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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 No: 058

The Czechs have a coalition government with seven members, who are often at loggerheads with each other and, as it so happens, 2002 is an election year.
The economy is not doing badly, growing at 3.2% on an annual basis, while inflation is at just over 4% in 2002. This is a big improvement on the 1990s when growth was sluggish, although that acted as a restraint on inflation.
The big issue before the country is adhesion to the EU. There is a problem holding it up, namely Austrian opposition to the Temelin nuclear plant, whose closure they are demanding. The main figure agitating for this on the Austrian side is the governor of Carinthia, Joerg Haider, the leading populist politician in the country and the bugbear of the bien pensants of Europe. The Austrian government is distancing itself from his flagrant anti-Czechism, a characteristic of another not so reputable politician seventy years ago, whose name also began with 'H.'
It is unlikely, therefore, that the controversy will impact on the country's chances of joining the EU shortly.
Two figures have dominated Czech politics since independence in 1989 and the constitution of a separate Czech Republic in 1993.One is Vaclav Klaus, the head at present of the opposition, but premier for most of the 1990's. The other is his long-time adversary and foil, Milos Zeman, who has since become premier in his place.
The president throughout this time has been Vaclav Havel, who is certainly stepping down this year. A new era for Czech politics is dawning. 
The Social Democrats (CSSD) in office are unpopular; but so are the Conservatives (ODS) of former premier Vaclav Klaus. The country might be about to see a political re-alignment at forthcoming elections to parliament, due in mid-2002.
The beneficiary of disaffection with CSSD may not be Klaus, who is widely distrusted, but the leader of the 'real opposition,' the newly-elected head of KDU-CSL, Cyril Svoboda, part of the Four Party coalition of small parties and the communists, who are all keen to see an end to the alternation of the CSSD and the ODS, that has dominated Czech politics for years.
The economy is attracting extensive foreign investment, which is almost US$20bn in all. The government is persisting with privatisation, putting up the state's 62.99% stake in Unipetrol in September. Gazprom and LUKoil of Russia showed interest in some of Unipetrol's assets. So did Western majors, Shell, Conoco and Agip, which in a three-way consortium already held 49% of Ceska Rafinerska, with Unipetrol holding the remaining 51%. Czech breweries and light industry are also attracting interest.
The main problem is that unemployment is still high at 8.5% nationally, but at 18-20% in certain districts, such as Karniva in North Moravia and Most. The government has opened an industrial park in Karniva, which notched up its second major investment recently, a Swedish health care firm, Moelnlycke Health Care. The first is by Japanese firm, Shimano, which is due to make bicycle parts there.
The EU is reprimanding the Czechs for giving public contracts without tenders under their Article 50, which the government has regularly evoked. Public procurement law allows the government to award contracts without tenders in an emergency. This it has done several times this year because time is running out before next June's elections. But potential bidders have been angered and suspicion of corruption raised, which was widely thought to be an endemic problem in the administration throughout the 1990s. 
Pavel Telicha, the Czech chief negotiator with Brussels, expects the matter to be raised in future negotiations. "We should be more and more limited in the use of the article," he said. 
There are other issues on which the EU has reservations, notably using state aid to restructure the insolvent steel industry, the widening of the government deficit and the delay in passing legislation to establish a professional civil service.
Nevertheless the Czech Republic is likely to be able to close one or two more chapters to the 19 it has provisionally closed already with Brussels. It is probable it will remain a frontrunner to be invited to join the EU by the end of next year.

