Creative Labs is shifting key functions to its Dublin office and increasingly emphasising consumer electronics such as MP3 players, reports Jamie Smyth, Technology Reporter

Ten years ago, the electronics company Creative Labs decided to set up a multimillion euro assembly and testing plant for its European operations in Dublin.

At peak production, more than 500 people worked at its Ballycoolin site, which distributed Creative Labs' flagship soundcard product - which set industry standards - throughout Europe.

A decade later and the Singapore-based firm has shifted most of its assembly operations to China and is radically changing its focus from peripherals to consumer electronics. But despite a tough economic climate over the past few years and increasing costs in the Republic, Creative Labs says it has no regrets and recently established its Irish hub as its European headquarters.

"The progression towards Dublin becoming the European HQ has been a gradual one from 2001 onwards," says Miriam Brennan, who was appointed joint general manager for Creative Labs Europe last month.

"Creative Labs is probably less ideologically driven than most US firms and so it didn't just announce the closure of the UK headquarters . . . it took a longer-term approach and has replaced people through natural attrition."

Over the past three years, various functions have moved to the firm's Dublin offices, which it purchased in the early 1990s to handle the final assembly and distribution of its product range. The European technical support, customer service, finance, internal IT support and marketing functions are all now in place at the Dublin centre, with just a few key personnel due to transfer sometime later this year.

"The transfer to Dublin was driven more by personnel than by any tax reasons. I think the organisation was also impressed by the flexibility of the workforce in Dublin and its record."

Creative Labs is an example of a technology firm that has moved its operation up the value chain as its business model and conditions changed, says Ms Brennan, who can reel off the names of managers who have gone on to take bigger jobs within the firm.

The change of emphasis at Ballycoolin, from an assembly plant to an administrative centre, has resulted in job losses. Just 280 staff work at the plant now, compared to the 500 that were needed to assemble components into products in the late 1990s.

A sharp reduction in the duties that were charged on imported electrical goods from Asia for the PC market eliminated the barrier to shifting the vast majority of its assembly hubs to China. This also forced Creative Labs to create new distribution hubs in Holland, Austria and Finland to distribute its products in Europe.

But the firm's shift towards the consumer electronics market with the launch of a range of MP3 players is having a big impact on its business model and its China strategy, says Ms Brennan.

"We are beginning to find our business model reverting to where it was 10 years ago as we shift from PC peripherals, where duties have been eliminated, and consumer products, where duties remain," she says. "We are now working with the parent company to see if the final assembly of some of our products should take place in eastern Europe or Ireland rather than China."

By shipping components into Europe for assembly on selected product lines, Creative Labs could reduce the negative impact of European import duties, which are currently levied on goods. No final decisions have been taken yet but it is likely that final product assembly for some products will move back into Europe, and possibly even high-cost Ireland, some time in the future.

"As a business becomes more complex, it is always a good idea to review the model," says Ms Brennan. "It is really an issue of cost factors versus flexibility."

Protection of intellectual property is also a big issue that faces the firm as it moves into the cut-throat world of consumer electronics and takes on Apple's hugely popular iPod device, says Creative Labs European marketing director, Mr Jan Hauer.

"It is hard to keep your own IP when you are manufacturing in China. It takes just a few weeks for a new design to be ripped off and sold in the local market," he says. "For our new designs, we are using our own manufacturing facilities in Malaysia rather than subcontracting to Chinese factories."

The shift to becoming a consumer business with a 15 per cent market share in the MP3 jukebox market - second only to Apple's dominant iPod with a 50 per cent share - has taken its toll on Creative Labs, which has also had to battle the economic downturn.

The firm has chosen to discontinue several lines of business in recent years, which has eaten into its turnover. Group sales have fallen from $1.3 billion in fiscal 1999 to $702 million in 2003.

Figures filed with the Companies Registration Office show Creative Labs European operations have also had a difficult few years, with pre-tax profits falling to €8.4 million in the 12 months to the end of June 2003, down from €21.7 million a year earlier.

The director's report says that a continued downturn in the French and German economies, a change in the firm's product portfolio and the weakening of the dollar caused the lower profits.

The impact of a weaker dollar is clearly visible from a sharp rise in employee costs at Creative Labs' Dublin operations, which increased from €9.9 million in 2002 to €12.1 million in 2003 despite a fall in staff numbers from 300 to 263 during the year.

But with a spate of new product releases in the fast-growing MP3 sector imminent, Ms Brennan is confident that Creative Labs' future is bright and its Irish operation will prosper.

"Our business is so fast that it is impossible to see what is in store for the next 10 years but I think we are well placed to win very significant market share in the product lines that we have."