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czech republic

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  CZECH REPUBLIC

REPUBLICAN REFERENCE

Area (sq.km)
78,600

Population
10,400,000

Density
(per sq.km)

132.2

Capital
Prague

Currency
Koruna

President
Vaclav Havel

Private sector
% of GDP

80%

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Background:
After World War II, Czechoslovakia fell within the Soviet sphere of influence. In 1968, an invasion by Warsaw Pact troops ended the efforts of the country's leaders to liberalize party rule and create "socialism with a human face." Anti-Soviet demonstrations the following year ushered in a period of harsh repression. With the collapse of Soviet authority in 1989, Czechoslovakia regained its freedom through a peaceful "Velvet Revolution." On 1 January 1993, the country underwent a "velvet divorce" into its two national components, the Czech Republic and Slovakia. Now a member of NATO, the Czech Republic has moved toward integration in world markets, a development that poses both opportunities and risks.

UPDATE January 2002

The Czech Republic is at last turning into a success story. A laggard in reform after 1989, its government since the late 1990s has taken several constructive measures, completing bank privatisation, for instance, this year.
Key to its success over the last few years has been a huge inflow of foreign direct investment (FDI), no less than US$14bn in the last three years. The result has been spectacular; FDI which accounted for 15% of industrial output in 1997, now accounts for 40%, while responsible for two-thirds of pre-tax profits.
The pick-up in FDI, the largest in per capita terms in the region, was consequent on vital reforms in 1998, introducing a package of generous tax incentives, up to 10 years of corporate tax holidays, duty-free imports and special support for training and the creation of new jobs. They do not apply to the small to medium firm sector so much, an anomaly that needs to be addressed so that the FDI sector can have a network of local sub-contractors, a key effect of synergy between different sectors in a transition economy.
The government is continuing subsidies to older, ailing industries in a strong desire to ease the pains of transition. The risk is that they could become a substitute for it. But the problem is well understood and a programme of restructuring of ailing firms, plus public works, was announced in July, a CZK 166.4bn (US$4bn) plan. The EU is contributing to its finance.
The Czech Republic is pressing ahead with its accession negotiations to the EU. With every prospect of being a part of the first wave of EU expansion to complement its membership of NATO since 1999, it can look forward to another burst of FDI. Prague, to the west of Vienna, is the natural economic centre of Central Europe and an architectural and cultural jewel of the region. Czechs have a rosy future ahead of them.