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AUTOMOBILES

PSA/Toyota may benefit only low-cost suppliers


Auto parts suppliers in the Czech Republic and Europe are already gearing up for a fierce fight for the spin-off business when the SPA/Toyota consortium €1.5bn Kolin car plant starts producing in 2005, the Prague Business Journal has reported.
CzechInvest, the government agency largely credited with landing the PSA/Toyota deal, has made optimistic forecasts that up to 7,000 Czech jobs could be created in services and supplies for the plant. However, some analysts warn that existing Czech companies and new factories might be forced to focus on the lower end of the components market with more expensive pieces being shipped in from further away.
Once operational, the plant will employ 3,000 people and produce some 300,000 small, low-cost cars per year. PSA will be responsible for two out of every three cars produced, according to a spokesman. Whether this means slightly different models or just that the French will direct the cars though their sales network is unclear.
CzechInvest agency director, Martin Jahr said its forecast is upbeat because "most of the components will be new, which may require new facilities," he said. "Suppliers are going to have to face that reality."
"PSA/Toyota are still in the process of evaluating quotations and once the suppliers are chosen, they will have to decide whether to use existing facilities or construct new ones," he added.
PSA and Toyota have remained tight-lipped on the issue. Taro Takada of Toyota's international communications department in Tokyo said it was too early to tell, but "price, location and of course, quality will be major factors," he said.
"No single company has been selected," said a PSA spokesman, who added that no one had been ruled out.
CzechInvest's hopes are largely pinned on the existing supplier network that serves dominant local manufacturer Skoda Auto and other European car companies. More than half of the world's 50 leading suppliers already have facilities in the Czech Republic. With lower labour costs than Western Europe and proximity to the PSA/Toyota plant, CzechInvest is confident of attracting new suppliers, or that existing ones will crank up their operations. To some extent, car market analysts agree some suppliers will probably have to set up shop within 20 miles of the Kolin plant, in particular producers of parts added late in the manufacturing process and those that are order specific. "Things like seats can be very specific," said Ryan Tutak, associate editor for Eastern Europe with the automotive Web side just-auto.com. "These have to be made near to the plant. They are often ordered at the last minute, so seat makers have to be able to respond very quickly."
"Maybe half a dozen suppliers will feel that they have to be located pretty close to the plant," said John Lawson, an analyst with Schroder Salomon Smith Barney in London. And according to Joe Harritan, vice president at Credit Suisse First Boston in London, proximity to the plant could well entice others, especially long-standing suppliers of Toyota. "Being close to the plant is a great benefit," he said, "and it's almost a prerequisite for a Toyota plant."
A community of on-the-doorstep suppliers could occupy much of the 100 hectares set aside by PSA/Toyota at Kolín for this purpose.
"I would think that PSA/Toyota would want to get as much in the way of supplies as possible for Eastern Europe," Harrigan said. "There are quite a lot of suppliers in Poland, for instance, so that will all depend on how good transportation links are with the Czech Republic."
"You definitely need a low-cost source if you are going to build a lost-cost car," he added. However, Czechs could well lose out in the real battle to supply the more advanced parts that are not needed at the last minute. Low labour costs and proximity to the plant are not decisive factors here. And there are other competitors in the region who will be keen to get a piece of the action.
"Price won't influence supplier decisions so much," said Lawson. "Obviously it influenced the decision for the plant itself and the manufacturers have no doubt taken into account what their leverage on supply prices will be."
Both PSA and Toyota have plants in Western Europe and could have the edge when biding to supply advanced parts. "I things that's probably how it will work," Lawson said. "They know the technology, are used to dealing with the purchasing systems of these manufacturers and their product development systems." And price may not play a significant role for orders numbering up to 300,000 a year.
"Most components are not labour intensive," said Graeme Maxton, head of UK-based Autopolis, a consultancy firm focused on the auto industry. "With large volumes like this, labour costs don't actually count for much."
The ability of existing suppliers to provide the parts will probably be the key for how much spin-off business will come to the Czech Republic. "To a great extent, it will all come down to capacity," Maxton said. "If these suppliers don't have sufficient capacity to meet the order, this could well play a role in attracting international suppliers to invest in facilities in the Czech Republic."

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FOOD & DRINK

Budvar subsidiary to distribute from London


Sales manager at Brewery Budejovicky Budvar, Robert Chrt, announced that the company has established a subsidiary in London. Budweiser Budvar UK Limited will distribute and promote Budvar beer all over Britain, CTK News Agency has reported. The country is brewery's second biggest foreign client, totalling annual sales of nearly 90,000 hectolitres. "We were inspired by the establishment of a subsidiary in Germany two years ago and its financial results. Last year, we reported an increase in sales to 195,000 hectolitres of beer in Germany, and we expect the trend in Great Britain to be similar," Chrt commented. 
Germany has been Budvar's largest export territory for some time now, with the subsidiary's establishment now representing a great challenge in light of the large quantity of imported beers in the British market. Budvar, until last year, cooperated with one distributor in Great Britain - those activities will now be taken over by the subsidiary.

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MINERALS & METALS

Czech cabinet to launch talks with Indian steel giant to attract investment


The government has decided to continue talks with strategic partners about their involvement with the Moravske ocelarny ironworks and to launch exclusive talks with the Indian company Ispat International, which has expressed its interest in the Nova hut ironworks, Czech TV1 has reported.
The government will, though, continue to finance the ironworks' production via the Osinek company, a daughter company of the National Property Fund... The Indian company Ispat International, with which the government intends to hold talks about its involvement with the Nova hut ironworks, is according to Finance Minister Jiri Rusnok, the second biggest steel producer in the world, with ironworks in Europe, the USA and Asia.
Its interest is not restricted to the Nova hut ironworks. Rusnok said: "It has expressed serious interest in getting involved with the Czech steel industry, starting with the Nova hut Ostrava ironworks..."

