Tim Gosling in Prague -
The Czech Republic has fought hard to seal a pair of large investments from South Korea in 2014 that will bring much-needed jobs. Those deals illustrate how hard the crisis has hit a country that just ten years ago refrained from chasing simple manufacturers.
The country's success through the 1990s and early years of this century allowed Prague more room to choose which investments it would chase. High-tech and high added-value operations, which tend to form deeper roots in the host country, would be given a helping hand; simple manufacturing projects leveraging cheap labour that could easily jump further east as the EU expanded were also welcome, but not worthy of costly incentives.
Even as late as 2011, PwC described "a move away from reliance on [FDI] in low-cost labour production toward strategic FDI, emphasising high-quality labour forces, excellent infrastructure and technological support." The Czech Republic, PwC noted in the report, "has been building on its traditional strength in engineering and applied science, placing emphasis on the development of new capacities in sectors such as nanotechnology and aeronautics."
Fast forward to June this year and the Czech government was boasting of the "fight" it won to persuade South Korean tyre maker Nexen to invest CZK23bn (€827m) in a new plant in the country. Nexen's compatriot Hyundai Mobis followed suit in July, electing to manufacture headlights near Ostrava rather than at competing sites just over the border in Slovakia and Poland, and pledging to invest €96m by 2017.
"To win this new major investment, the Czech side has had to fight until the last moment against a competing Polish offer," Trade and Industry Minister Jan Mladek said of the Nexen deal on June 16, reported The Wall Street Journal. "Therefore we have chosen a mix of several incentives such as subsidies for creating new jobs, subsidies for strategic investments, tax breaks and a partial compensation for the local administration to buy [an] additional building plot [to be used by Nexen]."
The Czech site, 90 kilometres northwest of Prague in Zatec, got the final nod after a tense runoff with a Polish competitor just across the border. Both are close to auto plants run by Hyundai, Kia and Skoda in the Czech Republic and Slovakia that Nexen will supply.
Meanwhile, Mladek explained that Mobis will also be able to claim incentives, mostly through tax breaks and subsidies for job training. On the eve of the deal, South Korean Foreign Minister Yoon Byung-Se traveled to Prague to ask for further tax breaks, according to The Korea Times. Total incentives are reported at over CZK500m.
Back to basics
The tussle across the Visegrad region for these investments is reminiscent of the 2005 race to land another South Korean tyre producer, Hankook. However, back then, Czech officials said – off-record at least – that Prague refused to offer investment incentives. Yet with the crisis having pulled the rug from under the country's formerly successful drive for investment, the new government has made foreign investment a top priority.
Hungary eventually fought off Poland and Slovakia for the Hankook plant. In March, the European Commission gave approval to €58m in investment aid from Budapest to the company, which is planning a third phase expansion of its Hungarian facilities.
That kind of approach is back in vogue in the Czech Republic. The strategy changed when the Petr Necas' centre-right government was replaced by an interim administration in mid-2013, suggests Ondrej Votruba, head of investment agency CzechInvest, although he doubts that official policy would have ruled out offering incentives to Hankook. "We started to feel stronger political support," he tells bne of the effort to stave off competition from as many as seven CEE states for the Nexen deal.
That support appeared to increase when the centre-left coalition took power in January. "The top priority is jobs," Votruba continues. "Unemployment figures this year set a new record. While we also want to raise the tech level of Czech industry, we can't focus solely on high added-value projects. Those that employ mass workforces are rarely working in that sphere."
Mladek told reporters on July 17 that Prague handed incentives to 84 foreign companies, and 54 of their domestic peers, in the first half of this year. Overall, the minister claimed the country would see up to 14,000 new jobs created.
While relatively low in a European context, the Czech unemployment rate peaked at 8.6% in January following the country's longest ever recession in 2013. And joblessness reaches 12% in the worst hit regions of the country, such as around the former industrial hub Usti nad Labem in the northwest. The 1,000 jobs or so that Nexen will bring to the area will be hugely welcome.
Meanwhile, on a national level improving the job market is vital to help the economy in its steady but sluggish recovery. The traditionally conservative Czech consumer all but disappeared during the crisis, leaving exports as the only meaningful driver of the economy.
The effort to get domestic economic forces back on their feet reflects another issue exposed by the crisis – the need to diversify trade and investment. The Czech Republic's huge dependence on Eurozone demand for exports saw it hit particularly hard when the single currency area succumbed to the sovereign debt crisis.
Even if they do extend the country's over-reliance on the auto sector, the twin arrivals from South Korea are still a boon. The feeling is mutual; delegations from Seoul have clocked up a lot of air miles travelling to Visegrad recently.
Slovak Foreign Minister Miroslav Lajcak credited South Korea with being his country's "most important non-European investor" as he received a visiting party in July. Meanwhile, Seoul has been highly vocal about its plan to submit a bid on the roughly €10bn project to expand the Temelin nuclear power plant, even though Czech utility CEZ hasn't yet officially announced plans to resurrect the tender that it aborted in April.
The new Czech government has also spent the year pushing to deepen ties with China, even stating that economic concerns trump those of human rights. The signs are promising, although Beijing is notoriously slow in matching talk of investment with hard cash.
The Czech-Chinese Chamber of Cooperation said in July that Chinese pharmaceuticals are eyeing the Czech Republic as a potential base for their EU operations. The same month, state-owned China Railway Signal & Communication Corporation signed a deal to buy 51% percent in tram builder Inekon Group – a deal that should set it up to participate in rapid development of public transport in the giant Asian market.
"Limited resources" at CzechInvest, means those countries already covered by its office network are the top targets says Votruba. While that includes stalwarts Germany, the US, UK and Japan, China also features on the list. "We plan to open a new office in South Korea in 2015," he adds.
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