Panorama of the Manufacturing Industry of the Czech Republic 2018 Isbn 978-80-906942-7-9 Introduction by the Minister

PANORAMA OF THE MANUFACTURING INDUSTRY OF THE CZECH REPUBLIC 2018 ISBN 978-80-906942-7-9 INTRODUCTION BY THE MINISTER

INTRODUCTION BY THE MINISTER Dear readers, I am pleased to present what is already the twenty-second edition of the publication “Panorama of the Manufacturing Industry of the Czech Republic”. It has been prepared for you by the Ministry of Industry and Trade in cooperation with the Czech Statistical Office and with the assistance of the Ministry of- Agri culture, selected unions and associations. The publication describes individual divisions of the manufacturing industry of the Czech Republic. It is divided into three areas of the classification of CZ-NACE activities and classification of CZ-CPA commodity external trade. It reflects developments from 2008 to 2018. In this publication we present an overview of the current situation and the level of the industry and its divisions. The development of the Czech economy in 2018 met expectations, and the economy hit the borders of its limits. GDP for the whole of 2018 grew by 3%. Compared to the 4.4% achieved in 2017, this is a significant slowdown, caused by both a lack of work and production capacities and increasing uncertainties in the external environment. In particular, the labour market situation showed clear signs of overheating, which were reflected in record low levels of unemployment rates and high levels of work activity. The total employment rate has already exceeded 75% and has thus reached the highest value in the history of the Czech Republic. At the same time, the general unemployment rate, which was 2.2% in December, decreased and remained the lowest in the EU. Since April 2018, offers of job vacancies have begun to exceed the number of job seekers, which fell to 232,000 persons in December. Domestic demand has been a decisive factor in economic growth, with higher consumption associated with the growth in employment and wages and consumer optimism. Gross fixed capital production also contributed to the growth of the economy, where investment in construction, thanks to co-financing from European funds, maintained its rapid dynamics. At the same time, the growth of private investment was stimulated by the tension in production capacities and the efforts of companies to stand up to the competition. As for the external environment, the EU economy slowed on average to 2% year-on-year in 2018 (from 2.6% in 2017), which had a negative impact on domestic export performance, while net exports slowed economic growth. Dear readers, I believe that this publication, which is unique in bringing data up to the branch structure, will be beneficial for you and will be an important source of information. There is no other such structured material in our country and many years of experience have shown that there is great interest in such a publication. Panorama of the Manufacturing Industry of the Czech Republic, supplemented on the website of the Ministry of Industry and Trade by an interactive viewer of economic indicators, thus enables the wide professional public in the Czech Republic and abroad to become acquainted with the results in individual divisions, and at the same time we can also present their results internationally. Nice reading.

doc. Ing. Karel Havlíček, Ph.D., MBA Minister of Industry and Trade 3 4 CZECH STATISTICAL OFFICE INTRODUCTION

CZECH STATISTICAL OFFICE INTRODUCTION Dear readers, As for every year, this year's edition of Panorama of the Manufacturing Industry, compiled by the Ministry of Industry and Trade with the help of statistics from the Czech Statistical Office, mirrors the development of this very important area of the Czech economy. In terms of the industrial production volume, 2018 was one of the best years in history. The domestic production of the manufacturing industry increased by 3.3% year-on-year. Compared to 2010, an increase of a remarkable 15% has been recorded. The fact that almost all sectors recorded an increase was also positive. However, a certain slowdown in the growth rate occurred in the automotive industry, which was a clear workhorse of the dynamics in the previous five years. The manufacturing industry contributed to the largest share of gross domestic product in 2018. Its products are also the most important Czech export article. It also continues to be the largest employer, while the average wage in the industry continues to rise. The manufacturing industry plays an important role in supporting research and development. Companies in the field of motor vehicle production spend the most financial means on R&D in the long term. In terms of the whole of society, 2018 was largely an exceptional, jubilee year, calling for a recapitulation of the century of an independent Czechoslovakia. The Czech Statistical Office is only a few months younger than our country. The Act on the Organisation of the Statistical Service of 1919, the principles of which we still adhere to, was one of the first legislative acts adopted in Czechoslovakia thanks to the preparation and foresight of the “fathers” of Czechoslovak statistics, while publishing and popularising the collected information was part of the work of Czechoslovak statisticians from the very beginning. Issuing publications like the one you are holding in your hands right now is a matter of course. However, it is important to realise that this has not always been the case. After a promising start, Czechoslovak statistics and their service to the general and professional public had to go through several dark periods. First, the Nazi occupation, which, in addition to the ban on publishing data, also claimed the lives of many of the Office's employees, including its Chair. Free access to information (not only statistical information) was not even supported by the post-1948 regime, which degraded the role of statistics to confirming and temporarily even checking the fulfilment of plans for a centrally managed economy. In modern democratic history, the Office once again enjoys all freedoms, including unconditional professional independence. Adversity, however, has come from the element of water, which in 2002 took not only the statisticians’ building in Karlín, but also thousands of volumes from the Central Statistical Library. Despite all the difficulties, however, Czechoslovak and later Czech statistics have always maintained the high level and quality that Czech society can still benefit from even today. The Czechoslovak Statistical Journal from 19201 states in the preface: “It is only when the population sees in the statistical questionnaire not the incomprehensible curiosity of the authority, but a means of allowing citizens to participate in their own self-perceived interest in the desirable interaction with public authorities, can we say that the land [for statistical collection] has been groomed and promises plenteous fruit of work”. Therefore, I thank not only you, the readers, for your favour and interest in this publication, but also all those who provide data to the Czech Statistical Office and without whom this and similar interesting publications could not be created.

Ing. Marek Rojíček, Ph.D President of the Czech Statistical Office

1 The author of the quoted text is Dr. B. Hanosek. 5 6 CONTENT

CONTENT INTRODUCTION BY THE MINISTER �� 3 CZECH STATISTICAL OFFICE INTRODUCTION �� 5 CONFEDERATION OF INDUSTRY OF THE CZECH REPUBLIC ��13 FOOD CHAMBER OF THE CZECH REPUBLIC ��14 CZECH BEER AND MALT INDUSTRY ASSOCIATION ��15 ASSOCIATION OF THE TEXTILE-CLOTHING–LEATHER INDUSTRY �� 16 FORESTRY AND WOODWORKING INDUSTRY ASSOCIATION �� 17 ASSOCIATION OF THE PULP AND PAPER INDUSTRY ��18 ASSOCIATION OF THE CHEMICAL INDUSTRY OF THE CZECH �� 19 REPUBLIC �� 19 ASSOCIATION OF THE GLASS AND CERAMIC INDUSTRY OF THE CZECH REPUBLIC �� 20 UNION OF GLASS AND FASHION JEWELLERY PRODUCERS ��21 STEEL UNION �� 22 ELECTRICAL AND ELECTRONIC ASSOCIATION OF THE CZECH �� 23 REPUBLIC �� 23 ASSOCIATION OF ENGINEERING TECHNOLOGY �� 24 AUTOMOTIVE INDUSTRY ASSOCIATION �� 25 ASSOCIATION OF THE CZECH RAILWAY INDUSTRY �� 26 ASSOCIATION OF AEROSPACE MANUFACTURERS OF THE CZECH REPUBLIC �� 27 ASSOCIATION OF CZECH FURNITURE MANUFACTURERS �� 28 METHODOLOGY ��29 SOURCE OF DATA FOR THE INDUSTRY PANORAMA �� 29 CHAPTER STRUCTURE �� 33 INFA METHODOLOGY �� 34 LIST OF ABBREVIATIONS ��39 1. MANUFACTURING INDUSTRY ��41 1.1 PRODUCTION CHARACTERISTICS �� 41 1.2 INVESTMENT, R&D EXPENDITURES ��50 1.3 DIGITISATION ��53 1.4 PRICE DEVELOPMENT ��65 1.5 FOREIGN TRADE ��66 1.6 ECONOMIC VALUE ADDED ��68 1.7 SUMMARY AND PERSPECTIVES ON THE MANUFACTURING INDUSTRY �� 70 2. CZ-NACE 10 – MANUFACTURE OF FOOD PRODUCTS �� 71 2.1 CHARACTERISTICS OF THE DIVISION ��71 2.2 DEVELOPMENTS IN THE DIVISION �� 72 2.3 MAIN ECONOMIC INDICATORS �� 73 2.4 FOREIGN TRADE ��74 2.5 RESEARCH, DEVELOPMENT AND INNOVATION �� 75 2.6 SUMMARY AND PERSPECTIVE OF THE DIVISION �� 76 3.CZ-NACE 11 – MANUFACTURE OF BEVERAGES ��77 3.1 CHARACTERISTICS OF THE DIVISION ��77

7 3.2 DEVELOPMENTS IN THE DIVISION �� 78 3.3 MAIN ECONOMIC INDICATORS �� 79 3.4 FOREIGN TRADE ��80 3.5 RESEARCH, DEVELOPMENT AND INNOVATION ��81 3.6 SUMMARY AND PERSPECTIVE OF THE DIVISION �� 82 4. CZ-NACE 13 – MANUFACTURE OF TEXTILES ��83 4.1 CHARACTERISTICS OF THE DIVISION ��83 4.2 DEVELOPMENTS IN THE DIVISION �� 84 4.3 MAIN ECONOMIC INDICATORS �� 85 4.4 FOREIGN TRADE ��86 4.5 RESEARCH, DEVELOPMENT AND INNOVATION �� 87 4.6 SUMMARY AND PERSPECTIVE OF THE DIVISION ��88 5. CZ-NACE 14 – MANUFACTURE OF WEARING APPAREL ��89 5.1 CHARACTERISTICS OF THE DIVISION �� 89 5.2 DEVELOPMENTS IN THE DIVISION ��90 5.3 MAIN ECONOMIC INDICATORS �� 91 5.4 FOREIGN TRADE �� 92 5.5 RESEARCH, DEVELOPMENT AND INNOVATION �� 93 5.6 SUMMARY AND PERSPECTIVE OF THE DIVISION �� 94 6. CZ-NACE 15 – MANUFACTURE OF LEATHER AND RELATED PRODUCTS ��95 6.1 CHARACTERISTICS OF THE DIVISION �� 95 6.2 DEVELOPMENTS IN THE DIVISION �� 96 6.3 MAIN ECONOMIC INDICATORS �� 97 6.4 FOREIGN TRADE ��98 6.5 RESEARCH, DEVELOPMENT AND INNOVATION ��99 6.6 SUMMARY AND PERSPECTIVE OF THE DIVISION ��100 7. CZ-NACE 16 – MANUFACTURE OF WOOD AND OF PRODUCTS OF WOOD AND CORK, EXCEPT FURNITURE; MANUFACTURE OF ARTICLES OF STRAW AND PLAITING MATERIALS �� 101 7.1 CHARACTERISTICS OF THE DIVISION �� 101 7.2 DEVELOPMENTS IN THE DIVISION ��102 7.3 MAIN ECONOMIC INDICATORS ��103 7.4 FOREIGN TRADE ��104 7.5 RESEARCH, DEVELOPMENT AND INNOVATIOIN ��105 7.6 SUMMARY AND PERSPECTIVE OF THE DIVISION ��106 8. CZ-NACE 17 – MANUFACTURE OF PAPER AND PAPER PRODUCTS ��107 8.1 CHARACTERISTICS OF THE DIVISION ��107 8.2 DEVELOPMENTS IN THE DIVISION ��108 8.3 MAIN ECONOMIC INDICATORS ��109 8.4 FOREIGN TRADE ��11 0 8.5 RESEARCH, DEVELOPMENT AND INNOVATION ��111 8.6 SUMMARY AND PERSPECTIVE OF THE DIVISION �� 112 9. CZ-NACE 18 – PRINTING AND REPRODUCTION OF RECORDED MEDIA ��113 9.1 CHARACTERISTICS OF THE DIVISION �� 113 9.2 DEVELOPMENTS IN THE DIVISION ��114 9.3 MAIN ECONOMIC INDICATORS ��115 9.4 FOREIGN TRADE ��116 9.5 RESEARCH, DEVELOPMENT AND INNOVATION ��117 9.6 SUMMARY AND PERSPECTIVE OF THE DIVISION ��118

8 10. CZ-NACE 20 – MANUFACTURE OF CHEMICALS AND CHEMICAL PRODUCTS ��119 10.1 CHARACTERISTICS OF THE DIVISION ��119 10.2 DEVELOPMENTS IN THE DIVISION �� 120 10.3 MAIN ECONOMIC INDICATORS ��121 10.4 FOREIGN TRADE �� 122 10.5 RESEARCH, DEVELOPMENT AND INNOVATION �� 123 10.6 SUMMARY AND PERSPECTIVE OF THE DIVISION �� 124 11. CZ-NACE 21 – MANUFACTURE OF BASIC PHARMACEUTICAL PRODUCTS AND PHARMACEUTICAL PREPARATIONS ��125 11.1 CHARACTERISTICS OF THE DIVISION �� 125 11.2 DEVELOPMENTS IN THE DIVISION �� 126 11.3 MAIN ECONOMIC INDICATORS �� 127 11.4 FOREIGN TRADE �� 128 11.5 RESEARCH, DEVELOPMENT AND INNOVATION �� 129 11.6 SUMMARY AND PERSPECTIVE OF THE DIVISION �� 13 0 12. CZ-NACE 22 – MANUFACTURE OF RUBBER AND PLASTIC PRODUCTS �� 131 12.1 CHARACTERISTICS OF THE DIVISION ��131 12.2 DEVELOPMENTS IN THE DIVISION �� 132 12.3 MAIN ECONOMIC INDICATORS �� 133 12.4 FOREIGN TRADE �� 134 12.5 RESEARCH, DEVELOPMENT AND INNOVATION �� 135 12.6 SUMMARY AND PERSPECTIVE OF THE DIVISION �� 13 6 13. CZ-NACE 23 – MANUFACTURE OF OTHER NON-METALLIC MINERAL PRODUCTS ��137 13.1 CHARACTERISTICS OF THE DIVISION �� 137 13.2 DEVELOPMENTS IN THE DIVISION �� 13 8 13.3 MAIN ECONOMIC INDICATORS �� 139 13.4 FOREIGN TRADE ��140 13.5 RESEARCH, DEVELOPMENT AND INNOVATION ��141 13.6 SUMMARY AND PERSPECTIVE OF THE DIVISION �� 142 14. CZ-NACE 24 – MANUFACTURE OF BASIC METALS ��143 14.1 CHARACTERISTICS OF THE DIVISION ��143 14.2 DEVELOPMENTS IN THE DIVISION ��144 14.3 MAIN ECONOMIC INDICATORS ��145 14.4 FOREIGN TRADE ��146 14.5 RESEARCH, DEVELOPMENT AND INNOVATION �� 147 14.6 SUMMARY AND PERSPECTIVE OF THE DIVISION ��148 15. CZ-NACE 25 – MANUFACTURE OF FABRICATED METAL PRODUCTS, EXCEPT MACHINERY AND EQUIPMENT ��149 15.1 CHARACTERISTICS OF THE DIVISION �� 149 15.2 DEVELOPMENTS IN THE DIVISION ��150 15.3 MAIN ECONOMIC INDICATORS ��151 15.4 FOREIGN TRADE �� 152 15.5 RESEARCH, DEVELOPMENT AND INNOVATION ��153 15.6 SUMMARY AND PERSPECTIVE OF THE DIVISION �� 154 16. CZ-NACE 26 – MANUFACTURE OF COMPUTER, ELECTRONIC AND OPTICAL PRODUCTS ��155 16.1 CHARACTERISTICS OF THE DIVISION ��155 16.2 DEVELOPMENTS IN THE DIVISION ��156

9 16.3 MAIN ECONOMIC INDICATORS �� 157 16.4 FOREIGN TRADE ��158 16.5 RESEARCH, DEVELOPMENT AND INNOVATION ��159 16.6 SUMMARY AND PERSPECTIVE OF THE DIVISION ��160 17. CZ-NACE 27 – MANUFACTURE OF ELECTRICAL EQUIPMENT ��161 17.1 CHARACTERISTICS OF THE DIVISION �� 161 17.2 DEVELOPMENTS IN THE DIVISION �� 162 17.3 MAIN ECONOMIC INDICATORS ��163 17.4 FOREIGN TRADE ��164 17.5 RESEARCH, DEVELOPMENT AND INNOVATION ��165 17.6 SUMMARY AND PERSPECTIVE OF THE DIVISION ��166 18. CZ-NACE 28 – MANUFACTURE OF MACHINERY AND EQUIPMENT N.E.C. ��167 18.1 CHARACTERISTICS OF THE DIVISION ��167 18.2 DEVELOPMENTS IN THE DIVISION ��168 18.3 MAIN ECONOMIC INDICATORS ��169 18.4 FOREIGN TRADE �� 170 18.5 RESEARCH, DEVELOPMENT AND INNOVATION ��171 18.6 SUMMARY AND PERSPECTIVE OF THE DIVISION �� 172 19. CZ-NACE 29 – MANUFACTURE OF MOTOR VEHICLES (EXCEPT MOTORCYCLES), TRAILERS AND SEMI-TRAILERS ��173 19.1 CHARACTERISTICS OF THE DIVISION �� 173 19.2 DEVELOPMENTS IN THE DIVISION ��174 19.3 MAIN ECONOMIC INDICATORS �� 175 19.4 FOREIGN TRADE �� 176 19.5 RESEARCH, DEVELOPMENT AND INNOVATION ��177 19.6 SUMMARY AND PERSPECTIVE OF THE DIVISION �� 178 20. CZ-NACE 30 – MANUFACTURE OF OTHER TRANSPORT EQUIPMENT ��179 20.1 CHARACTERISTICS OF THE DIVISION �� 179 20.2 DEVELOPMENTS IN THE DIVISION ��180 20.3 MAIN ECONOMIC INDICATORS ��181 20.4 FOREIGN TRADE �� 182 20.5 RESEARCH, DEVELOPMENT AND INNOVATION ��183 20.6 SUMMARY AND PERSPECTIVE OF THE DIVISION �� 184 21. CZ-NACE 31 – MANUFACTURE OF FURNITURE ��185 21.1 CHARACTERISTICS OF THE DIVISION �� 185 21.2 DEVELOPMENTS IN THE DIVISION ��186 21.3 MAIN ECONOMIC INDICATORS �� 187 21.4 FOREIGN TRADE ��188 21.5 RESEARCH, DEVELOPMENT AND INNOVATION �� 189 21.6 SUMMARY AND PERSPECTIVE OF THE DIVISION ��190 22. CZ-NACE 32 – OTHER MANUFACTURING �� 191 22.1 CHARACTERISTICS OF THE DIVISION ��191 22.2 DEVELOPMENTS IN THE DIVISION �� 192 22.3 MAIN ECONOMIC INDICATORS �� 193 22.4 FOREIGN TRADE �� 194 22.5 RESEARCH, DEVELOPMENT AND INNOVATION �� 195 22.6 SUMMARY AND PERSPECTIVE OF THE DIVISION �� 196 PROCESSORS ��197

10 11 12 INTRODUCTION BY THE ASSOCIATIONS

CONFEDERATION OF INDUSTRY OF THE CZECH REPUBLIC Dear Readers of the Panorama, there is no need to discuss the importance of industry for the Czech economy. Its share in the country’s employment and economic results has consistently been stable. Industry is crucial for the economic growth of the Czech Republic. Therefore, it is in the national interest to maintain and further strengthen its position and importance. However, this does not mean that industry should not change. Its structure must be gradually transformed so that Czech companies can produce products with higher added value, which they will deliver to end customers, and collecting higher margins for them. Only in this way the industry will continue to be the driver of the economy and a source of prosperity in the future. Last year was successful from industry’s point of view. Industrial production grew for the fifth consecutive year. However, companies began to run into barriers to further development. They could not find the right number of people with the required skills in the labour market. They had to look for workers abroad. The tense situation in the labour market was reflected in rapid wage growth. At the end of last year, the average wage in manufacturing industry was more than 7 percent higher year-on-year. This was a much faster pace than labour productivity growth. Such development is unsustainable. The increase in wage costs was accompanied by an increase in other inputs. For half of the companies in our regular business cycle survey, the growth of these costs is a significant obstacle to further development. For example, the price of non-regulated electricity increased by a third last year. Companies also paid more for materials and services. Interest rates on loans increased due to a steady increase in the CNB’s interest rates. However, in a highly competitive market, companies could not fully reflect higher costs in higher prices. Entrepreneurs struggled for the whole of last year with input prices rising faster than the prices of their products and services. They had to make up for this difference by reducing their margins – their profitability has been steadily decreasing since Q3 2016. For now, our companies are able to successfully deal with these pressures. This is evidenced by another record year for Czech exports, which rose by 3.5 percent last year. Exports to Germany in recent years have grown at a much faster rate than the performance of the German economy. In order to ensure future competitiveness and prosperity, however, companies must not delay long-term investments, whether that’s investing in innovation and new product development, or in digital transformation, which enables businesses to take full advantage of new technologies such as artificial intelligence and individual elements of Industry 4.0. Our companies are aware of this. A regular survey by the Confederation of Industry shows that over 40% of industrial companies are planning to increase their investments this year. However, a growing share of companies are having to reduce their investment plans due to declining margins. Although digital transformation is a key task for companies, the State must also play an essential role in digitisation, not only in creating the conditions for building the necessary infrastructure, but also through the digitisation of the state administration. I want to believe that the government will be able to fulfil its vision that by 2024 it will manage to largely complete the digitisation of the State. This will save a lot of money not only for yourself but also for businesses and citizens. In 2018, at the Assembly of the Confederation of Industry of the Czech Republic, we reiterated our call for the government to get the Czech Republic among the top 20 most competitive countries in the world. In the competitiveness rankings, we are lagging behind in the quality of our public administration, and we score poorly in the area of infrastructure. We are also lagging behind in readiness for innovation, ICT and new technologies. We must pressure the government to ensure improvement. We will mention this at the Assembly in 2019. Ing. Jaroslav Hanák President of the Confederation of Industry of the Czech Republic 13 FOOD CHAMBER OF THE CZECH REPUBLIC The Czech food industry has historically been one of the fundamental branches of the manufacturing industry within the national economy as well as in the rest of the EU, and represents a relatively important element of the food chain. Its importance is mainly due to the fact that it ensures the basic nutritional needs of the population by processing the majority of domestic agrarian production and production of healthy, high-quality and widely available food. Both food and food-business operators are controlled by supervisory authorities, including feedstock produced by primary agricultural production. Although food safety, based on food law, is considered a priority, the essential attributes of the sector are quality, availability and adequate food sovereignty, while continuously strengthening competitiveness. The Czech food industry is influenced by a number of external factors, mainly resulting from the ever-increasing globalisation, accompanied at the same time in some countries by a strong renationalisation. The high number of foreign chains in the Czech Republic creates an unequal market environment for Czech producers in relation to their foreign competitors. The overly dense sales network in the Czech Republic distorts the natural competitive environment, where food businesses are forced to compete on price, reducing the production costs of their suppliers. This situation is totally contrary to the existing lifestyle trends focused on quality and innovative products, and does not allow them to engage in the European competitive environment. In order to achieve at least a partial level playing field with foreign competition, the State uses various support instruments, which are co-created by the Food Chamber of the Czech Republic. The decisive support for the development of food and beverage production in 2017 included direct financial support within the support programmes of the Ministry of Agriculture and Ministry of Industry and Trade and indirect support in the form of marketing and sales support. This includes in particular the promotion of brands aimed at improving the quality of food products and their promotion: KLASA, Regional Food, Protected Designation of Origin, Organic Food, Czech Food, Czech Product – guaranteed by the Czech Food Chamber and Czech Guild Standards, Czech Food Chamber Award for the most innovative food product, etc. Currently, the main strategic priorities of the Czech food industry are reasonable self-sufficiency in food production, competitiveness and efficiency of food production, and food safety and consumer protection. Strategic objectives also include ensuring a rational level of food production in terms of the maximum utilisation of domestic raw materials with efficient utilisation of processing capacities, environmentally sustainable food production, strengthening the importance of domestic production on the domestic- mar ket, increasing the export performance of industry and increasing the importance of food and beverage production employment and rural development. The support of the State in the areas of science, research and development and nutrition policy, which is related to the support of the quality development, is also essential for the further growth of the food industry. This is also related to support for the transfer of science and research know-how into practice and the introduction of innovations, among other through the Czech Technology Platform for Food.

Ing. Hynek Strnad Vice President of the Food Chamber of the Czech Republic

14 INTRODUCTION BY THE ASSOCIATIONS

CZECH BEER AND MALT INDUSTRY ASSOCIATION I am very pleased that this year I can say that our fields: malting and - brew ing, are doing very well. In 2018, Czech breweries brewed historically the largest amount of beer: 21.3 million hectolitres. Although we are not satisfied with the development of ratio between the on-trade and off-trade consumption, the per capita consumption remains relatively stable and the domestic market slightly increased after the slump in 2017. The Association and breweries are trying to reverse the trend of increasing consumption of packaged beer (off-trade). Breweries therefore invest in new pub concepts and offer specials and new types of beer only available in pubs. As the Association, we are preparing various events to promote draft beer – the biggest and best-known are the Czech Beer Days, which take place annually around St. Wenceslas’ Day, and aim to remind people that they should best enjoy beer in the company of friends and loved ones in a traditional Czech pub. The increasing involvement of small and large breweries and thousands of pubs fills us with a slight optimism that the on-trade decline will be slowed down or even stopped. Another of our activities to support draft beer is Czech Beer Wednesday, a day when people historically used to go to the pub in the middle of the week. This is a custom we would like to maintain in the future. In contrast, what we can be proud of is the popularity of Czech beer abroad. Its exports started to pick up after 1992 and have been growing continuously for the past seven years. Czech breweries exported 5.2 million hectolitres of beer last year, up 11.8% from 2017, which is 143 times the value of 1950. The largest volume was export to EU countries, which increased by 10% year-on-year, but this was out- stripped by exports to third countries. In 2018, exports to non-EU countries grew by 20% and the lion’s share of this success can be attributed to the State’s pro-export policy. Exports to EU countries consistently account for around 80% of total Czech beer exports. The greatest interest in our beer is traditionally in Slovakia and Germany. The “best performer of the decade” is Poland, where in 2010 only 3% of European exports of Czech beer were directed, while last year it was 12%. Poland thus ranks third among Czech beer importers. Beer exports to Sweden and Hungary also grew in 2018, while exports to the United Kingdom fell. Antarctica was one of the areas to which a significant volume of our beer was exported in 2018. In addition to Angola, Bahrain, Bermuda, the Philippines, Senegal and Ecuador, Antarctica is among the seven new interesting export destinations. However, beermaking continues to suffer from a lack of qualified people. The greatest shortage is among brewmasters, heads of individual centres and special professions dealing with automation or electronics. As a result, we have so-called “flying brewmasters” who can handle even three or four microbreweries. Although we have unique schools (which you hardly find anywhere else in the world), breweries today take several months or even a year to find a new brewmaster. Like every year, this year I would like to invite you all to celebrate the biggest brewers’ holiday – Czech Beer Days. During the celebrations you can traditionally look forward to a varied offer of St. Wenceslas specialties prepared by dozens of participating breweries. Some of them will open their premises to visitors and offer the opportunity to talk to the brewers themselves. You can enjoy yourselves in hundreds of participating pubs, taverns and restaurants. I wish a beautiful summer to all. And God bless!

Ing. František Šámal President of the Czech Beer and Malt Industry Association

15 ASSOCIATION OF THE TEXTILE-CLOTHING–LEATHER INDUSTRY At present, the Czech textile and clothing industry is mainly represented by the production of technical textiles. In 2018, the revenues of companies with more than twenty employees stood at CZK 53.17 billion. As regards textile and clothing exports, it is still a relatively varied mix of goods composed of technically advanced products, semi-finished products and products with lower added value. These products are primarily directed to demanding European markets, mainly to Germany, Italy, Poland, Slovakia, Austria, France, the Netherlands, Romania and the United Kingdom. In the textiles sector, the Association of Textile-Clothing-Leather Industry (ATOK) and textile companies have established CLUTEX (the technical textile cluster) and the Czech Technology Platform for Textiles. The Faculty of Textile Engineering of the Liberec Technical University (FT TUL) is a member of all three organisations. In addition to teaching, this school also focuses on the research and development of applications of new materials in the field of clothing and technical textiles, the development of composite structures containing inorganic fibres, nanoparticles and textile reinforcements, the design and evaluation of intelligent textiles, the modification and development of technologies for the processing of new materials, new energy sources and new transport media in textiles. The faculty is also relatively well-known for research and development in the field of nanotechnology utilisation in textiles. There are naturally also companies in the Czech Republic which have their own technical development or which cooperate with other (also foreign) schools and research institutions. Securing new workers with an adequate textile education is currently one of the biggest problems in the textile and clothing industry, which is difficult and takes time to resolve. As far as higher education is concerned, the FT TUL is a positive factor; however, the situation much worse in the case of secondary education. The problem has two aspects: the insufficient number of young people interested in textile and clothing education, and the poorly structured secondary and apprenticeship education in the regions where textiles and clothing companies operate; also, with one exception, there are no longer any textile technology schools. Therefore, to improve the situation, a nationwide sectoral agreement has been initiated, which forms the basis for regional sectoral agreements based on cooperation among regions, companies and schools in an effort to meet the educational needs of companies in the regions. At present, such agreements have been concluded in the South Moravian Region, the Olomouc Region and the Pilsen Region. Currently, there are ongoing negotiations on the conclusion of a sectoral agreement in the South Bohemian Region and they are being prepared in the Vysočina region. In the textile and clothing industry, large one-off contracts are not usually concluded. Numbers of smaller orders are more characteristic of this sector. Last year, after eight years of growth, textile industry production saw a decline in sales and a slight decrease in the number of employees and labour productivity, while the average wage increased significantly. However, sales in the clothing industry continued to grow. Among the most important factors that may negatively affect the development of the industry are the slowdown in the growth of the automotive industry, the lack of skilled employees and the increase in production costs. In the future, Czech textile and clothing companies will therefore be forced to focus even more on innovations leading to production with higher added value and more intensive building of international business contacts.

Jiří Grund President of the Association of the Textile-Clothing–Leather Industry

16 02 INTRODUCTION BY THE ASSOCIATIONS

FORESTRY AND WOODWORKING INDUSTRY ASSOCIATION The forestry and timber sector is an important branch of the Czech economy, which has recently experienced extraordinary developments, mainly logotyp – základní barevná varianta barevná logotyp – základní due to climatic calamity. In 2018 and in the previous period, Czech forestry and woodworking companies were affected not only by drought, wind and bark beetle, but also by economic problems caused by the amount of damage-related logging and the fall in wood prices. In addition to damage caused by calamity, we must also consider the damage to planting material in forest nurseries. During 2018, the climatic calamity peaked, with the volumes of wood processed in forests exceeding the capacities of the processing plants. This situation was also accompanied by a lack of workers to deal with it. The Ministry of Agriculture, Ministry of Industry and Ministry of Transport cooperated in addressing © 2014 the consequences in the areas of timber storage, podniků a dřevozpracujících lesnických Asociace rail and road transport and in preparing the necessary legislative changes and measures. In the area of education and research, the activities of the Faculty of Forestry and Wood Technology in Prague and Brno are very positive. The quality of the outputs of scientific and teaching activities and the possibility of their practical use will determine the further character of our industry in the following period, also in terms of the solution to the climate calamity. The woodworking industry in the Czech Republic was in good condition with regard to the sufficient supply of basic raw materials and good global demand for wood products. Due to the structure of logging, the situation of processors using deciduous varieties was more difficult. Nonetheless, the impact of high- com petition and the abundance of primary wood processing capacities continued, which also put pressure on the prices of final products and on production efficiency. The situation in our forests and our long-term dependence on the export markets will hopefully lead to long-term support for the processing of domestic timber on the Czech territory in existing ornew capacities.

Ing. Petr Jelínek Director of the Forestry and Woodworking Industry Association

17 ASSOCIATION OF THE PULP AND PAPER INDUSTRY The year 2018 was atypical for the pulp and paper industry in the Czech Republic. Al- though this industry remains an important, environmentally friendly, highly competitive and very promising part of the manufacturing industry, it has seen a decline in the tangible production indicators. Paper products still find very good use in all other branches of the manufacturing industry, especially the packaging industry and in the printing industry. Paper production is based on renewable raw materials, mainly of domestic origin (wood), and recyclable raw materials (waste paper). The strategy of sustainable development and the circular economy is implemented in this field. Pulp and paper are produced in almost a closed cycle. Unfortunately, the Czech pulp and paper industry is still characterised by great unevenness in terms of the paper and board product range and specialisation in the production of packaging and packaging paper. Most of the papers consumed in the Czech Republic must still be covered by imports, which are almost double domestic production (mainly printing and graphic papers and sanitary papers are imported). Paper consumption per capita exceeded 150 kg (in 2014 it reached approximately 130 kg per capita and in 1993, when the Czech Republic was established, 60 kg). In the past, the paper industry used to be a source of great environmental pollution and had high energy consumption demands. However, pollution is a thing of the past (since 1993 there has been a significant decrease of all types of pollution by up to 92%) and the energy consumption for the production of 1 tonne of paper has also decreased significantly. Electricity generation from own sources (mainly from biomass) has increased to almost 100% of the total electricity consumption in the pulp and paper industry. After the food industry, the paper industry is the second largest sector in the world using renewable raw materials, and has an enormous advantage in that the products can be recycled. Recycling is therefore intrinsic to the industry and, if we go back in history, this industry was created on the basis of the “recycling” of rags (and handmade and used paper). Paper mills have always behaved both economically and ecologically, and will continue to do so. Unfortunately, we do not have sufficient recycling capacity in our country and most of the paper collected intended for paper recycling is exported (collection amounted to 1,034 million tonnes in 2018 and exports amounted to 902 thousand tonnes). The decline in production last year stems from the fact that some manufacturers have made significant investments not only in production but also in energy and the environment. This work required a temporary shutdown of production, which will be offset by a significant increase in production capacity this year. Despite the dynamic growth in paper and cardboard consumption, the Czech Republic still lags behind the levels of the most advanced EU countries. It can be assumed that this indicator will increase further in the coming years, up to the consumption of almost 200 kg per capita per year. This would be equivalent to a total domestic consumption of paper and paperboard of approximately 2 million tonnes per year. Reaching this limit only by further growth in imports is not an economically efficient solution, and other large-scale investments must also be considered (mainly due to the large surplus of waste paper on the Czech market, which is still exported).

Ing. Jaroslav Tymich President of the Association of the Pulp and Paper Industry

18 INTRODUCTION BY THE ASSOCIATIONS

ASSOCIATION OF THE CHEMICAL INDUSTRY OF THE CZECH REPUBLIC The 2018 results for the chemical industry in the Czech Republic were influenced by developments in the domestic and foreign economy, which, compared to 2017, brought a slowdown, or stagnation, of sales growth and other indicators. Nevertheless, the chemical industry remains one of the most important industries in the Czech Republic, with significant export and innovation potential and a good competitive position. The results for the chemical industry in 2018 can be briefly summarised as follows: In the CZ-NACE 20 – chemical industry sector, sales were estimated to have increased by 2% year-on-year (after deducting the synergy effect of the refining industry and excluding the “sales of goods” indicator), while in the two remaining sectors, CZ-NACE 21 – pharmaceuticals and CZ-NACE 22 – rubber and plastics industry, sales stagnated at the level of the previous year due to a slowdown of growth in some related sectors, including the automotive industry (this also applies to revenues from own production without the share of sales of goods). Most industrial and financial indicators saw an increase compared to 2017. The number of workers in the observed aggregates of the chemical industry increased by 1.4% (+1,793) year-on-year, mainly due to the increase of workers in the chemical (+932) and pharmaceutical (+517) industries. Compared to 2017, exports from the chemical industry increased by more than 3% to CZK 438.3 billion, while imports increased by 3.3% to CZK 590.8 billion. Thanks to this, the high negative balance of the chemical sector increased by CZK 5.95 billion year-on-year to CZK -152.6 billion. In 2018, the share of export in total revenues (export performance) of the large chemical industry accounted for 87.4% compared to 85.4% in 2017, while the best-performing divisions were CZ-NACE 21 – pharmaceutical industry (190.1%), and CZ-NACE 22 – rubber and plastics industry performing the worst (68.6%). Compared to 2017, the indicator book value added was unfavourable, its value in large chemistry decreasing by 3.2% year-on-year to about CZK 140 billion, which is not sustainable with an average wage growth of 8%.

Ing. Petr Cingr President of the Association of the Chemical Industry of the Czech Republic

19 ASSOCIATION OF THE GLASS AND CERAMIC INDUSTRY OF THE CZECH REPUBLIC Glass, ceramics and porcelain are among the “invisible” materials that surround us without us realising it. They accom- pany us every day, through our whole life, from baby bottles to a dewy pint. Glass jewellery has brought out the beauty of our women perhaps since year one, as well as the endless surfaces of functional glass facades adorn modern architecture. Glass panels protect us from bad weather, both in the windows of our homes and in cars of all brands. Food packages as well as dishes are practical and above all environmentally friendly. Glass and ceramic products witness our intimate hygiene. Most of the 60 3m of liquids that each of us statistically pours down our throats over the course of our lives are delivered to our mouths with a glass, a cup or a bottle. The manufacture of glass, ceramics and porcelain is one of the traditional industries of the Czech Republic. The sector of flat glass and its further processing into automotive and building glass accounts for the largest share in the Czech Republic. This is followed by equally important sectors such as glass packaging, glass fibre production and finally the most noticeable utility glass in every household. Technical and sanitary ceramics is another strong player in the industry, as well as the well-known but smaller-volume porcelain and ceramics, with their several thousand years of history. The current trend towards maintaining and preserving a healthier planet for future generations is also important for the future of the industry. Sustainability is mentioned in all contexts, as is the circular economy or energy-efficiency of buildings. The products of our industry, thanks to their recycling, are eco-friendly products and contribute significantly to sustainable development. We welcome steps to improve environmental protection and the development of ecology. Of course, the regulation that is being introduced within the European Union is also affecting our industry. We see the unilateral burden on European producers against their global competitors as a problem. The EU states and companies registered in them thus pay a tax for their commitment and responsibility to future generations, and this is not yet paying back. That is why we are actively working in the European Commission together with other European producers to ensure the creation of a level playing field. We do not like subsidised imports into the EU, or a massive disregard for addressing the environmental impact of non-regulated countries. One positive aspect is the return to the time when we bought food and drinks in glass containers, thus reducing the burden on the environment. Even new technologies cannot do without glass and ceramic products. The times are pushing us forward. In order to remain successful in the Czech Republic and globally, manufacturers are still looking for new export territories. Companies invest in their people, modernise production, collaborate with schools, develop new technologies, processes, streamline production processes and build stronger sales teams. The products of the glass and ceramic industry in the Czech Republic are well-known all over the world, and production is strongly export-oriented. Most of our products are exported to EU countries, but overall they are exported to more than 180 countries around the world. It is a pity that they are often not identi- fiable, as they are part of global brand names. If glass, ceramics and porcelain could leave a genetic trace, believe that we could see its visible imprint over the entire globe.

Ing. Petr Mazzolini President of the Association of the Glass and Ceramic Industry of the Czech Republic 20 INTRODUCTION BY THE ASSOCIATIONS

UNION OF GLASS AND FASHION JEWELLERY PRODUCERS The development of the manufacture of fashion jewellery after the Velvet Revolution was mainly influenced by the privatisation of the production sector and subsequent ownership changes. Large manufacturing plants ceased to exist and a number of medium and small businesses have been created. There are about 80 companies in the Jablonec region. The structure of the manufacturing sector stabilised, and the manufacture of basic glass raw materials and beads was purchased in 2009 by Preciosa Group (today under Preciosa Ornela a.s.). It is important that the main technologies, the production of key components and the surface treatments have been preserved in both small and medium-sized enterprises. The Union of Glass and Fashion Jewellery Producers together with the City of Jablonec and the Glass and Fashion Jewellery Museum have contributed to this by its active participation in the organization of the sale of key equipment from Jablonex Group necessary to resume the production of metal parts and other technologies. Thus, the manufacture of fashion jewellery continues in a different production structure with several new trade companies. After the recession, the fashion jewellery industry stabilised and gradually changed production. The -de velopment is quite clear. Manufacture of fashion jewellery is aimed at products of medium to higher price levels with good craftsmanship and a high-quality finish. The fashion jewellery industry creates high added value. An important factor is also compliance with strict health regulations in the EU and the US. Interest- ingly, well-known fashion brands are looking for Czech production capacities. The main threat is competition from the Far East, which has incomparable wage and other conditions. The Czech market is threatened by the imports from the Far East, which is often of very poor quality, not complying with the EU health regulations. In this respect, market protection is totally inadequate and calls for stricter rules are not met with an adequate response. Another problem is the “human factor”. Wages in the Jablonec region have traditionally been lower than the national average, and much of the production is manufactured at home. We must not forget to add the hobbyist element – often the whole family is involved. This is manual work that cannot be replaced by robots. The generation of hobbyists is retiring. That said, about 4,000 people make their living by the production of fashion jewellery in the Jablonec region, and this number exceeds other sectors. This is related to the declining interest in the fashion jewellery courses in schools. We have great jewellery education in the region, excellent pedagogues and support from the State and the Liberec region. Unfor- tunately, the level of education does not correspond to the interest of the pupils – the education mainly involves the production of jewellery, glass blowing, etc. We can only try to convince the parents that fashion jewellery production is a nice and creative job with a solid perspective. The Union of Glass and Fashion Jewellery Producers links 47 companies, 4 secondary vocational schools, the Technical University Liberec and Museum of Glass and Fashion Jewellery in Jablonec nad Nisou. In addition to protecting the interests of its members, it strongly supports the image of the Czech fashion jewellery industry. Under the brand “Made in Jablonec”, the Union organises a successful annual fashion show, has returned the “Fragile Beauty” exhibition of fashion jewellery to Jablonec nad Nisou, has its own “Palace Plus” fashion jewellery centre and is launching two tourist products, “Visit Jablonec nad Nisou to see glass and fashion jewellery” and “Czech Christmas”. In 2018, the association participated in presentations in Yekaterinburg, Astana, Doha and Dresden. All the Union‘s efforts are aimed at supporting the traditional field, which has always made women happy. This has been the case for 200 years and we see no reason why it should not continue to be so in the future.

JUDr. Pavel Kopáček Chair of the Board of Directors, Union of Glass and Fashion Jewellery Producers 21 STEEL UNION The year 2018 was a good year for Czech steelmakers. The Czech and European economies flourished, and this is always good news for Czech steelmakers, because it means higher demand and prices. Crude steel production in the Czech Republic grew by 10% year-on-year to 5 million tonnes. As is traditional, we produced more long products (3.14 million tonnes) than short products (1 million tonnes). Czech tube manufacturers also flourished, producing almost half a million tonnes. The value of Czech steel exports increased by 12% year-on-year and reached a record CZK 108 billion. The European market is traditionally crucial for us, but we export some special products such as rails and oil and gas equipment to many non-European countries, including the US. Unfortunately, as in the EU as a whole, the volume of imported steel has increased as a result of redirection of steel from third countries due to protectionism and limited market access in the US and elsewhere. The EU became the world’s largest importer of steel last year, largely due to Europe’s weak industrial policy. This is in many ways unkind to traditional industries. Although the steel industry is a global business, its footprint in the Czech Republic is very regional and local: almost 20,000 people work directly in the steel industry in the North Moravian region and tens of thousands indirectly in the supply and related sectors. Gross value added in the Czech steel industry has reached CZK 5.5 million per employee, which is almost three times more than the average in the Czech industry. The greatest opportunity for us is the idea of a circular economy, which steel is made for, because it is 100% and endlessly recyclable. This gives it an edge over other materials, including plastics or carbon fibre. Our task is to show that steel is an irreplaceable, sophisticated material that belongs to the modern economy. In contrast, the most difficult challenge for us is to adapt to the EU’s stricter climate policy. The European

Commission‘s efforts to achieve neutral CO2 emissions by 2050 will have a huge impact on our industry, and the choice of instruments to achieve this will determine the survival of steel production in Europe. If European policy further deteriorates the competitive position of European smelters compared to producers in China, Russia or the US, the vast majority of production will be moved from Europe to third countries and hundreds of thousands of jobs will be lost. If we can jointly transform the industry, introduce low-carbon steel production technologies and ensure affordable green energy, including sufficient transmission capacity, Europe can maintain its position as a technology leader in the steel industry.

Ing. Jan Czudek Chair of the Board of the Steel Union

22 INTRODUCTION BY THE ASSOCIATIONS

ELECTRICAL AND ELECTRONIC ASSOCIATION OF THE CZECH REPUBLIC A very important part of the electrical industry, which generates large revenues, is undoubtedly Group CZ-NACE 26.2, Manufacture of computers and peripheral equipment. Manufacture of IT technology in the Czech Republic is primarily intended for consumption in the single EU market; together with CZ-NACE 26.3 (Manufacture of communication equipment) and CZ-NACE 26.5 (Manufacture of instruments and appliances for measuring, testing and navigation; watches and clocks) it has been the driver of exports of the entire electrical and electronics industry. However, the reality is that the Czech Republic is just an assembly place for computer technology: in most cases we do not participate in development or trade, but rather assemble imported components. Among the traditional fields in which the Czech Republic has long stood out is the group of measuring instruments. However, this is a global part of the industry, dependent on many effects that we cannot control or sometimes even predict. Therefore, the most stable fields include the above groups 26.3 and 26.5, which in most cases have not only their own production and trade, but also their own research and development. CZ-NACE 27.1, Manufacture of electric motors, generators, transformers and electricity distribution and control apparatus, fares even better. Basically, in all parameters (added value, revenues, sales and number of employees), the branch is absolutely dominant and accounts for about half of the entire CZ-NACE 27 division. It is therefore logical that this group is essential not only for the electrical and electronics industry and the manufacturing industry, but for the overall performance of the economy. This group then supplies the whole industry both in the Czech Republic and abroad. CZ-NACE 27.9 and CZ-NACE 27.3 include companies that are able to supply turnkey investment units. This ability has almost disappeared in the Czech Republic. It is very rare, however, especially due to the huge lack of professionals in individual professions, who are also not provided by a single supplier corporation. Despite some problems, the field is still growing linearly. Foreign trade also has a positive balance, and its high value has not even been affected by Russian market failures, although they were crucial for some companies. This shows that most companies had diversified their export activities before the fall of the Russian market. Despite being commercially linked to Germany, it is not always the destination of our products; Germany re-exports them, often after incorporating them into higher product units. The current barrier to higher production is – as in the whole industry – the labour shortage. At the same time, this forces companies to rely more on automated solutions, and so elements of Industry 4.0 are gradually being introduced. Its application is not only a natural technological development but also a response to the above-mentioned labour shortage. Ultimately, this deficiency can contribute to the modernisation of production facilities and the creation of other jobs and activities. Those jobs will bring higher added value and safer, more enjoyable and easier work for employees. In any case, the electrical and electronics industry is an extremely global industry: companies from the Czech Republic can look for contracts all over the world, but they also have competitors from all over the world. Only companies that focus significantly on the research/development of new products can stay on top.

Ing. Jan Prokš, Ph.D. Director of the Electrical and Electronic Association of the Czech Republic

23 ASSOCIATION OF ENGINEERING TECHNOLOGY The Association of Engineering Technology currently brings together 46 companies, mainly manufacturers of machine tools, instruments and components. In addition to the Slovak companies TRENS and RÖHM Slovakia, all other companies are located in the Czech Republic. In terms of total production of the Czech Republic, this group accounts for approximately 70% of the volume. In 2018 there was an increase in production of about 13% and in exports of almost 19%. Export levels reached historical highs. Production, however, remained below the record year 2015. In line with the favourable situation in the domestic manufacturing industry, import and consumption of machine tools increased by several per cent. The Czech Republic still maintains its good position in the field of machine and forming tools. It ranks 15th in the world producer ranking and 8th in production and consumption per capita. Among the European producers, we are in 5th place in production per capita. China remains the world’s largest producer, and Switzerland has the highest per capita production. The main export territories for the Czech Republic are Germany (about 31%), China (11.4%) and Slovakia (6.6%). These are followed by Russia, Poland, Italy and the US. For Germany, the Czech Republic is the fourth largest importer of machine tools. Exports to Russia saw a slight increase compared to 2017. Ex- ports to China grew by about 50% in 2018. Germany holds the first place among importers. It is followed by Japan, Switzerland, Italy, Taiwan, Austria and South Korea. In terms of export commodities, number one are grinders, followed by lathes, machining centres and milling machines. The main sector purchasing engineering technology is the automotive industry and its subcontractors, tool and mould makers, and the defence, aviation and energy industries. The high level of Czech machine tools and forming machines is due, among other things, to the high quality of the workforce and the innovation activity of most manufacturers, such as TOS Varnsdorf, Kovosvit MAS, TAJMAC - ZPS, TOSHULIN, TOS Kuřim, FERMAT and others. Their design and development capacities are supported by cooperation with universities, such as the RCMT Research Centre under CTU Prague, or independent research institutes such as VÚTS Liberec, Intemac Kuřim and producers and suppliers of electronic and mechatronic components, tools and robots. In 2019, we expect the global demand for machine tools to decrease compared to 2018. As a result of the US trade disputes with China and other known factors, investment activity is also declining. As a result, the demand for machine tools in Germany, our most important partner, and also in other markets, has cooled. Therefore, we assume that production in the Czech Republic will decrease by approximately 5–10% compared to 2018.

Ing. Oldřich Paclík, CSc. Director of the Association of Engineering Technology

24 INTRODUCTION BY THE ASSOCIATIONS

AUTOMOTIVE INDUSTRY ASSOCIATION In 2018, the Czech automotive industry again posted record results. The sector continues to be the engine of the Czech economy, a major employer that contributes to the development of individual regions of the Czech Republic and a major taxpayer for public budgets. However, 2018 was also a turning point for the whole European and world automotive industry. The European Union has approved regulations limiting CO2 emissions from passenger cars, which in turn means the onset of electromobility. The ambitious goals underlying the greatest transformation of the industry place huge demands on both the manufacturers and the supply chain, as well as on the necessary investments to build the appropriate infrastructure. Despite the slowing growth rate in the world markets, a slight decline in world production and the global threat of slowing growth in vehicle demand in China, US trade policy towards global trading partners and the unclear Brexit, in 2018, with nearly 1.5 million units produced, road vehicle production surpassed the results of the previous year by 1.6%. This is one of the reasons why the Czech Republic continues to be the world leader in bus production and the second in passenger cars per capita. It ranks fifth in the total number of motor vehicles produced in the European Union and fifteenth in the world. At present, the automotive industry accounts for almost one tenth of the Czech Republic’s GDP, more than a fifth of exports and a quarter of industrial production, it contributes more than a third to investment in research and development in manufacturing, and employs almost 170,000 people and indirectly almost 500,000 people. In 2018, the production of final producers (thirteen within AIA in the Czech Republic) again reached record highs. Both the production of passenger cars, which produced 1,437,396 (+1.7%), and the production of buses with 4,890 (+5.6%) plants, were successful. Manufacturers produced 829 trucks (-44%), 1,493 motorcycles (+12.2%) and 25,298 trailers (+0.4%). Sales by AIA members, which make up more than 90% of the Czech automotive industry, exceeded CZK 1.1 trillion last year, up by 0.8% compared to 2017. Traditionally, the production of the Czech automotive industry is export-focused, with more than 80% of production going abroad. Also exports slightly increased in 2018 (+0.3%) and reached a record CZK 920.7 billion. The largest proportion of exports – almost one third – is traditionally directed to Germany, followed by France, the United Kingdom and Spain. A very important argument for the importance of the automotive industry is its impact on employment, through which the sector contributes to the development of individual regions of the Czech Republic. The number of employees in AIA companies increased by 3.8% last year to 133,079 people, accounting for 15% of employees in the Czech industry. Together, however, they make up almost a quarter of industrial production. Growth in employee numbers was seen in all categories – final producers, contractors and other companies and organisations. The average wage in AIA companies increased by 8.7% year-on-year to CZK 40,865, which is CZK 8,980 above the national average. Wages in blue-collar professions grew at an even higher rate (+ 9.4%) to CZK 34,556, which is 8.4% above the average wage in the Czech Republic.

Ing. Bohdan Wojnar President of the Automotive Industry Association

25 ASSOCIATION OF THE CZECH RAILWAY INDUSTRY The railway industry is a stable pillar of the Czech economy. The current successful development of railway transport is based on the 200-year tradition of the Czech railway industry. This long-standing tradition is the foundation for the current representatives of the Czech railway industry, which not only rely on tradition but invest significantly in the development of new products, the purchase of advanced technologies and the renewal of production facilities. This technological innovation is a prerequisite for ensuring the competitiveness of this dynamically growing industry. ACRI-affiliated companies play a crucial part in deliveries to the Czech railway system, with an ever-growing share of exports. The turnover of the Czech railway industry is CZK 78 billion, of which exports represent 54%, and the total number of employees is 21,000. Třinecké železárny successfully exports to a number of European countries, BONATRANS, a wheelset maker, has recently opened a plant in India and its wheels can be found over almost all the world, Czech trams travel reliably in Germany, Turkey, Latvia and Finland and Czech companies are involved in securing railway traffic in Bulgaria, Serbia, Belarus, Slovakia, Israel and other countries. In the Czech Republic, we have been a stable partner to the national carriers CZECH RAILWAYS and ČD CARGO. Catenary-free trams manufactured by ŠKODA TRANSPORTATION for the Turkish city of Konya can currently without power supply by pantographs travel in normal urban traffic of at least 3 kilometres at a speed of up to 30 km/h. This type of power supply is mainly used when the tram travels to areas where contact wires are not installed, so there is no need for high investment in infrastructure or, as in the case of historic parts of the city of Konya, where the overhead contact lines would interfere with the local atmosphere. GHH-BONATRANS annually launches around a hundred new products (wheelsets or their parts). BONASTAR wheels have improved steel quality for wheel on wheelsets with brake discs. This gives operators up to a 30% increase in distance covered before scheduled maintenance, and thus significant lifecycle cost savings. Anoth- er example of product innovation is the induction-hardened axle. A multi-year research project has brought a revolutionary technological innovation in the field of the heat treatment of axles, which increases the fatigue strength several times. AŽD Praha, the leading European supplier of railway signalling and communication equipment, is one of the top companies in its field. On test polygons, AŽD PRAHA is preparing to test a system for regional trains that will run on an open track without drivers. AŽD Praha wishes to develop this system by 2020. It would be the first European producer of similar technology. For the time being, there are driverless trains or metro trains only on closed tracks. New technologies with the use of the highly accurate Galileo satellite system will also be interesting. Last year, AMiT started to supply rail panel computers to ABB India, specifically for installation in the driver’s cab of WAG-9 locomotives. These panel computers stand out particularly by being water-resistant. In March 2019, Glacier Express commissioned new cars between Zermatt and St. Moritz. This allowed passengers for the first time to enjoy the luxury COMFORT seats, which BORCAD supplied for the Excellence class. OLTIS Group offers complex and very flexible information systems with many components for use in transport, forwarding and logistics.

