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Czech Republic: Ignoring Political Malaise, Companies Push Ahead

Prague, 15 July 1998 (RFE/RL) -- Italy is often said to run better without a government than with one. In the last half century Italian governments have averaged less than a year in office, making long-term policy planning largely impossible as the politicians' struggled to survive.

And yet, despite many flaws, Italy is a country which has made enormous economic progress within one generation, lifting large sections of its population out of post-war poverty to today's comfortable standard of living.

The explanation must lie in the fact that the Italian business world just bypassed the squabbling politicians. Using their traditions of artisanship, enterprise and hard-work, they went ahead making money and creating jobs. Where inefficient bureaucracy got in the way, well, there were ways of keeping officials content.

In the Czech Republic today, there seem to be parallels developing with Italy. As in Italy, the Czech electoral process produces fragmentation, so that no one party can hope to build a strong government. Premier Vaclav Klaus's center-right coalition collapsed year after a long period of paralysis and internal dissension. A temporary government of technocrats took over and has performed well, but has not been able to continue broad reforms, nor give the country a long-term perspective for economic planning. Following inconclusive elections last month, the prospect is for a left-wing minority government supported in office by its rightist enemies -- not a very promising prospect.

Meanwhile, the country is practically rudderless, with the economy at zero growth or less, wages falling and joblessness growing. Foreign investment is down to a trickle. It's customary to speak of the Czech Republic as the one-time star of transition, which lost its way. But all is not gloom and doom. There are surprisingly positive results being achieved by major Czech companies which have shaken off the old inefficiencies. And others, which have not yet thrown off the stifling blanket of pseudo-privatization, are trying to follow.

The industrial giant which is the national flagship is of course Skoda cars, based in Mlada Boleslav. Owned by Volkswagen Group of Germany, Skoda has been transformed in a few years to a profit maker and although sales on a depressed domestic market are diving (by 16 percent), they are rising steeply in the competitive West European market (by 11 percent). In Italy in particular sales of the stylish new Skodas are soaring.

Of course, the massive infusion of German expertise and capital was the driving force behind Skoda's revitalization, although the Czech workers and managers are proud of their speedy adaptation to new ways. But other major Czech companies have stood their ground without a top-line foreign partner. One is CKD Holdings of Prague, the transport engineering conglomerate. The company says that every third tram in the world is from CKD. Formerly a rambling nationalized concern, since privatization in 1994 CKD has carried through a rigorous restructuring program to enable it to face the world. Press spokesman Richard Pazout explains:

"Unlike most companies in the Czech Republic, we have started a real, strict restructuring process, cutting down on the number of our businesses, concentrating on the core activities that we can compete with on the world market."

CKD now concentrates on five core industries, including rail transport and environmental technology, and its staff numbers have been cut from 20,000 to 14,000. Profit after tax last year was some $10 million on a turnover of some $360 million. That contrasts with heavy losses in 1996 after provision had to be made for non-payment by Russia of a huge 1991 order for locomotives. CKD's biggest market is still the Czech Republic, but it has a worldwide presence, and one of its biggest current orders is 100 million dollars worth of trams for Manila in the Philippines.

Pazout says in addition that his company is particularly in favour of transparency in its business dealings, and also of working at the cutting edge of technologies with foreign companies, such as Siemens of Germany.

Another, even bigger Czech concern is the Skoda Limited group, which employs a total of 35,000 people in a many-sided business empire based on heavy engineering. Skoda, headquartered in Plzen, is not related to the car company. Unlike CKD in Prague, Skoda Limited embarked in recent years on a program of acquisitions outside its core activities, and in some cases even outside the country. Thus in 1996 it took over the famous but deeply-indebted Tatra truck concern, as well as the troubled eastern German-based car press-maker Umformtechnik Erfurt.

This expansion into non-core areas contributed to dissipation of the group's energies, and last year losses amounted to some $38 million.

Under increasing pressure from its bank creditors, Skoda now says it is moving towards big-scale restructuring, including the sale of its new acquisitions. Executive Vice President of Technology Jan Musil says emphasis in future will be strictly on the core activities, including metallurgy, transport systems and power generation equipment. Six product areas will be ended.

Musil points out that the 1997 losses were mainly due to accounting provisions, for example reservables, exchange rate fluctuation risk and notably, to high interest rates. He says that actual production lines in the Skoda Plzen group were in profit, but outside subsidiaries, namely Tatra, the Liaz truck company and Umformtechnik, were making losses.

He says that preliminary results for the first part of this year indicate a group profit. And he says restructuring will begin in earnest:

"Very important is our restructuring program, for example we are selling many old production areas, which should give a total saving of 2.5 billion crowns (over $80 million). We want to remove old production areas, old equipment, for this year we plan to close two or three Skoda companies because we must give our money for technical development and production only in the core businesses."

So, as the politicians bicker in Prague, the country's heavy industry is learning to fend for itself in the new era.