A Successful Transformation?: Restructuring of the Czech Automobile Industry

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A Successful Transformation?

Petr Pavlínek

A Successful Transformation? Restructuring of the Czech Automobile Industry

Prof. Petr Pavlínek University of Nebraska at Omaha Department of Geography and Geology 6001 Dodge Street Omaha, NE 68182-0199 USA [email protected]

ISBN: 978-3-7908-2039-3

e-ISBN: 978-3-7908-2040-9

DOI 10.1007/978-3-7908-2040-9 Contributions to Economics ISSN: 1431-1933 Library of Congress Control Number: 2008923092 c 2008 Physica-Verlag Heidelberg This work is subject to copyright. All rights are reserved, whether the whole or part of the material is concerned, speciﬁcally the rights of translation, reprinting, reuse of illustrations, recitation, broadcasting, reproduction on microﬁlm or in any other way, and storage in data banks. Duplication of this publication or parts thereof is permitted only under the provisions of the German Copyright Law of September 9, 1965, in its current version, and permission for use must always be obtained from Springer. Violations are liable to prosecution under the German Copyright Law. The use of general descriptive names, registered names, trademarks, etc. in this publication does not imply, even in the absence of a speciﬁc statement, that such names are exempt from the relevant protective laws and regulations and therefore free for general use. Cover design: WMX, Heidelberg Printed on acid-free paper 9 8 7 6 5 4 3 2 1 springer.com

To the memory of my parents Ilona Pavlínková (1937-2001) and Josef Pavlínek (1929-2001)

Preface

I started researching the dramatic changes in the automobile industry of Central and East European countries in the late 1990s. My interest grew out of my previous work on the post-socialist transformation, foreign direct investment and regional economic development. While researching the economic and regional development effects of foreign direct investment, I was increasingly drawn to the automobile industry because of the speed and depth of its transformation through foreign direct investment and its potentially very significant economic and regional development effects. In addition to working on the Central and East European automobile industry as a whole, I became interested in detailed case studies of enterprise restructuring as I wanted to understand its complex nature and the role of different actors in the restructuring of the automobile industry. In order to achieve this goal, I visited dozens of automotive enterprises, especially in the Czech Republic (Czechia) to conduct in-depths interviews with key informants. I have also interviewed key informants at ministries, automotive associations and academia and collected various secondary data and information. This book is the outcome of this work. In this endeavor I have benefited from various support. The University Committee on Research and Creative Activity at the University of Nebraska at Omaha funded three field work sessions in Czechia to conduct interviews and research for this book. A part of the original writing was conducted during my visiting position at the Slavic Research Center of Hokkaido University in Japan between June 2001 and March 2002. The final writing and publication of this book was financially supported by the Research Program No. MSM 0021620831 sponsored by the Ministry of Education, Youth and Sport of the Czech Republic. I am truly grateful for all this support without which the preparation and publication of this book would have been impossible. Colleagues at the University of Nebraska at Omaha have provided a supportive environment for my research and writing. I am grateful beyond measure to all people from Czechia who were willing to be interviewed in the course of research for this book. I am also grateful to Prof. Petr Dostál from Charles University in Prague for his support of the publication of this book. Others have contributed along the way. In particular, I am grateful to

VIII

Preface

Philippa McDermott and Carol Dillon for proofreading parts of the manuscript. I also want to thank Marvin Barton from the University of Nebraska at Omaha for the production of maps in Chap. 1. Several chapters draw on my previously published papers or their parts that have been heavily edited and updated for this book. In particular, Chap. 1 draws on parts of Pavlínek P (2002) Restructuring the Central and Eastern European Automobile Industry: Legacies, Trends and Effects of Foreign Direct Investment. Post-Soviet Geography and Economics 43(1):41-77 and on parts of the Introduction in Pavlínek P (2006) Restructuring of the Polish Passenger Car Industry Through Foreign Direct Investment. Eurasian Geography and Economics 47(3):353–377 both published by Bellwether Publishing, Ltd. Chapter 1 also partially draws on pages 1701–1704 originally published in Pavlínek P (2002) Transformation of Central and East European Passenger Car Industry: Selective Peripheral Integration through Foreign Direct Investment. Environment and Planning A 34(9):1685–1709 by Pion. Chapter 4 is based upon Pavlínek P (2000) Restructuring of the Commercial Vehicle Industry in the Czech Republic. Post-Soviet Geography and Economics 41(4):265–287 published by Bellwether Publishing, Ltd. Chapter 5 was originally published in Pavlínek, P (2002) Domestic Privatization and its Effects on Industrial Enterprises in East-Central Europe: The Evidence from the Czech Motor Component Industry. Europe-Asia Studies 54(7):1127–1150 by Taylor & Francis. Chapter 6 draws on two previously published papers: Pavlínek P (2002) The Role of Foreign Direct Investment in the Czech Automotive Industry Privatization and Restructuring. Post-Communist Economies 14(3):359–379 published by Taylor & Francis and on parts of Pavlínek P (2004) Regional Development Implications of Foreign Direct Investment in Central Europe, European Urban and Regional Studies 11(1):47–70 published by SAGE. Finally, Chapter 7 is partially based on Pavlínek P (2003) Transformation of the Czech Automotive Components Industry through Foreign Direct Investment. Eurasian Geography and Economics 44(3):184–209 published by Bellwether Publishing, Ltd. I am thankful to all these publishers for their permissions to use my previous work in this book. Most importantly, I am grateful to my family, especially to my wife Gabriela and children Adam and Sára, for their everyday love, support, care and encouragement without which the completion of this book would have been impossible. November 2007

Petr Pavlínek

Contents

1 Central and East European Automobile Industry............................. 1 1.1 The Central and East European Automobile Industry Before 1989 ...................................................................................... 3 1.1.1 Passenger Car Industry............................................................ 3 1.1.2 Truck Industry ......................................................................... 6 1.2 Post-1990 Automobile Industry Transformation in CEE ................. 9 1.3 The Role of CEE in the European Automotive Industry Division of Labor ........................................................................... 19 1.3.1 Mass Production of Small Passenger Cars ............................ 20 1.3.2 The Low Volume Production of Special Models.................. 20 1.4 CEE Truck Manufacturing in the 1990s and Early 2000s.............. 23 1.5 Production Trends in the Rest of the CEE Motor Industry ............ 26 1.6 The Plan of the Book...................................................................... 28 2 Czech Automobile Industry Before 1990.......................................... 33 2.1 Pre-1945 Development................................................................... 34 2.2 Organization of the Automobile Industry Between 1945 and 1989 ......................................................................................... 36 2.3 Effects of the CMEA on the Czechoslovak Automobile Industry........................................................................................... 46 2.4 Production Trends 1945-1989 ........................................................ 49 2.5 Foreign Links and Trade Patterns................................................... 54 2.6 Investment in the Czechoslovak Automotive Industry Before 1990 .................................................................................... 61 2.7 Pre-1990 Development of the Škoda Passenger Car Maker........... 65 2.7.1 Pre-1945 Development of Škoda .......................................... 65 2.7.2 Development of Škoda Following the Second World War............................................................................. 67 2.7.3 Stagnation in the 1970s and Early 1980s .............................. 70 2.7.4 Škoda Favorit ........................................................................ 72 2.8 Conclusion...................................................................................... 76

X

Contents

3 Post-1989 Transformation of Škoda Auto........................................ 79 3.1 Privatization.................................................................................... 79 3.2 Difficulties in the Early 1990s........................................................ 86 3.3 Transfer of Managerial Know-how from VW to Škoda................. 90 3.4 Restructuring Strategies.................................................................. 94 3.5 Post-1995 Success and Challenges of the Early 2000s ................ 105 3.6 Škoda’s Vrchlabí Plant ................................................................. 112 3.7 Škoda’s Kvasiny Plant.................................................................. 114 3.8 Internationalization of the Škoda Production Network ................ 116 3.8.1 Poland.................................................................................. 117 3.8.2 Russia .................................................................................. 118 3.8.3 Ukraine and Kazakhstan...................................................... 120 3.8.4 Bosnia-Herzegovina............................................................ 121 3.8.5 India .................................................................................... 122 3.8.6 China ................................................................................... 124 3.9 Conclusion.................................................................................... 124 4 Restructuring of the Czech Commercial Vehicle Industry........... 127 4.1 Tatra Kopřivnice........................................................................... 128 4.1.1 Pre-privatization Agony ...................................................... 129 4.1.2 Privatization ........................................................................ 131 4.1.3 Post-privatization Experience ............................................. 132 4.2 Liaz............................................................................................... 138 4.2.1 Pre-privatization Agony at Liaz .......................................... 139 4.2.2 Privatization of Liaz and its Effects .................................... 141 4.3 Avia Praha .................................................................................... 143 4.4 Karosa Vysoké Mýto.................................................................... 149 4.5 Conclusion.................................................................................... 154 5 Effects of Domestic Privatization in the Auto Components Industry....................................................................... 157 5.1 Domestic Privatization Strategies and Their Outcomes ............... 159 5.2 Domestic Privatization of the Czech Auto Components Industry......................................................................................... 165 5.2.1 Management Buy-outs ........................................................ 166 Privatization of Hanácké železárny a pérovny ....................167 Karsit Jaroměř: Successful Managerial Privatization .........168 Failed Management Buy-outs .............................................170 5.2.2 Management Buy-outs Followed by Joint Venture or Sale to Foreign Partners .................................................. 171 Privatization of PAL Praha .................................................171 Privatization of Osinek Kostelec nad Orlicí........................172

Contents

XI

5.2.3 Spontaneous Privatization ................................................... 173 5.2.4 Effects of Voucher Privatization: The Role of IPFs in Privatized Companies...................................................... 175 5.3 Negative Effects of Czech Privatization on Enterprises............... 178 5.4 Conclusion.................................................................................... 182 6 The Role of FDI in the Czech Automotive Industry...................... 185 6.1 Governmental Policies, FDI and Privatization ............................. 187 6.1.1 Privatization of Kablo Velké Meziříčí ................................ 189 6.1.2 Privatization of Magneton Kroměříž................................... 190 6.2 Immediate Effects of FDI in Privatized Enterprises..................... 193 6.2.1 Disciplining the Labor......................................................... 193 6.2.2 Contested Nature of Enterprise Restructuring..................... 195 6.3 Advantages of Foreign Ownership for Czech Automotive Enterprises .................................................................................... 197 6.3.1 Access to Worldwide Sales and Distribution Networks ............................................................................. 198 6.3.2 Technology Transfer ........................................................... 199 6.4 FDI-associated Risks for Enterprises and Regional Development ................................................................................ 201 6.4.1 Stability of Western Investment .......................................... 201 6.4.2 Local Integration of Foreign-owned Companies................. 205 6.5 FDI Effects on Domestic Research and Development ................. 209 6.5.1 Transfer of R&D Abroad (Global Strategy)........................ 211 6.5.2 Local R&D Promotion Based on Specialized Expertise (Multi-local Strategy).......................................... 213 6.5.3 Local R&D Promotion Based on Skilled and Inexpensive R&D Labor (Supply-oriented Strategy).......... 215 6.6 Foreign Capital Failures ............................................................... 219 6.6.1 ČZ–Cagiva .......................................................................... 220 6.6.2 Zetor–John Deere&Co. ....................................................... 221 6.7 Conclusion.................................................................................... 223 7 Restructuring Strategies in the Czech Automotive Components Industry....................................................................... 227 7.1 Effects of Price and Trade Liberalization in the Early 1990s....... 228 7.2 Survival Strategies of Czech Component Suppliers in the Early 1990s................................................................................... 232 7.2.1 Export Expansion ................................................................ 232 7.2.2 Labor Shedding ................................................................... 233 7.2.3 Niche Marketing.................................................................. 234 7.2.4 Cooperation with a Foreign Partner .................................... 235

XII

Contents

7.2.5 Concentration on the Passenger Car Components Production ........................................................................... 236 7.3 Supplier Network Transformation in the Czech Passenger Car Industry.................................................................................. 236 7.4 Effects of FDI in the Czech Automotive Components Industry......................................................................................... 247 7.5 Toyota Peugeot Citroën Automobile (TPCA) .............................. 250 7.6 Hyundai ........................................................................................ 252 7.7 Conclusion.................................................................................... 254 8 Conclusion ......................................................................................... 257 8.1 Transformation of the Czech Automobile Industry...................... 259 8.2 A Successful Transformation? ..................................................... 264 References............................................................................................... 267 Index ....................................................................................................... 291

List of Abbreviations

AIK Automobile Industry - kombinát ASAP Akciová společnost pro automobilový průmysl (Joint Stock Company for Automobile Industry) AZNP Automobilové závody, národní podnik (Automobile Works, National Enterprise) BAZ Bratislavské automobilové závody (Bratislava Automobile Works) CAW Czechoslovak Automobile Works CE Central Europe CEE Central and Eastern Europe CEO chief executive officer CKD complete knock-down CMEA Council for Mutual Economic Assistance CPE centrally planned economy CZK Czech crown DM German mark EBRD European Bank for Reconstruction and Development EU European Union FDI foreign direct investment FIE foreign invested enterprise FTS first-tier supplier GM General Motors HZP Hanácké železárny a pérovny IPB Investment and Postal Bank IPF investment privatization fund JIT just-in-time JV joint venture Kčs Czechoslovak crown L&K Laurin & Klement LCV light commercial vehicle MAZ Minsk Automotive Plant MKD multi knocked-down NPF National Property Fund ODA Občanská demokratická alliance (Civic Democratic Alliance) ODS Občanská demokratická strana (Civic Democratic Party)

XIV

List of Abbreviations

OICA R&D SKD SOE STS T&N TAZ TNC TTS USD VHJ VW ZŤS

Organisation Internationale des Constructeurs d’Auxtomobiles research and development semi knock-down state-owned enterprise second-tier supplier Turner & Newall Ltd Trnavské automobilové závody (Trnava Automobile Works) transnational corporation third-tier supplier United States dollar výrobní hospodářská jednotka (production economic unit) Volkswagen Závody ťažkého strojárstva

A Successful Transformation?

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Christina Keinert Corporate Social Responsibility as an International Strategy 2008. ISBN 978-3-7908-2023-2

Petr Pavlínek

A Successful Transformation? Restructuring of the Czech Automobile Industry

With 50 Figures and 32 Tables

Author Prof. Petr Pavlínek University of Nebraska at Omaha Department of Geography and Geology 6001 Dodge Street Omaha NE 68182-0199 USA [email protected]

ISBN: 978-3-7908-2039-3

Series Editors Werner A. Müller Martina Bihn

e-ISBN: 978-3-7908-2040-9

Contributions to Economics ISSN: 1431-1933 Library of Congress Control Number: xxxx c 2008 Physica-Verlag Heidelberg This work is subject to copyright. All rights are reserved, whether the whole or part of the material is concerned, speciﬁcally the rights of translation, reprinting, reuse of illustrations, recitation, broadcasting, reproduction on microﬁlm or in any other way, and storage in data banks. Duplication of this publication or parts thereof is permitted only under the provisions of the German Copyright Law of September 9, 1965, in its current version, and permission for use must always be obtained from Springer. Violations are liable to prosecution under the German Copyright Law. The use of general descriptive names, registered names, trademarks, etc. in this publication does not imply, even in the absence of a speciﬁc statement, that such names are exempt from the relevant protective laws and regulations and therefore free for general use. Cover design: xxxx Printed on acid-free paper 9 8 7 6 5 4 3 2 1 springer.com

To the memory of my parents Ilona Pavlínková (1937-2001) and Josef Pavlínek (1929-2001)

Preface

I started researching the dramatic changes in the automobile industry of Central and East European countries in the late 1990s. My interest grew out of my previous work on the post-socialist transformation, foreign direct investment and regional economic development. While researching the economic and regional development effects of foreign direct investment, I was increasingly drawn to the automobile industry because of the speed and depth of its transformation through foreign direct investment and its potentially very significant economic and regional development effects. In addition to working on the Central and East European automobile industry as a whole, I became interested in detailed case studies of enterprise restructuring as I wanted to understand its complex nature and the role of different actors in the restructuring of the automobile industry. In order to achieve this goal, I visited dozens of automotive enterprises, especially in the Czech Republic (Czechia) to conduct in-depths interviews with key informants. I have also interviewed key informants at ministries, automotive associations and academia and collected various secondary data and information. This book is the outcome of this work. In this endeavor I have benefited from various support. The University Committee on Research and Creative Activity at the University of Nebraska at Omaha funded three field work sessions in Czechia to conduct interviews and research for this book. A part of the original writing was conducted during my visiting position at the Slavic Research Center of Hokkaido University in Japan between June 2001 and March 2002. The final writing and publication of this book was financially supported by the Research Program No. MSM 0021620831 sponsored by the Ministry of Education, Youth and Sport of the Czech Republic. I am truly grateful for all this support without which the preparation and publication of this book would have been impossible. Colleagues at the University of Nebraska at Omaha have provided a supportive environment for my research and writing. I am grateful beyond measure to all people from Czechia who were willing to be interviewed in the course of research for this book. I am also grateful to Prof. Petr Dostál from Charles University in Prague for his support of the publication of this book. Others have contributed along the way. In particular, I am grateful to

VIII

Preface

Philippa McDermott and Carol Dillon for proofreading parts of the manuscript. I also want to thank Marvin Barton from the University of Nebraska at Omaha for the production of maps in Chap. 1. Several chapters draw on my previously published papers or their parts that have been heavily edited and updated for this book. In particular, Chap. 1 draws on parts of Pavlínek P (2002) Restructuring the Central and Eastern European Automobile Industry: Legacies, Trends and Effects of Foreign Direct Investment. Post-Soviet Geography and Economics 43(1):41-77 and on parts of the Introduction in Pavlínek P (2006) Restructuring of the Polish Passenger Car Industry Through Foreign Direct Investment. Eurasian Geography and Economics 47(3):353–377 both published by Bellwether Publishing, Ltd. Chapter 1 also partially draws on pages 1701–1704 originally published in Pavlínek P (2002) Transformation of Central and East European Passenger Car Industry: Selective Peripheral Integration through Foreign Direct Investment. Environment and Planning A 34(9):1685–1709 by Pion. Chapter 4 is based upon Pavlínek P (2000) Restructuring of the Commercial Vehicle Industry in the Czech Republic. Post-Soviet Geography and Economics 41(4):265–287 published by Bellwether Publishing, Ltd. Chapter 5 was originally published in Pavlínek, P (2002) Domestic Privatization and its Effects on Industrial Enterprises in East-Central Europe: The Evidence from the Czech Motor Component Industry. Europe-Asia Studies 54(7):1127–1150 by Taylor & Francis. Chapter 6 draws on two previously published papers: Pavlínek P (2002) The Role of Foreign Direct Investment in the Czech Automotive Industry Privatization and Restructuring. Post-Communist Economies 14(3):359–379 published by Taylor & Francis and on parts of Pavlínek P (2004) Regional Development Implications of Foreign Direct Investment in Central Europe, European Urban and Regional Studies 11(1):47–70 published by SAGE. Finally, Chapter 7 is partially based on Pavlínek P (2003) Transformation of the Czech Automotive Components Industry through Foreign Direct Investment. Eurasian Geography and Economics 44(3):184–209 published by Bellwether Publishing, Ltd. I am thankful to all these publishers for their permissions to use my previous work in this book. Most importantly, I am grateful to my family, especially to my wife Gabriela and children Adam and Sára, for their everyday love, support, care and encouragement without which the completion of this book would have been impossible. November 2007

Petr Pavlínek

Contents

1 Central and East European Automobile Industry............................. 1 1.1 The Central and East European Automobile Industry Before 1989 ...................................................................................... 3 1.1.1 Passenger Car Industry............................................................ 3 1.1.2 Truck Industry ......................................................................... 6 1.2 Post-1990 Automobile Industry Transformation in CEE ................. 9 1.3 The Role of CEE in the European Automotive Industry Division of Labor ........................................................................... 19 1.3.1 Mass Production of Small Passenger Cars ............................ 20 1.3.2 The Low Volume Production of Special Models.................. 20 1.4 CEE Truck Manufacturing in the 1990s and Early 2000s.............. 23 1.5 Production Trends in the Rest of the CEE Motor Industry ............ 26 1.6 The Plan of the Book...................................................................... 28 2 Czech Automobile Industry Before 1990.......................................... 33 2.1 Pre-1945 Development................................................................... 34 2.2 Organization of the Automobile Industry Between 1945 and 1989 ......................................................................................... 36 2.3 Effects of the CMEA on the Czechoslovak Automobile Industry........................................................................................... 46 2.4 Production Trends 1945-1989 ........................................................ 49 2.5 Foreign Links and Trade Patterns................................................... 54 2.6 Investment in the Czechoslovak Automotive Industry Before 1990 .................................................................................... 61 2.7 Pre-1990 Development of the Škoda Passenger Car Maker........... 65 2.7.1 Pre-1945 Development of Škoda .......................................... 65 2.7.2 Development of Škoda Following the Second World War............................................................................. 67 2.7.3 Stagnation in the 1970s and Early 1980s .............................. 70 2.7.4 Škoda Favorit ........................................................................ 72 2.8 Conclusion...................................................................................... 76

X

Contents

3 Post-1989 Transformation of Škoda Auto........................................ 79 3.1 Privatization.................................................................................... 79 3.2 Difficulties in the Early 1990s........................................................ 86 3.3 Transfer of Managerial Know-how from VW to Škoda................. 90 3.4 Restructuring Strategies.................................................................. 94 3.5 Post-1995 Success and Challenges of the Early 2000s ................ 105 3.6 Škoda’s Vrchlabí Plant ................................................................. 112 3.7 Škoda’s Kvasiny Plant.................................................................. 114 3.8 Internationalization of the Škoda Production Network ................ 116 3.8.1 Poland.................................................................................. 117 3.8.2 Russia .................................................................................. 118 3.8.3 Ukraine and Kazakhstan...................................................... 120 3.8.4 Bosnia-Herzegovina............................................................ 121 3.8.5 India .................................................................................... 122 3.8.6 China ................................................................................... 124 3.9 Conclusion.................................................................................... 124 4 Restructuring of the Czech Commercial Vehicle Industry........... 127 4.1 Tatra Kopřivnice........................................................................... 128 4.1.1 Pre-privatization Agony ...................................................... 129 4.1.2 Privatization ........................................................................ 131 4.1.3 Post-privatization Experience ............................................. 132 4.2 Liaz............................................................................................... 138 4.2.1 Pre-privatization Agony at Liaz .......................................... 139 4.2.2 Privatization of Liaz and its Effects .................................... 141 4.3 Avia Praha .................................................................................... 143 4.4 Karosa Vysoké Mýto.................................................................... 149 4.5 Conclusion.................................................................................... 154 5 Effects of Domestic Privatization in the Auto Components Industry....................................................................... 157 5.1 Domestic Privatization Strategies and Their Outcomes ............... 159 5.2 Domestic Privatization of the Czech Auto Components Industry......................................................................................... 165 5.2.1 Management Buy-outs ........................................................ 166 Privatization of Hanácké železárny a pérovny ....................167 Karsit Jaroměř: Successful Managerial Privatization .........168 Failed Management Buy-outs .............................................170 5.2.2 Management Buy-outs Followed by Joint Venture or Sale to Foreign Partners .................................................. 171 Privatization of PAL Praha .................................................171 Privatization of Osinek Kostelec nad Orlicí........................172

Contents

XI

5.2.3 Spontaneous Privatization ................................................... 173 5.2.4 Effects of Voucher Privatization: The Role of IPFs in Privatized Companies...................................................... 175 5.3 Negative Effects of Czech Privatization on Enterprises............... 178 5.4 Conclusion.................................................................................... 182 6 The Role of FDI in the Czech Automotive Industry...................... 185 6.1 Governmental Policies, FDI and Privatization ............................. 187 6.1.1 Privatization of Kablo Velké Meziříčí ................................ 189 6.1.2 Privatization of Magneton Kroměříž................................... 190 6.2 Immediate Effects of FDI in Privatized Enterprises..................... 193 6.2.1 Disciplining the Labor......................................................... 193 6.2.2 Contested Nature of Enterprise Restructuring..................... 195 6.3 Advantages of Foreign Ownership for Czech Automotive Enterprises .................................................................................... 197 6.3.1 Access to Worldwide Sales and Distribution Networks ............................................................................. 198 6.3.2 Technology Transfer ........................................................... 199 6.4 FDI-associated Risks for Enterprises and Regional Development ................................................................................ 201 6.4.1 Stability of Western Investment .......................................... 201 6.4.2 Local Integration of Foreign-owned Companies................. 205 6.5 FDI Effects on Domestic Research and Development ................. 209 6.5.1 Transfer of R&D Abroad (Global Strategy)........................ 211 6.5.2 Local R&D Promotion Based on Specialized Expertise (Multi-local Strategy).......................................... 213 6.5.3 Local R&D Promotion Based on Skilled and Inexpensive R&D Labor (Supply-oriented Strategy).......... 215 6.6 Foreign Capital Failures ............................................................... 219 6.6.1 ČZ–Cagiva .......................................................................... 220 6.6.2 Zetor–John Deere&Co. ....................................................... 221 6.7 Conclusion.................................................................................... 223 7 Restructuring Strategies in the Czech Automotive Components Industry....................................................................... 227 7.1 Effects of Price and Trade Liberalization in the Early 1990s....... 228 7.2 Survival Strategies of Czech Component Suppliers in the Early 1990s................................................................................... 232 7.2.1 Export Expansion ................................................................ 232 7.2.2 Labor Shedding ................................................................... 233 7.2.3 Niche Marketing.................................................................. 234 7.2.4 Cooperation with a Foreign Partner .................................... 235

XII

Contents

7.2.5 Concentration on the Passenger Car Components Production ........................................................................... 236 7.3 Supplier Network Transformation in the Czech Passenger Car Industry.................................................................................. 236 7.4 Effects of FDI in the Czech Automotive Components Industry......................................................................................... 247 7.5 Toyota Peugeot Citroën Automobile (TPCA) .............................. 250 7.6 Hyundai ........................................................................................ 252 7.7 Conclusion.................................................................................... 254 8 Conclusion ......................................................................................... 257 8.1 Transformation of the Czech Automobile Industry...................... 259 8.2 A Successful Transformation? ..................................................... 264 References............................................................................................... 267 Index ....................................................................................................... 291

List of Abbreviations

AIK Automobile Industry - kombinát ASAP Akciová společnost pro automobilový průmysl (Joint Stock Company for Automobile Industry) AZNP Automobilové závody, národní podnik (Automobile Works, National Enterprise) BAZ Bratislavské automobilové závody (Bratislava Automobile Works) CAW Czechoslovak Automobile Works CE Central Europe CEE Central and Eastern Europe CEO chief executive officer CKD complete knock-down CMEA Council for Mutual Economic Assistance CPE centrally planned economy CZK Czech crown DM German mark EBRD European Bank for Reconstruction and Development EU European Union FDI foreign direct investment FIE foreign invested enterprise FTS first-tier supplier GM General Motors HZP Hanácké železárny a pérovny IPB Investment and Postal Bank IPF investment privatization fund JIT just-in-time JV joint venture Kčs Czechoslovak crown L&K Laurin & Klement LCV light commercial vehicle MAZ Minsk Automotive Plant MKD multi knocked-down NPF National Property Fund ODA Občanská demokratická alliance (Civic Democratic Alliance) ODS Občanská demokratická strana (Civic Democratic Party)

XIV

List of Abbreviations

OICA R&D SKD SOE STS T&N TAZ TNC TTS USD VHJ VW ZŤS

Organisation Internationale des Constructeurs d’Auxtomobiles research and development semi knock-down state-owned enterprise second-tier supplier Turner & Newall Ltd Trnavské automobilové závody (Trnava Automobile Works) transnational corporation third-tier supplier United States dollar výrobní hospodářská jednotka (production economic unit) Volkswagen Závody ťažkého strojárstva

1 Central and East European Automobile Industry

The recent changes in the global automobile industry involved, among others, its continuing consolidation, the changes in production strategies, the redefinition of relations between assemblers and suppliers, and, consequently, the major shifts in its geography of production (e.g. Dicken 2003:355-398; Conybeare 2004). Globalization in the automobile industry has been typified by an increasing number of mergers and acquisitions, involving not only car makers but also components producers, and by a growing number of the technology-, research- and market-oriented international strategic alliances and cross-shareholdings among automobile producers. The wave of mergers and acquisitions in the past twenty years has led to an increasing global concentration of the automobile industry. By 2005, the ten largest company alliances (including their affiliates and wholly-owned companies) accounted for 90% of the global market with the top five accounting for 75% (The Economist 2005:63). During this period, the relentless Japanese and, more recently, South Korean competition forced the West European and U.S. auto makers to introduce new production concepts to cut production costs and maximize product and labor flexibility to make car factories lean and flexible. The goals were to free idle capital tied up in stocks of parts and finished cars, streamline the entire production and design process on a continuous basis to minimize production time and waste, and to increase product differentiation (Womack et al. 1990; Lagendijk 1997:10; Dicken 2003:365-366). Car manufacturers have increased their flexibility by producing different sorts of vehicles on the same production line. The market fragmentation caused by rapidly increasing product varieties forced car manufacturers to adopt cost-cutting strategies, such as the platform strategy and modular assembly, to offset the increased costs of producing and marketing a number of small-volume vehicles rather than a few high-volume vehicles (e.g. Lung 2004:148-150; Lung et al. 1999; Sako and Murray 2000). Two additional possibilities for carmakers to succeed in the highly competitive industry are to either penetrate new markets or to increase their competitiveness by shifting parts of their production to low-cost regions. P. Pavlínek, A Successful Transformation? Contributions to Economics, doi: 10.1007/978-3-7908-2040-9_1, © Physica-Verlag Heidelberg 2008

2

1 Central and East European Automobile Industry

Both strategies have been pursued vigorously at the global scale (Humphrey et al. 2000; Dicken 2003). However, despite the globalization drive, the global automobile industry remains typified by the strong regionalization of its production and distribution networks especially in Europe and North America (Dicken 2003:386-397; Freyssenet and Lung 2000:75-76). One of the important regional trends in the past several decades has been the integration of peripheral areas of especially West European and North American cores into the car manufacturing production and distribution networks. These peripheries offer car makers the possibility of cutting production costs by shifting especially labor-intensive parts of the automobile production chain to these locations (Humphrey et al. 2000:8; Humphrey and Oeter 2000:51-55; Lung 2000:23-24). Since the early 1990s, the chances to exploit such a “spatial fix” opened in Central and Eastern Europe (CEE) (Sadler et al. 1993:347; Sadler and Swain 1994:400).1 The goal of this book is to examine the development and restructuring of the automobile industry in the Czech Republic (Czechia). The Czech automobile industry is part of the CEE periphery of the European automobile production system. The book concentrates on the post-1990 developments, although it is approaching the Czech automobile industry from a historical perspective and in the context of developments in the automobile industry in CEE as a whole. Therefore, before focusing on the Czech case, this introductory chapter reviews major developments in the CEE automobile industry as a whole. First, the development of the CEE automobile industry during the pre-1989 period is briefly outlined. Second, the post-1990 transformation of the CEE passenger car industry is summarized, followed by a discussion of the role of the CEE passenger car industry in the global and European car industry division of labor. Fourth, the post-1990 developments in CEE truck manufacturing are outlined. The chapter finishes with a brief outline of the book.

1In this book, CEE denotes the former state socialist countries of Central and Eastern Europe including the European part of the former Soviet Union. Central Europe refers to the Czech Republic (Czechia), Hungary, Poland, Slovakia and Slovenia.

1.1 The Central and East European Automobile Industry Before 1989

3

1.1 The Central and East European Automobile Industry Before 1989 1.1.1 Passenger Car Industry The CEE automobile industry has traditionally been at the periphery of the European car production system. Prior to World War II, the indigenous development of passenger car industry was limited to the Czech part of former Czechoslovakia, the area of Germany that became East Germany, and the former Soviet Union. In both former East Germany and Czechia, the origins of automobile production can be traced back to late 1890s and early 1900s (see Chap. 2). Even there, however, car industry was significantly less developed than in Western Europe before World War II. The development of car manufacturing elsewhere in CEE prior to World War II was even more limited and reflected the activities of foreign firms; for example, small numbers of passenger cars were assembled in Hungary, Romania, Poland, and Yugoslavia under agreements with Fiat, Ford, Austro-Daimler, and other manufacturers (Pavlínek 2002a, 2006). After World War II, the development of the CEE automobile industry was affected by several important factors associated with the state socialist development model, such as the nationalization and state ownership of all industry, central planning, the division of labor within the Council for Mutual Economic Assistance (CMEA), the overall neglect of passenger car production especially in the early 1950s during the Stalinist phase of socialist industrialization, and the persistent lack of investment capital to continuously develop and modernize the industry (see Chap. 2; Pavlínek 2002:43-44). Tables 1.1 and 1.2 and Fig. 1.1 show that passenger car production grew quickly in the1950s, 1960s, and 1970s after post-war reconstruction and the launch of passenger car production in former Yugoslavia (1955) and Romania (1968), and the resumption of car production in Poland (1967), based on foreign license agreements. Average annual growth rates for the CEE countries as a whole exceeded 10% for the 1950s, 1960s, and 1970s (Table 1.2). Despite the fact that these high rates of annual growth can be largely attributed to the low initial base, it was during this period that CEE’s share of world passenger car production grew from 1.2% (in 1950) to 8.2% (1980). The greatest gains were made between 1965 and 1980 (+5.8%), as the new passenger car factories based on foreign license agreements went into operation in Poland (Fiat), Romania (Renault), former Yugoslavia (Renault), and the former Soviet Union (Fiat). During this period, the volume of CEE passenger car production increased by almost five and one-half times, from 446,000 to 2.4

4

1 Central and East European Automobile Industry

10 8

2000

Percent

Thousands of cars

2500

1500 1000

6 4 2

500 0 1950 1955 1960 1965 1970 1975 1980 1985 1990

0 1950 1955 1960 1965 1970 1975 1980 1985 1990

Year

Year

Fig. 1.1. Total passenger car production in CEE (left) and the percent share of world passenger car production by CEE (right), 1950-1990. Source: Based on the production data from national statistical yearbooks of individual CEE countries.

million units (Table 1.1). After 1980, however, the CEE share of world passenger car production gradually declined, reflecting the stagnation of the industry and its failure to keep pace with developments in the global automobile industry. Passenger car production declined in the former Soviet Union and Poland, the largest CEE passenger car makers, while slow growth continued in the rest of the region. Table 1.1. Passenger car production in CEE, 1950-1990 Year

Poland

1950 1955 1960 1965 1970 1975 1980 1985 1990

0 4,015 12,863 24,800 64,200 164,000 351,000 283,000 266,000

GDR Yugoslavia Romania Bulgaria 7,165 22,247 64,071 102,877 126,611 159,147 176,761 210,370 145,000

0 760 10,461 35,880 110,709 183,000 255,000 228,000 291,724

0 0 1,200 3,653 23,604 68,013 88,232 134,000 100,000

0 0 0 n.a. n.a. n.a. 15,401 15,000 14,641

USSR 64,600 108,000 139,000 201,000 344,000 1,201,000 1,327,000 1,332,000 1,259,000

Czechoslovakia 24,463 12,530 56,211 77,705 142,856 175,411 183,745 183,701 191,233

Total CEE 96,228 147,552 283,806 445,915 811,980 1,950,571 2,397,139 2,386,071 2,267,598

Source: Annual statistical yearbooks of the above countries, various years.

After the Second World War, the development of an indigenous or independent passenger car industry continued in former East Germany and in Czechoslovakia. It was best represented by the Czechoslovak Škoda and East German Trabant and Wartburg operations, which had a long history of car manufacturing. Perpetuation of the existing car-making tradition resulted in a continuous technological independence of these companies from Western car makers until the early 1980s. However, the Czechoslovak and East German passenger car makers were forced to concentrate on

1.1 The Central and East European Automobile Industry Before 1989

5

the production of small inexpensive low-quality models and their overall development was constrained by the centrally planned economy and state socialist economic policies (see Chap. 2 and Pavlínek 2002a:44-48 for details). Table 1.2. Average annual percentage passenger car production growth/decline in CEE, 1951-1990a Poland GDR Yugoslavia 1951-1990 1951-1955 1956-1960 1961-1965 1966-1970 1971-1975 1976-1980 1981-1985 1986-1990

21.8b 109.3c 26.2 14.0 21.0 20.6 16.4 -4.2 -1.2

7.8 25.4 23.6 9.9 4.2 4.7 2.1 3.5 -7.2

0 0 68.9 28.0 25.3 10.6 6.9 -2.2 5.1

Romania USSR 0 0 0 24.9 45.2 23.6 5.3 8.7 -5.7

7.7 10.8 5.2 7.7 11.3 28.4 2.0 0.1 -1.1

CzechoSlovakia 5.3 -12.5 35.0 6.7 13.0 4.2 0.9 0.0 0.8

Total CEE 8.2 8.9 14.0 9.5 12.7 19.2 4.2 -0.1 -1.0

a

Poland, Yugoslavia and Romania did not produce any passenger cars in 1950. 1952-1990. c 1952-1955. Source: Compiled by the author from the annual statistical yearbooks of the above countries. b

The rest of CEE passenger car industry was based on Western technology and licensing agreements (Table 1.3). This strategy was followed in countries with no or a very limited history of indigenous car production prior to the state socialist period (Poland, Romania, Yugoslavia) to overcome the technological gap and to quickly launch production. The same strategy was also followed in the former Soviet Union to quickly elevate domestic passenger car production. As in the case of former East Germany and Czechoslovakia, these CEE countries concentrated on the development of compact or sub-compact car production to manufacture affordable cars for the general public. Upgrades for these models typically were quite limited and the passenger cars produced in the late 1980s were still largely based on the original Western models. Levels of production and efficiency as well as quality standards at these newly built or expanded factories remained low and the CEE car producers involved in these licensing agreements did not progress to develop full-scale autonomous manufacturing of automobiles (Lyall 1994:21). With the exception of the VAZ plant at Togliatti, Russia, built to produce licensed Fiat cars, these factories were small by Western standards and typically produced less than 200,000 passenger cars annually (Sadler et al. 1993:340). Bulgaria, Hungary, and Albania did not

6

1 Central and East European Automobile Industry

develop any passenger car production under state socialism. Nevertheless, Bulgaria assembled about 15,000 Russian Moskvitchs annually in the 1980s. Thus, with the exception of underdeveloped and isolated Albania, Hungary was the only CEE country that did not assemble any passenger cars during the state socialist period. This situation resulted from the CMEA division of labor in which Hungary was to specialize in the production of buses for the entire CMEA and the production of passenger car components mainly for Russian and Polish car manufacturers (see Havas 1995, 2000a for details). However, in the early 1980s, the policy with respect to Hungary was reversed, and Hungarian officials began to seek a Western partner with which to establish car assembly operations. Negotiations between Hungarian officials and Japanese Suzuki began as early as 1985 (Havas 1995:39). Table 1.3. License agreements for the passenger car production in CEE during the state socialist period. Year of license agreement

Year of production launch

Factory name and location

Western partner

1953

1955

Crvena Zastava, Kragujevac, Yugoslavia

Fiat

1965

1967

FSO, Warsaw, Poland

Fiat

1966

1968

Kolibasi Plant, Pitesti, Romania

Renault

1966

1970

AvtoVAZ, Togliatti, Russia

Fiat

1971

1973

FSM, Bielsko Biala, Poland

Fiat

1972

1973

Renault

1976

1982

Industry of Motor Vehicles, Novo Mesto, Yugoslavia Oltcit, Craiova, Romania

1987

1991

FSM, Tychy, Poland

Fiat

Citroën

Source: Compiled by the author from various sources.

1.1.2 Truck Industry The production of trucks also grew substantially in CEE from 330,000 units in 1950 to a peak of more than one million units in 1985 (Tables 1.4 and 1.5; Fig. 1.2). Large production increases occurred from 1950 to 1965 (from 330,000 to 695,000 units) and from 1970 to 1975 (from 710,00 to

1.1 The Central and East European Automobile Industry Before 1989

7

950,000 units). Output stagnated in the second half of the 1960s, the second half of the 1970s, and the early 1980s. As in the case of passenger cars, the second half of the 1980s was a period of production declines. Despite this growth, Fig. 1.2 shows that, unlike passenger car production, CEE truck production failed to keep pace with global production trends during the state socialist period. With the exception of 1950–1955 and 1970–1975, the share of CEE in the world’s truck production exhibited a downward trend, declining from a peak of 16.4% in 1955 to 8.1% in 1990. Truck production in CEE was dominated by the former Soviet Union, which consistently accounted for more than 80% of the truck production between 1950 and 1990. Its share declined from the peak of 97.4% of all trucks produced in CEE in 1950 to 80.4% by 1975 and 1980, and then increased to 84.3% by 1990 as the production in other CEE countries grew but then declined in the cases of Poland, Yugoslavia, and Romania. 18 15 900

Percent

Thousands of trucks

1200

600

12 9 6

300

3

0 1950 1955 1960 1965 1970 1975 1980 1985 1990

0 1950 1955 1960 1965 1970 1975 1980 1985 1990

Year

Year

Fig. 1.2. Total truck production in CEE (left) and the percentage share of CEE in world truck production (right), 1950–1990. Source: Based on production data from national statistical yearbooks of CEE countries.

The truck industry was even more isolated from Western markets than passenger car production. Exports of trucks to Western European and other developed countries were minimal, as the vast majority of trade was conducted within CMEA. Exports outside CMEA were small and directed toward the less developed countries. The case of Czechoslovakia is exemplary in this respect. On average, Czechoslovakia exported about one-third to two-fifths of its truck output between 1950 and 1990. More than 90% of truck exports went to the state socialist countries in the 1970s and 1980s, rising to 96% in 1989. In the 1980s, 45% of exported trucks went to the Soviet Union. The former Soviet Union, Poland, Bulgaria and East Germany accounted for 70% of Czechoslovak truck exports in the 1970s and 1980s. The trucks that were exported outside CMEA were directed to the developing nations such as the United Arab Emirates and India. No trucks

8

1 Central and East European Automobile Industry

were exported to the Western industrialized countries prior to 1989. This overdependence on CEE markets proved to be disastrous in the 1990s. Table 1.4. Truck production in CEE, 1950-1990 Year

GDR

1950 1955 1960 1965 1970 1975 1980 1985 1990

1,003 14,191 12,864 15,179 24,180 35,845 36,954 45,305 31,360

Polanda Yugo- Romania Bulgariab USSRa slavia

Czecho- CEE total slovakia

782 10,456 19,484 26,661 41,000 66,500 53,700 49,100 39,000

5,984 10,541 13,306 16,456 24,462 33,407 45,688 47,956 47,589

826 2,450 4,564 9,572 12,901 14,847 18,439 15,772 9,989

2,860 8,383 14,306 35,018 35,965 31,711 20,788 8,457

n.a. n.a. n.a. n.a. n.a. n.a. 4,994 8,680 7,285

322,000 400,000 501,000 613,000 572,000 763,000 787,000 823,000 774,000

330,595 440,498 559,601 695,174 709,561 949,564 978,486 1,010,601 917,680

a

Production figures for Poland and USSR include LCVs.2 Production data for Bulgaria were not published until the 1980s. Source: Compiled by the author from the annual statistical yearbooks of the above countries. b

Table 1.5. Average annual percentage truck production growth/decline in CEE, 1951-1990a GDR Poland Yugoslavia Romania USSR 1951-1955 1956-1960 1961-1965 1966-1970 1971-1975 1976-1980 1981-1985 1986-1990 1951-1990

69.9 -1.9 3.4 9.8 8.2 0.6 4.2 -7.1 9.0

68.0 13.3 6.5 9.0 10.2 -4.2 -1.8 -4.5 10.3

24.3 13.2 16.0 6.2 2.8 4.4 -3.1 -8.7 6.4

n.a. 24.0 11.3 19.6 0.5 -2.5 -8.1 -16.5 3.1

4.4 4.6 4.1 -1.4 5.9 0.6 0.9 -1.2 2.2

Czecho- CEE total lovakia 12.0 4.8 4.3 8.3 6.4 6.5 1.0 -0.2 5.3

5.9 4.9 4.4 0.4 6.0 0.6 0.6 -1.9 2.6

a

For the period 1956-1990, Polish and USSR data include the production of LCVs. Source: Calculated by the author from data in Table 1.4.

2 Light commercial vehicles (LCVs) are vehicles used for the carriage of goods that have a carrying capacity below 3.5 tons; they include such vehicles as delivery vans and pick-up trucks.

1.2 Post-1990 Automobile Industry Transformation in CEE

9

1.2 Post-1990 Automobile Industry Transformation in CEE Thus, at the end of the state socialist period (1945-89), car manufacturing in CEE was not significant globally with only about six percent of the world production in 1989. The industry was unproductive and obsolete by Western standards because it was slow to adopt the changes that swept through the industry in the capitalist West in the 1970s and 1980s. The collapse of state socialism and the “transition” to capitalism in CEE resulted in a dramatic restructuring of the previously state socialist automobile industry in the 1990s. Three crucial developments affected the industry in the early 1990s. First, the disintegration of CMEA and the reorientation of trade toward Western Europe resulted in the breakdown of established trade flows within the region. The CMEA export markets of CEE producers collapsed in the early 1990s; for car producers in smaller CEE countries the trade reorientation toward Western Europe did not compensate for lost markets in CEE. Second, the domestic markets of local car producers also collapsed, as a result of a flood of imports of cheap used Western cars following trade liberalization. Domestic demand for new cars also sharply declined, reflecting economic crisis and high inflation associated with shock therapy that undermined purchasing power and household savings. At the same time, prices of new domestically produced cars were increasing, making them less attractive for potential buyers. And third, the opening of the region to Western trade and investment provided the opportunity for rapid market penetration by Western car makers and the possibilities to set up production operations based on the relatively cheap (given the productivity levels) and skilled labor force located close to European Union (EU) markets. As a result of these factors, sales of domestic and CEE passenger car producers collapsed across CEE in the early 1990s. With collapsed CMEA markets and collapsing domestic markets, CEE producers lacked capital not only to sustain pre-1989 production levels, but also to finance actions necessary for their long-term survival, such as the acquisition of new technologies, new product development, and overall restructuring. Companies such as the Czechoslovak Škoda and Polish FSM accumulated large debts and were increasingly unable to finance day-to-day operations, including payments for deliveries of components and production materials (see Chap. 3). Because of increasing domestic competition and intense competition internationally, and given the trends in the global automobile industry (typified by corporate centralization and mergers resulting in a decreasing number of large transnational corporations [TNCs] dominating car production), it was obvious that the small CEE car manufacturers with small domestic markets, such as Czechoslovakia,

10

1 Central and East European Automobile Industry

Romania, Yugoslavia, and even Poland, could not survive without an increased production and substantial expansion of their exports. Under this situation, two strategies have been pursued in passenger car industry in the 1990s. The first was a foreign capital–financed and directed restructuring of existing car plants and their integration into European and in some cases global production networks. The second strategy involved a continued reliance on domestic markets and competition based solely on the production of low-priced cars that are much cheaper than the cheapest foreign competition. This second approach was usually necessitated by failure to quickly find a foreign investor willing to make any commitment under conditions acceptable to CEE governments (e.g. in the case of the passenger car makers Dacia, AvtoZAZ, Zastava, and various truck makers) or it was actively pursued, as in the case of Russian car makers. The first strategy was much more common. As a result, with the exception of Russia and Serbia, the CEE passenger car industry has been transformed by foreign auto makers since 1990. Traditionally, the motor industry has been considered the key representative of modern manufacturing industry because of its size and linkages with many other industries and its effects on overall economic development. Having recognized the importance of the car industry for the entire national economy, most CEE governments have actively promoted its transformation through foreign direct investment (FDI). The industry played an important role in the reintegration of CEE economies into the European economy after 1990. Some consider the CEE passenger car industry restructuring to be “a symbol of sweeping changes” in the region and a success indicator of post-socialist transformations (Havas 2000a:95). However, while the passenger car industry restructuring is generally regarded as being exceptionally successful by governments and general public in countries such as Hungary, Czechia and Slovakia, the process of change has been geographically uneven and often contradictory in many respects. CEE offers three major advantages to foreign auto makers. First, its population of 330 million represents a potentially large market for new passenger cars. Major automobile industry players, typically plagued by overcapacity, cannot afford to ignore this market in the long run. Second, the relative location of Central Europe being close to Western Europe, one of the cores of the global automobile industry and its largest market, combined with Central Europe’s relatively low labor costs (given its productivity) have played the crucial role. This allows car makers to lower their production costs through shifting parts of the production to CEE and thus to increase their competitiveness in Western Europe. Low production costs and the proximity of Western Europe also make it possible to supply

1.2 Post-1990 Automobile Industry Transformation in CEE

11

components to West European car factories from CEE while keeping transportation costs relatively low. Finally, the extension of the EU membership to ten CEE countries in 2004 and 2007 allows the car makers and parts suppliers to enjoy the benefits of the single European market and the non-EU companies to avoid EU tariffs by setting up assembly operations in the CEE EU members. These factors have prompted foreign car makers and component suppliers to invest more than USD 24 billion in the CEE passenger car industry since 1990 (Lepape, 2005, Table 1.6), because it has played an increasingly important role in their competitive strategies in Europe. As a result, the CEE passenger car industry has experienced a radical transformation through FDI and has been selectively integrated into the West European automobile production and distribution networks (e.g. Pavlínek 2002a, 2002b; Havas 2000b; Radosevic and Rozeik 2005). These processes of internationalization and peripheral integration have been similar to those experienced previously by other “emerging markets” in the automobile industry, such as Spain and Mexico, located close to the core areas of the global automobile industry (Humphrey and Oeter 2000:53; Layan 2000). In addition to these processes of internationalization and peripheral integration, the situation in CEE has also been affected by the complex processes of the post-socialist economic transformation and the need to overcome the legacies of state socialism in the automobile industry. The CEE passenger car production declined by 510 thousand units during the early transformation period between 1990 and 1994 because of the above described difficulties experienced by CEE producers following the collapse of state socialism. Since 1995 production has recovered, as the result of FDI-financed and led transformation, and it increased by 2.0 million passenger cars between 1994 and 2006 (Table 1.7). Consequently, CEE’s share on the world passenger car production slightly grew from 5.8% in 1990 to 7.3% in 2006 and its share on the European production rose from 11.4% in 1990 to 20.1% in 2006 (Fig. 1.3). However, significant differences exist within CEE. Large foreign TNCs now dominate passenger car production especially in Central Europe - in Czechia, Hungary, Poland, Slovakia and Slovenia. For example, the share of FDI on revenues in the manufacture of motor vehicles, including its engines, parts and accessories, reached 91.5% in Czechia in 2001, 96.0% in Hungary and 90.7% in Poland in 1999 (Srholec 2003:700). A similar situation exists in Romania and increasingly also in Ukraine. FDI penetration of the passenger car industry has been much slower in Russia where the domestic passenger car makers continue to dominate, although foreign TNCs have started to gradually erode the position of the domestic car makers.

12

1 Central and East European Automobile Industry

Table 1.6. Selected FDI in the CEE passenger car assembly, 1989-2007 Firm

Location/Original Local Partner

Investment (USD mil.)

BMW

Leipzig, (former East) Germany

453

2001

BMW

Kaliningrad, Russia/ Avtotor

50a

1999

Daewoo

Warsaw (Żerań), Poland/ FSO

936a

1995

Daewoo

Craiova, Romania/ Automobile Craiova S.A.

900

1994

Daewoo

Zaporizhya, Ukraine/ Avtozaz

1,300 a

Year

1997

Fiat

Bielsko Biała and Tychy, Poland/ FSM

1,800

Fiat

Nizhny Novgorod, Russia/ GAZ

850

2000

Vsevolozhsk (Leningrad Oblast), Russia/ Ford-Vsevolozhsk Ltd. Craiova, Romania

230a

1999

950

2007

Ford

Obchak (near Minsk), Belarus (car assembly closed in 2000)

10a

1997

GM

Gliwice, Poland, Opel Polska

1,010a

1995

GM

Eisenach, (former East) Germany/ Automobilwerke Eisenach

1,000a

1990

GM

Elabuga, Russia/ ELAZ (JV production halted in 1998)

270

1996

GM

Togliatti, Russia/ Avtovaz

100

2001

GM

Shushary (close to St. Petersburg), Russia

300

2007

Hyundai

Nošovice, Czechia

1,000

2006

Kia

Žilina, Slovakia

1,050a

2004

Nissan

St. Petersburg, Russia

200

2006

Porsche

Leipzig, (former East) Germany

45

2000

PSAb

Trnava, Slovakia

700a

2003

Renault

Novo Mesto, Slovenia/ Industry of Motor Vehicles

500a

1993

Renault

Colibasi-Pitesti, Romania/ S.C. Automobile Dacia S.A. Colibasi

600a

1999

Renault

Moscow, Russia/ Avtoframos

300

1999

Ford Ford

1992

1.2 Post-1990 Automobile Industry Transformation in CEE

13

Table 1.6. (Continued) Rover

Varna, Bulgaria/ Daru (Rover withdrew from JV in 1996)

120a

1993

Suzuki

Esztergom, Hungary/ Autókonszern

1,500a

1990

Toyota

Shushari (close to St. Petersburg), Russia

144

2005

Toyota/ PSAb

Kolín, Czechia

1,500

2001

VW

Mosel, (former East) Germany

1,360a 190a

1990 1999

VW

Dresden, (former East) Germany

VW

Mladá Boleslav, Vrchlabí, Kvasiny, Czechia/ Škoda

5,000a

1991

VW

Györ, Hungary, Audi Hungária,

923a

1994

VW VW

Bratislava, Slovakia/ BAZ

1,600

Poznań, Poland/ Tarpan

241

a

a

1991 1993

a

Denotes actually realized investment since the formation of a joint venture or the start of greenfield production. In other cases the figures are anticipated investment programs rather than actually realized investments. Year refers to the starting year of an investment program in the actually realized investments or the year when the investment commitment was made. Investment figures are only approximate. This listing does not claim to be comprehensive. b PSA = PSA Peugeot Citroën. Source: Compiled from manufacturers’ press releases, company reports, and various articles. 21 18

3500

Percent

Thousands of cars

4000

3000 2500

15 12 9 6

2000

3

1500 1990 1992 1994 1996 1998 2000 2002 2004 2006

0 1990 1992 1994 1996 1998 2000 2002 2004 2006

Year

Year % of world production % of European production

Fig. 1.3. Passenger car production in CEE, 1990-2006 (left) and the share of CEE on the world and European passenger car production, 1990-2006 (right). Source: Based on the production data from national statistical yearbooks of individual CEE countries (1990-1996), OICA (2007).

14

1 Central and East European Automobile Industry

Table 1.7. Passenger car production in CEE countries, 1990-2006 Bosnia Bulgaria Czechia Hungary Poland Romania Serbia Slovakia Slovenia Russia Ukraine Total

1990 1995 2000 2006 38,000 0 2,250 2,164 14,641 0 0 0 187,780 208,279 450,995 841,242 0 51,034 134,029 187,633 266,000 366,000 533,066 632,300 100,000 88,000 77,361 197,463 179,000 8,400 11,091 9,832 3,453 22,227 180,706 295,391 74,000 88,000 122,949 115,000 1,103,000 835,000 960,000 1,084,918 155,623 58,700 17,100 274,860 1,796,662 1,725,640 2,489,547 3,640,803

Source: 1990-1995 data from national statistical yearbooks of the respective countries, 2000-2006 data from OICA (2007). Central Europe

400

60

Central Europe

40

Eastern Europe

20

Index: 1990=100

Percentage

80

350 300 250 200 150

Eastern Europe

100 50

0 1990 1992 1994 1996 1998 2000 2002 2004 2006

0 1990 1992 1994 1996 1998 2000 2002 2004 2006

Year

Year

Fig. 1.4. The share of Central Europe and the rest of CEE broadly defined as Eastern Europe on the CEE passenger car production (1990-2006) (left) and the index of passenger car production in Central Europe and Eastern Europe (19902006) (right). Source: Based on data in OICA (2007) and statistical yearbooks of individual CEE countries (various years).

Foreign TNCs are the main reason behind the changes in the geography of the passenger car industry in CEE after 1989 in which the share of Central Europe on the total CEE production increased from 25% in 1990 to 55% in 2006. The total passenger car production increased in Central Europe from 531,000 units in 1990 to 2.1 million units in 2006. The rest of CEE experienced a production increase by only 75,000 units from 1.59 million units in 1990 to 1.67 million units in 2006 (OICA 2007; Pavlínek 2002a, 2002b) (Fig. 1.4). The share of the more geographically peripheral Eastern Europe (Russia and Ukraine) declined by 22.9%, from 59.3% in 1990 to 36.4% in 2006, and the share of Southeastern Europe (Romania, Serbia,

1.2 Post-1990 Automobile Industry Transformation in CEE

15

Fig. 1.5. Location of foreign-invested passenger car assembly plants in CEE and the Central European passenger car assembly hub. Source: Based on Table 1.6.

Bulgaria, and Bosnia-Herzegovina) fell by 7.5%, from 15.6% in 1990 to 7.5% in 2006. The importance of Central Europe in the assembly of passenger cars is set to further increase between 2007 and 2010 when four new large assembly plants will reach the full production capacity. Two of these plants were opened in Slovakia at the end of 2006 (PSA Peugeot Citroën, Kia), one was launched in Czechia in March 2005 (Toyota/PSA Peugeot Citroën) and one should begin production in Czechia in late 2008 (Hyundai). These four new assembly plants will add 1.2 million units to the annual production capacity of Central Europe. The concentration of passenger car assembly and components production in Central Europe has

16

1 Central and East European Automobile Industry

resulted in the formation of the Central European hub in the passenger industry assembly (Figs. 1.5 and 1.6). Uneven passenger car production trends are more pronounced at the national scale (Fig. 1.7). Three distinct production trajectories developed among the CEE countries in the 1990s. The first group of Central European countries (Czechia, Slovenia and Poland joined by Hungary and Slovakia — two newcomers in the passenger car assembly) experienced the fast growth during the 1990s. The dramatic growth in output among these five Central European countries (by 890,000 units between 1990 and 2000 and over one million if production in the former GDR is included) resulted from FDI in the passenger car industry leading to its radical restructuring and integration into the European car production networks. Second group was formed by Russia and Romania. These two countries experienced gradual production declines (by 13% in Russia and 23% in Romania between 1990 and 2000). In Russia, the reasons for the decline included a continuing dominance of domestic passenger car producers that focused on defensive restructuring strategies and the inability of foreign companies to set up a successful production operation and to win a significant share of the Russian passenger car market. In the case of Romania, the inability of its largest passenger car maker Dacia to find a Western investor until 1999 (Renault) and the problems of a Daewoo-owned factory in Craiova led to a production decline in the 1990s. Finally, passenger car production collapsed in Ukraine and Serbia in the 1990s. In Serbia, the collapse was caused by war and economic sanctions; in Ukraine, it resulted from the failure of South Korean Daewoo to successfully revive collapsed domestic production (see Pavlínek 2002a, for details). By 2006, however, the picture became more complex. The first group of Central European countries continued to perform strongly, although Poland almost fell out of this group in the early 2000s because of the collapse of the Daewoo-owned passenger car operations in Poland (see Pavlínek 2006). While Russia’s and Serbia’s production trends followed the trajectories started in the 1990s, Romania and Ukraine experienced a strong revival of their passenger car production. Successful foreign capital-led restructuring of Dacia organized by Renault revived the passenger car production in Romania, which increased by 140,000 units annually between 2001 and 2006. Ukrainian production staged an even stronger comeback after declining to only 2,000 units in 1997. Between 1999 and 2006, the annual production increased by 265,000 passenger cars. This production increase resulted from successful partnerships between the domestic producers, such as AvtoZAZ, and foreign companies, such as DaimlerChrysler, General Motors (GM), Adam Opel, Renault, AvtoVAZ and others, designed to assemble foreign passenger cars from imported

1.2 Post-1990 Automobile Industry Transformation in CEE

17

components in Ukraine to avoid tariffs on imported new passenger cars. These regional and national trends are also reflected in the changing share of individual CEE countries on the total CEE passenger car production between 1990 and 2006 (Table 1.8).

Fig. 1.6. FDI inflows in passenger car assembly in CEE, 1990-2007. Source: Based on Table 1.6.

1 Central and East European Automobile Industry

500 450 400 350 300 250 200 150 100 50 0

300000

Czechia

Slovenia

Poland

Ukraine

Romania

Serbia

Russia

150000 100000

Year Slovakia

2006

2005

2004

2003

2002

2001

2000

1999

1998

1997

1996

0

1995

50000

1994

Year

200000

1993

1990 1992 1994 1996 1998 2000 2002 2004 2006

250000

1992

No. of passenger cars

Index: 1989=100

18

Hungary

Fig. 1.7. Passenger car production trends in CEE (1990-2006). Source: Based on data in national statistical yearbooks, national automobile associations, OICA (2007).

Table 1.8. Percentage share of individual countries in CEE passenger car production in 1990 and 2006 1990 2006 Russia 52.0 29.8 Poland 12.5 17.4 Czechia 8.9 23.1 Serbia 8.4 0.3 Ukraine 7.3 7.5 Romania 4.7 5.4 Slovenia 3.5 3.2 Bosnia-Herzegovina 1.8 0.1 Bulgaria 0.7 0.0 Slovakia 0.2 8.1 Hungary 0.0 5.2 Total 100.0 100.0 Sources: Calculated by the author. 1990 data: the annual statistical yearbooks of the above countries, 2006 data: OICA (2007).

The growth in CEE passenger car production is projected to continue in the next several years. As mentioned above, two new passenger car assembly plants were launched in Slovakia in 2006, one in Czechia in 2005, and an additional one will start production in Czechia in 2008. The existing assembly facilities of many car makers are being expanded across CEE. As a result, the CSM Worldwide projects an increase in the CEE light vehicle production from 3.3 million units in 2005 to 7.0 million units by 2013. Russia is projected to continue to be the largest CEE producer in 2013 with

1.3 The Role of CEE in the European Automotive Industry Division of Labor

19

2.59 million units, followed by Czechia (1.11 million units), Poland (1.09 million units) and Slovakia (919 thousand units) (Table 1.9). By 2013, the CEE’s share of the European light vehicle production (including Turkey) is projected to increase to 28% from 17% in 2005 (CMS 2007). Table 1.9. Projected light vehicle (passenger cars and LCVs) production in CEE countries, 2007-2013 (in thousands of units) 2007 2008 2009 2010 2011 2012 2013 Bosnia 4 5 5 4 4 5 Czechia 829 799 988 1,019 990 991 Hungary 261 332 345 327 358 330 Poland 703 755 857 904 997 1,039 Romania 232 352 351 357 356 353 Russia 1,504 1,587 1,803 2,097 2,405 2,538 Serbia 15 26 24 28 27 26 Slovakia 516 628 706 794 877 881 Slovenia 199 139 139 129 123 109 Ukraine 325 361 411 451 489 476 Total 4,588 4,984 5,628 6,110 6,626 6,747

5 1,114 374 1,087 343 2,587 25 919 104 447 7,006

Source: CMS Worldwide (2007).

1.3 The Role of CEE in the European Automotive Industry Division of Labor Western passenger car makers pursued different strategies in CEE. These strategies have been closely related to the changing role of CEE in the European car industry division of labor. The FDI driven integration of the CEE passenger car industry into the periphery of the European car production system concentrated on its two basic functions in the 1990s. First, CEE specializes on the mass production of small cars for domestic and export markets to capitalize on its cheap and skilled labor and car manufacturing traditions. Second, the region has increasingly concentrated on the low volume production of niche market products such as SUVs and highpriced sports cars mainly for export to the EU (see also Havas 2000b:245248; Humphrey et al. 2000:8; Humphrey and Oeter 2000:54; Lung 2000:24; Pavlínek 2002b:1701-1704). While the mass production of small passenger cars is typically associated with high levels of integration of automakers in local economies in CEE countries in the form of supply

20

1 Central and East European Automobile Industry

(backward) linkages, the low volume production of special models is typified by low levels of integration as most components are supplied from Western Europe. 1.3.1 Mass Production of Small Passenger Cars The mass production of small and cheap cars in CEE is, to a large extent, path dependent because the state socialist passenger car industry specialized precisely in the production of this type of passenger cars. However, path dependency was not the reason why this tradition continued in the 1990s and 2000s. Instead, the combination of low labor costs, quality of labor, a manufacturing tradition and the geographical proximity of CEE to Western Europe was ideally suited to the cost-cutting strategies of Western car producers. Because of the fierce competition in the market for small passenger cars and the small profit margins in producing these cars, car makers are forced to produce these cars as cheaply as possible. In addition, small cars are traditionally by far the best selling passenger cars in CEE because of the lower purchasing power of the population of CEE compared to Western Europe. Thus, a typical strategy of Western car makers in CEE has been to establish the best possible market position in a country where they produce and then expand their market share in the rest of the region and in Western Europe. Fiat, GM, Opel and Daewoo in Poland, Suzuki in Hungary, Volkswagen (VW) in Czechia and Daewoo and Renault in Romania have focused on the standardized mass production of small vehicles for domestic and export markets. This regional specialization is being further strengthened in the first decade of the 21st century as the Japanese (Toyota), South Korean (Hyundai and Kia) and French (PSA Peugeot Citroën) automakers are establishing their mass production operations of small passenger cars for the European market in CEE and the existing operations are being expanded (e.g. Škoda Auto, VW, Fiat, Renault, Opel). 1.3.2 The Low Volume Production of Special Models The low volume production of special models has developed in CEE as one of the Western car makers’ responses to the fragmentation of the passenger car market in Western Europe. Because it would be too expensive to commit the same kind of capital investment for a smaller series of special models as it would be for the mass production of standard passenger cars, this type of production requires an increased labor input and greater production flexibility. Manufacturing small volumes of a particular vehicle thus requires cost-cutting strategies in which labor costs and flexibility

1.3 The Role of CEE in the European Automotive Industry Division of Labor

21

play an important role. In this type of production, shop-floor flexibility is not derived from technologically intensive flexible production methods but from labor flexibility. Therefore, the cost of labor must be low enough to achieve efficiency and the labor must be highly flexible in order to accomplish rapid changes to new products. Young workers with a limited work history and thus less influenced by old habits that may be difficult to break are typically hired for this type of operations. They can be quickly trained and are less likely to develop strong labor unions.3 A number of CEE factories such as Audi Hungária, Opel Hungary and VW Slovakia proved to be very successful in this type of car manufacturing mainly as a result of their flexible labor strategies and “lean” production methods that would often be impossible to adopt in Western Europe because of union resistance or existing labor legislation. For example, Audi Hungária which assembles expensive TT sports cars in Györ, Hungary subcontracts the handling of all materials. A subcontracted material handling and logistics firm unloads the train cars that bring in 90% of components from Germany and then moves the car bodies and other components to the plant. Also Audi personnel have nothing to do with moving anything around the plant as all this work is subcontracted. All the components are supplied to the assembly line in small stocks by the logistics company. Most of the TT cars assembly is done manually which allows the assembly of two versions of the car (the coupe and roadster) and their variations (front-wheel and four-wheel drive versions that have different rear suspensions) on the same assembly line as adapting to the differences between the two models is relatively easy compared to automated assembly lines. The Audi Hungária’s “lean” production system became the basis for a worldwide implementation of the Audi Production System in 1999 (Sabatini 2000). The production system of VW Slovakia is based upon similar production strategies (see Krecháč 2001; Pavlínek and Smith 1998:629). Opel Hungary pursued a similar maximum outsourcing strategy in its engine production as Audi Hungária. Additionally the company introduced a continuous 24-hour, 7-day production based on four-shifts. VW Slovakia introduced a floating working time system in 1997 to further increase production flexibility and cut labor costs. In the new system an annual limit of work hours is set but the working time is unevenly distributed throughout the year based on the immediate production needs (Krecháč 2001:81). This allows VW Slovakia to better react to changing demand for its vehicles while, at the same time, paying only those workers that are necessary for the given production volume. These examples highlight 3

For example, the average age of Audi Hungária’s workers was only 28 years in 2001 (Sabatini 2000). Also compare Swain (1998:661) on Magyar Suzuki.

22

1 Central and East European Automobile Industry

another important role of the CEE passenger car industry in the European and global automotive industry division of labor. CEE has increasingly served as a testing ground for new production strategies, what Grabher (1997:127-9) has called “experimenting-with-the-future” approaches. If successful, these strategies are then subsequently implemented in modified forms in parent factories of the particular car maker.4 These different production strategies followed by Western car manufacturers in CEE then suggest the existence of relationships between work organization, type of car production, its embeddedness in local economies and the division of labor within the European car industry. In both cases discussed above CEE’s peripheral position within the European car production system is the crucial explanation why these particular product specializations emerged in the region in the 1990s. The strategies of mass production of cheap cars in CEE are most concerned with the overall production costs that compel car manufacturers to seek local suppliers of simple components while pressing their Western first tier suppliers to establish their operations in CEE, thus embedding car production in local and regional economies. The overall production costs, including the cost of labor and its skills, play a decisive role in this type of operation. While labor flexibility is important, it is not as critical component of mass production strategies compared with the low volume production of special models. In contrast, the low volume production of niche market vehicles rests upon high labor flexibility as shown above. While labor costs play an important role in the decisions to develop this type of production in CEE, it is the high level and a particular kind of labor flexibility described above that has led to its development and location in CEE at the periphery of the European car production system. Such labor flexibility could hardly be achieved in Western Europe given its existing labor laws and strength of its labor unions. The emphasis on labor flexibility rather than overall production costs, combined with low production volumes, also explains why foreign car makers in this type of production have not been so eager to establish strong supplier links within CEE and why embeddedness of their operations has been low compared with the mass production of small passenger cars.

4

In this respect, Škoda’s experimentation with “strategic insourcing” has been well documented (see Pavlínek and Smith 1998:627; Havas 2000b:250-1; see also Chap. 3).

