Karol Balog, director of the Agency for Industrial Development and Revitalisation.
photo:Courtesy of AIDR
The Slovak Spectator (TSS): From what I understand you just returned from Italy, where you said that you were trying to 'twist the arms of some businessmen' to get investment. How did that go?
Karol Balog (KB): Italy is ranked third in trade with Slovakia but only about 10th place as far as investment. They have invested very very little here. Mostly it has been in the textile and wood industry. The reason is that a lot of Italian companies are basically small and medium sized companies that concentrate on their production in Italy. If you looked at their turnover you would consider them large companies but if you look at how many employees they have, they are small employing 20 to 50 employees.
I visited about 15 companies in my few days there. I was surprised by how few people work there. The reason is perhaps that they specialise very much. Here in Slovakia a lot of companies do everything. Slovak firms have a large range of products producing everything from screws to needles to the biggest parts in one company. In Italy they outsource.
For example I visited chair manufacturers who specialise in certain price ranges. Some produced cheap chairs; other produced middle-priced chairs; while some produced very exclusive expensive chairs. In Slovakia a chair producer would make all kinds of chairs from cheap to expensive. That means they need lots of workers and they are not efficient.
I also visited some marble and ceramic companies. They had very few people though huge turnover. They put great emphasis on marketing, design and colours. Prior to stocking any production, they did very intensive market research.
On the contrary, Slovak companies pay little attention to this type of research.This stems from the former Czechoslovakia when most if not all the trade was done in Prague. Slovakia was basically a manufacturing facility for Czechoslovakia. After the split all the marketing stayed in Prague so people here were not very used to marketing and still aren't educated in it. They don't have the financial resources to travel and do market research. This is the basic difference between the Italian approach which is very effective: small companies with few people that make huge revenues because they pay a lot of attention to market research.
TSS: Do you think the Italian model is something that Slovak firms should be emulating? Market research, for example ?
KB: Absolutely. Some companies do marketing but are unsuccessful then don't do it again. But we do have successful companies in all kinds of sectors. We have good manufactures who sell 90 to 100% to exports and they are successful. They are doing fine. These few companies accepted the model like the Italian approach from the very beginning.They took whatever marketing people they could get their hands on and co-operated with them. That was their good fortune and smart vision for the future.
I've visited many Slovak companies together with foreign investors. For the most part these investors are impressed with how good the products Slovak companies make sometimes even on obsolete machinery. The education of the workforce is still very good. This is thanks to our network of industrial schools - three year schools where young people learn both theoretical and practical skills needed for special industrial sectors - the students were immediately put to work by companies in these sectors.
TSS: This is something people outside Slovakia often don't realise: that the Slovak workforce is one of the most educated in the world. Why isn't the government promoting and developing this more? Wouldn't this be a big selling point to investors?
KB: I really don't know why. Unfortunately what stage of development is the government in right now? There are poor relations between the coalition and opposition and even within the coalition the relationship is far from good. They probably don't have the time or the peace of mind to focus on the things they should. But if we in Slovakia don't continue educating our workforce, we'll lose our competitive edge in this particular field.
And with prices of energy and everything else rising to a level that is not very different from the rest of Europe, the competitive edge of Slovak business is going to fail without an educated workforce.
Those foreign manufacturers who are looking for the cheapest labour force probably take their business somewhere else. They go to Romania, Bulgaria or to China. But those who want to move upmarket with their products, be it textiles or shoes or any kind of consumer goods, they stay in Slovakia. Because in many of these countries I mentioned you can get a cheaper workforce, but they aren't really that educated or able to make quality products.
TSS: How exactly does your agency aim to try and redress this balance to make potential investors realise how good the workforce in Slovakia is?
KB: This is one of many things we do. But our main goal is finalising a project called SPEED which stands for Slovak Program for Enterprisers with Excess Debt. We work with 28 companies helping them first by diagnosing the health of their company, then working with them in settiing up a business plan so that they can succeed. For those companies that want or need it, we try to find potential investors. Or it's not always the case that companies want a foreign investor, but most of them at least want to have some co-operatin with foreign companies either to get access to foreign markets or to gain some know-how or skills.
