Green investment in the Czech Republic

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Green investment in the Czech

Republic

NOBUE SATO

Enhancing the economic growth of the Czech Republic by the investment focusing on renewable energy industry.

{Picture: Dancing Building in Prague, Czech Republic}

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1. BASIC INFORMATION

KEY INFORMATION ON THE CZECH REPUBLIC

Area 79,000 k㎡ (1/5 of Japan)

Population 10.5 million (1/10 of Japan)

 It is about the same size of Japan (120 million) if all the eastern European countries from Poland to Yugoslavia are included

 Although the economic relationship between Russia is very high, the people's eyes are more to the direction of Western countries because of their feelings of dominated by Russia during their old eastern era.

Capital Prague

 Prague was the capital of the Holy Roman Empire and one of the most prosperous cities in Europe. Influenced by that in cultural and lifestyle aspect, there are still remnants of them seen such as stone pavement.

Location (and

history) In the very heart of Europe

 Czech appears in history in AD 900

 Became Czechoslovakia in 1700s

 Divided into two countries when becoming independent of the old Soviet Union in 1993.

Currency CZK. Koruna (1 CZK = 4.5854 YEN)

 Because of their fear of inflation, the currency is not yet Euro but Czech Koruna

 Introduction of Euro is planned, but the timing is not defined yet

Political system Parliamentary democracy

Head of state President Vaclav Klaus

Language Czech

Membership EU member since 2004

 Joined EU at the same time of Hungary in 2004

 In 2007, Bulgaria and Rumania joined EU as well Czech is also a member of OECD, NATO, WTO, IMF, EBRD and WIPO (World Intellectual Property Organization)

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2. WHY CZECH REPUBLIC?

ATTRACTIVE INVESTMENT CLIMATE

PEOPLE

Well-educated and Skilled Workforce

1) Technology

Education system of the Czech satisfies the needs of an economic competitiveness. It can offer manufacturing employers with high productivity levels and skilled workforce.

Czech shows very strong position regarding percentages of technically oriented students.

There are many high leveled Universities such as Czech Technical University in Prague for engineering, manufacturing, and construction fields.

Source: Institute for Management Development, World Competitiveness Book, 2008

2) Language

Czech people have very high language ability. 61% of Czechs can speak at least one foreign language (mainly English and German, but also some people speak Russian). 90% of Czechs aged from 18 to 59 are able to speak at least one foreign language and their ability is quickly improving.

Source: European Commission, Eurobarometer, 2006 Favorable Labor Costs

6.26 5.94 5.61 5.22 5.06 4.58 4.56 4.49 4.32 3.6

0 2 4 6 8

Czech educational system meets the needs of a comptitive economy = 10

69 67 61 57 56 51

42 0

20 40 60 80

Finland Germany Czech Republic Poland EU25 France Hungary

Respondents able to participate in a conversation in foreign language (%)

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Why Czech Republic?  4

In Czech Republic, well skilled workers are available at a lower cost of those in western countries. Although the average annual wage has grown 6~7% over the past 5 years, it is much lower compared to Western Europe.

Source: The Economist Intelligence Unit, 2009

TECHNOLOGY

High technology in mechanical field

1) Historical Background

Czech has a long history as a traditional industrial country. Before World War 2, Czech was supporting German machinery industry so that it already had a strong foundation. High ability of technical engineers has been traditionally handed down from one generation to another.

LOCATION

Good access to established western and emerging eastern markets

Czech is located in the center of Europe. Companies have easy access to whole European market as well as CIS countries and Russia.

After becoming the member of the EU, Czech Republic’s significance as a transit hub has been increasing. Infrastructure is very advanced.

 Prague is only a two-hour flight from most of other EU capitals.

 The road and motorway network is very dense.

 Several modern railway projects are underway to link with the pan-European high- speed railway network.

CLUSTER INITIATIVES IN THE CZECH REPUBLIC

Generally, cluster initiatives are regarded as an important strategy for regional development.

