Written by: John Letzing
Even as they pick the last bits of the country’s privatized economy off the auction block, German investors show no sign of losing interest.
KEEP THE SUSHI bars and golf courses coming. The more at home the Japanese have felt in the Czech Republic, the more likely that country’s financial interest has become. Of course, it’s not only added creature comforts that are bringing a surge of investors from the Far East. CzechInvest, the government agency responsible for supporting international investment, has lately made a strong push in Asia – with two offices opened there in the last three years (Japan and Hong Kong). A surge in greenfield development has resulted, the highlight being a commitment made by Toyota together with Peugeot/Citroe¨n to build a plant in Kolín. The flurry of Asian activity has led some to speculate on the future of the country’s traditional powerhouse foreign investor: Germany. “German influence is still relatively strong,” says Martin Jahn, CEO of CzechInvest, “though they don’t have the dominance they have had in the past.”
Statistics of late seem to belie Jahn’s claim. But what has propped up the German numbers is a large-scale shopping trip through the country’s most attractive bits of privatized infrastructure. German firm RWE settled on a premium price for the country’s gas sector (Transgas and distributors) of EUR 4.1 billion (CZK 133 billion), and thus became the second-biggest pipeline operator in Europe. This caused the total amount of German foreign direct investment for the first half of 2002 to balloon to an extraordinary 4.47 billion Euros, some 75% of the total from all countries. Apart from the purchase of gas, German investment compared to Asian was EUR 370 million to EUR 106 million. And the greenfield investment by Toyota with Peugeot/Citroe¨n, at EUR 1.5 billion, should further level the interests of Asia and Germany by the end of this year.
Utilities are only one piece of the Czech privatization pie that is just now offering up its sweetest pieces; Telecom seems the next to go. Monopoly operator Czech Telecom, too, has a German suitor in Deutsche Bank. Though negotiations have seemed drawn-out, leading many to speculate that Deutsche Bank is pressuring the government to lower its already considerably low price (EUR 1.82 billion for a 51% stake), others point out that the extremely complicated nature of the deal could alone account for a delay.
Interestingly, all of this good news about German money flooding the country comes on the heels of consistently incongruent bad news regarding the German economy. Chronic problems with unemployment there seem to bode pressure to keep investment and jobs inside of the borders. Not the case, says Andreas Schaefer, of the Czech German Chamber of Commerce, who adds: “Most (German) politicians realize that when a company invests abroad, it helps save jobs in Germany.” Oftentimes, an inexpensive plant in the Czech Republic may be the only thing keeping its German cousin afloat.
In terms of telecommunications, news from Germany has also been grim. Deutsche Telekom, parent of local mobile operator T-Mobile, now sits under a frightful mountain of debt – some EUR 66.2 billion. But analysts say that Czech T-Mobile is both too small and too profitable to be subject to a major strategy shift. “They (Deutsche Telekom) can solve the debt issue, and there are various options for doing so,” says Frank Wellendorf, an analyst with West LB Panmure in Germany. In fact, Wellendorf notes, should a further stake in the Czech market become available, DT may well be interested. “My guess is DT would not force it in the current phase,” he says, “but if one of the shareholders (in T-Mobile) wanted to sell at a reasonable price, Deutsche Telekom would not hesitate very long.”
Indeed, all bets are on Germany’s interest in the Czech economy to grow dramatically in the near future. Even with little left to pick up through privatization, existing investments will likely swell. The key factor is imminent EU entry, slated for 2004. As part of its annual survey, the Czech German Chamber of Commerce recently asked members how EU entry would affect their presence here. Schaefer says that, “by a wide margin, companies said they will increase it.” This is due mainly to diminishing concerns about legal stability. As Schaefer observes, “the Czech Republic in the EU means that the rule of law will be enforced.” This economic development means that the fates of the two nations will become more solidly intertwined, perhaps more so than any others in Europe – Germany now accounts for a dramatic 36% of all Czech foreign trade. This is perhaps an unlikely formula for two countries with a mutual history checkered by animosity and mistrust.
As German investment becomes even more commonplace, there is hope that not only historical mistrust but also some inimical flaws will fade away. Chief among them, claim many observers, is a tendency among Germans to try too hard not be stereotypically imperious managers. The effort to be low-key and unobtrusive, says Deloitte & Touche partner and analyst Pavel Stehlík, can be a detriment: “they do not act like German occupiers…and as a result they lose a lot of opportunities. They could make changes a lot faster than they do.” Andreas Schaefer agrees, but is quick to point out one sensitive area where this behavior works best – in the media. Nearly all of the Czech news media, including national leading dailies, are German-owned. Yet as a rule, the foreign investors steer clear of day-to-day management decisions. And that, says Schaefer, makes everybody more comfortable.
|Buying into banking
The final privatization round of Czech banks featured one striking anomaly: where were the Germans? For a group that, in terms of foreign investment, seems to have fingers in just about everything else, it seemed odd it should sit back while Belgian, French and Austrian players snapped up the biggest retail banks in the land (ČSOB, Komerční banka and Česká spořitelna, respectively). “It’s safe to say,” according to Jan Slabý, analyst at Wood & Company, that Germans missed out.
|Tapping into utilities
It raised eyebrows last winter when German utility company RWE stepped up and handed the Czech government a very handsome sum for Transgas – some CZK 133 billion. RWE spokesman Andreas Brabeck calls it “a reasonable price.” Deloitte & Touche partner and analyst Pavel Stehlík agrees, citing the acquisition as a sound bit of strategy. According to Stehlík, who handled consultation with Transgas during pre-privatization: “the acquisition of the Czech gas sector was critical (for RWE) for two reasons – first, closing the gap in size, and second, growing their gas business, because they were much stronger in energy than in gas. It was important to have a second leg as big as their first one. And the last thing is it was important for them that they got access to Russian contracts.” Having those contracts will enable RWE to better manage risk, allowing it to opt for gas from either Russia or its former supply in the North Sea. Additionally, the fact that RWE supplies the city of Prague with energy through its stake in PRE creates interesting opportunities for gas/electricity synergy.