International
Wednesday Newspaper Review - Irish Business News and International Stories
By Finfacts Team
Apr 4, 2007, 08:57

The Irish Independent also reports that drilling of five new development wells on the Corrib gas field off the West coast has begun with Shell and its partners aiming to have the wells completed by the end of the year.

The Irish Times reports that Minister for Finance Brian Cowen has reiterated that implementation of the National Development Plan, rather than tax cuts, will have the first call on resources if Fianna Fáil is returned to office.

"Continued growth will rely on maintaining prudent economic and fiscal policies and on retaining a competitive and flexible economy," Mr Cowen said yesterday following publication of the latest set of Government accounts.

"That is why the National Development Plan will have first call on resources and will be implemented in full, on time and on budget if we are re-elected to office."

The Exchequer returns for the first three months of the year show that tax revenues are far less buoyant than this time last year, but the Government remains on target to meet its Budget day projection of an overall Government surplus of over €2.2 billion.

Fine Gael finance spokesman Richard Bruton said that there was a discord between what the Minister was saying and the scale of the promises made by the Taoiseach in his ardfheis speech 10 days ago.

In his speech Bertie Ahern committed himself to substantial tax and PRSI cuts if re-elected this summer, only days after several of his Ministers, including the Minister for Social and Family Affairs Séamus Brennan had said Fianna Fáil would avoid "auction" politics.

"There is an element of going back to the Séamus Brennan line about safety first in order to protect economic gains in what the Minister is now saying. They are trying to run on both sides of the track at the one time," said Mr Bruton.

"Brian Cowen is emphasising the NDP as a tactic to get the debate away from the quality of public services. The Taoiseach knows they are not winning the debate on services which is why he tried to divert attention by making all those promises," he added.

Mr Cowen said the Exchequer figures confirmed that the public finances remained in a healthy position thanks to the prudent fiscal policies pursued by this Government.

"My department is forecasting a continuation of strong economic growth, with gross domestic product and gross national product both expected to rise by 5.3 per cent this year. This Government is working to ensure that our economy remains strong," the Minister said.

Income from tax and other sources exceeded expenditure by €1,861 million in the first three months of the year. However, this was nearly €560 million down on the figure for the same period last year.

Mr Cowen said that notwithstanding this, the figures confirmed that the public finances remained in a healthy position.

"Both tax revenues and expenditure are more or less where we expected them to be at this point in the year. These results, combined with recent CSO data, show that the Irish economy continues to perform well."

Tax receipts were up 10.2 per cent year-on-year to €11,846 million, despite lower-than-expected receipts from income tax, VAT and excise duty.

Property taxes, including stamp duty and capital gains, were some €81 million lower than expected in the first three months, with the fall-off attributed to the cooling property market.

However, stronger-than-expected corporation tax revenues compensated, bringing the overall taxation revenue figure in just ahead of target.

Pat McArdle, chief economist with Ulster Bank, warned that if corporation tax revenues did not remain strong throughout the year, the Government could miss its Budget day target of a €546 million Exchequer deficit, but an overall surplus of €2.3 billion.

Bloxham Stockbrokers economist Alan McQuaid said the lower-than-expected income tax receipts in the early part of 2007 did not reflect a weakening economy and said he expected growth to average more than 5 per cent this year.

"There is no doubt that the slowing housing market will impact negatively on stamp duties in the coming months, but the overall strength of the economy this year, boosted by €10 billion in maturing SSIA funds, should ensure that total tax receipts in 2007 will again be well ahead of official projections," Mr McQuaid said.

The Irish Times also reports that Premier Foods has agreed to sell Erin, its largest retail brand in the Republic, in order to facilitate its purchase of RHM, the British plc that sells the Sharwoods, Saxa and Bisto brands here.

The Competition Authority made the "divesting" of Erin by Premier a condition for allowing Premier's purchase of RHM to proceed. Brian McManus, a former chief executive with IIB Homeloans, is to be appointed trustee and will supervise the management of the business pending the sale of Erin. Erin employs approximately 130 people in Thurles, Co Tipperary, and the decision by the Competition Authority means the operation can now be sold as a going concern.

The purchase of RHM by Premier Foods was approved without conditions by the Office of Fair Trading in Britain.