For all developed countries in the world, supporting activities of cluster became a very important for industrial, regional, and innovation policies.

1) What are clusters?

14.44

25.52 28.38 31.61

39.32 41.22

0 10 20 30 40 50

Czech Republic United States United Kingdom France Belgium Germany

Labor costs per hour in 2008 USD

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Clusters are very effective to develop cooperation between companies, universities, and institutions in that region. Participation of all of the stakeholders brings strong benefits.

2) Cluster support by Czech government and European funds

In 2004, Czech Republic started its systematic support for cluster initiatives.

 Launch of subsidy program to companies for mapping and clusters establishment

 CZK 5.3 billion (EUR 203.5 million) set aside for the program during 2007-2013

THREE STATE-WIDE CLUSTERS

1) Automotive cluster

Czech has very strong automotive industry

 Automotive manufacture (Skoda, Volkswagen, Toyota, Hyundai, etc.)

 Auto-part manufacture

 Hundreds of suppliers from variety of fields (Electrics, Plastics, etc.) 2) Brewing cluster

Beer brewing is Czech’s traditional industry (Pilsner, Budweiser, etc.)

 Brewer associations

 Specialized schools

 Base material sources (hops and malt) 3) Machine building cluster

Variety of machine building companies and educational institutions

 Liquid machines manufacturing in South Moravia

 Mining machines in North Bohemia

HIGH POTENTIAL SECTORS FOR THE FUTURE

1) Nanotechnology

This sector has developed over the past decades in Czech. Several academic and private entities became successful on new developments. Nanotechnology for Society, for

example, comprises a platform for universities and the industrial companies that will promise long-term development in this field.

2) Biotechnology, Life Sciences and Medical Devices

This sector is developing very rapidly in the Czech because of strong research ability, well- educated labors, and good business environment.

3) Renewable and Alternative Energy

This sector has great potential to grow. Financial support is available from European Funds.

Czech government is providing energy saving project as a countermeasure for environment

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Why Czech Republic?  6

issues and sells CO2 emission rights as a country. Field mustards planted for biofuels are largely expanding.

GOOD RELATIONSHIP WITH JAPANESE COMPANIES

ECONOMY OF THE CZECH REPUBLIC

GDP of Czech Republic is about 25~30% of that of Japan. However, regarding the

comparison with the population, GDP per capita of the Czech is 20,800 and this number is relatively high among Eastern European countries. Their life is affluent. After Lehman shock, their economy is recovering and unemployment rate stays relatively stable around 7%.

JAPANESE COMPANIES IN THE CZECH REPUBLIC

1) Overview

 There are about 240 Japanese companies in the Czech Republic.

 Japan is the second largest greenfield investor and has invested total 3.2 billion USD so far in the Czech Republic. (The largest is Germany)

 For Japanese investors, Czech Republic is the fourth most popular location for investment in EU countries (The top three are Great Britain, France and Germany) and the most popular location within the Central and Eastern European countries.

2) Investors

 Concentration in the automobile and electronic sectors.

 New trend in R&D area such as technology centers and manufacturing plants

 Examples of large Japanese company in the Czech Republic include Toyota, Kyocera, Panasonic, and Daikin.

Number of

companies Investment amount

(US $) Employment number

Manufacturing industry

87 3,050 million 39,723

R&D, Strategic

services 3 (9) 12 million 265

Sales and others 146 56 million 4,240

Total 236 3,118 million 44,228

Data as of Sep. 2008 by CzechInvest

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IMPRESSIVE FDI RESULTS

HOSTS OVER 65,000 FOREIGN COMPANIES

Many foreign companies are strengthening their competitiveness by investing Czech Republic wisely. Foreign-owned companies are enhancing the economy of the Czech.

