Panorama of the Manufacturing Industry of the Czech Republic 2017 Isbn 978-80-906942-5-5 Minister of Industry and Trade Introductory Note

PANORAMA OF THE MANUFACTURING INDUSTRY OF THE CZECH REPUBLIC 2017 ISBN 978-80-906942-5-5 MINISTER OF INDUSTRY AND TRADE INTRODUCTORY NOTE

INTRODUCTORY NOTE BY THE MINISTER

Dear readers, As Minister of Industry and Trade, it gives me a great pleasure to write a few words for the twenty-first edition of the “Panorama of the Manufacturing Industry of the Czech Republic”. It has been prepared by the Ministry of Industry and Trade in close cooperation with the Czech Statistical Office and with the contribution of the Ministry of Agriculture, the Confederation of Industry and selected sectoral associations. The publication describes individual branches of the Czech manufacturing industry. It has been prepared in a breakdown into groups of CZ-NACE activity classification and foreign trade classification with CZ-CPA commodities. It aims to provide readers with an overview of the current situation in individual industries and their sectors. It covers the period 2008–2017. In 2017, the performance of the Czech economy continued to gain strength while boosted by positive expectations of both households and businesses. Confidence indicators reflected general expectations in terms of growing production and investment activity, which were fulfilled despite the rising labour market tensions. High economic activity was also beneficial for households, which benefited from accelerating wage growth and were not afraid to spend. Foreign demand also had a share in balanced development and its growth was reflected in the results of the external sector, which contributed to a higher economic performance by the year-on-year improvement in the positive balance of foreign trade in goods and services. In the national economy, gross domestic product grew by 4.3% year-on-year and extended the growth to the fourth consecutive year. As in the previous three years, the main source of expenditure was domestic demand, which saw a stable consumption growth, strengthened by impact of investments. Households spending has been continuously increasing since the beginning of 2013 and culminated last year by 4.3% year-on-year growth. In 2017, the industrial production continued to grow for the fourth year in a row and showed 6.5% year-on-year increase. Also this year, when we commemorate the 100th anniversary of the establishment of independent Czechoslovakia, the industry has retained its privileged position in our economy, which is exceptional on European scale. The long standing tradition of industrial production often opens doors for our entrepreneurs to new foreign markets. But there is still much to be done to rank among the global industrial leaders. The Government and the Ministry of Industry and Trade committed themselves to do their best to enhance the business environment and simplify the business conditions as much as possible. Digitization must be applied wherever needed and all the tedious repetitive tasks must be fully automated. Entrepreneurs, as well as the general public, need electronic, modern and clear communication with public administration. We are also preparing a strategic investment plan to further expand and improve our infrastructure and measures to be taken in order to increase our competitiveness. Dear readers, I believe that this publication, which is unique by providing manufacturing industry data structured by branches, will be an important and useful source of information for your needs. There is none other well- arranged statistical overview available in the Czech Republic than this one, and many years of experience show that such a publication is in great demand and use. The Panorama of the Czech Manufacturing Industry, accompanied by an interactive viewer of economic indicators on the Ministry’s website, provides the professional public both in the Czech Republic and abroad with the results in individual branches of the manufacturing industry over the last period while offering the opportunity to present the achievements of individual sectors on an international scale. I hope you enjoy reading it. Ing. Marta Nováková Minister of Industry and Trade

3 PRESIDENT OF THE CONFEDERATION OF INDUSTRY INTRODUCTORY NOTE

INTRODUCTORY NOTE OF THE PRESIDENT

Dear Readers of the Panorama, Industry is a crucial sector for our economy and for the whole Czech Republic, which has been experiencing economic growth for the fifth year in a row. 2017 was a particularly record year for the Czech economy, when business grew across industries and so did corporate revenues, nominal values of contracts as well as salaries and wages that were accompanied by rising input prices and the overall growth of price levels. The positive effects of the economic boom implying a high GDP growth in 2017 showed themselves in multiple fields. The most visible one is low unemployment, which is good news for employees, but less good for employers, especially for those who face an acute shortage of employees, being a barrier to further growth. That is why in some cases, businesses have to reject new orders. Economic growth and high employment imply a higher tax collection and a higher amount earned from social security premiums. In this way, economic policy makers can increase public salaries, index pensions, and generally increase spending. We agree with these objectives, but this increased spending will need to be financed even in the future when the economy may not see so much growth and the tax collection may not be so dazzling. The State should also think about and support the business environment as a source of added value. Good economic development in 2017 gave companies and the State the means and opportunity to invest. Employers and the State must not miss this opportunity. The uncompromising market pushes companies towards innovation and streamlining of production and all processes. If companies do not do so, they can go bankrupt or disappear from the market. I’m glad to see positive numbers on the value of investments last year, but we still have space for improvement. We need long-term investments linked to innovation. Innovation is vital and we are trying, for example, to raise awareness among companies about the possibilities of the digital economy and the reality facing many companies in the world and in the Czech Republic. New orders should definitely not be taken for granted. As entrepreneurs, we must be able to deal with a number of obstacles. Affecting our export-oriented policy, the koruna appreciated, and although the interest rates remained low, they started growing. In a number of industries, wage growth already exceeds productivity growth. The price of oil has not dropped. The European economy is not growing at a dizzying pace, but we are still able to maintain our market share and successfully export. However, we are facing challenges associated with the ability to respond to the most up-to-date trends based on data and individualisation of production, which lead to an increase in labour productivity. Technologies such as artificial intelligence, virtual and augmented reality or blockchain are already finding their way to companies and their development can be very fast. In order to succeed, we also need a stable and supportive environment. That is why businesses and citizens must constantly encourage their Government to try to solve existing problems and look into the future. We should ask, as well as many years before, how to ensure faster completion of the motorway network (because transport is the blood of the economy), when there will there be sufficient coverage by high-speed Internet (because the flow of data is unconditionally important for today’s economy and the importance of this factor will continue to grow), when the State administration will be digitized, at least at the level allowed by current progress (effective digitization saves time and money for the State and its inhabitants) and when we will finally start using euro in our open and export-oriented economy. Ing. Jaroslav Hanák President of the Confederation of Industry of the Czech Republic

4 PRESIDENT OF THE CZECH STATISTICAL OFFICE INTRODUCTORY NOTE

INTRODUCTORY NOTE OF THE PRESIDENT

Dear readers, The publication of the Panorama of the Manufacturing Industry, the latest issue of which you have on your hands now, is one of the most traditional analytical outcomes. The current issue brings detailed information on the development of respective industries, compiled by the Ministry of Industry and Trade on the basis of statistics from the Czech Statistical Office and other data sources, already for the twenty-first time in a row. As in previous years, the overall picture is positive. The year 2017 was an extremely successful one for the Czech industry. The industry growth was supported not only by foreign demand, yet also by domestic one. Current data of national accounts confirm that the manufacturing industry still remains one of the main instigators of the domestic economy growth and gives work to approximately 1.3 million employees. The gross value added the manufacturing industry generated rose by respectful 10.5%, year-on-year, in 2017, and the industry thus became an unrivalled driving force of the domestic economic growth. Results of short-term sectoral statistics show that the total industrial production increased by 6.5% in 2017, while it was right the production of the manufacturing industry that grew (+7.0%). The current situation is a climax of a long-term development. The production growth rate of the manufacturing industry was the highest in the last six years, by 11.3% higher compared to that in 2015, and even more than a third higher compared to that in 2010. In 2017, among the most successful economic activities, which contributed most to the growth of the manufacturing industry, there were the manufacture of motor vehicles, trailers and semi-trailers with a growth of 9.6% that was by far the most important, followed by the manufacture of fabricated metal products (+8.3%), manufacture of machinery and equipment (+8.8%), manufacture of rubber and plastic products (+8.0%), and manufacture of electrical equipment (+8.3%). From the standpoint of the manufacturing industry overall development, it is undoubtedly the manufacture of motor vehicles, trailers and semi-trailers that plays the crucial role, as a number of statistical data illustrate. In 2017 the production of these economic activities grew by more than a half compared to that in 2010 and reached a record-breaking value of 1.4 million cars. A significant growth in other subcontractor economic activities, such as the manufacture of rubber and plastic products and the manufacture of electrical equipment, is just linked to the automotive industry progress. However, in the light of these large numbers, we should not forget economic activities that may seem less important. Yet the Czech industry features a very rich and varied structure covering all economic activities of the economic classifications in use, which is a characteristic not common in every country. The publication of the Panorama of the Manufacturing Industry provides documents on this in a more than lucid way and I believe it will find a number of satisfied users.

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

5 6 CONTENTS

Contents

MINISTER OF INDUSTRY AND TRADE 3 PRESIDENT OF THE CONFEDERATION OF INDUSTRY 4 PRESIDENT OF THE CZECH STATISTICAL OFFICE 5 CZECH BEER AND MALT INDUSTRY ASSOCIATION 11 ASSOCIATION OF TEXTILE-CLOTHING–LEATHER INDUSTRY 12 FORESTRY AND WOODWORKING INDUSTRY ASSOCIATION 13 ASSOCIATION OF THE PULP AND PAPER INDUSTRY 14 ASSOCIATION OF CHEMICAL INDUSTRY OF THE CR 15 ASSOCIATION OF THE GLASS AND CERAMIC INDUSTRY OF THE CZECH REPUBLIC 16 UNION OF GLASS AND FASHION JEWELERY PRODUCERS 17 CZECH CEMENT MANUFACTURERS ASSOCIATION 18 ASSOCIATION OF FOUNDRIES OF THE CZECH REPUBLIC 19 STEEL UNION 20 ASSOCIATION OF MANUFACTURERS AND SUPPLIERS OF MEDICAL DEVICES (AMSMD) 21 ELECTRICAL AND ELECTRONIC ASSOCIATION OF THE CZECH REPUBLIC 22 ASSOCIATION OF ENGINEERING TECHNOLOGY 23 AUTOMOTIVE INDUSTRY 24 ASSOCIATION OF AEROSPACE MANUFACTURERS OF THE CZECH REPUBLIC 25 ASSOCIATION OF THE CZECH RAILWAY INDUSTRY 26 ASSOCIATION OF CZECH FURNITURE MANUFACTURERS 27 METHODOLOGY 29 SOURCE OF DATA FOR THE INDUSTRY PANORAMA 29 CHAPTER STRUCTURE 34 INFA METHODOLOGY 35 LIST OF ABBREVIATIONS 38 1. MANUFACTURING INDUSTRY 41 1.1 PRODUCTION CHARACTERISTICS 41 1.2 INVESTMENT, R&D EXPENDITURES AND INNOVATIONS 52 1.3 PRICES 59 1.4 FOREIGN TRADE 60 1.5 ECONOMIC VALUE ADDED 63 1.6 SUMMARY AND PERSPECTIVES OF THE MANUFACTURING INDUSTRY 64 2. CZ-NACE 10 MANUFACTURE OF FOOD PRODUCTS 67 2.1 DIVISION CHARACTERISTIC 67 2.2 DIVISION DEVELOPMENT 68 2.3 MAIN ECONOMIC INDICATORS 69 2.4 FOREIGN TRADE 71 2.5 RESEARCH AND DEVELOPMENT 72 2.6 DIVISION SUMMARY AND PROSPECTS 73 3. CZ-NACE 11 MANUFACTURE OF BEVERAGES 75 3.1 DIVISION CHARACTERISTIC 75 3.2 DIVISION DEVELOPMENT 75 3.3 MAIN ECONOMIC INDICATORS 76 3.4 FOREIGN TRADE 78 3.5 RESEARCH AND DEVELOPMENT 79 3.6 DIVISION SUMMARY AND PROSPECTS 80

7 4. CZ-NACE 13 MANUFACTURE OF TEXTILES 81 4.1 DIVISION CHARACTERISTIC 81 4.2 DIVISION DEVELOPMENT 81 4.3 MAIN ECONOMIC INDICATORS 82 4.4 FOREIGN TRADE 84 4.5 RESEARCH AND DEVELOPMENT 84 4.6 DIVISION SUMMARY AND PROSPECTS 85 5. CZ-NACE 14 MANUFACTURE OF WEARING APPAREL 89 5.1 DIVISION CHARACTERISTIC 89 5.2 DIVISION DEVELOPMENT 89 5.3 MAIN ECONOMIC INDICATORS 90 5.4 FOREIGN TRADE 92 5.5 RESEARCH AND DEVELOPMENT 93 5.6 DIVISION SUMMARY AND PROSPECTS 93 6. CZ-NACE 15 MANUFACTURE OF LEATHER AND RELATED PRODUCTS 95 6.1 DIVISION CHARACTERISTIC 95 6.2 DIVISION DEVELOPMENT 95 6.3 MAIN ECONOMIC INDICATORS 96 6.4 FOREIGN TRADE 97 6.5 RESEARCH AND DEVELOPMENT 98 6.6 DIVISION SUMMARY AND PROSPECTS 99 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 DIVISION CHARACTERISTIC 101 7.2 DIVISION DEVELOPMENT 102 7.3 MAIN ECONOMIC INDICATORS 102 7.4 FOREIGN TRADE 104 7.5 RESEARCH AND DEVELOPMENT 105 7.6 DIVISION SUMMARY AND PROSPECTS 106 8. CZ-NACE 17 MANUFACTURE OF PAPER AND PAPER PRODUCTS 107 8.1 DIVISION CHARACTERISTIC 107 8.2 DIVISION DEVELOPMENT 107 8.3 MAIN ECONOMIC INDICATORS 108 8.4 FOREIGN TRADE 110 8.5 RESEARCH AND DEVELOPMENT 111 8.6 DIVISION SUMMARY AND PROSPECTS 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 113 9.4 FOREIGN TRADE 115 9.5 RESEARCH AND DEVELOPMENT 116 9.6 SUMMARY AND PERSPECTIVE OF THE DIVISION 117 10. CZ-NACE 20 MANUFACTURE OF CHEMICALS AND CHEMICAL PRODUCTS 119 10.1 DIVISION CHARACTERISTIC 119 10.2 DIVISION DEVELOPMENT 120 10.3 MAIN ECONOMIC INDICATORS 121 10.4 FOREIGN TRADE 123 10.5 RESEARCH AND DEVELOPMENT 124 10.6 DIVISION SUMMARY AND PROSPECTS 125

8 CONTENTS

11. CZ-NACE 21 MANUFACTURE OF BASIC PHARMACEUTICAL PRODUCTS AND PHARMACEUTICAL PREPARATIONS 127 11.1 DIVISION CHARACTERISTIC 127 11.2 DIVISION DEVELOPMENT 127 11.3 MAIN ECONOMIC INDICATORS 128 11.4 FOREIGN TRADE 130 11.5 RESEARCH AND DEVELOPMENT 131 10.6 DIVISION SUMMARY AND PROSPECTS 132 12. CZ-NACE 22 MANUFACTURE OF RUBBER AND PLASTIC PRODUCTS 133 12.1 DIVISION CHARACTERISTIC 133 12.2 DIVISION DEVELOPMENT 134 12.3 MAIN ECONOMIC INDICATORS 135 12.4 FOREIGN TRADE 136 12.5 RESEARCH AND DEVELOPMENT 137 12.6 DIVISION SUMMARY AND PROSPECTS 138 13. CZ-NACE 23 MANUFACTURE OF OTHER NON-METALLIC MINERAL PRODUCTS 141 13.1 DIVISION CHARACTERISTIC 141 13.2 DIVISION DEVELOPMENT 142 13.3 MAIN ECONOMIC INDICATORS 143 13.4 FOREIGN TRADE 144 13.5 RESEARCH AND DEVELOPMENT 145 13.6 DIVISION SUMMARY AND PROSPECTS 146 14. CZ-NACE 24 MANUFACTURE OF BASIC METALS 149 14.1 CHARACTERISTICS OF THE DIVISION 149 14.2 DIVISION DEVELOPMENT 149 14.3 MAIN ECONOMIC INDICATORS 150 14.4 FOREIGN TRADE 152 14.5 RESEARCH AND DEVELOPMENT 153 14.6 DIVISION SUMMARY AND PROSPECTS 154 15. CZ-NACE 25 MANUFACTURE OF FABRICATED METAL PRODUCTS, EXCEPT MACHINERY AND EQUIPMENT 155 15.1 DIVISION CHARACTERISTIC 155 15.2 DIVISION DEVELOPMENT 156 15.3 MAIN ECONOMIC INDICATORS 156 15.4 FOREIGN TRADE 158 15.5 RESEARCH AND DEVELOPMENT 159 15.6 DIVISION SUMMARY AND PROSPECTS 160 16. CZ-NACE 26 MANUFACTURE OF COMPUTER, ELECTRONIC AND OPTICAL PRODUCTS 161 16.1 DIVISION CHARACTERISTIC 161 16.2 DIVISION DEVELOPMENT 162 16.3 MAIN ECONOMIC INDICATORS 162 16.4 FOREIGN TRADE 164 16.5 RESEARCH AND DEVELOPMENT 164 16.6 DIVISION SUMMARY AND PERSPECTS 166 17. CZ-NACE 27 MANUFACTURE OF ELECTRICAL EQUIPMENT 167 17.1 DIVISION CHARACTERISTIC 167 17.2 DIVISION DEVELOPMENT 168 17.3 MAIN ECONOMIC INDICATORS 168 17.4 FOREIGN TRADE 170 17.5 RESEARCH AND DEVELOPMENT 171 17.6 DIVISION SUMMARY AND PROSPECTS 172

9 18. CZ-NACE 28 MANUFACTURE OF MACHINERY AND EQUIPMENT N.E.C. 173 18.1 DIVISION CHARACTERISTIC 173 18.2 DIVISION DEVELOPMENT 174 18.3 MAIN ECONOMIC INDICATORS 174 18.4 FOREIGN TRADE 176 18.5 RESEARCH AND DEVELOPMENT 176 18.6 DIVISION SUMMARY AND PROSPECTS 178 19. CZ-NACE 29 MANUFACTURE OF MOTOR VEHICLES, TRAILERS AND SEMI-TRAILERS 179 19.1 DIVISION CHARACTERISTIC 179 19.2 DIVISION DEVELOPMENT 180 19.3 MAIN ECONOMIC INDICATORS 181 19.4 FOREIGN TRADE 183 19.5 RESEARCH AND DEVELOPMENT 184 19.6 DIVISION SUMMARY AND PROSPECTS 185 20. CZ-NACE 30 MANUFACTURE OF OTHER TRANSPORT EQUIPMENT 189 20.1 DIVISION CHARACTERISTIC 189 20.2 DIVISION DEVELOPMENT 190 20.3 MAIN ECONOMIC INDICATORS 191 20.4 FOREIGN TRADE 193 20.5 RESEARCH AND DEVELOPMENT 194 20.6 DIVISION SUMMARY AND PROSPECTS 195 21. CZ-NACE 31 MANUFACTURE OF FURNITURE 197 21.1 DIVISION CHARACTERISTIC 197 21.2 DIVISION DEVELOPMENT 197 21.3 MAIN ECONOMIC INDICATORS 198 21.4 FOREIGN TRADE 199 21.5 RESEARCH AND DEVELOPMENT 200 21.6 DIVISION SUMMARY AND PROSPECTS 201 22. CZ-NACE 32 OTHER MANUFACTURING 203 22.1 CHARACTERISTICS OF THE DIVISION 203 22.2 DIVISION DEVELOPMENT 204 22.3 MAIN ECONOMIC INDICATORS 204 22.4 FOREIGN TRADE 205 22.5 RESEARCH AND DEVELOPMENT 206 22.6 DIVISION SUMMARY AND PROSPECTS 207

10 CZECH BEER AND MALT INDUSTRY ASSOCIATION

CZECH BEER AND MALT INDUSTRY ASSOCIATION Drinking beer, talking about life, politics and the 100-year anniversary of our country When our ancestors founded independent Czechoslovakia a hundred years ago, beer was the witness to perhaps all the excited debates across the whole country. A glass of the golden drink raised to signify consent, joy of meeting someone, perhaps even as a sign of respect and remembrance of someone who has left us forever, has always been part of our days both ordinary and festive. The beer-making and beer-drinking tradition in the Czech lands dates back more than a millennium. So it makes me a little bit sad to see it disappearing from our lives. I’m sure it’s not because we would stop liking Czech beer. We just do not drink it in a pub, discussing everything from politics to childhood diseases and where a skilled craftsman was more easily to be found than in the Yellow Pages. On the other hand, I am delighted with the interest in beer-making in the Czech Republic. This is evidenced by hundreds of new microbreweries, whether those following on a previous tradition or those built on a green field. Doing business in the Czech Republic in a field which everyone claims to understand is not easy. However, my lifelong experience tells me that beer is exactly the product where you can recognize how much care and love it has been given. Honest work is often rewarded. I personally know dozens, maybe hundreds of professionals who give the Czech beer industry excellent reputation. Still, our industry suffers from a lack of qualified people. Several microbreweries can share one brewmaster for a while, but it is difficult to achieve sustainable quality, not to mention the potential for further development. Another unfavourable trend is the widening gap between consumption of draught and packaged beer. Currently, this ratio is 38 to 62 percent, while a couple of years ago it was exactly the opposite. Changing lifestyle, speed of our times together with regulations is reflected in the brewing industry. However, I am glad that more and more of us are returning to the traditional Czech lager. Its majority share means we are closer to brewing countries such as Germany, Austria or Belgium. A few years ago, people put beer among the seven wonders of the Czech Republic in one poll. Beer represents the Czech skills abroad, where it is increasingly in demand. The number of Czech pubs abroad is growing, and they are able to induce the neighbourly atmosphere even in very remote countries. The export of traditional Czech culture is not a specialty of only large breweries, but also medium-sized and small breweries. Therefore, exports have been growing steadily since 2011. In total, 4.6 million hectoliters were exported from the Czech Republic last year, up 4.5 percent year-on-year. Most beer was exported to Slovakia, Germany and Poland. Exports to non-EU countries increase by 18% year-on-year, the largest consumers of Czech beer being Russia, South Korea and the USA. However, export is not a cure for all, and although the condition of Czech breweries is very good, the total beer production dropped by 0.7 percent last year and the production for the domestic market even reduced by 2.1 percent. While nearly 16.4 million hectoliters of beer were consumed in the Czech Republic two years ago, last year it was only 16 million hectoliters. St. Wenceslas is the patron of brewers. On the eve of his day, we will celebrate already the sixth Days of Czech beer, and I would like to invite you to celebrate it with us. Dozens of breweries, from the smallest to the largest ones, will prepare a wide variety of St. Wenceslas specials. You can enjoy yourself in hundreds of taverns, pubs and restaurants, which will decide to join the biggest beer holiday in the Czech Republic. Beautiful summer to all. And God bless, friends!