Premier is active in Ireland, Britain and continental Europe. In the Republic its brands include Campbells, Oxo, Erin and McDonnells. RHM is active in the same markets. In Ireland its principal brands are Sharwoods, Paxo, Saxa, Bisto and McDougalls. Its Gateaux cakes and Saxa salt products are manufactured under licence in the Republic.

The inquiry by the Competition Authority concluded that the purchase would not create competition difficulties in the soups and sauces markets, but would create a difficulty in the gravy market.

It found that, unlike with the British market, own brand gravy products were not popular with Irish consumers. The Bisto brand has 50-60 per cent of the market, while the Erin brand had 10-20 per cent and Oxo up to 5 per cent. Post merger, the companies would have up to 80 per cent of the gravy market.

The companies submitted that the repeal of the Groceries Order had led to "fierce and increasing competition, in particular on price, between the major retailers" and that this undermined the ability of suppliers to dictate retail prices.

They argued that Tesco, Dunnes, Musgrave and Superquinn between them account for 78.9 per cent of Irish grocery sales "so that even suppliers with sizeable shares are unlikely to have any real influence".

However, the authority was not convinced by this argument. It had been told by retailers that they feared a dominant supplier in the gravy market. Both retailers and suppliers said consumers would not stop buying a gravy brand because of a 5-10 per cent price increase.

In the light of the view taken by the authority on the gravy market, Premier suggested that it sell not just Erin gravy but other Erin meal enhancers such as sauces and casserole mixes. It alternatively suggested that it sell the entire Erin business. The authority decided that splitting the Erin brands (meal enhances and soups) would make the purchase of Erin less attractive.

The second proposal did not have this difficulty and would retain the existing level of competition in the gravy market. It would mean the prospective buyer could purchase the entire Erin operation.

The Irish Examiner reports that close to €2.7 billion has been wiped from the value of AIB’s shares since they peaked on February 20.

M&T’s profit warning in the US added to the bank’s woes with over €120m wiped off the shares alone yesterday, as slippage in the share price continues at the country’s biggest bank.

Allied holds a 26% stake in M&T and the reaction to the news in the market has been pretty severe as investors fear further bad news from the US bank.

It warned earnings for 2007 would range between $1.50 — $1.60 against an earlier consensus forecast of $1.86.

That warning added to the negative sentiment about the US property market and shares in the banking sector across the globe have been caught in the backwash, Investors fear worse is to come as rumours abound in the US that sub-prime lenders face seriousdifficulties with debt defaulters.

Sub-prime lenders are the category of bank that lends to those with poor credit ratings and are seen to be a bad risk compared to borrowers in general.

The M&T debacle has put much of the focus on AIB’s share price performance and on the slippage since 20 February when it peaked at €24.39.
In late trading the bank’s share price had fallen 0.65% or 14 cents representing a loss of over €120m as investors feared further bad news from the US and M&T.

Factors other than M&T have also been impacting the share and not just those of AIB.

For the past month concerns about the housing market here have been undermining confidence in banks with a big exposure to mortgage lending including Bank of Ireland, Irish Life and Ulster Bank.
Stuart Draper, head of research at Dolmen Stockbrokers, said several factors have been at play.

Property woes in the US have affected global sentiment which hit the banking sector in Britain.

And that has further undermined the Irish situation where huge concerns are emerging over the outlook for housing.

The ESRI raised serious questions last Thursday about the number of houses lying idle, suggesting demand could slump to close to 50,000 against a projected 80,000 due to be built this year.

The Financial Times reports that the newly merged NYSE Euronext exchange group will make expansion in the fast-growing derivatives sector in the US its next priority, senior executives said on Tuesday.

While John Thain, the chief executive, said he did not expect a major acquisition “in the near term”, he refused to rule out participating in the current round of deal-making among the Chicago-based derivatives exchanges. ”I’m not ruling it out but that doesn’t mean I’m going to do it either.”

He made his comments while also signalling that he expects the new group to present a major new threat to the London Stock Exchange, and that he is to move the international listing business from New York to Paris to bolster the challenge to the UK exchange.

The new group - whose shares start trading on Wednesday - is pledging a campaign to persuade companies from fast-expanding Asian countries such as China and India to list in Paris rather than London, if they want to avoid the impact of US regulations.

