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Czech car giant eyes Slovak suppliers

ŠKODA Auto has revealed they are considering replacing their luxury car component suppliers in the Czech Republic with contractors in Slovakia.
The announcement came after results showed the company's profits down eight per cent in 2001 from the year before due to a strong Czech crown.
Škoda suppliers in the Czech Republic have so far been unwilling to take account of the shifting exchange rate and drop the prices of their components, the firm said.

ŠKODA Auto has revealed they are considering replacing their luxury car component suppliers in the Czech Republic with contractors in Slovakia.

The announcement came after results showed the company's profits down eight per cent in 2001 from the year before due to a strong Czech crown.

Škoda suppliers in the Czech Republic have so far been unwilling to take account of the shifting exchange rate and drop the prices of their components, the firm said.

"We negotiate with them every week, but if the Czech crown keeps strengthening we will be forced to change some suppliers. One alternative we have considered is to move our activities to Slovakia and take advantage of the cheaper Slovak crown and conditions similar to those in the Czech Republic," said Škoda spokesperson Milan Smutný.

However, he refused to specify which suppliers Škoda was considering changing.

Top Škoda representatives have praised the potential of the automotive production sector in Slovakia, which is driven by the German giant Volkswagen - Škoda's majority owner.

Volkswagen has expanded production from 126,503 cars in 1999 to a projected 200,000 this year. It has also drawn a supplier base to Slovakia over the last two years, including French auto parts maker Plastic Omnium, which invested $53 million in late 2000.

VW is also building an industrial park near western Slovakia's Lozorno to house suppliers such as car interior producers Johnson Controls, Lear Corporation and Sommer Liberty, and electronics maker Delphi. Plastic Omnium and French VW supplier Inergie have already settled in their own complex five kilometres from the Lozorno park.

"Volkswagen is invested in Slovakia, the Slovak crown is softer, and the government has prepared industrial zones," said Škoda chairman of the board Vratislav Kulhánek. He added that these factors may also convince some Škoda suppliers who have plants in the Czech Republic to move their production to Slovakia.

The Czech Republic has recorded considerable growth in foreign direct investment over the last two years, growth that caused its currency to strengthen by 9.7 per cent against the euro last year.

Privatisation deals in 2001, such as the sale of Komerční banka for one billion euros, along with the sale of majority stakes in the Czech energy utilities Transgaz for over four billion euros and Unipetrol for 349 million euros, have also helped the currency strengthen.

The exchange rate is now about 31.5 Czech crowns to the euro. At the same time, the Czech crown has strengthened against the Slovak crown by 15 per cent since 1999. The exchange rate last week was Sk1.33 to the Czech crown.

"In theory, this would mean that suppliers in Slovakia are 15 per cent cheaper than suppliers in the Czech Republic. The question is if Slovak suppliers have increased their prices... but I don't think they can have because Škoda wouldn't have come up with the idea of using suppliers in Slovakia if they hadn't checked the prices first," said Marek Senkovič, an analyst at Istrobanka in Bratislava.

Notwithstanding the pending sale of Slovak gas utility SPP for $2.7 billion, Slovak foreign direct investment is not likely to catch with the Czech Republic's total soon, meaning the Slovak crown is also not likely to move up from its Sk42 to the euro to rival the Czech crown in the low 30s.

"There is a big chance that Škoda will decide to start using suppliers located in Slovakia. It would definitely help the corporate sector, increase exports from Slovakia and help to cut the trade deficit," Senkovič said.

Senkovič suggested that Škoda might be looking to import electric cables, car interiors and seats and plastic mouldings.

Among automotive parts suppliers making these goods are Plastic Omnium (plastic gas tanks), the US Johnson Controls (car seats), and Volkswagen Elektrosystemy (cables).

Domestic car sales in Slovakia rose 27 per cent from 2000, and while Volkswagen Slovakia's output stagnated at just over 180,000 cars, the country's largest exporter still accounted for 16 per cent of total Slovak exports in 2001.

If Škoda now starts using suppliers in Slovakia, it could take the Slovak automotive industry to a new level. Last year the Czech auto giant sold over 462,000 cars, while revenues reached $4.2 billion.

But car experts say that changing a major firm's supplier base is a long and difficult process, and that Slovak firms should not start celebrating yet.

"Companies in Slovakia have to be prepared for this wait, and if some suppliers now making components in the Czech Republic are considering moving to Slovakia or finding partners here, that too will take some time. I reckon Škoda would need about one year to put this in practise," said Ján Pribuža, the government plenipotentiary for the car industry.

"But we would definitely welcome such a step," he added.

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