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ARMAMENTS

Arms maker Ceska Zbrojovka gets a new owner, continues to diversify


Czech arms maker, Ceska Zbrojovka (CZ) Uhersky Brod, has a new owner in the form of low-profile firm Eximat, which won Komercni Banka's (KB) tender for nearly 70 per cent of shares in the pistol manufacturer, the Prague Business Journal reports.
KB hasn't officially announced either the name of the winner or the price, but bank sources have confirmed current minority shareholder Eximat as the new owner. The bank demanded Kc 250m in the past for its stake.
Eximat, based in Hradec Kralove, beat two other contenders, including Albia, formed by former top managers of CZ and entrepreneur, Jiri Pavlica, who, however, denies seeking to acquire the arms maker. Eximat is controlled by Rudolf Ovcari, who also played a role in the privatisation of steelworks Trinecke Zelezarny.
Eximat currently owns 6 per cent of CZ. Recently its representatives pushed through a change in CZ's articles of association and the firm shifted to a German model of management through the supervisory board, on which Eximat is present.
Ceska Zbrojovka is best known in connection with the recent slow-paced, and several times postponed, tender for re-arming the Czech Police with 46,000 new pistols. The Ministry of the Interior has to check the reliability of the CZ-75 pistol before it can decide whether the south Moravian company has landed this important order.
The company, however, says that it isn't depending on the Kc 500m order. "The police order is important for us, but not essential to survival," said CEO and chairman of the board, Vladislav Volenec. "If we spread out production for this order over 4 to 5 years it makes 8 to 9 per cent of annual revenues. Gaining this order is an important factor for stability and a reference for foreign partners in particular." CZ is also seeking to sell the pistols to the Slovak police.
The arms producer last year posted a 7.3 per cent increase in sales to Kc 1.04bn but a Kc 7.96m loss, compared with a Kc 49.6m loss in 1999. In the first nine months of this year sales grew by Kc 17m year on year, and profits sank by Kc 17m to Kc 31m.
More than 80 per cent of its production is exported to around 100 countries around the world. Volenec said the company's most important market is in the US along with several EU countries, above all Germany, France and Italy, and South-eastern Asia. He highlighted the success of its US subsidiary, CZ-USA, which generated US$6.3m (Kc 240m) in sales between January and September, the same amount as for all of 2000. Projected sales this year are US$8.5m (Kc 320m).
CZ sold 8,243 pistols in the first six months of 2001 compared with 10,315 for all of 2000. It projects sales this year worth Kc 1bn, of which Kc 250m will come from the diversification of its production to include supplies for the auto industry.
"Due to legal changes in different countries of the world, supplies of our guns might be reduced," Volenec explained. "That's why we do not want to depend on this production."
The company has pushed ahead with its restructuring plans, including the dismissal of 5 per cent of its staff, or around 110 out of its 2,050 employees.
Ceska Zbrojovka is a long-standing manufacturer of small arms with production diversified from exclusively military weapons to sports and hunting rifles.
The decision to construct a weapons factory in Uhersky Brod dates back to the middle of 1936, when the Committee for National Defence decided to relocate strategic defence industries deep within the borders of then the Czechoslovakia. The factory was established as a branch of Ceska Zbrojovka Strakonice, a producer of aircraft machine guns and pistols. The Moravia plant's first products were aircraft machine guns, military pistols and light hunting rifles.
During the Nazi occupation, the company was forced to produce and repair military weapons. From 1945 onwards the company returned to manufacturing a combination of military weapons, sporting and hunting firearms.
In the 1950s the company gained fame with its model 58 assault rifle, and later the model 61 Skorpion submachine gun. Nevertheless, the most popular product of Ceska Zbrojovka is the CZ 75 semiautomatic pistol of which more than 800,000 have been produced.
In 1983 the company was incorporated into Agrozet Brno and in addition to its traditional production began manufacturing aircraft engine gearboxes for Motorlet Praha and also tractor power hydraulics for Zetor Brno. Ceska Zbrojovka in its current form was founded in May 1992.

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AUTOMOBILES

Kolin says Toyota-Peugeot auto plant talks on track


The Ministry of Industry and Trade and the mayor of Kolin confirmed recently that a third round of talks was held between town representatives and a joint delegation from automakers PSA Peugeot Citroen and Toyota on construction of a plant manufacturing small passenger cars at its industrial zone, the Prague Business Journal reported.
Kolin lost out last summer on a 1bn Euro (Kc 33.4bn) investment by BMW on a manufacturing plant for its BMW Series 3 cars and has been looking to make good that body blow by finding alternative investors for its 370-hectare industrial zone.
Kolin mayor, Zdenka Majerova, confirmed that contracts have already been signed to purchase 98% of the industrial zone. The town is to receive a Kc 500m loan to buy up the site and state subsidies worth Kc 600m for infrastructure for the zone.
"The land for the site is ready," said Majerova. "We will use the same approach as we did with BMW. We will do our utmost to close this deal because we would definitely welcome an investment of this size. We are ready to move on this as soon as any decision is made."
The PSA-Toyota consortium is looking to invest 1.5bn Euro (Kc 50.14bn) in the plant, which could create up to 3,000 new jobs. The partnership is, according to a PSA spokesman, looking at locations around Europe, including the Czech Republic.
"At the moment we have a joint PSA-Toyota delegation that is approaching different countries, such as the Czech Republic, but also countries such as Poland and Hungary," he said.
However, the competition is much wider, including all European countries. "No country in Europe has been excluded yet. We really will have to wait until the end of this year or the beginning of next year before the two companies reach a joint decision," the PSA spokesman added.
CzechInvest, the government agency in charge of promoting foreign investment, is optimistic about Kolin's chances to land the auto plant. "We are currently holding intensive negotiations to find out the consortium's specific requirements and the possible investment incentives that we could offer them," said agency director, Martin Jahn.
"Our advantage lies in the large number of subcontractors for the automobile industry based in the Czech Republic, the qualified local work force, and our geographical location. We feel that Kolin has great potential to obtain this investment."
However, PSA is less effusive. Poland, Hungary and the Czech Republic, all front-runners for accession to the EU, have highly skilled workers and high standards of engineering and good geographic locations, the Paris-based spokesman said.
The spokesman confirmed that talks are under way, but remained non-committal on the chances of Kolin winning the bid. "Yes, we have held talks with representatives of some local authorities in the Czech Republic," he said. "This country has a lot of interesting aspects, but again, that doesn't mean that it has been short-listed."

