Foto: Isifa.com
In the late 1990s, Japanese companies started to discover the Czech Republic. For many of them, the country—a bridge between Western and Eastern Europe—became an ideal place to invest. This materialized in more than Kč 94 billion (€3.5 billion) invested into the Czech Republic since 1993, which generated over 22,500 new jobs, according to state-run business development and investment promotion agency CzechInvest. Now, the Czech Republic features more Japanese production facilities than Italy or Spain. However, as labor costs have been rising and the country has switched the focus of its investment incentives from manufacturing to added-value industries such as R&D, Japanese companies are at a crossroads. Staying in the Czech Republic in the future will be probably tied to top-end industries, but the public needs to get used to the idea that many manufacturers will probably be leaving the country in the next 10 years, experts say.
Facing the crunch
| JAPANESE COMPANY PRESENT IN THE CZECH REPUBLIC |
| |
Number |
Investment
(in millions of $) |
New jobs |
| Production |
92 |
3 062,76 |
39,913 |
| R&D, services |
9 |
12,05 |
265 |
| Trade |
151 |
56,75 |
4,281 |
| Total |
252 |
3 131,56 |
44,459 |
Source: JETRO |
Tomoya Noda, a senior manager with Deloitte Central Europe in Prague, said that it’s difficult to find Japanese companies that haven’t been affected by the economic crisis.
“It seems Japanese companies are gradually starting to lose their interest for the Czech Republic,” he said.
Others agreed. “The economic crisis had a strong impact on the whole business environment. I don’t believe any company could get along unaffected, regardless of its origin,” said Tomáš Rutrle, managing director at Fujitsu Technology Solutions in the Czech Republic.
Ito Shuichi, managing partner of the car part producer Furukawa Electric Autoparts Central Europe in Unhošť, Central Bohemia, said that the economic crisis has impacted his company as well, but wouldn’t go into details.
| JAPANESE INVESTMENTS TO THE CZECH REPUBLIC MEDIATED BY CZECHINVEST |
| Number of projects |
99 |
| Value of investments (in millions of Kč) |
94,749,25 |
| Value of investments (in millions of $) |
3 061,66 |
| Number of new jobs created |
22,474 |
Source: CzechInvest |
“In the late 2008 to the first half of 2009, our business was influenced by the global economic crisis. Yet, we’ve seen some recovery since July 2009,” said Sunao Kaieda, general director of LCD TV screen producer IPS Alpha Technology Europe in the Triangle Industrial Zone in West Bohemia.
“Japanese companies in the Czech Republic certainly felt drops in the number of orders, mainly from their customers in Germany. On the other hand, the situation of many of them was to a large extent stabilized by orders from the Toyota Peugeot Citroën Automobile Czech (TPCA) consortium which, despite the crisis, produces at its maximum capacity,” said Michal Stieber, director of project management department with CzechInvest.
According to the Japanese trade organization Jetro, there are currently some 252 Japanese companies in the Czech Republic. The vast majority is involved in producing electronic goods and parts for automotive producers.
The slight recovery of the global economy, which started to be reflected also in the highly sensitive automotive industry, has been a blow for the Japanese firms, as the last couple of months haven’t proved fortunate for the largest global carmaker, Toyota Motor Corporation. The company said it identified problems with the pedal system and then with the brake system of several models. Some 8 million cars worldwide, out of which more than 1.5 million are in Europe, must be checked. Recently, similar problems were discovered in Toyota’s best-selling hybrid model, Prius. Confronted with the size of the problem, the U.S. government, through the National Highway Traffic Safety Administration (NHTSA), launched an investigation Feb. 4, 2010. The NHTSA told news agency the Associated Press it has some 124 complaints. In four cases, the troubles led to traffic accidents. The problem appears when the car gets onto uneven surfaces. So far, Prius has been the best sold hybrid car worldwide.