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

11 ASSOCIATION OF TEXTILE - CLOTHING - LEATHER INDUSTRY

ASSOCIATION OF TEXTILE - CLOTHING - LEATHER INDUSTRY At present, the Czech textile and clothing industry is mainly represented by the production of technical textiles. The focus on the production of technical textiles gives companies a fairly wide range of opportunities in terms of sales and development, whether they are textiles for the automotive and aviation industries or for healthcare, construction, agriculture sectors and other fields of human activity. In 2017, the revenues of companies with more than twenty employees were at CZK 55.25 billion. As regards textile and clothing exports, it is still a relatively varied mix of goods composed of both 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 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 Textile. Thesetwo organizations are aimed at supporting technical development and innovation in the textile industry. For example, the cluster has helped to organise the development of Prowell, a new material which is unique in its design using two different materials – cotton and polyester, which give the fabric new properties, its advantages being excellent absorbency, warmth, fast drying and low volume of the textile. Other textiles include Nanomembrane, a brand new nanofibre membrane. This membrane has unique properties that are unrivalled among other membranes in the world and is used for sports and outdoor activities. Textiles intended for health care include anti-decubitus bed mattresses or a new type of surgical thread (visible by NMR imaging) suitable for permanent applications as an in-vivo medical equipment. We can also mention a new inspection system for assessing colour defects of finished fabrics and equipment designed to measure the characteristics of spool coils intended for dyeing in pressure machines. In addition to the above-mentioned organizations, it is necessary to also mention the Faculty of Textile, Technical University of Liberec (FT TUL). 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. Furthermore, the areas of interest of this school include interdisciplinary use of textiles, the use of optical fibres and shape memory materials for technical products, the development of textile sensors and sensors suitable for use in textiles. The faculty is also relatively well-known for research and development in the field of nanotechnology utilization 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 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 nation-wide sectoral agreement was 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 Hradec Králové Region, the Zlín Region, the South Moravian Region and the Olomouc 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 Pilsen and Vysočina regions. In the textile and clothing industry (as in other consumer industries), large one-off contracts are not usually concluded. This sector is rather characteristic for a number of smaller orders. The textile and clothing industries grew last year for the eighth consecutive year and it can be assumed that barring unexpected events, they will continue to grow in the years to come, especially in the context of economic recovery. Among the most important factors that may negatively affect the industry are the lack of qualified employees, increase in production costs and the appreciation of the Czech koruna. 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 Textile - Clothing - Leather Industry

12 FORESTRY AND WOODWORKING INDUSTRY ASSOCIATION

FORESTRY AND WOODWORKING INDUSTRY ASSOCIATION

In the last two years, forestry and woodworking enterprises in the Czech Republic have faced ongoing bark beetle infestation and wind calamity, making it a period of excess supply of basic spruce material for production and a great lack of other, especially deciduous varieties. In the third quarter of 2017, bark beetle infestation peaked, with the volumes of wood processed in forests exceeding the capacities of the processing plants. Thanks to a significant drop in prices, a meeting was held at the Ministry of Agriculture, which resulted in new contractual relationships with LČR s.p. and the majority of contracts for the period from March 2018 onwards were re-tendered. The woodworking industry in the Czech Republic was in very good condition with regard to the sufficient supply of basic raw materials and very good global demand for wood products. Due to the structure of logging, the situation of processors using deciduous varieties was more difficult.

In 2017, the decision on one of the largest modern Czech investments in wood processing was made. Capacity expansion and increase in value added will be realized at the Mondi plant in Štětí with an impact on local demand for coniferous varieties of 750,000 m3 from 2019. The situation in our forests and the long-term dependence on the export markets will hopefully lead to the long-term support for the processing of domestic timber on the Czech territory in existing or new capacities.

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

13 ASSOCIATION OF THE PULP AND PAPER INDUSTRY

ASSOCIATION OF THE PULP AND PAPER INDUSTRY The paper and pulp industry is a traditional industry that is a very competitive and very promising branch of the processing industry in the Czech Republic with very good environmental performance. Its products are indispensable in virtually all manufacturing industries, mainly in the production of packaging of all types, in printing industry, chemical, electrical, and food industries. The manufacture of paper and paperboard is based on the processing of renewable raw materials of domestic origin (wood) and recyclable secondary raw materials (scrap paper). For many years, the strategy of sustainable development has been actively pursued in this field, and the production of pulp and paper takes place in a virtually closed cycle. Paper mills have always behaved both economically and ecologically, and will continue to do so. Bio- and eco-design are the basis for the vast majority of paper and paperboard products. Processing of paper for recycling, however, is not at the required level in the Czech Republic and most of the scrap paper is unfortunately sold out, with exports accounting for more than 80% of recyclable paper available in our market. The paper and pulp industry is very investment-intensive (a paper mill with a preparation facility is an investment of several billion CZK), and even more is needed to build a pulp plant. The production of woodpulp requires a relatively large amount of water (but this is largely circulated) as well as energy (electricity, heat). However, they are predominantly supplied from own sources on the basis of waste recovery of pulp, woodpulp and paper. The Czech paper industry, which is now an integral part of the European paper industry (a member of CEPI), is still affected by the important fact that it is conceived as a Czechoslovak industry. This still significantly influences the current production capacities and, above all, the coverage of consumption from domestic sources. The Czech paper industry is characterized by production specialising in packaging and wrapping papers, which are then massively exported in the case of some products. However, the bulk of domestic paper and paperboard consumption still has to be covered by imports (1,494 million tonnes in 2017), which is much higher than the total domestic production (908 thousand tonnes). In particular, graphic papers and hygienic papers are imported, as well as some materials for the production of corrugated paperboard. The development of the Czech Republic as a whole and the prospects of the paper industry are quite accurately described in the different types of statistics, in particular statistics on the annual per capita consumption of paper. According to UNESCO, the consumption of communication (print and graphic) papers documents the literacy and social and cultural maturity of the society, the consumption of hygienic papers informs about the health and social level and the consumption of packaging and wrapping papers tells about the development of the entire industry and food industry as all goods are packed and paper products and paper and cardboard products are the most widely used packaging material (for example, corrugated paperboard plays an irreplaceable role in transport packaging). The paper sector statistics show the continued development of the industry (total domestic production has increased by 13% and consumption by 5% year-on-year), followed by the domestic consumption of paper per capita, which rose from 130 kg in 2014 to 150 kg in in 2017 (in 1993, when the Czech Republic was established, only 60 kg per capita was consumed). Another increase potential is evident, as the EU average consumption is around 160 kg (but Slovakia, Hungary or Portugal consume only about 100 kg, Belgium, Finland, Sweden, Germany and Austria much more than 200 kg per capita per year). However, the global average is only around 60 kg per capita per year. The perspectives of the sector are largely based on sufficiency of raw materials and energy resources and proposals for systemic measures limiting the inefficient increase of costs of enterprises and discouraging foreign investors from investing in the paper industry in the Czech Republic. This involves in particular risks to the availability of the basic raw material – wood – for the paper industry, which may materialise if wood is used for the production of renewable energy. The environmental objectives in the paper industry need to be assessed with regard to their economic and social impacts, and optimal solutions must be found both in the economy and employment and in environmental issues. This approach reflects the principle of sustainable development (circular bioeconomy) based on the dynamic balance of the economic, social and environmental pillars. This approach is fulfilled and defended by the Czech paper industry in cooperation with other member States of the Confederation of European Paper Industries (CEPI). Despite the dynamic growth in paper and paperboard manufacture and consumption, the Czech Republic still does not reach the levels of advanced EU countries in self-sufficiency and satisfying national demand, although this indicator is expected to increase further over the next few years up to the consumption of 180 kg per capita. This would be equivalent to the total domestic consumption of paper and paperboard of approximately 2 million tonnes per year. Reaching this level is only another absolute increase in imports and it is not an economically efficient solution; therefore, larger investments should be considered, primarily in connection with a large surplus of scrap paper in the Czech Republic and its high volume of exports. The optimistic outlook for the paper sector should be significantly supported by the fact that it is a sector based on sustainable and renewable organic sources which can be easily recycled and are generally seen as environmentally friendly. Ing. Jaroslav Tymich President of Association of the Pulp and Paper Industry

14 ASSOCIATION OF CHEMICAL INDUSTRY OF THE CR

ASSOCIATION OF CHEMICAL INDUSTRY OF THE CR Along with the positive developments both of the Czech and European economies, the results of the chemical industry in the Czech Republic in 2017 (without counting refining of petroleum, the figures of which have not yet been released for publication by the Czech Statistical Office) showed a significant growth in sales achieved by the majority of chemical companies in the Czech Republic. All three monitored aggregations increased, ranging from almost 5 percent in chemicals (CZ NACE 20) to more than 8 percent in pharmaceuticals (CZ NACE 21). The same applies to the rubber and plastics industry (CZ NACE 22) which capitalized on the continuing boom in some downstream industries and particularly in the automotive industry. Total revenues in this sector grew by 6.3%. The results of the chemical industry achieved in 2017 can be briefly summed up as follows: • Major industrial and financial indicators increased when compared to 2016. The number of employees in the monitored aggregates of the chemical industry grew by 3.8% (+4 692)on the year-on-year basis mainly due to a significant increase in the job occupancy in the rubber and plastics industry (+3 914 employees); • The year-on-year growth of chemicals exports was more than seven percent and amounted to CZK 424.8 billion while imports increased by only 4.3% to CZK 568.3 billion CZK. This positive development accounted for reducing a high negative balance in the chemical industry by CZK 4.4 billion to CZK 143.5 billion on the year-on-year basis. In 2017, the share of exports in the total revenues of the large scale chemical industry reached 85.3% when compared to 84.4% in 2016. The highest growth in export performance was in CZ NACE 21 (178.1% YOY) while exports in CZ NACE 22 considerably decreased (68.2% YOY); • The book value added in the large scale chemistry in 2017 grew in all branches and increased by more than 14% on the year-on-year basis (to CZK 151.3 billion), however, by far the most in CZ NACE 20 (+ 42.7% YOY) documenting the record volume of revenues achieved in the chemical industry; • Taking into account the aforementioned facts, the overall development of the sector can be evaluated as very positive and we believe that the same trend will continue also in 2018.

Ing. Petr Cingr President of the Association of chemical industry of the Czech Republic

15 ASSOCIATION OF THE GLASS AND CERAMIC INDUSTRY OF THE CZECH REPUBLIC

ASSOCIATION OF THE GLASS AND CERAMIC INDUSTRY OF THE CZECH REPUBLIC

Perhaps, reading this latest Panorama of the Manufacturing Industry 2017, you are sitting at your desk and drinking coffee from a designer porcelain cup or drinking water from a glass, you are looking out of the window without noticing the transparent and insulating barrier between you and the outside, and when you turn off the display and when you finish your coffee... you probably will probably see ceramics. These and other products that you use everyday are so-called mineral products, CZ-NACE 23.1–23.4.

Production and processing of glass, porcelain and ceramics have deep roots in the Czech Republic and are closely related to our craft tradition and are today a successful part of the Czech manufacturing industry. Products of glass, ceramics and porcelain are simply beautiful, trendy, practical and extremely environmentally friendly. They are enormous and tiny, they are both common and luxurious. They are an integral part of our everyday lives. We touch them everyday, use them to see the world, store food, decorate our environment, and bring to our homes design, light and warmth, and even signal. The importance of these products is growing especially now that sustainability and environmental impact are such important issues. The products of this sector meet the most demanding requirements both in terms of their impact on the environment and, most importantly, the functionalities they offer. Either directly or in combination with other advanced processes. Our products are, on the one hand, significant contributors to the reduction of greenhouse gas emissions and, on the other hand, they can make a significant contribution to reducing the risk of unsustainable growth of plastic waste. Manufacturers and processors of glass and ceramics and porcelain in the Czech Republic are well aware of these perspectives and act accordingly. This is evidenced by the results of the industry. They have been consistently positive. Last year, this attracted both domestic and foreign capital, which helped further develop and strengthen existing producers’ positions. The industry is still heavily export-oriented, as domestic markets are not large enough and foreign demand is still high. But Czech products are competitive and attractive. Successful sales are preceded by a long-term development, production, skills and abilities in processing, design preparation, and marketing strategies. All this is based on long-term development and self-reflection in the Czech Republic. There have been major positive changes in a number of sectors that are now comparable to the world. Especially the development of new products and their functional properties and design have received great support from their -ow ners, patrons or academic institutions in recent years. It is financially supported by various projects. New investments in development and new technologies are a commitment and a promise for the future. It remains only a question of good and enlightened management to continue down this path. This publication will provide you with the hard figures on the industry’s development. The sector’s turnover has already exceeded CZK 50 billion. The share of exports often accounts for more than 90% of total sales. The largest customer is the EU, but there is a significant increase in sales volumes in the Middle East markets, China and the Americas. The number of employees has been stagnating at around 25 thousand, but this is not due to the lack of interest in the sector, but rather to the extreme rigidity and low capacity of the labour market. This is true for all qualification groups. High fluctuation allowed by this situation is another problem. Manufacturer try to address this by gradually introducing automatic handling and automation. Average wage vary across sectors and are, of course, dependent on the degree of process control automation, required expertise and productivity. It is in the range of CZK 19 thousand (ceramics and porcelain) to CZK 38.5 thousand (flat glass). The whole sector faces other major challenges, which often result from growing accountability, mainly represented by EU requirements. This is probably a good thing, but it requires a common active approach. The above-mentioned climate change is further addressed by a new emission permit policy for the period 2021–2025. Since glass, ceramics and porcelain sector is among energy-intensive industries, changes can make a significant impact. Equally important are the new requirements of the European Union for new standards for the contact of products with food, including glass and ceramics. In order to protect the interests of producers both in the Czech Republic and in the EU, anti-dumping must be addressed. Customs duties have been successfully introduced for some imports of State-supported production from East Asia. Glassmakers, ceramics makers and porcelain manufacturers have their Association of the Czech Glass and Ceramics Industry Association in the Czech Republic, which constantly monitors and evaluates developments in the industry and then coordinates the interests of its members. And because glass, porcelain and ceramics are a tradition in our country, it is important for us to maintain and develop this heritage.

Ing. Petr Mazzolini President of the Association of the Glass and Ceramic Industry of the Czech Republic

16 UNION OF GLASS AND FASHION JEWELLERY PRODUCERS

UNION OF GLASS AND FASHION JEWELLERY PRODUCERS

The development of the manufacture of fashion jewellery after the Velvet Revolution was mainly influenced by the privatization of the production sector and subsequent- ow nership 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 stabilized, 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 Jewelery Producers together with the City of Jablonec and the Glass and Fashion Jewellery Museum 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 became stabilized and gradually changed production. The development is quite clear. Customers are not looking for cheap, mass-produced items – we are not able to compete in this respect. Manufacture of fashion jewellery is aimed at products of medium to higher price levels with good craftsmanship and quality finish. An important factor is also comply with strict health regulations in the EU and the US. Interestingly, well-known fashion brands are starting to look 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. Market protection is totally inadequate in this respect. 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 re- tiring. That said, about 4000 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. Unfortunately, the quality of education is not matched by the interest of pupils – these are mainly vocational programmes, which teach the production of fashion jewellery, the blowing of glass, etc. The Union of Glass and Fashion Jewellery Producers works with students and invites them to various demonstration events. It is a pleasure to observe a 2nd year fashion jewellery student create a horse figurine in 20 minutes, while the customer is watching and waiting until the figurine cools down and he can buy it. We need to convince parents that the production of fashion jewellery is a nice and creative job with a promising future. The Union of Glass and Fashion Jewellery Producers associates 46 companies, 4 secondary vocational schools, Techni- cal 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 jewelery industry. Under the brand “Made in Jablonec” it organizes a successful fashion show every year. The Union returned to Jablonec nad Nisou the exhibition of fashion jewellery “Fragile Beauty”, its own fashion jewellery center “Palace Plus” and is launching tourist products “Visit Jablonec nad Nisou to see glass and fashion jewellery” and “Czech Christmas”. 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 Chairman of the Board of Directors, Union of Glass and Fashion Jewellery Producers

17 CZECH CEMENT MANUFACTURERS ASSOCIATION

CZECH CEMENT MANUFACTURERS ASSOCIATION

Production and consumption of cement and other hydraulic building materials were, and will be, mainly national. Only a small proportion of production will be subject to cross-border export or import, mostly only where the construction company is exporting the relevant building material together with the construction work. From this long-term perspective, it is absolutely essential to look at the consumption of this commodity as a national matter. A second perspective, perhaps illogically separated from production, is the consumption of cement. Construction sector, perhaps except some very specific buildings, such as tunnels in Iceland, is an exclusively national matter, made more complicated in terms of how many of the buildings are ordered by private investors and the Czech Republic. It is necessary to see that the State as a client does not have a simple role, both in defining its priorities, in obtaining and combining money from different national and European sources, through the advertising of construction contracts and their commissioning. Our view of totally non-functional PPP systems is clear. Let’s look at two of the state’s core construction areas, namely road transport infrastructure and social housing. The first area is slowly starting to work, as well as the State institutions responsible for it. Nevertheless, there is a need to create a pipeline of construction projects, especially non-motorway ones, in parallel with national tax resources for the period when Czech construction will not go through a cyclical upturn. The second area left to full deregulation without demographic supervision of the state threatens to cause serious problems in the future. However, we can look at the capital of Austria, where in the 1960s they laid the foundations of a housing social policy that has been consistently working irrespective of the changes of governments. The Czech cement industry as one of the basic articles of the building industry will be ready to support all of the above mentioned activities. We are currently preparing for both the technical and environmental challenges that will arise after 2020 and will obvi- ously not be cheap. The first challenge is the extension of the applicable European harmonized standard where other types of cement will be added so that it can be offered to the construction industry, which will have to forget about the old classification into “portland - slag-portland - blast furnace” cements. The second challenge is the pending principle of reducing greenhouse gas emissions after 2020. There is likely to be a significant international and inter-disciplinary pressure on available allowances for expected production. It is necessary to reiterate that the manufacturing industry needs only allowances matching the customers’ demand for cement. The cement industry feels to be a Czech national industry and employer, being very economical and environmentally friendly, and expects the Government to come up with a clear and long-term development program of the Czech Republic.

Ing. Karel Chuděj President of the Czech Cement Manufacturers Association

18 ASSOCIATION OF FOUNDRIES OF THE CZECH REPUBLIC

ASSOCIATION OF FOUNDRIES OF THE CZECH REPUBLIC

Foundry production constitutes the foundation on which downstream industries can build. It reflects the development of Czech industry. In the last decade, which saw the transformation of the material mix in favour of light alloy metals, there has been an impact on the long-term statistics of foundry production in mass units – cast tonnes. The weight reduction of structural elements in Fe-based castings is changing towards material substitution and the use of qualitatively more demanding materials. The automotive industry continues to be the most involved in these changes. The reduction in casting weight is negatively reflected in the cumulative outputs of the foundries as measured by weight – when the weight of the individual parts decreases, so do the production volumes expressed in weight units. This trend most affected grey cast iron and carbon steel castings. In 2017, our foundries were operating at full capacity, which was limited by the lack of qualified staff. The total production of 450 thousand tons of castings corresponds to 2011. This is about 100 thousand tonnes of castings more than the historical minimum in 2010. However, the material ratio is different. The total production of iron-based castings in the Czech Republic is about 300 thousand tons per year. 2017 saw the end of the long-term decline in production of classical cast iron with foliated graphite (dominated by the traditional segment of engineering industry, especially the production of machine tools). Cast iron with spheroidal graphite or special cast iron containing alloying elements such as Si, Mo, for exhaust manifolds or turbochargers bodies saw only a slight increase. The demand for carbon steels continues to decline. The production of alloyed steels for mining equipment, mills and crushers or incandescent grate castings for incinerators is stable. Foundry production is demanded for infrastructure, particularly for rail transport and rolling stock parts whose construction requires high-quality steel castings. The production of pump bodies for the energy sector is also not negligible. The production of steel castings is based on single-item and small-series production with a high share of manual work by qualified workers. With an annual volume of about 60 thousand tonnes, the Czech Republic places fifth in the production of steel castings in Europe. World producers are well established and new demand for steel castings is not easy to find. Production of Al alloy castings continues to grow steeply, where demand for these castings has increased year-on-year. The main driver is the automotive industry. Automakers constantly increase their needs with existing or new components, such as engines, axles, transmissions, castings for hydraulics and lighting technology. Interest in structural castings remains for car body parts remains unchanged. The possibilities of Czech foundries are limited by their capacity. Existing production is approx. 150 thousand tonnes and growing annually. Large-scale production is based on high-pressure casting machines with robotic handling. Seventy-five percent of the total production is dispatched to foreign automotive companies and the situation is to remain unchanged in the coming years. Production of castings from other non-ferrous metals is represented especially in the production of copper alloy castings. The annual production is approx. 20 thousand tonnes per year. We expect the same volume also in the coming years. The sharp increase in production in 2009–2011 stopped and was followed by gradual slight increase. Copper alloy castings are mainly used in the electrical industry and in wheels of circulating pumps, bearings and hinges of engineering equipment. This year, the total production of Czech foundry industry should be around 450 thousand tonnes. 82% of production capacities of iron castings are used. For Al alloy foundries, capacities are completely full. At present, demand exceeds supply, especially due to the high investment intensity of this segment. Nevertheless, a number of foundries are preparing or investing in increased production capacities. The limiting factor in the Czech foundry industry is the critical shortage of skilled labour. The use of foreign workers is complicated by legislation and difficult administration. Investing in new technologies does not always allow job reduc- tions and growth in labour productivity. This is especially true for one-piece and small-series production of Fe-based castings. The use of progressive 3D printing methods is at its beginnings. For economic reasons, they cannot compete with traditional production methods of engineering components with complex shapes. Still, most foundries experiment with this technology. Generally there is ongoing material shift from traditional “ferrous” castings to “non-ferrous”, which are subsequently displaced by plastics and super strong carbon fibres. Foundry is a key, strategic industry essential for all downstream industries. Foundry products provide a large amount of irreplaceable parts for a wide range of customers not only in the Czech Republic but also abroad.

Ing. Zdeněk Vladár President of the Association of Foundries of the Czech Republic

19 STEEL UNION

STEEL UNION Steel industry employs nearly twenty thousand people in the Czech Republic and indirectly tens of thousands more. Its tradition dates back to the 19th century. Today, our industry and Europe face challenges that will shape it for the next decade. The first challenge is to reduce the impact of industry on the environment. Since the 1990s, we have invested CZK billions in the greening of steel production and have been able to reduce dust emissions by an incredible 99 percent. We reduce CO2 emissions as a major global source. We are actively involved in preparing a new form of the European emissions trading scheme. We take the idea of low carbon steel production seriously. However, European and national environmental legislation is evolving and we are still improving. We want to continue to be a good neighbour and to make a positive contribution to the life and development of our cities, which have been a safe harbour for industry since the last century. The second challenge is unfair competition from many non-EU countries whose companies benefit from State support, subsidized loans, lack of collective bargaining, and lax, unenforceable environmental standards and regulations. Such conditions allow them to offer steel at prices lower than actual production costs. We see this as an attack on all European steel makers, whether in the Czech Republic, in France or elsewhere. We are very much in favour of free trade and competition, but only on equal terms. Let‘s not destroy European industry just because we are more naive than our competitors. Examples from other countries show that once industrial companies shut down, they never come back. The third challenge is the lack of qualified people. The economy is growing, and with it the demand for steel. However, like other sectors of the Czech economy, steel industry suffers from a desperate lack of qualified, especially technically educated people. We are working together with national, regional and local governments in this area to come up with solutions, strengthen the attractiveness of metallurgy, work with schools and universities. Without skilled people, there are no steelworks. We know that our production must be modern and clean. We are applying innovation and we are very interested in the idea of Industry 4.0. We support digitization and automation in a number of operations. Many manufacturing activities are already controlled by computers, which provides more detailed and accurate information about the entire manufacturing process and benefits us and our customers. We want to produce sophisticated products and supply them all over the world. I firmly hope that Czech steel making will handle these challenges and will be here for another hundred years.