 Employ 45.7% of the industrial workers

 Create 59.5% of industrial sales

 Produce 70.1% of direct industrial exports

Major investors in the Czech Republic (Source: CzechInvest)

Technology Centers Panasonic Japan

Honeywell USA/Germany

Mercedes Benz Engineering Germany

Rieter Switzerland

Valeo France

Rockwell USA

Business Support Services DHL Germany

Accenture USA

IBM USA

Exon Mobil USA

Siemens Germany

Tesco Germany

Electronics Panasonic Japan

Siemens Germany

Hitachi Japan

Foxconn Taiwan

TYCO Electronics USA

Celestica Canada

High-tech Engineering ABB Sweden / Switzerland

Parker Hannifin USA

Ingersoll-Rand USA

Siemens Germany

Honeywell USA

Daikin Japan

Life Science & Healthcare Baxter USA

Lonza Switzerland

Arrow USA

Molnycke Sweden

Kimberly-Clark USA

Procter & Gamble USA

Automotive Volkswagen Germany

Toyota / PSA Japan / France

Robert Bosch Germany

Denso Japan

TRW Automotive USA

Hyundai Korea

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Why renewable energy industry?  8

3. WHY RENEWABLE ENERGY INDUSTRY?

ENVIRENMENT ISSUES IN CZECH REPUBLIC

ENVIRENMENT GUIDELINE ESTABLISHED BY EU (EU ETS)

Relationship between global warming and renewable energy industry

Many countries are targeting to use cleaner, less polluting, technologies. Purpose of the use of these technologies is reductions in CO2 emissions in order to solve global warming. Their policies include emissions reductions, increased use of renewable energy, and increased energy efficiency.

Increased renewable energy legislation, commercialization, and incentives are created by climate change problems, together with oil prices rise, peak oil, and government support increase. The industry weather became better than many other sectors because of new government spending, regulation and policies.

EU ETS

The European Union Emissions Trading Scheme (EU ETS) is the largest multi-national emissions trading scheme globally. It is a major EU climate policy and Czech Republic is responsible for achieving the target numbers defined by EU ETS just like the other EU member countries.



Target % of renewable energy consumption of total energy consumption in the Czech Republic defined by EU ETS



8% in 2010



20% in 2020

In order to achieve that target, it is expected that the renewable energy demand in the Czech Republic will increase and the supply side industry will grow.

EMISSION TRADING BETWEEN CZECH & JAPAN (3/31/09)

Japanese government purchased 40 million tons of emissions from the Czech Republic in March 31, 2009.

Czech Republic will use purchase price for global warming countermeasure as this trading is established by the use of the "Green Investment Scheme" (GIS).

By using the purchase price, the Czech Republic will promote:



Renewable energy & energy saving in housing sector



Technology transfer from Japan

In addition to Japanese government, Mitusi Corporation also bought emission rights from Czech Republic using the same Green Investment Scheme that the Japanese government used. The amount was 24.5 million tons. Total emission rights that Japanese bought from Czech Republic became 64.5 million tons.

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EXAMPLE (1) SOLAR PANEL PRODUCTION BY KYOCERA

Production plant overview

Kyocera Corporation started the operation of its first European solar production plant in Czech Republic in 2004.

 Location: Northern Czech town of Kadan

 306 employees

 Produce high quality solar cells and modules

 Supply products to Germany and other EU countries from the Czech Republic Purpose of opening production plant in the Czech Republic

1) To respond more effectively to the requirements of the continuously growing demand in European market

2) To satisfy the demand for environmentally friendly solar energy products 3) To support on-site sales teams

4) To increase the number of jobs in the long term to help achieve the objective.

Global Strategy of production

Kyocera created total of four production sites in Japan, China, Mexico and the Czech Republic to promptly service the four largest solar energy markets in Japan, China, USA, and Europe.

These four factories made Kyocera to have the world's largest company-owned integrated production system. Within the company, each step in the production process is performed:

from the assembly of solar modules to casting of silicon over the manufacture of environmentally friendly solar cells.

There is a further benefit that the optimization of module development can be suit the requirements of each market.

