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The new Asian wave
Written by: John Letzing
Photo: Petr Poliak
Investment from Asia has been arriving
in record numbers lately, capped by the TPCA auto plant in Kolín.
The deluge prompts two questions: why Asia, and why now?
THE JAPANESE needed no post-1989 introduction to Czech manufacturing
capabilities; they'd first made an acquaintance staring down the
barrels of machine guns produced by the old Škoda Plzeň works in
Bohemia during the Russo-Japanese war, nearly 100 years ago. Jan
Kubíček, director of the Japanese office of CzechInvest, the government
agency responsible for attracting foreign investment, tells us there
are three symbols of Czech accomplishment in the collective Japanese
imagination: machine guns, Olympic gymnast Věra Čáslavská (a star
of the '64 Olympics in Tokyo), and marathoner Emil Zátopek. There
are also cars. Kubíček keeps a black-and-white photo of an old Laurin
& Klement sedan (the predecessor to Škoda) perched beneath Mt.
Fuji on his office wall. It's a sepia-toned reminder that Czechs,
cars and Japan go well together, and as such is a subtly effective
tool at Mr. Kubíček's disposal.
Lately, Kubíček hasn't needed much assistance. Asian investment,
spearheaded by Japan, is spiraling to record numbers driven mainly
by strategic moves into the automotive sector. According to Czech
National Bank statistics, in 2000 total foreign direct investment
from Asia amounted to CZK 1.8 billion, while in the first three
quarters of 2002 alone that amount shot up to CZK 4.7 billion. But
the "Asian investment boom" is not necessarily a sudden,
or even very recent phenomenon. What's at play is a decision making
style that runs counter to accepted business practices in the west.
Japanese firms, rather than brisk strategizing, prefer a prolonged
- sometimes agonizing - search for broad consensus. Kubíček recounts
that dealings with Toyota, slated to roll the first car out of its
new TPCA factory in Kolín in February of 2005, actually commenced
some "five or six" years ago. "Especially (for) Japanese
projects, it's a long, long decision process," says Kubíček.
"In Japan everything has to be approved by everyone."
Kubíček's boss, CzechInvest CEO Martin Jahn, adds that the glacial
decision-making may require patience, but is symptomatic of what
is, overall, a comforting predictability: "When they finally
make a decision, they stick to it. (With) Americans, if the second
quarter results are off, then suddenly everything's different,"
he expounds. The EUR 1.5 billion investment by TPCA, a joint-venture
of Toyota together with French car maker PSA Peugeot Citroe¨n, is
a record for greenfield investment in the Czech Republic.
Of course it's not only Japanese investment making up the recent
Asian flood - other major players active here include South Korea
and Taiwan. But the preponderance of Japanese money speaks well
for future interest from its Asian neighbors. Says Jahn: "Investors
from Korea, Taiwan, and other countries tend to follow the Japanese."
Though a trendsetter in general terms, when it comes to business
culture Japanese firms are wholly unique. Deciphering characteristically
Japanese management practices is now a daily part of life for a
growing percentage of the Czech workforce - according to statistics
from JETRO, the Japanese External Trade Organization, over 22,000
Czechs are either currently employed by Japanese firms or are slated
to be in the near future. Along with surprisingly long decision-making
periods, another distinct aspect of Japanese business practices
is a stultifying blend of management tiers, often concealing who
really calls the shots. In this respect the stereotype of the Japanese
businessman (or "bijinesuman" in Japanese slang) as a
cryptic, strictly backroom dealer is at least partially validated.
"Japanese style is uniquely individual," acknowledges
Kunio Kadowaki, President of Aisan Bitron Czech, a Japanese supplier
of fuel pumps and plastic auto parts. Kadowaki adds, "negotiations
and things like that are often underground."
Jan Sýkora is a member of Deloitte & Touche's Japanese Desk,
designed to help the consulting firm better serve the recent influx
of potential Japanese clients. He claims that the murky source of
decision-making at Japanese firms is related to Japanese society
as a whole. "In most firms in the west there is a clear relation
- the higher position in the social hierarchy, the higher power
and responsibility," says Sýkora. "In Japanese society
the relation is like this: the guy on top of the social hierarchy
is nothing more than decoration. Their power is very limited, and
their responsibility is near zero. So if you want to discuss core
problems, don't address the man on top of the hierarchy... it's
the middle managers who are the neck, just turning the head,"
he notes. So how does someone with a legitimate proposal identify
a decision-maker and get things done? According to Sýkora, one must
keep a patient, watchful eye on the "kone", or social
connections within any given firm and operate accordingly. People
like Jan Kubíček at CzechInvest, who have spent a good deal of time
interacting with Japanese management, have developed the patience
and prescience required for this. Other Czechs may not be as inclined
to put up with it.
