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Manufacturing prosperity
Written by: David Creighton & Jason Hovet
Photo: Benoit Decout, Petr Poliak, Vojtěch Vlk

Masatake Enomoto & Ichiro Chiba	Photo: Vojtěch Vlk

Central location. Skilled workforce. Low costs. These phrases are music to investors - and a combination that has worked well for the Czech car industry. But as a second wave of investment rolls in, what benefits, beyond jobs, will come with it?

SINCE THE EARLY 1990s, foreign investment in the automotive industry has been a driving force in the Czech economy, currently accounting for about 17% of manufacturing output and 20% of the country's exports, and employing some 130,000 people. The arrival of Volkswagen Group (VW), which partnered with Škoda Auto in 1991, grabbed major headlines then. But their arrival more quietly opened the floodgates to hordes of other foreign auto part suppliers and manufacturers, who have in turn made the Czech Republic a new European Detroit.
While that may be a bit of an overstatement - at least for now - the numbers cited as evidence by CzechInvest (which coined the term) are impressive: investment in the auto industry has nearly topped EUR 7 billion since 1990. Of the 350 automotive manufacturing companies in the country, 55% are now foreign-owned, and this list includes half of the world's Top 50 auto parts firms.
The second wave of suppliers and manufacturers now flowing into the country - in anticipation of the new Toyota-Peugeot-Citroe¨n Automotive Czech (TPCA) plant set to begin production in 2005 - will definitely bring more jobs. Just as importantly, Japanese investment coming as a result of TPCA will continue to push productivity up in the Czech Republic, as VW did more than a decade ago.

Jan Hanzl Photo by: Vojtěch Vlk

Will this new investment be sustainable?
"The potential [of the car industry] in the Czech Republic still isn't exhausted," says Jan Hanzl, the director for investment incentives at CzechInvest. "The Czech Republic still remains a country which is very attractive for the auto industry." Suppliers, both old and new, would second that opinion. They have seen a successful past decade in the Czech Republic, and sales, as a whole, have grown annually by 7%, with their combined turnover reaching EUR 11.3 billion, by CzechInvest's figures. And with production at TPCA due to begin soon, current suppliers are starting to face new competition - a welcome development. "Competition is an essential stimulant for higher production," says Pavel Roman, marketing director at Europe's second-largest component investor, Robert Bosch.
Currently, Mladá Boleslav is the closest thing the Czech Republic has to a Motor City, and investment there has created many positive trends in and around the city. Similarly, the industrial town of Kolín, 60 kilometers east of Prague, is gearing for its own change in the coming years. Suppliers have already started to set up shop, meaning more jobs. And in a city with 10.6% unemployment, TPCA's EUR 1.5 billion investment has been warmly welcomed. "If we reduce unemployment by 2 to 2.5%, then we will be happy; if we reduce it by more, then we will be very happy," says Kolín mayor, Miroslav Kaisler, referring to TPCA's impact on the town's unemployment.
According to Masatake Enomoto, the president of TPCA, a staff of around 500 is already in place, and when the plant is fully operational in 2005, nearly 3,000 workers should be employed there. Although TPCA's corporate secretary Ichiro Chiba declined to comment on wages, he allowed that "we are going to offer competitive conditions, not only with regard to remuneration, but a good working environment, too." Jobs are important, but the mayor thinks there will be more benefits. "We all hope that the TPCA plant will have a positive impact on increasing the number of residents and in the development of the town in all spheres - cultural, sporting, social and commercial," Kaisler says.
As far as tax revenues, however, Kolín will not immediately benefit because, as part of its investment package, TPCA received a 10-year tax-free period. Also, part of this package is a commitment to extend the D11, which runs north of the town and links Prague with the Polish border. The extension of the motorway will bring economic benefits by integrating Kolín into the national and international highway network, and its position in relation to the network of major routes was one of the reasons why TPCA chose the location. Conversely, Mayor Kaisler voiced concerns that if the motorway link is not built then congestion could become a negative by-effect. "We fear increases in traffic and goods vehicles supplying the car plant," he admits.
This new highway will also be favorable for Kolín's local economy. "TPCA should influence the activities of local businesses," Kaisler explains, adding that he thinks TPCA will also improve skills in the local labor market. The attractiveness of these benefits for future investment has already been evidenced with TPCA suppliers such as Nik Logistics, Lear Corporation, and Gefco planning to locate in Kolín. TPCA's investment has also spurred a second wave of investment in the automotive industry. "It is mainly [from] the dramatic increase in Japanese investment in the last two years," says CzechInvest's Hanzl. At present about 20 well-known Japanese manufacturers operate in the car industry in the Czech Republic, and many are using the Czech Republic (and the region) as a foot in the door to the rest of Europe. "For most of these [Japanese] companies, deliveries to TCPA will be important, but not [their] sole impulse," explains Hanzl. "They are looking towards a considerable increase in deliveries to other European car plants as well."

