The Hi-Tech Miracle Rescuing Ireland From A Banking Crisis

¹²The Hi-Tech Miracle Rescuing Ireland From A Banking Crisis
Alone Among The Debt–stricken States Of The Outer Eurozone, Ireland Has A Booming Export Base.

By Ambrose Evans-Pritchard In Galway | 8 October 2010

July's trade surplus of €4.48bn (£3.92bn) was almost double that of the same month two years ago (€2.62bn), even though Dell Computers has since decamped to Poland for cheaper labour. Dell's exit seemed traumatic at the time but it is becoming ever clearer that Ireland no longer needs such low-end assembly work. The Celtic Tiger has moved on, as you learn quickly in the hi-tech hub of Galway, home of the "semantic web", the next internet revolution.

Most of the world's medical device giants have operations in an arc around this Atlantic outpost, where Gaelic can be heard again in the Guinness bars of Shop Street, spoken by the young. Nor are Galwegians cobbling together somebody else's kit these days, as they did in the 1990s. "We're as good as Switzerland, Germany, or anywhere in the world," said John Power, the founder of Irish start-up company Aerogen and holder of 40 patents.

He holds up his Aeroneb micropump, used to deliver drugs deep into the lungs to keep the airways open. The small contraption vibrates 140,000 times a second, emitting a superfine aerosol spray through invisible holes, each measuring just three microns. It is a surgeons' tool, ending the need for uber-doses of intravenous drugs. One version is small enough for premature babies. "We're saving lives all over the world, it is a great feeling," said Mr Power.

Besides two accountants, his team in Galway's leafy suburbs are all scientists or engineers with degrees or PhDs. Production is farmed out. "Our annual revenues have grown 40% a year for the past three years, and we expect the same this year. Japan is huge for us," he said. So Japan's aging crisis is a boon for someone, at least.

Medical products are a structural "play" on the two great trends in the world— the greying of the West and the accelerating health demands of middle-class Asia. The medical technology plants along Ireland's west coast— drawing on a small army of young science graduates— are together the world's third-biggest exporter of medical devices in absolute terms, after the US and Germany. Life sciences make up a third of Ireland's €160bn exports. Boston Scientific alone has 4,500 employees in the country, mostly graduates, some making drug-coated stents to stop arteries clogging up.

The sector hardly missed a beat during the "Great Recession", and will grow 10% this year. It is insulated from Ireland's banking debacle. "We don't even look at the Irish market in our planning," said John O'Dea, head of the Galway start-up Crospon, which makes catheters with imaging technology for stomach surgery. Crospon's products are sold to hospitals in Europe and the US.

"We got fat during the Celtic Tiger era but we've woken up pretty abruptly. Wages are not going up anymore— we're bending the cost curve downwards," said Mr O'Dea. Wages for entry-level jobs have dropped 10% to 15%, tracking cuts in public wages.

Barry O'Leary, head of Ireland's Industrial Development Agency, said wage restraint has largely reversed the damage from the bubble. Unit labour costs are expected to fall 13% viz-a-viz the eurozone from 2008 to 2011. Office rental costs have dropped nearly 45%. Dublin has fallen from being the world's sixth most expensive city to 33rd.

Ireland has pulled off the remarkable feat of outright deflation to secure its place in Europe's currency union without setting off violent protest, or even strikes. Deflation is double-edged, of course. Ireland's nominal GDP has shrunk by a fifth, while debt contracts are fixed. Public debt will rise to about 115% of GDP, including the €40bn hit from Anglo Irish and other banks. The crucial issue is whether Ireland has the export base to trade its way back to life.

"When the global crisis hit, our higher costs came to the fore. We have been slowly clawing it back, giving nothing away," said Gerry McDonnell, head of Stryker Orthopaedics in Limerick, which makes knees and hips. Discipline has paid off, as has Swedish-style social solidarity. The US group is selling its plant at Caen in France— plagued by labour strains— and shifting the research operations to Ireland. "We're moving up the value chain," said Mr McDonnell.

There will be hitches.

A "patent cliff" is looming as licensing protection expires on best-selling drugs produced in Ireland: Eli Lilly's Zyprexa for schizophrenia, Bristol-Myers' Plavix for strokes, as well as Pfizer's Lipitor for cholesterol— though not yet its patent for Viagra, produced for the whole world at a plant outside Cork. Drug sales tend to crash by 80% within two months of patent expiry.

"We've become the Silicon Valley of the pharma industry, but the next few years are going to be very challenging," said Eamon Judge, head of supply operations at Eli Lilly. "It will turn up again from 2013 because we have 70 new products in the pipeline". Luckily for Ireland, IBM is to base its "Smart Planet" operations in Dublin, while Google, PayPal, eBay, Facebook and United Technologies are mostly recruiting again. So is Dublin's "Canary Dwarf" and financial services export industry, ironically a safety net for the economy.

Whatever bond spreads of Irish debt seem to say from one day to the next, there is little doubt that this hub of global companies can pull the country out of its tailspin and contain the cancer of Anglo Irish Bank. As the Habsburgs used to say: the situation is desperate but not serious.