The Pitfalls On the Path To Paradise
By Steven Pearlstein
Wednesday, July 28, 2004; Page E01
When Chancellor Gerhard Schroeder recently declared it "unpatriotic" for good German companies to outsource work to Eastern Europe, and chastised new European Union members for lowering taxes to steal jobs, he surely had in mind this bustling capital on the Danube that is quickly becoming the Detroit of Europe.
Volkswagen arrived first, in the 1990s, planning to build a few thousand low-end compacts for local markets. Having discovered it could hire skilled workers at a quarter of what it cost back home, VW is now churning out high-end Touareg and Audi 4X4s for export worldwide. Once Peugeot Citroen and Hyundai finish building new plants, western Slovakia will pump out nearly a million cars a year.
It's easy to see why Steve Forbes calls this an "investor's paradise." The new business-friendly government has pushed through a flat 19 percent tax that applies to corporate and personal income and sales, with dividends and capital gains largely excluded. Tax holidays and other direct subsidies allow foreign companies to recoup up to half the money they invest in new facilities.
But to look only at government policies and the influx of foreign investment is to miss Eastern Europe's other story -- the dramatic and painful transformation of the economy that was already here.
In Pilsen, next door in the Czech Republic, it took an hour simply to drive around the famous Skoda works, a complex of more than 50 buildings connected by rusting steam pipes and rail sidings. Skoda once supplied central Europe with cars, trains and artillery guns, along with the steel that went into them. Hitler had Skoda in mind when he invaded Czechoslovakia, and the Americans bombed it in the final days of World War II to keep it from Soviet hands. During communist times, 40,000 workers produced everything from trolleys to nuclear power plants.
An early round of privatization produced a mountain of bad debt for state banks. Then, four years ago, the government brought in western-trained managers who began closing down some operations, outsourcing others, and selling some valuable pieces to foreign investors. Now the Appian Group, a London-based investment firm with Washington roots, is pumping fresh capital into two remaining profitable divisions that build giant steam turbines for China and trolley cars for cities such as San Francisco and Dayton, Ohio.
Jiri Zapletal, Skoda's new chief executive, acknowledged that it's hard to focus the remaining 5,500 employees on cutting costs, pleasing customers and outrunning the competition. "It took Moses 40 years to reach his goal, and we will be more successful," he told me.
Nearby, the venerable Pilsner Urquell brewery has been taken over by the South African company that also bought Miller Brewing Co. Thanks to an aggressive marketing effort, the company has doubled its capacity to satisfy surging world demand.
Here in Bratislava, much of the restructuring is driven by corporate raiders such as the Penta Group, which has imported sophisticated Wall Street tactics to an economy rife with inefficiency and ripe with arbitrage opportunities.
While there is considerable debate about whether these "sharks" get inside help from friendly politicians, there's no doubting their ingenuity in taking control of public companies, or the ruthlessness with which they fire managers, spin off subsidiaries, lay off workers and sell what remains.
At Penta's sleek new offices, a staff of 160 controls companies with a combined payroll of 10,000. They have outfoxed U.S. Steel, partnered with Credit Suisse First Boston, mapped strategy with the Boston Consulting Group, and followed every deal done by Kohlberg Kravis Roberts and the Carlyle Group. According to one of the five founders, Jozef Oravkin, Penta has turned a $20,000 stake into a company worth $350 million.
"We are hated by many in this city, even though we are cleaning things up," Oravkin said.
Nevertheless, there seems little instinct to slow the pace of reform.
Although they may not understand or even trust global markets, 50 years of experience tells them they like government management even less. It is that embrace of frontier capitalism that makes Schroeder and the German business establishment so nervous.
© 2004 The Washington Post Company