South Koreans step up investments in Czech Republic

The Czech Republic has secured another major foreign investment with the South Korean car parts maker Hyundai Mobis signing a deal to build a factory outside Ostrava. It’s the third large South Korean investment project in the Czech Republic – but new EU rules on incentives could make it harder for the country to attract big foreign investors in the future.

Chung Myung-Chul and Bohuslav Sobotka signed the investment deal on Tuesday, photo: ČTK

Czech Prime Minister Bohuslav Sobotka and Hyundai Mobis CEO Chung Myung-Chul signed the investment deal at a ceremony in Prague’s Hrzánský Palace on Tuesday. The South Korean car parts maker will build a plant in Mošnov outside the north eastern city of Ostrava.

The firm will invest some 96 million euros in the factory which will produce car lamps for Hunday’s manufacturing operations in the Czech Republic and Slovakia. It is scheduled to open in 2017, and create around 900 jobs, according to Prime Minister Sobotka.

Photo: ČTK

“We were in competition with Slovakia and Poland up until the last moment, and I’m glad that Hyundai Mobis eventually decided to build its plant here. This is good news particularly for the Moravia-Silesia region which needs those 900 jobs as there are some 80,000 unemployed people in the region today.”

Hyundai Mobis received an incentive of over 500 million crowns from the Czech government and the city of Ostrava. The firm’s CEO Chung Myung-Chul, told the news conference that this would be his company’s first plant in Europe.

Photo: YouTube

“Today is a big day for our company because we are launching a project of the construction of our first factory in Europe, the cradle of the global automotive industry. The Czech Republic boasts a long and rich industrial tradition.”

The Hyundai Mobis plant is the third major South Korean investment project in the Czech Republic, after the Hyundai car plant in Nošovice built in 2006, and the planned Nexen tyre factory in north Bohemia. Germany has been for decades the dominant foreign investor in the Czech Republic – but researcher Vilém Semerák of the Prague-based CERGE-EI institute says the South Koreans are following in Germany’s footsteps in central and Eastern Europe.

Vilém Semerák, photo: Filip Jandourek, ČRo

“I actually think that South Korea is trying to replicate the German influence in central and eastern Europe. When you look at what Kia and Hyundai have been doing in the past two years, they are clearly trying to imitate what Volkswagen and other car producers have been doing”.

“They have moved their development centres to Germany and try to produce Europe-designed cars for European customers. And just like the Germans, they are also making use of cheap labour and relatively good production conditions in central and eastern Europe.”

Czech industry leaders have recently been stressing the need to target countries like China and Russia – not just as export destinations but also as possible investors. Do you think they could follow South Korea’s lead in this region?

“First of all, it’s definitely better for the Czech economy to have investments from South Korea than from Russia or China. Looking at the effects of investment on productivity and also entrepreneurial culture in the country, it’s definitely better if they come from a more developed country with stable conditions like South Korea.

Photo: Free Domain

“Investments from regions such as Russia and the former Soviet Union, they sometimes also bring with themselves some undesirable side effects such as entrepreneurial culture. So betting on South Korea is better.

“As for inspiration – I think that we cannot say it will not inspire the Chinese mainly. China has been planning to develop and expand their car sector for a quite a long time, so assuming they will adopt a pattern similar to the South Koreans, that means getting inspiration from Germany and sourcing input for their companies like the Germans do, that could be quite interesting.”

Photo: tungphoto, FreeDigitalPhotos.net

How attractive is the Czech Republic to foreign investors compared to other post-communist countries in the region?

“If you look at the total inflow of foreign direct investment, or FDI, per capita, you’ll see that almost right until the financial crisis, we were the top country in the region with the highest stock of FDI per inhabitant.

“Then Estonia took over and at present, we are number two in central and eastern Europe. So I would say we are quite attractive.”

Photo: JLogan, Wikimedia CC BY 3.0

The European Commission has changed the rules for incentives to foreign investors. In the Czech Republic, the ceiling has been lowered from 40 to 25 percent, and government officials say it has already had a negative effect on investors’ interest in the Czech Republic. What effect will the new rules have in the long run?

“I don’t really expect any major effect. From the point of view of investors, they are focusing on tangible factors such as the proximity of developed markets, the endowment of the markets, and so on.

“Incentives are a nice topping, something nice to have, but it’s not going to be the main reason for an investment. So if the Czech Republic is just as attractive as similar countries like Slovakia, then the incentives might play a key role in the decision. But if we are more, or significantly more attractive, the incentives would not change this.

“Also, the Czech Republic is not the only country affected by the change. Regions similar to the Czech Republic will face similar regulations so it will not have a major impact.

Photo: Marián Birošík, Free Domain

“What can actually happen is that it could help increase efficiency within the EU. Sometimes, incentives have led to detrimental competition, with regions competing rather than cooperating when trying to attract foreign investment.”

The Hyundai Mobis plant will be third South Korean investment in the automotive industry here. Is it a safe bet to rely so heavily on one segment?

Photo: Ladin, CC BY-SA 3.0

“Not putting all eggs in one basket can obviously be a reasonable strategy in some situations. On the other hand, we are talking about relatively small economies – the Czech Republic, Slovakia and Hungary – and we must expect they will specialize to some extent.

“What we get in specialization is that they will focus on one sector or sub-sector, and largely abandon production in other sectors. We can never predict future perfectly but any specialization is a risk – but one that can lead to improved competitiveness.

“Within the whole of Europe, it seems the car industry has bigger capacities than are needed. But at the same time, the South Koreans, Kia and Hyundai, have been among the most dynamic companies in the field, and have over the past three years succeeded in expanding their output while other companies were struggling. So it can be a risk but not necessarily a dramatic one.”

“One thing that would be better and that has been missing so far would be if the South Koreans decide to relocate some of their research and development capacities to the Czech Republic as well.

“That doesn’t seem to be case with the latest investment which is a pity. If we had a bit more of hi tech types of investment here, it would definitely be a safer bet than simply producing and assembling car parts.”