Ing. Jan Czudek Chairman of the Management Board of the Steel Union

20 ASSOCIATION OF MANUFACTURERS AND SUPPLIERS OF MEDICAL DEVICES

ASSOCIATION OF MANUFACTURERS AND SUPPLIERS OF MEDICAL DEVICES (AMSMD) The production of medical devices has a long and very successful tradition in the Czech Republic. This is evidenced by a number of worldwide Czech patents and innovative products such as polarography, contact lenses, biodegradable stents, etc. High quality of final Czech products can be seen in medical beds, armchairs and other medical instruments and implants. One of the largest production lines in the world producing highly standardised hospital beds is in the Czech Republic. A Czech producer of microscopes has also achieved worldwide success. Most healthcare manufacturers are also highly export-oriented with regard to the small Czech market, and export their products to the whole world. Currently, members of the AVDZP employ almost 9,000 employees and have a turnover of CZK 19 billion per year, with an export share of more than 40% (more than 80% for some manufacturers). The portfolio of medical devices is broad and includes approximately 500,000 items from dressing material to orthopedic implants or pacemakers. Collaboration with the Ministry of Industry and Trade is crucial in all areas of AMSMD’s focus: The first area is support for the development and innovation of products and services of medical device manufacturers. They place emphasis on research that leads to high technical parameters and innovation level of products and solutions of medical treatments and methods. Manufacturers of medical devices are aware that without technical equipment it is impossible to provide good medical care. Physicians state that advances in medicine require innovation such as in imaging systems, devices and tools for microsurgery and the use of computing. That is why manufacturers now also focus on other disciplines such as nanotechnology and microsystems for device building, devices for minimizing invasive methods, introducing information technology into healthcare, emergency medicine, cardiac surgery and other areas of modern medicine. To achieve these results, it is necessary to cooperate with companies with a number of research institutes of higher education institutions as well as with top doctors and hospital workplaces. In addressing their research projects, companies are trying to obtain different forms of support and dedicated grant programs that are managed by the MIT . Another key area is export aid, and the Association works very closely with both MIT and CzechTrade, as well as with the MFA and other institutions and partners. To find new markets and business partners and to develop existing cooperation abroad, companies participate in a number of foreign trade fairs with State participation. Traditionally the most popular fairs are Medica Düsseldorf and Arab Health in Dubai. SMEs from among manufacturers of medical devices also make use of other programs to promote participation in international fairs, such as NOVUM. In recent years, the most popular form of support among medical device manufacturers includes the MFA’s projects PROPED to support economic diplomacy. The export of medical devices involves a number of specific and demanding conditions, from highly trained distributors of their products who are able to communicate with local healthcare facilities to obtaining the necessary certificates in each country, which is often complicated and especially expensive. Targeted projects can help to successfully promote exports even under these challenging conditions. Today, many of our companies have their subsidiaries abroad, through which they gradually increase their exports. Recently, some companies have also been successful in delivering investment units such as hospitals and other healthcare facilities. In this area, they also use the services of EGAP and CEB. The third and also the most important area of cooperation with the Ministry of Industry and Trade is the area of medical device legislation, where the MIT acts as a supervisory and managing authority. In 2017, after about eight years of discussions, the Czech Republic finally adopted new regulations which tightened the conditions for both manufacturers and notified bodies which control compliance of processes of medical device manufacturers, and then grant the appropriate certificate. Without this certificate, the manufacturer cannot placeits products on the market. Recently, however, medical device manufacturers have had to face very difficult business conditions. Once effective, the new rules will not only lead to a significant increase in costs of compliance for manufacturers, but strict controls now lead to a permanent reduction in the number of notified bodies across the EU. Not long ago, there were around a hundred, now there are about forty, and European Commission expects the final number to be around 10. This, however, only means victory of large ones over small ones, rather than promoting quality. As a result, remaining notified bodies are unable to cope with the volume of existing medical devices, let alone new ones. The prices of these services are skyrocketing, introduction of innovative products into the market is delayed for months, soon to be years. All this ultimately eliminates, in particular, small and medium-sized manufacturers of medical devices, which can hardly weather these turbulences. This adverse situation requires support and solution from the Ministry of Industry and Trade and Ministry of Health. Even so, it will be very difficult to face the pressure of large multinational companies. Nevertheless, we believe that with the help and support of the State, the traditional manufacture of high-quality and highly innovative medical devices with high added value will be maintained in the Czech Republic.

Ing. Jana Vykoukalová Executive Director of AMSMD

21 ELECTRICAL AND ELECTRONIC ASSOCIATION OF THE CZECH REPUBLIC

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, i.e. 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 was the driver of exports of the entire electrical and electronics industry. However, we have to admit 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. The group of measuring instruments has long been one of the traditional fields in which the Czech Republic specializes. In general, this industry can be considered well-established. However, this is a global part of the industry, dependent on many effects that we cannot control or sometimes even predict. The most stable groups are 26.3 and 26.5, which in most cases (in addition to their own production) also have their own research and development in the Czech Republic, and naturally trade. CZ-NACE 27.1, i.e. Manufacture of electric motors, generators, transformers and electricity distribution and control apparatus, fares even better. Basically, in all parameters (added value, revenues, sales or the 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 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. Companies that are active in other areas (27.9 and 27.3) are also able to deliver turnkey investment units, which is an ability that 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 have 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 of higher production is – as in the whole industry – labour shortage. This may in some cases act as natural feedback and protection from overheating in the industry. 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 response to the above-mentioned labour shortage. Ultimately, this deficiency can contribute to the modernization 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, electrical and electronic 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 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

22 ASSOCIATION OF ENGINEERING TECHNOLOGY

ASSOCIATION OF ENGINEERING TECHNOLOGY The Association of Engineering Technology currently brings together 48 companies, mainly manufacturers of machine tools, instruments and components. Except Slovak companies TRENS and RÖHM Slovakia, all other companies are located in the Czech Republic. In terms of total output in the Czech Republic, this group accounts for about 75% of the performance of the whole industry. In 2017 there was a slight decline in production and exports of about 4 percent. Russia continues to be one of the adverse factors. In line with the favourable situation in the national manufacturing industry, there was a significant increase in the consumption and import of machine tools of about 16%. The Czech Republic has been globally No 15 producer of machine tools, and placing 8th in per capita production. Among European manufacturers, we are fifth. The world’s largest manufacturer is China, with Switzerland having the biggest production per capita. These figures confirm the high level of competitiveness of a large number of Czech manufacturers. The main export territories for Czech Republic are Germany (about 31%), China (9%) and Slovakia (7.7%). These are followed by Russia, Poland, USA and Italy. For Germany, the Czech Republic is the 4th largest importer. Exports to Russia saw a further decline compared to 2016. Compared to 2013 and 2014, this is a decrease of 66%. Exports to China saw an increase of about 17% in 2017. Germany is the Czech Republic’s No 1 import partner. It is followed by Japan, Italy, South Korea, Taiwan, Austria and Switzerland. In terms of export commodities, No 1 are grinders, followed by lathes, machining centers and milling machines. The main sector purchasing engineering technology is automotive and its subcontractors, tool and mould makers, defence, aviation and energy industries. In terms of electronics, drives, mechatronics, control and technological SW, machine tools are among the very best. Most of our manufacturers use the same components for their products as their competitors and are thus able to integrate their machines into the Industry 4.0 communication structures. The high level of Czech machine tools and forming machines is due, among other things, to the innovation activity of most manufacturers, among which are TOS VARNSDORF, KOVOSVIT MAS, TAJMAC ZPS, TOSHULIN, TOS Kuřim, FERMAT and others. They rely on their own design and development capacities supported by cooperation with universities, such as RCMT Research Center under CTU Prague, or on independent research institutes such as VÚTS Liberec and producers and suppliers of electronic and mechatronic components, tools and robots. One of the main limiting factors for the development of the division is the insufficient supply of technical workforce. Businesses are therefore forced to look for their own ways to get skilled workers. TOS Varnsdorf High School established in 2015 is a unique example to be followed by other companies. Most enterprises still rely on collaboration with public schools and vocational schools. The Czech Republic does not have machine tool companies of such size that could afford to establish their own universities. For this reason, close cooperation between existing universities and manufacturers of machine tools is important. In 2018, we expect improved results compared to 2017. Based on the continuing favourable situation in the Czech economy, we expect growth in domestic demand for machine tools. Exports will be adversely affected by the appreciation of the koruna. We expect a slight improvement in our trade relations with China and maintaining our positions in European markets.

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

23 AUTOMOTIVE INDUSTRY ASSOCIATION

AUTOMOTIVE INDUSTRY ASSOCIATION The automotive industry in the Czech Republic has never been stronger, and has never achieved such results in the past as in the last few years. The production of motor vehicles in 2017 exceeded 1.4 million units, thus exceeding the result of the previous (also record) year of 2016 by 70,000, i.e. 5.2%. Production of passenger cars, production of buses, trucks, trailers and production of motorcycles grew. These favourable results were influenced by the positive development of the European and world economy and the growing consumer demand for vehicles in the Czech Republic as well as in Europe. Just as the automotive industry grew in the world in 2017, the same was the case in the Czech Republic, while demand at home and abroad remained strong. Vehicle production grew again in 2017, again faster than the Czech industry as a whole, and supported the growth of the whole Czech economy. The Czech industry continues to be dominated by the production of passenger cars. Czech plants produced 1,413,881 passenger cars (+5.2%), 4,631 buses (+5.5%), 1,481 trucks (+11.7%), 1,331 motorcycles (+8.4%) and 25,219 trailers (+2.1%). The Czech Republic is the global powerhouse in the production of passenger cars and buses per capita, while also being fifth in Europe and seventeenth in the world in the number of motor vehicles produced. The Czech automotive industry accounts for 9% of the Czech GDP. It employs approximately 160,000 people. In total, including related fields, it employs more than 400,000 people. The 146 AutoSAP members account for about a quarter of industrial production and exports. The revenues of AutoSAP members for the first time exceeded CZK 1 trillion in 2016, exceeding it by almost CZK 100 billion and rising by more than 7% in 2017. The share of industrial production in the Czech Republic amounted to more than 24%. Exports from the Czech Republic were also at a record, with more than 80% of the products intended for export. The export volume of AutoSAP members grew by more than 6% in 2017 to almost CZK 918 billion. AutoSAP’s share of Czech exports in 2017 was 21.8%. The largest part of the export goes to Germany, followed by Great Britain, France and Slovakia. AutoSAP members represent 10% of employees in the Czech industry, but a quarter of industrial production. The Czech automotive industry boasts higher labour productivity than in other sectors, with employees receiving higher wages. The number of employees in AutoSAP companies has increased to 126,375. Compared to 2017, this represents a year-on-year increase of 6,929 persons (5.8%). The growth of employees was seen in all categories – final producers, contractors and other companies and organizations. The average wage in AutoSAP rose by 7.1% to CZK 37,399 in 2017, in blue-collar professions by 8.4% to CZK 31,272. Overall, the average wage for AutoSAP members is 26.8% higher than the average wage in the Czech Republic. Ing. Bohdan Wojnar President of the Automotive Industry Association

24 ASSOCIATION OF AEROSPACE MANUFACTURERS OF THE CZECH REPUBLIC

ASSOCIATION OF AEROSPACE MANUFACTURERS OF THE CZECH REPUBLIC

The Czech aviation industry has traditionally been based on the close cooperation of all economic and non-economic entities which focus on the whole aircraft life cycle. These are universities, research organizations, development and design offices, manufacturers of aircraft and their parts, maintenance and repair centres, and air traffic control. 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 – aircraft, engine and propellers – and the related accessories. The Czech Republic specializes especially in sports aircraft, small transport aircraft for up to 19 passengers, training jets and small unmanned aircraft. Of strategic importance is also the participation of Czech aerospace companies in the supply chains of major world manufacturers such as Airbus, Bombardier or Embraer. For all of these activities, our industry has the necessary technological background that is not in any way different from that of other advanced aviation 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 (in-house) development centres but also closely cooperates with national research institutes (e.g. Czech Aerospace Research Centre) or specialized institutes of the Czech Technical University in Prague and the Brno University of Technology. The life cycle 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. In this time frame, also for reasons of traffic safety, it is virtually impossible to immediately apply the latest R&D results. The innovation process is continuous with the gradual implementation of the latest R&D results; in the Czech Republic, this applies to current programmes (e.g. L410NG, L39NG or EV-55), but also for global players (e.g. Airbus, Boeing, Bombardier). In Europe, our aviation industry has a very good position. Our companies and research centers are respected partners in the supply chain and in the robust European Clean Sky 2 program, where they work together in teams composed of strong European players such as Airbus, Dassault Aviation, Leonardo, Rolls Royce, Airbus Helicopters, Safran Group, Thales, etc. European and international cooperation and its continuous qualitative and quantitative increase are fundamental for the development of the Czech aerospace industry. The long-term shortage of qualified staff at all education levels continues to be an area of particular concern. The situation is addressed by a wide range of measures, such as providing retraining from other industries, employing people from abroad, running own (private, company) vocational and regular secondary schools, providing students with traineeships in companies, specification of diploma and dissertation theses, as well as giving part-time jobs to undergraduates or doc- toral students. The best industry experts in specific fields also become part of the learning process as lecturers at both secondary and tertiary schools. The links between the Czech aerospace companies and schools is good. In terms of the development of the aviation industry, we consider all contracts important, regardless of their size or focus, because they all help to develop the use of cutting-edge technologies and employment of highly qualified experts. Here are some of the most important activities recently dealt with by some of the Czech companies in 2017: - Aircraft Industries – Manufactures and sells a 19-seat L 410 Czech airplane and at the same time certified and started mass producing its modernized version L 410 NG; - Aero Vodochody Aerostructures – works as a contractor on projects for e.g. Bombardier or Embraer, provides “after- -market service” for its L39 or L159 training aircraft and is developing a new, modern version of the L39NG training aircraft; - GE Aviation Czech – manufactures GE H80 turbo propeller engines and has started the development of a modern turbo propeller engine of the higher power line Catalyst; - První brněnská strojírna Velká Bíteš – continues to develop, produce and sell modern small turbine engines and auxiliary power units; 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- ae rospace industry. Most of our companies participate in the completion of the L 410 NG and L39NG projects and starting of its mass production. We are intensively trying to engage in European and global supply chains.

Ing. Josef Kašpar President of Association of Aerospace Manufacturers of the Czech Republic

25 ASSOCIATION OF THE CZECH RAILWAY INDUSTRY

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 rely not only 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 72 billion, of which exports are 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 almost all over the world, Czech trams travel reliably in Turkey, Czech companies are involved in securing railway traffic in Bulgaria, Serbia, Belarus, Slovakia and other countries. In the Czech Republic, we have been a stable partner to the national carriers CZECH RAILWAYS and ČD CARGO. Specific projects include, for example, new InterPanter or RegioPanter units manufactured by ŠKODA TRANSPORTATION; new or highly modernized locomotives from CZ LOKO production; modern block equipment supplied by AŽD Praha, wheelsets of BONATRANS and many other projects. Catenary-free trams manufactured by ŠKODA TRANSPORTATION for the Turkish city of Konya can currently be powered by pantographs and travel in normal urban traffic at least 3 kilometers 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 lines 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. The ForCity Alfa trams are designed to handle the most demanding track profiles without any problem, which is also thanks to the individual wheel drive. The biggest advantage of the tram is its rotating undercarriage that is gentle on the tracks and reduces the cost of vehicle and infrastructure maintenance. The optimum speed is controlled by a computer, depending on occupancy by passengers, track condition and track profile. ForCity Alfa has anti-slip and anti-skid protection. The Škoda Electric from Pilsen together with SOR Libchavy, another Czech company, produced an 18-meter fully low- floor articulated trolleybus designed for urban public transport. The modern Škoda vehicle makes transport easy thanks to five doors for passenger entry and exit. The first Škoda 31 Tr trolleybus was manufactured at the end of 2010 and it is the latest trolleybus model produced by Škoda. 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 30% increase in distance covered before scheduled maintenance, and thus significant life cycle cost savings. Another example of product innovation is induction-hardened axle. A multi-year project of researchers has brought a revolutionary technological innovation in the field of heat treatment of axles, which increases the fatigue strength several times. The four-axle interoperable dieselectric EffiShunter 1000, developed and manufactured in CZ LOKO, has an output of 895 kW, a maximum speed of 100 km/h and a pulling force of 267 kN. It is designed especially for all types of movement and heavy duty on industrial sidings. It is equipped with alternating AC/AC power transfer from an internal combustion engine to the drive wheel, and its parameters conform to the latest standards for operation across Europe. The locomotive is equipped with a digital control system with on-line diagnostics and GPS monitoring. Further sophisticated technologies such as automatic speed control, radio remote control, or automatic coupling devices can be installed on request. AŽD Praha, the leading European supplier of railway signaling 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 only on closed tracks. New technologies with the use of the highly accurate Galileo satellite system will also be interesting. UniControls has again expanded its operations in the Chinese market by supplying in late 2017 elements of control system for eight pilot tramways designed for suburban transport in the North Chinese port city of Dalian.

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

26 ASSOCIATION OF CZECH FURNITURE MANUFACTURERS

ASSOCIATION OF CZECH FURNITURE MANUFACTURERS

The Czech furniture industry has been growing for the seventh consecutive year. Exports of Czech furniture have been successful. Although export performance declined slightly in 2017 compared with 2016, the volume of exports saw a year-on-year increase. Do- mestic consumption of furniture is still growing at a slow pace. The performance of the furniture industry grew again. In September 2017, the Associ- ation assumed that production would grow to CZK 45.18 billion. Confirmed results for the past year now show that production grew less than we expected, to CZK 44.68 billion. Furniture production in the Czech Republic rose from CZK 44.64 billion in 2016 to CZK 44.68 billion last year. This is a very modest increase over the previous years. It is possible that the furniture industry is producing at its human capacity. Further growth in the furniture industry is likely to depend on investment in modern technologies and automation. Of course, given the export orientation, the CZK exchange rate will be very important. The growth of domestic furniture consumption is balanced compared to previous years. The good results of the furniture industry, however, rely mainly on export success. The growth in the volume of imported furniture from abroad remains basically balanced. The share of imports on domestic consumption is also increasing. The share of import in domestic consumption exceeded 52% last year. The export performance of the Czech furniture industry dropped to 18.78%, but the volume of exported furniture increased from CZK 27.02 billion in 2016 to CZK 27.28 billion in 2017. After years of growth, the price of exported furniture has declined. However, this decline can be explained by appreciation in the Czech koruna. This is because the overwhelming majority of exporters have contracts in euro. In 2017, the average price for one kg of exported furniture was CZK 76.10. By contrast, the price of imported furniture has been declining for the second year. Between 2016 and 2017, there was a relatively steep fall in the price of imported furniture. In 2015, its price fell to 66.38 CZK/kg. In 2016, the price fell to 64.64 CZK/kg. In 2017, the price fell steeply to 50.08 CZK/kg. This is a slump that definitely cannot be explained by exchange rate changes. Thus, the trend of importing increasingly cheaper and, of course, lower quality furniture is continuing. 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 specialized furniture companies. The largest importer of furniture into the Czech Republic is Poland, followed by Germany, China, and Italy. The bulk of exports go to Germany, well ahead of Slovakia and France. Since its inception, the Association of Czech Furniture Manufacturers has supported the sale of quality furniture and the provision of quality furniture related services in the Czech Republic. The Association of Czech Furniture Manufacturers is the administrator of the label Czech Quality – Furniture www.ceska-kvalita-nabytek.cz and the operator of a search engine of proven furniture companies at www.nabytek-jistota.cz. The Association of Czech Furniture Manufacturers focuses significant part of its activities on long-term monitoring of the statistical trends in the manufacture and trade in furniture. The Association is an important partner for state administration institutions in representing the requirements of Czech furniture manufacturers. On 22 March 2018, the Association of Czech Furniture Manufacturers announced the winners of FURNITURE OF THE YEAR 2018 award. This is the ninth official annual FURNITURE OF THE YEAR award. This year, the award goes to the “ALBA” collection, designed by the Italian designer Alexander Gufler for TON a.s. The jury of the Association of Czech Furniture Manufacturers concludes: “It is an armchair that features stunning ergonomic precision. Upholstery is extremely professional, which has an effect on a highly comfortable seating”. Other products appreciated by the jury include: (in alphabetical order by manufacturer) Dresser “DIAMOND LONG” by ARBYD CZ s.r.o., design: ARBYD CZ s.r.o. Sofa “ARC”, manufactured by FORM, spol. s r.o., design: Josef Barták and Martin Beinhauer. Bed “BETINA”, manufactured by JELÍNEK - výroba nábytku s.r.o., design: Jochen Flacke. Collection “MARANI”, manufactured by LUGI s.r.o., design: Vincent Marani. Collection “NONA”, manufactured by mminterier, design: René Šulc. Table “Polygon”, manufactured by Sykora, spol. s r.o., design: Angelika Akova / Polystone + SYKORA. The furniture is evaluated in terms of functionality, safety, aesthetics, suitability of the technology and material used. The furniture is evaluated by a five-member expert panel made up of independent experts. Their recommendation is approved by the Board of Directors of the Association of Czech Furniture Manufacturers.

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

27 28 METHODOLOGY

METHODOLOGY

The Panorama of the Manufacturing Industry 2017 is published as a joint document of the Ministry of Industry and Trade (MIT), the Czech Statistical Office (CZSO) and the Confederation of Industry of the Czech Republic (CI).

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 2008–2017.

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 2008–2016). The data in the P5-01 comprise all sizes of enterprises, i.e. also self-employed persons. The 2017 period is calculated additionally using the 2017/2016 indices, which are based on the quarterly statistical statements P3-04, P6-04, Work 2-04, and data from the Business Sector Financial Analysis 2017.

In 2015, there was a change in accounting and thus also in accounting statements with effect from 2016. Panorama reflects this change. The 2008–2017 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.