Ing. Marie Vopálenská Director of the Association of the Czech Railway Industry

26 INTRODUCTION BY THE ASSOCIATIONS

ASSOCIATION OF AEROSPACE MANUFACTURERS OF THE CZECH REPUBLIC The Czech Republic is one of the few countries in the world that has retained the ability to develop and manufacture the entire portfolio of basic aerospace products and related accessories. Our main focuses are sports aircraft, small transport aircraft for up to 19 passengers, training jets and small un- CZECH REPUBLIC manned aircraft, as well as participation in the supply chains of major global manufacturers such as Airbus. For all of these activities, our industry has the necessary technological background, no different from that of other countries. This technological background is constantly being upgraded and extended to cover new technology domains that result from ongoing research and development. The Czech aerospace industry has its own (corporate) development centres, but also cooperates with national research centres and specialised institutes. The lifecycle of an aircraft is hardly comparable to any other industry sector. Its development takes from 7 to 10 years and then it is produced and operated for 20 to 30 years. The innovation process is continuous with the gradual application of the latest research and development outputs. In the European perspective, the Czech aviation industry does not stand alone; conversely, it is involved in the largest European aviation programme, CLEAN SKY 2 and is working on involvement in related initiatives. Our companies and research centres are respected members of a team consisting of strong European players such as Airbus, Dassault Aviation, Leonardo, Rolls Royce, Airbus Helicopters, Safran Group, Thales and others. A long-term problem is the critical shortage of workforce qualified in the aviation profession, at all levels of education. Retraining and employing people from abroad is a very important issue. Large aviation companies operate their own vocational secondary school whose students are directly involved in company practice during their studies. They assign university students research themes for diploma or dissertation theses related to the aviation industry. It is also typical for companies to employ undergraduates in their final years of study or part-time doctoral students. In terms of maintaining the capabilities of our aviation industry, we consider all contracts important, regard- less of their size or focus, because they all help to develop the use of all the cutting-edge and demanding technologies. Examples include: • Aircraft Industries – manufactures and sells a 19-seat L 410 Czech airplane of Czech design, and is starting to mass-produce its modernised version L 410 NG; • Aero Vodochody Aerospace – cooperates as a contractor for projects of Embraer (Brazil) and others. Provides “after-market service” for its L39 or L159 training aircraft, is developing a new modern version of the L39NG training aircraft; • GE Aviation Czech – manufactures GE H80/85 turboprop engines that have replaced the original M601 engines by Walter and is developing a new Catalyst turboprop engine; • PBS Velká Bíteš – develops, produces and sells small modern turbine aviation engines and auxiliary power units; • Czech Sport Aircraft – develops and manufactures light sport aircraft PS 28 Cruisers / Sport Cruisers. The Czech aviation industry is highly export-oriented; therefore, many of our activities aim to find new outlets for our products. In addition, we work with the Czech government to create an effective system of national support for the aerospace industry. Most of our companies have participated in the completion of the L 410 NG and EV-55 and starting of its mass production. Ing. Josef Kašpar President, Association of Aerospace Manufacturers 27 ASSOCIATION OF CZECH FURNITURE MANUFACTURERS The growth of the Czech furniture industry exceeded the autumn estimates of the Association of Czech Furniture Manufacturers. Growth in production volume has continued uninterrupted since 2010. Exports of Czech furniture have been successful. Although export performance remains balanced in 2018 compared with 2017, the volume of exports saw a year-on-year increase. The domestic consumption of furniture increased after years of gradual growth and finally surpassed the pre-crisis value of 2009. The performance of the furniture industry grew again. Furniture production in the Czech Republic rose from CZK 44.68 billion in 2017 to CZK 46.34 in 2018. This is a substantial increase over the previous years. It can be seen that the furniture industry can cope with the shortage of production workers. Growth is supported by investments in modern technologies, digitisation and robotisation. Of course, the executive management and organisation of production also play a role. Given the export focus, the CZK exchange rate will be important in the future. Despite the growth of domestic furniture consumption, the good results of the furniture industry are based on export success. For many years, the volume of imported furniture has been gradually increasing. The share of imports in domestic consumption is also increasing. The share of imports in domestic consumption slightly exceeded 53% last year. The export performance of the Czech furniture industry was 18.78% in 2017 and 18.75% in 2018, which can be considered a steady state. However, the volume of exported furniture increased from CZK 27.28 billion in 2017 to CZK 28.68 billion in 2018. In the case of furniture exported from the Czech Republic, after a certain decrease in the price per kilogram in 2017, we are seeing a renewed increase in the price of exported furniture. And this growth is quite strong. Last year, exported furniture reached an average value of CZK 81.68 per kilogram. By contrast, the price of imported furniture has been declining for the third year. In 2015, its price fell to 66.38 CZK/kg. Between 2016 and 2017, there was a relatively steep fall in the price of imported furniture. In 2016, the price fell to 64.64 CZK/kg. In 2017, the price fell steeply to 50.08 CZK/kg. Between 2017 and 2018, the decline continued to CZK 48.28/kg. There is still a trend of importing ever cheaper furniture and one can speculate that its quality is inferior. Naturally, statistics also include luxury and very expensive furniture that is also imported. The largest furniture importers in the Czech Republic are still mainly large specialised furniture companies. However, new players are also succeeding in online sales. The largest importer of furniture into the Czech Republic is Poland, followed by Germany, China, Slovakia and Italy. The bulk of exports go to Germany, well ahead of Slovakia and France. The United Kingdom placed fourth, but there may now be concerns about the approaching Brexit and the subsequent development of trade relations.

Ing. Martin Čudka President of the Association of Czech Furniture Manufacturers

28 METHODOLOGY

METHODOLOGY The Panorama of the Manufacturing Industry 2018 is published as a joint document of the Ministry of Industry and Trade (MIT) and the Czech Statistical Office (CZSO). Its first part contains views of some sectoral associations on the development of selected industries and their future perspectives. The data presented in this part are also based on internal sources of individual sectoral associations, and given that the structure of the division of individual branches of industry may differ from the official CZ-NACE classification of economic activities used by the MIT and the CZSO, these data are not always comparable to data presented in the second part of the publication. The second part of the publication has been prepared by the MIT and deals with the basic production and financial characteristics, price developments and foreign trade.

SOURCE OF DATA FOR THE INDUSTRY PANORAMA Enterprises within the Panorama of the Manufacturing Industry are sorted according to their primary economic activity based on the CZ-NACE classification of economic activities. CZ-NACE coding is based on the standard European Union NACE classification of economic activities: • the first level, sections, is identified by an alphabetical code, • the second level, divisions, is identified by a two-digit numerical code, • the third level, groups, is identified by a three-digit numerical code, • the fourth level, classes, is identified by a four-digit numerical code. The alphabetical section code is not a part of the activity code that identifies the other classification levels, e.g. the activity “glue production” is classified under code 20.52, where 20 is the division code, 20.5 is the group code and 20.52 is the class code. Section C, to which this activity belongs, is not shown in the code. The Panorama analyses the sectors at group level. The monitored period in the analysis is 2008–2018. Until 2017, the official data of the CZSO are stated from the statement P 5-01. The year 2018 has been recalculated by the Ministry of Industry and Trade, the recalculation carried out according to its own methodology. The characteristics of the manufacturing industry, its divisions and groups according to CZ-NACE is based on the data from CZSO annual statistical report P5-01 (period 2008–2017). The data in the P5-01 comprise all sizes of enterprises, i.e. also self-employed persons. The 2018 period is calculated additionally using the 2018/2017 indices, which are based on the quarterly statistical statements P3-04, P6-04, Work 2-04, and data from the Business Sector Financial Analysis 2018. In 2015, there was a change in accounting and thus also in accounting statements with effect from 2016. Panorama reflects this change. The 2008–2018 data were transferred to the accounting methodology valid from 2016. The data in the statement P5-01 are in the format of financial statements valid until 31 December 2015. First, the data were converted to the format valid as of 31 December 2015 and then subsequently to the format valid from 1 January 2016. Indicators are defined in Tables 1 to 5. Possible differences in data in the outputs of the Czech Statistical Office and the Ministry of Industry and Trade are due to data rounding.

29 Table 1

Balance sheet (valid until 31 Dec. 2015) Source of data or calculation Total assets CZSO Report P5‐01 B. Fixed assets CZSO Report P5‐01 B.I. Fixed intangible assets CZSO Report P5‐01 B.II. Fixed tangible assets CZSO Report P5‐01 B.III. Long‐term financial assets Fixed assets ‐ fixed intangible assets ‐ fixed tangible assets C. Current assets CZSO Report P5‐01 C.I. Supplies in stock CZSO Report P5‐01 C.II. Long‐term receivables CZSO Report P5‐01 C.III. Short‐term receivables CZSO Report P5‐01 Short‐term financial assets Current assets ‐ supplies in stock ‐ long‐term receivables ‐ short‐term C.IV. receivables A.+D.I. Accruals + receivables Equity Total assets ‐ fixed assets ‐ current assets Total liabilities Total assets A. Equity CZSO Report P5‐01 B. Foreign resources CZSO Report P5‐01 B.I. Reserves CZSO Report P5‐01 B.II. Long‐term liabilities CZSO Report P5‐01 B.II.6+B.II.7. Long‐term bonds and bills CZSO Report P5‐01 B.II.‐ (B.II.6.+B.II.7.) Other long‐term liabilities Long‐term liabilities ‐ (long‐term bonds and bills) B.III. Short‐term liabilities CZSO Report P5‐01 B.III.8+B.III.9. Short‐term bonds and bills CZSO Report P5‐01 B.III.‐ (B.III.8.+B.III.9.) Other short‐term liabilities Short‐term liabilities ‐ (short‐term bonds and bills) B.IV. Bank loans and assistance CZSO Report P5‐01 B.IV.1. Long‐term bank loans Bank loans and assistance ‐ (short‐term bank loans and assistance) B.IV.2.+BIV.3. Short‐term bank loans and assistance CZSO Report P5‐01 C.I. Accruals MIT calculation Source: MIT

METHODOLOGY

Table 2

Balance sheet (effective from 1 January 2016) Balance sheet (effective until 31 December 2015) Total assets (A .+ B. + C. + D.) Total assets B. Fixed assets Fixed assets B.I. Fixed intangible assets Fixed intangible assets B.II. Fixed tangible assets Fixed tangible assets B.III. Long‐term financial assets Long‐term financial assets C. Current assets Current assets C.I. Inventories Inventories C.II. Receivables Long‐term receivables + Short‐term receivables C.II.1. Long‐term receivables Long‐term receivables C.II.2. Short‐term receivables Short‐term receivables C.III+ C.IV. Short‐term financial assets+cash Short‐term financial assets A.+D.I. Accruals + receivables Equity Accruals + receivables Equity Total liabilities Total liabilities A. Equity Equity A.I. Registered Capital Registered Capital A.II.+A.III.+A.IV. Retained earnings + profit funds Calculated MIT A.V. P/L after tax P/L after tax B.+C. Liabilities Liabilities B. Reserves Reserves C. Payables Calculated MIT C.I. Long‐term payables Calculated MIT C.I.1.C.I.5 Long‐term bonds and bills Long‐term bonds and bills C.I.2 Long‐term bonds and bills Long‐term bonds and bills C.I.3+C.I.4+C.I.6+C.I.7+C.I.8+C.I.9 Other long‐term liabilities Other long‐term liabilities C.II. Short‐term payables Calculated MIT C.II.1.C.II.5 Short‐term bonds and bills Short‐term bonds and bills C.II.2 Short‐term bonds and bills Short‐term bonds and bills C.II.3+C.II.4+C.II.6+C.II.7+C.II.8+C.II.9 Other short‐term liabilities Other short‐term liabilities D.I. Passive Accruals Passive Accruals Source: MIT

Table 3

Profit and loss statement (valid until 31 Dec. 2015) Source or calculation I. Revenues from goods sold CZSO Report P5‐01 A. Costs of goods sold revenues from sale of goods ‐ sale margin + Sale margin CZSO Report P5‐01 II. Production CZSO Report P5‐01 II. part 1 Revenues from finished products CZSO Report P5‐01 II. part 1 Revenues from services sold CZSO Report P5‐01 II.2. + II.3. Change in balance of supplies + activation Production ‐ revenues from goods sold ‐ revenues from services sold B. Consumption from production Sale margin + production ‐ value added + Value added CZSO Report P5‐01 C. Personnel costs CZSO Report P5‐01 C.1. Wages CZSO Report P5‐01 Social security and health insurance costs Social C.3. + C.2. security + bonuses to company body members Personnel costs ‐ wages ‐ Other personnel costs C.4. Other personnel costs CZSO Report P5‐01 Gross operating surplus Value added ‐ personnel costs E. Write‐offs CZSO Report P5‐01 Other revenues Total revenues ‐ revenues from goods sold ‐ production Other costs Total revenues ‐ costs of goods sold ‐ cost of production ‐ personnel costs ‐ write‐offs ‐ EBIT EBIT Earnings before tax + interest paid N. Cost interests CZSO Report P5‐01 **** Earnings before tax Earnings in accounting period + tax Q. + S. Tax CZSO Report P5‐01 *** Earnings in accounting period CZSO Report P5‐01 Source: MIT

Table 4

Profit and loss statement (effective from 1 January 2016) Profit and loss statement (effective until 31 December 2015) Revenues from sale of own products + Revenues from sale of own I. Revenues from sale of own products and services services II. Revenues from sale of goods Revenues from sale of goods A. Consumption Calculated MIT A.1. Costs of goods sold Costs of goods sold A.2.+ Material and energy consumed, and services Consumption from production A.3. Change in inventory of own products + activation with opposite B.+C. Change in inventory of own products + activation sign D. Personnel costs Personnel costs D.1. Wages Wages Social security and health insurance costs Social security + bonuses D.2.1 Calculated MIT to company body members + Other personnel cost Social security and health insurance costs Social security + bonuses Social security and health insurance costs Social security + bonuses D.2.1 to company body members to company body members D.2.2 Other personnel costs Other personnel costs E.1. Adjustments to intangible and tangible fixed assets Depreciation J. Cost interests and similar costs Cost interests ** Earnings before tax Earnings before tax L. Tax Tax *** Earnings in accounting period Earnings in accounting period Source: MIT

METHODOLOGY

Table 5

Additional and recalculated data Source: P5‐01 or Profit and loss statement (effective until 31 December 2015)

Value added Value added Gross operating surplus Gross operating surplus EBIT EBIT Total revenues CZSO Report P5‐01 Sales Revenues from goods sold ‐ Revenues from services sold Sum of recalculated registered number of employees and working owners (including Employed persons cooperating household members) for whom work in the company was the major activity Working owners (including cooperating household members) for whom working in the company was the major CZSO Report P5‐01 activity Number of units CZSO Report P5‐01 Investments CZSO Report P5‐01 Total revenues (CZSO Report P5‐01) – (change in inventory of own products + Total costs activation) ‐ earnings before tax Interest‐bearing resources Equity + bank loans + long‐term bonds and bills + short‐term bonds and bills Source: MIT

Price development is based on the CZSO monthly data statement Prices Avg 1-12. 2005 is considered the base year, i.e. 2005 = 100%. Industrial producer prices are in the CZ-CPA classification. Statistics on external trade in goods in a cross-border concept are the sum of intra-EU trade and trade with non-EU countries. Data on foreign trade in the cross-border concept are taken from the CZSO. For the expression of foreign trade, the CZ-CPA production classification was chosen, which corresponds to the CZ-NACE classification. From the Input – Output tables compiled by the Czech Statistical Office, inputs into sections classified into domestic and foreign (imports) were calculated. Outputs were divided into exports, gross fixed capital formation, final government consumption + other consumption, final household consumption and supplies for intermediate consumption. In addition, the import intensity of exports was calculated from the Input – Output tables. Individual data for innovation, R&D expenditures and the use of information and communication technologies were linked to individual production and financial data. From the linked data, the part on innovation and R&D expenditures in Chapter 1 was elaborated.

CHAPTER STRUCTURE The Panorama contains chapters for the entire CZ-NACE C section of the Manufacturing Industry and for individual divisions of the manufacturing industry, with the exception of sections CZ-NACE 12 Manufacture of tobacco products, CZ-NACE 19 Manufacture of coke and refined petroleum products and CZ-NACE 33 Repair and installation of machinery and equipment, which were omitted for reasons of individual data protection. The sum of data for the entire section contains these omitted divisions. Chapter 1 Manufacturing industry includes subchapter 1.1 Production characteristics, which first presents the development of the indicator in 2008–2018, and then the shares in the relevant indicators for individual divisions ordered by size. If it is a relative indicator, its values for each division are ordered again by size. Subchapter 1.2 Investments, R&D and innovation expenditures deals with approaches to investment in tangible and intangible assets, and to R&D and innovation expenditures. Subchapter 1.3 Digitalization is a view of the state of digitization in the manufacturing industry

Subchapter 1.4 discusses price developments. Subsection 1.5 deals with foreign trade in the CZ-CPA classification. Subchapter 1.6 analyses the developments in economic value added and its causes. Subchapter 1.7 contains summary and perspectives of the manufacturing industry. The chapters for each division are broken down into the subchapter Division characteristics, which spec- ify the group shares in the selected absolute indicators. The data in the interactive browser on the MIT website can be used to calculate the group shares for all absolute indicators. Below follows a descriptive subchapter Division developments, which is followed by the subchapter Main economic indicators. This chapter includes the selection of economic indicators for the division and price development of the commodities of the division. Again, all indicators for both the division and the groups can be obtained from the interactive browser on the MIT website, but not for price development, which is available on the CZSO website. The following subchapter Foreign trade contains the development of exports, imports and balances of MI in terms of commodities broken down according to CZ-CPA. A subchapter on R&D is followed. The chapter is concluded with a subchapter section Summary and perspectives of the division.

INFA METHODOLOGY The performance of sections, divisions and groups was evaluated using the INFA methodology1, which is used by the Ministry of Industry and Trade in Financial Analysis and was also used in the previous Panorama. The INFA methodology is a financial analysis tool that allows for a comprehensive assessment of the profit/loss of enterprises in each group, linking financial controlling and risk controlling indicators in a causal manner. The INFA methodology was not applied in full in Panorama. INFA is based on the need to link (and at the same time have the possibility of a separate view) the indicators of financial controlling and risk controlling when assessing enterprise performance. The indicator which is the most aggregated embodiment of this link is economic value added. Both an enterprise and a division, group or the entire manufacturing industry have high enough performance if they achieve positive economic value added. INFA works with the management form of EVA, based on the calculation of “spread”. Spread compares a company’s return on equity (ROE) with an alternative cost of equity, that is, the return on equity required in relation to the risk incurred (re). EVA is the product of spread and equity. Where: EVA = Spread * equity. When analyzing the generation of EVA, INFA separates the generation of company output (represented by EBIT), its division and the relationships between the time structure of assets and liabilities (see Figure 1). In Figure 1, the first group (I.) contains those factors that affect the size of the enterprise output created (EBIT). EBIT is the most appropriate output characteristic, since this quantity is not affected by the amount of output for creditors (interest) and the State (tax). The amount of EBIT needs to be evaluated in relation to the size of property that is bound (assets) and through which the EBIT was created. The EBIT/asset indicator shows the overall profitability of an enterprise and is called the production capacity of an enterprise. The first group of indicators comprises the productive capacity and indicators explaining and illustrating how it was created. High and stable production capacity has a positive effect on both ROE and re. The second group (II) contains factors that are decisive for the method of distributing EBIT created by an enterprise among the owners and creditors (the “capital providers”) and the State. The production capacity is also influenced by the company’s debt ratio (financial leverage). If the production capacity of the company is not sufficient, ROE deteriorates due to higher indebtedness. The leverage clearly affects the level of risk (re): higher indebtedness always generates higher risk. With the growth of indebtedness, the distribution of EBIT changes to the detriment of the owners, as the portion of the EBIT taken by creditors in the form of interest grows.

1 The authors of the INFA methodology are Inka and Ivan Neumaier. 34 METHODOLOGY

The third group (III) includes indicators indicating the financial stability which creates the conditions for the generation and division of company output. Assets and their sources are compared in terms of their life.

Figure 1 INFA diagram

I. EBIT

creation

ROE III. Financial re stability

II. EBIT division

Spread

Source: INFA Performance Indicator Diagnostic System, Neumaier I., Neumaierová, I. Central European Business Review

Indicators representing the equilibrium of the system (the ability of an enterprise to meet its obligations to all stakeholders in a timely manner) are a prerequisite for the operation of the business and have a significant impact on corporate risk. These include, in particular, common liquidity (L3). What is decisive is how the indicators of all of the above-described groups collectively affect the return

on equity (ROE) and risk (re), i.e. whether the spread (ROE – re) increases or decreases. INFA allows the selection of basic indicators to assess the performance of enterprises (Fig. 2). EBIT creation indicators are orange, EBIT division indicators are green and financial stability indicators are red.

Estimating the value of alternative equity coste r according to INFA methodology is, as applied by the MIT, based on several simplifying assumptions: • Real interest rate is substituted for the cost of foreign capital. • The market value of the foreign capital is made identical to the book value of foreign interest-bearing capital. • It is assumed that the weighted average cost of capital (WACC) is independent of the capital structure. A change in the capital structure merely reallocates the total cost of capital between the owners and creditors. • In the WACC formula, the share of net profit to profit is substituted for (1 – income tax rate) that characterizes the tax, i.e. the actual impact of taxation is taken into account. 35 The alternative cost of equity (re) must be calculated separately for each enterprise. Equity (re) is calculated automatically for most enterprises; individual specificities are taken into account in the most important businesses. This involves approximately 500 enterprises.

The value of re for individual groups, sections and divisions is counted as a weighted arithmetic mean:

re of the group = ∑(re of enterprise * enterprise’s equity) / ∑ enterprise’s equity.

In accordance with the financial analysis of the corporate sector, risk-free rate fr means 10-year government bond yield (Table 6).

Figure 2 INFA diagram (including basic indicators)

Structure Cost Structure of of total intensity total revenue

assets

EBIT/Total Total revenues revenues/Assets

Liquidity L3

ROE ROA = EBIT/Assets re

Net profit/Profit

Structure of Equity/Assets liabilities

Interest-bearing capital/Assets

Interest rate

Part of Interest-bearing business capital risk

Spread

Source: modified according to INFA Performance Indicator Diagnostic System, Neumaier I., Neumaierová, I. Central European Business Review (2014)

36 METHODOLOGY

Table 6

Year 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Risk‐free rate rf 4.55% 4.67% 3.71% 3.79% 2.31% 2.26% 1.58% 0.58% 0.43% 0.98% 1.98% Source: MIT The use of the INFA methodology determined the choice of calculated indicators, which is supplemented by labour productivity, average wage and endowment with tangible fixed assets (Table 7).

Table 7

Indicators Source or calculation EVA Spread * Equity

Spread ROE ‐ re ROE Earnings in accounting period / Equity Rate of alternative cost of equity (re) Calculation according to INFA methodology EBIT/Assets EBIT/Assets Revenues/Assets Total revenues/Assets EBIT/Revenues EBIT/Total revenues Equity/Assets Equity/Assets Interest‐bearing capital/Assets Interest‐bearing capital/Assets L3 Current assets/(short‐term liabilities + short‐term bank loans and assistance) L2 (Long‐term receivables + short‐term receivables + short‐term financial assets)/(short‐term liabilities + short‐term bank loans and assistance) L1 Short‐term financial assets/(short‐term liabilities + short‐term bank loans and assistance) GOS/Total revenues Gross operating surplus/Total revenues VA/Total revenues Value added/Total revenues PC/Total revenues Personnel costs/Total revenues Value added per employee Value added/(recalculated registered number of employees + working owners)*1000 Average wage Wages/Recalculated registered number of employees /12*1000 Capital intensity (Fixed intangible assets + fixed tangible assets per employee)/Average FTE*1000 Source: MIT

The data from Tables 2, 4 to 7, for each group, division, and manufacturing industry total, are available in the interactive table on the MIT website at www.mpo.cz/en/panorama-interactive-table.html

38 LIST OF ABBREVIATIONS

LIST OF ABBREVIATIONS

Abbreviation Name € euro AI automotive industry AS CR Academy of Sciences of the Czech Republic CEFIC European Chemical Industry Council CEPI Confederation of the European paper industry CNB Czech National Bank

CO2 carbon dioxide cp constant prices CR Czech Republic CZ-CPA classification of production CZK mill. million Czech crowns CZ-NACE Classification of Economic Activities CZSO Czech Statistical Office EBIT earnings before interest and taxes EPS polystyrene EU European Union EVA economic value added FSC Forest Stewardship Council FT foreign trade FTE share of researchers GDP gross domestic product GDPR General Data Protection Regulation, Data Protection EU Directive 2016/679 GfK a market research company GM General Motors GVA gross value added GWH gigawatt hour ha hectare IAEI Institute of Agricultural Economics and Information ICT information and communication technologies I-O tables Input - output tables IT Information technology kg kilogram MEYS Ministry of Education, Youth and Sports MFA Ministry of Foreign Affairs MI manufacturing industry mil. hl million hectolitres MIT Ministry of Industry and Trade MoA Ministry of Agriculture MoD Ministry of Defence of the Czech Republic MoRD Ministry of Regional Development MoT Ministry of Transport NAFTA North American Free Trade Agreement

39 National RIS3 Strategy National Research and Innovation Strategy for Intelligent Specialization of the Czech Republic OP EIC Operational Programme Enterprise and Innovation for Competitiveness PA polyamide PE polyethylene PEFC Programme for the Endorsement of Forest Certification PET polyethylene terephthalate PP polypropylene PVC polyvinyl chloride R&D Research and Development re alternative cost of equity rf risk-free rate RO research organization ROE return on equity SME small and medium enterprises

40 1. MANUFACTURING INDUSTRY

1. MANUFACTURING INDUSTRY The manufacturing industry (MI) is a significant division of the economy and an important actor contributing to the development of technology, knowledge and job opportunities. In the Czech Republic, it has a long-standing tradition and in its development it has demonstrated an ability to maintain its position in a competitive environment, mainly thanks to the entry of foreign capital and involvement in regional and global value chains. However, a high degree of integration and connection to foreign trade makes the MI sensitive to changes in external conditions. According to the CZ-NACE Classification of Economic Activities, this section includes the mechanical, physical or chemical conversion of materials or components into new products. Inputs into the MI include the products of agriculture, forestry, fishing, mining, quarrying of stone, sand and clay and the products of other manufacturing activities. At the section level (the first level of classification) of CZ-NACE, the manufacturing industry is the most important section of the economy: in 2018, it accounted for 25.6% of the gross value added (GVA) at current prices, 38.3% of output at current prices and 26.6% of persons employed. The economy is usually divided into agriculture (section A), industry (sections B + C + D + E), construction (section F) and services (other sections). In this case, the manufacturing industry is part of industry (besides the manufacturing industry, this also includes mining and quarrying, energy production and water supply and waste treatment), which is the second largest producer of GVA (30.2% at current prices) in second place after services (62.0% at current prices). The importance of the manufacturing industry for the Czech economy is obvious mainly in international comparison. The Czech Republic, with the MI representing more than a quarter of gross value added ranks among the top European countries. Only Ireland has a higher share. Slovenia, Germany, Hungary, Slovakia and Poland appear on other places. The total EU average of the manufacturing industry per country accounts for 16.3%. The dynamic development of the MI in the Czech Republic is evident from the share in gross value added (at current prices), which increased from 24.5% to 25.6% in 2008-2018, i.e. an increase of 1.1 pp, by which the MI’s contribution to the creation of GVA and hence GDP at current prices increased. The share of -em ployed persons decreased from 26.9% to 26.6%, i.e. by 0.3 pp. As a result, in the Czech Republic, the MI recorded faster growth in labour productivity from GVA than the total economy. The share of production (at current prices) increased from 36.4% to 38.3%, i.e. by 1.9 pp. This publication is made unique by the fact that it segments manufacturing industry in the CZ-NACE classification at the second level and classifies activities at the third level1. Further data are available on the MIT website in an interactive viewer of economic indicators (www.mpo.cz/en/panorama-interactive-table. html ).

1.1 PRODUCTION CHARACTERISTICS

1.1.1 NUMBER OF ENTERPRISES In the Czech Republic, there were 179,567 enterprises (business entities) in the manufacturing industry in 2018. Of these, 92.9% are micro-enterprises, SMEs (excluding micro-enterprises) account for 6.6% and large enterprises account for 0.5%. Until 2012, the number of businesses grew, even in 2009, during the recession. Some enterprises may have disappeared, but more new enterprises have emerged, as a recession is also an opportunity to change the structure. In 2010 to 2012, a significant growth in the number of enterprises was driven by an increase in working owners – self-employed persons. In 2013, the number of self-employed persons decreased. Since 2014, there has been another slight increase in the number of enterprises (Chart 1.1). In the MI structure by the number of enterprises (Chart 1.2), the dominant divisions are those with a high

1 Selected CZ-NACE divisions are not mentioned in the publication due to individual data protection. 41 share of micro-enterprises, including self-employed persons (CZ-NACE 25 Manufacture of Metal Structures and CZ-NACE 16 Manufacture of Wood). On the other end of the scale, some divisions have mostly large enterprises.

Chart 1.1 – Number of enterprises Chart 1.2 – Number of enterprises by CZ-NACE

200 000 25 16 180 000 14 27 160 000 18 32 140 000 10 23 120 000 31 28 100 000 22 26 179 567 175 883

173 889 11 172 632 172 596 80 000 172 054 170 041 167 688 167 344

153 965 13 149 249 60 000 20 29 24 40 000 17 30 20 000 15 21 2018 2017 0 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 0 10 000 20 000 30 000 40 000 50 000 Source: CZSO data, 2018 MIT calculations Source: CZSO data, 2018 MIT calculations

1.1.2 REVENUES The manufacturing industry transforms raw materials, sub-deliveries or components into products. There- fore, revenues from the manufacturing industry mainly consist of revenues from the sale of internal products and services. Revenues from the sale of goods, i.e. from what businesses resell, account for a smaller portion of total revenues. Revenues (at current prices) after a decline in 2009 show a steady increase until 2018, however, with a significantly reduced growth rate between 2012 and 2013 and 2015 to 2016 (Chart 1.3). In terms of revenues, Production of Motor Vehicles (CZ-NACE 29) is definitely the most important division, whose share was more than a quarter of the MI, but it decreased year-on-year. It is well ahead of other important divisions: Manufacture of Metal Structures (CZ-NACE 25), Manufacture of Machinery (CZ-NACE 28), Manufacture of Computers (CZ-NACE 26), Manufacture of Electrical Equipment (CZ-NACE 27), Manufacture of Rubber and Plastic Products and Manufacture of Electrical Equipment (CZ-NACE 22) and Manufacture of Food Products (CZ-NACE 10), see Chart 1.4.

1. MANUFACTURING INDUSTRY

Chart 1.3 – Revenues (in CZK billions) Chart 1.4 – Revenue share by CZ-NACE (MI = 100%)

6 000 Revenues from own products and services sold 29 25 Other revenues 28 5 000 4 877 26 4 688 451 27 4 348 4 282 432 22 4 122 375 384 10 4 000 3 747 356 3 720 20 3 563 3 614 3 346 352 343 24 333 323 23 3 009 304 3 000 16 297 17 11 32 4 426

2 000 4 256 3 964

3 907 30 3 766 3 404 3 368 13 3 292 3 231 3 042 31 2 713 1 000 21 18 14 15 2018 2017 0 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 0% 5% 10% 15% 20% 25% 30% Source: CZSO data, 2018 MIT calculations Source: CZSO data, 2018 MIT calculations

1.1.3 VALUE ADDED AND PERSONNEL COSTS Value added shows what has been added to the purchased material, semi-finished products, services and goods. After the decrease in value of the indicator by 13% in 2009, the value added reached 2008’s level only in 2011. Then there was a three-year period when the growth was from 3% to 5%. In 2014, there was a high year-on-year growth of 14% and the growth slowed again to 1% in 2018 (Chart 1.5). The manufacture of motor vehicles has again the largest share, accounting for almost 20% of the MI (Chart 1.6), whose development in 2018 was, however, according to the estimation of the Ministry of Industry and Trade, accompanied by an absolute decrease in value added as well as a decrease in the share of this sector in the total MI. The relationship between the growth of input prices and output prices was the main factor in the year-on-year changes in value added. The development of personnel costs between 2008 and 2018 (Chart 1.7) had two phases. Between 2008 and 2013, following a decline in 2009, the value stabilised at the approximate level of 2008. However, from 2014 there was a sharp increase, with an increasing pace, until 2018. This was a joint effect of the impacts of the boom, when employment grew significantly both in the economy and in the MI, while wage growth accelerated. The share of individual divisions in personnel costs is between the share in revenues and the share in value added. Production of motor vehicles is again the most significant (Chart 1.8).

Chart 1.5 – Value added (in CZK billions) Chart 1.6 – Value added share by CZ-NACE (MI = 100%)

1 200 29 25 28 1 000 27 22 10 23 800 20 26 24 600 16 32 1 057 1 045

997 11 967 920 17 400 809 787 767 763 30 728

662 13 31 200 21 18 14 15 2018 2017 0 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 0% 5% 10% 15% 20% 25%

Source: CZSO data, 2018 MIT calculations Source: CZSO data, 2018 MIT calculations

Chart 1.7 – Personnel costs (in CZK billions) Chart 1.8 – Personnel costs share by CZ-NACE (MI = 100%)

700 29 25 28 600 27 22 10 500 23 24 26 400 20 32 30 300 623 16 572

522 17 487

459 13 438 436 434 200 422 401 393 11 31 18 100 21 14 15 2018 2017 0 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 0% 5% 10% 15% 20%

Source: CZSO data, 2018 MIT calculations Source: CZSO data, 2018 MIT calculations

1. MANUFACTURING INDUSTRY

1.1.4 NUMBER OF EMPLOYEES AND EMPLOYED PERSONS In small and micro-enterprises, the owners (entrepreneurs) work mostly alongside employees. They are mostly self-employed persons. Including the working owners, the number of employed persons is higher than the number of employees by 11.9%. The development of the number of employed persons, i.e. employees and working owners, is shown in Chart 1.9. The development of the number of employed persons followed the development of the business cycle in the economy, which copied the “W” shape, and the troughs of employment in the MI were in 2009, 2010 and 2013. In 2018, the number of employees in the MI amounted to 1,165,661. At the same time, employment offices registered 324,410 vacancies, of which approximately 140,000 were related to the MI. In addition, the MI employed 71,417 employees through agencies. In terms of MI divisions, the largest employers are CZ-NACE 29 Manufacture of Vehicles and CZ-NACE 25 Manufacture of Metal Structures. Somewhat smaller employers include CZ-NACE 28 Manufacture of Machinery, CZ-NACE 27 Manufacture of Electrical Equipment, CZ-NACE 22 Manufacture of Rubber and Plastic Products and CZ-NACE 10 Manufacture of Food Products (Chart 1.10). The share of working owners in employment in individual divisions (Chart 1.11) is the largest in the divisions Manufacture of Wood (CZ-NACE 16) and Manufacture of Wearing Apparel (CZ-NACE 14).

Chart 1.9 – Employed persons

1 400 000 1 328 155 1 287 354 1 304 433 Employees Owners (including working owners) 1 257 866 1 232 477 116 447 1 180 752 1 196 483 1 196 728 1 180 996 1 197 166 1 164 236 137 709 138 773 1 200 000 135 167 134 532 114 951 130 900 133 374 132 321 125 502 129 821

1 000 000

800 000

600 000 1 211 708 1 165 661 1 149 645 1 122 699 1 097 945 1 065 801 1 065 583 1 064 845 1 063 354 1 051 174 1 038 734 400 000

200 000

0 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Source: CZSO data, 2018 MIT calculations

Chart 1.10 – Share in employment Chart 1.11 – Share of working owners in by CZ-NACE (MI = 100%) employment by CZ-NACE

29 16 25 14 28 18 27 25 22 32 10 31 23 ZP 11 26 10 24 23 32 15 16 27 20 13 13 26 30 20 31 17 17 28 18 22 14 30 11 24 21 29 15 2018 2017 21 2018 2017

0% 5% 10% 15% 20% 0% 10% 20% 30% 40% 50%

Source: CZSO data, 2018 MIT calculations Source: CZSO data, 2018 MIT calculations 1.1.5 LABOUR PRODUCTIVITY AND AVERAGE WAGE Generally, labour productivity is calculated as a share of value added and the number of employees. This calculation is correct for capital companies, but it is a problem for self-employed persons because self-employed persons also work and create value added. Therefore, labour productivity per employed person, i.e. employees + working owners, was calculated. In terms of labour productivity dynamics and average wage dynamics, the situation was favourable except in 2018 and 2019. Working owners or self-employed persons are remunerated from profits, which is not reflected in the average wage. After including owners’ remuneration, the average wage (including profit) would probably increase, and this could mean that also in 2010, 2011 and 2012, the labour productivity dynamics of employed persons would be weaker than the “average wage (including profit)” – Chart 1.12. The development of labour productivity and average wages in the manufacturing industry is shown in Charts 1.13 and 1.14. Labour productivity recorded four major changes. In 2009 it dropped. In 2010, 2014 and 2017 it recorded steep surges. In 2018, however, it slightly decreased. The average wage steadily increased in the period under review, with the growth rate rising over the past three years. The following divisions show the highest values of labour productivity in 2018: Manufacture of Chemicals and Chemical Products (CZ-NACE 20) and Manufacture of Beverages (CZ-NACE 11), but the ranking of divisions in 2017 was different (Chart 1.15). Manufacture of Motor Vehicles (CZ-NACE 29) was the division with the highest average wage in 2018. The average wage increased year-on-year in all MI divisions (Chart 1.16).

1. MANUFACTURING INDUSTRY

Chart 1.12 – Comparison of labour productivity and average wage developments (year 2008 = 100%)

Avarage wage Labour productivity

155%

145%

135%

125%

115%

105%

95% 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Source: CZSO data, 2018 MIT calculations

Chart 1.13 – Labour productivity (CZK/person/ Chart 1.14 – Average monthly wage (CZK/person) month)

70 000 35 000

60 000 30 000

50 000 25 000

40 000 20 000 67 631 67 507 66 023 65 363 64 071

30 000 15 000 31 735 29 560 57 088 27 730 54 806 53 448 26 497 52 074 25 735 24 894 24 573 47 864 23 763 46 723 23 017 22 200

20 000 10 000 21 713

10 000 5 000

0 0 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Source: CZSO data, 2018 MIT calculations Source: CZSO data, 2018 MIT calculations

Chart 1.15 – Labour productivity by CZ-NACE Chart 1.16 – Average monthly wage by CZ-NACE (CZK/person/month) (CZK/person)

20 29 11 11 21 21 29 20 17 30 23 24 24 28 26 26 22 27 30 23 ZP ZP 27 17 28 22 25 25 10 32 32 18 13 13 31 10 18 31 16 16 15 15 14 2018 2017 14 2018 2017

0 20 000 40 000 60 000 80 000 100 000 120 000 140 000 160 000 05 000 10 000 15 000 20 000 25 000 30 000 35 000 40 000 Source: CZSO data, 2018 MIT calculations Source: CZSO data, 2018 MIT calculations

1.1.6 ASSETS AND EQUITY Other characteristics are the size of assets and equity, i.e. characteristics tied to assets and their financing. The size of assets in the manufacturing industry grew from 2009 until 2018, following a decrease compared to 2008 (Chart 1.17). Total assets are equal to total liabilities, i.e. capital tied up in manufacturing enterprises. The development of the assets in the MI can therefore be interpreted as the development of capital tied up in the MI. In terms of divisions (Chart 1.18), Manufacture of Motor Vehicles (CZ-NACE 29) had the clearly highest assets. It was followed by Manufacture of Machinery (CZ-NACE 28), followed by Manufacture of Metal Structures (CZ-NACE 25). The book value of equity in the manufacturing industry grew from 2009 until 2018, following a decrease compared to 2008 (Chart 1.19). The share in equity of the manufacturing industry in the CZ-NACE divisions is shown in Chart 1.20. The shares approximately correspond to asset shares.

1. MANUFACTURING INDUSTRY

Chart 1.17 – Assets (in CZK billions) Chart 1.18 – Assets by CZ-NACE (MI = 100%)

4 000 29 28 3 500 25 22 27 3 000 20 26 10 2 500 24 23 2 000 11 30 3 436 3 426 17 1 500 3 236 3 066

2 983 16 2 850 2 703 2 677 32 2 564 2 542 2 453 1 000 13 21 18 500 31 14 15 2018 2017 0 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 0% 5% 10% 15% 20% 25% Source: CZSO data, 2018 MIT calculations Source: CZSO data, 2018 MIT calculations

Chart 1.19 – Equity (in CZK billions) Chart 1.20 – Equity by CZ-NACE (MI = 100%)

2 000 29 25 1 800 28 22 1 600 20 27 1 400 10 23 1 200 24 26 1 000 11 17 1 794

1 724 30

800 1 662

1 566 16 1 483 1 400

1 331 32

600 1 264 1 243 1 205 1 192 21 13 400 18 31 200 14 15 2018 2017 0 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 0% 5% 10% 15% 20% Source: CZSO data, 2018 MIT calculations Source: CZSO data, 2018 MIT calculations

1.2 INVESTMENT, R&D EXPENDITURES

1.2.1 INVESTMENTS Investments, i.e. the purchase of tangible and intangible fixed assets, in the years 2008 to 2018, recorded a significant decrease in 2009 and 2010 compared to 2008 and further increased in the period 2011 to 2015, but did not reach the level of 2008. A very slight decline occurred in 2016, followed by a sharp increase in 2017 and 2018, when the value of investments exceeded the 2008 value (Chart 1.21). In the MI structure (Chart 1.22), the division Manufacture of Motor Vehicles (CZ-NACE 29) had the markedly highest investments. The share of investments in revenues shows the investment intensity of revenues. This indicator is influenced by the technological nature of production and the investment period, i.e. also by structural changes within the MI. In 2008, the value was the highest. Between 2009 and 2010, a slump occurred, followed by a slight increase (except for 2016) until 2017. In 2018, the value of the investment share in revenues increased significantly (Chart 1.23). Values for individual MI divisions in 2017 and 2018 are shown in Chart 1.24.

Chart 1.21 – Investment (in CZK billions) Chart 1.22 – Investment by CZ-NACE (MI = 100%)

350 29 22 25 300 27 28 26 250 10 20 23 200 17 24 11 150

288 21 16 242 226

220 32 216

100 208 13 183 178

161 31 148 143 30 50 18 14 15 2018 2017 0 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 0% 5% 10% 15% 20% 25% Source: CZSO data, 2018 MIT calculations Source: CZSO data, 2018 MIT calculations

1. MANUFACTURING INDUSTRY

Chart 1.23 – Share of investment in revenues Chart 1.24 – Share of investments in revenues by CZ-NACE (%)

7% 21 22 17 6% 11 31 25 5% 13 27 23 4% ZP 32 10

3% 6,34% 29

5,91% 18 5,17% 5,14%

5,06% 14 4,96% 4,93% 4,89% 4,77%

4,46% 28

2% 4,27% 15 20 30 1% 26 16 24 2018 2017 0% 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 0% 2% 4% 6% 8% 10% 12% 14% 16% Source: CZSO data, 2018 MIT calculations Source: CZSO data, 2018 MIT calculations 1.2.2 R&D EXPENDITURE IN THE MANUFACTURING INDUSTRY R&D expenditure includes all current and investment expenditure incurred in the Czech Republic in the given year. The reporting units are all economic entities performing R&D in the Czech Republic as their primary or secondary economic activity. R&D data are available for 2010–2017. In the monitored period 2010–2017, the total R&D expenditures were highest in 2017 (Chart 1.25) and continued to grow. The decisive R&D investments came from entrepreneurs. Public resources, both domestic and foreign, were several orders lower. The number of enterprises with R&D expenditures increased steadily over the period 2010 to 2017. In 2017, it was highest in CZ-NACE 28 Manufacture of Machinery and lowest in CZ-NACE 15 Manufacture of Leather (Chart 1.26). More detailed information on R&D is published on the CZSO website (www.czso.cz/csu/czso/research-and-development ) in the publication “Research and Development Indicators – 2017”.

Chart 1.25 – R&D expenditures in the manufacturing industry by source of funding (CZK million)

Government+universities Entrepreneurs EU+other international organisations

35 000 30 519 30 000 420 25 277 26 203 24 264 179 25 000 22 066 421 656 19 544 338 20 000 17 763 15 804 335 681 15 000 419 29 041 22 458 23 430 25 220 20 217 10 000 17 237 13 405 15 120 5 000

0 1 980 1 961 1 971 1 510 1 385 1 192 804 1 056 2010 2011 2012 2013 2014 2015 2016 2017

Source: CZSO data, MIT calculations

Chart 1.26 – Number of enterprises with R&D expenditures by CZ-NACE

28 25 27 26 20 22 10 29 23 33 32 30 13 24 21 31 16 14 17 11 18 15 2016 2017 0 50 100 150 200 250 300 350 Source: CZSO data, MIT calculations

1. MANUFACTURING INDUSTRY

1.3 DIGITISATION The Government of the Czech Republic places great emphasis on the promotion of modern technologies and strives to rank the Czech Republic among the leading countries in the field of innovation and digitisation. That is why the cross-cutting strategic document “Digital Czech Republic” was adopted in 2018, which deals with the impacts of digitisation on individual economic sectors and ensures consistency with already adopted materials at the EU level and existing legislation. Subsequently, in 2019, the Innovation Strategy of 2019–2030 in the Czech Republic was approved: “Czech Republic: The Country for the Future”. Data for description of the Digitisation chapter were created through the interconnection of data from the ICT 5-01 and P 5-01 statements and the data were recalculated to the entire population of industry. Data from the ICT 5-01 survey were not primarily designed for the division of enterprises under domestic and foreign review and classification into two places of the Classification of Economic Activities CZ-NACE, which may affect the resulting values. The results of the analyses in this chapter must be understood rather as experimental ones. In order to measure progress in the implementation of digitalisation, it is necessary to continuously obtain data on the state of information technologies in the Czech Republic, which the CZSO has been monitoring since 2002. Since 2017, the CZSO has added several indicators that help to determine the state of digitisation and the use of modern technologies in individual sectors of the national economy. The following parameters were selected to assess the digitisation level: • Internet connection speed • use of cloud computing • use of 3D printing • deployment of robots • use of Big Data • e-commerce and data exchange The 2017 data provide a benchmark for assessing developments in the digital industry in the years ahead.

1.3.1 INTERNET CONNECTION SPEED A high-quality and secure Internet connection is a necessary condition for the use of modern communication technologies. Most modern technologies require high-bandwidth connectivity to operate. This is necessary for cloud computing, Big Data, e-commerce and data exchange. On the basis of data from the CZSO it is possible to determine the speed of Internet connections for individual enterprises. The consolidated results show the distribution of Internet connection quality from different viewpoints. The comparison of labour productivity by quality of Internet connection and ownership structure offers an important view (Chart 1.27). While in enterprises owned by domestic entities, labour productivity is roughly the same independent of the type of connection, in enterprises with foreign owners, the link between connection quality and labour productivity is clearly visible. Foreign-controlled enterprises with high-capacity connections (100 Mb/s or more) have more than four times higher labour productivity compared to enterprises with low-capacity connections (less than 2Mb/s). These companies with foreign owners are characterised by communication between employees in different locations and the use of central- ised information systems requiring secure connections from branches located around the world. That is why these enterprises use a high-speed Internet connection. The breakdown by Internet connection speed from different perspectives, according to the number of enterprises, revenues, number of employees, value added and assets is shown in Chart 1.28. With respect to the fact that a small enterprise with one employee has the same weight in the number of

53 enterprises as a large enterprise with several thousand employees, this causes a relatively high proportion of enterprises to show as having lower connection speeds. High-speed connection clearly dominates the revenue share, as each enterprise here has the weight of its total revenues. It turns out that a large proportion of enterprises that generate high revenues use high-speed Internet connections. The breakdown of enterprises by number of employees, value added and assets is roughly the same as shares in revenues. All weightings are similar. Chart 1.27 – Labour productivity Chart 1.28 – Distribution by connection speed (CZK/employee/month)

Total Foreign owners Domestic owners Less than 2 Mb/s 2 ‐ 9 Mb/s 10 ‐ 29 Mb/s 140 000 20 ‐ 99 Mb/s 100 Mb/s and more Not identified 100% 1,45% 0,10% 0,43% 0,16% 0,07% 120 000 10,14% 90% 26,65% 100 000 39,06% 37,13% 80% 19,57% 39,54%

80 000 70%

60% 60 000 30,82% 120 084 50% 98 697 40,99% 28,81% 40 000 89 711 30,53% 30,63% 77 681 75 732

70 774 40% 66 222 62 860 59 016 53 377 52 078 52 093 50 887 50 719

20 000 48 492 38 339 36 707 30% 27 340 26 280 25 929

22 240 30,17% 0 20% 25,13% 23,70% 23,22% 24,41% 10% 11,02% 6,34% 8,30% 6,29% 3,43% 0% 0,27% 0,92% 0,48% 0,25% Number of Revenue Number of Value added Assets enterprises employees Source: CZSO data, MIT calculations Source: CZSO data, MIT calculations

Connection speeds above 30 Mb/s are critical. Divisions with enterprises with this high speed, which -ac count for more than 80% of revenues, are CZ-NACE 26 Manufacture of Computers, CZ-NACE 30 Manufacture of Other Transport Equipment, CZ-NACE 11 Manufacture of Beverages, CZ-NACE 29 Manufacture of Motor Vehicles and CZ-NACE 21 Manufacture of Basic Pharmaceutical Products and Preparations (Chart 1.29). Revenues generated by enterprises with a connection of more than 30 Mb/s in the section account for 69.6% of the MI revenues. The highest share is in CZ-NACE 29 Manufacture of Motor Vehicles (35.1%). Oth- er divisions already have a share between 5% and 10%, namely CZ-NACE 26 Manufacture of Computers, CZ-NACE 27 Manufacture of Electrical Equipment, CZ-NACE 22 Manufacture of Rubber and PlasticProducts and CZ-NACE 28 Manufacture of Machinery (Chart 1.30).

1. MANUFACTURING INDUSTRY

Chart 1.29 – Revenues share of enterprises with Chart 1.30 – Share of revenues of enterprises connection speed higher than 30 Mb/s in the with connection speed higher than 30 Mb/s in MI division’s total revenues revenues (MI = 100%)

26 29 30 26 11 27 29 22 21 28 24 24 27 10 18 25 23 23 32 20 17 17 22 30 15 11 20 32 28 21 31 31 10 13 25 16 13 18 16 14 14 15

0% 20% 40% 60% 80% 100% 0% 5% 10% 15% 20% 25% 30% 35% 40% Source: CZSO data, MIT calculations Source: CZSO data, MIT calculations 1.3.2 CLOUD COMPUTING Cloud computing is one of the modern trends in IT, utilising the computing power of virtual computers that are centrally configured, expanded, and managed. This computer architecture allows one to flexibly change the required power as needed, both up and down, increase system reliability and make adjustments and upgrades during operation or only with minimum drop-outs. Cloud computing provides its users with high availability, scalability and flexibility in testing and running applications. Comparison of labour productivity shows that the relation between the use of cloud computing (Cloud Yes) and labour productivity (MI Total) is in no manner dramatic (Chart 1.31): enterprises using these advanced technologies have slightly higher labour productivity than the overall average for the MI. For enterprises with foreign owners, this improvement is more pronounced. The distribution of the use of public and private clouds is shown in Chart 1.32. In all the monitored categories there is a slight prevalence of the use of public clouds. These are more used by companies with Czech owners. The use of the cloud in each division is shown in Chart 1.33. The share of revenues of enterprises using the cloud above 60% of total revenues includes CZ-NACE 26 Manufacture of Computers, CZ-NACE 11 Manufacture of Beverages and CZ-NACE 17 Manufacture of Paper. Revenues generated from cloud-based enterprises in the section account for 48.6% of the section’s revenues. The highest share is in CZ-NACE 29 Manufacture of Motor Vehicles (32.0 %). CZ-NACE 26 Manufacture of Computers has a share above 10%. CZ-NACE 27 Manufacture of Electrical Equipment, CZ-NACE 22 Manufacture of Rubber and Plastic Products, CZ-NACE 28 Manufacture of Machinery and CZ-NACE 10 Manufacture of Food Products are above 5% (Chart 1.34).

Chart 1.31 – Labour productivity by cloud usage Chart 1.32 – Share of enterprises using public (CZK/employee/month) clouds in MI (MI = 100%)

Total Foreign owners Domestic owners Total Foreign owners Domestic owners 100 000 100%

90 000 90%

80 000 80%

70 000 70%

60 000 60%

50 000 50% 98 419

40 000 89 711 40% 84 173 80 781 75 732 72,89% 71,15% 69,77% 69,03%

30 000 30% 66,22% 63,63% 62 573 61,40% 60,61% 59,70% 59,40% 58,50% 57,72% 57,66% 57,46% 54,04% 53 557 50 719 20 000 49 766 20%

10 000 10%

0 0% Cloud Yes Cloud No Whole Manufacturing Number of Revenue Number of Value added Assets Industry enterprises employees Source: CZSO data, MIT calculations Source: CZSO data, MIT calculations

Chart 1.33 – Revenues share of enterprises using Chart 1.34 – Revenues share of enterprises using public clouds in the division’s revenues cloud in MI revenues (MI = 100%)

26 29 11 26 17 27 27 22 29 28 22 10 15 25 23 24 24 23 32 17 31 20 28 11 10 32 18 30 30 16 21 31 14 13 25 21 16 18 20 14 13 15

0% 20% 40% 60% 80% 100% 0% 5% 10% 15% 20% 25% 30% 35% Source: CZSO data, MIT calculations Source: CZSO data, MIT calculations

1. MANUFACTURING INDUSTRY

1.3.3 3D PRINTING 3D printing is another modern technology, where products from various materials are created according to plans prepared in advance. At present, the use of plastic is the most widespread, which is used to make either prototypes and samples for testing or products for end consumers, individually tailored to the desired size, taste or other requirements. This is used, for example, when creating personalised medical compensatory aids. 3D printing is rapidly moving from the area of modelling and prototyping in mechanical engineering into other industries such as construction, healthcare, education, clothing and catering. The dependence between labour productivity and the use of 3D printing technology is shown in Chart 1.35. Aggregated data on labour productivity, however, do not take into account the in-house scope of this technology. As the use of 3D discs is currently rather low (compared to standard technologies), there are no significant differences in aggregated data between the use of 3D printing or whether these are enterprises under domestic or foreign control. This is not even affected by whether 3D printing is carried out on 3D printers or purchased as a third-party service, by the ownership structure, as foreign-owned enterprises achieve roughly the same labour productivity independently of whether they use 3D printing or not. The number of enterprises that use 3D printing is relatively small, as shown in Chart 1.36. If the enterprise uses at least one 3D printer, it is included in the colour section. Less than 10% of enterprises use 3D printing. 3D printers are mainly used by enterprises with high revenues and assets, many employees and generating great added value. Of the enterprises that use 3D printing, most use their own printers. The expansion and utilisation of 3D printing is still relatively low. It will be interesting to see how this indicator changes in the future. The method of 3D printing use is shown in Chart 1.37. The following categories of 3D printing are used: custom made prototypes or models manufacture for resale; production of prototypes or models for own use; manufacture of semi-finished products, components, tools and other products (excluding prototypes or models) for resale; manufacture of semi-finished products, components, tools and other products (excluding prototypes or models) for use in the production process; they are shown in Chart 1.37 and assessed in terms of the number of enterprises, employees, sales, value added and assets. It turns out that 3D printing is mainly used for the production of prototypes and components for a company’s own use. 3D printing is a new technology and is not as universally applicable to all areas of the manufacturing industry as other digital technologies, so its deployment is smaller when compared to other monitored technologies. The share of revenues at enterprises using 3D printing is shown in Chart 1.38. Most 3D printing is used by CZ-NACE 32 Other Manufacturing Industry, CZ-NACE 27 Manufacture of Electrical Equipment and CZ-NACE 26 Manufacture of Computers.

57 Chart 1.35 – Labour productivity in enterprises by Chart 1.36 – Percentage of 3D printing method of 3D printing use (CZK/employee/month) deployed in MI (MI = 100%)

Total Foreign owners Domestic owners 100% Owned and rented Purchased service None & not identified 100 000

90 000 90%

80 000 80%

70 000 70% 68,46% 72,87% 70,15% 71,45% 60 000 60% 90,66% 50 000 50% 93 249 90 059 89 711 40 000 40% 80 339 80 262 75 732 72 545

30 000 68 199 30% 7,94% 51 733 51 477 8,51% 50 719 50 553 7,51% 20 000 8,31% 20%

10 000 23,60% 10% 18,81% 21,33% 21,04% 3,03% 0 6,31% Owned and Purchased None & not Whole 0% rented service identified Manufacturing Number of Revenue Number of Value added Assets Industry enterprises employees Source: CZSO data, MIT calculations Source: CZSO data, MIT calculations

Chart 1.37 – Use of 3D printing by purpose of its use

25% Prototype for resale Prototype for internal use Product for resale Product for internal use

20%

15%

23,62% 21,92% 21,34% 10% 19,59%

16,15% 14,06% 14,68% 14,41%

6,01% 5,61% 5,62% 5,34% 4,50% 4,93% 3,05% 2,52% 2,89% 2,95% 2,29% 1,10% 0% Number of enterprises Revenue Number of employees Value added Assets Source: CZSO data, MIT calculations Revenues generated by enterprises using 3D printing in the section account for 26.6% of the section’s -rev enues. In terms of the volume of revenues using 3D printing, CZ-NACE 29 Manufacture of Motor Vehicles, CZ-NACE 27 Manufacture of Electrical Equipment and CZ-NACE 26 Manufacture of Computers are the most significant (Chart 1.39). 58

1. MANUFACTURING INDUSTRY

Chart 1.38 – Revenues share of enterprises using 3D Chart 1.39 – Revenues share of enterprises using 3D printing in division’s revenues printing in MI revenues(MI = 100%)

32 29 27 27 26 26 29 22 15 28 22 25 30 32 28 23 21 30 23 24 31 31 25 16 16 21 13 20 24 13 20 10 18 15 10 18 17 17 14 14 11 11

0% 10% 20% 30% 40% 50% 60% 0% 10% 20% 30% 40% 50% Source: CZSO data, MIT calculations Source: CZSO data, MIT calculations 1.3.4 DEPLOYMENT OF ROBOTS Robots, which were initially used only for repeated routine activities in mechanical engineering, are slowly moving into other fields, whether they are autonomous vehicles for the transport of people and goods, systems using drones to check a designated area or robots for work in warehouses. The use of robots reduces the amount of human work, increases efficiency and allows for flexible responses to fluctuations in capacity requirements for production. Chart 1.40 shows the impact of robot deployment on labour productivity by ownership structure of enterprises. There are two types of robots: routine robots (industrial robots that are programmed for one activity) and adaptive robots (service robots performing their tasks partially or fully automatically, robots capable of adapting or learning from experience). It is clear from Chart 1.40 that the deployment of adaptive robots in companies with foreign owners significantly increases labour productivity. Industrial robots are mainly deployed in large enterprises, as shown in Chart 1.41. Most enterprises still use only non-adaptive robots, but they are gradually being supplemented with modern adaptive robots. There are very few enterprises that use only the latest adaptive robots. In many of companies, industrial robots of different generations work side by side. The purpose of using adaptive robots by type of work and the ownership structure of enterprises is shown in Chart 1.42. With the exception of deployment in security, foreign companies have a leading position in robotic deployment. Foreign companies are then dominant in the area of robotic transport of goods and people and in robotic sales. The figure in the chart shows labour productivity that is achieved in the respective companies. This can be compared with the labour productivity achieved in the manufacturing industry as a whole. The highest productivity is achieved in enterprises using adaptive robots in transportation, in warehouses and on construction sites.