Miroslav Kaisler Photo by: Vojtěch Vlk

Aisan Bitron is one example. In 2002, its first subsidiary, Aisan Bitron Czech, started producing fuel pumps in a 4,500-square-foot factory in Louny. (It also started producing throttle valves in a second plant, Aisan Bitron Louny, a year later.) Toyota is already an important end customer, as are other Asian car manufacturers. However, Aisan would like to expand its customer base, and for them, the Czech Republic's central location is very important. Production is already exported to suppliers in Poland, France, and the United States. The big prize would of course be Germany, where car production is the highest in Europe.
Another Japanese supplier, Denso Corporation, felt it needed to add a Czech presence to the operations it already has around Europe. "The Czech market definitely has big potential," says Zdeněk Oklestek, from Denso's public relations department. Currently, all production at its Liberec air-conditioning facility is marked for export. But that will soon change. "TPCA will become one of our important customers," says Oklestek, though he adds that it was not the sole reason for their Czech entry. Denso's USD 100 million-plus will soon pay off - for both the company and Liberec. "In a few years, our sales will reach over EUR 200 million," Oklestek says, "and the number of [employees] will grow to over 1,000."
For existing suppliers, like Robert Bosch, TPCA will be welcome - Toyota and PSA are both good customers - but they aren't planning any new major investment. "We want to, at a minimum, maintain our yearly growth in turnover," says Bosch's Roman, according to whom this has been a combined 300% in the last five years. Currently the company has three Czech plants, which employ 7,000 people and produce compressor units, engine cylinder heads and fuel injection systems.
The pressure on the workforce as new investment comes (see sidebar, p. 22), is a concern for other suppliers. "[Those] coming from outside won't have great advantages in this," says Mojmír Čapka, general director at Brisk Tábor, which produces heaters and spark plugs, among other things. He suggests joint-ventures may become more common, as more investors look to crack the Czech market. His company, which exports 90% of its production and has grown by 200% in the last five years, already has some suitors.
However, if one phrase could scare off investors, it might be "rising labor costs". And as the Czech Republic and the region start to enjoy the riches of EU membership, this could sour investors' appetite. Aisan's president, Kunio Kadowaki, wasn't sure what his company would do if costs climbed too high in the future. For now, he is taking a wait-and-see approach, although he underscores, "Labor costs are very important."
Low costs, above all, are something that can't be touted too loudly now, as the Czech crown continues to firm against the euro. Amid falling profits in 2002, even Škoda threatened to use Slovak suppliers after, it said, Czech component suppliers refused to adjust prices to mitigate the shifting exchange rate. In Hungary, VW already has recently stopped production at its Audi plant, and while it may be to early to tell, some industry observers are wondering if this is the first case of a car manufacturer pulling out of central Europe due to rising costs.
Is it likely that carmakers start looking farther east? As PwC's quarterly newsletter AutoFacts reports, "too much investment has been made for VMs (vehicle manufacturers) to walk away." Still, low costs remain an important factor - which explains the trend in joint-ventures such as TPCA. "'Go east' is the trend, as other east European markets have significant growth potential," Romancov points out. "This, however, is rather a long-term strategy, as the environments are not stable, purchasing power is low to poor, and infrastructure is insufficient."

