Dell Relocates - Nissan Downsizes

On the day that Nissan opted to cull a quarter of its workforce at the ultra-efficient car plant on Tyne and Wear, the story that caught my eye was across the Irish sea.

Dell’s decision to close its manufacturing capacity in Limerick and transfer production to a low-cost location in Lodz in Poland will come as a severe blow to the Irish economy….

A quite astonishing statistic from this news article today. It claims that Dell’s operation in Ireland accounted for 5% of the country’s GDP. Dell is Ireland’s largest exporter too. So the loss of around 1,900 jobs (add another 3-4,000 on top from suppliers to the factory) will deal a crippling blow to the local economy.

This is a good example of the multiplier effect - where a change in output and jobs in one business or market can have important second-round effects in related supply-chain industries or the local or regional economy. It has been estimated that the knock-on effect could be between one and three jobs lost elsewhere in the region for every one lost at the Dell plant directly.

A decision like this can’t have been easy, but it sounds like the need to remain efficient and minimise unit costs was the main influence - despite efforts from the Irish government to persuade Dell to change its mind. An excellent example of some of the financial issues that influence the choice of manufacturing location, and also of the impact of such a decision on wider stakeholders.

One of the emerging political issues is whether the Polish government acted contrary to EU rules in a bid to encourage Dell to relocate production. RTE news reports that £European officials are to investigate a €52.7m aid package the Polish Government used to attract computer giant Dell away from Ireland.”

Labour costs in Poland are around one third of the level in Ireland and whilst Ireland has an advantage in productivity, this is nowhere near sufficient to offset the cost advantages of relocation, especially given the low costs of transporting computers from Poland to consumer markets in Western Europe.

The Irish economy is already deep in recession.

Back to Nissan

The factory has the highest productivity rates in the European car industry. But not even Nissan’s flagship factory at Sunderland has been unscathed by the dramatic fall in new car orders…

It looks like the 27% fall in new car orders in December 2008 was the final straw for Nissan management. Before December, Nissan’s sales figures had bucked the national trend and were only slightly down on 2007. However, it looks like Nissan has now been caught up in the free-falling new car sales that have damaged car manufacturers around Europe.

Prior to the announcement of today’s job losses, Nissan had implemented a variety of actions designed to reduce production capacity without needing to lay workers off. The Sunderland factory took an extended Christmas holiday; employees reduced their shift hours; extra training courses were laid on. But sooner or later, action has to be taken to reduce fixed costs - particularly in the face of a substantial drop in demand. Let’s hope that the skills of those who will leave Nissan’s employment are not permanently lost.