timesonline.co.uk/business 14.09.08 5 Now you see it… I n February 1999, three weeks short of his 34th birthday, Michael Dell bounced into Limerick bearing gifts. The youngest ever chief executive of a Fortune 500 company, the world’s 500 largest firms, Dell was unveiling the founda- tion stone for a third manufacturing plant there that would create 1,700 new jobs. Dell may have been a Texan university drop-out, but his personal dynamism and business vision had turned him into a multibillionaire. The magic was about to rub off on Limerick. Mary O’Rourke, then the minister for public enterprise, was struck by Dell’s can- do attitude and down-to-earth manner. “Oh, he was very young. You read about these young prodigies and Dell was clearly one of them,” O’Rourke recalled. “It was exciting. Dell was opening up huge vistas for Limerick.” Almost a decade on, the firm’s future in Limerick is less certain. Dell is carrying out a radical review of its global manufacturing and there are growing fears it could scale back or even close its operations here. Last month The Sunday Times revealed Dell was in talks with Foxconn, an Asian contract manufacturer, about allowing it to buy its plant in Poland. The move is part of a much bigger push by the group towards outsourcing production under a process called original design manufacturing. The news provoked uproar in Poland and set off alarm bells in Ireland where Dell exports ¤9 billion worth of products annu- ally, accounting for 2% of gross national product. This month, The Wall Street Jour- nal upped the ante further. It wrote that the company was planning to sell or close factories across its entire global network within 18 months. Since then, a blanket of silence has descended around the future of its Irish operations. DELL employs 3,000 people directly in Lim- erick. A further 1,500 work on a contract basis, and about 800 are added during peak times of the year. About 2,000 of Dell’s per- manent workers are employed in manufac- turing, with a large proportion making lap- tops, the product line that is most vulnera- ble to outsourcing. Another 1,000 work in areas less likely to face outsourcing. Between 9,000 and 20,000 related jobs in Munster are in some way dependent on the plant. Logistics and computer parts mak- ers, including Banta, Flextronics, UPS, Syncreon and Schenker, are the most vul- nerable. Banta, for example, employs 700 people. John Gilligan, the mayor of Limerick, described the possibility of Dell leaving or scaling back its operations there as cata- strophic. “We are very, very worried. We really don’t know what is going on,” he said. Gilligan is not alone. Nobody in Limer- ick, local business or the government really knows what is happening. Everything, says Dell, is “rumour and speculation”. Dell’s decision to overhaul the way it makes desktops, laptops, servers and other devices did not happen overnight. Michael Dell told shareholders in July that “as we evolved, we lost focus and allowed our cost structure to become uncompetitive”. The rot started when Michael Dell stepped down as chief executive in March 2004. He put his “good friend” Kevin Rollins in charge. The men were close, separated at work by just a sliding door between their offices in Texas. Rollins, however, failed to deliver. Under his watch, Dell’s share price halved from a peak of $42. On the sidelines as chairman, Michael Dell watched in alarm as Hewlett- Packard overtook the company he had founded to become the world’s number one maker of personal computers. Hewlett-Packard, unlike Dell, had embraced outsourcing. This meant it could take Dell on not just with the quality of its products and customer support but also, for the first time, on price. In January 2007, Michael Dell finally let Rollins go, took the reins, and vowed to turn things around. A wave of high-profile executive resignations or sackings fol- lowed. Michael Dell was on the warpath. The following month, Dell announced the appointment of Mike Cannon as presi- dent of global operations. Cannon has one crucial task: cut costs in Dell’s global sup- ply chain and manufacturing. Dell is determined to reclaim its position as the best-value computer maker in the world, and Cannon is just the man to achieve that. Cannon was chief executive of Solec- tron, a contract electronics manufacturer. He was widely credited with turning around the company, which had been weighed down with billions of debt, falling sales and declining market share. Dell is facing similar challenges. Cannon, a 25-year manufacturing veter- an, is now a close confidant of Michael Dell. The men got to know each other at the World Economic Forum in Davos, Switzer- land in 2006. Cannon contributed to a high- powered panel discussion on outsourcing. Dell liked what he heard, and within 13 months Cannon had moved to Dell. Working in secret, Cannon and Dell began to formulate a plan. Cannon assem- bled a team who toured all nine of its global facilities including Limerick. Every aspect of Dell’s supply chain was pored over with a view to stripping out costs. A year ago, the company announced plans to cut its headcount by 8,800 as part of a bid to reduce its operating expenses by $3 billion (¤2 billion) a year by 2010. Dell Ireland largely escaped the axe, with 250 jobs lost primarily in its sales and support unit in Cherrywood, Dublin. According to sources, Dell’s actual head- count in Cherrywood is now about 1,400, some 400 people fewer than its peak of 1,800. Only a small number of jobs have been lost in Limerick, however. But the ripple effect of Dell’s decision to tighten its supply chain is already biting there. In February 2007, Ire-tex let 80 work- ers go after Dell changed the type of pack- ing method it used. Last February, Sercom Solutions, a DCC subsidiary, got rid of 120 workers in part due to a reduction in orders from Dell. Dell also closed a high-cost plant in its home state of Texas with the loss of 900 jobs. Dell is far from finished with its cull. Last month, Brian Gladden, its recently appointed chief financial officer, told ana- lysts: “There’s a lot of work left to do.” The impact of Dell’s cost-cutting on Ire- land remains to be seen. Dell has to do some- thing: its gross margins fell from 20% last year to 17% this year. Its revenues are flat. Always frugal with its R&D spending, it is racing to launch lightweight laptops, servers and even mobile phones. It has ditched its direct sales mantra and embraced selling through stores as well as over the internet. Last week, Ashok Kumar, an analyst with Collins Stewart in New York, a leading investment banking group, described Dell as “a perpetual turnaround story”. Dell is “lacking any sustainable cost or product advantage,” he said. Professor Frank Barry of the Trinity College school of business has studied the history of computer hardware-makers in Ireland. In the late 1990s, a third of all per- sonal computers sold in Europe were made here, he said. It’s been downhill ever since, with more than 10,000 jobs lost in the sec- tor since the start of the millennium. “It’s up for grabs what will happen at the moment,” Barry concluded. “If Dell sells off its factories to contract manufacturers they won’t be tied down by history to Limerick. Closure in such an event is a real possibility.” However, Barry said it was not inevita- ble that Dell would leave Ireland as Digital, Wang and AST had in the past. “My guess is they will restructure. They could go down the Apple or IBM route and remain in Ireland, but do other things,” he said. The IDA has successfully helped the other two companies to switch to higher value-added services here. It could do the same with Dell, suggests Barry. Well-placed sources are not as convinced. They point to the departure of Waterford- born Nicky Hartery, Dell’s head of Europe- an manufacturing, as an indication the company is preparing to make tough deci- sions in Europe in the next nine months. Dell’s Polish plant, in Lodz, the country’s second city, is running at a quarter of its capacity. Just three of its production lines are up and running in a plant that can hold 12. This compares with eight lines that are working in Limerick. Dell employs 1,200 staff in Poland at an average of ¤3 an hour compared with ¤12 an hour in Limerick. Units made there are already being shipped to Britain. The good news for Limerick is that Dell is not happy with the performance of the Polish plant. The factory is dogged with an emerging trade union issue, which is anathema to Dell’s way of doing business. Roger Kay, the president of Endpoint Technologies Associates, a market intelli- gence analyst, advised Limerick staff, how- ever, to “start dusting off their resumes”. “Michael Dell has tried for two years to turn the company around and it still hasn’t happened. Desperate times herald desper- ate measures. You can expect to see harsher remedies in the next little while,” he said. Wall Street, Kay said, was disappointed both with Dell’s operating costs and gross margins. Transforming how it made prod- ucts was the key to changing this. Louis Miscioscia, the managing director of Cowen, an American broker, said it made sense for Dell to outsource all of its laptop manufacturing. Some of these products are made in Limerick. The company “may still have to keep something” when it comes to high-end desktops and servers aimed at the corporate sector. He said it was “logical” for Dell to move more manufacturing to lower cost areas, but it would have to weigh up logis- tical and tax benefits that favoured Ireland. DELL’S share price so far this year is down 20%. Last week it yet again dipped below $20 despite Michael Dell spending $100m of his personal fortune to support the stock. Tough calls are clearly on the agenda. Back in 1999, Michael Dell was a hero in Limerick. Just days before, Apple Comput- ers had announced 450 jobs losses in Cork. Standing alongside O’Rourke, Dell announced his ambitious plans for the Raheen plant. “Dell is here and we’re not leaving,” Dell confidently declared. Nobody expects him to make that same boast today. ...now you don’t? Michael Dell once created thousands of jobs in Ireland but now his firm’s future in Limerick is uncertain, writes Tom Lyons ‘‘ DESPERATE TIMES HERALD DESPERATE MEASURES. YOU CAN EXPECT TO SEE HARSHER REMEDIES People at the opening of the Limerick plant by Michael Dell saw the young multibillionaire’s magic