Chart 1.40 – Labour productivity in enterprise Chart 1.41 – Share of robots deployment by use of robots (CZK/employee/month) by their use

Total Foreign owners Domestic owners Non‐adaptive robots only Adaptive robots only 300 000 All robots None & not‐identified 100%

250 000 90%

80% 40,67% 200 000 44,34% 44,93% 53,22% 70%

150 000 60% 84,07% 286 964

50% 100 000 20,55% 19,18% 17,67% 40% 11,72% 0,49% 1,35% 0,43% 0,44% 50 000 126 470 115 912 30% 89 711 81 168 80 511 75 732 73 766 71 326 64 731 59 809 59 014 50 719 24 095 47 233 0 20% 38,29% 34,62% 36,05% 36,05% 2,08%0,25% 10% 13,60%

0% Number of Revenue Number of Value added Assets enterprises employees Source: CZSO data, MIT calculations Source: CZSO data, MIT calculations

Chart 1.42 – Labour productivity of adaptive robots by purpose of use (CZK/employee /month)

Total Foreign owners Domestic owners 180 000

160 000

140 000

120 000

100 000

80 000 169 245 169 245 163 297 155 240

60 000 140 676 127 749 126 398 116 391 116 020 114 318

40 000 82 709 75 751 75 751 69 332 64 589 63 256 58 596 20 000 39 547 36 288 24 049 24 049 0 Security Transportation Cleaning Warehouses Assembly Sales Construction Total Source: CZSO data, MIT calculations

1. MANUFACTURING INDUSTRY

Robots are used most intensively in the division CZ-NACE 29 Manufacture of Motor Vehicles, where enterprises with deployed robots account for over 90% of revenues. CZ-NACE 27 Manufacture of Electrical Equipment and CZ-NACE 22 Manufacture of Rubber and Plastic Products, where enterprises with robots generate over 65% of revenues, are other branches with high robot deployment. The share of enterprises using robots in the section‘s revenues is 59.3%. The largest share is in the division CZ-NACE 29Manufacture of Motor Vehicles, namely 46.01% (Chart 1.44). Other divisions have a significantly lower share.

Chart 1.43 – Revenues share of enterprises using Chart 1.44 – Revenues share of enterprises using robots in the division’s revenues robots in MI revenues (MI = 100%)

29 29 27 27 22 22 24 25 32 28 30 24 17 26 25 10 28 23 11 17 23 30 26 32 10 11 31 20 15 16 16 31 21 21 20 18 18 15 13 13 14 14

0% 20% 40% 60% 80% 100% 0% 10% 20% 30% 40% 50% Source: CZSO data, MIT calculations Source: CZSO data, MIT calculations

1.3.5 BIG DATA USAGE Big Data systems use a huge amount of data from the production process, social networks and various autonomous sensors. With analyses and artificial intelligence, enterprises are trying to gather customer and system behaviour information from this unstructured data to better forecast future developments and op- timally plan production, sales, and maintenance. Using Big Data correctly can bring significant competitive advantage to individual enterprises. Enterprises using Big Data achieve more than 30% higher labour productivity than the overall manufacturing industry average, as shown in Chart 1.45. Enterprises that derive data from social networks show the highest productivity. Enterprises with foreign owners again achieve higher labour productivity. Processing and evaluation at enterprises using Big Data is mostly carried out by their internal employees (Chart 1.46). The results are similar whether we look at enterprises in terms of their number, sales, employees, value added or asset size.

Chart 1.45 – Labour productivity in enterprise Chart 1.46 – Percentage breakdown of Big Data by use of Big Data (CZK/employee/month) processing internal/foreign

Total Foreign owners Domestic owners 100% Internal employees External service 200 000

180 000 90% 21,75% 24,27% 22,21% 24,03% 160 000 28,31% 80% 140 000

120 000 70%

100 000 60% 194 834 80 000 175 683

60 000 147 770 50% 135 563 115 370 114 515 108 045

40 000 102 354 89 711 40%

79 044 78,25% 75 732 77,79% 74 707 75,73% 75,97% 67 458 64 952 63 038

58 784 71,69% 20 000 55 761 52 003 51 743 50 719 49 926 30% 0

20%

10%

0% Number of Revenue Number of Value added Assets enterprises employees Source: CZSO data, MIT calculations Source: CZSO data, MIT calculations Infrastructure and applications for Big Data are the most widespread in division CZ-NACE 29Manufacture of Motor Vehicles, accounting for 53.2% of revenues (Chart 1.47). Divisions CZ-NACE 17 Manufacture of Paper and CZ-NACE 20 Manufacture of Chemicals are over 40%. The average revenues share of enterprises using Big Data in the section is 32.2%. Virtually half of the revenues of enterprises processing Big Data are in division CZ-NACE 29 Manufacture of Motor Vehicles (see Chart 1.48). CZ-NACE 27 Manufacture of Electrical Equipment, CZ-NACE 22 Manufacture of Rubber and Plastic Products and CZ-NACE 24 Manufacture of Basic Metals account for more than 5%.

1. MANUFACTURING INDUSTRY

Chart 1.47 – Revenues share of enterprises Chart 1.48 – Revenues share of enterprises processing Big Data in division’s revenues processing Big Data in MI revenues (MI = 100%)

29 29 17 27 20 22 24 24 32 20 11 10 22 28 27 17 21 26 13 25 10 23 18 32 28 11 16 13 23 21 31 16 26 31 25 18 30 30 15 15 14 14

0% 10% 20% 30% 40% 50% 60% 0% 10% 20% 30% 40% 50% Source: CZSO data, MIT calculations Source: CZSO data, MIT calculations

1.3.6 ELECTRONIC COMMERCE AND DATA INTERCHANGE Electronic data interchange in communication between companies (B2B) or between companies and customers (B2C) is an important element of increasing work efficiency. A reliable and secure high-speed Internet connection is a prerequisite for establishing effective electronic communication. Enterprises use a variety of technologies and approaches. Electronic data interchange is applied at all stages of the production cycle, from the design, development and testing of new products, through production preparation and communication with subcontractors, to marketing, sales, distribution channel management and after-sales service. The data obtained from the various phases of electronic communication may be an important input for later Big Data analyses and thus contribute to further improvement of products and processes. A comparison of the share of purchases made by manufacturing enterprises with support for electronic communication is shown in Chart 1.49. It compares which channels are used most. Roughly the same percentage of purchases are made through suppliers’ websites and through electronic data interchange, which is a higher form of automatic communication. Enterprises with foreign participation have twice as high a share in web purchases and more than four times higher a share of using electronic data interchange. However, more than half of purchases are still made in non-electronic form using a paper order. The sales analysis in terms of digitisation is shown in Chart 1.50. A relatively small part of sales is carried out through web interfaces, whether that is business with customers (B2C) or between organisations (B2B, B2G). It should be noted that these statistics are for the manufacturing industry, which does not include trade organisations. Electronic data interchange, which is an automatic method of communication between companies, again clearly dominates. Foreign-owned enterprises have almost a four times higher share in sales via electronic data interchange; this volume also includes sales within the global value chain. More than half of sales are made through standard paper exchange.

Chart 1.49 – Percentage of purchases Chart 1.50 – Percentage of sales Total Foreign owners Domestic owners Total Foreign owners Domestic owners 90% 90%

80% 80%

70% 70%

60% 60%

50% 50%

40%

40% 84,93% 82,01%

30% 30% 64,52% 57,24% 56,44%

20% 48,24% 20% 40,27% 31,97% 10% 28,82% 10% 23,13% 22,94% 19,63% 0,68% 0,59% 2,83% 2,71% 10,51% 7,48% 0,92% 3,14% 11,01% 0% 0% Web interface Electronic data Without electronic Web B2C Web B2B & B2G Electronic data Without interchange purchasing interchange electronic sale Source: CZSO data, MIT calculations Source: CZSO data, MIT calculations Electronic purchasing, both via the web and using electronic data interchange by individual divisions, is shown in Chart 1.51. CZ-NACE 26 Manufacture of Computers and CZ-NACE 29 Manufacture of Motor Vehicles account for the largest share, almost 70% of electronic purchases. Electronic purchasing accounts for 42.8% in the section. The division CZ-NACE 29 Manufacture of Motor Vehicles has a dominant position again (Chart 1.52). Chart 1.51 – Share of electronic purchases in Chart 1.52 – Share of electronic purchases in MI

division’s total purchases purchases (MI = 100%)

26 29 29 26 27 27 32 28 28 22 11 25 17 10 22 24 25 17 18 32 30 20 13 23 21 11 31 30 15 13 24 16 23 31 16 18 10 21 20 14 14 15

0% 10% 20% 30% 40% 50% 60% 70% 0% 10% 20% 30% 40% 50% Source: CZSO data, MIT calculations Source: CZSO data, MIT calculations 64

1. MANUFACTURING INDUSTRY

The highest share of electronic sales (via Web + data interchange) is in division CZ-NACE 26 Manufacture of Computers (Chart 1.53). This is followed by the group of the division with an electronic sales share from 40% to 50%: CZ-NACE 29 Manufacture of Motor Vehicles, CZ-NACE 11 Manufacture of Beverages, CZ-NACE 27 Manufacture of Electronic Equipment and CZ-NACE 22 Manufacture of Rubber and Plastic Products. The total share of electronic sales in the section is 35.5%. CZ-NACE 29 Manufacture of Motor Vehicles and CZ-NACE 26 Manufacture of Computers account for the largest number of sales via electronic sales (Chart 1.54). Chart 1.53 – Share of electronic sales in the Chart 1.54 – Share of electronic sales in MI division’s revenues revenues (MI = 100%)

26 29 29 26 11 27 27 22 22 28 32 10 28 25 15 24 21 11 10 17 17 32 24 23 25 20 30 30 14 21 13 13 31 31 23 16 16 14 20 18 18 15

0% 10% 20% 30% 40% 50% 60% 70% 80% 0% 5% 10% 15% 20% 25% 30% 35% 40% Source: CZSO data, MIT calculations Source: CZSO data, MIT calculations

1.4 PRICE DEVELOPMENT Producer prices in the manufacturing industry in the period of recession, i.e. in 2009, declined. They started to grow from 2010 to 2014, reaching their maximum in 2014. In 2015, and subsequently in 2016, they began to decline again. The years 2017 and 2018 meant growth above the 2008 level (Chart 1.55). For comparison, industrial producer prices and consumer prices are also included in the chart.

Chart 1.55 – Industrial Producer Price Indices in 2008 to 2018 by CZ-CPA (2005 = 100%)

130 125 120 115 110 105 100 95 90 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 MI 107,4 101,5 103,0 108,9 111,4 111,6 112,8 108,4 105,0 107,5 109,4 Consumer 112,1 113,3 114,9 117,1 121,0 122,7 123,2 123,6 124,4 127,4 129,9 Industry 110,5 107,0 108,3 114,3 116,8 117,7 116,8 113,1 109,4 111,4 113,7

Source: CZSO data, MIT calculations 1.5 FOREIGN TRADE Foreign trade is presented in cross-border statistics by commodity, i.e. in the CZ-CPA classification, as opposed to the economic activities given in the CZ-NACE classification. The importance of the MI in the national economy is also confirmed by data on foreign trade. In the total exports of the Czech Republic, in 2018, MI products represent almost 96% of exports and 92% of imports (Chart 1.56). Exports and imports of commodities from the manufacturing sector increased in 2009–2018, while the value of other commodities representing agricultural and raw material items oscillated, mainly due to their sensitivity to price developments. The positive external trade balance consists of commodities of the manufacturing industry with a growth tendency (except in 2015 and 2017 to 2018), while the balance of other commodities is negative, mainly due to imports of energy raw materials. In a more detailed view of the MI exports, there is evident dominance of the exports of motor vehicles, computers, machinery and electrical equipment (Chart 1.57). The largest positive balance in manufacturing products is in the groups of motor vehicles, followed by machinery, electrical equipment and metal structures. Negative balances are found mainly in the groups of metals, chemicals and pharmaceuticals. Enterprises operating in the MI do not import all products produced by the manufacturing industry for their production. A large proportion of these products is imported for consumption by the population, and the MI also imports products from other sections (e.g. fuels, raw materials). From the input-output tables it is possible to estimate imports into the manufacturing industry. The necessary import for export (data from 2015) is 50.11%. This value is likely to be similar in 2018. Assuming the share of necessary imports for exports in 2018, its value is CZK 4,212 billion * 0.5 = CZK 2,106 billion. Assuming a similar share of import for products destined for the internal market, imports into the MI probably amount to CZK 2,443 billion. The trade balance is therefore probably higher and thus amounts to 4,212 – 2,443 = CZK 1,768 billion, not just CZK 506 billion according to the imports and exports of CZ-CPA belonging to the manufacturing industry.

1. MANUFACTURING INDUSTRY

Chart 1.56 – Exports, imports and balance 2009–2018 (CZK billion)

Export MI CPA Import MI CPA Export other CPA Import other CPA Balance MI CPA Balance other CPA

5 000

187 4 000 193 202 178 184 3 000 204 174

Export 188 169 149

2 000 4 212 4 052 3 796 3 681 3 445 3 001 2 869 2 691

1 000 2 363 513 558 509 532 534 1 989 463 506 222 234 338 0 72 113 147 157 161 129 84 52 91 115 1 000 1 767 2 129 2 353 2 406 2 488 2 887 3 195 222 3 264 2 000 3 517 282 3 706 335 361 335 3 000 313

Import 282 231 284 4 000 302

5 000 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Source: CZSO data as of 8 April 2019

Chart 1.57 – Export, import and balance in 2018 by CZ-CPA (CZK million)

1 200 000 Export Import Balance 1 000 000

800 000

600 000

400 000

200 000

400 000

600 000

800 000

1 000 000 29 26 28 27 25 22 20 24 32 10 23 13 21 17 30 14 16 15 31 11 18 Source: CZSO data as of 8 April 2019

In terms of territories, MI commodities are largely exported to Germany (32%), through which some commodities from the Czech Republic form part of German exports to third countries. It is well ahead of other countries, especially the neighbouring Slovakia (7%), Poland (6%), France (5%), and the United Kingdom (5%). Imports are again dominated by Germany (26%), followed by China (15%), Poland (8%) and Slovakia (5%), see Chart 1.59. Chart 1.58 – Foreign trade in products, CZ-CPA

Import Territories in 2018 Export Territories in 2018

Germany other Germany other 26% 33% 33% 32%

China Slovakia 15% Netherlands Italy 7% Netherlands 4% 4% 3% Poland France 6% Austria Italy Poland 3% 4% 5% France 8% Austria United 3% 4% Slovakia Kingdom 5% 5% Source: CZSO data as of 8 April 2019 1.6 ECONOMIC VALUE ADDED The most aggregated indicator of efficiency is economic value added. Between 2008 and 2011, manufacturing enterprises did not make economic value added for their owners. In 2012 and 2013 they were virtually at zero. The period from 2014 to 2017 was highly favourable and high economic value added was generated. In 2018, the value of economic value added fell significantly, but was still positive (Chart 1.60). In 2017, the main divisions with excellent results in economic value added were Manufacture of Mo- tor Vehicles (CZ-NACE 29), and the Manufacture of Rubber and Plastic Products (CZ-NACE 22). The divisions with the smallest contribution towards economic value added were Manufacture of Food Products (CZ-NACE 10) and Manufacture of Machinery (CZ-NACE 28) – see Chart 1.61. The value of economic value added is affected by the value of the division, therefore the monitored indicator is relative economic value added, i.e. Spread (the difference between the return on equity and the alternative cost of equity), which shows the effectiveness of generating economic value added. Spread can also be expressed as a share of economic value added and equity, i.e. the generation of economic value added from CZK 1 of equity. The developments in Spread follow that of economic value added (Chart 1.62). The developments in Spread are determined by the developments in the return on equity (ROE) and the developments in alternative cost of equity (re), which is mainly affected by the decline in the risk-free rate (rf). The ranking of divisions by Spread size is more interesting (Chart 1.63). Production of Wearing Apparel (CZ-NACE 14) placed first, followed by Manufacture of Motor Vehicles (CZ-NACE 29), the winner of in economic value added. However, Production of Wearing Apparel (CZ-NACE 14) placed 10th in the ranking of economic value added. Most other divisions also show differences in the ranking of economic value added and Spread. The EVA chart shows the contributions of individual divisions to the overall economic value added in the MI, while the Spread chart shows the efficiency of the generation of economic value added. 68

1. MANUFACTURING INDUSTRY

Chart 1.59 – Economic value added Chart 1.60 – Economic value added by CZ-NACE (in CZK billion) (in CZK million)

150 29 22 25 100 20 23 16 14 50 106,44 32 91,23 90,02

77,09 27 17 5,94 29,34 18,56 2,73 10,41 ‐ 0 ‐ 18 21 31 66,53 ‐ 13 ‐50

101,48 11 ‐ 15 26 ‐100 24 30 28 10 2018 2017 ‐150 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 ‐20 000 ‐10 000 0 10 000 20 000 30 000 40 000 50 000 Source: CZSO data, MIT calculations Source: CZSO data, MIT calculations

Chart 1.61 – Spread, ROE, re and rf (%) Chart 1.62 – Spread by CZ-NACE (%)

20 14 29 20 15 22 17 25 10 27 32 5 16 23 13 0 21 18 31 ‐5 11 28 24 ‐10 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 26 Spread ‐ 5,5 ‐ 8,5 ‐ 1,5 ‐ 0,8 0,2 0,4 5,2 6,8 5,4 5,3 1,6 30 ROE 10,3 7,6 12,7 13,0 12,4 12,5 16,2 16,9 14,8 14,9 12,5 10 re 15,9 16,1 14,2 13,8 12,2 12,1 11,1 10,1 9,4 9,6 10,9 15 2018 2017 rf 4,6 4,7 3,7 3,8 2,3 2,3 1,6 0,6 0,4 1,0 2,0 ‐30 ‐20 ‐10 0 10 20 Source: CZSO data, MIT calculations Source: CZSO data, MIT calculations

1.7 SUMMARY AND PERSPECTIVES ON THE MANUFACTURING INDUSTRY The results of the manufacturing industry in the Czech Republic (MI) need to be evaluated from multiple views regarding all those involved in the MI business (stakeholders), i.e. owners, employees, the state and others. Recent developments appear to be generally positive for all parties. The business owners’ view is focused on long-term economic value added generation. In the period from 2008 to 2018, the generation of economic value added jumped from unfavourable negative values to very solid positive values in 2014 to 2017. In 2018, a positive but low, compared to 2017, economic value added was achieved. Although revenues are growing reliably in 2018, value added growth in fact stopped. Input prices are rising faster than output prices. At the same time, personnel costs are accelerating their growth. The view of employees focuses (among other factors) on the number of employees, which is growing, and above all on the development of the average wage, which is constantly growing and with a recent acceleration in the growth rate. However, this is a problem for the owners, when the advance of labour productivity growth over the average wage in 2018 turned to the detriment of owners – labour productivity stagnated. The state’s view of the MI is primarily through contributions to the State budget. This is reflected mainly in increasing VAT payments, consumption and income taxes. In 2019, competition is likely to intensify and wage pressure is also on the rise. One solution to this situation is to replace human labour with machines. This is probably already happening – investments are growing, both in absolute terms and in their share of revenues. Expenditures on research and development are also increasing. The result should be an increase in digitisation and robotisation in the MI. As a result of digitisation, not only will less-qualified jobs cease to exist, but new jobs and professions will be created. Increasing the requirements for a technically educated workforce will also lead to further pressure to increase workers’ wages. Innovations are the engine of the MI’s further development, which also include the digitisation of production, which is mostly of a procedural or organisational nature. However, product innovations are the basis of the MI’s success. Fundamental product innovations often take place outside the Czech Republic, but with respect to the interconnection of our MI within global value chains (they account for about 70% of MI revenues, which corresponds to the share of foreign-controlled enterprises), these innovations can be expected to penetrate most of the MI production in the Czech Republic. For enterprises operating largely outside global value chains, this is a great opportunity to engage in related innovations. For them, the availability of financial resources for the necessary investment in technology will be critical. Therefore, success will not only depend on the Czech Republic, but will be affected by the situation of the main partners, especially Germany. The deployment of digitisation means significantly higher labour productivity and thus creates space for increasing wages and increasing value for owners, and also contributions to the state. Digitisation achieves a higher level in foreign-controlled enterprises than in domestic-controlled enterprises. There is more space for increasing labour productivity in domestic-controlled enterprises. Two-thirds of domestic-controlled enterprises are small and medium-sized enterprises (SMEs), which account for approximately two-thirds of all SMEs. The problem, however, is the delay in the effects of digitalisation (investment in digitalisation). In 2019, it will therefore be very difficult for owners to maintain the positive value of the economic value added in the total MI. In terms of employees and the state, 2019 is likely to be a successful year. It turns out that one of the main requirements for the future is the increased emphasis on working with time. It is necessary to work not only with delays in investment effects, but also with delays in responding to market demands, delays in introducing innovations and effects from employees’ skills upgrading. The main initiator is the activity of entrepreneurs who have to adapt to objective development first, apply in time the trends brought by this brand new philosophy of system use, integration and interconnection of -var ious technologies, taking account of their continuous and very rapid development. Without it, they cannot maintain and strengthen their competitiveness in the Czech Republic and the global market. 70 2. CZ-NACE 10 – MANUFACTURE OF FOOD PRODUCTS

2. CZ-NACE 10 – MANUFACTURE OF FOOD PRODUCTS

2.1 CHARACTERISTICS OF THE DIVISION

Breakdown of the CZ-NACE 10 division by individual groups: 10.1 Processing and preserving of meat and production of meat products; 10.2 Processing and preserving of fish, crustaceans and molluscs; 10.3 Processing and preserving of fruits and vegetables; 10.4 Manufacture of vegetable and animal oils and fats; 10.5 Manufacture of dairy products; 10.6 Manufacture of grain mill products, starches and starch products; 10.7 Manufacture of bakery and farinaceous products; 10.8 Manufacture of other food products; 10.9 Manufacture of prepared animal feeds.

The production of food products is one of the major branches of the manufacturing industry. Product safety is a top priority for food policy. The responsibility for compliance with it lies with the food business operators and, with the ever-expanding range of foodstuffs, this is an obligation that places increasing demands on operators. Emphasis is also placed on consumer protection and the dissemination of health information to improve consumer awareness. Food quality is gaining importance. Its higher level is presented by the national quality label, KLASA. Se- lected foods enter regional competitions such as “Regional Foods” and products labelled “Czech Food” have their logo. Under the protection of the EU are products from the Czech Republic which have been granted Protected Geographical Indication, Protected Designation of Origin and Traditional Specialty Guaranteed, which guarantee the uniqueness of varieties or recipes and specified production processes. In recent years, self-sufficiency has been emphasised for the main types of food for domestic agricultural production, which should be proportional to a rational level of coverage of domestic demand. However, the current situation shows the need for improvement.

Table 2.1.1 – Shares of groups in CZ-NACE 10 in 2018 (%, division = 100%)

Group Personnel Value Own Assets Number of Number of Revenues Incomes CZ‐NACE costs added capital total employees units

10.1 21.8 20.8 23.0 22.6 15.1 15.9 23.9 25.0 10.2 0.9 0.8 0.8 0.8 1.0 0.9 0.9 0.3 10.3 4.0 4.1 3.6 3.6 3.9 3.3 3.9 1.7 10.4 1.4 2.1 5.5 5.7 2.6 4.0 1.0 0.2 10.5 11.3 10.8 15.1 15.8 12.0 11.2 9.5 1.9 10.6 4.2 4.3 4.9 4.9 3.8 4.8 3.6 2.4 10.7 28.3 25.2 13.8 13.6 17.1 19.3 33.6 43.7 10.8 20.4 21.3 18.3 18.1 25.2 23.0 17.8 20.1 10.9 7.7 10.6 15.1 15.0 19.2 17.7 5.7 4.9 Source: CZSO, data 2018 MIT calculations

2.2 DEVELOPMENTS IN THE DIVISION Processing and preserving of meat and production of meat products (CZ-NACE 10.1) is one of the key branches of the division, linked to animal production. The meat business base is consistently one of the largest and growing business bases within the CZ-NACE 10 division, comprising 2,100 units of all size categories, i.e. approximately one quarter of the entire sector. In terms of comparison with agri-oriented countries, this group has rather smaller, especially slaughtering, capacities. The group is facing a shortage of skilled workers, which hinders its further development. This also applies to apprenticeships. Concerning meat production, some recovery has occurred in beef, but in the Czech Republic’s main type of meat, pork, there is a gap between production and self-sufficiency, which fell to 51.5% (2018). At the same time, consumption per capita reached moderate growth with a volume of 43.4 kg (IAEI estimate for 2018). The -de cision-making sector supports the intention to strengthen competitiveness, so that its consumption is to a larger extent filled with domestic raw materials, both for jointed meat and meat products.Year-on-year, the production of poultry meat increased in 2018, reaching 195.3 thousand tonnes. The demand for poultry meat is mainly motivated by the interest in so-called “white meat”, which is particularly suitable for consumers who prefer this type of meat in terms of nutrition. To a lesser extent, in terms of production and consumption, sheep and rabbit meat, for example, are represented. Another group related to animal production is the manufacture of dairy products (CZ-NACE 10.5). Milk production for processing reached 3,056.7 million litres last year, while domestic dairies bought 2,525.3 million litres and the difference became part of agrarian exports. The share of unprocessed milk production as part of this export has already reached 24.8%; although processing capacities exist in the Czech Republic, foreign customers offer better milk monetisation. The production of milk in the Czech Republic, given the decline in dairy cows, is based on high utility, and at the same time its quality is improved. The structure of the production of dairy products changes in individual years. In the last year under review, there has been a decline in butter production, while the production of cheeses and curds and some other products, such as drinking milk and milk desserts, has increased. The composition of dairy products is also changing, with part of the milk fat being replaced by sources of unsaturated meat acids that are found in olive or rape- seed oil. Dairy products are considered to be an excellent source of calcium and are therefore particularly suitable for certain population groups. The group dependent on plant agrarian production is Manufacture of bakery, confectionery and other farinaceous products (CZ-NACE 10.7), which is linked to mill production. Manufacture of bakery traditionally includes the manufacture of bread, whose volume after 2009 has already dropped below 300 thousand tonnes: a permanent trend. However, the product range is expanding. Demand is growing for crafted breads, toast breads and others. A similar, i.e. long-term downward trend, is also seen in regular bread. Production from frozen semi-finished products is popular. The volume of fresh pastry production varies somewhat from year to year. However, its value is gradually increasing due to better raw materials and appearance. The trend of increasing the proportion of packaged goods continues, which, together with wage growth and other impacts, has an impact on costs. The group has a large business base of all size categories with a share of almost one quarter of units within the sector, spread all over the Czech Republic and with only a slightly smaller share of the number of employees, so it remains a significant employer. Recruiting new staff and apprentices for the field is very difficult, as is the case with other food industries. The share of other groups mentioned in point 2.1 above are not very important in a number of indicators in the food structure, but in their production is irreplaceable in the food market, for example, flour, sugar, processed fruit and vegetables or potato products, ready meals, industrial feeds and other products. In terms of the development of the food industry, the share of more processed products in particular is increasing.

72 2. CZ-NACE 10 – MANUFACTURE OF FOOD PRODUCTS

2.3 MAIN ECONOMIC INDICATORS Chart 2.3.1 – Main economic indicators of CZ-NACE 10

9 000 120 000 Number of units Average number of employees 8 000 100 000 7 000

6 000 80 000

5 000 60 000 4 000 8 418 8 087 7 628 7 436 7 313 103 499 7 305 7 166 101 414 98 101 7 117 96 817 96 642 96 412 96 215 96 072 95 878 93 922 93 137

3 000 6 508 40 000 5 714 2 000 5 317 20 000 1 000

0 0 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

350 000 60 000 Sales (CZK m) Value added (CZK m) Average monthly wage (CZK) Labour productivity from the VA (CZK/month)* 300 000 50 000

250 000 40 000 200 000 30 000 150 000 53 924 52 813 50 970 305 348 50 202 301 492 299 718 299 506 298 893 298 053 49 475 296 589 292 785 288 727 287 811 46 972 46 201 276 530 45 789

20 000 44 822 44 623

100 000 40 634 56 985 56 123 54 216 53 380 53 040 51 204 50 264 49 784 49 134 48 152 48 018

10 000 25 512 50 000 23 606 21 777 20 558 19 967 19 739 19 402 19 154 18 983 18 695 18 087

0 0 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Source: CZSO, MIT calculations, MIT estimate for 2018. Note: Other detailed data, including data for individual CZ-NACE classes, are available on the MIT website in an interactive browser of economic indicators: www.mpo.cz/en/panorama-interactive-table.html. * This is an aliquot monthly share computed from annual data Chart 2.3.2 – Price developments in CZ-CPA 10 Chart 2.3.3 – Spread (ROE – re) CZ-NACE 10 (%) (2005 = 100 %)

150 20 140 130 15 120

110 10 100 90 5 80 70 0 60 50 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 ‐5 10 111,9 104,1 101,8 111,5 115,3 119,3 118,5 114,1 111,2 114,6 113,6 10.1 100,6 99,2 94,9 96,1 101,5 104,9 106,1 102,8 100,7 104,2 101,4 ‐10 10.3 111,6 111,7 111,5 117,2 121,2 124,4 128,6 134,7 133,9 129,4 129,8 10.4 130,8 110,5 110,1 131,3 135,4 135,7 119,2 116,6 118,1 118,1 114,7 ‐15 10.5 109,2 97,3 103,4 109,9 107,8 115,3 121,3 110,7 104,2 114,8 114,4 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 10.6 143,6 114,2 106,9 139,2 132,3 140,7 127,7 124,0 120,0 116,6 120,6 Spread ‐9,04 ‐6,63 ‐4,56 ‐6,07 ‐6,56 ‐4,96 ‐3,59 ‐3,20 ‐0,71 ‐4,40 ‐7,85 10.7 120,0 113,6 106,7 125,7 130,5 130,1 127,1 125,5 122,9 125,6 127,8 rf 4,55 4,67 3,71 3,79 2,31 2,26 1,58 0,58 0,43 0,98 1,98 10.8 101,8 102,6 99,0 105,6 113,4 113,5 111,0 106,2 106,3 108,8 104,0 ROE 8,24 11,32 11,68 10,31 8,59 9,42 10,53 10,57 12,32 9,20 6,54 10.9 130,6 108,2 106,1 122,0 130,8 143,1 133,1 130,0 126,3 122,7 125,3 re 17,29 17,95 16,25 16,38 15,14 14,38 14,12 13,77 13,04 13,60 14,39

Source: CZSO, MIT calculations Source: CZSO, MIT calculations Note: Group 10.2 is not monitored 73

2.4 FOREIGN TRADE

2.4.1 DEVELOPMENT OF FOREIGN TRADE Exports of food products (CZ-CPA 10) increased in the monitored years until 2015, then slightly decreased. Imports followed a similar trend, with a turning year of 2016. The development of exports is connected with the application of the required commodities and the search for new territories. In addition to food entrepreneurs, not only from among large companies, an important role should be played by agrarian diplomats working in selected countries which may become potentially interested in food from the Czech Republic. On the other hand, imports of more or less processed food, mainly realised by multinational retail chains, also increased. Imports also involved food businesses, for example from the meat industry, which imported mainly meat for further processing. The total balance of external trade in food products was permanently negative during the period 2009 to 2018, reaching its minimum in 2017 at CZK -36,450 million; in 2018 the balance slightly decreased. See Chart 2.4.1 for more details Chart 2.4.1 – Exports, imports and foreign trade balance in products by CZ-CPA 10 (CZK million)

200 000 Export Import Trade balance 150 000

100 000 151 118 150 746 149 858 147 547

50 000 138 806 125 324 119 343 119 227 116 294 114 296 113 609 108 547 104 559 96 538 93 019 90 797 88 255 70 852 30 740 28 039 55 758 62 279 33 939 31 892 30 515 33 708 30 259 35 039 28 786 36 450 ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ 0 ‐

‐50 000 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Source: CZSO, data as of 8 April 2019 2.4.2 TERRITORIAL STRUCTURE OF FOREIGN TRADE As in previous years, the decisive import territories with CZ-CPA 10 products in 2018 were Germany and Poland – EU member states. In terms of exports of these products, Slovakia is the largest territory, followed by Germany and Poland. The shares of these countries in terms of imports and exports are shown in Chart 2.4.2. Chart 2.4.2 – Foreign trade in products, CZ-CPA 10

Import territories in 2018 Export territories in 2018

other other 24% Slovakia 25% Germany 25% 25%

United Kingdom Hungary 3% 4% France Germany 4% 18% Austria Poland Italy 4% Slovakia 20% 4% Spain 7% Poland 5% Italy Austria 5% 11% Netherlands 5% Hungary 5% 6% Source: CZSO, data as of 8 April 2019

2. CZ-NACE 10 – MANUFACTURE OF FOOD PRODUCTS

2.5 RESEARCH, DEVELOPMENT AND INNOVATION In 2017, CZ-NACE 10 saw a significant year-on-year increase in R&D expenditure of 30.49% to CZK 291 million (see Chart 2.5.1), while a decrease was observed in the previous three years. They accounted for 0.99% of total R&D expenditure in the manufacturing industry. Expenditures from business sources prevailed throughout the period under review. The share of researchers (FTE) in the total number of researchers in the manufacturing industry was 1.60%, i.e. 136 researchers per year (average for 2013–2017). Enterprises benefiting from a significant volume of targeted support from the State budget within the framework of national programmes of the Ministry of Industry and Trade (TIP, TRIO), MoH (MoH program for 2008–2011), MoA (Agricultural Sector Research Programme 2007–2012, VAK, KUS, ZEMĚ) and TA CR (ALFA, Competence Centres and EPSILON) in the period 2007–2018 included RABBIT Trhový Štěpánov a.s., EcoFuel Laboratories s.r.o., CHMELAŘSTVÍ, cooperative Žatec and FAVEA a.s. EcoFuel Laboratories s.r.o. signed up to participation in the ALFF project: The Algal Microbiome: Friends and Foes (Horizon 2020), which focuses on the use of plant aquacultures in the food, chemical and pharmaceutical industries. With- in Horizon 2020, the company PRO-BIO obchodní společnost s.r.o., participated in the project, ECOBREED: Increasing the efficiency and competitiveness of organic crop breeding. The project aims to develop methods of infrastructure for organic breeding; develop varieties with increased resistance to biotic and abiotic stresses, more efficient nutrient utilisation and higher quality; and develop methods for the production of high-quality organic seed. Within the announced OP EIC calls under the National RIS3 Strategy, from 1 January 2015 to 31 October 2017, 37 projects were approved with a planned total aid of CZK 1.06 billion, of which the EU grant is CZK 0.36 billion. The projects are mainly focused on strengthening the R&D capacity of enterprises (93%) and all fall within the Sustainable Food Production sector. As regards European support for applicants / beneficiaries, the largest EU support was granted to Pekárna Zelená louka, a.s. among large enterprises (Innovation line for toasted bread production PENAM a.s.; total expenditures CZK 400 million, of which EU subsidies were CZK 100 million); and MARLENKA international s.r.o. among small and medium-sized enterprises (Innovation of honey products; total expenditure of CZK 248 million, of which EU subsidies were CZK 87 million). Chart 2.5.1 – R&D expenditure (CZK mil.) and the number of enterprises with R&D in CZ-NACE 10

EU+other international organisations Number of enterprises Entrepreneurs Government+universities 350 80 327 324 297 305 291 70 300 3 78 12 3 105 236 60 250 216 223 6 0 2 50 200 40 281 76 150 251 269 72 69 230 30 63 62 207 201 58 208 193 50 100 46 20

50 10

34 21 23 23 20 0 19 10 19 0 2010 2011 2012 2013 2014 2015 2016 2017 2010 2011 2012 2013 2014 2015 2016 2017

Source: CZSO, MIT calculations

2.6 SUMMARY AND PERSPECTIVE OF THE DIVISION The Manufacture of food products division is quite varied, both in terms of production and the resulting food product range. This product range is innovated and also adapts to the course of the year, being broadest in the pre-Christmas period. It also responds to groups of the population according to age, such as infant and baby food, and different production for other categories with regard to their state of health, physical load, etc. The level of consumers’ income is also important, as are unique foods – delicacies are produced for those with high demands, but also present are products for ordinary consumers. This is particularly true of the domestic market, but to a certain extent also for exports. At present, the consumer often requires knowledge of the origin of the food, and the food labelling system enshrined in food law adapts to this. As to origin, it is also defined when a product can be referred to as “Czech food” or organic food. Within the quality system, a large share of consumers are oriented towards products that have been awarded the national KLASA brand or have been awarded the Regional Food award. For Czech and European food of exceptional quality, trademarks – protected designations of origin, protected geographical indica- tions, as well as designations of traditional specialties – are used as a means of protection. Overall, the whole division is seeing an upward trend, even with certain fluctuations, in the value added indicator. This is a positive development, which is also positively reflected in the growth of labour productivity, which should dynamically approach the economically developed countries. In the coming years, we expect growth in the investments necessary to modernise the sector and replace workers who are scarce in the labour market and lacking in food companies, which is a barrier to their further development. So far, there has been no improvement in the financial indicators of a synthetic nature, such as the EVA indicator, which is mainly monitored by investors. The external trade balance also persists, decreasing slightly in 2018. The main export territory in 2017 (and in previous years) is Slovakia, with a share of 25 % of the total export volume. The same volume, i.e. 25% of food imports comes from Germany. Prospectively, the situation in exports could be changed by agrarian diplomats working mainly in more distant territories, and other measures such as trade fairs and exhibitions, pro-export programmes, etc. The situation in terms of food production and its composition not only in the domestic market but also abroad could be improved by a higher rate of investment in science and research, in particular applied research, and systematic support from both the EU and national sources. Strategic priorities should be decisive for the future perspective of the food industry in the coming years. These include: • food security and adequate self-sufficiency, • competitiveness and efficiency of food production, • food safety and consumer protection. In the Czech Republic, as in a country with an open economy, it will be desirable to strengthen the effective links between processors and domestic agriculture. The strategic objective is also sustainable development, which includes improving the relationship of the division to the environment. Future developments in the sector will also be linked to reducing energy consumption and creating smart food logistics. Pro- duction capacities can be expected to concentrate, digitise and respond more flexibly to the increasing demand for food.

76 3. CZ-NACE 11 – MANUFACTURE OF BEVERAGES

3.CZ-NACE 11 – MANUFACTURE OF BEVERAGES

3.1 CHARACTERISTICS OF THE DIVISION Breakdown of CZ-NACE 11 (breakdown is shown by classes, this division is not classified by groups):

11.01 Distilling, rectifying and blending of spirits; 11.02 Manufacture of wine from grapes; 11.03 Manufacture of cider and other fruit wines; 11.04 Manufacture of other non-distilled fermented beverages; 11.05 Manufacture of beer; 11.06 Manufacture of malt; 11.07 Manufacture of soft drinks; production of mineral waters and other bottled waters.

CZ-NACE 11 Manufacture of beverages is less economically important within the manufacturing industry. However, the importance of the manufacture of beverages arises from their irreplaceability in the diet of people of all ages. Fluid intake influences the state of health of the population. Manufacture of beverages is significantly influenced by the traditions of the population, natural conditions in the country and people’s changing preferences. The Czech Republic is characterised mainly by beer consumption. Therefore, malt production, whose raw material is malting barley, is significantly represented here. The population in some regions prefers wine, especially in the areas where it is grown, and the tradition also includes vineyards and wineries, although much of the wine comes from imports. A proportion of the population consumes spirits. In the consumption of alcohol, the Czech Republic is among the top in the EU. Spa areas are often focused on mineral waters, which are part of their curative procedures. Companies produce products distributed throughout the Czech Republic and abroad. The expansion of the consumption and thus production of a wide range of soft drinks or their various flavours is also driven by the development of vehicular traffic, which is still on the rise, and the effort to come up with innovations to increase competitiveness. Some drinks are imported, but a significant proportion is of Czech origin. The business base has grown significantly since 2008. In 2018, there were 2,495 business units in the industry, more than double the number at the start of the reference period. The number of units has increased particularly in recent years and is based, for example, on the expansion of the number of microbreweries (about 440 of these units). The increase in microbreweries also significantly related to Prague, which is a tourist centre. The situation of employed persons in this sector is somewhat different, as their numbers have fluctuated during the monitored years. In 2018, it reached 15,994 persons, down 1,148 compared to 2008. However, the number of working owners increased significantly over the period. There has often been a shortage of people interested in working in the above-mentioned plants in recent years, but their number has been increasing. The industry must also invest in production and respond to changing technologies, and some companies are expanding their capacity. Manufacturing also reflects people’s changing preferences and the efforts of companies to reduce the impact on the environment.

77 3.2 DEVELOPMENTS IN THE DIVISION Significant drought and heat in 2018 had a positive impact on beer consumption and production. Accord- ing to a survey of the Czech Association of Breweries and Malt Houses, consumption in the Czech Republic in 2018 was 141 litres of beer per capita, up 3 litres from the previous year. Beer production (in mass units) including non-alcoholic beer and microbreweries amounted to a record 21.3 million hl of beer. Compared to 2010, when the amount was 15.7 million hectolitres, this represents a growing trend. In 2018, the share of draft beer dropped to 36% (by 2% year-on-year), while the share of lager consumption was 50.3%. The consumption of non-alcoholic beer was 620 thousand hl., a year-on-year increase of 7.3%, and the growth trend was also reflected in the “beer mixes”. Regarding packaging, in the year under evaluation, bottled beer accounted for 40%, keg beer 34%, PET bottles 12%, cans 11% and tanks 3%. The EU brand system now also includes Czech beer, which obtained a protected geographical indication in 2008. According to a survey conducted by the Institute of Sociology of the ASCR, almost nine out of ten men and almost half of women drink beer in the Czech Republic. Since 2010, the volume of malt production has grown from 498 thousand tonnes to about 547.5 thousand tonnes in 2018 and 2017. For spirits, new trends strengthened, due to income growth and, in this context, demand for more expensive spirits. However, Czech rums, bitter herbal liqueurs and vodka, i.e. a relatively wide assortment of domestic and foreign brands, are also successful in the market. The demand also focuses on quality wines. This popular beverage continued to have a negative trade balance in 2018 due to high imports. Imports amounted to 1 404 thousand hl of wine, i.e. 12.7% less than in the previous year. Domestic production was 800 thousand hl. According to the CZSO, 103.7 thousand tonnes of grapes were harvested from an area of 15.9 thousand hectares of vineyards in 2018. IAEI estimates consumption in 2018 to be slightly higher than in the previous year, when it was 19.4 litres per person per year. The warm weather in 2018 also increased interest in the production of soft drink producers, who strive to make it compatible with lifestyle. These include, for example, beverages with less sugar, more environmentally friendly production, etc. The range of other beverages such as natural mineral waters, spring waters, baby waters and bottled drinking water is also significant. These packaged beverages appeal to the desire for the correct fluid intake, which applies to all categories of consumers. Since 2013, sales in the division have been growing steadily. In recent years, increasing value-added has had a positive impact on labour productivity and business competitiveness. Labour productivity has been gradually increasing since 2013, although since 2014 the number of employees has increased. The price development of CZ-CPA 11 was fluctuating in the period under review, but the upward trend prevailed.

Spread (ROE - re) in this sector, however, fluctuated throughout the period under review, with the exception of 2012 and 2017. The biggest drop was recorded in 2014 with a low ROE (return on equity), which has increased substantially in recent years.

78 3. CZ-NACE 11 – MANUFACTURE OF BEVERAGES

3.3 MAIN ECONOMIC INDICATORS Chart 3.3.1 – Main economic indicators of CZ-NACE 11

3 000 18 000 Number of units Average number of employees 16 000 2 500 14 000

2 000 12 000

10 000 1 500 8 000 17 142 16 124 15 994 15 856 15 538 2 495 15 044 14 706 14 670 14 421 14 357 14 106 1 000 2 237 6 000 2 052 1 815

1 613 4 000 1 277 1 266 1 232 500 1 222 1 115 1 034 2 000

0 0 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

90 000 160 000 Sales (CZK m) Value added (CZK m) Average monthly wage (CZK) 80 000 140 000 Labour productivity from the VA (CZK/month)* 70 000 120 000 60 000 100 000 50 000 80 000 40 000 76 257

60 000 137 980 131 893 71 189 70 687 127 880 126 593 23 714 67 334

30 000 67 192 66 830 120 700 22 472 64 885 117 356 62 842 21 228 21 149 62 499 62 366 21 008 114 132 113 256 61 456 20 465 112 509 111 031 19 676 19 347 107 652 18 865 18 721 18 327 40 000 20 000

10 000 20 000 36 956 26 827 28 227 28 979 29 613 30 777 31 038 31 549 32 075 33 442 34 612 0 0 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Source: CZSO, MIT calculations, MIT estimate for 2018. Note: Other detailed data, including. data for individual CZ-NACE classes are available on the MIT website in an interactive browser of economic indicators: www.mpo.cz/en/panorama-interactive-table.html. * This is an aliquot monthly share computed from annual data

Chart 3.3.2 – Price developments in CZ-CPA 11 Chart 3.3.3 – Spread (ROE – re) CZ-NACE 11 (%) (2005 = 100%)

130 20

120 15

10 110

5 100

0 90 ‐5 80 ‐10 70 ‐15 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 60 Spread ‐4,80 ‐3,12 ‐5,26 ‐1,90 1,53 ‐6,04 ‐9,99 ‐0,94 ‐2,16 0,30 ‐0,53 rf 4,55 4,67 3,71 3,79 2,31 2,26 1,58 0,58 0,43 0,98 1,98 50 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 ROE 10,42 10,99 10,30 12,15 13,62 8,34 3,66 12,52 10,15 12,72 12,70 11 111,8 113,1 111,4 111,8 116,2 116,6 117,5 118,3 117,3 118,0 120,7 re 15,22 14,12 15,55 14,05 12,09 14,38 13,65 13,46 12,31 12,42 13,22

Source: CZSO, MIT calculations Source: CZSO, MIT calculations

3.4 FOREIGN TRADE

3.4.1 DEVELOPMENT OF FOREIGN TRADE The balance of foreign trade in products under CZ-CPA 11 was positive over the whole period. Its positive development was based on the volume of exports, which peaked in 2015 (see Chart 3.4.1). In subsequent years, this volume decreased, but in 2018 it increased again. Imports grew throughout the period under review, with wine import contributing significantly to this value.

Chart 3.4.1 – Export, import and balance by CZ-CPA 11 (CZK million)

20 000 18 000 Export Import Trade balance 16 000 14 000 12 000 10 000 8 000 17 540 17 399 17 309 17 040 16 892 16 604 15 796 14 733 14 680 6 000 14 506 13 284 12 727 12 287 11 972 11 013 11 016 10 857 10 506

4 000 9 428 9 238 2 000 1 096 359 2 446 1 588 350 1 715 3 035 3 320 2 629 0 2 734 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Source: CZSO, data as of 8 April 2019

3.4.2 TERRITORIAL STRUCTURE OF FOREIGN TRADE Imports come to the Czech Republic largely from EU countries. These are Germany, Italy, Poland, Hungary and other countries, as shown in Chart 3.4.2. Exports are traditionally directed to Slovakia, followed by Poland and Germany.

Chart 3.4.2 – Foreign trade in CZ-CPA 11 products

Import territories in 2018 Export territories in 2018

Germany other Slovakia 14% 26% other 27% 32% Italy 11% Sweden 3% Poland Italy 10% 3% Poland 13% Slovakia Hungary Austria Austria 7% Hungary 7% Germany 4% 4% United France 9% 12% Kingdom 8% Russia 5% 5% Source: CZSO, data as of 8 April 2019

3. CZ-NACE 11 – MANUFACTURE OF BEVERAGES

3.5 RESEARCH, DEVELOPMENT AND INNOVATION With respect to the volume of R&D expenditure and the number of enterprises performing R&D, CZ-NACE 11 is among the smallest in the manufacturing industry. Expenditure on R&D in CZ-NACE 11 peaked between 2013 and 2016. In 2017 there was a decrease to CZK 10 million (see Chart 3.5.1), i.e. 41.18% less year-on- year. Division 11 accounted for 0.06% of total R&D expenditure in the manufacturing industry. The major part (90%) of R&D expenditure of CZ-NACE 11 in 2017 came from business sources. CZ-NACE 11 belongs to the divisions that in recent years have received almost no public support from abroad, which could be due to the size of this division (see number of enterprises performing R&D in Chart 3.5.1). The share of researchers (FTE) of the total number of researchers in the manufacturing industry was 0.08%, i.e. 7 researchers per year (average for 2013–2017). The companies that received in 2007–2018 a significant amount of special-purpose State support within the national programmes of the MIT (TIP), MoA (VAK, KUS) and Technical Assistance of theCzech Republic (ALFA, Competence Centres, EPSILON, Éta) include IDS Advisory s.r.o., Plzeňský Prazdroj, a.s. and SLADOVNY SOUFFLET ČR, a.s. In the context of the OP EIC calls under the National RIS3 strategy, the R&D aid received by the division is among the lowest. In the period 1 January 2015 – 31 October 2018, total aid for 7 approved projects (European, Czech public and private sources) was planned at CZK 0.02 billion, of which CZK 0.01 billion was from EU grants. Projects are mainly focused on strengthening the R&D capacity of enterprises (67%) and supporting ICT in business (19%). All projects fall within the application industry Sustainable Production of Food. In the reference period, projects for the manufacture of beverages were submitted only by small enterprises. As regards European support for applicants / beneficiaries, the largest EU support was granted to APROS Group, s.r.o. (project New type of fruit spirits and products made from them; total expenditures CZK 8.4 million, of which EU subsidies were CZK 3.8 million), BOHEMIA HEALING MARIENBAD WATERS a.s. (project Innovation in BOHEMIA HEALING MINERAL WATERS CZ a.s.; total expenditures of CZK 7.8 million, of which EU subsidies were CZK 3.5 million).

Chart 3.5.1 – R&D expenditure (CZK mil.) and the number of enterprises with R&D in CZ-NACE 11

EU+other international organisations Number of enterprises Entrepreneurs Government+universities 20 10 17 18 17 9 0 0 16 14 8 14 0 12 7 12 0 10 6 10 0 5 15 15 9 8 4 8 8 6 14 7 5 5 12 6 0 9 3 0 0 5 5 4 2 4 5 6 3 2 5 1 2 2 1 0 0 0 0 0 1 0 2010 2011 2012 2013 2014 2015 2016 2017 2010 2011 2012 2013 2014 2015 2016 2017

Source: CZSO, MIT calculations

3.6 SUMMARY AND PERSPECTIVE OF THE DIVISION CZ-NACE 11 plays an important role as a producer of beverages which are essential for human beings in ensuring their health safety. The consumption of beverages is also influenced to a different extent by the lifestyle of consumers. The division relies on the business base in the Czech Republic. The manufacture of beverages and especially hot-spring production is closely related to natural resources and also affects the health of consumers. In terms of products, beer dominates the production characteristics. It is associated with the manufacture of malt obtained from malting barley and also hop cultivation, which creates a link to agriculture. This production is based on a long-standing tradition, but at the same time, technical and technological progress has been made in the processing of production and, more recently, the development of packaging that is more suited to consumers and their preferences. Development towards the growth of consumption and thus the production and import of a more expensive assortment, with the growth of purchasing power, is evident in spirits. Wine production and consumption is becoming more and more popular in the Czech Republic. This is -re lated to the negative balance of foreign trade, which persists. However, improving the quality of domestic wine also allows its export. The consumption and production of soft drinks and mineral water is strongly dependent on the weather. Warm and dry periods during the year support their consumption, and this is also reflected in higher production in the performance of the respective productions. The value-added indicator of this section has seen growth in recent years, rising above the 2008/2009 levels in 2018 and 2017. This was also enabled by the recovery of labour productivity, which is important for the further development of the division in terms of competitiveness. The average wage increased as labour productivity increased. Sales, as an indicator of the position of the division on the market, have been growing since 2013. The balance of foreign trade in beverages remains positive, but the surplus of exports over imports is declining. This is because imports have been growing faster than exports in recent years. The main export partner is Slovakia with 27%, with Germany being the largest import partner with 14%. It is desirable to look for new export territories to find new contracts. There should be more funding for science and research. This should make it possible to further expand the range and improve the quality of beverages, as well as to achieve technological improvements in a number of plants. The number of beverage producers is likely to increase. The further outlook for the development of beverage production will be influenced both by the development of the weather and by the growth of purchasing power in the Czech Republic. The development of tourism has a positive effect on consumption and thus on production. Consumption may also be affected by a change in legal regulations governing the consumption of alcoholic beverages in the Czech Republic where it was previously prohibited, such as on bike paths, etc.

82 4. CZ-NACE 13 – MANUFACTURE OF TEXTILES

4. CZ-NACE 13 – MANUFACTURE OF TEXTILES

4.1 CHARACTERISTICS OF THE DIVISION

Breakdown of the CZ-NACE 13 division by individual groups:

13.1 Preparation and spinning of textile fibres; 13.2 Weaving of textiles; 13.3 Finishing of textiles; 13.9 Manufacture of other textiles.

Manufacture of textiles is divided into cotton, silk, flax and wool, depending on the type of raw material processed. The manufacturing process of most textile enterprises involves several technological steps. These include spinning, weaving, finishing and manufacture of other textiles. The textile industry has a long tradition in the Czech Republic, but this does not mean that the industry is significantly prosperous. It is a sensitive sector facing high competition in the global market, especially from third countries, yet the textile industry of the Czech Republic is export-oriented. In the Czech Republic, the textile industry is traditionally most widespread in the northern part of the country, especially in the Liberec, Hradec Králové and Olomouc regions. In terms of selected economic indicators (see Tab. 4.1.1), CZ-NACE 13.9 clearly dominates the division with the manufacture of nonwovens, technical and industrial textiles (approximately 71% of revenues). Its dominant position is evident in the number of production units, employees and value added. Com- pared to the previous year, CZ-NACE 13.1 remains relatively unchanged in revenues (approximately 6%). CZ-NACE 13.2 Weaving of textiles saw a slight decrease in the group’s share in the revenues of the division (approx. 21.5%). Compared to 2017, CZ-NACE 13.3 performed the worst, posting a significant decrease in revenues in absolute value and also in the share in revenues of the division (by 0.6%). In this group, the number of people employed also decreased by almost half. The production units are dominated by micro-enterprises, small manufacturing companies, small entrepreneurs and self-employed persons. Their economic success and failure results in the fluctuation in the number of production units in the monitored period.

Table 4.1.1 – Shares of groups in CZ-NACE 13 in 2018 (%, division = 100%)

Group Personnel Value Own Assets Number of Number of Revenues Incomes CZ‐NACE costs added capital total employees units

13.1 8.2 8.6 6.1 6.1 8.3 7.3 8.4 1.7 13.2 22.7 19.4 21.5 20.9 23.7 23.7 23.1 2.1 13.3 0.9 0.7 0.8 1.0 0.9 1.6 1.2 2.4 13.9 68.1 71.2 71.6 72.0 67.1 67.4 67.2 93.9 Source: CZSO, data 2018, MIT calculations

4.2 DEVELOPMENTS IN THE DIVISION The results of the Czech textile industry generally correspond with developments in the EU. The group shows favourable economic results thanks to Group 13.9 focusing on the production of technical textiles. The growth is indicative of the group’s links with other sectors such as the automotive, construction, agriculture, health and aviation sectors. Worldwide production of technical textiles currently accounts for two-thirds of world textile production. A similar trend is also found in the Czech Republic, where according to the ranking of the largest textile companies (in terms of sales and number of employees) prepared by the Association of Textile, Clothing and Leather Industry for the Svět textilu magazine, most manufacturers of technical textiles are represented in the top 10 (JUTA a.s., PEGAS NONWOVENS s.r.o., SAINT-GOBAIN ADFORS CZ s.r.o., BORGERS CS spol. s.r.o., Kordárna Plus a.s., Fibertex Nonwovens, a.s.). Since October 2018, Kordárna Plus a.s. has had a new Thai owner, Indorama Ventures, a global player in the petrochemical industry and a producer of polymers, fibres, tyres and safety measures. Textile weaving (Group 13.2) has been constant since 2015, without major fluctuations. One significant representative of this group is Nová Mosilana a.s., which is the largest production plant of the Italian Marzotto Group and the largest manufacturer of woollen fabrics in Europe. With a thousand employees, it is one of the largest employers in the South Moravian region. Due to the decline in profits in 2017, the company simplified and reduced the production programme. Every year the company invests in machinery innovations in the amount of approximately EUR 6 million. Modernisation is focused on energy savings and automation. In March 2018, the final phase of the sale of CNM textil a.s. to the new owner, the Pakistani company Samira (100% owner) took place. The good economic condition of the industry gives Czech companies the courage and desire to invest abroad. GRUND a.s. successfully became established in the US. The company was able to create an interesting product in bathroom rugs, which are designed by many renowned world designers. Family office R2G, which holds 88.5% of Pegas Nonwovens, has acquired one of the world’s largest non- woven companies in the US. From New York’s First Quality Enterprises (FQE), it acquired the First Quality Nonwovens (FQN) division, which owns companies for the production of nonwovens for the production of sanitary items in the US and China. It is historically the largest Czech investment in the US. By merging FQN and Pegas, a new company PFNonwovens was created. It will continue to supply textiles to First Quality Enterprises as it has until now. Since 2012, the number of production units in the whole division has been gradually decreasing. The decline has been influenced by a decrease in demand for common textile products and by imports of cheap goods from abroad. This is also related to the less favourable development of external demand. Converse- ly, technical textile units have seen growth, which corresponds to continuity with other industries. Employment in the textile industry also shows a long-term downward trend. Since 2008, the number of employed persons has decreased by 9,701. This is due to record-low unemployment, a shortage of skilled labour in recent years, and austerity measures due to wage growth. Revenues and added value reached the highest level in 2016; after a slight decline since 2017, they hold an unchanged position in 2018. In connection with the favourable economic development since 2008, the average wage in the textile industry has increased by CZK 9,680 and, at the same time, labour productivity has increased.

