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US portfolio targets know-how
Written by: Jason Hovet
Photo by: Petr Poliak, Vojtěch Vlk

Knowledge-based investment is making its presence felt in areas from research to business, and American firms have been quick to capitalize on the trend.

IN THE WORDS of former CzechInvest head Martin Jahn, who was recently appointed the vice-premier for economic issues, shifting the country's foreign investment "from quantity to quality" has been a priority for the government agency. Already, the office is seeing success, with 40% of investment now going to research & development and business support services. In the first half of 2004 alone, 23 such projects have been filed - compared with only seven at the same time the year before. Ranking among the top investors in research and business support are American companies, whose total investment in all sectors totalled USD 138 million in 2003.

Weston Stacey               Photo: Petr Poliak

"The technology and strategic services sector in the Czech Republic has been rapidly expanding over the past several years," says Karolína Bočková of CzechInvest's US office, which is located in California's famed Silicon Valley. "US companies, (of which there are now some 300 operating in the Czech Republic), have significantly contributed to this development," she adds.
Most recently, ExxonMobil, the world's largest publicly owned company, opened its European center for strategic services in Prague. Consolidating the oil giant's European IT, finance and accounting services, the Prague center should employ 300 people, mainly university graduates, by the end of the year. "If the [center's] operations achieve the anticipated success, then further growth of the workforce is expected," said Philip Cappuyns, ExxonMobil's spokesperson. Among the reasons for investment is the educated and language-proficient workforce here, a factor often cited by other investors. The investment also falls under CzechInvest's program to support strategic services, thus allowing the company to receive benefits for staff training.
Although the company wouldn't disclose the exact value of its investment, CzechInvest officials have put it in the "hundreds of millions of crowns." According to Cappuyns, "Our investment is in state-of-the-art office facilities and computer systems, and in the training of the people that work there." Joining a team of other global support centers for ExxonMobil, the Prague center is only one of three in Europe - the other two being in Manchester and Budapest. "Just like with most other Business Support Centers, it is expected that up to 95% of the services provided by [the Prague office] shall support operations outside the Czech Republic," Jahn, then at CzechInvest, stated at the opening.

Pulling strings from Prague
ExxonMobil is hardly alone in its move. Accenture, which has been in the country since 1991 and is the world's largest outsourcing provider, recognized the benefits of Prague's location, low cost, and talented workforce three years ago when it opened a new Delivery Center here, adding to a worldwide network of more than 20 similar centers. Opened in October 2001, the center supports back-office work in nine European countries and 11 languages. "The Prague center is the latest move in Accenture's strategy to create a global network of shared-service centers," said Martin I. Cole, Accenture's lead partner for outsourcing operations, when the project was unveiled. "While we will initially focus on serving European clients, we will rapidly expand the site's capabilities, offering a wide range of critical business processes to multinational companies."
In two years, the project has been quite successful and further expansion plans were announced last October. Although the company can't comment on the size of the investment, by 2008 the center should have 1,500 employees, a five-fold increase from its current level. Hugh Kirby, another partner in outsourcing services, says, "The Prague Center has been a huge success thanks to the skills of the local staff and quality of the facility." Presently, the center provides its clients with finance and accounting services, but after expansion (which will take place in stages), human resources, logistics, and customer relationship services will also be among the center's offer.
According to Weston Stacey, executive director of the American Chamber of Commerce, "Both [research centers and business-support centers] are the future catalysts of Czech economic growth." But, for Stacey, knowledge-based investment doesn't stop there. "We are also trying to bring research-related investment in health care because this country has the potential to be one of the leaders in this industry," he explains. "Health care has great potential to be one of the primary engines of this economy." Similarly, Hana Lasslerová, with CzechInvest's Chicago office, says she has seen a lot of interest in life sciences investment.
Based on experiences of most companies, expansion and fresh investment don't seem unlikely. ExxonMobil's Cappuyns notes that the company considered many criteria in selecting Prague: the quality of the local infrastructure and telecom services, the availability of skilled personnel with the required education level and language skills, the cost of operating, and the legal framework. "We considered candidate locations in a very wide geography," he says. "I cannot speculate whether the Czech Republic will succeed in attracting more [service] investment, but if other prospective investors use the same criteria, they may make the same selection [as we did]."

Laurie Spengler                 Photo: Vojtěch Vlk

Education level attracts research
One long-time investor is the American manufacturer Honeywell, which has been present here since 1962. Moreover, it has been quite busy in the past few years. In 2003, Honeywell took over the Flextronics building in Brno to expand its production activities in automation control systems. (Flextronics had left the building, and 1,000 people unemployed, the year before when it pulled out of its investment deal.) A year later, most of the production lines are prepared and Honeywell plans to employ as many as 300 workers in the next few years - an investment totaling USD 12 million. Jaroslav Doležal, Honeywell's national executive, says this project "is reconfirming [Honeywell's] faith in the excellent education of Czech specialists." At the plant, 15% of staff will have university educations. This deal adds to Honeywell's Global Design Center in Brno, which opened in 2003 and employs 60 engineers (ten years earlier, Prague was the site of Honeywell's first foreign research laboratory). Adding to Honeywell's Czech operations in Prague and Brno, is the acquisition of Mora Aerospace in Olomouc. The company, which specializes in sheet metal for the aerospace industry, announced expansion plans in March and plans to add 400 employees to the current 520 in the coming years. In total, Honeywell currently employs more than 1,000 people in the Czech Republic.
US investment should continue now that EU accession has (almost) been completed. "Most experts agree that EU accession will have a positive impact on U.S. investment," says Laurie Spengler, director of Central European Advisory Group, which has more than 10 years experience in advising foreign investors. "In the eyes of many investors, joining the EU reduces the risk of unexpected changes in the market conditions," she adds, while praising government incentives for attracting new investment.
Still, notes Stacey from the American Chamber, competition is stiff. "If [the Czech Republic] can position itself correctly, which means taking a hard look at how the country compares with Slovakia, Germany, Ireland or Portugal, to name just a few competitors, it will continue to grow as a research-based, high-end economy," he says. Lower costs definitely help eastern countries in this respect. Just as well, education is an advantage over the country's eastern European neighbors. "Having a well-educated workforce is one of the Czech Republic's greatest advantages," Spengler points out. For this reason, CzechInvest's Bočková remains confident. "In the next few years, I expect a continuous inflow of high value-added investments," she says.