| A WORK COMMITMENT ISSUE |
| One of the biggest challenges that Japanese companies face the Czech Republic is the job commitment of the work force. “There are differences in the attitudes that Czechs hold toward the work/social life balance, where Japanese generally value work higher than most Czechs,” said Michal Stieber, director of project management department with CzechInvest. Another difference is the way Czech people, as well as Czech companies organize their work. At least some Japanese companies, feel like Czech companies are inherently unable to provide competitive prices due to the way businesses operate. “I’ve accompanied several Japanese companies on their visits to their potential Czech business partners. After finishing such a visit, many of the Japanese companies admitted that they were slightly surprised by such basic things as the layout of the machinery in the plant, which makes production inefficient thus ultimately increasing end-prices,” he noted. |
The Canadian government joined the U.S. criticism against the Japanese carmaker, according to the Czech News Agency (ČTK). In the Czech Republic, it isn’t clear how many cars will be called back to service for the moment. The main model checked is the Toyota Aygo. ČTK reported that here, not only the Toyota, but also other models such as Peugeot 107 and Citroën C1, produced at the TPCA plant in Kolín, Central Bohemia, will be called back for safety checks. Estimates take the figure up to some 100,000 cars, but the final number hasn’t been confirmed so far.
Radek Kňava, spokesman of TPCA in the Czech Republic declined to comment for CBW on the economic situation of his company, blaming the lack of time on the pedal safety check troubles. Worldwide, Toyota is attempting to motivate car dealers to retain customers via financial incentives. However, it isn’t clear how large the overall impact over the company brand reputation and financial statement will be. The hit was already visible in Toyota Motor Corporation’s stock price, which has been sinking since mid-January. The group is traded on the Tokyo Stock Exchange (TSE).
Similar problems have been announced also by the Japanese car and motorcycle maker Honda Motor Company. At the beginning of this year, it also announced it would call back some 646,000 Fit/Jazz and City cars for safety checks connected to its window closing systems.
In the third quarter of 2009, Toyota reached a net profit of JPY 153.2 billion (Kč 32.8 billion), up from a JPY 164.7 billion loss one year before. Despite the problems with the pedal and brake systems, the firm improved its financial outlook for 2010. In the Czech Republic, TPCA started activities in 2005. More than 332,500 cars have been produced in the factory so far, in one of the largest Japanese investments in the Czech Republic.
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Challenging, but still on top
Many Japanese companies and managers claim the Czech business environment is still challenging for them, for various reasons.
Shuichi characterizes the Czech business environment as “so-so” at the moment. For him, the most important aspects about the Czech Republic are cheaper labor costs compared with Western European countries and the location, close to Western European markets.
Fujitsu’s Rutrle said the Czech economic environment is very fragile, right now. “The financial system survived in good shape, as did the major companies. However, businesses are very cautious about new investments and if they are doing so at all, the pressure on cost is enormous,” he said. Moreover, growing unemployment figures and political instability do not contribute to peace of mind either. “Looking at some more mature economies, one would wish the Czech business environment to become more transparent, trustworthy and less hypocritical,” he said. “I did business in many countries to the east and to the west of our borders, and from that perspective, the Czech businesses are not doing that bad at all,” he added.
Asked whether it is possible we would witness a massive departure of Japanese companies from the Czech Republic in the future because of rising labor costs, CzechInvest’s Stieber said that this depends on their willingness and need to be present in Central and Eastern Europe (CEE). “As a matter of fact, we are seeing a rise in the inquiries about investing in the CEE region that is caused by the rising Yen exchange rate, which renders production in Japan more expensive,” he said.
On the challenge side, many companies have to face the hustle of the Czech legal and taxation environment. “As usual, there are positives and negatives. The legislative framework is quite stringent, mainly in the area of environmental regulations,” Stieber said. The problem is that some of these regulations are stricter than those prescribed by the European Union. Another complication is that, sometimes different authorities understand the same rules differently. “Last but not least, let’s mention the euro adoption and its persistent postponing,” Stieber said.
Deloitte’s Noda also said that one of the major challenges is the policy of grants and incentives. “It doesn’t seem that the Czech Republic considers manufacturing companies as important as it did in the past.” Plus, “it’s not easy to stand the poorness of every service,” he added.
IPS Alpha’s Kaieda said that some two years ago, his company faced many problems in the Czech Republic, including a rapid increase of salaries, low labor attendance ratio, high sickness leaves and so on. Recently, these conditions are changing. “Business in the Czech Republic is becoming a bit more competitive,” he said. “Our business is competing with Asian manufacturing companies, and we need to have more advantages in operating skills if we want our productivity to become much higher than the current level,” he said.
