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czech republic

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  CZECH REPUBLIC

REPUBLICAN REFERENCE

Area (sq.km)
78,600

Population
10,264,212

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 No: 062 - (20/06/02)

Social Democrats win Parliamentary election
The Czechs have voted back the Social Democrats. This possibly ends the career of Vaclav Klaus, the leader of the Civic Democrats, although he may well stand in Presidential elections in January when his old foe Vaclav Havel is due to stand down.
The re-election of the government is not so surprising for the Czechs are doing better than in the late 1990s when they rather stumbled economically. GDP growth which was 2.9% in 2000 was 3.6% in 2001 and is expected to be 3.5% in 2002. This is better than the EU average of 1.3% expected this year, but about par for the course for the ex-communist economies of Central Europe.

The advantage of backwardness
The Czech Republic was slower to privatise in the 1990s than Poland or Hungary. But this leaves it with more impetus today, its state asset sell-off being in full swing. Last year saw the sale of Komercni Bank, the last large bank in state control, to Societé Generale of France for US$1bn. The Czechs recently defeated a rival Polish bid to host a US$1.5bn car assembly plant to be built jointly by France's PSA Peugeot Citroen and Japan's Toyota Motor. The sale of Cesky Telecom, the telecoms utility, however, has been delayed, the offers being adjudged too low.
In all, foreign direct investment (FDI) tops US$20bn, having been US$4,477m in 2000, 4,820m in 2001 and seven billion prospectively for 2002. This is a highly creditable performance, comparable to Hungary's on a per capita basis, if second to Poland in absolute terms.
The automotive deal is particularly important, notes Martin Jahn, head of CzechInvest: "This investment would make the Czech Republic the automotive centre of Central and Eastern Europe."

More open business practices
The Czechs are tightening up their accountancy procedures. When the economy entered a recession in 1997, several large companies went bankrupt without warning from their auditors. A new accountancy law will make this less likely. The Enron scandal gave a new fillip to the move towards more transparency. A cleaner more open business climate is being created, and not before time!.
The Czechs had the most prosperous economy in continental Europe in 1938, and was the region's only democracy, when the UK and France sold them down the river to Hitler. They have every assurance of firm Western support this time and of regaining an economic vitality as well as democratic legitimacy, within the EU as well as NATO.

EU Jitters
Nevertheless there is a problem with EU entry for Brussels is insisting on full compliance with all 25 chapters of 'l'acquis communitaire' and the Czechs still have five to go. One concerns agricultural quotas and subsidies, which they, like other candidate countries, regard as much too low. Candidate members are expected to accept subsidies of only 25% of the level obtained by existing members' farmers, putting their own farmers at a competitive disadvantage.
Whereas EU entry won a majority of support in opinion polls earlier this year, now it obtains only 43% in the Czech Republic.
In a coming referendum on the issue, whose timing has yet to be decided, a victory for the advocates of entry, which includes the government, is not a forgone conclusion. Klaus may well use the issue to stage a fight-back. He is a 'Eurorealist,' he says, convinced of the benefits of free-trade with the EU, which generally already obtains, but also convinced that the Czechs should take or leave full EU entry strictly on a hard-headed calculation of the merits and demerits at the time. 