29 Table 1

Balance sheet (valid until 31 Dec. 2015) Source of data or calculation

Total assets CSO Report P5-01

B. Fixed assets CSO Report P5-01

B.I. Fixed intangible assets CSO Report P5-01

B.II. Fixed tangible assets CSO Report P5-01

B.III. Long-term financial assets Fixed assets - fixed intangible assets - fixed tangible assets

C. Current assets CSO Report P5-01

C.I. Supplies in stock CSO Report P5-01

C.II. Long-term receivables CSO Report P5-01

C.III. Short-term receivables CSO Report P5-01

C.IV. Short-term financial assets Current assets - supplies in stock - long-term receivables - short-term receivables

A.+D.I. Accruals + receivables Equity Total assets - fixed assets - current assets

Total liabilities Total assets

A. Equity CSO Report P5-01

B. Foreign resources CSO Report P5-01

B.I. Reserves CSO Report P5-01

B.II. Long-term liabilities CSO Report P5-01

B.II.6+B.II.7. Long-term bonds and bills CSO 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 CSO Report P5-01

B.III.8+B.III.9. Short-term bonds and bills CSO 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 CSO 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 CSO Report P5-01

C.I. Accruals MIT calculation Source: MIT

30 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 Caltulated MIT

A.V. P/L after tax P/L after tax

B.+C. Liabilities Liabilities

B. Reserves Reserves

C. Payables Caltulated MIT

C.I. Long-term payables Caltulated 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 Caltulated 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

31 Table 3

Profit and loss statement (valid until 31 Dec. 2015) Source or calculation

I. Revenues from goods sold CSO Report P5-01

A. Costs of goods sold revenues from sale of goods - sale margin

+ Sale margin CSO Report P5-01

II. Production CSO Report P5-01

II. part 1 Revenues from finished products CSO Report P5-01

II. part 1 Revenues from services sold CSO 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 CSO Report P5-01

C. Personnel costs CSO Report P5-01

C.1. Wages CSO Report P5-01 Social security and health insurance costs Social C.3. + C.2. Personnel costs - wages - Other personnel costs security + bonuses to company body members C.4. Other personnel costs CSO Report P5-01

Gross operating surplus Value added - personnel costs

E. Write-offs CSO Report P5-01

Other revenues Total revenues - revenues from goods sold - production Total revenues - costs of goods sold - cost of production - personnel Other costs costs - write-offs - EBIT EBIT Earnings before tax + interest paid

N. Cost interests CSO Report P5-01

**** Earnings before tax Earnings in accounting period + tax

Q. + S. Tax CSO Report P5-01

*** Earnings in accounting period CSO Report P5-01 Source: MIT

32 METHODOLOGY

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 I. Revenues from sale of own products and services own services II. Revenues from sale of goods Revenues from sale of goods

A. Consumption Caltulated MIT

A.1. Costs of goods sold Costs of goods sold

A.2.+A.3. Material and energy consumed, and services Consumption from production 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 Caltulated 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 + bonus- D.2.1 to company body members es 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

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 CSO Report P5-01

Sales Revenues from goods sold - Revenues from services sold

Average full-time equivalent CSO Report P5-01

Working owners CSO Report P5-01

Number of units CSO Report P5-01

Investments CSO Report P5-01

Total costs Total revenues - earnings before tax

Turnover (Revenues for goods + Production) Revenues from goods sold + Production

Interest-bearing resources Equity + bank loans + long-term bonds and bills + short-term bonds and bills Source: MIT

33 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.

Cross-border data on foreign trade are taken from CZSO, where they are based on customs statistics. The CZ-CPA production classification has been 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 2008–2017, 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 Price developments discusses price developments (2005 = 100%). Subsection 1.4 deals with foreign trade in the CZ-CPA classification. Subchapter 1.5 analyses the developments in economic value added and its causes. Subchapter 1.6 contains summary and perspectives of the manufacturing industry

The chapters for each division are broken down into the subchapter Division characteristics, which specify 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 new subchapter on R&D is included. For the relevant chart, the sum total in individual years may vary due to the rounding of values. The chapter is concluded with a subchapter section Summary and perspectives of the division.

34 METHODOLOGY

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.

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.

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

35 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. 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 stability re

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 Indicatorsall stakeholders representing in a thetimely equilibrium manner) ofare the a prerequisitesystem (the forability the of operation an enterprise of the to business meet its and obligations have a to all stakeholderssignificant impact in a timelyon corporate manner) risk. are These a prerequisite include, in particular, for the operation common of liquidity the business (L3). 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 Whatequity is decisive (ROE) and is howrisk (r thee), i.e. indicators whether ofthe all spread of the (ROE above-described – re) increases orgroups decreases. collectively INFA allows affect the the selection return on equityof basic (ROE) indicators and risk to (r eassess), i.e. whetherthe performance the spread of enterprises (ROE – re) (Fig.increases 2). EBIT or creation decreases. indicators INFA allows are orange, the selection EBIT of basicdivision indicators indicators to are assess green the and performance financial stability of enterprises indicators (Fig.are red. 2). EBIT creation indicators are orange, EBIT division indicators are green and financial stability indicators are red.

Estimating the value of alternative equity cost re 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.

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.

36 Estimating the value of alternative equity cost re 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. METHODOLOGY

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 The value of r for individual groups, sections and divisions is counted as a weighted arithmetic mean: most importante 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. 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 r means 10-year government In accordance with the financial analysis of the corporate sector, risk-freef rate rf means 10-year bond yield (Table 6). government bond yield (Table 6).

Figure 2 INFA diagram (including basic indicators)

Structure of total Structure of Cost intensity revenue total assets

EBIT/Total revenues Total revenues/Assets

Liquidity L3

ROE ROA = EBIT/Assets re

Net profit/Profit

Equity/Assets Structure of liabilities

Interest-bearing capital/Assets

Interest rate

Part of business Interest-bearing capital risk

Sprea d

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

Table 6

Year 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Risk-free rate rf 4.55% 4.67% 3.71% 3.79% 2.31% 2.26% 1.58% 0.58% 0.43% 0.98% Source: CNB data, MIT calculations

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).

37 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) (Long-term receivables + short-term receivables + short-term financial assets)/(short-term liabilities + L2 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/Average FTE*1000

Average wage Wages/Average FTE/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 https://www.mpo.com/en/panorama-interactive-table.html.

LIST OF ABBREVIATIONS

Abbreviation Name AI automotive industry AS CR Academy of Sciences of the Czech Republic cp current prices BAT Best Available Techniques CEFIC European Chemical Industry Council CEFTA Central European Free Trade Agreement CEPI Confederation of the European paper industry CNG compressed natural gas

CO2 Carbon dioxide CRM Customer Relationship Management CZ-CPA Classification of production CZ-NACE Classification of Economic Activities CNB Czech National Bank CR Czech Republic CZSO Czech Statistical Office

38 METHODOLOGY

TFA Tangible fixed assets EBIT earnings before interest and taxes EBITDA earnings before interest, taxes, depreciation and amortization EFPIA European Federation of Pharmaceutical Industries and Associations EGAP Exportní garanční a pojišťovací společnost, a.s. EGR Exhaust Gas Recirculation EPS polystyrene ERP Enterprise Resource Planning EC European Community EU European Union EVA economic value added FSC Forest Certification System FTE share of researchers GfK a market research company GM General Motors GDP Gross domestic product HMMC Hyunday Motor Manufacturing Czech s. r. o. GVA gross value added ICT information and communication technologies I-O tables Input - output tables IT Information technology Commission European Commission LLDPE Linear Low Density Polyethylene LNG liquefied natural gas LPG liquefied petroleum gas hl million million hectoliters MoRD Ministry of Regional Development MIT Ministry of Industry and Trade SMEs small and medium-sized enterprises MFA Ministry of Foreign Affairs NAFTA North American Free Trade Agreement NAP CM National Action Plan for Clean Mobility National RIS3 Strategy National Research and Innovation Strategy for Intelligent Specialization of the Czech Republic nm nanometer NOx Nitrogen oxide OP EIC Operational Programme Enterprise and Innovation for Competitiveness OP RDE Operational Programme Research, Development and Education OP EI Operational Programme Enterprise and Innovation PA Polyamide PE polyethylene PEFC Forest Certification System PET polyethylene terephthalate VA value added PP polypropylene PVC polyvinyl chloride re alternative cost of equity rf risk-free rate ROE return on equity cp constant prices

39 CI Confederation of Industry of the Czech Republic SW software TA CR Technology Agency of the Czech Republic USA United States of America USD US dollar R&D Research and Development RO research organization VW Volkswagen Cars & SUVs FT foreign trade MI Manufacturing industry

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 the 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. During the global recession, this was reflected in a sharp drop in production and efficiency in foreign-controlled firms, while Czech companies passed through the crisis period with minimal fluctuations.

Dynamic development of the MI in the Czech Republic confirms its contribution to the creation of gross value added and employment, which reached approximately 27% in 2017. The Czech Republic belongs to the countries with the highest share of MI in the economy; within the EU-28, it is second only to Ireland.

With the development of technology as well as with economic policy plans, the MI also increasingly involves activities that have the character of services (science and research, education, servicing and complementary activities) that intertwine with the services sector, but cannot be statistically separated. The MI is thus gradually losing the character of assembly plants. The automotive industry, which at the same time acts as a multiplier for the development of other downstream industries, heavily dominates the MI. At the same time, this unambiguous focus on the automotive sector is a risk in the event of a decline in foreign demand.

Further data is available on the MIT website in an interactive viewer of economic indicators (https://www. mpo.cz/en/panorama-interactive-table.html).

1.1 PRODUCTION CHARACTERISTICS

1.1.1 REVENUES The manufacturing industry transforms raw materials, sub-deliveries or components into products. Therefore, revenues from the manufacturing industry mainly consist of revenues from the sale of products and services. Revenues from the sale of goods, i.e. from what businesses resell, account for a smaller portion of total revenues. There have been several three-year periods in revenue growth. In the 2008–2010 period, there was an absolute decline in revenues in 2009. The second period ran from 2011 to 2013, when revenues increased in 2011 compared to 2010 and then revenues were lower. The next period, 2014–2016, was similar to the second period. Due to a steep growth in revenues, 2017 is likely to be the start of another three-year period (Figure 1.1).

In terms of revenues, the most important division is definitely the production of motor vehicles (CZ-NACE 29), whose share was more than a quarter of the GDP and even increased slightly year-on-year. It is well ahead of other important divisions with shares of 8.4 to 6.5%: 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 (CZ-NACE 10), see Chart 1.2.

Chart 1.1 – Revenues (in CZK billions) Chart 1.2 – Revenue share by CZ-NACE (MI = 100%) 5 000 Revenues from own products and services sold 4 670 29 Other revenues 25 4 352 4 500 4 282 406 28 4 122 379 26 375 4 000 3 720 3 747 356 27 3 563 3 614 22 3 500 3 346 352 343 333 323 10 3 009 304 24 3 000 20 297 23 2 500 16

2 000 4 264 11

3 973

3 907

3 766 32

3 404 3 368

3 292 1 500 3 231 30 3 042 13 2 713 18 1 000 31 21 500 14 15 2017 2016 0 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 0% 5% 10% 15% 20% 25% 30% Source: CZSO data, 2017 MIT calculations Source: CZSO data, 2017 MIT calculations

1.1.2 VALUE ADDED, PERSONNEL COSTS AND GROSS OPERATING SURPLUS 1.1.2Indicator VALUE group: ADDED, value addedPERSONNEL (not present COSTS in ANDthe profit GROSS and OPERATING loss statement SURPLUS valid since 2016, but it can be Indicatorcalculated), group: personnel value addedcosts and(not grosspresent operating in the profit surplus and are loss interdependent. statement valid Gross since operating2016, but surplusit can be = calculated),value added personnel - personnel costs costs. and gross operating surplus are interdependent. Gross operating surplus = value added - personnel costs. Value added shows what has been added to the purchased material, semi-finished products, services and Valuegoods. added The development shows what hasof value been added added in to the the manufacturing purchased material, industry semi-finished was similar products,to that of services revenues and in goods.2008–2017 The development(see Chart 1.3). of Again, value thereadded are in thethree manufacturing-year periods, industrywith the was2014 similar–2016 toperiod that showingof revenues higher in 2008–2017growth of value(see Chartadded 1.3). than Again, of revenues. there are The three-year largest periods,share is withagain the the 2014–2016 manufacture period of motorshowing vehicles, higher growthwhich accounts of value addedfor more than than of revenues.10% of the The MI largest(see Chart share 1.4). is again the manufacture of motor vehicles, which accounts for more than 10% of the MI (see Chart 1.4). The share of value added in revenues (value added margin) is one of the main indicators of profitability for Themanufacturing share of value enterprises added inand revenues shows how(value a addedcompany margin) is able is toone cover of the the main cost indicators of material, of profitabilityenergy and forpurchased manufacturing goods andenterprises services. and In showsterms howof total a company revenues, is able not -toso -coversignificant the cost divisions of material, have theenergy high andest purchased goods and services. In terms of total revenues, not-so-significant divisions have the highest share share of value added to revenues, i.e. manufacture of leather and related products (CZ-NACE 15) and of value added to revenues, i.e. manufacture of leather and related products (CZ-NACE 15) and manufacture ofmanufacture wearing apparel of wearing (CZ-NACE apparel 14). This (CZ indicator-NACE is14). influenced This indicator by the nature is influenced of the manufacture by the nature in the relevant of the division,manufacture as well in asthe the relevant degree division, of involvement as well inas transnational the degree of chains involvement and their in impacttransnational on the redistributionchains and their of financialimpact on resources the redistribution within the ofchain. financial For example, resources this within is evidenced the chain. by theFor factexample, that in this terms is evidencedof volume, by in thethe largestfact that division in terms of CZ-NACEof volume, 29 inthe the share largest of value division added of CZto- revenuesNACE 29 theis below share the of MIvalue average added (see to revenuesChart 1.5). is below the MI average (see Chart 1.5). Personnel costs over the period 2008–2017 develop analogously to added value (see Chart 1.6). The share of individualPersonnel divisions costs over in personnel the period costs 2008 is –between2017 develop the share analogously of revenues to andadded the value share (seeof value Chart added 1.6). (Chart The share 1.7). of individual divisions in personnel costs is between the share of revenues and the share of value added Gross(Chart operating 1.7). surplus is the difference between value added and personnel costs (Chart 1.8). It tells us what is left for the company after it pays personnel costs. Until 2013, its development was equivalent to theGross development operating surplus of added is the value. difference In 2014, between revenues value grew added faster and and personnel so did added costs (Chart value, but1.8). growthIt tells us of what is left for the company after it pays personnel costs. Until 2013, its development was equivalent to

42 2 1. MANUFACTURING INDUSTRY the development of added value. In 2014, revenues grew faster and so did added value, but growth of personnel costs was lower, causing a surge in gross operating surplus. Since 2015, the gains of gross personneloperating costs surplus was have lower, been causing significantly a surge in lowergross operatingdue to higher surplus. growth Since 2015,of personnel the gains costs. of gross In operating2014, the surplus have been significantly lower due to higher growth of personnel costs. In 2014, the efficiency of the manufacturingefficiency of the industry manufacturing increased industry significantly, increased but since significantly, 2015 the but rate since of the 2015 increase the rate has ofbeen the decreasing. increase has been decreasing. TheThe shareshare ofof grossgross operatingoperating surplussurplus toto revenuesrevenues is is shown shown in in ChartChart 1.9.1.9. ThisThis indicatorindicator showsshows thethe specificspecific aspectsaspects of of the the individual individual divisions, divisions, namely namely the sharethe share of value of addedvalue toadded revenues to revenues and the needand forthe a needworkforce for a toworkforce generate to revenues. generate From revenues. this point From of this view, point in 2017of view, the in best 2017 divisions the best are divisions manufacture are manufacture of beverages of (CZ-NACEbeverages 11), (CZ manufacture-NACE 11), manufacture of basic pharmaceutical of basic pharmaceut products (CZ-NACEical products 21), (CZmanufacture-NACE 21), of manufacture chemicals and of preparationschemicals and (CZ-NACE preparations 20) and (CZother-NACE divisions. 20) and Interestingly, other divisions. the ranking Interestingly, in 2016 was the different. ranking Many in 2016 divisions was sawdifferent. large differences Many divisions in the saw value large of differencesthe indicator. in the value of the indicator.

Chart 1.3 – Value added (in CZK billions) Chart 1.4 – Value added share by CZ-NACE (MI = 100%) 1 200 29 25 28 1 000 22 27 10 23 800 20 26 24 600 16

1 063

1 006 32 967 920 17 400 809 787 767 763 30 728

662 13 31 200 21 18 14 15 2017 2016 0 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 0% 5% 10% 15% 20% 25% Source: CZSO data, 2017 MIT calculations Source: CZSO data, 2017 MIT calculations

3 43 Chart 1.5 – Share of value added to revenues (value added margin) by CZ-NACE (%) 15 14 Chart32 1.5 – Share of value added to revenues (value added margin) by CZ-NACE (%) 1523 1411 3225 2321 1131 2518 2120 3130 1822 2028 3013 2216 2827 1317 MI16 2710 1729 MI24 1026 2017 2016 29 0% 5% 10% 15% 20% 25% 30% 35% 40% 45% Source:24 CZSO data, 2017 MIT calculations 26 Chart 1.6 – Personnel costs (in CZK billions) Chart 1.7 – Personnel costs share2017 2016 0% 5% 10% 15% 20% by 25%CZ-NACE (MI30% = 100%) 35% 40% 45% Source:600 CZSO data, 2017 MIT calculations 29 Chart 1.6 – Personnel costs (in CZK billions) Chart 1.7 – Personnel costs share 25by CZ-NACE (MI = 100%) 600 28 29 500 27 25 22 28 10 500 27 23 400 22 24 10 26 23 400 20 24 300 32

569 26 30

521 20 16 487

300 459 32

438 436 434 13 422 200 569

401 30 393 17 521 16 487 11 459 438 436 434 13 200 422 31 401 393 17 100 18 11 21 31 14 100 18 15 2017 2016 0 21 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 0% 5% 10% 15% 20% 14 Source: CZSO data, 2017 MIT calculations Source: CZSO data, 2017 MIT calculations 15 2017 2016 0 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 0% 5% 10% 15% 20% Source: CZSO data, 2017 MIT calculations Source: CZSO data, 2017 MIT calculations

44 4

4 1. MANUFACTURING INDUSTRY

Chart 1.8 – Gross operating surplus (in CZK billions) Chart 1.9 – Share of gross operating surplus to revenues by CZ-NACE (%) 600 11 21 20 500 14 23 16 25 400 22 32 17 18 300 31 15 494 485 480 MI 462 200 13

373 27 353 345 327 325 29

269 28 100 10 30 24 26 2017 2016 0 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 0% 5% 10% 15% 20% 25% Source: CZSO data, 2017 MIT calculations Source: CZSO data, 2017 MIT calculations

1.1.3. NUMBER OF EMPLOYEES AND EMPLOYED PERSONS 1.1.3. NUMBER OF EMPLOYEES AND EMPLOYED PERSONS Mostly in small and micro enterprises, the owners (entrepreneurs) work alongside employees. They are mostlyMostly inself small-employed and micro persons. enterprises, After theincluding owners the (entrepreneurs) working owners, work thealongside number employees. of employed They personsare mostly is higherself-employed than the persons. number After of employees. including the The working share ofowners, worki ngthe owners number in of the employed number personsof employed is higher persons than the number of employees. The share of working owners in the number of employed persons increased from increased from 8.8% in 2008 to 11.1 % in 2012, and then started declining to 10.6% 2017. Employment in 8.8% in 2008 to 11.1 % in 2012, and then started declining to 10.6% 2017. Employment in the manufacturing theindustry manufacturing shows a laggingindustry link shows to thea lagging development link to the of revenuesdevelopment (Chart of 1.10).revenues To (Chart better 1.10). understand To better the undersdevelopmenttand the of employees,development it is ofsuitable employees, to comment it is suitableseparately to on comment the number separately of employees. on the In number2009, sales of employees.declined to theIn 2009, lowest sales level. declined Employee to the dismissal lowest occurred level. Employee in 2009 dismissal(as a response occurred to a indrop 2009 in (asrevenues), a response but toit went a drop on inuntil revenues), 2010, when but revenuesit went on began until to 2010, grow. when The numberrevenues of beganworking to owners grow. The also number decreased of workingin 2009, but increased significantly in 2010. In 2011, revenues grew at a similar pace as in 2010, which was associated owners also decreased in 2009, but increased significantly in 2010. In 2011, revenues grew at a similar pace by the recruitment of new employees. In 2012 and 2013, the revenues growth rate declined and companies asresponded in 2010, withwhich a gradualwas associated reduction by in the the recruitmentnumber of employees. of new employees. In 2012 and 2013, the revenues growth rate declined and companies responded with a gradual reduction in the number of employees. In terms of MI divisions, thethe largestlargest employersemployers are CZCZ-NACE-NACE 29 manufacture of vehicles, and CZCZ-NACE-NACE 25 manufacture of metal structures. Somewhat smaller employers are CZ-NACE 28 manufacture of machinery, manufacture of metal structures. Somewhat smaller employers are CZ-NACE 28 manufacture of machinery, CZ-NACE 27 manufacture of electrical equipment, CZ-NACE 10 manufacture of food products and CZ-NACE CZ22- NACEmanufacture 27 manufacture of rubber of and electrical plastic equipment,products (Chart CZ-NACE 1.11). 10 The manufacture share of working of food owners products in andemployment CZ-NACE 22in individualmanufacture divisions of rubber (Chart and 1.12) plastic is the products largest (Chart in manufacture 1.11). The ofshare wood of working(CZ-NACE owners 16) and in manufactureemployment ofin individuwearingal apparel divisions (CZ-NACE (Chart 14).1.12) is the largest in manufacture of wood (CZ-NACE 16) and manufacture of wearing apparel (CZ-NACE 14).