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AVIATION

Mexico interested in Czech aeroplanes


Mexico is interested in closer co-operation with Moravian companies producing aircraft. This was confirmed by Mexican Ambassador to the Czech Republic, Federico Salas Lotfe, after a visit to the Moravian Aeroplanes company in Otrokovice, which is to supply to training aeroplanes for the Mexican Naval Air Force, Czech Radio has reported. 
Roman Werner from the Czech Radio in Brno, gave more details: "At the beginning of 2001 the Mexican Naval Air Force commissioned 10 two-seater training aeroplanes Z-242. His excellency Federico Salaz is satisfied with the work on the aeroplanes."
Salas Lotfe said: "I was surprised to see that the people were working at full stretch and I was impressed by the management's attitude. I could see the high quality of the produce. The professionality of the local producers guarantees the high quality of products bought by the Mexican Air Force." 
Federico Salas said that his country was also interested in the products of Letecke zavody, former Let Kunovice. Mexico will discuss the possibility of commissioning the L-410 turbo high-wing monoplanes to monitor its air space.

Lockheed Martin says not interested in Aero Vodochody

US arms maker, Lockheed Martin, does not have plans to buy into aircraft maker Aero Vodochody, the weekly 'Tyden' wrote in a recent issue, quoting the vice-president of the US firm, Greg Hubbart. Following his recent visit to the US, Czech Prime Minister, Milos Zeman, was still commenting on Lockheed's interest in Aero, saying it existed at a general level, but nothing specific.
However, this appears to be a misunderstanding, as Lockheed is not interested in entering Aero, Hubbart said. In addition, no meetings were held between Zeman and the firm's representatives during his visit to the US he stated, adding the Zeman met with representatives of the US administration who represent the interests of Lockheed, the Czech Press Agency reported.
Hubbart said that the US administration had offered the Czech side the older aircraft F-16 made by Lockheed. However, this does not appear to be a subject of interest at this time as the Swedish-British consortium Saab/BAE Systems is involved in a government tender for supplies of supersonic planes for the Czech army. Furthermore, the consortium has also showed an interest in Aero.
The consortium's entry depends on a decision by the government as to whether or not it will purchase the supersonic Gripen fighters for the arm.
The decision to buy Gripen fighters will be made at the end of December. The price for 36fighers is less than 75 billion Czech crowns. Aero is 65 percent government-owned, with the remaining 35 per cent belonging to Boeing Ceska, a joint venture of Boeing and Czech Airlines CSA.

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BONDS

Czech government decides to issue state bonds to cover 2002 budget deficit


Most of the 46bn-koruna deficit of the next year's state budget will be covered by a bond issue, the government has decided, Czech Radio 1 has reported. 
The government spokesman, Libor Roucek, confirmed that the government approved the bill on bond issue. Parliament will have the final say on the bill.
Roucek said: "The bill is based on the law on the state budget which stipulates that part of the budget deficit amounting to 44bn korunas will be covered by an issue of state bond in keeping with a special law, in other words in keeping with the provisions of the law on bonds.
Short-term treasury bonds will be issued to cover the 2.2bn korunas, which is the remainder of the deficit.

