Written by: John Letzing
Photo: Petr Poliak
Investment from Asia has been arriving in record numbers lately, capped by the TPCA auto plant in Kolín. The deluge prompts two questions: why Asia, and why now?
THE JAPANESE needed no post-1989 introduction to Czech manufacturing capabilities; they’d first made an acquaintance staring down the barrels of machine guns produced by the old Škoda Plzeň works in Bohemia during the Russo-Japanese war, nearly 100 years ago. Jan Kubíček, director of the Japanese office of CzechInvest, the government agency responsible for attracting foreign investment, tells us there are three symbols of Czech accomplishment in the collective Japanese imagination: machine guns, Olympic gymnast Věra Čáslavská (a star of the ’64 Olympics in Tokyo), and marathoner Emil Zátopek. There are also cars. Kubíček keeps a black-and-white photo of an old Laurin & Klement sedan (the predecessor to Škoda) perched beneath Mt. Fuji on his office wall. It’s a sepia-toned reminder that Czechs, cars and Japan go well together, and as such is a subtly effective tool at Mr. Kubíček’s disposal.
Lately, Kubíček hasn’t needed much assistance. Asian investment, spearheaded by Japan, is spiraling to record numbers driven mainly by strategic moves into the automotive sector. According to Czech National Bank statistics, in 2000 total foreign direct investment from Asia amounted to CZK 1.8 billion, while in the first three quarters of 2002 alone that amount shot up to CZK 4.7 billion. But the “Asian investment boom” is not necessarily a sudden, or even very recent phenomenon. What’s at play is a decision making style that runs counter to accepted business practices in the west. Japanese firms, rather than brisk strategizing, prefer a prolonged – sometimes agonizing – search for broad consensus. Kubíček recounts that dealings with Toyota, slated to roll the first car out of its new TPCA factory in Kolín in February of 2005, actually commenced some “five or six” years ago. “Especially (for) Japanese projects, it’s a long, long decision process,” says Kubíček. “In Japan everything has to be approved by everyone.” Kubíček’s boss, CzechInvest CEO Martin Jahn, adds that the glacial decision-making may require patience, but is symptomatic of what is, overall, a comforting predictability: “When they finally make a decision, they stick to it. (With) Americans, if the second quarter results are off, then suddenly everything’s different,” he expounds. The EUR 1.5 billion investment by TPCA, a joint-venture of Toyota together with French car maker PSA Peugeot Citroe¨n, is a record for greenfield investment in the Czech Republic.
Of course it’s not only Japanese investment making up the recent Asian flood – other major players active here include South Korea and Taiwan. But the preponderance of Japanese money speaks well for future interest from its Asian neighbors. Says Jahn: “Investors from Korea, Taiwan, and other countries tend to follow the Japanese.” Though a trendsetter in general terms, when it comes to business culture Japanese firms are wholly unique. Deciphering characteristically Japanese management practices is now a daily part of life for a growing percentage of the Czech workforce – according to statistics from JETRO, the Japanese External Trade Organization, over 22,000 Czechs are either currently employed by Japanese firms or are slated to be in the near future. Along with surprisingly long decision-making periods, another distinct aspect of Japanese business practices is a stultifying blend of management tiers, often concealing who really calls the shots. In this respect the stereotype of the Japanese businessman (or “bijinesuman” in Japanese slang) as a cryptic, strictly backroom dealer is at least partially validated. “Japanese style is uniquely individual,” acknowledges Kunio Kadowaki, President of Aisan Bitron Czech, a Japanese supplier of fuel pumps and plastic auto parts. Kadowaki adds, “negotiations and things like that are often underground.”
Jan Sýkora is a member of Deloitte & Touche’s Japanese Desk, designed to help the consulting firm better serve the recent influx of potential Japanese clients. He claims that the murky source of decision-making at Japanese firms is related to Japanese society as a whole. “In most firms in the west there is a clear relation – the higher position in the social hierarchy, the higher power and responsibility,” says Sýkora. “In Japanese society the relation is like this: the guy on top of the social hierarchy is nothing more than decoration. Their power is very limited, and their responsibility is near zero. So if you want to discuss core problems, don’t address the man on top of the hierarchy… it’s the middle managers who are the neck, just turning the head,” he notes. So how does someone with a legitimate proposal identify a decision-maker and get things done? According to Sýkora, one must keep a patient, watchful eye on the “kone”, or social connections within any given firm and operate accordingly. People like Jan Kubíček at CzechInvest, who have spent a good deal of time interacting with Japanese management, have developed the patience and prescience required for this. Other Czechs may not be as inclined to put up with it.