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BANKING

German owner sets deadline for Zivnostenska Banka bidders

Troubled German bank Bankgesellschaft Berlin AG (BGB) ended months of speculation with an advertisement in the Financial Times announcing the separate sale of its 85.16 per cent stake in Zivnostenska Banka, the Czech Republic's oldest and currently its eighth largest bank, The Prague Business Journal has reported.
Banks seeking to buy BGB's stake in Zivno have to provide written expression of interest to the adviser for the sale, Schroder Salomon Smith Barney. The expected going price for the stake, say some analysts, could range between €150m to €200m. 
Up until the publication of the FT ad, it was unclear whether Zivno would be included in the sale of an 81% stake in BGB held by the city state of Berlin.
Interest in the majority stake in Zivno has been intensifying in recent months. Barring the pending sale of another small Czech bank, Union Banka, this may be the last opportunity for a major foreign bank to get a foothold in the local market.
The list of suspected and confirmed interested parties already contains seven names: GE Capital Bank, HVB Bank, Volksbank, Bayerische Landesbank and three Italian banks; Banca Intesa, Sanpaolo-IMI and Unicredits Italiano, which failed in its bid to buy the state's majority stake in Komercni Banka (KB) last year. Analysts now also believe that Citibank may bid for Zivno bringing the total to eight.
With so many possible players in the running, bidding is expected to be fierce, with some observers saying there could be some "daft" offers made for a relatively small bank, even if it allows rare access to the Czech market. Unicredito in particular is expected to be a very keen bidder, due to its high offering price for KB last year and its ambitions to cover as much of the region as possible.
Zivno boasts a history that goes back to its founding in 1868, the first bank in the Austro-Hungarian Empire created using exclusively Czech capital. During the First Czechoslovak Republic it became the country's largest bank. Under the communist regime some of the country's most respected bankers from the 1990s, including former Czech National Bank (CNB) governor, Josef Tosovsky, received their training at the bank's London office.
At the start of the post-Communist era, Zivno was again ahead of the pack, becoming the first Czech bank to be privatised in 1992 to Germany's BHF-Bank and the International Finance Corporation, before being sold to BGB in 1998. During the 1990s, the bank managed to avoid the problems of most of its Czech peers, emerging from the country's banking sector crisis with a relatively clean balance sheet. But despite a new focus under BGB on three pillars - personal and private banking, corporate lending and investment banking - Zivno began to fall further behind the other Czech banks after they were sold into foreign hands. And when BGB was hit by scandals last year over questionable property loans and its links to Berlin political circles, Zivno's requests for an equity increase of Kc 2.6bn (US$78.5m) to improve its competitieness could not be met. The bank's market share now stands at around 2 per cent, its assets total some Kc 51bn and its clean record makes it an attractive prospect.
"From the point of view of its loan portfolio, it's in good shape," said Jan Slaby, an analyst at Wood & Company. "With a new owner and a clear strategy Zivno could have some good opportunities for growth."
Analysts have welcomed the news that Zivno is to be sold off on its own, rather than in a package with BGB, as it will boost bidder interest.
"There is not likely to be a great deal of interest in BGB, as it has a lot of problems, so the fact that it will be sold off separately is definitely good news for Zivno," said a leading manager at one of the major Czech banks, who asked not to be named.
And the fact that the sale represents a last chance for a foreign bank to get into the Czech market may heighten interest.
"The CNB's policy is not to issue any more banking licences, so the only way to penetrate the market is to buy into a bank," Slaby said.
The name most frequently mentioned by analysts is that of Italian bank Unicredito Italiano whose strategy for expansion throughout the region received a setback last year when it failed to buy KB. Two months ago the bank confirmed its interest in buying Zivno.
"Unicredito is very strong in Poland and Bulgaria, it's the largest bank in Croatia and they have a small bank in Slovakia, so basically what's missing in their regional coverage is the Czech Republic and Hungary," said Jiri Stanik, a banking analyst at Raiffeisenbank in London. "It's a high priority for them to fill this gap, especially after losing KB."
There are also banks with a local presence that have expressed an interest, such as GE Capital Bank and HVB. Citibank has also been touted as a possible contender, but regional CEO, Atif Bajwa, recently told Prague Business Journal (PBJ) that while he could not rule out the possibilities, the bank had nothing further to announce at this point. Although banks with an existing local distribution network may be willing to enter the running, analysts say Unicredito's determination to cover the region may push its price higher.
"They bid high for KB and they have no meaningful operations on the market like other players such as Citibank, so they may be more willing to bid more than the other interested parties," said Andrczej Nowaczek, a bank analyst at Credit Suisse First Boston in London. "For buyers like SocGen (Societe Generale) and Unicredito it pays to have a presence in as many countries in the region as possible, so I think the bidding may be quite competitive."

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ENERGY

New bid for CEZ exceeds hopes for 200bn crowns

Premier Milos Zeman, speaking at a news conference recently, said unofficial bids for power utility CEZ, exceed government hopes for 200bn Czech crowns, reaching 260bn crowns, New Europe has reported. 
"There are unofficial bids which are substantially higher than the 200bn crowns required by the government, more specifically 260bn crowns, and I hope that the price will still rise," Zemna stated, quoted by CTK News Agency.
The previous tender for CEZ was cancelled when none of the bidders offered 200bn crowns. Electicite de France and Italy's Enel were bidding until the last moment. Publicising the unofficial information three weeks before mid-month elections, Zeman did not, however, offer any of the new bidders' details.
Against expectations and contrary to the government approval earlier, the National Property Fund (FNM) at the recent extraordinary general meeting of CEZ, prevented its purchase of state-owned stakes in the eight distribution companies in exchange for a part of CEZ's stake in transmission system, CEPS.
The FNM expressed reservations regarding various aspects of the transaction, such as the unclear situation of FNM-owned shares with special rights in the distributor companies and the as yet unsigned contract with the appraiser who evaluated the CEPS shares.
Later statements by FNM representatives and Finance Minister, Jiri Rusnok, suggested the problem was probably in the method of appraisal, while Zeman accused the fund's officials of dereliction of duty as it was entirely up to the fund to make sure that all legal requirements were met.
Industry and Trade Minister, Miroslav Gregr, in favour of the sale of the power sector as a whole, also spoke of incompetence: "Only an absolute fool would sell the market separately." He cautioned this would lead to the closure of some power plans in north-western Bohemia as well as some mines.

