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The challenge: remaining flexible and focused

The wish list among business leaders who clamour for more government transparency, a level playing field for all competitors, a predictable investment environment, political stability and the availability of qualified labour has not changed much over the past couple years. But successful manoeuvring in the always choppy waters of business has been made even more difficult by recent challenges: sluggishness in global economic growth, the need to deal with public finance deficits in Europe and demands for business to meet targets in reducing ecological hazards.

Slovakia needs to educate specialists for the future.(Source: Ján Krošlák)

The wish list among business leaders who clamour for more government transparency, a level playing field for all competitors, a predictable investment environment, political stability and the availability of qualified labour has not changed much over the past couple years. But successful manoeuvring in the always choppy waters of business has been made even more difficult by recent challenges: sluggishness in global economic growth, the need to deal with public finance deficits in Europe and demands for business to meet targets in reducing ecological hazards.

The Slovak Spectator spoke with Myung-Chul Chung, president of Kia Motors Slovakia, David J. Rintoul, president of U.S. Steel Košice, Paolo Ruzzini, CEO of Slovenské Elektrárne, Stephen Caulfield, director of global deployment & field services and co-site leader for the Dell European Business Center in Bratislava, and Marek Senkovič, chief economist of the Slovnaft refinery, part of the MOL Group, to get these business leaders’ take on the economic and investment challenges of 2011 and their views on 2012.

The Slovak Spectator (TSS): What in your opinion are Slovakia’s competitive advantages in terms of attracting foreign capital? Which areas must Slovakia work on to maintain or improve its advantages?
Myung-Chul Chung (MCH):
Slovakia is situated in the heart of Europe; its location is very convenient and companies can export their products all over the region. Its tax rates are also favourable and Slovakia has a very good pool of labour: very responsible and open to learning new things. Slovakia is also a member of the European Union and the eurozone which helps foreign investors to do business in Europe.

David J. Rintoul (DJR): First of all I want to mention the skilled and hard-working people. U.S. Steel discovered this advantage before the acquisition of the Košice mill and our experience has proved this fact in practice. In the future we believe this part of the world will continue to grow and we will help Slovakia to grow. Slovakia, and especially the Slovak government, must be careful to maintain the competitive environment in the country and set the same rules as in other countries of the European Union. We want to stay competitive and we strongly believe that
progressive and modern industry is the core of economic development.

Paolo Ruzzini (PR): We are investing more than €3 billion in new projects in Slovakia, of which for sure [doubling the size of the nuclear power plant in] Mochovce is the most important one, because of the country’s favourable business environment. This investment will guarantee energy security for Slovakia at competitive conditions. A well-educated labour force, a strong tradition in technical sectors, and a network of qualified suppliers are the major advantages of the country.

Stephen Caulfield (SC): We still rely on very talented and well educated people in all the different areas of business such as HR, marketing, IT and finance. The essential attributes for our operation are a highly educated workforce with strong language skills, a competitive cost base and experienced multi-national business leaders. Slovakia has the first two of these and is making great progress on the last one. Globally speaking, in order to develop competitive advantage, Slovakia needs more flexible labour laws to support quick start-ups and quick expansions for existing organisations.

Marek Senkovič (MS): Slovakia remains attractive for investors from the point of view of labour productivity, the quality of labour and its cost. In comparison with other countries within the central European region, however, I consider it most important that Slovakia is a member of the eurozone even despite the problems the currency is facing at the moment. This aspect of a common currency is very important for investors from western Europe.

TSS: What are the most significant challenges facing Slovak businesses? What are the challenges that businesses in your sector face?
MCH:
Every country needs new investments from domestic or international companies for its further development. Missing or unfinished highways and an unstable political situation do not increase the attractiveness of the country. The automotive industry is a highly competitive industrial branch and every company fights to produce the most desired cars at the highest quality, to design new models and to satisfy customers. People are aware of the need for environmental protection. The production of eco-friendly cars is very trendy nowadays and every car producer realises the necessity of innovations in this area. The pressure from customers is very strong and the market is not very stable.