Tetsuya Yamada, spokesman for TPCA, says he is so far encouraged
by the interaction he's seen between Japanese and locals. He claims
there are more similarities than differences: "For example,
they are both not working so hard, but working seriously."
Though at first glance this quote may read like a zen koan, Jan
Sýkora tells us that it makes perfect sense. Says Sýkora, "there
are some myths about the Japanese style of working, that they're
something like worker bees. This is a myth - the ordinary employee
is very similar to the Czech one, partly lazy, but if they do something
they do it seriously." Of course, the version of Japanese corporate
culture that is for export is slightly altered. Kunio Kadowaki,
of Aisan Bitron Czech, has spent the past ten years abroad including
seven in America, and knows full well how to adapt to western standards.
He puts it like this: "A Japanese style is necessary, but maybe
this we arrange around a Czech style."
Aisan Bitron is but one example of the Japanese auto parts suppliers
now deluging the Czech market, not necessarily to supply the new
TPCA plant, though that firm's decision to locate here certainly
aided their own. Aisan Bitron estimates TPCA will eventually account
for some 10 to 20% of its business here. Denso, a producer of air-conditioning
systems located in Liberec, has invested some USD 75 million (CZK
2.3 billion) into its operations. Spokesman Koji Ohashi says Denso
expects to achieve sales of USD 180 million (CZK 5.4 billion) by
fiscal year 2005, based largely on contracts not related to TPCA.
What TPCA and these various suppliers hold in common, apart from
any potential cooperation, is a desire to use this country as a
center for export to all of Europe. Ondřej Votruba, of JETRO, says,
"almost all production from the TPCA plant is considered for
export, and the Czech Republic... has a slightly better location
than the other countries (like Hungary or Poland). From (here) any
export is a little bit simpler, as routes are shorter."
"This is 'keiretsu', or networking," says Sýkora, referring
to the vast numbers of Japanese auto suppliers setting up shop here.
"The real base of the Japanese economy rests on small and medium
enterprises, which just follow the big firms. So if Toyota comes
here (as part of TPCA), the major part is not that of Toyota. The
major part is the tens to hundreds, and maybe thousands of small
and medium enterprises following the big one." Whether these
new suppliers will be able to breach markets held by existing suppliers
of clients such as Škoda Auto remains to be seen. But it will surely
be an uphill battle. "When I talk to them (Japanese suppliers)
about future plans, they want to try to make an effort to sell to
Škoda also," says Jan Kubíček. "But existing suppliers
have long-term relations, and also Škoda as part of the Volkswagen
group has very strict conditions for pricing... when parts makers
first come they start from scratch and don't know a lot of suppliers,
so they import a lot from Japan, which makes the product more expensive."
Kadowaki of Aisan Bitron recalls having had many long and fruitless
meetings in the US with management at established local auto makers
like GM and Ford. He'll likely see a similar scenario develop in
the Czech Republic.
If business for Japanese and other Asian newcomers does not develop
well, many worry their presence will cease as soon as the very generous
incentives granted to them by the government dry up. CzechInvest
has succeeded in drawing Asian interests more than any other country
in this region largely due to offering a generous ten-year tax holiday,
training incentives and site location support. Many see this formula
as untenable, giving away a lot for something in return with little
assurance of long term viability - especially when coupled with
the rising cost of local labor as this country nears EU entry. Says
Tetsuya Yamada, of TPCA: "In the initial stage of selecting
a country we wanted to choose one with cheaper labor costs compared
to other western European countries. But the Czech Republic will
enter into the EU, so that means we are wondering a bit whether
our labor costs will increase or not."
Stick around awhile
Thanks largely to softer factors, no mass exodus of Asian investors
is likely to occur. Both location and a high level of technical
education should keep heavier investors planted for many years to
come, despite rising wages. Aisan Bitron, for example, could not
find a better place from which to supply European customers like
Peugeot and Renault. And Denso, says spokesman Koji Ohashi, feels
that "wages and labor is only one of the factors in the investment...
productivity and efficiency must also be taken into consideration."
Yet, simple assembly operations with fewer local ties are expected
to pack up and move east as soon as the getting here is not as good.
"There are a lot of small and medium sized firms just coming
for five to ten years to take the good part of the incentives, and
after ten years, after the tax holiday, they will just move on to
the east - Slovakia or Ukraine," says Jan Sýkora. Martin Jahn
adds, "maybe some investors will just use incentives and just
leave. But for the country it's still beneficial. The return on
the investment is quite good if you look at the training of people
and the creation of exports." Most agree that the bell curve
of Asian investment will peak and dip in the next two years, with
a leveling off some four years down the road.