84 4. CZ-NACE 13 – MANUFACTURE OF TEXTILES

4.3 MAIN ECONOMIC INDICATORS Chart 4.3.1 – Main economic indicators of CZ-NACE 13

3 500 40 000 Number of units Average number of employees

3 000 35 000

30 000 2 500 25 000 2 000 20 000 1 500 3 151 34 429

2 828 15 000 2 715 2 601 2 520 2 424 2 337 2 320 27 343 1 000 2 287 25 641 25 574 25 537 25 449 25 395 2 123 25 053 25 012 24 744 24 728 2 064 10 000

500 5 000

0 0 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

60 000 60 000 Sales (CZK m) Value added (CZK m) Average monthly wage (CZK) Labour productivity from the VA (CZK/month)* 50 000 50 000

40 000 40 000

30 000 30 000 56 521 55 817 54 817 54 692 54 321 51 584 51 449 51 294 49 763 49 488 48 839 48 317 47 743 47 439

20 000 20 000 45 903 43 983 43 253 42 444 14 446 14 335 14 315 14 282 41 242 13 817 40 977 12 829 12 524 12 409 12 044 11 804 36 805 11 463 31 541

10 000 10 000 25 699 23 748 22 187 21 196 20 767 19 675 19 173 18 731 18 208 17 213 16 019 0 0 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Source: CZSO, MIT calculations, MIT estimate for 2018. Note: Other detailed data, including data for individual CZ-NACE classes are available on the MIT website in an interactive browser of economic indicators: www.mpo.cz/en/panorama-interactive-table.html. * This is an aliquot monthly share computed from annual data

Chart 4.3.2 – Price developments in CZ-CPA 13 Chart 4.3.3 – Spread (ROE – re) CZ-NACE 13 (%) (2005 = 100 %)

120 20

15 110

10 100 5 90 0

80 ‐5

70 ‐10

‐15 60 ‐20 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 50 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Spread ‐15,58 ‐8,44 ‐1,19 ‐2,08 0,86 ‐0,12 1,39 0,04 0,27 2,48 ‐0,64 13 99,4 99,5 100,2 108,1 108,8 108,7 112,3 111,9 111,1 110,5 111,1 rf 4,55 4,67 3,71 3,79 2,31 2,26 1,58 0,58 0,43 0,98 1,98 13.2 99,4 99,6 99,3 106,3 109,2 107,7 112,4 112,9 113,3 111,4 110,3 ROE 1,38 3,10 9,91 8,03 10,72 8,80 10,96 9,46 9,30 10,02 8,31 13.9 101,0 102,0 101,1 104,9 108,9 109,3 112,8 112,4 110,9 110,3 111,4 re 16,97 11,54 11,10 10,12 9,86 8,93 9,58 9,42 9,03 7,54 8,95

Source: CZSO, MIT calculations Source: CZSO, MIT calculations Note: Groups 13.1 and 13.3 are not monitored

4.4 FOREIGN TRADE

4.4.1 DEVELOPMENT OF FOREIGN TRADE Exports and imports of CZ-CPA 13 continued to grow between 2009 and 2018, although exports grew faster than imports in the last reference year. The value of exported goods reached CZK 67 billion. The external trade balance, which was positive throughout the period, slightly increased owing to higher export growth in 2018 (see Chart 4.4.1). Almost 60% of the division’s exports were made by Group 13.9, where the value of exports increased year on year. However, exports also grew in Group 13.1.

Chart 4.4.1 – Exports, imports and foreign trade balance in products by CZ-CPA 13 (CZK million)

80 000

70 000 Export Import Trade balance

60 000

50 000

40 000

30 000 67 197 66 362 63 819 60 975 58 231 56 288 56 157 54 305 51 450 50 948 49 495 49 363 20 000 48 508 43 280 42 654 40 772 40 644 39 571 36 687 10 000 33 066 10 206 6 505 5 967 7 864 8 591 10 027 10 909 9 514 8 170 0 8 736 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Source: CZSO, data as of 8 April 2019

4.4.2 TERRITORIAL STRUCTURE OF FOREIGN TRADE Territorial distribution of foreign trade has seen little change. The main export territories of textile products in 2018 were, as in the previous year, Germany, Italy and Poland. Almost a third of the goods were exported to Germany. Imported goods came mainly from Germany and Italy and, as expected, from China (see Chart 4.4.2).

Chart 4.4.2 – Foreign trade in CZ-CPA 13 products

Import territories in 2018 Export territories in 2018

other other Germany 30% 30% Germany 28% 30%

United France Kingdom Italy Austria 4% 3% Italy 12% Turkey 4% Netherlands 11% Poland 5% Romania 3% China 9% Belgium Poland 10% 4% Netherlands Slovakia 4% 4% 4% 5%

Source: CZSO, data as of 8 April 2019

4. CZ-NACE 13 – MANUFACTURE OF TEXTILES

4.5 RESEARCH, DEVELOPMENT AND INNOVATION Expenditure on R&D in CZ-NACE 13 reached its maximum in the reference period in 2014. Since then, there has been a continuous decrease in the volume of R&D expenditures. In 2017, R&D expenditures amounted to CZK 267 million (see Chart 4.5.1). The decrease in R&D funds in 2017 was mainly due to lower business R&D expenditures and also public funds from the Czech Republic and universities. The share of R&D expenditures for CZ-NACE 13 accounted for 1.14% of total R&D expenditure in manufacturing. CZ-NACE 13 accounted for 0.75% of the total number of researchers in manufacturing, i.e. on average 64 researchers per year (for the period 2013–2017). Companies that benefited from a significant amount of targeted support from the State budget under the national programmes of MIT (TIP, TRIO), MEYS (EUREKA CZ, INTER-EXCELLENCE) and TA CR (ALFA, EPSILON) in 2007–2018 include SINTEX, a.s., SkyParagliders a.s., PEGAS NONWOVENS s.r.o., NYKLÍČEK a s.r.o. and Holzbecher, s.r.o. barevna a bělidlo Zlíč. Furthermore, SINTEX, a.s. is a participant in theFIBFAB: Industrialisation of bio-based textile fabrics for clothing applications (Horizon 2020) project, which is aimed at launching the production of biodegradable and sustainable fabrics based on polylactic acid (PLA) for the production of work and protective clothing and leisure clothing. As part of the OP EIC calls, 49 projects under the National RIS3 Strategy have been approved, i.e. R&D area with average aid. In the period 1 January 2015 – 31 October 2017, their total aid (European, Czech public and private sources) was planned at CZK 1.89 billion, of which CZK 0.70 billion was from EU grants. Projects are mainly focused on strengthening the R&D capacity of enterprises (75%), less on strengthening technological cooperation of companies (15%). All projects fall within the Textile application sector. Of the EU subsidies, JUTA a.s. was the most supported among large companies (Production of innovated textiles for construction and agriculture project; total expenditures CZK 383 million, of which EU subsidies were CZK 96 million and Innovation of technical laminates and foils to increase the competitiveness of JUTA a.s. project; total expenditures CZK 196 million, of which EU subsidies were CZK 49 million); among small and medium-sized enterprises it was RETEX a.s. (Strengthening innovation performance of RETEX a.s. project; total expenditures CZK 217 million, of which EU subsidies were CZK 76 million).

Chart 4.5.1 – R&D expenditure (CZK mil.) and the number of enterprises with R&D in CZ-NACE 13

EU+other international organisations Number of enterprises Entrepreneurs Government+universities 350 35 314 308 2 289 300 280 30 25 0 267 1 1 250 224 25 202 4 200 0 172 20 0 307 273 15 150 270 278 29 28 29 257 26 26 27 196 24 23 100 188 10 163

50 5

23 0 15 9 9 5 5 16 9 0 2010 2011 2012 2013 2014 2015 2016 2017 2010 2011 2012 2013 2014 2015 2016 2017

Source: CZSO, MIT calculations

4.6 SUMMARY AND PERSPECTIVE OF THE DIVISION Although the textile industry is a traditional manufacturing sector, it has undergone significant changes in recent years, influenced by EU legislation, the import of cheap goods from abroad, and the strong demand for textile trends. It is in a state that requires an innovative approach both in terms of technology and ecology based on EU legislation and Industry 4.0 requirements, and protection against unfair commercial practices and competitiveness. In 2018, approximately 28.5% of textile manufacturers, together with the clothing, leather and footwear industries, participated in the introduction of innovative elements based on Industry 4.0. The economic results show that the textile industry has maintained its standard for several years. The production of technical textiles, which keeps the whole section in good condition, can also be seen as positive. Demand for technical textiles and growth in orders signal that this is a long-term trend. Smart and e-textiles are a continuing trend in the textile industry. This is evidenced by the development, research and implementation of smart and e-textiles by VÚB a.s., which already has several commercially realised products (e.g. special conductive hybrid threads, magnetic therapy tapes – special textile products, electronic elements based on textiles, elastic conductive ribbons and strain gauge linear textiles). Transforming the current European textile and clothing industry into a stable and competitive player is outlined in the EU document “European Technology Platform for the Future of Textiles and Clothing”. The aim is to ensure the long-term competitiveness of the textile and clothing industry by strengthening innovative opportunities for the development of new fibres, textiles, textile products and clothing. With the emerging trends of market globalisation, some business activities have negative environmental impacts. The Czech Republic has participated in the international ENTeR project, which mapped the production of textile waste and the way it is treated. The aim was to gather information on the current state of waste recovery (fibres, edge trim, fabric pieces, defective products, etc.), barriers (technical and legislative) -mak ing it more difficult to recycle, and innovation needs of businesses. It can be stated that textile companies are trying to use it according to the opportunities open to them. In the case of more complex materials, such as fabrics with coatings, laminates, composites, etc. that cannot be recycled, they end up in landfill or incinerators. Due to the character of these textiles, there is often no technological solution for their processing and recovery. In the context of textile waste recycling, it is necessary to focus on addressing their effective recovery with the advent of the circular economy, thus avoiding restrictive measures for reducing the volume of unprocessed waste. In recent years, the textile industry has seen a lack of student interest in studying in the industry, which is causing major problems for companies in replacing outgoing workers. In order to address this issue, the EDTEX “International Strategic Partnership in the Field of Textile Vocational Training” (12/2016–11/2018) project was run. This project was aimed at transforming vocational training and increasing efficiency with regard to structural changes in the European textile and clothing industry to better meet the needs of a quality and skilled workforce.

88 5. CZ-NACE 14 – MANUFACTURE OF WEARING APPAREL

5. CZ-NACE 14 – MANUFACTURE OF WEARING APPAREL

5.1 CHARACTERISTICS OF THE DIVISION Breakdown of the CZ-NACE 14 division by individual groups: 14.1 Manufacture of wearing apparel, except fur apparel; 14.2 Manufacture of articles of fur; 14.3 Manufacture of knitted and crocheted apparel.

Manufacture of wearing apparel is labour-intensive due to the high proportion of manual work involved in the product. It is a sector with fast-turnover production and consumption. The manufacture of wearing apparel is characterised by the creation of fashion collections depending on seasonal effects and customers’ requirements. Production in small series is prevalent, with an increasing importance of custom-made ready-made production, including related services, such as fashion consultancy or alteration of garments. The industry is important for maintaining female employment, especially in regions with a long tradition of clothing production. Generally speaking, there is a significant trend in the division with an increasing number of small production units and micro-companies. Cost and quality are the basic factors affecting the clothing industry. Other factors such as fashionability, flexibility, innovation in the product range using new textile materials and technologies which enable high labour productivity to be achieved even at high production costs, also have a significant impact. Manufacture of wearing apparel is influenced by the structural market change that has resulted from globalisation and the expansion of Asian goods into the European market, competitiveness, cooperation and processing activities in regions, concentrated distribution and consumer market developments. The development of the consumer market in the clothing sector is influenced by an ageing population, an increase in living standards with an increase in purchasing power, an increase in demand for quality and comfort (trademark) and environmental responsibility. The dominant group of the division is the manufacture of wearing apparel CZ-NACE 14.1 (approximately 90% of sales). Its leading position is also visible in other monitored indicators. As in the previous year, the lowest share of the division’s sales was in Group 14.2 Manufacture of fur products (approximately 0.7%). Less than one tenth of the division’s sales and number of employees were posted by Group 14.3 (approximately 8.9%).

Table 5.1.1 – Shares of groups in CZ-NACE 14 in 2018 (%, division = 100%)

Group Personnel Value Own Assets Number of Number of Revenues Incomes CZ‐NACE costs added capital total employees units

14.1 90.6 90.9 90.4 90.0 88.1 87.7 90.7 93.7 14.2 0.4 0.1 0.7 0.7 2.1 1.8 0.5 1.0 14.3 9.0 9.0 8.9 9.3 9.8 10.5 8.9 5.4

Source: CZSO, data 2018 MIT calculations

5.2 DEVELOPMENTS IN THE DIVISION In the wearing apparel sector, which is dominated by small production units, companies that have applied the so-called North European business model have been successful. Companies have retained control over important processes (such as design, business, finance, marketing, quality, etc.) and have moved production to more cost-effective regions. As a result of rising wage, transport and logistics costs, production in Asia is no longer paying off. The fashion cycle (supply, demand and delivery) has been shortened from half a year to several weeks, which suppliers from China and other Asian countries cannot meet. Delivery by ship usually takes about 30 days. Clothing production is gradually returning closer to the target markets in Europe, where production costs are lower, e.g. Belarus, Bulgaria, Macedonia, Romania or Turkey. The favourable economic situation, demand for fashion trends and consumer willingness to spend on Czech quality help domestic clothing companies to invest in technology and innovative production programmes. Mileta a.s., one of the largest textile/clothing manufacturers in Europe, which produces scarves and hand- kerchiefs in addition to shirts and lawns, has modified the design and material in its “pronto programme” (approximately 70% of products with high utility and aesthetic value). As part of its innovation, it carried out a comprehensive reconstruction of the combined wide washing line equipped with drying and folding equipment. Another innovation is the production of textiles with their own digital printing on a newly installed machine. In the additional Home & Hotel segment, total sales amounted to CZK 37,559 thousand. Although this segment represents less than 7% of total sales in the long term, it contributes to the further diversification of sales. Also in this segment, the company embarked on further innovations and began the development of women’s and men’s pyjamas sewn from its own fabrics, which many companies in the world do not offer. CLINITEX s.r.o., a manufacturer and supplier of medical textiles and ready-to-wear clothing, surgical clothing and bedding, introduced its innovative products to its British partners as part of the “Czech Medical Devices Day” diplomacy project. The company applied for subsidies under OP EIC – Innovative Voucher Patient II. The aim of the project is the innovation and testing of textile products for health and social- ser vices with a focus on increased wearing comfort. These innovative textile structures are being designed for the manufacture of clothing for medical staff and patient underwear, including paediatric patients, and bedding. In the research and development of special clothing, VÚB a.s. is an initiative with projects and innovations that have been applied to a large extent and are being used industrially. In subsidy projects, the company is engaged in the development of smart clothing for the improvement of health and social care for the elderly and disabled (“MEDITEX” (07/2016–12/2019), “SeniorTex” (09/206–08/2020) and “TEXDERM” Textiles and clothing with increased comfort for the specific needs of children with skin problems (07/2017–06/2021)). TONAK a.s., which is one of the largest hat manufacturers in Europe and exports approximately 90% of its production (Bolivia, Italy, Hungary, Germany, Nigeria, Poland, Austria, Russia, Senegal and the US), also contributed to the positive results in the division. Over the past three years, it has been working intensively on making the brand more visible on the Czech market. It collaborates with bloggers, Czech fashion icons and the recently launched Czech-Slovak Vogue. Annual production is about 2.25 million hats and caps, with 1.8 million berets, caps and fez from Strakonice and 450–500 thousand hats or semi-finished products from Nový Jičín. It produces for the companies Stetson, Borsalino and Akubra. The company posted growth last year, which was caused by a change in its approach to marketing and design (renewal of the entire design according to fashion demand and investment of CZK 15 million in new technologies in 2016 and 2017). In 2018, the company increased its knitwear production but faced a lack of employees. And this is one of the major problems of the section. Currently, many manufacturing companies feel this. The growth potential of the apparel companies has begun to run out. The lack of a skilled workforce is aggravated by a trend in education where people are not interested in technical education.

90 5. CZ-NACE 14 – MANUFACTURE OF WEARING APPAREL

5.3 MAIN ECONOMIC INDICATORS Chart 5.3.1 – Main economic indicators of CZ-NACE 14

16 000 35 000 Number of units Average number of employees

14 000 30 000

12 000 25 000 10 000 20 000 8 000 15 000 31 815

6 000 13 772 12 917 27 154 12 290 25 777 11 739 25 360 25 081 24 965 24 950 24 727 11 280 24 580 23 966 23 839 10 784 10 789 10 000 10 337 4 000 9 895 8 756 8 257

2 000 5 000

0 0 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

25 000 45 000 Sales (CZK m) Value added (CZK m) Average monthly wage (CZK) 40 000 Labour productivity from the VA (CZK/month)* 20 000 35 000

30 000 15 000 25 000

20 000 10 000 38 553 37 587 20 290 7 222 19 946 35 199 6 932 34 927 19 192 6 598 6 562 18 744 15 000 33 394 6 429 18 231 6 161 16 981 5 664 30 067 5 451 5 455 5 410 5 400 15 892 15 767 15 643 15 518 15 460 27 603 26 197

10 000 24 577 22 455

5 000 21 688 17 908 16 862 15 929 14 835 5 000 14 427 13 324 13 119 12 963 12 386 12 228 12 217 0 0 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Chart 5.3.2 – Price developments in CZ-CPA 14 Chart 5.3.3 – Spread (ROE – re) CZ-NACE 14 (%) (2005 = 100 %)

120 40

110 30

20 100

10 90

0 80

‐10 70 ‐20 60 ‐30 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 50 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Spread ‐24,84 0,17 7,51 11,96 26,25 13,16 18,43 18,58 13,46 15,49 11,61 14 101,5 101,6 101,4 101,9 102,8 103,1 104,1 105,0 106,3 106,6 109,5 rf 4,55 4,67 3,71 3,79 2,31 2,26 1,58 0,58 0,43 0,98 1,98 14.1 101,9 102,1 101,9 102,3 103,3 103,6 104,5 105,1 106,1 106,6 109,6 ROE ‐12,24 7,29 14,82 18,26 32,86 22,62 28,46 27,06 21,92 24,52 21,59 14.3 99,1 98,3 98,5 99,4 99,7 99,8 102,2 104,8 108,5 107,1 107,9 re 12,61 7,12 7,32 6,30 6,61 9,47 10,04 8,48 8,47 9,03 9,99

Source: CZSO, MIT calculations Source: CZSO, MIT calculations Note: Group 14.2 is not monitored

5.4 FOREIGN TRADE

5.4.1 DEVELOPMENT OF FOREIGN TRADE This section is strongly export-oriented. However, the value of exports stagnated year-on-year in 2018 and the value of imported goods decreased. The external trade balance in CZ-CPA 14 was negative throughout the period under review, but slightly decreased in 2018 (see Chart 5.4.1). In terms of external trade by group, the largest share of total turnover in 2018, as in previous years, was represented by CZ-CPA 14.1 Manufacture of wearing apparel, except for fur products, with an export share of 88%, in which exports reached roughly the same value as in the previous year, but exports in other groups increased.

Chart 5.4.1 – Exports, imports and foreign trade balance in products by CZ-CPA 14 (CZK million)

80 000 Export Import Trade balance 60 000

40 000 72 283 70 837 65 236 54 751 54 528 20 000 54 283 49 370 45 963 39 421 37 917 36 997 35 118 35 060 34 879 31 819 24 396 25 102 26 875 27 816 12 815 10 483 11 605 16 309 19 274 9 835 17 532 17 550 25 225 19 166 ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ 10 122 ‐ 0 ‐

‐20 000

‐40 000 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Source: CZSO, data as of 8 April 2019

5.4.2 TERRITORIAL STRUCTURE OF FOREIGN TRADE Germany has traditionally been among the largest foreign customers; in 2018 the value of exported goods to Germany increased slightly to CZK 25.2 billion. Exports also went to Slovakia, Austria and Italy. Imports in 2018 were dominated by Asian countries, most by China, with a significant share of imports coming from Bangladesh, as well as from Germany and Turkey (see Chart 5.4.2).

Chart 5.4.2 – Foreign trade in CZ-CPA 14 products

Import territories in 2018 Export territories in 2018

other Netherlands 17% other China 2% 26% 28% France 3% United Germany Kingdom 46% India 4% 4% Poland Poland Bangladesh Austria 6% 4% 16% 7% Italy Cambodia Germany 7% Slovakia 4% 8% Slovakia Turkey 8% 4% 6% Source: CZSO, data as of 8 April 2019

5. CZ-NACE 14 – MANUFACTURE OF WEARING APPAREL

5.5 RESEARCH, DEVELOPMENT AND INNOVATION CZ-NACE 14 is one of the smaller sections of the manufacturing industry in terms of the volume of R&D expenditure, the number of enterprises performing R&D and the number of researchers. The lowest volume of R&D funds was spent in 2014 and compared to this year the expenditure on R&D in CZ-NACE 14 increased by 90%. Expenditure on R&D in 2017 amounted to CZK 19 million and CZ-NACE 14 accounted for 0.06% of total R&D expenditure in manufacturing. This increase was due to an increase in the volume of funds from business sources, which is also in line with the growth in the number of enterprises in CZ-NACE 14 (see Chart 5.5.1). Despite the positive trend in the volume of R&D expenditures in recent years, the amount of R&D expenditures in 2017 reached only 44.19% of the expenditures in 2011. The share of researchers (FTE) of the total number of researchers in the manufacturing industry sectors was only 0.14 %, i.e. 12 researchers per year (average for 2013–2017). Enterprises which benefited from a significant amount of targeted support from the State budget within the national programmes of the MoD (Development of Operational Capabilities of the Armed Forces of the Czech Republic), MIT (TIP, TRIO), MEYS (EUREKA CZ) and TA CR (ALFA, EPSILON, ÉTA) in the period 2007–2018 include B.O.I.S. - FILTRY, spol. s r. o., TONAK a.s., VOCHOC, s.r.o., DEONA MEDI s.r.o. and KNITVA s.r.o. This is one of the less-supported R&D areas within the OP EIC calls under the National RIS3 Strategy. In the period 1 January 2015 – 31 October 2017, aid for 24 approved projects (European, Czech public and private sources) was planned at CZK 0.11 billion, of which CZK 0.06 billion was from EU grants. The projects are aimed at strengthening cooperation between ROs and enterprises (36%), strengthening R&D capacities of enterprises (27%), and increasing the internationalisation of SMEs (27%). All projects fall within the application sector Traditional Cultural and Creative Sectors. In the reference period, projects for the manufacture of wearing apparel were submitted only by SMEs. As regards European support for applicants/beneficiaries, the largest EU support for SMEs was- grant ed to Triola a.s. (Smart textiles project; total expenditure of CZK 22 million, of which EU subsidies were CZK 15 million).

Chart 5.5.1 – R&D expenditure (CZK mil.) and the number of enterprises with R&D in CZ-NACE 14

EU+other international organisations Number of enterprises Entrepreneurs Government+universities 50 14 43 45 0 12 40 35 35 0 10 30 8 22 25 39 19 28 0 6 12 20 17 11 14 0 0 10 10 10 15 12 9 9 9 10 1 4 18 1 10 13 0 16 10 12 2 5 8 7 5 4 3 0 2 2 2 2 0 2010 2011 2012 2013 2014 2015 2016 2017 2010 2011 2012 2013 2014 2015 2016 2017

Source: CZSO, MIT calculations

5.6 SUMMARY AND PERSPECTIVE OF THE DIVISION The apparel industry is among the traditional divisions of the manufacturing industry not only inthe Czech Republic but also in the EU. It is a sector with a high degree of creativity and will continue to have a significant impact on the lifestyle of European countries in the future. Unfortunately, the global market is exposed to considerable competition, especially from third countries with their own raw materials base and low labour costs. Although the apparel industry produces consumer goods of strategic importance, especially in the field of professional and military clothing, where specific features of clothing are -re quired, within Czech production, investments have a long-term downward trend. Due to the strong competition on the markets, it is necessary to focus primarily on: • small-scale production of garments with higher added value according to customer requirements, • sophisticated implementation of innovative measures in production, • the level of strategic knowledge about markets, customers, and trends that shape changes in customer needs and preferences, • production of special clothing for demanding occupations and extreme conditions (uniforms, protective clothing for various demanding operations, outdoor clothing for sports and leisure), • improvement of business activities – marketing and other activities of direct contact with the market (flexibility, information processing, short realisation of production, use of functional materials and introduction of new applications), • own research and development, cooperation on projects with research organisations and universities, • creation of smart clothing while maintaining easy maintenance by washing and ironing (e.g. electronic sensors and components for monitoring vital signs in protective clothing and healthcare, integrated solar cells to ensure thermal comfort of the wearer, or communication with mobile technologies), • education and training of workers (increasing demand for skilled and flexible workers). The trend in the clothing industry will be smart clothing and e-clothing, which are in an advanced stage of development or in the implementation stage. VÚB a.s. has commercially implemented results of projects for smart clothing protected by the “Clevertex” mark (e.g. special non-flammable underwear, antistatic ESD clothes, underwear for thermoregulation and thermal insulation (e.g. for outdoor sports activities)).

94 6. CZ-NACE 15 – MANUFACTURE OF LEATHER AND RELATED PRODUCTS

6. CZ-NACE 15 – MANUFACTURE OF LEATHER AND RELATED PRODUCTS

6.1 CHARACTERISTICS OF THE DIVISION

Breakdown of the CZ-NACE 15 division by individual groups: 15.1 Tanning and dressing of leather; manufacture of luggage, handbags, saddlery and harness; dressing and dyeing of fur; 15.2 Manufacture of footwear.

This division includes the treatment and dyeing of fur and the working of skins into leather by tanning or preservation and further treatment and processing of leather into consumer articles. It also includes the manufacture of similar products from other materials, such as rubber footwear, textile luggage, etc. These products are included here because they are manufactured by the same technological process as leather products. Due to its focus, the division is characterised by a high proportion of manual work on the product and lower technological demands. Within the manufacturing industry, the leather and footwear industry is one of the sections with the lowest level of book value added and number of employees. Nevertheless, it still maintains its pro-export orientation as a result of focusing on higher value-added products such as specialised product types and higher quality products. CZ-NACE 15.1 saw the share of sales decrease in 2018 (58.3%). In 2012–2017, the share of sales remained on average around 71.8% and the group was the leader of the division for several years. In 2018, CZ-NACE 15.2 Manufacture of footwear improved significantly, where the share of value added and the number of employees increased in the monitored period as the share of sales increased (see Table 6.1.1). The division is characterised by micro-enterprises and self-employed persons, who account for about 86% of the units. However, their share in sales is only 9.3% (of which two-thirds of sales are made in Group 15.1 and one third in the manufacture of footwear) and the share in the number of employees is 5.9%. In terms of economic indicators, the most important are small and medium-sized enterprises, which make up 83.4% of sales and employ 78.6% of employees in the whole division. The importance of primary production depends directly on the manufacture of footwear and the manufacture of luggage, saddlery and similar products.

Table 6.1.1 – Shares of groups in CZ-NACE 15 in 2018 (%, division = 100%)

Group Personnel Value Own Assets Number of Number of Revenues Incomes CZ‐NACE costs added capital total employees units

15.1 62.3 62.7 58.3 59.4 67.5 72.4 60.0 73.7 15.2 37.7 37.3 41.7 40.6 32.5 27.6 40.0 26.3 Source: CZSO, data 2018 MIT calculations

6.2 DEVELOPMENTS IN THE DIVISION The Czech market for footwear sales is relatively small. In 2018, the number of units and all economic indicators such as sales, value added and employees continued to decline. The labour productivity indicator grew due to the gradual introduction of innovative measures in production and higher work skills of employees. The division is negatively affected by imports of cheap goods from abroad, especially from China and other Asian countries. Domestic producers have managed to cope with this, but at the cost of falling sales. China, as the world’s largest shoe manufacturer, also affects pricing policy. A study of footwear consumption for 2030 shows that in the next 15 years, because of rising production costs and rising labour costs in China, the price of footwear will increase worldwide. Increasing production costs will generate a higher selling price, affecting the quantity sold. Given the low footwear purchases, consumers are expected to be more interested in proper footwear maintenance that will extend the life cycle of footwear. This would have a positive effect on the provision of footwear and leather goods repair services. The combination of these options will again pose new challenges for entrepreneurs, both in the leather industry and in the provision of related services. Footwear created according to the special designs of world designers and using the latest technologies or, on the other hand, handmade could be considered as an investment in the future. Many Czech companies cooperate with foreign partners and manufacture products with more complex structure, products with higher utility value and modern design, which are sold mainly in foreign markets. Shoe production is a matter of smaller, mainly family companies, which are focused on specialised products for which there is a high demand on the Czech market. The leader is still quality children’s certified footwear that meets the requirements for orthopaedic and hygienic safety and safety. In the Czech Republic there are several manufacturers of children’s footwear that produce certified products labelled “ŽIRAFA” (BOTY BEDA s.r.o.; BOKAP s.r.o.; DZO s.r.o.; EDUARD TUREČEK; HP Čechtín, s.r.o.; JONAP – výroba obuvi s.r.o.; Konsorcium T+M, s.r.o.; MCK TRADE EU Ltd; MOLEDA, a.s.; PEGRES obuv s.r.o.; První krůčky s.r.o.; V+J OBUV s.r.o.). In 2018, three companies (HP Čechtín, s.r.o.; JONAP - výroba obuvi s.r.o. and PEGRES obuv s.r.o.) were authorised to use, in addition to the “ŽIRAFA” label, the “Czech Quality” label, whose production focuses on craftsmanship and the use of healthy materials and overall footwear design in terms of proper development and formation of the foot. Shoe manufacturers see the future in online stores. The long-term trend of companies is the sale of production in their own online stores. Prabos plus a.s., the largest domestic manufacturer of working and military footwear with a production of 250,000 pairs per year, has focused on strengthening the leisure shoes segment and its own sales in the online store. For Czech shoe manufacturers, in addition to online sales, one of the main routes is export. A favourable export period was recorded by BOTAS a.s., which returned to the original brand and enjoyed sales growth. The company was successful in the US, where there was a great interest in figure skating and hockey shoes, and in Spain and Germany for new cross-country ski shoes for summer cross-country skiers. Another positive aspect is that manufacturers and processors are directing investments into the modernisation of machinery and technological innovations. An example is KARO Leather Company s.r.o., which, with the support of European subsidies in the Přerov branch, installed a line for processing and finishing tanned leather, including other auxiliary equipment. From the economic point of view, the new line streamlined the entire production process, accelerated production technology and improved the working environment of employees.

96 6. CZ-NACE 15 – MANUFACTURE OF LEATHER AND RELATED PRODUCTS

6.3 MAIN ECONOMIC INDICATORS Chart 6.3.1 – Main economic indicators of CZ-NACE 15

1 000 8 000 Number of units Average number of employees 900 7 000 800 6 000 700 600 5 000 500 4 000 932 7 556 897 895 880

400 840 790 6 577 6 542 3 000 6 513 760 6 140 719 5 891 679 659 5 489 5 457 5 425 5 387 300 629 2 000 4 938 200 100 1 000 0 0 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

7 000 45 000 Sales (CZK m) Value added (CZK m) Average monthly wage (CZK) 40 000 6 000 Labour productivity from the VA (CZK/month)* 35 000 5 000 30 000

4 000 25 000

3 000 20 000 6 120 2 361 6 076 6 062 6 019 2 310 5 936 39 154 5 912 5 898 38 603 2 149 5 654 5 529 36 440 2 007 5 399 1 998 35 539 1 937 1 924 1 896 1 872 15 000 33 544 1 795 1 780 4 827 2 000 31 498 28 174 26 635 25 347 10 000 25 184 23 163 21 336 20 389 18 972

1 000 17 193 16 259 15 643 15 468 14 824 14 194 5 000 13 951 13 409

0 0 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Chart 6.3.2 – Price developments in CZ-CPA 15 Chart 6.3.3 – Spread (ROE – re) CZ-NACE 15 (%) (2005 = 100 %)

130 40

120 30

110 20

100 10

90 0

80 ‐10

70 ‐20 60 ‐30 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 50 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Spread ‐13,91‐5,70 ‐7,54 ‐1,97 ‐0,87 ‐5,56 ‐4,05 7,96 0,76 ‐5,45 ‐21,96 15 103,0 103,7 105,0 107,6 109,5 109,7 111,3 111,8 112,7 113,7 115,3 rf 4,55 4,67 3,71 3,79 2,31 2,26 1,58 0,58 0,43 0,98 1,98 15.1 104,2 104,8 106,4 109,1 111,0 111,5 112,8 111,8 111,7 111,1 109,4 ROE 15,01 16,93 10,20 13,59 15,29 16,94 18,10 27,31 20,57 14,20 0,64 15.2 101,5 102,4 103,1 105,6 107,5 107,5 109,2 110,7 112,0 114,2 118,3 re 28,92 22,63 17,75 15,56 16,16 22,50 22,15 19,35 19,81 19,65 22,60

Source: CZSO, MIT calculations Source: CZSO, MIT calculations

6.4 FOREIGN TRADE

6.4.1 DEVELOPMENT OF FOREIGN TRADE Exports and imports grew between 2009 and 2017, but in 2018 they declined. The Czech Republic did not show a positive foreign trade balance in the whole time series, in any of the years (see Chart 6.4.1). The level of imports in this division is consistently higher than the revenue for the sales of own products and services. In the European context, the Czech Republic has a relatively small market for footwear sales. If manufacturers wish to fully use their capacity and not compete in the domestic market with very cheap Asian competition, they have to export. There are a number of manufacturing cooperation projects with Western partners. In addition, a number of companies are switching to more complex products with higher utility and modern design. Therefore, 70–80% of Czech shoemakers’ production is successfully exported. Chart 6.4.1 – Exports, imports and foreign trade balance in products by CZ-CPA 15 (CZK million)

60 000

50 000 Export Import Trade balance

40 000

30 000

20 000 47 448 43 309 41 834 38 969 38 336 34 413 32 555 29 778 28 042 27 622

10 000 26 256 24 759 24 468 24 423 21 555 21 081 20 265 17 449 3 342 9 119 7 018 6 370 8 563 14 211 9 112 1 497 ‐ ‐ 10 754 ‐ ‐ 9 191 ‐ ‐ 12 992 ‐ ‐ ‐ ‐ 0 11 146

‐10 000

‐20 000 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Source: CZSO, data as of 8 April 2019 6.4.2 TERRITORIAL STRUCTURE OF FOREIGN TRADE The export territories of the division include demanding markets in Germany, Austria, Slovakia and the United Kingdom (see Chart 6.4.2). Despite rising prices, the largest volume of imports was from China in 2018, but mostly at dumping prices. Similar imports also come from Vietnam and other Asian countries (e.g. Cambodia and Indonesia). Conversely, products imported from Germany are better quality and therefore more expensive. Chart 6.4.2 – Foreign trade in CZ-CPA 15 products

Import territories in 2018 Export territories in 2018

other other 21% 22% China France Germany 31% 3% 34% Slovakia Hungary 3% Indonesia 3% 3% Poland 5% Cambodia 5% Vietnam Italy Austria 13% 5% Slovakia 12% Poland United Italy 11% 5% Germany 9% Kingdom 9% 6%

Source: CZSO, data as of 8 April 2019 98

6. CZ-NACE 15 – MANUFACTURE OF LEATHER AND RELATED PRODUCTS

6.5 RESEARCH, DEVELOPMENT AND INNOVATION In terms of volume of R&D expenditure, number of enterprises performing R&D and number of employees, CZ-NACE 15 is one of the smaller divisions in the manufacturing industry. CZ-NACE 15 R&D expenditure amounted to CZK 17 million in 2017 (see Chart 6.5.1) and accounted for 0.07% of total R&D expenditure in manufacturing. This expenditure was almost entirely from business sources. The share of researchers (FTE) in the total number of researchers in the manufacturing industry was 0.11%, i.e. 9 researchers per year (average for 2013–2017). Given that in terms of R&D expenditure and number of enterprises the division is relatively small, there is only one company which received a significant amount of special-purpose State budget aid within the national programmes of Technical Assistance of the Czech Republic (ALFA) in the period 2007–2017. This company is GALA a.s. (Research and development of the use of nanomaterials in the manufacture of balls project). In the period 1 January 2015 – 31 October 2017, eight projects under the National RIS3 Strategy were approved for the OP EIC, which ranks the manufacture of leather and related products among the less-supported R&D areas in the National RIS3 Strategy. Their total planned aid (European, Czech private and public sources) was CZK 34 million in the period under review, of which CZK 16 million was from EU grants. The aid is aimed mainly at creating the R&D capacities of small enterprises (82%). The largest EU grant was awarded to KARO - Leather Company s.r.o. (R&D capacity to streamline own production activities in the premises in Přerov of KARO - Leather Company s.r.o. project; total expenditures CZK 15 million, EU grant CZK 7 million).

Chart 6.5.1 – R&D expenditure (CZK mil.) and the number of enterprises with R&D in CZ-NACE 15

EU+other international organisations Number of enterprises Entrepreneurs Government+universities 7

19 20 18 19 6 17 0 0 0 17 15 15 0 14 0 5 15 0 0 0 4

10 16 17 19 3 6 6 6 6 13 17 13 16 15 5 5 5 5 2 5 1

2 2 2 2 0 0 0 1 0 0 2010 2011 2012 2013 2014 2015 2016 2017 2010 2011 2012 2013 2014 2015 2016 2017

Source: CZSO, MIT calculations

6.6 SUMMARY AND PERSPECTIVE OF THE DIVISION The Czech market is relatively small and most footwear, over 30 million pairs in Czech stores, is imported. The shoes were imported from abroad for the largest retail chains CCC, Humanic and Baťa. After production restructuring, footwear manufacturers focused on footwear and clothing accessories with a higher value added, especially in the segments of work shoes, protective and safety shoes, as well as orthopaedic, health, prophylactic and quality children’s footwear. Customers return to quality Czech footwear, especially children’s and health footwear, and require it from their retailers. The trend in footwear production is tailor-made footwear from leading Czech designers, using modern raw materials and preparations at a higher price, but also “barefoot” footwear, which has begun to be produced by smaller companies. This kind of footwear is designed to allow the foot to work almost as if it were “barefoot”. Barefoot shoes are characterised by low weight and a straight, thin and very flexible sole and shape corresponding to the shape of the foot (both in width and length). With these characteristics, barefoot shoes support the natural development of the foot. Of course, shoes are made of breathable and harmless materials that prevent the development of mould or various allergic reactions. Leather products have long been preferred, mainly due to their high quality, timeless design and long life. However, their popularity is declining, mainly because of the environmental lifestyle being adopted by more and more young people in our society. While the demand for leather goods is growing globally, alternatives are being sought, to which designers and innovative creators are responding positively. So- called “eco-leather”, or “vegan leather”, which is produced in various ways from predominantly natural fibres, is growing in popularity. It saves natural resources, is characterised by quality material processing, does not contain animal components at any stage of production, and also eliminates the negative impact on the environment. The lack of skilled workers in the leather and footwear sector remains a persistent problem. Important factors for maintaining the competitiveness of the manufacture of leather and related products still include: • creating favourable conditions for entry of foreign capital; • presenting good business plans to obtain financial resources from EU funds, and their co-financing possibilities; • active communication with the general public about the attractiveness of the leather industry and shoe production and cooperation with the Ministry of Education and Youth, which will continue to expand forms of education (e.g. use of the European Union Erasmus+ education programme and professionally focused “SHOEMAN” project to improve the qualifications of managers of small footwear companies, or the POVEZ II grant project, which allows employers and self-employed persons to obtain financial contributions for training or retraining employees); • expanding cooperation with national and foreign scientific and technical facilities; a good example is the opening of the Shoe Research Centre, opened on 30 April 2019 by Tomáš Baťa University in Zlín. The centre employs young scientists together with experienced technologists, thus linking scientific research with practice. The transfer of acquired knowledge from the field of basic research into practice within the university is provided by the Technology Transfer Centre; • introducing new knowledge into practice and using it in product innovation. When producing footwear, respect the individual wishes of customers, focusing on the health aspect of footwear, i.e. health fitness of shoes, proper ergonomics, wearing comfort, functionality, practicality, but also visual and aesthetic factors.

100 7. CZ-NACE 16 – MANUFACTURE OF WOOD AND OF PRODUCTS OF WOOD AND CORK, EXCEPT FURNITURE; MANUFACTURE OF ARTICLES OF STRAW AND PLAITING MATERIALS

7. CZ-NACE 16 – MANUFACTURE OF WOOD AND OF PRODUCTS OF WOOD AND CORK, EXCEPT FURNITURE; MANUFACTURE OF ARTICLES OF STRAW AND PLAITING MATERIALS

7.1 CHARACTERISTICS OF THE DIVISION

Breakdown of the CZ-NACE 16 division by individual groups: 16.1 Sawmilling and planing of wood; 16.2 Manufacture of products of wood, cork, straw and plaiting materials.

The wood industry, although divided into only two sections, includes a very diverse range of manufacturing types and products. Its products are used in virtually all areas of life, in most divisions of the manufacturing industry and in the construction and household sectors. Lower-quality wood also serves as an ecological fuel.

Products from this manufacturing division are made from renewable raw materials that reduce CO2 emissions and are environmentally friendly. Wood is a versatile raw material for which there are many processing methods and from which it is possible to create a truly rich range of products. As research and development progress, it is becoming an increasingly sophisticated material that can replace non-renewable raw materials in the future. Forests cover almost 34% of the territory of the Czech Republic, which corresponds to an area of 2.67 million ha. The wood sector processes raw coniferous and deciduous wood by sawing it into timber, with coniferous wood being the most-used raw material. As in previous years, state forests managed by Lesy ČR, s. p. and Vojenské lesy a statky ČR, s.p. (about 56%) account for the largest share of forest ownership. Other significant forest owners include private owners, municipalities and cities. The annual capacity of woodworking operations in the Czech Republic is estimated at 12 million3 m of wood, of which 45% are small and medium-sized saws. The division is characterised by a high share of small and micro-enterprises. However, we also find large companies with an annual turnover of over CZK 1 billion. In the wood-procesing industry, the group that dominates in selected economic indicators and the number of units is CZ-NACE 16.2 Manufacture of products of wood, cork, straw and plaiting materials, except furniture (Table 7.1.1). Its dominant position is evident in all the indicators monitored. This is mainly due to the wide range of products produced by this group.

Table 7.1.1 – Shares of groups in CZ-NACE 16 in 2018 (%, division = 100%)

Group Personnel Value Own Assets Number of Number of Revenues Incomes CZ‐NACE costs added capital total employees units

16.1 22.5 22.4 27.2 27.2 25.3 23.6 20.7 4.9 16.2 77.5 77.6 72.8 72.8 74.7 76.4 79.3 95.1 Source: CZSO, data 2018 MIT calculations

101

7.2 DEVELOPMENTS IN THE DIVISION In 2018 the wood industry was marked by persistent drought and the associated bark beetle calamity, which destroyed most spruce growth in the Czech Republic and Central European countries. The total volume of infected spruce trees in our territory is estimated to be 18 million 3m , of which about 12 million m3 of bark beetle-infested wood were logged in 2018. The most serious situation is in the Vysočina region, in the South Moravian and South Bohemian regions. However, the issue is spreading and the condition of forests is also deteriorating in other regions of the Czech Republic. This situation caused a huge surplus of coniferous wood on the market, which resulted in a large drop in the purchase price, especially for spruce logs. In 2017, the price per cubic metre of spruce wood was around CZK 1,600; now it is sold for CZK 800. This situation is very serious for forestry, and there is a lack of funds for forest regeneration. Despite the declining purchase price for coniferous logs, the price of timber remains the same as in previous years. Large and medium-sized wood-processing companies used the excess of spruce wood on the market and its low purchase prices by increasing their processing capacity. Timber production thus increased by 245,000 m3. In 2018, a total of 8.15 million m3 of coniferous and deciduous logs were processed by cutting. Nevertheless, there is still a high export of raw timber abroad with no added value, mainly due to higher selling prices and the overload of domestic processors. The same is true for the export of timber and products of this sector, when a large proportion is sold abroad at higher prices and a large amount of timber industry products are imported to cover domestic consumption. Further growth of woodworker numbers is hampered in particular by a lack of skilled workers and insufficient sales of the timber produced. The consumption of timber also increased by 150,0003 m . One of the factors is the ever-increasing number of buildings with a wooden load-bearing structure. In the Czech Republic, a total of 18,287 family houses were built in 2018, of which 2,945 were wooden buildings. Compared to 2017, family houses made of wood grew by 36%. The production of particle board, plywood and blockboard increased by 6.4% year-on-year. Thanks to the continuing increase in the number of boilers and pellet stoves in Czech households, the production of wood pellets increased (a total of 377,000 tonnes were produced). This is an increase of 3.3% compared to 2017. As already mentioned, the woodworking sector is still struggling with a shortage of workers. As a result, many companies have already invested in the automation of manufacturing operations in connection with Industry 4.0, which will reduce the number of jobs needed. However, for smaller sawmill operations, automation is not the solution, especially for those that also deal with forestry activities related to forest growing and logging. In the context of climate threats, the general public, as the main consumers of the sector’s products, and large buyers, increasingly demand that wood products come from forests managed in a sustainable way. This guarantee is provided by two international certifications, PEFC and FSC, which are currently applied worldwide. The forest area of 311,776,983 ha is certified worldwide by PEFC. In the Czech Republic, and about 67% of forests are certified this way. The FSC certificate applies to 200,963,183 ha of forest land worldwide, but in the Czech Republic only 2% of forests bear this label. At present, therefore, processors are beginning to put pressure on some forest owners to increase the FSC forest area in order to eliminate the need to import this raw material from abroad. State forests are already working to introduce a certificate in selected areas suitable for this type of forestry.

102 7. CZ-NACE 16 – MANUFACTURE OF WOOD AND OF PRODUCTS OF WOOD AND CORK, EXCEPT FURNITURE; MANUFACTURE OF ARTICLES OF STRAW AND PLAITING MATERIALS

7.3 MAIN ECONOMIC INDICATORS Chart 7.3.1 – Main economic indicators of CZ-NACE 16

35 000 70 000 Number of units Average number of employees

30 000 60 000

25 000 50 000

20 000 40 000

15 000 30 000 64 289 61 058 60 323 59 041 29 495 29 405 58 288 29 103 28 848 28 650 27 849 27 672 27 553 27 474 27 415 54 780 54 458 26 832 53 640 53 181 53 125 53 034 10 000 20 000

5 000 10 000

0 0 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

120 000 80 000 Sales (CZK m) Value added (CZK m) Average monthly wage (CZK) 70 000 100 000 Labour productivity from the VA (CZK/month)* 60 000 80 000 50 000

60 000 40 000 75 320 69 299

102 554 30 000 97 097 63 197 94 267 94 140 61 773 40 000 92 675 89 344 59 529 86 428 84 344 84 327 84 251 83 238 27 715 53 605 24 927 23 716 49 557 23 372 48 844 23 143 22 044 46 960

21 378 20 000 20 859 20 848 45 609 20 702 20 206 44 716 20 000 10 000 23 277 22 005 20 310 19 221 18 445 16 462 16 189 16 408 16 707 17 001 17 565 0 0 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Chart 7.3.2 – Price developments in CZ-CPA 16 Chart 7.3.3 – Spread (ROE – re) CZ-NACE 16 (%) (2005 = 100 %)

130 30

120 25

110 20

15 100

10 90 5 80 0 70 ‐5 60 ‐10 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 50 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Spread ‐2,33 ‐8,09 ‐4,73 ‐6,59 ‐3,65 ‐3,53 1,59 3,44 5,96 3,79 3,01 16 103,4 100,3 103,0 110,3 110,7 111,8 118,4 118,5 117,4 119,1 122,1 rf 4,55 4,67 3,71 3,79 2,31 2,26 1,58 0,58 0,43 0,98 1,98 16.1 95,8 95,3 102,1 114,3 113,2 116,4 123,1 119,5 115,2 113,6 114,4 ROE 20,75 14,89 15,89 16,21 15,52 16,52 22,21 22,29 24,45 23,87 22,29 16.2 107,8 103,1 103,6 108,0 108,8 109,1 115,7 117,2 117,4 120,6 124,5 re 23,08 22,98 20,63 22,81 19,16 20,05 20,62 18,85 18,49 20,07 19,28

Source: CZSO, MIT calculations Source: CZSO, MIT calculations

103

7.4 FOREIGN TRADE

7.4.1 DEVELOPMENT OF FOREIGN TRADE Development of foreign trade in CZ-CPA 16 commodities shows that during the period under review, the value of exports grew faster than the value of imports, so the positive balance gradually increased. The sum of exported products of this group increased by almost CZK 3 billion year-on-year to CZK 42.71 billion. A similar increase can be seen in imported goods. In addition to rising prices, this may also be due to the increasing number of units operating in the Czech Republic in this sector.

Chart 7.4.1 – Exports, imports and foreign trade balance in products by CZ-CPA 16 (CZK million)

45 000 40 000 Export Import Trade balance 35 000 30 000 25 000 20 000 42 710 39 846 37 936 36 678 15 000 36 460 32 714 30 593 29 762 28 453 10 000 26 324 23 209 21 960 19 500 20 329 19 033 17 925 17 607 17 886 17 426 18 753 15 594 15 395 14 666 17 120 14 521 14 506

5 000 15 199 15 096 11 818 13 932 0 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Source: CZSO, data as of 8 April 2019

7.4.2 TERRITORIAL STRUCTURE OF FOREIGN TRADE Territorial distribution of foreign trade has seen little change over the long term. Among the largest foreign customers of CZ-CPA 16 products in 2018 are EU Member States such as Germany (38%), Austria (19%), Slovakia (8%), Italy (6%) and Poland (4%). Exports to Germany mainly involve timber, construction joinery products and pallets. Austria is most interested in logs, timber, veneer, agglomerated products and plywood. In 2018, most CZ-CPA 16 goods were imported from Germany (22%), followed by Poland (21%), with an evident year-on-year increase in imports of 2%, Austria (14%) and Slovakia (9%).

Chart 7.4.2 – Foreign trade in CZ-CPA 16 products

Import territories in 2018 Export territories in 2018

other Slovenia other 18% Germany France 20% 2% 22% Switzerland 2% 2% Germany 38% China Netherlands 4% 3% Russia 4% Poland Poland 21% 4% Italy Slovakia Ukraine Slovakia 6% 8% 4% 9% Austria Austria 19% 14%

Source: CZSO, data as of 8 April 2019

104

7. CZ-NACE 16 – MANUFACTURE OF WOOD AND OF PRODUCTS OF WOOD AND CORK, EXCEPT FURNITURE; MANUFACTURE OF ARTICLES OF STRAW AND PLAITING MATERIALS

7.5 RESEARCH, DEVELOPMENT AND INNOVATIOIN Expenditure on R&D in CZ-NACE 16 amounted to CZK 48 million in 2017 (see Chart 7.5.1) and accounted for 0.14% of total R&D expenditure in manufacturing. Compared to the previous year, there was an increase of CZK 1 million. The bulk of the funds were expenditures from business resources. It is precisely the growth in expenditure from business sources that can also explain the increase in R&D expenditure of CZ-NACE 16 in recent years, which is also related to the growth in the number of enterprises in this division of the manufacturing industry. The share of researchers in CZ-NACE 16 in the total number of researchers in the manufacturing industry sectors was 0.32%, i.e. 27 researchers per year (average for 2013–2017). Companies that benefited from a significant amount of targeted support from the State budget under the national programmes of MIT (TRIO), MoA (KUS) and TA CR (EPSILON) in the period 2007–2018 include EUROPANEL s.r.o., ELTRO ŠŤASTNÝ, s.r.o., MATRIX a.s., SLAVONA, s.r.o. and KAISER s.r.o. In the context of the OP EIC calls under the National RIS3 strategy, the R&D aid received by the division is below average. In the period 1 January 2015 – 31 October 2017, total aid for 66 approved projects (European, Czech public and private sources) was planned at CZK 0.43 billion, of which CZK 0.18 billion was from EU grants. Projects are focused especially on strengthening the R&D capacities of enterprises (84 %). Most of the projects, by their substantive focus, correspond to the application sector Ensuring a healthy and quality environment and efficient use of natural resources (54); the remaining 12 belong to Traditional cultural and creative industries. In the reference period, projects for the processing of wood and manufacture of products of wood (except furniture) were submitted by large enterprises as well as SMEs. As regards European support for applicants/beneficiaries, the largest EU support was granted to Kloboucká lesní s.r.o. for SMEs (Centre of composite wood-based applications project; total expenditure CZK 59 million, of which EU subsidies were CZK 30 million) and to DEKWOOD, s.r.o. for large enterprises (Composite material DEK-FDP project; total expenditure of CZK 24 million, of which EU subsidies were CZK 6 million).

Chart 7.5.1 – R&D expenditure (CZK mil.) and the number of enterprises with R&D in CZ-NACE 16

EU+other international organisations Number of enterprises Entrepreneurs Government+universities 16 70

58 14 60 0 12 47 48 50 42 0 0 10 40 8 15 14 30 58 6 20 44 11 18 46 10 20 0 9 4 8 8 2 11 7 27 5 10 13 5 0 20 2 0 11 5 4 0 4 0 0 0 1 0 0 0 2010 2011 2012 2013 2014 2015 2016 2017 2010 2011 2012 2013 2014 2015 2016 2017

Source: CZSO, MIT calculations

105

7.6 SUMMARY AND PERSPECTIVE OF THE DIVISION In the CZ-NACE Group 16.1 Sawmilling and planing of wood, the largest companies include Stora Enso s.r.o., Serafin Campestrini s.r.o., Mayr-Melnhof Holz Paskov s.r.o., Javořice a.s. and LESS & TIMBER, a.s. In the Group CZ-NACE 16.2 Manufacture of products of wood, cork, straw and plaiting materials, except furniture, large producers of wood-based panels include Dřevozpracující družstvo Lukavec, KRONOSPAN CR spol. s r.o. and Pfeifer Holz s.r.o. and, in the production of wooden containers, Wotan Forest a.s. and PILOUS spol. s r.o. The quality of domestic wood-processing industry manufacturers makes their products attractive not only in the domestic market, but also in the markets of other EU countries and elsewhere in the world. The key issue for the further development of the domestic timber industry is primarily the increase in competitiveness in the domestic and foreign markets, which consists mainly of the production of new products with higher added value. The introduction of the latest techniques and technologies and the application of modern management methods also aid this. There are also benefits to be gained in the area of strengthening R&D cooperation with foreign partner organisations. The Czech Republic continues to lag behind the developed EU countries and in the world in the use of wood. For example, the annual consumption of wood per capita in the US and Japan is 150% higher than in the Czech Republic. The potential for higher utilisation of wood is seen mainly in construction, in the production of agglomerated materials and in furniture. Thanks to the renewability of wood raw material and a number of research and new discoveries in this area, wood appears to be the material of the future. Wooden buildings are becoming more and more popular in the Czech Republic. They have a large representation especially in family houses, where in 2018 they climbed to 16.1% of all completed houses. According to the Association of Prefabricated House Suppliers, the vision is that in a few years the timber market share in the family house market in the Czech Republic could increase to the level of Germany or Switzerland, where this share is 20%. In addition to family houses, however, we can already see public buildings made of wood such as schools, kindergartens, churches and even fire stations. The main barrier preventing a further increase in the number of realised wooden buildings in the area of public and high- rise buildings is fire safety. However, a number of organisations and construction companies are striving to modify the regulations, and thus the development of the construction of wooden public buildings and civic amenities buildings in the Czech Republic can be expected in the future. There is an excess supply of the most popular spruce logs due to continuing bark beetle infestation, and their price has dropped sharply. With the accompanying sales crisis, there is a problem with temporary and long-term storage of beetle-infested wood, where there is a lack of areas suitable for wet storage of wood that will maintain its quality for several years. Reduced prices of logs and their availability were favourable for domestic sawmills, which have increased their processing capacity. This trend is expected to continue in the next year. After the end of the bark beetle calamity, the increase in processing capacities in the Czech Republic is estimated at approximately 17 million 3m per year. Many small and medium-sized enterprises could increase their cutting by simply increasing shifts, but here we encounter the problem of a lack of skilled people. In the future, this problem, at least in part, could be solved by more extensive automation, but that will not solve the problem completely. It is necessary to motivate children and students to be interested in these fields of activity. Export of wood does not fulfil the function of forestry policy and is purely an economic activity. For strategic reasons, the objective for this industry is therefore to find qualitatively and quantitatively the best use of all harvested and processed wood in the country of origin of the natural resource. This also includes efforts to achieve the highest level of processing of the wood commodity in domestic processing facilities.

106 8. CZ-NACE 17 – MANUFACTURE OF PAPER AND PAPER PRODUCTS

8. CZ-NACE 17 – MANUFACTURE OF PAPER AND PAPER PRODUCTS

8.1 CHARACTERISTICS OF THE DIVISION

Breakdown of the CZ-NACE 17 division by individual groups: 17.1 Manufacture of pulp, paper and paperboard; 17.2 Manufacture of articles of paper and paperboard; The paper industry is one of the smaller but important industries in the Czech Republic. Paper and paper products are still irreplaceable in some areas, despite the development of technology. In the past, the paper industry was one of the major polluters of the environment, but at present it has very good environmental performance. Manufacture of paper is based on renewable resources (wood) and secondary raw materials (waste paper). The input material for paper production is mostly spruce wood chips. It is processed by a chemical process into cellulose, from which pulp is subsequently formed by washing, bleaching and grinding. This is then further adapted to the type of final product. The products of this division are used in practically all branches of the manufacturing industry, especially in the production of packaging and products for the printing and chemical industry. They are also used in electrical engineering and the food industry. For many years, the strategy of sustainable development has been actively pursued in this field, and the production process takes place in a closed cycle. However, it is very demanding in terms of investment and is characterised by high energy consumption and the need to provide sufficient water. The consumed energy is largely covered by renewable sources and by waste heat from own production. In terms of selected economic indicators and number of units, CZ-NACE 17.2 Manufacture of paper and paper products is the dominant group in the paper industry (Table 8.1.1). Its dominant position is evident in all the indicators monitored.

