Foreign investments in the Czech Republic: Boom or fall? 2004

Czech factory
Czech factory

Article analysing foreign investment and business in the Czech Republic since 1989 and recent changes which are occuring.

Submitted by Steven. on November 24, 2006

Transformation towards private capitalism, which started after 1989, was at the beginning mainly affected by the struggle inside the old-new ruling class for the actual character of this change. Already in 1990 the Czech faction of bourgeoisie led by Vaclav Klaus, who was minister of finance and who later became the prime minister and who is now the present president, got the strongest position. As a head of Obcanska demokraticka strana (ODS), he was, with many others, stressing out so called Czech way of privatisation. This Czech way was mainly based on preference of the home investors, who were, not exceptionally, members of the party nomenklatura of the former regime. In several next years these people seemed to be faction of bourgeoisie that was not interested in productive valorization of capital - hence many of them gained huge property by means of the voucher privatization (project of the Vaclav Klaus´s group), and then they tunneled them and transfered their profits to foreign bank accounts.

Remarkable foreign investments appeared later in 1995, when the government sold 27 per cent stake of monopoly telecommunication company SPT Telecom - Czech Telecom how it is called at present - to Swiss-Dutch consortium TelSource (KPN and Swisscom). Although it was one of the first significant foreign investments, it was not the actual redisposition of the production itself, but only taking over already existing apparatus and production. Investment into construction of the new factories did not emerge yet. We should also point out, that these investments were not strictly classical expression of production redisposition connected with the lock outs and firing the employees in the countries, where the capital was coming from. Entrance of the Volkswagen into Skoda Mlada Boleslav car factory in 1991 was about the same character, likewise mastery of the Czech tobacco industry by Philip Morris, investments of the energetic concern E.ON into South Bohemia energy engineering, and above all, the biggest German capital investment, which was entrance of the energy company RWE into Czech monopoly gas distributor - Transgas (2002). There were also some more investments of the same rank, e.g. mastery of the Czech banking by the foreign capital. Czech banking hit rock bottom after series of bankrupts in 90s, and 95 percent of its control was also taken over by foreign banks, e.g. entrance of French Societe General into Komercni banka. The real boom of the straight foreign investments to Czech emerged in 1999; a year after Czech social democrats (CSSD) won the election. This new government introduced many advantages and encouragements, which should have attracted new investors. These encouragements involved production the same as services, IT, research and development, and included 10 years long taxation free period for newly established firms, possibility of getting the land estates for very low price, support of infrastructure building, special advantages for investments into high unemployment regions (north of Czech and Moravia). While in 1998 2,64 billion USD flowed into Czech, it was already 4,88 billion USD a year later. Amount of the straight foreign investments reached its top in 2002 with 9,3 billion USD. Czech took the second place behind Poland with the total of investments among the countries of the former eastern block. With 2500 USD per person, Czech was even at the first place in central and Eastern Europe. In order to fully satisfy our survey, let us mention, that in years from 1999 to 2001 foreign investments took 10 percent of Czech GDP.