Tetsuya Yamada, spokesman for TPCA, says he is so far encouraged by the interaction he’s seen between Japanese and locals. He claims there are more similarities than differences: “For example, they are both not working so hard, but working seriously.” Though at first glance this quote may read like a zen koan, Jan Sýkora tells us that it makes perfect sense. Says Sýkora, “there are some myths about the Japanese style of working, that they’re something like worker bees. This is a myth – the ordinary employee is very similar to the Czech one, partly lazy, but if they do something they do it seriously.” Of course, the version of Japanese corporate culture that is for export is slightly altered. Kunio Kadowaki, of Aisan Bitron Czech, has spent the past ten years abroad including seven in America, and knows full well how to adapt to western standards. He puts it like this: “A Japanese style is necessary, but maybe this we arrange around a Czech style.”
Aisan Bitron is but one example of the Japanese auto parts suppliers now deluging the Czech market, not necessarily to supply the new TPCA plant, though that firm’s decision to locate here certainly aided their own. Aisan Bitron estimates TPCA will eventually account for some 10 to 20% of its business here. Denso, a producer of air-conditioning systems located in Liberec, has invested some USD 75 million (CZK 2.3 billion) into its operations. Spokesman Koji Ohashi says Denso expects to achieve sales of USD 180 million (CZK 5.4 billion) by fiscal year 2005, based largely on contracts not related to TPCA. What TPCA and these various suppliers hold in common, apart from any potential cooperation, is a desire to use this country as a center for export to all of Europe. Ondřej Votruba, of JETRO, says, “almost all production from the TPCA plant is considered for export, and the Czech Republic… has a slightly better location than the other countries (like Hungary or Poland). From (here) any export is a little bit simpler, as routes are shorter.”
“This is ‘keiretsu’, or networking,” says Sýkora, referring to the vast numbers of Japanese auto suppliers setting up shop here. “The real base of the Japanese economy rests on small and medium enterprises, which just follow the big firms. So if Toyota comes here (as part of TPCA), the major part is not that of Toyota. The major part is the tens to hundreds, and maybe thousands of small and medium enterprises following the big one.” Whether these new suppliers will be able to breach markets held by existing suppliers of clients such as Škoda Auto remains to be seen. But it will surely be an uphill battle. “When I talk to them (Japanese suppliers) about future plans, they want to try to make an effort to sell to Škoda also,” says Jan Kubíček. “But existing suppliers have long-term relations, and also Škoda as part of the Volkswagen group has very strict conditions for pricing… when parts makers first come they start from scratch and don’t know a lot of suppliers, so they import a lot from Japan, which makes the product more expensive.” Kadowaki of Aisan Bitron recalls having had many long and fruitless meetings in the US with management at established local auto makers like GM and Ford. He’ll likely see a similar scenario develop in the Czech Republic.
If business for Japanese and other Asian newcomers does not develop well, many worry their presence will cease as soon as the very generous incentives granted to them by the government dry up. CzechInvest has succeeded in drawing Asian interests more than any other country in this region largely due to offering a generous ten-year tax holiday, training incentives and site location support. Many see this formula as untenable, giving away a lot for something in return with little assurance of long term viability – especially when coupled with the rising cost of local labor as this country nears EU entry. Says Tetsuya Yamada, of TPCA: “In the initial stage of selecting a country we wanted to choose one with cheaper labor costs compared to other western European countries. But the Czech Republic will enter into the EU, so that means we are wondering a bit whether our labor costs will increase or not.”
Stick around awhile
Thanks largely to softer factors, no mass exodus of Asian investors is likely to occur. Both location and a high level of technical education should keep heavier investors planted for many years to come, despite rising wages. Aisan Bitron, for example, could not find a better place from which to supply European customers like Peugeot and Renault. And Denso, says spokesman Koji Ohashi, feels that “wages and labor is only one of the factors in the investment… productivity and efficiency must also be taken into consideration.”
Yet, simple assembly operations with fewer local ties are expected to pack up and move east as soon as the getting here is not as good. “There are a lot of small and medium sized firms just coming for five to ten years to take the good part of the incentives, and after ten years, after the tax holiday, they will just move on to the east – Slovakia or Ukraine,” says Jan Sýkora. Martin Jahn adds, “maybe some investors will just use incentives and just leave. But for the country it’s still beneficial. The return on the investment is quite good if you look at the training of people and the creation of exports.” Most agree that the bell curve of Asian investment will peak and dip in the next two years, with a leveling off some four years down the road.