Table 8.1.1 – Shares of groups in CZ-NACE 17 in 2018 (%, division = 100%)

Group Personnel Value Own Assets Number of Number of Revenues Incomes CZ‐NACE costs Added capital total employees units

17.1 21.2 35.8 34.1 34.9 38.2 40.5 17.1 31.4 17.2 78.8 64.2 65.9 65.1 61.8 59.5 82.9 68.6 Source: CZSO, data 2018 MIT calculations

107

8.2 DEVELOPMENTS IN THE DIVISION From the perspective of Czech paper and paperboard manufacturers, 2018 can be considered a relatively successful year. The economy is still in good shape, resulting in an increase in packaging and packaging paper consumption. The total consumption of paper and paperboard in the Czech Republic exceeded 1.55 million tonnes. Despite dynamic growth, however, it is not reaching the level of advanced EU countries. The annual consumption of paper in the Czech Republic per capita in 2018 is 150 kg. The Czech paper industry is characterised by unevenness in the produced assortment and specialisation in the production of packaging and packaging types of paper. The revenues of paper companies are strongly influenced by economic development and production capacities in Europe, given the significant trade in paper products. In the Czech Republic, a total of 843 thousand tonnes of paper and paperboard were produced, which represents a 7% decrease in production from 2017. Almost 1.29 million tonnes of these products were exported abroad. However, the consequence of massive exports is that increasing consumption of paper in the Czech Republic must be ensured by imports. Thus, in 2018, over 2.27 million tonnes of paper and paperboard were imported. Imports are thus more than double the domestic production. In particular, graphic papers and hygienic papers are imported, as well as some materials for the production of corru- gated paperboards. The domestic processing of waste paper is not sufficient and most of the collected paper intended for paper recycling is still exported. The processing of waste paper for production is still at 230 thousand tonnes. In contrast, the amount of recovered paper is constantly growing and in 2018 again exceeded 1 million tonnes. The Czech Republic is thus a surplus market in this area and also a major exporter. In terms of the development in production and consumption of paper and paperboard, the European market is stagnating. It is growing in some commodities and decreasing in others. There is a sharp drop in the consumption of graphic and newsprint papers. This is mainly due to the progressive digitisation and success of electronic media over the printed ones. As a result, capacities for the production of graphic paper or its renovation for the production of packaging papers are being stopped. At the same time, prices of cellulose and all types of paper and paperboard have been on the rise for a long time. This is due to declining demand for printed newspapers and magazines, which has led companies to shut down most of their production capacities in North America, Europe and Asia. This led to a shortage of publication paper in the market. Higher electricity prices and also the use of wood in new industries such as biofuels are other factors affecting price growth. In the market for paper, cellulose and raw materials, China is a global and major player, but does not have enough of its own raw materials, i.e. waste paper and wood for cellulose production. China has to import more than half of the pulp and waste paper for production, making it a key market in the industry. In 2017, the Chinese government gradually introduced rigorous checks on the quality of scrap paper, limited import licences, and banned imports of mixed paper. In 2018, it continued by lowering the limit of non-paper impurities and imposing a 25% duty on imports of paper for recycling from the US. Despite these measures, which are primarily part of the state’s new environmental strategy, China has remained an important element affecting the evolution of supply and demand for waste paper in Europe and the world. The paper industry prides itself on being environmentally friendly. This is illustrated by the Eco-Friendly Product label, which states that throughout its entire lifecycle, a product or service is considerably more friendly not only to the environment but also to human health. Customers are also putting pressure on the paper industry in the area of the origin of the wood used for cellulose production. There are currently two international certifications in the world, PEFC and FSC, which are a guarantee that the wood comes from sustainable forests. In the Czech Republic, 67% of forest areas are managed according to the PEFC certificate and 2% according to the FSC certificate. Therefore, some processors are beginning to put pressure on forest owners to increase the FSC forest area in order to eliminate the need to import this raw material from abroad.

108 8. CZ-NACE 17 – MANUFACTURE OF PAPER AND PAPER PRODUCTS

8.3 MAIN ECONOMIC INDICATORS Chart 8.3.1 – Main economic indicators of CZ-NACE 17

1 200 25 000 Number of units Average number of employees

1 000 20 000

800 15 000 600

986 10 000 1 017 965 953 21 381 950 928 929 928 20 792 20 384 895 19 761 19 362 19 218 18 934

400 18 748 18 424 18 262 18 191 763 707 5 000 200

0 0 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

100 000 100 000 Sales (CZK m) Value added (CZK m) Average monthly wage (CZK) 90 000 90 000 Labour productivity from the VA (CZK/month)* 80 000 80 000 70 000 70 000 60 000 60 000 50 000 50 000 40 000 40 000 86 492 86 416 86 096 84 392 81 328 79 073 77 825 74 117 71 261 30 000 70 895 30 000 65 824 64 226 20 811 63 433 63 024 20 309 62 695 60 415 60 033 59 859 18 610 59 515 57 379 56 902 16 601 53 544 15 037 14 357 13 854 13 211 13 107

20 000 12 794 20 000 12 687 30 825

10 000 10 000 28 786 26 320 25 651 24 901 24 395 24 249 24 017 23 735 22 961 21 602 0 0 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Chart 8.3.2 – Price developments in CZ-CPA 17 Chart 8.3.3 – Spread (ROE – re) CZ-NACE 17 (%) (2005 = 100 %)

130 16 14 120 12 110 10

100 8 6 90 4 80 2

70 0 ‐2 60 ‐4 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 50 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Spread ‐0,23 ‐0,69 2,71 ‐1,62 2,34 ‐1,11 4,00 5,39 7,37 7,17 1,49 17 101,4 95,9 97,8 102,3 100,7 99,2 102,3 102,6 102,4 103,4 107,4 rf 4,55 4,67 3,71 3,79 2,31 2,26 1,58 0,58 0,43 0,98 1,98 17.1 102,2 95,3 107,6 113,9 108,8 110,3 116,9 119,0 118,2 122,1 125,8 ROE 8,74 8,90 10,08 8,06 9,88 7,64 12,13 12,98 14,62 14,65 10,64 17.2 100,8 95,8 94,3 98,2 97,5 95,6 98,0 98,2 98,0 98,4 102,6 re 8,97 9,58 7,37 9,68 7,54 8,74 8,13 7,59 7,25 7,48 9,15

Source: CZSO, MIT calculations Source: CZSO, MIT calculations

109

8.4 FOREIGN TRADE

8.4.1 DEVELOPMENT OF FOREIGN TRADE The value of CZ-CPA 17 imports has consistently exceeded the value of exports. In 2018, the long-term trend of decreasing the negative balance of the foreign trade balance was interrupted. From CZK -237 million in 2017, it reached CZK -596 million in 2018 (see Chart 8.4.1). The total sum of exported products of this group increased by CZK 2.63 billion year-on-year to CZK 61.49 billion. Higher growth is also visible in imported goods, which grew by less than CZK 3 billion to around CZK 62.1 billion. Chart 8.4.1 – Exports, imports and foreign trade balance in products by CZ-CPA 17 (CZK million)

70 000

60 000 Export Import Trade balance

50 000

40 000

30 000 62 084 61 489 59 097 58 859 57 929 57 588 56 790 56 258 53 972 50 721 20 000 50 237 47 227 46 984 45 549 45 179 42 752 41 526 40 906 39 466 10 000 36 557 4 349 1 329 5 701 1 138 596 5 713 4 233 237 ‐ 3 251 ‐ 4 688 ‐ ‐ ‐ ‐ ‐ ‐ ‐ 0 ‐

‐10 000 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Source: CZSO, data as of 8 April 2019

8.4.2 TERRITORIAL STRUCTURE OF FOREIGN TRADE The largest foreign customers of CZ-NACE 17 are traditionally Germany (23%), where its share increased by 2%, Poland (11%) and Slovakia (8%). In terms of imports, our largest suppliers are Germany (31%), Poland (13%) and Austria (10%), which increased by 2%. The territorial structure of foreign trade in paper products has been relatively stable in the long run, the main trading partners remaining the same (Chart 8.4.2). Chart 8.4.2 – Foreign trade in CZ-CPA 17 products

Import territories in 2018 Export territories in 2018

other Germany 24% other 23% Germany 33% 31% Finland 3% Poland 11% Sweden Slovakia 3% 8% Poland USA United 13% Italy 4% Italy Austria Kingdom 4% 5% 5% Slovakia 10% France Austria China 7% 6% 5% 5% Source: CZSO, data as of 8 April 2019

11 0

8. CZ-NACE 17 – MANUFACTURE OF PAPER AND PAPER PRODUCTS

8.5 RESEARCH, DEVELOPMENT AND INNOVATION In terms of the volume of R&D expenditure, CZ-NACE 17 belongs to relatively smaller sections of the manufacturing industry. In 2017, R&D expenditures amounted to CZK 52 million (see Chart 8.5.1) and accounted for 0.12% of total R&D expenditure in the manufacturing industry. Compared to 2016, there was a significant increase in R&D expenditures from business sources and also from Czech public sources and universities. The share of researchers (FTE) in CZ-NACE 17 in the total number of researchers in the manufacturing industry divisions was 0.16%, i.e. 13 researchers per year (average for 2013–2017). The companies that received in 2007–2018 a significant amount of special-purpose State support within the national programmes of the Ministry of Industry and Trade (TIP, TRIO) and Technical Assistance of the Czech Republic (ALFA, Competence Centres and EPSILON) include OTK GROUP, a.s., Hostýnské papírny s.r.o., SPM – Security Paper Mill, a.s. and CIUR a.s. Within the National RIS3 Strategy, the manufacture of paper and paper products is an R&D area that receives below average support. In the period from 1 January 2015 – 31 October 2018, 36 projects falling within the National RIS3 Strategy were approved under the OP EIC for implementation with planned total aid (EU, public and private Czech funds) of CZK 0.46 billion, of which CZK 0.15 billion is an EU grant. Pro- jects are focused on strengthening the R&D capacities of enterprises (87%). Most of the projects fall under the application sector Ensuring a healthy and quality environment and efficient use of natural resources; three projects fall under Traditional cultural and creative industries. In the reference period, projects for the manufacture of paper and paper products were submitted by large enterprises as well as SMEs. As regards European aid for applicants/beneficiaries, the largest EU aid was granted to S&K LABEL spol. s r.o. for SMEs (FLEXO 2017; Innovation project DIGI; Expansion of S&K LABEL’s export scope projects; total expenditures of CZK 97 million, of which EU grant of CZK 34 million); the largest EU aid for large enterprises was granted to OP papírna, s.r.o. from the Olomouc Region (Inno- vation of OP papírna, s.r.o., Innovation of paper machine PS5 projects, total expenditures CZK 159 million, of which EU grant was of CZK 40 million).

Chart 8.5.1 – R&D expenditure (CZK mil.) and the number of enterprises with R&D in CZ-NACE 17

EU+other international organisations Number of enterprises Entrepreneurs Government+universities 60 12 55 52 4 0 50 10

40 8 32 34 27 30 42 26 6 0 16 10 10 10 20 4 8 13 14 17 7 7 0 6 6 12 3 10 9 18 2 16 5 9 10 5 5 5 0 0 0 2011 2012 2013 2014 2015 2016 2017 2011 2012 2013 2014 2015 2016 2017

Source: CZSO, MIT calculations

111

8.6 SUMMARY AND PERSPECTIVE OF THE DIVISION In CZ-NACE 17.1 Manufacture of pulp, paper and cardboard, the largest companies operating in the Czech Republic are KRPA PAPER a.s., Lenzing Biocel Paskov a.s., Mondi Štětí a.s. and OP papírna, s.r.o. Group 17.2 Manufacture of paper and paperboard products is dominated by Smurfit Kappa Czech s.r.o., DS Smith Packaging Czech Republic s.r.o., Mondi Bupak s.r.o. and Kimberly-Clark, s.r.o., which produces sanitary and toilet paper products. The Association of the Czech Paper Industry expects growth in the consumption of paper, cardboard and paperboard in the Czech Republic in the coming years. The annual consumption could rise to 200 kg per capita. This consumption is achieved by Western European countries. Paper for packaging, paperboard and sanitary paper is likely to have the largest share of the increase, mainly due to the launch of a number of new production investments made in recent years. However, consumption of all types of graphic and newsprint paper is expected to continue to decline. The trend of pulp price growth is expected also for 2019, mainly due to its shortage. Consumption of sanitary items increases with an increasing standard of living. As a result, much of the pulp that was previously used for papermaking now ends up in sanitary and toilet articles. However, the Czech Paper Industry Asso- ciation expects that the increasing price of pulp will have a positive impact on the paper industry. At present, the Czech paper industry fulfils all the demanding environmental limits for air, water and waste and follows the principles of the circular economy. Paper technology and paper as a product are very eco-friendly with regard to renewable raw materials for production, multiple recycling of paper fibres and a high level of use of biomass for the production of own energy. The paper industry, through the Confed- eration of European Paper Industries (CEPI), is currently also actively involved in the development of plans for the transition of energy-intensive industries to a low-carbon economy, in line with the EU 2050 vision. The industry’s perspectives are largely based on ensuring sufficient raw materials for production and -ener gy sources. Also important are proposals for system measures that limit the inefficient increase in company costs and discourage foreign investors from investing in the paper industry in the Czech Republic. The future growth of the industry may be affected by the current calamity situation in domestic forests caused by drought and spruce bark beetle, where spruce is dying across the country. The challenge remains to ensure a sufficient amount of basic raw material (wood) and to balance the supply and demand for graphic and newsprint papers.

112 9. CZ-NACE 18 – PRINTING AND REPRODUCTION OF RECORDED MEDIA

9. CZ-NACE 18 – PRINTING AND REPRODUCTION OF RECORDED MEDIA

9.1 CHARACTERISTICS OF THE DIVISION Breakdown of the CZ-NACE 18 division by individual groups: 18.1 Printing and service activities related to printing; 18.2 Reproduction of recorded media.

CZ-NACE 18 Printing and reproduction of recorded media includes the printing of newspapers, books, pe- riodicals (magazines, journals), business forms, postcards and other materials and related activities such as book binding, production of printing plates and data capture. Production processes used in the printing industry include various methods for transferring images from plates, screens or computer records to media such as paper, plastic, metal, textile or wood. Its products are used in all other divisions of the manufacturing industry as well as in culture and education. The division represents a very advanced and still dynamically developing industry. The sector is characterised by high competition among the different product types and, as with many other sectors, is currently significantly affected by developments in digital technology. Digitisation, together with the increasing use of the Internet and social networks, is bringing a decline in the range of printed products, the growth of electronic media and e-commerce, shortening production times, custom- ised printing, personification and needs orientation, and greater flexibility. The sector must continually respond to new possibilities, starting with the preparation of orders through pre-press preparation to printing or distribution of the finished order. Thanks to higher technological demands, the requirements for qualified workforce are also increasing. Small and medium-sized enterprises in the printing industry account for two thirds of sales. Essential for this sector is mainly the domestic market, from which the majority of sales originate. The most significant in the division is Group 18.1, which accounts for around 86% of value added, 87% of sales and personnel costs, over 82% of the division’s assets and about 85% of equity (Table 9.1.1).

Table 9.1.1 – Shares of groups in CZ-NACE 18 in 2018 (%, division = 100%)

Personnel Value Own Assets Number of Number of CZ‐NACE Revenues Incomes costs added capital total employees units

18.1 86.8 85.7 87.0 85.4 84.6 82.5 88.0 78.4 18.2 13.2 14.3 13.0 14.6 15.4 17.5 12.0 21.6

Source: CZSO, data 2018 MIT calculations

113

9.2 DEVELOPMENTS IN THE DIVISION According to the latest expert surveys, the printing industry is globally in a good condition. Some world regions are developing better than others, which includes Europe. The division is developing well despite the global recession and the impact of digital media. Printers have lower margins as costs rise faster than prices. Paper has become significantly more expensive due to the lack of the basic raw material for its production – pulp. Demand for newspapers and magazines has been decreasing in recent years. This trend has led manufacturers to shut down large production capacities in North America, Europe and Asia. As for the Czech Republic, sales in the industry have not changed significantly in the last two years. How- ever, the amount of sales in 2018 did not even reach the pre-crisis period. The number of employees has been increasing slightly for several years; since 2014 it has increased by 1,437 employees, but their number has not reached 2008 levels. The number of units has also seen an upward trend since 2013, and by 2018 their number increased by 944 units. The average wage in the monitored period 2008–2018 saw a slightly increasing trend with an increase of CZK 4,702. The division is going through a difficult period due to the current economic situation. Printing firms are being forced to adapt their strategy to economic and market developments. In the printing sector, as mentioned above, there is a sharp increase in the price of materials, rising paper prices and rising energy prices. Contracts for the public and private sectors are often unprofitable for the reasons mentioned above- be cause the resulting product prices are tied to a certain period of time. In the case of rotary printing of -leaf lets, printers face additional printing restrictions. Clients change format and volume. Newspaper printing is down, also because subscriptions are falling and distribution itself is becoming more expensive. Printers and subscribers are being dragged into the “trade war” of large distribution companies. The printing market is trying to face adverse developments. Companies in this division have to fight hard for contracts that are scarce, and pressure on lower prices reduces their profitability. There is also a significant shortage of workers in the market, which is associated with upward pressure on labour costs. The market for technology sales is relatively consolidated. There is a continuous installation of printing towers in flat offset. In the area of rotary printing, the LITHOMAN III 48 S heatset rotary printing machine has been installed in the Czech Republic. Positive developments in investments in the installation of new digital technologies remains unchanged. In line with expectations, the trend in digital printing growth and the development of the packaging industry continues. Printing companies are responding to this and adapting to this development. The struggle for customers is therefore great and also requires the search for new markets. In order to maintain the competitiveness of the division, manufacturers must invest in technology. For example: Pilsen’s Typos acquired a brand new Heidelberg XL 106-5+L printing machine in 2018. It is a five-colour machine with dispersion varnishing technology. By acquiring this machine, it has modernised its fleet and increased production capacity while maintaining high print quality. In 2018, GZ media was acquired by PBTISK PŘÍBRAM, a leading Czech manufacturer of books and bookbinding. Zlín’s Graspo acquired a new Polar cutting line as well as a Heidelberg Stahl KH 82-6KTL folding machine. This is a fully automated combination folding machine with vacuum system of sheet alignment on the loading table.

114 9. CZ-NACE 18 – PRINTING AND REPRODUCTION OF RECORDED MEDIA

9.3 MAIN ECONOMIC INDICATORS Chart 9.3.1 – Main economic indicators of CZ-NACE 18

10 000 30 000 Number of units Average number of employees 9 000 25 000 8 000 7 000 20 000 6 000 5 000 15 000 9 501 9 136 27 851 8 969 8 949 8 954 8 932 8 773 8 730 8 687 8 673

4 000 8 557 25 967 24 829 24 010 23 535 23 421 23 133 22 912

10 000 22 658 22 123 3 000 22 098 2 000 5 000 1 000 0 0 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

50 000 80 000 Sales (CZK m) Value added (CZK m) Average monthly wage (CZK) 45 000 70 000 Labour productivity from the VA (CZK/month)* 40 000 60 000 35 000 30 000 50 000 25 000 40 000 46 472 20 000 45 412 42 170 66 520 41 550 30 000 40 684 40 625 40 073 39 667 39 649 63 325 63 227 61 937 13 179 59 852 37 153 12 755 12 703 12 590 12 413 35 863 12 250 12 228 12 170 56 666 11 951 55 586 54 994

15 000 54 454 11 249 11 109 53 265 20 000 52 027 10 000 10 000 25 899 25 325 24 196 23 631 22 973

5 000 22 347 22 281 22 231 22 104 21 721 21 197 0 0 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Chart 9.3.2 – Price developments in CZ-CPA 18 Chart 9.3.3 – Spread (ROE – re) CZ-NACE 18 (%) (2005 = 100 %)

110 25

20 100

15 90

10 80 5

70 0

60 ‐5 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Spread 1,69 ‐0,09 ‐2,01 ‐3,09 0,68 1,14 6,03 10,38 6,48 1,35 0,87 50 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 rf 4,55 4,67 3,71 3,79 2,31 2,26 1,58 0,58 0,43 0,98 1,98 18 99,4 99,7 91,9 91,6 91,4 91,3 92,0 90,9 89,7 89,6 90,4 ROE 20,03 16,70 14,37 14,15 14,56 14,56 17,95 23,31 19,30 14,46 13,83 18.1 99,4 99,7 91,9 91,6 91,4 91,3 91,9 91,1 89,9 89,8 90,6 re 18,34 16,79 16,38 17,24 13,89 13,42 11,91 12,94 12,82 13,11 12,96

Source: CZSO, MIT calculations Source: CZSO, MIT calculations Note: the data was not monitored for Group 18.2

115

9.4 FOREIGN TRADE

9.4.1 DEVELOPMENT OF FOREIGN TRADE Trade with CZ-CPA 18 products is small, as most products are intended for the domestic market. The value of exports increased sharply in 2014, then fluctuated at lower levels and decreased significantly in 2018. By contrast, the value of imports jumped sharply in 2011 and then stagnated until 2015 and then began to decline slightly. The foreign trade balance has been high since 2014 due to increased exports (Chart 9.4.1).

Chart 9.4.1 – Exports, imports and foreign trade balance in products by CZ-CPA 18 (CZK million)

900

800 Export Import Trade balance

700

600

500

400 847 778 748 724

300 651 603 548 530 529 526 520 510 503

200 438 389 359 392 350 339 337 319 260 259

100 222 203 9 55 148 77 ‐ 5 0

‐100 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Source: CZSO, data as of 8 April 2019

9.4.2 TERRITORIAL STRUCTURE OF FOREIGN TRADE The main trading partner is traditionally Germany, with 59% of CZ-CPA 18 exports and 51% of imports. Significant export partners are also the Netherlands (11%) and Slovakia (4%). Import partners are China (8%) and Switzerland and USA (7%), see Chart 9.4.2.

Chart 9.4.2 – Foreign trade in CZ-CPA 18 products

Import territories in 2018 Import territories in 2018 Sweden 2% Belgium Japan Hungary 4% 4% other 2% other Switzerland 10% 13% 2% Poland Poland 4% 3% United Austria Kingdom 4% 5% Germany Germany USA 51% Slovakia 59% 7% Switzerland 4% 7% China Netherlands 8% 11%

Source: CZSO, data as of 8 April 2019

116

9. CZ-NACE 18 – PRINTING AND REPRODUCTION OF RECORDED MEDIA

9.5 RESEARCH, DEVELOPMENT AND INNOVATION Division CZ-NACE 18 is relatively small in terms of R&D expenditures. Expenditure on R&D cannot be stated due to the protection of individual data. Enterprises that benefited from a significant amount of targeted support from the State budget under the national programmes of the MIT (TIP, TRIO), the MoE (Ministerial Research Programme of the Ministry of Environment 2007–2011) and TA CR (BETA) included CICERO Stapro Group s.r.o. and NOVATISK, a.s. Although CZ-NACE 18 is a very small division in terms of R&D expenditure and the number of researchers, it is successful in terms of the number of Horizon 2020 projects. The BrainHack: Bringing the arts and sciences of brain and neural computer interface together project involves the company T.S.R.ACT, s.r.o. The second Czech company involved in the Horizon 2020 project is A-ETC, s.r.o. This company participates in BIOWYSE: Biocontamination Integrated Control of Wet Systems for Space Exploration. Within the RIS3 National Strategy, printing and reproduction of recorded media is among the less-supported R&D areas. In the period 1 January 2015–31 October 2017, 16 projects (of which three were by OPTAG- LIO a.s.) falling within the National RIS3 Strategy were approved under the OP EIC for implementation with planned total aid (EU, public and private Czech funds) of CZK 0.41 billion, of which CZK 0.16 billion was an EU grant. The aid is focused on strengthening the R&D capacities of enterprises (93%). Most projects correspond to the application sector New cultural and creative industries (12), the remaining four sectors falling under Ensuring a healthy and high-quality environment and efficient use of natural resources. In the reference period, projects for the printing and reproduction of recorded media were submitted by large enterprises as well as SMEs. As regards European support for applicants/beneficiaries, the largest EU support for SMEs was granted to OPTAGLIO a.s./OPTAGLIO s.r.o. (Forensic Security Research Centre of OPTAGLIO; Development of security printing R&D; Support of the sale of OPTAGLIO’s own products on foreign markets; Facilitating the entry of OPTAGLIO in the market of stamp protection products; Facilitating the entry of OPTAGLIO in the market of branded goods protection; Facilitating the entry of OPTAGLIO into foreign markets projects, total expenditure of CZK 157 million, of which EU subsidies were CZK 76 million) and for large companies OTK GROUP, a.s. (Innovation of IML labels; total expenditure of CZK 75 million, of which EU subsidies were CZK 19 million).

117 9.6 SUMMARY AND PERSPECTIVE OF THE DIVISION There is currently a significant shortage of publication paper and the basic raw material for its production – pulp. This is due to the decline in demand for newspapers and magazines in recent years. This trend has led manufacturers to shut down large production capacities in North America, Europe and Asia. The trend of rising paper prices is expected to continue this year and publishers should prepare for it. This will put pressure on publishers to look for more cost-effective solutions. Companies cannot succeed in today’s globalised world without innovation. The power of innovation in the printing and packaging industry is exceptional and stronger than ever. Compared to other industries which focus on Industry 4.0, the printing industry is no doubt a pioneer in the industrial implementation of core concepts in online printing. Increasing individualisation and personalisation of print orders for -tar geted marketing campaigns leads to the growing importance of low-cost orders and requires a significant acceleration of production. The solution is integrated automation that enables greater manufacturing flexibility, reduced production downtime and efficient production schedule. To succeed in the current economic and competitive market, printing and packaging companies need to focus on realising their comparative advantages, reducing unproductive costs, innovating and maintaining high production flexibility. In view of the shortage of staff, it is necessary to strive for more robotisation, digitalisation in production and overall focus on modern technologies. Digitisation and product diversity in the printing industry will require modern service standards and intelligent logistics. At the same time, it is also necessary to be well-versed in current trends in the printing and communication market. The fastest growing market in the print and media industry is the online print market, which is gaining in importance.

118 10. CZ-NACE 20 – MANUFACTURE OF CHEMICALS AND CHEMICAL PRODUCTS

10. CZ-NACE 20 – MANUFACTURE OF CHEMICALS AND CHEMICAL PRODUCTS

10.1 CHARACTERISTICS OF THE DIVISION Breakdown of the CZ-NACE 20 division by individual groups: 20.1 Manufacture of basic chemicals, fertilisers and nitrogen compounds, plastics and synthetic rubber in primary forms; 20.2 Manufacture of pesticides and other agrochemical products; 20.3 Manufacture of paints, varnishes and similar coatings, printing ink and mastics; 20.4 Manufacture of soap and detergents, cleaning and polishing preparations, perfumes and toilet preparations; 20.5 Manufacture of other chemical products; 20.6 Manufacture of man-made fibres.

The manufacture of chemicals and chemical products is one of the most advanced and fastest-growing industries and occupies an important position in the Czech economy. The chemical industry has seen a number of structural changes over the last 25 years and has maintained its weight in the national economy. The chemical sector is strongly interlinked with other manufacturing industries such as automotive, plastics and rubber, textile, electronics, construction, paper and pulp industries and others, and is an important supplier of input raw materials for them. The chemical industry is strongly dominated by Group 20.1 (Table 10.1.1), which is the production of basic chemicals, fertilisers and nitrogen compounds, plastics and synthetic rubber in primary forms (i.e. basic petrochemical industry, manufacture of inorganic and organic chemicals and polymers). Enterprises include Unipetrol RPA, s.r.o., Synthos Kralupy a.s., Deza, a.s., BorsodChem MCHZ, s.r.o., Spolana, s.r.o., Lovochemie, a.s., Spolchemie – Spolek pro chemickou a hutní výrobu, a.s., Synthesia, a.s., Silon s.r.o. and Linde Gas a.s. The second is Group 20.5 representing the production of explosives, detonators, glues, essential oils, chemically transformed oils and fats, methyl esters of fatty acids for the propulsion of engines, etc. Indet Safety a.s. and Austin Detonator s.r.o. operate in this field. Next is Group 20.4, which includes manufacturers of soaps and detergents, cleaning and polishing agents, perfumes and toilet preparations, represented e.g. by Schwan Cosmetics CR, s.r.o. or Procter & Gamble.

Table 10.1.1 – Shares of groups in CZ-NACE 20 in 2018 (%, division = 100%)

Group Personnel Value Own Assets Number of Number of Revenues Incomes CZ‐NACE costs added capital total employees units

20.1 59.2 73.6 84.2 84.5 79.9 80.2 53.4 66.6 20.2 1.6 1.1 0.6 0.6 0.9 0.8 2.1 2.7 20.3 6.8 4.3 3.4 3.3 3.5 3.5 7.6 4.1 20.4 12.9 8.1 4.5 4.4 7.6 6.4 15.7 10.6 20.5 17.0 11.5 6.4 6.1 7.4 8.3 18.5 15.6 20.6 2.6 1.4 1.0 1.0 0.8 0.8 2.8 0.3 Source: CZSO, data 2018 MIT calculations

119

10.2 DEVELOPMENTS IN THE DIVISION The Czech chemical industry has been fully privatised and foreign capital has entered a significant part of this industry. Key commodity chemistry technologies were modernised after 2000 and are among the more advanced medium-capacity technologies available with a predominant export focus. At present, the chemical industry in the Czech Republic is facing increased international competition, rising energy and feedstock prices, pressure on resource efficiency and the need for innovation. The slowdown of the Czech economy is another factor with consequent effects given the high interdependence with other sectors of manufacturing. The number of workers in the chemical industry has been increasing in recent years, but representatives of the chemical industry point to a growing shortage of technically educated workers and mention a lack of interest in the study of chemistry. In addition, chemistry grows throughout the manufacturing industry and chemical experts are also required in other technical fields. In this context, the Confederation of Chemical Industry of the Czech Republic is preparing a project of a contest for teachers of elementary school chemistry teachers “Let’s make chemistry attractive” in order to increase interest in the study of chemistry. In addition, the competition for primary school pupils “We are looking for the best young chem- ist in the Czech Republic” has been running for several years. Many companies have set up co-operation with secondary vocational schools and universities, as well as student traineeships in companies. The refining and petrochemical group Unipetrol, s.r.o., a member of the international concern PKN Orlen, increased its revenues by 7% year-on-year, investments in 2018 reached CZK 7.9 billion. They were directed mainly at the construction of a new polyethylene unit and a new gas boiler room of the ethylene unit in Litvínov. Spolana s.r.o. is also investing heavily in plant modernisation after being taken over by the Unipetrol Group. It has stopped PVC production by mercury electrolysis and launched a new product – granulated agricultural fertiliser Spolsan G. Spolana is also active in environmental support. DEZA, a.s. has modernised hydro-refining. It is the only company in Central Europe that processes crude benzole and crude tar. With its processing capacity it is one of the world’s leading companies in the industry. SPOLCHEMIE – Spolek pro chemickou a hutní výrobu, a.s. (Association for Chemical and Metallurgical Production) has started production in new membrane electrolysis. The unique feature of the new technology is that it allows the simultaneous production of potassium hydroxide (SPOLCHEMIE is its only producer in the CEE region) and sodium hydroxide. The Chinese consortium Wanhua Industrial Group announced an investment worth EUR 100 million in BorsodChem MCHZ, s.r.o., where the first investment of CZK 800 million involves the modernisation of the nitrobenzene plant. SILON, s.r.o. newly opened a production plant in Georgia, USA. The new plant will specialise in the production of technical compounds for the automotive and construction industries.

120 10. CZ-NACE 20 – MANUFACTURE OF CHEMICALS AND CHEMICAL PRODUCTS

10.3 MAIN ECONOMIC INDICATORS Chart 10.3.1 – Main economic indicators of CZ-NACE 20

2 000 35 000 Number of units Average number of employees 1 800 30 000 1 600 1 400 25 000 1 200 20 000 1 000 1 851

1 837 15 000 1 819 1 793 31 793 1 765 1 762 1 761 1 754 1 742 800 31 283 30 594 29 551 29 166 28 754 28 659 28 631 28 594 28 445 28 113 1 535 1 502 600 10 000 400 5 000 200 0 0 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

300 000 160 000 Sales (CZK m) Value added (CZK m) Average monthly wage (CZK) 140 000 250 000 Labour productivity from the VA (CZK/month)* 120 000 200 000 100 000

150 000 80 000 274 798 141 967 60 000 140 393

100 000 125 034 111 253 191 745 96 943 100 284 96 276 186 573

40 000 93 444 178 624 51 368 49 996 89 176 171 577 171 392 169 835 165 843 161 850 41 967 77 561 152 791 36 638 34 104 31 808 31 616 30 584 66 946 50 000 28 774 28 069 126 074 22 262 20 000 24 928 25 459 26 472 27 249 28 661 28 182 28 754 29 367 31 143 32 913 35 798 0 0 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Chart 10.3.2 – Price developments in CZ-CPA 20 Chart 10.3.3 – Spread (ROE – re) CZ-NACE 20 (%) (2005 = 100 %)

170 30 25 150 20 15 130 10

110 5 0 90 ‐5 ‐10 70 ‐15

50 ‐20 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 ‐25 20 112,7 104,0 118,0 128,2 137,1 137,9 138,5 122,5 115,1 118,6 120,4 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 20.1 115,0 103,7 124,4 137,1 149,1 151,0 152,3 129,5 118,6 123,1 126,1 Spread ‐17,73‐21,66 ‐4,17 ‐6,32 ‐1,09 ‐3,60 4,12 10,55 6,17 11,60 3,32 20.3 107,4 111,1 111,5 118,4 126,7 128,9 132,4 132,8 131,2 130,5 131,1 rf 4,55 4,67 3,71 3,79 2,31 2,26 1,58 0,58 0,43 0,98 1,98 20.4 103,3 101,1 95,4 96,1 99,7 102,1 104,2 103,3 102,6 100,6 100,1 ROE 4,31 1,73 12,40 8,92 12,64 9,73 16,47 21,03 16,12 20,44 14,55 20.5 115,6 107,8 107,6 113,2 113,1 106,3 101,2 98,2 99,3 103,4 100,8 re 22,04 23,40 16,57 15,24 13,73 13,33 12,35 10,48 9,95 8,84 11,23

Source: CZSO, MIT calculations Source: CZSO, MIT calculations Note: Groups 20.2 and 20.6 are not monitored.

121

10.4 FOREIGN TRADE

10.4.1 DEVELOPMENT OF FOREIGN TRADE The chemical industry has consistently reported an excess of imports over exports. The negative balance has grown rapidly over the last five years, doubling in value. In 2018, foreign trade in chemical products showed an increasing demand for chemicals. In 2018, imports continued to grow at a faster pace than exports, and subsequently the negative foreign trade balance increased (see Chart 10.4.1).

Chart 10.4.1 – Exports, imports and foreign trade balance in products by CZ-CPA 20 (CZK million)

350 000 300 000 Export Import Trade balance 250 000 200 000 150 000 295 840 279 075 267 856

100 000 261 406 249 548 224 100 211 452 201 173 179 040 172 479 171 106 50 000 167 688 159 747 157 958 151 588 151 191 139 315 131 058 60 261 77 069 50 510 101 659 66 142 61 858 117 178 116 268 107 968 116 800 38 084 ‐ ‐ ‐ ‐ ‐ 92 975 ‐ ‐ ‐ ‐ 0 ‐ ‐50 000 ‐100 000 ‐150 000 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Source: CZSO, data as of 8 April 2019

10.4.2 TERRITORIAL STRUCTURE OF FOREIGN TRADE Germany and Poland continued to be the dominant territories for both the export and import of chemical products in 2018. In exports they are followed by Slovakia, Hungary and Italy. Important import countries include France, the Netherlands, Italy and Belgium (Chart 10.4.2). The trade in CZ-CPA 20 commodities is mainly with the EU countries.

Chart 10.4.2 – Foreign trade in products, CZ-CPA 20

Import territories in 2018 Export territories in 2018

Germany other other 21% Germany 31% 33% 30%

Poland 14% France Poland 3% Slovakia 8% Slovakia 4% USA France 10% Italy 3% Italy Russia 5% 7% 6% 5% Belgium Austria Netherlands Hungary 5% 5% 4% 6% Source: CZSO, data as of 8 April 2019

122

10. CZ-NACE 20 – MANUFACTURE OF CHEMICALS AND CHEMICAL PRODUCTS

10.5 RESEARCH, DEVELOPMENT AND INNOVATION Expenditure on R&D in CZ-NACE 20 increased by CZK 195 million to CZK 1,101 million in 2017 (see Chart 10.5.1). The increase in the volume of R&D expenditures was mainly due to higher expenditures from business sources, but also expenditures from public sources in the Czech Republic and universities as well as from increased public foreign sources. The significant increase in business expenditure was due to an increase in the number of enterprises with active R&D (a year-on-year increase of 11 enterprises). Enterprises benefiting from a significant amount of targeted support from the State budget within the national programmes of the MoD (Development of Operational Capabilities of the Armed Forces of the Czech Republic), MIT (TIP, TRIO), MEYS (EUREKA CZ), MoI (Security Research of the Czech Republic 2015–2022, Security Research Programme of the Czech Republic 2010–2015), MoA (VAK, KUS, ZEMĚ) and TA CR (ALFA, Competence Centres, DELTA, EPSILON, ZÉTA) in the period 2007–2018 included Explosia a.s., GeneProof a.s., BOCHEMIE a.s., Contipro Biotech s.r.o., and Lučební závody Draslovka a.s. Kolín. Four companies are participating in Horizon 2020 projects. Contipro a.s. is involved in DRIVE: Diabetes Reversing Implants with enhanced Viability and long-term Efficacy and in N2B-patch: Nose to Brain Delivery of NG-101 via the Olfactory Region for the Regenerative Treatment of Multiple Sclerosis Using Novel Multi-functional Bio- materials Combined with a Medical Device. RANIDO, s.r.o. is a participant in BioMates: Reliable Bio-based Refinery Intermediates. UNIPETROL RPA, s.r.o. is participating in COMSYN: Compact Gasification and Syn- thesis process for Transport Fuels. SILON s.r.o. is participating in MultiCycle: Advanced and sustainable recycling processes and value chains for plastic-based multi-materials. In the period from 1 January 2015 to 31 October 2018, 120 projects were approved under the OP EIC for implementation with planned total aid (EU, public and private Czech funds) of CZK 1.72 billion, of which CZK 0.77 billion was an EU grant. The aid is mainly aimed at strengthening the R&D capacity of enterprises (72%) and, to a lesser extent, cooperation of research organisations and enterprises (24%). The vast -ma jority of projects fall within the application sector Chemicals and chemical industry (108). Twelve projects correspond to Sustainable Agriculture and Forestry. For SMEs, ROKOSPOL a.s. was the most supported by EU subsidies (Characterisation of pigments, fillers and polymeric bases; Quantum dots – characterisation of colloidal dispersions III; Modern nanotechnology-based surface protection to improve health and the environment; R&D centre for use of specific form of nanodiamonds in surface protection; R&D centre of a specific group of nanoparticles and quantum dots; Research and development of specific surface for environmentally friendly operation of the air conditioning unit projects; total expenditures CZK 179 million, of which EU subsidies were CZK 90 million); and for large companies Explosia a.s. (Impact of new energy additives on propellant properties; Construction of a development centre for SMD in Explosia ; total expenditure of CZK 106 million, of which EU subsidies were CZK 52 million).

Chart 10.5.1 – R&D expenditure (CZK mil.) and the number of enterprises with R&D in CZ-NACE 20 EU+other international organisations Number of enterprises Entrepreneurs Government+universities 100 1 400 1 183 1 166 90 1 127 1 200 1 101 47 1 011 55 80 962 958 55 29 1 000 906 70 56 112 15 23 60 800 50 100 89 89 600 1 059 1 027 85 86 87 86 86 982 1 021 40 808 856 820 836 400 30 20 200 10 99 87 90 84 0 79 78 47 51 0 2010 2011 2012 2013 2014 2015 2016 2017 2010 2011 2012 2013 2014 2015 2016 2017 Source: CZSO, MIT calculations 123

10.6 SUMMARY AND PERSPECTIVE OF THE DIVISION The chemical industry is an important part of the manufacturing industry in the EU and worldwide. Accord- ing to the latest Cefic (European Chemical Industry Council) data, the global turnover of the chemical industry for 2017 is worth EUR 3,475 billion. At present, China has the strongest position with EUR 1,293 billion, Europe the second position with EUR 542 billion and NAFTA (North American Free Trade Agreement) countries with EUR 519 billion. According to Cefic data, the European chemical industry is represented by 28,330 companies and 1.14 million jobs. According to Cefic, the projected 1.5% growth in manufacturing industry in 2019 should be sufficient to maintain the demand for chemicals at the same level or higher than in previous years. In 2018, there was a slight decrease in chemical production compared to the previous year due to higher oil prices, lower demand in the automotive industry and unusually low water levels in European rivers, causing delays in transport. In the long term, the European chemicals industry expects stable growth, supported by increasing demand for sustainable solutions. However, there are concerns that performance may be affected by trade tensions between the US, China and Europe, as well as uncertainty about Brexit. By 2030, the global market is expected to double and China’s share should increase to 44%. Twenty years ago, Europe accounted for 28% of the global chemical industry, followed by NAFTA with 24%, and China with 13%. Also, in the last 20 years the EU’s sales have increased by 50%, but its world market share has fallen in 2016 to half the 1996 level.1 The European chemical industry is energy intensive and under strong competitive pressure. It faces challenges such as increased international competition, rising prices of energy and inputs, pressure to use resources more efficiently, significant cumulative regulatory costs, especially in the area of emissions and new chemical legislation, a number of EU regulations (REACH) and the need for innovation. As an energy-intensive industry, the chemical sector is dependent on the requirements related to climate change and energy policies. In addition, the chemical sector is highly regulated to protect the health of its employees and consumers, and the environment. The chemical industry is also significantly influenced by customs wars and Brexit. The Czech chemical industry has been globalised for a long time, and to a large extent controlled by automated systems. For the further development of the Czech chemical industry, it will be crucial to secure the necessary investment in science, research and innovation and a predictable, less complex regulatory framework. At the same time, the conditions for greenhouse gas emissions trading, energy prices and the availability of strategic raw materials will also contribute to future development.

1 Cefic – The European Chemical Industry Council. Cefic. Facts and Figures 2018 of the European chemical industry [online] [vid. 2019-5-22], s. 5 – 45. Available at http://www.cefic.org/Facts-and-Figures/ 124 11. CZ-NACE 21 – MANUFACTURE OF BASIC PHARMACEUTICAL PRODUCTS AND PHARMACEUTICAL PREPARATIONS

11. CZ-NACE 21 – MANUFACTURE OF BASIC PHARMACEUTICAL PRODUCTS AND PHARMACEUTICAL PREPARATIONS

11.1 CHARACTERISTICS OF THE DIVISION Breakdown of the CZ-NACE 21 division by individual groups: 21.1 Manufacture of basic pharmaceutical products; 21.2 Manufacture of pharmaceutical preparations.

Drug production did not become an independent industry until the end of the th19 century, but it has experienced an unprecedented boom in recent decades and is now a high-value industrial sector belonging to high-tech industries. It is one of the promising sectors with strong progressive development, demanding of science and research. Globally, this sector is seen as one of the major industrial sectors with high importance and a high level of R&D investment. Due to the complexity and cost of research, the research is carried out by large and medium-sized companies producing original medicines. In addition to the traditional research centre areas in America and Europe , the number of centres in South and Southeast Asia is also increasing. In the Czech Republic, the key players in the pharmaceutical industry are companies controlled by foreign owners. They focus mainly on generics. The CZ-NACE 21 division is divided into two segments: manufacture of basic pharmaceutical substances (CZ-NACE 21.1) and manufacture of finished pharmaceutical forms (CZ-NACE 21.2), such as medicaments, vaccines, homeopathics, dental products, etc. Segment 21.2 has a significantly higher share of sales and other economic indicators of the division (see Table 11.1.1). In the Czech Republic, the pharmaceutical sector is represented by the division with the smallest number of units within the manufacturing industry – according to data from the Czech Statistical Office, approximately 90 business entities operate in the sector. Table 11.1.1 – Shares of groups in CZ-NACE 21 in 2018 (%, division = 100%)

Group Personnel Value Own Assets Number of Number of Revenues Incomes CZ‐NACE costs added capital total employees units

21.1 14.8 9.4 8.1 9.0 14.2 12.9 13.5 20.6 21.2 85.2 90.6 91.9 91.0 85.8 87.1 86.5 79.4 Source: CZSO, data 2018 MIT calculations

125

11.2 DEVELOPMENTS IN THE DIVISION The Czech pharmaceutical industry goes back many years to the notes of the Malá Strana pharmacy, but the production of pharmaceuticals did not transfer from pharmacies to factories until the beginning of the 20th century. The industry is characterised by high product added value, based on R&D-intensive technologies and a highly skilled workforce. The products of the industry can be divided into innovative (patent protected) and generic products (these come onto the market only after the patent protection has ended). The Czech market is in a way disadvantaged by its size and pricing policy. The Czech Republic is one of the countries of Central and Eastern Europe, which, compared to Western Europe, has a lower population and thus a much smaller pharmaceutical market. Production is highly demanding in terms of product quality and production facilities, which must meet the most demanding criteria with regard to product safety. The French pharmaceutical company Sanofi launched in 2018 the sale of the European division of generic medicines Zentiva by separating the division into an independent company. Upon completion of the sale and exit of the Sanofi Group in October 2018, Zentiva, as a generics manufacturer, began to operate as an independent organisation. Zentiva currently produces approximately 500 products in 900 dosage forms. Teva Czech Industries s.r.o., formerly known as Galena, is part of the Teva multinational group. Its broad portfolio includes generic medicines – mainly antiasthmatics, cytostatics, immunosuppressants, hypolipi- demics, antihypertensives, etc. – in the form of tablets, capsules and liquid dosage, as well as OTC drugs, APIs and plant extracts. The products meet recognised quality standards and are exported to a number of countries around the world, including the US and Western Europe. PRO.MED.CS Praha a.s. produces tablets and capsules (over two million a day). In 2017, the company exported 84% of its production abroad, mainly to Russia, Eastern Europe and Central Asia. Among other things, the company sells medicines Godasal, Ambrosan or Warfarin, and others in the field of gastroin- testinal, cardiovascular and musculoskeletal medicines. It has approximately 330 employees in the Czech Republic. Bioveta a.s. not only sells its products in the Czech market, but is also exported to more than 80 countries in Europe, Asia, Africa, America and Australia. The history of this company began as early as 1918, with the establishment of the State Institute for the Recognition of Animal Diseases and Vaccine Production. The current production programme has 20 product categories. The historically most successful product of the company is the rabies vaccine, which has become the most widely used vaccine in the world used to eradicate rabies in foxes. The producer and distributor of vitamins, minerals and nutritional supplements Walmark not only holds a strong position in the Czech Republic and Slovakia, but has rapidly expanding subsidiaries in seven other European countries and exports to nearly 40 other countries around the world. The best-known products include Proenzi, Urinal, Spectrum and Marťánci (children’s vitamins). The Walmark Group generates more than two thirds of its sales abroad.

126 11. CZ-NACE 21 – MANUFACTURE OF BASIC PHARMACEUTICAL PRODUCTS AND PHARMACEUTICAL PREPARATIONS

11.3 MAIN ECONOMIC INDICATORS Chart 11.3.1 – Main economic indicators of CZ-NACE 21

100 12 000 Number of units Average number of employees 90 10 000 80 70 8 000 60 50 6 000 92 88 88 87 87 86 86 86 83

40 80 78 9 982 10 253 9 736 9 688 9 566 9 539 9 539 9 491 9 471 9 120 4 000 9 005 30 20 2 000 10 0 0 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

50 000 140 000 Sales (CZK m) Value added (CZK m) Average monthly wage (CZK) 45 000 120 000 Labour productivity from the VA (CZK/month)* 40 000 35 000 100 000 30 000 80 000 25 000 60 000 20 000 43 300 39 127 108 551 37 122 105 680 36 426 12 553 12 299 35 800 103 573 102 425 101 928 11 833 97 565 11 796 34 480 96 430 34 294 15 000 34 242 94 894 94 574 33 733 11 170 10 968 10 950 10 827

10 728 40 000 10 431 10 080 87 378 86 967 30 918 30 890 10 000 20 000 5 000 36 662 33 767 32 610 32 230 27 158 28 773 29 156 29 672 30 470 30 476 31 372 0 0 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Chart 11.3.2 – Price developments in CZ-CPA 21 Chart 11.3.3 – Spread (ROE – re) CZ-NACE 21 (%) (2005 = 100 %)

120 30

25 110 20

100 15

10 90 5

80 0

‐5 70 ‐10

60 ‐15 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Spread 13,44 ‐8,61 9,13 ‐1,24 ‐0,28 ‐0,25 2,22 4,82 6,12 1,62 0,23 50 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 rf 4,55 4,67 3,71 3,79 2,31 2,26 1,58 0,58 0,43 0,98 1,98 21 101,4 105,8 102,4 104,4 107,2 106,4 104,7 105,5 105,4 105,0 107,8 ROE 24,29 3,19 18,71 9,84 9,11 7,08 9,69 10,74 11,65 6,94 6,79 21.2 101,4 105,8 102,4 104,4 107,2 106,4 104,7 105,5 105,4 105,0 107,8 re 10,85 11,81 9,58 11,08 9,40 7,33 7,47 5,93 5,53 5,31 6,57

Source: CZSO, MIT calculations Source: CZSO, MIT calculations Note: Group 21.1 is not monitored

127

11.4 FOREIGN TRADE

11.4.1 DEVELOPMENT OF FOREIGN TRADE In the case of pharmaceutical commodities, imports have long dominated exports (see Chart 11.4.1). -Ex ports rose sharply in 2014 and continued to grow at a slower pace. The situation was similar for imports. Within individual groups of the division, Group 21.2 accounts for over 21% of foreign trade.

Chart 11.4.1 – Exports, imports and foreign trade balance in products by CZ-CPA 21 (CZK million)

140 000

120 000 Export Import Trade balance

100 000

80 000

60 000 115 233 108 685 104 448 102 415 40 000 96 851 78 368 76 838 76 426 73 462 73 107 65 351 60 549 60 428 58 876 20 000 57 356 33 652 38 946 39 496 43 539 44 020 48 136 49 882 43 186 32 890 45 742 ‐ 39 422 43 238 40 572 33 188 ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ 0 27 365

‐20 000

‐40 000

‐60 000 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Source: CZSO, data as of 8 April 2019

11.4.2 TERRITORIAL STRUCTURE OF FOREIGN TRADE In 2018, Germany was traditionally the largest market for pharmaceutical products with a 25% share (mainly medicines and pharmaceuticals such as cotton, gauze, bandages), followed by Denmark with 15% (medicines, anti-sera) and Slovakia with 12% (medicines, pharmaceuticals). In 2018, Germany was the largest import partner (20%, mainly medicines and vitamins), followed by France with a share of 8% (medicines). They were followed by a group of states with shares of 5% to 6% (see Chart 11.4.2).

Chart 11.4.2 – Foreign trade in CZ-CPA 21 products

Import territories in 2018 Export territories in 2018

other Germany Germany 20% 28% other 25% 37% United Kingdom France 4% 8% USA Ireland Denmark Denmark 4% 5% 15% 8% Poland Italy USA 4% Slovakia Austria 5% 6% 12% 4% Hungary Switzerland Netherlands 5% 6% 4% Source: CZSO, data as of 8 April 2019

128

11. CZ-NACE 21 – MANUFACTURE OF BASIC PHARMACEUTICAL PRODUCTS AND PHARMACEUTICAL PREPARATIONS

11.5 RESEARCH, DEVELOPMENT AND INNOVATION Total expenditure on R&D in CZ-NACE 21 in 2017 amounted to CZK 1,113 million (see Chart 11.5.1). They accounted for 4.23% of total R&D expenditure in the manufacturing industry. The bulk of the funds were expenditures from entrepreneurial resources; the least stable component was public foreign expenditure. These fluctuations were due to the approaching end of the EU programming period, and it can be assumed that in the upcoming years expenditures will again grow as a result of drawing on the funds from the new operational programmes. The share of researchers in CZ-NACE 21 in the total number of researchers in the manufacturing industry sectors was 2.63%. Enterprises that benefited from a significant amount of targeted support from the State budget under the national programmes of the MoD (Defence Applied Research, Experimental Development and Innovation), MIT (TIP, TRIO), MoI (Security Research for the State Needs 2010–2015, Security Programme research for the needs of the state 2016–2021), MoA (KUS, COUNTRY) and TA CR (ALFA, Competence Centres, DELTA, EPSILON) in the period 2007–2018 include Bioveta, a.s., VAKOS XT a.s., SEVAPHARMA a.s., VIDIA spol. s r.o. and VUAB Pharma a.s. Two companies are involved in Horizon 2020 projects in this division. BioVendor - Laboratorní medicína a.s. participates in the DIAGORAS: Chair/bedside diagnosis of oral and respiratory tract infections, and identification of antibiotic resistances for personalised monitoring and treatment and RNADIAGON: Excellence in research and development of non-coding RNA DIAGnostics in ONcology projects. The second company is Zentiva, a.s., which is involved in the ORBIS: Open Research Biopharmaceutical Internships Support project. Within the National RIS3 Strategy, the manufacture of basic pharmaceutical products and pharmaceutical preparations is an R&D area that receives average support. In the period from 1 January 2015 to 31 October 2018, 32 projects falling within the National RIS3 Strategy were approved under the OP EIC with planned total aid (EU, public and private Czech funds) of CZK 0.60 billion, of which CZK 0.31 billion was an EU grant. The aid is mainly aimed at strengthening the R&D capacity of enterprises (73%) and, to a lesser extent, cooperation of research organisations and enterprises (20%). In the reference period, projects were submitted by large enterprises as well as SMEs. As regards European support for applicants/beneficiaries, the largest EU support was granted to APIGENEX s.r.o. (Construction of the Centre for Research and Development of Peptides and Small Molecules of APIGENEX s.r.o. project; total expenditures of CZK 73 million, of which EU subsidy was CZK 36 million) and for large enterprises VUAB Pharma a.s. (New platinum complexes for tumour therapy; Research and development of protelyt- ics from natural sources for the treatment of thrombotic conditions and chronic wounds projects; total expenditures CZK 31 million, of which EU subsidies were CZK 12 million).

Chart 11.5.1 – R&D expenditure (CZK mil.) and the number of enterprises with R&D in CZ-NACE 21

EU+other international organisations Number of enterprises Entrepreneurs Government+universities 30 1 200 1 116 1 124 1 138 1 113 1 054 1 076 1 075 12 1 11 984 6 88 71 66 25 1 000 6

800 20

15 600 951 1 050 1 100 1 067 27 27 28 27 27 928 951 898 982 25 23 23 400 10

200 5

80 117 0 55 60 55 54 36 35 0 2010 2011 2012 2013 2014 2015 2016 2017 2010 2011 2012 2013 2014 2015 2016 2017

Source: CZSO, MIT calculations

129

11.6 SUMMARY AND PERSPECTIVE OF THE DIVISION According to data from EFPIA (European Federation of Pharmaceutical Industries and Associations) -mem bers, the global pharmaceutical market achieved an estimated turnover of EUR 754,555 million in 2017. The North American market (US and Canada) remains the world’s largest market with 48.1%, ahead of Europe (22.2%) and Japan (7.7%). The pharmaceutical industry in Europe currently employs approximately 750,000 people, of which 115,000 work in research and development. The research-based pharmaceutical industry can play a key role in rebuilding Europe and ensuring future competitiveness in the global economy. In 2017, an estimated EUR 35,200 million was invested in European R&D. In the emerging economies of Brazil, China and India, market and research is growing rapidly, leading to a gradual migration of economic and research activities from Europe. In 2013–2017, the Brazilian, Chinese and Indian markets grew by 11.5%, 9.4% and 11.0%, respectively, while the top five EU countries grew by 5.4% and the US market 7.3%.1 The combination of large sales volumes and low margins divides the generic segment into 20 top companies. The pharmaceutical industry is awaiting a giant transaction – the acquisition of the biotechnology company Celgene by the US drug manufacturer Bristol-Myers Squibb for about USD 74 billion. Their combination creates a giant with activities in the field of cancer treatment. The announced transaction is one of the largest acquisitions in the history of the pharmaceutical industry. The pharmaceutical industry makes a significant contribution to the welfare of both Europe and the world by ensuring the availability of medicines and fostering economic growth and sustainable employment and, as a strong sector, it is a prerequisite for successful future development.

