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EC-PHARE GUIDED RESTRUCTURING LAST HOPE FOR SHOE COMPANY TO STEP OUT OF THE MUCK

JAS Export struggles to make shoe fit

Only five years after the fall of communism in 1989, JAS Bardejov's formerly stable footwear business came apart at the seams. Now, holding on by a shoestring, the company survives under its daughter company, JAS Export, formed in 1996.
The struggles of the north-east Slovak mass shoe producer have had implications far beyond the factory's walls, affecting almost every person in the region. Unemployment in Bardejov is 26%, one of the highest rates in the country. The shoe company once employed over 5,000 people; in 1998 only 1,180 had jobs.

Only five years after the fall of communism in 1989, JAS Bardejov's formerly stable footwear business came apart at the seams. Now, holding on by a shoestring, the company survives under its daughter company, JAS Export, formed in 1996.

The struggles of the north-east Slovak mass shoe producer have had implications far beyond the factory's walls, affecting almost every person in the region. Unemployment in Bardejov is 26%, one of the highest rates in the country. The shoe company once employed over 5,000 people; in 1998 only 1,180 had jobs.

"Anybody living in Bardejov was either working with JAS or closely connected to the company," said Karol Balog, director of the Agency for Industrial Development and Revitalisation (AIDR), a government-funded organisation which now administers an EC Phare-sponsored project to aid failing companies trying to adapt to western ways of doing business (see story, page 1).

The shoe manufacturer's massive production hall symbolises everything wrong with the once communist-run business. "If you go there, you see huge buildings where there are four or five floors of machines for as far as you can see, hundreds of them," said Balog. "Of course, if you make millions of pairs of one design of shoe, this works. But if you have to go into much wider variety of models, colours, sizes and shapes and want to produce only 10 to 15 thousand pairs of each, it's a very different ball game. So, you have to redesign the whole thing."

And redesign is what AIDR has come to do. Since November 1998, a group of western and Slovak experts has been working closely with JAS Export to turn the ailing producer into a viable enterprise.

According to Jozef Stalmach, General Manager of JAS Export and the firm's main shareholder, his young company hoped to gain assistance from AIDR in finding a creditor to help with liquidity, advice on developing marketing and sales, and a plan for restructuring the company's operations. "If we weren't working with AIDR, who knows what would happen," said Stalmach.

No shoe-in

AIDR had been less than enthusiastic about taking on JAS as an aid project. "I have to say that the selection committee's decision was very tough and this was the only case where the committee went to visit the spot personally," said Balog. "If JAS Export was not such a large provider of employment in the region, especially for women, the committee would probably have decided not to bother."

The consortium company that took on the challenge of JAS's restructuring was Munich-based Pohl Consulting & Associates, which developed a comprehensive restructuring plan to be implemented over two years.

Andreas Pohl, managing director of Pohl consulting, said that after an in-depth analysis of JAS Export, the company was found to be operationally sound despite its financial troubles. This could be seen in the company's steady stream of revenues from 1996, leading to 1999's modest total turnover of 445 million Slovak crowns ($10.5 million) (see chart). Pohl was also impressed by the company's stable, though limited, EU customer base, with 90% of JAS exports going to Germany. The shoemaker's price advantage due to low labour costs as well as skilled workers convinced the consulting firm that there was something to build on.

Still, JAS Export is financially burdened by the former parent company's past debts. JAS Bardejov a.s., which went bankrupt in 1998, owed the social insurance fund 27.7 million crowns ($660,000) in addition to other debts.

While JAS Export is not obliged to pay back these creditors, it has made less than advantageous deals to use the facilities of the former JAS Bardejov, now controlled by a bankruptcy administrator. These factors combined with the fact that the company owns no tangible assets - property and equipment are all rented from the mother company - make garnering a bank loan nearly impossible.

Strapped for cash

To deal with the lack of working capital, Pohl's aim was to help JAS establish a solid client base and then approach AIDR contacts at banks in Germany. Outlined in the plan was a tactic to shore up contracts with JAS's major EU customers like Puma, a sport shoe company, and Elefanten, a children's shoe, through 2001; armed with these reliable contracts, JAS might then be able to convince banks to lend the firm money. Hypobank (Munich), Dresdner Bank (Frankfurt), Deutsche Bank (Frankfurt) and Commerzbank (Frankfurt) were all listed as potential doors JAS Export could knock on.

Until Pohl's intervention, JAS Export relied on sporadic seasonal contracts by major brand shoe manufacturers, a situation Balog described as being a "sword of Damocles" for JAS. "These big names know that there is a lot of competition, so they hold you by your neck and say 'Listen, if you don't give me the best price, I can go next door and make a contract with them,'" Balog said.

With the implementation of sales and marketing strategies that use production capacities year-round, Pohl anticipated more customers and a subsequent profit increase of 5%.

Pohl's plan to revamp production was expected to reduce overhead costs by 5% (representing 3.5 to 4 million crowns), and to cut the number of customer complaints, which presently stands at 3.8%, in half.

Stalmach also mentioned management training as vital for survival in the new open market. "There are many questions before us that we have to solve," he said. "We still feel that we have to study and prepare our people for the free market economy, how to run the company to be flexible enough to fulfill the requests of our customers."

Presently, Pohl's diagnosis has been completed and the implementation process is expected to be finished by November this year. Following that, JAS Export will be left to fend for itself and to try and attract a foreign investor - something Balog, for one, considered unlikely.

"Who would go to Bardejov to buy an old shoe factory?" Balog asked. "A foreign investor will be difficult to get, because there are now more facilities than are needed in central Europe and there is high competition in Hungary, Poland and the Ukraine. There is too much work and too little fun (in Bardejov)."

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