5 45 Chart 1.10 – Employed persons Chart1 600 000 1.10 – Employed persons 1 600 000 Employees Owners Employees Owners 1 400 000 1 400 000 1 328 155 1 282 695 1 328 155 1 260 906 1 232 477 1 260 906 1 282 695 116 447 1 180 752 1 196 483 1 196 728 1 180 996 1 197 166 1 232 477 116 447 1 164 236 1 196 483 1 196 728 1 197 166 1 200 000 1 180 752 1 164 236 1 180 996 137 389 136 355 1 200 000 134 532 137 389 136 355 114 951 130 900 133 374 129 821 132 321 134 532 125 502 130 900 132 321 114 951 125 502 133 374 129 821 1 000 000 1 000 000

800 000 800 000

600 000 600 000 1 211 708 1 146 340 1 123 517 1 211 708 1 097 945 1 065 801 1 065 583 1 064 845 1 063 354 1 051 174 1 146 340 1 038 734 1 123 517 1 097 945 1 065 801 1 065 583 1 064 845 1 063 354 1 051 174

400 000 1 038 734 400 000

200 000 200 000

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

Chart 1.11 – Share in employment Chart 1.12 – Share of working owners in employment

Chartby CZ- 1.11NACE – (MIShare = 100%) in employment Chartby CZ -1.12NACE – (%)Share of working owners in employment by CZ-NACE (MI = 100%) by CZ-NACE (%) 29 16 29 16 25 14 25 14 28 18 28 18 27 25 27 25 10 31 10 31 22 32 32 22 MI 23 MI 23 11 24 11 24 27 26 27 26 15 32 15 32 23 16 23 16 10 20 10 20 13 13 13 13 26 30 26 30 20 31 20 31 17 17 17 28 17 28 18 22 18 22 14 30 14 30 11 24 11 24 21 21 21 21 15 2017 2016 29 2017 2016 15 2017 2016 29 2017 2016 0% 2% 4% 6% 8% 10% 12% 14% 16% 0% 10% 20% 30% 40% 50% Source:0% CZSO2% data, 4%2017 MIT6% calculations8% 10% 12% 14% 16% Source:0% CZSO data,10% 2017 MIT20% calculations30% 40% 50% Source: CZSO data, 2017 MIT calculations Source: CZSO data, 2017 MIT calculations 1.1.4 LABOUR PRODUCTIVITY AND AVERAGE WAGE 1.1.4 LABOURLABOUR PRODUCT PRODUCTIVITYIVITY AND AND AVERAGE AVERAGE WAGE WAGE Generally, labour productivity is calculated as a share of value added and the number of employees. This Generally, labourlabour productivityproductivity isis calculated asas a share of value added and the number of employees. This calculation is correct for capital companies, but it is a problem for self self-employed-employed persons because self-self- 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.added. Therefore, labour productivity per employed person, employed persons also work and create value added. Therefore, labour productivity per employed person, i.e. employees + working owners, was calculated. The development of both productivities was compared i.e. employees + working owners, was calculated. The development of both productivities was compared

46 6 6 with the development of the average wage. The development of both productivities is very similar; however, the labour productivity of employed persons is less dynamic.1. InMANUFACTURING terms of labour productivity INDUSTRY dynamics and average wage dynamics, the situation was favourable except in 2009. Owners are remunerated from profits, which is not reflected in the average wage. After including owners’ with the development of the average wage. The development of both productivities is very similar; however, remuneration, the “average wage” would probably increase, and this could mean that also in 2012, the the labour productivity of employed persons is less dynamic. In terms of labour productivity dynamics and labouraverage productivity wage dynamics, dynamics the situation of employed was favourable persons would except be in 2009.worse Owners than the are “average remunerated wage” from (see profits, Chart 1.13).which is not reflected in the average wage. After including owners’ remuneration, the “average wage” would Givenprobably that increase, the share and of thisworking could owners mean isthat high also in somein 2012, divisions, the labour labour productivity productivity dynamics is further of considered employed persons would be worse than the “average wage” (see Chart 1.13). as productivity of employed persons. The development of labour productivity and average wage in the manufacturingGiven that the shareindustry of isworking shown ownersin Charts is 1.14high andin some 1.15. divisions, Labour productivity labour productivity recorded is four further major considered changes. Inas 2009 productivity it dropped. of employed In the years persons. 2010, The 2014 development and 2017 ofit labourrecorded productivity a steep surge. and average Average wage wage in was the increasingmanufacturing throughout industry the is shown period, in but Charts at the 1.14 end and of 1.15. the periodLabour itsproductivity growth even recorded accelerated four major in connection changes. withIn 2009 tensio it dropped.ns in the In labour the years market 2010, where 2014 unemployment and 2017 it recorded is below a steep its natural surge. level, Average which wage is awas strong increasing driver forthroughout wage growth. the period, Lack of but workers at the isend evident of the in period practically its growth all areas. even accelerated in connection with tensions in the labour market where unemployment is below its natural level, which is a strong driver for wage growth. TheLack highestof workers labour is evident productivity in practically in 2017 all are areas. recorded in the following divisions: manufacture of beverages (CZ-NACE 11) and manufacture of chemicals and chemical preparations (CZ-NACE 20; the surge related to theThe resumptionhighest labour of productionproductivity after in 2017 extraordinary are recorded events in thein 2016), following but divisions:the ranking manufacture of divisions of in beverages2016 was different.(CZ-NACE CZ11)-NACE and manufacture 20 recorded theof chemicals largest increase and chemical in annual preparations labour productivity (CZ-NACE (Chart 20; the 1.16). surge The related division to the resumption of production after extraordinary events in 2016), but the ranking of divisions in 2016 was withdifferent. the highest CZ-NACE average 20 recorded wage inthe 2017 largest is the increase manufacture in annual of labourmotor productivityvehicles (CZ -(ChartNACE 29).1.16). In The2016 division it was CZwith-NACE the highest11 manufacture average ofwage beverages in 2017 (Chart is the 1.17).manufacture of motor vehicles (CZ-NACE 29). In 2016 it was CZ-NACE 11 manufacture of beverages (Chart 1.17).

Chart 1.13 – Comparison of labour productivity and average wage developments (2008 = 100%)

Avarage wage Labour productivity

145%

140%

135%

130%

125%

120%

115%

110%

105%

100%

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

Source: CZSO data, 2017 MIT calculations

47 Chart 1.14 – Labour productivity (CZK/person/month) Chart 1.15 – Average monthly wage (CZK/person) 70 000 35 000

60 000 30 000

50 000 25 000

40 000 20 000

69 038

66 493

65 363

64 071

30 000 15 000

29 673

57 088

27 713 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 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Source: CZSO data, 2017 MIT calculations Source: CZSO data, 2017 MIT calculations

Chart 1.16 – Labour productivity by CZ-NACE Chart 1.17 – Average monthly wage by CZ-NACE (CZK/person/month) (CZK/person)

11 29 20 21 21 11 29 30 17 20 22 26 23 24 26 28 MI 23 28 27 24 MI 27 22 30 17 25 25 10 18 13 32 32 13 18 10 16 31 31 16 15 15 14 2017 2016 14 2017 2016 0 20 000 40 000 60 000 80 000 100 000 120 000 140 000 0 5 000 10 000 15 000 20 000 25 000 30 000 35 000 40 000 Source: CZSO data, 2017 MIT calculations Source: CZSO data, 2017 MIT calculations

1.1.5 NUMBER OF ENTERPRISES

Until 2012, the number of businesses grew, even in 2009, during the recession. Probably some businesses have disappeared, but more new businesses emerged, as the recession also opened up new business

48 8 1. MANUFACTURING INDUSTRY

1.1.5 NUMBER OF ENTERPRISES Until 2012, the number of businesses grew, even in 2009, during the recession. Probably some businesses have disappeared, but more new businesses emerged, as the recession also opened up new business opportunities.opportunities. InIn 2010 2010 to to2012, 2012, business business growth growth was drivenwas driven by an byincrease an increase in working in workingowners - ownersself-employed - self- persons.employed In persons.2013, the In number 2013, ofthe self-employed number of self persons-employed and thus persons the number and thus of businesses the number decreased. of businesses Since 2014,decreased. there Sincehas again 2014, been there a slighthas again increase been in a theslight number increase of businessesin the numbe (Chartr of businesses1.18). (Chart 1.18). InIn thethe MIMI structurestructure byby thethe numbernumber ofof enterprisesenterprises (Chart(Chart 1.19),1.19), thethe dominantdominant divisionsdivisions areare thosethose withwith aa highhigh shareshare ofof micromicro enterprises,enterprises, includingincluding self-employedself-employed personspersons (CZ-NACE(CZ-NACE 2525 manufacturemanufacture ofof metalmetal structuresstructures andand CZ-NACECZ-NACE 1616 manufacturemanufacture ofof wood).wood). OnOn thethe otherother end,end, therethere areare divisions divisions with with mostlymostly large large enterprises. enterprises.

Chart 1.18 – Number of enterprises Chart 1.19 – Number of enterprises by CZ-NACE 200 000 25 16 180 000 14 27 160 000 32 18 140 000 10 23 120 000 31 28

100 000 22

178 153 175 420 173 889

172 596 11 80 000 172 054 170 041 167 688 167 344

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

1.1.6 ASSETS AND EQUITY CZ-NACE1.1.6 ASSETS sections AND orEQUITY divisions can be characterized by revenues, number of employees or number of enterprises. Other characteristics are the size of assets and equity, i.e. characteristics tied to assets and their financing.CZ-NACE sections or divisions can be characterized by revenues, number of employees or number of enterprises. Other characteristics are the size of assets and equity, i.e. characteristics tied to assets and Fromtheir financing.2009, the size of assets in the manufacturing industry was growing until 2017, following a decrease compared to 2008 (Chart 1.20). The development of the value of assets depends on the development of their structureFrom 2009, and the the size growth of assets indices in ofthe individual manufacturing asset items, industry but wasthis alreadygrowing goes until beyond 2017, followingthis brief discussion.a decrease Totalcompared assets to are 2008 equal (Chart to total 1.20). liabilities, The development i.e. capital tied of inthe manufacturing value of assets enterprises. depends Theon thedevelopment development of the of assetstheir structure in the manufacturing and the growth industry indices can oftherefore individual be assetinterpreted items, asbut the this development already goes of capitalbeyond tied this in brief the manufacturing industry. discussion. Total assets are equal to total liabilities, i.e. capital tied in manufacturing enterprises. The Indevelopment terms of divisions, of the assetsmanufacture in the manufacturingof motor vehicles industry (CZ-NACE can therefore29) had markedly be interpreted highest as assets the development(Chart 1.21). Itof was capital followed tied in by the the manufacturing manufacture industry. of machinery (CZ-NACE 28) and the manufacture of metal structures (CZ-NACE 25). In terms of divisions, manufacture of motor vehicles (CZ-NACE 29) had markedly highest assets (Chart 1.21). It was followed by the manufacture of machinery (CZ-NACE 28) and the manufacture of metal structures (CZ-NACE 25). 49

9 An interesting indicator showing the capital intensity of production is the endowment of employees with intangibleAn interesting and tangibleindicator fixed showing assets the (see capital Chart intensity 1.22). Over of productionthe period 2008–2017,is the endowment the value of employeesof this indicator with grew, except in 2011 and 2017. intangible and tangible fixed assets (see Chart 1.22). Over the period 2008–2017, the value of this indicator Ingrew, terms except of divisions, in 2011 and endowment 2017. with intangible and tangible fixed assets (Chart 1.23) is highest in the manufactureIn terms of divisions, of metals endowment (CZ-NACE 24),with chemicalintangible industry and tangible (CZ-NACE fixed 20),assets manufacture (Chart 1.23) of is motor highest vehicles in the (CZ-NACEmanufacture 29) andof metals the manufacture (CZ-NACE 24), of beverageschemical industry(CZ-NACE (CZ 11).-NACE Only 20), in these manufacture divisions of is motorendowment vehicles higher (CZ- than in the manufacturing industry as a whole. The lowest endowment is shown in the manufacture of NACE 29) and the manufacture of beverages (CZ-NACE 11). Only in these divisions is endowment higher wearing apparel (CZ-NACE 14) and the manufacture of leather (CZ-NACE 15). Endowment of employees with assetsthan in reflects the manufacturing the different natureindustry of asproduction a whole. in The each lowest division. endowment is shown in the manufacture of wearing apparel (CZ-NACE 14) and the manufacture of leather (CZ-NACE 15). Endowment of employees Fromwith assets 2009, re theflects book the valuedifferent of equitynature inof production the manufacturing in each division. industry was growing until 2017, following a decrease compared to 2008 (Chart 1.24). The share in equity of the manufacturing industry in the CZ-NACE From 2009, the book value of equity in the manufacturing industry was growing until 2017, following a divisions is shown in Chart 1.25. The shares approximately correspond to asset shares. decrease compared to 2008 (Chart 1.24). The share in equity of the manufacturing industry in the CZ-NACE divisions is shown in Chart 1.25. The shares approximately correspond to asset shares. Chart 1.20 – Assets (in CZK billions) Chart 1.21 – Assets by CZ-NACE (MI = 100%) 3 500 29 28 25 3 000 22 27 10 2 500 26 20 23 2 000 24

3 293

30 3 242

1 500

3 066 2 983

2 850 2 703 2 677 17 2 564 2 542 2 453 16 1 000 13 21 18 500 31 14 15 2017 2016 0 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 0% 5% 10% 15% 20% 25% Source: CZSO data, 2017 MIT calculations Source: CZSO data, 2017 MIT calculations

10 1. MANUFACTURING INDUSTRY

Chart 1.22 – Endowment of employees with intangible Chart 1.23 – Endowment of employees with intangible and and tangible fixed assets (in CZK thousand / person) tangible fixed assets by CZ-NACE (in CZK thousand / person) 1 100 24 20 1 000 29 11 900 MI 26 800 23 17 700 10 28 600 22 25 500 992 988 1 003 980

960 16 909 907 891 889 27 400 795 13 32 300 21 30 200 18 31 100 15 14 2017 2016 0 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 0 500 1 000 1 500 2 000 Source: CZSO data, 2017 MIT calculations Source: CZSO data, 2017 MIT calculations

Chart 1.24 – Equity (in CZK billions) Chart 1.25 – Equity according to CZ-NACE (MI = 100%) 2 000 29 28 1 800 25 22 1 600 27 23 1 400 24 20 1 200 10 26 1 000 11

1 744 17

800 1 658

1 566

1 483 30

1 400

1 331 16

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

11 51 1.2 INVESTMENT, R&D EXPENDITURES AND DIGITISATION

1.2.1 INVESTMENTS

1.2The fall INVESTMENT, in investment in 2016 was R&D due to EXPENDITURESthe conclusion of EU grants AND under the current programming DIGITALISATIONperiod and the slow start of the new programming period. The investment cycle, favourable economic development and confidence in future developments positively affected investment outcomes for 2017 1.2.1(see Chart INVESTMENTS 1.26). TheIn MI fall structure, in investment (Chart in 1.27), 2016 bywas far due the to largest the conclusion investment of EU was grants in manufacture under the current of motor programming vehicles (CZ period-NACE and29) andthe slowthen startin manufac of the turenew ofprogramming metal structures period. (CZ The-NACE investment 25) and machinerycycle, favourable (CZ-NACE economic 28). development and confidence in future developments positively affected investment outcomes for 2017 (see Chart 1.26). The share of investments in revenues shows the investment intensity of revenues. This indicator is Ininfluenced MI structure, by the (Chart technological 1.27), by far nature the largest of production investment and was thein manufacture investment ofperiod, motor i.e.vehicles also (CZ-NACEby structural 29) andchanges then within in manufacture the MI. In of 2009, metal the structures value of (CZ-NACEthe indicator 25) decreasedand machinery significantly (CZ-NACE and 28). dropped even further in 2010. Then its value grew until 2015, fell slightly in 2016, and in 2017 the value of the indicator rose Theagain. share For of the investments whole 2009 in –revenues2017 period, shows the the share investment of investments intensity ofin revenues.revenues Thiswas indicatorwell below is influenced the 2008 by the technological nature of production and the investment period, i.e. also by structural changes within thelevels MI. (see In 2009, Chart the 1.28). value Values of the for indicator individual decreased MI divisions significantly in 2016 andand 2017dropped are showneven further in Chart in 2010.1.29. Then its value grew until 2015, fell slightly in 2016, and in 2017 the value of the indicator rose again. For the whole 2009–2017 period, the share of investments in revenues was well below the 2008 levels (see Chart 1.28).

Values for individual MI divisions in 2016 and 2017 are shown in Chart 1.29.

Chart 1.26 – Investment (in CZK billions) Chart 1.27 – Investment by CZ-NACE (MI = 100%) 300 29 25 28 250 20 22 10 27 200 23 26 24 150 32 16

245 11 226

220 17 215

100 208 18 183 178

161 30 148 143 13 50 21 31 14 15 2017 2016 0 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 0% 5% 10% 15% 20% 25% Source: CZSO data, 2017 MIT calculations Source: CZSO data, 2017 MIT calculations

52 1. MANUFACTURING INDUSTRY

Chart 1.28 – Share of investment in revenues for the Chart 1.29 – Share of investment in revenues for the sale of sale of own products and services own products and services by CZ-NACE (%) 7% 32 15 17 6% 20 21 11 5% 25 16 22 4% 10 13 30

3% 6,34% 31

5,26%

5,14%

5,06% 23 4,95% 4,93% 4,89% 4,77%

4,46% 28

2% 4,27% 18 24 27 1% 29 14 26 2017 2016 0% 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 0% 2% 4% 6% 8% 10% 12% Source: CZSO data, 2017 MIT calculations Source: CZSO data, 2017 MIT calculations

1.2.2 R&D EXPENDITURE IN THE MANUFACTURING INDUSTRY 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. Reporting units are all economic entities performing R&D in the Czech Republic as the primary orR&D secondary expenditure economic includes activity. all current Linked andR&D investmentdata are available expenditure for 2010 incurred–2016. in the Czech Republic in the given year. Reporting units are all economic entities performing R&D in the Czech Republic as the primary or Thesecondary number economic of enterprises activity. with Linked R& R&DD expenditures data are available increased for 2010–2016.steadily in 2010–2016 (Chart 1.30), both in enterprises under foreign and under domestic control (except in 2017). The number of enterprises with R&D expenditures increased steadily in 2010–2016 (Chart 1.30), both in In the monitored period 2010–2017, the total R&D expenditures were highest in 2017 (Chart 1.31) and enterprises under foreign and under domestic control (except in 2017). continued to grow. The decisive R&D investments came from entrepreneurs. Public resources, both domesticIn the monitored and foreign, period were 2010–2017, several orders the lower. total R&D expenditures were highest in 2017 (Chart 1.31) and Incontinued 2016, the to grow.number The ofdecisive enterprises R&D investments according tocame CZ- fromNACE entrepreneurs. was highest in Public CZ-NACE resources, 28 Manufacture both domestic of machineryand foreign, and were lowest several in CZ orders-NACE lower. 18 Printing and reproduction of recorded media (Chart 1.32). R&DIn 2016, expenditure the number according of enterprises to CZ- NACEaccording and tobroken CZ-NACE down was by highest origin inis CZ-NACEshown in 28 Chart Manufacture 1.33. The ofhighest machinery R&D expenditureand lowest in is CZ-NACE in CZ-NACE 18 Printing 29 Manufacture and reproduction of motor of vehicles,recorded mostlymedia (Chartfrom the1.32). business sector. A higher share of public resources can be seen in CZ-NACE 26 Manufacture of computers. R&D expenditure according to CZ-NACE and broken down by origin is shown in Chart 1.33. The highest R&D expenditure is in CZ-NACE 29 Manufacture of motor vehicles, mostly from the business sector. A higher share of public resources can be seen in CZ-NACE 26 Manufacture of computers.

13 53 Chart 1.30 – Number of enterprises with R&D expenditures Chart 1.30 – Number of enterprises with R&D expenditures Domestic Under foreign control Domestic Under foreign control Domestic Under foreign control 30 000 30 000 25 140 30 000 24 327 24 034 25 140 25 000 24 034 24 327 25 140 22 358 24 034 24 327 25 000 21 386 22 358 25 000 21 386 22 358 18 857 19 596 21 386 19 596 20 000 18 857 19 596 20 000 18 857 13 211 20 000 11 763 12 041 10 801 11 763 12 041 13 211 10 185 11 763 12 041 13 211 15 000 9 155 10 185 10 801 8 675 10 185 10 801 15 000 8 675 9 155 15 000 8 675 9 155 10 000 10 000 10 000 12 271 12 285 10 441 11 201 11 557 11 929 5 000 10 182 12 271 12 285 11 929 5 000 10 182 10 441 11 201 11 557 12 271 12 285 11 929 5 000 10 182 10 441 11 201 11 557 0 0 0 2010 2011 2012 2013 2014 2015 2016 2010 2011 2012 2013 2014 2015 2016 2010 2011 2012 2013 2014 2015 2016 Source: CZSO data, MIT calculations Source: CZSO data, MIT calculations Chart 1.31 – R&D expenditures in the manufacturing industry by source of funding (CZK million) Chart 1.31 – R&D expenditures in the manufacturing industry by source of funding (CZK million) Government+universities Entrepreneurs EU+other international organisations Government+universities Entrepreneurs EU+other international organisations Government+universities Entrepreneurs EU+other international organisations 30 000 30 000 26 203 30 000 25 277 26 203 24 264 25 277 26179 203 24 264 25 277 25 000 22 066 24 264 656 179 25 000 425 656 179 25 000 22 066 425 656 19 544 22338 066 425 17 841 19 544 338 20 000 19335 544 338 20 000 17 841 20 000 15 804 17 841 335 15 804 681 335 15 804 681 15 000 419 681 15 000 419 25 220 15 000 419 22 453 23 430 20 217 23 430 25 220 17 237 22 453 23 430 25 220 10 000 15 120 20 217 22 453 13 405 17 237 20 217 10 000 15 120 17 237 10 000 13 405 15 120 13 405 5 000 5 000 5 000 1 980 1 961 1 971 1 510 1 385 1 192 804 0 1 980 1 961 1 971 0 1 980 1 961 1 971 1 510 1 385 1 192 804 0 2010 2011 2012 12013 510 12014 385 12015 192 2016804 2010 2011 2012 2013 2014 2015 2016 2010 2011 2012 2013 2014 2015 2016 Source: CZSO data, MIT calculations Source: CZSO data, MIT calculations Chart 1.32 - Number of enterprises with R&D expenditures by CZ-NACE in 2016 Chart 1.32 - Number of enterprises with R&D expenditures by CZ-NACE in 2016 Domestic Under foreign control Domestic Under foreign control Domestic Under foreign control 28 258 28 258 2825 145 258 25 145 2527 125 145 27 125 2726 104 125 26 104 2620 89 104 20 89 2022 77 89 22 77 2229 71 77 29 71 2910 6971 10 69 1023 58 69 23 58 2332 41 58 32 41 3230 4041 30 40 3021 23 40 21 23 2113 23 13 23 1324 2123 24 21 2431 15 21 31 15 3116 10 15 16 10 1614 910 14 9 1417 89 17 8 1711 8 11 8 1115 5 8 15 5 1518 35 18 18 3 0 3 50 100 150 200 250 300 0 50 100 150 200 250 300 0 50 100 150 200 250 300 Source: CZSO data, MIT calculations Source: CZSO data, MIT calculations 14 14 54 1. MANUFACTURING INDUSTRY

Chart 1.33 – R&D expenditures by CZ-NACE in 2016 by source of funding (CZK million)

Government+universities Entrepreneurs EU+other international organisations

29 7 818 28 3 956 27 3 799 26 2 334 30 1 711 21 1 138 25 1 052 22 1 051 20 906 32 557 23 547 13 289 10 223 24 159 16 47 31 30 17 26 11 17 15 15 14 14 18 14 19 9 0 1 000 2 000 3 000 4 000 5 000 6 000 7 000 8 000 9 000

Source: CZSO data, MIT calculations

1.2.3 DIGITISATION

Currently, digitization is an ongoing global process. The manufacturing industry, as a significant component 1.2.3of the DIGITALISATION world economy, is undergoing a profound transformation and entering a new era of production. Individual manufacturing industries are affected by this change in various ways, according to the Currently, digitalization is an ongoing global process. The manufacturing industry, as a significant component technological and manufacturing characteristics of the industry. It should be emphasized that digitization of the world economy, is undergoing a profound transformation and entering a new era of production. Individualitself is manufacturingonly a “necessary” industries condition are affected of Industry by this change4.0, which in various primarily ways, reflects according the to impactthe technological of new andtechnologies manufacturing on industrial characteristics production of the and industry. which, It shouldin a wider be emphasized context, thanks that digitization to intelligent itself digital is only a “necessary”communication, condition brings of together Industry all 4.0, levels which of value primarily added reflects – from the product impact dev ofelopment new technologies to logistics, on including industrial productionnew business and models.which, in a wider context, thanks to intelligent digital communication, brings together all levelsThe ofrelationship value added between – from digitization product development (Industry 4.0) to andlogistics, labour including productivity new inbusiness the manufacturing models. industry in 2016 can be tracked based on available data using the following indicators: Internet connectivity, The relationship between digitalization (Industry 4.0) and labour productivity in the manufacturing industry in website2016 can capabilities, be tracked integration based on availableof enterprise data processes using the or following the use ofindicators: cloud computing. Internet connectivity, website capabilities,99.8% of the integration manufacturing of enterprise industry processes enterprises or thehave use Internet of cloud connection computing. (measured by revenue share). Labour productivity in these enterprises is practically at the level of the manufacturing industry (CZK 99.8%66,615). of the On manufacturingthe other hand, industry labour productivityenterprises inhave enterprises Internet with connection no Internet (measured connection by revenueis almost share). half Labour productivity in these enterprises is practically at the level of the manufacturing industry (CZK 66,615). (CZK 38,863). Labour productivity increases with Internet connection speed (Chart 1.34). From CZK 34,920 On the other hand, labour productivity in enterprises with no Internet connection is almost half at less than 2 Mbps to CZK 97,632 at more than 100 Mbps. More than a third of enterprises (measured by (CZK 38,863). Labour productivity increases with Internet connection speed (Chart 1.34). From CZK 34,920 at revenueless than share) 2 Mbps have to the CZK fastest 97,632 Internet at more connection. than 100 Mbps. More than a third of enterprises (measured by revenue share) have the fastest Internet connection.

