French investment: End of the big boom
Written by: Jason Hovet
Photo by: Luminum, Tomáš Kubeš, Petr Poliak
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.
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.
Photo: luminum - d.raub & l.šavrdová
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.
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."
Photo: petr poliak
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
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.
More players, bigger field
Photo: foto archiv
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
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
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."
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
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.