Aryzta may be forced to close US factories

SWISS-IRISH food company Aryzta could be broken up in the future, according to market sources who expect major changes following last week’s announcement that chief executive Owen McKillen and two other executives are to resign.

Societe Generale analyst Warren Ackerman, who was one of the first commentators to publicly criticise the compa- ny, said there were significant problems in the US.

“The fundamental issue is that Aryzta has too much spare capacity in the US. In our view, a full review of its cost base is needed and we suspect US factory closures will be required,” he said.

“A quick turnaround is not likely and its margin guidance is still too optimistic.”

A number of sources also raised concerns over the likely price that Aryzta will get for its 49pc stake in French frozen food company Picard.

Some analysts have suggested that a price as low as €300m may be achieved — after it paid €446m for the stake in 2015.

Last week Aryzta chairman Gary McGann said it had begun talks with Lion Capital, which owns 51pc of Picard, “to evaluate investment alternatives” for the French business.

ONE month into Donald Trump’s presidency, much remains unclear about the precise direction and form of future US economic policy. But the tilt towards protectionism promised during the campaign has materialised in multiple ways — from the people appointed to important positions to the actions and statements made by the new administration. While the impact on Ireland of the proposals announced are impossible to calculate with any accuracy, the new president’s posture on a number of issues should give cause for very real concern. That’s because of Ireland’s huge trade and investment links with the US.

Before looking at the issues around the proposed taxes on imports, on corporation tax and specific investment related issues, a brief description of the importance of the US for the Irish economy is necessary.

Last year, Ireland exported almost €40bn worth of goods and services across the Atlantic to the US, a figure that has been rising over the long term. According to a recent study by Citi Bank on Trump’s proposed protectionist measures, Irish exports to the US as a percentage of GDP, at 10pc, is the highest in Europe. Globally, only Mexico and Canada are more dependent on exports to America, according to the report.

The second pillar of the IrelandUS economic relationship is foreigndirect investment (this is closely linked to exports owing to the role of US companies in Ireland exporting back to their home market, although the exact scale of this activity is unknown as there is no data available on Irish exports to individual markets disaggregated by ownership of firm).

As the accompanying chart shows, the cumulative value of all US direct investment in Ireland over the years stood at $350bn in 2015, more than twice the amount invested in Germany and France combined. It is important to state that this enormous figure comprises both the traditional type of FDI — money invested in factories and offices — as well as FDI related to financial engineering practices such as corporate inversions. The eagle-eyed might notice the huge jump in 2015, which was ultimately reflected in a GDP growth rate that year of 26pc.

As US pharmaceutical companies in Ireland tick all the boxes that enrage Trump about corporate America, this sector could be the one most subject to change.

Trump summoned the ceos of the US pharma industry to the White House at the end of January. Apart from berating them — with considerable justification — for their pricing of medicines in the US, he also made it clear that he wanted them to return production to the US. Given the scale of US pharmaceutical activity in Ireland, if even a chunk of these activities, say 20pc, were relocated back to the US, the impact on the Irish economy would be large — the wider pharma and chemicals sector accounts for more than half of all industrial output and goods exports, and directly for more than 30,000 jobs in the economy.

It is not widely known, but Ireland is the single largest source of pharmaceutical imports into the US, according to American trade figures. The value of Irish-made pharma products stood at a massive $25bn in 2015, exceeding even the big traditional producers, such as Britain and Germany, according to US trade data. As mentioned above, there is no data available on exports by the ownership of firms, but as many of the big players in the US industry have production facilities here — think of products from Botox to Viagra — it is certain that a sizeable amount of total Irish exports to the US of pharma products are accounted for by American companies.

The implications of Trump’s policy proposals and thinly-veiled threats are already being felt in the sector. Eli Lilly was recently reported to have delayed a €200m investment in its Kinsale operation for fear that it could be targeted by the Trump administration. It is easy to see plenty more decisions along these lines being made. Even more worryingly, there is a real risk that jobs here could be relocated to the US — it is not hard to see companies making very public gestures of job-shifting to appease the administration.

Companies in all sectors involved in exporting to the US appear increasingly at risk on another front. The proposal put forward last summer by Republican lawmakers to reform the US corporation tax code includes a proposed “border tax”, which envisages slapping a 20pc de facto tariff on imports. Although there are many uncertainties around the proposal, such barriers to trade have real effects. Some companies exporting to the US from Ireland could try to get round the tax by shifting production to the US, if they are in a position to do so. For those that are not, it would make their products less competitive and would inevitably have a trade destruction effect.

The trade-diplomacy aspects of the matter are discussed in an accompanying column in the main section of this newspaper, but suffice to say here that when it comes to international economic matters, the EU collectively has superpower status. It would certainly take a case to the World Trade Organisation, as the EU trade commissioner made clear last week if a border tax was imposed. Retaliatory measures against US imports would also be very likely.

EU barriers to US imports would have a disproportionate impact on Ireland, given the density of supply-chain linkages that the American multinational sector has here. And matters could get worse. If Trump were to attempt to intimidate the EU by taking a fresh round of measures, a full-scale trade war could break out.

But even if the reform of the US corporate tax code that eventually makes it through the US congress — if that indeed ever does happen — and it does not contain measures that are in breach of WTO rules, there is still plenty to worry about for Ireland.

A reduction in the headline rate of corporation tax and an ending of the (unusual) taxing of foreign earnings would bring the US into line with other developed economies. That would remove one — of many — motives for American companies to invest in Ireland. In some cases servicing the European market by exporting American-made goods and services from the US, rather than by locating production within Europe, could become more cost effective.

Given the sunk costs of investments already in Ireland, the effect of a radical overhaul of the tax code would not lead to a sudden exodus in investment and jobs, but it would almost certainly reduce the amount of new investment. Given the ever-changing nature of business, if investment does not keep coming through the pipeline, depreciation and other effects lessen its impact on the real economy over time.

The Irish economy has carved out a highly-specialised niche for itself as a hub in the transatlantic economy. That has happened because the political, fiscal and legal context facilitated it. Very big changes in context are looming. It is not an exaggeration to say that the basis of the entire model now faces real threats.