Doing Business in Eastern EuropePosted by John on Sep 25, 2013 in Blog, Eastern Europe, Featured, Uncategorized | 0 comments
A typical story of the economic transition in East-Central Europe is of the frustrated manager in a state-owned company under Communism who becomes a rich and successful entrepreneur after 1989. Certainly there were plenty of frustrated managers during the Communist period. And you can read plenty of stories about the new fabulously wealthy business owners that have emerged in the region over the last 23 years.
But this particular story overlooks two very large categories of people: those who managed to do reasonably well under the system of state ownership and those who have encountered numerous challenges in the new entrepreneurial climate.
Miroslav Blazek belongs to both categories. During the Communist period, he worked for the Zetor tractor company in Czechoslovakia and travelled throughout Europe representing the firm and overseeing the servicing of the product. Zetor produced and sold 30,000 tractors a year and was the number tractor import in such places as Greece and Ireland. Although Zetor supplied virtually all the state farms in Czechoslovakia, not everything went smoothly. All of the hard currency went to the Czech central bank, which meant that Zetor couldn’t use it to import scarce parts. There was also a chronic labor shortage.
On the other hand, the system had certain advantages, for instance the apprentice system. “We had a very good system of apprenticeship,” Miroslav Blazek told me in an interview in Prague in February. “We had our own very good apprenticeship school and training center. At that time, I didn’t know any of my schoolmates who wouldn’t go either to school or to an apprenticeship. They usually stayed at the same job. When children went to an apprenticeship they usually stayed at that company for the rest of their lives.”
Blazek has gone on to work on several entrepreneurial efforts, the latest one involving machine tools from North Korea. He’s endured usurious bank loans and bankrupt companies. He has watched unscrupulous individuals use privatization to effectively steal national wealth.
“I think you could call it here the ‘wild west,’” he described the early days of economic transition. “The people who didn’t care about anything or about anybody were able to get a lot of compensation. If you were strong enough and didn’t care about anybody, you could be in a very good position. We all started more or less from zero. In the beginning, you could get very easy credit and loans from the bank. But later on most of the projects failed, and gradually many were bought by Western companies.”
We talked about what it was like to work for a state-owned enterprise, what the fate of the Zetor tractor company has been, and what it’s been like to negotiate a deal with North Korea.
Tell me how you got involved working in business before 1989.
I was quite lucky because I was involved more or less all my life in the tractor business in a Czech tractor company named Zetor where all my family worked. Naturally, when I finished school, I went to work there too. I really liked the job. I was very keen on tractors, cars, lorries, everything. I managed to get a very good position. I was responsible for servicing tractors in the Czech Republic and later on, abroad. I was able to travel abroad quite a lot, and my family and I spent a few years in England selling tractors. It was very nice.
Before 1989 it was a state-owned company. What was it like to work within that system?
I would say it was maybe easier because it was a very big company. There were 10,000 employees producing more than 30,000 tractors a year. At that time, we had no trouble financing, no problem with employees. However, it was difficult to import parts from abroad to improve the tractor, to make a better quality product. But I would say that it was probably easier than the business is today.
There was competition from a tractor company in Poland and of course there was Caterpillar. I don’t know if you had to go up against Caterpillar…
No. At that time, Caterpillar was not producing classical tractors, and that is what we produced. When I was living in the UK, our biggest competitors were ACE, Massey Ferguson, John Deere. We used to be the fifth place in the UK. At the time there were maybe 30 other companies.
When was that?
1979 and 1980.
What was your biggest export market?
At that time we were number one in Greece, Iceland, Norway, Finland, and Ireland. And we were in a very good position in France, the United Kingdom of course, and the United States.
That’s interesting because a lot of people, when I talk to them about the collapse of the economies after 1989, a lot of them say that the reason was the collapse of markets in the Soviet Union, but it doesn’t sound like you sold to the Soviet Union.
No, we didn’t sell anything in the USSR. Our problem was the collapse in Iraq. We used to sell a lot of tractors in Iraq. There was an assembly plant in Iraq, and around 7,000 tractors went to Iraq where they were assembled. At the top time, sometime in the late 1970s, we had about 100 people from Zetor there assembling and servicing tractors.
And what about domestically, did you have a domestic market?
Yes, of course. There were no other tractors in Czechoslovakia except Zetor. There were very few from Romania or East Germany. But 95% of the tractors at that time came from us. Because we had big collective farms, they were able to absorb a lot of tractors. We were selling between 5,000 and 7,000 tractors domestically.
And you were also responsible for servicing the tractors?
I was responsible mainly for servicing the tractors.
You mentioned difficulty of getting imported parts, like clutches. Were there any other bottlenecks in those days that were challenging?
We usually had shortages of people. There was no unemployment at the time, so there was a shortage of people. It was sort of a bottleneck. Otherwise, to get enough components for production was a problem because these producers were operating at 100 percent or even 110 percent capacity, and they were selling parts to the Soviet Union in high numbers. You see, there were always single producers for starter motors, alternators, cooling systems, carburetors. There was always one producer supplying Skoda cars. At the time we had very big lorry production: Tatra, Liaz, Avia. And they all needed a lot of stock, like alternators and so on.