1 European Federation of Pharmaceutical Industries and Associations In EFPIA publications [online] The Pharmaceutical Industry in Figures – Key Data/2018 [vid. 2019-5-7], p. 3 – 15. available at www.efpia.eu/media/361960/efpia-pharmafigures 13 0 12. CZ-NACE 22 – MANUFACTURE OF RUBBER AND PLASTIC PRODUCTS

12. CZ-NACE 22 – MANUFACTURE OF RUBBER AND PLASTIC PRODUCTS

12.1 CHARACTERISTICS OF THE DIVISION

Breakdown of the CZ-NACE 22 division by individual groups: 22.1 Manufacture of rubber products; 22.2 Manufacture of plastics products. Plastics are polymers in which external stress causes deformations of a predominantly irreversible (permanent) nature. The plastics are rigid at normal temperature, mostly easy to form, workable, light and with good insulating properties – they can be thermal, acoustic and electric insulators, but conductive plastics have also been created. In most cases, plastics are flammable and poorly resistant to higher temperatures. In general, the higher the stability of the polymer, the longer it degrades. Synthetic rubbers are very important substances, which are highly elastic materials with low stiffness, which can under normal conditions be greatly deformed without breaking. Historically, polymers are among the youngest construction materials and, in comparison with conventional materials, have gained recognition mainly due to their easy workability, low density and generally suitable ratio between utility properties and price. Their production and processing requires much less energy and labour than metals. Many are superior to metals in their chemical resistance. Plastics and rubber have a wide range of uses – for packaging materials, in the construction, automotive, electrical and agricultural industries, and are increasingly used in the textiles and footwear industry. This is a sector dominated by large and medium-sized enterprises. Large enterprises and medium-sized enterprises have consistently made up almost two thirds and over a quarter of its revenues, respectively. In value added, the situation is similar. Large enterprises make up half and medium-sized enterprises make up a third of the number of people employed in the division. The division is dominated by the production of plastic products – CZ-NACE 22.2. It is mainly dominant in terms of the number of units and the number of employees; in other characteristics its dominance over the production of rubber products is more moderate (Table 12.1.1). Table 12.1.1 – Shares of groups in CZ-NACE 22 in 2018 (%, division = 100%)

Group Personnel Value Own Assets Number of Number of Revenues Incomes CZ‐NACE costs added capital total employees units

22.1 29.1 36.8 40.5 44.5 39.7 36.3 25.8 21.5 22.2 70.9 63.2 59.5 55.5 60.3 63.7 74.2 78.5 Source: CZSO, data 2018 MIT calculations

131

12.2 DEVELOPMENTS IN THE DIVISION The plastics and rubber industry in the Czech Republic has been showing steady growth in recent years due to its close links with the automotive, electrical and construction industries. Its prospects are further strengthened by a good raw material base, broad supply links with related industrial segments and the increasing competitiveness of domestic producers thanks to the influx of state-of-the-art technology. The economic indicators of this industry segment indicate that it is a division with one of the most stable developments. The plastics industry in the Czech Republic has been one of the major drivers of the Czech economy and the manufacturing industry for many years. The problem is the limited product range from the production of plastics only to the so-called commodity types: PE, PP, PVC and PS (EPS). It is necessary to develop compounding to prepare plastics according to customer requirements. In June 2018, a new hall at Saar Gummi Czech in Červený Kostelec (SGC) was opened. The company increased sales by 8%, with seal contracts for BMW and Mercedes contributing to growth. The company is one of the key plants in the Saar Gummi global group, which has since 2011 belonged to the Chinese group CQLT. SGC supplies seals to every fourth car produced in Europe, currently to Škoda, Volkswagen, Opel, Citroën, Ford, Seat, Audi, Mercedes-Benz, BMW, Porsche and Lamborghini, mainly door and bonnet seals made from technical rubber using extrusion technology. The Czech company Gumotex has won a contract for its automotive division from Volkswagen for the production of more than 10 million sun visors for Škoda Octavia, Seat Leon, Volkswagen Golf and VW Passat. In 2015–2017 Gumotex implemented a project for the development of a new sun visor for passenger cars, which was financed with the support of the European Union from the funds of the Regional Development Fund within the Enterprise and Innovation for Competitiveness Operational Programme. Nexen Tire plans to launch robotised tyre production at its newest branch near Žatec. South Korea’s Nexen Tire is one of the world’s leading tyre manufacturers. In 2018 they opened a new production hall with high technology in the premises of Continental Barum in Otrokovice. It focuses not only on the production of tyres, but also on the production of moulds for passenger car tyres. The company Gumárny Zubří, specialising in the development and production of technical rubber, thermoplastic and thermoplastic elastomer products, has been awarded the eighth Supplier for Cars of the Year award. Their main production programme is of car mats and precision technical mouldings. Fatra, which dates back to 1935, is currently one of the leading European plastics processors. It is currently preparing to launch a new rolling mill, which means an increase in the overall production capacity of floor coverings and waterproofing membranes, but also an expansion of the flooring offer. The company produces PVC floor coverings, waterproofing foils, technical foil products, plastic profiles, BOPET foils for food purposes, vapour-permeable foils for sanitary needs, injection moulded products and PVC granulate.

132 12. CZ-NACE 22 – MANUFACTURE OF RUBBER AND PLASTIC PRODUCTS

12.3 MAIN ECONOMIC INDICATORS

Chart 12.3.1 – Main economic indicators of CZ-NACE 22

4 500 100 000 Number of units Average number of employees 4 000 90 000

3 500 80 000 70 000 3 000 60 000 2 500 50 000

2 000 4 244 4 058 91 514 91 147 3 907

40 000 88 080 87 352 84 316 3 663 3 617 3 572 3 563 3 551 3 527 79 685 79 575 78 748 77 806 3 385 76 700 75 744

1 500 3 262 30 000 1 000 20 000 500 10 000 0 0 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

350 000 100 000 Sales (CZK m) Value added (CZK m) Average monthly wage (CZK) 90 000 300 000 Labour productivity from the VA (CZK/month)* 80 000 250 000 70 000 60 000 200 000 50 000 150 000 324 180 320 841 40 000 304 103 297 876 81 859 81 396 79 651 79 548 282 002 75 608 258 418 71 155 84 476 83 970 254 551 68 780 80 625

79 780 30 000 100 000 245 425 73 694 63 389 227 935 62 074 223 804 64 190 62 813 58 469 55 633 55 055 193 842 52 155 51 281 48 951 20 000 50 000 30 523

10 000 28 404 26 670 25 083 24 442 23 725 23 401 22 750 20 930 21 332 22 449 0 0 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Chart 12.3.2 – Price developments in CZ-CPA 22 Chart 12.3.3 – Spread (ROE – re) CZ-NACE 22 (%) (2005 = 100 %)

120 30

25 110

20 100 15 90 10

80 5

70 0

‐5 60 ‐10 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 50 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Spread ‐4,50 ‐1,33 4,53 5,53 8,87 10,21 13,32 15,85 14,79 10,79 6,46 22 98,2 94,8 93,6 97,4 100,5 100,1 102,8 101,5 99,0 99,3 99,1 rf 4,55 4,67 3,71 3,79 2,31 2,26 1,58 0,58 0,43 0,98 1,98 22.1 100,0 97,9 96,1 104,6 112,3 109,7 111,3 106,6 100,4 99,8 96,5 ROE 12,16 14,87 18,22 18,51 19,42 21,02 22,91 23,74 22,24 18,57 15,27 22.2 97,6 93,7 92,7 94,6 95,8 96,2 99,3 99,1 98,0 98,5 99,3 re 16,66 16,20 13,69 12,98 10,56 10,81 9,58 7,89 7,45 7,78 8,81

Source: CZSO, MIT calculations Source: CZSO, MIT calculations

133

12.4 FOREIGN TRADE

12.4.1 DEVELOPMENT OF FOREIGN TRADE This sector has been showing increasing export dynamics over the past decade linked to German manufacturers and the automotive industry. A strong pro-export policy is indicated by a positive balance.

Chart 12.4.1 – Exports, imports and foreign trade balance in products by CZ-CPA 22 (CZK million)

250 000

Export Import Trade balance

200 000

150 000

100 000 196 172 193 387 184 695 183 944 182 443 182 267 172 303 170 867 165 689 154 010 151 911 143 264 134 771 134 224 128 238 50 000 126 567 118 429 112 204 98 793 95 478 9 443 6 225 13 729 3 315 7 657 15 026 16 856 12 393 0 17 140 16 578 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Source: CZSO, data as of 8 April 2019

12.4.2 TERRITORIAL STRUCTURE OF FOREIGN TRADE The main trading partner in both export and import was Germany. Other significant export territories include Slovakia, Poland and France. In imports, other important partners are Poland, China, Italy and Slovakia (Chart 12.4.2).

Chart 12.4.2 – Foreign trade in products, CZ-CPA 22

Import territories in 2018 Export territories in 2018

other other Germany 28% 31% Germany 32% 36%

Hungary 3% Hungary 4% Spain Slovakia 4% 9% France United Poland France Poland 4% Kingdom China 9% 5% 7% Italy 4% USA Slovakia 6% 5% 4% Austria 5% 4% Source: CZSO, data as of 8 April 2019

134

12. CZ-NACE 22 – MANUFACTURE OF RUBBER AND PLASTIC PRODUCTS

12.5 RESEARCH, DEVELOPMENT AND INNOVATION Expenditure on R&D in CZ-NACE 22 in 2017 amounted to CZK 957 million, down CZK 94 million from 2016 (see Chart 12.5.1). A decrease in R&D expenditure is recorded across all sources of expenditure. The number of enterprises active in R&D returned to the 2015 level, i.e. 81 enterprises. R&D accounts for 3.99% of the total expenditure in division 22. The share of researchers in CZ-NACE 22 in the total number of researchers in the manufacturing industry sectors was 4.41%, i.e. 373 researchers per year (average for 2013–2017). Enterprises which benefited from a significant amount of targeted support from the State budget under the national programmes of the MIT (TIP, TRIO), MEYS (EUREKA CZ, INTER-EXCELLENCE), MoI (Security research of the Czech Republic 2015-2022), MoA (KUS) and TA CR (ALFA, Competence Centres, DELTA, EPSILON, ZÉTA, THÉTA) in 2007–2018 include SPUR a.s., OPTAGLIO s.r.o., ASIO, spol. s r.o., 5M s.r.o. and PREFA KOMPOZITY, a.s. A total of three companies are involved in Horizon 2020. ASIO, spol. s r.o. participates in SuPER-W: Sustainable Product, Energy and Resource Recovery from Wastewater and project Circular Agronomics: CIRCULAR AGRONOMICS – Efficient Carbon, Nitrogen and Phosphorus cycling in the European Agri-food System and related up- and down-stream processes to mitigate emissions. LiCrete s.r.o. is the coordinator of LiCrete: LiCrete – Light transmitting composite material for building purposes. The ZDMP: Zero Defect Manufacturing Platform project includes the self-employed natural person Jindřich Svoboda. Within the National RIS3 Strategy, the manufacture of rubber and plastics products is an R&D area that -re ceives average support. In the period from 1 January 2015 to 31 October 2018, 128 projects falling within the National RIS3 Strategy were approved under the OP EIC with planned total aid (EU, public and private Czech funds) of CZK 2.31 billion, of which CZK 0.88 billion was an EU grant. The aid is mainly focused on strengthening the R&D capacities of enterprises (92%). In the reference period, projects for the manufacture of rubber and plastic products were submitted by large enterprises as well as SMEs. For SMEs, PEBAL s.r.o. was the most supported by EU subsidies ( In- novated PE foil recipes in PEBAL s.r.o.; Support of export opportunities of PEBAL s.r.o.; Introduction of production of unique biodegradable packaging projects; total expenditures CZK 146 million, of which EU subsidies were CZK 52 million) and for large companies TRW-Carr s.r.o. from the Central Bohemian Region (Innovation of product and process of production of safety belts for passenger cars project; total expenditures CZK 101 million, of which EU subsidy was CZK 25 million).

Chart 12.5.1 – R&D expenditure (CZK mil.) and the number of enterprises with R&D in CZ-NACE 22

EU+other international organisations Number of enterprises Entrepreneurs Government+universities 1 400 90 1 204 80 1 200 1 061 52 1 051 70 11 21 957 1 000 850 16 60 800 695 683 36 674 50 11 8 62 600 1 077 40 77 79 81 77 81 978 976 891 65 66 747 30 400 55 628 626 545 20 200 10 76 0 67 56 49 67 72 55 50 0 2010 2011 2012 2013 2014 2015 2016 2017 2010 2011 2012 2013 2014 2015 2016 2017

Source: CZSO, MIT calculations

135

12.6 SUMMARY AND PERSPECTIVE OF THE DIVISION According to the latest PlasticsEurope 2018 data, the plastics industry, with a turnover of EUR 355 billion in 2017 (including thermoplastics, polyurethanes, thermosets, elastomers, adhesives, coatings, seals and PP fibres excluding PET, PA and polyester fibres), is one of the main pillars of the European economy. It involves over 60,000 companies and employs more than 1.5 million Europeans. Worldwide, 348 million tonnes were produced in 2017, and Europe (EU28 + Norway + Switzerland) produced 64 million tonnes in 2017. In Europe, the highest demand for plastics is in the packaging sector (almost 40%), construction (almost 20%), the automotive industry (10%), the electrical industry and agriculture. Asia (50.1%) – China (29.4%) – has the leading position in the plastics industry, followed by Europe (18.5%) and NAFTA (17.7%). The long-term global trend is a growing waste problem. The European Commission published the strategy for plastics and other documents on the circular economy on 16 January 2018. This document presents the basic vision of a new perspective on plastics in the circular economy. It is essential to focus on the production and use of plastics to ensure that from their inception, the products in question respect the principles of the circular economy. By 2030, all plastics should either be reusable or recyclable. Recycling will also help reduce greenhouse gas emissions and the EU’s dependence on fossil fuel imports. Another task is to reduce the leakage of plastics and microplastics into the environment. PlasticsEurope 2018 reports a 79% increase in recycling volumes between 2006 and 2016, 61% energy processing, and in this context a 43% decrease in landfill volumes for EU28 + Norway + Switzerland. It also points out that in 2016, European recycling volumes (31%) exceeded landfill volumes (27%) for the first time. PlasticsEurope also states that in 2016, 19 countries reported plastic packaging recycling exceeding 35%.1 After several years of strong growth, EU28 plastic production is halting in 2018 and starting to decline slightly. The estimate for 2019 is again growth, albeit weak (0.5%). Research and development activities can be expected in the areas of lightweight plastics with a focus on improving insulating properties, new flame retardants, biofoam plastics, foams with high heat resistance, sandwich applications, method of reducing odorous emissions in plastics processing, application of biopolymers for technical parts for the vehicle, construction and textile industry and engineering plastics reinforced with fibres for 3D printing, electrically conductive plastics for the electrical industry, etc.

1 PlasticsEurope, Plastics – the Facts 2018. In Plastics – the Facts [online] [vid. 2019-5-17], pp. 12 – 36. Available at www.plasticseurope.org/en/resources/market-data 13 6 13. CZ-NACE 23 – MANUFACTURE OF OTHER NON-METALLIC MINERAL PRODUCTS

13. CZ-NACE 23 – MANUFACTURE OF OTHER NON-METALLIC MINERAL PRODUCTS

13.1 CHARACTERISTICS OF THE DIVISION Breakdown of the CZ-NACE 23 division by individual groups: 23.1 Manufacture of glass and glass products; 23.2 Manufacture of refractory products; 23.3 Manufacture of clay building materials; 23.4 Manufacture of other porcelain and ceramic products; 23.5 Manufacture of cement, lime and plaster; 23.6 Manufacture of articles of concrete, cement and plaster; 23.7 Cutting, shaping and finishing of stone; 23.9 Manufacture of abrasive products and non-metallic mineral products n.e.c.

In the Czech Republic, CZ-NACE 23 groups benefit from a good raw materials base and modern production units. The Czech glass industry and industrial production of building materials have a long tradition and a relatively high quality. In addition to the glass and building materials industries, the division includes a wide range of ceramic, porcelain and glass products. However, glass production in the Czech Republic has long been much more than the romantic idea of a glassblower with a whistle in the glassworks. This method of production today contributes negligibly to the industry’s revenues. Flat glass production and glass fibre production are becoming dominant fields. Building materials and glass also play an important role in sustainable development thanks to their energy performance and durability, which determines the energy consumption of buildings throughout their life. Large businesses are characteristic of the division. They account for more than half of the revenues, value added and employees of the division. When looking at individual groups, in 2018 Group 23.6 had the highest share of revenues within the division, followed by Group 23.1. Group 23.1 also had the largest share of total assets in the reference year, followed by Groups 23.6, 23.5 and 23.4. The number of employees was highest in Groups 23.1 and 23.6. Specific data are set out in Table 13.1.1.

Table 13.1.1 – Shares of groups in CZ-NACE 23 in 2018 (%, division = 100%)

Group Personnel Value Own Assets Number of Number of Revenues Incomes CZ‐NACE costs added capital total employees units

23.1 39.9 34.5 31.2 32.0 33.3 34.1 41.7 35.7 23.2 6.6 5.2 4.8 4.7 4.8 4.1 6.5 0.7 23.3 6.3 8.2 7.2 7.2 6.3 7.5 6.1 3.4 23.4 7.2 4.6 4.3 4.1 4.0 3.7 8.8 19.2 23.5 4.6 8.9 6.7 7.1 10.6 10.7 3.0 0.2 23.6 27.5 28.3 33.4 33.1 29.7 30.6 25.3 13.6 23.7 1.4 1.7 2.1 2.0 1.3 1.3 2.3 24.7 23.9 6.5 8.6 10.3 9.8 9.9 8.0 6.3 2.4 Source: CZSO, data 2018 MIT calculations

137

13.2 DEVELOPMENTS IN THE DIVISION In assessing the development of the glass industry and industrial production of building materials in 2018, it is necessary to take into account their immediate interconnection with the construction sector, where the key segments of the this group of manufacturing industry have in essence partly followed the development of building production in the Czech Republic and the EU. The construction industry contributes about 7% to the total economy of the Czech Republic, employs more than 9% of the total number of employed persons and is able to absorb a significant proportion of workers with lower or different qualifications. The industrial production of building materials has undergone a long and complicated development, from classic bricks to various shaped bricks, which allow dry masonry and acceleration of the entire construction. Cast concrete structures also have a long tradition, from which, as in the past, not only tunnels or bridges were built, but nowadays also various commercial and administrative centres, apartment buildings and various industrial buildings and halls. Last year, the Czech market saw a shortage of some building materials, mainly bricks, but also building glass, insulation and panels. Delivery times were up to double compared to the previous year, with build- ers waiting for goods for several months. This shows the increasing construction production in recent times. Czech glassmaking has built up an excellent reputation in the world over the course of its hundred-year tradition. There is very tough competition in this field in the world, which Czech companies strive to face by the quality, innovation, design and originality of products. Although the Czech glassworks were hit hard by the 2008 financial crisis, they got back on their feet. In 2018, the Confederation of Industry of the Czech Republic included Czech glass in a survey of the largest industrial icons that built the reputation of Czech industry at home and abroad. Czech glass is a phenomenon. For example, Preciosa’s designer luxury fixtures adorn the sumptuous palaces in the Middle East. The Sheraton Dubai Mall has a monu- mental lighting installation weighing over 1,700 kilograms. Chandeliers from Preciosa also illuminate the world’s most luxurious yachts. Lasvit s.r.o. is also known worldwide (lighting for Dubai metro stations, Burj Khalifa’s tallest restaurant, and the Waldorf Astoria in Ras Al Khaimah and Etihad Towers in Abu Dhabi), whose latest achievement is a multi-ton chandelier for the Dubai Opera House. Foreigners coming to the Czech Republic are attracted to the traditional Czech crystal. And not just them. More than 90% of domestic utility glass production is exported abroad. At present, the CZ NACE 23 division employs approximately 59,000 workers in the Czech Republic, produces a turnover of almost CZK 160 billion and exports 80-90% of its production. Given this strong pro-export orientation, the main challenge is the sector’s ability to succeed in third-country markets, i.e. outside the EU. Other basic challenges for manufacturers in the industry nowadays are mainly to ensure that there are enough skilled workers, for whom production will become a hobby, as it is interesting both professionally and in terms of craftsmanship.

13 8 13. CZ-NACE 23 – MANUFACTURE OF OTHER NON-METALLIC MINERAL PRODUCTS

13.3 MAIN ECONOMIC INDICATORS Chart 13.3.1 – Main economic indicators of CZ-NACE 23

8 000 80 000 Number of units Average number of employees 7 000 70 000

6 000 60 000

5 000 50 000

4 000 40 000 6 884 6 672 68 640 3 000 6 576 30 000 6 204 6 157 6 107 6 001 5 994 5 985 5 951 5 818 58 084 57 541 57 441 57 148 56 774 55 447 55 455 55 312 55 214 2 000 20 000 54 218

1 000 10 000

0 0 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

180 000 90 000 Sales (CZK m) Value added (CZK m) Average monthly wage (CZK) 160 000 80 000 Labour productivity from the VA (CZK/month)* 140 000 70 000

120 000 60 000

100 000 50 000

80 000 40 000 82 770 80 829 160 279 158 023 75 993 75 304 53 038 150 078 72 538 52 014 51 353 141 907 141 119 47 874 47 763

60 000 30 000 67 148 66 893 66 497 65 757 65 472 135 144 64 949 44 263 130 329 128 633 41 636 127 576 40 532 125 407 39 658 39 588 124 108 39 443 40 000 20 000 32 328 30 476 28 752

20 000 10 000 27 710 26 650 25 946 25 736 25 372 24 809 23 933 23 238 0 0 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Chart 13.3.2 – Price developments in CZ-CPA 23 Chart 13.3.3 – Spread (ROE – re) CZ-NACE 23 (%) (2005 = 100 %)

150 20 140 130 120 15 110 100 90 10 80 70 60 5 50 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

23 109,4 107,2 104,3 103,9 104,1 103,7 103,4 103,7 105,0 106,0 109,5 0 23.1 107,8 100,9 98,8 100,2 99,7 99,3 98,0 97,2 100,4 102,9 104,6 23.2 106,6 109,6 107,1 108,4 110,7 111,9 112,0 111,5 112,9 111,5 113,5 ‐5 23.3 109,7 96,1 86,1 86,1 88,7 88,7 92,7 92,5 97,5 102,6 112,2 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 23.5 108,1 110,8 104,5 98,8 96,8 94,4 93,4 93,4 93,5 93,6 94,0 Spread ‐1,37 ‐3,75 ‐2,51 ‐2,81 ‐3,09 ‐3,08 0,40 3,07 5,30 3,61 2,08 23.6 107,5 108,4 107,3 106,7 106,0 105,5 105,3 106,5 107,6 108,7 111,8 rf 4,55 4,67 3,71 3,79 2,31 2,26 1,58 0,58 0,43 0,98 1,98 23.7 103,3 99,9 100,6 99,1 96,1 94,3 91,2 91,3 88,9 86,2 89,8 ROE 12,55 8,78 9,77 9,09 8,08 8,58 11,73 13,36 15,03 13,91 13,69 23.9 126,3 122,4 120,8 123,7 133,4 135,9 135,5 133,4 129,7 126,5 135,1 re 13,92 12,53 12,28 11,91 11,16 11,66 11,33 10,29 9,72 10,30 11,61

Source: CZSO, MIT calculations Source: CZSO, MIT calculations Note: Group 23.4 is not monitored.

139

13.4 FOREIGN TRADE

13.4.1 DEVELOPMENT OF FOREIGN TRADE In 2018, the export of CZ-CPA 23 products was CZK 74 billion. Traditionally, the largest market for construction, ceramic and glass products was Germany, with a share of 26%, followed by Slovakia with 11% and Poland with 8%. Italy and Austria are other EU outlets with a 5% share. In these markets, besides glass, the best-selling building materials include cement, ceramic universal tiles (wall and floor tiles), brickmaker ceramic products, precast concrete products and concrete products, dry plaster mixtures and materials for thermal insulation systems. The section is characterised by a high foreign trade balance, which accounts for more than one third of its exports. Both exports and imports are constantly growing (Chart 13.4.1). The trading in and marketing of glass and building materials and products on the European market are governed by uniform European rules and assessing their properties is subject to harmonised European standards. Chart 13.4.1 – Exports, imports and foreign trade balance in products by CZ-CPA 23 (CZK million)

80 000 Export Import Trade balance 70 000

60 000

50 000

40 000 73 998 73 662 71 921 71 242 30 000 69 472 61 312 60 054 57 046 54 400 51 500 48 243

20 000 47 599 45 638 42 934 42 660 40 419 39 777 37 280 33 527 28 583 25 419 26 283 29 875 10 000 26 399 26 538 21 535 21 625 19 766 19 635 20 873 0 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Source: CZSO, data as of 8 April 2019

13.4.2 TERRITORIAL STRUCTURE OF FOREIGN TRADE Germany is the Czech Republic’s largest trading partner in both the exports and imports of virtually all the products in this division. Given the unfavourable share of transport costs in the resulting building product price, the importance of other neighbouring countries increases. That is why Slovakia, Poland and Austria are also important trading partners for the exports of building materials (Chart 13.4.2). Chart 13.4.2 – Foreign trade in products, CZ-CPA 23

Import territories in 2018 Export territories in 2018

other Germany other 25% Germany 26% 26% 34%

France 4% Slovakia Austria 11% 4% Poland Hungary 3% 17% Poland China Belgium United Austria Italy 8% 6% Italy Slovakia 5% Kingdom 5% 5% 6% 7% 3% France 5% Source: CZSO, data as of 8 April 2019 140

13. CZ-NACE 23 – MANUFACTURE OF OTHER NON-METALLIC MINERAL PRODUCTS

13.5 RESEARCH, DEVELOPMENT AND INNOVATION Expenditure on R&D in CZ-NACE 23 amounted to CZK 588 million in 2017 (see Chart 13.5.1) and accounted for 2.26% of total R&D expenditure in manufacturing. Compared to 2016, there was an increase in expenditures from all sources (mostly business and public sources from the Czech Republic and universities). At the same time, the number of enterprises with active R&D increased to 68 in 2017. The share of researchers (FTE) in CZ-NACE 23 in the total number of researchers in the manufacturing industry divisions was 2.00%, i.e. 170 researchers per year (average for 2013–2017). The companies with CZ-NACE 23 as their main economic activity that received in 2007–2017 a significant amount of special-purpose state support within the national programmes of the Ministry of Industry and Trade (TIP, TRIO) and Technical Assistance of the Czech Republic (ALFA, Competence Centres, DELTA, EPSILON and ZÉTA) included HELUZ cihlářský průmysl v.o.s., BETOSAN s.r.o., Prefa Brno a.s., IQ Structures s.r.o. and CIDEM Hranice, a.s. Two companies are involved in Horizon 2020 projects in this CZ-NACE 23. The first company is AGC Flat Glass Czech a.s., which is involved in DOMUS: Design Optimisation for- effi cient electric vehicles based on a User-centric approach. The other company, ŽPSV a.s., is participating in the GeoDust: Utilisation of secondary raw material in geopolymers production project. Within the National RIS3 Strategy, the manufacture of non-metallic mineral products is an R&D area that receives average support. In the period from 1 January 2015 to 31 October 2018, 91 projects within the National RIS3 Strategy were approved under the OP EIC with planned total aid (EU, public and private Czech funds) of CZK 1.47 billion, of which CZK 0.60 billion was an EU grant. The aid is mainly focused on strengthening the R&D capacities of enterprises (88%). The projects in terms of their content correspond to the application segments Glass and Ceramics (49) and Ensuring a healthy and quality environment and the efficient use of natural resources (42). In the reference period, projects were submitted by large enterprises as well as SMEs. As regards European support for applicants/beneficiaries, the largest EU support was granted to SANS SOUCI, s.r.o. for SMEs (Innovative antireflective layers; Development of export opportunities of SANS SOUCI; Development of export opportunities of SANS SOUCI projects; total expenditures of CZK 161 million, of which EU subsidies were CZK 73 million) and Lias Vintířov, lehký stavební materiál, k.s. for large enterprises (Innovation of Liapor lightweight ceramic aggregate production technology with a focus on small fractions up to 4 mm; Development of a new technology for firing lightweight ceramic aggregates projects; total expenditures of CZK 64 million, of which EU subsidies were CZK 25 million).

Chart 13.5.1 – R&D expenditure (CZK mil.) and the number of enterprises with R&D in CZ-NACE 23

EU+other international organisations Number of enterprises Entrepreneurs Government+universities 700 80 625 597 588 3 70 600 537 12 547 4 2 468 2 60 500 391 403 16 50 400 2 15 40 590 300 558 549 68 509 526 61 30 57 58 57 59 58 411 52 200 355 357 20

100 10

41 0 33 31 32 25 27 19 34 0 2010 2011 2012 2013 2014 2015 2016 2017 2010 2011 2012 2013 2014 2015 2016 2017

Source: CZSO, MIT calculations

141

13.6 SUMMARY AND PERSPECTIVE OF THE DIVISION The glass industry is one of the divisions with the highest level of automation and in recent years also robotics. Companies are investing in modernising production and in products with higher added value. In 2018, AGC Processing Teplice a.s., a member of the AGC Group, invested CZK 155 million in a new quench- ing furnace and other equipment for the subsequent processing of glass. Over the last five years, facade glass has seen innovation. The most automated industrial production is the production of glass containers, which is currently supplemented by robotisation and digitisation (e.g. Vetropack Moravia Glass, a joint stock company, put into operation a lubricating robot and by digitisation reduced dependence on human machine operators). This year, the Preciosa Group has set aside into a separate company the production of Vinolok glass stoppers, replacing cork and plastic stoppers in bottles for wines or spirits. This is a typical product with higher added value. EcoGlass, a.s., the manufacturer of optical elements for lighting applications, bet on specialised production. The trend is microoptics and the formation of microstructures on glass lenses. In 2018, the activities of industry representatives in the Czech Republic and the European Union were directly linked to topics such as contact of products with food, prolongation of anti-dumping on porcelain imports from China, REACH issues, EU ETS after 2020 and circular economy linked to promoting glass recycling. Industrial production of building materials can also be assessed as stabilised, promising and well-placed to further maintain and improve their starting position in the competitive European market. The future of the industrial production of building materials, as well as other industries in the country, lies in the upcoming automation of production and its robotisation. The new BIM method introduced in the construction industry and the deployment of robots in production are also being tested and put into practice, for example in BAUMIT in the application and manufacture of facade products and in the application and production of ceramic brick products by Wienerberger, a.s. and HELUZ cihlářský průmysl v.o.s. (branches in Jezernice in North Moravia, and Hevlín and Novosedly in South Moravia). The Directive of the European Parliament and of the Council imposes an obligation to apply BIM to all above-the-threshold public works contracts from January 2022 and this method must be well-managed by our companies by then. The development of the glass, ceramics and building materials industries is based not only on tradition but also on new innovations. The division is developing and innovating its products, technologies, selected materials and design. Ensuring sufficient skilled workers is currently one of the basic challenges for industry manufacturers. There is a need for more active communication towards the wider public by the State, especially to pupils and their parents as early as at primary schools to support the main groups in the CZ-NACE 23 division.

142 14. CZ-NACE 24 – MANUFACTURE OF BASIC METALS

14. CZ-NACE 24 – MANUFACTURE OF BASIC METALS

14.1 CHARACTERISTICS OF THE DIVISION

Breakdown of the CZ-NACE 24 division by individual groups: 24.1 Manufacture of basic iron and steel and of ferro-alloys; 24.2 Manufacture of tubes, pipes, hollow profiles and related fittings, of steel; 24.3 Manufacture of other products of first processing of steel; 24.4 Manufacture of basic precious and other non-ferrous metals; 24.5 Casting of metals. Metallurgy has a two-hundred-year tradition in the Czech Republic and is still one of the key branches of the manufacturing industry, as steel is used in almost all sectors of the economy. The product portfolio includes a wide range of products, ranging from rails, wires and various types of steel bars (long products) to sheets and strips of various dimensions and sizes, including crash barriers or thick plates for wind turbines and ships (flat products). The Czech Republic traditionally manufactures high-quality steel pipes, in various diameters, stainless and classical, welded and seamless, which are used in a variety of applications from the automotive industry to oil and gas extraction. Almost 98% of iron and steel production comes from the Moravian-Silesian region, where the three largest steel companies in the Czech Republic are located. The industry employs approximately 20,000 people directly and tens of thousands indirectly in supply companies, services and other related fields. In terms of size, large enterprises are most important and account for up to 75% of the division. The CZ-NACE 24.1 group accounts for the largest share according to the individual groups of the division, namely 53% of the division’s sales. The share of CZ-NACE 24.4 and CZ-NACE 24.5 is similar and represents approximately 14% and 13% of revenues, respectively. Third are CZ-NACE 24.2 and CZ-NACE 24.3, which account for about 10% (Table 14.1.1).

Table 14.1.1 – Shares of groups in CZ-NACE 24 in 2018 (%, division = 100%)

Group Personnel Value Own Assets Number of Number of Revenues Incomes CZ‐NACE costs added capital total employees units

24.1 43.4 44.5 53.2 55.0 55.0 52.8 39.0 7.1 24.2 11.0 12.8 9.9 10.5 12.7 11.2 10.8 3.9 24.3 8.7 8.8 10.0 9.4 7.3 8.7 8.5 4.0 24.4 9.9 9.5 14.0 13.3 11.3 12.4 9.3 10.6 24.5 27.0 24.5 12.8 11.9 13.7 14.8 32.4 74.4 Source: CZSO, data 2018 MIT calculations

143

14.2 DEVELOPMENTS IN THE DIVISION In the Czech lands, iron production in blast furnaces began to be introduced in the 18th century. In the 19th century, production was concentrated in places with the presence of iron ores (around Králův Dvůr, Vítkovice and Třinec) and in places where coal was used for coke production (Kladno and Ostrava). The steel industry has undergone a fundamental change over the last two decades. The environmental impact of the industry has been greatly reduced as operations produce a fraction of dust and other pollut- ant emissions compared to the 1980s and 1990s, and the use of recycled steel is also increasing. Thanks to advanced automation and the use of modern technology, the same amount of steel is produced with fewer people. In 2018, CZ-NACE 24 accounted for 4.6% of manufacturing industry sales and thus ranked 9th out of 24 manufacturing industries. Although sales in 2018, despite their growth compared to 2017, did not even reach the 2008 level and the share of the division in manufacturing revenues declined between 2008 and 2018, the industry has developed technologically, and products with higher added value are increasingly being used. According to the Steel Union, crude steel production in the Czech Republic reached 5 million tonnes in 2018, which is one tenth more than in 2017. The successful trend in the production of tubes continues; in 2018 more than half a million tonnes were produced, a comparable quantity to that produced by the much larger France. Total domestic steel consumption reached 7.2 million tonnes last year. Exports from the Czech Republic increased by 6% compared to 2017 to 4.9 million tons and, thanks to the focus of production on more sophisticated products, reached a record value of CZK 108 billion. Exports of goods from which Czech companies have much more profit, such as pipes, wire rods and bar steel, grew. Unfortunately, the volume of imported steel grew even faster than exports and also reached a historical high: 7.5 million tonnes. In 2018, the situation of the steel industry in the Czech Republic was significantly influenced by the- de velopment of the steel market in the world and in the European Union. Production in the EU countries reached 168 million tonnes last year, which is slightly less than in 2017. The world’s largest steel producer in 2018 was again China, which produced 928 million tonnes, i.e. more than half of the world’s total production. Europe last year imported a record 43 million tonnes and the imported steel further pushed out European production. Imports to the Czech Republic and Europe are at their historically highest levels due to persisting overcapacity in production in China and other emerging countries. According to the directors of the most important steel producers in Europe and the directors of national steel associations, including the Czech Republic, the situation in the steel market is critical. The main causes of this situation are global production overcapacity, declining domestic demand, soaring imports,

expensive feedstocks and enormous CO2 costs. All these factors significantly weaken the competitiveness of European producers compared to competitors from other countries. In the Czech Republic, steel companies are still trying to limit the impact of their activities on the environment. Billions of crowns invested in reducing emissions from operations in the Moravian-Silesian region led to a significant decrease in harmful emissions into the air. Although industry is still a major source of pollution, its share, for example, in dust emissions, has declined. On the other hand, other sources of emissions have gained in importance, especially small sources, which can include local furnaces and transport. Between 2004 and 2017, ArcelorMittal Ostrava reduced dust emissions from 2062 to 379 tonnes. Polycyclic aromatic hydrocarbon emissions, including the toxic benzo(a)pyrene, have decreased from 1,751 tonnes per year to 22 tonnes in 2017 since 2003. In Třinecké železárny, dust emissions fell to a new historical minimum of 148 tonnes in 2017.

144 14. CZ-NACE 24 – MANUFACTURE OF BASIC METALS

14.3 MAIN ECONOMIC INDICATORS Chart 14.3.1 – Main economic indicators of CZ-NACE 24

1 400 60 000 Number of units Average number of employees

1 200 50 000

1 000 40 000 800 30 000 600 55 958 1 170 995 46 394 46 314 1 041 20 000 44 617 44 541 44 363 44 311 44 041 939 43 932 43 877 43 744 928 927 908 891 400 860 758 701 200 10 000

0 0 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

300 000 90 000 Average monthly wage (CZK) Sales (CZK m) Value added (CZK m) 80 000 Labour productivity from the VA (CZK/month)* 250 000 70 000

200 000 60 000

50 000 150 000 40 000 76 263 75 069 70 517 70 106 240 142 100 000 30 000 69 045 226 738 65 018 211 672 61 021 59 373 201 489 199 420 56 655 194 332 192 275 190 568 181 920 181 272 48 275 46 679 20 000 39 716 39 425 37 244 36 393 144 552 33 633 32 684 31 763 38 521 50 000 29 435 25 270 33 792 21 197 31 239 29 395 28 380 10 000 28 032 27 021 26 967 26 352 25 051 24 544 23 742 0 0 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Chart 14.3.2 – Price developments in CZ-CPA 24 Chart 14.3.3 – Spread (ROE – re) CZ-NACE 24 (%) (2005 = 100 %)

170 25

20 150 15

130 10

110 5 0 90 ‐5

70 ‐10

‐15 50 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 ‐20 24 113,4 94,3 98,3 111,7 109,3 105,9 108,5 105,2 97,9 107,8 113,5 ‐25 24.1 114,2 87,6 93,9 111,0 108,0 103,6 106,2 101,4 93,4 105,2 112,7 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 24.2 117,6 108,5 107,6 117,8 115,4 108,4 109,7 105,0 97,3 104,3 110,5 Spread ‐4,12 ‐22,61‐14,83‐12,00‐15,09 ‐6,83 1,27 ‐4,39 ‐3,44 ‐0,98 ‐2,40 24.3 104,1 93,5 92,7 98,5 96,4 93,7 96,9 94,5 90,4 101,1 106,4 rf 4,55 4,67 3,71 3,79 2,31 2,26 1,58 0,58 0,43 0,98 1,98 24.4 129,0 108,0 122,8 139,8 135,6 135,8 140,6 146,6 132,5 147,0 146,0 ROE 7,86 ‐2,85 2,83 3,86 ‐1,94 4,51 12,30 6,06 6,41 9,38 8,81 24.5 109,9 109,8 106,5 111,1 113,9 114,8 116,0 115,7 113,0 111,8 114,1 re 11,98 19,76 17,66 15,86 13,15 11,34 11,03 10,44 9,86 10,35 11,21

Source: CZSO, MIT calculations Source: CZSO, MIT calculations

145

14.4 FOREIGN TRADE

14.4.1 DEVELOPMENT OF FOREIGN TRADE External trade in CZ-CPA 24 commodities showed increasingly higher imports over exports. As a result, the foreign trade balance deteriorated steadily, increasing slightly year-on-year in 2018 (see Chart 14.4.1). Nearly half of the exported goods belong to Group 24.1 of the individual group sections. Positive balance of foreign trade in 2018 was recorded by Groups 24.2 and 24.5.

Chart 14.4.1 – Exports, imports and foreign trade balance in products by CZ-CPA 24 (CZK million)

300 000 250 000 Export Import Trade balance 200 000 150 000 277 124

100 000 263 067 237 956 233 174 223 089 216 653 213 217 211 087

50 000 181 567 152 895 152 503 152 189 149 824 143 623 140 399 139 713 132 989 130 347 113 877 71 375 64 464 94 333 80 279 63 393 92 742 122 668 124 621 ‐ 67 690 43 446 ‐ ‐ ‐ 89 542 ‐ ‐ ‐ ‐ ‐ 0 ‐ ‐50 000 ‐100 000 ‐150 000 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Source: CZSO, data as of 8 April 2019

14.4.2 TERRITORIAL STRUCTURE OF FOREIGN TRADE In terms of foreign trade, European countries remain the key market for Czech production. Germany was the main trading partner for both exports and imports, followed in both cases by Poland, Slovakia and Italy (see Chart 14.4.2).

Chart 14.4.2 – Foreign trade in CZ-CPA 24 products

Import territories in 2018 Export territories in 2018

other other Germany 25% Germany 28% 25% 28%

USA 3% United Belgium Kingdom 2% Poland 3% Poland 15% France Hungary 15% 4% 4% Italy Slovakia Russia Slovakia 6% Italy Austria 12% 4% 7% 9% Austria 4% 6% Source: CZSO, data as of 8 April 2019

146

14. CZ-NACE 24 – MANUFACTURE OF BASIC METALS

14.5 RESEARCH, DEVELOPMENT AND INNOVATION Within the National RIS3 Strategy, the manufacture of basic metals is an R&D area that receives average support. In the period from 1 January 2015 to 31 October 2018, 27 projects within the National RIS3 Strategy were approved under the OP EIC for implementation with planned total aid (EU, public and private Czech funds) of CZK 1.56 billion, of which CZK 0.50 billion was an EU grant. The aid was mainly focused on strengthening the R&D capacities of enterprises (88%). In the reference period, projects for the manufacture of basic metals were submitted by large enterprises as well as SMEs. As regards European support for applicants/beneficiaries, the largest EU support for SMEs was granted to TOP ALULIT s.r.o. (Innovation of products and processes of TOP ALULIT s.r.o.; Compressor innovation in air conditioning; Innovation of automotive cooling system components by pressure crystal- lization; Extension of research and development infrastructure of the company TOP ALULIT s.r.o. projects; total expenditures CZK 392 million, of which EU subsidies were CZK 152 million) and for large companies to Constellium Extrusions Děčín s.r.o. (Constellium Extrusions Děčín: Innovation in the production of high strength aluminium alloy products for the new generation of cars project; total expenditure of CZK 553 million, of which the EU grant was CZK 100 million). Expenditure on R&D in CZ-NACE 24 in 2017 amounted to CZK 202 million, up 27.04% from 2016 (see Chart 14.5.1). The largest increase was posted in expenditures from public foreign sources and business sources. The number of enterprises active in R&D also increased to 25. The R&D accounts for 0.94% of the total expenditure in division 24. The share of researchers (FTE) in CZ-NACE 24 in the total number of researchers in the manufacturing industry divisions was 1.12%, i.e. 95 researchers per year (average for 2013–2017). The companies that received in 2007–2018 a significant amount of special-purpose state support within the national programmes of the MIT (TIP, TRIO) and Technical Assistance of the Czech Republic (ALFA, EPSILON, ZÉTA, THÉTA) include ŽĎAS, a.s., PILSEN STEEL s.r.o., TŘINECKÉ ŽELEZÁRNY, a. s., VÚHŽ a.s. and KOVOHUTĚ ROKYCANY, a.s. Furthermore, Mikrometal s.r.o. is participating in the Horizon 2020 project HYBUILD: Innovative compact Hybrid electrical/thermal storage systems for low energy Buildings.

Chart 14.5.1 – R&D expenditure (CZK mil.) and the number of enterprises with R&D in CZ-NACE 24

Veřejné z ČR + VŠ Podnikatelé Veřejné ze zahraničí Počet podniků

350 35 314 322 298 294 15 300 11 30 5 0 242 227 250 25 0 0 202 200 20 181 231 21 233 232 159 160 0 150 15 29 179 27 27 25 23 24 100 167 10 21 21 147

50 109 5 82 71 66 76 48 0 12 14 0 2010 2011 2012 2013 2014 2015 2016 2017 2010 2011 2012 2013 2014 2015 2016 2017

Source: CZSO, MIT calculations

147

14.6 SUMMARY AND PERSPECTIVE OF THE DIVISION In 2018, the division managed to meet last year’s expectations. The volume of production increased, compared to 2015 to 2017, labour productivity increased significantly, added value increased and wages increased as well. Sales of own products and services were also favourable. Overall figures for 2018 show that the Czech steel industry managed to increase the value of exports, which was the highest since the recession in 2015 and 2016, thanks to its focus on more sophisticated products. The negative trade balance persists, and further increased slightly in 2018. The record level of imports to the Czech Republic and Europe was caused by the already-mentioned persisting overcapacities of steel production, especially in China but also in other emerging economies. Global overcapacities and related unfair commercial practices and pressure on product prices are one of the main problems for Czech and European steel companies. In addition, in 2018 Europe was impacted by the new US tariffs on imports of aluminium and steel and the redirection of cheap third-country steel from the US market to the very open European market. In response to US tariffs, the EU introduced definitive EU safeguard measures in February 2019, which will apply until mid-2021. Volatility on the international market will thus be another determining influence. Despite the turbulent developments in the steel sector, the Czech steel companies have remained competitive and are not being forced to restrict production, which is currently threatening some of the prom- inent European producers. The correct targeting of anti-dumping and anti-subsidy measures in the EU also contributes to the current situation in the Czech Republic. Czech and other steelmakers in the EU are placed at a competitive disadvantage compared to producers from third countries where environmental requirements are not as strict as in Europe. Thus, in fulfilling the vision of a low carbon economy by 2050, the needs of the steel industry and maintaining its competitiveness must be duly taken into account. The prospects of the division and its competitiveness on the European and global markets will be based on priorities such as ensuring a fair and level playing field, promoting effective trade protection instruments, continuing investment in state-of-the-art and environmentally friendly technologies and innovations towards more sophisticated products and finally exploiting the potential of the circular economy. As for the overall economic climate, experts expect the European economy, including key neighbouring countries, to slow down over the next two years, which will also negatively affect the Czech steelmakers.

148 15. CZ-NACE 25 – MANUFACTURE OF FABRICATED METAL PRODUCTS, EXCEPT MACHINERY AND EQUIPMENT

15. CZ-NACE 25 – MANUFACTURE OF FABRICATED METAL PRODUCTS, EXCEPT MACHINERY AND EQUIPMENT

15.1 CHARACTERISTICS OF THE DIVISION Breakdown of the CZ-NACE 25 division by individual groups: 25.1 Manufacture of structural metal products; 25.2 Manufacture of tanks, reservoirs and containers of metal; 25.3 Manufacture of steam generators, except central heating hot water boilers; 25.4 Manufacture of weapons and ammunition; 25.5 Forging, pressing, stamping and roll-forming of metal; powder metallurgy; 25.6 Treatment and coating of metals; machining; 25.7 Manufacture of cutlery, tools and general hardware; 25.9 Manufacture of other fabricated metal products.

CZ-NACE 25 includes the manufacture of “purely” metal products, which have usually static function, as well as the manufacture of weapons and ammunition. This section covers a very wide range of products, from pins to nuclear reactors. This is also related to a wide range of different technologies. Despite the diversity of their products, for all production groups in CZ-NACE 25 the unifying characteristic is that the original material input is traditional metal semi-finished products produced in CZ-NACE 24 Manufacture of basic metals. A closer analysis of the production of individual manufacturing companies involved in metalworking re- veals that many companies seek to further increase the added value of their products by focusing on the subsequent assembly of their metalworking products into engineering assemblies, and thus these companies have much more of a character of engineering manufacturers.

Table 15.1.1 – Shares of groups in CZ-NACE 25 in 2018 (%, division = 100%)

Group Personnel Value Own Assets Number of Number of Revenues Incomes CZ‐NACE costs added capital total employees units

25.1 18.6 15.5 18.5 18.4 12.2 15.8 18.5 7.8 25.2 5.8 4.7 5.5 5.5 5.4 6.1 5.5 0.8 25.3 1.6 1.2 1.3 1.5 1.7 1.9 1.1 0.2 25.4 2.9 4.0 2.8 2.8 3.7 5.6 2.8 0.2 25.5 4.6 4.2 4.8 4.9 4.9 5.0 4.3 5.3 25.6 26.1 27.1 22.8 22.8 26.7 24.2 27.3 30.3 25.7 19.4 22.3 20.8 20.7 18.3 18.6 19.7 51.6 25.9 21.0 21.1 23.5 23.6 27.1 22.7 20.8 3.6 Source: CZSO, data 2018 MIT calculations

149

15.2 DEVELOPMENTS IN THE DIVISION Manufacture of fabricated metal products has an important role not only for other manufacturing industries, but also in non-industrial sectors such as the construction industry for which it is an important supplier of products. In the manufacturing industry, this industry is one of the most important components suppliers, especially for the mechanical and automotive industries, where these products are needed to complete finished products and equipment. In terms of size of companies, the most important in the division are medium-sized enterprises, whose share in sales, value added and number of employees of the division exceeds about one third. Large enterprises account for a smaller share of the division. About 20% of the division is made up of small enterprises. Among the individual groups of the division, Groups 25.9 and 25.6 account for the largest share of sales. However, while Group 25.9 had the highest share in sales of the division, in the share in employment and in value added it was overtaken by Group 25.6. Groups 25.7 and 25.1 had a slightly lower share. Other groups do not have a large share (i.e. up to about 5%) in the results of the division. This section has achieved favourable results and continued in 2018. It is characterised by a long-term slight increase in the number of units and employees. The number of employees has increased since 2009, as have sales and value added. In 2018, labour productivity also continued to grow. All this shows the good quality of products that are also used in foreign markets. Although the sector is not so energy intensive (the share of energy accounts for approximately 5% of the costs), prices of input materials are also affected by materialised energy and its price development in the world markets is thus indirectly reflected in the cost components of the sector‘s manufacturers. The development of the world prices of raw materials also affects the total costs. Over the past few years, Czech defence companies have been developing dynamically. Exports of arms and military equipment reached an estimated record value of CZK 18.8 billion in 2016 and the group also saw a successful development in 2017. In 2018, exports of this commodity showed a slight decrease compared to the previous year, the year-on-year index being 98.02%. The annual increase in sales of own products and services of defence companies is 106.06%. However, a number of companies have reached the limit of their capacities. The lack of skilled workers in the labour market hinders further development. The most dynamic development in section 2018 is reported by Group 25.6, which recorded a year-on-year increase in both revenues and direct export sales by approximately 10%. Direct export sales grew faster. Group 25.3 shows very favourable development, especially in the case of new orders from abroad; its increase was up 25% from the year before. It is essential for companies in the industry to respond to new conditions and technologies, including automation in production. The coming years seem promising in continuing the trend of investing the necessary resources in further automation, digitisation of logistics and the entire supply chain.

150 15. CZ-NACE 25 – MANUFACTURE OF FABRICATED METAL PRODUCTS, EXCEPT MACHINERY AND EQUIPMENT

15.3 MAIN ECONOMIC INDICATORS Chart 15.3.1 – Main economic indicators of CZ-NACE 25

50 000 250 000 Number of units Average number of employees 45 000 40 000 200 000 35 000 30 000 150 000 25 000 46 181 45 880 44 931 44 939 44 281

20 000 44 076 100 000 43 276 42 717 41 000 39 174 38 059 193 176 192 456 187 143 184 315 180 649

15 000 178 152 174 284 173 302 167 304 159 832 159 894 10 000 50 000 5 000 0 0 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

450 000 80 000 Sales (CZK m) Value added (CZK m) Average monthly wage (CZK) 400 000 70 000 Labour productivity from the VA (CZK/month)* 350 000 60 000 300 000 50 000 250 000 40 000 200 000 414 438 68 551 390 265

30 000 66 547 65 372 63 952 128 042 123 842 358 741 61 648 354 010

150 000 118 145 113 503 332 330 56 067 105 113 54 763 309 885 308 363 52 801 303 086 51 272 93 537 91 444 292 358 88 320 49 173 84 411

20 000 46 488 78 806 267 144 100 000 72 326 240 725 29 762

10 000 27 622 26 195 50 000 25 222 24 136 23 272 23 028 22 664 21 959 20 906 20 841 0 0 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Chart 15.3.2 – Price developments in CZ-CPA 25 Chart 15.3.3 – Spread (ROE – re) CZ-NACE 25 (%) (2005 = 100 %)

120 25

110 20

100 15

90 10

80 5

70 0 60 ‐5 50 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 ‐10 25 108,4 105,0 103,0 105,8 107,7 107,6 110,1 109,8 108,8 111,0 113,3 ‐15 25.1 112,1 103,0 96,7 101,0 104,0 101,9 104,4 104,0 102,7 106,8 109,2 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 25.2 113,0 110,9 110,5 108,6 106,7 105,7 106,4 106,8 109,1 112,1 114,2 Spread ‐0,93 ‐9,79 ‐3,00 ‐1,19 2,18 3,74 8,12 8,62 5,70 6,87 3,37 25.5 110,2 112,1 108,6 109,7 111,3 112,8 116,6 114,0 108,7 109,2 109,5 rf 4,55 4,67 3,71 3,79 2,31 2,26 1,58 0,58 0,43 0,98 1,98 25.7 105,3 106,5 105,4 107,7 108,1 109,7 112,0 113,2 115,2 115,5 115,6 ROE 18,63 11,23 14,93 16,46 16,80 17,92 21,39 20,43 17,00 18,51 16,10 25.9 107,6 99,3 100,2 103,0 104,8 103,7 107,6 106,2 101,6 104,7 108,6 re 19,56 21,02 17,93 17,66 14,62 14,18 13,27 11,80 11,30 11,63 12,73

Source: CZSO, MIT calculations Source: CZSO, MIT calculations Note: Groups 25.3, 25.4 and 25.6 are not monitored

151

15.4 FOREIGN TRADE

15.4.1 DEVELOPMENT OF FOREIGN TRADE Foreign trade in CZ-CPA 25 commodities shows increasing values of both exports and imports in2009–2018. The foreign trade balance, which was positive, reached its maximums in 2013 and 2014. In 2018 it increased compared to the previous year and its value was almost double that of 2009 (see Chart 15.4.1). Chart 15.4.1 – Exports, imports and foreign trade balance in products by CZ-CPA 25 (CZK million)

250 000 Export Import Trade balance

200 000

150 000

100 000 234 389 228 862 227 420 220 232 202 886 184 570 173 496 170 963 166 070 165 591 164 124 158 569 138 829 50 000 138 370 121 337 120 541 113 756 113 182 98 881 84 210 63 425 62 792 64 516 61 830 61 662 50 942 64 029 39 948 37 127 0 59 740 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Source: CZSO, data as of 8 April 2019

15.4.2 TERRITORIAL STRUCTURE OF FOREIGN TRADE Germany has traditionally been the largest export and import partner (both 37%). This is due to the mu- tually beneficial geographical position of both countries and economic links (the same multinational companies operating in the territories of the two states). Significant export territories are also Slovakia (8%), Poland (6%) and Austria (6%). Import partners include China (10%), Poland (7%), Italy (6%) and Slovakia (5%), see Chart 15.4.2.

Chart 15.4.2 – Foreign trade in CZ-CPA 25 products

Import territories in 2018 Export territories in 2018

other other 25% 28% Germany Germany 37% 37% France Belgium 3% 3%

South Korea United 3% Kingdom 4% Austria Netherlands Slovakia 4% China Italy 4% 8% 6% Poland 10% France Slovakia 7% Austria Poland 5% 4% 6% 6% Source: CZSO, data as of 8 April 2019

152

15. CZ-NACE 25 – MANUFACTURE OF FABRICATED METAL PRODUCTS, EXCEPT MACHINERY AND EQUIPMENT

15.5 RESEARCH, DEVELOPMENT AND INNOVATION Total expenditure on R&D in CZ-NACE 25 in 2017 amounted to CZK 1,331 million, up 26.52% year-on-year (see Chart 15.5.1). R&D accounts for 4.37% of the total expenditure in division 25. Expenditures from all sources increased, most in business and public foreign sources. The increase in expenditures from public foreign sources is connected with the success of Czech companies in obtaining projects from operational programmes. The increase in the number of enterprises with active R&D from 145 enterprises in 2016 to 185 enterprises is also significant. The share of researchers (FTE) in CZ-NACE 25 in the total number of researchers in the manufacturing industry divisions was 4.14%, i.e. 351 researchers per year (average for 2013–2017). Within the National RIS3 Strategy, the manufacture of fabricated metal products is an R&D area that receives the second-largest volume of aid. In the period from 1 January 2015 to 31 October 2018, 383 projects falling within the National RIS3 Strategy were approved under the OP EIC for implementation with planned total aid (EU, public and private Czech funds) of CZK 6.57 billion, of which CZK 2.51 billion was an EU grant. The aid was mainly focused on strengthening the R&D capacities of enterprises (90%). In the reference period, projects for the manufacture of fabricated metal products were submitted by large enterprises as well as SMEs. As regards European support for applicants/beneficiaries, the largest EU support was granted to HAJDIK, a.s. for SMEs (total expenditure CZK 263 million, of which EU grant was CZK 94 million) and MORA MORAVIA a.s. for large enterprises (total expenditure CZK 248 million, of which EU grant was CZK 62 million). Enterprises benefiting from a significant volume of targeted support from the State budget in the national programmes of the MIT (TIP, TRIO), MEYS (EUREKA CZ, INTER-EXCELLENCE), MoI (Security Research of the Czech Republic 2015–2022, Security Research Programme of the Czech Republic 2010–2015), MoA (Re- search Program in the Agrarian Sector 2007–2012, VAK, KUS) and TA CR (ALFA, Competence Centres, DELTA, EPSILON, THÉTA) in 2007–2018 include VÍTKOVICE POWER ENGINEERING a.s., První železářská společnost Kladno, s.r.o., ATOMA – tepelná technika, s.r.o., MODELÁRNA LIAZ spol. s r.o. and ŠKODA JS a.s. Four companies are involved in Horizon 2020 projects. Elbee Mobility s.r.o. is the coordinator of the Elbee project, a worldwide unique drive-from-wheelchair vehicle. AdvaMat s.r.o. is participating in the ICARUS: Innovative Coarsening-resistant Alloys with enhanced Radiation tolerance and Ultra-fine-grained Structure for the aerospace application project. LightMe: An Open Innovation Ecosystem for upscaling production processes of lightweight metal alloys composites involves the participation of J-VST, s.r.o.Intemac Solutions, s.r.o. is participating in the DIH: A Pan‐European Network of Robotics DIHs for the Agile Production project.

