Czech European exports rise in spite of push to diversify markets

Minister of Industry and Trade Jan Mládek came into his current post just over 15 months ago with a mission to change the country’s trade and investment policy. He criticized the former centre-right administration for damaging Czech business prospects in China and allowing foreign investment in the Czech Republic to diminish to a dribble. We took a chance to ask him about the successes and failures so far, firstly about whether the goal of boosting exports outside Western Europe had been achieved.

Jan Mládek, photo: archive of Czech Government

“If you are putting questions this way, we did not succeed at all because what happened last year and in the first quarter of 2015 is that the share of the European market as the main export market for Czech companies is only growing. We had 81 percent in 2013, we had 82.2 percent in 2014, and in the first quarter we have an even higher percentage of 83.5. So the European market is growing. It seems that one of the main reasons is that there are problems in many export markets of the Czech Republic. This is not only Ukraine and Russia, but we have also problems with countries like Iraq, Syria, and Libya and they are in complete disorder at this moment and hence there is minimum trade.”

But do you think you are laying the foundations for a recovery of trade with these countries outside Western Europe because that is the strategy isn’t it?

“We are taking as the European Union the EU 28, or maybe it would be better to say the European Economic Area as our main export market. What we are talking about here was the idea that we should not be dependent 82 percent but it should be slightly under 80. It would be naive to believe that there would be some complete change in direction of exports because it is simply impossible. We are very pleased that we are part of the [European] single market. We consider this to be an extremely big advantage and success, unlike some other areas of European integration, but the single market from a Czech perspective is a perfect thing. The only problem is that the Czech Republic is a traditional exporter of investment goods and in this category the European market is not easy because it is very competitive and full and we are seeing opportunities for Czech companies outside the EU. That is why we are interested in exports outside the European Union.”

You said in the past I think that the margins on contracts outside the EU are higher. How much higher are they? And that is probably a reflection of the more competitive European market?

This is a good business but the problem is that if you are not a final producer then your margins are small.

“I will not tell you the exact figures, but the fact is that Czech companies are heavily integrated into the European economy, mainly into the German economy, and the problem is that they are suppliers and sub-suppliers to major producers of final products, for example car makers. It is a very telling story that when there was a crisis in 2008-2009 and the first victim of this global crisis was the automotive industry I the Czech Republic. But it was not that the part that was producing the final product, that is cars, but those companies that were supplying the luxury car makers in Germany because they had a decline of exports to the U.S and other developed markets and hence they were not buying car parts from Czech Republic. This is a good business but the problem is that if you are not a final producer then your margins are small.”

Double squeeze on Russia

The second issue I wanted to talk about is how much trade with Russia has declined and whether there are any signs of a recovery or if that depends on the oil and gas markets?

Illustrative photo: European Commission

“First of all, there are two things. In 2014, even with the sanctions and counter sanctions, the decline of Czech exports was relatively limited. It was only four percent. That was because the contracts had to be fulfilled and there was demand. The real problem came in December when there was the devaluation of the rouble. There were all falling prices for crude oil and gas and therefore we do not have demand. I have here a figure comparing exports to Russia in the first quarter of 2015 compared with the same period in 2014. In 2015 it was only US $ 724 million and in the year earlier it was US $ 1,381 million. It is a significant decline of nearly 48 percent. The reason we are seeing a decline of exports to Russia is first of all the low prices of crude oil and gas. The second part is the sanctions, but only the third part of the sanctions that is dealing with the access of Russian public entities to credit from the West. If you have low income from crude oil, the obvious solution is to take out loans, hopefully cheaply. And if you do not have success there you have an even bigger problem. Those are two things now which we are seeing as detrimental for Czech exports to Russia.

“And we are not seeing an improvement of the situation, rather it is the other way around. And, unfortunately, it is not only Russia after December, it is the whole region of the CIS because either those countries are also exporters of crude oil and gas like Azerbaijan or Kazakhstan or they are dependent on Russian demand like Belarus and Ukraine and simply have lower economic activity because of the simple fact that they are not exporting to Russia. Obviously, the influence is much bigger than in the Czech Republic because our dependence on the Russian market not so big like these neighbours.”

Calories to China?

And the Chinese market, how is that shaping up because it is also a priority?

The Chinese understanding of Central Europe is everything between Tallinn and Tirana.

“That’s true, we have decided generally that we will improve are relations with China and we have been working hard. I was myself three times in Beijing and other Chinese cities supporting entrepreneurs speaking with Chinese officials. Symbolic progress will be the direct flight from Prague to Beijing which will start on September 22 this year. We have been very active at the Shanghai technology fair in April this year and we are trying to present the Czech Republic as a technology country.

“The Chinese have this idea that they will not discuss with individual countries in Central and Eastern Europe and they have crated the group 16 plus one. And they have contributed to the intellectual debate over what is Central Europe. The Chinese understanding of Central Europe is everything between Tallinn and Tirana. It is former Yugoslavia, Baltic States, Central Europe and so forth, 16 countries. And they have been looking at those countries and they came to the conclusion that those countries should be suppliers of calories of food to China. We told them: ‘Wait a second, we are not really a significant exporter of agricultural products. This is not the Czech Republic. We can export something, some special products but not really a big volume of calories. We are a technology country.’ So we are trying to discuss with them that we are willing to cooperate within this framework, because we understand that the Chinese prime minister does not have the time to discuss with each country separately, but we would like to present ourselves as a country that is able to deliver technologies. So, big Czech companies are starting to be active on the Chinese market, which is not very easy it is well known. We are also discussing abut platforms that would allow access to the Chinese market for small and medium-sized enterprises to overcome the distance. If we were to be successful in this, this would be significant progress.

“I think our [trade] balance will be improved this year with China. The only technical problem will be that it will be very difficult to distinguish what is due to our own effort and what is because of the revaluation of the foreign renminbi against the Koruna because they are connected with the dollar. During my visit in November there was three crowns per renminbi, now when I was there in April it was four crowns. So, Chinese imports are more expensive at this moment. “

Turning to Foreign Direct Investment, when you came into government you were very critical of the previous government for not giving enough priority to this. How much do you think you have changed the situation there and which countries are you looking to for more FDI?

Photo: Škoda Auto

“We have had quite a few successes. Last year we could quite the companies like Nexen Tyre which will build a huge tyre factory in Northern Bohemia, Hyundai Mobis which will work for the automotive sector. We have got Amazon, at least one logistics centre with the second one we were not so successful. This year we saw with Škoda Auto the agreement of their expansion of production at Kvasiny. They will not only produce the new Superb but they will also produce an SUV. They are still hiding what they will exactly be producing but I expect that they will be producing an SUV not only for Škoda but also for SEAT.

“I would like to add what I have discovered in this year and quarter and that year and a quarter and that it is absolutely necessary to have cooperation at all three government levels. In Kvasiny everything is doing very well because there is the support of local municipalities, regional government, and central government. If you don’t have it, you have problems like you had in Brno [the second potential Amazon investment]. “