Geopolitical issues increasing the pressures from energy inflation and supply chain issues on the manufacturing sector

August 10, 2022

Manufacturing is facing increasing pressure on a number of fronts, exacerbated by the war in Ukraine, including acute energy cost inflation and supply chain issues which were already under pressure before the onset of war.

Ireland has a modern, advanced manufacturing sector, which perhaps runs counter to the traditional idea of industrial output from a low tech factory floor environment. Around 260,000 people are employed in the Irish manufacturing sector, which accounts for over 12% of total employment, making manufacturing a clear driver of economic success.

Despite the pandemic and Brexit, Irish manufacturers grew their operations strongly over the last couple of years and proved themselves to be invaluable components in the global supply chain - 60% of Ireland’s final manufacturing exports are now part of global supply chains, one of the highest such ratios in the world, with Ireland performing at scale in the areas of medtech, technology, pharma, food and drink, and other product lines. Throughout the pandemic, we saw intense pressure on supply chains and access to raw materials. Developing robust and agile approaches, such as digitalisation and ‘last mile mapping’ to understand and optimise supply chains and create improved mobility, were essential in the efforts to manage these challenges and consolidate Ireland’s manufacturing success over the last two years. Reflecting that success, in an Ibec member survey conducted late last year, 60% of manufacturers expected export sales to increase, 50% expect to increase both capital investment and investment in digitalisation and advanced manufacturing, and 44% plan to increase employment.

We might have expected in 2022 to be able to draw breath, take the learnings of the last two years and push on past the pandemic crisis to address the issues that are in front of us. For example, as well as the supply chain bottlenecks and general inflation, we know that attracting new talent is an urgent priority for every manufacturing company in the country, with upskilling and digitalisation also high on the priority list. But instead, quite apart from the devastating humanitarian crisis in Ukraine, to which our Government and the EU is trying to provide practical and strategic assistance, the war is bringing acute energy price inflation for Irish businesses and consumers, as well as presenting new layers of supply chain and logistical challenges. On energy price inflation alone, Ireland is acutely exposed due to our high dependence on natural gas and low levels of electricity interconnection, and we are currently experiencing some of the highest wholesale electricity prices in Europe. Irish businesses spend over €3 billion annually on gas and electricity and another €1 billion on road transport fuels. Many Irish businesses are reporting energy prices between 3-5 times higher than last year.

At our ‘Manufacturing the Future’ conference in Galway recently, many companies talked about the common challenges they face and focus that will be needed to support them through the rest of 2022 and beyond. Given the impact of the geopolitical situation, there was discussion about the need for Europe to progress its ‘strategic autonomy’ agenda in manufacturing, first articulated by the EU in 2020, particularly in the context of current and potential future global supply chain shocks.

Among the areas of focus for the EU are diversified international partnerships, industrial alliances, and the monitoring of strategic dependencies, which identifies the products in sensitive ecosystems for which the EU is highly dependent on foreign sources. The Commission’s Chips Act aims to bring digital sovereignty – to confront semiconductor shortages and strengthen Europe’s technological leadership. The Act proposes a comprehensive set of measures to ensure the EU's security of supply, resilience and technological leadership. Recent global semiconductors shortages forced factory closures in a wide range of sectors from cars to healthcare devices.

Additionally, the elements that are essential for further manufacturing growth in Ireland include digital transformation, increasing the talent pipeline and developing sustainable manufacturing processes are also at the core of the sustainability and digitalisation agendas in Europe. We’ve already seen the added benefit in some high-tech sectors here with the co-locating of many R&D centres of excellence with high tech manufacturing, further driving us up the value chain.

There is a strong growth opportunity for the manufacturing sector inherent in the EU’s green and digital transformation goals, which Ireland can seek to progress and exploit. In that regard, it was great to see the Tanaiste launch a new trade strategy in recent weeks which will seek to build on Ireland’s status and reputation as an open, pro trade economy. But to consolidate and build on our manufacturing strength, companies will need support from Government, particularly in relation to the acute inflation in energy costs. Among the short term measures Ibec would like to see from Government are: work with business to provide direct fiscal interventions to help ease the burden of increasing energy costs; seek to develop, with EU partners, a common Emergency Aid Framework to support business across the continent through this period of volatility and exceptional costs; begin work on a new framework to permit the development of new emergency energy storage in Ireland; and revise the Diesel Rebate Scheme for Irish hauliers to keep the sector viable and Irish business competitive during this period. It is essential that Ireland acts now to provide as much assistance as possible to this diverse and important business sector.”

Sharon Higgins, Director of Membership and Sectors, Ibec