Are German Investors Ready to Leave?

A high-profile exit and a recent survey have worrying implications for the Czech economy

Awarded a number of prestigious business prizes, his name symbolizes Czech business success. So when it emerged that he planned to move his firm Linet to the Netherlands, it came as a shock to everyone. "I have decided to move the firm out of the Czech Republic because of the legal instability we face here," says Zbyněk Frolík.

The latest survey conducted by the Czech-German Chamber of Commerce (Deutsch-Tschechische Industrie- und Handelskammer) confirms that the business environment here is seen to be unfriendly. According to the survey, one third of German companies would have never invested in the Czech Republic had they known about the difficult local business environment.

As Ernst & Young (E&Y) points out, new investors have recently stopped coming to the Czech Republic. In the past year, the value of mergers and acquisitions here has declined drastically, by two-thirds. So should Czechs worry about this exodus of foreign investors?

Unpredictable Czech politicians
Improving nursing and hospital care around the world, Linet's products are sold in 93 countries. Having been voted "manager of the year" several times, Frolík has launched a successful business career in Germany. When looking for a partner, he was ready to offer 50 percent of the stock in his firm. "And it worked," says the 50-year old IT-specialist, who joined forces with the Wibo company from North Rhine-Westphalia, which makes beds for senior houses.

Teaming up with Linet proved to be a blessing for Wibo. Linet, which started out in a rented former farmhouse, grew much faster than anybody expected and today is much larger and more successful than Wibo. But Wibo has no reason for regret. It still owns half of the the six-billion-crown firm it was "given" for free.

Twenty years later, Zbyněk Frolík intends to take another important step, merging Linet and Wibo to form an international holding. "In five years, we would like to enter the German market and we need investors to know about us," says Frolík, explaining his plans. "Unfortunately, Czech firms are of no interest to anyone."

Reluctantly, he has been considering moving out of the Czech Republic for years. "Political instability, corruption and a lack of trust in legislation all made me speed up my decision," says Frolík. The solar energy project is an example of why businesspeople should be cautious about the political situation here, he says. At first, Czech politicians helped put in place unrealistically favorable conditions then, after investors had flooded the country, completely changed the rules. "How can we be sure this won't happen in other fields of business?" asks Frolík.

German investors needed
Around 4,000 German firms are estimated to be operating in the Czech Republic, with exports to Germany generating a fifth of Czech GDP. German and Austrian firms are the largest foreign investors in the Czech Republic, pumping in 22 billion crowns last year, according to the Ministry of Industry and Trade (MPO).

According to the Czech-German Chamber of Commerce survey, legal instability, a lack of trust in authorities and institutions, and corruption and crime are the things that German investors dislike most about the Czech Republic.

German-born Horst Blom points at the yellow footprints on the floor. "The large door is for vehicles, the small one for pedestrians," explains the 60-year old, and follows the yellow path for pedestrians. "You can take a shortcut through the large door but it's all about workplace safety." It's a seemingly trivial issue but Mr. Blom has struggled to spread the famously German sense of precision among his Czech co-workers for 15 years now. At the moment, his firm Hettich is looking for specialized psychologists who can explain the importance of following the yellow path to workers.

"I am concerned about this," says Blom. "These small details are the key to professionalism and success."

"On the other hand, if this was our biggest problem, I would be a happy man," he adds, laughing, and quickly starts praising his employees. "Smart, competent, creative, committed and ready to solve problems -- there are numerous advantages to working with Czechs."

Of the entire team of German managers who came with him to the Czech Republic 15 years ago, he is the only German still working at Hettich CZ. All the senior positions, including top management, are filled by Czechs.

Not running away
Blom, as the representative of a German firm, also took part in the Czech-German Chamber of Commerce's survey. "Enforcement of the law is a serious problem," he says. His company has been trying to get an official ban on the sale of counterfeit Hettich goods imported from China. "After two years of effort the only thing we have received is a letter saying that the court in Brno will deal with it," he explains.

On the other hand, none of the survey results, he says, signal that investors are losing patience with the Czech Republic. "We have been critical in the same way Czechs are critical of domestic politics and other problems. We are certainly not running away." On the contrary, the company significantly expanded production prior to the financial crisis and, as a result of increasing sales, it could expand further in the near future.

Hannes Lachmann of the Czech-German Chamber of Commerce has decided to stay, too. "No, no, we aren't running away," says Lachmann. "The Czech Republic remains among the most popular countries with investors. Beside some criticism, there are plenty of good things that they value here. Qualified labor, productivity, motivation. In all these, Czechs stand out as above-average."

For German investors, geographical proximity, EU membership and low labor and other costs play a key role as well. Czech wages are typically half those in Germany, and hiring a new employee in Germany is much more expensive than it is here. "Also, we shouldn't forget we are culturally quite close and Germans simply feel good in our country," says Linet's Frolík.

Promising figures
A more detailed look at the survey suggests that the situation isn't so bad. The Czech-German Chamber of Commerce poll lists the Czech Republic as one of the best places for potential investors. Germany is ranked first, followed by Slovakia -- but only because it has adopted the euro. According to the survey, 39 percent of respondents are increasing their investment in the country, and 43 percent have maintained existing levels. Until recently a majority of companies had had to cut their budgets due to the economic crisis.

So do the economic statistics look promising? The level of Czech-German business has returned to pre-crisis levels (roughly 55 billion euros). "There were two main waves of investment -- the first at the beginning of the 1990s and then after the Czech Republic joined the EU," says Andreas Höfinghoff of KPMG. "Something like that won't really happen again but there are still plenty of opportunities for small- and medium-sized companies." To prove his point, he adds that KPMG is aware of a number of development centers that would like to relocate from Germany to the Czech Republic.

Do these figures therefore indicate that Czechs shouldn't worry about a survey of investors' feelings and the critical stance taken by one Czech businessman? "Czech-German relations are truly strong," says KPMG's Höfinghoff. "Most of the companies that have invested in the Czech Republic would leave the country only under exceptional circumstances."

Nonetheless, analysts claim competition will continue to grow. "There is cheap labor in China and other developing countries and there is Germany," says Blom of Hettich CZ. "In the Czech Republic, we are beginning to notice a lack of qualified people in technical fields. We have been looking for people for a number of positions but in vain so far. We need developers, designers, innovators. All those are simply not here."

The real test will be if the Czech Republic can play a role in sophisticated development projects in the future, says Blom. German and local producers outsource any unskilled positions to developing countries but if Czechs become more qualified, the greater the chance they will have that German investors will stay.

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