Czech firm wins key tender to build gas plant in Mexico

The Skoda Praha company [supplier of technological equipment for power plants] has won an important international tender worth more than 3.5bn Czech korunas, Czech Radio1 has reported.
The Czech company will now become a key player in the construction of a steam and gas power plant in the Mexican city of Monterrey. The plant is expected to be built and launched in a record time of 24 months. 
This tender means that a Czech company will be involved in a Latin American project for the first time after a 12-year break. 
Industry and Trade Minister Miroslav Gregr said today that although Skoda Praha had recently gone through a serious crisis, it now stood a great chance of success in Mexico.
Gregr said: "The state can help by opening Mexico's door but the rest is up to the companies involved in the tender, on their performance and their ability to fight competition."

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FOOD & DRINK

Hame seeks to spread its success with new investor

The largest Czech producer of ketchups and pates, Hame in Babice, South Moravia, has asked Deloitte & Touche to help it find a strategic partner whose investment in the company will help open up foreign markets, the Prague Business Journal has reported.
An end-summer target has been set to find the investor, CEO, Leos Novotny, said. The shareholding to be offered to the partner is a matter for further negotiation, Novotny added.
With the investor on board the company will then try to increase its foreign presence, especially in Russia. Hame already controls 20% of the Russian meat pate market and would like to start producing there as opposed to the current situation, where all its Russian sales are imported from the Czech Republic.
The new Russian plant should be established in a current or former meat processing plant or canning factory because Hame doesn't want to build a Greenfield site. "We are holding talks with a leading Russian tinning company which controls some 25% of meat pates market, and we want to buy at least a majority stake in it," Novotny said. "The contract should be ready by summer."
Novotny added that Hame is also holding talks with two other tinning companies. Reconstruction of the production plant and technological equipment costs would amount to tens of millions of crown, he said.
Russian expansion is a sensible, if risky, path, said Petr Bodecek, an analyst with Brno-based brokerage Cyrrus Afin. "A Russian location has a comparative advantage; for example, labour force costs can be markedly less than the Czech Republic. Primary commodities suppliers could also make interesting offers," Bodecek said.

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FOREIGN INVESTMENT

Czech Republic attracts US$5bn in FDI, EBRD must help 

The Czech Republic attracted nearly US$5bn in foreign direct investments (FDI) last year, Finance Minister, Jiri Rusnok, announced recently at the annual meeting of the European Bank for Reconstruction and Development (EBRD) in Bucharest, reports New Europe.
Over the last few years, FDI in the Czech Republic has totalled US$2,500 per inhabitant, Rusnok stated, CTK News Agency has reported. A major part of investments were green-field projects, such as the new car production plant built by Toyota PSA in Kolin, Central Bohemia, and a plant for the production of TV tubes of LG Phiips in Hranice, North Moravia. Governmental agency CzechInvest attracted US$2bn in FDI in 2001.
Rusnok said that from the Czech government's point of view, in the future, the EBRD needs to focus on the support of small- and medium-sized enterprises (SME), including their capital financing. This will prove a decisive factor for the development of the country's economy, he noted. The EBRD should take on an important role in financing the development and modernisation of the infrastructure and in the restructuring and privatisation of Czech companies.
Part of the meeting is also a trade forum organised by the EBRD, made up of a series of seminars, talks, and presentations of the individual client member countries of the
Bank. Rusnok also met with representatives of the European Investment Bank (EIB), according to CTK. The EBRD, in its last report, put the Czech Republic's 2002 GDP growth at 3.5 per cent, at the same time calling on the government to reform public finances including the pension system.