Most of the biggest investors in Czech are firms residing in Germany (25 percent) and in Japan (20 percent) followed by firms from USA and Netherlands. In general, firms from EU participate on the total amount of investments from three quarters. We should also point out the trend of rising investments of firms from Thai-wan or India, that by means of investments in Czech try to reach easier access to EU countries trade after the entrance of Czech to EU. Foreign capital is mostly concentrated on car industry in Czech: 46 percent. Let us mention construction of the new car factory of TPCA consortium (Toyota Peugeot Citroen Automobile) in Kolin for 1,5 billion Euro, where about 300.000 cars should be produced every year. Electrical engineering industry follows with 18 percent proportion of the total of investments. The rise of investments into Research and Development and strategically services appeared in 2003. The biggest amount of capital in this sector entered to Czech when German logistic firm DHL started to build up its European centre of services and information technology in Prague. The world cliental centre of Air France was also built in Prague and Honeywell Corporation builds up its global development centre in Brno (on the same place where Flextronics used to be settled). We can also see the similar trend in Slovakia, where, besides the biggest investments of VW, PSA and Hyundai/KIA, Samsung is constructing its new factory for digital technology products; it should also contain logistic centre for central Europe. Investments into development centers and strategically services mostly stay limitedly targeted on Prague and Brno. There are both technical colleges and relatively enough of high - qualified labour power in these cities. But the limits of investments into these spheres in Czech are already visible on problems with gaining the proper labour power (mainly in Prague), which capital needs for this type of investments - Czech belongs among countries with the lowest number of university educated people in Europe (12 per cent in Czech, 20 per cent in EU countries). That is why the government tries to get high qualified people from different countries of Eastern Europe (e.g. Ukraine, Byelorussia, and Bulgaria) interested in Czech. Representatives of car and electro technical sectors, to which flows most investments in Czech at all, already asked government to accomplish education system reform, which would provide enough of qualified labour power - they warn, that the present condition could lead to end of further investment flow and could even cause interruption of production, that is already functional. Despite of massive flow of foreign investments into Czech over years from 1999 to 2002 and despite of partial reversal towards strategically services development in 2003, there have been discovered limits of these trends in Czech. Right year 2003 meant radical slump of total amount of investments - its flow was the lowest since 1997. The total amount actually only corresponded to the total of reinvested profits (profits, which firms controlled from abroad, leave in Czech). Even these profits have decreased if compared to the previous year. While the foreign capital left 64,3 billion Czech Crowns in Czech in 2002, it was only 62,2 billion in next year. It was the first decrease at all between two following years. Czech bureau of statistics has to admit, that: “world records in amount of the straight foreign investments held by Czech in several past years are over now.” Reinvested profits have decreased for the first time in Czech over the last year. In: (Czech bureau of statistics) official institutions claim, that this decrease is caused by two huge transactions - purchase of 49 percent share in mobile phone company Eurotel from American investor to Cesky Telecom, Buying back that share should increase the possibility of selling the total share of the state in Cesky Telecom, this is planned by the government in 2005. The government is expecting regeneration of the global telecommunication sector and is also hoping, that profits are coming from massively advanced mobile phone trade (nine in ten people in Czech own mobile phone - Eurotel is the most important part of value of Cesky Telecom) and the sale of 27 per cent share of Swiss-Dutch consortium TelSource right in Cesky Telecom to the Czech financial investors. That can be only part of the truth. New study of the German Fraunhofer Institute claims, that many of the German metallurgy and electronics firms, which transferred production from home to east, are now coming back to Germany. Lower wage expenses are not everything for capital - there is much lower productivity of labour in Czech, which compensates advantages of the cheap labour power. It is also the mentioned lack of qualified labour power what causes some problems. While in 1997 it was one in 6,5 firms coming back to Germany, it is one in three at present. Despite of these facts, considering the central and Eastern Europe, the foreign investments made Czech economy being the most connected one with the world in past years. Even the German economy is more enclosed than the Czech one. Czech economy has the tightest relations with Germany - about 40 percent of Czech export is to Germany, and due to statements of the Czech national bank, the one percent point deceleration of German GDP causes half percent point deceleration of the Czech one.

Car industry
As we said, most of investments are going into the car industry, and thanks to this fact, it became the most important sector in Czech. 85 percent of its production is exported, which is 21 percent of the total Czech export. There are 130.000 workers employed in the car industry in Czech. There are regions (Liberec, south Czech), where it makes 75 percent of all investments (91 in 100 invested Czech Crowns goes into car industry in Liberec), which makes them very vulnerable considering possibly rising crises of this sector.

Despite of the importance of this sector, there are no significant struggles in it (as in Czech in general). There were some strike alerts in Skoda Mlada Boleslav (and also in its branches in Moravian Kvasiny and in Vrchlabí) connected with collective unions negotiation, which were promoted and led by union bosses, so that no open strike ever broke out. Several times there was a situation, when workers stopped working for a while because of the high speed of the specific line (in 2001), and workers also refused going to work over irregular night shifts (beginning in 2003). But mainly the later example was rather part of the union strategy during the negotiation, than result of an autonomous workers struggle, as we can say considering reachable information. Breaking out of the open conflict in Skoda is, among others, prevented by effective cushion tactics of the management and unions. When workers periodically are being fired, the first ones are the ones, who were employed through job agencies - mainly from Slovakia. Also the threat of moving the production to Ukraine is playing its strong role - VW Group has already built factory near Uzhorod (Ukraine), and there are coming not only Volkswagens but also Skodas from its lines.

