The economic benefits of foreign direct investment are well-documented: hundreds of thousands of direct and indirect jobs, billions of euro in corporate taxes, and hundreds of billions in exports are usually the ones to make the headlines. However, there is another, often hidden, benefit and that is the opportunities it offers Irish firms to break into global supply chains.
Most of these companies are world leaders in their sectors. Products manufactured in Ireland are destined for European and global markets and rich rewards await any Irish firm which can manage to win a place on the supply chains.
Highly innovative Irish companies such as Bellurgan Precision and Modular Automation have established themselves as suppliers to some of the world’s leading medical device companies as a result of building relationships with their Irish sites. In the services sector, many Irish building and mechanical and electrical contractors have built highly successful international businesses on the back of their track records with multinational clients here in Ireland.
And the opportunities are increasing as a result of changes on global markets, according to Enterprise Ireland senior innovation executive David Keeley. "Major disruption is happening globally in nearly every industry due to factors like digital transformation and environmental sustainability," he points out. "This is creating opportunities to supply new types of products and services into global supply chains."
The changing nature of the supply chain itself is also having an influence. Large companies generally want to deal with as few suppliers as possible. They deal directly with a small number of tier-one suppliers who will meet their global needs for certain products or services. At most, there will be two approved tier-one suppliers for any product or service and these suppliers are increasingly expected to manage lower-tier suppliers on behalf of the client companies.
This simplifies matters greatly and drives out cost for the client company. It also makes it harder for smaller companies to gain direct entry to the chain.
‘Complete system solutions’
“Major multinational companies are increasingly looking for their top-tier suppliers to offer them complete system solutions,” says Keeley. “They’re reducing the number of their tier-one suppliers despite a trend towards an increase in product complexity. Suppliers with the capability to be innovative, responsive and practical are becoming increasingly important and attractive. In addition, suppliers that are better at fostering and maintain relationships with end customers and sub-suppliers are becoming increasingly attractive.”
In many cases, this means Irish firms will actually be dealing with the tier-one supplier rather than directly with the end customer.
Prof Donna Marshall of the UCD Smurfit Graduate School of Business says Irish suppliers need to understand the multinationals and their requirements. “Major multinationals are all looking for the same things: great products, low prices, excellent quality and delivery as standard,” she says. “These are not ‘nice-to-haves’ but ‘must-haves’ for multinationals. So, we have to go above and beyond that as Irish suppliers and really understand what the multinationals need on top of great prices, delivery and quality.”
The competitive landscape is also important. “What we also have to realise in Ireland is that we’re not competing against each other to break into multinational supply chains, we’re competing with the rest of the world – Singapore, the Netherlands, Bangladesh, Turkey, and so on. We really need to stand out. We need to find ways to make Irish suppliers really interesting and essential for multinational supply chains.”
Those stand-out qualities vary from sector to sector. “In certain sectors, like pharma and medical devices, quality, safety and security are absolutely key, this is similar to the food industry. In other industries, innovation or resilience – where you have to have the ability to change quickly, either because of natural disasters, like floods, earthquakes, volcanoes or social disasters like sickness, strikes – or showing that you can be agile, can make a huge impact. Showing a company that you have the ability to change quickly, that you are expert in scenario-planning and execution and that you anticipate both short- and long-term changes can make you very attractive.”
Demonstrating how innovative you are in terms of products or processes always make you stand out from the crowd, she adds. “So really think about what you are providing that no one else in the world can provide. This might even be great relationship management connections, which we do really well in Ireland compared with the rest of the world. Think differently about what you are really good at.”
Connecting and collaborating
Other things Irish companies can do is increase their power and reach by connecting and collaborating with other suppliers to show they are part of a large network that would be of value to the multinational supply chain. “A multinational might really like your product or process but if you can’t show how you will scale up to meet their needs, they will go elsewhere, so really think about how to do this. “
Keeley agrees and advises Irish firms to get involved in identifying new end-markets and forming relationships with end customers and tier-one suppliers by creating industry-led end-market clusters of large and small companies, multinationals and research institutes to help take advantage of opportunities.
Enterprise Ireland is assisting in the development of such clusters. “The key is for members with different skills, capabilities, experiences and networks to collaborate and innovate together, allowing for existing established supplier relationships to be leveraged, copied and even augmented with additional value offerings in partnership with other cluster members.”
There are other considerations to be taken into account, according to KPMG indirect tax director Fionn Uibh Eachach. He points out that companies exporting outside of the EU will have to deal with a variety of customs and VAT issues which may not affect them at the moment.
“If you want to look further afield than Europe, there will be customs and VAT implications,” he says. “Even if there are no tariffs on the product, there will still be administrative matters such as customs declarations to take care of. You have to retain agents to look after this and it is a non-tariff cost which has to be taken into consideration.”
He also explains how VAT rules can affect cash flow. At present, business-to-business transactions within the EU are effectively zero rated for VAT. That is not the case in other countries. Even if the VAT at point of import can later be recovered, the fact that it has to be paid upfront is a cost to the business which needs to be considered.
‘Absorb the costs’
“Businesses selling into non-EU markets have to look at the commercial terms of the sale and ask if they can absorb the costs involved. You also have to look at the jurisdiction you are selling into and their tax rules.”
The biggest lesson is do a lot of research, says Prof Marshall. “Companies really need to understand the company’s supply chain they are trying to break into, what makes it tick and what they can bring to the supply chain that no one else can.
“For instance, if you want to get into the supply chain of Marks & Spencer, you have to examine their culture, their communications, their values. You’ll see they are dedicated to not only very high quality but also sustainability. You need to demonstrate that you are fantastic at delivering high-quality products consistently and that you have visibility in your supply chain in terms of employment and labour issues, gender issues, health and well-being and in terms of the environmental impact of your own operations and those of your supply chain.”
This gives Irish firms a particular advantage, she adds. “We are the ‘green isle’ so showing the world how sustainable we are could really be a unique selling point to differentiate us from other nations. We really need to enhance our supply chain sustainability practices and ensure that when multinationals are choosing their suppliers to meet their sustainable development goals, they know that Ireland is a key country to do that.”