DJR: You can see this in Slovakia, Europe and the world generally: the current biggest challenge is stronger economic growth. Without growth the system does not work; with growth comes development of new technologies.

PR: One of the most important challenges in the business environment is to ensure transparent and level conditions on the playing field. Predictability and a transparent environment is a prerequisite for any investment. To answer the second question, in the power industry only the most effective suppliers can succeed because customers are very selective.

SC: Slovakia can expect to have strong competition from other offshore locations who may be more competitive from a labour cost perspective. I think Slovakia’s main challenge is to continue to cool down wage inflation while at the same time market itself as a “Centre of Excellence” for doing business in central and eastern Europe. The major challenges for our business are wage inflation and restrictive labour laws.

MS: In general, the Slovak business sector is most dependent on demand for its products from western Europe; thus consumer sentiment and tendencies in Germany significantly influence what happens in Slovakia. Of the internal factors, businesses quite rightly are concerned to what extent the solution of the debt crisis and deficits in public finances will, in the end, get reflected in changes to the tax burden and regulation.

TSS: Some foreign investors have started warning about a lack of qualified labour in Slovakia. In your opinion is this an urgent issue here and if so, how can it be most effectively addressed?
MCH:
When Kia Motors Corporation decided to establish its production plant in Slovakia, the large pool of qualified employees here was one of the main reasons for making the investment. Later, the situation changed and in 2008 qualified labour was no longer available. Many graduates cannot find a job in their field so the educational system should be tuned in a different way. The state, in cooperation with the regional authorities, should monitor schools and cooperate with private companies to set priorities for the education of young generations. Based on the current situation in the engineering industry Slovakia needs more technical students.

DJR: To date we have been able to staff our team with qualified personnel. We see an interest by schools in getting feedback from industry about what is topical, in which direction they should go to educate specialists for the future.

PR: Even though we are a company producing electricity and we often recruit specialised technicians, we currently have no problem in covering our needs and hiring highly-qualified people for open positions. Vacant positions are filled mainly by experts who have participated in the construction of nuclear power plants in the past and at the same time we provide opportunities for young technicians to learn from more experienced colleagues, who help them to develop professionally.

SC: This is currently not a hot issue in our business. However, in order to strengthen investment needs in Slovakia, I would suggest that the 3rd level education should be more connected to leading edge technologies. This will encourage further R&D type of foreign investments.

MS: It is true that the potential of sufficient qualified labour in Slovakia has been exhausted or is being exhausted now. But increasing the pool of qualified labour is no short-distance run. Slovakia should better support interest in studying at technical schools even if study there is more demanding. Until Slovakia has enough qualified labour, there should be no problem in supporting an influx of such labour from other countries.

TSS: What would you define as the main problems or the pressure points in the labour market today and are there legislative changes that would help?
MCH:
Schools should educate students in required areas otherwise their knowledge and skills will be useless. The current situation in Slovakia is critical. Because of this we try to cooperate with technical high schools to educate future specialists in the engineering industry and car production. We feel a lack of qualified graduates in several specialisations such as maintenance, quality control, and similar fields.

DJR: We appreciate the latest changes in the Labour Code because especially in such complicated times and circumstances there is a need to be flexible in the labour market and to have the ability to respond in a very quick way.

PR: In general we do not see any criticalities. The only issue that could be mentioned is the low mobility of Slovaks. We see the tradition here of people’s attachment to their homes and families. On the other hand, we believe that this is partially a generational issue that will disappear.

SC: We are continually opening various new posts and departments in our European Business Centre. However, the lack of flexible labour laws means it can be difficult for us to hire quickly or to best respond to the challenges of the market.