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INDUSTRY

New Olomouc bearing plant could save German jobs, owner claims

The opening by a US multinational of a new US$20m (Kc 670m) industrial bearing plant near Olomouc recently to take advantage of lower wage costs than in Germany, has raised questions over whether high-cost economics necessarily lose out from such moves, Prague Business Journal reported recently.
US company Torrington shifted its low technology industrial bearing production for automobiles from Northern Germany lock, stock and machine tools last year to take advantage of Czech wage costs, which are between four and six times lower.
German workers have been told by the company that the move of low-tech production to the Olomouc plant could be the best way of safeguarding the remaining jobs in Kunsebeck, from which 275 machine tools were relocated to the Czech Republic. The remaining German production requires more specialist engineering knowledge, associated with high-technology products made in short production runs, the company said.
If customers can be supplied with bottom-range products from the Czech plant, they are likely to call on Torrington for the higher-price items made in Germany, said Ian Marsden, who is in charge of Torrington's European operations. "It's in the interests of the company to be competitive across the spectrum of bearings," he said. "If we can't satisfy our customer in one type of bearing, it is likely they will go to a competitor for others as well."
The German plant has struggled to remain competitive in the production of low-cost bearings because of its relatively high labour costs, Marsden added.
However, although the short-term relationship between the Czech and German plants might be symbiotic, the longer-term picture could be very different. "The German workers know they are competing with their colleagues in the Czech Republic for a future share of Torrington's production work," said John Turpin, head of the industrial solutions business of Torrington's parent company, Ingersoll Rand (IR).
The Olomouc plant opened recently with 400 employees and the possibility of growth. "The Olomouc investment should return in three years, and then we will be able to expand further," said Milan Thomas, CEO at the Olomouc plant. "The IR group has drafted another two projects for the Czech Republic, and it also has plans in Poland, Russia and other countries," he added.
The plant should export some 95% of its output to Western Europe. Customers include Caterpillar, the US construction equipment maker, the Italian car group Fiat and German gearbox manufacturers ZF and Getrag.
The German plant may also continue to benefit from its connections with the large and technically proficient German engineering industry.
The Olomouc plant's turnover should reach some Kc 1bn in the first year with sales expected to increase by 10% annually in the first few years. "If the production capacities turn out to be insufficient, we will tackle the situation either through an acquisition of another producer or through the construction of a new plant," Tomas said.
Torrington sells bearings for use in machines that require rotary motion, and this year sales are expected to top US$1bn, of which roughly a quarter will be European.
Ingersoll-Rand, which has annual turnover of some US$10bn, ranks among the world's leading suppliers of mechanical and control components for the car and engineering industries. It employs about 50,000 people worldwide.
Tomas said the group is completing the construction of a new plant to produce compressors in Unicov near Olomouc, in which it has invested US$25m, or Kc 502m, in expanding the Unicov plant.
The company feels that while the US market is almost saturated there are still possibilities to grow in Europe. "In the US we have some 70% of the market, while in Western Europe we have 15-17%," Tomas said. "Our market share in Central and Eastern Europe was practically none. This was the reason why the management of the US company decided to expand on this territory, and the Olomouc plant is the pilot project.

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MINERALS & METALS

Steel company privatisation processes running smoothly

A possible buyer in the form of Salzgitter AG steel group has expressed interest in the purchase of the Czech Republic's second biggest steel maker, Vitkovice. The German firm wants exclusive rights to study the company's books before submitting a bid. Financial details have yet to be announced. Meanwhile, the Czech government and the LNM Group were recently slated to finalise a deal to buy Nova Hut. The country's largest steel producer is also government-owned, dpa News Agency reported. Although LNM is British-based, it is registered in the Dutch Antilles. 
Talks are centred on creditor demands and terms for a government assumption of some of the company's estimated 10bn Czech crown debt. Nova Hut and Vitkovice, both based in the eastern city of Ostrava, were major operations during communist times but fell on harsh times in the 1990s. The two companies manage to improve performance by reducing operations and laying off over 20,000 workers over the past seven years.

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RETAIL INDUSTRY

British retailer announces plans to expand in Prague city centre

British main street retailer Debenhams plans to open a new store in Prague, its second in Central and Eastern Europe and one of a handful being launched outside its British and Irish base, Prague Business Journal reported recently.
The Prague store will be developed along the franchise lines Debenhams has established for all its international operations. It has already signed an agreement with local trading company TIPCO to be its franchisee.
Although Debenhams has its eyes on a city centre site, the details have yet to be announced. "As we are still undergoing negotiations the site will be announced in the near future," said Debenhams' international director, Francis McAuley. "Our first (Czech ) store is scheduled to be open in two years."
The general retailer, which sells everything from high fashion to flowers, stationery and household goods, opened its first Central European store in Budapest in October 2000. Company policy is to expand in the region.
Debenhams differs from other retailers in the combination of own-name brands, such as Maine New England and Casual Club, exclusive designer ranges and leading international brands that make up its offer. Its own brands account for nearly 50% of sales. Those brands are complemented by international and designer brands like Ben Sherman, Clairns and designer clothes by Jasper Conran.
Debenhams international department stores are managed with franchise partners in each region. Debenhams currently has seven international stores in the Middle East operated through franchise partners. International franchises are a key component in long-term growth, the company said.
Debenhams operates 97 stores in the UK and Ireland with a further 11 stores to open over the next four years. The company is scheduled to open two other international stores in Stockholm and Jeddah, Saudi Arabia this autumn and next year in Kuala Lumpur, Malaysia and in Copenhagen in 2004.
ACNielsen retail analyst, Rob Clark, said fellow British-based retailer Marks & Spencer, which has a Prague city centre store, is most vulnerable to losing some of its customers to Debenhams. But the overall effect of the new store will be to help revitalise the city centre, he added.
Debenhams posted a 14% rise in pre-tax profit to £92.1m (Kc 451m) in the half year to March 2nd; exceeding analysts profit expectations, which were between £87m and £91m. Total sales increased 8.1% to £938m.

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