October 2012 by Ulster Business

John Simpson

FG Wilson last year opened an engineering centre of excellence in Larne. It will have shed almost 1,000 jobs by the end of 2012.

The decision by the American owned Caterpillar organisation to downsize their operations in Northern Ireland in FG Wilson was unpleasant news.

The decision was a surprise since this has been a home-grown success story – or that was what it seemed.

Fred Wilson and his family developed their business by exploiting an expanding world market for diesel electric generators of many sizes. The product range fitted many world-wide market opportunities.

Whatever the market opportunity, when FG Wilson was taken over by Illinois-headquartered Caterpillar Inc, the products were selling successfully around the world.

With hindsight, some of the technology and techniques were vulnerable to market penetration by rival manufacturers. So the decision to shift a large part of the assembly and manufacturing capacity for smaller generators to China is difficult to fault if, or when, there was no inherent profitable advantage in retaining production here. Assembly in China became a realistic prospect when the 'extra' cost of assembly and shipment from Northern Ireland to China exceeded any other advantage in comparative costs. Transport and labour costs weighed against Northern Ireland and were no longer offset by productivity and technical expertise.

Invest NI chief executive Alastair Hamilton was only being realistic, not defeatist, when he surmised that, on what he knew of the arithmetic, he understood the decision.

His judgement was not defeatist when it is put in the context of learning the policy lessons on what this means for the reshaping of local business and industrial policies. The judgement can help to re-orientate official policy and, as a result, eventually make the local economy stronger.

The prophets of doom have been encouraged by negative assertions that the loss of a large part of FG Wilson points to an inherent weakness in local manufacturing. Can Northern Ireland continue to rely on manufacturing as a source of economic strength in the future when it has lost an ability to compete in a firm like FG Wilson?

There are two inter-linked questions. First, can Northern Ireland build a more competitive economy with an ability to increase exports to external markets? Second, how can that competitive ability be enhanced?

There is a defence for Northern Ireland in the response that FG Wilson is only one business, even if it happens to be a big one. One casualty does not mean that there is a systemic flaw. That defence is deceptively comforting.

Whilst the argument is understandable, the combination of circumstances was not exceptional. They might recur. Indeed, a reflective examination of the ebb and flow of business in the last 30-40 years might identify comparable examples in textiles, shirt manufacturing, ship building, computer manufacturing and telecommunications equipment. Gone but not forgotten; but also, not a continuing and cumulative disaster.

Northern Ireland has been taught an important lesson. To maintain and grow the economy, there needs to be continuous progress in advancing the skills, knowledge, technology and productivity of the people who live and work here. To fail to advance on these different questions is a bigger danger than simply trying to stand still: to fail to keep pace with other advanced economies is the equivalent of accepting a widening economic differential to our collective competitive disadvantage.

These challenging statements offer a prescription for the matrix of successful policies to grow the economy.

Before someone suggests that there is a single readymade option that should be implemented – devolve and cut corporation tax – this thinking needs to be put into perspective.

If corporation tax had already been devolved to Northern Ireland, alone, it would have been marginal in Caterpillar's thinking about FG Wilson. It might be a little more than marginal if Caterpillar had other investments planned in the future for Europe. However, on its own, corporation tax rates are only one factor influencing location, not the only factor.

The critical feature of successful policies to rebuild the economy is that, to maintain and improve employment prospects and living standards, Northern Ireland needs to have a continuously improving competitive advantage. If other developing regions are improving their productivity and competitiveness, then Northern Ireland cannot stand still or it will effectively drop behind in attracting investment, whether internal of foreign.

This scenario offers a formidable challenge. Every policy, every year and every supporting service must not only match those available in other advanced European regions but it must be successfully managed to continuously improve.

The challenge can be crudely illustrated by suggesting, flippantly, that Northern Ireland could still build large ships and be a large scale manufacturer of shirts provided local costs were much reduced. In other words, employee earnings would be much lower.

The converse is that, in future, competitive advantage and adequate earnings and employment depend on improved productivity, enhanced skills, better institutional and administrative support, technology advances and a flow of R&D with the implementation of innovative ideas. These are the basic fundamentals.

The institutional and fiscal factors that may bring further competitive advantage by enhancing the retained profits of enterprises, tend to get headline attention. That can be deceptive. Attractive rates of corporation tax are significant but must sit alongside the many other features.

In a review of the factors determining Northern Ireland's relative competitiveness, there are concerns about the adequacy of our range of vocational skills and the front-line expertise being delivered by the Universities and Further Education Colleges. In addition, as has now been explicitly acknowledged by the First Minister, our public administration as illustrated by the criteria and speed in making planning decisions is vulnerable to serious criticism. The planning law and practice opens the way to processes of Judicial Review which goes beyond the original expected remit of the Courts.

These adverse features are all too often understated, minimised and deferred.

Only with a recognition of the complex matrix of factors affecting competitiveness can there be a useful discussion of fiscal policy. Lowering corporation tax, if there were no adverse consequences, would be an attractive marginal addition. If the balance of political judgement is that the devolution of corporation tax is neither sensible nor practical, then the debate moves on.

Recently, David McNellis, Director of commercial real estate agency Lisney, returned to the neglected offer by the Treasury that Northern Ireland might develop and use the concept of an Enterprise Zone as an incentive mechanism. David argues that now is the opportunity to give this concept further consideration.

There is scope to argue that all of Northern Ireland, or selected areas, might be designated. The selected areas could have eased planning constraints and possible financial advantages in terms of business rates and/or some approved forms of tax benefits from capital allowances. In addition, there are other financial instruments to consider such as, for example, a TIF (tax increment financing) scheme which is being exploited in Edinburgh and Liverpool and might be applied in a local urban regeneration area.

For those who argue that the devolution of corporation tax is the best available option, the reply must be that if that is not the case, then there can be a plan B. There is plenty of scope for difficult but radical adjustments to the delivery of economic policy.

FACT FILE

Diesel generator manufacturer FG Wilson last month announced plans to cut 760 jobs by the end of 2012 at its sites in Larne, Springvale and Monkstown. Parent company Caterpillar Inc, the heavy machinery giant, said it was taking measures to make it the company more competitive in the long term. Caterpillar blamed problems in the Eurozone and continuing financial uncertainty in the global economy for dampening demand from its small generator set customers. The company has already moved the production of its 400 series generator sets to Tianjin in China to build the product closer to its customers, resulting in 170 agency workers being let go in Northern Ireland. Further redundancies in Northern Ireland are expected as Caterpillar has decided to shift production of around 70 per cent of its small generator sets to China by 2014.

 

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