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ENERGY

E.ON signals it could plug into Czech electricity exports again


German energy giant E.ON has signalled that in the not too distant future it could again become a buyer of Czech electricity.
In June this year E.ON - formerly one of the biggest importers of Czech electricity - cancelled a Kc 2bn contract to buy power from dominant power producer CEZ, citing increased opposition within Germany from environmental groups. The contract accounted for around 6% of CEZ's annual electricity production. The Czech company sought damages totalling millions of crowns for the abrupt change but details of the settlement have not been made public, the Prague Business Journal reported recently.
Environmental groups opposed E.ON's purchase of Czech nuclear energy at a time when the Temelin nuclear power plant was undergoing trial tests. E.ON has recently indicated that it could again return to the Czech market as a big power buyer but only for non-nuclear generated electricity.
In fact, it is not so much E.ON's position that has changed as CEZ's. Previously, CEZ had ruled splitting its nuclear and non-nuclear sales, a tactic to circumvent green opposition. Now it has shifted that position, opening the way for E.ON and others to come back on board as buyers.
Recently, CEZ teamed up with the country's three biggest coal mining companies, Severoceske Doly, Mostecka Uhelna Spolecnost and Sokolovska Uhelna, along with Carbounion Bohemia (a trading company), to form a new company whose sole aim will be to find fresh markets for the electricity producer's coal-generated power. Each partner will invest Kc 10m in the new company.
CEZ's creation of the new coal company, Coal Energy, indicated that fresh imports could be possible, said an E.ON manager, who asked not to be identified. "We feel that the current situation is not consistent with our long-term co-operation and we are persuaded that we will find an appropriate solution," he added.
A spokesman for CEZ said that the initial aim of Coal Energy, which still has to be officially registered, was to boost exports eastward, to countries where it had not traditionally been present, for example Serbia, Romania, Slovenia and Balkan countries, not to solve problems in Germany.
CEZ said in a press release that Coal Energy was created to boost coal production and safeguard North Bohemia against the negative social impact of the declining mining industry.
As well as the possibility of buying power off Coal Energy, E.ON could also find new electricity buying opportunities opening up when the troubled privatisation of CEZ is completed, and it moves to new ownership.
CEZ's future owners could well split the company's electricity production and sales divisions to concentrate nuclear-produced sales on the domestic market and non-nuclear sales on export markets.
E.ON is already acting as an adviser on the CEZ sale to the Anglo-American consortium of International Power and NRG Energy. Its advice centres on the consortium's bid for the six regional distribution companies being put on sale alongside the electricity producers.
As well as offering advice on distributors, in which E.ON already has significant minority shares - mostly in companies that share a border with Bavaria and Austria - the company has probably sought assurances that a post-privatisation CEZ will have different and more accommodating structure regarding electricity sales.
The government's slightly relaxed sale conditions over CEZ's privatisation, which now allows bidding partners to transfer assets between them, means that members of consortia could cleanly split the company's electricity production into nuclear and non-nuclear divisions. Different consortia partners could under this scenario take charge of the various divisions.
CEZ has played down the impact of E.ON's cancelled contract. Explaining the company's third quarter results, Chief Financial Officer, Petr Voboril, said exports had held up after the cancellation. "This shows that the impact of E.ON's cancellation was not so drastic," he said.
CEZ exported 9.36 TWh of electricity in the third quarter, up from 9.19 TWh year-on-year. Meanwhile, it strengthened its position on the Czech market, with its own production supplying 59.3% of the country's needs, up from 58.1%. Although it cut power prices to regional distribution companies and electricity auctions, CEZ has already sold 60% of its expected power production for next year.
The company posted a 61% improvement in net profits (under international accounting standards) to Kc 8.9bn from Kc 5.5bn. The company was helped by higher domestic demand, 2.7% up year-on-year, the stronger Czech crown and continued paring of costs.
Coal-fired power stations currently produce more than two-thirds of CEZ's electricity but that proportion is set to fall when Temelin's two nuclear reactors begin full production.

Chinese power station construction loan talks begin

The final round of talks regarding the US$268.5m loan for the construction of the Shen-tou thermal power station in China was set to commence in late November, Miroslava Hrncirova, the Czech Export Bank deputy CEO announced.
A delegation from the Bank of China will visit the Czech Republic, the contract probably being signed by the end of their stay, IntelliNews News Agency reported. In line with preliminary agreement, the Czech Export Bank, drawing the loan for five years and then paying it back for another five years, will finance 80 per cent of the Czech exporters' supplies.

Rotch energy looking to stay in Czech market

Little information exists on Rotch Energy of Britain, the only company of the four short-listed candidates for Unipetrol that is a purely financial investor with no partner in the fight for a 63 per cent stake in the petrochemical group, New Europe has reported.
Also, not much is known about its ownership structure. Rotch Energy marketing head, Jiri Smid said; "The Tchenguiz family of Britain, originally coming from Iran, is a 100 per cent owner of the firm."
Smid rejects assumptions that Rotch wants to enter the Czech chemical sector only to sell it later. He said the firm had been seeking investments for 18 to 20 years, which is the case with Unipetrol. "We want the entire holding firm," he was quoted as saying by Czech Press Agency.

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