1.4 CEE Truck Manufacturing in the 1990s and Early 2000s

23

1.4 CEE Truck Manufacturing in the 1990s and Early 2000s The production of trucks followed a quite different trajectory than that for passenger cars, as truck manufacturing collapsed across the region in the 5 1990s (Fig. 1.8, Table 1.10). In the vast majority of CEE countries, truck production never recovered from the shock of price and trade liberalization of the early 1990s. As I have already argued, compared to passenger car production, the truck industry was more dependent on CMEA markets and more isolated from Western competition than the passenger car industry prior to 1989. In the early 1990s, both the CMEA markets and domestic markets of truck producers collapsed, reflecting the sharp economic de6 cline of the early 1990s, the virtual disappearance of military orders , and the changing structure of demand. The demand for heavy and mediumsized trucks has declined, while the demand for light trucks and delivery vans increased, reflecting the needs of emergent small and medium private enterprises in the economy. In Russia, for example, the annual production of heavy trucks declined by 85% between 1990 and 2006, from 577,300 to 88,073 units. At the same time, the production of LCVs more than doubled from 87,900 to 218,252 units (Goskomstat Rossii 1990-1999; OICA 2007). Three groups of countries can be identified in CEE based on truck production trends in the 1990s and early 2000s. First, truck production ceased in Slovenia and Bulgaria in 1997, and in Slovakia in 2004. Second, Serbia, Romania, Ukraine, Czechia, and Russia experienced declines in truck output proper (excluding LCVs) in the 85 to 95% range between 1990 and 2006. Thus, in these countries the industry barely survived the post-1990 transformation period and its future seems uncertain (with the possible exception of Russia). The Russian and Ukrainian truck manufacturing experienced a modest recovery between 2003 and 2006. On the other hand, and third, the production decline was somewhat less dramatic in Belarus,

5

This section deals with heavy trucks. It does not deal with light commercial vehicles (LCVs). Heavy trucks are vehicles used for the carriage of goods that have a carrying capacity above 3.5 tons. 6 For example, in the case of the Russian truck producer ZIL, the Defense Ministry’s orders accounted for up to 60% of ZIL’s total annual output during the 1970s and 1980s. ZIL’s 1990 production was 184,200 trucks, but since that time defense orders dropped to only 40 vehicles a year (Kozlov 2001).

24

1 Central and East European Automobile Industry

where the total output of trucks decreased by 46% between 1990 and 2006.7

Hungary and Poland are not included in these three groups for different reasons. Hungary is the only country for which complete truck production data are not available. Truck production by Rába, the only Hungarian truck and component producer before 1989, declined by more than 90% between 1990 and 1999, from 379 units in 1990 to 36 units in 1999.8 At the same time, however, limited foreign assembly of trucks was established in the country in the 1990s by companies such as Schwarzmueller in the town of Dunaharaszti. As a result, Hungary assembled 2,600 trucks in 2006 (OICA, 2007). In the case of Poland, the Polish official truck statistics are misleading since the category of trucks covers also LCVs such as delivery vans and it also includes passenger cars that have obtained certificates to serve as cargo carrying vehicles (they have a metal lattice separating the compartment for cargo from the rest of the cabin). According to these official data, the Polish truck production increased from 39,000 units in 1990 to 76,100 units in 2006, an increase by 95% (GUS 2007:353). The data provided by the International Organization of Motor Vehicle Manufacturers (Organisation Internationale des Constructeurs d’Automobiles [OICA]) suggest that the Polish production of trucks and LCVs reached 79,695 units in 2006 of which 76,100 units were LCVs which would leave 3,595 units for heavy trucks (OICA 2007; Samar 2007). The most important reason why truck manufacturing did not follow the trends in passenger car manufacturing was that FDI played a much smaller role in truck industry restructuring than in the passenger car industry. CEE truck manufacturing attracted much smaller volumes of FDI and when FDI was attracted, it was oriented mainly toward the assembly of a small number of trucks to serve domestic CEE markets in such countries as Poland, Russia, Czechia and Hungary. Export-oriented investments typical of the passenger car industry have not been established by foreign investors in 7

Under the joint venture arrangement between the main truck manufacturer in Belarus (the Minsk Automotive Plant [MAZ]) and the German firm MAN, roughly 90% of Belarusian output is exported to Russia and non-Western countries such as Vietnam, Syria, Iraq, Iran, and Jordan, as well as to assembly plants in Poland and Egypt (Kozlov 2000c). Thus, although truck production did decline substantially, the MAZ/MAN venture was able to retain a portion of the Belarusian firm’s market niche internationally by exploiting its existing tradition and experience in exporting to these markets during the Soviet period. 8 Letter from Bernadett Csajbi, Communications Manager, Rába Automotive Group, November 7, 2001.

1.4 CEE Truck Manufacturing in the 1990s and Early 2000s

25

the truck industry. As a result of the limited capital investment, effects on both the enterprises involved and regional economies have been minor.

Index: 1990=100

120 90 60 30 0 1990 1992 1994 1996 1998 2000 2002 2004 2006

Serbia Slovenia Romania Bulgaria Russia Ukraine Belarus Czechia Slovakia

Index: 1990=100

200 150

150

100

50

0 1990 1992 1994 1996 1998 2000 2002 2004 2006

Year

Year Passenger cars

Trucks

Fig. 1.8. Index of production of heavy trucks (above 3.5 tons) in CEE countries (left) and the comparison of passenger car and truck production trends in CEE, 1990-2006 (right). Note: The truck production data exclude Poland. Source: Based on production data in national statistical yearbooks of the respective CEE countries (1990-1999) and OICA (2007). Table 1.10. Truck production in CEE countries, 1990-2006 Belarus Bulgaria Czechia Hungary Polanda Romania Serbia Slovakia Slovenia Russia Ukraine Total a

1990 42,000 7,285 34,941 n.a. 39,000 8,457 8,421 8,492 1,600 624,600 27,680 802,476

1995 12,900 259 6,676 n.a. 30,700 3,098 693 165 0 122,100 6,500 183,091

2000 14,133 0 3,073 1,621 58,300 759 555 70 0 44,213 1,417 124,141

2006 22,500 0 1,979 2,600 79,695 516 413 0 0 88,073 2,870 198,646

Polish production data also include LCVs. Source: 1990-1995 data from national statistical yearbooks of the respective countries, 2000-2006 data from OICA (2007), 2000 Polish data from Polish Central Statistical Office (2001), 2006 Polish data from Samar (2007).

26

1 Central and East European Automobile Industry

1.5 Production Trends in the Rest of the CEE Motor Industry Production of LCVs has increased in CEE since 1990 (Table 1.11). In most CEE countries, the LCVs, such as pick-up trucks and vans, are assembled by foreign-owned passenger car makers, such as VW, Fiat and Renault, and may share the same chassis as passenger cars. Their production has therefore been affected positively by passenger car industry restructuring through FDI. Thus, LCVs have, to a large extent, avoided the difficulties experienced by the truck industry elsewhere in CEE during the 1990s. The statistical data for LCV production has only been available from OICA since 1997. Statistics compiled by national statistical offices typically recognize only two categories: passenger cars and trucks. However, they differ in terms of which category LCVs belong to. In some countries, such as Czechia, light delivery vans are typically included in the category of passenger cars. In other countries, such as Poland and Russia, LCVs as a whole are included in the category of trucks. Between 1997 and 2006 production of LCVs increased by 57% in CEE (from 224,664 to 353,667 units) (OICA 1998-2007; Table 1.11.).9 Russia and Poland are the two largest LCV producers accounting for 61.7% and 21.5% of CEE total respectively in 2006. A brief look at bus, motorcycle, and tractor production trends, as a part of a broadly defined motor vehicle industry, reveals that these industries experienced sharp declines across CEE in the 1990s (Figures 1.9 and 1.10). Although CEE bus production in general declined by 50% between 1990 and 2006, there are large differences among the individual countries. 10 Production completely ended in Bulgaria, Romania and Slovakia. Hungary’s traditional bus production declined by 93%. The bus maker Ikarus, one of the world’s largest prior to 1989, was rescued in a takeover by the Irisbus Holding in 1999, but its production has so far failed to recover. Production decreased less dramatically in Russia (-54%), Ukraine (-46%), Belarus (-35%) and Czechia (-8%) between 1990 and 2006. Poland is the 9

Part of the increase in LCV production in Russia may reflect changes in the definition of light trucks over the period since 1994. Until 1994, LCVs were defined as light trucks with a capacity below 1.25 tons, from 1995 through 1997 as light trucks with a capacity below 1.5 tons, and since 1998 with a capacity below 3 tons (letter from Yuriy Ivanov, Deputy Chairman of the CIS Statistical Committee, November 20, 2001). 10 Several domestic companies started to assemble buses in Slovakia since 1992, but overall production exceeded 100 units only in 1994 and 2000. Production ended in 2003. Overall, Slovakia produced 678 buses between 1992 and 2003.

1.5 Production Trends in the Rest of the CEE Motor Industry

27

only country where production increased (by 59%) as the result of FDI by Western TNCs, such as Volvo and Scania, in the Polish bus industry. The production of motorcycles collapsed across CEE in the 1990s (Fig. 1.10). Data from Russia, Belarus, Ukraine, Czechia, and Slovakia show production declines of at least 90% in each of these countries. In Ukraine, the production of motorcycles declined by 99.8% from 103,253 motorcycles made in 1990 to 182 in 2000. Similarly, tractor production dropped by more than 90% in these countries with the exception of Belarus, where it decreased by 75%. These production trends indicate that the increase in passenger car production in the 1990s and 2000s in several Central European countries represents a special case which has not been typical for the CEE motor industry as a whole, and which reflects FDI-driven transformation of the Central European passenger car industry. Table 1.11. LCV production in CEE countries, 1997-2006 1997

2000

2006

Czechia

37,548

22,771

1,077

Poland

23,650

19,956

76,100

Romania

18,657

13,192

11,410

3,611

953

808

Slovakia

855

0

0

Slovenia

159

0

35,320

Serbia

Russia

140,183 168,631 218,252 0

Ukraine Total

10,696

10,700

224,663 236,199 353,667

Source: OICA (2007). Russia Ukraine Belarus Czechia Slovakia

80 60 40 20 0 1990

1992

1994

1996

Year

1998

2000

100

Index: 1990=100

Index: 1990=100

100

Russia Ukraine Belarus Czechia Slovakia

80 60 40 20 0 1990

1992

1994

1996

1998

2000

Year

Fig. 1.9. Production trends in tractors (left) and motorcycles (right) in selected CEE countries between 1990 and 2000. Source: Based on production data in national statistical yearbooks of the respective CEE countries.

28

1 Central and East European Automobile Industry

Index: 1990=100

160

Russia Ukraine Belarus Poland Hungary Czechia Romania Bulgaria

140 120 100 80 60 40 20 0 1990 1992 1994 1996 1998 2000 2002 2004 2006

Year Fig. 1.10. Trends in the production of buses and coaches in selected CEE countries (1990 = 100). Source: Based on production data in national statistical yearbooks of the respective CEE countries (1990-1996) and OICA (1997-2007).

1.6 The Plan of the Book Successful Transformation? investigates the processes of the post-1989 transformation in the Czech automobile industry and its selective integration in the West European automobile manufacturing system. The Czech automobile industry represents an interesting case to study these processes. The automobile industry has played an important role in the Czech economy for many decades. It was one of the key industrial sectors both in terms of its share of total industrial production and total industrial employment during the state socialist period before 1989, employing 140,000 workers by the late 1980s. It was a largely self-sufficient industry, with a number of vehicle manufacturers producing both passenger cars and commercial vehicles and a fully developed network of local component supply companies. The Czechoslovak automobile industry produced not only for the needs of the Czechoslovak market but also for the needs of other CEE member countries of the CMEA. Following the 1989 collapse of state socialism in the former Czechoslovakia, the automobile industry underwent a profound transformation. In the early 1990s, the Czech automobile industry was affected by similar

1.6 The Plan of the Book

29

developments that affected the industry in CEE as a whole: the collapse of export markets and of established trade flows; the collapse of domestic markets, and rapid market penetration of the Czech market by Western producers. Overall, the Czech automobile industry benefited from the advantages identified for CEE as a whole during the post-1989 period: its geographic location with respect to the Western European core of the automobile production system, its cheap but relatively skilled labor force, and its manufacturing tradition. As a result of the post-1989 transformation, the Czech automobile industry was internationalized and was reintegrated into the periphery of the European automobile industry. By 2006, Czechia became the second largest producer of passenger cars in CEE (after Russia) and, as such, the role of the passenger car industry in the Czech economy as a whole has increased substantially since 1989. However, the rest of the Czech automobile industry, and of the more broadly defined motor industry, has virtually collapsed. The output of especially trucks, motorcycles and tractors is much lower now than it was at the end of the state socialist period in the late 1980s. As we could see earlier, the situation is similar in other CEE countries. Not surprisingly, it is the transformation of the CEE passenger car industry, and not the automobile industry as a whole, that received the most attention in the academic literature (e.g. Havas 1997, 2000a, 2000b; Sadler et al. 1993; Sadler and Swain 1994; Meyer 2000; Poznańska and Poznański 1996; Richet and Bourassa 2000; Pavlínek 2002a, 2002b; Pavlínek and Smith 1998). The analysis of the CEE truck industry, automotive components industry, and the rest of the automobile industry has been rather neglected, although few notable exceptions exist in parts manufacturing (see Havas 1995; Meyer 2000). In the case of the components industry, the most obvious reason for this situation includes the data collection difficulties for hundreds of companies involved in supplying the final assemblers and first tier suppliers. Yet, while completely dependent on final assemblers, it is the network of automotive components suppliers that has potentially much greater regional economic development effects than final assemblers by providing employment, generating incomes, integrating the suppliers into international production networks, and diffusing new production and business concepts throughout the industry and manufacturing as a whole. The goal of this book is to investigate the Czech automobile industry as a whole, including the components industry and truck manufacturing. This study of the Czech automobile industry thus aims to contribute to the understanding of complex processes of post-1989 change in the CEE automobile industry as a whole. Chapter 2 sets the stage for the investigation of the post-socialist transformation in the Czech automobile industry by analyzing its development

30

1 Central and East European Automobile Industry

before 1989. It briefly outlines the beginnings of the Czech automobile industry during the pre-World War II period. Then it concentrates on its post-World War II development up until 1989 during a period of centrally planned economy. The chapter describes the organizational structure of the industry during the state socialist period, and it analyzes production trends in different sectors of the automobile industry before 1989. It also considers the effects of the CMEA division of labor on the Czech automobile industry, foreign trade and investment policies during this period. The case study of pre-1990 Škoda, the largest Czechoslovak passenger car manufacturer, illustrates the effects of the centrally planned economy at the enterprise level. Chapter 2 thus shows how the Czech automobile industry arrived at the end of the state socialist period and its situation at the starting point of the post-socialist transformation. A detailed case study of the post-1990 restructuring and transformation of Škoda Auto is presented in Chap. 3. Škoda was the most important passenger car maker in Czechoslovakia during the state socialist period, and Škoda Auto was the only passenger car maker in Czechia until 2005 when Toyota and PSA Peugeot Citroën opened a new assembly plant at Kolín. As such, Škoda Auto has had the most profound effect on the Czech passenger car industry and on the network of its suppliers. Chapter 3 concentrates on the post-1990 takeover of Škoda by German VW and the subsequent transformation of Škoda into a major passenger car producer in CEE. First, privatization of Škoda is examined, followed by a discussion of the difficulties related to the launch of enterprise restructuring and introduction of the new production concepts and philosophy in the first half of the 1990s. The chapter then investigates the strategies VW has applied to transform Škoda, such as the transfer of managerial know-how and its restructuring strategies. These strategies led to the success at Škoda Auto in the second half of the 1990s and in the 2000s. The chapter also examines the strategies aimed to internationalize Škoda Auto’s production network. Chapter 4 turns to the developments in the Czech commercial vehicle industry. It employs a case-study approach to examine changes in the Czech truck and bus manufacturing in the 1990s and early 2000s. The chapter focuses on three truck manufacturers (Tatra, Liaz, and Avia) and one bus producer (Karosa). In particular, the chapter investigates their enterprise behavior before privatization, privatization methods, enterprise restructuring and its effects on production, and the financial health of enterprises. The chapter documents the failure of voucher privatization of these enterprises to create an efficient ownership structure and improve collapsing truck production. Also, as the case of Avia illustrates, a foreign direct

1.6 The Plan of the Book

31

investment does not necessarily result in a successful enterprise transformation. Chapter 5 provides a critical account of the post-1990 domestic privatization policies and their effects on the Czech automotive components industry. The chapter investigates whether mass privatization strategies pursued by the Czechoslovak and Czech governments yielded the results expected by neoliberal economic assumptions. In particular, the chapter investigates whether domestic privatization has led to effective enterprise restructuring. It does so through the analysis of primary information collected during in-depth interviews conducted with directors or top managers of 20 Czech automotive component firms in 2000 and 2001. After an overview of domestic privatization strategies in Czechia and their outcomes, three broad domestic privatization strategies are investigated: management buy-outs, spontaneous privatization and voucher privatization. The role of Investment Privatization Funds in the companies privatized by voucher privatization is then discussed. This analysis is the basis for a critique of Czech domestic privatization. Chapter 6 turns to FDI and its role in the privatization and the restructuring of the Czech automotive industry. As argued above, FDI has played a decisive role in the post-socialist transformation of the CEE passenger car industry. This chapter specifically focuses on changes related to FDI experienced in the automotive industry at the enterprise level in order to better understand the effects of FDI on enterprise restructuring. As in Chap. 5, Chap. 6 combines the primary data collected during enterprise interviews with secondary data to discuss the effects of FDI in the Czech components sector, and, to a lesser extent, in truck, bus and tractor production. The chapter reviews changing governmental policies toward FDI and its effects on privatization of car component producers in the 1990s. Immediate FDI effects at the level of individual enterprises are discussed, such as the issues of disciplining labor and the contested nature of enterprise restructuring. FDI effects at the enterprise level are presented as a complex issue with uncertain outcomes. Advantages of foreign ownership for Czech enterprises are summarized as well as potentially less positive outcomes of FDI at the enterprise level related to the stability or instability of FDI, regional economic linkages of foreign-owned enterprises in Czechia, and FDI effects on enterprise research and development (R&D). The chapter also provides examples of failed cooperation between domestic producers and foreign partners in the Czech automotive industry. This analysis is further extended in Chap. 7, which traces the profound restructuring of the Czech automotive components industry during the 1990s and early 2000s through FDI, and the integration of Czech-based suppliers into European and global automotive supplier networks. The

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1 Central and East European Automobile Industry

chapter first deals with the effects of price and trade liberalization and survival strategies employed by component suppliers during the early 1990s. It subsequently illustrates the effects of VW’s investment in Škoda on Škoda’s supplier network and the strategies employed by Škoda Auto to rapidly improve the quality of supplied components while keeping their prices low. The chapter then summarizes the effects of FDI in the Czech automotive components industry as a whole since 1990. Major findings of the book are summarized in Chap. 8.

2 Czech Automobile Industry Before 1990

Successful Transformation? focuses on a detailed analysis of the post-1989 automobile industry restructuring in Czechia. However, before we concentrate on the post-socialist industrial restructuring it is important to recognize that the profound post-1989 changes did not take place in a vacuum but were strongly affected by previous developments. The automobile industry has played an important role in the Czech economy for many decades. It has been one of the key industrial sectors both in terms of its share of total industrial production and of total industrial employment. Following the 1989 collapse of state socialism in the former Czechoslovakia the automobile industry has undergone a profound transformation. Although the post-socialist change has dramatically reshaped the sector, it is important to realize that the course of this transformation has been very much affected by previous developments. Differences among the individual sectors of the automobile industry before 1990 in terms of, for example, their trade orientation and state investment policies affected how these sectors performed in the 1990s. This chapter therefore reviews the development of the Czech automobile industry before 1990. This chapter begins with a brief summary of pre-1945 developments followed by a discussion of the organization of the automobile industry and its centralized planning between 1945 and 1989. Next is an evaluation of international influences on the sector in terms of attempts at the division of labor within the CMEA and the role of the Czechoslovak automobile industry in the CMEA. The chapter then continues with an analysis of production trends and trade patterns during the post-WWII period and the differences among the individual sectors of the industry followed by an overview of investment policies in the automobile industry during the state socialist period. Finally, the chapter focuses on the pre-1990 development of Škoda passenger car maker, historically the most important Czechoslovak automobile producer.

P. Pavlínek, A Successful Transformation? Contributions to Economics, doi: 10.1007/978-3-7908-2040-9_2, © Physica-Verlag Heidelberg 2008

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2 Czech Automobile Industry Before 1990

2.1 Pre-1945 Development The Czech automobile industry is one of the oldest in Europe. Founded in 1895 at the town of Mladá Boleslav in central Bohemia, Škoda (originally Laurin&Klement) is the third oldest European car manufacturer (after Daimler Benz and Peugeot). The first automobile was built there in 1905. Tatra traces its history of passenger car and truck production at the northern Moravian town of Kopřivnice back to 1897, and the first automobile on the territory of Czechia was built there in 1898. Car production in Prague started shortly afterward. In 1907 the Prague Automobile Factory (Pražská továrna na automobily) made its first Praga brand automobile and Walter launched its automobile production in 1913. Additional Czech producers entered car production following World War I, namely Brno’s Armory in 1923 (“Disk” and “Z” brands), Aero in 1929 and Jawa in 1934 (ČSÚ 1970:2). Czechia is thus one of only six countries that began to develop their automobile industry in the last decade of the 19th century (together with Germany, France, Italy, the United Kingdom and the United States of America). Despite this early development, the Czech car makers were less advanced than their Western European counterparts before WWII. Because of the small domestic market, cars were produced in very small series (less than 700 cars annually on average) and in a small number of types, thus contributing to their high prices (twice the prices in Western Europe, that were in turn twice the prices of US-made automobiles) despite their good quality. The Czechoslovak automobile market was protected by high import duties against foreign competition (up to 65% of the car price). By the mid-1930s the automobile production had gradually concentrated to the three largest producers (Škoda works in Mladá Boleslav – Škoda brand, ČKD in Prague – Praga brand, and Ringhoffer works in Kopřivnice – Tatra brand), who accounted for 90% of the Czechoslovak production. Even though Czechoslovakia manufactured more cars than Sweden, Austria or Belgium in the late 1930s, it produced only 14,000 cars annually at its peak compared to hundreds of thousands of automobiles made in the developed Western economies (Fig. 2.1, Table 2.1) (Jakubec and Pátek 2000:120–1; Jakubec 2000:147). The domestic automobile supplier industry was almost nonexistent before World War II and about 85% of components were imported mainly from Germany and Italy (ČSÚ 1970:9).

2.1 Pre-1945 Development

5000

Number of trucks

Number of passenger cars

14000 12000 10000 8000 6000 4000 2000 0 1900

35

1910

1920

1930

4000 3000 2000 1000 0 1900

1940

1910

1920

1930

1940

Year

Year

Fig. 2.1. Czech automobile production in the pre-socialist period (1900-1947). Sources: Based on data in SR ČSSR (various years), ČSÚ (1970:14-15). Table 2.1. Automobile production in 1928 and 1937 (in thousands of units) Country

1928

France 224 Great Britain 217 Germany 105 Italy 55 Czechoslovakia 13 Austria 10 Belgium 8 Sweden 1 Other 4 Europea 637 USSR 1 USA 4,359 World 5,239 a

of which p. cars 175 169 80 n.a. 10 7 7 n.a. n.a. n.a. n.a. 3,815 n.a.

Country

1937

Great Britain 493 Germany 327 France 200 Italy 57 Czechoslovakia 14 Sweden 7 Austria 6 Belgium 1 Other 4 Europea 1,109 USSR 200 USA 4,810 World 6,336

of which p. cars 379 264 177 43 12 n.a. 5 n.a. n.a. n.a. 18 3,916 n.a.

Excluding USSR

Source: Kubů and Pátek (2000:385). The production trends during the pre-1945 period were typified by large fluctuations (Fig. 2.1). Czechoslovak automobile production grew rapidly in the second half of the 1920s only to suffer a major decline during the Great Depression in the early 1930s. Output grew rapidly again in the second half of the 1930s and it peaked in 1938 before the onset of the Second World War. At its peak Czechoslovak passenger car makers produced only 13,900 passenger cars and 4,800 trucks in 1939. During the Second World War the car industry served military needs. Passenger car production declined dramatically (from 13,900 units in 1938 to 1,700 units in 1944 and 300 units in 1945). Truck production dropped less dramatically (from 4,800 in 1938 to 1,400 units in 1944 and 1,000 units in 1945 (ČSÚ

36

2 Czech Automobile Industry Before 1990

1970:14-15). Some automobile factories were bombed and almost destroyed (Praga, for example), others were damaged by bombing (Škoda, Aero) while some survived the war intact (Tatra, Jawa) (Kožíšek and Králík 1995:83).

2.2 Organization of the Automobile Industry Between 1945 and 1989 The developments immediately after the Second World War had profound consequences for the Czechoslovak motor industry during the entire state socialist period. On October 24, 1945 large factories were nationalized and the methods of central planning were gradually introduced. However, up until 1948 a mixed economy continued to exist in which market economy was combined with state planning. Indirect rather than direct planning tools were applied and nationalized enterprises enjoyed a considerable degree of autonomy. The Soviet methods of centralized planning were introduced after February 1948 (see Selucký 1991; Myant 1989). Kožíšek and Králík (1995:91) described the effects of centralized planning in the automobile industry as follows: [Car industry] experts and managers became all of a sudden supernumerary. From now on political secretariats, commissions, committees and [Communist] party meetings made all decisions about the production program, individual types [of automobiles] and individual employees whatever their position.

The automobile industry was completely reorganized. In 1945, the Ministry of Industry decided without a competitive tender that only two basic types of passenger cars would be produced in Czechoslovakia (the large Tatra 87 and the small Škoda 1101).1 The Ministry also decided on the 1

These two basic types were later changed to T600 (Tatraplan) and Š1102 (Tudor). Four additional types continued to be produced in very small series in the second half of the 1940s. These included Aero-Minor produced at two plants (Motorlet and Rudý Letov - both originally aircraft producers), and T57 and T87 produced by Tatra. Their production was terminated and by 1950 the number of types of passenger cars produced in Czechoslovakia had declined to the planned two. Škoda and Tatra were two largest passenger car producers at the start of World War II (Škoda produced 5,674 units and Tatra 2,352 units in 1939). Passenger car production was terminated at Aero (749 units in 1939), Jawa (786 units in 1939), and Praga (2,015 units in 1939) (ČSÚ 1970:15; Roudný 1989:4).

2.2 Organization of the Automobile Industry Between 1945 and 1989

37

division of labor within the automobile industry. Only Škoda was to produce small passenger cars but it would not produce any commercial vehicles; Aero, Praga and Avia would only make trucks; Tatra was to concentrate on truck production but could keep the production of large passenger cars (it had to abandon the production of small passenger cars);2 and Jawa would only produce motorcycles. This directive meant, for example, that Jawa was not allowed to produce its small passenger car Jawa Minor II or that truck production was transferred from Škoda to Aero, Praga and Avia in 1947 (Kožíšek and Králík 1995:83). Car body shops were nationalized and grouped into Karosa national enterprise which concentrated on the production of buses. New transport equipment industry factories were built, such as Zetor Tractors Company established in Brno, southern Moravia in 1946 to produce tractors. Liaz (the name originated as the abbreviation of the Liberecké automobilové závody - the Liberec automobile works) was set up in 1951 originally to make the Š706 truck. The production of the Š706 truck was relocated from Avia Praha to several northern Bohemian factories in cities such as Jablonec nad Nisou and Mnichovo Hradiště (see Chap. 4 for details). The production of buses was also transferred from Avia to LIAZ (their production was halted in 1964). These hasty reorganizations and production transfers in the early 1950s were politically motivated and triggered by the onset of the Cold War. As a result of all these changes, competition in the automobile industry (as in the entire Czechoslovak economy) virtually disappeared and the automobile production became highly concentrated in several specialized companies. One of the most important early decisions was to build up the domestic automotive supplier industry to limit dependence on foreign imports. Seven national enterprises in the supplier sector were established and their production capacity grew quickly.3 By 1955, there were eleven distinct producers of automotive components employing 17,000 workers. They supplied 90% of domestic automotive component needs compared to only 15% supplied by domestic suppliers prior to the Second World War 2

Tatra thus continued to produce only a small number of luxury passenger cars (with the exception of the 1952-1956 period when it did not produce any passenger cars) for the needs of high government and Communist Party officials and for the top managers of state-owned enterprises (see Chap. 4). 3 These included PAL Kbely (small electric engines, windshield wipers, motor vehicle accessories), PAL-Magneton Kroměříž (electrical and electronic accessories, ignition systems and starters), Jiskra Tábor (heating and spark plugs and sparking systems, motor vehicle accessories), Autopal Nový Jičín (lighting and cooling accessories), Autobrzdy Jablonec nad Nisou (brakes), Motorpal Jihlava (injection pumps) and Motor České Budějovice (gasoline engines, fuel systems and filters, carburetors) (ČAZ 1980).

38

2 Czech Automobile Industry Before 1990

(Roudný 1989:4, 15). However, the domestically produced components were typically of lower quality compared to those imported from Western Europe.4 The automobile industry was administratively and institutionally reorganized several times during the state socialist period. The high number of institutional and administrative reorganizations of individual industrial sectors typified the Czechoslovak centrally planned economy, especially in the late 1940s, 1950s and early 1960s. The newly established centrally planned economy sought increased efficiency through better organization. However, the high number of reorganizations suggested that in many cases these changes failed to yield the expected results and that there were continual struggles over the organizational structure of the industry (see Pavlínek 1997:153). In the automobile industry, the two tier system was initially put in place after its nationalization, in which individual enterprises were directly subordinated to their respective ministries. The Czechoslovak Automobile and Aviation Works (Československé závody automobilové a letecké) were established in 1949 to group the entire automobile industry, including its links to the aviation industry, into one association.5 The automobile industry employed more than 30,000 people in 1949. The organization was renamed the Czechoslovak Automobile Works (Československé automobilové závody) after the aviation industry was detached in the early 1950s. Then the state management of the automobile industry was transferred to the so called main executive of the newly established Ministry of Engineering in 1953.6 In 1955, the Ministry of 4

For example, when Czechoslovakia bought the license from the French Renault to produce Saviem trucks it was decided that all components had to be produced domestically and their foreign import was not allowed. This led to a marked decrease in the quality of trucks produced by Avia compared to the original Renault-Saviem trucks (interview with Branko Remek, ČVÚT Praha, Praha, February 10, 2004). 5 Some aircraft producers, such as Avia national enterprise, were producing automobiles during this period. Avia was producing trucks and buses and the national enterprise consisting of the main plant in Prague and its subsidiaries was organizationally subordinated to Škoda Mladá Boleslav. In 1950, Avia produced 2,090 medium-weight trucks (Š706) making it the second largest truck producer in Czechoslovakia. It also produced 553 buses. Truck and bus production was transferred from Avia in 1951 and the company fully concentrated on aircraft production during the Cold War in the early part of the 1950s. Truck production was reintroduced at Avia in 1958 (Roudný 1989:4, 15). 6 These main executives (hlavní správy) were agencies established within the ministries. They were responsible for the planning and management of individual manufacturing branches.

2.2 Organization of the Automobile Industry Between 1945 and 1989

39

Automobile Industry and Agricultural Machinery was established as the automobile industry regained its status of “developing sector” which it had lost during the Cold War in the first half of the 1950s (Roudný 1989: 4, 15). Another change took place in 1958 when the three existing engineering ministries were grouped into the Ministry of General Engineering. Auto and parts producers as well as other Czechoslovak industrial enterprises were reorganized into industrial associations known as VHJs (výrobní hospodářské jednotky, literally “production economic units” also translated as industrial-economic combines) (see Smith 1998; McDermot 1997, 2002; Rychetník 1981; Myant 1989). VHJs represented an attempt to address the failure of the Soviet model of directive central planning that led to declines in industrial output, productivity and export performance and exhausted material and human resources (McDermott 2002:32). The original purpose of VHJs was decentralization and simplification of the task of centralized planning for even the smallest enterprises by grouping enterprises with a similar production profile into larger associations. VHJs were to rationalize production by decreasing the number of firms and thus eliminating redundancy. In the centrally planned economy VHJs acted as middle-level management between the ministries and the enterprises. VHJs centralized the purchase of production materials, the sale of finished products, R&D, the planning of production and other functions for a particular industrial branch, such as the automobile industry. VHJs were organized either horizontally (trust) or vertically (koncern, kombinát). The horizontal organization was much more common in Czechoslovakia. Three basic types of VHJs existed: a core plant grouped with attached branch plants (the so called koncern), enterprises of comparable sizes and production programs in a particular industrial sector or similar branches of production (trust), or vertically integrated enterprises (kombinát) typical of heavy industry (Rychetník 1981:117). In 1980 there were 101 VHJs controlling 1,050 firms in Czechoslovakia (McDermott 1997:77). One of the major tasks of VHJ directorates was to elaborate the production plans for the individual enterprises grouped in a particular VHJ based upon the national plans and to collect the production data and other information from them. The collected information was organized by the VHJs and submitted to their respective ministries. The ministries then organized the collected data for their particular economic sector and passed the information on to the State Planning Commission in the case of the federal ministries and the Czech and Slovak Planning Commissions in the case of the national ministries. The State, Czech and Slovak Planning Commissions prepared federal and national production plans based upon the information collected.

40

2 Czech Automobile Industry Before 1990

However, it would be wrong to assume that the centrally planned economy (CPE) operated in a strictly hierarchical manner. The biggest problem associated with this system was the poor quality of data and information that eventually reached the planning commissions. The factories, enterprises, VHJs and ministries used the information they submitted for bargaining with the upper planning level to maximize the resources they received while minimizing their outputs - production increases and “profit” handovers. Parallel information was fed through the Communist Party hierarchy to the center. The CEO of Barum Otrokovice described the quality of economic data as follows: Economic and technical [production] data were exaggerated for political reasons before 1989. Every [Communist Party] secretary wanted to show himself off and exaggerated the numbers. At the end, the [State and Czech] Planning Commissions received completely meaningless data. They knew that the data were exaggerated so they amended it. It was a kind of socialist art.7

This quote suggests the relative weakness of the top planning institutions vis-à-vis VHJs, large enterprises and regional political representations. In fact, VHJs and large enterprises in industries with a high concentration of production, such as the auto industry, metallurgy, chemical industry, mining industry and energy production, together with top regional political representatives, became particularly economically powerful in the 1980s as the center of economic power gradually shifted from the central planning institutions towards them. This economic power shift towards industrial associations and large enterprises was partially intentional in a move to introduce the Soviet “khozraschot” into the Czechoslovak economy in the early 1980s. The state planning was supposed to shift from the central to the “khozraschot” level (i.e. the level of VHJs and individual enterprises). It was also recommended to “enlarge relative independence of the khozraschot sphere, . . . increase the responsibility of trusts [VHJs] and enterprises for the outcome of entrusted resources management” (Dvořák 1982:31-2). The State Planning Commission was dependent on the VHJs and large companies for the provision of goods, services and information, and the distribution of resources was regulated by these monopolies rather than by the planning center (Hlaváček and Mejstřík 1997:8; McDermott 1997:77-78; Mlčoch 1989). Mlčoch (2000a:30) has described this situation as a “reverse control pyramid” within which local control groups sought to 7

Interview with the Executive Board Chairman and Plant Manager of Barum Continental s.r.o., Otrokovice, July 26, 2000.

2.2 Organization of the Automobile Industry Between 1945 and 1989

41

maximize their share of state resources and output. Hlaváček and Mejstřík (1997:8) have even argued that “the center was often a tool in the hands of [the] top management of important firms in strongly monopolized or oligopolized fields of production.” The car makers and other large monopolistic producers had power to indirectly but considerably change the plan because they were basically irreplaceable in the system of the CPE (ibid. 1997:9). Despite this relative power of car and truck manufacturers, their overall development was dictated by centralized investment decisions and, to a large extent, by the needs of the CMEA. When VHJs were introduced in 1958 the production of motor vehicles and agricultural machines was reorganized into 25 VHJs (seven trusts and 18 branch national enterprises) (McDermott 2002:34). The passenger car maker Škoda Mladá Boleslav (AZNP) and the truck maker Tatra continued to be directly subordinated to the planning center (Roudný 1989:15). In 1965 a new VHJ called the Czechoslovak Automobile Works (CAW) (Československé automobilové závody) was established as a trust that included the entire cycle of automobile production including R&D, sale and after-sale services. The CAW included 27 so called national enterprises of which 24 were production enterprises composed of 101 factories and 80 detached workshops (93 factories and 73 workshops were located in Czechia, 8 factories and 7 workshops were located in Slovakia) (Fig. 2.2). As of December 31, 1968 the CAW employed 134,678 workers (compared to more than 36 thousand workers employed by the sector in 1949) and accounted for 7.2% of Czech and 5.7% of Czechoslovak industrial production (ČSÚ 1970:11-12, Drobný and Minařík 1985:13).8 This organizational structure lasted for twenty years. Attempts at economic reform resulted in organizational changes in the second half of the 1980s. On January 1, 1986 the CAW was reorganized from trust to kombinát and renamed Automobile Industry - kombinát (AIK). Another layer of administration, the so called branch enterprises, was added to the existing ones to link national enterprises in related branches of the automobile industry. The automobile industry was directed by the Federal Ministry of General Engineering. The AIK was composed of six branch enterprises, one production enterprise directly managed from the ministry (BAZ Bratislava) and three related service-type organizations (R&D, sales and distribution) (Fig. 2.3). This organization structure lasted for only two and half years. Roudný (1989:14) argued that the new organization 8In terms of the position within the engineering industry, the trust accounted for 19% of production, 14% of workforce, 22% of exports into socialist countries and 16% of exports to capitalist countries. The trust accounted for 3.5% of the Czechoslovak national income (Roudný 1989:15).

42

2 Czech Automobile Industry Before 1990

structure did not change the overall production base of the automobile industry and it did not introduce any new rules of entrepreneurship. As such, Roudný claimed, effects of this reorganization were negative as they deepened the existing problems of the automobile industry. Ministry of Engeneering, Metallurgy and Heavy Engeneering Czechoslovak Automobile Works Trust General Headquarters Škoda

Tatra

Avia

Liaz

Karosa

Metallurgy

Metallurgy

Avia Letnany truck assembly

Jablonec nad Nisou standard engines

Vysoké Mýto bus assembly

Platforms

Truck assembly

Avia Žilina repair shop, furgons

Mnichovo Hradište truck assembly

Brandýs nad Orlicí bus/truck seats

Bodies

Tatra Príbor Car sssembly

Avia Ivancice box vans

Liberec - Hanychov large engines

Slatinany street washers

Assembly

Tatra Nový Jicín frames, components

Avia Brno superstructures

Liberec - Ostašov foundry

Horice fire engines

Tool shop

Tatra Bánovce axels, shafts

Melník frames

Jaromer car seat frames

AZNP Vrchlabí assembly

Tatra Cadca components

Zvolen platform assembly

Policka box vans

AZNP Kvasiny assembly

Tatra Stropkov spare parts

Prerov road tractors

Brno cesspool emptiers

AZNP Liberec components

Velký Krtíš engines and engine parts

AZNP Repair shop

Holýšov cabins

Fig. 2.2. The cross-section of the organization of the Czechoslovak Automobile Works industrial association (VHJ) between 1965 and 1986. Only five out of 27 national enterprises are shown.

Economic reforms enacted by the government in late 1987 reorganized the industry through the dissolution of VHJs and the introduction of smaller “state enterprises” as independent legal entities. To preserve the existing links and ties among firms in similar branches of industry, the reform encouraged the creation of voluntary associations by legally independent firms. During the transition period, the automobile industry was transferred to the Federal Ministry of Metallurgy, Engineering and Electronics on July 1, 1988. Although the AIK was not dissolved immediately, its role weakened dramatically as it continued to oversee only two branch enterprises (PAL and ČSM) and three national enterprises (Karosa, Orličan and BAZ). All remaining branch enterprises and national enterprises became state

2.2 Organization of the Automobile Industry Between 1945 and 1989

43

enterprises directly supervised by the ministry (Figure 2.4).9 On June 27, 1989, 17 state enterprises (out of 25) that were formerly included in the AIK and CAW established the voluntary Association of Automobile Industry organized as an interest group. In terms of territorial organization, the transport equipment industry was originally located in Czechia (especially in the region stretching from Prague to the city of Liberec in northern Bohemia).10 However, the Czech companies gradually established branch plants in Slovakia as a part of official regional development policies to industrialize Slovakia or as a result of Slovak political pressures (the case of BAZ - Bratislavské automobilové závody in Bratislava).11 Liaz, the producer of heavy road trucks, set up subsidiaries in Zvolen in 1971 (final assembly and the production of components) and in Veľký Krtíš (engine assembly, main LIAZ truck and engine repair shop) also in 1971. Tatra, the heavy off-road truck maker, established branch plants in Bánovce nad Bebravou (assembly and the production of components) in 1957 and in Čadca (components) in 1958. Avia, the producer of medium-weight trucks, launched its Slovak subsidiary in the town of Žilina in 1952 originally to conduct general repairs and the servicing of its cars in Slovakia and later to produce truck superstructures and connecting shafts. The production of light commercial vehicles was transferred from Vrchlabí to Trnava (TAZ - Trnavské automobilové závody) in 1973 and the production of special tractors was transferred from Zetor Brno to Martin (ZŤS - Závody ťažkého strojárstva) in 1978 after the launching of tractor engine production at ZŤS in 1973. The production of mopeds and motorcycles with engines below 1,000 cubic centimeters, including R&D of new products, was relocated from Prague’s Jawa company to Povážské strojárne in Povážská Bystrica in western Slovakia in 1955 (Häufler 1978:200; Krecháč 2001:42-68; Kuba 1986:239). 9

State enterprises were supposed to be economically independent which also meant independent decision making. 10 The automobile production in this region included the manufacturing of trucks in Prague (Avia and Praga); special-purpose trucks were assembled in Brandýs nad Labem - Stará Boleslav; the main assembly facility of Škoda passenger cars was in Mladá Boleslav with two branch plants in Vrchlabí and Kvasiny in eastern Bohemia; Liaz heavy road trucks were built in Mnichovo Hradiště and Jablonec nad Nisou; buses were also made in Jablonec nad Nisou but the production was gradually concentrated to Karosa Vysoké Mýto of eastern Bohemia. Engines were produced in Prague, Liberec and Jablonec nad Nisou (Häufler 1978:199). 11 The decision to build the BAZ was made in the middle of 1971. The construction of the Bratislava plant was officially launched on April 3, 1974 (Drobný and Minařík 1985:60; Kožíšek and Králík 1995:140) (see Chap. 3 for details).

44

2 Czech Automobile Industry Before 1990

2.2 Organization of the Automobile Industry Between 1945 and 1989

45

46

2 Czech Automobile Industry Before 1990

2.3 Effects of the CMEA on the Czechoslovak Automobile Industry Czechoslovakia was one of the six founding members of the CMEA in January 1949 together with Bulgaria, Hungary, Poland Romania and the Soviet Union. East Germany joined in 1950. The original goals of the CMEA included the development of mutual economic and technological cooperation among its members; the coordination of strategies against Western trade embargoes and other perceived trade discrimination; and the coordination of economic development among its members. As the most industrialized member state, Czechoslovakia became responsible for helping economically the least developed CMEA members. The participation of Czechoslovakia in the CMEA led to its rapid trade reorientation from more developed and competitive Western markets to uncompetitive CEE markets. While 80% of Czechoslovak foreign trade was realized in Western markets in 1946-1947, by 1953 80% was realized in CEE (Faltus and Průcha 1996:137; Chalupa 1997:17). Despite its stated goals the CMEA struggled to achieve a more effective division of labor among its members. CMEA’s economic policies had been strongly politically motivated from the start because the organization had been formed as “an institution for waging the cold war in the economic sphere” (Kaplan 1995:61). In general, the desired coordination of national economic plans within the CMEA proved to be extremely difficult to achieve. Faced with the unsuccessful policies of the 1960s, the CMEA members approved the “Complex program of socialist economic integration” in 1971, a plan to transform the CMEA into an “integrated economic bloc” in 15-20 years (Faltus and Průcha 1996:143). In 1956, the first session of the Permanent CMEA Engineering Commission established Section Seven that initially grouped together automobile, tractor and agricultural engineering. Since 1960 Section Seven focused solely on the automobile industry, and its main goal was to further specialization and cooperation in the sector within the CMEA. The Czechoslovak and Soviet governments agreed to cooperate in the production of heavy trucks in 1969. In 1971 the Permanent CMEA Engineering Commission established a separate group of heavy off-road trucks (12 tons and above) with air-cooled engines, and determined that the Soviet producers Kamaz and Belaz and the Czechoslovak Tatra would specialize in the production of these vehicles for the needs of the CMEA. Additionally, Tatra was designated as the only CMEA producer to assemble 26 ton three-axle off-road trucks. This decision was formally confirmed by the CMEA Executive Committee and by the 1972 “Multilateral Cooperation

2.3 Effects of the CMEA on the Czechoslovak Automobile Industry

47

and Specialization Agreement”. Consequently, Tatra had to modernize and double its production facilities by 1980. The total investment of 4,618 million Czechoslovak crowns (Kčs) included a long-term loan of 77.53 million convertible rubles from the Moscow based International Investment Bank (Kuba 1986:220; Vlašimský 1975:3). Additionally, within the CMEA’s division of labor, Czechoslovakia’s role was to produce compact passenger cars (with engines not exceeding 1200 cubic centimeters), heavy road trucks, long-distance buses and motorcycles. Based on the 1976 CMEA agreement Czechoslovakia also specialized in the production of refrigerated trailers, and the 1978 CMEA agreement determined further Czechoslovak specialization in the production of garbage disposal trucks and street sprinkler trucks (Häufler 1978:199; Drobný and Minařík 1985:15; Kuba 1986:220). Passenger car makers within the CMEA were not supposed to compete against one another. As a result, East Germany produced front-wheel drives with frontmounted engines. The Soviet Union made cars that were rear-wheel drives with front-mounted engines. Czechoslovakia produced rear-wheel drives with rear-mounted engines. The CMEA cooperation and specialization may thus have constrained progressive developments in the Czechoslovak automobile industry.12 A number of bilateral cooperation agreements in the automobile industry were also signed. For example, Czechoslovakia and Bulgaria signed a cooperation agreement between the Czechoslovak heavy on-road truck maker LIAZ and the Bulgarian producer Madara Šumen in 1970.13 Based on the agreement, LIAZ supplied three thousand of its completely knocked-down trucks to Madara Šumen annually in exchange for eighteen

12

Nestorović (1991:54-5) argued, for example, that Škoda was not reportedly allowed to produce a new car with a front-wheel drive and 1,600 cm3 engine in the 1970s. Only after the prototypes of a new car were built in 1979, did Škoda learn that the Czechoslovak government had agreed with the Soviet government not to produce passenger cars with engines above 1,200 cm3 to avoid the competition of the new Škodas with Soviet Ladas. Thus, the entire project had to be abandoned and an intermediate model was designed. The new remodeled front-wheel drive Škoda with an 1,300 cm3 engine was not launched until 1988 after the expiration of the agreement with the Soviet Union. However, Kožíšek and Králík (1995:140) dismissed this story as unfounded “popular rumors” and provided a more realistic explanation of why the project of the Š720/740 was abandoned (see Chap. 3). 13 The supplement signed in 1971 specified the specialization of Madara Šumen in the production of rear axels for LIAZ trucs. The agreement was renewed in 1980 for the period of 1980-2000 (LIAZ 1987:122).

48

2 Czech Automobile Industry Before 1990

thousand rear axles.14 The entire project had been plagued by major problems in the Bulgarian automobile industry especially between 1970 and 1980 despite the large material and technical assistance provided by LIAZ to Madara Šumen (LIAZ 1987:122-123). The fact that this was considered the “largest case of specialization and cooperation within the CMEA automobile industry” (Drobný and Minařík 1985:15) suggests the limited nature of cooperation within the CMEA automobile industry. Another example was an agreement between Czechoslovakia and the Soviet Union about the annual supply of ten to twelve thousand Avia trucks to the Soviet Union starting in 1987. Based on this agreement, the production facilities of Avia were expanded to allow for the production of twenty thousand trucks annually. Czechoslovakia had also a bilateral agreement with the Soviet Union about the annual supply of one hundred thousand Jawa and ČZ motorcycles. Bilateral specialization agreements were also signed with Hungary (import of thirty thousand kits of cockpit instruments for Karosa buses, Tatra 815 trucks, Tatra 613 passenger cars and Zetor tractors), East Germany (supply of carburetors, coolers and brake kits for Wartburg passenger cars), Poland (import of components such as thermostats, spark plugs and horns; export of carburetors and other Czechoslovak components), Romania (import of piston rings and hydraulic mufflers; export of main brake cylinders and carburetors for Dacia passenger cars), and Yugoslavia (cooperation between Czech Jiskra Tábor and Yugoslavian Iskra Nova Gorica - export of spark plugs and import of thermostats) (Drobný and Minařík 1985:16). Autopal Nový Jičín supplied headlights to Soviet Lada cars and radiators to East German Wartburgs. In some cases, however, the insufficient production capacity of Czechoslovak component producers limited their potential possibilities of exporting to other CMEA members. For example, Motor Jikov had to decline an offer to supply 600,000 carburetors to the Soviet Lada Togliati car maker. Similarly, Praga Praha had to turn down a number of orders from the CMEA countries for its gearboxes (Chalupa 1998:18). Some cooperation agreements never worked. This was the case in the cooperation agreement between Czechoslovakia and East Germany to jointly produce passenger cars called Š760 starting in 1980 at the amount of 300,000 units annually in each country. The plan was to jointly produce a front-wheel drive four-stroke engine passenger car. Škoda cooperated on the project with East German AWE Eisenach and Sachsenring Zwickau, the makers of Wartburg and Trabant passenger cars. East Germans were developing the clutch, gearbox, front axle and power train unit, while 14

LIAZ stopped producing rear axles in 1982 and all rear axles were supplied by Madara Šumen after 1982 (LIAZ 1987:59).

2.4 Production Trends 1945-1989

49

Škoda was responsible for the development of the engine and front axle. Additionally, Hungarian component suppliers were to supply electric equipment and electric accessories. Czechoslovakia planned to invest 10 billion Kčs (1.7 billion USD). The Czechoslovak and East German versions of the car were to have the same chassis but distinct car bodies. Škoda contracted the Italian designer firm Ital Design to design the car body of the Š760. The first prototypes were made and tested in 1972. Overall, 130 prototypes were made, the last one in May 1979. East German companies stopped cooperating and communicating in April 1973. East Germany officially withdrew from the project at the end of 1973, citing the lack of capital to finance the expansion of production and other necessary investment at its plants (Dufek 2004:13; Kožíšek and Králík 1995:143; Nastojaščij 1974:2). East German companies were then supposed to supply Škoda with gearboxes and various components and some Czech companies were in turn supplying components to East German passenger car makers. In another case, it was decided that Bulgaria would produce lead-based car batteries for the needs of the entire CMEA. Consequently, Czechoslovakia stopped its own development of lead-based car batteries and scaled down their production. However, Czechoslovakia was forced to resume their development and production after Bulgaria was unable to produce and supply batteries to other CMEA members in the 1960s (ČSÚ 1970:9-10).

2.4 Production Trends 1945-1989 Between 1948 and 1989, passenger cars and trucks experienced the largest production increases while the production of motorcycles over 100 cubic centimeters and buses grew the least rapidly. Four distinct periods could be recognized with respect to the Czechoslovak passenger car industry under state socialism: the period of production decline in the early 1950s, the period of rapid growth from the mid-1950s until the late 1960s, slow growth in the 1970s and stagnation in the 1980s (Table 2.2, Figure 2.5). After the onset of the Cold War and the introduction of Stalinist economic policies in Czechoslovakia in the early 1950s, passenger car production declined from 24,463 cars in 1950 to 5,400 in 1954 (by 78%). Production of buses, motorcycles and tractors also declined. At the same time, truck production more than doubled (from 5,984 to 12,900 units) (Figs. 2.5 and 2.6).15 In 15

The Czechoslovak-Soviet trade agreement for 1951-1955 signed in November 1950 after lengthy negotiations had long-term detrimental effects for the

50

2 Czech Automobile Industry Before 1990

each of three years between 1952 and 1954 more trucks were assembled than passenger cars. The government preferred the production of motorcycles to passenger cars for the general public during this period.16 In 1952 only 3,533 passenger cars were sold in Czechoslovakia. Out of these 3,480 were sold to state-owned enterprises, state institutions and the military. Only 53 passenger cars were sold to private individuals (Králík 2001:63). The decline in passenger car production during this period was caused by three main factors. First, the government decided to reorganize the passenger car production in 1950. The production of large Tatra passenger cars (T600) was moved from Kopřivnice to Mladá Boleslav in 1951 to free production capacity for truck production at the Tatra plant. The production transfer and the fact that Tatra cars were completely different from Škoda models led to a dramatic decline in the quality of the T600 models produced at Škoda and contributed to the production decline. As noted above, Tatra also had to stop its assembly of small passenger cars in this period.17 The second factor was the militarization of the economy and the partial shift from passenger car production towards the production of light military vehicles. For example, Škoda designed and tested a whole range of off-road military vehicles that were produced as prototypes or in small series. More importantly, the production of the T805, a small off-road military vehicle, was transferred from the Tatra Kopřivnice plant to the Škoda plant in 1952. These military vehicles were produced at the expense of the passenger cars T600. Škoda made almost 7,000 units of the T805 between 1952 and 1955. Then the production of the T805 was moved again, this time to Škoda Plzeň. Another example was the termination of passenger car assembly at Škoda’s Vrchlabí subsidiary in 1954, its separation from Škoda and the subsequent concentration on military production there. Finally, government investment policies were almost exclusively oriented towards heavy industry and military production, which precluded any substantial investment in passenger car production, a necessary precondition for its modernization (Kožíšek and Králík 1995:96-7). The revival of passenger car production started in 1955 with the launch of the new Š440 (Spartak). Tatra resumed passenger car production in 1956 with the assembly of ten units of its new model T603 (ČSÚ 1970:4).18 Overall, the Czechoslovak car industry fell behind the rest of the Czechoslovak economy, including the automobile industry (for details see Kaplan 1995:75-103). 16 Interview with Branko Remek, ČVÚT Praha, Praha, February 10, 2004. 17 Interview with Branko Remek, ČVÚT Praha, Praha, February 10, 2004. 18 Tatra’s designers prepared the T603 secretly without the knowledge of central planning institutions, since Tatra was supposed to specialize in the production of

2.4 Production Trends 1945-1989

51

developed world during the first decade that followed World War II as the development of heavy industry was given strong preference by the government and investment in the car industry was very low.19 The production of passenger cars expanded rapidly in the late 1950s and 1960s. It increased more than eleven times between 1955 and 1970. This growth mainly resulted from the new production plant with the annual capacity of 120,000 passenger cars built at Škoda Mladá Boleslav between 1960 and 1964 (see Chap. 3 for details). The rate of growth gradually subsided during the 1970s (28.6% increase between 1970 and 1980) and it stagnated in the 1980s (2.6% growth between 1980 and 1989) (Table 2.2, Fig. 2.5). 1000000

Number of trucks

Number of p. cars

50000 750000

500000

250000

40000 30000 20000 10000

0 1950

1970

1990

0

2006

1950

1970

Year

Number of motorcycles

3500

Number of buses

1990

2006

Year

3000 2500 2000 1500 1000 500

180000 150000 120000 90000 60000 30000 0

0 1950

1970

1990

Year

2006

1950

1970

1990

2006

Year

Fig. 2.5. Czech production trends in passenger cars, trucks, buses and motorcycles, 1948-2006 (1994-1997 motorcycle data include mopeds). Sources: Based on data in SR ČSSR (1971-1990), AIA (2007), ČSÚ (1970).

heavy off-road trucks and military vehicles. It was a luxury car for high ranking officials and top factory managers (interview with Branko Remek, ČVÚT Praha, Praha, February 10, 2004). 19 While Czechoslovak passenger car production increased three-fold between 1948 and 1962, it grew 70-fold in West Germany, four-fold in the United Kigdom, 43-fold in Sweden, 20-fold in Italy and 13-fold in France (ČSÚ 1970:4).

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2 Czech Automobile Industry Before 1990

Table 2.2. Production of passenger cars, trucks, tractors, buses and motorcycles in Czechoslovakia between 1948 and 1989 Year

Passenger cars Trucks including vans

1948 17,971 7,221 1950 24,463 5,984 1955 12,530 10,541 1960 56,211 13,306 1965 77,705 16,456 1970 142,856 24,462 1975 175,411 33,407 1980 183,745 45,688 1985 183,701 47,956 1989 188,611 50,570 Source: SR ČSSR (1971-1990).

Tractors

Buses

9,098 10,455 12,570 32,492 30,534 18,465 29,585 33,359 35,184 34,317

1,122 977 1,112 1,572 1,381 2,602 3,150 3,303 3,386 3,201

Motorcycles Motorcycles over 100 cm3 below 100 cm3 68,007 10,976 65,248 10,255 95,812 3,556 160,072 76,000 102,470 59,810 107,756 84,290 116,898 111,980 136,986 120,974 157,289 55,792 118,911 45,818

Table 2.3. Average annual percentage production growth/decline in passenger cars, trucks, tractors, buses and motorcycles in Czechoslovakia between 1949 and 1989 Year

Passenger Trucks Tractors Buses Motorcycles Motorcycles cars over 100 cm3 below 100 cm3 including vans 1949-89 6.1 5.0 3.4 2.7 1.4 3.6 1949-59 9.9 4.3 11.2 -0.2 7.5 17.3 1960-69 10.1 7.5 -4.4 7.9 -2.0 -0.5 1970-79 1.8 6.2 6.6 1.9 0.3 7.7 1980-89 0.4 1.6 -0.3 0.5 -0.6 -9.7 Source: Calculated by the author from the data published in SR ČSSR (19711990).

The commercial vehicle industry was similarly affected by the postWorld War II policies of production concentration and centralization, the Cold War and the division of labor within the CMEA. Truck production was concentrated on three producers: Praga, Škoda (at the Avia plant) and Tatra.20 20

In addition to these three core producers, light trucks were produced by Aero for a limited period before 1950 and the production of special-purpose trucks was gradually introduced in several existing engineering plants. Examples included the production of waste disposal trucks at Brandýské strojírny a slévárny at Brandýs nad Labem starting in 1950, refrigerating trucks and containers at Orličan Choceň launched in 1960, THZ (fire engine trucks) started in 1962, the introduction of

2.4 Production Trends 1945-1989

53

Number of tractors

40000 35000 30000 25000 20000 15000 10000 5000 0 1950

1970

1990

2006

Year Fig. 2.6. Tractor production in Czechia, 1948-2006 (1948-1967 data are for Czechoslovakia as a whole). Sources: Based on data in SR ČSSR and ČR (various years).

As Tables 2.2 and 2.3 and Figs. 2.5, 2.6 and 2.7 show, the growth in the manufacturing of individual products was quite uneven. Truck production grew until the late 1970s and, as with the passenger cars, it also stagnated in the 1980s. Motorcycle and tractor manufacturing rapidly expanded in the 1950s and it also grew in the 1970s, while it declined in the 1960s and 1980s. Overall, by the 1980s the stagnation in the production of passenger cars, trucks, tractors and buses and the decline in the production of motorcycles had set in. Between 1970 and 1989, passenger car production increased by one-third (+32%), truck production more than doubled (+107%), the production of tractors almost doubled (+86%) and the production of buses grew by one-fourth (+23%). The production of motorcycles over 100 cubic centimeters grew until 1985 (+46% compared to 1970), then it started to decline (-24% between 1985 and 1989) as the result of the gradual conversion of ČZ Strakonice plant from motorcycle to car components production. The production of motorcycles below 100 cubic centimeters peaked in 1979 (+50% compared to 1970), then it declined by 64% between 1979 and 1989. Transport equipment as a whole accounted for over one-quarter of engineering output and was the second special-purpose truck production at Roudnické slévárny in 1964 and at Trnavské automobilové závody in Trnava in 1965 (ČSÚ 1970:7).

54

2 Czech Automobile Industry Before 1990

most important segment of the Czechoslovak engineering industry in the late 1980s. In 1990 it contributed 16% to manufacturing valued added (15% in 1980) (UNIDO 1992:144).

Trucks

20 10 0

Tractors

30

Passenger cars

30

Average annual growth/decline

Average annual growth/decline

40

Buses 20

Motorcycles

10

0

Years

1986-89

1981-85

1976-80

1971-75

1966-70

1961-65

1956-60

-10

1951-55

1986-89

1981-85

1976-80

1971-75

1966-70

1961-65

1956-60

-20

1951-55

-10

Years

Fig. 2.7. Average annual rates of growth/decline in five-year periods between 1950 and 1989 for the Czechoslovak production of passenger cars and trucks (left) and buses, tractors and motorcycles (right). Source: Calculated by the author from data published in SR ČSSR (various years).

2.5 Foreign Links and Trade Patterns During the state socialist period (1948-1989) the production of passenger cars was technologically quite independent from the West. Even though the latest state socialist model of the Škoda (Favorit) passenger car increased Škoda’s dependency on Western technology, Czechoslovak passenger car production was the most independent in CEE before 1989 (The Economist 1988:68). At the end of the 1980s, only about 10% of automotive components were imported (Chalupa 1998:20). Apart from East Germany with its two-stroke engine Trabants and Wartburgs, other state socialist countries were more dependent on Western technology to produce passenger cars, with Poland being most dependent (see Pavlínek 2002a). Tables 2.4 and 2.5 show that the Czechoslovak tractor and motorcycle production was dependent most on exports, exporting majority of their production in the 1970s and 1980s. While exports of passenger cars steadily declined from an average of two-thirds of the annual production in the 1950s to about one-third in the late 1980s, exports of trucks, tractors and motorcycles peaked in the 1980s. Exports of trucks and motorcycles were the most dependent on the CEE markets, exceeding 90% of exported

2.5 Foreign Links and Trade Patterns

55

trucks and 80% of exported motorcycles in the 1970s and 1980s (Table 2.6). About half of exported tractors went to the CEE markets while the percentage of exported passenger cars to CEE declined from 73% in 1980 to 32% in 1989 as the Czechoslovak government was looking for means to increase hard currency earnings. Thus, passenger car production was the most exposed to Western competition in the late 1980s where 68% of car exports were heading in 1989, while truck production was exposed the least to a competitive market environment, with less than 5% of exports going to non-socialist countries in 1989. Those trucks went predominantly to non-socialist developing countries and not to the developed capitalist economies. Table 2.4. Percentage of produced cars, trucks, tractors, motorcycles and buses exported from Czechoslovakia (1948-1990) Year Passenger cars and vans Trucks Tractors Motorcycles Buses 1948 39.4 19.9 21.1 16.7 n.a. 1950 79.2 48.8 57.9 29.6 n.a. 1955 75.3 24.0 70.5 32.6 n.a. 1960 54.4 55.3 n.a. 44.5 n.a. 1965 63.3 38.3 n.a. 40.7 n.a. 1970 51.7 35.0 72.7 47.9 26.1 1975 44.8 28.5 66.3 92.2 13.6 1980 43.8 35.5 76.7 84.1 6.2 1985 32.3 47.5 72.7 83.1 6.1 1989 33.5 34.8 80.0 81.3 5.3 1990 30.8 32.9 77.8 80.3 8.3 Source: Calculated by the author from the data published in SR ČSSR (19711990). Table 2.5. Average annual percentage of produced cars, trucks, tractors, motorcycles and buses exported from Czechoslovakia, 1950-1989 Year P. cars and vans Trucks Tractors Motorcycles Buses 1950-59 66.0 36.3 68.5a 45.0 n.a. 1960-69 55.5 39.7 58.4b 48.1 n.a. 1970-79 51.2 33.9 73.8 83.5 16.6 1980-89 41.0 41.2 74.6 85.9 4.8 Notes: 1950-59 averages do not include data for 1951, 1952 and 1954 which are not available. a Average of 1950, 1953 and 1955-57. b Average of 1966-69. Source: Calculated by the author from data published in SR ČSSR (1971-1990).

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2 Czech Automobile Industry Before 1990

Table 2.6. The share of exported transport products (in percentage) sold in the state socialist and capitalist countries based on the value of exports, 1970-1989 Year 1970 1975 1980 1985 1989

Passenger cars SSC CC 77.2 22.8 66.6 33.4 73.2 26.8 46.1 53.9 32.0 68.0

Trucks SSC CC 91.4 8.6 93.3 6.7 90.6 9.4 92.1 7.9 96.2 3.8

Motorcycles SSC CC 88.2 11.8 80.9 19.1 87.1 12.9 93.5 6.5 88.6 11.4

Tractors SSC CC 50.1 49.9 40.4 59.6 48.7 51.3 67.8 32.2 53.4 46.6

SSC state socialist countries, CC capitalist countries. Source: Calculated by the author from data published in SR ČSSR (1971-1990). Table 2.7. The average number of Škoda passenger cars exported to its most important foreign markets annually and their average annual share of Škoda’s exports between 1966 and 1990

1966-70 1971-75 1976-80 1981-85 1986-90

East Germany No. % 15,915 26 18,144 22 17,634 20 9,427 10 1,425 2

Hungary No. 4,366 11,070 12,365 13,923 10,135

% 7 13 15 17 17

West Germany No. % 3,245 5 3,852 5 2,732 3 3,931 5 5,909 10

Yugoslavia No. 16,374 13,930 9,522 2,478 2,569

% 22 16 11 3 4

United Kingdom No. % 1,833 2 7,663 9 9,780 12 9,995 13 13,711 22

Source: Calculated by the author from data published in SR ČSSR (1971-1990). Table 2.8. The most important export destinations of Czechoslovak trucks (average number of trucks exported annually and average annual percentage share) between 1971 and 1990 Year 1971-75 1976-80 1981-85 1986-90

USSR No. 2,298 3,644 8,702 9,393

% 24 26 44 47

East Germany No. % 768 8 1,233 9 624 3 401 2

Bulgaria No. 1,494 2,658 2,412 1,497

% 15 18 12 7

Poland No. 2,214 2,333 1,760 2,757

% 23 16 9 15

Source: Calculated by the author from data published in SR ČSSR (1971-1990).

2.5 Foreign Links and Trade Patterns

57

Table 2.9. The most important export destinations of Czechoslovak motorcycles between 1971 and 1990

1971-75 1976-80 1981-85 1986-90

USSR No. % 61,200 35 93,600 44 98,200 53 81,600 55

Poland Hungary No. % No. % 31,400 17 27,600 16 36,400 17 27,200 13 23,600 12 11,000 1 21,000 14 7,200 5

Egypt No. % 32,000 15 21,200 9 15,200 8 14,200 10

USA No. % 5,000 3 7,000 3 1,600 1 1,250 1

No average number of motorcycles exported annually, % average annual percentage share Source: Calculated by the author from data published in SR ČSSR (1971-1990). Table 2.10. The most important export destinations of Czechoslovak tractors between 1971 and 1990 Iraq 1971-75 1976-80 1981-85 1986-90

No. 1,396 4,818 5,487 5,262

% 8 18 22 20

Yugoslavia

France

No. % No. % 1,958 11 2,697 16 2,905 11 1,815 7 1,972 8 1,254 5 1,419 5 1,082 4

United Kingdom No. % 1,356 8 1,770 7 1,081 4 1,124 4

No average number of tractors exported annually, % average annual percentage share Source: Calculated by the author from data published in SR ČSSR (1971-1990s).

Table 2.7 shows a shift in exports of Škoda passenger cars away from the CEE markets such as East Germany and Yugoslavia to Western markets, such as the United Kingdom and Germany in the 1980s. Between 1966 and 1970, East Germany and Yugoslavia accounted for 48% of all Škodas exported. By 1986-90, these two countries accounted for only 6%. At the same time, the share of the United Kingdom increased from 2% to 22% and that of West Germany from 5% to 10%. By 1989, 68% of exported Škoda passenger cars went to Western markets and 32% to CEE, compared with 1970 when only 23% of Škoda exports went to the West while 77% went to the East. State-owned foreign trade companies such as Motokov that were selling Škoda cars abroad built a dealership network in Western Europe. In CEE, in addition to East Germany, Hungary and Yugoslavia, Škoda passenger cars were exported to Poland (up to 19,500 cars in 1982, 7% of Škoda’s exports between 1976 and 1990) and Romania (3,000-5,500 cars annually). No passenger cars were exported to the Soviet Union. Thus Škoda was much more exposed to Western competition than

58

2 Czech Automobile Industry Before 1990

the truck and motorcycle producers before 1990. These differences had important implications for automobile producers in the 1990s. Compared to passenger cars, the situation of Czechoslovak truck producers was very different before 1990 as they were most dependent on the Soviet market where 45% of all exported trucks were sold in the 1980s. The former Soviet Union, Poland, Bulgaria and East Germany consistently accounted for 70% of Czechoslovak truck exports in the 1970s and 1980s (Table 2.8).21 The production of motorcycles was similarly heavily dependent on the CEE markets. The Soviet Union alone accounted for about 55% of all Czechoslovak motorcycles exported in the 1980s. The USSR, Poland and Hungary together accounted for 75% of Czechoslovak motorcycle exports between 1986 and 1990. Mopeds were successfully exported to Egypt and small numbers even to the United States (Table 2.9). Bus production was predominantly aimed at the domestic market and only small numbers were exported. Out of these the vast majority went to Bulgaria, Romania and Mongolia. The situation was substantially different with respect to tractors, which were successfully exported world-wide including the Western industrialized countries. About 20% of exported tractors annually were exported to Iraq in the 1980s and a similar percentage went to Poland. Tractors were also exported to developed countries such as France, the United Kingdom, Ireland, Finland and Japan in addition to developing countries such as Iraq and India (Table 2.10). Thus, tractors were exposed to Western competition much more than trucks and motorcycles before 1990 and therefore their production had a better chance to survive in the post-1990 competitive environment. Auto components production focused on the domestic market. The export of auto components was very small compared to cars (finished products) and the vast majority of exports went to CEE, not to the West (Tables 2.11 and 2.12). More than 92% of exported car components, 96% of exported truck and bus components and more than 90% of exported car accessories went to the state socialist countries. The examples of exported components included spark plugs exported to Poland and Hungary, brakes and springs to East Germany (to supply Wartburg and Trabant) and the rest of CEE (including the USSR) and headlights to supply the Soviet Zhiguli and Lada passenger cars. Car components exported to the West included, for example, automobile tires produced at the Rudý Říjen (Red October) Otrokovice plant that were exported world-wide, and the company had a sales network (dealerships or sales affiliations) in 78 foreign countries including the United States, Canada and Australia. Rudý Říjen 21

See Chap. 4 for details on individual Czech truck maker exports before 1989.

