Robert Anderson in Prague -

If Czech glass is not to go the same way as the country's once famous shoe and motorcycle industries, Crystalex needs to make some tough choices

To foreign consumers the Czech Republic is famous for three things: pilsner beer, Skoda cars and Bohemia crystal. Skoda Auto and most of the country's breweries are now foreign owned but Bohemia Crystalex Trading (BCT) - the dominant domestic producer of utility glass and the owner of the Bohemia Crystal and Bohemia Glass trademarks - remains a Czechowned national icon.

But if Czech glass is not to go the way of the country's once famous shoe and motorcycle industries - which have collapsed in the face of Asian competition - Crystalex will have to make some tough choices about its future:

should it remain diversified or specialise; should it continue to handle its own sales or become a contract producer for others; and can it afford to stay independent or must it find a foreign partner?

Crystalex was created when the post-war Communist regime nationalised and melded together more than 50 utility and decorative glass producers, many of which had been run by the recently expelled Sudeten German minority.

The glass industry - the second biggest in the world before World War II - overcame the loss of German expertise and Western export markets because the Communist regime was savvy enough to invest in modern plants, such as Novy Bor in North Bohemia, and to grant artists a rare freedom to experiment with new designs. For instance, Crystalex's Claudia beverage service, first produced in 1975, is still the second best selling in the world. The glass sector also survived the collapse of Communism in 1989 in better shape than many other Czech industries because it was not so dependent on the old Soviet bloc markets.

However, Crystalex itself fared less well because some of the best plants such as Moser, the Karlovy Vary luxury glass producer, were spun off, while the rest of the company languished under state ownership.

Finally, in 1997 Crystalex was privatised for €11 million through a controversial tender that excluded foreign bidders. The buyer was Porcela Plus, a former state ceramics trading company working with Investicni a Postovni Banka, virtually the house bank of the then ruling Civic Democrats. “They held a tender but they didn't tell people that the lowest bid would win,” says one losing bidder sarcastically.

THIN GLASS

Since 1997, Porcela Plus has slimmed down Crystalex from six plants to three, while acquiring three new plants under the holding company BCT umbrella and halving the overall workforce to 5,700.

“We're still not finished obviously,” says Peter Gonda, BCT's Czech-Canadian chief operations officer, but he points out that making further cuts is difficult.

For instance, production at the Karolinka plant in Moravia has been halted, but products from Novy Bor are still sent there to be hand decorated because its skilled workers refuse to move and there is no space for them anyway at Novy Bor, which is working at 90% capacity. “In the Czech Republic people are not willing to move to where the work is,” says Gonda. “To close down everything and start again somewhere else is not an easy thing to do here.”

IMITATION CRYSTAL

Since he joined two years ago, Gonda has focused instead on trying to convert BCT into a proper operating company, rather than merely the trading arm of six separate production units making lead crystal, sodium-potash glass and technical glass. This restructuring has proved problematic because minority shareholders are blocking the formal legal merger of the companies. This has forced BCT to improvise.

“What we have tried to do is to combine (the different) legal entities into one operating unit,” Gonda says, adding: “You can't do things as quickly as you would like.”

BCT's biggest challenge however has not been in production but in sales - 90% of which are exports - in a market that has turned against lead crystal because of the risk of lead contamination of food and drink.

Under Communism marketing was rudimentary and Crystalex's sales were handled by a separate state trading company to minimise contacts with the outside world.

Both, therefore, required a drastic overhaul, but Crystalex has not had sufficient financial resources to invest in either its own sales network or the Bohemia Crystal and Bohemia Glass brands.

DEFENDING THE BRAND

Crystalex is struggling even to defend its once proud trademarks against Czech pirate producers.

“The competition is taking advantage of our trademark,” says Gonda. “We can't protect the brand.”

This puts Crystalex at a big disadvantage against luxury glass producers, while leaving it vulnerable to cheap utility glass competitors from Asia, particularly in the US market which makes up 30% of sales.

Already almost 40% of the company's production consists of orders from Western European and US clients that market the glass under their own brands.

“We can't compete with long established trademarks like Waterford Crystal,” says Gonda. “You will have to spend so much on advertising to get more of a market share with your brand name.”

The Asian threat is a real one, particularly in the soda-potash glass market, which makes up one third of the group's sales. The whole Czech industry is struggling to meet this challenge, with utility glass revenues falling 13% to €213 million in 2004.

“It's going to become an issue once they improve quality and they are improving,” says Gonda, who admits that Asian competitors are almost 50% cheaper.

One option would be to outsource some production to Asia. BCT did explore the possibility of using Vietnam, but Gonda says managers did not have the time to pursue it.

“We have limited resources and so much work is being down here at the moment,” he says. “This plan is on the back burner right now.” More drastic options would be to specialise in luxury glass or to become just a contract producer for a Western glass company, but neither is being seriously considered at the moment.

PRIVATE EQUITY INTEREST

BCT's position has been made even more difficult by the appreciating Czech koruna, rising utility prices and the cost of servicing debt piled up during the group's acquisition spree in the late 1990s.

BCT refuses to give any exact figures, but Gonda says the group has stable revenues of more than €200 million and profitability is improving. BCT is making an operating profit and is cash positive, enabling it to repay debt, which reportedly hit €209 million. “A reasonable debt is Koruna2 billion-2.5 billion on our revenues of Koruna6 billion,” he says. “We are getting very close to that.”

Private equity firms active in Prague say that Porcela Plus' banks have pushed Radovan Kvet and Jan Soucek, the group's secretive owners, to put the company up for sale. Gonda denies that there is any commercial pressure to do a deal.

“We feel the group is strong enough and has made substantial progress on its own,” he insists. “A lot of companies in Western Europe are closing down. We're still in business. Our sales levels are not dropping. And we're doing it without foreign investment.”

Private equity firms have been taking a look at Porcela Plus over the past year, but have been put off by its complex and untransparent structure, as well as the owners' insistence on selling the group as a whole.

“It's a good business, it's growing and it could be more profitable than it is,” said one private equity manager, pointing to the group's low margins because of its reliance on other companies for distribution.

Any private equity buyer is likely to radically restructure the group, selling off profitable operations such as technical glass quickly, while shrinking and repositioning the lead crystal and sodium-potash glass operations before approaching strategic buyers.

The Czech glass maker is destined, it seems, to go the way of its beer and car industries.