Websites can be used for various purposes. In terms of Industry 4.0, it is important to ensure that the website allows customers to place an order, make payments, and monitor the progress of their order (Chart 1.35). If the website allows all three activities, labour productivity in such an enterprise is practically double (CZK 130,037) compared to the manufacturing industry average. Such enterprises account for 11.5% of the manufacturing industry’s revenue. If they do not allow either of these activities, the labour productivity is lower than the manufacturing industry average.

55 Chart 1.34 – Internet Connection

Labour productivity (CZK/person/12) Shares 22,3% more than 100 Mb/s 97 632 more than 100 Mb/s 32,8% 35,1%

30 - 99,9 Mb/s 61 565 26,7% 30 - 99,9 Mb/s 24,7% 26,0%

10 - 29,9 Mb/s 57 072 34,8% Employees 10 - 29,9 Mb/s 29,9% Value added Yes 27,9% Sales

2 -9,9 Mb/s 53 527 Yes 14,7% 2 -9,9 Mb/s 11,8% 10,6% less than 2 Mb/s 34 920 1,1% less than 2 Mb/s 0,6% total 66 615 0,3% 99,6% total 99,7%

No 38 863 99,8%

0,4%

No 0,3%

MI 66 493 0,2%

0 20 000 40 000 60 000 80 000 100 000 0% 20% 40% 60% 80% 100% Source: CZSO data, MIT calculations

Chart 1.35 – Website capabilities

Labour productivity (CZK/person /12) Shares 72,9% No 63 168 No 69,2% 70,7% 6,2% Employees ayments +Payments Yes 130 037 Yes 12,2% Value added Tracking+Ordering 11,5% Tracking+Ordering+P Sales No 62 483 91,3% No 85,8% 86,8%

Payments Yes 108 366 8,7% Payments Yes 14,2% 13,2% No 63 088 73,6% No 69,8% Ordering Yes 75 966 71,2% 26,4% Ordering Yes 30,2% No 62 089 28,8% 90,2% status No 84,3% Yes 107 190

Tracking order 85,2% 9,8% Yes 15,7% MI 66 493 14,8% Tracking status order Tracking

0 20 000 40 000 60 000 80 000 100 000 120 000 140 000 0% 20% 40% 60% 80% 100% Source: CZSO data, MIT calculations

56 16 of the manufacturing industry’s revenue. If they do not allow either1. MANUFACTURINGof these activities, INDUSTRYthe labour productivity is lower than the manufacturing industry average.

TheThe integrationintegration of of in-house in-house processes processes means means interconnecting interconnecting information information for automated for automated data sharing data throughsharing thethrough following the followin systems:g systems:

-- ERPERP (Enterprise (Enterpri Resourcese Resource Planning) Planning) integrates integrates in-house in -processeshouse processes such as production, such as production, logistics, purchasing, logistics, storage,purchasing, sales, storage, distribution, sales, accounting, distribution, etc. accounting, These are interconnectedetc. These are databases.interconnected The ERP databases. system providesThe ERP a systemreal-time provides overview a real of in-house-time overview processes. of in -house processes. - CRM (Customer Relationship Management) is a management information system about clients and - CRM (Customer Relationship Management) is a management information system about clients and processes related to them. processes related to them. - SMC (Supply Chain Management) is a system that allows real-time control of the entire supply-chain. -Introducing SMC (Supply ERP Chain or CRM Management) or their comb is a inationsystem methatans allows higher real-time labour controlproductivity of the ofentire enterprises. supply-chain. However, not as much as the website applications (Chart 1.36). The finding that ERP has introduced in enterprises Introducing ERP or CRM or their combination means higher labour productivity of enterprises. However, not as muchaccounting as the forwebsite over applications81% of the (Chartmanufacturing 1.36). The industry’s finding that revenues ERP has isintroduced positive. inCRMs enterprises are introduc accountinged in forenterprises over 81% that of theaccount manufacturing for over 50% industry’s of revenue. revenues Together, is positive. both ERP CRMs and are CRM introduced businesses in accountenterprises for overthat account49% of forrevenue. over 50% The of introduction revenue. Together, of the both SCM ERP system and CRMis interesting. businesses Itaccount is used for in over a small 49% ofnumber revenue. of Theenterprises introduction whose of labour the SCM productivity system is isinteresting. practically It the is usedsame in as a the small manufacturing number of enterprises industry average. whose labour productivity is practically the same as the manufacturing industry average.

Chart 1.36 – Integration of in-house processes

Labour productivity (CZK/person/12) Shares 89,5% No 66 384 No 89,4% 82,9% SCM SCM Yes 67 428 10,5% Yes 10,6% 17,1% No 48 199 23,0% Employees No 16,7% Value added 17,1% Sales

ERP+CRM Yes 81 356 39,2% ERP+CRM Yes 48,0% 49,3% No 57 166 58,4% No 50,2% CRM Yes 79 602 49,1%

CRM 41,6% Yes 49,8% No 48 391 50,9% 25,4% ERP No 18,5% Yes 72 641 18,8%

ERP 74,6% Yes 81,5% MI 66 493 81,2%

0 20 000 40 000 60 000 80 000 100 000 -10% 10% 30% 50% 70% 90% Source: CZSO data, MIT calculations

57 Chart 1.37 – Use of cloud computing

Labour productivity (CZK/person/12) Shares

5,1% Computing power+ERP+CRP 155 091 Employees Computing power+ERP+CRP 12,0% Value added 11,8% Sales

Computing power 137 876 5,9%

Computing power 12,2% Cloud 12,0% No 60 180 Cloud 70,3%

No 63,6%

Yes 81 429 61,4%

29,7%

Yes 36,4%

MI 66 493 38,6%

0 40 000 80 000 120 000 160 000 0% 10% 20% 30% 40% 50% 60% 70% 80% Source: CZSO data, MIT calculations CloudCloud computingcomputing meansmeans usingusing paidpaid services that allow remote accessaccess to computing capacities andand data storagestorage viavia the the Internet. Internet. Cloud Cloud computing computing is usedis used in morein more than than a third a third of enterprises, of enterprises, measured measured by the by share the inshare the inmanufacturing the manufacturing industry’s industry’s revenues. revenues. Labour Labouproductivityr productivity in these in enterprises these enterprises (CZK 81,429) (CZK 81,429) is higher is thanhigher the than manufacturing the manufacturing industry industry average average (see Chart (see 1.37). Chart That’s 1.37). not That’s such not a big such difference. a big difference. However, However, if Cloud Computing is used to run in-house applications, labour productivity is significantly higher (CZK 137,876). CC if Cloud Computing is used to run in-house applications, labour productivity is significantly higher (CZK together with ERP and CRP results in even higher labour productivity. The problem is that the revenue share of137,876). these enterprises CC together is aroundwith ERP 12%. and CRP results in even higher labour productivity. The problem is that the revenue share of these enterprises is around 12%. Industry 4.0 assumes the processing of Big Data, primarily through cloud computing. A prerequisite for Big DataIndustry and 4.0cloud assumes computing the processing is fast internet. of Big WhileData, primarilythe above through analysis cloud does computing. not provide A sufficientprerequisite hard for data Big aboutData and Industry cloud 4.0, computing it is clear is that fast cloud internet. computing While theenterprises above analysis have the does highest not labourprovide productivity. sufficient hard data about Industry 4.0, it is clear that cloud computing enterprises have the highest labour productivity. The Czech Republic in an international comparison

ThisThe sub-chapterCzech Republic contains in an internationalan international comparison comparison of the Czech Republic within selected indicators such as: the share of enterprises that have purchased cloud computing services, the share of enterprises that have carriedThis sub out-chapter Big Data contains analysis, an the international share of enterprises comparison with ofInternet the Czech access, Republic and the within share ofselected enterprises indicators using Internetsuch as: connectionthe share of with enterprises a specified that download have purchased speed. cloud computing services, the share of enterprises Tablethat have1.2.3.1 carried - Share out of Bigenterprises Data analysis, in the manufacturingthe share of enterprises industry that with have Internet purchased access, cloud and computing the share ser of- vicesenterprises in 2016 using Internet connection with a specified download speed.

TableShare 1.2.4.1of Country- Share of enterprises in the manufacturing industry that have purchased cloud computing servicesenterprises in 2016Czech Slovakia Poland Hungary Germany Share of CountryRepublic enterprises 14.73 14.39 7.27 9.87 13.87 Czech Slovakia Poland Hungary Germany Source: OECD (https://stats.oecd.org), 2018 Republic 14.73 14.39 7.27 9.87 13.87

Source: OECD (https://stats.oecd.org), 2018

58 18 1. MANUFACTURING INDUSTRY

As can be seen from Table 1.2.3.1, the Czech Republic is best among the selected countries, where cloud computing services were purchased by 14.73% of the enterprises in the manufacturing industry in 2016. However, there is room for improvement worldwide, because the global winner was Finland where cloud computing services were purchased by 59.19% of enterprises in the manufacturing industry in 2016.

Similar results are also achieved by the Czech Republic within Big Data analysis. In 2016, 6.69% of Czech enterprises in the manufacturing industry performed Big Data analysis. In the selected sample of countries, we were beaten in 2016 only by Slovakia, where this analysis was carried out by 8.73% of the enterprises in the manufacturing industry. In the remaining V4 countries and in Germany, the share of enterprises ranged from 4.6 to 4.8%. The best results on a global scale were reached by the Netherlands with 14.99%.

In terms of Internet access, in 2016 98.03% of Czech enterprises had broadband Internet connection (including both fixed and mobile connection). Therefore, the Czech Republic again placed best compared to other V4 countries and Germany. In these countries, the share of enterprises with access to the Internet ranged from 92 to 96%.

Table 1.2.3.2 – Share of companies in the manufacturing industry using internet connection with a given download speed in 2016

Country Download speed Czech Republic Slovakia Poland Hungary Germany

Less than 2 Mbps 3.58 8.26 3.59 3.14 6.61

2 Mbps – less than 10 Mbps 35.36 36.67 30.25 30.07 27.75

10 Mbps – less than 30 Mbps 39.11 22.73 29.98 32.98 29.07

30 Mbps – less than 100 Mbps 11.99 10.77 15.32 15.35 21.1

More than 100 Mbps 7.68 6.97 8.52 8.29 8.97 Source: OECD (https://stats.oecd.org), 2018

Despite the high internet coverage, Internet speed (expressed in download speed) remains a problem. The OECD data show that in 2016 the largest share of Czech enterprises in the manufacturing industry (39.11%) used Internet with a download speed of 10 Mbps – 30 Mbps. If we compare the share of companies in the manufacturing industry which in 2016 used Internet with a download speed of more than 100 Mbps, then it is clear that in the sample of countries the Czech Republic has the 2nd lowest share. In the remaining countries, this share is more than 8%.

1.3 PRICES

The significant increase in import prices in the first months of 2017 weakened in June; then, import prices decreased and remained in red numbers until the end of the year. The slowdown in their dynamics in the second half of the year was linked to the appreciation of the koruna exchange rate with the weaker euro-area output price growth, and was reflected in all monitored components. Import prices still supported growth in industrial output prices. The prices of imported inputs were reflected in industrial producer prices, which also reversed in January and started to grow, slowing down in the second half of the year. On average for 2017, for the first time after three years industrial prices ended higher than in the previous year (Chart 1.38).

59 dynamics in the second half of the year was linked to the appreciation of the koruna exchange rate with the weaker euro-area output price growth, and was reflected in all monitored components. Import prices still supported growth in industrial output prices. The prices of imported inputs were reflected in industrial producer prices, which also reversed in January and started to grow, slowing down in the second half of the year. On average for 2017, for the first time after three years industrial prices ended higher than in the previous year (Chart 1.38).

Chart 1.38 – Industrial Producer Price Indices in 2008 to 2017 by CZ-CPA (2005 = 100%) 130 125 120 115 110 105 100 95 90 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 MI 107,4 101,5 103,0 108,9 111,4 111,6 112,8 108,4 105,0 107,5 Consumer 112,1 113,3 114,9 117,1 121,0 122,7 123,2 123,6 124,4 127,4 Industry 110,5 107,0 108,3 114,3 116,8 117,7 116,8 113,1 109,4 111,4

Source: CZSO data, MIT calculations

1.4 FOREIGN TRADE 1.4 FOREIGN TRADE Foreign trade is presented in cross-border statistics by commodity, i.e. in the CZ-CPA classification, as Foreignopposed trade to the is presentedeconomic inactivities cross-border given statisticsin the CZ -byNACE commodity, classification. i.e. in Thethe CZ-CPAimportance classification, of MI in the as opposed national toeconomy the economic is also activitiesconfirmed given by data in the on CZ-NACE foreign trade.classification. In the total The importanceexports of the of MICzech in the Republic, national in economy 2017 MI isproducts also confirmed represent by dataalmost on 96%foreign of trade.exports In theand total93% exportsof imports of the (Chart Czech 1.39). Republic, Exports in 2017 and MI imports products of representcommodities almost from 96% the of exportsmanufacturing and 93% sector of imports were (Chart increasing 1.39). inExports 2009 –and2017, imports while of the commodities value of otherfrom thecommodities manufacturing representing sector were agricultural increasing and in raw2009–2017, material whileitems the oscillated, value of mainly other commodities due to their representingsensitivity to agricultural and raw material items oscillated, mainly due to their sensitivity to price developments. The price developments. The positive external trade balance consists of commodities of the manufacturing positive external trade balance consists of commodities of the manufacturing industry with a growth tendency (exceptindustry in with 2015 a andgrowth 2017), tendency while the(except balance in 2015 of other and commodities2017), while theis negative balance mainly of other due commodities to imports ofis energynegative raw mainly materials. due to imports of energy raw materials.

InIn aa moremore detaileddetailed viewview ofof thethe MIMI exports,exports, therethere isis evidentevident dominancedominance ofof thethe exportsexports ofof motormotor vehicles,vehicles, computers,computers, machinerymachinery andand electricalelectrical equipmentequipment (Chart(Chart 1.40).1.40). TheThe largestlargest positivepositive balancebalance inin manufacturingmanufacturing productsproducts isis in inthe the groups groups of motor of motor vehicles, vehicles, followed followed by machinery, by machinery, electrical electrical equipment equipment and metal structures.and metal Negativestructures. balances Negative are balances mainly in are the mainly groups in ofthe metals, groups chemicals of metals, and chemicals pharmaceuticals. and pharmaceuticals. Engagement of MI enterprises into global value chains can be documented on the import intensity of Engagement of MI enterprises into global value chains can be documented on the import intensity of exports. Whileexports. in While1990, CZKin 1990, 1 of CZKexports 1 of included exports includedCZK 0.286 CZK of 0.286imports, of imports,in 2015 itin was 2015 CZK it was0.5011 CZK (Chart 0.5011 1.41). (Chart It is1.41). positive It is thatpositive the thatvalue the of importsvalue of necessaryimports necessary for exports for reversedexports reversedin 2015. inIn 2015.2015, Inthe 2015, share the of shareforeign- of controlledforeign-contr enterprisesolled enterprises accounted accounted for around for 86 around % of the86 %manufacturing of the manufacturing industry’s industry’s revenues, revenues, being virtually being zerovirtually in 1990. zero Betweenin 1990. 1990Between and 19902015, and the 2015,exports the of exports the manufacturing of the manufacturing industry products industry grew products ten times, grew which would not have been possible without engaging in international division of labour. In 2015, the most ten times, which would not have been possible without engaging in international division of labour. In import-intensive division was refined petroleum products (CPA 19), followed by computer products (CPA 26), chemicals2015, the (CPAmost 24) import and -motorintensive vehicles division (CPA was 29), refined see Chart petroleum 1.42. products (CPA 19), followed by computer products (CPA 26), chemicals (CPA 24) and motor vehicles (CPA 29), see Chart 1.42. Using the share of necessary imports for export and import intensity of production from I-O tables, imports for the manufacturing industry can be estimated. Imports to the manufacturing industry amounted to CZK 2,019 billion. The balance of MI was positive in 2017, amounting to approximately CZK 2,011 billion. Compared to 20 the balance of MI CPA products of CZK 521 billion, it is a big difference. The manufacturing industry does not exclusively import goods belonging to the MI CPA (e.g. the automotive industry does not import cars). With the total external balance of CZK 422 billion, the external balance of the other sectors of the economy is significantly negative.

60 Using the share of necessary imports for export and import intensity of production from I-O tables, imports for the manufacturing industry can be estimated. Imports to the manufacturing industry amounted to CZK 2,019 billion. The balance of MI was positive in 2017, amounting to approximately CZK 2,011 billion. Compared to the balance of MI CPA products of CZK 521 billion, it is a big difference. The manufacturing industry does not exclusively import goods belonging to the MI CPA (e.g. the automotive industry does not import cars). With the total external balance of CZK 422 billion, the external balance of the other sectors of the economy is significantly negative. 1. MANUFACTURING INDUSTRY

Chart 1.39 – Exports, imports and balance 2009–2017 (CZK billion)

Export MI CPA Import MI CPA Export other CPA Import other CPA Balance MI CPA Balance other CPA 5 000

4 000 178 205 178 184 3 000 204 174 188 169 2 000 149

4 030 3 798 3 697 3 445

3 001 2 869 2 691

1 000 2 363 513 558 509 538 521

1 989 463 222 234 338 0 72 113 147 157 161 129 84 52 95 1 000 1 767 2 129 2 353 2 406 2 488 2 887 3 187 222 3 260 2 000 3 509 282 335 361 335 3 000 313

Import Export Import 289 230 273 4 000

5 000 2009 2010 2011 2012 2013 2014 2015 2016 2017

Source: CZSO data as of 9 May 2018

Chart 1.40 – Export, import and balance in 2017 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 21 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 9 May 2018

Chart 1.41 – Export intensity of manufacturing industry Chart 1.42 – Import intensity of exports by CZ-CPA in 2015 exports in % in % 60 19 90,99 29 58,08 26 57,42 24 53,57 50 13 53,45 20 52,71 61 22 50,42 MI 50,11 40 27 49,96 17 45,60 32 43,54 30 42,75 30

28 41,45

33 41,45 31 40,76 52,67 52,39

50,11 25

48,48 40,15

20 15 36,38

40,83 18

35,86

34,82 10 34,82 21 33,29 28,60 10 23 32,73 14 31,92 11 31,70 16 30,24 12 6,91 0 1990 1995 2000 2005 2010 2013 2015 0 20 40 60 80 100 Source: CZSO data, MIT calculations Source: CZSO data, MIT calculations

In terms of territory, MI commodities are largely exported to Germany (33 %), through which part of commodities from the Czech Republic is 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 (27%), followed by China (13%), Poland (8%) and Slovakia (5%), see Chart 1.43.

22 Chart 1.40 – Export, import and balance in 2017 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 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 9 May 2018

Chart 1.41 – Export intensity of manufacturing industry Chart 1.42 – Import intensity of exports by CZ-CPA in 2015 exports in % in % 60 19 90,99 29 58,08 26 57,42 24 53,57 50 13 53,45 20 52,71 22 50,42 MI 50,11 40 27 49,96 17 45,60 32 43,54 30 42,75 30

28 41,45

33 41,45 31 40,76 52,67 52,39

50,11 25

48,48 40,15

20 15 36,38

40,83 18

35,86

In terms of territory, MI commodities are largely exported to Germany (33 %), through which part of Incommodities terms of territory, from the MICzech commodities Republic is arepart largely of German exported exports to to Germany third countries. (33 %), It through is well ahead which of part other of commoditiescountries, especially from the the Czech neighbouring Republic is Slovakiapart of German (7%), Poland exports (6%), to third France countries. (5%), and It is the well United ahead Kingdomof other countries,(5%). Imports especially are again the neighbouringdominated by Slovakia Germany (7%), (27%), Poland followed (6%), Franceby China (5%), (13%), and thePoland United (8%) Kingdom and Slovakia (5%). Imports(5%), see are Chart again 1.43. dominated by Germany (27%), followed by China (13%), Poland (8%) and Slovakia (5%), see Chart 1.43.

Chart 1.43 Foreign trade in products, CZ-CPA 22 Import territories in 2017 Export territories 2017

other 33% other Germany 34% 27% Germany 33%

Spain 3% China 13% Aus tria 4% Slovakia South Korea France Poland 7% Italy Poland 3% Italy 5% 6% 4% 8% 4% Austria 3% United France Kingdom 3% Slovakia 5% 5%

Source: CZSO data as of 9 May 2018

62 1. MANUFACTURING INDUSTRY

1.5 ECONOMIC VALUE ADDED

The most aggregated indicator of efficiency is economic value added. The development of economic value added of the manufacturing industry was generally positive. In 2008–2009, it was largely unsatisfactory, being close to zero in 2010 and 2011. This changed in 2012, when the economic value added moved above zero, i.e. the manufacturing industry began to create value for its owners. In 2013, it was still close to zero. In 2014, it started growing radically, which continued in 2015. In 2016, it experienced a decrease, which continued into 2017 (Chart 1.44).

In 2017, the main divisions with excellent results of economic value added are manufacture of motor vehicles (CZ-NACE 29), and the manufacture of rubber and plastic products (CZ-NACE 22). The divisions with smallest contribution towards the economic value added are manufacture of machines (CZ-NACE 28) and manufacture of basic metals (CZ-NACE 24) – see Chart 1.45.