2.5 Foreign Links and Trade Patterns

59

Otrokovice exported about 25% of its production before 1989, half of its exports went to CEE while the other half went to the Western markets.22 Kablo Velké Meziříčí exported its whole-plastic cables to Germany and Austria, brake linings produced at Osinek Kostelec nad Orlicí were also exported to the West etc. (2000, 2001 and 2005 interviews). Comparison of the importance of the value of exports by individual sectors of the automotive industry reveals that the value of truck exports was by far the most important, accounting for more than 40% of the value of exports among the observed categories. Trucks were followed by tractors and by truck and bus components. The share of value of passenger car exports was low and it was lower in the 1980s compared to the 1970s (Table 2.12). This could be explained by the expansion of truck production in the 1970s and 1980s to serve the needs of the CMEA while the development of the passenger car sector was slow during the same period. The importance of the value of passenger car exports increased after the production of new model (Favorit) began in 1988 and 1989. Table 2.12 also shows that the value of exported passenger car components and car accessories was very low, suggesting that their focus was on the domestic market. In terms of the value of exports to capitalist countries, exports of tractors and passenger cars were the most important, accounting for 80% of export value among the observed sectors (Table 2.13). Transport equipment as a whole accounted for 13.8% of industrial exports in 1988 (12.6% in 1975) while its share of imports in total industrial imports stood at 4.5% (6% in 1975). The share of exports in transport equipment production increased from 29.7% in 1975 to 39.6% in 1985, but fell to 37.1% in 1988 (UNIDO 1992:144). Overall, 61.9% of Czechoslovak exports of machinery and transport equipment went to the CMEA countries and 22.5% went to market economies in 1988. In terms of imports of machinery and transport equipment, the state socialist countries accounted for 37.4% while market economies accounted for 37.7% (OECD 1994:28). Exports and the marketing of cars and car components abroad was centralized through special state-owned foreign trade companies such as Motokov.23 The producers thus did not need to worry about the sale and marketing of their vehicles abroad. As a result, managements of car and component producers had no experience and expertise in the marketing 22

Interview with Executive Board Chairman and Plant Manager of Barum Otrokovice, Otrokovice, July 26, 2000. 23 There were 50 large state-owned foreign trade companies that were state monopolies in foreign trade in Czechoslovakia before 1989. The state dissolved these companies in 1990 (Hlaváček and Mejstřík 1997:27).

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2 Czech Automobile Industry Before 1990

and sale of their products abroad, which became a major disadvantage for Czech firms after the trade liberalization in 1991. Table 2.11. Percentage of Czechoslovak car components exports to state socialist and capitalist countries between 1970 and 1988 based on value Year

Passenger car Truck and bus Car accessories components components SSC CC SSC CC SSC CC 1970 85.2 14.8 96.3 3.7 84.7 15.3 1975 88.4 11.6 95.4 4.6 89.2 10.8 1980 92.4 7.6 96.5 3.5 91.9 8.1 1985 93.0 7.0 96.2 3.8 94.2 5.8 1988 92.4 7.6 98.2 1.8 89.7 10.3 SSC state socialist countries, CC capitalist countries. Source: Calculated by the author from data published in SR ČSSR (various years). Table 2.12. Percentage share of the value of total exports by individual transport industry sectors, 1970–1988 Year Trucks Tractors P. cars 1970 1975 1980 1985 1988

27.6 32.6 38.0 42.7 43.8

12.5 14.0 14.5 14.1 19.3

19.0 14.9 11.9 6.4 9.2

Motor- Truck & bus Accessories P. car cycles components components 12.7 21.0 3.5 3.7 12.2 18.1 4.6 3.5 10.6 16.9 3.7 4.3 9.3 19.7 4.2 3.7 7.1 14.1 4.3 2.2

Source: Calculated by the author from data published in SR ČSSR (various years). Table 2.13. Percentage share of the value of exports to capitalist countries by individual sectors between 1968 and 1988 Year Trucks Tractors P. cars

Motorcycles

Truck & Accessories P. car bus components components 1970 14.6 38.3 26.6 9.2 4.7 3.3 3.3 1975 11.1 42.6 25.4 11.9 4.3 2.6 2.1 1980 21.2 44.4 19.0 8.1 3.6 1.8 1.9 1985 25.4 34.5 26.1 4.6 5.7 1.8 1.9 1988 10.1 49.8 31.4 3.9 1.4 2.5 0.9 Source: Calculated by the author from data published in SR ČSSR (various years).

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2.6 Investment in the Czechoslovak Automotive Industry Before 1990 Instead of by managers, the most important production decisions regarding the production program, types of vehicles to be produced, investment allocation and personnel decisions were made by the communist nomenklatura and the ministries. Whether or not a particular vehicle would be produced was not decided by automobile producers but by the government and the Communist Party in the form of governmental and Communist Party resolutions. Factory directors had to be members of communist nomenklatura and mostly were only political figures rather than car industry specialists and professional managers (Kožíšek and Králík 1995:91). Investment decisions in the automotive industry were centralized and profits generated by vehicle and component manufacturers were redistributed by the planning machinery. Component plant managers interviewed in 2000 and 2001 argued that 98% of enterprise profits were handed over to the state before 1989.24 Under the conditions of shortage economy, factory directors were constantly appealing to the Communist party and governmental officials for the allocation of investment in their plants by central planning institutions. Investment decisions were therefore driven by governmental policies in the context of the national economy as a whole, its five-year plans, political goals (such as the industrialization of Slovakia) and in the context of CMEA specialization and cooperation agreements. In the mid-1980s, major investment in the automotive industry was associated with the launch of the Škoda Favorit passenger car in 1988 and 1989, in order to make sure that the car met at least the minimum standards required in the West and that it was competitive among cheap compact cars on the West European market (Table 2.14). The Czechoslovak government spent about one hundred million dollars to purchase new technology, licenses and parts in the capitalist West. For example, the Favorit was designed by the Italian Bertone, John Brown Automation (a part of the British Trafalgar House) delivered a new engine assembly line, Girling (a part of the British Lucas Industries) supplied brakes, and Pierburg (a part of the West German Bosch) carburetors (The Economist 1988:68). Gumotex Břeclav bought the West German Henecke production line to 24

Interviews with the Executive Board Chairman and Plant Manager of Barum Otrokovice, Otrokovice, July 26, 2000; the general director of Lucas Autobrzdy, s.r.o., Jablonec nad Nisou, February 8, 2001; and the general director of FederalMogul Friction Products a.s., Kostelec nad Orlicí, July 17, 2000. However, according to ACIS (1992:38) industrial companies had to hand over only 65% of their profits to the government before 1989.

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produce the car seat filling for Škoda Favorit, Brano bought the Bomore license to produce door openers, windshield wipers were produced under the license of Fister, the brake linings were purchased from Ferrodo etc. However, the effects of this investment were very uneven across the automotive sector because only the direct and most important Škoda suppliers saw any substantial investment and had access to Western technologies. Otherwise the auto suppliers depended on outdated technologies, as they had no access to modern Western technologies and Western materials. The exceptions included some electronic parts the Czechoslovak and CMEA industries were unable to produce and specific admixtures for the production of plastic materials unavailable in Eastern Europe.25 In fact, this problem was not specific to the automobile industry but affected the Czechoslovak economy as a whole, as the impossibility of buying the most progressive technology and some materials was generally regarded as one of the most important barriers to speeding up technological progress in the former Czechoslovakia (Myant 1989:240). More than 50% of the capital stock across automobile enterprises was obsolete in 1990 and productivity levels stood at only 40% of their Western counterparts (UNIDO 1992:146). Despite the growing exports of passenger cars to Western Europe in the 1980s and the purchase of licenses for the production of the new model of Škoda (Favorit) in the late 1980s, the Czechoslovak passenger car production was still very much isolated from the West European car industry. For example, the total imports of passenger car components and accessories were small, amounting to 1.22 billion Kčs (229 million USD) in 1988, and out of these only 213 million Kčs (40 million USD) were spent on imports from the non-socialist countries (17.4%).26 The value of imports of passenger car components and accessories from the West almost tripled between 1985 and 1988 (+289%) which was related to increased imports to supply the Favorit. At the same time, the value of imports of passenger car components and accessories from CEE increased only by one-third (+34%) (SR ČSSR 1989).

25

Interview at the Czech Automotive Industry Association, July 10, 2000. The conversion to U.S. dollars is based on the 1988 official exchange rate of 5.32 Kčs for 1 USD (SR ČSSR 1988:189). 26

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Table 2.14. Selected significant investments in the Czechoslovak automobile industry 1945-1990 (in millions of Kčs) Company

Period

InvestLocation Purpose ment Compo- 1945-65 600 various plants across Development of the components Czechoslovakia nents industry Jawa late 1950s n.a. Týnec nad Sázavou Increased export of motorcycles to the Soviet Union, introduction of the unified model Jawa-ČZ Škoda 1960-64 2,000 Mladá Boleslav New production complex AZNP Praga late 1960s n.a. Praha R&D, new gearbox testing facility, specialization in the production of gearboxes LIAZ 1970-80 340 Mnichovo Hradiště, Modernization of the assemJablonec n. N., bly plant, engine plant and Hanychov, Zvolen, branch plants to increase proHolešov, Veľký duction capacity by 50%, new Krtíš branch plant construction at Veľký Krtíš Avia 1967 n.a. Praha Launch of licensed production of 1.5 and 3 ton RenaultSaviem trucks Tatra 1972-80 4,600 Bánovce, Čadca, Doubling of production Nový Jičín, Příbor, Kopřivnice Tatra 1981-89 8,000 Kopřivnice, Příbor, Complete reconstruction of Bánovce, Čadca, production capacities Nový Jičín New car factory BAZ 1971-89 n.a. Bratislava Škoda 1982-87 4,500 Mladá Boleslav Launch of Škoda Favorit AZNP Note: Investment amounts are only approximate and they are not compatible since they are not adjusted for inflation and taken from various sources. Sources: TIS (1991:30), Kuba (1986:239), ČSÚ (1970:5, 10), LIAZ (1987:55), Hradil (1990), Vlašimský (1975:2, 3, 14), interview with Branko Remek, ČVÚT Praha, Praha, February 10, 2004.

Investments in branch plants were “haphazard and in small amounts” and component suppliers were allocated investment capital by the state only in “exceptional cases” because in the 1970s and 1980s the investment was concentrated into several key projects such as the BAZ Bratislava (the Bratislava Automobile Works) or car assemblers such as Škoda Mladá

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Boleslav, Tatra Kopřivnice or other final assemblers.27 The investment in the supplier sector was higher during the first post-World War II decades when Czechoslovakia decided to build up its previously almost nonexistent automotive components industry because of the political decision to rely on domestic production and to limit any imports of components from Western Europe. Between 1945 and 1965 600 million Kčs was invested in its development (ČSÚ 1970:10). However, this total investment in the entire supplier sector was very low when compared, for example, with the 2 billion Kčs spent to modernize Škoda’s production facilities between 1960 and 1964. As a result, the overall quality of automotive components was generally low compared to Western standards despite the fact that it was high compared to the rest of CEE (1996, 1999, 2000, 2001 and 2004 interviews). Some industry managers believed that the products of Czech automotive industry were one, two or even more generations behind the Western ones.28 The only exception were the components produced for the Tatra heavy off-road trucks that had to withstand the extreme climatic and off-road conditions of Siberia.29 In some of the cases listed above, the Czechoslovak components were exported to Western Europe and then they had to achieve at least the minimal Western quality standards. The centrally planned economy provided production security for car and component manufacturers because trade was planned rather than being market-driven and what was produced was also sold. There was no market insecurity. One of the outcomes of this situation was only a weak pressure to modernize the products. For example, the Soviet Union did not require sophisticated motorbikes and requested the same Czech motorcycles for twenty years. In the 1970s and 1980s, tens of thousands of Czechoslovak motorcycles (Jawa and ČZ) were exported to the Soviet Union annually with the original engines designed in the 1950s (see Table 2.9). As a result, there was only a very limited motorcycle product development, leading to its gradual liquidation and the quality of motorcycles thus increasingly lagged behind the Western standards.30 The perception of the motorcycle industry by the central planning authorities as a declining and even obsolete 27

Interviews with the CEO of C.I.E.B. Kahovec, August 1, 2000 and at the Ministry of Industry and Trade of the Czech Republic, July 1, 1996. 28 Interview with the director of the Department of Automobile Industry, Ministry of Industry and Trade of the Czech Republic, Prague, July 2, 1996. The average time lag behind the world competition of the Czech industry was estimated to be 15 years in the late 1980s (Žák 1999:17). 29 Interview at the Czech Automotive Industry Association, Prague, July 10, 2000. 30 Interview at the Czech Automotive Industry Association, Prague, July 10, 2000.

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sector also contributed to its decline. It was believed that the future of private passenger transport would be completely dominated by automobiles.31 Since they could not satisfy the basic needs of even the preferred automobile production, the central planning institutions therefore rarely allocated any investment to the motorcycle producers.32 When the export of motorcycles to the Soviet Union collapsed after 1989 and the Czechoslovak motorcycle producers faced foreign competition, they could not compete with the much more sophisticated Japanese, German and Italian products (Handl 2001). The production of Jawa motorcycles, for example, fell from around 100,000 a year in 1990 to less than 10,000 in 1993 and less than 3,000 in 1998. In 2006 the company made only 1,001 motorcycles (Lyall 1994:60; AIA 2007). The entire Czechoslovak economy was gradually decreasing its ability to compete and the car industry was no exception (see Hlaváček and Mejstřík 1997:7). The effects of pre-1990 state socialist economic policies at the company level can be well illustrated by developments in Škoda passenger car maker, the largest and most important automobile producer in the former Czechoslovakia, to which we will now turn.

2.7 Pre-1990 Development of the Škoda Passenger Car Maker 2.7.1 Pre-1945 Development of Škoda Laurin & Klement (L&K), Škoda’s predecessor, was the Czech car company originally founded as a bicycle factory in the city of Mladá Boleslav in 1895. L&K started to produce motorcycles in 1899 and passenger cars in 1905 (seven years after the first automobile was assembled by Tatra on the territory of Czechia). In addition to passenger cars the company produced various light commercial vehicles, trucks, buses, airplane engines and agricultural machines. In 1925, L&K merged with the Czech engineering giant Škoda Plzeň which marked the end of the L&K brand. The merger had become a necessity as L&K automobiles were becoming less 31

The Czechoslovak president Anotnín Novotný reportedly declared in the 1960s that “Czechoslovakia would be unable to reach communism on motorcycles” (interviews at the Ministry of Industry and Trade, Prague, February 19, 2004, with the Technical Director of ČZ a.s., and with the Chair of the Department of Controlling, ČZ a.s. Strakonice, July 1, 2005). 32 Interview at the Czech Automotive Industry Association, Prague, February 4, 2004.

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and less competitive on the domestic market because of their high cost compared to other manufacturers, and L&K urgently needed capital to upgrade its production and introduce new models of its automobiles. The merger thus assured the further expansion and development of automobile production in Mladá Boleslav. Since 1930 automobile production was organized separately within the Škoda Plzeň concern in the Joint Stock Company for Automobile Industry (Akciová společnost pro automobilový průmysl - ASAP). The ASAP consisted of the automobile production complex in Mladá Boleslav together with the automobile division in Plzeň, the repair shop in Prague, all subsidiaries, garages and sales outlets. In the early 1930s, Škoda continued to rank third among the Czechoslovak passenger car manufacturers (behind Praga and Tatra) in the number of assembled passenger cars.33 The market position of Škoda started to improve after the company significantly lowered production costs with the introduction of the assembly line in 1928 and with the unification of its line of models which started to share some features and components such as the construction of the chassis. In particular, Škoda’s domestic market share began to grow after it introduced a small cheap automobile (the Škoda Popular) in February 1934. By December 1936, Škoda had become the top selling brand among passenger cars in Czechoslovakia for the first time and it also increased the share of exports to half of its passenger car production in 1937.34 Between 1905 and 1939 Škoda introduced 90 models of passengers cars and 39 models of trucks (ČAZ 1980). After the German occupation of Czechia in March 1939 the ASAP Škoda was incorporated into the German concern Reichswerke-HermannGöring A.G. in August 1939. Škoda served German military needs during the Second World War with the production of components for military terrain vehicles and planes, cartridge cases and various weapon components. Although vehicle assembly continued, it did so in significantly reduced and declining numbers and it accounted for only a minor share of the overall production (Kožíšek and Králík 1995:13-75).35 33

The attempted merger between Škoda and Praga (owned by ČKD) in the company called “Motor” failed after only two months in early 1932. Tatra also negotiated its participation but withdrew before the merger took place (see Kožíšek and Králík 1995:31-33). 34 Škoda’s sales on the domestic market increased by 59% in 1936 compared to 1935. The company sold 3,013 automobiles in Czechoslovakia in 1936 (Kožíšek and Králík 1995:46). 35 Vehicle assembly at Škoda’s complex in Mladá Boleslav during the Second World War: 1939: 7,052 (5,672 passenger cars/1,348 trucks); 1940: 3,060 (1,850/1,210); 1941: 3,269 (2,059/1,210); 1942: 2,505 (1,592/912); 1943: 2,120

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2.7.2 Development of Škoda Following the Second World War The state socialist period of central planning (1948-1989) had profound effects on Škoda and its development. As in the case of all industrial enterprises, Škoda’s development was determined by the state planning machinery. The company both benefited from this system and suffered because of it. It benefited from its monopoly position on the Czechoslovak passenger car market during the entire state socialist period which it achieved by the way of governmental regulation that removed all Škoda’s competitors from the domestic market. At the same time, Škoda lost its independence in such crucial decision-making areas such as what and how many types of cars it would produce, how often they would be modernized, how much and when it would invest in its production, and where and for how much it would buy the components for its assembly operations. Thus, the company was caught in the web of political economy of state socialism in which it became completely dependent on the government and its bureaucrats for crucial decisions and investment capital allocation. Decisions regarding Škoda were taken in the context of the government’s other multiple commitments to national economic development and, more importantly, in the context of national and international political imperatives. As a result, these decisions did not always work in favor of Škoda and were not supportive of its development needs. In many cases they significantly constrained Škoda’s development and its development potential. Overall, the loss of decision-making autonomy and the total dependence on government for investment capital during the state socialist period had negative consequences for the company as it gradually fell behind West European automobile producers. Consequently, Škoda’s cars became less and less competitive in foreign markets. Following the Second World War the Mladá Boleslav factory complex was nationalized and separated from the Škoda concern in the fall of 1945. As a stand-alone company, the car producer was renamed the Automobile Works, National Enterprise Mladá Boleslav (Automobilové závody, národní podnik Mladá Boleslav or AZNP Mladá Boleslav) but was allowed to keep the brand name Škoda for its cars. As already mentioned, the Ministry of Industry designated Škoda as the only producer of small passenger cars in Czechoslovakia in 1945, thus creating a monopoly producer and eliminating Škoda’s domestic competition. Škoda’s task was to produce a “people’s passenger car”. At the same time, Škoda had to transfer its production of commercial vehicles to other automobile producers (Aero, (1,091/1,029), 1944: 683 (35/648), 1945: 316 trucks made by May (Kožíšek and Králík 1995:75).

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Praga and Avia) (Kožíšek and Králík 1995:80-83).36 Additionally, two smaller factories were attached to Škoda after their nationalization and they have remained Škoda’s production facilities until today. The first one was a factory specialized in the production of car bodies located in the city of Vrchlabí in northeastern Bohemia, which affiliated with Škoda at the end of 1946.37 The Vrchlabí plant produced light commercial vehicles following its attachment to Škoda (see Sect. 3.6). The second one was another car body shop located in the town of Kvasiny in eastern Bohemia which was attached to Škoda in 1947 and produced mostly sporty versions of Škoda automobiles (see Sect. 3.7). As we could see, the Czechoslovak passenger car industry was negatively affected by the onset of the Cold War in the early 1950s with the militarization of the economy and a sharp decrease in passenger car production. During this period Škoda produced the T600 passenger cars (between 1951 and 1952) and small off-road military vehicles (the T805, between 1952 and 1955). These vehicles were assembled by Škoda to free the production capacity for heavy off-road military trucks (the T128) at Tatra Kopřivnice. Additionally, Škoda continued to produce its passenger cars although in much reduced numbers (the Š1102 launched in 1949 and the Š1200 launched in 1952 both derived from the pre-World War II Škoda Popular 995). In May 1954 Škoda introduced a new model originally called “Spartak” as a “provisional version of the people’s passenger car” (Kožíšek and Králík 1995:101). The Spartak was considered “provisional” because it was not yet truly a people’s passenger car everyone could afford to buy.38 Eighty percent of its mechanical parts and components including the chassis were the same as in its predecessor the Š1200. This “80% principle” according to which 80% of a new model is the same as its predecessor was applied throughout the entire state socialist period with the exception of the last pre-1989 model Favorit. The Spartak’s mass production was launched in 1955 under the name of Š440. The upgraded version of the 36

The production of the Š150 (1.5 ton truck) was transferred to Aero and Praga and the production of the Š706 (7 ton truck) was transferred to Avia. Škoda also had to stop producing its Š756 truck in 1947. 37 The Vrchlabí plant was detached from Škoda between 1954 and 1958. 38 The Spartak was sold under the name Š440 when it went on sale in the Fall of 1955. The name was allegedly changed because it was too similar to Dutch “Sparta” motorcycles. The Š440 was sold for 27,450 Kčs at the time when the average gross monthly income was 1,200 Kčs. The car went on sale only two years after the 1953 currency reform which destroyed virtually all household savings in Czechoslovakia. More importantly, every buyer needed a special voucher to buy the car (Králík 2003:7).

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Š440 was renamed to Octavia and its sporty version to Felicia in 1959. The car was successful both at home and abroad but Škoda was unable to satisfy the demand. This led to the decision by central planning institutions to dramatically modernize and expand the Mladá Boleslav plant to increase its daily production capacity from 120 to 600 cars (Kožíšek and Králík 1995:96-107, 124). The factory was modeled according to Renault’s production system which, as a state-owned company, was politically acceptable in the state socialist Czechoslovakia.39 The construction of the new production complex composed of 40 buildings was launched in 1960 and finished in 1964. The total construction costs reached almost 2 billion Kčs (about 280 million USD at the official exchange rate) (ČSÚ 1970:5). After its completion, Škoda’s production complex was considered one of the most progressive car manufacturing facilities in Europe. However, it only lessened the growing gap in productivity between Škoda and the West European car makers.40 The Š1000 MB was the first model produced in the new plant, starting in 1964. It was a new four-door body rear-wheel drive car with a rear-mounted engine.41 The main reason for the production of rearmounted engine rear-wheel drive passenger cars instead of front-mounted engine front-wheel drive vehicles was the absence of a suitable manufacturer of the front-wheel drive joint shaft in Czechoslovakia in the early 1960s. The government did not allow its import from abroad since no 39

Interview with Branko Remek, ČVÚT Praha, Praha, February 10, 2004. This gap could be approximately measured by the number of vehicles produced per worker. In 1962 Škoda produced 3.9 cars per worker, VW made 14.9, Vauxhall 8.8, and Renault 8.7. After the completion of the new production facilities (passenger car production in the new complex increased only gradually from 18,331 units in 1964 to 95,688 units in 1968), Škoda made 6.1 cars per worker in 1967 (6.5 in 1968) compared to VW’s 12.9, Renault’s 11.6 and Volvo’s 11.6 vehicles per worker in 1967 (ČSÚ 1970:4-6). 41 Previous Škoda models were typically rear-wheel drives with the engine located in the front. However, this construction was about 15% more expensive than either a front-placed engine front-wheel drive or rear-placed engine rear-wheel drive. The higher production cost was one of the reasons why Škoda abandoned its typical well-tried construction, since the government wanted Škoda to produce a cheap people’s car. The other reason was the fear of Škoda’s management that only a new construction would convince the government officials of the necessity for large investment needs. Finally, rear-placed engine small passenger cars were popular with other producers at the end of the 1950s and early 1960s and they accounted for more than 50% of small passenger cars made in Europe. VW, Fiat and Renault are examples of West European producers making this type of passenger cars at that time. However, this construction made it impossible for Škoda to produce any station wagons or pick-up trucks based on the Š1000 MB. 40

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components were allowed to be imported from the capitalist West. Neither did it allow the purchase of its production license abroad. It also refused to finance its domestic development and production (Kožíšek and Králík 1995:118-119). Nevertheless, the Š1000 MB was considered one of the best models in its class of small passenger cars with a one liter engine in the mid-1960s.42 About half of its production was exported both to CEE and to the rest of the world. The upgraded version of the Š1000/1100 MB was introduced as Š100/110 in 1969. 2.7.3 Stagnation in the 1970s and Early 1980s In the late 1960s the future of Škoda looked promising. In the middle of 1967 the government prepared and passed an ambitious project “The Development of Integrated Production of Passenger Automobiles in Czechoslovakia” which planned the production of two new basic types of Škoda passenger cars starting in 1972. The first basic type was to be a smaller car with a 1,000 - 1,100 cm3 engine (Š740), the second type was to be a midsized automobile with a 1,250 - 1,500 cm3 engine (Š720). Both cars were to be of “classic” construction, i.e. equipped with a front-placed engine and rear-wheel drive.43 According to the plan, Škoda was to produce 120,000 units of the Š720 in 1975. Škoda prepared prototypes and was getting ready for the production launch when the entire project was stopped in the middle of 1971. The Czechoslovak government made a political decision to build a new greenfield automobile factory in Bratislava (Slovakia) which required huge investments and thus made it financially impossible for the government to pursue both projects. It therefore decided to cancel the Š720 project and the already built production equipment was scrapped. Similarly, the project of Š740 which was designed by Škoda’s designers to replace the existing dated Š100/110 models was canceled in June 1972. Škoda’s top management was replaced during the political purges of the early 1970s. According to a new government resolution, the future development and production of compact cars in Czechoslovakia was to be pursued in cooperation with East Germany. It was hoped that this would result in significant savings. A new front-engine front-drive model was to be 42

The same car with a slightly larger engine (1,107 cm3 ) was introduced as the Š1100 MB and the Š1100 MBX (two-door version) in 1967. 43 In the preparation of the Š720, Škoda was inspired by existing leaders in its class such as Ford, Renault, Saab, Toyota and especially the BMW 1500. The design was prepared by Ital Design and Giorgett Giugiaro, a world-class designer (Dufek 2004:12).

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launched in 1978.44 In the meantime, the new management at Škoda was given the task of modernizing the existing Š100 because its foreign sales were rapidly declining. The modernized car was to be introduced in 1974 (Dufek 2004:12-13). Thus, in the twenty years following the 1964 completion of the new production complex, Škoda received only minimal investment capital from the government, as governmental automobile industry investment priorities were elsewhere.45 As we could see the lack of investment made it impossible for Škoda to dramatically modernize its cars and to keep up with developments in the automobile industry. The car maker was unable to modernize its products for external reasons and not because of its inability to develop new competitive products. Despite the fact that the Š100/110 models were already considered obsolete in terms of their rear-engine construction in the early 1970s, a new construction would have required a substantial investment, which the government refused to allocate. The lack of investment in the supplier industry combined with the monopoly position of suppliers on the domestic market and the impossibility to import higher quality components from abroad if these were produced domestically further contributed to Škoda’s problems. Many suppliers refused or were unable to produce upgraded components based on Škoda’s specifications and consequently the quality of supplied components was low. Additionally, in allocating investment the government used the fact that the pressure on Škoda to dramatically modernize its cars was relatively low as Škoda continued to enjoy a near monopoly position on its domestic market. As a result, the governmental officials together with loyal top production and technology managers at Škoda could successfully resist radical construction and production innovations that would target the car’s weaknesses. Thus, the “new” Š105/120 introduced in 1976 was only an upgraded version of the Š100/110 which in turn was an upgraded version of the Š1000/1100. To introduce the Š105/120 the company built new body and paint shops and the assembly line was modernized. According to the original plans the Š105/120 was to be only a temporary solution. In the end, however, the car was produced for 13 years as the government continued its refusal to allocate the substantial investment needed for the radical modernization of Škoda models.

44

The project and its eventual failure are described in Sect. 2.3. The most important investment projects in the automobile industry during this period included the construction of BAZ in Bratislava and the expansion of production of heavy off-road vehicles at Tatra Kopřivnice and Bánovce nad Bebravou (see Table 2.14). 45

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There was very little Škoda could do despite its relative economic power derived from its monopolistic position in the Czechoslovak automobile market. Its managing director was replaced in the late 1970s because of his continuing efforts to secure investment for Škoda. Škoda’s top managers were furious because, in their view, the investment kept flowing to the troubled construction of BAZ in Bratislava while their company was continuously denied investment despite its demonstrated needs (Dufek 2004:14). Overall, the 1970s and early 1980s were a period of stagnation during which Škoda fell substantially behind the West European car makers in the same class of passenger cars. Škoda passenger cars became obsolete low quality vehicles. This situation made Škoda more vulnerable and could have undermined its status of an independent car producer. In the late 1970s the Soviet planners proposed the cooperative production of a unified people’s car in several state socialist countries. According to the proposal, components would be produced in several countries that would also assemble the same small Soviet passenger car. Škoda was supposed to assemble the Soviet model along with its Š105/120 model. Some central planners even considered the Soviet model a potential successor of the Š105/120, which would be a much cheaper alternative than the pending expensive modernization necessary for the introduction of a new model of Škoda in the future. However, Škoda’s director, supported by the Interior Minister, successfully argued against the proposal. Tatra and Liaz truck makers were then considered as potential assemblers of the Soviet people’s car, but the entire project was abandoned as the participant countries were unable to deal with its economic costs and logistical complexity (Kožíšek and Králík 1995:155). 2.7.4 Škoda Favorit Eventually, economic imperatives rather than Škoda’s pleas convinced the government and Communist Party officials to change their attitude about the need to support the further development of the company and its product. Of course, the main reason was the fact that Škodas sold on Western markets were an important source of hard currency earnings for the government and that the car was rapidly falling further behind its Western competitors. Therefore, Škoda was first allowed to negotiate in the early 1980s about the purchase of the foreign license and know-how to produce the 1,100 - 1,500 cm3 front-drive engine using modern technologies. Some governmental officials believed that the foreign license could help Škoda to overcome the increasing gap between its cars and West European models

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and save high R&D costs.46 However, the future costs of the foreign license would have been significant, especially in terms of degrading Škoda’s own R&D and in dramatically increased dependence on Western technologies. No agreement with foreign automakers was reached because Škoda could not accept their demands and the government did not have enough money to pay for the license.47 Škoda was thus forced to rely on its own R&D capabilities to upgrade its product (Dufek, 2004:14). The November 1982 governmental resolution (No. 282) approved by the Central Committee of the Communist Party mandated the development of a new model of Škoda (called Š781) by June 30, 1985 and the launch of its production in 1987. The car was to be of “Italian style”. The project was included among the state priorities and the Communist party established a special commission that would report to the Central Party Committee about its progress. The government thus gave Škoda only two and half years to develop the new model and build a new factory to produce it. It was an almost impossible task under the conditions of a centrally planned economy since the same task would normally take five years. Consequently, the company had to hire dozens of new R&D personnel and it drew on its previous R&D for models that were never produced. Škoda asked the Italian Nucio Bertone to design a new model that was to be a front-engine front-wheel drive. The car maker even received unprecedented permission to cooperate with Western firms to develop components 46

Similar thinking in East Germany led to the 1984 license agreement between VW and East Germany concerning the production of VW 1.3 and 1.5-liter engines at a factory in the then Karl-Marx Stadt (Chemnitz). At full capacity, to be reached by 1990, the factory was to produce 396,000 engines annually. East Germany was to use the annual shipment of 100,000 engines back to VW’s main plant in Wolfsburg to pay for the license, equipment and limited imports of VW’s vehicles to East Germany. VW was to install these engines in its Polos and Golfs. Other CEE countries such as Poland and Hungary were also negotiating new license agreements with Western passenger car makers in the 1980s (The Economist 1988:68-69). 47 Škoda negotiated with Citroën, Fiat, VW and Renault. Citroёn withdrew from negotiations. Fiat demanded that Škoda purchased its license for the production of the entire automobile, not just the engine. VW and Renault also offered licenses for already produced vehicles, although VW offered a license for its engines. Each company demanded that Škoda cars produced under their license or Škoda cars equipped with engines produced under their license would not be exported outside CEE. All of them refused to be paid in produced automobiles. Škoda also considered the license costs to be very high. For example, VW demanded 150 million DM for its license for the production of engines, 58 German Marks (DM) for each produced vehicle and additional fees for produced spare parts (Dufek 2004:14).

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in those cases when the domestic production of a particular component did not exist or did not satisfy the needs of Škoda.48 The company also won permission to buy certain components and production technology abroad (Kožíšek and Králík 1995:155-163; Dufek 2004:16). Needless to say, the amount of money available for this type of cooperation was extremely low and Škoda had to rely on its investment-starved domestic suppliers who were typically inflexible, slow to change their components and unable to raise their quality to Western standards. The poor quality of domestic components was largely the consequence of the centrally planned system in which the component suppliers operated. The government dictated the quantity of components produced by each supplier and its selling price. Since the prices were often set artificially low the suppliers were forced to use lower quality raw materials. The access to high quality Western materials for domestic suppliers was either absolutely impossible or it was only allowed if there was no domestic alternative. In this system, Škoda had very little control over the quality and quantity of supplied components. It therefore resorted to their increased in-house production which reached almost 50% of all components for the new model (Henderson 1995:438). Škoda also faced an unexpected difficulty when the then European Community adopted stricter emission controls in November 1983 to encourage the use of unleaded gasoline. The Š781 was to use the old engine from the Š120 which could not use unleaded gasoline. Already under an extreme time pressure, Škoda had to find a quick solution if it wanted to sell its new model in Western Europe. It turned to Western companies for help and a number of Western licenses were bought for domestic component suppliers to produce pistons, circlets, valves, carburetors and other components to upgrade the engine (Dufek 2004:16; see also Sect. 2.6). Some of Škoda’s production facilities were modernized for the production of its new model. For example, the welding shop was almost 100% robotized as a CMEA showcase.49 It was equipped with 104 newly installed Kuka robots. At the same time, however, the press and paint shops continued to use 20-year-old machinery which made it impossible to increase the production capacity of the Škoda plant (Henderson 1995:438). The new model “Š781 Favorit” was prematurely introduced in September 1987 since only less than 200 units were made in 1987 and only slightly more than 21,000 were made in 1988 when production started at 48

Examples of Western firms that cooperated with Škoda on the development of its new model included Porsche, Boge, Kautex, Elring, Goetze and Fichtel&Sachs (Henderson 1995:449-450). 49 Interview with the Škoda Auto union leader, Mladá Boleslav, June 20, 1996.

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Škoda’s main production complex in Mladá Boleslav in August 1988.50 Later Škoda also produced the station wagon (Forman) and pickup truck based on the Favorit design. The quality of the Favorit continued to be low compared to Western quality standards despite favorable product reviews the car received in Western Europe. Although the Favorit was considered competitive with Western European models in its class, it did not dramatically improve the Škoda’s image as a cheap and low quality car. The following quote from Kimberley (2001) is a good example how the state socialist Škoda and its automobiles were viewed in the West: The downward slide began soon after the war ended, when the company came under state control. After a false dawn of some promising models, Škoda produced some of the worst models of the time, its rear-engined cars with swing-axle rear suspension and a build quality bringing tears to the eyes. Fitting into the cheap and cheerful index, there was a steady stream of exports destined for those bargain hunters who were prepared to pay good money for a set of wheels, no matter how bad they were. However, it established a reputation that even to today dogs the company, although the Škoda jokes of yore (“Why does a Škoda have a heated rear screen?” “To keep your hands warm when pushing it.”) have virtually faded into history.

Despite all these problems, the successful introduction of the Favorit in the late 1980s was extremely important for Škoda’s future. It narrowed the gap between Škoda and its Western competitors in the class of small passenger cars so that Škoda could offer a (potentially highly) competitive product. It also meant that Škoda remained the only state socialist passenger car company (with the exception of the obsolete East German two-stroke engine Trabants and Wartburgs) capable of developing and producing passenger cars more or less independently of large Western auto makers. However, the high costs associated with the introduction of the Favorit resulted in a high debt burden for Škoda (2.5 billion Kčs were borrowed to launch the Favorit - 422 million USD at the official exchange rate). At the end of 1989 the total debt of Škoda reached 6 billion Kčs (1 billion USD) making it the most indebted Czech company, and its debt was growing every day

50

The introduction of the Favorit in 1987 and the fact that its exports did not start until 1989 very negatively affected the sales of Š105/120 models that accounted for the vast majority of production in 1988, when 135,000 units were produced. The production of the Š105/120 continued in 1989, when 82,600 units were made (in addition to 100,000 units of the Favorit). It ended on December 28, 1989.

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Millions of Kcs

(Žák 1999:19) (Fig. 2.8).51 Despite the partial modernization of Škoda’s production complex, the company was in dire need of further investment for its additional modernization. Among others, Škoda needed to build a new press shop, paint shop and incinerator. It also needed to introduce a new engine that required the construction of a new engine factory because its existing engine was based on a 25-year old model originally built for the Š1000 MB that went into production in 1964. Thus, Škoda found itself in a very vulnerable position at the end of the state socialist period. Its post-1989 development and restructuring are analyzed in the next chapter. 1000 800 600 400 200 0 -200 -400 -600 -800 -1000

1985

1986

1987

1988

1989

1990

Year Fig. 2.8. Škoda’s annual profits/losses between 1985 and 1990. Source: Based on data in Henderson (1995:437), Charap and Zemplinerová (1993:123).

2.8 Conclusion The brief analysis above uncovered the basic contours of the Czechoslovak automobile industry development prior to 1990 and especially during the state socialist period. While the industry was established early compared to the rest of CEE, it was significantly less developed than in the most industrialized countries of Western Europe prior to World War II. However, the 51

In 1990, Škoda’s before tax profit per car (Favorit) was only 1,000 Kčs, which represented about the average weekly wage (Kožíšek and Králík 1995b:186).

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relatively technologically independent car-making tradition established during this period played an important role in the development of the industry following the Second World War. Technological independence was pursued (with some exceptions) also during the state socialist period and it distinguished the Czechoslovak automobile industry from the industry in other state socialist countries (with the exception of East Germany). At the end of the state socialist period, Czechoslovakia had an auto industry producing passenger cars (Škoda, Tatra), a range of trucks (Tatra, Liaz, Avia, Praga) and buses (Karosa). Czechoslovakia also produced more than 160,000 motorcycles and 34,000 tractors annually (Table 2.2). The truck and bus industry alone employed 40,000 workers. The auto industry was quite self-sufficient, with a network of domestic component suppliers, and largely relied on the domestic R&D. However, the growth had all but disappeared by the 1980s as the stagnation set in. Economic stagnation and persistent investment shortages meant that automobile producers and component suppliers generally lacked the investment capital needed to innovate and increase the quality of existing products to assure their competitiveness. The chapter revealed that the state socialist economic policies affected the automobile industry in many different ways in terms of its organization, both sectoral and territorial, product structure, production volumes and its technological development. While the output of motor vehicles grew substantially between 1948 and 1989 and their quality compared very well with those of other CMEA countries, the policies of autarky led to an increasing gap between the Czech automobile industry and the industry in the most developed countries. The Czech automobile industry barely kept up with the overall developments in the automobile industry, and then only until the early 1960s. It did so only because of its lead over neighboring countries from the pre-World War II period. After the early 1960s the Czech automobile industry gradually fell behind the West European automobile industry. The reason for this gradual retardation was not so much a question of design or construction but poor quality management and the lack of the investment capital necessary to assure continuous technological development. Additionally, the product structure became distorted in favor of heavy trucks produced for the needs of the CMEA. The passenger car industry specialized in the production of small vehicles with weak engines that suffered persistent quality problems. The motorcycle factories produced tens of thousands of technologically obsolete motorcycles, largely for export to the Soviet Union and other state socialist countries. Overall, the Czechoslovak automobile industry was thus producing predominantly technologically obsolete and inferior products of low quality and it was ill equipped to operate in a competitive environment and to face

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any Western competition. However, as we could see, substantial differences existed among the different sectors of the motor industry in terms of, for example, dependency on and territorial structure of exports. As we will see in subsequent chapters, the negative effects of the Czechoslovak transport equipment operation in the uncompetitive market environment before 1989 were the most devastating for those sectors that never really faced any Western competition, such as trucks and motorcycles. These state socialist legacies affected how the individual branches of the motor industry performed during the post-1989 period of transformation to which we will now turn.

3 Post-1989 Transformation of Škoda Auto

The collapse of state socialism in Czechoslovakia in November 1989 resulted in an immediate shock for Škoda. Because of the persistent labor shortages so typical for the centrally planned economy, resulting from its inefficient use of labor, Škoda had to increasingly rely on forced labor and foreign workers in the 1970s and 1980s. It built a prison right behind the border of its factory in the 1970s. By the late 1980s the company employed up to 1,600 convicts and 1,520 Vietnamese workers. Convicts worked in the most outdated shops such as the metallurgy, press and mechanical finish. They accounted for almost 90% of employees in the press shop, for example. All convicts left suddenly after the presidential amnesty in early January 1990. Škoda was paralyzed. The Favorit assembly line slowed from the daily production of 212 cars on January 2, 1990 to 57 cars on January 3 and it stopped completely on January 4 when no cars were made. The situation led to massive losses for Škoda and a hasty reorganization within the factory. However, newly employed (including 230 soldiers) or inexperienced workers transferred from other assignments within the factory could not quickly achieve the desired pace and quality of production (Kožíšek and Králík 1995:185). As a result, Škoda’s financial losses and its massive debt continued to accumulate throughout 1990 reaching 7 billion Kčs (251 million USD) by the time of its privatization in early 1991 (Charap and Zemplinerová 1993:123).

3.1 Privatization Already in the 1980s when the Favorit was being designed and its production launch prepared, Škoda’s managers knew that they would not build a good car without cooperation with a foreign car maker. The idea of a foreign partner for Škoda was also floating at the Ministry of Industry in the late 1980s (Žák 1999:19). However, the idea of a joint venture (JV) with a foreign car maker could be seriously considered only after the collapse of state socialist government in late November and early December 1989. In the late 1980s, Škoda was unable to satisfy the domestic and foreign P. Pavlínek, A Successful Transformation? Contributions to Economics, doi: 10.1007/978-3-7908-2040-9_3, © Physica-Verlag Heidelberg 2008

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demand for its automobiles. Its production capacity was about 180,000 cars annually.1 Domestic demand was estimated at 250,000 units annually but Škoda supplied only 130,000 units in Czechoslovakia and 50,000 units were exported. It was estimated that an increase in annual output to 350,000 cars would require an investment of 23.5 billion Kčs (Hradil 1990). Already laden with a heavy debt burden that continued to grow every day, Škoda could not finance any production expansion and was unable to acquire outside loans. It did not even have enough capital to finance its day to day operations and pay for supplies of components. Škoda’s insolvency threatened not only its future existence but also the existence of its 237 domestic suppliers. The car maker could not rely on the government to pay for the necessary production expansion. A foreign partner was, among other things, expected to supply the investment capital necessary for the expansion of production. Additionally, Škoda desperately needed to improve the quality of its cars and to become profitable, which required further capital investment. A JV with a strong foreign partner thus seemed to be the only plausible solution that could save Škoda from going bankrupt in the 1990s.2 The first unofficial contacts between Škoda and Western car-makers regarding a potential JV were apparently established already in December 1989. The public tender to privatize Škoda was announced in early 1990. Twenty-four foreign companies registered to participate but only eight revealed a serious interest in Škoda (including BMW, GM, Renault-Volvo, VW, Ford, Fiat and Mercedes Benz). This relatively wide-ranging interest in Škoda by foreign car makers suggested their eagerness to expand into CEE as a potentially new major market for passenger cars. It also suggested that despite its problems Škoda was perceived as a relatively successful company, given the state socialist circumstances in which it had had to operate for the past forty years. Foreign car makers thus believed that Škoda could be successfully used as a bridgehead to CEE markets. 1

Škoda’s production capacity was increased to 850-900 units daily shortly before its privatization (Charap and Zemplinerová 1993:138). 2 The government also considered the outright sale of Škoda to a foreign partner instead of forming a JV. Other options were also considered: government-financed restructuring that would lead to increased profitability. Škoda would be then privatized under more favorable conditions. Another considered option was a bond issue to raise capital for Škoda, but neither the government nor the banks were willing to guarantee it (Charap and Zemplinerová 1993:123). Škoda’s situation seemed to be so desperate that the federal Forecasting Institute proposed abandoning passenger car production altogether in Czechoslovakia in favor of producing automobile components for foreign car-makers (Calbreath 1995:7).

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This perception of Škoda by foreign companies gave the Czech government a relatively strong bargaining position. Basic requirements for privatization a foreign partner had to meet included the preservation of Škoda’s brand name, preserving the final assembly of automobiles in Mladá Boleslav, doubling the production capacity from 180,000 units in 1990 to 350,000-400,000 by the year 2000, maintaining the links with the domestic components supplier industry, technological improvement of engines so they could meet Western European emission standards, retention of the in-house R&D, and maintenance of current employment levels (20,698 in 1989, 19,800 in 1990). In the long-run, the JV partner was expected to build a new engine plant with an annual capacity of 500,000 units (Kříž 1991a:6; Nesvadba 2002:14, Henderson 1995:443-444). Obviously, the Czech government was trying to make sure that Škoda would maintain key strategic functions after its privatization and would not be degraded into a mere assembler of foreign models. VW’s delegation headed by its president was first to visit Škoda in early 1990. After discussions with eight different car manufacturers VW and Renault became two finalists selected by the Czech Ministry of Industry and Electrical Engineering in August 1990. Renault originally offered to replace the production of the Favorit by the assembly of either a new car based on its older model Renault 18 or the upcoming Renault Twingo. Renault’s proposal would mean the end of the Škoda brand. Škoda’s production complex would become Renault’s branch plant, assembling Renaults in Czechia. All production equipment would be leased. Renault’s strategy in competition with VW was to appeal to “traditional” Czech-French ties and to exploit the negative historical experience of Czechs with Germans. The French organized banquets, presented their cars to journalists and used more or less political arguments to persuade the Czech government to select them.3 However, the Czech government informed Renault that its offer was unacceptable since it did not meet terms of the tender. Renault then asked the Czech government to postpone its final decision by two months to prepare a new offer. The government agreed. According to the new offer, Renault would maintain the production of the Favorit and increase it to 250,000 units annually. Additionally, Renault planned to launch the production of R19 Chamade in 1993 and later the production of a new mini sub-compact model. Škoda’s production capacity would thus more than double to 400,000 units annually. Between 60% to 70% of output would be exported predominantly to CEE. A new engine factory would be built as well as a factory to produce gearboxes and other 3

Interview with the Škoda Auto union leader, Mladá Boleslav, June 20, 1996.

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components. Renault also planned to prepare a new concern-wide model in the late 1990s whose body would be designed at Škoda. Renault would enter Škoda indirectly through a newly formed company in which Renault would own 40% of shares and the Czech government would retain 60%. Renault’s total investment would reach 13.4 billion French Francs (2.6 billion USD) before 1999. Most of Škoda’s main component suppliers would continue to supply the production. Renault also pledged to increase employment at Škoda (Ehrich 1990a:3). Compared to Renault, VW offered in its original proposal a direct capital relationship in a JV between VW and the Czech government and to preserve the Škoda brand. Škoda would become an equal partner of VW, Audi and Seat brands in the VW Group with its own R&D, purchasing and sales. VW would first purchase 31% of Škoda’s shares and the Czech government would keep 69%.4 VW promised to gradually increase its stake to 70%. The company would continue to produce the Favorit with an emphasis on its increased quality and gradual modernization while increasing its output to 250,000 units annually. A new model was to be introduced in 1994 and it would be jointly developed by Škoda and VW in Mladá Boleslav. VW also proposed to invest up to 10 billion DM (6.6 billion USD) by 2000 (6 billion DM by 1996) in Škoda’s modernization and its further development, including the construction of new tool, press, welding and painting shops and an engine factory that would produce 1,400-2,000 cm2 engines. Škoda’s existing component suppliers would continue to supply if they met VW’s requirements and they could be potentially linked with VW’s suppliers.5 VW would help in the distribution of Škoda automobiles both in Western and Eastern Europe, it would develop a new distribution network for Škodas which would be separate from VW’s (Kožíšek and Králík 1995:186; Ehrlich 1990b:8-9). In preparing its offer, VW managers worked closely with Škoda managers. Managers of both companies built on links established in the mid-1980s when Škoda and VW were negotiating license production of VW’s engines for the Škoda Favorit. VW agreed to meet the terms of the tender because they fit into its business strategy. For example, the Czech requirement to maintain the Škoda brand would allow VW to sell cheaper cars outside Western Europe without undermining the image of its existing brands (Myant 1999:72). Additionally, 4

The government received 69% of Škoda’s equity for Škoda’s physical assets which it formally owned and which it contributed to the JV. 5 VW gathered information about Škoda’s component suppliers during its preliminary negotiations with the Czech government. Even at this preliminary stage, VW helped Škoda’s suppliers establish contacts with its German suppliers and explore the possibilities of their future cooperation.

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Škoda’s very poor brand image would not be damaging VW’s image in Western Europe. The preservation and upgrading of the existing network of Czech component suppliers was a necessity for VW if it wanted to continue the production of the Favorit.6 The joint-venture form of the agreement also fit well into VW’s approach since it was politically acceptable in Germany because it did not lead to any production transfer from Germany to Czechia and thus did not threaten any manufacturing jobs in Germany. VW was keen to expand to CEE to establish a strategically important presence in the region and by doing so to catch up with Fiat, its main competitor, which had been present there for many years (see Chap. 1) (Dörr and Kessel 1997:18). Škoda’s unions were well informed about the competing proposals and visited both Renault and VW. They preferred VW’s social system and believed that VW offered a greater potential for the development of Škoda and its labor force. They also preferred German to French since the Czechs generally knew German better than French because of tradition, the possibilities to travel to East Germany before 1989 and the possibilities to receive the German TV signal. In the post-1989 anti-communist backlash some of Škoda’s union members disliked what they considered to be the strong influence of communist unions at Renault. For all these reasons, Škoda’s unions decided to support VW although their support was not based on any deep comparative analysis of both companies. The unions even organized a protest meeting at Škoda’s welding shop in early 1991 when Renault seemed to be politically preferred by governmental officials. The unions threatened to strike unless their opinion regarding Škoda’s future JV partner was seriously considered by key decision makers.7 VW was also preferred by Price Waterhouse Privatization Services which advised the Czech government, and the Czech government’s Economic Council also recommended the government to select VW as a JV partner for Škoda. Overall, Renault’s offer was considered to be weaker than VW’s and the company seemed to be less interested in preserving the Škoda brand. For all these reasons, the government decided to invite VW to form the JV with Škoda on December 9, 1990. The “secret” agreement between the Czech government and VW was signed on March 28, 1991. The terms of the agreement were not to be released for twenty years. The JV was formed on April 16, 1991 (Kožíšek and Králík 1995b:187-8; Nesvadba 2002:17; Charap and Zemplinerová 1993:128). 6

VW’s strategy in the Czech automotive supply industry is analyzed in Chap. 7. Interviews with the Škoda Auto union leader, Mladá Boleslav, June 20, 1996 and at the Ministry of Industry and Trade of the Czech Republic, Prague, July 1, 1996. 7

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The government divided Škoda into two parts. The first part included everything Škoda needed for the production of passenger cars (the Mladá Boleslav production complex plus its Kvasiny and Vrchlabí subsidiaries – see Sects. 3.6 and 3.7). The second one included the rest of the original company including all Škoda’s debts.8 VW was buying only the first part of Škoda without any debt burden. The value of Škoda’s assets was assessed at 800 DM million exclusive of debts but inclusive of the trade mark. VW paid 620 million DM for a 31% share of Škoda (500 million DM was invested as working capital in exchange for 25% of the equity in the JV and 120 million DM was invested to partially repay Škoda’s debts in exchange for 6% of the equity in the JV). According to the agreement, VW paid an additional 350 million DM to increase its ownership share at Škoda to 50.5% and 40 million DM for Škoda’s debts in 1994. In 1995, VW paid the final third installment of 350 million DM and 40 million DM for Škoda’s debts to reach 70% of equity in the JV. Altogether VW purchased 70% of Škoda automobilová from the Czech government for 1.4 billion DM (about 900 million USD) (Charap and Zemplinerová 1993:129; Nesvadba 2002:17-18). The government retained a 30% share of Škoda which was planned to be sold after its anticipated future increase in value to repay Škoda’s pre-privatization debts and some environmental clean-up costs (Žák 1999:19, 1997:17). VW purchased this share for 650 million DM (12.3 billion CZK) in 2000 to become the 100% owner of Škoda.9 The total price VW paid for 100% ownership of Škoda thus amounted to 2.05 billion DM. VW also promised to invest an additional 8.2 billion DM between 1991 and 2000 namely to build an engine factory with an annual capacity of 8

This second part was transformed into the Prisko (the abbreviation of Privatization of Skoda) company which was 100% owned by the Fund of National Property. It included, for example, Škoda’s apartments, child care centers, and two production facilities not directly linked with the assembly of automobiles – Škoda Bělá pod Bezdězem (pressed components, wiring) and Škoda Liberec (small components, ironwork). Prisko was divided into ten joint stock companies on July 1, 1991 (Interview at the Ministry of Industry and Trade of the Czech Republic, Prague, July 1, 1996). 9 The Czech government made the sale of the remaining 30% share of Škoda dependent on three conditions: it wanted the right to fill one seat on Škoda’s advisory board until 2007; the right to be consulted about potential closure or significant reduction in the production of vehicles, gearboxes and engines until 2007; and the right to receive information from the advisory board about developments in the company, including its business and investment strategy. The government originally demanded 20 billion CZK (520 million USD), VW originally offered 8 billion CZK (205 million USD) (HN 2000a:1).

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450,000 engines and to double the production capacity to 390,000 cars annually by 1997. The agreement also contained clauses aimed at protecting the Czech components supplier industry and Škoda’s workers. In exchange, VW received a two year tax holiday from the Czech government; 19% tariffs to protect the Czech market from foreign competition for at least four years and the promise of additional non-tariff barriers in case of increased imports of foreign cars; duty free import of production technologies; a promise to finance the upgrade of Škoda’s telecommunication system to the Western European level; a promise to lower the turnover tax so that it would not exceed its highest level in the Western European car producing countries; assurances that Škoda’s monopoly position on the domestic market would not be challenged according to the Czech Antimonopoly law and Škoda’s business activities would not be “disproportionately restricted” (unless its monopoly position is abused and the Antimonopoly law is violated); a promise to help finance the retraining of workers; a promise of no restrictions on investment and construction preparation and speedy approval of all necessary permissions; and other concessions such as the obligation of the Czech government to pay for the cleanup of any environmental damage caused by Škoda prior to the formation of JV with VW (LN 1991:6). Although the JV agreement was criticized for selling Škoda to VW cheaply and providing too many concessions to VW (e.g. Nepil 1991:6), it has generally been accepted in Czechia that Škoda would have been unable to compete with Western car makers without substantial new investment and that it was likely to go bankrupt (e.g. Kříž 1991b:3; Žák 1999:19; Myant 1999:73). As mentioned above, Škoda had neither the investment capital nor the financing to continue day to day production for much longer and at the time of privatization, it did not have enough funds to pay the salaries of its workers (Žák 1999:19). Without a major injection of capital Škoda would have been unable to improve the quality of its cars and to keep up with foreign competitors.10 VW therefore purchased a troubled company. Although Škoda entered the JV debt-free, it lacked capital, its sales were rapidly declining and its domestic market was contracting due to the collapse of demand in the early years of the post-socialist transformation and the mass-importing of used cars from Western Europe. The sale of Škoda to VW and the quality of agreement can be judged very positively given the inexperience of the Czech government in dealing with JV negotiations, although it was far from being perfect, as we will see in the next section. 10

Interview at the Ministry of Industry and Trade of the Czech Republic, Prague, July 1, 1996.

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The JV agreement was prepared during the pre-privatization period in Czechia when the privatization legislation was not yet in place. The Ministry for National Property Management issued the directive as to what the privatization projects should look like only on August 15, 1991, four months after the VW-Škoda JV was formed.11

3.2 Difficulties in the Early 1990s Immediately after the formation of the JV the most important decisionmaking powers were transferred to VW despite the fact the state continued to own 69% of Škoda until 1994. From the start Škoda (officially Škoda Auto) was directed by a five-member board of directors dominated by VW. The chairman of the board of directors was Czech (he had one vote) as well as the director for human resources while the technological director, marketing director and economic director were Germans. VW’s road to success at Škoda has not been easy as Škoda faced unexpected difficulties in the early 1990s. Its already small domestic marked collapsed after being hit by price liberalization which caused the inflation rate to soar to 57.9% in 1991. High inflation undermined household savings and their purchasing power at the same time as the prices of domestically produced cars were rising and cheap used automobiles were pouring into Czechoslovakia from Western Europe.12 Škoda’s domestic sales declined from 123,000 units in 1990 to only 27,000 units in 1991 as Czechs alone bought 110,000 used Western cars in 1991.13 Škoda’s exports were expected to concentrate on CEE but its CEE markets were hit by the war in former Yugoslavia and high tariffs in Poland, and anticipated exports to the former Soviet Union did not materialize because of a severe economic crisis there.14 Škoda’s assembly line stopped for four days in September 11

Interview at the Ministry of Industry and Trade of the Czech Republic, Prague, July 1, 1996. 12 The price of the Škoda Favorit increased from 90,310 Kčs in October 1990 to 210,000 CZK in October 1993. A major reason was the increased cost of components by more than 100% on average. The average monthly disposable wage of Škoda’s shop floor workers was 6,799 Kčs in October 1993 (Kožíšek and Králík 1995b:190). This meant that shop floor workers needed 31 monthly salaries to purchase the Favorit. 13 Interview with the Public Relations Manager, Škoda Auto, Mladá Boleslav, June 14, 1999. 14 Sales to Poland reached 40,000 units in 1991 and then declined dramatically after customs and tax barriers increased the price of imported cars by 41% (Myant 1999:76).

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1991 because of low demand for its vehicles, and the company laid off 1,500 (mostly foreign) workers. The 1991 production of 172,000 cars was 15,000 units less than in 1990 (Fig. 3.1) and 33,000 vehicles lower than the annual production target set by VW (Myant 1993:248). Škoda’s losses reached 904 million Kčs (31 million USD) between April 16 and December 31, 1991 (since the start of the JV in 1991). Even larger production decline and financial losses were prevented by almost doubling exports to 130,000 units. Export expansion to Eastern Germany was particularly successful (ibid.). The car maker then successfully pressured the government to increase the protection of its domestic market. The Czechoslovak federal government lowered passenger car turnover tax from 40% to 25% and introduced a 15% import surcharge. A new law regulating the technical condition of imported used passenger cars came into effect in early 1993. By 1993 the situation had changed and Škoda’s output increased to 220,000 automobiles (200,000 in 1992) (Fig. 3.1). Škoda became VW’s only profitable operation during the world-wide recession in the automobile industry. Its 1992 profit reached 4.2 billion crowns (Fig. 3.2). VW President Ferdinand Piëch described Škoda as the “loveliest daughter” of the entire corporation and the only division capable of undercutting Japanese competition (Calbreath 1995:7).

Manufactured cars (in thousands)

600 550 500 450 400 350 300 250 200 150 1990

1992

1994

1996

1998

2000

2002

2004

2006

Year Fig. 3.1. Annual production of automobiles by Škoda Auto 1990-2006. Source: Based on data in Škoda Auto (1993-2006).

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11000

CZK millions

9000 7000 5000 3000 1000 -1000 -5000

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

-3000

Year Fig. 3.2. Annual after tax profit/loss by Škoda Auto 1991-2006. 1991 data for April, 16-December, 31 period. Source: Based on data in Škoda Auto (19932006).

Despite Škoda’s relative success VW’s worldwide loses reached 1.9 billion DM (1.1 billion USD) in 1993, largely caused by the huge financial losses suffered by its Spanish manufacturer Seat. VW was forced to close one of Seat’s three factories and lay off its 9,000 workers. VW’s German workers had to accept a four-day work week. Inevitably, VW’s crisis also negatively affected Škoda as VW decided to unilaterally lower its promised investment plans and production targets in September 1993. VW’s decision was particularly shocking for Škoda, the Czech government and public because of the way it was announced at the very last minute. For a year VW and Škoda had been preparing a 1.4 billion DM (853 million USD) loan agreement with an international consortium of some fifty banks to finance the construction of a new engine factory with an annual capacity of 450,000 engines and the doubling Škoda’s production capacity to 390,000 units by 1997. However, one day before the loan was to be signed VW announced to the press that it was withdrawing from the agreement. The Czech government, then still a majority owner of Škoda-VW JV with an ownership share of 69%, was not consulted about this decision at all. Škoda was not consulted and informed about the decision in advance either.

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Following an outcry on the Czech side VW apologized to the Czech government and assured it that its original promises made during the JV formation would be fulfilled, though more economically. Škoda was still planning to produce 450,000 vehicles annually by 1997 and the loan refusal was not to affect employment in Mladá Boleslav (Sedlák 1993). However, WV had reassessed its future investment in Škoda’s automation and had decided to pursue lower levels of automation to avoid high capital costs. Instead, a new strategy was to emphasize greater labor input and increased labor flexibility (Dörr and Kessel 2000:32-33). From now on Škoda should finance its investment needs from its own sources. Additional savings would be derived from the platform strategy and the associated unification of car components within the VW Group, and the integration of key suppliers in the assembly operations (Kožíšek and Králík 1995:191). In November 1993, VW’s board of trustees approved a new 3.75 billion DM investment plan for Škoda (about 40% of the originally promised investment plan). Shortly afterwards Škoda’s chairman announced that the company would not build a new engine plant because VW was unable to use 250,000 engines planned to be installed in VW’s cars outside Czechia (Kalma 1994:13). Finally in October 1994 VW decided to lower the planned expansion in Škoda’s annual production capacity to 300,000 units (Kříž 1994:1). VW justified these decisions on the basis of its huge financial losses in 1993 and excessive capacity in its motor engine plants.15 VW had some 12 engine plants with an annual capacity of 5.6 million engines, while it produced annually 3.5 million cars. However, Žák (1997:17) argued that VW amidst its economic problems used the total lack of interest of the Czech government in the JV after the 1992 elections and the breakup of Czechoslovakia (and therefore a one-third decrease in the size of Škoda’s domestic market) to scale down its investment plans. A similar engine plant was then built in Brazil and the engine plant that was supposed to be built in Mladá Boleslav was built in Hungary (ČTK 2001a). VW’s unilateral decision caused a lot of political controversy in Czechia as the latent mistrust of VW and Germans as a whole was mobilized and VW’s true intentions at Škoda were publicly questioned. Although VW was accused of breaching the JV agreement, there was nothing the Czech government could do. It was revealed that VW’s original investment promises were not part of the official JV agreement but only oral commitments. As such they carried no legal obligation. This situation further undermined 15

Declines in sales of passenger cars by the VW Group members in Western Europe in 1993 compared to 1992: VW by 20.5%, Audi by 23.2%, SEAT by 17.8%, Škoda by 0.1% (Machoň 1994:13).

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the Czech trust in VW and in its long-term plans with Škoda. Czech fears of Škoda being transformed into a mere assembly plant intensified despite the Škoda chairman’s assurances that this was not the case (Kalma 1994:13). In December 1993 the government asked for an addendum to the original JV agreement that would clearly stipulate the commitments of both the government and VW in the Škoda-VW JV. VW agreed and the addendum negotiations began in February 1994. VW took a hard line throughout a long negotiation process, hinting at the possibility of leaving Czechia if production costs rose too sharply in Škoda. VW’s tough attitude put it in a strong negotiating position as the Czechs feared that VW might leave Škoda, since the governmental goal in the addendum negotiations was to make sure that Škoda continued to play its prominent role in the Czech economy (Calbreath 1995:10). Consequently, the negotiated (secret) addendum signed on November 18, 1994 more or less confirmed VW’s previous strategy and its decisions to lower investment and production targets at Škoda. Annual production capacity was to be increased to 340,000 vehicles by 2000 (with a possibility of raising the target to 390,000 vehicles if market conditions permitted).16 Any changes in production capacity (including the production of engines and gearboxes) would have to be approved by both JV partners. The government gained a right to participate on all fundamental decisions regarding the JV and a veto power over any decision that would dramatically affect Škoda’s activities until December 31, 1999. After this date VW was to purchase the remaining 30% of JV shares from the Czech government. VW was to increase its stake in the JV to 70% in 1994. The clause included additional protection for Czech component suppliers who would be allowed to supply the entire VW Group if they met VW’s criteria. The clean up of environmental damage caused by Škoda prior to the formation of JV with VW was to follow the laws existing during the addendum completion (Nesvadba 2002:34).

3.3 Transfer of Managerial Know-how from VW to Škoda At the time of the JV formation Czechs and Germans differed in their approaches to production corresponding to the differences between state socialist and capitalist modes of production. The Czech and German workers and managers had operated in these different modes of production for more than forty years prior to the formation of the Škoda-VW JV. The 16

This was a compromise. The Czech government wanted the production capacity set at 390,000 vehicles while VW offered 300,000 vehicles (Nesvadba 2002:34).

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differences did not disappear overnight with the collapse of the state socialist system in former Czechoslovakia. Somewhat ironically, the centrally planned economy was typified by the anarchy of the production process (Burawoy 1985:163; Burawoy and Krotov 1992:18-19) which forced the shop floor workers to improvise to deal with frequent spare part, tool and material shortages in order to keep production running. Škoda’s workers became masters in such improvisation and considered it to be an important part of car production (Buček and Stehlík 2002). On the contrary, the capitalist mode of production is typified by the planned organization of production (Burawoy 1985:163; Burawoy and Krotov 1992:19-20) and, not surprisingly, VW’s managers have emphasized perfect planning and production organization. These two different mentalities and approaches to production clashed at Škoda in the early 1990s. Additionally, before 1990 Škoda conducted no market research, product positioning, advertising and promotions so these skills needed to be developed as quickly as possible. One of VW’s managers who worked at Škoda after the formation of the JV summarized the quality of Škoda’s managers as follows (Gutman 1995:21): Despite high professionality there existed a fundamental - but not insurmountable – lack of economic knowledge and experience, initiative, responsibility, and management skills... Commitment, involvement of those concerned, willingness and ability to take decisions had been “de-learned” for decades.