So there was competition the, among the different manufacturers here?
For one producer of components.
Those were domestically produced?
But they produced only a certain number?
Yes. They had been running above capacity, and we all had been trying to get as much as we could. It was the opposite of the way in Western countries.
In the West, another producer would have emerged to supply that demand.
We were very short of hard currency. Hard currency was something you couldn’t get. You couldn’t say, “Okay, if I cannot buy in Czechoslovakia, I’ll buy in Germany.” We couldn’t get hard currency. Even though we were exporting 80% of our tractors to Western Europe and the United States, which brought a lot of hard currency into the country, we couldn’t get even a small part of it.
You had to transfer all of it to the central government?
Yes, all of it went to the central bank. We couldn’t export by ourselves. There was a single company that was responsible for exporting all tractors, cars, motorcycles, lorries, and buses.
You mentioned that you had 100 percent employment so you had a labor shortage. Did that make a problem in terms of the quality or the efficiency of labor? It was difficult to fire people…
I wouldn’t say so, because, at that time, people didn’t change jobs so often. In our factory I knew a lot of people, and actually the majority of people had been working there all of their lives. It was rather difficult to leave a job. You had to give six-month notice, and no employer wanted to wait six months.
Also, we had a very good system of apprenticeship. We had our own very good apprenticeship school and training center. At that time, I didn’t know any of my schoolmates who wouldn’t go either to school or to an apprenticeship. They usually stayed at the same job. When children went to an apprenticeship they usually stayed at that company for the rest of their lives.
You mentioned that your family had been involved in the tractor business?
All my family, more or less everyone, had been working there because it was quite near to our house.
Let’s go to 1989: was that a surprise, November 1989?
I would say, for me, that yes, it was quite a surprise. It was clear that there would be changes, but I think very, very few people expected the changes would be so quick or so radical.
How aware were you of what was going on in Poland, for instance, or Hungary?
I spent at least six months of every year abroad. Every month for two weeks I was abroad in Western Europe. I was able to drive a car to Germany. So I was always watching TV, talking to people. I had information like anyone else in Eastern Europe, maybe more because of traveling abroad. In my experience, most people in England knew very, very little about Europe. They knew the world only from London up to Hull.
So what happened at the factory after 1989?
At first, John Deere was going to buy the whole factory. Unfortunately, they didn’t succeed, and the factory was in a very difficult situation. They stopped production for a year, and it was sold to a Slovak company. I left the company in 1990. The Slovak company made it much, much smaller. The production was about 4,000 tractors each year.
Was it mostly for domestic production?
I think it was the same as before, only ten times less. The tractors were going to the Czech Republic and some of the previous markets.
So what did you do in 1990?
I started my own business. I was trying, sometimes with success sometimes with less success.
I understand. Tell me about your successes.
I think my biggest success was: I was trying to build up a logistics center. I chose a place close to Slovakia, not far from the motorway. I thought it would be a very good project. It started with very good prospects in the late 1990s. Unfortunately, there was a crisis, and it collapsed. We had to stop because I was unable to pay money back to the bank. The interest rate was about 18%, and if you didn’t pay in time they would loan you more money at the same rate. I was always telling the bankers that the girls in those special houses, brothels, couldn’t make so much money.
A comparison could certainly be made between the two professions.
I did various things and in the end I finished this company with my friend, and I started a new business. This one was a small sister company. The major company was producing special screws for use in solar power construction. Unfortunately, my friend had bad people in the finance department. They had been selling everything to Germany and they didn’t watch prices carefully. When the crown went up, got stronger, they didn’t react quickly. They started to lose money, and they went bankrupt. At the time, I was responsible for the preparation and production of a gasification unit. The idea was to develop it and our sister company would produce it and I would of sell it, service it and install it. We managed to prepare one prototype, but when we should start the business, our sister company went bankrupt.
When I introduced this gasification unit, I sent around a description, and the most keen people were from North Korea. The idea was to bring two containers there. We started talking about business cooperation, but they had no money and I had no machine.
A perfect marriage!
But when we started talking about how to get money, we agreed to start a so-called CDM ( Clean Development Mechanism ) project. According to the Kyoto Protocol, any country who signed the protocol, when they do a project to reduce CO2, will get the allowances from the UN agency in Bonn. We started with such a project, but when the sister company collapsed we were already so far that even after the collapse of the company we could carry on. We’ve now registered six projects. Later this year I hope we will get allowances.
Are you still at the prototype stage or do you actually have a gasification unit now?
No, just the protoype. It was unfortunately part of the sister company, so it was part of the bankruptcy.
So you’ll have to find another company to manufacture it?
No, I wasn’t financially strong enough to carry on. This machine was for gasifying rice husks. I didn’t have enough time. CDM projects are very expensive to prepare because you are not allowed to ask for registration yourself, you have to go through a so-called validator and validation of such a project costs 15,000 euros. So, I concentrated on this business.