Chart 15.5.1 – R&D expenditure (CZK mil.) and the number of enterprises with R&D in CZ-NACE 25

EU+other international organisations Number of enterprises Entrepreneurs Government+universities 1 331 1 400 200 1 207 52 1 142 180 1 200 66 1 052 96 160 915 879 11 1 000 140 15 786 771 18 800 120 29 54 100 1 219 185 600 1 075 968 1 001 80 783 750 143 145 603 558 129 133 129 133 133 400 60 40 200 20 154 159 117 111 78 0 66 40 61 0 2010 2011 2012 2013 2014 2015 2016 2017 2010 2011 2012 2013 2014 2015 2016 2017

Source: CZSO, MIT calculations

153

15.6 SUMMARY AND PERSPECTIVE OF THE DIVISION Metalworking and mechanical engineering have had a long-standing tradition in the Czech Republic. The need to use metals in the production of components for final product assembly and manufacture is increasing. This is due to the utility properties of metals. With the development of the engineering industry and with the support of primarily the automotive industry, the demand in the Czech Republic for metal components in these divisions for joining material and for increasingly technologically complex tools is increasing. Another major buyer of metalworking products is the construction industry. Metal constructions and prefabricated components are becoming increasingly popular in the building industry and are an integral part of virtually every investment assembly. CZ-NACE 25 is not among significant environmental polluters, although the division includes surface treatment and metal refining technologies which use environmentally hazardous chemicals. The businesses treat their waste in accordance with the applicable legislation. With the rising standard of living, variety of supply and quality of final products in the Czech Republic, sales of metal products for ordinary consumers have also increased. In the global competitive environment, companies have succeeded in the last few years in winning larger as well as smaller contracts within investment assemblies. Many companies have maintained and further expanded their markets. For these reasons, manufacture of metal structures and metalworking products in the Czech Republic has very good prospects for further development in a challenging competitive environment.

154 16. CZ-NACE 26 – MANUFACTURE OF COMPUTER, ELECTRONIC AND OPTICAL PRODUCTS

16. CZ-NACE 26 – MANUFACTURE OF COMPUTER, ELECTRONIC AND OPTICAL PRODUCTS

16.1 CHARACTERISTICS OF THE DIVISION Breakdown of the CZ-NACE 26 division by individual groups: 26.1 Manufacture of electronic components and boards; 26.2 Manufacture of computers and peripheral equipment; 26.3 Manufacture of communication equipment; 26.4 Manufacture of consumer electronics; 26.5 Manufacture of instruments and appliances for measuring, testing and navigation; watches and clocks; 26.6 Manufacture of irradiation, electromedical and electrotherapeutic equipment; 26.7 Manufacture of optical instruments and photographic equipment; 26.8 Manufacture of magnetic and optical media.

CZ-NACE 26 is historically one of the key sectors of the Czech economy. A distinctive feature of manufacturing processes is the design and use of integrated circuits and highly specialised miniature technologies. It is relatively heterogeneous. Moreover, electronics and electrical engineering is a subcontractor for many other sectors, in particular the automotive and engineering industries. The shares of the individual groups in the division are different for selected indicators, as shown in Table 16.1.1. Dominant groups in sales are 26.2 and 26.5. Interestingly, sales and value added of 26.2Manufacture of computers and peripherals show that value added is low compared to sales, as the products are largely only assembled here. Conversely, 26.5 Manufacture of instruments and appliances for measuring, testing and navigation; watches and clocks, with one third of electronic microscopes being manufactured in the Czech Republic, has high value added and sales.

Table 16.1.1 – Shares of groups in CZ-NACE 26 in 2018 (%, division = 100%)

Group Personnel Value Own Assets Number of Number of Revenues Incomes CZ‐NACE costs added capital total employees units

26.1 14.7 13.5 4.3 4.1 10.2 7.3 15.3 29.8 26.2 10.2 8.9 50.5 49.5 24.9 31.9 12.2 7.0 26.3 13.9 13.1 4.8 4.6 10.1 5.7 12.4 22.8 26.4 7.7 5.1 9.9 9.4 8.0 9.1 7.8 7.2 26.5 47.6 55.2 29.2 31.0 41.3 43.3 45.3 24.2 26.6 1.0 0.3 0.5 0.5 1.1 0.6 0.8 2.4 26.7 4.9 3.7 0.9 0.9 4.2 1.9 6.1 3.2 26.8 0.1 0.1 0.1 0.1 0.2 0.1 0.1 3.4 Source: CZSO, data 2018 MIT calculations

155

16.2 DEVELOPMENTS IN THE DIVISION The most important producers of the CZ-NACE 26.1 are ON Semiconductor Czech Republic, s.r.o., in CZ-NACE 26.2 Foxconn CZ s.r.o., Wistron InfoComm (Czech) s.r.o. a Inventec (Czech) s.r.o., in CZ-NACE 26.3 ADC Czech Republic, s.r.o., Laird s.r.o., in CZ-NACE 26.4 Panasonic AVC Networks Czech, s. r. o., in CZ-NACE 26.5 Continental Automotive Czech Republic s.r.o., FEI Company, s.r.o and TESCAN Orsay Holding, a.s., in CZ-NACE 26.6 UJP Praha and in CZ-NACE 26.7 Meopta-optika s.r.o. Foxconn has consistently been one of the largest exporters; it has a large share of the revenues in the industry and continues to expand its activities in the Czech Republic. Because manufacturers focus on producing products that are successfully sold, the segment sales results are important. GfK posted year-on-year growth in the key laptop category in the IT sector, but the negative development of tablets and desktops continued. In the telecommunications sector, we are seeing increasing weight of smart phones with a larger display. Positive developments were seen in the development of smart watches and fitness wristbands, but the demand for conventional mobile phones continues to decline. The office equipment sector showed year-on-year growth in both the basic and advanced laser multifunc- tion segments. In the consumer electronics sector, the demand for televisions and set-top boxes continued to grow strongly as a result of the switch to DVB-T2 broadcasting. Portable Bluetooth speakers and cordless headphones also recorded a double-digit increase in sales. According to GfK, interest in premium segments is growing, which increases the average price of goods sold. The average price of large-screen TVs declined year-on-year in the period under review. In the camera segment, there was a growing demand for system compacts thanks to new models with full- frame sensors. However, GfK saw a drop in sales in SLRs and fixed-lens compacts. 26.5 Manufacture of instruments and appliances for measuring, testing and navigation; watches and clocks continues to be successful, especially in the field of electron microscopy, with well-known Brno companies Thermo Fisher Scientific (FEI Company), Tescan Orsay Holding and Delong Instruments cooperating with the Brno University of Technology and Institute of Scientific Instruments. Most microscopes are exported, especially to Asian countries. The Brno Thermo Fisher Scientific Technology Centre in Černovice is the largest production of electron microscopes in the world (27,000 m2). Tescan in Brno-Kohoutovice is expanding, building a new building, which should be completed in autumn 2019. Both buildings will be connected to one production centre of electron microscopes and other special scientific instruments, e.g. microtomographs. Days of Electron Microscopy are also held in Brno in March, an effort to bring electron microscopy closer to the general public. It is used in many areas – in medicine, biological applications, material research and forensic science.

156 16. CZ-NACE 26 – MANUFACTURE OF COMPUTER, ELECTRONIC AND OPTICAL PRODUCTS

16.3 MAIN ECONOMIC INDICATORS Chart 16.3.1 – Main economic indicators of CZ-NACE 26

4 000 60 000 Number of units Average number of employees 3 500 50 000 3 000 40 000 2 500

2 000 30 000 3 465 3 397 3 371 3 353 3 319 3 311 3 270 3 259 3 245 3 244

1 500 3 220 49 649 49 289 48 349 45 198 45 079 20 000 45 003 42 431 41 922 41 760 41 192

1 000 37 759 10 000 500

0 0 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

400 000 100 000 Sales (CZK m) Value added (CZK m) Average monthly wage (CZK) 90 000 350 000 Labour productivity from the VA (CZK/month)* 80 000 300 000 70 000 250 000 60 000 200 000 50 000

150 000 374 366 40 000 339 051 78 514 77 104 314 481 308 162 72 654 298 691 296 432 71 031 70 975 289 354 30 000 67 789 277 172 272 044 268 026 61 090

100 000 243 346

20 000 48 950 44 662 44 233 40 140 36 482 35 907 39 802 34 126 32 007 31 281 25 086 33 685 22 512

50 000 33 091 18 903 30 672 15 986

10 000 29 118 27 754 27 220 26 145 25 631 24 719 23 802 23 687 22 202 0 0 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Chart 16.3.2 – Price developments in CZ-CPA 26 Chart 16.3.3 – Spread (ROE – re) CZ-NACE 26 (%) (2005 = 100 %)

110 30

20 100 10 90 0

80 ‐10

‐20 70 ‐30 60 ‐40

50 ‐50 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 26 95,0 95,2 93,5 91,3 90,9 90,1 91,1 91,2 91,1 90,7 90,8 Spread ‐41,57‐40,84 ‐2,93 1,31 ‐5,67 ‐3,96 7,16 1,26 ‐0,86 ‐2,39 ‐2,76 26.1 95,6 90,0 89,4 88,4 83,5 82,1 85,1 82,6 85,4 83,6 81,2 rf 4,55 4,67 3,71 3,79 2,31 2,26 1,58 0,58 0,43 0,98 1,98 26.3 100,8 99,0 98,3 96,5 97,5 97,0 96,4 96,1 96,7 97,2 99,9 ROE ‐20,15‐35,14 ‐7,64 ‐3,50 6,81 7,11 15,06 10,07 7,38 5,23 6,08 26.5 94,3 97,5 95,7 94,7 96,3 96,5 96,8 96,8 96,5 95,5 96,2 re 21,42 5,70 ‐4,71 ‐4,81 12,48 11,08 7,90 8,81 8,24 7,61 8,85

Source: CZSO, MIT calculations Source: CZSO, MIT calculations Note: Groups 26.2, 26.4, 26.6, 26.7 and 26.8 are not monitored

157

16.4 FOREIGN TRADE

16.4.1 DEVELOPMENT OF FOREIGN TRADE Foreign trade in CZ-CPA 26 products showed a very slight W-curve in 2009-2018, with bottoms in 2013 and 2016 (Chart 16.4.1). In these years, with the saddle in 2013, sales saw a similar course. In the period under review, the structure of exports changed as the share of communication equipment increased from 13% in 2009 to 29% in 2018. Conversely, the share of consumer electronics fell from 22% in 2009 to 10% in 2018. The most important export item, computers and peripheral devices, maintained its position at less than 50% of total exports.

Chart 16.4.1 – Exports, imports and foreign trade balance in products by CZ-CPA 26 (CZK million)

800 000 700 000 Export Import Trade balance 600 000 500 000 400 000 738 204 300 000 730 172 645 339 630 914 603 239 574 458 562 340 556 871

200 000 529 050 504 460 486 129 479 758 473 774 467 194 456 371 447 139 430 201 427 913 353 067 100 000 342 182 10 885 8 032 45 861 28 780 ‐ 38 991 14 425 26 171 ‐ ‐ 24 590 12 565 5 469 0 ‐ ‐100 000 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Source: CZSO, data as of 8 April 2019

16.4.2 TERRITORIAL STRUCTURE OF FOREIGN TRADE The main export territory was still Germany with a 32% share. It was followed by other EU countries: the Netherlands, the United Kingdom, France, Poland and Slovakia. Imports are mainly from China (50%) and Germany (12%).

Chart 16.4.2 – Foreign trade in CZ-CPA 26 products

Import territories in 2018 Export territories in 2018

other Ireland USA 19% other 2% 2% 32% Germany United 32% Kingdom 3% South Korea China 3% 50% Italy Malaysia 3% Netherlands 10% 4% Austria Germany 3% 12% United Netherlands Slovakia Poland France Kingdom 5% 4% 4% 5% 7% Source: CZSO, data as of 8 April 2019

158

16. CZ-NACE 26 – MANUFACTURE OF COMPUTER, ELECTRONIC AND OPTICAL PRODUCTS

16.5 RESEARCH, DEVELOPMENT AND INNOVATION R&D expenditure in CZ-NACE 26 in 2017 amounted to CZK 2,568 million (see Chart 16.5.1), up CZK 234 million compared to the previous year. Since 2012, there has been a steady increase in total R&D expenditure. Compared to 2011, expenditures increased by 123.50%. R&D accounts for 8.01% of the total expenditure in division 26. The share of researchers (FTE) in CZ-NACE 26 in the total number of researchers in the manufacturing industry divisions was 12.86%, i.e. 1,090 researchers per year (average for 2013–2017). Within the National RIS3 Strategy, the manufacture of computer electronic and optical products is an R&D area that receives above average support. In the period from 1 January 2015 to 31 October 2018, 187 projects falling within the National RIS3 Strategy were approved under the OP EIC for implementation with planned total aid (EU, public and private Czech funds) of CZK 2.47 billion, of which CZK 1.12 billion was an EU grant. The aid is mainly aimed at strengthening the R&D capacity of enterprises (76%) and, to a lesser extent, cooperation between research organisations and enterprises (19%). As regards European aid for applicants/beneficiaries, the largest EU aid was granted to CRYTUR spol. s r.o. for SMEs (total expenditure CZK 233 million, of which EU grant was CZK 85 million) and Meopta - optika s.r.o. for large enterprises (total expenditure CZK 314 million, of which EU grant was CZK 88 million). Enterprises that benefited from a significant amount of targeted support from the State budget under the national programmes of the MoT (Support for the implementation of sustainable transport development), MoD (Defence applied research, experimental development and innovation, Development of Armed Forc- es of the Czech Republic), MIT (TIP, TRIO), MEYS (EUREKA CZ, INTER-EXCELLENCE), MoI (Security Research of the Czech Republic 2015–2022, Security Research Programme of the Czech Republic 2010–2015, Secu- rity Research Programme for the needs of the State 2016–2021) and TA CR (ALFA, Competence Centres, DELTA, EPSILON, ZÉTA, THÉTA) in 2007–2018 include UJP PRAHA a.s., Meopta - optika, s.r.o., ERA a.s., ON SEMICONDUCTOR CZECH REPUBLIC, s.r.o. and SQS Vláknová optika a.s. From the perspective of the Czech representation in the Horizon 2020 projects, CZ-NACE 26 is a very successful division. Czechs participate in a total of 15 projects involving 10 Czech companies. Agrotech a.s. is participating in three projects (PIXAPP, PICTURE, REDFINCH), LESPROJEKT-SLUŽBY s.r.o. is also involved in three projects (DataBio, AFarCloud, SmartAgriHubs), and PSI (Photon Systems Instruments), spol. s r.o. in two projects (PlantHUB, SE2B). Other companies are each involved in one project – TESCAN Brno, s.r.o. (ELENA), OPTOKON, a.s. (CLONETS), FEI Czech Republic s.r.o. (SeNaTe), SQS Vláknová optika a.s. (VisloN), Teco a.s. (I-MECH), Net- cope Technologies, a.s. (A-WEAR) and Humainn – Human Machine Innovations s.r.o. (HuMaInn DataMall).

Chart 16.5.1 – R&D expenditure (CZK mil.) and the number of enterprises with R&D in CZ-NACE 26

EU+other international organisations Number of enterprises Entrepreneurs Government+universities 3 000 120 2 568

2 500 2 334 40 100 33 1 975 1 874 80 2 000 24 42 1 522 1 500 28 60 1 191 1 149 1 233 2 307 107 101 100 104 104 18 40 2 139 94 95 97 30 1 728 1 000 1 645 40 1 284 931 926 964 500 20

242 194 229 210 186 223 221 0 163 0 2010 2011 2012 2013 2014 2015 2016 2017 2010 2011 2012 2013 2014 2015 2016 2017

Source: CZSO, MIT calculations

159

16.6 SUMMARY AND PERSPECTIVE OF THE DIVISION Of all the manufacturing sectors, the electrical industry has the greatest involvement in the global value chains of multinational companies. As is evident from the development of the sector, with the penetration of digitalisation into other areas of life, other possibilities of utilising the production of the electrical industry are opening up. According to CzechInvest, in connection with Brexit, foreign investors from outside Europe have recently shown interest in new investment opportunities in the sector and in subcontracting Czech companies. In particular, Asian investors want to maintain their production in Europe and allocate it to a stable region, preferably close to the countries in which they have their clients, namely Germany. Information technology is currently driving businesses. According to Context, Czech companies spent 13.81% more on security solutions last year than in 2017. GDPR is the biggest driver for growth in the sales of security products. Dell Technologies has announced its 2019 forecasts, predicting an increase in the use of virtual assistants, marketing of the first 5G devices and increase in demand for the cloud. Machine intelligence is projected to begin to merge with augmented and virtual reality in homes. Automation and robotics are predicted to work faster and more smoothly with technology. The use of augmented and virtual reality applications in the workplace will also increase, which, according to Dell, will further increase productivity. There will also probably be an increase in the number of organisations involved in sustainable entrepreneurship, leading to the emergence of new waste-free business models. This will mainly be due to innovation in the areas of recycling and closed-cycle processes. Red Hat also predicts 2019 will be revolutionary in terms of the automation of security processes. Today, security products are primarily one-off solutions that are incompatible and not capable of mutual integration. This year, according to Red Hat, organisations will begin to use automation to connect different solutions to create a consistent and coherent approach to IT security. The company also estimates that the successful expansion of network automation will continue this year – primarily the mass deployment of the network in connection with IoT requirements. According to Red Hat, container TV technology will also enable new generations of television content to be made available and offer new business models and new forms of viewing experience. This year, new television services should thus be launched. The transition to automation and digitisation of all parts of the production chain will put pressure on efficiency and increase competition. In this context, changes in the necessary knowledge and skills of employees will have to take place. The electronics industry has to respond to these trends because they offer tremendous opportunities in terms of the sustainability and increased productivity of industrial production and services and increase the demand for skilled work.

160 17. CZ-NACE 27 – MANUFACTURE OF ELECTRICAL EQUIPMENT

17. CZ-NACE 27 – MANUFACTURE OF ELECTRICAL EQUIPMENT

17.1 CHARACTERISTICS OF THE DIVISION

Breakdown of the CZ-NACE 27 division by individual groups: 27.1 Manufacture of electric motors, generators, transformers and electricity distribution and control apparatus; 27.2 Manufacture of batteries and accumulators; 27.3 Manufacture of wiring and wiring devices; 27.4 Manufacture of electric lighting equipment; 27.5 Manufacture of domestic appliances; 27.9 Manufacture of other electrical equipment; Manufacture of electrical equipment is historically one of the most important industries within the manufacturing industry, with a large spectrum of products. This division covers the production of products by which electricity is produced, distributed or used. It also includes the manufacture of electrical equipment for lighting and signalling and production of electrical domestic appliances. The complementary character of the production of the electrical engineering industry creates conditions for downstream production in other sectors of the manufacturing industry (especially automotive) and power engineering. This division is one of the largest employers in the manufacturing industry. The division is characteristic for large businesses, which account for three quarters of revenues and about 70% of value added. The share of medium-sized enterprises is 14% in revenues, 18% in added value and 20% in the number of employees. Small enterprises account for the rest. The most important group, as measured by the share of revenue and value added, is 27.1. Other major groups are 27.9 and 27.4. The importance of the groups is shown in Table 17.1.1.

Table 17.1.1 – Shares of groups in CZ-NACE 27 in 2018 (%, division = 100%)

Group Personnel Value Own Assets Number of Number of Revenues Incomes CZ‐NACE costs added capital total employees units

27.1 48.2 47.6 41.5 40.8 39.7 43.5 45.9 68.7 27.2 1.7 1.9 4.4 4.2 6.3 4.5 1.4 0.4 27.3 6.9 6.2 7.2 7.2 7.6 9.1 7.8 2.4 27.4 16.8 19.6 19.6 21.0 19.1 18.8 15.2 2.3 27.5 5.3 5.1 5.0 4.8 6.1 5.2 6.1 5.5 27.9 21.1 19.6 22.4 22.1 21.2 19.0 23.7 20.7 Source: CZSO, data 2018 MIT calculations

161

17.2 DEVELOPMENTS IN THE DIVISION The most important companies include: 27.1 – Siemens, s.r.o., ABB s.r.o., 27.2 – Johnson Controls Autobaterie spol. s r.o., 27.3 – nkt cables s.r.o., 27.4 – HELLA AUTOTECHNIK NOVA, s.r.o., Varroc Lighting systems, s.r.o., Automotive Lighting s.r.o., 27.5 – Miele technika s.r.o., Mora Moravia, s.r.o., 27.9 – MD Elektronik spol. s r.o. As can be seen from the economic indicators, this section is mostly affected by Group 27.1. Manufacture of electric motors, generators, transformers and electricity distribution and control apparatus, i.e. products with a longer innovation cycle. Further positive developments in Group 27.2 can be expected in the context of the new European Com-

mission regulation which is setting stricter CO2 emission standards for cars and light commercial vehicles and putting more pressure on the switch to electromobility. Batteries are “key enabling technologies”. In the production of battery cells, however, virtually all production is concentrated in China (the four largest companies). Innovation is now most apparent in the phase where cells are assembled into batteries. The wiring and storage of cells and the associated innovations drive current technological advances and allow battery capacity to increase. Most battery manufacturers are de facto dependent on cell delivery. Car producer demand for batteries is often satisfied by contracts with China, be it Volvo or Volkswagen. Therefore, the problem nowadays is mainly the production of cells. Several production capacities for the production of lithium batteries operate or are being built in the Czech Republic. HE3DA s.r.o. in Horní Suchá in the Karviná region plans to start production in Q4 2019. The total annual capacity of produced batteries should reach the 1.2 GWh target by 2020. Mass production of HE3DA batteries will mean that the factory will be one of the largest suppliers of lithium batteries, while at the same time the most environmentally friendly operation of its kind in the world, and fully robotised. In the future it is planned to expand the plant to 15 GWh. This battery manufacturing technology is followed by the M.E.S. (Magna Energy Storage a.s.) project, which will supply battery storage of various sizes for storing energy from renewable sources. One of the new Japanese investments in the Czech Republic is a factory for the production of battery electrolyte for electric cars from Central Glass Czech s.r.o., which will supply the European market. According to GfK, the large household appliances sector showed an increase across categories. For most categories of small household appliances, the average price increases, consumers are willing to invest in more expensive products. The continuing and dynamic growth of the industry caused by the electrification and implementation of autonomous control systems is also positive for Group 27.9, whose leading companies specialise in in-vehicle data transmission solutions, and the interest in these solutions is increasing. Autonomous driving is an innovation that will fundamentally change the automotive industry in the future. A vehicle equipped with autonomous steering is capable of sensing the surroundings of the vehicle, evaluating current driving situations and controlling the vehicle. At the highest level of autonomous driving, the vehicle can do everything without human input. In connection with electrification, an increasingly large charging infrastructure has to be taken into- ac count. EU countries have massively started building charging station infrastructure, much of which will re- charge battery capacity in just a few minutes (superchargers and ultrachargers). With the development of electromobility and the growing number of charging stations, problems arise with the sufficient capacity of existing lines and transformer stations, both at distribution level and within local distribution systems. Companies already offer a solution in the form of a battery storage system. In this case, batteries are a means of storing energy, preferably from renewable sources such as solar power. Battery production and development are of great strategic importance in the context of the transition to clean energy as well as a key part of the EU’s competitiveness.

162 17. CZ-NACE 27 – MANUFACTURE OF ELECTRICAL EQUIPMENT

17.3 MAIN ECONOMIC INDICATORS Chart 17.3.1 – Main economic indicators of CZ-NACE 27 (2008 = 100)

18 000 120 000 Number of units Average number of employees 16 000 100 000 14 000

12 000 80 000

10 000 60 000 8 000 108 849 15 556 15 149 103 352 99 271 99 112 14 829 14 753 14 702 100 864 97 381 95 517 94 179 93 283 13 773

6 000 40 000 90 726 13 288 85 972 12 689 11 985 11 568 4 000 11 114 20 000 2 000

0 0 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

400 000 90 000 Sales (CZK m) Value added (CZK m) Average monthly wage (CZK) 350 000 80 000 Labour productivity from the VA (CZK/month)* 70 000 300 000 60 000 250 000 50 000 200 000 40 000 150 000 338 187 69 026 68 947 68 863 67 979 310 952 30 000 66 930 292 622 63 550 288 781 62 414 276 711 58 994 82 945 57 424 78 646 74 556 248 485 74 200

100 000 71 823 239 619 235 595 50 155 63 263 63 333

60 106 20 000 45 692 55 219 207 674 204 359 48 735 45 578 168 683 32 393

50 000 30 227

10 000 28 297 27 184 26 031 25 694 25 395 24 038 22 565 21 866 20 886 0 0 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Chart 17.3.2 – Price developments in CZ-CPA 27 Chart 17.3.3 – Spread (ROE – re) CZ-NACE 27 (%) (2005 = 100 %)

150 25 140 130 20 120 110 15 100 10 90 80 5 70 60 0 50 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 27 107,3 103,9 107,5 109,1 108,3 108,5 108,8 108,0 105,8 107,1 107,3 ‐5 27.1 103,2 104,9 104,8 106,4 107,2 107,5 107,5 105,8 104,1 103,7 103,8 ‐10 27.2 139,8 118,8 114,7 108,9 106,8 110,3 114,8 115,5 109,2 117,6 112,5 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 27.3 116,6 103,2 119,9 124,7 120,8 118,1 115,2 117,5 111,5 120,3 122,2 Spread ‐5,45 ‐3,06 6,32 4,66 4,56 5,81 9,15 10,71 7,79 6,45 0,56 27.4 95,3 94,3 91,5 90,1 89,6 90,7 91,6 89,5 86,8 84,1 83,1 rf 4,55 4,67 3,71 3,79 2,31 2,26 1,58 0,58 0,43 0,98 1,98 27.5 100,7 101,2 101,6 102,1 102,7 103,9 104,9 104,1 104,4 105,2 108,8 ROE 11,21 12,55 20,36 18,43 17,12 17,43 20,60 20,95 16,88 15,53 11,48 27.9 107,3 111,7 109,8 110,3 110,3 111,0 115,4 115,6 117,5 117,9 118,6 re 16,67 15,62 14,04 13,76 12,56 11,62 11,45 10,24 9,08 9,08 10,91

Source: CZSO, MIT calculations Source: CZSO, MIT calculations

163

17.4 FOREIGN TRADE

17.4.1 DEVELOPMENT OF FOREIGN TRADE Imports and exports of CZ-CPA 27 commodities grew steadily between 2009 and 2018 (Chart 17.4.1). The foreign trade balance was still positive, but the maximum was reached in 2014. The commodity structure of exports was again dominated by Group 27.1 Manufacture of electric motors, generators, etc., with a 34% share, followed by Group 27.3 Manufacture of wiring and wiring devices. The same was true for imports (27.1 – 37%).

Chart 17.4.1 – Exports, imports and foreign trade balance in products by CZ-CPA 27 (CZK million)

450 000 400 000 Export Import Trade balance 350 000 300 000 250 000 200 000 399 337 391 581

150 000 361 995 348 745 337 806 308 498 301 280 295 296 276 828 272 312

100 000 261 103 246 081 230 544 215 263 203 713 193 206 182 915 174 380 50 000 166 167 128 724 107 263 45 656 49 097 90 839 90 302 79 106 85 167 87 642 91 583 0 63 166 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Source: CZSO, data as of 8 April 2019

17.4.2 TERRITORIAL STRUCTURE OF FOREIGN TRADE The dominant position in exports and imports was held by Germany, which is mainly due to the ownership relations of companies under foreign control (Chart 17.4.2). Other export territories have a much lower share, namely Slovakia, France, Poland etc. In imports, China placed second, but with a 17% share (Germany 30%). It is well ahead of other countries – Poland, Italy, Hungary and Austria.

Chart 17.4.2 – Foreign trade in CZ-CPA 27 products

Import territories in 2018 Export territories in 2018

other other 31% 29% Germany 30% Germany 40%

France Italy 3% 3%

Hungary Romania China 3% Austria 3% Slovakia 17% United 4% Italy Poland Poland France 5% Kingdom Austria 5% 5% 5% 5% 4% Hungary 4% 4% Source: CZSO, data as of 8 April 2018

164

17. CZ-NACE 27 – MANUFACTURE OF ELECTRICAL EQUIPMENT

17.5 RESEARCH, DEVELOPMENT AND INNOVATION In terms of R&D expenditure, number of enterprises active in R&D and number of employees, CZ-NACE 27 is one of the largest division in the manufacturing industry. Expenditure on R&D in 2017 amounted to CZK 4,147 million (see Chart 17.5.1). With the exception of 2013, they grew continuously. The bulk of the funds were expenditures from business resources. In 2017, there was an apparent increase in expenditure from foreign public sources thanks to the successful use of funds from operational programmes. Expend- iture of Section 27 accounted for 12.64% of total R&D expenditure in manufacturing and 16.66% of total researchers (FTE) in manufacturing, i.e. 1,412 researchers per year (2013–2017 average). Within the National RIS3 Strategy, the manufacture of electrical equipment is an R&D area that receives above average support. In the period from 1 January 2015 to 31 October 2018, 180 projects were approved under the OP EIC for implementation with planned total aid (EU, public and private Czech funds) of CZK 2.47 billion, of which CZK 1.0 billion was an EU grant. The aid is mainly aimed at strengthening the R&D capacity of enterprises (75%) and, to a lesser extent, cooperation between research organisations and enterprises (18%). Projects fall within the application sector Electronics and Electrical Equipment. Projects for the manufacture of electrical equipment were submitted by large enterprises as well as SMEs. As regards European support for applicants/beneficiaries, the largest EU support was granted to LESIKAR, a.s. for SMEs (total expenditure CZK 56 million, of which EU grant was CZK 27 million) and ED TRANSFORMÁTORY a.s. for large enterprises (total expenditure CZK 142 million, of which EU grant was CZK 60 million). Enterprises benefiting from a significant volume of targeted support from the State budget within the national programmes of the Ministry of Transport (Support for the Implementation of Sustainable Devel- opment of Transport), MIT (TIP, TRIO), MEYS (EUREKA CZ), MoI (ALFA, BETA, Competence Centres, DELTA, EPSILON, ZÉTA, THÉTA) in the period 2007–2018, include ELEKTROTECHNIKA, a.s. (formerly ČKD ELEKTRO- TECHNIKA, a.s.), ŠKODA ELECTRIC a.s., Moog Brno s.r.o (formerly VUES Brno s.r.o.) and ATAS elektromo- tory Náchod a.s. Czech entities are involved in three projects. InterFlex: Siemens, s.r.o. and Fronius Česká republika s.r.o. joined the Interactions between automated energy systems and Flexibilities brought by energy market players. Siemens, s.r.o. is also participating in the Cross-CPP project, Ecosystem for Services based on integrated Cross-sectorial Data Streams from multiple Cyber Physical Products and Open Data Sources. T-Elektronik s.r.o. is involved in the TURBO-REFLEX project: TURBOmachinery REtrofits enabling FLEXible back-up capacity for the transition of the European energy system.

Chart 17.5.1 – R&D expenditure (CZK mil.) and the number of enterprises with R&D in CZ-NACE 27

EU+other international organisations Number of enterprises Entrepreneurs Government+universities 4 500 4 147 160 3 799 66 4 000 140 3 351 11 3 500 3 036 25 120 3 000 33 100 2 500 2 049 1 882 80 2 000 35 4 026 146 1 619 17 3 734 130 136 1 402 3 205 60 122 127 127 123 125 1 500 29 2 894 21 40 1 000 1 870 1 752 1 476 1 292 500 20

0 89 114 145 113 110 121 53 55 0 2010 2011 2012 2013 2014 2015 2016 2017 2010 2011 2012 2013 2014 2015 2016 2017

Source: CZSO, MIT calculations

165

17.6 SUMMARY AND PERSPECTIVE OF THE DIVISION Electrical engineering is typically a subcontracting and assembly industry. It is characterised by a high share of value added in production, it processes relatively small volumes of materials and energy and does not excessively impact the environment. CZ-NACE 27 is significant in a wide range of technological processes and the use of progressive technologies. The electrical engineering industry, in the context of Industry 4.0, will most see the creation of new jobs and the extinction of old ones. Less-skilled professions will be replaced by automation, which at present, with low unemployment, can significantly address the problems of the difficult search for employees, also increasing productivity while saving costs. It is desirable that enterprises with foreign capital participation, in addition to production capacities, also create development capacities using more domestic creative workers. The Czech Republic as a member of the European Union is influenced by its policies. A great deal of pres-

sure is being created to reduce CO2 pollution in transport, which in connection with the aforementioned regulation, will lead to the necessity to produce more electric vehicles, although the Czech Republic has long been promoting a technology-neutral approach. The advent of electromobility is related to the establishment of the so-called EU Battery Alliance, an initiative of European Commissioner M. Šefčovič, but led by industry (some companies operating in the Czech Republic also participate, e.g. HE3DA, Saft), which brings together companies from the entire battery production value chain. The availability of state-of-the-art battery types is the key issue for the competitiveness of EU industry. However, they must provide added value in order to compete with batteries manufactured in Asia. Sustainable sourcing of raw materials, manufacturing, take-back of old batteries, their recycling or recovery is considered an added value. Battery prices are expected to fall by up to 70% within 15 years. At present China is the largest manufacturer of batteries, producing 55% of the batteries in the world. Another big battery market is being created in the US. According to the European Commission‘s plan, by 2030 every third vehicle in Europe should have zero emissions, i.e. an electric drive. InnoEnergy SE estimates that by 2025 the European battery market could reach EUR 250 billion. In addition to many economic advantages, globalisation and the creation of global manufacturing specialisation centres have several disadvantages. For example, social unrest or a natural disaster may delay the production of components on which final production is dependent (for example, there was a problem with the supply of processors last year). The electronic engineering industry faces this challenge from a special position, because it is the manufacturer of the necessary components and equipment. It is, therefore, not only influenced by ongoing changes, but also influencing them significantly. Finally, it is still true that the Czech Republic is known for its excellent level of education, central location, good infrastructure and good logistics connections to customers in the region. These advantages have been exploited over the past decades. However, it is necessary to continue this work and prepare the environment for the emergence of new trends and innovations not only in the electrical engineering industry.

166 18. CZ-NACE 28 – MANUFACTURE OF MACHINERY AND EQUIPMENT N.E.C.

18. CZ-NACE 28 – MANUFACTURE OF MACHINERY AND EQUIPMENT N.E.C.

18.1 CHARACTERISTICS OF THE DIVISION

Breakdown of the CZ-NACE 28 division by individual groups: 28.1 Manufacture of general-purpose machinery; 28.2 Manufacture of other general-purpose machinery; 28.3 Manufacture of agricultural and forestry machinery; 28.4 Manufacture of metal forming machinery and machine tools; 28.9 Manufacture of other special-purpose machinery. The important sections of the manufacturing industry include CZ-NACE 28 Manufacture of machinery and equipment, which has a long tradition in the Czech Republic. It covers a very wide range of equipment that subjects materials to mechanical or thermal effects or performs manufacturing processes on materials (e.g. handling, spraying, weighing or packing), including the manufacture of components that produce and use the power. It also includes specially manufactured parts for these machines and equipment. This division also includes fixed, movable or manually operated equipment, whether for industry, craft, construction, agriculture or household use. Engineering groups are thus closely related to other industries. The division also covers the manufacture of special equipment for passengers or freight. The development, production, sale and export of equipment of this division acts as an indicator of the state and further development of the Czech economy, in relation to the condition of other sectors and households. In terms of company size, large and medium-sized enterprises are dominant. Large enterprises account for about 50% of revenues, value added and employees of the division. Medium-sized enterprises account for about one third of the total. The rest are small enterprises. Within the division, the most important group is 28.2 Manufacture of other general-purpose machinery and equipment, which accounts for more than one third of the selected indicators, except for the number of units, where it accounts for almost two-thirds. Other large groups in terms of the number of enterprises are 28.1 and 28.9, while others are less significant (Table 18.1.1).

Table 18.1.1 – Shares of groups in CZ-NACE 28 in 2018 (%, division = 100%)

Group Personnel Value Own Assets Number of Number of Revenues Incomes CZ‐NACE costs added capital total employees units

28.1 23.3 22.4 20.9 20.9 26.3 25.9 22.7 11.2 28.2 35.1 37.9 36.3 35.8 36.2 32.1 35.5 63.0 28.3 6.0 5.4 6.5 7.1 5.0 5.9 6.6 4.5 28.4 9.7 9.2 7.7 7.8 10.6 9.9 9.5 4.6 28.9 26.0 25.0 28.7 28.4 21.9 26.2 25.7 16.7 Source: CZSO, data 2018 MIT calculations

167

18.2 DEVELOPMENTS IN THE DIVISION Among the TOP 100 ADMIRED COMPANIES of the Czech Republic 2019, where the ranking is compiled separately in 25 industries and the top four firms in each industry make up the total of one hundred admired companies in a given year, the following engineering companies are included in the “9 MACHINERY – EX- CLUDING AUTOMOTIVE PRODUCTION” group: TOS VARNSDORF a.s., Česká zbrojovka a.s., WITTE Nejdek, spol. s r.o., AGROSTROJ Pelhřimov, a.s. The Czech engineering industry will continue to grow in 2019, but its growth rate will slow to 1.3% on average. This was confirmed by a majority (71%) of the directors and board members of engineering companies with whom CEEC Research has conducted structured research since October 2018. However, there are no significant differences between the expectations of large and small/medium-sized enterprises. One third (28%) of companies expect a decline in sector performance already in 2019. In 2019, it is expected that the revenues of engineering companies will slow down to 3.8%, while one fifth of companies (21%) will even decline. Small and medium-sized enterprises, which expect to double their growth in sales, will thrive more than large companies (4.6% vs. 2.9%). For 2020, companies predict a further slowdown in growth, to 2.2% on average, and the share of companies whose sales will decline will increase to one third (35%). Based on CEEC Research, Czech engineering companies are expected to grow their export revenues by an average of 5% in 2019. Small and medium-sized companies expect slightly higher growth than large companies (5.3% vs. 4.6%). For 2020, CEOs predict a slowdown in export sales growth to 3.3% on average. Demand outside EU countries has the most positive effect on sales. In this division, a significant representative is the economically successful Group 28.2, which accelerated the growth of total sales in 2018 and in particular saw a significant growth in investment. The group with the largest share of revenues for own products and services from the whole division is 28.25 Manufacture of industrial cooling and ventilation equipment, which also places first in CZ-NACE 28, not only in revenues, but also in the number of business entities with more than 50 employees. Cooling technology has a large industrial base in the Czech Republic and new knowledge is directly applicable in science and industrial practice. Successful R&D solutions in the field of cooling are a potential stimulus for the export of Czech technologies and other innovations. The Czech Republic is a member of the Interna- tional Institute of Refrigeration, which provides Member States with the latest knowledge in the fields of cryotechnology, gas liquefaction and separation, heat and mass transfer, refrigeration equipment, cryobi- ology, cryomedicine, food technology, refrigerators and freezers, refrigerated land transport, air conditioning, heat pumps and energy recovery. Companies in the sector are struggling to cope with the ever-increasing cost of industrial production, and are increasingly aware that their competitiveness cannot be built solely on cost advantage. Therefore, they seeks to innovate, invent new solutions and invest in new technologies, from innovations in machining and forming to 3D printing, automation, robotics, digital factory tools and related software solutions. Some companies in the engineering industry are increasing production capacities, but also the capacity portfolio is changing with a higher degree of automation.

168 18.3 MAIN ECONOMIC INDICATORS Chart 18.3.1 – Main economic indicators of CZ-NACE 28

7 000 160 000 Number of units Average number of employees

6 000 140 000

120 000 5 000 100 000 4 000 80 000

3 000 6 455 6 111 5 835 5 702 60 000 137 944 5 590 5 574 5 371 128 567 126 867 5 194 124 843 124 836 121 872 120 528 4 919 4 865 118 686 117 536 117 197 4 742

2 000 111 668 40 000

1 000 20 000

0 0 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

450 000 80 000 Sales (CZK m) Value added (CZK m) Average monthly wage (CZK) 400 000 70 000 Labour productivity from the VA (CZK/month)* 350 000 60 000 300 000 50 000 250 000 40 000 200 000

396 096 30 000 65 277 376 567 64 108 64 057 63 356 62 798

150 000 60 256 340 118 58 346 339 251 327 175 54 973 54 558 307 025 306 152 94 914 94 703 93 051 92 376 296 736 91 257 49 053 48 638 84 148 279 981

80 144 20 000 77 823 74 524 254 992 100 000 70 098 66 661 239 221 33 761 31 554 29 464 28 246 27 750 26 834

10 000 26 461 25 177

50 000 24 312 23 515 23 471

0 0 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Chart 18.3.2 – Price developments in CZ-CPA 28 Chart 18.3.3 – Spread (ROE – re) CZ-NACE 28 (%) (2005 = 100 %)

130 20

120 15 110

100 10 90

80 5

70 0 60

50 ‐5 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 28 106,6 108,5 106,8 107,0 107,9 108,8 109,5 109,5 109,6 110,4 111,5 ‐10 28.1 104,5 105,3 102,7 103,5 106,8 107,6 107,3 106,7 105,6 105,0 104,6 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 28.2 108,1 110,8 109,0 109,4 109,3 110,4 112,5 112,8 112,5 113,0 113,4 Spread ‐5,58 ‐7,52 ‐1,93 ‐0,70 2,42 ‐0,43 2,89 2,38 ‐1,34 ‐0,73 ‐3,17 28.3 101,6 104,1 104,0 105,1 105,4 104,1 104,0 105,3 109,0 115,2 119,2 rf 4,55 4,67 3,71 3,79 2,31 2,26 1,58 0,58 0,43 0,98 1,98 28.4 104,4 104,9 104,9 104,4 104,4 106,8 108,4 108,5 108,7 108,9 111,1 ROE 10,73 7,71 12,29 12,56 13,47 10,63 13,84 12,16 8,05 9,04 7,67 28.9 108,2 109,9 108,0 107,4 107,1 107,3 106,3 106,5 108,1 109,9 112,3 re 16,31 15,23 14,22 13,26 11,05 11,06 10,95 9,78 9,39 9,77 10,83

Source: CZSO, MIT calculations Source: CZSO, MIT calculations 169

18.4 FOREIGN TRADE

18.4.1 DEVELOPMENT OF FOREIGN TRADE Foreign trade in CZ-CPA 28 products showed a steady growth in both exports and imports. Throughout the period 2009 to 2018, a positive foreign trade balance was apparent, which slowed slightly in the last year under review, reaching its highest value in 2017. Gradually increasing export volumes of CZ-CPA 28 products are indicative of the continuous improvement of the quality, technical level and competitiveness of the products (Chart 18.4.1). Year-on-year growth of exported goods in 2018 was recorded by all groups in the division. Roughly one third of exports were in Groups 28.1 and 28.2. Chart 18.4.1 – Exports, imports and foreign trade balance in products by CZ-CPA 28 (CZK million)

600 000 Export Import Trade balance 500 000

400 000

300 000 517 788 497 048

200 000 473 572 444 202 416 506 376 372 368 883 350 663 347 529 338 839 335 796 332 153 310 036

100 000 281 622 255 054 247 104 244 093 240 350 196 898 170 917 148 906 141 419 95 446 149 519 73 176 84 724 103 558 106 471 121 319 0 105 363 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Source: CZSO, data as of 8 April 2019

18.4.2 TERRITORIAL STRUCTURE OF FOREIGN TRADE In terms of export territories, Germany was the main trading partner in CZ-CPA 28 commodities in 2018, as in the previous year (see Chart 18.4.2). Exports were further spread evenly, being diversified from Slovakia to the US. Imported goods were also well-diversified in other countries following after Germany.

Chart 18.4.2 – Foreign trade in CZ-CPA 28 products

Import territories in 2018 Export territories in 2018

other 27% other Germany 36% 33% Germany 37%

Austria France 3% 6% France Austria 3% Poland 4% 4% Italy USA Italy Slovakia USA China 8% 4% 4% 5% 5% Japan 8% Poland United Kingdom 5% 4% 4% Source: CZSO, data as of 8 April 2019

170

18. CZ-NACE 28 – MANUFACTURE OF MACHINERY AND EQUIPMENT N.E.C.

18.5 RESEARCH, DEVELOPMENT AND INNOVATION In terms of R&D expenditure, number of enterprises active in R&D and number of employees,CZ-NACE 28 is one of the largest divisions in the manufacturing industry. Expenditure on R&D amounted to CZK 4,244 million in 2017 (see Chart 19.5.1) and accounted for 16.03% of total R&D expenditure in manufacturing. Ex- penditures from business sources account for the largest share of total R&D expenditures. There was an apparent increase in enterprises active in R&D to 289 enterprises. The share of researchers in CZ-NACE 28 in the total number of researchers in the manufacturing industry was 14.75%, i.e. 1,250 researchers per year (average for 2013–2017). Within the National RIS3 Strategy, the manufacture of machinery and equipment is the area that receives most aid. In the period from 1 January 2015 to 31 October 2018, 438 projects within the National RIS3 Strategy were approved under the OP EIC with planned total aid (EU, public and private Czech funds) of CZK 7.29 billion, of which CZK 3.24 billion was an EU grant. The aid is aimed at strengthening the R&D capacity of enterprises (74%) and at cooperation between research organisations and enterprises (16%). All projects correspond to the application sector Mechanical Engineering–Mechatronics. Projects were submitted by large enterprises as well as SMEs. Of the EU subsidies, CGMC, cooperative is the most supported among SMEs (total expenditures CZK 279 million, of which EU subsidies were CZK 136 million), and VALEO VYMĚNÍKY TEPLA s.r.o. among large enterprises. (total expenditure CZK 380 million, of which EU grants were CZK 95 million). Enterprises drawing on a significant amount of targeted support from the State budget within national programmes of the MoD (Support of Operational Capabilities of the Czech Armed Forces, Defence Applied Research, Experimental Development and Innovation, Development of Operational Capabilities ofthe Czech Armed Forces, Development of Czech Armed Forces), MIT (TIP, TRIO), MEYS (EUREKA CZ, INTER-EX- CELLENCE), MoI (Security Research of the Czech Republic 2015–2022, Security Research Programme of the Czech Republic 2010–2015), MoA (Agricultural Research Programme 2007–2012, VAK, KUS) and TA CR (ALFA, BETA, Competence Centres, DELTA, EPSILON, ZÉTA, THÉTA) in the period 2007–2018 include VOP CZ, s.p., ZKL Brno, a.s., Poličské strojírny a.s., TOS KUŘIM - OS, a.s. and Doosan Škoda Power s.r.o. Seven companies are participating in Horizon 2020 projects. Doosan Škoda Power s.r.o. is participating in two projects, FLEXTURBINE and TURBO-REFLEX, Jihostroj a.s. in ARGOS, PROPCONEL and Mavel a.s. in MOTOR and EXPERTISE. One project involves four companies – FERRAM STROJÍRNA, s.r.o. (CloudiFacturing), ZETOR TRACTORS a.s. (DataBio), FOTON, s.r.o. (AVA) and ELMARCO s.r.o. (GAIA).

Chart 18.5.1 – R&D expenditure (CZK mil.) and the number of enterprises with R&D in CZ-NACE 28

EU+other international organisations Number of enterprises Entrepreneurs Government+universities 350 5 000 4 287 4 194 4 244 4 500 300 3 893 3 956 3 845 68 86 73 4 000 67 13 63 250 3 500 2 932 3 000 2 499 148 200 2 500 36 3 872 3 945 150 3 373 3 854 3 777 289 2 000 3 626 258 260 258 240 248 244 247 2 362 1 500 2 060 100 1 000 50 500 403 422 408 347 0 254 200 166 226 0 2010 2011 2012 2013 2014 2015 2016 2017 2010 2011 2012 2013 2014 2015 2016 2017

Source: CZSO, MIT calculations

171

18.6 SUMMARY AND PERSPECTIVE OF THE DIVISION Czech general mechanical engineering includes energy engineering, which is currently very important, because it is experiencing development due to increasing global demand for energy. Energy engineering includes the production and supply of equipment across a wide range of industries in general engineering, from the production of turbines, fittings, compressors and pumps to lifting and handling equipment. Manufacturers of energy equipment from the Czech Republic often belong to multinational companies, which, given their interconnection and influences, opens the way to foreign contracts and involvement in supplier consortia. At the same time, many purely Czech companies are successful exporters of energy equipment thanks to the many years of tradition and rich contacts. The manufacture of industrial cooling and ventilation equipment has good prospects for the future, as cooling is involved in all branches of human activity, including safety and quality of food in the chain from harvest to consumer, air-conditioning ensuring building comfort, pharmaceutical production and health care, low temperature and gas liquefaction techniques and refrigeration equipment in all industries. The tradition and the current level of manufacture of machine tools, which forms an integral part of the division, creates the conditions for further successful development of the group. Mechanical engineering is successful, although factors limiting further development include the shortage of workers in most companies, which causes an overload of production capacities. This also contributes to the development of automation, digitisation and the faster adoption of new technologies in mechanical engineering. One important trend in mechanical engineering is also the rapid development of new types of materials and production technologies. For these reasons, there is a need to introduce compulsory practical training in primary, secondary and higher education institutions in manufacturing companies and to assign diploma theses to real practice. Experts should teach in schools; the professional level of teachers at all school levels should be raised. It is necessary to teach at the level of current scientific, technical and technological knowledge and practice.

172 19. CZ-NACE 29 – MANUFACTURE OF MOTOR VEHICLES (EXCEPT MOTORCYCLES), TRAILERS AND SEMI-TRAILERS

19. CZ-NACE 29 – MANUFACTURE OF MOTOR VEHICLES (EXCEPT MOTORCYCLES), TRAILERS AND SEMI-TRAILERS

19.1 CHARACTERISTICS OF THE DIVISION Breakdown of the CZ-NACE 29 division by individual groups:

29.1 Manufacture of motor vehicles; 29.2 Manufacture of bodies (coachwork) for motor vehicles; manufacture of trailers and semi- -trailers; 29.3 Manufacture of parts and accessories for motor vehicles.

The automotive industry (AI) significantly contributes to the overall economic performance of the Czech Republic. Its representation in the manufacturing industry is constantly increasing. In 2018, exports and added value saw a slight decrease. The “number of employees” indicator continued to grow, despite the shortage of workers in the market. However, companies are poaching each other’s employees. Large businesses are typical for this segment and make up about 95% of the division. This segment includes, depending on the nature of the production programme, the following product composition: passenger cars, light commercial vehicles and trucks, buses and trolleybuses, snowmobiles, golf carts, amphibious vehicles, fire trucks, trailers and semi-trailers and manufacture of auto parts. The AI purchases products and services from other manufacturing industry branches, e.g. electrotechnical (batteries, electric drives, lights), metallurgical (sheet metal, steels), chemical (tyres), plastics (parts of interiors), glass, textile and general engineering branches, and from other related industries and services. The fleet in the Czech Republic has grown again, reaching 5.8 million passenger cars, 577,000 light commercial vehicles, 21,500 buses and 190,000 trucks. The average age of passenger cars reached 11 years. This has been effectively growing since 2009, when scrappage ended. After the end of its life, a vehicle becomes “waste”, which is the source of materials for recovery (iron, plastics, glass, non-ferrous metals, precious elements and others). Over 184,000 motor vehicles were ecologically disposed of in the Czech Republic in 2018. Currently, 93% of the tyres on the market are collected, equivalent to 10.5 million units a year. Car batteries are also an important commodity for recycling (Kovohutě Příbram nástupnická, a.s.). The most important group of the division is 29.3, which accounts for 52.3% of the division’s sales, and about 75% of the division in the number of persons employed (Table 19.1.1). The share of vehicle manufacturers in personnel costs increased due to higher wage increases and their share in sales increased due

Table 19.1.1 – Shares of groups in CZ-NACE 29 in 2018 (%, division = 100%)

Group Personnel Value Own Assets Number of Number of Revenues Incomes CZ‐NACE costs added capital total employees units

29.1 32.7 48.1 47.0 46.7 52.2 45.9 23.7 7.6 29.2 1.4 1.0 0.7 0.7 0.9 0.9 1.8 14.8 29.3 65.8 50.8 52.3 52.6 46.9 53.2 74.5 77.7 Source: CZSO, data 2018 MIT calculations

173

to increased production of vehicles and conversely a decrease in component production.

19.2 DEVELOPMENTS IN THE DIVISION The automotive industry has a rich history. We can mention for example 140 years since the birth of Hans Ledwinka, the spiritual father of the so-called “Tatra concept car”, 120 years since the production of the first Tatra truck, 90 years of bus production in Vysoké Mýto, 85 years since the foundation of Mitas (now Trelleborg Wheel Systems Czech Republic a.s.), 75 years since the start of production of the T 111 truck (the only truck in the world which has a monument, in the Siberian city of Magadan), 60 years since the start of production of trucks Praga V3S (about 130,000 vehicles produced), 20 years since the end of production of Tatra cars and 15 years since the end of production of LIAZ trucks, 10 years since the start of production of cars in Hyundai Motor Manufacturing Czech, s.r.o. In 2018, we also saw milestones in sales and production: Škoda exceeded one million cars delivered for the fifth consecutive year, it produced its 21 millionth car (one million ŠKODA SUVs) and two million DQ200 transmission, two million EA211 engines and seven million MQ200 transmissions. Škoda Octavia was the best-selling model in the Czech Republic, Croatia, Estonia, Poland and Slovakia. Continental Automotive Czech Republic has already produced 1 million vehicle information system control units for PSA. The new Škoda 35Tr trolleybus, the new SOR NS 18 city articulated bus, the AVIA D120 4x4 truck, the new Hyundai i30 Fastback and the EKOVA electro-buses with ultra-fast charging in the OppCharge standard were introduced. Kolín’s Toyota Peugeot Citroën Automobile (TPCA) has started production of facelifted Toyota Aygo, Peugeot 108 and Citroën C1 models. In the 24th year of the Czech Exporters Competition, Iveco Czech Republic, a.s. won the category “Export Growth in 1993-2017” among companies with export volume of over CZK 500 million per year. There was a slight increase in the number of employees in the sector, especially with new projects that domestic companies acquired with the launch of production of new models of vehicles, not only in our country. Sales increased slightly. In 2018, the automotive industry faced a shortage of skilled workers, especially in technically oriented fields (in the Czech Republic there were over 300,000 vacancies, of which about 20,000 employees are demanded by the automotive industry). This sector has had a long-term shortage of technically oriented employees with secondary and tertiary education. Moreover, the number of new graduates is insufficient. For these reasons, companies have increased their salaries and are trying to attract workers from abroad, which is often a lengthy procedure. The cooperation of companies with educational institutions is increasing, but the number of students interested in technically oriented fields is lower than that needed by industrial companies. The lack of drivers (about 15,000 needed) is also problematic for companies. Carriers must refuse orders, which is also reflected in the lower interest in buying/leasing trucks. Because many of these positions remain vacant, many companies are unable to fulfil their orders. For these reasons, companies hire agency workers, which is often problematic in terms of both qualifications and language barriers. Average prices of new passenger cars increased again and exceeded CZK 400,000 for base models. We found exactly 25 models of cars for less than CZK 250,000. In Germany, average prices of new passenger cars exceeded EUR 31,000 (the price has increased by 38% over the last ten years). The prices of new models are also rising in connection with increasing equipping of cars to include navigation, assistance systems and other electrical equipment. In terms of wages, in 2018 the average wage increased by more than CZK 2,000 to almost CZK 38,000 (the average gross monthly nominal wage per FTE in the national economy increased to CZK 33,840). Also for the year 2019 collective agreements were concluded, which increased wages in companies by up to several thousand CZK. In some companies the average wage exceeded CZK 50,000.

174 19. CZ-NACE 29 – MANUFACTURE OF MOTOR VEHICLES (EXCEPT MOTORCYCLES), TRAILERS AND SEMI-TRAILERS

19.3 MAIN ECONOMIC INDICATORS Chart 19.3.1 – Main economic indicators of CZ-NACE 29

1 400 200 000 Number of units Average number of employees 180 000 1 200 160 000 1 000 140 000 120 000 800 100 000

600 1 292 1 256

1 209 80 000 180 765 174 937 1 126 1 125 1 105 165 550 1 087 1 082 1 076 1 061 157 038 154 510 1 004 146 577 141 337 60 000 141 247 140 861

400 137 568 133 803 40 000 200 20 000 0 0 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

1 400 000 120 000 Sales (CZK m) Value added (CZK m) Average monthly wage (CZK) Labour productivity from the VA (CZK/month)* 1 200 000 100 000

1 000 000 80 000 800 000 60 000 600 000 1 309 488 107 846 1 305 717 104 209 99 444 101 186 1 213 178 40 000 93 970 1 112 577 84 173 400 000 993 344 77 941 77 345 77 251 832 894 217 877 785 487 213 175 62 388 202 979 749 524 61 243 189 724 173 946 691 175 141 506 627 041

131 342 20 000 130 463 126 729 578 570 113 081

200 000 99 728 37 576 34 817 32 739 31 450 30 470 29 511 28 565 27 535 24 622 25 368 26 697 0 0 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Chart 19.3.2 – Price developments in CZ-CPA 29 Chart 19.3.3 – Spread (ROE – re) CZ-NACE 29 (%) (2005 = 100 %)

110 25

20 100 15 90 10

80 5

0 70 ‐5 60 ‐10

50 ‐15 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 29 90,6 91,0 86,6 84,9 85,3 86,8 90,1 89,7 87,8 85,7 84,1 Spread ‐5,88 ‐9,71 1,58 6,02 4,55 2,12 10,63 14,92 12,28 12,36 6,80 29.1 93,5 85,4 81,9 79,4 78,3 77,8 78,4 80,7 82,2 83,6 85,1 rf 4,55 4,67 3,71 3,79 2,31 2,26 1,58 0,58 0,43 0,98 1,98 29.2 96,3 96,5 93,6 95,4 97,3 97,6 99,6 100,2 100,0 99,7 100,3 ROE 8,98 5,61 13,91 17,99 14,76 13,04 19,20 22,69 19,02 19,36 15,20 29.3 88,6 91,6 86,9 85,2 86,2 88,1 92,2 91,1 88,3 85,3 82,7 re 14,86 15,32 12,33 11,97 10,21 10,92 8,57 7,77 6,74 7,00 8,40

Source: CZSO, MIT calculations Source: CZSO, MIT calculations

175

19.4 FOREIGN TRADE

19.4.1 DEVELOPMENT OF FOREIGN TRADE After a nine-year growth in exports, there was a slight decline due to a decrease in component exports, following a decline in vehicle production in Germany, France, and the United Kingdom. This decrease was not countered even by an increase in exports of complete vehicles by almost 25,000. Imports also saw a slight decline, although there was an increase in vehicle production in the Czech Republic and an increase in sales and imports of vehicles from abroad. Nevertheless, the development of external trade in the CZ-CPA 29 commodity is very positive: the foreign trade balance is almost comparable to that of imports, unlike in any other division (see Chart 19.4.1).