”If a company is not going to list in the US, we want them to list on Euronext,” said Mr Thain. He said the combination of the US and European platforms will help issuers on Euronext to reach US investors while remaining outside the US regulatory regime. “We think [this] combination will help us to compete with London,” he said.

But while the desire to challenge London for international business is clearly important Mr Thain made clear that the push forward in derivatives sector is the next strategic move.

The strategy of the new transatlantic company highlights the intense rivalry between exchanges around the world and the wave of consolidation that is reshaping the landscape not only for equity trading but in the derivatives sector as well.

”If you look at our business mix, we are not where would like to be in the US,” said Mr Thain.

He added that NYSE Euronext would be unlikely to proceed with a big acquisition “in the near term”, while the two groups were still coping with the “management challenges” of their merger.

Mr Thain also said that while NYSE Euronext would be targeting international business, it would be wary about how far it sought to attract Russian listing away from the LSE. “We are very concerned about the quality of corporate governance and transparency of company financials and the protection of minority shareholders, and with a number of Russian companies these things are called into question,” he said.

“That is much less true for Chinese companies [so] we are more active in China than Russia. And Indian companies don’t appear to really have any issues in that respect.”

Where the new group is successful in winning international business Mr Thain hopes candidates will opt to list their

The FT reports that corporate profitability rose to its historically highest level at the end of last year as manufacturing and service sector companies benefited from strong sales growth combined with lower energy prices and subdued wage pressures.

Economists said soaring profitability in the fourth quarter augured well for business investment, underpinning the Bank of England’s strong growth forecast for this year.

The net rate of return on capital rose to double-digit levels even in manufacturing.

With corporate spending likely to remain strong and business surveys suggesting companies will not fully pass on lower energy costs to customers, pressure on the Bank to put up interest rates – perhaps as early as Thursday– has been intensifying.

Traders in the money markets reckon there is now nearly a 50:50 chance the monetary policy committee will raise rates to 5.5 per cent this month.

A rate rise certainly would not shock the markets as it did in January.

Official figures on Tuesday showed the net rate of return on capital in non-oil UK companies rose to 14.7 per cent in the fourth quarter last year; the highest rate of profitability since quarterly figures were first published in 1989.

Including profits made on North Sea operations, the 15.1 per cent net rate of return for the whole of 2006 showed UK corporate profitability was at its highest level for more than 40 years.

Adrian Cooper, economic advisor to the Ernst & Young Item Club, said: “Profitability is at record levels. This is at last feeding through to strong business investment, which is now the most dynamic driver of GDP growth.”

The Treasury expects real capital investment to increase by between 6.5 and 7 per cent this year after 6.5 per cent growth last year.

The New York Times reports that outsourcing is breaking out of the back office.

For years, most service industry jobs that were moved to countries like India were considered relatively low-skill tasks like answering customer inquiries. But that has been changing in recent years, and increasingly the jobs of Western white-collar elites in fields as diverse as investment banking, aircraft engineering and pharmaceutical research have begun flowing to India and a few other developing countries.

In the view of most specialists on the phenomenon, the kinds of jobs that cannot be outsourced are slowly evaporating.

Boeing and Airbus now employ hundreds of Indians in challenging tasks like writing software for next-generation cockpits and building systems to prevent airborne collisions. Investment banks like Morgan Stanley are hiring Indians to analyze American stocks, jobs that commonly pay six-figure salaries on Wall Street.

The drug maker Eli Lilly recently handed over a molecule it discovered to an Indian company, which will be paid $500,000 to $1.5 million a year per scientist to ready the drug for commercial use — work that would be significantly more costly if carried out by Americans.

With multinationals employing tens of thousands of Indians, some are beginning to treat the country like a second headquarters, sending senior executives with global responsibilities to work there. For example, Cisco Systems, the leading maker of communications equipment, has decided that 20 percent of its top talent should be in India within five years; it recently moved one of its highest-ranking executives, Wim Elfrink, to Bangalore, the center of the Indian industry, as chief globalization officer.

Accenture, the global consulting giant, has its worldwide head of business-process outsourcing in Bangalore; by December it expects to have more employees in India than in the United States.