Available, yet more expensive
One major opportunity that Japanese managers perceive on the Czech market is still the availability of a skilled work force. “There is an available labor force that just wasn’t here two years ago. People are well-educated and qualified,” Stieber said. Moreover, competition among real estate developers has brought down the prices of well-prepared business premises. “Now, we can provide good access to target markets, thus lowering logistics cost,” he said. Another important thing is that the quality of life and services that managers can rely on in the regions of their investment interest is becoming very good, he added.
| FEWER JAPANESE TOURISTS IN PRAGUE |
The number of Japanese tourists in the Czech Republic has been constantly decreasing for the last five years. This is connected to the overall decrease of visits of Western tourists here, according to Tomio Okamura, vice president, spokesman and member of the board of the Association of Czech Travel Agencies and Tour Operators (AČCKA). Unless the country improves the service offer in the regions and raises the quality of life and safety in the capital, things can’t be expected to improve in the mid-term, he said.
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Rutrle noted that the pressure on cost reduction opens the door to companies that are more flexible, leaner, more effective, and that can come up with solutions and business models with tangible savings. “In the IT environment specifically, customers may review their traditional ‘own & operate’ model and they may decide to prefer more dynamic and cost efficient models,” he said. Basically, multiple options are now available, from pure service offering through managed solutions such as infrastructure and applications up to the cloud-based approach. “These concepts have been around for quite a while, but in today’s environment they are more appealing then ever,” Rutrle said.
According to Furukawa’s Shuichi, the major opportunity for his firm is that customers are located in the Czech Republic. The biggest challenge, on the other hand, is to get a new job here. Deloitte’s Noda added that a major advantage is the bottom-up stability of the Czech business environment. He also argued that one of the major opportunities is the diligence of the nation. “Companies should bring up more Czech business leaders,” he said.
IPS Alpha’s Kaieda agreed that there are many diligent operators and indirect staff in the Czech Republic. “After they get well-trained, our company will become much more competitive in European companies. Czech staff needs more experience, but afterwards they can be really good managers,” he said.
Promising recovery
| TRADE AND ECONOMIC RELATIONS WITH JAPAN IMPROVE |
By the volume of trade, Japan is the 15th most important foreign trade partner of the Czech Republic. The share of Japan in overall imports to the Czech Republic reached 3.4 percent in 2008, while exports to Japan reached 0.3 percent from the overall exports. The trade balance has been almost equal immediately after the fall of communism, according to CzechInvest. Yet, the balance has become negative and the difference has been increasing, despite the increase of exports from the Czech Republic to Japan. In the field of services, one of the most significant factors is tourism, followed by transportation. One major factor that boosted imports was Japanese investment into the Czech Republic. Exports from the Czech Republic to Japan have grown since 2000. In 2005, for example, exports grew by 50.4 percent. Some of the most significant Czech exporters to Japan are BMC, Tchecomalt Group, Bohemia Hop, Top Hop, Obchodní sladovny Prostějov, Crystalex, Nová Huť Export, Nikom, Ivax Šmeralovy závody Brno, ČKD Blansko, ŽĎAS, Preciosa, Jablonex, and Thonet.
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Numerous Japanese companies have been announcing positive results for the second part of 2009. They come from all the industry spectrums, like the technology producers Hitachi, Sony Corporation and Sharp Corporation, carmaker Honda Motor Company and financial services provider Nomura.
The largest Japanese producer of electronic goods, Hitachi, returned to net profit in the third quarter of 2009 thanks to lower costs connected to television and microchip production. It earned JPY 21.9 billion compared to a JPY 371.1 billion loss a year before. It also improved its yearly financial outlook.
Sony, another Japanese producer of electronics, managed to achieve in the fourth quarter of the last year an operating income of JPY 146.1 billion, compared to a JPY 18 billion loss in 2008. Net profit rose to JPY 79.2 billion. This was also thanks to higher profitability of its television division, the company said.
In the same tone, Sharp got also into the black in the third quarter, same as in the second of 2009. The firm was helped by implemented cost reductions and higher demand for television with screens in liquid crystal screens. Net profit for the last three months of 2009 reached JPY 9.1 billion, compared to a JPY 65.8 billion loss in 2008.
From a different industry, the car and motorbike maker Honda incresed net profits in the third quarter by 565 percent to JPY 134.6 billion. The figure was supported by the recovery of the worldwide demand for cars and lower costs. The firm also improved its overall outlook for the financial year.
In the financial world, the largest Japanese brokerage firm Nomura earned some JPY 10.2 billion in the third quarter, compared with a JPY 342.9 billion loss one year before.
Positive outcome was also visible in the Czech Republic. “Fujitsu has a solid product and service portfolio. There were some declining segments, while others enjoyed a significant growth. Overall, in 2009 we were actually doing better than the year before,” Rutrle said.
