Hyundai contract signed amid corruption scandal

After days of speculation, it's been signed and sealed - a contract that should secure the biggest single foreign investment in the Czech Republic since the fall of communism. Czech government officials on Thursday signed a contract with the South Korean car maker Hyundai on the construction of a major car plant in the eastern part of the Czech Republic. But, behind the smiles and handshakes, there was an air of uncertainty. The absence of Hyundai's chairman Chung Mong Koo - indicted on corruption charges - has evoked speculation as to whether Hyundai will be able to meet its commitments.

Kim Tong-Chin and Milan Urban, photo: CTK

Daniela Lazarova has been following the story and joins me now in the studio. Daniela, this deal is obviously a big coup for the government and it has put a brave face on the complications that have emerged. But we are getting some disturbing signals from South Korea aren't we?

Well, the situation is quite uncertain. Hyundai has made it very clear in its statements to the press that the start of construction work will have to be put off until the company chairman's return and since that is unforeseeable it might have to be put off indefinitely. On the other hand, Czech officials are treating the chairman's arrest as an unfortunate matter that will not threaten the deal. Trade and Industry minister Milan Urban who headed the Czech government delegation to Seoul said that the terms of the agreement were clear and binding and that he had received assurances from Hyundai officials that everything would go according to plan.

So what is the plan? There has been speculation that the deal won't be as big as originally thought, and the plant might not be ready to schedule.

Kim Tong-Chin and Milan Urban, photo: CTK

That's right, originally we heard construction work was scheduled to begin this summer but the terms of the contract say something different and would obviously give Hyundai some breathing space. Jiri Havlicek is the trade ministry's spokesman:

"The Hyundai auto company has committed itself to starting construction work on the plant within three months of acquiring a building permit, and no later than the end of 2007."

The first car should roll off the production line in 2008 - which is very ambitious - and by 2010 the plant should be producing 300 thousand cars a year and employing some three and a half thousand people. In the first phase Hyundai will invest 750 million euros, total investment should exceed one billion euros. So there are some firm commitments and some more flexible points where the company can deliver as the situation develops. Its priorities now are to apply for investment incentives, to be approved by the EC and request a building permit.

What happens if they fail to meet the construction deadline because of how the corruption scandal develops?

Well, in that case the Czech Republic could pull out of the agreement and Hyundai would have to return the investment incentives and doubtless pay compensation. But that would really be an extreme situation and it seems very unlikely that the whole deal will fall through. Both sides have a lot riding on it, Hyundai needs a new plant, it has already got a brand new Hyundai model which is to be produced in the Czech Republic and of course the CR needs the investment and the jobs - so no doubt every effort will be made to make it happen.