From my immediate experience in Italy, the number of employees in our companies is still too high to be effective. Unfortunately I'm talking against the government's efforts to improve unemployment and I know we already have massive unemployment near 20%. But still, most companies have not reached the bottom of their workforce effectiveness. For example if you take US Steel and VSŽ, the hot topic right now, there are 24,000 employees there. In steel mills around the world an effective company that produces equal quality products as VSŽ, does so with 5,000 to 6,000 workers. Whatever US Steel says in public about saving jobs, they are going to have to let go of a lot of people. Whether they will do it in a year or two depends on what kind of agreement they have with the government.
TSS: Do you think this is common in many Slovak companies? Are they overstaffed which makes them inefficient?
KB: Yes, but you have to take into account the size of Slovakia - 50,000 square kilometers with a population of just over five million - we have an extremely large amount of big companies with lots of employees in a relatively small space. Anywhere in the West, you are not going to find a very high percentage of companies that have over 1,000 employees.
In Bardejov they had the shoe manufacturer JAS Bardejov that had something like 5,000 employees, almost more employees than there were people living in the town. Of course now the number of workers has dropped to somewhere around 1,000 which is still higher than what they probably need to be effective. But these people who are running this company have a very strong social feeling. They say 'we live here in this small town and I just can't let go of more people. I know how hard they work to make a living. I can't lay them off. This is the only chance they have. There are no other major providers of jobs in the region. Even if I just barely make it in this company I can't lay off more workers.'
TSS:What exactly is wrong with that attitude. There is always a trade-off between efficiency and employment, and certainly here in Slovakia your particlular example is not unique. Where is the best place to draw the line?
KB: From the employer's point of view you have two options. You either want to make a profit and you don't care how many employees you have, you go with the most efficient way. Or you just say, fine we have this company here and I am an owner or I represent the owners but I'm not going to be a very capitalistic entreprenuer. Instead, I'll be somewhere in the middle of being a capatilist and a socialist who takes into account that these people can either work at my factory or be left unemployed. In the future, the pressure will be to be more efficient. If companies want to survive, they cannot be overemployed.
TSS: When you're helping these firms of yours, what is the main failing of many of a Slovak company that finds itself in trouble?
KB: Practically all the companies in our project have excess debt. The debt comes from many years ago and is like a cannonball pulling down these companies. If you take the approximate 20% interest rate they still have to pay on loans, in five years you might pay back the loan, but you'll still have to pay back the interest which is the same amount as the loan. Generally manufacturers are happy if they make 10% profit, but even this doesn't help with a 20% interest on a loan.
The other problem is the very limited marketing know-how. When companies take the time to really do it properly, they can penetrate tough markets. One example of a company that did this is Bučina Zvolen, a logging company, which was very successful in Japan despite cultural differences and tough trade barriers. They kept at it for four years studying the needs of possible Japanese clients. Once you do this for one market you can expand to other countries.
TSS: So problems lie in the interest rates on loans for companies and also with management know-how. Though the government may not be able to influence the banks, is there anything the government can do to help companies like set up a special fund or something?
KB: Yes, the government indicated that they are willing to help in restructuring the banks to prepare them for foreign investors. This will cost somewhere 100 billion Slovak crowns, a huge amount of money. Now, Slovak industry according to the latest statistics are producing about a 18 billion Slovak crown in annual loss. If you multiply this by five or six, you come up with that 100 billion crowns which means that if you don't restructure the corporate sector at the same time as the banks, in five years the Slovak banks are going to be in the exact same position they are in today. You'll need another 100 billion crowns to restructure these banks again.
Now is this a profitable way to do business? I don't think so. If I could recommend something to the government, I would suggest that the government take 10% of the estimated money for the banks and allot it for industry restructuring. Roughly these 10 billion crowns would be used to revitalise the most salvagable of Slovak industry.
There is no doubt that some companies are going to go down the drain. There are some that are in such bad shape that it's not worth doing anything about it. Or there are companies that still have management ownership that will continue tunnelling money no matter what laws or restrictions the government puts up. So definitely 20% or 25% of industry will be destroyed. We will see them dissappear in the next few months, maybe a year. But I have to emphasise that there are a lot of struggling companies that deserve to survive.
TSS: How will Slovakia finally attract the kind of foreign investment that its neighbors have?
KB: By Slovakia having some more success stories like Volkswagen. I always say that no matter what propoganda you do, investors will look at successful investor's experiences already operating in Slovakia. They will come, talk to them, get their first-hand experiences. Without any success stories, there won't be any investment. If US Steel is successful in VSŽ it will have a cumulative effect.
17. Apr 2000 at 0:00 | Ed Holt