Chart 19.4.1 – Exports, imports and foreign trade balance in products by CZ-CPA 29 (CZK million)

1 200 000 Export Import Trade balance 1 000 000

800 000

600 000 1 009 617 400 000 1 005 672 942 462 824 534 730 704 595 350

200 000 559 203 546 343 543 950 522 425 461 723 509 120 463 274 463 767 433 342 401 372 423 162 388 179 361 439 369 265 294 334 301 016 274 068 227 727 260 482 236 040 261 943 195 942 285 135 0 192 237 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Source: CZSO, data as of 8 April 2019

19.4.2 TERRITORIAL STRUCTURE OF FOREIGN TRADE For the import territories, virtually nothing has changed in the first four places, except for a 1% reduction in Germany’s share of imports, where both vehicles and components saw a decrease. Poland came second (Chart 19.4.2). In exports, we also saw a decline of two percentage points to Germany and the United Kingdom, which was due to a decline in exports of components and vehicles, respectively. By contrast, Poland (+2.0), France (+1.0) and Spain (+1.0) saw an increase in their share thanks to imports of components (Poland) and vehicles (France and Spain). Czech cars are the best-selling models in their category in several countries.

Chart 19.4.2 – Foreign trade in products, CZ-CPA 29

Import territories in 2018 Export territories in 2018

other other 25% 30% Germany Germany 34% 33% Italy 3% Austria Romania 3% 4% Italy France Poland 3% France Spain 7% 11% Poland 5% 6% Hungary Slovakia 5% United 5% South Korea 8% Kingdom Slovakia 6% 6% 6% Source: CZSO, data as of 8 April 2019

176

19. CZ-NACE 29 – MANUFACTURE OF MOTOR VEHICLES (EXCEPT MOTORCYCLES), TRAILERS AND SEMI-TRAILERS

19.5 RESEARCH, DEVELOPMENT AND INNOVATION The automotive industry is also one of the important sectors in research and development. In terms of R&D expenditure and number of employees, CZ-NACE 29 is the largest division within the manufacturing industry. Expenditure on R&D in CZ-NACE 29 amounted to CZK 10,373 million in 2017 (see Chart 19.5.1) and accounts for 29.84% of total R&D expenditure in manufacturing. The bulk of the funds were expenditures from business resources. The share of researchers in the surveyed division in the total number of researchers in the manufacturing industry sectors is 22.23%, i.e. 1,884 researchers per year (average for 2013–2017). The manufacture of motor vehicles (except motorcycles), trailers and semi-trailers is a heavily supported R&D area under the National RIS3 Strategy. In the period from 1 January 2015 to 31 October 2018, 72 projects falling within the National RIS3 Strategy were approved under the OP EIC for implementation with planned total aid (EU, public and private Czech funds) of CZK 4.01 billion, of which CZK 1.34 billion was an EU grant. The aid is mainly focused on strengthening the R&D capacities of enterprises (96%). All projects fall within the Automotive application industry. In the reference period, projects for the manufacture of motor vehicles (except motorcycles), trailers and semi-trailers were submitted by large enterprises as well as SMEs. As regards European support for applicants/beneficiaries, the largest EU support was granted to AAS Automotive s.r.o. among SMEs (Innovation of surface treatment of aluminium parts of cars project; total expenditure CZK 143 million, of which EU subsidies were CZK 50 million) and to KOVOVÝROBA HOFFMANN, s.r.o. among large enterprises (Develop- ment of new processes for the production of complex, high-strength parts for car bodies using controlled local modification of technological properties; Introduction of production of a new type of high-strength bodies projects; total expenditures CZK 445 million, of which EU subsidies were CZK 123 million). Enterprises that benefited from a significant amount of targeted support from the State budget under the national programmes of the MoD (Defence applied research, experimental development and innovation, Development of operational capabilities of the Armed Forces of the Czech Republic, Development of the Armed Forces of the Czech Republic), MIT (TIP, TRIO) MEYS (EUREKA CZ) and TA CR (ALFA, Competence Centres, EPSILON) in the period 2007–2018 include MEDTEC - VOP, spol. s r.o., TATRA, a.s. and TESLA BLATNÁ, a.s. There are three companies involved in Horizon 2020 projects in this CZ-NACE 29. These are Senior Flexonics Czech s.r.o. with the HEATSTACK project, Škoda Auto, a.s. with the ITEAM project, VALEO AUTOKLIMATIZACE k.s. with the ENABLE-S3 project and TRW Automotive Czech s.r.o. with the STREAM-0D project. Chart 19.5.1 – R&D expenditure (CZK mil.) and the number of enterprises with R&D in CZ-NACE 29

EU+other international organisations Number of enterprises Entrepreneurs Government+universities 12 000 80 10 373 70 24 10 000 60 7 100 7 818 8 000 6 6 501 6 499 50 36 54 25 6 000 40 4 610 72 73 71 73 3 993 10 287 69 70 3 455 7 30 61 60 4 000 4 7 780 0 6 355 7 013 6 398 20 4 472 2 000 3 377 3 890 10

0 78 98 131 49 119 51 31 62 0 2010 2011 2012 2013 2014 2015 2016 2017 2010 2011 2012 2013 2014 2015 2016 2017

Source: CZSO, MIT calculations

177

19.6 SUMMARY AND PERSPECTIVE OF THE DIVISION In terms of manufacturing, the Czech Republic produced a record number of vehicles, exceeding 1.44 million motor vehicles (up 3.6% year-on-year) and 24,690 trailers (up 5.3% year-on-year). National passenger car manufacturers produced a total of 1,437,396 cars (in 2017 it was 1,413,881 cars). Bus production increased to 4,890 vehicles (+259 units/+5.6% year-on-year). Tatra reported the production of 559 trucks and the restored production of AVIA vehicles (39 units produced) was unfortunately terminated in No- vember. A total of 25,298 trailers of all categories were produced in the Czech Republic in 2018. The production of trailers and semi-trailers increased by 91 units, i.e. by 0.4% compared to the same period of the previous year. Over 930 trailers and 1,124 semi-trailers for trucks were produced by PANAV, a.s. and SCHWARZMÜLLER s.r.o. and over 22,600 trailers for cars or light commercial vehicles were produced by AGADOS, spol. s r.o. In addition to production, domestic companies also invested in research into reducing emissions and autonomous vehicles. For example, the car manufacturer Škoda spent CZK 22.5 billion on research and development of new products in 2018 (up almost CZK 7.0 billion year-on-year). In January 2018, a new transmission test centre was opened in the Motor Centre, with an investment of almost CZK 180 million in new modern technologies. Valeo, for example, has opened a research centre to test autonomous vehicles. State aid was approved for the construction of a new test centre for self-driving BMW cars (investment incentive of up to CZK 528 million). Several hundred new jobs will be created. Sales of new passenger cars in the EU for the first four months of 2019 fell by 2.6% year-on-year to 5.3 million. Registrations have been decreasing since September 2018. In the first five months, Germany’s production of vehicles was down 10% year-on-year (by about 220 thousand vehicles). Also in the US and China, markets are showing a cooling down in demand for new vehicles. In connection with the bans on the operation of older diesel vehicles, especially in Germany, but also in other countries, interest in new diesel vehicles is decreasing. On the other hand, the sale of petrol and alternative vehicles, mainly electric vehicles, is growing. This year, we expect a decline in vehicle sales not only in the EU but also in other markets. Car manufacturers also have to meet the EU 2020 emission targets, otherwise they will pay a fine of

EUR 95 for each car and gram of CO2. New emission targets for 2025 and 2030 for new passenger cars, light commercial vehicles and trucks have been approved. Recognising the need for local battery production, the EU has developed a battery initiative. Automakers point to a lack of a charging infrastructure for the ever-increasing number of electric vehicles. In 2019, we expect a reduction in vehicle production, not only in the EU, and with it a reduction in employment in the automotive industry. At the same time, switching to electromobility will require fewer people in the manufacture and subsequent maintenance of these vehicles. It will be necessary to increasingly incorporate into the education curriculum of technical schools and vocational schools matters related to the operation of alternative-drive vehicles. In terms of further development, the conditions of Brexit have not been agreed; for European car makers, this represents a great uncertainty in terms of the regime under which they will export and import from the United Kingdom. In the area of autonomous driving, we saw further purchases of automobile factories or joint ventures with companies specialising in the development of software and sensors, or automakers created independent divisions. Recharging infrastructure investment is projected to reach EUR 40 billion by 2020–2025.

178 20. CZ-NACE 30 – MANUFACTURE OF OTHER TRANSPORT EQUIPMENT

20. CZ-NACE 30 – MANUFACTURE OF OTHER TRANSPORT EQUIPMENT

20.1 CHARACTERISTICS OF THE DIVISION

Breakdown of the CZ-NACE 30 division by individual groups: 30.1 Building of ships and boats; 30.2 Manufacture of railway locomotives and rolling stock; 30.3 Manufacture of air and spacecraft and related machinery; 30.4 Manufacture of military fighting vehicles (data not disclosed); 30.9 Manufacture of transport equipment n.e.c. The product range in the division Manufacture of other transport equipment is characterised by a wide range of transport equipment, such as the manufacture of boats and shipbuilding, the manufacture of rail vehicles and locomotives, aircraft and spacecraft and the manufacture of their parts. It also includes the production of motorcycles, mopeds and bicycles, including electric bicycles, wheelchairs and children’s strollers. In terms of production characteristics, in the Czech Republic the most important CZ-NACE 30 group is 30.2 Manufacture of railway locomotives and rolling stock, whose production characteristics account for about half of the division. The second largest group whose share of production characteristics is around one third of the division is 30.3. Group 30.1 Building of ships and boats showed a slight improvement and the manufacture of transport equipment, Group 30.9, on the other hand, recorded a slight decrease. Considering the individual groups, the highest share of revenues within the division in 2018 was achieved by Group 30.2, accounting for 44.7%. A slightly lower share in revenues was held by Group 30.3 – 34.7%. Group 30.2 had the largest share of total assets (59.8%) in the relevant year, followed by Groups 30.3, 30.9, 30. 4. and 30.1. The number of employees was also the highest in Group 30.2, followed by Groups 30.3 and 30.9. Specific data are set out in Table 20.1.1.

Table 20.1.1 – Shares of groups in CZ-NACE 30 in 2018 (%, division = 100%)

Group Personnel Value Own Assets Number of Number of Revenues Incomes CZ‐NACE costs added capital total employees units

30.1 0.7 0.9 0.9 0.8 0.8 0.8 1.0 15.8 30.2 43.6 46.0 44.7 44.7 62.2 59.8 43.4 7.5 30.3 43.2 38.7 34.7 36.2 20.9 26.3 38.6 11.1 30.4 2.8 5.3 5.9 5.2 6.5 5.8 3.1 0.9 30.9 9.8 9.2 13.6 13.1 9.7 7.3 13.9 64.7 Source: CZSO, data 2018 MIT calculations

179

20.2 DEVELOPMENTS IN THE DIVISION The developments in the division are primarily dependent on the situation in the key areas of the division. The manufacture of other means of transport includes, in particular, railway and tramway locomotives and rolling stock, aviation equipment and its repairs. The manufacture of boats, motorcycles and bicycles is not so significant in the Czech Republic. Significant enterprises within Group 30.1 are: BARKMET a.s., which specialises in the construction and production of steel vessels. It offers welding of metal structures and piping and plasma cutting. It manufactures container ships, chemical tankers, towing tugs, pontoons, yachts, floating houses etc. Furthermore, ČESKÉ LODĚNICE, a.s., which has been in the market since the 19th century, is a traditional manufacturer of cargo ships of all kinds, technical vessels and floating equipment. At present the company has shipyards in Děčín-Křešice. In terms of production characteristics, in the Czech Republic the most important CZ-NACE 30 group is 30.2 Manufacture of railway locomotives and rolling stock. The development of rail transport is one of the EU’s priorities as part of the Transport Strategy 2050 in line with the EU Transport White Paper. In line with the European strategy for the construction of high-speed rail corridors, strengthening the importance of urban rail and regional rail transport and in line with the rail freight preference for medium and long-haul traffic, an increase in carriers’ interest in modern, fast, reliable, safe and energy efficient train sets and related equipment can be expected. Group 30.2 is represented by ŠKODA TRANSPORTATION a.s. with its products being in the market for more than 150 years. Today, ŠKODA TRANSPORTATION focuses on the production of vehicles for public transport and railways. CZ LOKO, a.s., ŠKODA VAGONKA a.s., ČKD KUTNÁ HORA, a.s., DAKO-CZ and BONATRANS GROUP a.s. are other important players in the field of railway technology manufacture. IFE-CR, a.s. is one of the world leaders in the development and manufacture of automatic door systems for rail vehicles, etc. The aviation industry has a hundred-year tradition in the Czech Republic, with its strongest aspect being professional continuity and internationalisation. The Czech Republic is one of the few countries in Europe that can develop and produce complete aircraft and their parts on its own. At the same time, the Czech aviation industry has become a part of supply chains for large global players such as Airbus and Boeing. The aviation industry employs highly educated, often narrowly specialised professionals. Only a few of the aviation specialisations cannot be used in other industries. The largest companies in Group 30.3 are AERO VODOCHODY AEROSPACE a.s., HONEYWELL AEROSPACE OLOMOUC s.r.o., LETOV LETECKÁ VÝROBA s.r.o., the oldest aviation manufacturer in the Czech Republic, EVEKTOR, s. r.o., AIRCRAFT INDUSTRIES, a.s., ATEC, v.o.s., AEROSPOOL CZ, spol. s.r.o., KUBÍČEK AIRCRAFT s.r.o., BRM AERO s.r.o., and CZECH SPORT AIRCRAFT a.s. Group 30.9 is represented by companies: BOHEMIA BIKE a.s., which is a manufacturer of the Czech bicycle brand Leader Fox, and DAMA SPORT – manufacture of children’s bicycles and bicycles for adults, CONDOR bicycles. Other well-known companies are: JAWA MOTO s.r.o. - the oldest existing Czech company which has been producing motorcycles since 1929 and JRM SPEEDWAY FACTORY s.r.o DIVIŠOV – production and sale of speedway motorcycles and spare parts. Ekolo.cz s.r.o. is the first Czech manufacturer and seller of electric bicycles.

180 20. CZ-NACE 30 – MANUFACTURE OF OTHER TRANSPORT EQUIPMENT

20.3 MAIN ECONOMIC INDICATORS Chart 20.3.1 – Main economic indicators of CZ-NACE 30

900 25 000 Number of units Average number of employees 800

700 20 000

600 15 000 500

400 836 23 545 23 198 23 077 769 22 685

10 000 22 024 734 20 695 20 650 671 19 721 650 19 424

300 18 918 18 359 592 584 557 508

200 434 397 5 000 100

0 0 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

80 000 100 000 Sales (CZK m) Value added (CZK m) Average monthly wage (CZK) 90 000 70 000 Labour productivity from the VA (CZK/month)* 80 000 60 000 70 000 50 000 60 000 40 000 50 000 40 000 30 000 68 658 65 094 64 397 79 902 21 417 60 446 75 216 59 680 74 042 20 567 20 525 73 017 72 571 57 697 18 967

30 000 68 350 17 872 66 471 66 349 52 852 65 759 16 890 64 442 16 655 50 966 16 201 58 682 14 445 20 000 14 387 13 527 43 650 42 915 42 196 20 000

10 000 35 241 32 844 30 273 29 212

10 000 28 556 27 442 27 381 26 647 26 480 25 748 24 909 0 0 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Chart 20.3.2 – Price developments in CZ-CPA 30 Chart 20.3.3 – Spread (ROE – re) CZ-NACE 30 (%) (2005 = 100 %)

120 30

25 110 20

100 15

10 90 5

80 0

‐5 70 ‐10

60 ‐15 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Spread ‐9,36 10,90 6,37 9,05 7,47 5,48 3,71 3,25 6,61 ‐4,09 ‐7,18 50 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 rf 4,55 4,67 3,71 3,79 2,31 2,26 1,58 0,58 0,43 0,98 1,98 30 107,6 109,5 109,3 108,8 108,9 108,4 108,2 107,9 107,6 109,1 112,2 ROE 4,66 24,05 23,65 27,47 26,44 24,47 18,66 16,21 17,14 7,63 5,99 30.2 108,7 110,9 110,5 109,4 109,3 108,8 108,6 108,3 108,0 109,5 112,6 re 14,01 13,15 17,28 18,42 18,98 18,99 14,95 12,96 10,53 11,72 13,17

Source: CZSO, MIT calculations Source: CZSO, MIT calculations Note: Groups 30.1, 30.3, 30.4 and 30.9 are not monitored.

181

20.4 FOREIGN TRADE

20.4.1 DEVELOPMENT OF FOREIGN TRADE In terms of the Czech Republic’s reputation, the division is one of the most important ones and its products are used in more than 100 countries around the world. We successfully expand our export territories and are also successful in obtaining orders not only for national but especially foreign customers. In this way, companies often establish long-term cooperation with foreign customers. After a decline in 2010, exports of products (CZ-NACE 30) in the period under review grew until 2015. In the following years, exports fluctuated, reaching CZK 53.9 billion in 2018, down by 3.2% year-on-year. However, imports increased significantly, their value increased by 57% year-on-year. Imports of aircraft and related equipment increased by CZK 20 billion year-on-year. In 2018, the external trade balance turned negative for the first time in the monitored years. See Chart 20.4.1 for more details. Chart 20.4.1 – Exports, imports and foreign trade balance in products by CZ-CPA 30 (CZK million)

60 000 Export Import Trade balance 50 000

40 000

30 000 55 727 55 361 53 947 51 475

20 000 48 057 46 232 41 400 40 304 38 156 35 405 35 194 32 336 31 886 10 000 29 236 26 354 24 960 24 775 22 294 25 121 21 457 21 308 18 821 20 533 20 092 15 862 1 414 15 344 13 948 7 111 ‐ 0 13 896

‐10 000 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Source: CZSO, data as of 8 April 2019

20.4.2 TERRITORIAL STRUCTURE OF FOREIGN TRADE The main import territories of CZ-NACE 30 products were suppliers from the US in 2018, followed by EU Member States – France and Germany. For exports of these products, Germany is the largest territory, followed by France and the US. The shares of these countries in terms of both imports and exports are shown in Chart 20.4.2.

Chart 20.4.2 – Foreign trade in products, CZ-CPA 30

Import territories in 2018 Export territories in 2018

other Germany 19% other 19% USA 32% Taiwan 31% 3% Slovakia France 12% 4% Austria Canada 3% 4% Poland USA 5% 10% Austria China France Russia Slovakia 4% 6% 16% Germany 6% 7% 13% United Kingdom 6% Source: CZSO, data as of 8 April 2019

182

20. CZ-NACE 30 – MANUFACTURE OF OTHER TRANSPORT EQUIPMENT

20.5 RESEARCH, DEVELOPMENT AND INNOVATION R&D expenditure in CZ-NACE 30 in 2017 amounted to CZK 1,969 million (see Chart 20.5.1), up CZK 258 million compared to the previous year. The bulk of the funds were expenditures from business resources. Furthermore, it can be observed that from 2010 to 2014, expenditures from public foreign sources increased, which was mainly caused by drawing public funds from the OP EIC. R&D accounts for 6.78% of the total expenditure in the manufacturing industry. The share of researchers (FTE) in CZ-NACE 30 in the total number of researchers in the manufacturing industry sectors is 5.71%, i.e. 484 researchers per year (average for 2013–2017). Within the National RIS3 Strategy, the manufacture of other transport equipment is an R&D area that receives average support. In the period from 1 January 2015 to 31 October 2018, 40 projects within the National RIS3 Strategy were approved under the OP EIC for implementation with planned total aid (EU, public and private Czech funds) of CZK 1.14 billion, of which CZK 0.49 billion was an EU grant. The support is mainly focused on strengthening the R&D capacities of enterprises (80%). The content of the projects mainly corresponds to the application sectors Aerospace Industry (25 projects) and Automotive (9 projects), followed by Railway and rail vehicles (4 projects) and Ensuring a healthy and quality environment and efficient use of natural resources (2 projects). Projects for the manufacture of other transport equipment were submitted by enterprises of all size categories. As regards European support for applicants/beneficiaries, the largest EU support was granted to AICTA Design Work, s.r.o. for SMEs, (total expenditure CZK 85 million, of which EU subsidies were CZK 58 million) and AERO Vodochody AEROSPACE a.s. for large enterprises (total expenditure CZK 549 million, of which EU subsidies were CZK 174 million). The companies that received in 2018–2017 a significant amount of special-purpose State aid within the national programmes of the Ministry of Industry and Trade (TIP, TRIO) and Technology Agency ofthe Czech Republic (ALFA, Competence Centres, DELAT and EPSILON) include AERO Vodochody AEROSPACE a.s., První brněnská strojírna Velká Bíteš, a.s., CZ LOKO, a.s., Aircraft Industries, a.s. and TL-ULTRALIGHT s.r.o. There are eight companies involved in Horizon 2020 projects. LA Composite, s.r.o. is involved in the DREAM and LATTE projects. Zodiac Galleys Europe s.r.o. (now Safran Cabin CZ s.r.o.) is involved in the CRiSTA and LPA GAM 2018 projects. The other companies are each involved in one project, namely První brněnská strojírna Velká Bíteš, a.s. (DISRUPT), JIHLAVAN, a.s. (SOLUTION), DT – Výhybkárna a strojírna, a.s. (S-CODE), LATECOERE Czech Republic s.r.o. (ELCOCOS), and GE Aviation Czech s.r.o. and Avia Propeller, s.r.o. are involved in ENG GAM 2018.

Chart 20.5.1 – R&D expenditure (CZK mil.) and the number of enterprises with R&D in CZ-NACE 30

EU+other international organisations Number of enterprises Entrepreneurs Government+universities 2 500 50

45 1 992 1 969 2 000 8 1 848 40 1 715 1 711 45 1 643 34 18 35 1 475 15 1 453 37 1 500 4 23 30 25 1 781 43 1 000 1 824 20 41 40 1 398 1 507 1 704 38 38 39 39 37 1 284 1 613 1 369 15 500 10

5 188 203 231 191 0 109 61 61 100 0 2010 2011 2012 2013 2014 2015 2016 2017 2010 2011 2012 2013 2014 2015 2016 2017

Source: CZSO, MIT calculations

183

20.6 SUMMARY AND PERSPECTIVE OF THE DIVISION Orders for the production of large ships continue, but only several ships a year. In 2019, another large ship “kasko” was launched for a Dutch customer (production lasted nine months). There will be more orders for our shipyards, since from January 2019 onwards, only double-hull ships can sail on European waters for environmental reasons, which is one of the specialised production methods in this sector in our country. Unfortunately, ship transport performances have been decreasing since 2010 due to worsening conditions of the Elbe’s navigability. For rail vehicle manufacturers, approximately half of the revenues are domestic orders, both the production of new rail vehicles and the renovation of older vehicles. As one of the largest investments we can mention the large expansion of the Bombardier plant for the production of rail vehicles in Česká Lípa (approximately CZK 1.48 billion and 620 new jobs). The company announced full capacity for five years ahead. Furthermore, we can mention the supply of Škoda Transportation-Škoda Vagonka of up to 55 trains and five two-storey push-pull train sets (for about CZK 8 billion). DAKO-CZ will supply brake components for Sofia metro trains. Brno manufacturer IGW will supply 400 gearboxes for Toshiba diesel-electric hybrid locomotives. AŽD Praha has received contracts in Belarus for about CZK 300 million to equip the line with signalling devices. CZ LOKO will supply 5 744 Effishunter locomotives. For Czech companies, the good news is that a loan agreement of up to CZK 3 billion has been concluded to finance expenditure for the development of railway infrastructure. In the aviation industry, we are one of the few countries that can build its own aircraft. Aero Vodochody introduced a single-engine two-seater L-39NG aircraft (the aircraft should be type certified by the end of 2019). There are already several orders for this new aircraft. Aero will repair 16 L-159 aircraft for the Czech Army for CZK 1.6 billion. Aero lost a significant contract – supplies of cockpits for helicopters UH-60M Black Hawk (drop of about CZK 0.5 billion). Aircraft Industries completed the first test take-off of the first L 410 NG aircraft. In 2019, it signed a Memorandum under which a total of 30 aircrafts L 410 UVP-E20 will be delivered to Yingan General Aviation over the next seven years. PBS GROUP, a.s. introduced a new PBS TJ80 jet engine. For Czech companies, the good news is a significant increase in orders for Airbus, which received, for example, an order for 300 planes for China. Evektor announced orders for several aircraft. Czech companies are also successful in the space industry. There is hope that the Ariane 6, a European Union project, will be developed and manufactured in the Czech Republic. GE Aviation announced the production of about 400 turboprop engines by 2022. CTU opened a new laboratory for testing turboprop engines for CZK 300 million in Hradec Králové. GE Aviation Czech and ATB Antriebstechnik AG, Austria, have agreed to cooperate in the development of electric turboprop drives. There are currently around 70 companies and research centres in the Czech Republic involved in space activities. The Czech Republic is one of the largest European manufacturers in the production of hot air balloons. Revenues in combat vehicle manufacture should increase significantly. Ministry of Defence has signed a contract to supply 62 wheeled armoured vehicles Titus for more than CZK 6 billion. In the production of bicycles, e-bikes, motorcycles and electric mopeds, Czech manufacturers are benefiting from an increase in sales of these vehicles, especially in the EU. Sales of classic bicycles in our country are around 300,000 pieces a year; for electric bikes it is about 30-40,000 pieces. From the above, we assume that in 2019 this sector will see growth in revenues and exports. In terms of employment and the current lack of a free labour force, we expect the number of employees to stagnate or decrease in relation to improvements in manufacture efficiency. Railways companies in passenger and freight transport increase their transport capacity every year and air transport has also been increasing in recent years.

184 21. CZ-NACE 31 – MANUFACTURE OF FURNITURE

21. CZ-NACE 31 – MANUFACTURE OF FURNITURE

21.1 CHARACTERISTICS OF THE DIVISION Breakdown of CZ-NACE 31 (breakdown is shown by classes, this division is not classified by groups): 31.01 Manufacture of office and shop furniture; 31.02 Manufacture of kitchen furniture; 31.03 Manufacture of mattresses; 31.09 Manufacture of other furniture.

This division includes the manufacture of furniture and related articles made of any material except stone, concrete and ceramics. The raw materials used are, for example, solid wood, veneers, bookmatched veneers and wood-based materials, as well as metals, plastics, textiles, leather and glass. Furniture is defined as a free-standing or built-in unit used for storage, lying, sitting, working, eating, hob- bies or another purpose, intended for the interior or exterior. It is perceived as a product for the human habitat, which enables the satisfaction of people’s basic and derived needs based on socio-economic -ex pectations. It significantly determines the quality of our lives. It affects the characteristics of the interior, and a person’s quality of rest, mental well-being, vitality and work performance. The way we feel in a given environment is largely influenced by the choice of furniture, which completes the resulting aesthetic im- pression of the whole interior or exterior. Furniture thus affects a wide range of issues of creation, production, trade, ecology, medicine, psychology, sociology, history, architecture, art and other related disciplines. The furniture industry mainly involves assembly activities. An important aspect of the manufacturing process is the design of furniture based on aesthetic and functional requirements. For products in this division, great emphasis is placed especially on health protection. The most discussed topic is formaldehyde emissions, which greatly affect the quality of the indoor environment of buildings. In EU countries, the migration of substances from these products must meet European standards. The transition from handicrafts to industrial in this sector has given rise to innovative changes in materials, machinery, production organisation and management. New technologies and production processes with the application of automated assembly lines and numerically controlled machining centres have enriched the market, which until then offered only conventional production technologies. Despite the high level of automation, the individual production of small and medium-sized companies maintains its place in the furniture market.

185 21.2 DEVELOPMENTS IN THE DIVISION The furniture industry in the Czech Republic is retaining its market position. In 2018, there was a decrease in the number of large companies in this sector and, conversely, an increase in the number of small business units. This may be due to the increasing public interest in atypical solid wood products that are not offered by large companies. A new phenomenon in this industry is variable and mobile furniture, due to the growth of cities under pressure from new inhabitants. About 1.5 million people settle every week in cities around the world. However, this results in diminishing housing space. This trend also affects the Czech Republic, where the newest one-bedroom and two-bedroom apartments are the most commonly offered. Designers and furniture makers focus more on how to fit all the necessary furniture into small apartments, while maintaining comfort and plenty of room to do all the home activities. The solution is furniture which can be composed and transformed in various ways to always fulfil the given function that one needs. Modern technology is also changing the furniture industry. An example is the contactless charging of mobile phones installed directly in the table desktop. These tables can be placed both indoors and on terraces and gardens. In this way, in addition to offices, it will also be possible to charge phones in restaurants and cafes. The export performance, which is largely based on the results of the furniture industry, showed only a slight increase. According to the Czech Furniture Association, the domestic consumption of furniture rose slightly more after years of gradual growth and finally surpassed the pre-crisis value of 2009. However, domestic consumption is largely represented by imported furniture, mostly from Poland and China. The growth of exports of products is accompanied with their import. The Czech Furniture Association states that after a certain decrease in the price per kilogram in 2017, we are seeing a significant increase in the price of furniture exported from the Czech Republic. In 2017, the average value of exported furniture was CZK 76.10 per kilogram and in 2018 it was CZK 81.68 per kilogram. In contrast, the price of imported furniture has been declining for the third year. The price of imported furniture between 2017 and 2018 fell to CZK 48.28 per kilogram. The reason is the import of increasingly cheaper furniture from abroad, which is probably of lower quality. A major problem in this sector is the continuing shortage of workers. The number of furniture school graduates has fallen since 2005 in joinery by 69% and in upholstery by 80%, and it continues to decline. While in 2017 the furniture industry employed about 25,239 people, in 2018 the estimate is 24,909. Employers are addressing the lack of people by investing in modern technology, digitisation, robotics, executive management and production organisation. They see another possible solution in the connection of companies with vocational schools and secondary and primary schools, which would develop in particular children’s qualifications and relationship with the profession. The development of digitisation and the decrease in the number of employees also had an impact on the average wage in this sector. Compared to 2017, it increased by approximately 6% to CZK 23,981. Along with this, labour productivity has risen for several years, which climbed to around CZK 53,099 per month in 2018.

186 21. CZ-NACE 31 – MANUFACTURE OF FURNITURE

21.3 MAIN ECONOMIC INDICATORS Chart 21.3.1 – Main economic indicators of CZ-NACE 31

9 000 35 000 Number of units Average number of employees 8 000 30 000 7 000 25 000 6 000

5 000 20 000

4 000

8 241 15 000 8 116 31 805 7 292 7 254 28 871 28 366 28 317 27 468 3 000 6 783 6 419 25 623 25 508 25 418 25 239 25 189 24 909 6 095 6 000 5 836

5 659 10 000 5 538 2 000 5 000 1 000

0 0 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

50 000 60 000 Sales (CZK m) Value added (CZK m) 45 000 Average monthly wage (CZK) 50 000 Labour productivity from the VA (CZK/month)* 40 000 35 000 40 000 30 000 25 000 30 000

20 000 53 099 43 830 43 700 50 726 41 145 40 927 48 133 39 256 20 000 46 158 12 971 36 369 12 555 43 168 35 299 11 794 34 632 34 392 15 000 34 350 33 958 11 274 40 093 10 843 38 833 10 355 9 887 9 764 9 595 9 545 9 448 36 083 35 428 33 700 10 000 33 108 10 000 23 981 22 547 21 019 19 558 18 999 18 414 17 917 17 564 17 334 17 155 5 000 17 076 0 0 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Chart 21.3.2 – Price developments in CZ-CPA 31 Chart 21.3.3 – Spread (ROE – re) CZ-NACE 31 (%) (2005 = 100 %)

120 25

20 110 15

100 10

5 90 0 80 ‐5

70 ‐10

‐15 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 60 Spread ‐3,89 ‐7,96 ‐12,59‐11,04 ‐4,28 ‐4,17 ‐2,36 ‐1,07 0,50 1,15 ‐0,82 rf 4,55 4,67 3,71 3,79 2,31 2,26 1,58 0,58 0,43 0,98 1,98 50 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 ROE 13,23 7,70 8,74 9,50 11,16 11,14 14,13 14,18 15,47 15,65 15,31 31 103,5 105,8 105,6 106,4 106,2 107,1 109,1 109,2 109,0 107,8 108,7 re 17,12 15,66 21,33 20,54 15,44 15,31 16,48 15,25 14,97 14,49 16,13

Source: CZSO, MIT calculations Source: CZSO, MIT calculations

187

21.4 FOREIGN TRADE

21.4.1 DEVELOPMENT OF FOREIGN TRADE The value of CZ-CPA 31 exports has consistently exceeded the value of imports. The resulting external trade balance is thus positive (see Chart 21.4.1). The largest change in external trade occurred in 2016, when seats used in motor vehicles were moved from this division to CZ-CPA 29 Motor vehicles (except motorcycles), trailers and semi-trailers. Since then, the external trade value has been relatively steady. The largest furniture importers in the Czech Republic are still mainly large specialised furniture outlets. Chart 21.4.1 – Exports, imports and foreign trade balance in products by CZ-CPA 31 (CZK million)

80 000

70 000 Export Import Trade balance

60 000

50 000

40 000

30 000 70 244 64 870 55 401

20 000 50 471 46 321 44 832 40 910 40 528 36 336 30 677 29 217 28 983 10 000 28 201 26 444 24 548 24 253 24 172 23 232 22 297 21 895 24 343 24 724 20 579 4 436 4 969 6 921 19 015 19 877 19 773 0 12 164 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Source: CZSO, data as of 8 April 2019

21.4.2 TERRITORIAL STRUCTURE OF FOREIGN TRADE According to Chart 21.4.2, the largest customers of CZ-NACE 31 are Germany (35%), Slovakia (10%) and France (8%). In terms of imports, our largest furniture supplier is Poland (28%), Germany (17%), China (14%) and Italy (7%).

Chart 21.4.2 – Foreign trade in CZ-CPA 31 products

Import territories in 2018 Export territories in 2018

other other 20% Poland 26% Sweden 28% Germany 2% 35% Lithuania USA 2% 3% Austria Netherlands 4% 3% Germany Slovakia Italy United Slovakia 17% Kingdom 6% 7% France 10% China 5% 8% 14% Poland 5% Austria 5% Source: CZSO, data as of 8 April 2019

188

21. CZ-NACE 31 – MANUFACTURE OF FURNITURE

21.5 RESEARCH, DEVELOPMENT AND INNOVATION Total expenditure on R&D in CZ-NACE 31 in 2017 amounted to CZK 47 million, up 56.67% year-on-year (see Chart 21.5.1). The year-on-year increase is also apparent in the number of enterprises (year-on-year increase by 33.33%). R&D accounts for 0.16% of the total expenditure in division 31. The share of researchers in CZ-NACE 31 in the total number of researchers in the manufacturing industry sectors was almost 0.21 %, i.e. 18 researchers per year (average for 2013–2017). Within the National RIS3 Strategy, the manufacture of furniture is an R&D area that receives below average support. In the period from 1 January 2015 to 31 October 2018, 40 projects falling within the National RIS3 Strategy were approved under the OP EIC for implementation with planned total aid (EU, public and private Czech funds) of CZK 0.46 billion, of which CZK 0.19 billion was an EU grant. The aid was mainly aimed at strengthening the R&D capacity of enterprises (72%) and, to a lesser extent, cooperation between research organisations and enterprises (17%). Projects fall within the application sector Traditional Cultural and Creative Sectors. In the reference period, projects for the manufacture of furniture were submitted mainly by SMEs; there was only one large enterprise. As regards the European support of applicants/beneficiaries, most of the EU subsidies were granted to the Cluster of Czech Furniture Manufacturers (CCFM) (CCFM – Internation- alisation of the Cluster; CCFM – Development of the CCFM; CCFM – Development of CCFM II; CCFM – De- velopment of a technology centre for the development of surface treatments and non-wood materials; CCFM – Research, development and innovation in the furniture industry; CCFM – Research, development and innovation in furniture industry II; CCFM Technology Centre focused on research and development in the area of flat panels forming projects; total expenditures CZK 82 million, of which EU subsidies were CZK 41 million). The large enterprise is BLANÁŘ NÁBYTEK, a.s. (Research and development of a smart bed by Blanář Nábytek, a.s. project; total expenditures CZK 11 million, of which EU subsidies were CZK 4 million). The enterprises whose main economic activity was in CZ-NACE 31 and which benefited from a significant amount of targeted support from the State budget under the national programmes of the MIT (TIP, TRIO), MEYS (EUREKA CZ) and TA CR (ALFA) in 2007–2018 include BORCAD cz s.r.o., MERCI, s.r.o., FORM, spol. s r.o., Dřevojas, výrobní družstvo and KOVO, výrobní družstvo.

Chart 21.5.1 – R&D expenditure (CZK mil.) and the number of enterprises with R&D in CZ-NACE 31

EU+other international organisations Number of enterprises Entrepreneurs 80 Government+universities 25 72 70 13 20 60 53 0 47 47 50 42 42 15 0 39 0 0 0 40 0 30 10 20 30 55 50 0 16 16 36 44 44 15 15 15 15 20 39 42 13 30 5 10 6 0 4 3 3 0 0 0 3 0 2010 2011 2012 2013 2014 2015 2016 2017 2010 2011 2012 2013 2014 2015 2016 2017

Source: CZSO, MIT calculations

189

21.6 SUMMARY AND PERSPECTIVE OF THE DIVISION The companies with the largest turnover in 2018 in the Czech Republic are Steelcase Czech Republic s.r.o., which focuses on office furniture, KOVONA SYSTEM, a.s., engaged in metal production, and BJS Czech s.r.o., which supplies its products made of agglomerated materials mainly to IKEA. IKEA is the world’s largest furniture retailer. There are four department stores in the Czech Republic, which were visited by 10.2 million visitors in the financial year 2017/2018. Furniture sales in these stores increased by 3.4% and in the case of kitchen furniture by 4.3%. Other major furniture retailers in the Czech Republic include Kika, Jysk, Asko-Nábytek, Sconto and Möbelix CZ. There has been consistent stiff competition in the furniture market. According to the Association of Czech Furniture Makers, chains strive to attract customers with the lowest price possible, but sometimes this means concessions in quality. Online retailers are also joining the battle for customers, pushing prices even lower. The largest furniture importers in the Czech Republic are still mainly large specialised furniture outlets. Based on the results of foreign trade, it can be stated that the trend of importing cheaper and lower-quality furniture still persists, while the higher-quality and more expensive products of Czech furniture makers are exported. Approximately 5% of the total furniture exports went to the United Kingdom in 2018, making it the fourth largest customer together with Poland and Austria. However, there may be concerns about subsequent trade relations caused by the approaching Brexit. In the future, the export of Czech furniture may also be affected by the exchange rate of the Czech koruna. Further growth in the furniture industry is likely to depend on investment in modern technologies, digitisation and robotics. Very important is also a change in attitudes towards vocational training. There isa certain improvement in sight due to the introduction of a dual education system in selected fields, which would include a contract between pupils and companies or a contract between companies and vocational schools for shared responsibility in the preparation of pupils, as in countries such as Germany and Austria. According to the Chamber of Commerce, linking studies with specific successful companies is one way to give children and their parents a reason to study these fields. Furniture manufacturers are currently also facing a problem with forest product certification. Most buyers, led by retail chains such as IKEA, XXX Lutz and others, already require that wood products be made from FSC-certified forests. However, there is a shortage of such forest areas in the Czech Republic (about 2%). From 2017 onwards, forest owners have been under pressure to increase the FSC forest area in order to eliminate the need to import this material from abroad. State forests are already working to introduce a certificate in selected areas suitable for this type of forestry.

190 22. CZ-NACE 32 – OTHER MANUFACTURING

22. CZ-NACE 32 – OTHER MANUFACTURING

22.1 CHARACTERISTICS OF THE DIVISION Breakdown of the CZ-NACE 32 division by individual groups: 32.1 Manufacture of jewellery, bijouterie and related articles; 32.2 Manufacture of musical instruments; 32.3 Manufacture of sports goods; 32.4 Manufacture of games and toys; 32.5 Manufacture of medical and dental instruments and supplies; 32.9 Manufacturing n.e.c. The manufacturing industry includes a wide range of products, most of which are classified under separate sectors. CZ-NACE 32 includes a total of six different manufacturing groups, which differ in terms of input raw materials, production technologies and the final products. Some groups are resource-intensive, -de pending on the high manual skills and creativity of designers and workers. Many of these product groups have a long tradition and a considerable international reputation (e.g. the production of bijouterie, musical instruments, wooden toys, office supplies, etc.). CZ-NACE 32.9 is a group with a wide range of products, which covers bijouterie from general metals, glass, wood, leather, etc., school and office supplies, brushmaking products, matches, umbrellas, parasols, etc. There are many micro-enterprises in the division with a minimum contribution to production characteristics. The most important are large enterprises classified in Groups 32.4 and 32.5. Group 32.5 Manufacture of medical and dental instruments and supplies accounted for the largest share of the division’s employment and other indicators. The second important group of the section was then 32.4 Manufacture of games and toys. Together, these groups accounted for over 60% of the employment and sales of the division. The largest share in the number of units was in Group 32.1, with low shares in other indicators, which is caused by a large participation of individuals or micro-enterprises and a large share of manual labour in production.

Table 22.1.1 – Shares of groups in CZ-NACE 32 in 2018 (%, division = 100%)

Group Personnel Value Own Assets Number of Number of Revenues Incomes CZ‐NACE costs added capital total employees units

32.1 4.5 5.9 8.2 7.5 8.1 7.3 5.6 36.6 32.2 2.9 2.7 2.2 2.2 2.4 2.0 3.0 3.1 32.3 8.0 8.3 7.3 7.1 4.5 5.5 8.5 5.4 32.4 22.0 26.4 30.7 31.1 32.3 32.6 19.6 5.2 32.5 43.5 39.6 34.0 34.3 32.1 33.5 41.4 26.3 32.9 19.1 16.9 17.5 17.7 20.6 19.0 21.9 23.4 Source: CZSO, data 2018 MIT calculations

191

22.2 DEVELOPMENTS IN THE DIVISION Division 32, Other manufacturing, is the supplier and purchaser of products and services in relation to a number of other manufacturing industry divisions, e.g. the chemical and plastics industry, manufacture of basic metals, health care and other related industries and services. In terms of selected economic indicators, it can be stated that development is positive in all groups of this division and that value added, labour productivity and the number of employees are increasing. Excep- tions are CZ-NACE 32.1 Manufacture of jewellery, bijouterie and related articles and CZ-NACE 32.3 Manu- facture of sports goods, where the number of employees has decreased. Nevertheless, here too, we can see an improving situation. Division 32, Other manufacturing, has a particular problem in a small number of investment activities that would be aimed at technology development and research and development, which is reflected in the currently low demand for high-skill professions. This is mostly due to limited financial resources of organisations. In terms of R&D expenditures, this division has a low level of R&D funding. Due to productivity gains, the lay-off of redundant workers, for which new jobs will be needed, is still expected. According to CZSO data, the year-on-year growth in industrial production in this section reaches stable, slightly positive results. An important group of divisions are enterprises in CZ-NACE 32.5 Manufacture of medical and dental instruments and supplies. In this industry, high demands are placed on product quality, surface treatment and hygiene and these products are irreplaceable in terms of quality of life. Companies are forced to innovate and come up with better quality products. Czech companies are among the top manufacturers in the market. Foreign trade is key; for example, Linet operates abroad through 15 subsidiaries, such as in the UK, the Netherlands, France, Sweden and the US. Together with Slovakia, the Czech Republic is the fastest growing exporter of toys in Europe. Not only brick-and-mortar shops, but increasingly also online shops are important for toy manufacturers. The Czech Republic owes its leading position in particular to the gradual relocation of Lego kits to its territory. Plastic kits account for more than two thirds of Czech toy exports. Czech toy makers also have a strong position in exports of dolls and miniature models. According to the Toy and Game Association, most of the parts and semi-finished products are manufactured elsewhere in the world and are assembled, packaged and distributed in the Czech Republic. The toy manufacturer market is formed on the one hand by large producers owned by foreign companies and on the other hand by traditional Czech manufacturers, including the family company Dino Toys. During the spring of 2018, Dino Toys took over TOPA, a producer of wooden picture blocks, and the takeover of the plant was a culmination of a long-term business relationship between the two entities. There is also demand for Dino Toys products abroad. The most successful items abroad are mainly games and toys with the Little Mole licence or children’s puzzles licensed by Disney.

192 22. CZ-NACE 32 – OTHER MANUFACTURING

22.3 MAIN ECONOMIC INDICATORS Chart 22.3.1 – Main economic indicators of CZ-NACE 32 (2008 = 100%)

10 000 45 000 Number of units Average number of employees 9 000 40 000

8 000 35 000 7 000 30 000 6 000 25 000 5 000

9 472 20 000 9 235 8 952 41 360 8 918 41 018 8 778 8 656 8 601 8 575

4 000 8 544 39 468 38 906 38 600 38 007 37 767 37 495 37 384 8 028 37 104 36 818 7 814 15 000 3 000 2 000 10 000 1 000 5 000 0 0 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

80 000 70 000 Sales (CZK m) Value added (CZK m) Average monthly wage (CZK) 70 000 60 000 Labour productivity from the VA (CZK/month)*

60 000 50 000 50 000 40 000 40 000 30 000 70 855 60 004 67 764

30 000 24 243 66 192 57 423 56 469 22 996 63 106 21 788 52 949 52 572 59 813 19 926 50 117 19 571 55 246 18 487 47 699 47 619 17 574 53 011 17 521 45 864 17 145 20 000 16 362 44 233 16 305 49 667 48 452 47 422

20 000 41 015 45 545 27 689

10 000 26 055 10 000 24 351 22 766 21 742 21 462 20 774 19 912 19 744 18 895 17 960 0 0 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Chart 22.3.2 – Price developments in CZ-CPA 32 Chart 22.3.3 – Spread (ROE – re) CZ-NACE 32 (%) (2005 = 100 %)

140 20

130 18

120 16 14 110 12 100 10 90 8 80 6

70 4

60 2

50 0 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 32 105,0 107,1 107,5 108,3 108,5 108,5 108,0 108,5 109,7 110,6 111,7 Spread 4,34 7,65 6,62 4,96 5,08 4,14 2,27 3,17 5,98 5,00 2,18 32.4 104,3 100,6 99,9 100,3 101,4 102,1 98,3 97,7 99,3 101,2 101,3 rf 4,55 4,67 3,71 3,79 2,31 2,26 1,58 0,58 0,43 0,98 1,98 32.5 98,7 101,6 102,3 102,5 102,0 101,5 102,6 102,8 103,5 103,2 104,1 ROE 16,43 18,62 15,93 15,20 15,82 14,35 13,78 14,16 15,92 15,05 13,25 32.9 107,9 113,1 113,5 116,3 117,2 117,2 118,3 121,6 123,1 125,2 127,8 re 12,10 10,97 9,31 10,25 10,74 10,21 11,50 10,98 9,94 10,04 11,07

Source: CZSO, MIT calculations Source: CZSO, MIT calculations Note: Groups 32.1, 32.2 and 32.3 are not monitored.

193

22.4 FOREIGN TRADE

22.4.1 DEVELOPMENT OF FOREIGN TRADE Exports, imports and the balance of foreign trade in CZ-CPA 32 commodities saw favourable development until 2016. The following year, the foreign trade weakened. In 2018, all indicators recorded a year-on- year increase and exports reached the highest value of CZK 128 billion (see Chart 22.4.1). Imports grew, but faster than commodity exports that year. The most important item of the section’s exports was toys, accounting for 50%. About a quarter of the division’s exports were made up of products in Group 32.5.

Chart 22.4.1 – Exports, imports and foreign trade balance in products by CZ-CPA 32 (CZK million)

140 000 Export Import Trade balance 120 000

100 000

80 000

60 000 127 594 126 479 122 886 118 219

40 000 106 774 92 102 85 540 81 638 81 404 81 319 73 975 71 272 67 029 65 912 58 440 55 261 20 000 54 751 51 727 50 485 44 841 44 244 44 569 42 055 41 567 40 862 33 662 16 544 0 10 692 19 544 26 653 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Pramen: ČSÚ, data k 8. 4. 2019

22.4.2 TERRITORIAL STRUCTURE OF FOREIGN TRADE The largest foreign buyer of CZ-CPA 32 products is traditionally Germany, with an export share of 33% (Chart 22.4.2). Other major buyers include Austria, Slovakia and the United Kingdom. Most goods were imported from China and Germany.

Chart 22.4.2 – Foreign trade in CZ-CPA 32 products

Import territories in 2018 Export territories in 2018

China other 20% 28% other Germany 32% 33%

Russia 4% Germany 18% Italy Denmark 4% Austria 3% 8% Hungary Slovakia USA Austria Italy 7% Poland United 7% 5% 7% 4% Poland 5% France Kingdom 4% 5% 6% Source: CZSO, data as of 8 April 2019

194

22. CZ-NACE 32 – OTHER MANUFACTURING

22.5 RESEARCH, DEVELOPMENT AND INNOVATION Expenditure on R&D in CZ-NACE 32 in 2017 amounted to CZK 567 million, up CZK 10 million from 2016 (see Chart 22.5.1). The bulk of R&D expenditure was related to business resources. The R&D accounts for 1.74% of the total expenditure in division 32. The year-on-year increase by six enterprises is also apparent in the total number of enterprises in the division. The share of researchers (FTE) in CZ-NACE 32 in the total number of researchers in the manufacturing industry divisions was 2.86%, i.e. 42 researchers per year (average for 2013–2017). Within the National RIS3 Strategy, Other manufacturing is an R&D area that receives below average support. In the period from 1 January 2015 to 31 October 2018, 106 projects falling within the National RIS3 Strategy were approved under the OP EIC for implementation with planned total aid (EU, public and private Czech funds) of CZK 0.99 billion, of which CZK 0.42 billion was an EU grant. The aid was mainly aimed at strengthening the R&D capacity of enterprises (73%) and, to a lesser extent, cooperation between research organisations and enterprises (17%). The substantive content of projects is mainly in line with the application sector Ensuring a healthy and quality environment and the efficient use of natural resources (60 projects), followed by Traditional cultural and creative industries (24 projects) and Pharmaceuticals, biotechnology, medical devices, life sciences (22 projects). In the reference period, projects for Other manufacturing were submitted by large enterprises as well as SMEs. As regards European support for applicants/beneficiaries, the largest EU support was granted to MZ Liberec, a.s. for SMEs (total expenditure CZK 113 million, of which EU grant was CZK 49 million) and BioVendor - Laboratorní medicína a.s. for large enterprises (total expenditure CZK 104 million, of which EU grant was CZK 54 million). Enterprises in division 32 which benefited from a significant amount of targeted support from the State budget under the national programmes of the Ministry of Industry and Trade (TIP, TRIO), MEYS EUREKA( CZ, INTER-EXCELLENCE), MoH (Programme for the Promotion of Health Applied Research 2015-2022) and TA CR (ALFA, Competence Centres, DELTA, EPSILON, ZÉTA) in 2007–2018 include ProSpon, spol. s.r.o., Med- ical Technologies CZ a.s., L I N E T spol. s r.o., MEDIN, a.s. and BTL zdravotnická technika, a.s. There are two companies involved in Horizon 2020 projects in CZ-NACE 32. Nanopharma, a.s. is a member of three projects (CanBioSe, NanoSurf, NEMOSINE) and WoodcompPropellers s.r.o. is participating in the ARGOS project.

Chart 22.5.1 – R&D expenditure (CZK mil.) and the number of enterprises with R&D in CZ-NACE 32

EU+other international organisations Number of enterprises Entrepreneurs Government+universities 567 600 557 60 11 11 500 50 452 403 358 46 356 400 40 345 22 7 289 18 6 300 30 8 516 521 53 51 314 49 47 47 248 44 200 282 305 348 20 42 41 214

100 10

67 92 92 57 44 36 0 32 30 0 2010 2011 2012 2013 2014 2015 2016 2017 2010 2011 2012 2013 2014 2015 2016 2017

Source: CZSO, MIT calculations

195

22.6 SUMMARY AND PERSPECTIVE OF THE DIVISION The CZ-NACE 32 division is characterised by a very wide range of products, often diametrically different in terms of production technology and final use. This division has a particular problem in a small number of investment activities that would be aimed at technology development and research and development, which is reflected in the currently low demand for high-skill professions. CZ-NACE 32.5 saw positive development in 2018. Czech companies manufacturing healthcare technology are successful in Europe, the Americas and the Far East, and with the EGAP insurance tools, they also have the prospect of further expansion. Overall, this group accounts for almost 30% of the division‘s foreign trade turnover. Among the most successful companies is LINET spol. s r.o. As the company says, it has had a record year. It produced the largest number of medical beds in history – 110 thousand. Its revenues will range between EUR 270 million and EUR 280 million, and there is a contract which could bring Linet closer to its dream goal of one-billion revenues. Although CZ-NACE 32.4 Manufacture of games and toys is among the groups with the best economic results, in 2018 there was a drop in revenues, value added and exports. For example, toy manufacturer Ravensburger Karton from Polička achieves year-on-year stable results both in terms of net profit and sales, and as stated in its annual report, most of its production is exported. Like other employers, Ravensburger too is struggling with labour shortage in manual positions. Kladno’s Lego has recently been struggling with slowing growth or even declining sales in Western Europe and the US. The problem is the production and sale of products infringing on copyright. Last year, however, the Danish toy manufacturer won another lawsuit in China with companies copying its kits. This group accounts for almost 50% of CZ-NACE 32 foreign trade turnover. Despite this fluctuation, these results indicate good prospects even for the nearest future. Producers of musical instruments (CZ-NACE 32.2) were also successful in 2018. The number of their orders (especially from abroad) is increasing, which is also true of Petrof spol. s r.o., the traditional producers of pianinos and pianos from Hradec Králové. Throughout its history, Petrof has produced over 630,000 instruments. Eighty per cent are still handmade. The company exports 94% of the two thousand items it produces. Last year alone, Petrof’s turnover exceeded CZK 250 million. The company exports musical instruments to more than a dozen countries, and in response to the late payment culture in Western markets, it has shifted its attention mainly to China, Russia, and also to Japan, Singapore and Iran. In order for CZ-NACE 32 to maintain or strengthen its competitiveness, it is necessary that producers continuously invest in modern technology, innovate their production and seek new opportunities for -for eign capital entry and investment incentives. They should focus on the renewal or expansion of existing contacts, mainly towards the East and third countries. They should of course participate in international exhibitions and fairs. In this respect, they should also use MIT’s support. A continuing challenge for CZ-NACE 32 is the import of cheap, low-quality and often harmful to healt products from competitors, which is particularly true of toys, where the Czech Trade Inspectorate regularly identifies most shortcomings.

196 PROCESSORS

PROCESSORS Prepared at MIT by: Section of Digitization and Innovation, Section of Industry and Enterpreneurship External cooperation: Czech Statistical Office, Ministry of Agriculture (MoA), Institute of Agricultural Economics and Information (ÚZEI). Contrinutors: Confederation of Industry of the Czech Republic, Food Chamber of the Czech Republic, Czech Beer and Malt Industry Association, Association of the Textile-Clothing–Leather Industry, Forestry and Woodworking Industry Association, Association of Czech Pulp and Paper Industry, Association of the Chemical Industry of the Czech Republic, Association of the Glass and Ceramics Industry of the Czech Republic, Union of Glass and Fashion Jewellery Producers, Steel Union, Electrical and Electronic Association of the Czech Republic, Association of Engineering Technology, Automotive IndustryAssociation, Association of the Czech Railway Industry, Association ofAerospace Manufacturers of the Czech Republic, Association of Czech Furniture Manufacturers. Reviewrs: Ing. Martin Hronza, Ing. Ivan Neumaier, Ing. Martin Lešek, Ing. Alena Fedorová, Ing. Petra Truchlá and Ing. Petr Mervart

197 PANORAMA OF THE MANUFACTURING INDUSTRY OF THE CZECH REPUBLIC 2018 Published by Ministry of Industry and Trade of the Czech Republic, Na Františku 32, 110 15 Praha 1, CZ Number of pages 198 First edition, Prague 2019 Print: Calamarus s.r.o., Pod Táborem 54/10, 190 00 Praha 9, CZ © Ministry of Indystry and Trade of the Czech Republic, 2019 ISBN 978-80-906942-7-9