This is not a zero-sum game, in which every job added in India comes at the expense of an American or European one.

In many ways, the shift reflects a changing view at multinational companies as they find it easier to meet growing demand by taking advantage of the improved skills of newly educated people in the developing world. And some companies are returning certain jobs to the United States, finding that the work in India and elsewhere is not up to snuff.

But there are trade-offs as well. As Indian back offices become more sophisticated, Western companies are finding that large parts of their work, even high-end tasks, can also be done from India. From the consumer perspective, India has emerged as a pool of 1.1 billion potential customers for companies seeking faster growth. And so many companies are shifting their energy to where they see their futures being written.

“India is at the epicenter of the flat world,” said Michael J. Cannon-Brookes, vice president for business development in India and China at I.B.M., which has reduced its American work force by 31,000 since 1992 even as its Indian staff mushroomed to 52,000 from zero.

“It’s one of the world’s two biggest pools of high-value skills, which we want to leverage both to help clients in the domestic marketplace and to help clients globally,” he said. “The two play off each other.”

The increasing interest of Western companies in rapidly developing countries like India, China and Brazil came to the fore last week. Reports emerged during a visit to New Delhi by Citigroup’s chairman, Charles O. Prince III, that the company planned to eliminate or reassign at least 26,000 jobs, 8 percent of its staff. It will move many jobs to less costly American cities, and others to India.

The bank has 22,000 employees in India, who are not part of the cuts. That reflects its role as Citigroup’s fastest-growing international market in terms of revenue, said Mr. Prince, who predicted that overseas operations would supply most of Citigroup’s growth.

To underline the shifting geography of opportunity, Mr. Prince suggested days after the planned cuts became known that he would increase Citigroup’s Asian work force by more than 10,000, through acquisition of banks in Japan and Taiwan.

Still, specialists warned that a continued flow of work to India required drastic improvements in its educational system and basic facilities. Water and power shortages are endemic, and industry experts predict that India could lack 500,000 engineers by 2010. Yet the country has already tapped a deep well of English-speaking engineers, attracting more outsourced work than any other country.

Alan S. Blinder, a former vice chairman of the Federal Reserve and economic adviser to President Bill Clinton, recently described outsourcing as a “third Industrial Revolution” that, by his estimate, poses a risk to the employment of as many as 28 million to 42 million workers in the United States.

“We have so far barely seen the tip of the offshoring iceberg, the eventual dimensions of which may be staggering,” he wrote in the journal Foreign Affairs .

But Mr. Blinder, who teaches at Princeton, added that the consequence should not be large-scale unemployment but a shift in Western job markets.

The West, he argued, would shed jobs in easily outsourced fields, like accounting, and increase work among jobs like police officers and doctors, which must be done in person.

At the forefront of the outsourcing business is Infosys Technologies, an Indian company that has pursued a strategy of reinvesting the profits from low-skilled work into a vast upgrading of skills to prove itself to Western companies and fend off rivals from China, Eastern Europe and elsewhere.

Infosys devotes $65 of every $1,000 in revenue to training. I.B.M., by contrast, spends just $6.56, according to a 2006 proxy statement.

A few years ago, Airbus and Boeing were outsourcing work like digitizing old hand drawings. But they have begun to rely on their Indian suppliers for even more complex work, hiring aerospace engineers from state-owned aviation companies and scholars from Indian engineering colleges.

Airbus hired Infosys, which is based in Bangalore, to design part of the wing of the superjumbo A380 aircraft. It is working with another supplier, Tata Consultancy Services, to build software for cockpits, with up to half of the hundreds of switches removed and replaced by touch screens. Airbus has hired a third Indian company to design and build jet doors.

In the forthcoming Boeing 787, two critical systems — one to avert collisions in flight and another to land in zero visibility — will be built to a substantial degree by HCL Technologies, an outsourcing firm that has its headquarters outside New Delhi.

“In theory, we could place the work anywhere,” said Ian Q. R. Thomas, the president of Boeing India. “We’re here because we found a level of sophistication.”

Investment banks like Morgan Stanley, which have used Indians for basic research, are now hiring them to write reports for institutional investors on American and European stocks.