Not surprisingly, VW’s managers originally felt that the best way to restructure Škoda would be to follow the conventional way of know-how transfer. This involved a quick transfer of management, production and rationalization strategies from VW since these worked successfully in other VW’s plants. Given the rather bad overall situation at Škoda prior to the JV formation, VW’s managers considered VW’s corporate model and Western methods as a whole to be vastly superior to Škoda’s production and organization structures which they regarded as useless. Such attitudes dismissed Škoda’s long car-making tradition and the relatively high level of manufacturing skills of its labor force, instead of building on them. Škoda’s Czech managers and workers also originally believed that Western production and organization methods were superior (Dörr and Kessel 1996:50-51). Škoda launched a massive management training program and many managers were sent to gain experience abroad in other VW plants. Based on the Škoda union’s request, VW organized bus excursions (60 buses in total) for hundreds of shop floor workers to visit VW’s factories

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to see the working conditions under which the cars were produced in Germany. They [Škoda’s workers] could see ergonomics for the first time in their lives. They could see the pace of work and the physical intensity of work but also how workers’ meals were being prepared and distributed. This then generated a pressure to do something about how things were done here [in Mladá Boleslav].17

After the JV formation, Škoda’s managers and workers thus willingly replaced even well functioning practices with Western ones. However, these attitudes started to change after the introduction of Western methods did not lead to any significant improvements and when the Czechs began to question seemingly uncoordinated measures pursued by foreign managers. Some of these measures, such as transferring important R&D functions from Škoda, threatened Škoda’s own R&D and were seen as undermining Škoda’s long-term position within the VW Group. Consequently, tensions and conflicts increased between the Czech side and VW’s (mostly German) managers (Dörr and Kessel 1998:225). Škoda’s unions and workers felt that VW underestimated the abilities of Czech workers and managers and in their view did not send “specialists” but only “third-rate” managers to Škoda after the formation of the JV. They felt that VW’s managers did not take time to learn about Škoda’s system of production and its carmaking experience. Instead, VW’s managers attempted to apply their approaches into a completely different environment that posed specific obstacles and therefore needed to be adjusted to Škoda’s conditions and carmaking experience. While Škoda’s managers were largely inexperienced in free market economics, Škoda had many top-class mechanical engineers and machine specialists. VW’s managers sent to Škoda had typically an economic rather than technical background and, according to the unions, they tended to downgrade Škoda’s specialists.18 Consequently, many Škoda specialists left the company in the early 1990s. The Škoda Auto union leader argued in 1996: We had one enormous weakness. We knew many things better than they [the Germans] did and I think that we do even today. We know how to be more practical, we can better improvise to achieve a better result. However, during the previous [state socialist] regime we completely failed in marketing and advertising and all of this. 17

Interview with the Škoda Auto union leader, Mladá Boleslav, June 20, 1996. Interview with the Škoda Auto union leader, Mladá Boleslav, June 20, 1996. See also Dörr and Kessel (1998:226-227). 18

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The simple and total transfer of VW’s production and management practices that ignored the existing experience, attitudes and overall ways of making cars at Škoda obviously did not work as smoothly and efficiently as VW’s managers had planned.19 This restructuring strategy, combined with the high-handed behavior of foreign managers at Škoda (Dörr and Kessel 1996:50), was harshly criticized by Škoda’s labor unions and generated suspicions among Škoda’s workers about VW’s true intentions with Škoda and about its commitment to the terms of the JV agreement. At the same time, VW as a whole was facing serious challenges as it came under increasing pressure from its main competitors. In particular, VW’s market position was undermined by the growing success of Japanese car makers. This situation had undermined confidence in VW’s established and well-tried model among its corporate managers. They began to realize that VW’s production model might no longer guarantee the future competitiveness and success of the corporation. Both of these pressures led VW’s corporate managers to reconsider their approach to Škoda’s restructuring. The outcome was a new restructuring strategy that was to combine VW’s and Škoda’s strengths, experience and innovation potential (Dörr and Kessel 1998:225-6; 1996:51). To assure the transfer of managerial know-how, VW introduced tandem management and coaching at Škoda. Its main advantage is the speed of know-how transfer compared with traditional approaches such as seminars (Gutman 1995:23). Fifty VW managers (expatriates) worked at Škoda as of November 1991 (Machoň 1994:13). Their number peaked at about 400 after tandem management was introduced. They were typically transferred to work at Škoda for three years. The number of expatriates declined to 140 by 1996 and to 40 by 2005.20 All expatriates were teamed up with Czech managers who were supposed to learn new methods and approaches from their mentors.21 However, in some cases VW’s managers originally sent to work at Škoda did not even posses the managerial knowledge, experience and capabilities they were supposed to pass on to their Czech 19

The failure of the simple transfer of VW’s production and managerial strategies to Škoda is hardly surprising since these historically developed in the context of the German economy and systems of production, German work practices, labor regulation and labor union strategies, and German economic regulation and governance. As such they are not simply transferrable from one spatial (national) context to another (see e.g. Peck 2000:144). 20 In 2005, 40 Czech managers worked in other than Škoda plants within the VW Group (Bautzová 2005). 21 Interviews with two Public Relations Managers, Škoda Auto, Mladá Boleslav, July 4, 1996.

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colleagues (Dörr and Kessel 1998:227, 1996:52). The tandem organization was negatively affected by communication problems. These were partially caused by the fact that German was used for communication in tandems. This, according to Škoda’s unions, put native speaking Germans in an advantageous position within tandems compared to their Czech colleagues. Even if the Czech managers spoke German reasonably well they could never speak it at the level of native German speakers. This has led to the danger of Germans communicating only with Germans and Czechs communicating only with Czechs (Guttman 1995:23). This is why the unions pressed (unsuccessfully) for English to become a medium of communication within tandems and the company as a whole, because they believed that it would put Czechs in a more equal position with Germans and other VW expatriates.22 Dörr and Kessel (1998:226-227; 1996:52) argued that communication difficulties within tandems had also other important reasons such as the fears of Czech managers as to whether they would keep their positions and would have a chance for promotion within the company, which inhibited their ability to communicate. At the same time, according to Gutman (1995:22-23) some expatriates behaved as “Mr Omniscient: parading as an expert, combined with arrogance and a distinctly perceivable [sic] [perceptible] feeling of superiority” which hindered cooperation and communication with local managers and workers. Despite these difficulties, tandem management proved to be an efficient and speedy way of managerial know-how transfer from VW to Škoda.

3.4 Restructuring Strategies In the meantime, VW launched restructuring and rationalization strategies at Škoda to increase production efficiency and flexibility, reduce production costs and increase the overall product quality. Before the formation of the JV, 70% of assembled cars had had some defect that had to be fixed in a large repair center at the end of the assembly line (Henderson 1995:438). Not surprisingly, after the JV was formed Škoda’s immediate goal was to dramatically increase the quality of the existing model while keeping prices low. This has been achieved through two restructuring processes. One was the internal restructuring of the company itself. The second one involved the restructuring of Škoda’s external relations with its component suppliers and also the extension of its network of international dealerships. Labor costs were very low and accounted for only 6–7% of total production 22

Interview with the Škoda Auto union leader, Mladá Boleslav, June 20, 1996.

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costs in the early 1990s. Low-cost labor was the major factor behind the increased competitiveness of the company. An average Czech auto worker with comparative or even better skills cost at least 90% less than in Germany in the first half of the 1990s.23 As a result, there was little room for Škoda to squeeze wages and the company instead focused on a strategy of labor-force flexibilization. The major task of internal restructuring was to replace traditional centralized hierarchical structures of production organization and decisionmaking typical of the Taylorist-Fordist system of mass production with more horizontal decentralized structures typical of the Japanese production system (Dörr and Kessel 1996:53). The decentralized horizontal organization of production is based upon the establishment of autonomous production units that employ team work and the organization of self-regulating work groups composed of teams. These have been described as “small manageable groups, which work independently and under their own responsibility. They do not work on single parts of a task but concentrate on the overall task, on processes and on the optimization of these” (Škoda Auto 1998:16). Each team is composed of six to eight workers. This type of automobile production organization has been labeled as “fractal” organization and it is a German variant of lean production first introduced by the Japanese automakers. One of its goals is to implement the philosophy of continuous improvement and small scale innovation on the shop floor, which is a variant of the Japanese Kaizen method. At the same time, fractal (modular) organization of production was designed to increase the overall production flexibility, the ability to quickly react to changing conditions, requirements and market signals, improve cooperation and limit bureaucratization tendencies in the organization of production (Škoda Auto 1998:16; Dörr and Kessel 1996:53). Škoda’s assembly facility constructed for the Felicia model represented the pilot project of the “fractal factory”. VW described the fractal factory concept first implemented at Škoda as follows (Usines & Industries 1998:77): The underlying concept behind the fractal factory was to make production as transparent as possible, providing assembly workers with direct contact to the flow of information and encouraging effective team-work. Fractal units consist of numerous smaller production lines on which modules are assem23

In the early 1990s, Western European labor costs accounted for 30-35% of overall production costs. In 1993, Škoda estimated that the ratio of its operative labor costs to an equivalent German figure was 1:18, and 1:12 at the level of all employees. Reportedly only 1% of Škoda’s cost structure per car was made up of direct labor costs, compared to an estimated 40% in VW’s German plants (Lyal 1994:53).

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3 Post-1989 Transformation of Škoda Auto bled and which flow directly into the main assembly lines – the backbone of plant operations. The aim of these fractal units is to promote a feeling of individual responsibility and to motivate employees within independent teams. Limiting automation to 15% increases the value of an individual’s talents and decision-making ability when it comes to mastering new technologies. Should these technologies change, however, fractal units offer yet another advantage: they can be modified, replaced or expanded accordingly without affecting the production process on the central assembly lines.

The fractal production organization has also involved the radically new production concept of “strategic insourcing”, integrating component suppliers with vehicle assembly operations. Selected key component suppliers are allocated space within the production complex to assemble the components brought in from supplier’s facility into preassembled modules (subsystems), such as cockpit units, drive units, roofs, doors or seats.24 After being thoroughly tested for quality, these modules are then delivered in the just-in-time regime direct to the assembly line for installation. At its extreme, the preassembled modules are installed in automobiles by suppliers who are completely responsible for perfect quality and installation of their particular subsystem. Strategic insourcing is a cost-cutting strategy which lowers logistical costs and costs of warehousing for car makers by lowering component inventories. At the same time, geographical proximity increases production flexibility by allowing car makers in tandem with their integrated component suppliers to react to differences in customer demand just before the actual assembly of vehicles. The introduction of fractal organization and strategic insourcing at the Škoda production complex was related to the launch of Felicia, a small car that replaced the Favorit in October 1994.25 It became a contested issue. Škoda was the only VW plant in 24

Thus, for example, cockpit units are fully preassembled by an integrated component supplier (Siemens VDO Automotive) from windshield wiper controls, cables, radio, dash board, heater, passenger air bag and steering column. Up to 1,200 cockpit units are assembled daily by 220 workers inside the Fabia’s assembly facility. Each cockpit unit for the Fabia is assembled from 264 individual components. Fifty five component suppliers, more than half of them foreign, supply components to Siemens at Škoda’s facility for the assembly of cockpit units for the Fabia. Many of these second-tier suppliers work in the just-in-time regime. Siemens receives orders from Škoda specifying requirements for each cockpit unit 180 minutes prior to the assembly of a particular car. In 180 minutes Siemens must secure components, assemble and test the cockpit unit and deliver it on the Fabia assembly line just-in-time and with the required quality (Němec 2002:4). 25 The Felicia series was Škoda’s first new model since the formation of the JV with VW. The Felicia was based upon the Favorit and it shared about half of its most important components. As with the Favorit, the Felicia was targeted at the

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Europe where this production concept was introduced (other two were VW’s plants in Brazil and Argentina), mainly because it was rejected by the unions in other plants.26 In the first phase, a variety of components began to be produced at Škoda’s manufacturing complex by outside suppliers, but the actual assembly work continued to be performed by Škoda’s workers. In the second phase, employees of the suppliers were supposed to install their preassembled modules directly into the cars on the assembly line, thereby bypassing Škoda’s workers. The implementation of the second phase has been prevented by union resistance at Škoda (a warning strike on October 17, 1994) (HN 1994:1-2; Hrabě 1994:VI). The conflict was about what kind of modular car production would be introduced. The type of modular production eventually employed by Škoda Auto has been labeled as an industrial condominium (Salerno et al. 1998; Frigant and Lung 2002:743-744) in which the car maker continues to perform key manufacturing functions including the actual assembly of vehicles and the manufacture and assembly of most strategic modules such as engines and transmissions. The industrial condominium type of modular production is different from a modular consortium in which the car maker is no longer directly involved in manufacturing, and functions instead as the “principal coordinator of co-design and coproduction processes” (Frigant and Lung 2002:743). In this type of modular production, the first-tier suppliers are not only assembling the modules in the vehicle assembly facility but they are also directly involved in the actual assembly of vehicles on the assembly line, replacing the assembly workers of the vehicle manufacturer. Rationalization strategies led to layoffs in the Fall of 1994 when 800 Czech workers lost their jobs in addition to hundreds of mainly foreign workers (800 Cubans, 700 Poles and more than 1,500 Vietnamese) (Fig. 3.3). Škoda unions blamed the situation on the Czech government because lower medium-range market. It was designed as a car that would meet West European quality, safety and other standards in its class but would be sold for East European prices. This combination of quality and value was to make the Felicia highly competitive. VW managers argued that in terms of quality the Felicia was fully comparable with other VW models (Kovář 1995:15). 26 In the early 1990s, ‘strategic insourcing’ was also resisted in Spain (at the Seat plant) and VW did not even attempt to introduce it in Germany because of the expected union resistance. The only other two VW plants where this production concept was introduced were located in Brazil (the greenfield truck plant in Resende) and in Argentina (the refurbished General Pacheco car plant near Buenos Aires). In these two plants supplier integration was pushed much further. For example, in the Resende plant VW workers do no assembly work (interview with the Škoda Auto union leader, Mladá Boleslav, June 20, 1996).

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of the poorly prepared JV agreement which was supposed to guarantee employment levels, and accused it of the “long-term apathy... toward the gradual liquidation of the Czech automobile industry” (Spitková 1994). The unions feared that the job security of “thousands of workers” would be threatened if component suppliers were allowed to install preassembled modules directly into automobiles on the assembly line and that older workers would be unable to keep up with increased work intensity and would lose their jobs. Škoda’s spokesman argued that workers’ fears were exaggerated since only seven component suppliers were to be integrated in the assembly of the Felicia and only 10% of component supplies would be affected (Pinka 1994:I).27

Number of employees

24000 23000 22000 21000 20000 19000 18000 17000 16000 15000 1992 1994 1996 1998 2000 2002 2004 2006

Year Fig. 3.3. Number of employees at Škoda Auto (excluding foreign workers), 19912006. Source: Based on data in Škoda Auto (1993-2006).

The ability of VW to use Škoda as a testing ground for its new production methods rejected by the unions in the West was made possible by the inexperience of Škoda’s unions that initially failed to recognize the far reaching implications of supplier integration for its work-force – the usually low-paid and non-unionized suppliers could eventually replace the 27

Škoda used six integrated suppliers for the production of the Felicia, including Johnson Controls (seats), Peguform Bohemia (bumpers and door filling), HP Pelzer (floor covering), Autometal/Leistritz (exhaust system assembly), ATESO/Lucas Autobrzdy (rear axle and breaks), and VDO/PAL Kbely (dashboard) (HN 1997b:3).

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higher paid and unionized Škoda’s assembly workers.28 It also indicates the relative weakness of Škoda’s unions compared to their Western European counterparts (Calbreath 1995:10). In addition to cost cutting, “strategic insourcing” has thus been used as a mechanism through which component suppliers can quickly react to Škoda’s changing needs. Škoda has introduced “strategic insourcing” to not only achieve greater flexibility in production but also to place more responsibility for the quality and timing of deliveries on the suppliers. These cost-cutting and rationalization of production strategies were fully employed in the newly built modular assembly plant for the mid-sized model Škoda Octavia. The plant construction started in February 1995 and was completed in 19 months at the Škoda production complex in Mladá Boleslav. It was designed to push labor productivity to its limits. Attention was paid to such details as the shop floor illumination by natural daylight to make the working environment feel more comfortable for the assembly line workers. The assembly line was designed using the “employee (workers’, information) spine concept” in which the assembly line is built as a ring with the space in the center used as an information area (information spine) (Fig. 3.4). The information spine area should promote communication and thus innovation. An additional advantage of the spine concept is its increased flexibility. The assembly line can be easily extended and the adjoining areas can be modified according to changing requirements. The production of the Octavia model started with five “integrated suppliers”, and the combination of supplier integration with just-in-time delivery of preassembled modules and components lowered the material stocks so that they remain at the assembly line for less than two hours.29 The “information spine” concept also rationalized management and administration by moving it into the “information spine” and thus as close as possible to the assembly line and by reducing the number of management levels from seven to three. Direct communication between teams and managers allows much better information exchange and a more flexible response as the managers can intervene in the assembly process immediately. As a result, only 15% of workers on the Octavia assembly plant are non-assembly line personnel (compared to 60% for Škoda Auto as a whole prior to the launch of the Octavia) (CzechInvest 1996:10; Škoda Auto 1996:G5). The new facility 28

Interview with the Škoda Auto union leader, Mladá Boleslav, June 20, 1996. Johnson Controls (seats, seatbelts and runners), Rockwell (doors, sunroofs, trim and speakers), Siemens/Allibert (cockpit which includes instrument panel, steering wheel, heater, airbags and pedals) and Expert (front end which includes the bumper, headlamps, radiator, and grille) (HN 1997b:3). 29

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built for the production of the Octavia model was to become the most efficient car plant in Europe at the time of its launch in 1997.30

Fig. 3.4. Schematic design of the “information spine” concept assembly line for the production of Octavia. Based on Škoda Auto (1996:2, 1998:20).

The second mechanism that has been adopted to increase work place flexibility is the segmentation of the labor force into core and peripheral workers. Core workers comprise unionized and relatively highly-paid skilled Czech labor – workers who have benefited from the offensive restructuring strategy. On the other hand, peripheral workers are non-unionized foreign (usually Polish but also Slovak) workers. Foreign workers are hired through and employed by an agency which is paid by Škoda to undertake recruitment. In this way, Škoda takes minimal responsibility for the peripheral workers. By mid-1996, Škoda was employing about 1,300 Polish 30

The plant was designed to produce up to 90,000 cars annually with only 950 assembly workers (CzechInvest 1997:2). This would represent the production of 95 cars per worker per year. In 1995, Škoda as a whole produced 13.5 cars per worker and only 9.7 cars per worker in 1991 (Kožíšek and Králík 1995). Škoda invested 11 billion CZK (about 350 million USD) in the new assembly plant (including a new 7.2 billion CZK (about 230 million USD) paint shop).

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workers in this way, and the number of temporary foreign workers reached 3,704 in 2006 (Fig. 3.5). This number fluctuates considerably, however. Foreign workers accounted for 2-15% of total workers employed by Škoda Auto between 1991 and 2006. According to a senior manager, “[i]f Škoda needs 300 more Polish workers next month, it will get them, and the following month it might need 500 workers less.”31 These workers work long hours and they invariably have to work at a faster pace and, according to one senior manager, perform the type of work “where the Czechs do not want to work.”32 Škoda claims that the reason it is employing such workers is because of a lack of Czech labor due to low unemployment levels in the region (around 2% in the second half of the 1990s). However, Škoda was also planning to gradually replace Polish workers with cheaper and, according to one manager, “less demanding” Ukrainian labor. This experience of core and periphery in the labor force reflects earlier techniques of labor segmentation under state socialism. As we could see, Škoda used to directly employ prison labor before 1989 to perform many of those tasks now undertaken by Polish workers. 4000

15 12

3000

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Foreign workers

3500

2500 2000 1500 1000

9 6 3

500 0 1992

1994

1996

1998

Year

2000

2002

2004

2006

0 1992 1994 1996 1998 2000 2002 2004 2006

Year

Fig. 3.5. Left: Number of foreign workers employed by Škoda Auto 1991-2006 (as of December 31). Right: The share of foreign workers on total number of workers in Škoda Auto. Source: Based on data in Škoda Auto (1993-2006).

The focus of increased flexibility thus allowed Škoda to pursue, according to the management, a policy of “the reasonable automation and mechanization” of its production.33 Because of cheap but highly skilled labor, the company could afford not to buy expensive robots where workers can do the same high quality job. As one manager put it; “Fifty workers cost less

Interview at Škoda Auto, Mladá Boleslav, July 4, 1996. Ibid. 33Interview at Škoda Auto, Mladá Boleslav, June 14, 1999. 31 32

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than two robots and people are more flexible and cheaper overall.”34 While VW has introduced robots in its German plants, Czech workers are able to do similar tasks at lower cost. Lower levels of fixed capital investment compared to other car makers could be translated into lower production costs and thus the increased competitiveness of Škoda automobiles. These cost cutting strategies, the emphasis upon quality improvement and increased flexibility have dramatically improved Škoda’s competitiveness abroad. However, the company’s top managers argued that it was still unable to compete with the Japanese auto makers in terms of quality and efficiency. Compared to Toyota, for example, Škoda’s cars had twice as many defects and were less reliable. Toyota and Nissan needed about 20 hours to produce one car while Škoda required about 40 hours in the mid1990s. Toyota delivered its cars three times faster than Škoda (Zimmermann 1997:4-5). Furthermore, Škoda anticipated increased competition from its rivals who were busy building and modernizing their assembly capacities in low-cost countries such as Poland and Hungary and most recently also in Czechia and Slovakia. As a result, Škoda’s top management pushed for further rationalization strategies in an attempt to close the gap between Škoda and the Japanese auto makers and, at the same time, to increase the gap between Škoda and new low cost entrants in CEE such as Opel Polska in Gliwice. The new “Škoda Production System” was designed to reinforce the introduction of Toyota-inspired production methods, to maximize simplification and standardization of all production activities and by doing so to further increase production efficiency and product quality (Büsching 1998:2).35 Rolf Zimmermann, a member of Škoda’s board or directors responsible for the production described the system as follows (Zimmermann 1997:4): The goal [of the Škoda Production System] is to make sure that the individual [production] systems and processes undergo continuous innovation and improvement, that the workers work in the system of team work and are Ibid. The “Škoda Production System” was designed in 1996 and its pilot tests took place at the end of 1996 and in early 1997. The system was introduced throughout the company in 1997 and 1998. It is composed of ten elements that should lead to optimizing production including team work; visual management, including the Andon system; rapid problem solving on the shop floor; optimization of material supplies, lowering waste and material inventories on the assembly line (the Kanban system); standardization and optimal order of production tasks; optimal work place organization; productive maintenance (TPM); increasing presence at the work place; standardized inspection; and business plan – deployment (Zimmermann 1997:4–5; Petr 1997:2). 34

35

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creatively integrated into the production process not as tools but as its integral and flexible component.

The company hoped that the Škoda Production System would further increase its flexibility and its ability to react to changes more quickly. However, the introduction of the system on the Škoda shop floor has proven to be difficult and slower than the senior management expected (Zimmermann 1997:4–5; Büsching 1998:2), which indicates a certain resistance of workers and the lower level management to the new production system. The workers and managers were suspicious because the new organization into work-teams resembled the socialist work-teams introduced before 1989 (then called the “socialist work brigades”) to increase efficiency of production. The Continuous Improvement Process was perceived by many workers and managers to contain practices typical of the socialist competition previously organized by the Communist Party and its labor unions (Dörr and Kessel 1996:53). These rationalization strategies also resulted in minimization of the number of workers on the assembly line and in an ever increasing pace of work for those who remained. The unions negotiated agreements with the management trying to protect the workers from overexertion (assembly workers complained that they could not take scheduled toilet breaks, for example). However, these agreements were repeatedly violated by the company. Top managers agreed to increase the number of assembly workers and lower the pace on the assembly line only after a 30 minute warning strike on July 26, 2001 (Sadílek 2001; LN 2001). The restructuring of Škoda’s external relations with its component suppliers was also crucial for the company since the largest costs (about 60% of total production costs) were associated with materials and supplies. Škoda has attempted to keep down costs by building subcontracting linkages with companies located in Czechia who have been able to replicate the locational advantages of low cost but skilled labor.36 Component suppliers were put under pressure by Škoda to dramatically increase the quality of their products while keeping costs down. In many cases, however, the original Czech component suppliers were unable to meet quickly (if at all) the high quality standards required by Škoda. Therefore, Škoda has directly encouraged Czech suppliers to form JVs with Western companies. By doing this Škoda was able to keep the cost of its components low compared to its Western European and Asian competitors. As a result, by 2000 fifty JVs had been established between Škoda’s Czech component suppliers 36

The effects of VW’s investment in Škoda on the Czech automotive component industry are dealt with in greater detail in Chap. 7.

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and Western companies and forty green field component plants had been built. Consequently, two-thirds of Škoda’s total purchasing of components and materials were derived from Czech-located producers in 2000 (Škoda Auto 2000:23) (see Chap. 7, Table 7.4 for details). However, the move to establish a corporation-wide production strategy for common platforms for all of its models of similar sizes has resulted in a reduction in the role of domestic suppliers and the increased role of foreign-owned suppliers located both in Czechia and abroad. This strategy first affected the mid-size Octavia model introduced in November 1996. All auto parts that cannot be seen were unified and installed in all models of the same size (VW, Audi, Seat, Škoda) – a global sourcing strategy. At the same time the external parts of a particular model remained distinct. This strategy significantly reduced production costs by increasing economies of scale and reducing the number of suppliers. If a supplier is able to supply auto parts in the required quality and cost, it might be selected to supply the entire VW Group. As a result of this strategy, however, the share of domestically produced components has fallen from 70 % for the Felicia to only 31 % for the Octavia, thereby reducing the level of local embeddedness of component production. Since the introduction of the small Fabia in the Fall of 1999 all Škoda models have been built on VW’s corporate platforms. Consequently, the share of component supplies derived from domestic-owned Czech suppliers has been declining. Škoda thus utilized former networks established under state socialism but transformed them on the basis of its own corporate interests. Consequently, Škoda can be regarded as a highly embedded company, drawing upon a wide range of local components sourcing. One major reason for the high level of integration into local labor markets and local supply relations has continued to be the existing structures of local skill capacity and component networks. Yet, while transforming old network relations, many component producers have seen previously quite diverse production profiles consolidated into new forms of dependency on one customer. The dependency among components suppliers on JVs with Western firms has been further increased by the transfer of decision-making and R&D activities from Czechia to the “mother” companies of foreign firms located abroad. It still remains to be seen what effects this will have on the erosion of innovation and research capacities in Czechia.37 This experience, therefore, counters some of the more uncritical arguments about the role of component supply networks as a mechanism for enhancing technological and innovative learning in “host” economies. 37

The issues of FDI and R&D in the Czech automotive industry are discussed in Chap. 6.

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Clearly, then, in the case of Škoda, a strategy of offensive restructuring has been pursued with the upgrading of the components network resulting from the high level of embeddedness of the plant. Yet, such a strategy is not unambiguous for local sourcing has declined in significance as global sourcing strategies have been pursued across the VW corporation and domestic suppliers have witnessed an increased dependency upon lessdiversified markets. Finally, Škoda had to rebuild the sales and distribution network. Before 1989, the company had only very limited control over the marketing and distribution of its cars since these were conducted by state-owned distribution agencies. Škoda had only 12 retail outlets in Czechoslovakia before 1989 and the vast majority of its cars were sold through the sales network of Mototechna, the state-run distribution company. Sales of Škodas abroad were controlled by Motokov, the state-run trade organization. All Škoda foreign sale outlets were part of Motokov (Henderson 1995:440-445). Following the formation of the JV with VW, Škoda partially took over the existing domestic and foreign automobile sales units and integrated them with a newly built network of dealerships.

3.5 Post-1995 Success and Challenges of the Early 2000s Škoda’s restructuring strategy proved to be very successful. The company was transformed into a low-volume low-cost producer of good quality automobiles without fully reaping the benefits of economies of scale. Škoda could compete with Japanese and South Korean auto makers in terms of production costs (but not yet in terms of the quality and reliability of its vehicles). The period of success began with the introduction of the Felicia in 1995. Demand for Felicias exceeded the supply both on the domestic and foreign markets, leading to long delivery periods. In 1995, Škoda Felicias were exported to 60 countries and the company’s strategy was to sell one-third of its cars on its domestic market, one-third in CEE and one-third in the rest of the world (Kovář 1995:11). In 1996 Škoda introduced a new midsized model the Octavia that also became an instant success. Its original maximum production run was 90,000 cars annually but the Octavia’s success allowed the company to expand its production to more than 160,000 units annually with an additional investment of 5 billion CZK (151 million USD). This unexpected expansion of the Octavia’s output increased Škoda’s production capacity so that the goal of annual production of 340,000 vehicles

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by 2000 specified in the 1994 addendum was reached already in 1997. In the same year, the success of both the Felicia and the Octavia convinced VW headquarters to raise the production targets for Škoda from 340,000 to 500,000 units annually (to be reached in 1999) (LN 1997:14). Furthermore, the decision was made in 1997 to introduce a third model of Škoda. VW also reconsidered its 1993 decision not to build the new engine plant at Škoda’s production complex. A new 17 billion CZK (562 million USD) engine and gearbox plant with an annual capacity of 500,000 engines and 500,000 gearboxes was completed in 2001.38 Škoda had to finance this expansion, like all its investments in the 1990s and 2000s, entirely from its own cash flow. By the end of 2006 Škoda had invested 135.5 billion CZK in the development of the company since the formation of the JV with VW in 1991 (Fig. 3.6).

Millions of CZK

16000 14000 12000 10000 8000 6000 4000 2000 0 1992 1994 1996 1998 2000 2002 2004 2006

Year Fig. 3.6. Annual investment by Škoda Auto since the formation of JV with VW (1991-2006). Source: Based on data in Škoda Auto (1995-2006). 38

VW headquarters selected Mladá Boleslav over sites in Spain and Poland in the last week of November 1998 but it made the investment conditional upon governmental incentives that had to be offered by December 31, 1998. The government was quick to offer incentives on December 9, 1998. The original governmental incentives in the form of tax reliefs, duty free import of technology and factory equipment and an interest free loan of 2.3 billion CZK for employee training and retraining had to be lowered by almost 82% from 4.2 billion CZK (about 120 million USD) to 770 million CZK (21.93 million USD) to be approved by the European Commission (Šimůnek and Zlámalová 1998:16; MF Dnes 1999c:14; 1998b:14).

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The engine and gearbox plant created 2,000 new jobs of which 1,200 were filled by the existing Škoda workers. The plant concentrates on the production of the weakest engines within the VW Group. The engines are of Škoda’s own construction and about 30% of the output is supplied to other VW Group producers. For example, Škoda developed 1.2 liter gasoline engines that are also used by VW Polo and Seat Ibiza. However, the demand for Škoda engines by VW and Seat has been lower than expected (Korbel 2003a, 2004). The plant has been running at slightly above 50% of its maximum capacity since its inception.39 The total annual output exceeded 400,000 automobiles for the first time in 1998 and 500,000 in 2006 (Fig. 3.1). The Škoda Fabia, the first small model built on the VW corporate-platform in Mladá Boleslav was introduced in 1999 and it replaced the successful Felicia which was based on the Favorit and whose production stopped in 2001.40 The Fabia is assembled from approximately 500 platform components and 800 specific components in a new 12 billion CZK (300 million USD) assembly plant completed in 1999. In September 2001 the company introduced the Škoda Superb, its third and largest model built on the same platform as the VW Passat. The Superb is assembled in a new 5.7 billion CZK (180 million euros (EUR)) assembly facility at Kvasiny with an annual capacity of 35,000 units.41 It has not been as successful as the Fabia and the Octavia obviously because it is the most expensive Škoda model, too expensive for Škoda’s traditional customers typically attracted by the combination of low price and good quality.42 39

The engine plant produced 361,000 engines in 2002, 257,600 in 2003, 204,194 in 2004, 301,796 in 2005 and 282,564 in 2006 (Škoda Auto 2003:33, 2004:34, 2005:40, 2006:36). 40 The Fabia was named car of the year 2000 by two influential West European car magazines: Germany’s Autobild and Britain’s What Car? (The Economist 2001b). 41 The Kvasiny assembly plant is based upon the same principles of modular assembly and fractal organization as the main assembly facilities at Mladá Boleslav. There are three integrated suppliers: Brano Group (pre-assembly of air conditioning, air conditioning compressors, rear axle mufflers, compressed air coolers, ceiling panels, pressure tanks, and fuel cleaners), Draexlmaier (cable harnesses) and Expert Component (front ends). 42 Because of slower than expected sales only 19,270 units of Superb were assembled in 2003. It was almost 16,000 less than the planned production of 35,000 units and a 21% decline compared to the 2002 production of 24,305 units. The assembly of the Superb increased to 22,899 units in 2004 and 21,546 units in 2005 but declined to 20,403 in 2006 which was still well below the planned annual output of 35,000 units (Šimák 2002:6; Škoda Auto 2003–2006).

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The end of the production of the popular and cheaper Felicia and Felicia-based station wagon negatively affected the sales of Škoda automobiles. The 2002 production was down by 18,417 vehicles compared to 2001 and was 20,000 units lower than the plan for 462,000 vehicles. The company was forced to lower its daily vehicle production and it even stopped its assembly lines several times because of slower than expected sales. One thousand foreign workers (mainly Poles and Slovaks) were laid off in the fall of 2002. The 2003 average wage was lower than in 2001 and 2000, which generated tensions among the workers. The 2003 annual production was 4,915 vehicles lower than in 2002 and 23,332 units lower than in 2001, a decline of more than 5% compared to 2001 (Figure 3.1). Škoda blamed the strong crown and the lower than expected foreign demand for its cars. The company thus failed to reach its 2003 production and the sales target of over 550,000 vehicles declared by its CEO in 1998 (Šimůnek 1998:18). The early part of the 2000s has thus clearly been a period of stagnation after the period of rapid production increases in the second half of the 1990s. However, the modernized Octavia (Octavia II) was introduced in 2004 and its overall success, combined with the success of a newly introduced model called the Roomster in 2006, helped boost production in 2004, 2005 and 2006 to the record of 556,433 vehicles (Fig. 3.1).43 Although this was still far from the previously declared production targets, Škoda entered the period of further production increases based on the introduction of new models that should continue well in the second half of this decade. Unexpectedly, sales of Škodas grew fastest in Western Europe where 50% or more of its annual output has been sold since 1999 (Figure 3.7). Germany became Škoda’s largest export market in the second half of the 1990s and more Škodas were sold in Germany than in Czechia for the first time in 2004. The importance of the domestic market has been gradually diminishing for Škoda. It accounted for only 11.9% of company’s sales in 2006, down from 39% in 1995 and 66% in 1990.44 Although sales have been increasing in CEE they have not reached the planned one-third but only one-fourth of Škoda’s annual output and have been growing much 43

In the United Kingdom, for example, the Octavia won the Best Car title in the Auto Express Driver Power survey and in Top Gear’s customer satisfaction survey in 2007. The Octavia also won the title of Best Small Family Car by What Car? in 2005 and 2006. 44 The 1990 figure refers to Czechoslovakia as a whole. Compared to 66% of company sales in former Czechoslovakia in 1990, the 2006 combined share of Czechia and Slovakia of Škoda sales was 15.7%.

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more slowly than expected. Between three-fourths and four-fifths of Škodas sold in CEE are sold in Central Europe, suggesting that the company has not been very successful in penetrating East European markets mainly because of various trade barriers and a longer than expected economic crisis.45 Only about 5% of annual output is exported outside Europe. Although Škoda automobiles are sold in almost 90 foreign countries as compared to 30 in 1991, the company sales heavily depend on Western and Central European markets (Fig. 3.7). In 2006 more than 80% of Škoda vehicles were sold within the EU. Although this could be considered a success, the possibilities for further growth in the EU market are severely restricted by fierce competition and slow-growing and variable demand. Concerns have been expressed that Škoda sales have been at least partially growing at the expense of the more expensive VW models, as some potential car buyers recognized little under-the-hood difference between Škoda and VW models. VW and Škoda managers recognized that any future growth in the production and sales of Škoda cars will depend on increased exports to Eastern Europe and to countries with a rapidly growing new demand. According to its managers, Škoda does not intend to enter the North American market because of its overly competitive nature and the huge investments that would be required for brand promotion. Neither has it plans to sell cars in Africa because of its very low market potential.46 The possibilities of expanding sales in South America are also limited because of the strong presence of foreign manufacturers there.47 Therefore, Eastern 45

Poland is Škoda’s largest CEE market with 28,783 units sold in 2006, followed by Slovakia (21,380) and Hungary (16,892). Škoda has gradually been increasing sales in Russia from 5,429 vehicles in 2004 to 14,835 in 2006 and in Ukraine (from 9,005 cars in 2004 to 19,007 in 2006). Romania is Škoda’s largest market in Eastern Europe (20,154 vehicles sold in 2006). The sales almost tripled in Eastern Europe (which, in Škoda’s terminology, excludes Central European countries of Hungary, Poland, and Slovakia) between 2001 and 2006 from 24,167 units to 70,986 units (Škoda Auto 2004:38, 2006:40). 46 However, this might change. In January 2005 the Angolan Agency for Private Investment announced plans for the assembly of VW and Škoda cars in Angola starting in 2007. The new 48 million USD assembly facility with an annual capacity of 10,000 units was to be financed by the American ANCAR Worldwide Investments. It was to be located in the Viana industrial park near Luanda and it was to employ 2,500 workers (HN 2005). These plans were put on hold in 2005. 47 In 1998 Škoda announced its plan to build an assembly plant in the city of Santa Marta in northern Colombia. The plant, that was to be completed in the first half of 2000, was to assemble twenty thousand cars annually. Three-fourths of the production were to be exported to Central American and Caribbean countries and

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Europe and Asia (and Australia to a small extent) have been recognized as the potential future markets where the growth in sales of Škoda cars should take place (Minařík 2002:4). Medium-term production and sales targets for Škoda were further increased to 1 million vehicles annually by 2010 (Edmondson 2007). 70

Percentage

60

Western Europe

50 40 30

CEE

20

Czechia Overseas and Asia

10

0 1990 1992 1994 1996 1998 2000 2002 2004 2006

Year Fig. 3.7. Regional distribution of sales of Škoda vehicles, 1990-2006. 1990-1993 data for Czechia refer to Czechoslovakia as a whole. CEE sales exclude Czechia. Source: Based on data in Škoda Auto (1993-2006), Ryšavý (2000:34).

Dramatic increases in sales of Škodas in Western Europe in the second half of the 1990s were not viewed by VW’s headquarters as favorably as might have been expected. The successful implementation of platform strategy by the VW Group meant that the differences among the different brand models built on the same platform became mainly in the design of interiors and exteriors. The rest of the components (about 80% of the car) were the same.48 VW headquarters realized that in Western Europe cheaper

to Colombia’s Andean neighbors in South America (MF Dnes 1998a:13). However, the idea of an assembly plant in Colombia was abandoned as well as a similar plan to assemble Škoda cars in Egypt. 48 Ferdinand Piëch, VW’s CEO, announced in November 2000 that VW planned to push the unification of components one step further. Four common platforms would be replaced by 11 modular systems. This would allow the VW Group to share components (especially those independent of engine size and strength) across different platforms. This could save up to 1,000 DM per car in production

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Škoda and Seat models have started to successfully compete with the more expensive VW and Audi models built on the same platform.49 In other words, the success of Škoda and Seat on the Western European markets has been partially achieved at the expense of VW and Audi, which has negatively affected the profits of the VW Group as a whole. To overcome this situation and to lower the competition among the VW Group models, VW’s new CEO Bernd Pischetsrieder began to push for an increased brand segmentation and differentiation. On November 23, 2001, VW’s advisory board decided to divide the models produced by the VW Group into two divisions: the sporty Audi division and the classic VW division. The Audi division included the Audi, Seat and Lamborghini models. The VW division included the VW, Škoda, Bentley and Bugatti models (Plesl 2001:1).50 The reorganization into divisions should lower R&D and new-product development costs by eliminating duplications. The longterm consequences of this strategy for Škoda are far reaching despite being downplayed by Škoda’s CEO. Škoda’s relative freedom within the VW Group has been curtailed and it has become more subordinated to VW’s headquarters. This trend was reinforced in October 2004 when Škoda’s Czech CEO Vratislav Kulhánek was replaced by German Detlef Wittig, former sales and marketing director for the entire VW Group. For the first time ever Škoda paid a 3.05 billion CZK (122 million USD) dividend to VW in 2004. In the past the dividend was left at Škoda to be used for its further development (MF Dnes 2004a:1). According to the new VW’s strategy Škoda was to be the cheapest brand from VW’s portfolio, which means the product concentration on small and cheap cars instead of several models in different classes and with many different types of equipment. Larger models such as the Škoda Superb would not be further developed and produced in the future (this decision was reconsidered in 2005). Škoda’s future model development would be subordinated to VW’s overall development strategy. The company should concentrate its sales more in CEE markets. While in the late 1990s VW headquarters wanted Škoda to compete with Volvo or Rover, the new strategy was to compete with the cheaper cars of brands such as costs by achieving greater economies of scale. The strategy was planned to be gradually introduced by 2005 (HN 2000b:9). 49 For example, in 1999 the Škoda Octavia with the 1.6 liter engine cost 8,000 DM less (or 21% less) than similarly equipped the VW Golf which cost 37,500 DM. The two models share the same platform. Similarly, the Škoda Fabia and the Seat Cordoba compete with the more expensive VW Polo. All three models are built on the same platform. 50 VW purchased Bugatti, Lamborghini and Bentley in 1998.

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Opel, Ford, Hyundai and Fiat. To limit the competition with more expensive VW models, it was decided that Škodas would not be as well equipped as VWs and Škoda will no longer offer high-end versions of the Octavia, for example (Pražák and Šimůnek 2002:4; Korbel 2003b). The new strategy was opposed by Škoda’s unions and even led to their demonstration on October 25, 2002. The union members shouted “we do not want to produce Trabants” (LN 2002). Škoda announced in 2004 that it would start producing a minicar despite previous claims by its CEO that Škoda would not produce smaller cars than the Fabia since “it would make absolutely no sense and have no logic” (Zavadilová and Gallistl 2002). This would represent the fourth model assembled by the company. The assembly was to start at the Kvasiny plant either in late 2005 or in 2006 at the latest. However, the decision to produce the minicar has been reconsidered (for the time being) and the fourth model, called the Roomster, is a cross-over car between a station wagon and a van based on the modular concept and built on the same platform as the small Fabia (Bautzová 2005). With an annual capacity of 40,000 units the Roomster should help Škoda to increase its annual production to 600,000 vehicles. Its production was launched at the Kvasiny plant in 2006. Škoda also plans to enter the fast growing segment of small sport utility vehicles with the Škoda Yeti in 2009. Škoda’s main competitive advantage continues to be its flexible organization of production, high pace of work and low-cost skilled labor force. Low wages still continue to be Škoda’s major advantage although the difference in wages between Škoda and VW decreased from about onetenth of VW’s wages in the early 1990s to one-third in 2004. Wages continue to account for only 6% of overall production costs at Škoda compared to 17% at VW (MF Dnes 2004b:1).

3.6 Škoda’s Vrchlabí Plant The plant is located in the town of Vrchlabí in northeastern Bohemia. The subsidiary developed from “Ig. Petera & sons” carriage and car body shop which built its first car body in 1908. Prior to World War Two, the company produced various passenger car, bus and ambulance bodies. It employed about one hundred workers. Following the Second World War, its Sudeten German owners along with most of their workers were expelled from Czechoslovakia to Germany and the company was confiscated by the government in 1945. The company was then transformed into a manufacturing association called the “North Bohemian Body Shop Vrchlabí” which was incorporated into Škoda in 1946. There, it was given the task of

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producing commercial vehicles (Š1100 - ambulances and delivery vans). The company produced bodies and assembled the vehicles using engines and chassis delivered from Škoda’s main factory. The production of the Š1100 peaked in 1951 when 3,050 units were assembled. About 3,000 units of the Š1200 (delivery vans and stations wagons) were assembled annually between 1952 and 1954. The Vrchlabí plant was then detached from Škoda in 1954 when it became the “Automobile Works Vrchlabí, national enterprise.” Its new task included the production of a special console type of truck bodies (for the V3S model) and driver cabins for Tatra 805 trucks. The assembly of Š1201 vans and station wagons (and later ambulances) resumed in 1955 and the company was reincorporated into Škoda in 1958. The modernized version of the Š1201 was launched in 1961 (as the Š1202). The production volume of the Š1202 gradually increased and peaked in 1967, when 8,045 units were assembled. After 1960 the factory was gradually modernized. New welding and paint shops were built first, new storage facilities, a stokehold, a sewage disposal plant and other facilities were built later. However, because of the “construction capacity shortages” many construction projects had to be completed by the factory workers themselves instead of by specialized state-owned construction companies. The factory workers also built 250 apartments for plant employees, a daycare facility for 120 children, and a recreational facility in south Bohemia. Surprisingly, the factory did not have a moving assembly line and the vehicles had to be moved on the assembly line manually. The plant had its own development facility which developed a new light commercial vehicle between 1956 and 1959 (the Š1203). However, the government ministry officials were not interested in the Š1203, arguing that they could not allocate any money to start its production. The factory had to wait until 1966 for the government to approve the production of the Š1203, which did not start until 1968 (the Š1202 was assembled until 1972). The Š1203 was produced as a delivery van, ambulance, hearse and dray. However, in 1974 the government decided to transfer the entire production of the Š1203 to TAZ Trnava in Slovakia, despite vigorous opposition from Vrchlabí. In the same year, the government also ordered the plant to end all development work on a new delivery van (the Š1206). The Vrchlabí plant then started to assemble Škoda passenger cars. The first was the Š105/120 assembled between 1976 and 1988. The factory was selected for a trial run of the Favorit in 1987 and then assembled Favorits and Formans. In 1991, the Vrchlabí plant became part of the Škoda – VW JV. At that time, the factory was assembling 60 units of the Favorit and the Forman per day. By 2000, the average daily production had increased to 339 units

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(182 units of the Felicia and 152 units of the Octavia). It declined both in 2001 and 2002. The Vrchlabí plant has been further modernized and the same new production methods were introduced as at the main assembly facility in Mladá Boleslav. The Vrchlabí plant concentrates on the assembly of limited-edition vehicles. It also manufactures special equipment items such as airbags. The plant was the first to start the assembly of the new Octavia (Octavia II) in February 2004 and it continued to assemble the older version of the Octavia after the new one started to be assembled at Škoda’s main assembly facility. The number of workers at the Vrchlabí plant has fluctuated between 1,000 and 1,250 in the 1990s. It had increased to 1,600 workers by 2006. The Vrchlabí plant assembled 65,700 vehicles in 2004 and 66,319 in 2005. Since 2006, Škoda has been preparing a major expansion of the Vrchlabí plant between 2007 and 2009. It should dramatically increase daily assembly from 150 to 1,000 vehicles and add up to 3,000 new jobs. However, no official decision has been announced as of Spring 2007 (Petr et al. 1998: 4-5; Petr 1998:6; Škoda Auto various years; Truhlička 2007).

3.7 Škoda’s Kvasiny Plant The Kvasiny plant is located in the small town of Kvasiny in eastern Bohemia. It started as a body shop producing passenger car bodies for the Jawa 700 in 1934. Later, it also produced bodies for the Jawa 600 Minor. Before the Second World War the shop produced only four car bodies per day. It was nationalized following World War Two in 1945 and incorporated into Brno Armory (Zbrojovka Brno). The plant first continued to produce bodies for the passenger cars Jawa 600 Minor that were shipped to Jawa’s main assembly facility at Týnec nad Sázavou. The assembly of the Jawa 600 Minor was transferred to Kvasiny in 1946 but the small Kvasiny plant was unable to satisfy the market demand. Therefore, the Jawa Minor assembly was transferred again, this time to the Letov Letňany plant in Prague. The Kvasiny plant then produced various products for the Brno Armory and also components for automobiles and motorcycles. It was incorporated into Škoda in 1947. Škoda transferred the production technology to Kvasiny and introduced a low volume assembly of its special models there, such as the large Škoda Superb which had been produced by Škoda since 1934 (42 units assembled between 1947 and 1949), the roadster Š1101 (1,886 units assembled between 1948 and 1951), and the ambulance version of the Š1200. The Kvasiny plant continued to produce sports versions of Škoda automobiles

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until the 1990 JV agreement between Škoda and VW. The best known ones included the Š450 Felicia (1958-1961, 15,862 units), the Š110 R Coupé (1970-1980, 57,085 units) and the Š130 Rapid (1984-1990, 33,455 units). Additionally, the plant produced special models, such as the old Octavia station wagon (assembled between 1961 and 1971). Traditionally, the production at the Kvasiny plant was based on large inputs of manual labor and the level of automation was very low. In the 1990s the plant assembled pickup versions of the Favorit and the Felicia (81,361 units assembled), the VW Caddy (export version of the Felicia pickup - 18,859 units assembled between 1996 and 2000) and also regular Felicias and Felicia station wagons. The plant has also been producing bodies for the Fabia Sedan since 2001 after the assembly of Felicias ended there. The future of the plant was in doubt in the late 1990s because it was not known what it would produce after the end of the assembly of Felicias. There were rumors that it could be closed down. However, in 1999 Škoda decided to assemble its new Škoda Suberb at the Kvasiny plant. The decision led to the construction of a new assembly facility with a daily capacity of 300 automobiles, representing the largest investment in the history of the plant. The 190 million EUR new assembly plant (including the new paint and welding shops) was built in 14 months and completed in 2001. The production of the Škoda Superb was officially launched on October 1, 2001. The plant also assembles the Fabia Sedan (17,263 in 2004). In 2005 the Kvasiny plant was selected for the assembly of the Roomster. Škoda invested 3 billion CZK (120 million EUR) to build a new logistic center, parking spaces for the manufactured cars, employee car park, a bus station, a new freight traffic gatehouse etc. Two thousand new jobs have been created. Assembly was launched in March 2006 with an annual capacity of 40,000 units (25,055 Roomsters were assembled in 2006) and Škoda wants to increase it to 80,000 units. Annual production at the Kvasiny plant increased in the second half of the 1980s from less than six thousand cars in 1986 to more than nine thousand in 1990. However, production grew most rapidly in the 1990s when annual production reached forty thousand vehicles in 1997 and more than seventy thousand in 2000 (Fig. 3.8). The average daily production of 37 automobiles in 1991 increased to 172 units in 2000. Then it declined significantly in 2001 because of the production launch of the Škoda Superb. The plant had to dramatically increase the quality of production in the 1990s through restructuring strategies that paralleled the changes taking place in Škoda as a whole. Labor productivity measured by the number of vehicles assembled per employee has been increasing in the 1990s (from 10 in 1991 to 29 in 1997). The Kvasiny plant employed about 1,300 workers in the mid-1990s,

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70000 60000 50000 40000 30000 20000 10000 0

1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

Annual car assembly

1,100 workers in 2003, 2,700 in 2006 and it should increase to 3,500 in 2007 (the town of Kvasiny has only 1,200 inhabitants and only 165 workers of the Kvasiny plant live at Kvasiny) (Škoda Mobil 2002:1-4; Němec 1998:4; Kožíšek and Králík 1995b:91; Škoda Auto 2004:35).

Year Fig. 3.8. Annual assembly of Škoda vehicles at the Kvasiny plant. Source: Based on data in Němec (1998:4), Škoda Auto (1994-2006).

3.8 Internationalization of the Škoda Production Network Foreign assembly of Škoda models has been pursued as one of the strategies to penetrate foreign markets. It is interesting to note that small-scale foreign assembly of Škodas started long before its JV with VW. Škodas were assembled in Auckland in New Zealand between 1966 and 1972 by “Motor Industries”. They were all-purpose terrain vehicles built on chassis of the old Octavia and sold under the Trekka brand name. Škoda decided to end its cooperation because the company thought it would be more economical to export complete cars instead of chassis only. Only 2,300 units were assembled in New Zealand (Škoda Mobil 2003a:7). Similar lowvolume assembly operations were introduced in Pakistan by “Haroon Industries” (“Skopak” model - Skoda-Pakistan-Karachi) and in Turkey by “C.M.” (Š1202 Kamyonetleri) (Kožíšek and Králík 1995b:107). After

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1964 Škodas were also assembled in Dublin (Ireland) with more than 1,000 units assembled by 1980. In 1977 Škoda launched a low-volume assembly in San Jose, Costa Rica (ČAZ 1980). 3.8.1 Poland After 1990 and the JV formation with VW, Škoda was originally forced to start the assembly of its automobiles abroad to overcome trade barriers. Poland became the first country where foreign assembly of Škodas was introduced. The Polish car market is four times that of Czechia, and Škoda had sold its cars there for decades. In 1994 the Polish government imposed a 41% duty (35% customs duty plus 6% supplemental tax) on imported Škodas because the Czech government had raised duties on imports of Polish coal. Consequently, Škoda cars became virtually unsalable in Poland. The only option for Škoda was to open an assembly plant in the country because the Polish government allowed duty free import of car components by companies that assembled at least 1,000 vehicles in Poland per year. Škoda used the fact that VW had an assembly facility for commercial vehicles in the city of Poznań with unused production capacity (VW had assembled Tarpan vehicles there in the past and the VW Transporter T4 in the early 1990s). Škoda rented factory space from VW and started to assemble the Favorits in 1994 and Felicias in 1995, the assembly of the Škoda Octavia and Fabia followed later as they were introduced on the market. The assembly in Poznań peaked in 1999, when 44,000 cars were produced (Fig. 3.9). The multi knocked-down (MKD) cars were originally transported from Mladá Boleslav by trucks.51 As the assembly volumes increased, Škoda introduced their transport on special trains in November 1997. In 1998 these trains accounted for 56% of transported MKD vehicles, which increased to 70% in 1999. In 2000, on average 200 MKD vehicles were transported from Mladá Boleslav to Poznań per day.

51

Three types of car assembly from knocked-down vehicles in foreign countries are recognized. Semi knock-down (SKD) auto assembly, in which the cars are imported disassembled into several basic parts and then assembled in an assembly plant. Multi knocked-down (MKD) auto assembly, in which the cars are assembled from a greater number of pre-manufactured parts. The foreign assembly plant would typically include a painting shop and a welding shop. Complete knockdown assembly (CKD) auto assembly, in which the cars are imported completely disassembled from the home plant and the local components industry is supplying an increasing number of components for the local assembly of vehicles (Prouza 2000).

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Poland became Škoda’s second largest export destination after Germany in the second half of the 1990s, and its share of the Polish market rose to 7.9% by 2000. High import tariffs on Czech cars were removed in January 2002 and thus also the main reason for the assembly of Škoda cars in Poland, which was subsequently phased out and completely stopped in October 2002. By 2003 Škoda became the second best selling brand in Poland (behind the locally produced Fiat) with a market share of 12.0% which increased to 12.5% in 2004. In 2005 and 2006 Škoda was the best selling new car brand in Poland with a market share of 11.7% in 2005 and 12.0% in 2006 (Petr 2000:2; Havránek 1998:4-5; Prouza 2000; HN 1997c:2, Škoda Auto 2000:27, 2003:37, 2004:41, 2006:27).

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Year Fig. 3.9. Assembly of Škoda automobiles in Poland. Source: Based on data in Petr (2000:2), Havránek (1998:4-5), HN (1997c:2), Škoda Auto (2003:37), Škoda Auto (2005).

3.8.2 Russia The countries of the former Soviet Union and Russia in particular represent the second market Škoda has been trying to penetrate for many years. Škoda wanted to sell fifty to sixty thousand of its vehicles in Russia annually. Some even believed that the Russian market could easily absorb between 150,000 and 200,000 Škodas annually. However, high tariff barriers designed to protect domestic producers (up to 170% in the mid-1990s,

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25% tariff plus 20% of value added tax in the mid-2000s) made it virtually impossible for Škoda to be competitive with domestically produced passenger cars. The company therefore attempted to follow the same strategy as in the case of Poland: the local assembly of knocked-down vehicles. At the end of 1996 Škoda and the Russian company Avantgard signed an agreement about the formation of JV Avtorossija to assemble the Škoda Felicia and later the Octavia at the town of Safonovo in the Smolensk oblast (MF Dnes 1997b:17). However, the assembly never started at Safonovo. Then for two years Škoda was preparing the assembly of Felicia cars for the Russian market in Belarus. The plan was to assemble 30,000 cars annually. An agreement with the Agromaš plant in Minsk was reached in October 1997 after a successful pilot assembly of eight Škoda Felicia cars in 1996. However, the agreement fell through, reportedly for administrative and political reasons, in March 1998 after Škoda had installed production technology worth 1.5 million DM (865,000 USD) (MF Dnes 1998c:15). In 1997 Škoda sold nearly 10,000 cars in Russia and became the largest importer of fully assembled passenger cars. When the Russian economy and the ruble collapsed in August 1998 the prices of imported cars increased three to four times. Sales of all imported automobiles declined sharply as imported cars could not compete with the extremely low prices of domestic producers. Škoda thus intensified its negotiations about car assembly in Russia. On December 17, 1998 the Czech and Russian governments signed a “letter of intent” to manufacture Škoda Felicias in Russia. Škoda was to form a JV with the car maker Izhmash-Avto to assemble its cars in Izhevsk. The production capacity was to be at least 80,000 units annually and Škoda was to invest 530 million DM (9.5 billion CZK, 300 million USD). Eventually, in three to four years Škoda hoped to switch from the assembly of knocked-down vehicles to their full-scale production and to start buying components locally (Prouza 2000; Lavička 1998:14). The assembly was to start in 1999 but it was first delayed as Škoda postponed by five months the signing of the final agreement originally scheduled for May 31, 1999. The company cited the low value of the Russian ruble as the main reason. It argued that the price of domestically produced automobiles had dropped below 3,000 USD and that Škoda would be unable to compete with this price (MF Dnes 1999d:17). The costs of transporting SKD vehicles from Mladá Boleslav to Izhevsk alone would amount to 1,500 USD per vehicle. Transport costs are significantly raised by the need to transfer containers to the broad gauge railway on the Slovak-Ukrainian border (Minařík 2002:4). The entire project fell through in November 2001 because of “unclear property and legal issues” related to the JV agreement between Škoda and Izhmash-Avto (ČTK 2001b). Škoda

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demanded Izhmash-Avto stop producing its own “IZH” automobiles, which the company refused to accept (HN 2001:PT9). Despite this third failure to launch local assembly in Russia, Škoda refused to give up on the prospect of penetrating the Russian market, where it sold less than 1,900 of its cars in 1999 and only 2,924 in 2000. The new strategy was not to pursue a JV with a Russian company but to build a greenfield assembly facility together with VW which would have an annual capacity of 20,000 units, half of it for Škoda. The plant was to be launched in 2002 either at Stupin in the Moscow oblast or on an alternative site in the Leningrad oblast (Akrman and Michl 2001). As before, these plans did not materialize, although the chairman of Škoda argued in 2002 that the negotiations with the Russian government were ongoing and that the assembly could be launched in the “near future” (Euro 2002:47). However, these negotiations also collapsed. Škoda managers have felt that the Russian government’s requirements for foreign car makers to receive the incentives (a minimum investment of 50 million USD and 50% local content in five years after the start of assembly) were “totally unattainable” (Minařík 2002:4). New negotiations were launched in which VW proposed to invest 30 million euros (37 million USD) to assemble VW and Škoda models in Russia. In January 2006 VW and Škoda announced that they would build an assembly plant in Russia with an annual capacity of 250,000 vehicles. The plant is being built in Kaluga 188 km southwest of Moscow and the SKD assembly of Škoda Octavias was planned to be launched by the end of 2007 (Škoda Auto 2006:55). 3.8.3 Ukraine and Kazakhstan The most successful attempt so far to assemble Škoda automobiles in the post-Soviet region was launched in December 2001 at Solomonovo in southwestern Ukraine. Solomonovo is located close to the city of Chop on the Ukrainian-Slovak-Hungarian border in the Transcarpathian free economic zone. The main advantage of this location is that there is no need to transfer containers with SKD vehicles to the broad gauge railway, which keeps the transport costs down. SKD Škoda Octavia models (also Škoda Fabias since July 2002 and Škoda Superbs since April 2003) have been assembled by the Ukrainian company Eurocar (Evrocar) from duty free components under the Škoda license. Eurocar assembles both Škoda and VW models in the same facility. The initial 15 million USD investment by Eurocar was to rise to 50 million USD. Škoda and VW minimized the risk by not investing any capital in the project and by not entering into a JV agreement with Eurocar. The plans were to originally assemble five to

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seven thousand automobiles annually with an expected increase to 40,000 vehicles in 2005 and 45,000 vehicles in the future. The output did increase but it did not reach 20,000 Škodas in 2006.52 The production would gradually switch from SKD to MKD and eventually CKD assembly. Painting and welding shops were to be built in three years and Škoda began negotiations with about twenty local companies about the potential supply of simple components. Škoda managers have argued that the main reason for setting up car assembly in Ukraine was to get a foothold in the Ukrainian market. Škoda and VW could expand further to the east if a planned regional economic integration and removal of trade barriers takes place (it is planned to include Russia, Ukraine, Belarus and other former Soviet states) (Bautzová 2003:42-43; Škoda Mobil 2003b:1). Škoda also launched a low-volume assembly of Octavias for the local market in Kazakhstan in August 2005. The assembly plant with an annual capacity of 5,000 vehicles is located at Ust-Kamenogorsk. It produced 508 vehicles in 2005 and 1,196 in 2006 (Škoda Auto 2005:40, 2006:36). 3.8.4 Bosnia-Herzegovina In the meantime, Škoda launched the SKD assembly of its Felicia cars in Vogošča near Sarajevo (Bosnia-Herzegovina) on August 31, 1998. The assembly plant is part of the “Volkswagen Sarajevo” JV between VW with 58% of shares and the Slovenian Prevent Holding-owned Prevent Sarajevo with 42% of shares (originally held by the local UNIS Holding until October 2001). VW initially invested 48 million DM (27 million USD) in the JV which was set up in the former TAS assembly facility.53 VW’s investment was to double in coming years. Škoda’s CEO argued that the main reasons behind the return of VW to Sarajevo were political, to support the peace process following the civil war (Bautzová and Korbel 2004). Škoda did not invest any of its capital in the JV. Felicias were brought to Sarajevo from Mladá Boleslav disassembled into seven basic parts. 52

In 2002, its first full year of operation, Eurocar assembled two thousand Škodas but only 84 VW cars. Production increased to 5,480 Škoda cars and 2,434 VW models in 2003 (OICA 2003; ČTK 2004a). Eurocar assembled 8,527 Škoda models in 2004, 10,035 in 2005 and 18,866 in 2006 (Škoda Auto 2004:35, 2005:40, 2006:36). 53 The TAS (Tvornica Automobila Sarajevo - Sarajevo automobile factory) JV between VW and UNIS Holding assembled 400,000 units of VW Golf and Caddy cars between 1972 and 1992. Annual production peaked at 45,000 units. Production was interrupted by civil war in April 1992 and all production equipment was stolen from the factory during the war (Smutný 1998:1-2).

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Depending on sales, Škoda planned to develop a CKD assembly in Sarajevo in three years. The company planned to open painting and welding shops, assemble its cars from a greater number of parts and start sourcing some components from local companies. The production was to create 1,200 jobs. To stimulate sales of Felicia cars the government of BosniaHerzegovina decreased the sales tax on the Felicia from 20% to 7%. Škoda anticipated an annual assembly of 5,000 to 10,000 of Felicias by 2000 and up to 35,000 automobiles after the year 2000. Only 10% of the assembled Felicias were anticipated to be sold in Bosnia-Herzegovina. The remaining 90% were planned to be sold in the countries of the former Yugoslavia, Turkey, Syria and also across Eastern Europe (Smutný 1998:1-2; Škoda Mobil 1998b:3). However, the anticipated exports never materialized. For example, only 400 cars were exported to Turkey in 1999 because the Turkish government abolished import duties on automobiles made in Bosnia-Herzegovina. Consequently, only 1,400 cars were assembled in 1998, the 1999 production reached 2,500 cars and the 2000 production fell to 2,250 cars, which was less than 50% of the anticipated minimum output in 2000. The factory closure was imminent unless sales improved. It employs only about 80 workers (MF Dnes 2000a:22). Škoda blamed the Bosnian government for failing to arrange the promised bilateral export agreements with nearby countries and adopting “a do nothing attitude” with respect to Turkey (Prouza 2000). The original production plans proved to be unrealistic and output has failed to increase after 2000.54 3.8.5 India India became the first Asian country where Škoda launched the assembly of its cars after prolonged preparations and negotiations with the Indian government. The project for the assembly of the Škoda Felica and the Audi A6 in India was approved by VW in 1994 with an anticipated investment of up to 224 million USD and an annual production capacity of up to 50,000 vehicles. The plan was later modified to a 300 million USD investment, production capacity of 60,000 vehicles and 60% local content in 2000. The assembly of the Škoda Felicia was planned to begin in the city of Bangalore in 1996 (HN 1996a:1; 1996b:6). However, the Indian producer 54

In 2003, only 1,783 Škodas (1,301 Fabias and 482 Octavias) were assembled in the Vogošča plant (Škoda Auto 2005) and production slightly increased to 2,057 units in 2004 and 2,205 units in 2005 before declining to 2,164 vehicles in 2006 (Škoda Auto 2004:35, 2005:40, 2006:36).

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Eicher Group withdrew from the planned JV with VW in June 1997 (MF Dnes 1997c). The next project was announced in October 1997 by governmental officials after Czech-Indian ministerial talks and was later confirmed by Škoda officials. The construction of a 300 million USD assembly facility with an annual production capacity of 60,000 vehicles was to start in 1998. The assembled Felicias were to be sold on the Indian market (MF Dnes 1997d:15; 1997e:15). However, in November 1997 the Indian government introduced a new policy governing the automobile investments by foreign companies in the country. It raised the required level of local content for foreign car makers to 50% in three years after the onset of assembly and to 70% in five years. Škoda announced that it would be unable to meet these requirements (MF Dnes 1998d:15). It took Škoda until October 1999 to convince the Indian government to drop the local content requirements. The Foreign investment Promotion Board granted Škoda permission to establish its Indian subsidiary “Škoda Auto India Private Ltd” which was set up in Aurangabad (Maharashtra state) in December 1999. Škoda planned to assemble 3,000 vehicles in 2000 but the SKD assembly of Octavia models was not launched until 2001. The delay was caused by the uncertain and unclear conditions under which foreign car makers would operate in India and which were to be specified in the “new automobile policy” prepared by the Federal Ministry of Heavy Industry and made official in April 2001. These included a minimum investment of 250 million USD (five times the previous requirement), the export of at least 10% of annual production for five years, technology transfer requirements and investment in R&D (Viták 2001:5; Pražák and Ehl 2001). Because of these uncertainties Škoda postponed its planned construction of the new assembly facility and instead began assembly in rented factory space in 2001. The original assembly from SKD kits transported from Mladá Boleslav changed to CKD-3 kits assembly after the Indian government changed its customs rates in March 2003 (4,708 Octavias assembled in 2003 and 7,050 in 2004, although 8,500 had been planned for 2004).55 The 250 million CZK (10 million USD) assembly facility was not opened in Aurangabad until February 2004. Its daily production capacity is 40 vehicles (800 vehicles per month) and the facility employs about 300 workers. The assembly of the Škoda Suberb was launched in 2004 and Škoda Fabia models were to be assembled starting in 2005. The 2005 production 55

CKD-3 assembly involves the assembly from modules made up of an unequipped welded and painted body, a power unit (engine, gearbox, and front axle), rear axle, a fascia-board, particular interior elements and other components.

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reached 8,710 vehicles and the 2006 output grew to 12,599 units (Škoda Auto 2005:40, 2006:36). The company invested 100 million euros (97 million USD) in India between 2001 and 2004. Škoda planned to increase the annual assembly to 25,000 vehicles by 2007 and to set up an R&D center in India, the first one located outside Czechia (MF Dnes 2004c:1). As in the case of Ukraine, Škoda hopes its Indian assembly operation will become a launching pad from which it could potentially start its expansion into other countries of south and southeast Asia (Baláž and Meliška 2004:1, 6). 3.8.6 China China has become the latest country where Škoda intends to assemble its cars. China was off limits for Škoda up until the early 2000s because of Chinese quotas and tariffs and the internal division of labor within the VW Group, in which China was considered VW’s territory. For example, in 2003 Škoda was allowed to export only 2,100 of its cars to China. A similar quota was in place in 2004. Škoda’s CEO argued in December 2003 that the company “would definitely not build any assembly plants in China because it is VW’s territory and it would therefore be redundant” (Pohanka 2003). The situation changed after China was admitted to the World Trade Organization (WTO) and announced that it would abolish its quotas on imported automobiles in 2005 to comply with the WTO requirements. Škoda’s CEO Detlef Wittig announced in January 2004 that Škoda plans to produce up to 80,000 Octavia cars annually in China. Assembly of the Škoda Octavia under license was planned to start in 2007 in the existing VW factory in Shanghai (Shanghai Volkswagen Automotive Co. Ltd.) (Šimůnek and Kaláb 2006).

3.9 Conclusion There is no question about the success of VW’s takeover of Škoda. The Economist (2001b) argued in 2001 that “analysts reckon that Škoda is the most successful former Communist company anywhere.” Given Škoda’s situation prior to its 1991 JV with VW, it is reasonable to assume that without a foreign partner, Škoda would have struggled for survival and would have most likely gone bankrupt, unable to compete with Western car makers. Despite the initial difficulties Škoda has not only survived but the company has prospered. It has not become a mere assembly plant of VW as many Czechs feared at the time of the JV formation and in the first

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half of the 1990s. It continues to produce Škoda brand automobiles. The company not only retained its R&D functions but the number of R&D personnel more than doubled between 1991 and 2006 (from 600 to 1,420) (see Chap. 6). Overall, VW kept its commitments given in the 1991 JV agreement with the Czech government. The chapter shows that Škoda’s success resulted from combining Škoda’s and VW’s strengths. With the help of VW Škoda successfully developed its existing model (the Favorit) and later the Favorit-based Felicia, which allowed the company to survive the critical period of the first half of the 1990s. VW’s initial investment in Škoda and Škoda’s subsequent prosperity have had tremendous implications not only for the region of Mladá Boleslav, where the main factory is located and which has continuously recorded one of the lowest unemployment rates in Czechia (more than 20,000 factory jobs in the region of Mladá Boleslav, and in addition more than 3,000 in Škoda’s two factories in Vrchlabí and Kvasiny), but also for the Czech economy as a whole. The importance of Škoda for the Czech component supplier sector has been crucial especially in the first half and mid-1990s not only for its initial survival but also for its future development and increased international competitiveness (see Chap. 7). About 100,000 jobs in subcontracting companies and the service sector in Czechia are related to Škoda. Škoda’s exports accounted for between 7.7% and 9.9% of total Czech exports between 1999 and 2004. It is interesting that Škoda has been successful with its existing labor force. In an age when car manufacturers increasingly engage in careful recruitment procedures to hand pick workers for their new greenfield assembly plants, Škoda was forced to follow a very different strategy. Instead of selecting and training young inexperienced workers who were preferably unaffected by previous manufacturing experience into a highly flexible labor force, the company had to achieve similar results with the existing workers by building on their skills, tradition and car making experience. Škoda’s case thus illustrates that although existing manufacturing skills are often discarded by car makers as useless or even an obstacle for developing a flexible labor force, such skills may represent an important asset for a company. However, Škoda’s ownership by VW is not unproblematic. It has created a strong dependence of Škoda on VW that entails significant risk since the fortunes of the Mladá Boleslav region are linked to decisions made in a corporation external to the region, and one that has commitments to multiple products and markets. The 1993 cutbacks in VW’s investment plans in Škoda exemplify such risks as well as more recent decisions made by VW about the future role of Škoda within the VW Group. Škoda is likely to continue as a low-cost producer of small and cheaper

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models aimed at CEE and certain Asian markets that would not compete with more expensive VW Group models in more lucrative Western European and North American markets. This decision clearly highlights Škoda’s peripheral role in the European car production system and, to a certain extent, its peripheral role within the VW Group. Nevertheless, Škoda is likely to do well as long as VW, its parent company, does well and keeps up with aggressive Japanese and increasingly also South Korean competition.