Francois Bornibus               Photo: Vojtěch Vlk   Investing for the long term Franćois Bornibus, Hewlett-Packard's vice-president for HP Enterprise Systems Group in Europe, Middle East & Africa (EMEA), recently visited Prague along with other top managers of the American IT giant, including company head, Carly Fiorina. He sat down to talk about HP's growing business after its completed integration of Compaq in June 2003, as well as its activities in the Czech Republic. Why did you and company director Carly Fiorina decide to visit the Czech Republic? The reason we are here is because we see the importance of the Czech Republic and the overall eastern European market. 42% of Hewlett-Packard's (HP) world revenue is done in Europe, which is more than what we do in the U.S. [HP's business in] the new EU accession countries is growing around 20% a year, so it's by far, for HP, the fastest growing region in the world. The last couple of years have seen a global slowdown in investment. Has this been the case with HP as well? Often, when times are tougher, you see companies taking back their investment. HP invests for the long term. We are here for the long term with 600 people in the Czech Republic. What types of investment does HP have in the Czech Republic? There are three types of investment. First, there is investment in manufacturing. HP, four years ago, started assembling computers with Foxconn, [a subsidiary of Taiwanese IT manufacturer Hon Hai Precision Industry]. At that time, Foxconn was very small; now they have 1,000 employees and produce about 300,000 personal computers (PC) a month for HP. Second, we invest in knowledge, for example, in our European Configuration Center for large servers. This is centralized here in the Czech Republic where we have 25 experts. Also, we are now increasing knowledge of supply chain management because our supply chain for Europe will soon be managed out of the Czech Republic with around 50 people. Thirdly, something not a lot of other companies talk about is public/private partnerships. This is where the government works with private companies. We are starting to work on projects like this in the CR. You, personally, in your career for Compaq and now HP, have worked with all customer segments. Which one is most lucrative for IT companies? All of them. HP is covering all sectors and is very strong in all of them: consumer; small- and medium-sized business; and large businesses. The reason why it is so important for us is the timing of investment in these three segments is different. Having a strong presence in the three customer segments helps you balance when one segment is not performing well. You recently won a tender to help Visa consolidate its EU headquarters, thanks in part to your new Adaptive Enterprise Strategy. Can you briefly explain this new strategy? What companies like Visa request from IT is stability, cost performance, and reliability. But, for example, if you make a company acquisition and your technology isn't able to adapt very quickly to the other, you are dead. Adaptive Enterprise means our strategy is to provide our customers with very reliable, stable technology, but technology that will also help you adapt very quickly when your business changes. How does HP's future look in the Czech Republic? HP is already the number one IT company in the Czech Republic. It already has a very strong position. The future is bright because the country's future is bright. EU accession will enable future growth. But, one aspect here that is different than other accession countries, is that growth in the Czech Republic is very consistent. In other countries, it's like a rollercoaster. The Czech Republic is a very strong-performing country for HP.

The rewards of education Jaroslav Doležal           Photo: Petr Poliak Knowledge-based investment has turned heads, and many investors are getting more involved in schools in order to safeguard their money. "US companies are cooperating increasingly with Czech universities and research institutions," says CzechInvest's Karolína Bočková, "which is contributing to successful transformations of research results into production." Worldwide, Hewlett-Packard (HP) spends about USD 60 million yearly on educational initiatives, which range from basic schools to universities. "We are fairly successful in projects with basic schools in the Czech Republic," says Karel Vavruška, spokesperson for HP, adding that the company funds about four to five projects a year. A typical project, says Vavruška, is a PC classroom, which is typically 12 to 16 computers, a server and printers, and costs up to CZK 1 million. HP also provides equipment grants to universities. "In total, we give several million crowns worth of equipment in order to promote educational initiatives in the Czech Republic," says Vavruška. Besides its new Global Design Center and its Mora Aerospace facility, Honeywell's new factory in Brno manufactures burglar alarm panels and assemble combustion products. "We use modern technology, which requires qualified workers," says Jaroslav Doležal, Honeywell's national executive. "For this reason, we count on to a greater extent technically talented secondary school and university graduates." Honeywell, for its part, works closely with technical universities, both financially and otherwise: company representatives give guest lectures, mentor students, assist in research projects, and many students take part in internships at Honeywell. In June, Honeywell donated USD 207,000 to Czech technical universities. Honeywell's Global Design Center manager, Ladislav Skapa, explains: "Modern production designed as a complex interactive unit [for students] allows us to attain much better quality than the mere combination of classical solutions."