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), 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 (see Chart 1.46). The developments in Spread were 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 is more interesting (Chart 1.47). The production of wearing apparel (CZ-NACE 14) placed first, followed by the manufacture of motor vehicles (CZ-NACE 29), the winner of economic value added. However, the production of wearing apparel (CZ-NACE 14) placed 10th in the ranking ofvalue economic added valuein the added. MI, while Most the other Spread divisions chart also shows show the differences efficiency in of the the ranking generation of economic of economic value added value andadded. Spread. In the EVA chart, 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.

Chart 1.44 – Economic value added (in CZK billion) Chart 1.45 – Economic profit by CZ-NACE (in CZK million) 150 29 22 20 100 27 25 17 16 50 105,84 23 90,65 76,51 71,94 32 14 4,63 1,91 16,41 0 - 18

22,91 21 - 15 68,31 - 31 -50 11 106,35 - 13 26 -100 30 10 24 28 2017 2016 -150 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 -10 000 0 10 000 20 000 30 000 40 000 50 000 Source: CZSO data, MIT calculations Source: CZSO data, MIT calculations

Chart 1.46 – Spread, ROE, re and rf (%) Chart 1.47 – Spread by CZ-NACE (%)

20 14 63 29 22 15 20 17 27 10 16 18 MI 5 25 32 0 21 23 31 -5 15 11 10 -10 26 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 13 Spread - 5,7 - 8,9 - 1,8 - 1,3 0,1 0,3 5,2 6,8 5,5 4,1 28 ROE 10,3 7,6 12,7 13,0 12,4 12,5 16,2 16,9 14,9 13,8 24 re 16,0 16,5 14,6 14,3 12,3 12,2 11,1 10,1 9,5 9,7 30 2017 2016 rf 4,6 4,7 3,7 3,8 2,3 2,3 1,6 0,6 0,4 1,0 -10 -5 0 5 10 15 20 Source: CZSO data, MIT calculations Source: CZSO data, MIT calculations

24 value added in the MI, while the Spread chart shows the efficiency of the generation of economic value added.

Chart 1.44 – Economic value added (in CZK billion) Chart 1.45 – Economic profit by CZ-NACE (in CZK million) 150 29 22 20 100 27 25 17

105,84 23 90,65 76,51 71,94 32

14 4,63 1,91 16,41

0 - 18

22,91 21 -

68,31 - 31 -50 11 106,35 - 13 26 -100 30 10 24 28 2017 2016 -150 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 -10 000 0 10 000 20 000 30 000 40 000 50 000 Source: CZSO data, MIT calculations Source: CZSO data, MIT calculations

Chart 1.46 – Spread, ROE, re and rf (%) Chart 1.47 – Spread by CZ-NACE (%)

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

24 1.6 SUMMARY AND PERSPECTIVES OF THE MANUFACTURING INDUSTRY

The results of the manufacturing industry (MI) in the period 2008–2017 were very good. Among the significant aspects is the steady rise in labour productivity (except the 2009 crisis year) accompanied by a rise in average wage and maintaining a favourable relationship between the rise in labour productivity and rise in average wage. Productivity is linked to innovation and R&D expenditure. They are mutually conditional, i.e. rise in productivity allows rise in innovation and vice versa.

From the perspective of all the MI stakeholders (i.e. owners, employees, the State and others), their coalition in the MI is advantageous, and thus firm. From the perspective of business owners, the high economic value added is favourable. Good and rising wages and rising employment are beneficial for employees. Finally, the MI’s contribution to GDP creation, the payment of taxes and social security contributions by MI enterprises and, above all, the MI’s contribution to the external economic position of the Czech Republic are beneficial for the State.

The Czech Republic remains a small open economy with a strongly export-oriented industry. Industry accounts for about a third of GDP, which is practically the largest share of the EU-28. Currently, we are also the country with the second lowest unemployment rate. However, if the Czech economy is to keep this strong position on a long-term basis, it is necessary to respond to the developmental trends in technologies and in society, especially connected with digitization, and to apply them in practice. The future will be mainly influenced by the acceleration of technological innovations. At present and in the near future, this primarily means Industry 4.0. With regard to this phenomenon, and depending on a successful expansion of new technology and digital platforms, fundamental technological changes can be expected by 2020, notably in the manufacturing sector as well as in other sectors of the economy. Industry 4.0 has several levels based on

64 1. MANUFACTURING INDUSTRY the deployment of information technologies and the integration of the Internet, cybernetic-physical systems and artificial intelligence systems into pre-production stages, production, services and all other sectors of the economy, but also into new business models including product servicing, and on MI stakeholder involvement in innovation related to the so-called “4th Industrial Revolution”.

It is based on 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 various 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.

Fundamental innovations often take place outside the Czech Republic, but given the interconnection of our MI within global value chains (they account for about 70% of MI revenues), 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 a critical. Therefore, success will not only depend on the Czech Republic, but will be affected by the situation of our main partners, especially Germany.

Digitization concerns a wide range of economic sectors. Among them are branches of the manufacturing industry such as electronics, electrical engineering, design and manufacture of machinery and equipment, manufacture of instrument, automotive industry, manufacture of chemical and pharmaceutical products, metallurgy and steel, information technology and industrial automation, etc., as well as other sectors such as power engineering, maintenance, telecommunication and radiocommunication, banking, financial and marketing services, business activities, consultancy services, advertising, software development, agriculture, environment, health, nutrition and others.

The government must also play its part. The industry and the whole economy are going through major changes that will have consequences for the society as a whole, and therefore the Industrial Initiative 4.0 was formed in 2016. It resulted in a society-wide discussion involving not only businesses, academia and State administration, but also social partners, and subsequently it resulted in “Society 4.0 Alliance” established by the government at the beginning of 2017. Its task, or the task of the Digital Agenda Coordinator of the Czech Republic, is to formulate the Action Plan for Society 4.0 on this basis.

The aim of Industry 4.0 is to show possible directions of development and to outline measures that could not only support the Czech economy and industrial base, but also help to prepare the whole society for absorbing this technological change. The initiative contains basic information on the need for urgent changes brought about by the onset of the 4th Industrial Revolution, and maps out the possible measures to support investment, applied research and standardization, handles questions related to cyber security, logistics and legislation, and, most importantly for both trade unions and employers – it involves the trends related to the labour market, training and human resource development.

It is obvious that the situation on the labour market will change. Although new jobs and professions will be created, other, especially less qualified jobs, will be lost. Therefore, conditions must be created so that the changes are not destructive for the development of society, but that they provide an opportunity for the growth of people’s qualifications. The increase in the requirements for the technically educated workforce should naturally also lead to an increase in the workers’ wage, as called for by workers’ representatives.

Early recognition of Industry 4.0 will increase the attractiveness of the Czech Republic for new foreign investors and motivate foreign companies already present in our country to expand their investments. Reducing energy and raw material intensity of production, increasing productivity in production, optimizing logistics routes, technology solutions for decentralized energy production and distribution systems, and intelligent transport systems – these are the major benefits of Industry 4.0 for improved resource efficiency.

The introduction of the Industry 4.0 strategy will allow a comprehensive optimization of the entire vertical production process, for example in the automotive industry and other manufacturing industries. In fully

65 automated manufacturing operations, it will be possible to also produce small production batches that will reflect current customer requirements while maintaining the efficiency of mass production. It will also lead to the creation of “smart factories” where “smart products” will be produced. Enterprise systems will react flexibly to immediate and changing demand for products in real-time. Smart factories will thus open the door for new ways of creating added value.

66 2. CZ-NACE 10 MANUFACTURE OF FOOD PRODUCTS 2. CZ-NACE 10 MANUFACTURE OF FOOD PRODUCTS

2.1 DIVISION CHARACTERISTIC 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 and starch products; 10.7 Manufacture of bakery, confectionery and other farinaceous products; 10.8 Manufacture of other food products; 10.9 Manufacture of prepared animal feeds.

The manufacture of food products belongs to the traditional branches of the Czech processing industry with strategic importance. This importance is due to the fact that food production ensures the feeding of the population, and this demands the quantity and food self-sufficiency for the basic food types. Food policy based on food law considers food safety to be a priority monitored at Government level. The necessary obligations in this context are mainly placed on food business operators and the relevant supervisory authorities.

Another priority that is gaining importance is food quality both in the EU and in the Czech Republic. A large share of consumers have positive opinion of the KLASA national quality label. Some unique products are known from regional competitions as “Regional foods”. Consumers who prefer domestic production focus on products bearing the “Czech food” logo.

A major part of the production, especially in leading and large companies, is manufactured industrially, with introduction of digitization and automation. Some of these companies are controlled by foreign capital. However, handicraft is also maintained, especially for smaller companies supplying local markets. Most sales are realized through retail chains. Food is generally available to consumers, whether in-store or on-line. On-line sales have been gaining in importance. It is associated with flexible logistics and modern warehousing.

The range of foods is very wide, from fresh, with short consumption times, to durable foods. Organic food and farm food are also available. The products are also divided by the agrarian raw materials processed, so the structure of the CZ-NACE 10 division, as mentioned above, is quite diverse due to division to plant and livestock production.

When looking at individual groups, in 2017 group 10.1 had the highest share of revenues within the division, followed by group 10.8. In terms of enterprise size, revenues of large enterprises were 39%, revenues of medium enterprises were 42%, and revenues of small enterprises were 19%. Group 10.8 also had the largest share of total assets in the reference year, followed by groups 10.7, 10.9 and 10.1. The number of employees was highest in groups 10.7, 10.1 and 10.8. Specific data are set out in Table 2.1.1.

67 Table 2.1.1 – Shares of groups in CZ-NACE 10 in 2017 (%, division = 100%)

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

10.1 22.6 19.2 22.8 22.7 16.5 16.8 24.4 24.8

10.2 0.8 0.7 0.8 0.8 1.0 0.9 0.8 0.3

10.3 3.4 3.3 2.9 2.9 3.3 3.0 3.6 1.8

10.4 1.5 1.8 6.1 6.0 2.4 4.6 1.0 0.2

10.5 11.2 12.2 14.3 14.7 11.8 10.9 9.6 2.2

10.6 3.8 4.1 4.5 4.5 3.7 4.2 3.3 2.6

10.7 28.1 23.6 12.9 12.4 17.5 18.4 34.3 42.6

10.8 21.1 24.6 20.4 20.0 25.9 24.5 17.6 20.6

10.9 7.5 10.6 15.3 15.9 18.0 16.9 5.3 4.9 Source: CZSO data, 2017 MIT calculations

2.2 DIVISION DEVELOPMENT

The developments in the division are primarily dependent on the situation in the key areas of the division. In relation to animal production, these include the processing and preserving of meat and the production of meat products to extend the range and shelf life. Over the years, the production of meat, an important source of protein, minerals and vitamins, has seen a downward trend. In 2017, beef and veal saw a decline to 67,714 tons, which is 5.9% less year-on-year, causing the need for import. The main type of meat, pork, which is the traditional type of meat in Czech cuisine and the predominant type of meat in meat products, the so-called “production meat”, amounted in total to 211,001 tonnes in 2017, down 4.2% year-on-year. That is why company managements support restructuring and they are interested in enhancing competitiveness. In particular, support is directed at pig breeding, both from national and EU sources. In particular, this involves investment in technologies, but also in improving animal welfare.

Poultry, which usually contains less fat compared to other types of meat, is gaining popularity and its production has slightly increased to 158,906 tonnes (+1.5%) in 2017. Small-volume meat, in terms of production and consumption, is for example mutton or rabbit. Consumers mostly prefer fresh, high-quality meat.

Milk and dairy products, which contain all essential nutrients, are subject to year-on-year fluctuations, which have been caused, in particular, by the accumulation of stock of some of these products in the EU and changes in consumer preferences. The dairy industry in the Czech Republic, which is relatively well connected with the global market, has undergone a complicated period in recent years. The situation on the milk market, including cream and butter, seems to have stabilized to a certain extent (2017 saw higher producer prices of dairy products). In 2017, 2,901.0 million liters of milk (up 6.7%) were purchased directly from domestic producers, of which the purchase of dairies from producers and sales organizations amounted to 2,478.1 million litres (up 0.8%).

A key group of raw materials dependent on agricultural agrarian production is in the production of bakery, confectionery and other farinaceous products, which is linked to mill production. Bakery production belongs to the group of fast-moving goods and bread and common pastry belong to daily supply. The nutritional value of these products is associated with fibre content. The current composition of bakery production is very varied, including bread. Its production is gradually declining, but it also applies to regular pastries. The current trend is to increase the share of packaged goods in this group, which has an impact on costs.

In terms of location in the market, the above-mentioned group (except the nature of production, which is basic) represents a large base of enterprises of all sizes with a share of more than 40% of units within the

68 2. CZ-NACE 10 MANUFACTURE OF FOOD PRODUCTS division distributed throughout the territory of the Czech Republic; with roughly 1/3 of the employees of the division, it is also a significant employer, even though their number has been falling for a long time and there is a shortage of apprentices, which also applies to other food industries.

The other groups mentioned above, even if their share in the division, measured by production and economic indicators, is not crucial, are also significant given their utility value and the variety of their production, and have an irreplaceable place on the food market.

2.3 MAIN ECONOMIC INDICATORS

The evolution of selected indicators for the monitored period 2008–2017 was differentiated. The number of units increased from 5,317 to 7,953. The number of people employed was declining until 2014, but started growing again in 2014. Revenues and value added virtually stagnated throughout the monitoring period. Except 2012, labour productivity and average wage slightly increased, with productivity declining in 2012 (Chart 2.3.1).

Prices have reached their post-2008 maximum in 2013, but after that started decreasing (Chart 2.3.2).

Financial analysis culminates by the comparison of Spread (ROE – re), return on equity (ROE), alternative cost of equity (re) and risk-free rate (rf). In 2017, compared with 2016, the economic value added significantly deteriorated, almost reaching positive values in 2016. In other words, businesses in the division did not create value for their owners. The strong deterioration in economic value added was mainly due to the development in group 10.9. In 2017, positive economic value added was seen in groups 10.5, 10.6, 10.8 and 10.9.

The development of practically all indicators influencing the development of EVA was unfavourable. The growth of Spread caused a decrease in economic value added of CZK 1.7 billion, and within it a decrease of

ROE by CZK 1.1 billion and an increase of the alternative cost of equity (re) by CZK 0.6 billion. For re, the main cause was increase in the risk-free rate rf, which caused a decline in EVA of CZK 550 million. For ROE, the cause was the adverse development in EBIT/Assets (resulting in a decrease of EVA of CZK 0.85 billion) and Equity/ Assets (a decrease of CZK 0.23 billion). The ratio of labour productivity growth to average wage growth had a negative impact on the evolution of EVA in the division. Labour productivity (VA per employee) increased and caused an increase in EVA of CZK 1.1 billion, but the increase in personnel costs per employee caused an EVA decrease of CZK 1.3 billion.

Further data is available on the MIT website in an interactive viewer of economic indicators (https://www. mpo.cz/en/panorama-interactive-table.html).

Chart 2.3.1 – Major 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

7 953 7 744

7 436 7 313 7 305 103 499 7 166 7 117 98 101 101 414 97 584 96 817 96 412 96 197 95 878 93 922 3 000 40 000 93 137 6 508 5 714 2 000 5 317 20 000 1 000 0 0 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

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

53 998

51 440

305 348

303 530 50 202 299 506 298 893 49 475 298 053 296 589 292 785 287 999 287 811 46 972 46 201 45 789

276 530 20 000 44 822 44 623

100 000 40 634

58 256 54 689 53 380 53 040 51 204 50 264 49 784 49 134 48 152 48 018 10 000

50 000 23 464 21 792 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 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Source: CZSO, MIT calculations * This is an aliquot monthly share computed from annual data

Chart 2.3.2 - Price developments in CZ-CPA 10 (2005 = 100 %) Chart 2.3.3 - Spread (ROE – re) CZ-NACE 10 (%)

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 -5 10 111,9 104,1 101,8 111,5 115,3 119,3 118,5 114,1 111,2 114,6 10.1 100,6 99,2 94,9 96,1 101,5 104,9 106,1 102,8 100,7 104,2 -10 10.3 111,6 111,7 111,5 117,2 121,2 124,4 128,6 134,7 133,9 129,4 10.4 130,8 110,5 110,1 131,3 135,4 135,7 119,2 116,6 118,1 118,1 -15 10.5 109,2 97,3 103,4 109,9 107,8 115,3 121,3 110,7 104,2 114,8 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 10.6 143,6 114,2 106,9 139,2 132,3 140,7 127,7 124,0 120,0 116,6 Spread -9,04 -6,63 -4,56 -6,07 -6,56 -4,96 -3,59 -3,20 -0,26 -1,99 10.7 120,0 113,6 106,7 125,7 130,5 130,1 127,1 125,5 122,9 125,6 rf 4,55 4,67 3,71 3,79 2,31 2,26 1,58 0,58 0,43 0,98 10.8 101,8 102,6 99,0 105,6 113,4 113,5 111,0 106,2 106,3 108,8 ROE 8,24 11,32 11,68 10,31 8,59 9,42 10,53 10,57 12,76 11,66 10.9 130,6 108,2 106,1 122,0 130,8 143,1 133,1 130,0 126,3 122,7 re 17,29 17,95 16,25 16,38 15,14 14,38 14,12 13,77 13,02 13,64

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

70 2. CZ-NACE 10 MANUFACTURE OF FOOD PRODUCTS

2.4 FOREIGN TRADE 2.4 FOREIGN TRADE 2.4.1 DEVELOPMENT OF FOREIGN TRADE 2.4.1 DEVELOPMENT OF FOREIGN TRADE Exports of food products (CZ-CPA 10) grew until 2015, then stagnated in 2016 and declined in 2017. However, Exports of food products (CZ-CPA 10) grew until 2015, then stagnated in 2016 and declined in 2017. imports grew until 2016 and stagnated in 2017. Export development indicates the ability of producers andHowever, business imports managers grew tountil maintain 2016 andtheir stagnated positions in on 2017.foreign Export markets development or to penetrate indicates new theterritories ability ofin strongproducers competition. and business On the managers other hand, to maintain food imports their also positions grew, mainlyon foreign driven markets by retail or chains, to penetrate as well asnew by manufacturingterritories in strong businesses, competition. such as On from the otherthe meat hand, industry. food imports The overall also grew, balance mainly of these driven products by retail was chains, still negativeas well as throughout by manufact 2009–2017.uring businesses, See Chart such2.4.1 asfor from more the details. meat industry. The overall balance of these products was still negative throughout 2009–2017. 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

151 118 151 080 149 858

50 000 138 806 125 324 119 343 119 227 116 294 115 067 108 547 104 559 96 538 93 019 90 797 88 255 70 852 30 740 55 758 62 279 31 892 33 708 30 259 35 039 28 786 36 013 - 28 039 30 515 ------0 -

-50 000 2009 2010 2011 2012 2013 2014 2015 2016 2017

Source: CZSO, data as of 9 May 2018

2.4.2 TERRITORIAL STRUCTURE OF FOREIGN TRADE 2.4.2 TERRITORIAL STRUCTURE OF FOREIGN TRADE As in 2016, the decisive import territories with CZ-CPA 10 products in 2017 were Germany and Poland – EU Asmember in 2016, states. the decisive For exports import of territoriesthese products, with CZ-CPA Slovakia 10 is products the largest in 2017 territory, were followedGermany byand Germany Poland – and EU member states. For exports of these products, Slovakia is the largest territory, followed by Germany and Poland. The shares of these countries in terms of both imports and exports are shown in Chart 2.4.2. Poland. The shares of these countries in terms of both imports and exports are shown in Chart 2.4.2. Chart 2.4.2 Foreign trade in products, CZ-CPA 10

Chart 2.4.2 Foreign Importtrade territoriesin produ cints, 2017 CZ -CPA 10 Export territories in 2017

Import territories in 2017 Export territories in 2017 other other France 25% Germany 3% other Slovakia 25% 25% other France 25% 26% Germany United Slovakia 25% 3% 25% Kingdom 26% Hungary Uni4%te d 4% Kingdom Hungary Italy Poland 4% Austria4% 4% Germany 4% 20% Italy Poland 16% Austria 4% Austria Poland Germany 20% 4% Spain Slovakia 5% 11% 16% Austria Poland 4% 7% Hungary Italy Spain Slovakia 5% 11% 5% Netherlands 6% 4% 7% Hungary Italy 6% 5% Netherlands 6% Source: CZSO, data as of 9 May 2018 6% Source: CZSO, data as of 9 May 2018

71 2.5 RESEARCH AND DEVELOPMENT

Indicator characterizing the development of R&D in CZ-NACE 10, i.e. the volume of R&D expenditure, shows a decrease in 2014–2016 compared to 2010–2013. In 2010–2016, R&D expenditure from business sources 2.5were dominant RESEARCH in CZ-NACE 10AND (see Chart DEVELOPMENT 2.5.1). In 2016, R&D expenditures amounted to CZK 223 million and accounted for 1.28% of total R&D expenditure in the manufacturing industry. Compared to 2010, in Indicator characterizing the development of R&D in CZ-NACE 10, i.e. the volume of R&D expenditure, shows 2016 this division saw a decrease in R&D expenditure by 31%. This was mainly due to the decline in public a decrease in 2014–2016 compared to 2010–2013. In 2010–2016, R&D expenditure from business sources wereexpenditure dominant from in CZ-NACE abroad. 10 The (see share Chart of 2.5.1). researchers In 2016, R&D(FTE) expenditures in the total amounted number ofto CZKresearchers 223 million in andthe accountedmanufacturing for 1.28% industry of total sectors R&D is expenditure1.62 %, i.e. 127 in the researchers manufacturing per year industry. (average Compared for 2010 to– 2016).2010, in 2016 this divisionThe companies saw a decrease that received in R&D in expenditure 2004–2017 aby signif 31%.icant This amountwas mainly of special due to- purposethe decline State in publicsupport expenditure within the from abroad. The share of researchers (FTE) in the total number of researchers in the manufacturing industry sectorsnational is programmes 1.62 %, i.e. 127 of theresearchers Ministry perof Industry year (average and Trade for 2010–2016). (IMPULS, TIP, TRIO) and Technical Assistance of the Czech Republic (Alfa, Competence Centres and Epsilon) include RABBIT Trhový Štěpánov a.s., EcoFuel TheLaboratories companies s.r.o., that AMR received AMARANTH in 2004–2017 a.s. and a significant FAVEA a.s. amount For example, of special-purpose EcoFuel Laboratories State support s.r.o. within signed the a national programmes of the Ministry of Industry and Trade (IMPULS, TIP, TRIO) and Technical Assistance of participation in the ALFF project: The Algal Microbiome Friends and Foes (Horizon 2020), which focuses on the Czech Republic (Alfa, Competence Centres and Epsilon) include RABBIT Trhový Štěpánov a.s., EcoFuel Laboratoriesthe use of plant s.r.o., aquacultures AMR AMARANTH in the food, a.s. chemical and FAVEA and a.s. pharmaceutical For example, industries. EcoFuel Laboratories s.r.o. signed a participation in the ALFF project: The Algal Microbiome Friends and Foes (Horizon 2020), which focuses on theWithin use theof plant announced aquacultures OP EIC in thecalls food, under chemical the National and pharmaceutical RIS3 Strategy, industries. from 2015 to October 2017, 21 projects were approved for implementation with a planned total aid (European, public Czech and private WithinCzech sotheurces) announced of CZK OP 0.9 EIC billion, calls underof which the NationalEU grant RIS3 is CZK Strategy, 0.28 billion.from 2015 The to vast October majority 2017, of 21support projects is were approved for implementation with a planned total aid (European, public Czech and private Czech sources)directed ofto CZKthe 0.9introduction billion, of whichof process EU grant and/or is CZK product 0.28 billion. enterprise The vastinnovations majority (96%).of support The isprojects directed are to themainly introduction focused on of strengtheningprocess and/or the product R&D capacityenterprise of innovationsenterprises (96%).(96%) andThe practicallyprojects are all mainly fall within focused the onSustainable strengthening Food Productionthe R&D capacity sector. of enterprises (96%) and practically all fall within the Sustainable Food Production sector. Concerning the European support for applicants/beneficiaries, the largest EU aid for large enterprises was Concerninggranted to Pekárnathe European Zelená support louka, fora.s. applicants/beneficiaries,from the Central Bohemian the largestRegion EU(project aid for Innovation large enterprises line for wasthe grantedproduction to Pekárnaof toast Zelenábread louka,PENAM a.s. a.s., from total the expenditure Central Bohemian of CZK 400 Region million, (project of which Innovation EU grant line forof 100 the production of toast bread PENAM a.s., total expenditure of CZK 400 million, of which EU grant of 100 million); million); the largest aid for SMEs was granted to MARLENKA international s.r.o. from the Moravian-Silesian the largest aid for SMEs was granted to MARLENKA international s.r.o. from the Moravian-Silesian Region (projectRegion (project Innovation Innovation of honey of honey products, products, total expendituretotal expenditure of CZK of 248CZK million,248 million, of which of which the the EU EU grant grant of CZKof CZK 87 87million). million).

