THE engineering industry is a key sector of the Irish economy, with gross output of £7 billion and directly employing more than 71,000 people, but it must become more innovative or risk the flight of many multi national firms to low wage countries, a new report warns.

Engineering in Ireland, produced by Deloitte and Touche for the Engineering Industry Association, is to be published today to coincide with the ENQUIP fair at the RDS, Dublin. The report says that gross output has increased in real terms by 67 per cent since 1990.

Orgalime, the liaison group of the European Mechanical, Electrical, Electronic and Metalworking Industries, estimates that Ireland's engineering industry has the highest gross output per employee in Europe, at £138,000. The report says that a key component in the jump in gross output has been the growth of the electrical engineering sector.

But while Ireland's output per person is also higher than many emerging nations, the report warns that labour costs are up to 10 times higher: "As investment and productivity in these countries increase, the impact on our competitiveness will be dramatic," the report says.

To counter this, the report recommends that Irish engineering firms aim to become "world class". Research and development, significantly lower in Ireland than elsewhere in Europe, should be prioritised; factories and their manufacturing processes should be reorganised; they should develop new, efficient, ecofriendly processes to cope with the latest environment laws; they should upgrade the skills and training of their employees and they should make more use of information technology, allowing them to operate more efficiently across geographic boundaries.

The report also reflects the mixture of optimism and anxiety within the industry over EMU. While most are looking forward to the lower interest rates and the abolition of foreign exchange transaction costs, they are also worried that should Britain remain outside the single currency, and allow sterling to devalue, Irish firms that rely on the British market would suffer.

Nonetheless, the report stresses the overall benefits of the euro: "While in general, indigenous firms will be more suscentible to the impact of EMU than foreign owned firms, it is widely accepted that EMU membership (irrespective of whether or not the UK joins) will be favourable for Ireland."