There was no strike in Tatra Koprivnice (production of lorries, firm is owned by American Terex Corporation). When huge firing was announced at the beginning of the last year, workers from this factory were affected in very bad way, because of the location - north Moravia, a region with 20 percent unemployment. There was a demonstration, attended by many citizens of Koprivnice showed their solidarity and even some workers from Skoda, plant near Kvasiny, participated. Workers booed out the union boss, as he was trying to convince them, that firing would improve factory situation. There were even voices calling for more radical action against the management, but the workers’ rage did not break out into open fight after all. All these conflicts took place in firms, which were taken over as already existing factories and where the union voice is traditionally stronger - unions always had full control over these events so far. There are mostly no unions in the new car factories. At one respect, that means, that all the potential conflicts taking place in these factories have no publicity and can remain hidden, but, on the other hand, this situation can also mean, that absence of the intermediary institutions provides space for possible autonomous struggles, which would not be caught in its webs.

Electrical engineering industry
Electrical engineering sector is the second biggest one behind the car industry in Czech having the flow of foreign investments (18 percent of the total of investments). This flow began already in 1997, which was both connected to global rise of electrical engineering and IT industry and to fake expectations of capital about this sector in general. It has appeared soon in Czech too - Flectronics left Czech for Hungary and China, further investments of Phillips were stopped. Flextronics is an ideal illustration of exaggerated hopes in electronically engineering sector (not only) in Czech. Flextronics came to Brno in 2000, firm gained 10 years long tax - free period, duty advantages, land estates for symbolic 1 Czech Crown, new infrastructure built up by city hall, interests - free loan for prequalification. Flextronics promised to employ 3000 workers in the next five years. Firm invested 400 million Czech Crowns into building new production lines and there were 2400 workers employed in 2001- that was the height of its career in Brno. Summer 2002 - management announced the end of the factory and its replacement to Hungary and China. Only a tiny design-center remained in Brno. Capital’s empty expectations of electronics industry were also demonstrated, when Philips stopped further investments - it had built up a factory for 240 million Euros in Moravian, town Hranice, but canceled it’s planned 400 million Euro investments. Philips firstly stated, that it will employ 3250 people, but there are only 1270 people working in the factory now, while Czech government has approved massive advantages for this firm - importing duty-free technologies, 10 years long tax-free period and government has invested thousands of millions Czech Crowns into industrial zone, where the factory lies. Philips still rebuts the imputations of lock out, but the Flextronics experience shows that such a decision might come totally unexpectedly without any previous warning. There was also another similar example, when American battery producer Energizer decided to leave Czech this year. Fears are getting even stronger, if one realise, that, likewise the car industry, also electrical engineering industry caused dependence of some regions on the actual investments, e.g. investments of Panasonic, Matshushita, Celestica or above mentioned Philips. For Example Pilsen belongs among such regions, where 73 percent of all investments are concentrated to electro-techniques.

We do not have any information about important struggles in this sector either. Moreover, there are no old firms taken by new foreign capital in this sector like in the case of the car industry, where the unions have quite strong influence (Skoda, Tatra). Anyway, we will see whether these conditions of institutionalized structures absence will be rather advantage or not.

Boom or fall
Bourgeois media and government are trying to set up a feeling, that last year’s decrease of investments was only a temporary deviation and that the leaving of firms like Flextronics or Energizer is only an exception. This impression is also encouraged by statements, that Czech will be one of ten most attractive countries for investments in the next years. If so, that would only mean further “globalization” of the Czech economy. Economy interconnection of itself, is only one part of the problem - it is much more important, that there are such conditions being created, which might provide very special space for potential class struggle with no respect to the state borders.

From Wildcat no.70, Summer 2004
Taken from prol-position news #2, 5/2005