Meanwhile a great effort at mutual understanding between new Asian
investors and their Czech staff is underway. The key ingredient
here is the English language, globalization's chosen Esperanto.
"Japanese English is rather a special kind of English,"
says Sýkora, while Kubíček asserts, "frankly speaking, it's
very bad." But no one is going to wait for either Czechs to
learn Japanese in large numbers or vice versa, so English, no matter
how spotty, has to do. Added to this are complications that result
when the Japanese translate literally from their mother tongue -
often messages become far cloudier than they would be otherwise.
"If a Japanese says, literally translated into English as 'I'll
do my best', it means actually it won't happen," Sýkora explains.
"It may be puzzling... but it's a very, very polite way to
refuse doing something... they'll never just tell you 'no'."
Communication glitches such as these are not as prominent when dealing
with Koreans or Taiwanese, say experts. "Koreans are definitely
more European, or trying to be, than the Japanese," says Jahn.
"Also, I would say they are less arrogant than the Japanese,
without such superior attitudes." I. S. Cho, exports director
for Korean truck producer Daewoo Avia, adds his own take on Korean
management vis-`a-vis Japanese: "in the case of Korean management
it's more emotional... if we have something to do, we debate it
openly." Taiwanese managers, says Martin Jahn, share a similar
proclivity for transparency in decision-making.
This is welcome news, because Japanese investment, the force behind
the current Asian wave, should begin sputtering out soon, thus making
way for Taiwanese and Korean investors to become more prominent.
Those Japanese automotive suppliers that wanted to come, largely,
have already come. And similar interest from other Japanese powerhouse
industries like electronics cannot be counted on. Says Kubíček,
"most of the major Japanese (electronics) producers are in
the red, and they have their own problems. We can attract some,
but not like the auto industry." Martin Jahn cites South Korea
as having real potential for the future. And of course, there is
the prospect of capitalist China yet rearing its considerable head.
"For mid- to long-term prospects, I'd say China also has the
potential to become an important investor. Export investment, instead
of pure import," says Jahn, adding that it could occur in "five
to ten years, but not before that."
As Asian (primarily Japanese) investments take seed and develop,
this country becomes something of a laboratory for globalization.
Being tested is the idea recently posited by American journalist
James Surowiecki in The New Yorker: "corporations are still
national in character. In every regard, from management style and
compensation to corporate strategy, they're as characteristic of
their home countries as meat cuts." If this is so, then an
important question for the Czech Republic is this: though inarguably
distinctive, can raw fish and fried pork find a way to productively
significant Japanese investor in the Czech Republic
had nothing to do with automobiles. In 1996, when
Matsushita committed itself to the production of Panasonic
television sets in Plzeň, no other Japanese firm had
yet made a commitment to this country of such scope
and importance. Matsushita has now invested some CZK
2.7 billion, not only into TV production in Plzeň,
but also mobile phone and car audio system production
in Pardubice. The most encouraging aspect of Matsushita's
presence is the fact it has established a research
and development center for analog TV sets. As Jan
Kubíček, director of Japanese Operations for CzechInvest,
says, "if we attract good manufacturing companies,
we want to attract them also with R & D (research
and development), to be more sure they will stay."
In the entry foyer of Matsushita's Plzeň complex there
hangs a poem penned (ostensibly) by company founder
Konesuke Matsushita. The poem is entitled, quite suitably,
'Youth'. Of the 50 engineers now working at Matsushita's
R & D center (45 of which are Czech), "nearly
everyone," says Matsushita's managing director
Ted Asahi, "is just graduated from university."
As this baby-faced brain trust develops, says Asahi,
its R & D duties likely will expand from not only
analog TV, but digital television as well (currently
handled at the Matsushita plant in the UK). Meanwhile,
productivity in Plzeň continues apace. Asahi says
the firm expects to produce its five millionth TV
set in March - in sum, a TV for nearly one out of
every two Czech citizens.
However, these TVs rarely stick around, as a mere
two to three per cent of production goes to the domestic
market. Mr. Asahi, in addition to duties in Plzeň,
is president of the Japanese Chamber of Commerce in
Prague, an organization with a rapidly expanding membership
roster. He claims to have spent half of his "company
life" (Japanese traditionally spend entire careers
with one company) abroad - in the US, Mexico and the
UK. As such, he says he's highly qualified to implement
at Matsushita in the Czech Republic not a typical
Japanese style, but rather a "global standard."
He claims this involves, contrary to popular ideas
about traditional Japanese business culture, a total
transparency in decision-making.
THE ROAD from Prague to the west Bohemian city of Louny is strewn
with crumbling villages harboring a string of cheap auto bazars.