“Our analysts will cover equities on their own,” said an advertisement posted on an Indian career site last year by Thomas Weisel Partners, an American investment bank. “They do not report to another analyst in the U.S. They will do their own research, come up with their own opinions on the stock and offer them directly to U.S. institutional investors. Simply put, we are not a back office in India.”

And in the complex world of pharmaceutical research, Western companies have evolved from outsourcing slivers of research to India to outsourcing whole phases of drug development.

Eli Lilly’s deal with Nicholas Piramal, an Indian company, sent ripples through the industry. Lilly turned over ownership of a patented molecule it had discovered to Nicholas Piramal to usher the drug through the first two phases of clinical development, including the first human tests of the drugs. Moreover, Nicholas Piramal agreed to bear the risk of the project’s failing, in exchange for much larger royalty payments if it succeeded.

“Nicholas will do the whole thing, at their expense, at their own risk,” said Gino Santini, a senior vice president at Lilly.

High-end outsourcing is only half the reason that companies are investing so heavily in India, executives say. As India has become a more lucrative market in its own right, many Western companies are looking to take advantage of its vast potential market for growth.

And many executives argue that having a growing market and an outsourcing hub in the same place enriches innovation.

Having actual customers at the doorstep makes employees think more creatively about the problems of their own society, according to Ravi Venkatesan, the chairman of Microsoft India. Now that the Indian workers have more autonomy, he said, they are focusing on problems, like building software for the illiterate, that might not have occurred to American researchers.

The NYT also reports that a French high-speed train broke the world speed record on rail on Tuesday, reaching 357 miles an hour (574.8 kilometers) in a much publicized test in eastern France, exceeding expectations that it would hit 150 meters a second, or 540 kilometers an hour.

The train, code-named V150, is a research prototype meant to demonstrate the superiority both of the TGV high-speed train and of its probable successor, the AGV, which is also manufactured by the French engineering group Alstom. The performance on Tuesday came close to but did not break the world speed record for any train, set by an electromagnetic train in 2003.

The French railroad company SNCF and Alstom publicized the event as a test of “French excellence,” building on national pride for the 25-year-old bullet train.

The train reached its maximum speed in about 16 minutes at a site about 125 miles from Paris on a specially chosen sector of tracks of the new Eastern Europe TGV line, which will begin service between Paris and Strasbourg in June. The V150 train, with a reduced number of train cars and larger wheels, incorporates technological elements from the AGV.

SNCF and Alstom insist that the demonstration does not fulfill any immediate commercial purposes, but others say the speed could serve as a selling point in Asia and other markets.

“This world speed record is intended for research, to improve security and performance,” said Anne-Marie Idrac, the head of SNCF upon leaving the train. “And today the train that runs the fastest is the Eastern TGV. We don’t see the market today for such high speed.”

Alstom, the world high-speed train leader, with 21 percent of the market, is hoping it might parlay the record into sales, as its competitors — Siemens of Germany and Hitachi of Japan — have cut into Alstom’s lead in the competition for the market.

But Alstom has 70 percent of the market for trains that reach 270 kilometers (168 miles) an hour or more, Patrick Kron, Alstom’s chief executive, said in an interview.

“There are big developments to come in Europe, but also Latin America where we just announced we are competing for an order in Argentina,” Mr. Kron said.

High-speed trains are a potentially lucrative market in developing countries — China and India are the biggest markets, with China spending about 15 billion euros a year on its rail network, while India is looking at developing a high-speed train system.

Crowds gathered on bridges overlooking the rail tracks to watch the train race by, and national television broadcast live images from the train.

“It’s quite an achievement; I hope it’s going to help us sell a lot of TGV’s,” said Arnaud Delahaye, a 32-year-old technician from nearby Reims as he watched the V150 train from behind fences after its arrival at a purpose-built control center.

The Maglev from Japan holds the world record for a train with a speed of 581 kilometers (361 miles) an hour recorded in 2003; it uses electromagnetic technology, where the train does not actually touch the rail. This technology is more costly, typically runs shorter distances and is less compatible with existing rail networks.

High-speed trains have not caught on in the United States as they have in Europe, where TGV travel is generally considered faster transportation than air travel for distances that the TGV can cover in less than three hours.

France operates 400 TGV trains on about 1,100 miles of track built especially for high speeds.