Meanwhile a great effort at mutual understanding between new Asian investors and their Czech staff is underway. The key ingredient here is the English language, globalization’s chosen Esperanto. “Japanese English is rather a special kind of English,” says Sýkora, while Kubíček asserts, “frankly speaking, it’s very bad.” But no one is going to wait for either Czechs to learn Japanese in large numbers or vice versa, so English, no matter how spotty, has to do. Added to this are complications that result when the Japanese translate literally from their mother tongue – often messages become far cloudier than they would be otherwise. “If a Japanese says, literally translated into English as ‘I’ll do my best’, it means actually it won’t happen,” Sýkora explains. “It may be puzzling… but it’s a very, very polite way to refuse doing something… they’ll never just tell you ‘no’.”
Communication glitches such as these are not as prominent when dealing with Koreans or Taiwanese, say experts. “Koreans are definitely more European, or trying to be, than the Japanese,” says Jahn. “Also, I would say they are less arrogant than the Japanese, without such superior attitudes.” I. S. Cho, exports director for Korean truck producer Daewoo Avia, adds his own take on Korean management vis-`a-vis Japanese: “in the case of Korean management it’s more emotional… if we have something to do, we debate it openly.” Taiwanese managers, says Martin Jahn, share a similar proclivity for transparency in decision-making.
This is welcome news, because Japanese investment, the force behind the current Asian wave, should begin sputtering out soon, thus making way for Taiwanese and Korean investors to become more prominent. Those Japanese automotive suppliers that wanted to come, largely, have already come. And similar interest from other Japanese powerhouse industries like electronics cannot be counted on. Says Kubíček, “most of the major Japanese (electronics) producers are in the red, and they have their own problems. We can attract some, but not like the auto industry.” Martin Jahn cites South Korea as having real potential for the future. And of course, there is the prospect of capitalist China yet rearing its considerable head. “For mid- to long-term prospects, I’d say China also has the potential to become an important investor. Export investment, instead of pure import,” says Jahn, adding that it could occur in “five to ten years, but not before that.”
As Asian (primarily Japanese) investments take seed and develop, this country becomes something of a laboratory for globalization. Being tested is the idea recently posited by American journalist James Surowiecki in The New Yorker: “corporations are still national in character. In every regard, from management style and compensation to corporate strategy, they’re as characteristic of their home countries as meat cuts.” If this is so, then an important question for the Czech Republic is this: though inarguably distinctive, can raw fish and fried pork find a way to productively co-exist?
The first significant Japanese investor in the Czech Republic had nothing to do with automobiles. In 1996, when Matsushita committed itself to the production of Panasonic television sets in Plzeň, no other Japanese firm had yet made a commitment to this country of such scope and importance. Matsushita has now invested some CZK 2.7 billion, not only into TV production in Plzeň, but also mobile phone and car audio system production in Pardubice. The most encouraging aspect of Matsushita’s presence is the fact it has established a research and development center for analog TV sets. As Jan Kubíček, director of Japanese Operations for CzechInvest, says, “if we attract good manufacturing companies, we want to attract them also with R & D (research and development), to be more sure they will stay.”
In the entry foyer of Matsushita’s Plzeň complex there hangs a poem penned (ostensibly) by company founder Konesuke Matsushita. The poem is entitled, quite suitably, ‘Youth’. Of the 50 engineers now working at Matsushita’s R & D center (45 of which are Czech), “nearly everyone,” says Matsushita’s managing director Ted Asahi, “is just graduated from university.” As this baby-faced brain trust develops, says Asahi, its R & D duties likely will expand from not only analog TV, but digital television as well (currently handled at the Matsushita plant in the UK). Meanwhile, productivity in Plzeň continues apace. Asahi says the firm expects to produce its five millionth TV set in March – in sum, a TV for nearly one out of every two Czech citizens.
However, these TVs rarely stick around, as a mere two to three per cent of production goes to the domestic market. Mr. Asahi, in addition to duties in Plzeň, is president of the Japanese Chamber of Commerce in Prague, an organization with a rapidly expanding membership roster. He claims to have spent half of his “company life” (Japanese traditionally spend entire careers with one company) abroad – in the US, Mexico and the UK. As such, he says he’s highly qualified to implement at Matsushita in the Czech Republic not a typical Japanese style, but rather a “global standard.” He claims this involves, contrary to popular ideas about traditional Japanese business culture, a total transparency in decision-making.
