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INVESTMENT LEADERS

Interview with Otto Pichler, Managing Director of Mondi Business Paper SCP

He spent 17 years with Austrian pulp and paper firm Neusiedler AG before moving to Ružomberok, Slovakia, in 2001 to serve on the board of directors of Neusiedler's newest acquisition, the SCP Ružomberok mill. In January 2003 he was appointed Managing Director of that mill, now known as Mondi Business Paper SCP. Otto Pichler.
photo: courtesy of Otto Pichler

The Slovak Spectator (TSS): Mondi Business Paper SCP, and Slovak firms in general, did well with exports last year, growing 28% and 12% respectively. Did SCP's export result reflect the strength of the economy as a whole?

Otto Pichler (OP): Being in the paper industry, our company is under strong pressure to export. The Slovak market is too small, and over the last couple of years we've averaged a 95% export rate. We've also expanded our production by 60% over the last four years, from 300,000 tons to 480,000, reflecting the investments we've made. Labour productivity has also increased tremendously, from 150-160 tons per employee to around 480 nowadays.


TSS: Has the restructuring you did at the SCP Ružomberok mill after Mondi acquired it in 2000 altered your position within the Mondi group internationally?

OP: Our position in the group has been strengthened considerably due to our productivity, our cost position, and the fact that we have used the €300 million from our shareholders in a way that helped the company find a better position on the market.

We first made a €110 million investment in our No. 18 paper machine, putting in all new technology and making it top of the line. We also erected a new storage facility for finished products to provide service to the customers, as well as a new finishing area.


photo: Ľubomír Schmida

TSS: Has this been reflected in profits?

OP: Unfortunately not, because the pulp and paper market is in a long-lasting downside at the moment, for the second half in a row. Despite the increase in output prices have fallen. Still, if we had not invested so much here, if we had not rationalized, we would be under strong pressure.


TSS: What does your long-range business plan look like?

OP: We recently invested over €240 million and another €60 million parallel to that, so €300 million in just over four years. Now we must earn money back from this huge investment.

Moreover, the investment helped us to reduce the environmental impact, which as you can imagine was not insignificant. Now we can say we have not only fulfilled the limits according to the best available techniques, but in many cases we are much better. What you see here is a very modern mill that is in the top league.


TSS: Have local people noticed an improvement in air and water quality?

OP: I've received some very positive signs from the local authorities, but what personally affected me the most was the response I received from the surrounding villages. I even received a bouquet of flowers from a woman from a village, which was a very emotional occasion because we normally receive only complaints. She was saying thanks, and that her village was now free of smell.

We have also dramatically cut the sulphur dioxide impact here, and whereas only two or three years ago we contributed about 15% to local emissions, it's now about 1%.


TSS: You came into a mill that was overdue for reform, and while the environmental changes may have been well received, what about the job cuts?

OP:It varies between individuals, especially if they have been touched by rationalization, but overall it is perceived as a necessity that helps to secure jobs for the future. There are also some very negative examples in the vicinity where factories went bankrupt because they didn't do anything to improve their situation or modernize.

We've also been doing it [job cuts] step-by-step, year-by-year, and we now have the most painful cuts behind us. In 2006 and 2007 we are looking at just the last 10% of what we have already done. There is now a lot of perspective here compared to what I saw when I came over four years ago, and there is an upward trend in local small industry and business, which is able to absorb our downsizing quite well. I never heard of an employee of ours having many problems getting a job afterwards, and the employment rate here has been quite stable over the last few years.


TSS: You don't see any great nostalgia for Communism in Ružomberok?

OP: Quite the opposite, actually. I've been holding intensive face-to-face talks with our employees, in groups of about 20 to 40, and I have noticed that the people who are old enough to have experienced real socialism very much appreciate what they have now. Their workplace and work conditions can't be compared, and although we're very well known these days in the news, people who look at the facts will see that average blue-collar salaries here have climbed from 13,000 Sk a month to 22,300 Sk in just four years, which is 50% above the Slovak average and on the level of Bratislava.

I've noticed in my discussions that the younger generation is more dissatisfied, but I think it's because they take what they see on TV as the truth. We had some people here who left "overnight" without keeping even the rules of giving notice and went to Ireland, saying they had great jobs there and would be living like kings. But they all came back within six months and are now either doing jobs for much less money or are unemployed. It takes half a year to open their eyes to the fact that higher salaries don't necessarily mean better living conditions.


TSS: How much downsizing have you gone through?

OP: We now have 2,080 employees and we started with 3,200, but some of that downsizing is due to spin-offs. This year is the last big step of 150 to 200, and 2006 and 2007 will be only small steps of 30 or 40 employees, which we can handle quite well with early retirements and fluctuations.