To earn money, I started to bring machines from North Korea. I brought the first four machines in November. One is a very simple lathe, one a simple milling machine, one is a CNC lathe, and the last one is a CNC milling machine. But, as I told you, it’s an extremely difficult job. I had to go through a lot of difficulties and problems – customs, the authorities here in Czech Republic — because we are in the EU. It’s the same as in the United States.
With these four machines, what did you hope to do with them?
I had a strong partner, and they are going to buy the machines. They would like to buy more machines, so we are started now in the evaluation process. It’s more complicated because we are not allowed to bring technicians from North Korea. It takes maybe six weeks to make the machine functional. But the first machine, the lathe, should be ready soon.
I want to go back to the early 1990s. I’d like to hear your opinion about the economic changes. For instance, what did you think of the privatization program here?
I think you could call it here the “wild west.” The people who didn’t care about anything or about anybody were able to get a lot of compensation. If you were strong enough and didn’t care about anybody, you could be in a very good position. We all started more or less from zero. In the beginning, you could get very easy credit and loans from the bank. But later on most of the projects failed, and gradually many were bought by Western companies.
How would you have done it differently?
I do not think about it. That’s not my job. I am sure it was an extremely difficult decision. The idea was that every person in Czechoslovakia should get a certain small part of national value. There was no will to sell most of the companies directly to Western companies. I think at the time Western companies were not very keen. Maybe if they had sold most of the companies and put the money in a special national account until things settled and then used the money essentially for pensions, it would probably have been easier. Maybe things would have been better because most of that money was stolen.
By the people who ran the privatization.
So they had, what we call, insider knowledge, and they used that knowledge. Are they still in this country? Do people know who they are, or are they mysterious?
In some cases we know who they are. Some of them became rich and acceptable. That already happened. I’m sure that the government had a really hard time privatizing effectively. There was a very strong desire to do it immediately and cut all connection with the old system. So it was done very quickly. Possibly, at the time, people in the government didn’t have a chance to do it in a different way.
Specifically with the tractor company, do you think it could have been done in a different way? It’s owned by a Slovak company now.
In this case, it could have been done surely in a better way. Like Skoda. John Deere had a similar idea. They were under a lot of pressure to move production from a main factory in Mannheim. The production of tractors there is in an old factory that is now, with Mannheim getting bigger and bigger, in the center of the city. So, they were under a big pressure to move. Their idea was to gradually close the Mannheim factory and move production to Zetor, which would produce many more tractors in green colors under the John Deere name. But that didn’t happen.
If they had moved a major production facility, the Zetor factory probably would have grown.
And they wanted to keep the whole factory, because we had everything needed to produce tractors. Foundry, production of gears: everything we could produce there. They liked that. But the Slovaks sold most of the parts. They sold the foundry and it’s mostly just assembly now. I think they only keep production of gearboxes.
What happened to all of the people you knew at the factory? Obviously, some are still there, but others have…
They moved everywhere. I’ve been meeting them in my city in various positions, various jobs. Some are surprising me what they are doing.
Did a lot of them do what you did, people who were at that managerial level? Did a lot of people move into private business?
Quite a lot of them.
Were your contacts in Western Europe from when you were selling tractors useful after 1989?
Not really. Of course, I had very good knowledge of English language, which I could use sometimes.
Working with the North Koreans has been easy?
Certainly not easy. My advantage is that I have spent most of my time in a socialist country so I could understand them. I understand they have their own system, and they are not able to communicate very easily. I remember very well from Communist times when we had a telex at the factory, one central telex. When I needed to send a telex, my boss, if he had time or was in good mood, would pick it up and leave it at the post office, and maybe that telex operator would send it in the evening. They might receive the telex the next morning. Or maybe in two days or three days. I could understand my Korean partners because they have a similar procedure, so I know it’s a stupid question to ask, “Why didn’t you reply to my mail?” Maybe the boss wasn’t there to send the mail. It helps me a lot, this knowledge. I know their structure, behavior, habits, and I understand what they can do and what is possible. I understand that they have a problem with hard currency. I understand their feelings. I understand their wishes. That helps make our cooperation so far, knock wood, successful.
When you think back to before 1989, are there things that you miss from the previous era?
I don’t think there is something I really miss, but, surely, we had things that were much better than now. The system of schools and apprenticeship was much better. Now it is the most popular topic for discussion on television and in government – the shortage of good, skilled labor. We have a lot of lawyers, economists and managers. We have a lot of Chiefs and no Indians. The lower echelon of education has not been done in a good way.
Did they dismantle all of those schools?
Most of them. Now they are trying to get them revived.
They have a system like that in Germany, where they have a good set of technical schools. It has nothing to do with communism or capitalism.
I know. I compare it to when I went to England in 1979. I had in the workshop around 30 people. All except one were unskilled, and the one who was skilled was a hair-cutter. It was a shock for me. The general level of knowledge of people was incredibly low compared with the general level of knowledge in my country.
There’s no place for democracy in the workshop and in the school. In the school and in the workshop people have to do what they have to do: they shouldn’t discuss “why, how, I don’t like it.” If you don’t like it, go away. That’s my opinion.
Prague, February 19, 2013