4 Restructuring of the Czech Commercial Vehicle Industry

The growing Western literature dealing with the car industry in CEE suffers from two biases. First, it is mostly interested in passenger car manufacturing, largely ignoring producers of commercial vehicles and the supplier industry. Second, most studies focus on the effects FDI and related radical transformations in the industry, while paying much less attention to enterprises that remained domestically owned. However, commercial vehicle manufacturing and components manufacturing underwent in many ways different but no less dramatic changes. Compared to passenger car manufacturers, only a few large producers of commercial vehicles have been privatized through FDI. Many have been sold to company managers or “privatized” through governmental schemes such as voucher privatization (see Chap. 5). As we could see in Chap. 1, since 1990 production of commercial vehicles in CEE has virtually collapsed, whereas passenger car production has been growing as a result of massive FDI into the sector. Between 1990 and 2006 production of commercial vehicles declined by 71% (from 884,261 units in 1990 to 258,012 units in 2006).1 Poland was the only country that recorded increased production of commercial vehicles by 142% during this period thanks to an increase in the production of LCVs. Heavy truck and bus manufacturing disappeared in Bulgaria, Slovenia, Slovakia, and Latvia, and it fell by 46% in Belarus, 76% in Ukraine, 83% in Russia, 87% in Czechia, 94% in Serbia, and 95% in Romania. These declines were only partially offset by increases in the production of LCVs associated with passenger car production in countries such as Russia, Poland and Slovenia (OICA 2006; see Chap. 1). This chapter investigates restructuring of the Czech truck and bus industries in the 1990s and early 2000s by focusing on detailed case studies of three truck manufacturers (Tatra, Liaz, Avia) and one bus maker (Karosa). The chapter compares the effects of different types of privatization, and the presence or absence of FDI in particular, on these four manufacturers. 1

The figure includes the production of trucks and buses but excludes LCVs (with the exception of Poland). P. Pavlínek, A Successful Transformation? Contributions to Economics, doi: 10.1007/978-3-7908-2040-9_4, © Physica-Verlag Heidelberg 2008

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It also describes restructuring strategies and their effects on production and sale of vehicles. This chapter is largely based on the primary information collected during visits to enterprises and interviews with their managers and the interviews conducted at the Czech Ministry of Industry. For the most part the identity of those interviewed is not revealed because of the confidential nature of the information supplied.2

4.1 Tatra Kopřivnice Tatra Kopřivnice, a manufacturer of heavy off-road trucks, typifies several failures of the post-socialist transformation in the Czech manufacturing: the failure to implement quick and efficient company restructuring; inability to understand the trends in the global automobile industry and act accordingly by attracting foreign investment; failure to build upon existing strengths and traditions; failure of the state to protect the company and its assets before its privatization, which left incompetent managers to pursue their personal interests at the expense of the company; and failure of voucher privatization to result in a clearly defined ownership. Tatra, which has a long history of truck and passenger car production that goes back to 1897, used to be one of the most successful state socialist companies in pre-1989 Czechoslovakia. Two major decisions, both made at the level of CMEA, affected the company during the state socialist period. First, CMEA decided to halt the production of Tatra passenger cars in the 1950s, when Czech passenger car production was concentrated in the Škoda plant in Mladá Boleslav and its two smaller facilities at Vrchlabí and Kvasiny (see Chap. 2). Tatra continued to produce a small number of luxury cars used by high state officials. Second, based upon a 1971 CMEA decision, Tatra was selected to produce high-quality heavy off-road trucks for the needs of the entire CMEA. By the late 1980s, Tatra was producing more than 15,000 trucks annually and employed over 16,000 workers. The Czechoslovak market absorbed between 2,840 (in 1983) and 6,500 (in 1981) Tatra trucks annually between 1961 and 1989, with the remainder being exported to CEE. Approximately 5,000 Tatras were exported to the former Soviet Union alone each year (1999 interviews). During this (state socialist) period, Tatra focused on the production of trucks and plan fulfillment. Company management was not concerned with the sale and marketing of its vehicles, which was the responsibility of Motokov – the state-owned foreign trade company. As a result, Tatra’s 2

Such interviews conducted in 1996 are referred to in this chapter as “1996 interviews” and those in 1999 as “1999 interviews.”

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management had no experience and expertise in the marketing and sale of its trucks. This situation changed dramatically after the collapse of state socialism. 4.1.1 Pre-privatization Agony After 1989 the company quickly entered a period that can be described as “pre-privatization agony.” According to Šulc (1993:326) the symptoms of pre-privatization agony in former Czechoslovakia included: (1) passive approaches within enterprises toward their restructuring; (2) attempts to maintain the old system of production practices until privatization was launched; (3) efforts to achieve maximum profit for the management and employees at all costs, by stripping the assets of an enterprise and by increasing its debts; and (4) the total dominance of short-term enterprise interests over long-term development needs. Such practices, and specifically management’s desire to maximize its personal economic return, contributed to the collapse of Tatra’s production and sales after 1989 (Fig. 4.1). In 1990, Tatra stopped using the Motokov trading company to market and sell its trucks abroad and instead decided to sell its vehicles through more than 100 very small private trading companies – which happened to be established by Tatra’s managers, their relatives, and the former employees of Motokov soon after the general price and trade liberalization in Czechoslovakia of January 1, 1991. These small trading companies were able neither to handle large orders of trucks nor to provide quality service for the vehicles that they sold. However, within these firms officials and employees traded vehicles among themselves at discount prices, avoiding export taxes, and exported trucks illegally, making large profits in the process. At the same time, Tatra itself was unprofitable. These parasitic activities were one of the important factors why Tatra quickly began to lose market share in CEE. The situation was further complicated by the global recession in the automobile industry, the rapidly declining demand in the Russian and Czechoslovak markets as a result of economic crisis, and by increased competition from used Tatra trucks that became available in large numbers as the CEE countries downsized their armies or, in cases such as the former East Germany, re-equipped them with Western military equipment. At the time Tatra’s (former) management blamed the collapsing Russian market for most of the company’s problems. However, according to a member of Tatra’s board of directors, the decline in the Russian market for Tatras was not as catastrophic as Tatra’s managers wanted everybody to believe. Most of the company’s trucks

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sold in Russia were designed for oil and natural gas field operations in Siberia that were profitable and able to pay for new Tatras in hard currency despite the decline in overall production (Adámková 1995:31; 1999 interviews). Tatra could not simply divert its output to Western markets because of intense competition, a non-existent sales and service network, marketing inexperience, and lack of awareness of the Tatra brand name in the West. Additionally, Tatra was unable to offer sales terms, such as leasing of its vehicles, which are well established in Western markets.3 Western truck producers quickly introduced such sales terms in CEE, further undermining Tatra’s market position. In a desperate search for new markets, Tatra signed a contract with a Swiss trading company Diamoil to produce 2,650 trucks for Libya in 1991. The trucks were produced and delivered to Libya but Tatra was not paid. The company was able to recover about 2,000 trucks and eventually sell them at a considerable discount. Overall 500 trucks were lost and never paid for, partially because of the international embargo against Libya launched in 1992. Tatra allegedly lost 5.5–6.0 billion CZK (approximately 200 million USD) and acquired large debts (3.8 billion CZK, approximately 130 million USD) at the Czech Komerční Banka. According to later management the contract was “naive” but no one has been held responsible for the loss (Adámková 1995:32; Baďura and Nádoba 1998:15; 1999 interviews). Thus, even before its privatization, Tatra acquired enormous debts that negatively affected its future development while it was still owned by the state.

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Fig. 4.1. Annual sales (1981-2006) (left) and annual production (1989-2006) (right) of Tatra trucks. Source: Based on data in Tatra (1999), LN (2000a:13), MF Dnes (2000b:16), AIA (2007).

3

Tatra did not offer leasing of its vehicles until 2001.

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4.1.2 Privatization The government refused to restructure car manufacturers before their privatization because it believed that new owners could do it much more efficiently. It remained extremely passive despite the fact that a study by the Czech Ministry of Industry already had concluded in 1990 that the Czech commercial vehicle industry could only survive if the truck and bus manufacturers merged into one company that would subsequently form (or be sold to) a JV with a major Western truck producer (Myant 1993:250). The government also refused to decide how the individual vehicle makers would be privatized. Instead, the managers of individual automotive plants were given an opportunity to decide which privatization method they wished to pursue (i.e., share holding company, limited liability company, JV or foreign acquisition) (1996 interviews). Tatra was privatized in 1993 in the first wave of voucher privatization (see Sect. 5.1) after failed attempts to sell the company or a part of it to one of the Western European truck makers. The most important reasons why Tatra failed to team up with a foreign investor were an exaggerated pride in its end product, an unwillingness to surrender its independence (Myant 1999b:171), and governmental support for voucher privatization after the 1992 parliamentary elections. Tatra wanted to save its brand name, continue to produce trucks, and maintain truck production levels at all cost; consequently, it was unwilling to make any major concessions during the early 1990s. Additionally, the post-1992 Czech government provided no incentives to attract foreign investors to Tatra, and in many ways discouraged foreign investment (see Chap. 6). For example, Mercedes-Benz negotiated the acquisition of Tatra in the fall of 1991, but these negotiations failed because Mercedes-Benz allegedly wanted to liquidate truck production at Tatra and its brand name; it planned to transform Tatra into an engine reparation plant for MercedesBenz. Similarly, Fiat’s Iveco unit, the Italian truck maker, wanted to form a JV with Tatra in 1992 to assemble its trucks at Tatra’s Kopřivnice complex. However, Tatra was unwilling to accept Iveco’s terms, under which it would have to surrender its complete independence and give up its brand name. The negotiations also were adversely affected by the break up of Czechoslovakia in 1992 (1996 interviews; Tatra 1999). As one of the employees of Tatra noted in 1999: “There was a lot of pride at Tatra [in the early 1990s]: we are a national brand, we have 100 years of tradition, so why should we become an assembly branch plant for some Western truck maker?” (1999 interviews). Even in 1995, when Tatra seemed to be in a hopeless financial situation and facing bankruptcy, the company continued to unsuccessfully negotiate with several foreign truck manufacturers,

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including the German VW and later the French Renault, about forming a JV with a “strict condition that foreign capital must not acquire a majority stake” at Tatra (Adámková 1995:33). Václav Klaus, then the Czechoslovak finance minister, and his close advisors urged Tatra’s managers to participate in the governmental voucher privatization program instead of pursuing a foreign acquisition or JV with a Western truck maker. Klaus wanted to include well-known enterprises, such as Tatra, in the voucher scheme to boost its popularity in order to encourage public participation. Tatra’s managers, who wanted to protect their positions and their interests in the company, were assured that “voucher privatization was the safest way for them [to achieve their goals] because new owners would not understand anything and nobody would interfere in their decision making” (Žák 1997:18). Not surprisingly Tatra’s managers supported the voucher privatization scheme that would assure Tatra’s independence and provide them with strong corporate control over powerless institutional owners, the investment privatization funds (IPFs) (see also Mertlík 1995:334). They planned to acquire 20% of Tatra’s shares and 80% was to be exchanged for vouchers. Eventually, 97% of Tatra’s shares were exchanged for vouchers and 3% went to the Investment and Restitution Fund. Three large Czech and Slovak IPFs acquired two-thirds of Tatra’s shares, the rest was owned by small IPFs and by individual investors (1996 and 1999 interviews; Adámková 1995:32). 4.1.3 Post-privatization Experience Voucher privatization only worsened Tatra’s financial situation. Although the company did save its brand name and continued to produce trucks, privatization did not bring in any capital and the new inexperienced owners failed to provide any clear vision about the future development of the company and how to deal with its large debts (1999 interviews). Tatra continued to be dominated by its managers, whose role in the company increased rather than decreased compared to the period before privatization, a typical situation in large Czech enterprises privatized by voucher privatization (see Mertlík 1995:331-332; Chap. 5). A lack of production capital resulted in work stoppages, leading to a 90% production decline between 1990 and 1994 (from 14,586 trucks produced in 1990 to 1,358 in 1994) and growing financial losses by the firm. In March 1993, the new owners of Tatra (the investment funds) hired three U.S. managers (Gerald Greenwald, David Shelby and Jack Rutherford – the GSR company) to manage and save the company for 15% of its shares. However, the crisis management plan and radical restructuring

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introduced by the U.S. managers failed to deliver expected results quickly. The managers also were unable to fulfill their promise to find new markets for Tatra trucks in North America and in the rest of the world, to restructure Tatra’s debts, and to secure production capital. They were also unable to deal with the resistance of Tatra’s management to radical restructuring of the company that threatened their dominant position in the company and involved large-scale lay offs of employees. The company’s sales continued to decline and the U.S. managers were ousted in September 1994 (1996 interviews; Tatra 1999). Under the pressure of enormous debt, rapidly declining sales, and threats of bankruptcy, the new director and his top managers pursued a strategy of decentralized reorganization to break up Tatra into the core shareholding company and eight limited liability companies that are 100% owned by Tatra but nominally independent corporate satellites. This has been a common strategy pursued in troubled CEE companies (see Stark 1996:1004-1007). Tatra’s non-core activities – including foundry, forge, energy, tool, maintenance, and transportation units plus two branch plants (Tatra Nový Jičín and Tatra Příbor) – became nominally financially independent and were expected to become less dependent on Tatra by seeking outside work (orders).4 By 1999 the dependence of these corporate satellites on Tatra declined to 30%–60%, but their overall financial health did not improve and three of these companies (DIZ, SHT [former Tatra Nový Jičín] and Tatra Příbor) went bankrupt by 2000 (1999 interviews). Although this reorganization and internal restructuring probably averted the collapse of the company, it did not represent any dramatic turnaround. Tatra was still incurring enormous losses – it did not have access to production capital and thus could not produce continuously. The decline in the number of workers only slowly followed the production collapse, from 15,500 in 1989 to 8,200 in 1995, 6,500 by 2000 to 3,300 at the end of 2005. The company waited until 1997 to close its unprofitable branch plant at Příbor and was even slower to terminate the loss-making production of its T700 limousines in 1998 (200 million CZK loss in 1996 and 1997) (MF Dnes 1998e:13) (Fig. 4.2).

4

Three additional limited liability companies were established later.

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Number or passenger cars

1200 1000 800 600 400 200 0 1975

1979

1983

1987

1991

1995

1999

Year Fig. 4.2. Annual production of limousines T613 and T700 at Tatra (1973–1999). Source: Based on data in Tatra (1999).

Another attempt to save Tatra was launched by the Czech engineering giant Škoda Plzeň in 1996.5 Škoda Plzeň proposed to create a new division, Škoda Truck, by merging the service and after-sale operations of Tatra and Liaz (another troubled Czech truck manufacturer) to eventually produce a single type of truck.6 The ultimate plan of Škoda Plzeň was to create an integrated Central European truck-making group by including Poland’s Star and Hungarian Rába truck manufacturers. The debt-equity swap with the Czech Komerční Banka was supposed to lower Tatra’s debts, making the company eligible for additional loans from the bank. Škoda Plzeň bought 43.5% stake in Tatra for 461 million CZK. According to the Škoda Plzeň’s plan, Liaz would build diesel engines at Liaz for both Liaz and Tatra based upon an agreement with Detroit Diesel, an American engine maker. Tatra would stop using its own air-cooled engines but it would supply gearboxes to Liaz (Cook 1996:34, 1997:35; Adámková 1996:29). Škoda Plzeň expected to build between 7,000 and 11,000 vehicles at Tatra and Liaz (together) from 1997 on. However, the plan did not materialize because Komerční Banka did not execute the prepared debt-equity swap and the Czech government refused to subsidize Tatra. Škoda Plzeň announced that Tatra was for sale in 1998 but could not find a reputable company to buy 5

Škoda Plzeň is unrelated to Škoda Auto passenger car maker. The merger also included a small light-truck manufacturer Ross Roudnice nad Labem that was 51% owned by Ross and Liaz management. 6

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500 0 -500 -1000 -1500 -2000 -2500

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

Millions of Czech crowns

the firm. The arranged sale of Tatra to SDC International, a dubious American trading company, was blocked by the Czech government and Komerční Banka in September 1998. Thus, Tatra continued to struggle throughout the second half of the 1990s, accumulating additional financial losses, unable to pay its growing debts and to secure production capital to revive continuous production (Fig. 4.3). The year 1997 was the only one in which Tatra recorded a slight profit, after it built 1,127 trucks for the army of the United Arab Emirates for 180 million USD and because Tatra’s interest payments on its 3 billion CZK loan from Komerční Banka were postponed. In 1992-1999 Tatra accumulated financial losses of 6.671 billion CZK and since 1997 has been unable to pay interest on its loans, preventing it from securing additional loans necessary to revive its production. Not surprisingly, plans to increase annual production to 5,000 trucks by the year 2000 did not materialize. The crisis at Tatra culminated in the summer of 1999. First the company introduced a four-day work week at the beginning of the year, and in June 1999 2,500 workers out of 2,900 in the main Kopřivnice factory were asked not to come to work at all (Tatra 1999; Pražák 1998:16; MF Dnes 1998f:1).

Year Fig. 4.3. Operating income/loss of the Tatra joint-stock company since its privatization (1992-2006). Sources: Based on data in Tatra (1999, 2005, 2006a), Tatrovák (2002:1, 2007a:1), MF Dnes (2000c:18), iHNed (2003).

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Finally, the Czech government intervened to assist Tatra in 1999 through its controversial “Revitalization Program” for domestic industry, designed to help nine heavily indebted large Czech manufacturing companies avoid bankruptcy. According to the government plan, the state-owned bailout bank Konsolidační Banka bought bad debts from Komerční Banka,7 effectively transferring the ownership of these companies back to the state. The companies then were to be restructured and prepared for sale to foreign investors. In the case of Tatra, the Czech government reclaimed the majority stake at Tatra through the purchase of 44% of Tatra’s shares from Škoda Plzeň via Konsolidační Banka in August 1999 and 15% from Komerční Banka via the Česká Finanční, a subsidiary of the Czech National Bank, in October 1999 (MF Dnes 2000d:18). The government also assumed Tatra’s 4 billion CZK of bad debts from Komerční Banka. Tatra was given a 400 million CZK loan to finance its production, and the government, through its Revitalization Agency, began to look for a foreign partner that would bring in additional production capital and provide access to Western markets (MF Dnes 1999e:11). Tatra resumed continuous truck production in the fall of 1999. In 2000 the Revitalization Agency prepared a debt-for-equity swap of 4 billion CZK (105 million USD) with Kras Brno, a National Property Fund subsidiary, which bought Tatra’s debt from Konsolidační Banka. Kras Brno traded the debt for more than 16 million shares. The debt-for-equity swap erased Tatra’s debts and increased the government stake in the truck manufacturer to 91.6%. In November 2001, the Czech government decided to sell its stake at Tatra to the US-based SDC International, Inc. for 1.25 billion CZK (33.4 million USD). However, SDC International was clearly not the strategic investor that the government sought. It is an investment company focused on business acquisitions in CEE. Debt-ridden Tatra was sold to SDC International because there was no other buyer, and the Czech government refused to allocate any additional financial aid to Tatra. SDS International quickly sold 40.6% of Tatra’s shares to Terex Corporation while retaining a controlling 51% stake. However, Tatra’s problems continued unabated. After modest profits recorded in 2000 and 2001, Tatra generated losses in 2002 and 2003. The company was unable to maintain continuous production because of the lack of production capital and the inability to pay for the deliveries of components. In September 2003, Terex increased its stake at Tatra to 71%, thus becoming the majority owner. SDS and Terex launched a restructuring program which mainly included organizational changes and sales of Tatra’s assets. It trimmed Tatra’s labor force by 1,600 7

23 billion CZK (650 million USD) of debt was bought for 13 billion CZK (460 million USD) in July 1999.

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workers in 2003 alone and almost cut it in half to 3,100 workers between 2003 and 2006. Tatra itself employed 1,500 workers, and an additional 1,600 workers were employed at Tatra’s subsidiaries in 2006. As a result, Tatra recorded modest profits in 2004, 2005 and 2006 (Fig. 4.3). Although Tatra did not go bankrupt, Terek was unable to deliver on its promise to secure new markets for Tatras. In July 2006 Terex announced the sale of its 81% stake at Tatra to a group of Czech and American investors for 26.2 million USD.8 The new owners embarked on another round of restructuring. To satisfy the existing demand, Tatra hired 900 workers between October 2006 and October 2007, increasing its number of workers to 4,000 (Tatrovák 2007b). It remains to be seen whether the new ownership and the company restructuring will lead to a long-term stabilization and the survival of Tatra. The irony is that Tatra still has a good name in Russia and the rest of CEE and a distinct market niche for its competitive off-road trucks. Tatra’s vehicles are unique because they use the traditional Tatra chassis concept with the central backbone tube and independent swing half-axles proved in the toughest off-road conditions. Tatra’s trucks won the extremely difficult Paris-Dakar truck race six times between 1988 and 2001 (its truck ranked second in the 2000 Paris-Dakar-Cairo race) in a competition with the best European and overseas truck makers, suggesting the quality of the product. But because of its financial difficulties, Tatra has been unable to satisfy the existing demand for its trucks and thus has been gradually losing its remaining market share. The local and regional economic effects of Tatra’s production collapse have been substantial. Although the company was trimming its labor force cautiously during its rapidly declining production, it laid off almost 10,000 workers between 1990 and 2000. Throughout the 1990s Tatra continued to be the largest employer in the town of Kopřivnice,9 which was built to serve the needs of the plant, and the prosperity of the town directly depended on the economic health of Tatra. The unemployment rate grew to more than 10.5% in the Kopřivnice region (which is part of Nový Jičín district) by 1999 and up to 15.2% in the city of Kopřivnice in 2003. In the early 1990s many laid-off workers from Tatra were able to find jobs in the booming service sector, and some began to commute to the nearby towns. 8

The four new owners include the KBC Private Equity (a Brussels-based investment company), Vectra Ltd. (Tatra’s existing shareholder), Mr. Sam Eyde (an American investor), and the Meadow Hill company owned by Ronald A. Adams (Tatra’s supervisory board member) and his wife (Tatra 2006b). 9 The town, which had only 11,000 inhabitants in 1970, almost doubled its size during the following 15 years.

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However, by the late 1990s, the services were unable to absorb more workers because the purchasing power of the local population was declining, and the entire economy of north Moravia was in a deep recession; this prevented the dismissed workers from finding jobs in large numbers outside the town (1999 interviews). The situation improved after the city decided to open the Vlčovice industrial park in 1999. In the early 2000s the industrial park especially attracted foreign-owned auto component suppliers such as Dura, Cirex, Erich Jaeger and Brose who benefited from the availability of skilled workers formerly employed by Tatra. By 2006, the unemployment rate in the city decreased to 11% (Korbel 2006). The production collapse at Tatra also has had very negative effects on its 500 component suppliers. Not only did Tatra’s consumption of components decrease drastically, but the company was also very often unable to pay for the parts that were delivered.

4.2 Liaz Liaz, the producer of heavy road trucks, experienced an even more spectacular production collapse than Tatra after the end of the state socialist period. In many ways, Liaz’s post-1989 experience parallels that of Tatra: the company, to a certain extent, purposefully failed to attract foreign investors; it was privatized during the voucher privatization but the government retained the majority stake in the company until 1995; it accumulated huge debts; its production virtually collapsed; and all attempts to save it have failed. The most important difference between Tatra and Liaz, with respect to their survival, was that the Czech government has shown no interest in rescuing Liaz. As a result, the company failed to save its truck production and it went bankrupt in 2001. Liaz (the name originated as the abbreviation of the Liberecké automobilové závody – the Liberec Automobile Works) was established in 1951 as a successor of the German RAF automobile factory. RAF produced passenger cars in the city of Liberec since 1906, before it merged with L&K at the beginning of World War I. L&K, in turn, was bought by Škoda in 1925 (see Chap. 2). In 1951, the production of Š706 truck was relocated from Avia Prague to several northern Bohemian factories (Elektro-Praga Rýnovice, Rotex Liberec-Hanychov, Tonak Mnichovo Hradiště, and PBZ Svijany Loukov). Liaz’s production facilities were modernized between 1967 and 1974. It combined domestic technology with the best foreignmade machinery. It allowed Liaz to achieve production methods and productivity levels comparable with leading foreign truck manufacturers

4.2 Liaz

139

(ACIS 1992:39). By 1974, Liaz had become a large state socialist company with 10 branch plants scattered across former Czechoslovakia. In 1989, Liaz produced 18,101 heavy duty on-road trucks and 25,045 engines, and the company employed 12,300 workers (including 1,200 prisoners). About 40% of the production (7,000–7,500 trucks annually) was sold in Czechoslovakia. More than 8,500 trucks were exported, the vast majority to the CMEA countries (Bulgaria—up to 4,500 trucks annually, Poland—2,500, Hungary—600, East Germany—500, and the Soviet Union—2,000). Exports to less-developed countries such as Ethiopia, Cuba, Nicaragua, Tanzania, and North Korea were generally small and were based upon political decisions rather than economic considerations; therefore, these countries were rarely able to pay for the trucks delivered. Liaz did not export any vehicles to the developed West. In the late 1980s, Liaz was profitable, generating 400–500 million Kčs in profits annually. However, the company retained only 12–15 million Kčs, with the rest being taken by the state. In turn, Liaz received 100–150 million Kčs in investment capital annually from the state. Although Liaz road trucks were considered top quality and highly reliable vehicles within CMEA, they were technologically inferior to trucks produced in the capitalist West. The major reason was that the company could not import any components, new technologies, or materials from the West during the state socialist period. Also, as in a typical state socialist company, plan fulfillment and production increases were stressed at the expense of technological development and overall quality of the product (Šálek 1999a:4, 1999b:4, 1999c:4). 4.2.1 Pre-privatization Agony at Liaz Truck production collapsed quickly after 1989 (Fig. 4.4) as the CMEA disintegrated and the demand for Liaz trucks collapsed as a result of economic crisis both in Czechoslovakia and the rest of CEE. The events of 1989 left Liaz virtually paralyzed, as 1,200 prison laborers left the company practically over night because of a presidential grant of amnesty, and the entire top management was replaced by new, inexperienced managers. Furthermore, trade liberalization led to imports of new and used Western trucks almost duty free, which undermined Liaz’s position in the Czechoslovak market (Šálek 1999c:4).

4 Restructuring of the Czech Commercial Vehicle Industry

Number of trucks

140

20000 18000 16000 14000 12000 10000 8000 6000 4000 2000 0 1985 1987 1989 1991 1993 1995 1997 1999 2001

Year Fig. 4.4. Annual production of Liaz trucks (1985-2001). Note: The company went bankrupt in 2001. Sources: Based on data in LN (2000a:13), Pražák et al. (1999:14), Šálek (1999a:4), HN (1997d:18), AIA (2004).

As a result of its post-1989 paralysis, Liaz was unable to finish its cooperation negotiations with Iveco, Deutz, and Detroit Diesel that began in 1988 and 1989 (Šálek 1999d:4). Mercedes-Benz was seriously interested in forming a JV with Liaz and Avia (the producer of medium-weight trucks) in 1991 and early 1992 to produce 27,000 Mercedes-Benz light and heavy trucks annually and it proposed to invest close to seven billion Kčs between 1992 and 1998.10 On January 6, 1992 Avia and Mercedes-Benz signed a memorandum concerning the formation of this JV, followed by a similar memorandum signed between Liaz and Mercedes-Benz on January 9, 1992. The Czech government approved the plan on March 25, 1992. However, major disagreements emerged when the conditions of the JV began to be negotiated in April 1992 (1996 interviews). According to the preliminary agreements, Liaz would produce generic heavy trucks, based on Mercedes-Benz’s design. As in the case of Tatra, Liaz’s managers did not want to sacrifice Liaz’s own specialized operations for manufacturing and fitting customized components and producing only standardized parts 10

The proposed JV was to be incorporated into the Mercedes Benz’s transnational production network and its corporate structure. Avia was to produce 17,650 units and Liaz 9,450 units in 1997. If successful, the annual production was to increase to 37,000 units (Avia 1992).

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141

for Mercedes-Benz trucks. Instead, Liaz officials wanted to produce component parts for other customers as well, such as specialized cables for Telefunken and axles for Rockwell (McDermot 1997:95). Unfortunately, for Liaz and Avia, the JV had not been finalized before the June 1992 parliamentary elections. The new Czech government led by Václav Klaus was much less enthusiastic about the foreign ownership of Czech truck manufacturers and it did not continue negotiations with Mercedes-Benz about the Mercedes-Avia-Liaz JV started by the previous government (Žák 1997:17-18). The government also refused to provide indemnities against environmental liabilities of Liaz and Avia in early 1993 (McDermot 1997:95). Both Liaz and Avia also incurred heavy losses in 1992. At the same time, the severe economic crisis in the former Soviet Union and the rest of CEE and the break-up of Czechoslovakia forced Mercedes-Benz to reevaluate the future market potential of CEE. As a result of all these difficulties, Mercedes-Benz officially withdrew from the project on March 31, 1993 (1996 interviews). 4.2.2 Privatization of Liaz and its Effects As in the case of Tatra, Liaz was privatized through voucher privatization in 1993, but only 47.6% of company shares were exchanged for vouchers. The state retained 52.4% stake at Liaz through its National Property Fund (NPF) until 1995, when it was offered to a strategic investor (see below). Thus, Liaz faced the same consequences of voucher privatization as did Tatra: a lack of production capital that voucher privatization did not improve; an ambiguous ownership structure without clearly defined ownership;11 and lack of strategic plan to extricate itself from deep crisis. Consequently, the necessary company restructuring was continuously postponed, finally being launched in 1997. In the meantime, already low production levels continued to decline. In September 1995, Škoda Plzeň bought 52.4% of Liaz’s stake from the Czech government for 200 million CZK and the name of Liaz was changed to Škoda Liaz. Upon acquisition Škoda Plzeň arranged a 250 million CZK bank loan to finance increase in Liaz’s production and also attempted to restructure Liaz’s debts, which exceeded 1.2 billion CZK (HN 1996c:6). Škoda Plzeň had grand plans for Liaz: to produce 7,000-8,000 trucks by the year 2000 (Fig. 4.5); to penetrate new markets in Asia, North Africa, and South America; to assemble its vehicles in Brazil, China, and 11

The state as the majority shareholder was represented by the Ministry of Industry, which was not seriously interested in running the company.

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Number of trucks

6000

Reality Plan

5000 4000 3000 2000 1000 0

Millions of Czech crowns

India; and to form JVs with Zil and Kamaz, two Russian truck manufacturers. In September 1997, Liaz began the production of light trucks in a JV in Bulgaria and in October 1997, a new line of trucks, the Škoda 400, was launched. 0 -200 -400 -600 -800 -1000 -1200 1995

1996

1997

Year

1998

1999

1994

1995

1996

1997

1998

1999

Year

Fig. 4.5. Left: Comparison of 1995 production plans and actual production of Liaz trucks. Right: Operating losses of Liaz (1994-1999). Sources: Based on data in HN (1995:7, 1997d:18, 2001c:3), LN (2000a:13), and Pražák et al. (1999:14).

Under pressure from its largest creditor, the Czech Investment and Postal Bank (IPB), Liaz embarked upon radical restructuring only in 1997. The organizational restructuring of the company followed the same model as at Tatra: the creation of four nominally independent limited liability companies12 fully owned by the financial holding Škoda Liaz. Hundreds of workers were laid off. However, the expected turnaround did not take place. The planned cooperation and eventual merger with Tatra did not progress at all because of deeply seated rivalry between the two companies that was detrimental to both truck manufacturers.13 Instead of increasing, the truck production continued to decline and financial losses accumulated. Liaz lacked production capital to finance continuous production of its trucks because it was unable to pay its debts, and thus banks refused to provide additional loans. Liaz also did not have a sales and service network in Western Europe and thus could not export there in any significant numbers. Its traditional CEE and domestic markets remained depressed. And, as in the case of Tatra, the customers had to pay for their vehicles first and wait for them to be produced. Thus, Liaz could not compete with Western truck manufacturers, who offered much better financial terms and options, such as leasing, even within its traditional domestic and CEE markets. This was despite the fact 12

The companies were: Škoda Mnichovo Hradiště—truck assembly; Škoda Motory—engine production; Škoda Liberec—axles; and Škoda Mělník—frames. 13 Many of Liaz’s former employees believed that the rivalry between the two truck makers destroyed both Tatra and Liaz (see Fidler 1999:4).

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143

that the overall cost of a Liaz truck was often as low as 50% of a typical Western European model. The closure of the technological and quality gap between Liaz and Western European truck manufacturers that was achieved during the 1990s did not lead to increased sales either.14 As a result, Liaz quickly lost market share in Czechia and was unable to compete abroad. By the late 1990s, the company was at the brink of bankruptcy (Fig. 4.5). Because of heavy financial losses at Liaz (renamed Škoda Liaz in 1995 and then Truck International in 1999) and at Škoda Plzeň as whole, Škoda Plzeň decided to sell Liaz. However, no interested buyers emerged, Liaz’s debts reached more than 2.3 billion CZK by the year 2000. The IPB, the largest creditor, to whom Liaz owed 812 million CZK, was looking for a foreign buyer for Liaz since 1999 without success. The Czech government refused to include Liaz in its “Revitalization Program”. Consequently, the financial holding Truck International, including its subsidiary Škoda Mnichovo Hradiště, went bankrupt in March 2001. The collapse of Liaz resulted in substantial job losses: 12,500 jobs were lost between 1989 and 2001 (Škoda Truck 1999:1; Právo 2000:16). Attempts to revive the truck assembly at Liaz by the Slovak holding company Sipox failed and were definitely abandoned in September 2003.

4.3 Avia Praha Avia has existed as an aircraft manufacturer since 1919, and aircraft related production was not completely phased out until 1992. The production of commercial vehicles was introduced in 1946 and has dominated the company’s production since the early 1960s. Avia specialized in the production of medium-weight trucks. In 1967, Czechoslovakia bought a license from the French Renault company to produce 1.5 and 3 ton RenaultSaviem trucks at Avia. Avia was selected to produce medium-weight trucks for the entire CMEA and production capacity was therefore set at 20,000 vehicles annually. The Prague-Letňany production complex was modernized between 1969 and 1975 as the production of licensed trucks was prepared and launched. The company produced up to 19,000 gradually modernized trucks annually (Fig. 4.6) and up to 62% of its production was exported annually to the CMEA countries, China and Yugoslavia in the late 1980s (1999 interviews; MIT 1993). 14

New engines met Euro 1 and Euro 2 emission standards, and Liaz achieved ISO 9000 and IS0 9001 certifications of quality, for example.

4 Restructuring of the Czech Commercial Vehicle Industry

Number of vehicles

144

20000 18000 16000 14000 12000 10000 8000 6000 4000 2000 0 1986

1990

1994

1998

2002

2006

Year Fig. 4.6. Annual production of Avia trucks (1985-2006) including Lublin vans (1997-1999). Sources: Based on data in MIT (1993), Daewoo Avia (1999) and AIA (2007).

Despite the fact that Avia was considered the strongest among the Czech truck makers in the late 1980s and early 1990s (1996 interviews), the company experienced almost identical problems as Tatra and Liaz after 1989: the collapse of the CMEA and domestic markets led to rapidly falling production (Fig. 4.6), and the company searched unsuccessfully for direction and investment capital during its “pre-privatization agony”. There was no modernization of the core assembly facility at Prague-Letňany since 1975. It put Avia in a worse situation than Škoda Auto and Tatra whose production facilities were modernized in the 1980s. In 1992, Avia’s branch plants scattered across Czechia became independent and the state enterprise was transferred into a state shareholding company. The government began the search for a foreign investor that could provide production capital and find new markets for Avia trucks. Building upon its previous experience in the region and cooperation with Avia, Renault of France began JV negotiations with Avia after an unsuccessful bid for the Škoda passenger car plant in 1991 (see Chap. 3), but no agreement was reached. Renault allegedly did not offer favorable investment terms.15 Subsequently, as described in

15

Renault offered to establish a JV with Avia’s Letňany plant and build a modern industrial complex comparable to other Renault’s factories. It was to produce

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the previous section on Liaz, Avia was involved in JV negotiations with Mercedes-Benz in 1991 and 1992. This proposed JV was to include Mercedes-Benz, Liaz, and Avia. However, as in the case of Renault, Mercedes-Benz withdrew from these negotiations on March 31, 1993. Following the withdrawal of Mercedes-Benz, Avia negotiated with Steyr, an Austrian truck manufacturer, but Steyr was unwilling to form a JV with Avia without the participation of a major Western truck maker (1996 and 1999 interviews). As Tatra and Liaz, Avia participated in the first wave of voucher privatization. Forty-six percent of Avia’s shares were exchanged for vouchers and the Czech government retained 51% of the shares in its NPF to be offered to a strategic investor (3% went to the Restitution and Investment Fund). After the failure of JV negotiations with foreign truck makers, the government exchanged additional 17% of its shares for vouchers in the second wave of voucher privatization at the end of 1993, lowering its stake at Avia to 34%. In early 1995, a newly formed Daewoo—Steyr consortium purchased 34% of Avia’s shares from the NPF for 180 million CZK (6.4 million USD). In its agreement with the Czech government (represented by the NPF), Daewoo—Steyr promised to preserve the brand name Avia, to continue the truck production, and to invest 300 million USD in the development of a new truck model between 1995 and 2005. The consortium purchased an additional 16.2% of Avia’s shares from investment funds on the capital market to attain a majority stake (50.2%) in 1996. In the same year the company was renamed Daewoo Avia. Daewoo bought Steyr’s share in the company in 1998, becoming the sole majority shareholder (1996 and 1999 interviews; Daewoo Avia 1999).16 Daewoo decided to invest in Avia because Daewoo did not produce any medium-weight trucks (6–9 tons). The company expected growing demand for this type of commercial vehicle and Avia offered trucks of a reasonable quality that could be modernized and sold by Daewoo in Czechia, Slovakia, the rest of CEE, Africa, Asia and South America. In October 1995, Avia’s new director appointed by Daewoo, Mr. Kil Su-chung, argued that Avia needed to quickly increase its production to 7,000 trucks annually to be profitable. By the year 2000, Avia was supposed to produce 50,000 to 70,000 new AD100 trucks annually (Hejral 1995:7). By 1999, these plans were scaled back to the production of 5,000 trucks, with an expected 11,000 internationally competitive trucks and employ between 1,920 and 2,660 workers by 1997 (Avia 1992). 16 Nominally, Avia continued to be owned by the company called Daewoo— Steyr registered in the Netherlands.

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increase to 10,000 trucks by 2003. Additionally, Avia planned to assemble 1,500 Lublin vans annually.17

Number of employees

5000 4000 3000 2000 1000 0 1990 1992 1994 1996 1998 2000 2002 2004 2006

Year Fig. 4.7. Employment change at Avia (1989-2006). Sources: Compiled from Daewoo Avia (1999), MF Dnes (2000d:16) and other sources.

Daewoo managers were assigned key managerial positions in the company, but Daewoo did not introduce any radical production changes at Avia after it became the majority shareholder. Perhaps the most important change was the greatly increased emphasis on the product quality and the introduction of strict discipline on the shop floor. Gradual internal restructuring led to the cutbacks in administration personnel and the development of a sales and marketing department. Avia employed 4,933 workers at its Prague Letňany core plant in 1989, but it shed half of its workforce before the Daewoo takeover.18 Although Avia’s managers and labor unions argued that no radical changes in employment took place after the foreign takeover, Daewoo Avia shed additional 36% of its workforce between 1995 and 2000 (Fig. 4.7; 1999 interviews). Thus, the company shed almost 70% of its workers in the 1990s. By 2006 Avia employed only 400 workers, of which 260 were employed by the truck division. Although technology transfer is typically 17

These vans were assembled at Daewoo Avia between 1997 and 1999. Avia employed 3,964 workers at its core plant in Prague in 1991. Additionally, it employed 3,302 workers in its branch plants. The total labor force was thus 7,266 in 1991 (Avia 1992). 18

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considered to be a major benefit of FDI, no significant technology transfer took place in the case of Avia, because Daewoo had no experience with the production of medium-weight trucks. The completely new AD100 truck has largely been developed at Avia (chassis and new Avia engines) in cooperation with the Daewoo DWTC center in England (body). Avia invested 4 billion CZK in its development between 1995 and 1999. These development costs were financed by loans from the parent company (1999 interviews). In 1999, the managers argued that future survival of Avia would largely depend on the success of its new AD100 truck, which should have cost 50% less than comparable Mercedes-Benz models. They believed that the company could sell the AD100 truck not only on its traditional markets but also in Western Europe. The optimistic production plans of Daewoo Avia have never materialized. Although production increased by 38% between 1995 and 1997 to 5,348 units (reflecting the infusion of production capital), it thereafter declined rapidly in 1998 and 1999, and the gradual decline continued between 2000 and 2006. Avia built only 468 trucks in 2006 (Fig. 4.6). The company blamed its production collapse on one-year delay in the introduction of its AD100 truck, whose production was launched in August 2000. However, the new model has not improved Avia’s sales. The old A21/31 and its modernized versions (A60/75 and A80 trucks) were unable to compete with comparable Western vehicles (produced by Iveco, Star, Mercedes, MAN, Renault and DAF) abroad in terms of quality and service, despite the fact that they were on average only two-fifths the cost. In Asia, however, where Daewoo Avia wanted to sell more of its trucks, Avia trucks were too expensive (15,000-17,000 USD) to compete with comparable Asian trucks (10,000 USD) (Adámková 1996:28). It thus appears that Daewoo has failed to effectively use its global distribution network to sell the Avia trucks. Nonetheless, Daewoo has had some success in selling the Avia trucks in Poland, Hungary, Slovakia, Ukraine, Romania, and Uzbekistan. Exports to other countries have been negligible (Daewoo Avia 1999:9). The dominant position of Avia in the 3.5 to 9 ton category on the Czech market has also been undermined. The new-truck market share of Avia slipped from 66% in 1993 to less than 3% in 2006 (AIA 2007). As in the case of Tatra and Liaz, the traditional domestic and CEE markets have remained depressed. Although Avia used to sell about 6,000 trucks annually in the former Soviet Union before 1989, it did not sell any vehicles in Russia in the 1990s; its trucks were only sold in Uzbekistan and Ukraine (1999 interviews). The situation at Avia was further complicated by the financial crisis and then the bankruptcy at its majority shareholder Daewoo Motor in the Fall of 2000. All of Daewoo’s passenger car and LCV manufacturing

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500 0 -500

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operations in CEE, including Avia, were excluded from GM’s takeover deal with Daewoo’s creditors signed on April 30, 2002. Avia incurred large financial losses in the 1990s which peaked in 1999 and continued thereafter (Fig. 4.8). Avia has argued that large losses since 1999 have been partially caused by large write-offs of its development costs for the AD100 truck. Between 1993 and 2006 Avia recorded a profit only once in 1998 when it earned a mere 11 million CZK (about 300,000 USD). Its accumulated losses stood at 4.3 billion CZK (190 million USD) in 2004 and the annual output continued to decline.

Year Fig. 4.8. Operating income/loss of Avia, 1993-2006. Sources: Based on data in Daewoo Avia (1999:5), MF Dnes (2000d:16; 2006:9), iHNed (2007, 2004, 2002a, 2001).

As a result of these developments, Avia has been on the brink of bankruptcy since 2000. The crisis peaked in 2004 when serious financial difficulties and the nearly complete lack of production capital halted assembly production. Avia’s only chance for survival was to find a new strategic investor willing to inject production capital, service Avia’s debts, and improve Avia’s access to foreign markets through a functioning sales and distribution network. However, no established Western truck maker was willing to take over Avia. Eventually, the Odien Capital Partners, an investment company, bought Avia’s 5 billion CZK (218.6 million USD) debt from Daewoo in December 2004. Odien capitalized Avia’s debt in March 2005, thus becoming Avia’s majority shareholder (98.4%). The truck

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maker was renamed with its original name, Avia. Odien’s goal was to restructure Avia before its sale to a third party. Avia was reorganized in three divisions: the truck division, the components division and the property management division. In July 2006, Ashok Leyland, an Indian-based truck maker, agreed to purchase Avia’s truck division for about 30 million USD. Ashok Leyland promised to stop the losses and to increase the truck production seven times in three years. The acquisition of Avia would allow Ashok Leyland to establish its presence in the EU market. It remains to be seen, however, whether these latest developments will salvage the production of Avia trucks. Avia thus challenges the widely accepted uncritical view that foreign capital represents the salvation of troubled local companies. It also shows the potential dangers of dependence of domestic companies on the fortunes and misfortunes of large foreign TNCs.

4.4 Karosa Vysoké Mýto Karosa is a bus manufacturer that traces its history back to 1895, when the first workshop producing horse-drawn carriages was established. The first custom passenger car bodies were manufactured for Škoda, Tatra, and Praga in 1925. Bus bodies began to be produced in 1928. The company was nationalized in 1948, and Karosa became a typical multi-plant state socialist enterprise, with the core plant located at Vysoké Mýto and 11 branch plants scattered across Czechoslovakia. Karosa specialized in the production of buses and commercial vehicles. Its passenger car body production was phased out in the 1950s (Tulis 1990:6-67). By the late 1980s, Karosa was producing up to 3,400 buses annually (Fig. 4.9) and it also produced up to 1,200 special purpose vehicles annually, such as street washing trucks, cesspool emptying trucks, and fire engines (MIT 1993). As in the case of the other commercial vehicle producers, during the period of state socialism Karosa did not need to worry about the sale of its buses. Its major concern revolved around securing enough materials for production and maintaining a large labor force, typical supply constraints in the state socialist economy (see, for example, Burawoy 1985:162-163). Because of a shortage of workers, Karosa employed foreign laborers from Vietnam, Poland, Mongolia, Cyprus, and Syria. As opposed to Tatra, Liaz, and Avia, Karosa was not designated to export its buses to CMEA markets. This role was assigned to the Hungarian firm Ikarus. As a result, Karosa was not dependent on collapsing CMEA markets and sold its buses only in Czechoslovakia (1999 interviews).

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2500

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Fig. 4.9. Annual production (left) (1985-2006) and sale of Karosa buses (right) (1990-2006). Sources: Based on data in Karosa (1994:7, 1998:51), MIT (1993) and AIA (2007).

Changes at Karosa after 1989 were dramatic. In January 1991, when Czechoslovakia launched the price and trade liberalization, Karosa’s domestic market collapsed (Fig. 4.9). Karosa produced 300 buses in January 1991, but sold only 20 of them. The company reacted swiftly to this development and laid off all foreign workers and retirees and reduced the production shifts from two to one. Despite the reduced production, Karosa accumulated 600 unsold buses and a debt of 1.5 billion Kčs. It did not have any investment capital and it increasingly experienced problems in obtaining production capital. As in the case of other commercial vehicle manufacturers, the government’s proposed solution to these problems was rapid privatization (1999 interviews). On July 1, 1993 Karosa was transferred from a state enterprise into a state shareholding company. The company desired to participate in the second wave of voucher privatization but it also was interested in attracting a foreign buyer. As opposed to Liaz’s and Tatra’s managements, Karosa’s managing director understood consolidation trends in the European bus industry and believed that in order to survive Karosa had to team up with one of the strong European bus producers. Karosa negotiated with several Western bus makers for the purpose of forming a JV and had four basic goals. First, Karosa did not want to become a branch assembly plant for a Western bus maker. Instead, it desired to continue bus production using its original panel technology introduced in 1970. Second, Karosa sought to retain its own construction and development activities. Third, the company wanted to preserve its brand name and be an equal partner in any JV. Fourth, a foreign buyer had to provide sufficient investment capital to upgrade the production facilities. Karosa contacted Renault of France after its negotiations with Avia failed, and Renault was the only potential foreign investor that agreed to all of these criteria. Other investors were interested

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in various forms of cooperation, parts production, or assembly of their buses at Karosa (1999 interviews). The director of Karosa proposed and won approval for an unorthodox approach to attracting a foreign partner to the company through an increase in the capital stock of Karosa financed by the foreign partner. In this way, a foreign investor would not have to buy Karosa’s shares from the government. As a result, the investment capital would end up at Karosa and not in the government’s hands. On November 2, 1993 Renault and the European Bank for Reconstruction and Development (EBRD) signed a general agreement with the NPF giving them a right to increase the capital stock of Karosa in such a way that Renault and the EBRD would acquire 51% stake in the company. In addition to the above conditions, Renault promised to invest all Karosa’s profits within the firm for five years. On November 29, 1993, Karosa’s General Assembly increased the company’s capital stock by 269 million CZK (9.1 million USD) and asked Renault to buy newly emitted shares. Renault purchased the shares on April 18, 1994, acquiring a 34% stake at Karosa. On April 20, 1994, Karosa’s General assembly further increased Karosa’s capital stock by 274 million CZK (9.2 million USD). The newly emitted shares were subsequently bought by Renault (93 million CZK) and the EBRD (181 million CZK), allowing Renault to retain its 34% stake and the EBRD to acquire 17% stake at Karosa. The government’s stake at Karosa thus declined to 49%, which the NPF exchanged for vouchers during the second wave of voucher privatization in the mid-1994. IPFs acquired 32.9% stake at Karosa, individual investors 11.6%, and 4.5% of the shares went to the Restitution Fund. Renault bought EBRD’s 17% stake in December 1996, raising its stake at Karosa to 51%. Since 1997, Renault has been buying Karosa’s shares from the IPFs and individual investors, raising its stake at Karosa to 96% by April 2000. Since January 2000, Karosa has been included in the Irisbus group, formed by the merger of Renault’s and Iveco’s bus operations. Renault left Irisbus in 2002, leaving Iveco as its sole owner. In December 2005, Irisbus France S.A. merged with Iveco France S.A. into Iveco France S.A., which now owns 98% of Karosa’s shares (1999 interviews; Karosa 1994:3-6, 1995:8, 1999:12, 2006; LN 2000b:13). As in the case of other Czech motor vehicle manufacturers, Karosa’s backwardness compared to the Western bus producers was most pronounced in terms of its management and organization, rather than in terms of its production technology. The JV with Renault thus did not bring in any new technologies. However, according to the managing director of Karosa, the company benefited “enormously” from the transfer of management and organizational know-how and quality systems from Renault (1999 interviews). For example, Renault’s engineers and experts introduced

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the “Total Quality Concept” at Karosa in 1994. Its emphasis was on continuous improvements in quality and quality control, time delivery, and production costs. Another major benefit of the JV for Karosa included access to the French market through Renault’s commercial and service network. Karosa put considerable pressure on its component suppliers to increase the quality of their components, but its influence has been rather limited since it does not purchase large volumes of components from any given supplier. However, Karosa is using many suppliers that supply the Škoda passenger car plants, and it benefited from the strong pressure Škoda has placed on all its component suppliers to improve the quality and timing of deliveries (see Chap. 7). About 50% of components are obtained in Czechia and 50% are imported. Karosa gradually switched from Liaz to Renault engines in the second half of the 1990s (1999 interviews). Karosa was forced to start exporting its buses after 1989, because of the collapsing Czechoslovak market caused by the economic crisis. By 2006, the share of exports increased to 80% of Karosa’s production. In the early 1990s Karosa exported its buses to Russia and some CEE countries such as Albania, Lithuania, and Bulgaria. However, the deepening economic crisis in the later 1990s led to decreasing and volatile sales in these countries (334 buses in 1993, 93 in 1999, 65 buses exported to Russia in 2005); it also kept the traditional exports to Slovakia at constantly low levels (98 in 1993, 121 in 2000, 144 in 2005). The domestic market also remained depressed despite the fact that Karosa continued to dominate it with more than 80% of new buses market share in the 1990s (but declining to 46% by 2006), as opposed to the constantly declining market share of Czech truck manufacturers (Figure 4.10). Under this situation, Karosa’s partnership with Renault proved extremely valuable. Since 1997 Karosa has been successfully exporting its Recréo school buses to France through Renault’s and later Irisbus’ commercial network (200 in 1997 and 643 in 2005), making France its largest export market with the total of 877 buses sold there in 2005 and more than 1,000 in 2006. France, Italy and Germany accounted for 80% of Karosa’s exports (1,187 units) in 2005 (Karosa 2006; MF Dnes 2007). Compared to other Czech commercial vehicle producers, Karosa has thus been able to stabilize its output after its collapse in the early 1990s. In contrast to Tatra, Liaz, and Avia, Karosa has remained profitable since its privatization in 1993 (Fig. 4.11). Karosa’s profitability allowed the company to launch a major modernization drive in 2000 to upgrade its production facilities. A new paint shop was finished in July 2001, and an assembly line, sheet metal processing operations, welding shop, and power supply have been modernized. This modernization was completed in early

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2003 and its cost of 1.3 billion CZK (about 35 million USD) represented the largest ever investment in the company (Rychtera 2000). 100

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Fig. 4.11. Karosa’s operating income (1993–2006) (left) and employment change at Karosa (1992–2006) (right). Source: Based on Karosa Annual Reports (1993– 2005) and MF Dnes (2007).

Karosa continues to develop all its new products and its engineers increasingly participate on R&D for the entire Irisbus holding. R&D at Karosa is competitive and was not transferred to Renault, reflecting the fact that although the quality of Karosa’s engineers is high, their expertise is much less expensive than that of their French and Italian counterparts (1999 interviews). After the economic shock of the early 1990s, the bus maker has avoided any further large-scale lay-offs that have been typical for other

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Czech commercial vehicle makers (Fig. 4.11). Given the strong position of Irisbus on the European bus market (the second largest producer), Karosa’s investment in upgrading its production facilities, and its increasing access to Western European markets, we might expect that the company will continue its successful development. In 2007 Karosa was renamed to Iveco Czech Republic and its new buses are now produced under the Irisbus Iveco trademark.

4.5 Conclusion Four basic conclusions can be drawn from these four case studies of restructuring of commercial vehicle manufacturing in Czechia. First, shock therapy which included overnight price and trade liberalization and an almost complete withdrawal of the state from its still state-owned enterprises, left these enterprises in an extremely vulnerable position at the mercy of their managers, who became de facto owners. As the case of Tatra has demonstrated, enterprise managers pursued short-term goals at the expense of the future development of the enterprises and often acted to enrich themselves at the expense of the enterprises. This situation has been typical for the period between the end of state socialism and the onset of privatization (the so-called “pre-privatization agony”) in Czechia. Second, as cases of Tatra and Liaz show, the voucher privatization of truck manufacturers was a complete failure. The government’s neo-liberal philosophy was based upon an argument that any “real” private owner would always be better than the state. However, rather than leading to a clearly defined pattern of private ownership, voucher privatization led to “a large-scale and long-run institutionalization of . . . absentee ownership” (Mertlík 1995:334), resulting in a weak and scattered ownership structure that for practical purposes left the old state socialist enterprise managers in charge of enterprises. Such an ownership structure failed to exert a strong pressure on enterprise managers to conduct the radical enterprise restructuring necessary to ensure the future survival of enterprises, and it did not make them accountable for their managerial decisions. Instead, managers typically continued practices detrimental to their companies, such as acquiring large debts through soft loans that the enterprises were later unable to pay back and postponing enterprise restructuring. Thus, in those enterprises in which a majority of shares were exchanged for vouchers or where the state kept a majority stake but was unable to sell it to a strategic investor, “pre-privatization agony” in effect was replaced by “post-privatization agony.” The introduction of private ownership and market forces resulting

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in hard budget constraints, two pillars of the neo-liberal transition strategy, thus did not automatically result in an effective enterprise restructuring. The sudden withdrawal of the state from enterprises and its inability to establish an institutional and legal framework in which independent enterprises could efficiently operate was further detrimental to enterprises. Third, as the case of Daewoo—Avia suggests, FDI and foreign control do not necessarily lead to a successful enterprise transformation normally associated with foreign ownership (see also Chap. 6). However, Karosa represents an example of successful restructuring with the help of foreign capital. Neither Avia nor Karosa experienced a significant transfer of Western technology, which is one of the most widely cited benefits of FDI in the recipient countries. However, both companies benefited from the transfer of Western managerial practices and approaches to quality control. As we could see in Chap. 3, a similar situation existed at Škoda Auto. Both Avia and Karosa maintained their R&D functions and continued to design their new vehicles. Finally, the collapse of the CMEA market and inability to switch to Western markets was the most important reason for the production collapse of truck manufacturers. Overdependence on CEE markets that remain depressed, lack of experience in marketing outside CEE, non-existent service and distribution networks in Western markets, uncompetitive products, lack of awareness of Czech brand names, and intense Western competition on the domestic market all contributed to the increased inability of Czech truck producers to sell their products in numbers that would assure their profitability and future survival. Karosa seems to be the only exception, thanks to its access to Western markets through Renault’s and later Iveco’s distribution and service network. Thus, the Czech commercial vehicle manufacturing has barely survived the first 17 years following the collapse of state socialism. The four manufacturers analyzed in this chapter together lowered their production by 90% (from 50,559 to 4,908 units) and shed more than 28,000 workers between 1989 and 2006. The Czech truck manufacturing industry was hit especially hard as it experienced a steep production decline of 96% and 28,000 job losses between 1989 and 2006. As a result, its future looks bleak. It is unlikely that commercial vehicle manufacturers in Czechia will ever re-attain levels of output typical of the period of state socialism. It rather appears likely that a more than a century-long tradition of Czech truck manufacturing will almost end in the first decade of the twenty-first century because of the failed transition of the truck manufacturing industry to capitalism.

5 Effects of Domestic Privatization in the Auto Components Industry

Privatization of formerly state-owned enterprises (SOEs) has been considered one of the most important issues of post-socialist economic transformations into market based economic systems in CEE. Privatization of all economic sectors (i.e. industry, agriculture, services) and the development of the private sector in the economy was the central element of all economic “transition” plans. According to the liberal view, the “transition to capitalism” would fail without successful privatization and development of the private sector because a market economy cannot function properly without private ownership (e.g. Claudon and Gutner 1992; The Economist 1991). In the early 1990s CEE governments prepared conditions for the development of private capital by establishing private property rights and legalizing private ownership. New laws were put in place to equalize tax treatment with state-owned firms, remove restrictions on private firms’ size and activities, free private procurement and distribution, and reduce bureaucratic requirements for establishing new firms (Gelb and Gray 1991). While these governmental policies supported the development of new small-scale private enterprises, they did not solve the problem of privatization of the SOEs.1 A major discussion emerged around the techniques, speed and time frame of privatization of SOEs.2 The selection of privatization strategies typically represented one of the most controversial issues and a major point of contention between the supporters of radical approaches and those who advocated a gradual, more evolutionary development of private enterprise ownership. Slow privatization strategies emphasized the need for the state to restructure SOEs before selling them. Critics of slow privatization 1

Hungary had about 2,300 SOEs, Poland 7,500, former Czechoslovakia 4,800, Bulgaria 5,000 and Romania 40,000 (The Economist 1991). 2 See Frydman and Rapaczynski (1991) for a systematic approach to the problem of privatization in CEE. According to their approach, a privatization plan had to satisfy four requirements in order to have a chance of success: speed, social acceptability, effective control over the management of privatized enterprises, and assured access to foreign capital and expertise. P. Pavlínek, A Successful Transformation? Contributions to Economics, doi: 10.1007/978-3-7908-2040-9_5, © Physica-Verlag Heidelberg 2008

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stressed, however, that while it would create real enterprise ownership, it would take several decades before it could be completed. In contrast, fast privatization strategies assumed that rapid privatization of SOEs would quickly create the private owners who would then not only oversee effective enterprise restructuring but also protect the political and economic changes set in place after the collapse of state socialism. In neoliberal and neoclassical economic approaches, private owners are considered to be the best judges of enterprise long-term development needs, much better than any state ministries or agencies (see for example Adam 1993:639-641; Myant 1996:141; Mejstřík et al. 1997a). This chapter considers whether neoliberal assumptions about fast and mass privatization strategies that drove practical privatization policies in Czechia in the early 1990s delivered expected results in the automotive components industry. The most important question the chapter investigates is whether domestic privatization has led to effective enterprise restructuring. A number of empirical studies have tried to investigate the effects of Czech privatization strategies on enterprise restructuring and corporate governance. Gray (1996), for example, concluded that well designed voucher privatization may best meet the objectives of feasibility, governance, fairness, and institution-building. Hoekman and Pohl (1995) believed that Czechia has done best in restructuring its industries and reorienting them towards the West among the CEE countries because the country had pursued mass privatization most actively and credibly. Based on the empirical study of a cross section of 706 firms for the period 1992-1995, Claessens et al. (1997) argued that mass privatization had improved firm management because it had created a concentrated ownership structure. They also contended that the banks, with their indirect equity stake in privatized firms through their investment funds, had had a positive influence on the firms’ corporate governance. Thus they believed that, despite the initial scepticism and critique of the role of large bank-sponsored IPFs in the privatized companies, this type of institutional ownership was beneficial to companies. Similarly, Frydman et al. (1997) argued that IPFs did as well as any outsider owners in terms of enterprise restructuring following privatization. In particular, they found no evidence that funds were less effective than “strategic” investors. These views are in contrast to those arguing that privatization did not lead to large scale enterprise restructuring (e.g. Simonson 2000). The most critical analyses of enterprise behavior after privatization are those drawing on evolutionary and institutional economics. In the Czech context they are mainly represented by the work of Mlčoch (1997, 2000a, 2000b). The primary information presented in this chapter is based upon indepth interviews conducted by the author with directors or top managers of

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20 Czech automotive component firms in 2000 and 2001 (Table 5.1).3 While only eleven of these firms were 100% domestically owned at the time of an interview, several others underwent a period of private Czech ownership before they formed a JV or were completely bought by a foreign partner in the second half of the 1990s. With the exception of two companies, the remaining foreign-owned component suppliers or JVs were originally state-owned companies that underwent privatization in the early 1990s.4 Their insights into domestic privatization are also important as they all considered advantages and disadvantages of domestic ownership during the preparation of their privatization projects. The chapter also draws on in-depth interviews conducted by the author at the Czech Ministry of Industry and Trade and Škoda Auto in 1996, interviews at Škoda Auto, Tatra, Daewoo-Avia and Karosa vehicle manufacturers in 1999 and interviews at 13 Czech-based component suppliers and Škoda Auto in 2005. This chapter focuses only on domestic privatization and does not consider changes that took place in component suppliers after they became fully or partially owned by foreign capital (see Chap. 6). The chapter starts with an overview of domestic privatization strategies in Czechia and their outcomes, followed by an analysis of domestic privatization in the Czech automobile components industry. Three broad domestic privatization strategies are investigated: management buy-outs, spontaneous privatization and voucher privatization. Next is a discussion of the role of IPFs in the companies privatized by voucher privatization. The chapter ends with a critique of Czech domestic privatization.

5.1 Domestic Privatization Strategies and Their Outcomes Czech privatization and its outcomes have been analyzed in a great detail (see for example Mejstřík et al. 1997a; Mertlík 1995; Myant 1993; Kotrba 1995; Brom and Orenstein 1994; Mejstřík 1999; Coffee 1996). Therefore, I will only provide a brief context that directly relates to the domestic privatization of the automotive components industry. In 1990 the Czechoslovak government decided to pursue fast privatization as opposed to slow privatization based on its overall neoliberal “transition” strategy (see Pavlínek 1997:36-49). However, the lack of domestic capital made it impossible to 3

All interviews were conducted by the author in Czech and the quotes cited in this chapter were translated by the author. 4 Out of these two, one was run by the director of former SOE, which underwent unsuccessful sale to a foreign company in the early 1990s.

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pursue fast large-scale privatization of about 6,000 relatively large SOEs using only conventional methods (apart from the so-called small-scale privatization). As mass privatization was the only option for the Czechoslovak government if it wanted to pursue fast privatization, it decided to introduce voucher privatization in addition to conventional privatization techniques, despite serious questions about the scheme and the fact that predicting its long-term effects on enterprises and the entire economy was difficult. In particular, it was not known whether voucher privatization would enhance enterprise productivity and whether new owners would be able to exercise effective control over the privatized enterprises. It was also clear that voucher privatization would neither raise necessary capital to finance industrial restructuring of privatized enterprises nor raise any capital for the government. There were also serious questions about the nature of the capital market created by voucher privatization and the transparency of the voucher scheme (Mejstřík 1997a:58-59). For each company participating in voucher privatization the number of shares offered for vouchers was negotiated between the Ministry of Privatization, the company’s founding ministry, the company’s management, and the Center for Voucher Privatization. The government and its ministries exerted very strong pressure on companies privatized in the first wave to offer a certain percentage of their shares for vouchers in their privatization projects. The general director of Temac a.s. Zvěřínek argued that privatization projects for the first privatization wave “had to” include shares offered for vouchers because the government wanted to launch the voucher scheme. The Ministry of Privatization, which selected and approved privatization projects “was always checking whether some shares were being offered for vouchers in privatization projects.” The only exception to this requirement was a situation when there was a foreign partner willing to buy the entire enterprise.5 It seems that a privatization project which did not offer any shares for vouchers had a little chance to be approved during the first wave of privatization.6 This pressure on companies to participate in voucher privatization was not as strong during the second privatization wave. Voucher privatization started in the former Czechoslovakia in 1991, privatizing 2,168 SOEs in two waves concluded in December 1992 and in November 1994 respectively. In Czechia, out of 7.4 million adult citizens, nearly 6 million participated in the first wave and over 6.1 million in the 5

Interview with the general director of Temac a.s. Zvěřínek, July 19, 2000. By the end of 1995 the Ministry of Privatization had evaluated 24,259 projects out of 27,902 submitted for 5,087 companies; 7,367 privatization projects had been approved (Mejstřík 1997a:60). 6

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second wave. Voucher holders then used their vouchers to bid for shares of privatized companies of their choice (see Kotrba 1995:171-176 for details).7 However, 71.3% of voucher holders in the first privatization wave and 63.5% in the second wave entrusted more than 430 IPFs established by private companies, state-owned banks and joint stock companies to invest the vouchers on their behalf. The 14 largest IPFs accumulated 77.6% of all vouchers collected by the IPFs in the first wave and 60.1% in the second wave (Mejstřík 1997a:61-68; Brom and Orenstein 1994:895; Laštovička et al. 1995:201-202; Mejstřík 1999:249).8 The IPFs and individual shareholders became the most important owners in 842 Czech companies privatized in the first wave which offered more than 50% of their shares for vouchers.9 It seemed that the biggest criticism of voucher privatization – the dispersed ownership structure – was resolved by the IPFs. However, as shown below, my research has demonstrated that the IPFs did not typically become “good” owners of privatized companies but rather represented weak institutional ownership, contributing to slow and sometimes non-existent enterprise restructuring. Such a situation was paradoxical because the goal of effective enterprise restructuring was initially presented as one of the most important reasons for speedy privatization of SOEs. Fortunately for many companies the ownership structure created by voucher privatization was to be only temporary, and followed by further ownership consolidation. In this sense, voucher privatization and the entire mass privatization need to be understood as a first step in a long-term evolutionary process of changing ownership structure and institution building. During the so-called large-scale privatization sales of enterprises by conventional methods were carried out simultaneously with voucher privatization: direct sales to company managements or other predetermined buyers, public auctions, competitive tenders, free transfers of property to municipalities, and free transfers in the form of property restitution – the return of enterprises nationalized after the communist takeover in 1948 to their original owners (see Mejstřík et al. 1997a and Kotrba 1995 for 7

Joint-stock companies were frequently privatized by a combination of different methods. In the first privatization wave 61% of enterprise shares were available for vouchers on average. The remaining shares were privatized by other means (see Mejstřík et al. 1997b:67). In the second wave, the percentage of shares available for vouchers was lower (Kotrba 1995:175). 8 See Brom and Orenstein (1994:904-906) for a detailed account of the development of IPFs, and the investment companies that managed them in Czechia in the early 1990s. 9 See Laštovička et al. (1995:199-209) for a detailed analysis of the ownership structure of companies privatized by voucher privatization.

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details).10 All together, over 4,300 large enterprises were privatized in the two waves of large scale privatization (Svejnar 1995:13). While the state ended its direct ownership in the privatized enterprises, it continued to own many banks and other major financial institutions throughout the 1990s. These financial institutions in turn established the largest IPFs in the early 1990s, which then amassed huge amounts of former state property in the form of enterprise shares during the voucher privatization. Six of the nine and 11 of the 14 largest IPFs were established and owned by state-owned banks and insurance companies, four of the five largest IPFs were established by the largest banks, in which the state, represented by the NPF, held the controlling interest (see Brom and Orenstein 1994:906-910 for details).11 The fact that banks became important owners of shares in privatized SOEs created a conflict of interest between bank’s function as a manager of a stock portfolio and its role in extending the credit to enterprises. The state was also the major creditor of 80% of all large and medium-sized Czech companies because a large number of nonperforming loans were transferred to the state-owned Konsolidační banka, controlled by the Ministry of Finance. Additionally, the NPF held a 20% stake in the “privatized” companies (Stark and Bruszt 1998:15; Mejstřík 1997b:158; Mertlík 1995). Mlčoch (2000b:58) thus argued that this formally private ownership was in reality rather a “quasi-private” ownership resulting in a new type of state paternalism.

10

Large-scale privatization involved 3,500 larger state-owned enterprises worth about 480 billion CZK, as opposed to “small” privatization, which privatized shops, restaurants and other service outlets. Small-scale privatization started in early 1991 and was finished by the end of 1993. It privatized more than 24,000 units worth 30.2 billion CZK through public auctions. In restitution, 100,000 units, the majority of them real estate, and 17,000-20,000 retail shops, together worth 70-120 billion CZK, have been returned to the pre-1948 owners in Czechia. Property worth about 380 billion CZK that typically included real estate, blocks of flats and companies providing public services was transferred to municipalities (LN 1994; Mládek 1997:48-51; Mejstřík 1997a:57; Kotrba 1995:162-163). 11 To complicate the situation, the majority of banks were partially privatized in the course of voucher privatization, creating a complex web of cross-ownership in the Czech and Slovak banking sectors. The banks got around the legal restrictions preventing them from holding shares in other banks by setting up their own investment subsidiaries that were allowed to invest freely in other banks (see Mejstřík 1997b:161-163 for details).