Technology development history

Kyocera has been in the solar energy market for 30 years, and will continue to grow in the solar sector. At Kyocera, scientists have developed in year-long research a high-

performance ceramic that is an ecologically very promising material. Ceramic materials enable manufacturing components and accessories used for ecological applications.

EXAMPLE (2) SOLAR PANEL PRODUCTION BY O&M SOLAR

Good example of joint venture in Czech Republic in renewable energy industry O&M Solar is joint venture by Onamba (85.1%) and Mitsui (14.9%). This company is established in 2006 and has about 60 employees.

They produce solar panels in Olomouc, Czech Republic.

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How to make investment?  10

4. HOW TO MAKE INVESTMENT?

WHICH COMPANY TO INVEST IN? CRITERIA FOR COMPANY SELECTION

CHARACTERISTIC OF RENEWABLE ENERGY INDUSTRY

 Products and services reduce net greenhouse gas emissions

 Improve management of scarce resources

 Operate in environmentally and economically sustainable markets

 Have a long-term positive impact on their communities and society broadly

EVALUATION OF A POTENTIAL INVESTMENT OPPORTUNITY

Criteria for company selection

1) Industry

The industry that the company belongs should have considerable growth

demonstration and therefore the company also can achieve sustainable profitable growth.

Global renewable energy investment growth (1995-2007)

2) Market Leader

The company has a unique value position and is a market leader in its products and services that provide a considerable return-on-investment to its clients.

3) Strong Management Team

The company has a strong management team to operate the business already and may also need additions to make it stronger at the time of an investment or shortly thereafter.

4) Profitability

The company has ability to demonstrate material revenues and operating profits from its commercial transactions, or the potential to achieve profitability with the capital to be invested within a short period of time (1-2 years).

5) Potentiality

The company has the potential to be a market leader by investment or consolidation both horizontal and vertical and by realizing synergies of revenue and cost.

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PROJECT FINANCE IN CZECH REPUBLIC (HYPOTHETICAL)

Project flow by advisor

1) Origination (Planning)

 Strategy planning (Industry research)

 Marketing (Company selection) 2) Execution (Negotiation, taking action)

 Approach to the investors

 Enter into confidential agreement

 Company assessment, Condition negotiation

 Basic agreement negotiation / conclusion

 Due Diligence support

 Final contract negotiation / conclusion 3) Closing / Fund settlement

About IFC

They say Czech Republic is already graduated from being developing countries that IFC needs to take care of. However, there is still the branch of IFC in Prague and if there is any country risk to be take care of, IFC might be a good solution. Mr. Kano, the investment officer of IFC, says they might take action if they can expect fair amount of profit by executing the plan.

Next Step

I have done most part of origination (strategy planning and company selection) of the project by myself. Next step is an execution stage and I need to work very closely with selected financial advisor.

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How to make investment?  12

REFERENCES

   Books and magazines

 Doing Business in the Czech Republic 2008/2009

 CZECH FOCUS Number 1/2010 Association for Foreign Investment

 Investment Climate in the Czech Republic Czech Invest

 東欧チャンス大前研一 Special thanks for interview

 Mr. Hidenori Harada Mitsui & Co., LTD. General Manager, Biomass energy department, Environmental business division, Energy business unit II

 Ms. Mariko Yoshida Mitsui & Co., LTD Biomass energy department, Environmental business division, Energy business unit II

 Mr. Tsuyoshi Nakamura Mitsubishi Corporation General Manager, Emissions reduction business unit, New energy & power generation Div.

 Mr.Frantisek Trojacek Embassy of the Czech Republic Counsellor for Science and Technology

 Mr. Ondrej Votruba Embassy of the Czech Republic Head of Investment and Trade Section (Executive Director, Japanese Operations, CzechInvest)

 Mr. Kentaro Yamagishi Goldman Sachs Japan Co., Ltd. Managing Director, Head of corporate finance

 Mr. Kenichiro Yoshida Mizuho Research Institute Head of London office

Green investment in the Czech Republic