French investment: End of the big boom

With a few exceptions, big French investors have been relatively quiet recently. Is this a sign of slowing investment? The answer to that is yes – and no.


Jean-Christophe Moulet
Photo: luminum – d.raub & l.šavrdová

FOREIGN DIRECT INVESTMENT (FDI) into the Czech Republic nearly doubled in 2004. The Czech National Bank counted almost CZK 115 billion – up from CZK 59 billion in 2003 – flowing into the country and Czech Invest notched up 145 new projects valued at nearly CZK 50 billion – a 100% increase from the year before. Conspicuously missing from the list of the largest investment projects, though, was a French company. That’s not to say that French investment is finished – it isn’t and remains strong. Instead, it shows how it’s changing.
For one thing, there is a lack of new, large investors, which isn’t surprising for observers. Jakub Mikulášek, head of Czech Invest’s Paris office, says “there has always been a minimum of greenfield investment [from France].” Furthermore, Slovakia is doing much better than the Czech Republic at winning investment. “The competition with Slovakia is quite hard,” says Jean-Franćois Salzmann, a partner at accounting firm Mazars, crediting Slovakia’s more aggressive economic policies and conditions, as well as more – and cheaper – labor. Just as well, French investors’ strategies in the Czech Republic have previously been more centered on buying into existing companies, of which there is a smaller selection today. Many large investors, however, are already present here and are now expanding their investments by modernizing factories, for example. These long-time investors – along with the countless small and medium-sized French businesses operating locally – are what keeps France among the top five countries with FDI in the Czech Republic.

Not forgotten
Regardless of the lack of large deals, this year is important for French investment, marking the beginning of its priciest endeavour: the TPCA plant in Kolín, a joint-venture between Toyota and PSA. The EUR 1.3 billion plant started producing its three small-car models – CitroĎn C1, Peugeot 107 and Toyota Aygo – at the end of February and officially opened May 31. At that time, 2,500 people were working in the factory, with another 500 expected to be hired. By the end of May, 11,000 cars had been built, and the factory estimated 100,000 cars in total would be produced by year’s end. Announced in 2002, the project’s commencement has been eagerly anticipated and should add CZK 20 billion in sales to the CZK 460 billion Czech automotive market this year alone.
To be sure, suppliers, which now account for nearly 59% of total automotive sales, up from 46% in 1999, have benefitted the most from TPCA’s arrival – and this includes a good many French companies. A number of smaller companies have come just in the past few years. However, their arrival is usually muted as most choose among smaller companies to acquire existing firms rather than build from the ground up. A few examples include Lisi Automotive and Electropoli Groupe, both which bought into Czech automotive suppliers.
In Lisi’s case, last June it bought a 97% stake in Form, which specializes in cold forming and machining, for CZK 140 million. Lisi credited the acquisition of Form, with revenues of EUR 5.5 million and 210-strong workforce, in helping push Lisi’s 2004 sales up by 7% to EUR 541 million. Equally, Electropoli Groupe, another French supplier looking to the Czech Republic for international growth, took a two-thirds share in Galvia last July. In return, the French group, a leading European metal-finishing company in the automotive industry, gained two Czech production plants, a staff of 180, and a better position in central Europe.
However, not all French suppliers are looking just to buy into the market. In one of the few French deals announced by CzechInvest last year, Matthey, a member of the world’s largest steel producer, Arcelor Group, unveiled in December 2004 plans to invest nearly CZK 500 million into a new plant in Ústí nad Labem to produce stainless steel tubes for car exhausts, employing 100 people. Production there is already set to begin, and Jean-Christophe Moulet, the company’s managing director, reports that more than 1,000 tons of tubes a month will be made when the plant is at full capacity at the end of this year. “It was very aggressive planning [with] five and a half months between ground breaking and starting up production,” he says. “When you invest, you want to start quickly in order to have a quick payback.”