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Table 5.1. Vehicle component suppliers interviewed in Czechia in 2000 and 2001, privatization method used and the ownership structure in 2000. Component supplier Almet Hradec Králové Avon Automotive Rudník Barum Continental Brisk Tábor

Draka Kablo Federal Mogul Fezko Strakonice

Privatization method

Ownership structure in 2000

Vouchers 97%, Restitution fund 3% (First wave) Vouchers (First wave), Avon-Rubena JV in 1993

Prosperita fund 93% (corporate entity), physical entities 7% Wholly-owned Avon subsidiarya

JV with Continental in 1991 (51% shares) Vouchers 41%, Restitution fund 3%, Endowment fund 1%, NPF 55% - sold to Brital in 1995. Greenfield investment

Wholly-owned Continental subsidiarya Brital (three top managers of Brisk) 78% of shares

Direct sale of Osinek to Ferodo, JV between Ferodo a.s. and T&N Vouchers 97%, Restitution fund 3% (First wave)

Wholly-owned Draka subsidiarya Wholly-owned Federal Mogul subsidiarya (100%)

Stark (96% of shares) representing 15 foreign institutional and private investors Gumotex Direct sale to managers and 77% shares owned by managers and Břeclav bank representatives in 1995 bank representatives (55% of shares) (CHG Company) Hayes Newly built subsidiary of Wholly-owned Hayes Lemmerz Lemmerz Hayes Lemmerz subsidiarya HLF, Hajnice Direct sale to four managers Private owners 100% plant (100%) CIEB Competitive tender - direct Private owner 100% Kahovec sale (100%) Karsit Direct sale to managers Private owner 100% Jaroměř (100%) Lucas JV with TRW (19%) in 1993 Wholly-owned TRW subsidiarya Autobrzdy Magneton Vouchers 64%, Restitution GLOBin 50.08% (Czech Kroměříž fund 3%, NPF 34% privatization fund IS Capital) PAL Praha Direct sale to the director and Magna 70%,a private owner 30%. top managers Hanácké Direct sale to the director and The director and top managers železárny a top managers (77%), (96%) pérovny Restitution fund 4%, NPF 19% Rubena Vouchers 70%, the NPF 30% Česká gumárenská společnost 89% Hradec Králové (Continued)

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Table 5.1. (Continued) Component Privatization method supplier Tanex Plasty Vouchers 97% (first wave), Jaroměř Restitution fund (3%) Temac Foreign capital 71%, NPF Zvěřínek 27%, villages 2%. Gumárny Vouchers 45% (second Zubří wave), Restitution fund (3%), NPF 52%

Ownership structure in 2000 Two private Czech firms – DKU and ECMA Prague – 100% Wholly-owned Royal Econosto Group N.V subsidiarya 55% Karnitol Moravský Beroun), small shareholders 40%, investment funds 2%, local communities 5%.

a

Foreign ownership. Source: Based upon 2000 and 2001 interviews conducted by the author.

Throughout the 1990s the state kept its share in the most important Czech banks, which accumulated large non-performing enterprise debts.12 It is not surprising that the banks were reluctant to force enterprise restructuring through bankruptcies because the government was following active anti-bankruptcy policies, trying to preserve social peace by preventing low unemployment rate from soaring. Thus the state continued to be an indirect shareholder in hundreds of Czech companies without adequately enforcing its property rights (see also Mlčoch 1997:41). Some Czech politicians described this situation as “banking socialism” (see also Mlčoch 2000a: 62-64). Voucher privatization and the Czech privatization as a whole thus in most cases did not result in a clearly defined private enterprise ownership but in what Stark (1996) has called the “recombinant property.”13 According to this view, recombinant ownership of enterprises reproduces the old negative forms of enterprise behavior. Enterprises retain information monopoly developed under central planning, new owners receive only distorted and filtered information, and the enterprises are controlled by their managements joined by new representatives from IPFs creating “recombinant coalitions” that follow their own interests rather than those of enterprises (Mlčoch 2000b:58-59).

12

The four largest Czech banks (IPB, ČSOB, Česká spořitelna and Komerční banka) were privatized between 1998 and 2001. The cost of delayed bank privatization was put at 480 billion CZK (about 12.6 billion USD at the 2001 exchange rate) (see Páral 2001 for details). 13 Stark (1996) originally used the term to describe the triple boundary blurring caused by newly emerging property forms in Hungary: the boundaries of public and private, the organizational boundaries of enterprises, and the boundedness of justificatory principles.

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5.2 Domestic Privatization of the Czech Auto Components Industry The privatization experience of both passenger car assemblers and truck makers suggests that selected privatization strategies to a large extent predetermined a future economic success or failure of a car maker (see Chap. 4; Pavlínek 1998; Pavlínek and Smith 1998). In the case of passenger cars, I deal with the case of Škoda–VW JV formed in 1991 in Chap. 3. It has been considered a success despite the fact that the agreement was prepared and signed at the time when the privatization process did not even start in Czechia and the Czech negotiators had no experience in preparing and negotiating JVs with foreign investors.14 As we could see in Chap. 4, among commercial vehicle producers, only the privatization of the bus maker Karosa, purchased by Renault, has been successful. Privatization of Czech truck manufactures ended in failures (though their products and markets, are of course quite different from those of the passenger car assemblers). In the case of component suppliers, three broad privatization paths have generally been followed: the companies either remained in the hands of the Czech capital, were sold to foreign capital, or JVs with foreign (Western) companies were formed. Within these three broad groups there have been a number of different privatization strategies. The 2000 and 2001 interviews were organized so as to include the companies that broadly reflected these three privatization strategies, i.e. 100% foreign-owned, JVs and 100% Czech-owned. The effects of privatization on individual companies have been very complex and sometimes the same privatization strategy led to very different effects in different cases, as shown below. However, it is possible to identify several likely scenarios of privatization effects, depending on the privatization method used and the ownership structure created following the privatization. In the rest of the chapter, I will focus on privatization that relied solely on domestic capital and its effects on privatized companies. Twelve of the component producers analyzed here were originally privatized without the participation of foreign capital.15 However, some of these firms passed into partial or complete foreign ownership and control in the late 1990s (PAL Praha, Fezko Strakonice, Karsit Jaroměř) (Table 5.1). I have divided privatization strategies that excluded 14

Interview at the Ministry of Industry and Trade of the Czech Republic, July 1, 1996. 15 Gumárny Zubří, Rubena Hradec Králové, Magneton Kroměříž, Hanácké železárny a pérovny, Tanex Plasty Jaroměř, Karsit Jaroměř, Almet Hradec Králové, PAL Praha, Brisk Tábor, Fezko Strakonice, HLF Hajnice, CIEB Kahovec.

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foreign capital into three large groups: management buy-outs, spontaneous privatization and voucher privatization. 5.2.1 Management Buy-outs Managements of SOEs were in the best position to influence privatization outcomes: they were obliged by law to prepare privatization projects for their enterprises, they possessed the best information about their enterprises compared to any outsiders who prepared a competitive privatization project under extreme time pressure, and they had good contacts with governmental ministries to obtain the best information about the privatization procedures and to influence ministries’ decisions. It is not therefore surprising that enterprise managements, who submitted only 21.3% of all privatization projects, were responsible for 81.8% of all approved projects. In contrast, outsiders submitted 48.2% of all privatization proposals but only 7.4% of all approved projects came from them (Zemplinerová and Laštovička 1997:208-209). Managements could follow several possible strategies to keep control of their enterprise after privatization: they could become future owners of privatized companies, they could use voucher privatization because it was very likely that the dispersed ownership and resulting inefficient corporate governance would allow them to keep their control, or they could find a foreign buyer that would also most probably allow them to retain their positions. When they decided to buy enterprises they had the opportunity to manipulate the enterprise data and information to lower the purchase price. Most managements sought to purchase enterprises on 100% credit. Thus, managements were “a clear winner of the process, with the competing bidders having very little chance of success” (Kotrba, 1995:194).16 The relative freedom to device a privatization strategy allowed innovative and strong-minded managements to avoid voucher privatization all 16

Kotrba (1995:176-177) divided managerial buy-outs into seven basic categories: Management can (1) buy the whole company on its own account directly; (2) get some share of the company’s property; (3) “pick the raisins”, i.e. privatize the most interesting parts of the company on its account and leave other parts; (4) “get rid of junk”: as in “pick the raisins”, management privatizes the largest part of the original company; (5) act as an agent of a third party and then follow strategies 1–3; (6) submit a privatization project without getting a share of the property (e.g. 100% voucher privatization) and keep collecting benefits from managerial positions; and (7) make privatization as lengthy as possible and use the lack of ownership control to support its private activities at the expense of the nonprivatized enterprise.

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together despite the governmental pressure on SOEs to take part in the voucher scheme.17 There were two principal dangers to the long-term health of enterprises associated with managerial privatization of SOEs. First, managements typically lacked capital to pay for shares in companies they wanted to purchase from the state. Consequently, they had to borrow money from banks and repay those loans.18 The loans represented a major financial burden for the cash-starved privatized enterprises that needed a major influx of capital for enterprise restructuring and upgrading production. They were repaid (if they were repaid at all) either by stripping the company of its assets, if a company was not profitable, or by using the existing profits. This of course prevented many companies from financing restructuring or buying new technologies to upgrade production, which further undermined their competitiveness. In this sense, a free transfer of SOEs to managements with clearly defined business plans would have been much better for the longterm health of enterprises. Second, many managements that remained in charge of privatized enterprises did not change their economic behavior and style substantially after 1989. While keeping managerial continuity after 1989 may have been advantageous in a short run because important business links were not suddenly severed, its long-term consequences tended to be negative as managerial stereotypes developed in the centrally planned economy hampered effective industrial restructuring. The following two short case studies show the contrasting strategies and outcomes of management buy-outs in the Czech car components industry. Privatization of Hanácké železárny a pérovny

The case of Hanácké železárny a pérovny (HZP) typifies the problems associated with debt-laden managerial privatization. The original stateowned iron and steel works was divided into three different companies in 1993 to be privatized separately. HZP was one of these newly formed joint-stock companies, specializing in the production of hot-formed steel springs. The NPF failed to sell the company to a German investor interested in buying it because they could not agree on a price. Then the HZP 17

Originally the government wanted to privatize all SOEs using the voucher method. Václav Klaus, then the Czechoslovak finance minister, launched the “97 + 3” campaign in September and October 1991 according to which 97% of each privatized company should be exchanged for vouchers and 3% should go into the Restitution Fund (Tomáš Ježek, in Husák 1997:153). 18 Many such loans have never been repaid or the state has never been paid for enterprises sold. Czech economists and commentators labeled this type of privatization debt-laden.

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managers prepared a privatization project that would transfer 77% of the company to its director and his brother for 211.56 million CZK. The managers established a new private company, HZP – služby, which bid for the original company despite the lack of any capital to do so. The project was approved by the NPF and the company was sold in 1994. To purchase the company the managers took a bank loan of 211 million CZK. The new owners gradually purchased the remaining 19% shares from the NPF because no one else was interested in buying them (4% of the shares remained in the Restitution Fund). It took HZP six years to pay off the loan. During these six years the company failed to upgrade its production to keep up with Škoda Auto’s quality demands because of its lack of capital and the debt burden.19 In particular, the company could not invest 150 million CZK to purchase a new hot-formed spring production line and it failed to achieve the desired quality of springs using its existing technology. As a result, the company was not selected to supply springs for new Škoda models (Octavia and Fabia) in the second half of the 1990s and with the end of production of the Felicia model in 2001 it ceased to supply Škoda Auto entirely. This meant the end of its role as a supplier for primary passenger car production (about 15% of the production in 2000 and 30% in 1999). In 2000, the production of springs was down 72.5% compared to 1989 while the employment was down by less than 10%, suggesting a dramatic fall in labor productivity. The continuous production process was replaced by irregular production of smaller spring sets as the company moved away from production for passenger and truck car makers towards aftermarket production and the production of springs for train carriages.20 Karsit Jaroměř: Successful Managerial Privatization

Karsit Jaroměř, a producer of metal frames for passenger car seats and exhaust systems, is an example of a successful managerial buy-out. The original Karosa Jaroměř factory, located in the east Bohemian city of Jaroměř, used to be a branch plant of the bus maker Karosa Vysoké Mýto before 1989. Karist was founded by the director of Karosa Jaroměř in 1992 to privatize the company. Karosa Jaroměř successfully avoided voucher privatization and was sold to Karsit in 1994. Karsit’s proposal was selected by the NPF from just two privatization projects. The purchase was financed 19

The inability to invest because of a high debt burden and a constant threat of bankruptcy has been quite a typical situation in the Czech manufacturing after privatization (see Zemplinerová and Laštovička 1997:209). 20 Interview with the vicechairman of managing board, Hanácké železárny a pérovny, a.s., Prostějov, July 27, 2000.

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through a loan of 200 million CZK provided by Komerční banka. Today, Karsit is 100% owned by its general director. In 1995 and 1997 Karsit acquired two new factories: the first was Akord Dvůr Králové in 1995, a producer of metal extensions for pick ups, cabins for commercial vehicles and components for exhaust systems. The second, Autometal Příbram in 1997, represented a major acquisition because it was a traditional supplier of exhaust systems and catalytic converters to Škoda Auto, employing more than 500 workers at the time of acquisition but less than 400 in 2000. Karsit also established a leasing company (K&A Leasing) and a haulage company (Karsped) and has a subsidiary in Bardejov, Slovakia (Karsit Slovakia). Karsit is thus one of only two out of 20 interviewed car component suppliers that increased employment in the1990s, and its turnover increased ten times from 142 million CZK to about 2 billion CZK between 1994 and 2000. Karsit successfully supplies large transnational automotive companies such as VW, Magna, Johnson Controls and Faurecia.21 In 2001 Karsit received government investment incentives to build a new 435 million CZK (about 11.5 million USD) die-casting factory for the production of die-casting automobile components. The factory was launched in 2004 and 310 new jobs were created (Rychtera 2001). How did Karsit avoid similar problems to those experienced by HZP? Unlike HZP, Karsit underwent deep enterprise restructuring while building on its experience from the period before its privatization. Between 1993 and 1996, Karsit supplied metal car seat frames to Audi. With the help of Audi, Karsit built systems of quality control and efficient production organization to supply high-quality components and achieve the required timing of deliveries. Although direct deliveries to Audi ended in 1996, Karsit systematically built on this experience to secure new orders from other car producers. To be successful, Karsit had to deal with three major issues after its privatization: upgrading of production technology, further development of quality control systems, and becoming sufficiently profitable to service its privatization loans and buy new technology. Drastic production cost-cutting measures increased production efficiency after privatization. To keep up with the competitive pressures and rapid technological development in the automotive industry, Karsit decided to form two JVs with foreign companies. In 1999 Karsit established a JV, Arvin Exhaust s.r.o., with, the U.S.-based Arvin Inc., the world’s largest exhaust systems maker. Karsit’s stake is 36% while Arvin holds 64%. Arvin Inc. was selected by VW to supply exhaust systems to the entire VW Group but the 21

Interview with the general director and owner of Karsit Jaroměř, July 31, 2000.

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Czech government requires that a certain share of components supplied to Škoda must originate in Czechia. To satisfy this requirement, Karsit Příbram supplies some exhaust system components and Arvin Inc. supplies catalytic converters from Spain and Portugal. Exhaust systems are then jointly assembled in Karsit’s assembly facility located in Mladá Boleslav and delivered to Škoda’s assembly line. Another JV with an unnamed Italian company was negotiated in 2000 for the area of heavy pressing up to 1,500 tons. Karsit has been pursuing these JVs to secure access to new technologies, markets and capital.22 Overall, Karsit represents a company that successfully developed after its privatization by expanding production while increasing the quality of its products to achieve international standards and creating new jobs. Failed Management Buy-outs

Direct sales of companies to managements have often led to problems, as we saw in the case of HZP. Some management buy-outs failed completely and the privatized company had to be returned to the state after the new owners were unable to pay the purchase price. In the meantime, such companies typically underwent little if any restructuring, as their managers concentrated on short-term survival and often on asset striping. The privatization of Gumárny Zubří, a producer of car components from molded synthetic rubber, such as accumulator casings, car mats and mud flaps, illustrates such a situation. The efforts of several foreign companies to buy Gumárny Zubří failed because the existing managers wanted to buy the company for themselves and they were supported by the NPF and other central government offices, which preferred domestic to foreign capital. It was therefore decided to follow the Czech way to privatize the company and Gumárny Zubří was privatized during the second wave in 1994. The existing top managers set up a new company to buy 53% of Gumárny Zubří’s shares and their privatization project was approved by the Ministry of Industry. The remaining 42% of the shares were privatized during voucher privatization, 3% went to the Restitution Fund and 2% were given to local communities. However, for two years the managers were unable to secure a loan to pay the 10% down payment to the NPF for the purchase. As a result, the NPF had to cancel the sale and sold the shares to Stregoinvest, a brokerage firm. Stregoinvest did not understand how to run the company so they hired another company, also partially a brokerage firm, to run Gumárny Zubří. After two additional years of financial loses the company 22

Interview with the general director and owner of Karsit Jaroměř, July 31, 2000.

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was sold to its current owner, Karnitol Moravský Beroun. Four years of economic mismanagement had serious financial consequences for Gumárny Zubří.23 5.2.2 Management Buy-outs Followed by Joint Venture or Sale to Foreign Partners One way to avoid a long-term debt burden with its negative effects for restructuring and modernization of production was to sell a part of or the entire privatized company to a foreign buyer following its original privatization to domestic private owners. Such a transaction was advantageous to new private owners as they paid less than the market price to purchase the enterprise but sold it for its market price. A foreign purchase of a stake in the privatized company would thus pay off the privatization loan, would typically leave the Czech owners in top managerial positions, and would allow access to new Western markets and know-how. The cases of PAL Praha and Osinek Kostelec nad Orlicí are illustrative in this respect. Privatization of PAL Praha

When asked about the privatization of his company, the chief executive officer (CEO) of PAL Praha argued: I prepared for privatization of the enterprise very carefully. The basic idea was not to lose my ability to influence the way the enterprise operated and to block any external efforts to do anything with the enterprise. This strategy included the absolute rejection of voucher privatization. I considered this approach to be crucial for the future prosperity of this enterprise.24

PAL a.s., as a joint stock company with its several branch plants, participated in the second wave of privatization but no company shares were exchanged for vouchers. Instead, the company was split up in 1995 into five subsidiaries, its original branch plants, which were sold directly to private investors, mostly the existing managements.25 All revenues from the sale of subsidiaries went to the parent company, PAL a.s.; none went to the state. The director of PAL Praha argued that this way he protected

23

Interview with the Director of Gumárny Zubří, July 28, 2000. Interview with the CEO of PAL Praha, February 14, 2001. 25 These subsidiaries included: PAL Praha, Galvanovna, Autopříslušenství Hajnice, Volant Horní Počernice, and Autopříslušenství Světlá. 24

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the privatization revenues from being “looted” as “happened to many assets of the National Property Fund”. The director of PAL a.s. founded a joint stock company in which he became a majority shareholder and followed the “pick the raisins” privatization strategy in which the most interesting parts of the company are privatized to management’s private company and the remainder of the original company is left for other privatization strategies (Kotrba 1995:177). The director’s private company bought one PAL a.s. subsidiary named PAL Praha for 240 million CZK in 1997. All funds for the purchase had to be borrowed. PAL Praha included the main enterprise, which was the most lucrative PAL a.s. factory, producing small electric engines and windshield wipers, located in Prague, one branch plant outside Prague and other properties outside Prague. PAL Praha also became the owner of the original brand name. The deal was approved by the government. In effect, the director of PAL a.s. sold PAL Praha to his private company. He then became a 100% owner of PAL Praha and sold 70% of its shares to the Canadian Magna in 1997. This allowed the director not only to pay off all loans and company debts, but also to keep a 30% stake in the company and the CEO post (Šperkerová 1999).26 While the director of PAL a.s. transferred his managerial control into the ownership, his long-term perspective protected the company from asset stripping and “tunneling”, common practices during the privatization process. The sale of a majority stake to a foreign investor solved the company’s debt burden and allowed it access to capital and Western markets, two basic preconditions for successful future development. Privatization of Osinek Kostelec nad Orlicí

The top managers of Osinek Kostelec nad Orlicí, a producer of brake linings, followed a similar strategy. With the help of Ferodo Ltd, the leading UK manufacturer of brake linings and other friction materials, the director of the SOE Osinek established a private company called Ferodo, basically a twin of Osinek. He and other top managers left Osinek and moved to Ferodo in the early 1990s. Ferodo then bought “what it needed” from Osinek, i.e. the profitable parts of Osinek, paid for by 45% of Ferodo’s shares, while non-profitable and non-productive parts, such as its health center and recreational facilities, were left at Osinek. At the same time, Ferodo entered a JV agreement with Turner & Newall Ltd (T&N), the parent company of Ferodo Ltd, to gain access to production know-how for nonasbestos lining materials. In 1996 and 1997 Ferodo bought 45% of its shares back from Osinek. T&N became Ferodo’s 100% owner in 1997. In 26

Interview with the CEO of PAL Praha, February 14, 2001.

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1998 T&N was bought by the American Federal Mogul Corp. for $2.4 billion, which thus now owns the original Osinek.27 5.2.3 Spontaneous Privatization There have been many ways through which enterprises in state or corporate ownership were illegally transferred to private hands. Some managements privatized their state-owned companies without participating in voucher privatization and successfully gained ownership themselves without any payment to the Czech government for the privatized property, thus avoiding a debt burden. Such spontaneous transfers of SOEs to private ownership typically involved quite sophisticated schemes that were not transparent and would be considered illegal in a standard market economy. They were characteristic for the period of “pre-privatization agony” before the mass privatization began and before the rules of the game, however loose, were set by the government. Spontaneous privatization of SOEs was made possible by the sudden withdrawal of the state from SOEs that made top managers de facto owners. The complete absence of corporate governance by the NPF allowed top managers of SOEs to “trade” freely with private companies they owned either directly or indirectly in such a way that was advantageous for the private companies and disadvantageous for the SOEs. In the end, impoverished SOEs would be sold cheaply to their managers (Mlčoch 2000b:98-99). Such practices have been described as “tunneling” in the Czech privatization context. Mlčoch (2000b:36) recognized several “ideal” types of tunneling and asset stripping typical for the “pre-privatization agony”, including what he labeled “twins”, “leech” and “controlled bankruptcy”. “Twins”, for example, describes the situation in which top managers of a SOE set up a private company or limited liability company in the same branch and began to trade with its state-owned twin in a way that is advantageous to the private company and disadvantageous to the SOE, which was gradually being stripped off its assets.28 The Economist (1995:27) described one typical example of “tunneling” in CEE as follows: 27

Interview with the general director of Federal-Mogul Friction Products a.s., Kostelec nad Orlicí, July 17, 2000. 28 “Tunneling” also refers to a widespread misuse of money invested by individuals or companies into various corporate funds or small private banks. Companies that should have managed this money transferred it to different accounts worldwide leaving an empty shell behind. Examples of “tunneled” IPFs in Czechia include VIF Trend, Harvard funds, Mercia, C.S. Fondy, ČNIS (Česká národní investiční společnost), and Evbak (see Klein 2001, Klein and Pospíšil

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You are the boss of a state firm which makes, say, tyres. You set up a new company in your wife’s name to which you sell 50,000 tyres at cost price or below. You lend it the money to make the purchase. The new company then sells the tyres at market prices, pays off the loan from the state concern and makes a large profit. Repeat this several times and you are rich. Meanwhile the state firm has gone downhill, so you make a rock-bottom offer for it. The government accepts, glad to get it off its hands.

It is very difficult to evaluate to what extent such activities affected the Czech automobile industry. When asked about the extent of these practices in the sector, an officer from the Czech Automotive Industry Association argued in 2000 that “tunneling did not take place in the Czech automobile industry.”29 However, there have been cases when managements were milking their companies in the sector. For example, as we could see in Chap. 4, in 1990 Tatra stopped using the Motokov trading company to market and sell its trucks and instead decided to sell its vehicles through more than 100 very small private trading companies – which happened to be established by Tatra’s managers, their relatives and the former employees of Motokov. They made large profits in the process while Tatra itself was unprofitable. Similarly, as we could see, the managers of HZP set up a private company (HZP – služby) that was providing “trade services” for the SOE which they later bought – a situation similar to that described by the Economist above that allowed the managers of the SOE to milk the company before its privatization. These two examples suggest that various forms of “tunneling” were more widespread in the Czech automotive sector than is generally acknowledged. While such more or less free transfers of state property to managements were illegal, they could avoid two biggest traps of mass privatization in the rare cases when managements were interested in long-term enterprise development: weak corporate governance associated with an ownership structure dominated by the IPFs and small individual shareholders following voucher privatization, and a debt burden associated with management buy-outs. Both situations were detrimental for the long-term health of enterprises.

1999). Examples of “tunneled” small private banks in the 1990s include Kreditní a průmyslová banka, Bohemia, AB Banka, Česká banka and others (Páral 2001). 29 Interview at the Czech Automotive Industry Association, July 10, 2000.

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5.2.4 Effects of Voucher Privatization: The Role of IPFs in Privatized Companies In cases when managements were reluctant or unable to privatize their companies and there was no foreign buyer, the companies ended up being privatized by voucher privatization. The CEO of Autotextilie Fezko Strakonice described such a situation in his company: The management wanted to privatize this company quickly. However, at that time there was nobody among the top managers to take the responsibility and privatize the company by himself [to become the owner]. Voucher privatization was then probably the best solution.30

However, voucher privatization resulted in fragmented ownership of companies, typically among several IPFs and thousands of small shareholders. One of the consequences of such an ownership structure was that the existing managements often remained in charge and also that the new owners exerted only a weak or no pressure at all on the privatized companies to drastically restructure their production. This, of course, was advantageous for the existing managements, who could run companies as they did before. For example, the director of Almet argued: “Those people from privatization funds did not understand the production process. They did not meddle in management which suited me ideally.”31 It is not then surprising that the company did not experience any organizational or any other changes after its privatization, with the exception of labor shedding. A similar situation existed in Fezko Strakonice, privatized by voucher privatization: Czech [privatization] funds owned us between 1992 and 1998 and they were glad when our economic result was zero. They had no ambitions to make this enterprise profitable. Of course, they would do something if we were loss making but we were around zero and that was enough for them. They had no vision and they had no idea. They were satisfied with the management’s performance. They generated absolutely no pressure to restructure the company . . . No one cared about future investment needs and about research and development. No one was interested . . . There were no significant changes in the company management because everything somehow

30

Interview with the CEO of Autotextilie, FEZKO a.s., Strakonice, August 2, 2000. 31 Interview with the director and vice chairman of executive board of Almet a.s. Hradec Králové, August 9, 2000.

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worked, so it was surviving. The owners were satisfied and managers were basically satisfied so they did not look for any improvements.32

The general director of Lucas Autobrzdy evaulated the operation of IPFs in the parent company Ateso privatized through voucher privatization (97% of the shares, 3% for the Restitution Fund): It is a fact that in 1991, 1992 and 1993 the representatives of IPFs [in Ateso] had no idea about what industrial enterprises were and how they should be managed. But I think that a much bigger problem was that they [IPFs] had no idea what they should focus on and how to run anything. Most of the IPFs literally focused on a short-term capital acquisition and they had no interest in strategies that would enhance the value of the firm, its image, its name and its market value.33

According to the director of Rubena Hradec Králové, when he took over two originally separate companies in 1997 and 1998 the company had a large debt and was unable to pay for deliveries of production materials. Bankruptcy was only a few months away. He blamed the management and owners for this situation. The previous management had no program and no vision of how to develop the company. They invested irrationally. Production costs were high and the company employed too many workers. No enterprise restructuring took place after 1989. As for the owners, they generated no pressure on the two original companies to restructure because they did not understand how they operated. He described the way the IPFs had functioned in the former Rubena Náchod and Gumokov Hradec Králové as follows: The representatives of [privatization] funds were the members of the company’s board of directors but they did not participate in a normal every day life of the company. They attended the board meeting once a month where the existing management presented economic results. The managers talked about many issues and because [privatization] funds’ representatives did not understand what the managers were talking about and did not understand the production process either, they were unable to tell whether the managers were telling them the truth or not.34

32

Interview with the CEO of Autotextilie, FEZKO a.s., Strakonice, August 2, 2000. 33 Interview with the general director of Lucas Autobrzdy, s.r.o., Jablonec nad Nisou, February 8, 2001. 34 Interview with the general director and chairman of the board of directors of Rubena a.s., Hradec Králové, August 8, 2000.

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Thus the IPFs generally did not function as normal owners but rather as “absentee” owners and financial institutions that did not understand the production processes and did not know how to run manufacturing enterprises because they typically had no manufacturing specialists of their own or any links to firms that could run their companies for them. My findings thus contradict Mejstřík’s (1997b:167) conclusion that “the Czech funds have often preferred to play the role of active, strategic investor instead of passive, portfolio investor because they saw many more profit opportunities in this role”. It is not surprising that this period of scattered and “absentee” ownership often had disastrous financial consequences for the privatized companies and they accumulated large financial losses. By the end of the 1990s many companies privatized by voucher privatization in which interviews were conducted, such as Magneton Kroměříž, Rubena Náchod, and Gumokov Hradec Králové, were on the brink of bankruptcy. At this point, the IPFs sold some of these failing companies either to Czech or foreign investors. In the case of Fezko Strakonice, the former minister of industry Jan Vrba persuaded the Dutch Stark to invest in Fezko. Stark bought 71% of Fezko’s shares from the IPFs SIS and IKS, run by Komerční banka for 232 million CZK in 1998. Stark represents a number of Western institutional investors such as the US Bankers Trust and Austrian Erste Bank. The change to a clearly defined owner led to a radical restructuring of Fezko and its gradual economic turnaround.35 Similarly, Česká gumárenská společnost (formerly Barum holding) bought Rubena Náchod in 1996 and Gumokov Hradec Králové in 1998. Both companies were on the brink of bankruptcy and were merged to form Rubena Hradec Králové in 1999. The new owner appointed a new general director who completely changed the management and started radical restructuring leading to a gradual economic turnaround. A similar situation existed in Magneton Kroměříž and Gumárny Zubří, which were also turned around only after the IPFs sold their shares to new owners who achieved majority ownership and therefore were able to push through restructuring strategies. These changes suggest that the post-voucher privatization period of the IPFs dominance in privatized enterprises was only transitory. Nevertheless, it has been extremely costly for industrial enterprises as it slowed or stalled the restructuring necessary for their long-term economic success.

35

Interview with the CEO of Autotextilie, FEZKO a.s., Strakonice, August 2, 2000.

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5.3 Negative Effects of Czech Privatization on Enterprises Voucher privatization was designed to transfer SOEs into private hands quickly. In this sense, it has been very successful. However, as we could see, voucher privatization created a scattered ownership structure typically composed of several IPFs and thousands of small individual share holders. The state also often kept a certain share in privatized companies through its NPF planning to sell these shares to strategic investors. According to the rules of voucher privatization, a single investment privatization fund could not buy more than 20% of the shares of a particular company offered for sale.36 After voucher privatization was completed, the shares of a single enterprise were typically owned by at least four different IPFs and thousands of small individual share holders. Therefore, in order to have some influence in the privatized companies, the IPFs and also the state, if it retained a shareholding in a company, had to work together. Another big obstacle to effective corporate governance was IPFs’ complete lack of experience in running and managing manufacturing enterprises, which made it impossible for them to exercise effective corporate control. The CEOs interviewed argued unanimously that the IPFs had no idea about the production process and therefore could not act as efficient owners. This finding contradicts conclusions of Brom and Orestein (1994), Claessens et al. (1997) and Frydman et al. (1997). For example, Brom and Orestein (1994:917) argued that the investment companies that established IPFs “have taken a long-term and active role in enterprise management and are acting like ‘real’ owners.” The situation described has necessarily slowed the enterprise restructuring in Czechia as old managements who typically remained in charge of privatized companies were not forced to implement any of the radical restructuring that was necessary for enterprises to compete successfully in a completely new economic environment.37 However, in enterprises where ownership consolidation did eventually occur, the IPFs were replaced by various private industrial groups familiar with a particular industry and its 36

This ad hoc administrative measure was advantageous for enterprise managements as it gave them more room for maneuver among different IPFs and gave the enterprise more opportunity to represent its interests through the IPFs to the banks and various state institutions (Stark and Bruszt 1998:161). 37 Only about 10% of managers were replaced by the IPFs in companies where they achieved a majority ownership by 1993. In cases where management changes did take place, the old managers where typically replaced by younger mid-level managers from the same firm who were also managers under state socialism (Brom and Orenstein 1994:916).

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operation. These new owners typically appointed new CEOs to implement restructuring. In several of the companies interviewed, such as Rubena Hradec Králové, Gumárny Zubří and Magneton Kroměříž, these newly appointed Czech CEOs conducted radical restructuring and turned companies that were facing bankruptcy into profitable entities. These cases suggest that a foreign partner or foreign capital are not in fact necessary for successful enterprise restructuring, as it is often argued. Thus, while privatization has been seen as a crucial step in economic transformation and the development of a market economy, the way it was actually implemented has often had serious long-term negative consequences for enterprises. From this perspective, it is possible to identify and summarize five negative features of Czech domestic privatization:38 1. The time and effort devoted by managements of privatized companies to the preparation of privatization projects that often changed several times prevented them from concentrating on other more pressing issues at a time of economic uncertainty and a rapidly changing economic and legal environment and under conditions of rapid economic decline. Managers preoccupied with privatization projects could not concentrate on dealing with shocks stemming from price and trade liberalization. As a result, privatization was often prepared and negotiated at the expense of restructuring, plunging companies in “pre-privatization agony.” This was the “neither plan nor market” post-1989 period after the state’s sudden withdrawal from its SOEs and effective handover of control to enterprise managements (Mlčoch 2000a:60). This assessment of the early 1990s contradicts Urban’s (1997:192-193) general conclusion that “the restructuring process was already quite intensive at the company level in 1991 through 1993.”39 38

These are elaborated and extended from Myant’s three negative features of Czech privatization (1999a:152-154). 39 Urban (1997:192-193) quotes two large studies involving the 300 largest firms and 257 state and privatized companies that looked at changes in management, internal organization, quality control, workers’ qualification, products, break-up and merges of enterprises. While these are important changes, they did not necessarily lead to significant restructuring on the shop floor. The slow pace of such restructuring in the early 1990s was acknowledged by the government (Hospodářské noviny March 17, 1995, cited in Myant 1996:128) and other commentators (see Myant 1996:146-147 and Pavlínek 1997 for details). However, any generalizations are difficult to make because experiences differ a great deal among individual enterprises, according to the type of ownership, privatization method and competitive pressures. Enterprises that were privatized early and achieved clearly defined ownership were more likely to launch radical restructuring sooner than enterprises privatized by voucher privatization.

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2. Privatization led to organizational fragmentation of the Czech economy as managements were splitting companies up in order to privatize the most lucrative parts for themselves (the “picking raisins” and “getting rid of junk” privatization strategies). As I have shown with concrete examples, the former industrial associations (VHJs) were broken up into small individual enterprises that were then privatized separately. By the end of 1995, privatization of 3,552 SOEs created 21,605 new private companies (Mejstřík 1997a:60). While this has been often viewed as a positive development because it destroyed the territorial production monopolies established under state socialism (see Husák 1997:155&178; Urban 1997:186-187; OECD 1994:59-60, for example) it often resulted in severing important production, research and trade links. Additionally, detailed empirical research and econometric analyses showed that for most economic indicators the effects of company break-up on the performance of both main (parent) enterprise and subsidiaries were negative. Managements thus split companies up for personal pecuniary and non-pecuniary benefits and to put themselves in an advantageous position before privatization, not for the benefit of the companies (Lízal et al. 1995:231-232). Newly independent companies often deliberately broke their links with specialized foreign trade enterprises that had a monopoly on foreign trade under state socialism because they did not want to pay them commission for selling their products abroad. As a result, they had to build their foreign trade links from scratch, which proved to be very difficult as they lacked experience to conduct business abroad. This had disastrous consequences for some companies such as the truck manufacturers Tatra and LIAZ (see Chap. 4 for details). 3. Voucher privatization created an ambiguous ownership structure without clearly defined ownership despite the fact that in the vast majority of privatized companies a few large IPFs acquired enough shares to be in control. A weak and scattered ownership structure and the inability of the IPFs to establish effective corporate governance practically left the old state socialist enterprise managers in charge. As I have argued in Chap. 4, such an ownership structure failed to exert strong pressure on enterprise managers to conduct the radical restructuring necessary for the future survival of enterprises, nor did it make them accountable for their managerial decisions. Instead, managers typically continued practices detrimental to their companies, such as incurring large debts through soft loans which the enterprises were unable to pay off and postponing restructuring. The large state-owned banks that established several largest IPFs also failed to exert pressure on enterprises to undergo restructuring or discipline their unsustainable financial behavior.

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Instead, the banks continued to provide loans to heavily indebted enterprises (especially between 1994 and 1996) (see Mejstřík 1999:249-250). The introduction of private ownership and market forces resulting in hard budget constraints, two pillars of the neoliberal transition strategy, thus did not automatically result in an effective enterprise restructuring (see also Chap. 4). One of the reasons why enterprise restructuring was so slow to start was the fact that voucher privatization did not raise any capital to finance it. The capital market that resulted from the voucher scheme was severely undercapitalized and unregulated and consequently failed to function as a source of capital for enterprises. Thus, the concrete outcomes of voucher privatization contradicted the government’s proclamations about using privatization as the main instrument of enterprise restructuring. Myant’s (1996:146-147) conclusions about voucher privatization and its effects on enterprise restructuring are broadly in line with findings presented here. Myant argued that “voucher privatization has not as yet been a key factor in encouraging enterprise restructuring” (1996:157) and described the changes on the enterprise level after voucher privatization as “ambiguous” restructuring in which “reorganization and the hiving-off parts of existing enterprises may further the interests of particular individuals rather than contributing to improvements in overall efficiency” (1996:146). Instead of leading to deep enterprise restructuring and industrial transformation, the actual outcome of voucher privatization was much more modest. In the words of Mejstřík (1999:252) “voucher privatization played a role of temporary but very costly intermediary that opened the space for finding out the new ownership structure.” 4. The inability of the state to establish an institutional and legal framework in which independent enterprises could efficiently operate was further detrimental to enterprises and the entire economy. As a result of the very weak legislative framework for privatization and the subsequent operation of businesses, the enforcement of contracts was difficult and the “tunneling” of the IPFs and SOEs became widespread. The phenomenon of “incomplete contracts”, in which there is a limited chance for the seller to get paid for assets he/she has sold, spread quickly. Although the state kept an important ownership stake in companies privatized by the voucher scheme through its NPF, it typically did not exercise its ownership rights and exerted little or no pressure on company managements to perform well and to pursue sound long-term development policies. Tomáš Ježek, the architect of voucher privatization, argued in 1999 that it had been very successful and the problems Czech industry had encountered afterwards were not the result of voucher privatization but of the post-privatization period characterized by an

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unregulated and unsupervised market environment that allowed widespread cheating. Until 1996 the Czech government actively and aggressively opposed the idea of institutional protection of small shareholders and effective capital market regulation. As during the “pre-privatization agony”, many new owners followed short-term goals and ignored longterm development needs of enterprises. All these problems contributed to overall very limited enterprise restructuring (Dolečková and Havligerová 1999; Mejstřík 1999:252). 5. Finally, the transparency of privatization process and voucher privatization in particular has been low. Corruption has been suspected on a large scale both among the ministry officials and managements of companies to be privatized. The CEO of Barum Continental argued in 2000: Our privatization project did not fit in the schemes prepared by the ministries. All officials at the ministry were convinced that we stole hundreds of millions [of crowns]. They wondered how we managed to do it so they could not find out. We told them that it was simple because we did not steal anything. They simply did not believe us. All others were stealing and they bribed – and not small amounts of money – so things were kept quiet.40

Direct sales to pre-determined buyers were decided by ministry officials, which increased chances for corruption, especially if there were more than one competing projects proposing direct sale. The ministry officials could also provide important insider information to selected bidders that put them in an advantageous position compared with other bidders (Mejstřík 1999:244).

5.4 Conclusion The experience of the domestically-owned Czech automobile component producers challenges those views of Czech domestic privatization that argue that intensive enterprise restructuring was taking place in Czechia already in the early 1990s. While the privatization of SOEs to domestic owners resulted in profound organizational restructuring and ownership transfers, it did not necessarily lead to immediate and effective restructuring on the shop floor of privatized enterprises. Thus, the neoliberal

40

Interview with the executive board chairman and plant manager of Barum Otrokovice, July 26, 2000.

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assumption that any new private owners will conduct effective enterprise restructuring immediately after privatization was largely false. My research suggests that such a situation took place only in those cases where privatization resulted in clearly defined majority ownership, newly privatized enterprises avoided an excessive debt burden, and their new owners adopted a long-term development perspective. It seems that the number of such cases was rather small. This situation thus questions both the appropriateness of the practical privatization strategies followed in Czechia in the early 1990s and the quality of the institutional and legal environment established for the functioning of private enterprises. At the same time, the experience of Czech enterprises shows that, given the existing governmental policies, the weak state was in no position to conduct effective enterprise restructuring on its own as proponents of slow privatization argued. Despite the fact that the state kept a significant direct and indirect ownership stake in hundreds of privatized and semi-privatized enterprises, it chose not to enforce its ownership rights in the vast majority of cases, leaving many existing pre-1989 managements in charge of enterprises. My findings from the Czech automotive components industry show that voucher privatization was not the best strategy to stimulate effective enterprise restructuring. The IPFs that became majority owners of hundreds of industrial enterprises following voucher privatization typically could not exercise their ownership rights effectively because they had no experience with corporate governance of industrial enterprises and did not understand the industrial production. Real enterprise restructuring typically began only after the IPFs sold their stakes in companies to new majority owners. This finding challenges the views of IPFs as effective corporate investors with positive effects on privatized companies. It also undermines the argument of Frydman et al. (1997) that the IPFs are as good as any “strategic” investor in revitalizing of privatized companies. The research presented in this chapter has shown that the period of scattered ownership that followed voucher privatization and the ownership role of IPFs in the privatized companies was only transitory. It suggests that the imposition of an instant capitalist structure of private ownership by rapid mass privatization envisioned by the neoliberal and neoclassical approached did not take place. Instead, we see a gradual evolutionary process of development of effective private ownership of industrial enterprises following their original privatization. The chapter has also shown the diversity of domestic privatization experience: different strategies were pursued within the same industry resulting in different privatization outcomes. Moreover, the same privatization strategies also led to varying outcomes depending on the actual behavior of agents and new owners of industrial enterprises. Neoliberal and neoclassical economic accounts of privatization

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are thus weak in explaining the actual privatization and post-privatization experience of enterprises and its diversity in the case of Czech automotive components industry. Approaches based on evolutionary and institutional economics seem to offer a more appropriate theoretical and conceptual framework to understand the processes of domestic privatization and its outcomes in the Czech automotive components sector during the 1990s.

6 The Role of FDI in the Czech Automotive Industry

The role of FDI has been considered to be critical in the post-socialist economic development of CEE (e.g. Dunning 1993:25; Ozawa 2000:xii; Lankes and Stern 1997:1) because FDI is viewed as an “engine of development” (Csáki 1995:112), a vehicle of economic modernization and a driving force of productivity development (Hunya 2000:8, 12). Some commentators even consider FDI to be a “ship of riches that will ensure economic prosperity” (Kojima 2001:22). By the late 1990s, it has become a cliché in CEE to consider the role of foreign capital to be superior to that of domestic capital in enterprise restructuring. This positive view of FDI resulted at least partly from failure of domestic privatization schemes to generate strategic restructuring at the enterprise level in countries such as Czechia and Slovakia.1 It seems, however, that such views tend to exaggerate the actual effects of FDI in CEE and its role in the post-1989 economic transformation, because the overall volumes of FDI in CEE remain low when compared to other world regions.2 The generally assumed superior performance of enterprises with foreign capital compared to domestic enterprises has been very difficult to verify empirically with the exception of manufacturing (Szanyi 2000:76). It is also important to keep in mind that effects of FDI in CEE have been geographically and sectorally very uneven (e.g. Pavlínek and Smith 1998; Pavlínek 2002a, 2002b) and that FDI does not necessarily lead to automatic economic success in the foreign invested enterprises (FIEs – joint ventures and foreign-owned companies). Indeed, the research on FDI in CEE points towards a large diversity of FIEs in all possible respects and, consequently, to the need to better understand this diversity as well as the overall economic effects of FDI in CEE countries (Szanyi 2000:74). 1

See Meyer (2000:137) on the distinction between defensive and strategic restructuring. 2 CEE attracted 4.1% of global FDI inflows between 1990 and 2005. The total inward FDI stock of CEE accounted for 4.6% of the global stock in 2004. CEE’s share of the world’s population is 5.4% (UNCTAD 2006). P. Pavlínek, A Successful Transformation? Contributions to Economics, doi: 10.1007/978-3-7908-2040-9_6, © Physica-Verlag Heidelberg 2008

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Two types of FDI studies in CEE can be identified: First are the studies that typically investigate FDI from national and macroeconomic perspectives and focus on analyses of empirical data (e.g. Hunya 2000; Artisien et al. 1993; Zloch-Christy 1995). Second are the case studies of individual investments from various sectors (e.g. Estrin et al. 1997, 2000a). This chapter focuses on the role of FDI in the transformation of the Czech automotive industry. FDI has played a crucial role in the transformation of the passenger car industry in Central Europe (CE) and its selective peripheral integration into the European automotive production system in the 1990s (see Pavlínek 2002a, 2002b for details; Chap. 1). The Czech automotive industry has experienced a large influx of FDI resulting in the deep foreign penetration of the sector.3 By the end of 2005, FIEs accounted for 83% of the production capacity in the Czech automotive industry (AIA 2007). The goal of this chapter is to investigate the role of FDI in the privatization and transformation of the Czech automotive industry at the enterprise level using the case study approach. It is based upon actual experiences of selected automotive sector enterprises with FDI. The aim is to better understand the effects of FDI on enterprise restructuring. Based on this approach, the chapter hopes to illustrate the complexity of changes associated with FDI at the enterprise level in CEE. This chapter does not deal with VW’s acquisition of Škoda Auto, which has been considered the most successful automotive investment in Czechia and in CEE as a whole, because its analysis is carried out in Chap. 3. Instead, I focus on the situation in the automotive components sector and, to a lesser extent, in truck, bus and tractor production. This chapter also illustrates how the changing governmental policies towards FDI strongly influenced FDI inflows in the country and affected the Czech automotive components sector in the 1990s. The decision to form a particular JV was made by enterprises and had to be approved by the government, which also had to approve all greenfield investments. As in Chap. 5 the information presented in this chapter is based upon indepth interviews conducted with chief executive officers (CEOs) and top managers of 20 car component suppliers in Czechia in 2000 and 2001. While only nine of these suppliers were fully or partially foreign-owned at the time of the interview, the top managers of Czech-owned suppliers provided important insights and assessments of foreign-owned companies because four of them formed JVs with foreign partners that involved parts of

3

Czechia has been the largest recipient of FDI in the automobile industry among the CEE countries with estimated 6.5 billion EUR (8 billion USD) invested by the end of 2004 (Lepape 2005:2).

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their companies (Table 5.1 in Chap. 5).4 Most of the remaining companies interviewed have seriously considered forming JVs with foreign partners in the past or at the time of the interview and undertook negotiations with potential foreign investors.5 The chapter also draws on interviews conducted by the author at the Czech Ministry of Industry and Trade and Škoda Auto in 1996 and at Škoda Auto, Tatra, Daewoo-Avia and Karosa vehicle manufacturers in 1999 and interviews at 14 Czech-based component suppliers and Škoda Auto in 2005. While this type of research cannot and does not claim to be a fully representative sample of the Czech automotive industry as a whole and its results therefore cannot be easily generalized, I believe that interviews with key actors represented by top managers of selected companies provide important insights into the actual processes of enterprise privatization and transformation related to FDI. As such, it complements the empirical studies of enterprise restructuring and effects of FDI at the enterprise level. The chapter begins with a discussion of changing governmental policies toward FDI and its effects on privatization of automotive component producers in the 1990s. Next is an analysis of immediate FDI effects at the level of individual enterprises. In particular, the issues of disciplining labor and the contested nature of enterprise restructuring are discussed. I then consider advantages of foreign ownership for Czech enterprises and I also provide examples of failed cooperation between domestic producers and foreign partners in the Czech motor industry. Finally, I briefly investigate the questions of stability of FDI, regional economic linkages of FIEs, and FDI effects on enterprise R&D. A conclusion summarizes the main findings.

6.1 Governmental Policies, FDI and Privatization General governmental economic policies and specific policies towards FDI play an important role in attracting FDI to a particular country. They are sometimes considered to be the most important factor affecting FDI inflows (e.g. Lall 1996:425). The attitude of the Czech government toward FDI has undergone considerable changes since 1990. Three stages could be distinguished: the period before the 1992 parliamentary elections of governmental incentives to selected foreign investors; the 1992–97 period 4

These included Rubena Hradec Králové, Gumotex Břeclav, Tanex Plasty Jaroměř and Karsit Jaroměř. 5 Other forms of cooperation with foreign partners exist. For example, CIEB Kahovec has a licencing agreement with a German partner to produce car seats.

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during which foreign investors were not originally offered any incentives to invest and domestic investors were generally preferred; and the post1997 period of strong governmental incentives and support for FDI. The most successful JVs in the Czech automotive sector were formed between 1990 and 1992 when the Czech government followed a policy of careful choice of foreign partners for selected Czech enterprises. Examples in the automobile industry include the Škoda–VW and Barum–Continental JVs. As we could see in previous chapters, the post-1992 Czech government under the leadership of Václav Klaus generally disapproved of the entry of foreign capital into Czech companies and instead it preferred the so-called “Czech way” of privatization, i.e. privatizing Czech companies to Czech owners using the Czech rather than foreign capital. This attitude is somewhat surprising given Klaus’s liberal rhetoric. However, he considered property included in JVs as “lost to privatization” (Myant 1993:244). As Jan Vrba, the pre-1992 minister of industry, pointed out “the sale of enterprises to foreigners was not popular [after the 1992 elections] and least so to Germans” (Páral and Lékó 1999). In 1992, despite the perceived lack of domestic capital, the government decided not to provide any tax incentives for foreign investors. The deputy finance minister argued in 1993 that the incentives would “deform the natural economic structure of the Czech Republic” (LN 1993:12). Although companies were relatively free to choose their privatization method, the post-1992 elections government of Václav Klaus encouraged as many large companies as possible to participate in the governmental voucher privatization scheme.6 In particular, the participation of well known companies in voucher privatization, such as the heavy off-road truck maker Tatra Kopřivnice, was strongly promoted mainly by the supporters of Klaus to increase the popularity of the scheme (see Chap. 4). As wee could see in the case of Tatra, for example, the government indirectly exerted a strong pressure on its managers to participate in voucher privatization through aides of Václav Klaus assuring Tatra’s managers that voucher privatization would protect their positions and control of the company. The cases of Kablo Velké Meziříčí and Magneton Kroměříž described below show that the government often decided politically against proposed JVs without providing any explanation for its decisions. In the case of truck production, the Klaus government did not continue negotiations with Mercedes–Benz AG about the 250 million USD Mercedes– Avia–Liaz JV approved by the previous government in March 1992 that proposed the production of 27,000 trucks annually by 1997 (see Chap. 4). 6

Interview with the executive director of Draka Kabely and former director of Kablo Velké Meziříčí, Velké Meziříčí, July 27, 2000. See also Chap. 5.

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In the case of direct sales, the Czech buyers were given a price advantage over foreign buyers because they were entitled to buy properties for their stated book values. In most cases Czech buyers submitted audited estimates of value to reduce the purchasing price below the stated book value. Foreign buyers, however, had to submit a price proposal (Kotrba 1995:168). The interviews in several component suppliers showed that the government’s economic nationalism discouraged the companies from seeking foreign partners and forming JVs between 1992 and 1996. The following two short case studies illustrate the government policy toward foreign investors and its consequences for privatized companies during this period. 6.1.1 Privatization of Kablo Velké Meziříčí

7

After considering various privatization techniques, Kablo Velké Meziříčí, the largest Czech cable producer before 1989, prepared its privatization project with the help of Creditanstalt Vienna. The privatization project called for foreign capital participation either through an outright sale of Kablo or through the formation of a JV with a foreign partner. Kablo and Creditanstalt then approached about 50 foreign cable producers and asked them to make a purchase offer. About ten foreign producers expressed a serious interest in forming a JV with Kablo or buying the entire company. The best offer came from the Dutch Draka Holding, one of Europe’s leading cable producers. Draka offered to buy the entire Kablo for 800 milion CZK and to invest an additional 750 million CZK in technological improvements in the three years following the purchase. The takeover was supposed to bring know-how and increase employment at Kablo. The project was supported by Kablo’s management, its trade unions, the Czech Ministry of Industry and Trade and by the Ministry of Privatization.8 The sale of Kablo and its privatization were negotiated at various Czech ministries and the Czech government repeatedly discussed the offer on five different occasions. Finally, the government declined to authorize the sale in 1994. The director of Kablo was told by the then privatization minister 7

The information about privatization of Kablo Velké Meziříčí is based upon my interview with the executive director of Draka Kabely and former director of Kablo Velké Meziříčí conducted in Velké Meziříčí on July 27, 2000. 8 At the time these two ministries were led by Vladimír Dlouhý and Jiří Skalický respectively, both from the Civic Democratic Alliance (Občanská demokratická aliance – ODA). The ODA participated in the coalition government led by the Civic Democratic Party (Občanská demokratická strana – ODS) and prime minister Václav Klaus.

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Mr. Skalický, that the decision was “a political one”. The Civic Democratic Party (ODS) led by Klaus was against foreign companies buying Czech enterprises and it preferred Czech capital instead. The ODS ministers simply voted down Draka’s offer and the sale did not take place. What have been the consequences of the governmental decision? Instead of leaving Czechia, Draka decided to build a greenfield plant at Velké Meziříčí without paying 800 million CZK to the NPF. The new plant cost 250 million CZK to build. Kablo was eventually sold after two failed attempts, for two billion CZK to Kablo Vrchlabí. However, Kablo Vrchlabí never paid for Kablo Velké Meziříčí to the NPF. Kablo Vrchlabí itself was privatized by voucher privatization. Its majority owner, the IPB bank, tried to sell Kablo Meziříčí without any success and it went bankrupt in 2000. About one thousand jobs were lost at Kablo in the 1990s and its best technology was moved to Kablo Vrchlabí. 6.1.2 Privatization of Magneton Kroměříž

9

Magneton was privatized during the second wave of voucher privatization. However, the NPF kept 34% of Magneton’s shares to be sold to a strategic (foreign) investor. The management of Magneton was preparing a JV agreement with Bosch, a well established German producer of car components, that wanted to buy 34% of Magneton’s shares. However, according to Magneton’s CEO, the government represented by the NPF was not really interested in any foreign partner. The NPF asked Bosch to pay 2,400 CZK for one Magneton share while the real value of one share was only about 50% of that price or 1,200 CZK. Not surprisingly, Bosch was discouraged by this high asking price per share which was, according Magneton’s CEO, “a polite way to reject Bosch’s interest in the company.” In his view, the government did not sell its shares in Magneton to Bosch on purpose. Eventually, the NPF sold 34% of Magneton to an unnamed Czech investment privatization fund for 150 CZK per share which was only 6.25% of the price Bosch was asked to pay. The consequences of voucher privatization and the sale of 34% of its shares to the Czech investment privatization fund were devastating for Magneton and almost led to its bankruptcy.

9

The information about privatization of Magneton Kroměříž is based upon my interview with the executive board chairman and general director of Magneton Kroměříž, conducted in Kroměříž on August 10, 2000.

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The negative attitude of the post-1992 Czech government and Václav Klaus in particular to foreign capital was, of course, not specific to the automotive industry. The issue of foreign capital participation on privatization of Czech enterprises became highly politicized.10 The interest of foreign TNCs such as Siemens, ABB, GEC Alsthom, Framaton and others in participating in the privatization of Czech engineering giants such as ČKD and Škoda Plzeň was also blocked by the Klaus government, often in agreement with domestic managements who feared losing their jobs. Siemens was chosen to purchase Škoda Plzeň’s classical turbines and tracked vehicles divisions, and Siemens together with Framaton were selected to buy Škoda Plzeň’s nuclear energy division by the pre-1992 elections Czech government. The Klaus’ government canceled the selection process arguing that Siemens and Framaton did not offer enough money for these divisions (Páral and Lékó 1999). The case of Škoda Plzeň was thus reminiscent of the cases of Magneton Kroměříž and Kablo Velké Meziříčí. The government deterred foreign companies from forming JVs in Czechia by asking unrealistically high price for shares in the Czech partners, prolonging and obstructing JV negotiations, or simply refusing to approve the sale. Such companies, considered to be part of the “family silver”, were then sold to Czech managers for a low price, often with catastrophic consequences.11 The examples of such failed sales include the sale of Škoda Plzeň to Lubomír Soudek, Poldi Kladno to Vladimír Stehlík 10

See, for example, Pavlínek (1997:248-261) on the details of highly political and controversial decision making regarding the privatization of Czech refineries. 11 One such case was ČKD, a producer of trams, locomotives, metro carriages and other products. The company was saddled with large debts and hit by the collapse of the CMEA market. Without any explanation, the government decided to privatize the company to Czech capital in 1994 despite the ongoing negotiations with foreign investors (Siemens, ABB, GEC Alsthom, AEG). The unrealistically high asking price for the company, unwillingness to satisfy the demands of potential investors and obstruction of negotiations deterred all potential investors. Some of the managers sent a letter to the then prime minister, Václav Klaus, the privatization minister, Jiří Skalický, and the chairman of the NPF, Roman Češka, warning them about the dangers of ČKD’s privatization using Czech capital only. However, they never received any reply. Then the majority share of ČKD was sold to the Czech company Inpro for 40% of its nominal value. Inpro had to borrow the money from the Czech IPB (Růžičková 1999). By 2001 ČKD was on the brink of bankruptcy. Its new owners were accused of “tunneling” the company and the majority stake in the company was transferred back to the government. In the same year, the German Siemens agreed to buy several divisions of ČKD. Similar failures of the “Czech way” of privatization included, among others, Poldi Kladno and Škoda Plzeň.

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and ČKD to Jiří Maroušek. This so called “Czech way” of privatization contributed to economic difficulties Czechia experienced in the second half of the 1990s. At the same time, many potential investors looking for incentives began looking elsewhere in CEE. For example, it has been argued that Czechia lost several potential important investors in 1997 alone because of the lack of investment incentives. These investors included Coca-Cola, GM, Toyota and Denso that were reportedly ready to invest more than 2 billion USD (Zlámalová 1998a:14). Faced with the declining interest of foreign investors and the worsening performance of the Czech-owned industry, the Czech government unofficially returned to its pre-1992 practice of offering incentives to selected foreign investors in the mid-1990s. GM and Intel, for example, were offered various incentives to invest in Czechia.12 Increased political and economic instability after the 1996 parliamentary elections and the rapidly declining rates of economic growth further undermined Czechia’s ability to compete for FDI. Amid the declining FDI inflows, and after the collapse of the Klaus government in 1997, the new government introduced a system of incentives to attract FDI in April 1998. These incentives applied to new investments of more than 25 million USD over a five-year period and included corporate tax relief, zero customs duty on imported equipment, special job creation grants, job training grants, the provision of low-cost development land and the possibility to create a special customs zone for major individual investors (CzechInvest 1998:13; Zlámalová 1998b:15; HN 1998:1). The minimum investment capital required to qualify for governmental incentives was gradually lowered from 25 million USD to 5 million USD. In May 2000, it was modified to 350 million CZK (about 10 million USD) and 175 million CZK (about 5 million USD) in regions suffering from acute economic problems. Since May 2000, the expansion or modernization of existing production facilities in order to introduce new production and expand or modernize the existing one has also qualified for governmental incentives (Investment Incentives Act 2000). Investment incentives contributed to an upsurge in inward FDI to Czechia after 1997 (see Fig. 6.1).13

12

GM was offered tax holidays until the year of 2005, 40 million CZK (about 1.3 million USD) for infrastructure construction, and an interest-free loan of 140 million CZK (about 4.7 million USD) for training of future workers. Despite these incentives, the company announced that Hungary and Germany offered better incentives and therefore it would not invest in Czechia (HN 1997a:2). 13 Annual variability in FDI inflows can be mostly attributed to privatization of large state-owned enterprises in different years.

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Millions of USD

14000 12000 10000 8000 6000 4000

0

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

2000

Year Fig. 6.1. Annual inflows of FDI to Czechia, 1991-2006. Note: 1991 figure reflects the cumulative value of FDI. Sources: ČNB (2007) (1993-2006 data), Mejstřík (1995:60) (1991 and 1992 data).

6.2 Immediate Effects of FDI in Privatized Enterprises 6.2.1 Disciplining the Labor One of the most important immediate changes in the foreign-owned firms and JVs was the introduction of new management practices, work organization, and quality control.14 In the case of Škoda Auto, for example, Škoda’s union leader argued in 1996 that VW did not bring any new skills to Škoda, but it brought “new work organization and order”.15 These included basic cost-cutting measures and increasing labor productivity by minimizing unnecessary waste and improving utilization of the working day by employees. Using this simple strategy, VW substantially increased the quality of Škoda’s pre-1989 model (the Favorit) without any investment

14

In some cases, the changes were rather slow. New Dutch owners of Temac Zvěřínek waited for 10 months after its acquisition before sending their manager to the company (interview with the general director of Temac a.s. Zvěřínek, Zvěřínek, July 19, 2000). 15 Interview with the Škoda Auto union leader, Mladá Boleslav, June 20, 1996.

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within the first two years after the takeover of Škoda.16 Similar immediate changes have been experienced in other FIEs and successful domestically owned companies (1996, 1999, 2000, 2001 and 2005 interviews). What this new “organization and order” means in practical terms is replacement of the state socialist work organization and shop-floor practices with capitalist ones. The anarchy of production associated with state socialism and typified by continual reorganization of the labor process (Burawoy 1985:163) has been replaced with the planned organization of production.17 The considerable autonomy that workers enjoyed on the shop floor and the control of production they exercised under the previous state socialist system (see Clarke et al. 1994:181, Burawoy and Krotov 1993:53, 1992:19) has been removed and replaced by the increased authority of the foreman and effective managerial control as more efficient horizontal and vertical organization of the work-place has been introduced. New management practices also include the introduction of Western production concepts such as just-in-time production (Smith and Pavlínek 2000). Because the working discipline was low in many companies as the “labor force was spoiled by state socialism”,18 the introduction of “new work organization and order” often involved drastic changes in privatized companies. In the case of Barum Continental, for example, the general director introduced a concept of “positive environment and positive motivation” which clearly determined what kind of employee behavior was allowed and what was not. For example, several top managers were immediately dismissed for conflict of interests when it was found that they established private companies to conduct business with the parent company on terms disadvantageous to the parent company, a common practice in Czechia in the 1990s (see Chap. 5). For workers, the general director introduced what he called “the military regime”, which allowed smoking only in predetermined areas and prohibited the use of alcohol at the workplace, a widespread ill at Barum and other companies during the state socialist period. If this rule was violated by a worker with any managerial responsibility, he/she was dismissed immediately. If it was violated by ordinary workers, they would pay 1,000 CZK penalty for the first violation, 2,000 CZK for the second and would be dismissed after the third violation. 16

Interview at the Ministry of Industry and Trade of the Czech Republic, Prague, July 1, 1996. 17 While the planned organization of the way of appropriation and distribution of goods and services (what Burawoy (1985) calls relations of production) typical of state socialism was replaced by the anarchy associated with capitalism. 18 Interview with the Executive Board Chairman and Plant Manager of Barum Otrokovice, Otrokovice, July 26, 2000.

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Hundreds of workers were dismissed from Barum for alcohol-related offenses in the early 1990s. The company even hired 300–400 temporary workers from Slovakia to replace dismissed Czech workers. As a result of these measures, the discipline improved dramatically and the personal accident rate decreased to the lowest level in the Continental concern. The general director also argued that production quality parameters highly correlated with the tight discipline on the shop floor. The management hierarchy was greatly simplified to include only three levels: the top managers team, business teams responsible for the production of particular products and shop floor workers. These changes, together with other measures, allowed Barum to increase labor productivity seven times in the 1990s.19 6.2.2 Contested Nature of Enterprise Restructuring While the individual enterprise experiences differ, it would be wrong to assume that the changes following the entry of foreign capital have been smooth and unproblematic. The general director of Lucas Autobrzdy described his enterprise’s experience after the foreign takeover as follows: From today’s point of view I think that privatization came out well. But when I look at it from the point of view of that period, a week after week, my feelings were mixed and inconsistent. Many people left. Nevertheless, this firm went through all child diseases of a situation where a many times larger foreign firm enters a domestic company so they are not partners. One is large and the other is small so pushing through certain matters is not in the form of discussions but orders. It also reflects a certain form of ignorance of what the [domestic] partner previously did or did not achieve. The JV formation and enterprise restructuring led to quite substantial loses for several years. It also included failures of the foreign partner to meet its promises in terms of investment in new production, R&D and likewise. It is also important to say that the domestic partner resisted the changes as the majority of domestic firms do. I can see similar reactions today when I look around at firms where foreign capital is just entering or entered before.20

This quotation highlights several interesting issues associated with the formation of FIEs in Czechia. First, after their establishment, the nature of JVs is often contested as foreign and domestic partners struggle to find common ground because they frequently have different ideas about the ways a JV should operate. These differences reflect not only different 19

Ibid. Interview with the general director of Lucas Autobrzdy, s.r.o., Jablonec nad Nisou, February 8, 2001. 20

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historical experiences but also mutual prejudices between the JV partners. For example, the director of Karosa argued that he and other Karosa top managers originally could not understand some approaches and concepts Renault introduced at Karosa, such as the separation of purchasing and supply, because they were completely unfamiliar with them.21 Such a lack of understanding can easily lead to resistance to changes introduced by foreign partners. The above quotation by the general director of Lucas Autobrzdy, suggests that such resistance on the part of domestic managements has been widespread. In extreme cases it can contribute to the failure of JVs. Second, foreign companies tend to overlook past achievements and experiences of Czech firms. They often come to Czechia and CEE as a whole expecting to find a very primitive and underdeveloped production and work organization. Many interviewed CEOs of Czech companies, which later formed JVs with foreign partners, noted how foreign company guests were surprised when they visited their companies. For example, the director of Karosa argued that “when several [foreign] companies visited us [before the JV with Renault was formed] and saw how we made buses and what technology we had, they just gaped at it.” 22 Similarly biased views of Czech component suppliers by Western companies still persist. One of the top managers of Gumotex Břeclav argued in 2000: We have difficulties securing foreign orders. We do not have contacts and it is difficult for us to secure access to purchasing departments of foreign companies. And when we finally get there and when they are willing to see us then they look down on us or they do not seriously believe that we would be able to offer and supply products to them. Mostly only after these companies come here to visit us do they realize with a surprise what technology we have running here, that we have achieved certain quality standards and built quality control systems.23

Third, foreign companies have often had difficulties keeping investment promises they made when JVs were negotiated. Because their investment decisions are made in the context of their world-wide operations, and the situation in different markets and profitability can change quickly, it may affect their investment pledges made in Czechia, as we could see on the case of VW and its investment pledges in Škoda in Chap. 3.

21

Interview with the general director of Karosa a.s. Vysoké Mýto, Vysoké Mýto, June 16, 1999. 22 Ibid. 23 Interview with the Marketing Director of Car Accessories Division, GUMOTEX a.s. Břeclav, Břeclav, July 18, 2000.

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6.3 Advantages of Foreign Ownership for Czech Automotive Enterprises Those managements of Czech enterprises that recognized global and European trends in the automobile industry pushed strongly for the entry of foreign capital into their companies. In general, managements saw at least five major advantages in allowing foreign capital to participate in their privatization: First, it was clear that small, undercapitalized and technologically obsolete Czech component suppliers and car, truck or bus makers had only a slim chance to compete effectively with large foreign TNCs both abroad and increasingly in Czechia. Second, foreign ownership would mean relatively easy access to the investment capital needed for technological upgrading and enterprise restructuring. Third, foreign partnership would allow access to foreign markets through the sales and distribution networks of parent TNCs. Fourth, foreign ownership was likely to bring in Western technology and know-how some companies considered necessary for deep enterprise restructuring and quick improvements in quality standards. Finally, it was more than likely that top managers would keep their positions after the entry of foreign capital in “their” companies. Some managements also clearly recognized dangers associated with Czech privatization and chose foreign capital to avoid these traps. For example, the general director of Temac a.s. Zvěřínek, the manufacturer of gaskets and industrial sealing products, explained why his company refused domestic capital for its privatization: We had no illusions about Czech capital. We had this factory assessed by an international audit to find out its value. Then we told to ourselves: if a Czech owner comes here, he will borrow X million [Czech crowns] from a bank. Then he will milk the factory and all profits will be used to service the loan. It will take ten to twenty years to pay the loan off and the factory will become outdated in the meantime. After twenty years, the factory could be closed and torn down . . . We wanted to privatize our company to save the production here and to bring something for the people working in this region.24

I have already discussed the immediate benefits of the transfer of managerial know-how and Western production practices to Czech enterprises that typically led to improved quality of products and labor productivity without

24

Interview with the general director of Temac a.s. Zvěřínek, Zvěřínek, July 19, 2000.