Less manufacturing, more research
According to CzechInvest, more and more Japanese companies that initially invested in the Czech Republic are now interested in developing their activities with R&D. This is the case of the Plzeň, West Bohemia-based branch of Panasonic and Liberec, North Bohemia-based branch of Denso. An individual chapter is the Přerov, Central Moravia-based unit of Olympus Corporation, which produces top medical technology in the Czech Republic and also started activities in repairing photo cameras.
Cooperation functions on both sides. In December 2009, Elmarco, the Czech producer of machines for industrial scale nanofiber production, and the Kyoto Institute of Technology (KIT) announced a joint research agreement that will focus on several cutting edge research fields of nanofibers. The agreement aims to develop the technology to allow the production of nanofibers with different architecture and structure at industrial scale, the company said in a press release. “Successful outcomes of the agreement are anticipated to provide breakthrough in health, energy and environment related applications,” the company said.
Currently, Elmarco delivers laboratory equipment for the production of nanofibers, the Nanospider Lab Machine to Kyoto Institute of Technology. Elmarco’s proprietary technology is easily upscaled to industrial levels, which opens opportunities to explore the results from joint research projects into commercial uses. “We believe that this relationship with the Kyoto Institute of Technology can create knowledge contributing to both industrial and academic fields,” said Kaz Nomoto, president of Elmarco.
Going to Japan
In a similar note, numerous Czech companies start to discover the opportunities offered by the Japanese market. Among the most reputable ones are Moravia IT, a software producer that used translation tools between Japanese and English languages. Another one is Mavel, which exports small turbines to Japan, the same as Škoda Plzeň. Since August 2006, the Czech imaging software company Zoner has been active in Japan. Recently, also the medical bed producer Linet entered the Japanese market. Roman Watanabe, an expert with Zoner, told CBW that their Japanese branch was not affected by the economic crisis. “Even Japan has many problems, the same problems that other world’s markets have. Yet, our Japanese branch is still growing its sales,” he said.
Zoner noticed that the Japanese economy was also affected by the economic crisis. Yet, Japan is expecting growth and recovery of their economy in 2010. “Of course, the health and growth of the Japanese economy is directly affecting Zoner’s sales results. Anyway, for Zoner, the Japanese market is still an open space and big challenge. We will do our best on this Asian market,” he said.
The biggest opportunity Zoner sees on the Japanese market is the size of the economy. “The Japanese market is the second-largest economic market in the world after the U.S. Moreover, Japan is a country where digital imaging was born, so we have interest to connect the biggest Japanese makers and companies with our best photo software from Europe,” he said.
Watanabe identified major business opportunities in original equipment manufacturing (OEM). “We are ready to cooperate with local partners and we are taking actions in this direction. Not only Czech companies, but all foreign companies need to closely cooperate with local Japanese partners. This is the key for success on the Japanese market,” he said.
Regarding cultural challenges, Watanabe noted that Japan is changing. “It is not the Japan that it was some 15 years ago. Now, everything is much more open and easier. Japan is changing, Japanese are changing. Then of course, it depends on your heart and skills and how much you can learn from them and how close you can enter,” he said. “Members of our team in our Japanese branch are all Japanese, except for the chief executive officer. So, then, everything is easier.”
Watanabe expressed hopes that Czech photo software will join the business segments where the Czech Republic will be presented as one of the best market players in the future. “Why not,” he asked.
The future looks CEE
Despite such attractive perspectives, the shadow of departures remains in the air. On Jan. 8, 2010, the Panasonic Corporation president Fumio Ohtsubo said that the Japanese consumer electronics firm is considering manufacturing flat TVs in India. Panasonic already assembles flat TVs in Mexico, China and the Czech Republic. Nora also said that the future of Japanese companies in CEE is “somewhere in the Balkans.”
“As long as Japanese companies are interested in being present in the European market, final producers as well as their suppliers will want to be in the CEE region,” Stieber said. “As to in which countries of the region will they want to operate, this depends on many factors including the level of effectiveness they will be able to achieve in a particular country, on the preparedness of their governments, on the availability and quality of business premises and on the quality of the transport infrastructure enabling cost-efficient access to target markets,” he concluded.
“In terms of revenue, Fujitsu is the fourth-place vendor of global IT services and computing systems. It is about the same in the Czech Republic. It is clear that there is definitely room enough to grow,” Rutrle said.