Jean-François Salzmann
Photo: petr poliak

Flying high
Of course automotive isn’t the only sector for French investment, and CzechInvest has been busy focusing on attracting high value-added projects in other sectors like electronics and strategic services. For example, says Jakub Mikulášek of the agency’s Paris office, Czech Invest organized seminars in France relating to aerospace and real estate. Also, then-Prime Minister Stanislav Gross and Martin Jahn, deputy prime minister for economic affairs, both made official visits to France last year and promoted investment in the aerospace sector.
At least one group may have been listening because in April this year, Letov letecká výroba (LLV) announced it was building a new research and development center in Prague with the help of French parent LatécoŹre. The center, costing EUR 6.6 million and employing 150 employees, mainly engineers and mechanics, will develop and produce parts for large aircraft and could be used for LatécoŹre’s next big development project. This will be added to the aircraft components already produced by LLV for Airbus and Embraer. “LatécoŹre has a wealth of experience both in production and development,” says LLV director, Ivan Dubský. “This represents a strong foundation for us.” Since purchasing LLV in 2001, LatécoŹre has also helped the company build a new assembly facility and paint shop where parts for Airbus’ new jumbo A380 are worked on.

Home is where the growth is
Also adding to its Czech portfolio is the manufacturing giant Saint- Gobain, which already has mulitiple sites around the Czech Republic producing glass and distributing building materials. In January, the group’s building distribution division announced the acquisition of the W.A.W. – A-Keramika group, a leading seller on the tiles and sanitary wares markets here and in Slovakia with estimated sales of EUR 37 million. Saint-Gobain was already present in this particular market through another company, but this deals helps the group establish itself in Slovakia. Already with 18 separate companies here, the group plans to continue putting money into its businesses, including a recently installed third production line at a car windshield plant in Hořovice and increased procuction and processing upgrades at a plant in Litomyšl which makes building fabrics. “We are extremely satisfied with our investments in the Czech Republic,” says Paul Neeteson, Saint- Gobain’s general delegate for Germany and central Europe. He adds the group wants to use its Czech investments to grow its European market share by using the country as an export base; currently two-thirds of production is shipped out of the country to western Europe.


Paul Neeteson
Photo: foto archiv

More players, bigger field
Another long-time investor, LagardŹre, the media group behind radio station Frekvence 1 and Evropa 2, as well magazines Maxim and Elle, may soon be increasing its work in the Czech Republic. According to media reports, it’s currently applying for a digital television license and promises investments up to CZK 1 billion. Europe Développement Czech Republic (EDCR), LagardŹre’s Czech subsidiary, plans on two stations: one aimed at entertainment for women and another focusing on younger women.
Expanded investments by established French companies – as well as continued moves by SMEs (see sidebar, p. 40) – look to be the future of French investment, as there probably will be less large investments. “New investors are probably a bit afraid of competition on the labor market,” says Salzmann of Mazars. He does see some opportunities staying open in the services market. But for now, there have been no takers. Frédéric MaziŹre, a partner at Deloitte, somewhat agrees. “The [Czech Republic] is small, therefore opportunities for large investments are limited to a certain extent,” he says, adding deals in sectors like banking and automotive are pretty much done. “There are still some opportunities of significant investment [in other areas],” MaziŹre continues, mentioning infrastrucure and transport, construction, and even the hotel sector.
Others with a vested interest in the future of French operations here are just as hopeful. “I think that new big projects can come with further delocalization of French businesses from France,” says Pavla Přikrylová, a partner with Peterka & Partners law office, which represents several French clients. The question now is when. EU accession’s expected boost hasn’t materialized. “General interest in central European countries has definitely risen,” says CzechInvest’s Mikulášek. “However, from my point of view, this hasn’t been followed by a wave of investment.” Mikulášek says there are about five projects that “might happen in 2005″ but then adds, “We can’t expect any more ‘TPCAs’ coming from France these days.”

The first choice


Jean-François Remy
Photo: luminum – d.raub & l.šavrdová

While larger companies usually get most of the attention, it’s small and medium-sized businesses (SME) that form the backbone of French investment. According to a 2002 study from the French embassy, of the 400-plus companies here with French capital, 8% employ more than 500 employees, while 70% have a staff of less than 100.