They form a bleak runway to the new face of Louny's local economy:
an unearthly white industrial park wedged into a hilltop, which
Aisan Bitron Czech now calls home. Kunio "Kenny" Kadowaki
is the Japanese President of Aisan Bitron, an auto parts supplier
investing close to CZK 1.4 billion into its operations. While
Kadowaki's firm busies itself with building a second plant,
its first is now churning out fuel pumps at a steady clip. These
are perfectly unexciting but essential components, somewhat
resembling stainless steel hair curlers. But Aisan Bitron makes
highly sought after hair curlers - it supplies a wide variety
of brands including Renault, Peugeot, and Harley Davidson motorcycles.
Life inside Kadowaki's busy Louny plant is representative of
many similar Japanese projects now being embarked upon all over
the country. A smattering of young Japanese, teenagers in appearance,
sit in front of notebooks, chatting amiably with their Czech
colleagues. For all of the notions of extreme formality in Japanese
business, the atmosphere at Aisan Bitron, while orderly, is
also decidedly relaxed. Interaction with the boss is one exception.
Jaroslav Antoš, HR manager and the longest-standing member of
the local AB Czech team, speaks freely with reporters in private
quarters. Yet in the presence of his boss, he addresses him
infrequently and only with a tightly formal 'Kadowaki-san' ('Mr.
of the road
I. S. Cho
LEGENDARY Czech firm Avia has found that its products are
not up to the task of invading Russia, but do quite well transporting
goods there. Over half a century ago Avia was producing the
B-534, a well-known military aircraft used by the German Luftwaffe
during early stages of its invasion of the Soviet Union -
only to be abandoned when it proved problematic. In 1995 Korean
carmaker Daewoo acquired Avia and began developing a modernized
line of commercial trucks. Daewoo has now invested over USD
357 million (CZK 10.7 billion) into its Daewoo Avia operations
on the outskirts of Prague, despite the bankruptcy in 2000
of its parent Daewoo Motors. It employs 1,200 people and turns
out sturdy highway monoliths that mostly head straight to
Daewoo's commercial truck business is an interesting mix of
brown- and greenfield investment, building on the history
and know-how of local manufacturing legend Avia while also
pouring money into new factory operations of its own. USD
110 million (CZK 3.3 billion) was recently put into modernizing
production facilities and developing the D-Line series. Daewoo
Avia's Director of exports, I.S. Cho, acknowledges that the
recent Toyota investment in the TPCA plant at Kolín will radically
shake up the local automotive market, roiling supply chains
by drawing in new competitors. Those medium-sized Japanese
firms following Toyota may have one eye on the plant in Kolín,
but the other is planted solidly on prospects for developing
other local and regional customers.
Daewoo, as a South Korean firm, is somewhat unique among the
recent crop of Asian investors in the Czech Republic. But
the relative scarcity of Korean investment vis-`a-vis Japanese
may not last long; CzechInvest CEO Martin Jahn indicates that
South Korea shows real potential for investment growth in
MENTION FLEXTRONICS in the context of investment incentives,
and CzechInvest CEO Martin Jahn gets a bit touchy. It's no
wonder: when the Singapore-based firm ditched Brno last year
and fled to Hungary the media went off on a speculative tangent,
bemoaning those who would devour investment incentives and
then leave. "I try to explain to everyone," says
Jahn, "Flextronics was in their second year of a tax
holiday, and they had ten, so to say they used up their incentives
and left, that's bullshit." Flextronics' departure in
fact had nothing to do with a souring of relations, or with
abusing incentives - its fate here was intertwined with the
dwindling tech market, and as such it became subject to a
broad consolidation. Many other Flextronics operations in
the U.S. and Western Europe were shuttered, reducing its total
staff by about 10,000.
The Czech Republic competes with its regional neighbors in
attracting investors from Asia and often beats them handily,
thanks largely to a relatively advanced set of incentives.
"An important point is that the scheme of incentives
(here) is in compliance with EU regulations," says CzechInvest's
director of Japanese Operations, Jan Kubíček, who adds, "both
Poland and Hungary have to have theirs approved (by the EU)
this year." The undeserved hype surrounding Flextronics
notwithstanding, there is always a risk that these incentives
will be taken advantage of only so long as they create a window
of profitability for Asian firms, especially by those who
are investing in simple assembly projects. And when rising
wages are added into this mix, it can seem especially problematic
for the future. "Very simple production will definitely
be moved to the east," says Jan Sýkora, a consultant
at Deloitte & Touche. Jahn acknowledges this. "We
cannot use investment incentives to buy (Asian investors),
to get them to stay in the Czech Republic, it wouldn't work,"
he explains. "So many who came for cheap labor will leave
eventually... but they will be replaced with something else.
The Flextronics building will be used by a new investor who
will add value, that's the circle of life."