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any capital investment. Overall, however, access to investment capital has been cited as one of the major advantages of JVs, if not the most important reason for seeking a foreign partner, by Czech CEOs in the automotive components industry whom I interviewed. They argued that, without access to foreign capital, their companies would be unable to carry out production changes crucial for their long-term survival as component suppliers.25 6.3.1 Access to Worldwide Sales and Distribution Networks Similarly, foreign partners provided Czech component suppliers with access to their worldwide sales and distribution networks. The benefits of integration of CEE producers into such networks have been increasingly recognized (e.g. Kaminski and Smarzynska 2001). For some companies, such as PAL Praha, access to the sales and distribution network of a TNC was the most important reason why they sought a JV with a foreign partner.26 Many top managers of Czech component suppliers realized that they were unable to satisfy the needs of large transnational car makers even if they were the best local suppliers. To be successful globally, component suppliers need to offer the same product in the same highest quality at different locations around the world. Small and cash-strapped Czech component suppliers could not compete with large, transnational component suppliers abroad and did not have the capital to build their own global sales and distribution networks. Joining forces with an already established TNC is thus the fastest way for local producers to overcome the relative distance between themselves and global players in the car components industry. They could either join forces with a TNC manufacturing the same products or find a TNC whose production portfolio lacked a particular group of products they were producting. In the first case, a Czech component supplier would typically either become responsible for market expansion and supplies to CEE markets while not competing with the parent company on its established Western markets (the case of Draka Kabely, for example), or it would focus on the production of lower priced models or brands for the entire concern, capitalizing on its lower labor and production costs (such as the case of Barum Continental producing a budget brand of tires for Continental). In the second case, in which a Czech component supplier offers products not made by the TNC, these goods are then distributed through the worldwide distribution network of the parent company. In such 25 26

Ibid. Interview with the general director of PAL Praha, Praha, February 14, 2001.

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a case the Czech supplier has a chance to become a sole supplier for the entire concern. This has been the case for PAL Praha and its partnership with the Canadian Magna in which PAL Praha is the only producer of small electric engines for the entire Magna with the full responsibility not only for their production, but also for R&D (see below).27 The second case thus tends to leave all phases of the production process with Czech component suppliers, including R&D. It also allows for greater autonomy of a local subsidiary within a TNC and does not relegate Czech component suppliers to being simple assembly branch plants vertically integrated into their parent TNCs. While access to foreign markets through the sales and distribution networks of TNCs is one well-known positive impact of foreign acquisitions or JVs on domestic firms, it is also important to stress that foreign TNCs allow such access because it is profitable for them. Thus, the relationship must be mutually beneficial to be successful. In this respect the general director of Lucas Autobrzdy argued: Our integration into the TNC allowed us to gain access to new markets through the worldwide sales network of TRW. Today, we supply globally all significant car makers. We could not have achieved that without a foreign owner. At the same time, I think that TRW has profited too because it could not supply the huge number of products that are made here on the world market and it would not have achieved such a high market share in those products. It was all possible because we could offer a lower price than the producers of the same products in Western Europe. And these are the most complicated components within the classical brake components.28

6.3.2 Technology Transfer Another widely cited benefit of FDI is the transfer of modern technologies and production know-how to the acquired subsidiaries (e.g. Estrin et al. 2000b:xxix; Dyker 2001:1013). In CEE FDI has been generally viewed as an especially important vehicle of technology transfer (Bell 1997:64; Sharp and Barz 1997:95; Dyker 1999:22-23). To what extent did technology transfer take place in the foreign-owned component suppliers in Czechia interviewed? In some cases production technology was directly transferred from Western subsidiaries to Czechia. For example, Avon Automotive Rudník benefited from technology transfer in 2000 when its 27

Ibid. Interview with the general director of Lucas Autobrzdy, s.r.o., Jablonec nad Nisou, February 8, 2001. 28

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parent company Avon Rubber transferred half of the production technology and orders from its Croydon subsidiary and additional production technology was transferred from AMES Rubber (New Jersey) to Rudník.29 Barum Continental took over the production of a Swiss company including its machinery and technology that had not been used by Barum before. This allowed Barum to produce products they had never produced or even developed (speed category V for large limousines and race cars).30 The managers of Osinek Kostelec nad Orlicí were looking for a foreign partner because they needed to acquire the production technology of non-asbestos motor vehicle brakes. The new foreign owner of the company transferred this technology to the former Osinek, thus ensuring its future survival.31 In this particular case the transfer of modern technologies was the most important reason for teaming up with a foreign partner. A similar strategy was followed by Tanex Plasty Jaroměř, which formed a short-term JV between one of its Czech subsidiaries and a German company to gain access to German technology that was not otherwise available in Czechia. After two years, during which the Czech subsidiary learned to operate the new technology, the German share in the JV was bought back by Tanex Plasty.32 In other cases, foreign technology was transferred to ensure that a Czech subsidiary produces a particular component system, such as brakes, in the same way, and with the same quality as other European subsidiaries of a particular TNC (Lucas Autobrzdy, for example). Technology transfer did not take place only in cases when the Czech subsidiary produced a unique product that its foreign owner otherwise did not produce. PAL Praha and Temac Zvěřínek are two examples of such companies among those interviewed in Czechia. Some CEOs of Czech car component suppliers even argued that technology transfer from abroad was more or less a necessary precondition for their future economic success. They felt that a typical Czech-owned company would be unable to carry out a large technological investment that would allow it to become a European-scale automobile components supplier without endangering its own existence. Since such a company is typically small compared to large TNCs, it risks investment failure by not 29

Interview with the former director and executive board member of Avon Automotive a.s., Rudník, August 10, 2001. 30 Interview with the Executive Board Chairman and Plant Manager of Barum Otrokovice, Otrokovice, July 26, 2000. 31 Interview with the general director of Federal-Mogul Friction Products a.s., Kostelec nad Orlicí, July 17, 2000. 32 Interview with the general director of Tanex Plasty a.s. Jaroměř, Jaroměř, July 25, 2000.

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getting enough orders for its new product because of direct competition with foreign TNCs.33 This situation forces Czech suppliers to seek foreign partnerships that would not only help finance their technological upgrading but also substantially lower the risk of investment failure by integrating Czech producers into sales and distribution networks of Western companies. Thus, teaming up with foreign TNCs and subsequent technology transfer allowed many Czech car component suppliers not only to keep and strengthen their domestic position with respect to supplying Škoda Auto but also to substantially increase exports of their components to supply other European and overseas car manufacturers. Many Czech suppliers are no longer dependent on orders of Škoda-Auto. Only 10% of Lucas Autobrzdy turnover is related to component deliveries to Škoda Auto, for example. The company is much more dependent on its supplies to GM, Opel, Renault, VW and Peugeut.34 Compared to the vast majority of Czechowned component suppliers, wholly or partially foreign-owned suppliers are in a much better position to sell their products worldwide, which allows them to substantially increase their production. Barum Continental, which became the largest European tire maker, exporting most of its production, represents an extreme case in this respect. Thus, the vast majority of partly or wholly foreign-owned component suppliers interviewed benefited from technology transfer after FDI. The question remains whether there are any technology “spillovers” from foreign to domestically-owned firms (see, for example, Blomström 1989; Haddad and Harrison 1993; Aitken and Harrison 1999).

6.4 FDI-associated Risks for Enterprises and Regional Development 6.4.1 Stability of Western Investment Many Western car component suppliers have been attracted to Czechia not only by the geographical proximity of Škoda Auto assembly operations, but also by the possibilities of low-cost production for West European vehicle manufacturers and lately by generous governmental incentives for

33

Interview with the general director and owner of Karsit Jaroměř, Jaroměř, July 31, 2000. 34 Interview with the general director of Lucas Autobrzdy, s.r.o., Jablonec nad Nisou, February 8, 2001.

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foreign investors.35 The average 2000 monthly wage in the Czech automotive industry as a whole stood at 16,050 CZK (AIA 2001) which was 881.5 DM or 415.9 USD. In 2000, the average German labor cost was 7,835.49 DM per employee per month in the automotive industry (VDA 2001). The average Czech automotive industry wages were thus 11.25 percent of average automotive industry labor cost in Germany in 2000. By 2005 the average monthly Czech wages in the automotive industry increased to 21,136 CZK (AIA 2007) which was 882.6 USD or 709.6 EUR. Average wages in the Czech automotive component sector vary significantly but overall they reflect average wages for a particular sector and a particular type of work in a particular region and they are very low compared to Western Europe (Tables 6.1 and 6.2). The differences among the component suppliers interviewed in 2000, 2001 and 2005 were significant. For example, in 2000 Barum Continental’s average monthly workman wage of 21,000 CZK (the highest in Czechia) was more than three times higher than the average wage in the HLF Hajnice plant (6,500 CZK). Tables 6.1 and 6.2 also suggest that FIEs tend to pay their workers better than the Czech-owned domestic suppliers. Component suppliers can produce components in Czechia and supply various car makers in Western Europe and even overseas to reap the benefits of lower labor costs. Seventy percent of components production is exported and the value of exports reached 143 billion CZK in 2005 (6 billion USD) (MIT 2006:314; see also Chap. 7). The geographic proximity of Czechia to Germany allows some Czech-based component suppliers to supply German car assemblers in the just-in-time (JIT) regime. For example, Hayes Lemmerz’s subsidiary, located in Mladá Boleslav, supplies JIT and in-sequence assembled wheels and tires to the VW assembly plant in Dresden, Germany. However, it is unable to achieve this directly from Mladá Boleslav, so the company had to build a small warehouse next to the VW’s assembly plant where the wheels are sorted and arranged in sequences to be delivered JIT to the VW’s assembly line.36

35

As of March 2007, of all projects mediated by CzechInvest automotive industry projects accounted for 23% of the total, 45% of total FDI, and 35% of all newly created jobs. These were the highest shares among different industries (CzechInvest 2007). 36 Interview with the Managing Director of Hayes Lemmerz, Mladá Boleslav, July 12, 2000.

6.4 FDI-associated Risks for Enterprises and Regional Development

203

Table 6.1. Average monthly wages for manual workers in the interviewed component suppliers in the summer of 2000. Component supplier

Product

O

Barum Continental

tires

F

Hayes Lemmerz

wheel assembly

F

100

17,000

934

449

Lucas Autobrzdy

brakes

F

700 16,500c

918

441

Tanex Plasty Jaroměř

polyurethane foam components brake lining

C

250 15,000b

827

391

F

700

14,000

772

364

rubber components

F

665 13,000a

747

343

gaskets

F

250

12,500

689

325

Rubena Hradec Králové

rubber components

C

2,100 12,500b

689

325

Brisk Tábor

spark plugs

C

650 12,500b

689

325

CIEB Kahovec

seats

C

180 12,500b

689

325

Gumárny Zubří

C

250

12,300

678

320

Karsit Jaroměř

molded technical rubber components car seat frames

C

500

12,000

661

312

Hanácké železárny a pérovny Draka Kabely

hot-formed steel springs cables

C

500

12,000

661

312

F

320

11,000

606

286

Magneton Kroměříž

starters

C

1,200

11,000

606

286

Almet Hradec Králové pistons

C

120

10,860

599

283

PAL Praha

small electric engines

JV

1,000 10,000c

557

267

Fezko Strakonice

seat covers

F

700

9,000

496

234

Gumotex Břeclav

polyurethane foam components switches

C

1,600

8,000

441

208

C

110

6,500

358

169

Federal Mogul Avon Automotive Rudník Temac Zvěřínek

HLF, Hajnice plant

E

Average monthly wage, summer 2000 CZK DEM USD 3,700 21,000 1,157 546

O ownership, E employment in 2000, F foreign, C Czech. a Summer 2001. b Overall average wage including administrative workers, workmen wage was lower.

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6 The Role of FDI in the Czech Automotive Industry

c

January 2001. The figures above are approximate based upon the interviewees accounts. Exchange rate is based upon the average exchange rate published by the Czech National Bank for a month in which a particular interview was conducted. Source: Author’s interviews with CEOs in the above companies in 2000 and 2001. Table 6.2. Average monthly wages for manual workers in the selected interviewed component suppliers and Škoda Auto in the summer of 2005. Component supplier

Product

O

E

Average monthly wage, summer 2005 CZK EUR USD

F

4,300 26,000a

869

1,057

Bosch Diesel Jihlava Dura Automotive CZ Škoda Auto

fuel injection pumps, com- F mon rail doors, door frames, side F windows passenger cars F

6,000 23,000b

768

935

1,300 19,800

661

805

24,561 17,900

598

728

Monroe Czechia

shock absorbers, exhausts F

700 17,500

585

711

Denso

rubber components

F

1,500 15,000

501

610

Parker Hannifin

tube fittings, hoses, pipes, F valves lighting, cooling, airF conditioning cockpit and door systems C

900 15,000

501

610

4500 15,000

501

610

2,300 15,000

501

610

C

1,950 14,500

484

589

C

2,000 14,000

468

569

F

424 13,000

434

528

C

1,100 13,000

434

528

Barum Continental tires

Autopal Visteon Brano Group ČZ Strakonice Motorpal Jihlava

turbo chargers and other components fuel injection pumps

Showa Aluminium condensers Czech Motor Jikov automotive parts, tools,

O ownership, E employment in 2005, F foreign, C Czech. a Overall average wage for the company as a whole including the management and administrative workers, manual wage was lower b Including administrative workers but excluding the management, manual wage was lower. The figures above are approximate based upon the interviewees accounts. Exchange rate is based upon the average exchange rate published by the Czech National Bank for June, July and August 2005 when the interviews were conducted. Source: Author’s interviews with CEOs in the above companies in 2005.

6.4 FDI-associated Risks for Enterprises and Regional Development

205

In those cases where the major concern of the foreign investor is to protect or improve its competitive position in the markets outside Czechia through more cost-effective vertical integration, the cost of production has been the decisive location factor. In such a situation, the production can move to cheaper locations abroad when wages and overall production cost increase (see Pavlínek 2004:55-56). Indeed, attachments of some component suppliers to specific locations seem to be rather tenuous. For instance, the new Hayes-Lemmerz assembly plant launched in Mladá Boleslav in August 1999 to supply wheels to Škoda was built according to the specifications of Hayes Lemmerz but the company does not own it. It only owns the machinery and interior equipment. The director argued that there were two reasons for this situation. First, the building as such is not part of the core business of the company so it does not need to own it. Second and more important, in his words “we could be replaced anytime as we replaced the previous suppliers. It is possible to take away the machinery but impossible to move the building.”37 This case suggests that some component suppliers are employing various strategies to minimize their sunk costs (Clark 1994) in order to increase their overall flexibility. 6.4.2 Local Integration of Foreign-owned Companies Linkages of foreign-owned plants with domestic firms are considered the most important mechanism through which technology transfer takes place, additional jobs are generated, and new local enterprises are formed (Dicken 2003; UNCTAD 2001). The degree of integration of FIEs in local and regional economies of the host countries varies considerably because there are large differences between both different industrial sectors and in strategies pursued by TNCs within a particular sector (e.g. Pavlínek and Smith 1998; Pavlínek 2002b). FIEs with a high degree of local integration can play an important role in the regional economic transformation by encouraging and triggering restructuring of supplier networks. This has been the case of some FDI in the CE passenger car industry as typified by VW’s investment in Škoda that led to the transformation of Škoda’s network of component suppliers with important implications for the national economy as a whole (see Chap. 7). However, not all FDI is likely to result in the development of supplier linkages with local companies. Export-oriented, cross-border investments are particularly likely to be isolated from local

37

Interview with the Managing Director of Hayes Lemmerz, Mladá Boleslav, July 12, 2000.

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6 The Role of FDI in the Czech Automotive Industry

economies.38 Many Western companies develop no or only few linkages with local firms because they find it difficult to secure supplies of components from domestic suppliers at the desired level of sophistication, quality, and timing of deliveries (Pavlínek 1998; Pavlínek and Smith 1998; Ellingstad 1997; Swain 1998; Grabher 1994). At the same time, direct local competitors of FIEs are often forced out of business as they cannot compete; such FIEs have more efficient production, an advantage reinforced by tax holidays and other financial incentives provided by governments to attract them, and they also benefit from transfer pricing that is unavailable to domestic companies. Similar effects of FDI have been reported from peripheral regions in Western Europe leading to an argument that the truncated nature of FDI activities in such regions can actually act to their longterm disadvantage because it restricts their potential development of supplier linkages within the domestic economy (Ashcroft and Love 1993; Dicken 2003). Even in cases of some car manufacturers (such as Škoda Auto in Czechia) where the degree of local integration is high, many of their foreign-owned suppliers are typical branch plants vertically integrated into the TNC supplier networks with no local linkages in CE. As one car industry analyst has put it: “In most cases, the only thing they [Škoda’s foreignowned suppliers in Czechia] manufacture locally is the label. They’re screwdriver plants where low-wage employees put together high-tech products manufactured back home in the West” (Harris 1999:14). So while foreign suppliers transfer their new process technologies to their plants in the host nations (Fujita and Hill 1995), the regional economic effects of such plants are often very limited. In the system of lean production of automobiles, suppliers are increasingly expected to design their own components, assemble parts into component sub-systems at the lowest possible cost and in perfect quality, and deliver them to automobile assemblers JIT. The surviving local suppliers not taken over by TNCs can rarely meet such conditions and, as a result, are unable to compete with efficient production of sophisticated parts dominated by TNCs. Consequently, if they survive, they typically specialize in high-volume production of simple components or become second-tier suppliers delivering simple parts to the foreignowned first-tier suppliers. Such domestic suppliers are typically highly vulnerable to market fluctuations, their linkages with foreign-owned 38

Until early 2000s VW Slovakia was a good example of such an investment in the car industry. Out of 1,200 of its suppliers only two were Slovak suppliers supplying the Bratislava plant directly in 2000 (Weidokal and Stagles 2001). Almost all cars assembled by VW Slovakia are exported abroad (100.0% in 2000, 99.5% in 2005) (AIA SR 2001; VW Slovakia 2006).

6.4 FDI-associated Risks for Enterprises and Regional Development

207

first-tier suppliers or car assemblers are weak and typically do not involve much exchange of information and knowledge (UNCTAD 2001). As a result, even the few auto investments that are generally considered to be very successful and highly integrated in local economies (such as Škoda Auto) can lead to deskilling in the host countries. Additionally, the closure of uncompetitive domestic suppliers and extremely low or non-existent local content of foreign-owned suppliers may reduce the number of manufacturing jobs in the host countries (Fujita and Hill 1995). The degree of local integration is also important for the stability of investments. Foreign-owned branch plants set up to assemble large quantities of goods for Western European markets from imported components that have no or very weak linkages with local firms are not necessarily very stable elements of local and regional economies because they could be easily shut down and their production relocated if wages were to go up, local currency to appreciate or the investor face economic difficulties at home (Pavlínek 1998; Nicholls et al. 1998). There have already been examples of companies moving their production from CE to cheaper locations because of rising production costs after only few years of operation (see Pavlínek 2004:55-56). While the development of supplier linkages between foreign-owned and domestic companies is generally considered to be difficult (UNCTAD 2001), there are two specific problems that help explain weak linkages of many FIEs with local economies in CE. First, FDI in CE is a recent phenomenon and it takes time for foreign companies to develop supply linkages to domestic companies. Second, the generally lower level of technological and managerial knowledge in CE compared to the developed economies means that many CE companies are unable to satisfy demands of foreign companies. For example, in the case of automobile manufacturing, foreign-owned car assemblers and first-tier suppliers often argue that domestic suppliers cannot meet their quality demands (see Pavlínek 2002b). Empirical research focusing on FDI spillover effects to the domestic economy in Czechia and CE as a whole has so far found them to be weak and statistically insignificant. For example, Jarolím (2000) found FDI spillover effects to be statistically insignificant in Czechia, rejecting his hypothesis that foreign presence was positively affecting the productivity growth of domestically owned firms. Similarly, Djankov and Hoekman (2000) found a statistically insignificant spillover effect of FIEs on domestic industrial firms between 1992 and 1996. This means that even if FDI positively affected the performance of FIEs, these positive effects did not spill over to the domestic industry. The authors explain the lack of spillover effects by a short study-period, and suggest that know-how spillovers require a certain minimal level of technological capacity and effort on the

208

6 The Role of FDI in the Czech Automotive Industry

part of domestic firms to be absorbed. Kinoshita (2001) also found spillovers from FIEs to be insignificant for Czech manufacturing firms. The empirical research in other CEE countries yielded similar results. Konings (2000), for example, found no evidence of positive spillover effects of FDI to domestic firms in Bulgaria, Romania and Poland. He found negative spillover effects in Bulgaria and Romania, while there were no spillovers to domestic firms in Poland. Similarly, the empirical studies from less developed countries such as Morocco (Haddad and Harrison 1993) and Venezuela (Aitken and Harrison 1999) found either statistically insignificant or negative spillover effects from foreign to domestic companies in terms of impact of FDI on productivity growth of domestic companies. To say the least, the empirical research does not support the overly optimistic views of FDI effects on domestic industry. FIEs may have a detrimental effect on local companies by attracting their skilled and semi-skilled workers. In Czechia, domestic companies and regional politicians have been increasingly voicing their concerns about the negative effects of FIEs on local companies, complaining that foreign investors build new factories and entice workers away from local companies by offering higher wages and better work conditions (Dolejší 2001). For example, the mayor of south Bohemian city of Písek argued that not even a new factory with 1,000 new jobs is necessarily beneficial for a region if it headhunts the most skilled workers away from local companies using governmental financial incentives for foreign investors (Kerles 2001). In southern Bohemia, where unemployment rate stood at 5% in 2001, local and foreign companies have been competing over skilled workers such as locksmiths, turners, toolmakers and welders, with FIEs being much more successful. Motorpal, a Czech-owned supplier of fuel injection systems and precision parts for the automobile industry is a good example of how FDI may negatively affect local companies. In 1992 Motorpal formed a JV with Bosch to jointly produce common rails, an important part of the traditional Motorpal’s business. By increasing its investment, Bosch became the majority owner of the JV because Motorpal was unable to match Bosch’s investment in order to maintain its share in the JV. As a minority shareholder, Motorpal lost its ability to influence the decision-making in the JV. Therefore, Motorpal sold its share in the JV to Bosch in 1996. As a result, the company lost its entire business in common rails. Motorpal also lost its best workers to Bosch who were lured by higher wages. In 2005, Bosch

6.5 FDI Effects on Domestic Research and Development

209

was employing about 5,000 workers in the Jihlava region. Out of these, 3,000 workers were trained by and formerly worked at Motorpal.39 Local companies complain that they are unable to increase their production to satisfy the existing demand for their products because of the acute shortage of skilled workers caused by increasing competition from newly established FIEs (Dolejší 2001). Local companies are forced to increase wages rapidly to keep up with FIEs, which may force them out of business. The governmental support for the development of small and medium-size local enterprises is extremely small or non-existent compared with the incentives offered to foreign investors to create new jobs (Kerles 2001). FIEs can afford to pay higher wages not only because they are much stronger economically than local companies, but also because they receive up to 5,000 USD from the Czech government for each newly created job, which represented the average annual wage in the Czech automotive sector in the early 2000s. The situation at the local level thus calls for a more critical assessment of FDI effects on local economies in CE and more realistic expectations as to its contribution to regional economic development.

6.5 FDI Effects on Domestic Research and Development Large TNCs started to locate sizeable R&D operations abroad and established significant global R&D networks only in the mid-1970s (Howard 1990a:277). The globalization of R&D advanced considerably in the 1990s (Dalton and Serapio 1999). The degree of centralization and decentralization of R&D within the corporate hierarchy is typically related to the type of research conducted. While basic research as a strategic function tends to be localized close to the company headquarters, applied research tends to be decentralized to the individual product divisions. The highest degree of decentralization is typically related to development work which is conducted at the plant-level. Such corporate R&D hierarchy in large corporations is in turn expressed in a spatial hierarchy of R&D in which basic research, and to a lesser extent applied research, tends to be spatially concentrated in core metropolitan regions. Development activity is more geographically dispersed, even though it also tends to favor more central regions. For TNCs, this typically means that the most important R&D centers are located in home countries where the leading-edge R&D on TNCs’ core technologies is conducted, while R&D operations abroad involve smaller-scale applied research and development activities (Howard 39

Interview with the Chairman of the Board and the Business Director of MOTORPAL a.s., Jihlava, Jihlava, July 11, 2005.

210

6 The Role of FDI in the Czech Automotive Industry

1990b:135–8; Dalton and Serapio 1999:7–9). Consequently, the vast majority of R&D expenditures by TNCs are realized in home countries and the location of R&D facilities abroad has been almost exclusively the core phenomenon.40 FDI generally, and export-oriented FDI particularly, tend to vertically integrate domestic producers into large TNCs in which basic R&D is typically concentrated in the TNC’s home country in the developed world (Grabher 1997, 1994; Pavlínek 1998; Pavlínek and Smith 1998; Gowan 1995; Howard 1990b).41 Two groups of reasons for R&D investments abroad by TNCs can be identified: demand-driven and supply-oriented (Dalton and Serapio 1999:38; Howard 1990a:277, 1990c:496–7). The demand reasons include the TNCs’ needs to customize and develop their products for foreign markets and to support their manufacturing, sales, or service activities in host countries in order to gain and maintain market power. The supply-oriented reasons involve the need to tap pools of foreign R&D manpower and expertise and to develop new products that could be sold globally based on the ideas and innovations generated in foreign subsidiaries. Two general scenarios of FDI effects on R&D in host regions are recognized in the literature. The first possibility is the transfer of R&D by TNCs from host country’s FIEs to their home countries. The second scenario leads to an upgrading of host country’s R&D through the location of home-baseaugmenting laboratories in host regions to exploit specialized local expertise (Hotz-Hart 2000; Dunning 1992). In the context of CE generally and Czechia specifically, it has been argued that FDI can undermine the abilities of recipient countries to develop their own domestic industrial innovation and R&D sector, and therefore diminish their ability to produce more value-added goods and services 40

For example, US companies spent nearly 90% of R&D expenditures in the United States in 1997. Out of 186 US R&D facilities abroad, 164 were located in the developed countries. Most of the US R&D expenditures abroad are concentrated in five core countries: Germany, the United Kingdom, Canada, France and Japan, followed by Italy, the Netherlands, Brazil, Sweden and Australia. There was only one US R&D facility located in CEE, Honeywell’s Technical Center in Prague, Czechia. The largest R&D expenditures by foreign-owned businesses in the United States come from Switzerland, Germany, the United Kingdom, and Japan, followed by France, Canada, the Netherlands and Sweden (Dalton and Serapio 1999:9, 17, 35, 39, 83). 41 One survey of 621 FIEs conducted in Czechia found that 21% of surveyed firms conducted “significant R&D inside their Czech companies” and 56% of firms did some R&D or product development in Czechia (Pomery 1997). The results must be interpreted with caution, however, because the response rate of the survey was only 26% (163 companies).

6.5 FDI Effects on Domestic Research and Development

211

(e.g. Jindra 1996).42 According to this view, FDI may lead to a reduction in domestic technological capacity as uncompetitive local companies sharply reduce their R&D expenditures (see also Young et al. 1994). At the same time, many foreign TNCs may transfer the existing R&D to their R&D centers located abroad after their takeover of domestic companies. Empirical analysis of the determinants of the R&D expenditures of 241 Czech and 186 Hungarian firms in chemical and mechanical engineering industries concluded that foreign ownership “adversely affects the chances of investment in R&D” (Urem 1999:179). According to the survey conducted by CzechInvest in 1998, 22% of foreign investors in manufacturing conduct “significant” R&D in their Czech subsidiaries and 53% conduct product development work on exported goods. The OECD reported that 33% of Czech corporate R&D expenditures were made in the automotive sector and 63% of overall R&D expenditures were financed by industry compared to 43% in Hungary and 31% in Poland (CzechInvest 2001). According to the Czech Automotive Association, 65% of companies in the Czech automotive industry conduct R&D, and on average the companies spend 4% of their annual turnover on R&D.43 As of 2005, the Czech-based automotive industry employed 4,000 R&D personnel (CzechInvest 2005:4). Interviews with thirty Czech component suppliers and Škoda-Auto conducted in 2000, 2001 and 2005 revealed three major R&D location strategies pursued by foreign investors in the Czech automotive sector in the 1990s. All three strategies are seeking cost-effective R&D and two of them are related to the different spatial structures of TNCs and the position of Czech subsidiaries in the corporate hierarchy (Massey 1995) (Table 6.3). 6.5.1 Transfer of R&D Abroad (Global Strategy) The first strategy is linked to the part-process spatial model of TNC in which Czech component suppliers are predominantly assembly operations vertically integrated into Western TNCs with no or extremely limited R&D functions. The existing R&D, including selected experienced and talented Czech engineers and designers, tends to be transferred from Czech suppliers to the specialized R&D centers typically located in TNC’s home country. TNCs preferring such a concentration of R&D are typically those specialized on the production of a limited number of automotive 42

Interview with the general director of PAL Praha, Prague, February 14, 2001. Interview at the Czech Automotive Industry Association, Prague, July 10, 2000. 43

212

6 The Role of FDI in the Czech Automotive Industry

components or modules and servicing car assemblers in various markets worldwide (so called “global sourcing”). This is a cost-efficient approach that assures a high quality R&D and avoids overlapping R&D in different subsidiaries of the same TNC (Fig. 6.2). The elite group of first-tier transnational automotive component suppliers that emerged in the past 10–15 years built specialized R&D centers where they have concentrated R&D for their worldwide operations. These R&D centers are typically concentrated in the core areas of automobile production of the United States, Western Europe and Japan (Bordenave and Lung 1996). In the Czech context, it usually means that there is no or very limited development of new products in foreign branch plants and the existing R&D (basic R&D in particular) has been transferred to specialized R&D centers after the acquisition of Czech suppliers.

A

Local implementer: assembly operations of product A, no R&D

country 2 e.g. Czechia

International boundary

Core country Global or regional R&D center

R&D center

A

country 3

R&D transfer

A country 4

Fig. 6.2. Transfer of R&D abroad (global strategy).

For instance, Barum Otrokovice used to develop its new products in-house and its basic R&D used to be done at the nearby research institute. After its acquisition by Continental, all product development including testing of products was transferred to Continental’s central R&D facility. Several of Barum’s researchers work in the center. Barum has kept a construction office and about 70 workers are engaged in tasks associated with applied

6.5 FDI Effects on Domestic Research and Development

213

product development.44 Similarly, R&D was centralized after Federal Mogul merged with T&N and the existing R&D was largely transferred from its Kostelec nad Orlicí subsidiary to research centers in Germany, France and the United Kingdom. In 2000, 18 workers were engaged in the product development, some of them working on projects not related to on-site production.45 Draka Kabely, a greenfield factory built to produce industrial cables and cable harnesses, has no R&D. R&D is conducted at Draka’s factories in the Netherlands and Germany.46 Avon Rubber has a R&D center in Westbury (Wiltshire, the UK) and, subsequently, its Czech subsidiary Avon Automotive a.s. Rudník has retained only limited R&D functions, such as the cooperation with its suppliers’ designers on the shape of supplied components, their pilot production, and durability tests.47 It remains to be seen what long-term effects of such R&D transfers abroad will be in terms of innovation and research capacities and the overall economic development of Czechia (Jindra 1996). The transfer of strategic functions such as R&D, decision-making powers, global marketing and management functions to parent Western companies not only increases the dependency of local component suppliers on Western companies, but it also makes them more vulnerable at times of economic difficulty. 6.5.2 Local R&D Promotion Based on Specialized Expertise (Multi-local Strategy) The second strategy is related to the conglomerate model of TNCs in which the production of different commodities is under the same financial control. In such a case, a TNC tends to leave the R&D functions in its specialized subsidiaries that concentrate on the production of one class of automotive components exported worldwide. The pressure to concentrate R&D from various companies producing different products to one site is lower than in the case of several branch plants producing the same component in different locations (markets). The individual subsidiaries that possess specialized expertise within a particular TNC and produce a unique product are likely to be responsible for product development. This 44

Interview with the Executive Board Chairman and Plant Manager of Barum Otrokovice, Otrokovice, July 12, 2005. 45 Interview with the general director of Federal-Mogul Friction Products a.s., Kostelec nad Orlicí, July 17, 2000. 46 Interview with the executive director of Draka Kabely and former director of Kablo Velké Meziříčí, Velké Meziříčí, July 27, 2000. 47 Interview with the former director and executive board member of Avon Automotive a.s., Rudník, August 10, 2001.

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6 The Role of FDI in the Czech Automotive Industry

approach then stresses the development of R&D functions along with the production function in subsidiaries. In such a scenario there were no attempts to transfer the existing R&D abroad, and some companies have experienced growth in R&D conducted in Czechia after foreign acquisition (Fig. 6.3).

Core country Global or regional R&D center

World or regional mandate in G: product G assembly and R&D in G Local implementer in F

R&D center R& D

F G

R&D in G

country 3

Information exchange

A

t ra

R&D in A

country 2 e.g. Czechia ns fe r

B C D

E

R&D in C

country 4

World or regional mandate in A: product A assembly

R&D in A World or regional mandate in C: product C assembly and R&D in C Local implementer in B, D, E

Fig. 6.3. Local R&D promotion based on specialized expertise (multi-local strategy).

In the case of Temac Zvěřínek owned by the Royal Econosto N.V., the Dutch owner did not limit the existing R&D and there were no attempts to transfer it abroad. One reason is that the Econosto Group specializes in the production of industrial sealing products, while Temac also produces the automobile gaskets in which the Econosto Group has no expertise. However, the existing R&D was and is very small and its automotive section has only four workers.48 In the case of PAL Praha, the company was already spending 7% of its turnover on R&D in the early 1990s, long before its JV agreement with the Canadian firm Magna. After the JV was formed, PAL Praha built a new R&D center which was planned before the JV formation and was finished in December 2000. The center includes the development of new products, a prototype workshop, laboratories, testing rooms and a measurement center. It employs 70 workers, which is more than its R&D employment before 1989. PAL Praha is fully responsible for R&D 48

Interview with the general director of Temac a.s. Zvěřínek, July 19, 2000.

6.5 FDI Effects on Domestic Research and Development

215

of its products. There is no transfer of R&D results from Magna to PAL because Magna has no expertise in the production of small electric engines (the core business of PAL).49 Table 6.3. R&D location strategies by TNCs in the Czech automotive industry Global strategy TNC’s spatial part-process structure assembly of Type of production standardized products at different locations R&D R&D concentrated location outside CE

Reasons

R&D quality, efficiency

Examples

Barum Continental Draka Kabely, Avon Rubber, Denso Manufacturing, Dura Automotive, Showa Aluminium, Parker Hannifin

Multi-local strategy conglomerate assembly of specialized products at different locations R&D decentralized to factories- local R&D for globally marketed products specialized local expertise

PAL Praha, Temac Zvěřínek

Supply-oriented strategy varies varies, not necessarily linked to production routine R&D decentralized to CE, higher R&D centralized outside CE cost-cutting, highly skilled and inexpensive R&D labor, product customization for the local market Škoda-Auto, Lucas Autobrzdy, Bosch, Mercedes Benz, Rockwell Automation, Siemens, VisteonAutopal, Johnson Controls Trim

6.5.3 Local R&D Promotion Based on Skilled and Inexpensive R&D Labor (Supply-oriented Strategy) Finally, the third approach minimizes the cost of R&D for TNCs by developing R&D in Czechia, capitalizing on its highly educated and experienced designers and engineers that are much cheaper than comparatively skilled and educated workers in the West. This approach depends on the existence of a highly skilled workforce fully compatible with its Western counterparts and is not necessarily related to the production function (Fig. 6.4).

49

Interview with Tomáš Jindra, general director of PAL Praha, February 14, 2001.

216

6 The Role of FDI in the Czech Automotive Industry

This is the case for Lucas Autobrzdy, one of two Lucas European braking systems subsidiaries, where R&D is conducted despite the initial efforts to concentrate all R&D in the other R&D site in Germany. R&D is more important at Lucas Autobrzdy today than before its foreign acquisition despite the approximately same number of workers employed in R&D compared to the early 1990s. R&D at Lucas Autobrzdy was integrated into Lucas’ worldwide R&D operations. About 90% of new products developed at Lucas Autobrzdy are not produced on-site but are developed for other Lucas factories. Recently, there have been efforts to further expand local R&D because “a highly skilled and experienced engineer costs much less [in Czechia] than abroad.”50 Global or regional R&D center: basic research, strategic R&D

Core country

R&D center

R&D division of labor

Routine R&D

Decentralization of certain R&D functions from the core to CEE

country 2 e.g. Czechia

Routine R&D

country 3

Routine R&D

country 4

Fig. 6.4. Local R&D promotion based on skilled and inexpensive R&D labor (supply-oriented strategy).

Škoda Auto used to employ 584 workers in its R&D center before the acquisition by VW. In December 2006, the company employed 1,420 workers in R&D and its technical development is the third largest in the VW Group after VW and Audi (Škoda Auto 2007:30). Between 1998 and 1999, Škoda built a new designer center in its R&D complex for 200 million CZK (about 5.5 million USD) for 160 “top-class constructors and designers” (Škoda Mobil 1998a:1). This particular R&D expansion will save Škoda 12 million USD annually for external services (Němec 1997). Further 1.21 billion CZK (about 50 million USD) expansion of the R&D 50

Interview with the general director of Lucas Autobrzdy, s.r.o., Jablonec nad Nisou, February 8, 2001.

6.5 FDI Effects on Domestic Research and Development

217

center was announced in 2005 which will add an additional 370 R&D jobs (Škoda Mobil 2005:2). Although after the acquisition of Škoda by VW it was originally assumed that R&D would be transferred to Germany, the quality and experience of Škoda’s engineers combined with their low cost compared to German ones, have not only saved R&D at Škoda but led to its substantial expansion.51 Still, higher engineering functions related to platform development have been transferred to Germany and Škoda’s R&D has focused on the adjustment of VW Group’s platforms to use Czech-sourced components. At the same time, some routine R&D functions such as CAD operations have been moved from Germany to Mladá Boleslav to exploit the benefits of low-cost labor (CzechInvest 1997). Autopal Nový Jičín, a subsidiary of Visteon, is a producer of lighting technology, cooling and air-conditioning components. Autopal has two technical centers with the European-wide competency: one for lighting technology and the second one for cooling and air-conditioning technology. Both R&D centers are engaged in basic research. Autopal employed 395 R&D personnel in 2006 and only Škoda Auto employs more R&D personnel in the Czech automotive industry. This unusually strong R&D resulted from the strategy of Autopal’s post-1989 top management. In the early 1990s Autopal was looking for a foreign partner willing to further develop not only production but also the existing R&D. At the same time, Ford was looking for a possibility to set up the production of lighting components in Europe and it was also interested in Autopal’s R&D expertise in the air-conditioning and cooling components. As a result, the 1993 takeover of Autopal by Ford fit well in Ford’s development strategy in Europe and Ford further developed Autopal’s existing production and R&D expertise in lighting components. The second R&D center specializing in cooling and air-conditioning technology was opened in 2004 because of the success in the lighting technology R&D, low R&D costs at Autopal compared to Western Europe, and the fact that the parent company did not have any established R&D center in this area in Europe. The existing R&D activities in the United Kingdom and Germany are now being transferred to Autopal for cost-cutting reasons.52

51

Interview with the Škoda Auto Public Relations Manager, Mladá Boleslav, June 14, 1999. 52 Interview with the Chairman of the Board of Directors, Autopal s.r.o., subsidiary of Visteon Corporation, Nový Jičín, August 9, 2005.

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6 The Role of FDI in the Czech Automotive Industry

Table 6.4. Major automotive R&D centers in Czechia in 2006 Company Škoda Auto

Location Mladá Boleslav

TNC E Year JL Germany 1,420a before Yes 1990

České Germany 200 2005 Budějovice Prague Germany 100+ 1996

Yes

MercedesBenz

Plzeň

Germany 61

2004

No

Ricardo Valeo

Praha Praha

UK France

2000 2002

No No

Hella Autotechnik Lucas Varity PAL Int.

Mohelnice Germany 85

2004

Yes

R&D field of expertise Škoda models and joint R&D within the VW Group European center for lighting systems European center for air conditioning systems Automotive components and modules Car and engine components, electronic equipment, modules Car and engine components, electronic equipment, modules Engines and transmissions Air conditioning systems and control panels Lightning products

VisteonAutopal VisteonAutopal Robert Bosch MercedesBenz

Nový Jičín USA

207

Nový Jičín USA

188

Yes

Braking systems

125 100

before Yes 1990 2004 Yes

No

Jablonec n. N. Praha

USA

77b

2005

Canada

70

Continental Teves Kostal CR

Jičín

Germany 65

early Yes 1990s 2005 Yes

Zdice

Germany 50

2003

Yes

TRW-DAS

Dačice

USA

43

2006

Yes

Alcoa Fujikura

Plzeň

Japan/ USA

30

2005

No

Indet Safety Systems

Vsetín

Japan

19

2005

Yes

Windshield wiper systems Brake assist units and tandem master cylinders Electronic and electromechanical components Product development, re-design and testing Automotive electric and electronic distribution systems Micro gas generators for seatbelt pretensioners

TNC investor’s home country, E employment in 2006, JL joint location of R&D center with a manufacturing plant – Yes or No. a planned expansion up to 1700-1800 people by 2009. b planned expansion up to 120 engineers. The employment figures are based on company information and may not be comparable. They may include the entire staff of an R&D center or research scientists and engineers only. Source: author’s company interviews, web pages of the respected companies, CzechInvest (2007 database), and various additional sources.

6.6 Foreign Capital Failures

219

Similar developments could be seen across CE (Pavlínek 2004) but it remains to be seen whether the automotive R&D centers in Czechia listed in Table 6.4. signal a new trend of allocating more R&D responsibilities to Czechia by TNCs. Despite the fact that the majority of these R&D centers were opened in the past several years, it seems highly unlikely that any main automotive R&D centers would be transferred from the Western European automobile production core to its CEE periphery. In fact, the recent restructuring of the European automobile industry tended to reinforce strategic activities in the core, represented mainly by Germany, at the same time as some production activities were decentralized to the European periphery to take advantage of lower production costs. This led to increased domination of the European automobile production core over other European regions (Bordenave and Lung 1996). It seems more likely, that only some car manufacturers and component suppliers that have large-scale production in CE will set up R&D subsidiaries in the region to take advantage of local skills and low wages to minimize the purchasing of external services from Western Europe, thus further minimizing the cost of production in CE. It is also likely that such R&D centers will concentrate on routine R&D activities, while the core R&D functions will remain concentrated in Western Europe, the United States and Japan. The situation in the Czech automotive industry thus suggests that FDI effects on domestic R&D depend on particular cost-cutting strategies pursued by different types of TNCs. In other words, in some cases TNCs prefer cost-effective concentration of R&D in the developed countries, while in other cases the development of particular R&D functions in Czechia and CE as a whole could be a cheaper alternative to R&D concentration in high-wage countries. It remains to be seen which of these contrasting approaches will become more important and what will be its effects on the Czech R&D sector.

6.6 Foreign Capital Failures It would be wrong, however, to assume that FDI or close cooperation between Czech and foreign firms resulted in automatic success in all privatized companies. There have been a number of cases in which JVs or cooperation agreements failed in the Czech motor industry. These included, for example, Daewoo–Avia (trucks) analyzed in Chap. 4, ČZ–Cagiva (motorbikes) and Zetor–John Deere and Company (tractors). Here I will focus on the cases of ČZ-Cagiva and Zetor-John Deere.

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6 The Role of FDI in the Czech Automotive Industry

6.6.1 ČZ–Cagiva The JV between ČZ and the Italian Cagiva Motorcycles was agreed in 1991 as one of the first industrial JVs between a Czech company and a foreign investor after 1989. Cagiva purchased 51.2% of ČZ’s shares in 1992. ČZ was the largest Czechoslovak producer of motorcycles before 1989. It started to produce motorbikes in 1932 and by the late 1950s had become one of the largest European producers. In 1959 the company made more than 100,000 motorcycles. ČZ motorcycles were exported to 112 countries. However, since the 1970s, production was gradually reduced as it was not considered a priority by the Czechoslovak government (see Chap. 2). ČZ motorcycles became obsolete, mainly because of the lack of investment and absence of any technological development. In 1989, ČZ still made more than 21,000 motorcycles. After 1989 production continued to decline rapidly as the CMEA markets collapsed in the early 1990s and cheap second-hand foreign motorcycles were imported in large numbers to Czechoslovakia. In 1990 the company manufactured 17,000 motorcycles, but the production fell to just over 6,000 in 1992 (Lyall 1994:60). The JV with Cagiva was designed to salvage the production of motorcycles at ČZ because it would allow the access to Western capital and technology considered to be necessary for upgrading production. Equally important for ČZ was the prospect of accessing new markets with the help of Cagiva. Originally, ČZ-Cagiva JV was supposed to increase its production to 50,000 motorcycles annually, and it planned to produce 70,000 by 1996 while increasing their quality and competitiveness. The ČZ-Cagiva JV also planned to set up an assembly operation in the Chinese province of Shaanxi. However, the JV struggled right from the beginning, and the planned large-scale production was never successfully launched. ČZ-Cagiva never produced more than 6,000 motorcycles annually in spite of about 17 million USD (0.5 billion CZK) investment. The company never generated any profits. Cagiva Motorcycles and ČZ blamed each other for the JV’s failure, but the biggest problem was the fact that the JV with Cagiva did not result in access to worldwide sales and distribution networks and to any new markets for ČZ motorcycles.53 The JV was liquidated in 1998, and the production of motorcycles in ČZ ended (Vojtěch 1996; MF DNES 1997a, 1999a).

53Interviews with the Technical Director and with the Chair of the Department of Controlling, ČZ a.s., Strakonice, July 1, 2005.

6.6 Foreign Capital Failures

221

6.6.2 Zetor–John Deere&Co. Zetor Brno used to produce between 26,900 and 30,690 tractors annually and employ more than 10,000 workers in Czechia in the 1980s (SR ČSSR various years). Zetor introduced several new concepts, such as one of the first hitch-hydraulic systems, with full-position, draft and mixed control capability in 1960. Zetor was the first tractor producer to unify the production of individual spare parts and elements. It was also the first tractor company to manufacture a fully integrated safety cabin for the driver with insulated, rubber-mounted suspension. Most recently, Zetor pioneered a flat, vibration-insulated, rubber-mounted platform (operator’s station). Most of its products were exported world-wide, but more than half went to the CMEA countries in the 1980s. Between 1989 and 1993, production declined by 70%. The main reasons for this decline included the CMEA’s collapse, the Gulf war, and the international economic embargo against Iraq, where Zetor used to sell more than 5,000 tractors annually in the 1980s. Additional annual exports of about 6,000 tractors were lost when the Polish government set up protective tariffs to save Ursus – its domestic tractor producer. Finally, the Czech agricultural crisis led domestic demand to plummet from 6,000 to 600 annually in the early 1990s (Galík 1999). In this respect, the situation of Zetor was similar to the Czech truck producers in the early 1990s (see Chap. 4). In 1993 Zetor concluded marketing agreements with the American John Deere and Company, a leading producer of agricultural equipment, in order to halt its continuing production decline by allowing Zetor to access new markets through John Deere’s sales and distribution network. However, the agreements were disadvantageous for Zetor because they divided the existing markets between the two companies. John Deere & Co. received an exclusive right to supply Zetor’s most lucrative markets. At the same time, however, it did not guarantee any sale of Zetor’s tractors through its distribution network.54 Furthermore, Zetor was not allowed to negotiate a JV with a different partner for five years and could not withdraw from the agreements with John Deere under any circumstances. Zetor’s managers hoped that John Deere & Co. would buy Zetor if these agreements were successful. They also hoped that they would keep their positions and control of the company after its acquisition by John Deere & Co. because they allowed John Deere & Co. access to Zetor’s markets. However, while John Deere blocked Zetor’s markets it neither bought 54

In 1995, Zetor sold about 2,500 tractors in the U.S. and Mexico through John Deere’s sales network (MF DNES 1996).

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6 The Role of FDI in the Czech Automotive Industry

Year

2006

2005

2004

2003

1990 1992 1994 1996 1998 2000 2002 2004 2006

2002

-2500

0

2001

-2000 2000

5000

-1500

1999

10000

-1000

1998

15000

1997

20000

0 -500

1996

25000

500

1995

Annual production

30000

1994

Millions of Czech crowns

Zetor, because it could not agree on price, nor formed a JV with Zetor (Dolečková 1999). By 1994, Zetor was on the brink of bankruptcy. The Czech government helped Zetor at the end of 1994 when it decided that the state-owned Konsolidační banka should buy 70% Zetor’s shares from the NPF for a nominal price, and it also purchased Zetor’s debts of almost one billion CZK (almost 35 million USD) from two Czech banks (Česká spořitelna and Komerční banka). Thus the state owned 70% of Zetor through the Konsolidační banka and Zetor avoided bankruptcy. By 1996 the Konsolidační banka owned 79% of Zetor’s shares but Zetor was still accumulating financial losses (3.7 billion CZK by 1996 – about 136 million USD). According to the governmental plan, a foreign partner was supposed to “definitively save” Zetor (Dolečková 1999). No foreign partner was found, however, and Zetor continued to accumulate production losses and debts resulting in a complete production collapse in 1999 and 2000 when production was halted for 19 months. Zetor did not go bankrupt only because of continuous governmental subsidies. However, the government was unable to launch effective enterprise restructuring at Zetor despite six billion CZK spent to save it. In 2002 the government sold Zetor to Slovak HTC Holding for 310 million CZK and provided an additional 700 million CZK loan, because Zetor was unable to finance its day-to-day operations. The new owners restructured production and increased output to 6,492 units in 2006 (Figure 6.5). It remains to be seen whether these latest developments will lead to Zetor’s long-term survival.

Year

Fig. 6.5. Annual production of Zetor tractors 1989-2006 (left) and annual operating income/loss of Zetor 1994-2006 (right). Source: Based on Zetor (2006) and data from various sources.

6.7 Conclusion

223

6.7 Conclusion This chapter has shown that the governmental policies that discouraged privatization through FDI between 1992 and 1996 were often detrimental to the long-term development prospects of the affected enterprises. This was especially true in those cases when the government blocked foreign acquisitions of Czech enterprises or formation of JVs that were prepared and supported by existing managements. Alternatives to foreign ownership typically included either voucher privatization resulting in dispersed ownership and weak corporate governance or the ownership by undercapitalized private domestic companies that emerged following management buyouts of former state-owned enterprises (see Chap. 5). In general, in terms of enterprise restructuring there were not large differences between stateowned enterprises and domestic private companies in the first half of the 1990s (Hunya 1997:295). As a result, Czech ownership was generally slow to generate strategic enterprise restructuring necessary for a successful long-term enterprise development that would make Czech enterprises competitive both domestically and internationally. FDI inflows increased substantially after the new government introduced a system of FDI incentives in 1998, suggesting that such incentives play an important role in investment decisions of TNCs. One of the immediate outcomes of foreign acquisitions of domestic companies and JV agreements between domestic and foreign firms was a substantial increase in labor productivity resulting from the replacement of state socialist work organization and shop-floor practices with capitalist ones. This included the introduction of more effective managerial control, more efficient horizontal and vertical organization of the work-place, and measures to substantially increase labor discipline. As the evidence from the interviews shows, the introduction of such measures, including new managerial approaches, has often been a highly contested process resulting in conflicts between the new owners, workers and existing managers. In extreme cases, these conflicts could lead the failure of JVs. The examples of ČZ-Cagiva, Zetor-John Deere&Co. and Daewoo-Avia show that foreign partnership does not necessarily always benefit Czech companies. In all three cases, the cooperation with foreign companies failed to solve the fundamental problem for which it was sought in the first place: namely the long-term production security and economic success of domestic enterprises. Fully or partially foreign-owned Czech component suppliers greatly benefited from access to the worldwide sales and distribution networks of their parent enterprises. CEE producers generally consider their non-existent

224

6 The Role of FDI in the Czech Automotive Industry

sales and distribution networks in Western Europe and other foreign markets among their greatest weaknesses. Building such networks and the penetration of new markets is typically a long-term and expensive process. Foreign ownership by a well established Western company thus, offers a fast and relatively inexpensive way to overcome this handicap. Additionally, the possibility to sell their products through such networks allowed Czech companies to substantially increase their production by supplying new customers. Most companies interviewed also benefited from technology transfer following FDI. Although the most modern technology was not always transferred to Czechia, technology transfer has been considered very important in order to increase efficiency and narrow the gap between Czech and Western component suppliers. In terms of FDI effects on domestic R&D in the Czech passenger car industry, we could see that the fears of potential large-scale transfers of industrial R&D abroad by TNCs may be exaggerated. Foreign TNCs pursue three distinct R&D strategies in the Czech passenger car industry related to the globalization of R&D. The transfer of industrial R&D abroad is likely in what I called the “global R&D strategy”; this is linked to the part-process spatial model of TNC and global sourcing strategies in which foreign subsidiaries produce a limited number of standardized automotive components in different markets. The conglomerate model of TNC is related to the multi-local industrial R&D strategy; in this, local R&D, based upon specialized expertise within a TNC, is maintained and further developed to serve the TNC’s needs in a particular class of products. The third industrial R&D strategy is linked neither to a particular spatial structure of TNCs nor to a particular type of production but is rather supply-oriented. In this strategy, foreign-owned R&D facilities are attracted to Czechia for costcutting reasons to tap into skilled and inexpensive R&D personnel. These facilities typically concentrate on routine applied and development type of research while basic research remains concentrated in the core areas of global passenger car production. Thus, my research suggests that a full or partial foreign ownership has been mainly advantageous for the Czech car component suppliers. However, it also suggests that weak local and regional economic linkages of many FIEs not only mean that their overall regional economic impact and spillovers are limited, but they also make it relatively easy to move such production to lower-cost locations, should the need arise. As such, FIEs are not necessarily very stable element of local and regional economies. Additionally, FIEs generously supported by governmental incentives can

6.7 Conclusion

225

negatively affect local companies by headhunting their best workers. A crucial question that remains to be answered is whether the benefits of foreign-ownership are limited to FIEs or they spill over to domestic enterprises having thus positive effects for the entire national economy.

7 Restructuring Strategies in the Czech Automotive Components Industry

This chapter extends the analysis of the Czech automotive components industry presented in the previous two chapters. As we could see, privatization of the automotive components industry was a complex process that led to its profound organizational restructuring and ownership transfers. It involved a number of different strategies such as voucher privatization, management buyouts, spontaneous privatization, JV formation with foreign partners, or direct sales to foreign companies. Different privatization strategies had long-term consequences for the nature of enterprise restructuring. However, any sweeping generalizations about the relationship between a privatization strategy and the nature and outcomes of enterprise restructuring are impossible to make, inasmuch as the same privatization strategies could lead to very different outcomes in different enterprises as we could see in Chaps. 5 and 6. In this chapter the developments in the automotive components industry are analyzed in the light of the transformation of Škoda’s supplier network in the 1990s and 2000s, as Škoda Auto was and continues to be the single most important influence on the Czech automotive supplier sector. The chapter starts with a discussion of the effects of price and trade liberalization on the Czech automotive supplier industry and the survival strategies employed by component suppliers during the post-1989 economic crisis. The second section deals with supplier network transformation strategies in the 1990s, with a specific focus on Škoda’s supplier network in Czechia. The third section discusses the effects of FDI in the Czech automotive components industry in the second half of the 1990s and early 2000s. The wider economic implications of the Czech passenger car industry developments are evaluated in the conclusion.

P. Pavlínek, A Successful Transformation? Contributions to Economics, doi: 10.1007/978-3-7908-2040-9_7, © Physica-Verlag Heidelberg 2008

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7 Restructuring Strategies in the Czech Automotive Components Industry

7.1 Effects of Price and Trade Liberalization in the Early 1990s Price liberalization was launched in Czechoslovakia on January 1, 1991, when 85% of prices were freed together with the introduction of partial currency convertibility in foreign trade. The government eliminated foreign trade monopolies, import quantity restrictions, and export licenses for a large number of imports. Many production and consumption subsidies were also eliminated. Domestic enterprises involved principally in the production of consumer goods were protected by a temporary 20% import surcharge that was gradually phased out by January 1993. Price liberalization led to increased inflation that reached 57.9% in 1991, but fell to 10.9% in 1992 (Dyba and Svejnar 1995:24-33; Hlaváček and Mejstřík 1997:18; Urban 1997:183).1 At the same time, the Czechoslovak economy experienced a number of external economic shocks – such as the transfer to dollar payments in trade with the Soviet Union, the transfer of all foreign trade within CMEA from convertible rubles to convertible currencies and world prices, the necessity to purchase crude oil increasingly on the world market, the collapse of the Soviet and East German markets (and to a lesser extent of other CMEA markets) for Czechoslovak producers, the global economic recession, rapidly increased crude oil prices, and the international embargo of Iraq following its invasion of Kuwait in August 1990. Foreign trade volume with the CMEA members dropped by 49% in 1991 alone (Urban 1997:185).2 Broadly defined, the machinery industries were most negatively affected by the collapse of CMEA trade.3 The lower quality and technologically often inferior products of this sector could not be sold as easily on Western markets as standard natural resource-intensive intermediate goods (Bohatá et al. 1995:268).4 The dissolution of Czechoslovakia into Czechia and Slovakia on December 31, 1992 represented another economic shock for both newly independent countries.

1

See Myant (1993:187-205) for a detailed account of “shock therapy.” Fifty-four per cent of Czechoslovak exports went to the CMEA markets in 1989; of the European CMEA members, only Bulgaria was more dependent on CMEA trade (OECD 1994:16). 3 The machinery industries include machinery, electrical equipment and apparatus, instruments and motor vehicles. 4 The export to total sales ratio increased most dramatically for metallurgy and construction materials between 1990 and 1993 (Bohatá et al. 1995:273). 2

7.1 Effects of Price and Trade Liberalization in the Early 1990s

229

The entire Czechoslovak economy entered a period of deep “transition” crisis in 1991.5 A large number of industrial enterprises became insolvent and the widespread payment insolvency turned into the most serious enterprise problem in the early 1990s, as the internal debt of Czechoslovak enterprises increased from 2.5 billion Kčs in 1989 to 250 billion in 1992 (not inflation adjusted) (Mlčoch 2000:59). “Primary payment insolvency” describes a situation in which the value of firm’s unpaid obligations exceeds the value of its receivables (Hlaváček and Mejstřík 1997:21). Inefficient bankruptcy legislation and an active governmental anti-bankruptcy policy allowed the vast majority of such insolvent enterprises to avoid bankruptcy (see Brom and Orenstein 1994:898-9).6 Insolvent enterprises in turn negatively affected those that were in a better financial situation but were forced to sell their products on credit. Such enterprises were very often not paid on time and found themselves unable to pay for materials, goods and services they needed for production, a situation described as secondary payment insolvency. Mutual enterprise indebtedness resulting from primary and secondary payment insolvency contributed to severe manufacturing production declines in the early 1990s and became one of the barriers to enterprise restructuring. The effects of price and trade liberalization were not identical across the automobile industry. The automotive components industry was even less prepared to face market conditions than the final assemblers. While the assemblers underwent at least some modernization in the 1970s and 1980s, the investment in the components sector was minimal (see Chap.2). As a result, the automotive components sector was very obsolete and not ready to face any Western competition. Neither was it ready to quickly increase the quality of its products. The actual effects of price and trade liberalization depended on a number of factors, such as the degree of exposure of auto component suppliers to CMEA markets (higher exposure typically resulted in larger production declines), the degree of their dependence on the Czechoslovak truck industry 5

Czechia’s GDP declined by 14.2% in 1991 and by 6.6% in 1992, and in 1991 investment declined by 17.7%, domestic demand by 20.6%, and real wages by 24.5% (Urban 1997:185; Landersman 2000:6). Industrial production plummeted by 22.3% in 1991 and by 13.8% in 1992. Agricultural output fell by 8.9% in 1991 and by 12.1% in 1992 (Dyba and Svejnar 1995:38). Transport equipment output declined even more precipitously than the overall economy, falling by 47.7% between 1990 and 1992 (Myant 1999b:151). 6 By 1996, 8,680 bankruptcy petitions had been filled in Czechia. Of these only 1,900 bankruptcies were eventually declared with a delay of several years (Mejstřík 1999:238).

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7 Restructuring Strategies in the Czech Automotive Components Industry

that had virtually collapsed by the mid-1990s (see Chap. 4),7 and the ability of individual car suppliers to use their comparative advantages, such as low production costs, to reorient their exports to the West. Those enterprises that refused to sell on credit, such as the tire producer Barum Otrokovice, avoided serious financial problems associated with secondary payment insolvency. However, they could only avoid selling their goods on credit on the domestic market if they could sell their products abroad. Barum Otrokovice has been particularly successful in quickly replacing its CEE markets by export expansion in the West, thus averting a production decline.8 Overall, however, most component suppliers experienced sharp production declines in the early 1990s. Trade liberalization also led to greatly increased competition not only for car makers but also for the component producers, especially in terms of components for Škoda cars after it entered a JV agreement with VW in March 1991, and German suppliers were invited to supply Škoda. Before 1989, a typical state socialist company producing auto components also produced another range of products not related to automotive production. In many state socialist manufacturing enterprises, automobile components production accounted for only a fraction of the overall production. In many cases, non-automotive products were first to experience sharp declines in demand. For example, Magneton Kroměříž delivered two-thirds of its pre-1989 production to the CMEA armaments industry. As the result of defense industry conversion and restructuring, two-thirds of Magneton’s turnover “disappeared almost over night” after 1989. The company had gradually managed to replace the lost business by increasing its component deliveries to Czech automobile producers in the early 1990s. However, the collapse of Czech truck production in the first half of the 1990s represented another blow to Magneton. During the 1990s, most Magneton’s customers either changed their production program and stopped buying Magneton’s products, became unable to pay for deliveries, or suffered from some other “economic disasters” (such as the destruction of the Yugoslav Zastava factory by NATO bombing in 1998 to which Magneton supplied starters and alternators).9 Gumárny Zubří produced military and civilian protective masks for the entire Warsaw Pact, and its auto component production, focusing on accumulator casings and car mats, 7

Motorcycle production also collapsed from more than 120,000 units in the late 1980s to 1,005 in 2006 (AIA 2007). 8 Interview with the Executive Board Chairman and Plant Manager of Barum Otrokovice, Otrokovice, July 26, 2000. 9 Interview with the Executive Board Chairman and Director of Magneton Kroměříž, Kroměříž, August 10, 2000.

7.1 Effects of Price and Trade Liberalization in the Early 1990s

231

was much less significant before 1989. After 1989, the company lost 80% of its turnover as armaments production collapsed across CEE.10 Fezko Strakonice, the producer of textiles for car seat covers, traditionally produced woven and knitted fabrics and headwear products. While the headwear production remained profitable, the production of woven and knitted fabrics started to collapse, causing serious financial problems for the entire company.11 Gumotex Břeclav, the maker of molded foam parts for seats, sun visors, molded foam parts for headrests, and other parts for car interiors also produces molded foam parts for the furniture industry and recreational products, such as inflatable boats, rubber mattresses and plastic beach mats. These non-auto related products experienced the greatest decline in the early 1990s, whereas automotive component production initially declined only gradually.12 By the early 1990s, both, the Czech passenger car and truck production began to decline in Czechia. While Škoda’s 1991 passenger car production decline was only temporary, the truck production collapse was much deeper and apparently permanent (Figs. 2.5 and 3.1). This situation had the greatest negative impact on those Czech component suppliers dependent on the truck makers. The most difficult period for the truck component suppliers began in 1993. For example, Almet Hradec Králové, a firm that supplied pistons to Tatra Kopřivnice, was compelled to completely cease production at the end of 1992 and early 1993 because of the collapsing output at Tatra. The company had to find alternative products and buyers in order to survive, which it did by shedding labor and refocusing on niche production and the secondary market in pistons. The company now specializes in small production runs of pistons that larger foreign companies are not interested in supplying. The reliance on secondary markets has introduced a high degree of economic uncertainty for the company.13 C.I.E.B. Kahovec, the former Karosa Brandýs nad Orlicí, was one of the Karosa bus maker’s branch plants specializing in the production of springmounted driver seats for Karosa buses and all Czechoslovak trucks. The company produced 80,000 seats in 1988. After 1989 production declined

10

Interview with the Director of Gumárny Zubří, Zubří, July 28, 2000. Interview with the Vicechairman of Executive Board and Director of Autotextilie, FEZKO a.s., Strakonice, Strakonice, August 2, 2000. 12 Interview with the Chair of Marketing, car accessories division, Gumotex a.s. Břeclav, Břeclav, July 18, 2000. 13 Interview with the Director of Almet a.s. Hradec Králové and Vicechairman of Executive Board, Hradec Králové, August 9, 2000. 11

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7 Restructuring Strategies in the Czech Automotive Components Industry

sharply by almost 90% to about 10,000 seats annually because of the truck industry collapse.14 Those component suppliers that delivered parts to CEE car manufactures, such as Autobrzdy that produced brakes for the East German Wartburg plant, were impacted by production interruptions. In the case of Wartburg, its production ceased shortly after it was purchased by Opel (the European division of GM), and Autobrzdy received only a three weeks advance notice that its brakes were no longer needed.15 However, not all outcomes resulting from the loss of traditional CEE and domestic markets were negative. The most important positive effects of price and trade liberalization for auto component producers included easy access to Western markets and Western production materials not available before 1989.

7.2 Survival Strategies of Czech Component Suppliers in the Early 1990s Faced with these circumstances, Czech car component suppliers employed a number of short and long-term survival strategies to cope with the symptoms of the post-1989 economic crisis. 7.2.1 Export Expansion Export expansion to Western markets was a strategy employed to offset collapsing Czech and CEE automotive production (especially of trucks, tractors and motorcycles). This strategy required component producers to rapidly elevate the quality of their components and to lower production costs to be competitive in Western markets. It also depended on the existing sales/distribution networks in foreign markets and the experience in selling their components abroad.16 Such a situation was very rare, however. 14

Interview with the general director of C.I.E.B Kahovec, s.r.o., Praha, Brandýs nad Orlicí, August 1, 2000. 15 Interview with the general director of Lucas Autobrzdy, s.r.o., Jablonec nad Nisou, February 8, 2001. 16 In the Czech industry as a whole, this strategy was typically successful in enterprises that produced intermediate goods, raw materials, and standard goods not dependent on R&D, high skills, or complicated sales networks (Bohatá et al. 1995:261). See Chap. 4 for the example of an unsuccessful attempt by Tatra to sell its trucks abroad independently without an existing distribution network, which had disastrous consequences for the company.

7.2 Survival Strategies of Czech Component Suppliers in the Early 1990s

233

This approach was employed by the tire producer Barum Otrokovice, which increased its exports of passenger car tires to the United States by 30% over a period of several months in late 1990 and early 1991, capitalizing on its existing network of dealers and sales affiliates and low production costs. The company thus avoided selling its products on credit to Czech or CEE companies; this was a major advantage since income from credit sales often was not realized, creating the secondary payment insolvency problem described earlier. Other automobile component makers such as PAL Praha also successfully expanded exports to offset the collapsing demand of Czech truck makers in the first half of the 1990s.17 7.2.2 Labor Shedding Labor shedding was a universal strategy employed by component suppliers to cope with the economic crisis and production drop after price and trade liberalization in January 1991. For example, the production of spark plugs dropped by 30% at Brisk (former Jiskra) Tábor in 1991 and 1992. One hundred workers (10% of labor force) were laid off immediately and additional 250 workers were gradually dismissed. Fezko Strakonice, which employed 2,500 workers in 1989, had slashed its workforce to 700 workers by 2000 and 360 by 2005. Gumotex Břeclav laid off about 350 workers in 1990-1991, Avon Automotive, formerly Rubena Rudník shed 35% of its labor force (200 workers) between 1990 and 1992 (Table 7.1). In most companies, labor shedding was offset by increased labor productivity.18 By 2000, employment levels had not returned to the pretransformation numbers in 80% of the companies whose officials I have interviewed. Of the 19 interviewed companies that existed before 1989, only three increased employment in the 1990s (Karsit Jaroměř, Tanex Plasty Jaroměř and Avon Automotive Rudník), and one retained its pre1990 employment (Barum Continental). Karsit Jaroměř increased its employment by buying out smaller producers, and establishing new leasing and logistical companies (see Chap. 5). Tanex Plasty Jaroměř was built in the 1990s from a small plastic components producing unit employing 60 workers in 1989. While the parent tannery (Závody Antonína Zápotockého) collapsed in the 1990s, Tanex Plasty used an export-based strategy 17

Interviews with the Executive Board Chairman and Plant Manager of Barum Otrokovice, Otrokovice, July 26, 2000 and the general director of PAL Praha, Praha, February 14, 2001. 18 Labor productivity of the Czech automotive sector was between 20% and 80% of equivalent German and U.S. levels in the early 1990s (Lyall 1994:44).

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to increase its production and employment.19 After a 35% employment decline in 1990–1992, Avon Automotive Rudník has been gradually adding new jobs since the formation of Rubena-Avon JV in 1993 and especially since 1997 when Avon purchased the remainder of the company, raising its ownership stake to 100%. The pre-1989 employment levels were reached and exceeded only in 2000, when the parent company transferred a half of production technology and orders from its Croydon subsidiary to Rudník, with additional production technology being transferred from AMES Rubber (New Jersey).20 Similarly, Barum Continental was able to maintain its employment because of its highly successful export-led production strategy and its access to Continental’s sales and distribution network after the JV formation in December 1992. In all three cases labor productivity increased dramatically as in most other interviewed companies. 7.2.3 Niche Marketing Niche marketing is a strategy that has been pursued by smaller Czech component suppliers attempting to occupy in gaps left in the operation of larger firms. For example, the director of Almet, the Czech-owned piston producer, argued: “We have adjusted our entire production technology to make smaller product batches of what larger firms do not want to produce or what they mind producing.” 21 A similar strategy has been followed by HLF Hajnice, the producer of switches and other electrical components. The company also concentrates on the production of smaller series of what “large companies are not interested in making and what no one else wants to produce . . . [because] these are the only orders you get without any big effort and large costs normally associated with it because of product development, marketing and keeping up contacts.” 22

19

Interview with the general director of Tanex Plasty a.s. Jaroměř, Jaroměř, July 25, 2000. 20 Interview with the former director and executive board member Avon Automotive a.s., Rudník, August 10, 2001. 21 Interview with the Director of Almet a.s. Hradec Králové and Vicechairman of Executive Board, Hradec Králové, August 9, 2000. 22 Interview with the manager at H.L.F. s.r.o., Hajnice plant, Hajnice, August 8, 2000.