Steel exports increase 11% to 4.35m tonnes in 2001

Exports of steel products from the Czech Republic in 2001 went up 11 per cent to 4.35m tonnes from 3.93m tonnes in the previous year. In absolute terms, the growth was equal to almost 13 per cent from 47.4bn crowns to 53.4bn crowns last year, customs statistics have revealed.
The Hutnictvi zeleza steel makers association noted that: "Exports are rising to central Europe in particular," adding that exports to Poland, Hungary and Slovakia are growing faster than those to the EU. The country's steel makers saw exports to EU countries increase by some two per cent to 2.12m tonnes in 2001, and in absolute terms by three per cent to 26.5bn.
Meanwhile, exports to Poland were up two-thirds at 625,000 tonnes (by over 50 per cent to 6.6bn tonnes), while Hungary imported 150,000 tonnes of steel products, representing 30 per cent growth CTK News Agency reported. The main exported commodities were iron and steel base and profiles (2.904m tonnes at 19.6bn crowns), unprocessed rolled iron (1.1m tonnes at 11bn crowns) and tubes (505,000 tonnes at 11.7bn crowns).

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PHARMACEUTICALS

Czech Leciva looking to swallow Slovak drugmaker


The US owner of the Czech Republic's largest drug maker, Leciva, plans to buy its Slovak counterpart, Slovakofarma, if regulators in both countries agree the deal won't damage competition, the Prague Business Journal has reported.
American investment fund, Warburg Pincus, has agreed to purchase a 69 per cent share in Slovakia's largest pharmaceutical firm, owned by SL Pharma Holding. It believes a partnership will help push both companies further into Central and Eastern European export markets like Poland, Russia and countries of the Commonwealth of Independent States.
Although a preliminary agreement has been signed, the purchase price and details of the partnership are still being worked out and must be approved by competition regulators. Peter Polievka, a spokesperson for Leciva, said no decisions have been made about the possibility of layoffs among the nearly 3,500 employed by the two companies if Warburg Pincus chooses to streamline operations.
Slovakofarma has been up front about its desire to find a strategic partner with enough capital to pour into development and marketing. While Warburg Pincus which bought Leciva from the Czech government in 1998, aims to strengthen the company with the latest deal, it has also said it would sell the Czech producer to a larger drug company with the financial backing to help it enter new markets. Warburg Pincus has investments in 16 European health-care companies.
Jiri Michal, general manager of Leciva, said in a recent press statement that the gradual integration of the Czech and Slovak companies could lead to further alliances "that would be able to establish long-term partnerships with other companies, especially those operating within both the Czech and Slovak health-care markets."
Generic drug producers like Leciva and Slovakafarma don't develop their own drugs. Although the companies are still top sellers domestically, innovative drug makers have made inroads into their market share.
Officials at Leciva and Slovakofarma say they must find new markets to pay for the rising costs of winning the race to reproduce innovative drugs whose patents are due to expire. Costs have also increased as companies have had to meet Czech and European Union quality requirements.
In recent years both companies have performed relatively well. Leciva's sales have been strong. Revenues grew from Kc 5.3bn in 1999 to Kc 6.1bn in 2000. Results for 2001 were not available.
Slovakofarma's gross sales in 2000 reached Sk 6.3bn (Kc 4.7bn), a 6 per cent increase over 1999, with profits of Sk 350m (Kc 265m). Its 2001 first-half revenues of Sk 3.6bn (Kc k2.7bn) increased by 22.5 per cent year-on-year.

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TELECOMMUNICATIONS

Bidders pass through first phase of Czech Telecom tender


Despite eight bidders in Czech Telecom's pending privatisation commission, three bidders may come across some obstacles, New Europe has reported. 
Deutsche Telekom and Deutsche Bank appear likely to fall into this category with their bids related to performing due diligence on Telecom because of their links with mobile phone company RadioMobil, main rival to Telecom's Eurotel. Additionally, negotiations between Telecom's current strategic shareholder, TelSource (made up of Swisscom and Dutch KPN), and the US bidding consortium of CVC Partners and Spectrum Equity Partner has brought the ire of some members of the government's steering committee who deem TelSource's courtship a breach of its promise to sell its stake with the government's. The separate bids by Deutsche Telekom and Deutsche Bank are set to stumble on due diligence, specifically in performing it on Telecom's mobile arm Eurotel, due to their direct ownership links to Eurotel's rival RadioMobil, sources close to the sale have conceded.

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TRANSPORT

Businesses push for fast track solutions to Brno highway hell


Fast transport links are the road to riches, according to economists and foreign investors who often insist on a highway as a conditions for selecting a site, New Europe has reported.
However, with the 30-year-old Prague-Brno D1 highway showing its age under the strain of a massive traffic burden - far beyond that envisaged for the time of its construction - Brno businessmen are raising the alarm.
The country's main east-west transport axis is already inadequate and shows it plainly with long lines of cars to the horizon when big crowd-drawing events are staged in Brno, such as the motorcycle Grand Prix or the regular trade fairs.
Brno businessmen are stepping up the pressure on both the transport and telecommunications ministry and the state-run Reditelstvi Silnic a Dalnic (Roads and Motorways Directorate) to act quickly to improve the situation. "We would like to see, for example, better coordination between highway maintenance depots and the police in case of closures and quicker repairs of some sections," said Peter Bajer, director of Brno's Chamber of Commerce.

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