Production is the prize  Marek Romancov Photo by: Vojtěch Vlk Competition may act as a stimulant, and for the Czech Republic, that competition is coming from an old friend. Slovakia has grown its own motor industry in recent years. After months of anticipation, Hyundai announced at the Geneva Auto Show in March that it would build its new Kia plant in Žilina - giving an economic boost to north Moravia as well. For Slovakia, that makes three: VW already operates a plant outside of Bratislava, and PSA Peugeot Citroe¨n will finish construction on its plant in Trnava in 2006. By 2007, when Hyundai goes on line, Slovakia will actually be the largest car producer in the Visegrad area. According to ČTK, planned production will reach 810,000 cars in the Czech Republic in 2006 and (with Hyundai included) Slovakia's three plants would be turning out 820,000. While Slovakia is attracting foreign investors by decreasing the corporate income tax rate to 19%, investors aren't turning their back on the Czech Republic. In the last five years, CzechInvest has secured some 94 deals in the automotive sector, worth more than USD 4.3 billion. More importantly, it has boosted employment statistics by 30,000. The Czech Republic even placed ahead of traditional leaders Great Britain and France in auto component projects in 2003, grabbing 18% of foreign projects. Among EU candidates, this country snatched half the foreign investment projects. " The Czech Republic clearly has potential to become a member of the 'one million club,'" notes Marek Romancov at PricewaterhouseCoopers, referring to one million production units a year. However this could "hardly be achieved without the presence of an additional producer," he admits. So in the race to a million, Slovakia and the Czech Republic are now neck-and-neck. Jason Hovet

Making room for workers Allan Jírek Photo by: Vojtěch Vlk With the number of residents set to boom, Kolín faces new demands for housing. How will the existing residential market change? The government recognizes that housing is a key question if it is to attract companies like TPCA. "The government and Kolín will build a sufficient number of apartments to meet the recruitment needs of TPCA," notes Kolín Mayor Miroslav Kaisler. "Should the flats not be occupied by employees of TPCA, they will be allocated to local residents," he adds. Construction will be funded by the municipality and the State Fund for Housing Development, although the amount invested was not disclosed. A total of 850 apartments for TPCA employees will be built. Rents will be controlled, reflecting the need for affordability, and the municipality of Kolín will have exclusive ownership. The arrival of the plant could also boost housing provision for non-TPCA employees. According to Kamil Špinka of Kolín Municipality, "housing prices are currently beyond the means of young families. The location of TPCA could therefore present an opportunity for developers to build properties for people with average incomes." However, Allan Jírek, the general director of EUBE, a firm involved in a low-cost housing project in Mladá Boleslav, says, "in the medium-term, Kolín could become an interesting place for developers, but not immediately." Jírek feels that it will depend on the long-term work prospects of the employees, which is similar to what happened in Mladá Boleslav. "On top of this, should the accompanying social provision for future employees (such as low-interest loans) work, then Kolín will represent an attractive housing location for developers." EUBE itself intends to build flats in nearby Poděbrady, which will be aimed at average-income buyers. The role of the Ministry for Regional Development could also help in this matter, and spokesman Petr Dimun says that "the attraction of Kolín for developers is connected with the further development of the region. We will continue to work on this." David Creighton

The workforce is key Kunio Kadowaki Photo by: Petr Poliak Creating jobs is one thing, but filling jobs is another. Denso Corporation's huge investment is supposed to provide work for 1,000 people - but this will take some time. "Denso has more than 600 [employees] now," says Zdeněk Oklestek from the firm's PR department, but adds that the firm is currently in the process of recruiting. According to Oklestek, the interest of applicants is there, but not all are able to go through the recruitment process. "We are facing serious problems in the recruitment of good workers in this region," he says, pointing out that Denso has bussing programs to reach workers from farther afield. For Aisan Bitron, however, the issue isn't so much transportation for employees, but finding enough people to do the job. "We have about 300 employees right now [in both factories], and we will need about 100 more," says Aison's president Kunio Kadowaki, "But there are many companies operating here now; I'm worried there won't be enough [labor] capacity." Qualified staff is a concern for Aisan, which offers a training program in connection with local schools. "Before graduation, [students in their final year] train in our plant, and if they want the job, then they are already trained," notes Kadowaki. Thus far, 20 students have found positions in the factory to gain valuable experience. In Kolín, TPCA is expecting to find the majority of its staff from the region. "Even if Kolín itself is small, there are some significant numbers of [large] population centers in the commuting area," says TCPA's president, Masatake Enomoto. As far as qualifications, Václav Huttner, of the Kutná Hora labor office, believes this shouldn't be a problem. "In view of the fact that TPCA relies above all on individual training, we don't expect that there will be a shortage of qualified employees," Huttner says. Still, he points out that the long recruitment process can be stressing to some. "The problem at the beginning was slow information - the public is not used to so many rounds of recruitment," he says. David Creighton, Jason Hovet