OFTEN THEY ARE BREAKING new ground, such as the case of Cofidis, a credit lending company that offers loans of up to CZK 20,000 over the phone. With operations already around European mediterranean countries, opening an office in Prague last December was the company’s first step into the central European market. In choosing the Czech Republic, Jean-Franćois Remy, Cofidis’ general manager, says the company was attracted by a well-developed banking system and growing credit consumption in the country, as well as the positive experiences of sister company Magnet, a mail-order firm. Even with phone lending still rare, Remy says he’s quite happy with the startup. “The results are quite better than our expectations,” he says. Soon, staff should increase to 65 people from the current 34, and in total Cofidis’ investment could reach EUR 15 million.
For SME investors, the Czech Republic maintains a good reputation – and overall, French investors ranked the country second on a FDI confidence index from A.T. Kearney. According to Jean-Franćois Salzmann, a partner at accounting firm Mazars, the country is a safe bet for SMEs. “They are not a like big company which can take a big risk on a country,” he says, adding his firm has been in contact more with smaller companies, especially in manufacturing and retail. This belief is echoed by Philippe Delacarte, Komerční banka’s director of distribution channels. “[SMEs] are certainly encouraged that the Czech Republic is now an EU member and that its economic and political situations are stable,” Delacarte says.
In regard to acquisitions or joint-ventures, the years of market experience in the Czech Republic makes Czech companies more appealing – and there are still a number of small local companies looking to team with an international investor. “The result may be a higher investment cost but it’s still not a speculative investment,” says Christophe Beaujard, who, in 2004, started Prague-based investment consultancy Czech-Euro, “Most SMEs can’t afford to have a high-risk investment requiring large financial and human resources.”

Jason Hovet

 

Saying good-bye?


Photo: tomáš kubeš

Retail is reaching a saturation point and the first competitor has pulled out of the ring – unfortunately, it’s a French contender.

CLOTHING AND SHOE retailer La Halle, present here since 1998, is the first major chain to leave the increasingly tight market and shops will be closed gradually throughout the summer, with the final two closed in August. However, the stores’ local executive, David Pažitka, is quick to point out the decision “wasn’t because of [La Halle’s] results in the Czech Republic.” Rather, new shareholders, PAI Partners – which took over the chain’s former parent Vivarte last year – plans to focus on the French market. (It has also left the Polish and Hungarian markets recently.) “The new shareholder has decided to spend all available funds on developing operations in France and was unable to generate the expected returns on investment in the Czech Republic,” Pažitka says. According to TextilŽurnál trade publication, La Halle’s clothing sales fell 7.4% to CZK 375 million in 2004 placing the group 17th among the largest textile retailers in the country. Pažitka sees a few reasons for the underachievement: high rents, high competition, not to mention La Halle has changed shareholders three times in the past four years, making it difficult to form a continuous strategy.
It’s still a question if others will follow. In fact, there was speculation earlier this year surrounding the largest French retailer present here, Carrefour. In February, the group’s long-time global CEO, Daniel Bernard, resigned after failing to pick up falling global sales. José Luis Duran replaced him and immediatedly set a strategy which included, among other things, scaling back international expansion. (The French retailer has already retreated from the Japanese and Mexican markets.) In interviews with financial publications, Duran was paraphrased as saying if Carrefour can’t be one of the top three retailers by sales in a foreign market, it would likely leave the territory – although he denied to specify which territories and said he was in “no hurry to dispose of assets.”
With sales of CZK 11 billion in 2004 – up from CZK 10 billion the year before – according to estimates by Incoma Research, Carrefour is currently the country’s 8th largest retailer, and its position in Slovakia isn’t much better. Locally, the Carrefour office dismisses speculations about leaving. “Carrefour is undoubtedly developing its activities with hypermarkets in the Czech and Slovak republics,” says company spokesperson Jana Havlíčková, adding that this is according to a plan set in 2004. “The current results achieved in the competitive hypermarket environment are meeting our expectations.”
Quietly, some observers believe eventually Carrefour – and other retailers – will be forced to buy up competitors or get out. In Poland, it acquired 12 Hypernova hypermarkets from Ahold in February. What moves it will make here, though, are still to be seen.

Jason Hovet

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