Investors keep faith in Czechs

Date: 28/04/05

Foreign direct investment in the country between 1993 - when the country opened its doors to privately owned companies following the Velvet Revolution - and 2004 amounted to €41 billion, according to the Czech National Bank. Peaking at €9bn in 2002, the level has since dropped to around €3.6bn in 2004, but the Economist Intelligence Unit sees this level being maintained until 2008, as compliance with EU rules and regulations further improve the business environment.

Many larger companies, such as Unilever or IBM, have been present in the Czech Republic since 1993, but there has been a steady increase of companies since then, lured by the low wages and pool of skilled manual workers to be found there.

Joining the EU last May has reduced costs further. Jiri Pavlovsky, plant manager at Belgian digital screen maker Barco Czech says that the company saves €50,000 annually on customs costs. And Jakub Puchalsky from Unilever recalls the 48-hour queues at the old EU border that no longer exist.

Enlargement has also made smaller companies more confident about setting up operations in the country, says Remon Vos, managing director of CTP Invest, a property developer that has built six trade parks for foreign investors throughout the Czech Republic since coming to the country in 1996.

"It hasn't been a boom since 1 May, but certainly a trend, one that I feel we are in the middle of right now," says Vos.

CTP Invest has attracted more than 20 companies since launching, including some business units of German-owned logistics company DHL, UK electronics firm Dixons and French transport firm Norbert, and has been so successful that the company has since turned its eye to attracting service-related businesses such as back office activities, call centres or product development centres. The company now offers foreign investors space in two office parks, in the country's second and third largest cities, Brno and Ostrava.

The advantage of service activities is that, unlike manufacturing, companies do not need a high level of infrastructure for transporting goods and as such can be based in these smaller, cheaper cities. Salary levels in Brno average between €400-500 gross a month, while those in Prague are at least 25-30% higher.

Vos argues that it is not the labour costs that attract companies, but the high level of skilled workers.

Unemployment in Ostrava is now running at 20% (the European Commission's statistics office put the Czech average at 8.3% in February). "That makes a pretty comfortable employment pool," says Vos.

Others are not so sure. "It's the cheap labour market that is the main driving force," says Jan Vlaanderen, director of Dutch logistics company, Nunner.

Vlaanderen has a slightly different view of the Czech labour market, arguing that it takes several years to establish a good working team. He came to the Czech Republic ten years ago to set up Nunner and said five of those were spent trying to build up his workforce.

"Czech people are not loyal to a company, if they get offered 500 Crowns (€16) more they just leave," he says. Vlaanderen also criticises the legacy of communism, which he says has suppressed creativity and initiative amongst Czech workers.

The relatively recent return to capitalism has also affected the speed with which businesses can move to in the country. Of the ten years since the launch of CTP Invest, Vos says that five were spent negotiating with people and building up trust, although the Czech government is now offering financial incentives and an agency (CzechInvest) to ease the move for businesses.

Certainly management is not the strong point of the Czech workforce. Almost 100% of management at DHL's new centralised IT helpdesk in Prague is expatriated from various 'old' member states and Pavlovsky says that of the 300 employees at his plant in Kladno, just north of Prague, only 45 are white collar workers.

If this is true, it is entirely possible that if, as expected, enlargement leads to increased wealth in the new member states, currently attractive countries such as the Czech Republic could lose out to cheaper neighbours, or even further east to China and India.

For Vlaanderen this theory is a given. "Wages here have already risen 25% over the last five years," he says. "I don't know how long we will stay." He points to a building across the industrial park. "That used to be Flextronics, until they moved to Romania last year".

For the Czech Republic's economy minister Martin Jahn, the most serious threat is Ukraine, because it is geographically closer to his country than Romania and Bulgaria, and it has a high level of skilled workers. "Ukraine would be a big problem if it develops a stable system and low taxes," he says.

But Pavlovsky thinks that the issue is more complex than just labour costs. "If it's a problem for the Czech Republic then it's a bigger problem for Belgium or Germany," he says.

He argues that the Czech Republic is ideally located for exports to both eastern and western Europe.

Vos says that some companies have taken advantage of cheap labour in Romania but have kept their assembly plants in the Czech Republic.

Herman Vandevelde, plant manager of Dutch diaper maker Ontex in the northern town of Turnov, is also sceptical of a rush to relocate.

"It takes at least two years to get the machines up and running and people trained," he says. "Overall, integration takes a long time, so it's not the goal to move after just five years."

Article takes a look at the Czech Republic's success to attract foreign investment with its cheap labour force and favourable geographic location.