MS: Generally in Slovakia and in Europe as well, there is this assumption that it is necessary to have strong labour codes because these protect the interests of employees; the minimum wage is similar. Though this concept works on paper the reality is that a rigid labour code does not allow businesses to flexibly hire and fire labour depending on changes in the demand for their products. Thus, quite naturally they are afraid to hire new employees even though it is only businesses which can solve the problem of high unemployment. In addition, an inappropriately-set minimum wage eliminates the possibility of employment for some of the unemployed who have low qualifications or limited work experience.

TSS: Which factors have had the greatest impact on your business sector over the past year and which might have the most significant impact in the upcoming year?
MCH:
Our company was very successful in 2010 as we recorded the highest production in our history, over 229,000 cars. It was influenced by recovering demand in Europe but mostly by launching production of new car models. Furthermore, this year has been a successful period for Kia Motors Slovakia because we have recorded an increased number of orders for the Kia Sportage sport-utility vehicle. We have also completed the construction of a second engine shop and launched serial production of 1.4-litre and 1.6-litre gasoline engines. Next year we are planning to launch another brand-new model and introduce three-shift operations so we expect to increase our production volume up to full capacity. One of the most important issues that must be solved is completion of Slovakia’s highway construction.

DJR: The greatest impact has come from the high level of uncertainty in a global sense; and when we talk about the coming year the market is still very vulnerable and not predictable. In these conditions we have to stay flexible and focused on our business drivers.

PR: The energy sector is more and more competitive and at the same time it is facing the challenges of meeting targets for carbon reduction and providing secure and reliable energy supplies. The most influential event this year was the nuclear accident in Japan and its subsequent events and decisions made across Europe. Slovenské Elektrárne is one of the most progressive electricity producers in Europe thanks to our mix of generation sources that currently draws on hydro, nuclear, thermal and solar plants. We already generate almost 90 percent of our electricity without producing CO2 emissions. Our additional investment will increase this figure. It is good to mention that in a long-term perspective all nuclear facilities offer higher employment and substantial financial and non-financial benefits to their surrounding municipalities and in the short-term the investment helps to mitigate the consequences of the global economic crisis on Slovakia’s economy.

In speaking about upcoming years it is important to mention that 1.5 billion to 2 billion people, every fourth or every third human being on this planet, do not have access to energy and the hope for a global solution remains low. Given population growth and improvements in the global standard of living, the International Energy Agency expects global energy consumption to grow by 40 percent in the next 20 years. These are global facts that should influence the energy sector here in Slovakia as well.

MS: Unquestionably, the largest negative driver for the whole refinery industry is that during the crisis years between 2008 and 2009 there was a lower demand for oil products and a surplus of refinery capacities in the OECD countries. Supply will continue to exceed demand because the solution to the debt crisis will not allow households, businesses and governments to consume more than they currently use. This gets reflected in weak production and lowered sales margins for refineries which are even more impacted by stricter demands by governments of developed countries for replacement of fossil fuels with bio-fuels as well as pressure for reduction in energy consumption and environmental emissions.

SC: Dell’s European Business Center in Bratislava remains one of the largest IT employers in Slovakia with more than 1,700 people and a significant EMEA finance centre representing over 400 people. The factors we consider to be most significant are related to the labour code and the education system. We expect these to remain the key factors through the upcoming year.

TSS: Which legislative changes adopted by the government of Iveta Radičová do businesses most appreciate? Are there changes that cause you concern?
MCH:
From our point of view the changes in the Labour Code will have a positive impact. It will enable companies to react more flexibly to changes in the market. The delays in highway construction are probably Slovakia’s biggest weakness.

DJR: What puts Slovakia in a different direction compared to the rest of the European Union was its decision about additional CO2 taxation. This is a burden that is unique in the EU and does not make sense in a long-term view as it was done exactly at a time when other countries are trying to find ways to help traditional industries.

MS: The effort for more transparency during government procurement processes is certainly worthy of continuation by the upcoming government.

More information about Slovak business environment you can find in our Investment Advisory Guide.

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