THE ROAD from Prague to the west Bohemian city of Louny is strewn with crumbling villages harboring a string of cheap auto bazars. They form a bleak runway to the new face of Louny’s local economy: an unearthly white industrial park wedged into a hilltop, which Aisan Bitron Czech now calls home. Kunio “Kenny” Kadowaki is the Japanese President of Aisan Bitron, an auto parts supplier investing close to CZK 1.4 billion into its operations. While Kadowaki’s firm busies itself with building a second plant, its first is now churning out fuel pumps at a steady clip. These are perfectly unexciting but essential components, somewhat resembling stainless steel hair curlers. But Aisan Bitron makes highly sought after hair curlers – it supplies a wide variety of brands including Renault, Peugeot, and Harley Davidson motorcycles. Life inside Kadowaki’s busy Louny plant is representative of many similar Japanese projects now being embarked upon all over the country. A smattering of young Japanese, teenagers in appearance, sit in front of notebooks, chatting amiably with their Czech colleagues. For all of the notions of extreme formality in Japanese business, the atmosphere at Aisan Bitron, while orderly, is also decidedly relaxed. Interaction with the boss is one exception. Jaroslav Antoš, HR manager and the longest-standing member of the local AB Czech team, speaks freely with reporters in private quarters. Yet in the presence of his boss, he addresses him infrequently and only with a tightly formal ‘Kadowaki-san’ (‘Mr. Kadowaki’).
|Kings of the road
I. S. Cho
LEGENDARY Czech firm Avia has found that its products are not up to the task of invading Russia, but do quite well transporting goods there. Over half a century ago Avia was producing the B-534, a well-known military aircraft used by the German Luftwaffe during early stages of its invasion of the Soviet Union – only to be abandoned when it proved problematic. In 1995 Korean carmaker Daewoo acquired Avia and began developing a modernized line of commercial trucks. Daewoo has now invested over USD 357 million (CZK 10.7 billion) into its Daewoo Avia operations on the outskirts of Prague, despite the bankruptcy in 2000 of its parent Daewoo Motors. It employs 1,200 people and turns out sturdy highway monoliths that mostly head straight to foreign markets.
Daewoo’s commercial truck business is an interesting mix of brown- and greenfield investment, building on the history and know-how of local manufacturing legend Avia while also pouring money into new factory operations of its own. USD 110 million (CZK 3.3 billion) was recently put into modernizing production facilities and developing the D-Line series. Daewoo Avia’s Director of exports, I.S. Cho, acknowledges that the recent Toyota investment in the TPCA plant at Kolín will radically shake up the local automotive market, roiling supply chains by drawing in new competitors. Those medium-sized Japanese firms following Toyota may have one eye on the plant in Kolín, but the other is planted solidly on prospects for developing other local and regional customers.
Daewoo, as a South Korean firm, is somewhat unique among the recent crop of Asian investors in the Czech Republic. But the relative scarcity of Korean investment vis-`a-vis Japanese may not last long; CzechInvest CEO Martin Jahn indicates that South Korea shows real potential for investment growth in the future.
|Who will stay?
MENTION FLEXTRONICS in the context of investment incentives, and CzechInvest CEO Martin Jahn gets a bit touchy. It’s no wonder: when the Singapore-based firm ditched Brno last year and fled to Hungary the media went off on a speculative tangent, bemoaning those who would devour investment incentives and then leave. “I try to explain to everyone,” says Jahn, “Flextronics was in their second year of a tax holiday, and they had ten, so to say they used up their incentives and left, that’s bullshit.” Flextronics’ departure in fact had nothing to do with a souring of relations, or with abusing incentives – its fate here was intertwined with the dwindling tech market, and as such it became subject to a broad consolidation. Many other Flextronics operations in the U.S. and Western Europe were shuttered, reducing its total staff by about 10,000.
The Czech Republic competes with its regional neighbors in attracting investors from Asia and often beats them handily, thanks largely to a relatively advanced set of incentives. “An important point is that the scheme of incentives (here) is in compliance with EU regulations,” says CzechInvest’s director of Japanese Operations, Jan Kubíček, who adds, “both Poland and Hungary have to have theirs approved (by the EU) this year.” The undeserved hype surrounding Flextronics notwithstanding, there is always a risk that these incentives will be taken advantage of only so long as they create a window of profitability for Asian firms, especially by those who are investing in simple assembly projects. And when rising wages are added into this mix, it can seem especially problematic for the future. “Very simple production will definitely be moved to the east,” says Jan Sýkora, a consultant at Deloitte & Touche. Jahn acknowledges this. “We cannot use investment incentives to buy (Asian investors), to get them to stay in the Czech Republic, it wouldn’t work,” he explains. “So many who came for cheap labor will leave eventually… but they will be replaced with something else. The Flextronics building will be used by a new investor who will add value, that’s the circle of life.”