TSS: How have the unions reacted?

OP: The unions have two motivations. One comes from the examples they have in the vicinity, the bankrupt companies, and the second is that they see the overall picture. They appreciate our social engagement and see the development of the salaries here. Every month they get the full picture of the company's costs and profits, so there is full transparency. They see very clearly that if we had not undertaken this investment and rationalization and cost cutting, that this company would be in a very poor situation, which would mean bad things for them as well as for the shareholders.


TSS: Apart from a recent court verdict you lost to several employees you had dismissed in 2004, have you had many labour troubles since entering SCP?

OP: No, that was the only one. We have had many negotiations with the unions, and the result has been that our wages since 1999 (100%) have increased to 185% and far outperformed the CPI index, which increased to 139%. This was a big success for the workforce, and as managers we tend to have the problem that our shareholders ask why we are paying salaries that are more or less what we pay in Hungary, where labour and living costs are on average much higher than in Slovakia.


TSS: What do you tell shareholders?

OP: I tell them we have very organized unions here that know exactly what they want, and that this is the price for everything going so quickly. Turning a company around in four years needs not only the efforts of management but also cooperation from the unions, who have to explain these things to the people they represent.


TSS: Some economists worry Slovakia will not be able to hold on to many of its foreign investors in the long term, as wages rise and company margins fall, and investors move further east in search of cheap workers. What's your view?

OP: I would strongly differentiate between industries that are capital intensive, such as pulp and paper or the automobile industry, and industry that is more intensive on the labour side. I definitely see these [labour intensive companies] moving on in a few years.

Looking at our own situation, in the last two or three years all of our costs have reached Western European levels. Wood prices have increased by 50%, gas by 80%, electricity and other costs have risen as well, to the point that there is no motivation to enter here. Labour costs are an advantage in Slovakia, but no one is going to open a pulp mill here just because the labour is cheap. Resources like wood are much more important.

However, the fact that labour costs have increased by 170% over four years has reduced the competitive advantage quite substantially.


TSS: Given the different needs of capital- and labour-intensive investors, is the government pursuing an adequate investment strategy?

OP:I think they've done a good job so far, but I think they should also bear in mind the need to diversify. I also don't understand why people are calling for another pulp and paper investor to enter Slovakia when there is not sufficient wood here. We currently import 150,000 cubic metres of wood every year from Ukraine and the Czech Republic, while about 150,000 cubic metres of wood leaves this country every year as biomass exports with no value-added. What would another pulp mill do here?

I think it's good if the government stresses diversification in many different branches and doesn't just depend on automotive, which at the moment is very strong here.


TSS: Has the foreign investment that Slovakia has attracted over the last several years helped the country mature more quickly than it might have otherwise?

OP: Definitely. The kind of investment Slovakia has attracted is giving it tremendous momentum. If you take our company as a case in point, we are moving 2,080 people towards a completely new business culture. If you don't move people to a new business culture, you will not succeed on the market. We're talking about a new mindset, huge training efforts. We spend 3.5 to 4 million Sk a year on English language training alone, including for our blue-collar workers. This would never have happened here if someone hadn't come in and said the language of this company is now English, even in communications with our Austrian colleagues. It's a momentum that arises from many activities related to becoming part of international business.


TSS: If you have people dreaming of making 50,000 or 60,000 Sk a month, it would appear you still have some work to do in changing the mindset.

OP: This desire for unrealistic wages is due to the virtual picture people receive from television, one that people who don't live in that environment believe to be true. When I watch TV myself, I wonder how they can all afford two cars, nice houses, and I'm the managing director! But it's not a true picture, and many lifestyles you see on TV are based on borrowed money. It's virtual reality, but no one is telling that to people here.


TSS: Is the Slovak government now enjoying an investment "window of opportunity" that began with the election of the right wing coalition government in 2002 and EU and NATO entry in 2004, and may close after the next elections in 2006?

OP: Yes, there is a time window, and they are using it very well. Just compare how many times they have won tenders [for foreign investment] against Poland and the Czech Republic. The government in this respect has done extremely well, and we can see in Western Europe that people are becoming very concerned. What we saw in France and the Netherlands [where citizens rejected the draft EU Constitution - ed. note] is an expression of fear as to what is going on, what will come. There is a lot of debate over the cheap labour forces that have entered the EU and are now destroying these people's standard of living.

This is causing great tension, and judging from the discussion in Germany and other places, maybe they aren't ready. But it will come to their doors nevertheless, because it's not just Eastern Europe, it's Asia, it's South America. We can see how our market prices here have been affected by the US dollar, with all the Asian paper coming to Europe and other cheap products as well. We will have a very difficult time here, not just in Western Europe but also here in Eastern Europe, if our main markets are unable to buy what we produce.

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