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Table 7.1. Employment change in the selected group of Czech automotive components suppliers Component supplier

Product

Employment % change 1989 2000 2005 1989- 19892000 2005 Almet Hradec Králové pistons 275 120 n.a. -56.4 n.a. Avon Automotive Rudník rubber components 560 665 600 18.8 7.1 Barum Continental tires 3,700 3,700 4,300a 0.0 16.2 Brisk Tábor spark plugs 1,000 650 881 a -35.0 -11.9 Fezko Strakonice seat covers 2,500 700 360 a -72.0 -85.6 Gumotex Břeclav polyurethane foam 2,350 1,600 1,584 -31.9 -32.6 components Kablo Velké Meziříčí cables 1,600 600 n.a. -62.5 n.a. HLF, Hajnice plant electric switches 350 110 n.a. -68.6 n.a. CIEB Kahovec seats 250 180 n.a. -28.0 n.a. Karsit Jaroměř car seat frames 220 500 900 127.3 309.1 Lucas Autobrzdy brakes 1,400 700 1,300 a -50.0 7.1 Magneton Kroměříž starters 6,000 1,200 850 a -80.0 -85.8 Federal-Mogul Kostelec n.O. PAL International

brake lining

Hanácké železárny a pérovny Tanex Plasty Jaroměř Temac Zvěřínek Gumárny Zubří

700

450

small electric en- 2,000 1,000 gines hot-formed steel 550 500 springs polyurethane foam 60 250 components gaskets 640 250 molded technical 1,400 650 rubber components

n.a. -35.7

n.a.

550 -50.0 -72.5 300

-9.1 -45.5

180 a 316.7

200

350 -60.9 -45.3 736 -53.6 -47.4

a

2004 Note: The figures above are approximate based upon the interviewees accounts. Source: Interviews with CEOs in the above companies in 2000, and 2001 and other sources. Employment data for Kablo Velké Meziříčí was obtained during the interview at Draka Kabely.

7.2.4 Cooperation with a Foreign Partner Cooperation with a foreign partner at the early stages of economic transformation, often leading to JV agreements, typically allowed Czech component producers to access the sales and distribution networks of foreign partners and thus secure new foreign markets for their products. This strategy also increased the financial stability of Czech component suppliers, led

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to rapid enterprise restructuring, and increased access to investment capital and transfers of Western know-how and technology (see Chap. 6 for details). 7.2.5 Concentration on the Passenger Car Components Production Concentration on the production of passenger car components, while decreasing dependence on truck components, became a vital strategy for successful suppliers after VW took over Škoda and began to increase the production of passenger cars (Fig. 3.1). In the second half of the 1990s, successful Czech component suppliers also started increasingly to supply other European passenger car makers. This strategy further developed in the first decade of the 21st century.

7.3 Supplier Network Transformation in the Czech Passenger Car Industry Škoda passenger cars were known for their low quality compared to Western automobiles before 1989, a situation typical for all CEE passenger cars. Therefore, dramatically increased product quality became one of the imperatives of the post-1989 transformation of the passenger car industry to increase its competitiveness on both domestic and export markets. Increased competitiveness, in turn, was essential for the future survival of Škoda and the network of its suppliers and ultimately the Czech passenger car industry as a whole. To increase the quality of automobiles, the CEE car makers needed to dramatically improve the quality of final assembly as well as the quality of assembled components. To achieve these goals, Western (originally Japanese) quality systems and controls were introduced in the CEE assembly plants after their acquisition by Western TNCs and were also imposed on component suppliers. These quality parameters and controls closely parallel those introduced in the Western European passenger car assembly plants and their suppliers in the past 10-20 years (see, for example, Hudson 1997a, 1997b; Hudson and Schamp 1995; Sadler 1998; Bordenave and Lung 1996; Lagendijk 1997). Western car makers followed two distinct pathways to assure the high quality of automobile components to supply their CEE assembly operations. First, the desired quality was achieved quickly by turning to established West European component suppliers and importing their high quality auto parts. This strategy was particularly followed in low-volume

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237

production of niche-market vehicles in which the high quality of components is instrumental. Examples of the latter include VW Slovakia, Audi Hungária and Revoz Slovenia. In this type of production, over 90% of components are typically imported from Western Europe. While the cost of components is an important consideration, it is not as important as in the case of mass production of small cars (see Chap. 1). In those cases, such as Škoda, where the JV agreement between the government and VW included the protection of domestic component industry by allowing it to transform itself to serve the needs of Škoda, the Western car makers became actively involved in restructuring the domestic car components industry (see Pavlínek 1998; Pavlínek and Smith 1998; Meyer 2000). Other reasons included local-content regulations and cost-cutting. This second strategy was typically related to the mass production of standardized small passenger cars in CEE. In this case, the high quality of components must be coupled with their low cost for car makers to remain competitive. It was pursued through the radical transformation of domestic components industry spearheaded by Western car manufacturers. This supplier network transformation involved several distinct processes. First was the FDI-related transformation in which well-established (typically) first-tier Western component suppliers were pressured by Western car makers to follow them to CEE and establish their operations in the region either through greenfield investments or through forming JVs with the existing local suppliers (follower supply). JV agreements typically led to the rapid introduction of Western management strategies, work organization and training, quality controls and advanced technologies that dramatically improved the quality of produced components while increasing labor productivity and keeping the cost of production low in FIEs in CEE. The FDI-led transformation of the car components industry was complemented by the rigorous training of existing domestic suppliers that did not attract any FDI. Both of these strategies were implemented by VW after its acquisition of Škoda in Czechia. VW’s investment in Škoda in 1991 triggered a transformation of the automotive components sector in Czechia through follower supply and by forcing the local suppliers to increase the quality of auto parts for Škoda. First, Czech suppliers were pressured by Škoda to form JVs with foreign companies, being warned that, without a foreign partner, they would not be allowed to supply Škoda directly in the future. By the end of 1993, less than three years after the Škoda–VW JV was formed, 60 JVs and greenfield plants were established in Czechia to supply Škoda, accounting

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for more than 50% of its component supplies.23 With foreign supplies (not including Slovakia) accounting for 19% by volume in 1993, this left less than 30% of the market for wholly Czech-owned suppliers. In other words, since 1993 70% of Škoda’s supplies have been controlled by foreign capital, representing a dramatic change from 1991 when VW entered Škoda (Škoda Auto 1994; Table 7.2).24 This dramatic shift to foreign and foreigncontrolled supplies put the burden of transforming Škoda’s most important Czech suppliers on VW’s established Western suppliers, who quickly introduced their quality standards, know-how, technology and management and shop floor strategies in their acquired Czech plants. Table 7.2. Structure of Škoda’s suppliers according to their location and local content based on purchasing volume of supplies Location of Volume of Location of Volume of suppliers purchasing % suppliers purchasing % CZ Foreign CZ Foreign CZ&SK Foreign CZ&SK Foreign 1993 n.a. n.a. 66.7 33.3 n.a. n.a. 81.0 19.0 1994 n.a. n.a. 71.4 28.6 n.a. n.a. 82.1 17.9 1995 186 184 69.7 30.3 203 167 78.8 21.2 1996 245 483 74.4 25.6 265 463 80.9 19.1 1997 260 507 68.4 31.6 279 488 74.5 24.5 1998 274 595 66.4 33.6 293 576 70.9 29.1 1999 279 627 64.7 35.3 295 611 67.9 32.1 2000 303 884 66.5 33.5 n.a. n.a. n.a. n.a. 2001 290 943 66.6 33.4 n.a. n.a. n.a. n.a. 2002 n.a. n.a. 66.0 34.0 n.a. n.a. n.a. n.a. 2003 n.a. n.a. 63.7 36.3 n.a. n.a. n.a. n.a. 2004 n.a. n.a. 63.2 36.8 n.a. n.a. n.a. n.a. 2005 n.a. n.a. 63.9 36.1 n.a. n.a. n.a. n.a. 2006 n.a. n.a. 62.6 37.4 n.a. n.a. n.a. n.a. CZ Czechia, SK Slovakia. Source: Škoda Auto (1994-2007).

23

By 2005, 94 JVs had been established between Škoda’s Czech and Slovak component suppliers and Western companies, and 58 greenfield foreign-owned component plants had been built to supply Škoda (Interview with the top manager of Škoda Auto, Mladá Boleslav, June 30, 2005). 24 In terms of value (as opposed to volume), suppliers located in Czechia accounted for 70% while foreign sources accounted for 30% in 1995. The share of FIEs in automotive components production continued to grow in the second half of the 1990s (Škoda Auto 1996; Pavlínek 1998).

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Czech suppliers that did not form JVs with foreign companies were put under extreme pressure by Škoda to dramatically increase the quality of their components in a short period of time while keeping prices low. Škoda held workshops to inform its suppliers about the required quality standards, how to achieve them, and how Škoda’s new system of components purchasing functioned. After its takeover by VW, Škoda introduced quality control processes to evaluate its domestic suppliers and identify those capable of supplying high-quality components. Based on the VW’s concernwide standard, Škoda’s suppliers were ranked in four categories: A, B, C, and not classified. Supplier contracts are awarded based on the ranking. All Czech suppliers were originally placed in the category C or were not classified. In 1993, only 1% of Škoda’s CEE suppliers (vast majority of them being Czech and Slovak) were ranked in category A, while 38% were in category C and 44% were not classified (Němec 2000) (Fig. 7.1). Despite their relatively low ranking, most Czech and Slovak suppliers continued supplying Škoda because they produced Škoda-specific components and also because they were, to a certain degree, protected by the agreement between the Czech government and VW that allowed for a transition period during which the Czech suppliers could achieve the quality and delivery standards required by Škoda (see Chap. 3). 60

Percent

50 40 30 20 10 0 1993

1994

1995

1996

1997

1998

1999

Year A

B

C

not classified

Fig. 7.1. Classification of Škoda Auto’s Central European suppliers, 1993-1999. Source: Based on Němec (2000).

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Those Czech suppliers that wanted to continue supplying Škoda had to undergo a rigorous quality system certification process and pass regular quality audits conducted by Škoda. They were required to develop the VDA 6.1 quality control system based on the German standard and become certified.25 The introduction of quality control systems by individual component suppliers became a necessary precondition for their future ability to supply Škoda and other European car makers either directly or indirectly through first-tier suppliers. It typically took 3–5 years for successful local companies to undergo enterprise restructuring and achieve international quality certificates.26 Suppliers were also required to increase their flexibility to react quickly to Škoda’s production needs. In many cases they were simply replaced by foreign suppliers and were considered again as potential suppliers only after achieving Western quality standards certified by international quality certificates. As one of the directors argued in 2000: “We had only two options [in the early 1990s]. Either to catch on and do what was required by Škoda or to stop supplying it. It required large investments and a lot of effort on our part.” 27 Škoda’s suppliers in turn imposed high quality standards on their own suppliers and started to require their suppliers to be certified in terms of quality. They also started to conduct quality audits and rank their suppliers. VW’s investment in Škoda thus had extremely important implications for the Czech automotive industry as a whole, as Western quality concepts gradually spread through the entire supplier sector and led to a transformation of the supplier network to serve the new needs of Škoda. By 1999, 35% of Škoda’s CEE suppliers were ranked in category A, 51% in B, 8% in C and 6% were not classified (Němec 2000) (Fig. 7.1).28

25

The VDA 6.1, as well as other quality control systems in the car industry, stipulate the standard quality procedures and training that must be introduced and followed by a component supplier. Other quality standard certificates in the automobile industry include the American QS 9000, French EAQF (French standard), Italian AVSQ and European ISO 9000 and ISO TS 16949. 26 Interviewed Czech-owned suppliers that Škoda replaced with foreign suppliers at some point in the 1990s included: Brisk Tábor, Magneton Kroměříž, Fezko Strakonice, Rubena Hradec Králové, HLF Hajnice and Hanácké železárny a pérovny. Brisk Tábor, Magneton Kroměříž, Fezko Strakonice and Rubena Hradec Králové regained Škoda supplier status after undergoing enterprise restructuring and achieving quality certificates. 27 Interview with the general director of Temac a.s. Zvěřínek, Zvěřínek, July 19, 2000. 28 As of December 31, 2004, 63% of 1,059 Škoda suppliers were in the category A, 34% were in the category B and 3% were in the category C (interview with the

7.3 Supplier Network Transformation in the Czech Passenger Car Industry

241

In addition to the dramatically improved quality of components and flexible supply, Škoda’s suppliers were also asked to take a much more active role in R&D of their components. The majority of Škoda’s local suppliers were ill prepared to satisfy this demand, as they were accustomed to receiving exact specifications of components they were to produce from Škoda. Neither they were used to bidding for supplier contracts in a competitive environment. Škoda’s local suppliers thus faced a number of challenges simultaneously as a result of price and market liberalization, privatization, quality demands, flexibility of supply, and R&D. It is not therefore surprising that only the best local suppliers survived Škoda’s selection process in the early 1990s and continued supplying the firm throughout the 1990s and in the 2000s. Not surprisingly, most interviewed suppliers complained about what they considered to be very harsh and inconsiderate treatment by Škoda in the 1990s. VW was compelled to follow this supply-chain development strategy in Czechia for five fundamental reasons. First, it was taking over the production of an existing model (the Škoda Favorit) that overwhelmingly relied on Czech-made and model-specific components. These components were of lower quality compared to Western standards but could not be easily or rapidly completely replaced by Western imports to increase the quality of the cars. Therefore, to increase the quality of the Favorit, VW had to rapidly increase the quality of locally produced components by pairing the existing Czech suppliers with established Western component suppliers. Such JVs typically led to transfers of Western know-how and technology, leading to rapid quality improvements. The second factor dictating VW’s supply-chain development approach was the stability and security of supplies. At the time of VW’s takeover of Škoda, the Czech economy was in deep crisis following the introduction of “shock therapy” in January 1991, and many component suppliers faced serious financial difficulties that not only undermined their short and longterm financial viability, but also could have impaired their abilities to supply Škoda reliably and with required flexibility. The access to investment capital through the formation of JVs with Western companies not only increased the financial stability of Czech producers but it also allowed for technological upgrading and enterprise restructuring that contributed to the stability of supplies (see Chap. 6). Third, Škoda kept down its production costs by producing and supplying less sophisticated components locally by using the same comparative advantage of low-cost (but skilled) labor, as Czech labor costs were Head of the Department of Product Cost Reduction, Škoda Auto, Mladá Boleslav, June 30, 2005).

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7 Restructuring Strategies in the Czech Automotive Components Industry

approximately at 10% of German levels in the early 1990s. Additionally, VW’s existing suppliers that followed the firm into Czechia could provide Škoda with bulk prices not available from Czech-owned suppliers. Foreign-owned firms were also more likely to keep the wages down in their Czech subsidiaries (Calbreath 1995). Fourth, the WV-Škoda JV agreement negotiated between VW and the Czech government included provisions for the protection of the Czech component sector and obliged VW to use Czech suppliers for a certain period to allow them to increase the quality of their components and satisfy Škoda’s needs (see Chap. 3). This protection was very important because it provided breathing space for Czech component suppliers during which production upgrades could be implemented, typically with the help of foreign capital mediated by VW through Škoda. Finally, “follower supply” (or follow sourcing) strategy introduced by VW in Czechia and new assembler-supplier relations in the auto industry was not unique but a globally pursued strategy by Western auto makers in the 1990s (see Humphrey 2000, for example). Consequently, experience elsewhere in the world had shown it to be effective. The role of Czech-owned suppliers further decreased as VW gradually introduced its common platform strategy at Škoda, starting with the launch of its Octavia at the end of 1996.29 The “platform” strategy allows car makers to achieve economies of scale by sharing common components between different models. At the same time, the visible parts remain distinct, differentiating one vehicle from another in the buyer’s mind (The Economist 2001a:76). VW has particularly been successful in exploiting this strategy in Europe to overcome its financial problems of the early 1990s. The VW Group (VW, Audi, Seat and Škoda) reduced the number of platforms from 16 in 1993 to only four by 2000 while, at the same time, increasing the number of models based on these basic chassis from 30 to 54. By 2003, 80% of components for models based on the same platform had been shared. This strategy allowed VW to produce large economies of scale while greatly expanding its product range. Thanks to this strategy, VW increased its market share by 20% in Western Europe in the 1990s, largely at the expense of GM and Ford (The Economist 2000:83-4). VW’s common platform strategy applied at Škoda Auto has profoundly affected the Czech automotive components sector. By the end of 2001, all three Škoda’s models (Fabia, Octavia, Superb) were based on concernwide platforms that reduced local (Czech) content of Škodas as a share of 29

For example, the introduction of Škoda’s Fabia model, which is based on common platform strategy, cut the share of component suppliers located in Czechia by about 30% in terms of total value of supplies (MF Dnes 1999b).

7.3 Supplier Network Transformation in the Czech Passenger Car Industry

243

total purchasing from 78.8% in 1995 to 62.6% in 2006. However, the actual local content is lower since the data in Table 7.2 exclude deliveries from the VW Group. Including deliveries from the VW Group, the local content was 48% in 2004 (down from 51% in 2002 and 50% in 2003).30 In Czechia, as in the rest of CEE, Škoda’s first-tier suppliers (FTSs) are typically foreign-owned, whereas the locally-owned suppliers formed the second-tier suppliers (STSs) and third-tier suppliers (TTSs). In 2004, only three majority Czech-owned Škoda suppliers were classified as the FTSs, 33 as the STSs and 66 as the TTSs (Figure 7.2) (see Pavlínek and Janák 2007 for details).

First-tier 3

100%

Second-tier 36

33

Third-tier

80% 45

60% 40%

66 43

20% 0%

Majority Czech-owned

Majority foreign-owned

Fig. 7.2. The hierarchies of the majority Czech-owned and the majority foreignowned Czech-based Škoda suppliers based on the complexity of the supplied components in 2004. Note: Six suppliers were excluded because of undetermined ownership. Source: Compiled by author based on the data in Janák (2005).

Local suppliers can rarely meet conditions placed on FTSs by assemblers, such as design of their own sophisticated components, assembly of parts into component sub-systems at the lowest possible cost and in perfect quality, and their just-in-time (JIT) delivery. Consequently, they typically specialize in high-volume production of simple components or become STSs or TTSs delivering simple parts to the foreign-owned FTSs or TTSs. Such domestic suppliers are typically highly vulnerable to market fluctuations, 30

Interview with the Head of the Department of Product Cost Reduction, Škoda Auto, Mladá Boleslav, June 30, 2005.

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7 Restructuring Strategies in the Czech Automotive Components Industry

and their linkages with foreign-owned FTSs or car assemblers are weak and typically do not involve much exchange of information and knowledge (UNCTAD 2001; Meyer 2000). This situation is not unique to Czechia or CEE but it is one of the defining features of the automotive components sector globalization in the past 20 to 25 years (see Sadler 1999, 1998; Rutheford 2000; Barnes and Kaplinsky 2000; Humphrey 2000). When a new concern-wide platform based model of Škoda is introduced its suppliers are determined in Germany. Western suppliers or foreignowned Czech suppliers are thus typically given preference over the local ones. Czech suppliers then have a chance to supplant the foreign ones if they can offer less expensive products of the same quality (and the same design).31 For example, starters are initially being supplied by the German firm Bosch. Potential local suppliers, such as Magneton Kroměříž, then begin to submit offers to Škoda to replace Bosch, by supplying less expensive starters of the same quality. Successful supply relations with Škoda Auto became a stepping stone for local supplies to enter the VW Group market as a whole, and even to expand to other European car makers. Quality certificates and the proven ability to supply Škoda Auto allowed Czech suppliers, for example, to start to compete for supplier contracts abroad in the second half of the 1990s. By the late 1990s, many Czechowned suppliers that survived the rigorous selection process began to supply other members of the VW Group and other European and even North American car manufacturers.32 31

Discounts by local firms compared to the Western competition are typically in the range of 10 - 15%, in extreme cases up to 20%. Prices depend on a number of factors, including the amount of manual labor required in the production of a particular component. If the production is technologically intensive and labor input is low, then the prices of Czech suppliers are comparable to those of the Western ones. Despite lower labor costs, some Czech suppliers cannot compete with Western suppliers because they are small and do not get bulk prices for materials available to large companies. 32 For example, Brisk Tábor, the largest Czech-owned producer of spark plugs, ceased supplying Škoda Auto when it was replaced by the companies Bosch and Champion in the early 1990s. Brisk resumed supplying Škoda Auto only in 1998, after achieving all quality certificates and undercutting its Western competition. By 2000, the company was supplying also other VW Group members and a total of 17 car assemblers. Brisk also penetrated the Russian market by opening a subsidiary at Ozersk (Kaliningrad Oblast) in January 2000, which is employing 100 workers, and winning a supplier contract with Lada Togliatti in March 2001(interview with the Economic Director and Executive Board Chairman, Brisk Tábor, a.s., Tábor, August 2, 2000; HN 2001a). Other examples of Czech component suppliers interviewed in 2000 and 2001 that supply the VW Group and other

7.3 Supplier Network Transformation in the Czech Passenger Car Industry

245

Mladá Boleslav district

.

supplier location

Fig. 7.3. The location of the Škoda suppliers in Czechia in 1990. Source: Based on data in Svoboda (1991).

The organizational restructuring of the Škoda supplier network also resulted in its spatial restructuring in the 1990s and early 2000s. Before 1990 the Czech automotive components industry was typified by a dispersed spatial structure, which partially reflected the state socialist regional policies favoring a relatively balanced regional development (e.g. Pavlínek 1995; Smith 1998) and partially the location of final assemblers of passenger cars, trucks and buses. Additionally, it was also strongly affected by the fact that the vehicle assemblers were highly vertically integrated with the in-house production of components reaching almost 50% of all components in the case of Škoda in the late 1980s (Henderson 1995:438). Figs. 7.3 and 7.4 show a shift in the spatial structure of the Škoda suppliers between 1990 and 2004. The 1990 supplier map is the direct outcome of the

European and North American car assemblers include PAL Praha, traditional supplier of electric windshield wiper sets to Škoda Auto that became the largest supplier of these sets to the VW Group in the mid-1990s, and Tanex Plasty Jaroměř, the producer of polyurethane foam components (interviews with the general director of PAL Praha, Praha, February 14, 2001 and the general director of Tanex Plasty a.s. Jaroměř, Jaroměř, July 25, 2000).

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7 Restructuring Strategies in the Czech Automotive Components Industry

state socialist development since the Czech auto components industry was almost non-existent prior to World War II when about 85% of the components were imported mainly from Germany and Italy (ČSÚ 1970:9). Prior to the 1990s, the Škoda suppliers were concentrated in two areas of Czechia: in the northern half of Bohemia and in the eastern part of Moravia.33 Two major changes can be identified by comparing the 1990 and 2004 maps. First, there has been a pronounced dispersion of the suppliers into the areas between the two original concentrations. Second, an increasing number of the suppliers have concentrated on two types of locations reflecting the changing nature of passenger car production, especially in terms of the relationships between modular production, JIT deliveries and proximity/accessibility (see Pavlínek and Janák 2007). These locations are in the proximity to Škoda’s main production facility at Mladá Boleslav and along the highways linking Mladá Boleslav, Prague and Germany. Mladá Boleslav district

.

supplier location

Fig. 7.4. The location of the Škoda suppliers in Czechia in 2004. Source: Janák (2005:78).

33

In 1990, in addition to 181 Czech suppliers from 80 locations in Czechia, Škoda had 19 Slovak suppliers supplying from 11 locations in Slovakia, 20 suppliers from Western Europe, and 10 suppliers from CEE (Svoboda 1991:29-32).

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247

7.4 Effects of FDI in the Czech Automotive Components Industry Foreign investors have invested more than 10 billion USD in the Czech automotive sector as a whole since 1990 (about 2 billion USD went into Škoda alone mainly based on Škoda’s own cash flow) and 83% of capital stock was foreign-owned as of 2005 (AIA 2006). These automotive investments took place in three major waves. The first wave was triggered by the 1991 VW–Škoda JV that led to a dramatic change in Škoda’s sourcing strategy with an emphasis on follower supply. The second wave followed the introduction of generous governmental incentives for foreign investors in April 1998 (see Chap. 6 for details). These investments were not necessarily intended to supply Škoda Auto, but more generally components production was located in Czechia for cost-cutting reasons. These newly built plants were designed to supply West European car assemblers from Czechia. The third wave, started in 2002 after the announcement by Toyota and French PSA (Peugeot and Citroën) to build a new passenger car assembly plant at the city of Kolín (Sect. 7.5). The new plant sources 80% of components in Czechia (CzechInvest 2005:3). The fourth wave was triggered by the 2006 announcement by Hyundai that it would build its new assembly plant at Nošovice near Ostrava between 2006 and 2009 (Sect. 7.6). In 2005, the automotive industry generated 458 billion CZK in revenues (about 19 billion USD) accounting for 20% of Czech manufacturing output and 25% of total Czech exports (MIT 2006; CzechInvest 2005).34 Although Škoda’s transition to VW’s common platforms negatively impacted some local component suppliers that were replaced by concernwide suppliers, the sector as a whole continued to grow because its dependence on Škoda decreased substantially in the late 1990s as both foreign-owned and increasingly domestic suppliers started to supply other European car manufacturers from Czechia. Although VW’s investment in Škoda and its supply chain development strategy played a crucial role in the onset of the components sector transformation in the early 1990s, the rapid development of the automotive components sector in the second half of the 1990s and early 2000s was largely FDI and export driven, as the Western TNCs continued to invest in Czechia for cost-cutting reasons. Additionally, the quality leap achieved by many Czech component suppliers in the 1990s and certified by internationally recognized quality certificates, 34

These figures are for the production of motor vehicles, trailers and semitrailers including their components.

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their successful track record in supplying Škoda, and the lower price of their products compared to foreign competition led to their increased export competitiveness. As a result, Czech-based foreign-owned and domestic suppliers have been increasingly supplying passenger car manufacturers located outside Czechia, and more than 60% of components production is now exported. For example, Ford has more than 20 FTSs and about 20 additional suppliers in Czechia. Similarly, Opel has almost 50 suppliers in Czechia (CzechInvest 2002). Since the late 1990s, revenues in the components sector have grown faster than in the car industry as a whole and outperformed the car production dominated by successful Škoda operations (Fig. 7.5). The value of exports of components has grown more rapidly than the value of exports of finished cars since 1999 (Fig. 7.6). 1900

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By 2002, some 150 foreign components manufacturers set up subsidiaries, many of them multiple plants, in Czechia (CzechInvest 2002).35 Currently, 35

Examples of TNCs that established more than one subsidiary in the automotive components sector in Czechia include Bosch, Continental, Johnson Controls,

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there are some 290 Czech-owned and 360 foreign-owned automotive components plants in Czechia36 (Kaláb 2002a) employing almost 70,000 employees (MIT 2006).37 1300

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Fig. 7.6. Trends in export performance of the Czech automotive industry. Source: Based on data in MIT (2001, 2002, 2006).

Employment in the components sector almost tripled between 1994 and 2005, while at the same time the employment in the production of motor vehicles and their engines decreased by 2,681 workers (Fig. 7.7). Employment growth in the components sector has largely been driven by FDI since the majority of local component manufacturers and the manufacturing sector as a whole experienced substantial decreases in employment (Table 7.1). The employment decline in the production of motor vehicles and their engines was largely caused by the collapse in the truck production, because passenger car production (represented by Škoda) increased employment levels between 1994 and 2005 (Fig. 3.3).38

Hella, Siemens, Magna, TRW, Visteon, Hayes Lemmerz, and Valeo (CzechInvest 2002). 36 These figures are for manufacturing firms in which automotive production is the dominant activity. 37 The 2004 employment in the broadly defined Czech transport industry was 113,499. Production of motor vehicles and their engines employed 29,391 workers, manufacture of motor vehicles bodies, trailers, semi-trailers and their accessories 3,025, and the components sector 60,692. Manufacture of other transport equipment (such as motorcycles, bicycles, trains, trams, subway trains, aircrafts, and boats) employed 20,392 workers (MIT 2006). 38 Data on the production of motor vehicles and their engines include data on the production of internal combustion engines for motor cars and motorcycles, and production of passenger cars, buses, trucks, and motor cars for special use.

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70000

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Fig. 7.7. Employment change in the Czech automotive components sector and in the production of motor vehicles and their engines (left) and the comparison of employment trends (right). Source: Based on data in MIT (2001, 2002, 2006).

The rapid growth in the automotive components sector likely will continue in the foreseeable future. In the next few years, it will be partially driven by South Korean investment attracted by the new Hyundai assembly plant at Nošovice that will be launched in 2009. The plant is designed to produce 300,000 passenger cars annually and it is estimated that this investment will generate three to five thousand new jobs in the component supplier industry (Kaláb 2006; Sect. 7.6).

7.5 Toyota Peugeot Citroën Automobile (TPCA) Toyota Motor Corporation (Toyota) and PSA Peugeot Citroën (PSA) formed a strategic alliance to produce small entry-level passenger cars for the European market in July 2001 with the goal to minimize production and development costs. In December 2001 the two companies announced their decision to build a new joint production facility to assemble small passenger cars for the European market. The factory was to be built in the industrial zone close to the Czech city of Kolín in Central Bohemia. The Kolín-Ovčáry industrial zone was originally prepared for the German automaker BMW, which was looking for a new production site to assemble 200,000 units of its small models annually. However, in July 2001 BMW decided to build its new assembly facility in the east German city of Leipzich. Toyota and PSA chose Kolín over potential production sites offered by Poland and Hungary, the other two finalists. The main criteria for

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the decision included: the location in the EU (which was anticipated by the production launch in the case of CE countries) close to large West European markets, the availability of a qualified and low-cost labor force, a well-developed transport infrastructure, and a reasonably developed suppliers sector. The announced value of the total investment was 1.5 billion EUR which represented the largest greenfield investment in Czechia so far. (The cost of factory and factory equipment was to be 900 million EUR, 400 million EUR was to be spent on R&D in Japan and France.) The Czech government offered the package of incentives amounting to 15% of the total TPCA investment, including 80,000 CZK for each job created, ten-year tax holidays, 900 million CZK for the site preparation, and 442 million CZK for the purchase of land. It also promised to help with the recruitment of workers, build 850 apartments for the TPCA workers, and construct a road linking the factory with the future highway D5. (The highway was opened in December 2006.) The production capacity of the new assembly plant was set at 300,000 units annually and employment at 3,000 workers. It was predicted that the investment would generate an additional 7,000 new jobs in Czechia among TPCA suppliers. The JV in which Toyota and PSA Peugeot Citroën own 50% each was officially established in early 2002. Toyota is responsible for development and production while PSA Peugeot Citroën for purchasing and logistics. The factory construction began in April 2002; the test run was launched in December 2004, and the factory went officially online in February 2005. At the end, instead of the originally announced 1.5 billion EUR, TPCA investment was 1.3 billion EUR. Of these, a half (650 million EUR) was spent on R&D for the new car in Japan and France; technologies purchased by TPCA abroad cost 400 million EUR; machinery and equipment bought by TPCA abroad for its suppliers cost an additional 170 million EUR. The construction cost of the TPCA plant was 80 million EUR, and it was done by Czech construction companies supervised by the Japanese. Thus, of 1.3 billion EUR of total investment only 80 million EUR (6.2%) was spent in Czechia. In 2005 TPCA assembled 103,819 automobiles 99.5% of which were exported mainly to Western Europe but also to the rest of CEE. The full production capacity was reached in January 2006. The 2006 production reached 300,000 automobiles evenly divided among Toyota Aygos, Peugeot 107s and Citroën C1s, all built on the same platform. The three models thus share nearly all their parts, except for exterior features, and represent the smallest models in the portfolio of both Toyota and PSA. TPCA represents a typical Japanese transplant, and, as other Toyota factories, it was built to be extremely lean and flexible to maximize efficiency and

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lower production costs. When the assembly was launched it was heralded as the most modern assembly plant in the world. Workers for the new factory were very carefully recruited and extensively trained. During the two-year recruitment period, 55,000 people applied for the jobs but only 3,000 were selected. This approach mirrors the recruitment strategies of Toyota elsewhere. Only 40% of workers came from the Kolín region. About 1,000 workers were sent for training to Toyota factories in France, the United Kingdom and Turkey. Despite the large number of applications, TPCA has had difficulties finding and keeping workers. One reason for its difficulties included low starting salaries, which were only 13,380 CZK per month in 2004. This was lower than the average wage of 16,000–18,000 CZK in the Kolín region. Not surprisingly, the unemployment rate in the Kolín region did not decline as expected, and TPCA had to look for workers in the entire Czechia and later also abroad. In 2005 the average blue-collar wage was increased by 27% to reach the Czech average wage (but it was still below the average wage in the automobile industry) and to prevent workers from leaving TPCA in large numbers. In 2006 the average blue-collar wage further increased by 7% to 20,500 CZK, and the starting salary was raised to 17,880 CZK. Hundreds of workers left in 2004 and 2005 because of the lack of adequate accommodations in Kolín and the one-year delay in the construction of new apartments they were promised by the city. Only 291 apartments were finished in 2005 with a one-year delay; the remaining 560 were finished in September 2006. As a result, TPCA has been forced to hire Slovak and Polish workers to cope with labor shortages. An estimated 100 suppliers, 40 of them Japanese, have located in Czechia in the three years since the investment was announced. Forty-two TPCA suppliers are located in Czechia, and they account for 80% of components by volume (50% by value). Overall, TPCA is supplied from 21 different countries (iHNed 2002, 2006; Kaláb 2004, 2005; Kenety 2005; Korbel and Ježek 2005; PSA 2002).

7.6 Hyundai The South Korean Hyundai is the third passenger car manufacturer that has decided to establish its assembly operations in Czechia. The company was first looking for a production site for its Kia Motor subsidiary in CE in 2003. As in the case of Toyota, Hyundai wanted to establish its assembly operations within the EU to avoid EU tariffs on its cars. At the same time, Hyundai also wanted to benefit from low wages in CEE, which are still

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less than a quarter of Western European wages, and reduce its foreignexchange risks caused by its surging domestic currency (won) which makes the automobiles made in South Korea less competitive abroad. Czechia, Hungary, Poland and Slovakia were all considered, but Slovakia eventually won the 1 billion EUR investment. Both the Hungarians and the Czechs complained about the size of the investment incentives sought by Kia, which, according to them, started to outweigh the advantages of the investment. The Kia assembly plant was opened in the vicinity of Žilina in north-western Slovakia in 2006. Relatively high wages in Czechia compared to Slovakia were cited as a major reason why Czechia did not succeed in attracting Kia’s investment. In its new plant, Kia planned to build entry level cars where profit margins are extremely small and, among other things, are very sensitive to labor costs. In September 2005 Hyundai Motor Company announced its decision to build its second assembly plant in Europe. The 800–1,000 million EUR plant with a production capacity of 300,000 passenger cars annually and 3,000 workers was to be located either in Czechia, Hungary or Poland. Hyundai began to negotiate with the governments of these three countries about receiving the best possible investment incentives. By the end of September 2005, Czechia was cited by Hyundai as the prime candidate for the investment. Hyundai was especially interested in the Nošovice industrial zone located close to the city of Ostrava in the Moravian–Silesian region of northeastern Czechia. Kia’s factory is located just across the border in Slovakia. This, according to Hyundai, could result in important synergies, such as both assembly facilities being supplied by the group’s common suppliers. Hyundai also plans to produce 600,000 gearboxes at Nošovice (half of the output will be supplied to Kia’s Slovak factory, which in return will supply engines to Nošovice). An additional 3,000–5,000 jobs should be created in the supplier industry. Additionally, Nošovice is located far away from Škoda Auto factories and from the TPCA assembly plant in the old industrial region with the second highest unemployment rate in Czechia (14.4% in March 2006). It took an additional six months for Hyundai to announce its location decision in March 2006 and an additional three months of intense negotiations between the Czech government and Hyundai to finalize the agreement. The Czech government promised 1.3 billion CZK in tax breaks, 200,000 CZK for each created job, 350 million CZK for re-training of workers, and a 740 million CZK discount on the purchase of land for the factory. The government will also pay a direct subsidy depending on the size of actual investment. According to the EU rules, investment incentives must not exceed 15% of the total investment. The planned investment was heralded as the largest in Czechia to date. The regional government of the

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Moravian–Silesian region welcomed the investment decision as a positive development which would help to address regional problems, such as high unemployment, an underdeveloped transportation infrastructure, and the lack of investment capital (based on Šmíd 2006 and other news reports).

7.7 Conclusion VW’s acquisition of Škoda and the transformation of the entire passenger car industry that followed is generally viewed as a prime example of a successful FDI-driven post-socialist industrial transformation. CzechInvest (2002:2), for example, claimed that “the automotive sector is the biggest success story of the Czech economic transition.” Some even see VW’s acquisition of Škoda to be the “key event” in the entire history of Czech post-socialist transformation (Harris 1999:12). There is no doubt that the follower supply and pressure of Škoda on its local suppliers led to their rapid restructuring, which dramatically improved their competitiveness and export performance. These changes led to the transformation of not only Škoda’s supplier network but of the automotive components sector as a whole, with important implications for the entire Czech economy. Automotive industry indicators such as FDI, employment, revenues, and exports certainly look impressive, especially when considered in the contexts of Czech manufacturing as a whole and CEE post-socialist economic performance. However, a closer look reveals a number of potential dangers related to this type of economic development. The success is highly concentrated into the passenger car industry, while the rest of the transport industry remains depressed. The Czech economy is thus becoming increasingly dependent on the passenger car industry, which by its nature is plagued with instability and cyclical crises. Increased export dependence on few successful sectors, including the automotive industry, to only a few countries increases the vulnerability of the entire economy. At the regional scale, there are risks related to the increased vulnerability of regional economy resulting from strong dependence on a single TNC (VW) located outside the country, and its decisions made in the context of its global and multiple operations.39 For example, as we could see in Chapt. 3, VW placed Škoda among its conservative brands in 2002 and revealed its future plans, reinforcing Škoda’s peripheral position within the VW Group as a mass 39

These risks have recently materialized in Poland where the collapse of South Korean Daewoo negatively affected its production facilities in Poland (see Pavlínek 2006 for details).

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producer of cheap, small, standardized cars that should be primarily sold on the CEE markets. One of the reasons for this change has been growing competitiveness of Škoda automobiles in Germany and the rest of Western Europe at the expense of more expensive VW models. Automotive investment generally is rated highly for its ability to develop links with local and regional economies through its supplier links with local companies. Although this is not always the case in CEE (see Pavlínek 2002b), positive regional development effects of VW’s investment in Škoda support such a view. However, questions emerged recently about the durability and strength of these links. In its search for profits in an extremely competitive sector, Škoda has been progressively squeezing its domestic suppliers and is constantly looking for ways to lower costs of supplies. As the Czech currency began to appreciate in 2002 and labor costs continued to rise, the director of Škoda Auto argued that one possibility for Škoda to counter these pressures is to “replace domestic suppliers with foreign ones” – from countries with weaker currencies and lower labor costs such as Slovakia (Kaláb 2002b). Additional risks are associated with the increased concentration of the Czech automotive components sector on low value-added production. During the 1990s, the surviving local component suppliers were forced to concentrate on making simpler components than in the past, as the more sophisticated components were supplied by the elite group of Western FTSs. Many foreign investors in the automotive components sector that established subsidiaries in Czechia did so for cost-cutting reasons to reap the benefits of cheap and skilled labor, governmental incentives, and the proximity of car assembly operations in Czechia and abroad. These subsidiaries are often typical branch plants focusing on simple low-value added assembly operations with very limited or non-existent strategic functions such as R&D and decision making regarding finance and marketing. These higher functions are typically located abroad in the core areas of automobile production, although the exceptions do exist as we could see in Chap. 6. Indeed, the criticism of Western branch plants in CEE has been based on fears that they can be easily closed and moved to lower-cost locations if the local wages increase substantially or local currency appreciates rapidly. The concentration of low value-added production based on cheap labor and low-cost production in Czechia can thus make its economy more vulnerable to low-cost competition from less developed countries. It can also reinforce its peripheral position not only in the European passenger car industry, but in the European and global economy as well. Uncritical praise of the successful development of the automotive components sector in

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Czechia thus might be premature. It remains to be seen what the long-term consequences of the automotive components sector restructuring will be for the Czech economy as a whole and for its aspirations to gradually approach Western European levels of economic development.

8 Conclusion

The study of the Czech automobile industry presented in this book was set in the context of the post-socialist transformation of the automobile industry in CEE as a whole. The past two decades represented an important watershed in the development of the CEE automobile industry. Development of the passenger car industry during the state socialist period was only partially successful in narrowing the historical gap between CEE and the developed capitalist countries. CEE development strategies in the automobile industry led to a substantial increase in the number of vehicles produced. However, the quality of these cars was generally inferior to those produced in the capitalist West. With respect to passenger cars, development was overwhelmingly focused on the production of inexpensive compact and sub-compact cars. The weaknesses inherent in these development strategies were fully exposed in the early 1990s, leading to a region-wide production collapse in car manufacturing in CEE. The passenger car industry was less affected by this collapse than the rest of the automobile industry, and Russia’s passenger car industry was affected less than the rest of the region because of its large domestic market. In this book, I have argued that the role of FDI in the CEE passenger car industry transformation after 1990 has been and is likely to continue to be crucial. FDI not only usually “saved” the existing car manufacturers, but also led to the construction of new greenfield assembly plants. As a result, FDI led to increased production of cars and car components in the region. The effects of foreign capital at the level of individual automotive companies have also been significant as FDI led to their profound, although uneven, transformations. With the exception of Russia, a comparison of automobile producers with foreign capital with those that remained in local hands reveals that without the infusion of foreign capital a likely collapse of the industry would have taken place. The integration of car manufacturers and component suppliers into transnational networks in an increasingly globalized industry improved their chances of future survival by establishing a foothold in the global economy. Although such inclusion in the transnational economic networks is important for both the companies, regions and countries involved, the long-term positive regional economic

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effects of FDI have been in some cases limited and in many respects questionable. The effects of foreign capital on restructuring the car industry in CEE have been uneven both sectorally and geographically. While foreign capital has been heavily invested in passenger car production and related car component manufacture, its effects on the production of trucks, buses and motorcycles have been much smaller. FDI in the passenger car industry has also contributed to the growing economic inequalities within CEE since it has been concentrated in Central Europe while Eastern Europe and Southeastern Europe have so far received only limited amounts of FDI. There seems to be a trend for the selective process of an integration of specific parts of CEE into European and global automobile production networks. However, in the next 5 to 10 years, it appears reasonable to expect that both Eastern and Southeastern Europe will gradually undergo a similar process of passenger car industry restructuring, financed and directed by foreign capital, and their integration within the European car production and marketing network (as it has already happened in the case of Dacia in Romania). Within the European car production hierarchy, CEE’s role has been twofold: a largely path dependent specialization in the mass production of small passenger cars and a newly developed specialization in the assembly of low volumes of special purpose vehicles for exports to rich markets. Low labor costs, high labor flexibility based on liberal labor legislation and a high intensity of work have been instrumental in the development of this kind of car assembly while also allowing car makers to experiment with new “lean” production strategies in CEE. Both of these specializations are clearly related to the peripheral position of CEE within the European car production system. There are links between the position of CEE on the European car production periphery with the type of car production developed and the work organization employed by foreign car makers. The post-socialist transformation of the automobile industry is generally viewed positively and presented as a success. However, as we have seen in this book, this success has been limited both within the automobile industry and also geographically. While the passenger car industry recorded significant production increases in CEE in the second half of the 1990s and in the 2000s, the rest of the automobile industry remained depressed after its collapse in the early 1990s. It remains depressed, despite the signs of mild recovery in the mid-2000s. In other words, this foreign-capital-driven transformation of the Central European passenger car production is an exception to the general decline in the CEE motor vehicle industry. Geographically, the success of passenger car manufacturing has been largely limited to Central Europe, which benefited from its geographic proximity

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to the large West European market and its lower production costs compared to Western Europe. Thus, this relative success was based on the integration of the Central European passenger car industry into the West European automobile industry in the past fifteen years. As such, it represents a typical example of the integration of a peripheral region into a core automobile industry complex. As a result, unlike the situation in Eastern Europe, passenger car production tripled in Central Europe between 1989 and 2005, and it is projected to further increase in the next decade. Despite the increase in passenger car production, the role of the CEE automobile industry remains limited and peripheral within the European automobile industry production system. CEE still accounts for only 20% of the European passenger car production, although it accounts for 45% of Europe’s population. Given the fact that the period of the construction of new large greenfield passenger car plants by foreign companies in CEE is coming to a close, this situation is unlikely to change dramatically in the near future despite the continuing FDI in the CEE passenger car industry.

8.1 Transformation of the Czech Automobile Industry My approach to analyze the development and transformation of the Czech automobile industry was to focus on the post-socialist transformation and restructuring at the enterprise level. The book analyzes the automobile industry as a whole, including the truck industry and the components sector. My goal was to analyze what was actually happening within the automotive industry enterprises in the past twenty years. This approach has required the collection of the primary information during interviews and enterprise visits and its combination with the secondary information and data collected from various sources. I have analyzed the Czech auto industry from a historical perspective since the pre-1990 development and its outcomes strongly affected the changes the industry experienced after 1990. As we have seen in Chap. 2, the Czech automobile industry is one of the oldest in Europe. However, from the start, its development was peripheral in the European context. Before World War II, the Czech automobile industry lagged behind the developments in Western Europe in many respects. The production volumes remained low, preventing the car makers from achieving economies of scale. As a result, production costs were high, and the Czech car makers had to be protected by high tariffs against foreign competition. The Czech components sector was almost nonexistent, and the vast majority of components had to be imported from Western Europe. Despite these shortcomings, the Czech automobile industry

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was able to develop a car making tradition independently of large West European automobile producers. In this respect, Czechia differed from the rest of CEE, which (with the exception of future East Germany) depended on Western car makers to establish their car manufacturing. Following the Second World War and the post-war reconstruction, the Czech automobile industry experienced major changes associated with the nationalization of all enterprises and the introduction of a centrally planned economy in the former Czechoslovakia in the late 1940s. The automobile industry was completely reorganized to rationalize production, improve efficiency and achieve scale economies. As a result, automobile production became concentrated into several specialized companies. The government also decided what automobiles would be produced by each company, and the competitive market environment was eliminated. To increase technological independence, the domestic supplier industry was established. Truck manufacturing was preferred over passenger car production, especially in the 1950s during the Cold war. The governmental policies were also strongly affected by the division of labor in the automobile industry among the CMEA members. We have seen that the governmental policies pursued during the state socialist period yielded only limited results. On the positive side, production did increase substantially although the stagnation set in by the 1980s; the policies of autarky resulted in a well diversified production mix of passenger cars, trucks, buses, motorcycles, and tractors; the domestic supplier industry was developed, and the Czech automobile industry largely maintained its technological independence from Western producers, and it largely relied on domestic R&D. However, as we have seen in Chapter 2, there were many shortcomings and weaknesses related to the state socialist development model in the automobile industry. These included, for example, a complete loss of autonomy of individual companies and their dependence on governmental decision making. This situation led, for example, to persistent investment shortages and the limited ability of automakers to innovate their products. The Czech companies mostly operated in an uncompetitive environment on domestic and CMEA markets. The structure of the auto industry was distorted by the emphasis on the production of heavy trucks for the needs of the CMEA. As a result, the Czech automotive products were gradually becoming less competitive on Western markets as the Czech companies progressively fell further behind their Western European counterparts, despite the fact that they compared very well with other CEE automobile producers. This situation reinforced the peripheral position of the Czech automobile industry in the European automobile production system and limited the Czech auto producers’ ability to compete following the market liberalization in the early 1990s.

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These developments were illustrated in the case of Škoda passenger car maker, which mostly struggled during the state socialist period, and which emerged from this period as a financially weak producer of small passenger cars. Nevertheless, Škoda’s tradition, brand name recognition in CEE, its independent R&D and its last state socialist model (the Favorit) represented an important potential for future development. The case study of the post-1989 transformation of Škoda Auto into a major CEE passenger car maker shows that its success was based on the combination of several factors. These included a careful privatization, designed and implemented by the Czech government, which also involved the negotiation of local content agreements; the recognition on the part of a foreign investor (VW) of the importance of the strong industrial tradition and relatively independent innovation at Škoda, and the ability of VW to build on these strengths instead of ignoring them; the relatively low wages of Škoda workers compared to West European wages; the successful transfer of modern technologies and managerial know-how that allowed Škoda to successfully upgrade and develop its existing product, and the successful transformation of the Czech supplier industry. This situation thus led to the relatively successful coupling of existing regional assets with the strategic needs of a focal firm (VW) and its production network, resulting in the positive effects of Škoda’s transformation on the Czech economy as a whole. Škoda’s production tripled between 1990 and 2006, and the company has made its first steps towards the internationalization of its production network with the establishment of Škoda assembly operations in Ukraine, India, Bosnia-Herzegovina, Kazakhstan, China and Russia. Thus, Škoda’s post-1989 transformation has been extremely successful despite serious challenges the company had to deal with. It remains to be seen whether this success can be maintained in the future. As we have seen in Chap. 4, the story has been very different in the Czech truck industry. The industry collapsed in the early 1990s and it never recovered. The reasons for the dramatic production declines included the collapse of export and domestic markets, failed governmental policies, failed privatization, and short-term strategies pursued by managements that were detrimental to the health of enterprises. The sudden withdrawal of the state from state-owned enterprises before their privatization left the former state socialist managers in charge to pursue strategies that were not in the long-term interests of their enterprises. The government of Václav Klaus had no interest in foreign investors taking over the failing Czech truck makers. Instead, it promoted voucher privatization that left the existing managements in control over the enterprises. As we have seen, this strategy proved to be disastrous for Liaz and Tatra. Avia was eventually sold to a seemingly strong foreign investor. However, Daewoo

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was not successful in reviving Avia’s production, and Avia was negatively affected by the bankruptcy of its parent company. The bus production at Karosa is the only example of a successful commercial vehicle operation in Czechia. Here, the exclusion of the state from the privatization process combined with a strong domestic management and foreign ownership (Renault and later Iveco) led to economic success. Both the Czech government and foreign investors strongly affected the development of the automobile industry in Czechia in the 1990s and 2000s. The analysis of domestic privatization and its effects in the Czech supplier industry has exposed the detrimental effects of governmental policies for industrial enterprises, especially during the 1992-1997 period. Despite its continuing ownership, the government withdrew from industrial enterprises following the end of central planning. With no state oversight, enterprise managers became de facto enterprise owners. They were free to pursue their short-term goals that were often detrimental to enterprises’ long term development prospects. The government also refused to initiate enterprise restructuring in state-owned industrial enterprises following 1989, believing that it should be done by future private enterprise owners. However, as we have seen in Chap. 5, voucher privatization failed to trigger effective enterprise restructuring because of the scattered enterprise ownership it created. Effective enterprise restructuring only took place in those enterprises whose privatization resulted in clearly defined majority ownership. Nevertheless, the period of scattered enterprise ownership created by voucher privatization was only temporary, and a more clearly defined enterprise ownership emerged in the second half of the 1990s. It seems that those domestically-owned Czech automobile component producers that survived the economic crisis of the early 1990s and prospered in the second half of the1990s and in the 2000s did so to a large extent in spite of flawed governmental policies. The analysis of the role of FDI in the Czech automotive industry and privatization has illustrated FDI effects in parts suppliers at the enterprise level. As opposed to domestically privatized enterprises, where the change was typically slow or almost nonexistent, the immediate changes, experienced by enterprises sold to foreign investors, were significant. They typically included the reorganization of production, the introduction of Western management practices, dramatic changes in quality control, and improvements in labor discipline. Many of these changes and the way they were implemented were contested not only by workers but also by Czech managers. Overall, I have identified several major advantages of foreign ownership for Czech enterprises. These included the access to investment capital to upgrade equipment and technology in Czech enterprises; an immediate access of Czech enterprises to Western markets through worldwide

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sales and distribution networks of their parent companies; the transfer of modern technologies from parent companies to Czech enterprises; the transfer of Western know-how and managerial practices to Czech enterprises in order to improve labor productivity and product quality, and the overall improvements in the competitive position of Czech enterprises stemming from the market power of their parent companies. However, as we have seen in Chap. 6, the foreign ownership of Czech enterprises also involves risks for both the enterprises involved and for regional development in Czechia. These risks are related to the potential relocation of Western investment from Czechia, especially in those cases when the low cost of production was the most important reason for their initial investment in the country. In these cases, rising wages and the rapidly appreciating Czech crown may make Czechia an increasingly less attractive place to engage in labor intensive manufacturing for Western investors. There have already been examples of foreign companies relocating their subsidiaries from Czechia to lower-cost countries elsewhere. Export oriented investments are less likely to develop backward linkages with Czech suppliers which limits their regional development potential and makes it easier for them to relocate production should the need arise. There are also questions about the effects of FDI on domestic enterprises. Although it is generally assumed that FDI in manufacturing generates positive spillover effects on domestic industrial firms, the statistical evidence to support such claims has been so far weak. Additionally, as we have seen in Chap. 6, FIEs may negatively affect domestic firms by attracting their skilled workers through higher wages and better work conditions, which are often subsidized by generous governmental investment incentives offered to foreign investors. I have also shown that the effects of FDI on domestic industrial R&D in the automobile industry largely depend on the position of a particular foreign-owned subsidiary in the corporate hierarchy of its parent company and the role of a Czech subsidiary in its parent company’s corporate strategy. Both negative and positive effects of FDI on FIEs in the Czech automobile industry have been identified. As we have seen in Chap. 7, the Czech auto supplier industry was hit by a major crisis in the early 1990s. This crisis was related to the collapse of state socialism. Price and trade liberalization launched in 1991 combined with privatization led to dramatic adjustments in the sector. The output and employment declined dramatically. However, following the crisis, the Czech auto parts industry recorded continuous growth in production and employment in the second half of the 1990s and in the 2000s. I have shown that this growth has been closely related to VW’s investment in Škoda in 1991 and to VW’s supply-chain development strategy, which heavily relied on follower supply. VW’s investment thus not only saved

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passenger car assembly operations in Czechia but it also significantly contributed to the survival of Czech auto supplier manufacturing. The success of Škoda Auto has demonstrated that Czech-based suppliers can supply high quality components while keeping their prices relatively low. This situation has attracted more foreign investors in the manufacturing of auto components in Czechia. Many of these investments were export oriented and unrelated to Škoda Auto operations. Additionally, successful domestic-owned suppliers also began to increasingly supply other assemblers especially in Western Europe and across CEE. Consequently, exports of components from both foreign-owned and domestic companies have dramatically increased. This overall level of development of the Czech automobile supplier industry was one of the reasons why Toyota with PSA Peugeot Citroën and Hyundai decided to build their assembly plants in Czechia in the 2000s. These two large investments have then triggered another wave of FDI in the supplier sector in Czechia, mainly in the form of follower supply.

8.2 A Successful Transformation? Can we then answer the question asked by the title of this book? Did the Czech automobile industry experience a successful transformation in the past 17 years? This book has shown that there is no unequivocal answer to this question. The post-socialist transformation of the Czech automobile industry has been very complex with very uneven outcomes. Yes, the transformation of the Czech passenger car industry has obviously been very successful: the output of passenger cars has more than quadrupled and is set to further increase; the output of car components has grown even more dramatically than that of passenger cars; the quality of passenger cars and components produced has reached Western European standards, and the exports of passenger automobiles and auto components have increased dramatically. This book has shown that the success of Czech passenger car manufacturing has been based on FDI, and that passenger car manufacturing would have most likely collapsed in Czechia without large inflows of FDI. The economic and regional development effects of the passenger car industry have also been significant in Czechia. However, even this success carries with it a number of potential risks. The high concentration of production in the passenger car industry increases the vulnerability of the Czech automobile industry and the Czech economy as a whole because the automobile industry is susceptible to instability and cyclical crises. The specialization of the Czech-based suppliers

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in the production of less complex and low value-added components may reinforce the peripheral position of Czech companies in the European automobile industry system. It is also important to note that the Czech passenger car industry is now overwhelmingly foreign-owned, which means that crucial decisions about its future are made by foreign TNCs in the context of their world wide operations and multiple international commitments. This overdependence on foreign capital may increase the vulnerability of Czech-based assembly plants and component suppliers. Finally, it is important to note that despite its success, the position of the Czech passenger car industry remains peripheral in the European automobile industry system. It remains to be seen whether it can gradually improve its position. At the same time, this book has demonstrated that while the Czech passenger car industry has been successful, the rest of the Czech automobile industry has not. The only exception to this rule has been bus production. Truck manufacturing has never recovered from its collapse in the early 1990s. A more broadly defined motor industry has experienced similar declines. This book has shown that the main reason for this failure was a combination of pre-1989 and post-1989 developments. Pre-1989 reasons included a distorted structure of the Czech automobile industry towards the production of heavy trucks and its overdependence on CEE markets. As such, the pre-1989 structure of the Czech automobile industry was unsustainable in the new market economy. After 1989, a number of reasons have been identified in this book to be responsible for the failure, such as flawed governmental policies, failed privatization, the short-term rent-seeking behavior of enterprise managements in domestic-owned enterprises, and the lack of FDI, which was partially the outcome of governmental policies between 1992 and 1997. Thus, while the short-term and long-term prospects of the Czech passenger car industry and the related components production look promising, the rest of the automobile industry and more broadly defined motor industry will likely continue to struggle. With the exception of bus manufacturing, it may not survive the next decade.

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Index

A Aero, 34, 37 Albania, 5, 6 Almet Hradec Králové, 231 Audi Hungária, 21, 237 automotive components industry effects of FDI, 247–250 effects of price and trade liberalization, 228–232 employment change, 235 export expansion, 232 labor shedding, 233 niche marketing, 234 risks, 255 supplier network transformation, 236–246 survival strategies, 232–236 Autopal Nový Jičín, 217 Avia, 37, 43, 48, 63, 143–149 annual production, 144 Daewoo—Steyr consortium, 145 employment change, 146 financial losses, 148 JV negotiations, 144, 145 pre-1990 development, 143 privatization, 145 Avon Automotive, 199, 233, 234 AvtoZAZ, 10 B Barum Continental, 194, 195, 198, 200, 201, 212, 234 Barum Otrokovice, 230, 233 BAZ, 43, 63, 71, 72 BMW, 250

Bosch, 208 Bosnia-Herzegovina, 15, 121, 122 Brisk Tábor, 233 Bulgaria, 5, 7, 15, 23, 26, 46 C C.I.E.B. Kahovec, 231 CEE bus production, 26 LCVs, 19, 23, 24, 26, 27 low volume production of special models, 20 mass production of small passenger cars, 19, 20, 22 motorcycles, 27 passenger car industry before 1990, 3–6 passenger car production, 11, 14, 17 post-1990 car industry transformation, 9–19 production trends LCVs, bus, motorcycles, tractors, 26–28 role in European division of labor, 19–22 tractors, 27 truck industry before 1990, 6–8 truck manufacturing, 2, 7, 23, 24, 29 truck manufacturing after 1990, 23–25 ČKD, 191 CMEA, 3, 6, 7, 9, 23, 28, 30, 46, 47, 48, 49, 228 ČZ, 48, 53, 64 ČZ–Cagiva, 220

292

Index

Czech automobile industry effects of the CMEA, 46–49 foreign links and trade patterns 1945-1989, 54–60 investment 1945-1989, 61–65 organization 1945-1989, 36–45 pre-1945 development, 34 production trends 1945-1989, 49–54 territorial organization, 43 wages, 202, 203, 204 Czechia, 2, 3, 10, 11, 15, 16, 18, 20, 23, 24, 26, 27, 29, 30, 31 Czechoslovakia, 3, 4, 5, 7, 10, 28, 30 D Dacia, 10, 48 Daewoo, 16, 20, 145 Draka Kabely, 198, 213 E East Germany, 3, 4, 5, 7, 46, 48, 49 embeddedness, 22 exports of Škoda passenger cars, 57 F Fezko Strakonice, 175, 177, 231 Fiat, 3, 5, 20, 26 follower supply, 237 Ford, 3 foreign direct investment, 10, 185 access to sales and distribution networks, 198–199 annual inflows, 193 contested nature, 195–196 Czech components industry, 247–250 effects on domestic R&D, 209–219 enterprise effects, 193–196 failures, 219–222 governmental policies, 187–193 incentives, 192

labor effects, 193–195 local integration, 205–209 spillover effects, 207, 208 stability, 201–205 supplier linkages, 207 technology transfer, 199–201 G global automobile industry, 1, 2 GM, 16, 20 Gumárny Zubří, 170, 177, 230 Gumotex Břeclav, 196, 231, 233 H Hanácké železárny a pérovny, 167 Hungary, 3, 5, 6, 10, 11, 16, 20, 21, 24, 26, 46 Hyundai, 15, 20, 252–254 I investment privatization funds, 161, 162, 177, 178 J Jawa, 34, 37, 43, 48, 63, 64 K Kablo Velké Meziříčí, 189, 190 Karosa, 37, 48, 149–154, 196 exports, 152 Irisbus, 151 post-1990 change, 150 pre-1990 development, 149 privatization, 151 Renault, 151 Karsit Jaroměř, 168, 169 Kia, 15, 20, 253 Klaus Václav, 167, 188, 191 Kolín, 250 L Lada, 48 Laurin&Klement, 34

Index Liaz, 37, 43, 47, 63, 138–143 annual production, 140 bankruptcy, 143 JV negotiations, 140, 141 pre-1990 development, 138, 139 privatization, 141 Lucas Autobrzdy, 176, 195, 196, 199, 216 M Magneton Kroměříž, 177, 190, 230 motorcycles, 64, 65 Motorpal, 208 N Nošovice, 253 O Osinek Kostelec nad Orlicí, 172, 200 P PAL Praha, 171, 199, 214, 233 Poland, 3, 4, 5, 7, 10, 11, 16, 19, 20, 24, 25, 26, 46, 48 Praga, 34, 37, 63 privatization role of state in privatized enterprises, 164 privatization, 159–164 effects of voucher privatization, 175–177 failed management buy-outs, 170 management buy-outs, 166–173 negative effects, 178–182 role of investment privatization funds, 161 role of state in privatized enterprises, 162 spontaneous privatization, 173–174 tunneling, 173, 174 PSA Peugeot Citroën, 15, 20, 30, 250–252

293

R Renault, 3, 16, 20, 26, 81, 82, 144 research and development automotive R&D centers in Czechia, 218 FDI effects, 209–211 mulit-local strategy, 213–215 supply-oriented strategy, 215–219 transfer abroad, 211–213 Revoz Slovenia, 237 Romania, 3, 5, 7, 10, 11, 14, 16, 20, 23, 26, 46, 48 Rubena Hradec Králové, 176, 177 Russia, 5, 10, 11, 14, 16, 18, 23, 24, 26, 27, 29 S Serbia, 10, 14, 16, 23 Škoda, 34, 37, 50, 54, 63 debt, 75 Favorit, 61, 72, 74, 75 insolvency, 80 Kvasiny plant, 68 post-1945 development, 67 pre-1990 development, 76 privatization, 79, 81 Š100/110, 70, 71 Š1000 MB, 69, 70 Š105/120, 71, 72 Spartak, 68 stagnation in the 1970s and early 1980s, 70 unions, 83 Vrchlabí plant, 68 Škoda Auto, 20, 30, 32 automation and mechanization, 101 Bosnia-Herzegovina, 121, 122 China, 124 common platforms, 104 component suppliers, 103 difficulties in the early 1990s, 86 engine and gearbox plant, 107 Fabia, 107 Felicia, 96, 105, 108 fractal organization, 95, 96

294

Index

India, 122, 123, 124 internal restructuring, 95 internationalization of the production network, 116 investment, 88, 89, 107 Kazakhstan, 121 Kvasiny plant, 114, 115 labor costs, 94 modular production, 97 Octavia, 105 Octavia assembly line, 99 Octavia II, 108 Poland, 117 position within the VW Group, 111 privatization, 79–86 R&D, 216, 217 restructuring strategies, 94–105 Roomster, 108 Russia, 118, 119, 120 sales and distribution network, 105 segmentation of the labor force, 100 Škoda Production System, 102, 103 spatial restructuring of supplier network, 245, 246 strategic insourcing, 96 Superb, 107 supplier network transformation, 237–246 territorial structure of sales, 108, 109 transfer of managerial know-how, 94 Ukraine, 120 unions, 98 Vrchlabí plant, 112, 113, 114 Yeti, 112 Škoda Plzeň, 50, 134, 141, 191 Slovakia, 10, 11, 15, 16, 18, 21, 23, 26, 27, 43 Slovenia, 11, 16, 23

socialist industrialization, 3 Soviet Union, 3, 4, 5, 7, 46, 48 T Tanex Plasty Jaroměř, 200, 233 Tatra, 34, 43, 48, 50, 63, 128–138 annual production and sales, 130 employment, 136 financial losses, 135 local and regional economic effects, 137, 138 pre-privatization agony, 129 privatization, 131, 132 restructuring strategies, 132, 133 Revitalization Program, 136 state socialist development, 128 Temac Zvěřínek, 214 Toyota, 15, 20, 30, 250–252 TPCA, 250–252 U Ukraine, 11, 14, 16, 23, 26, 27 V VHJs, 39, 40, 41 voucher privatization, 160 VW, 20, 21, 26, 30, 32, 81, 82, 83, 88 VW Slovakia, 21, 237 VW-Škoda joint venture addendum, 90 joint venture agreement, 84 management know-how transfer, 91, 92, 93 W Wartburg, 48, 232 Y Yugoslavia, 3, 5, 7, 10, 48

Index Z Zastava, 10, 230 Zetor, 37, 48

annual production, 222 privatization, 222 Zetor-John Deere, 221–222

295

Contributions to Economics www.springer.com/series/1262

Further volumes of this series can be found at our homepage Kerstin Press A Life Cycle for Clusters? 2006. ISBN 978-3-7908-1710-2 Russel Cooper/Gary Madden/ Ashley Lloyd/Michael Schipp (Eds.) The Economics of Online Markets and ICI Networks 2006. ISBN 978-3-7908-1706-5 Renato Giannetti/Michelangelo Vasta (Eds.) Evolution of Italian Enterprises in the 20th Century 2006. ISBN 978-3-7908-1711-9 Ralph Setzer The Politics of Exchange Rates in Developing Countries 2006. ISBN 978-3-7908-1715-7 Dora Borbély Trade Specialization in the Enlarged European Union 2006. ISBN 978-3-7908-1704-1 Iris A. Hauswirth Effective and Efﬁcient Organisations? 2006. ISBN 978-3-7908-1730-0

Christian H. Fahrholz New Political Economy of Exchange Rate Policies and the Enlargement of the Eurozone 2006. ISBN 978-3-7908-1761-4 Sandra Gruescu Population Ageing and Economic Growth 2007. ISBN 978-3-7908-1905-2 Patrick S. Renz Project Governance 2007. ISBN 978-3-7908-1926-7 Christian Schabbel The Value Chain of Foreign Aid 2007. ISBN 978-3-7908-1931-1 Martin Eckardt Insurance Intermediation 2007. ISBN 978-3-7908-1939-7 George M. Korres (Ed.) Regionalisation, Growth, and Economic Integration 2007. ISBN 978-3-7908-1924-3 Kerstin Groß Equity Ownership and Performance 2007. ISBN 978-3-7908-1933-5

Marco Neuhaus The Impact of FDI on Economic Growth 2006. ISBN 978-3-7908-1734-8

Ulrike Neyer The Design of the Eurosystem’s Monetary Policy Instruments 2007. ISBN 978-3-7908-1977-9

Nicola Jentzsch The Economics and Regulation of Financial Privacy 2006. ISBN 978-3-7908-1737-9

Christian Roland Banking Sector Liberalization in India 2008. ISBN 978-3-7908-1981-6

Klaus Winkler Negotiations with Asymmetrical Distribution of Power 2006. ISBN 978-3-7908-1743-0

Nicole Brunhart Individual Financial Planning for Retirement 2008. ISBN 978-3-7908-1997-7

Sasha Tsenkova, Zorica Nedovi´c-Budi´ c (Eds.) The Urban Mosaic of Post-Socialist Europe 2006. ISBN 978-3-7908-1726-3

Bas van Aarle/Klaus Weyerstrass (Eds) Economic Spillovers, Structural Reforms and Policy Coordination in the Euro Area 2008. ISBN 978-3-7908-1969-4

Brigitte Preissl/Jürgen Müller (Eds.) Governance of Communication Networks 2006. ISBN 978-3-7908-1745-4 Lei Delsen/Derek Bosworth/Hermann Groß Rafael Mu¯noz de Bustillo y Llorente (Eds.) Operating Hours and Working Times 2006. ISBN 978-3-7908-1759-1

Katrin Luger Chinese Railways 2008. ISBN 978-3-7908-2001-0

Pablo Coto-Millán; Vicente Inglada (Eds.) Essays on Transport Economics 2006. ISBN 978-3-7908-1764-5

Petr Pavlínek A Successful Transformation? 2008. ISBN 978-3-7908-2039-3

Christina Keinert Corporate Social Responsibility as an International Strategy 2008. ISBN 978-3-7908-2023-2