Chart 2.5.1 – R&D expenditure in CZ-NACE 10 (CZK million)

Government+universities Number of enterprises

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

50 10 34 23 23 0 19 10 21 20 0 2010 2011 2012 2013 2014 2015 2016 2010 2011 2012 2013 2014 2015 2016

Source: CZSO, MIT calculations

72 2. CZ-NACE 10 MANUFACTURE OF FOOD PRODUCTS

2.6 DIVISION SUMMARY AND PROSPECTS

The manufacture of food products represents a relatively varied division consisting of a number of branches linked to agriculture. Its key role lies primarily in the production and supply of foods to feed the population. In particular, food is distributed to the domestic market, but exports of some food commodities are also significant. Through a labeling system, food law allows the consumer to identify what food he purchases. As to origin, it is also defined when a product can be referred to as “Czech food”.

Within the quality system, consumers recognize quality food products by the KLASA national label or the Regional Food logo. For Czech and European food of exceptional quality, trademarks – protected designations of origin, protected geographical indications, as well as designations of traditional specialties – are used as a means of protection. The last product that has received this label is “Prague ham”.

The equity of the division is growing steadily. The growth in value added since 2014 is positive and the indicators that characterize the market situation show that this development is also evident in the sales of own products and services. Pre-tax profit increased significantly, especially in 2016, and it is expected to be roughly the same in 2017. Value added has been growing since 2014. It is expected that in 2018 the investments needed to modernize the division and replace employees will continue to grow. Financial indicators have not yet improved.

In the case of foreign trade, there is a negative trade balance, which further deepened in 2017. This is due to a deterioration in exports with the stagnation of imports. The main export territory in 2017 was Slovakia with a share of 26% of the total export volume. 25% of food imports comes from Germany. The export situation could change by using agrarian diplomats and other measures. The situation not only in foreign trade, but in the overall food production and its structure, could improve by higher (especially applied) R&D expenditure.

The perspective of the division should be based on the main strategic priorities. These include: - Food security and adequate self-sufficiency - Competitiveness and efficiency of food production - Food safety and consumer protection.

In order to meet the strategic priorities and the objectives set out above, it is also desirable for the Czech Republic, as an open economy, to strengthen the effective between processors and the domestic agriculture. This also includes sustainable development, which includes improving the relationship of the division to the environment. It is also necessary to make use of Industry 4.0 and reduce energy intensity and create intelligent food logistics. Production capacities within company systems will gradually have better conditions thanks to digitization for a more flexible response to changing demand for food, both in bulk and craft industries, especially in rural areas.

73 74 3. CZ-NACE 11 MANUFACTURE OF BEVERAGES 3. CZ-NACE 11 MANUFACTURE OF BEVERAGES

3.1 DIVISION CHARACTERISTIC

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 grape; 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 belongs to smaller divisions of the manufacturing industry. Its significance is given by the fact that beverages are indispensable in people’s diets. Hydration is associated with health. Some beverages can contribute to improving health, and other, especially alcoholic beverages consumed in larger quantities damage health. The Czech Republic is predominantly considered to be a territory belonging to the northern part of Europe where beer consumption is typical, but southern Moravia belongs to the southern part of Europe which prefers wine and some regions such as Haná and other north- east areas prefer spirits. In the consumption of alcohol, the Czech Republic is among the top in the EU. The Czech Republic has numerous spa areas connected with mineral waters, which are drunk both on site and are bottled and distributed throughout the Czech Republic and abroad.

In terms of size, the division is dominated by large enterprises accounting for 57 % of its revenues, 62 % of its value added and 42 % of its employees. Medium-sized enterprises account for less than a third of revenues, value added and the number of employed persons. Small and micro enterprises are significant in terms of the number of entities and number of employed persons (27%). The revenues and value added of the division account for 11% and 13%, respectively.

3.2 DIVISION DEVELOPMENT

According to the Czech Association of Breweries and Malthouses, the amount of beer produced in the Czech Republic in 2017 (in mass units), including non-alcoholic beer and microbreweries, was 20.3 million hectolitres. Compared to 2010, when the amount was 15.7 million hectolitres, this represents significant growth, but year- on-year it declined by 0.7%. According to research conducted by the Institute of Sociology of the Academy of Sciences, 87% of men and 59% of women drink beer. The group of men interested in beer produced in the Czech Republic such as unfiltered, top fermented or wheat beers is growing. In recent years, there has been a development of microbreweries with a relatively high technological standard and good quality. Their number has already exceeded 400 and includes brewhouses with annual production of up to 200 thousand hectolitres of beer. Following the methanol incident (2012), there is a stricter State supervision over these breweries. The popularity of beers in cans and PET bottles consumed at home increased. The brand system used in the EU now also includes Czech beer, which obtained a protected geographical indication in 2008. Since 2010, the volume of malt production has grown from 498 thousand tonnes to about 546 thousand tonnes (2017).

75 According to the Union of Manufacturers and Importers of Spirits, in 2013–2017, the sales of spirits were dominated by Czech rum, bitter herbal liqueurs and vodka. Concerning the Czech rum, a traditional spirit, the composition of its aroma is an issue. The EU has granted an exemption for the use of the rum ether used in the Czech Republic for a period of 5 years.

The wine production has fluctuated considerably and according to the Union of Wine Producers, the market offer has been declining since 2009, as well as self-sufficiency, with a high negative balance of foreign trade. Negative trade balance with wine improved slightly in 2017 and amounted to CZK -1,501,000 hectolitres, which amounted to CZK 4.4 billion. Wine is exported mainly to Slovakia and Poland. The Wine Fund promotes this commodity. The wine year 2017 was marked by two weather extremes – drought and heat. Therefore, according to winemakers, the year 2017 has a typical character of full wines with a varietal nature, a ripe grapes and a spicy flavour. Compared to 2016, wine grape production was up 5%. According to the CZSO, 79.7 thousand tonnes of grapes were harvested from an area of 15.8 thousand hectares of vineyards in 2017. The warm weather in 2017 also resulted in an increased consumption of non-alcoholic beverages and mineral waters.

3.3 MAIN ECONOMIC INDICATORS

In 2008–2017, the development of selected indicators varied. The number of units grew significantly in this period, especially in manufacture of beer and wine, due to the establishment of mini-breweries and small wineries. Growth was also seen in the average wage, which peaked in 2017. Revenues declined the most in the 2011 crisis period; they recovered in the following years but the 2008 levels have not been fully reached yet. A similar trend was seen in value added and the number of employed persons. Labour productivity (Chart 3.3.1) has been steadily growing.

Industrial producer prices in CZ-CPA 11 recorded a surge in 2012, which continued in the following years at a slower pace (see Chart 3.3.2). In 2012, there was a full recovery in the demand for spirits, even for those that are more expensive and can guarantee to a certain extent that they are not adulterated, and other beverage producers joined this pricemaking tendency which depends on the market situation.

Financial analysis culminates by the comparison of Spread (ROE – re), return on equity (ROE), alternative cost of equity (re) and risk-free rate (rf). Since the drop in Spread in 2013 and 2014, it has gradually improved (Chart 3.3.3). In 2017, compared with 2016, the generation of economic profit improved, but it is still negative. Practically, the development of all indicators affecting EVA was favourable, except the risk-free rate increase (caused a decrease in EVA by CZK 266 million) and the share of paid-up capital on assets (EVA decrease of CZK 71 million). The ratio of labour productivity growth to average wage growth had a positive impact on the evolution of EVA in the division. Labour productivity (VA per employee) increased and caused an increase in EVA of CZK 250 million, but the increase in personnel costs per employee caused an EVA decrease of only CZK 126 million.

Further data is available on the MIT website in an interactive viewer of economic indicators (https://www. mpo.cz/en/panorama-interactive-table.html).

76 3. CZ-NACE 11 MANUFACTURE OF BEVERAGES

Chart 3.3.1 – Major 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 15 538 2 462 15 251 15 082

14 706 14 670 14 421 14 357 1 000 6 000 14 106 2 077

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 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

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

50 000 100 000

40 000 80 000

70 687 68 890

30 000 67 474 60 000 67 192 138 357 66 830 23 028 64 885 62 842 62 499 62 366 21 228 21 149 21 149 128 494 61 456 126 593 20 465 19 676 19 347 120 700 18 865 18 721 18 327 117 356 114 132 113 256 112 509 111 031 20 000 40 000 107 652

10 000 20 000 26 827 28 227 28 979 29 613 30 777 31 038 31 549 32 075 33 319 33 976 0 0 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Source: CZSO, MIT calculations * 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 60 Spread -4,80 -3,12 -5,26 -1,90 1,53 -6,04 -9,99 -0,94 -2,11 -1,75 rf 4,55 4,67 3,71 3,79 2,31 2,26 1,58 0,58 0,43 0,98 50 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 ROE 10,42 10,99 10,30 12,15 13,62 8,34 3,66 12,52 10,20 10,67 11 111,8 113,1 111,4 111,8 116,2 116,6 117,5 118,3 117,3 118,0 re 15,22 14,12 15,55 14,05 12,09 14,38 13,65 13,46 12,31 12,42

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

77 3.4 FOREIGN FOREIGN TRADE TRADE

3.4.1 FOREIGN TRADE 3.4.1 FOREIGN TRADE The reported balance of foreign trade in products under CZCZ-CPA-CPA 11 was positive over the whole period. Its growth was reported in 2012–2014 (Chart 3.4.1) and began to decline in the following years. The development growth was reported in 2012–2014 (Chart 3.4.1) and began to decline in the following years. The of the foreign trade balance is mainly correlated with the developments in exports. development of the foreign trade balance is mainly correlated with the developments in exports.

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 17 541 17 309 17 001 16 604 15 609 14 733 14 680 6 000 14 506 13 284 12 727 12 287 11 972 11 016 11 013 10 857 10 506 9 428

4 000 9 238 2 000 1 588 1 715 2 446 3 320 2 629 3 035 2 734 1 392 0 351 2009 2010 2011 2012 2013 2014 2015 2016 2017

Source: CZSO, data as of 9 May 2018

3.4.2 TERRITORIALTERRITORIAL ST STRUCTURERUCTURE OF FOREIGNOF FOREIGN TRADE TRADE

Imports comecome toto the the Czech Czech Republic Republic largely largely from from EU EU countries. countries. These These are are Germany, Germany, Italy, Italy, Poland, Poland, Hungary Hungary and otherand other countries, countries, as shown as shown in Chart in Chart 3.4.2. 3.4.2.

Imports are traditionally directeddirected toto Slovakia,Slovakia, followedfollowed byby PolandPoland andand Germany.Germany.

Chart 3.4.2 – Foreign trade in CZ-CPA 11 products Chart 3.4.2 – Foreign trade in CZ-CPA 11 products Import territories in 2017 Export territories in 2017 Import territories in 2017 Export territories in 2017

other Germany United o26%ther other 13% Slovakia Germany Italy KingdomUnited 26% o31%ther Italy Slo26%vak ia 13% It3%aly King3%do m 31% 12%Italy 26% 12% 3% 3% Poland Russian federation Pol9%an d Russian 3% 9% federation Poland Hungary 3% P14%olan d Austria Germany Austria France Hun9%gar y 14% Au5%stri a Ge14%rman y Au5%stri a Fr9%anc e 9% 5% 14% 5% 9% Hungary Spain Slovakia Hun6%gar y S5%pai n Slo7%vak ia 6% 5% 7% Source: CZSO, data as of 9 May 2018 Source: CZSO, data as of 9 May 2018

78 3.5 RESEARCH AND DEVELOPMENT

R&D expenditure in CZ-NACE 11 increased significantly between 2013 and 2016, but in terms of the volume of R&D expenditure and the number of enterprises engag3. CZ-NACEed in R&D 11 MANUFACTUREthis division is the OF smallest. BEVERAGES R&D expenditures in 2016 amounted to CZK 17 million, which is more than three times the total R&D 3.5expenditures RESEARCH in 2010. Almost AND all of the DEVELOPMENT funds were expenditures from business resources. CZ-NACE 11 belongs to those divisions which in recent years did not receive almost any public aid from abroad, which R&Dcould expenditure be due to the in CZ-NACEsize of this 11 division increased (see significantly number of betweencompanies 2013 engaged and 2016, in R&D but (Chart in terms 3.5.1); of the also volume, from of R&D expenditure and the number of enterprises engaged in R&D this division is the smallest. R&D 2010 to 2016 the average number of researchers (FTE) in this division was 5 researchers per year. expenditures in 2016 amounted to CZK 17 million, which is more than three times the total R&D expenditures inThe 2010. companies Almost that all of received the funds in 2004 were– 2017expenditures a significant from amount business of resources.special-purpose CZ-NACE State 11 support belongs within to those the divisionsnational programmeswhich in recent of theyears Ministry did not of receive Industry almost and anyTrade public (IMPULS, aid from TIP, abroad, TRIO) and which Technical could beAssistance due to the of size of this division (see number of companies engaged in R&D (Chart 3.5.1); also, from 2010 to 2016 the averagethe Czech number Republic of researchers(Alfa, Competence (FTE) in Centres this division and Epsilon)was 5 researchers include IDS per Advisory year. s.r.o., Plzeňský Prazdroj, a. s. and SLADOVNY SOUFFLET ČR, a.s. The companies that received in 2004–2017 a significant amount of special-purpose State support within the nationalIn the context programmes of the OPof theEIC Ministrycalls under of Industrythe National and TradeRIS3 strategy, (IMPULS, the TIP, R&D TRIO) aid and received Technical by the Assistance division ofis theamong Czech th eRepublic lowest. (Alfa,In the Competence period 2015 Centres – October and 2017,Epsilon) total include aid for IDS 8 Advisoryapproved s.r.o., projects Plzeňský (European, Prazdroj, Czech a. s. and SLADOVNY SOUFFLET ČR, a.s. public and private sources) was planned at CZK 0.02 billion, of which CZK 0.01 billion from EU grants. Most Inaid the (64%) context is intended of the OP for EIC introduction calls under ofthe process National an RIS3d/or strategy,product enterprisethe R&D aid innovations received by and the for division new oris amongupgraded the IT lowest. centers In (20%). the period Projects 2015 are – mainlyOctober focused 2017, totalon strengthening aid for 8 approved R&D capacity projects of(European, enterprises Czech (64 public%) and and supporting private sources) ICT in businesswas planned (20 at%). CZK All 0.02 projects billion, fall of withinwhich CZKthe 0.01application billion fromindustry EU grants. Sustainab Mostle aid (64%) is intended for introduction of process and/or product enterprise innovations and for new or upgradedProduction IT of centers Food. (20%). Projects are mainly focused on strengthening R&D capacity of enterprises (64 %) and supporting ICT in business (20 %). All projects fall within the application industry Sustainable Production ofIn Food.the reference period, projects for the manufacture of beverages were submitted only by small enterprises. As regards European aid for applicants/beneficiaries, largest EU aid was granted to BOHEMIA InHEALING the reference MARIENBAD period, WATERS projects a.s. for thefrom manufacture the Karlovy ofVary beverages Region (projectwere submitted Innovation only in by BOHEMIA small enterprises. HEALING As regards European aid for applicants/beneficiaries, largest EU aid was granted to BOHEMIA HEALING MINERAL WATERS CZ a.s.), total expenditure of CZK 8 million, of which EU grant of CZK 4 million) and MARIENBAD WATERS a.s. from the Karlovy Vary Region (project Innovation in BOHEMIA HEALING MINERAL WATERSAPROS Group, CZ a.s.), s.r.o. total from expenditure Prague (projectof CZK 8 New million, type of of which fruit EUspirits grant and of productsCZK 4 million) made and from APROS them, Group, total s.r.o.expenditure from Prague CZK 8 million, (project of New which type EU grant of fruit of CZK spirits 4 million). and products made from them, total expenditure CZK 8 million, of which EU grant of CZK 4 million).

Chart 3.5.1 – R&D expenditure in CZ-NACE 11 (CZK million)

Government+universities Number of enterprises Entrepreneurs EU+other international organisations 17 18 17 9 0 0 16 14 8 0 14 12 7 12 0 6

10 5 15 15 8 4 8 8 6 14 5 5 12 7 6 0 3 0 0 5 5 4 2 4 6 3 5 5 2 1 2 2 0 0 0 0 0 1 0 2010 2011 2012 2013 2014 2015 2016 2010 2011 2012 2013 2014 2015 2016

Source: CZSO, MIT calculations

79 3.6 DIVISION SUMMARY AND PROSPECTS

Manufacture of beverages, as part of the manufacturing industry, contributes to its business base in many regions, but primarily affects the lifestyles of those who consume them, which affects their health and lifespan. Beer, a national beverage, is dominant product in the production characteristics. It is linked to the production of malt and hops, and hence its link to agriculture. In addition to tradition, new technologies are also used (relation to modern machinery and packaging). The development towards the consumption and production of more expensive products is evident in spirits.

The production of wine is undergoing fluctuations, which is due to the weather, which has often fluctuated in recent years. The negative balance of foreign trade in wine is still considerable. Since domestic wine is of good quality, its export is also significant.

Consumption and production of non-alcoholic beverages and mineral waters is also somewhat weather- dependent and subject to fluctuations. This is reflected in the performance of the respective production.

The indicator of added value of the division has grown in recent years, reaching roughly the 2008/2009 levels in 2016 and there was an increase in 2017. Similarly, gross operating surplus should increase in 2017, which is a prerequisite for further investments that can be expected to increase in this year, e.g. in beer making. Revenues from sales of products and services have been stagnating in recent years.

The balance of foreign trade in beverages remains positive, but the surplus of exports over imports is declining, as imports grow more dynamically in recent years than exports. The main exports partner is Slovakia with 26%, with Germany being the largest import partner (13%). In the future, it would be desirable to expand exports to other territories, as is the case with beer. In R&D, the trend of recent years should continue, with more funding being available. This should allow the range of beverages to be further expanded to better meet the needs of consumers.

The future of this division will largely depend on the development of the purchasing power in the Czech Republic, but also on the further development of tourism. If there is a growing interest in the Czech Republic, the number of tourists visiting the Czech Republic and their time of stay and consumption will increase, which will affect not only food, but also beverages whose offer is quite varied.

80 4. CZ-NACE 13 MANUFACTURE OF TEXTILES 4. CZ-NACE 13 MANUFACTURE OF TEXTILES

4.1 DIVISION CHARACTERISTIC

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 the 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 is a sensitive sector facing large competition on the global market, especially from third countries, yet the textile industry of the Czech Republic is export-oriented.

The production of technical textiles, which belongs to group 13.9 Manufacture of other textiles, is increasingly important, its share in total sales is constantly increasing and in 2017 it reached 69.7%. Another important group was 13.2 Weaving of textile (Table 4.1.1). In terms of enterprise size, in 2017 the division was dominated by large enterprises with 56% of revenues, 49% of value added and 44% of employees. These were followed by medium-sized enterprises with 28% of revenues, 33% of value added and 36% of employees.

Table 4.1.1 – Shares of groups in CZ-NACE 13 in 2017 (%, division = 100%)

Personnel Value Own Assets Number of Number of CZ-NACE group Revenues Incomes costs added capital Total employees units

13.1 8.2 9.1 6.4 4.8 8.9 7.7 8.1 1.9

13.2 23.9 20.3 22.4 23.0 25.9 25.8 23.4 2.2

13.3 1.9 1.6 1.4 1.2 0.7 1.3 2.3 2.0

13.9 66.0 69.0 69.7 71.0 64.5 65.3 66.3 93.8 Source: CZSO data, 2017 MIT calculations

4.2 DIVISION DEVELOPMENT

The division developed very favourably in 2017. Groups 13.9 and 13.1 contributed most to this result. 2017 was one of the best in the last 12 years, when textiles increased sales by about 3% compared to 2016. The results of the Czech textile industry generally correspond with the developments in the EU. They benefited from growing economy and the fact that the division underwent a change and focused mainly on the production of technical textiles, which are in strong demand in the automotive, construction, agriculture, healthcare and aviation industries, which unambiguously suggests that the textile industry is linked to other industries. The importance of technical textiles is great; today, it accounts for two-thirds of the world’s textile production and its importance is growing. Looking at the development of the division in terms of revenues, 7 out of 10 largest manufacturing companies produce technical textiles. The year 2017 was also positive for regular

81 textiles manufacturers. On the other hand, it should be noted that sales in 2017 reached approximately 88.3% of sales in 2000, which has been the best year since 1997.

In a number of regions, significant enterprises are large employers and are also an example of entrepreneurial skills and social approach to their employees. Turnovers of leading companies grow by 10.0 % per year, and it is no exception that these companies invest CZK tens of millions per year in their production. Such companies include GRUND a.s., which plans to build a manufacturing plant in the US where it wants to focus mainly on production from organic cotton. Other major companies include: JUTA a.s. Dvůr Králové n. Labem, BORGERS CS spol. s r.o. Rokycany, PEGAS NONWOVENS s.r.o. Znojmo, Nová Mosilana a.s. Brno, LANEX a.s. Bolatice, Kordárna Plus a.s. Velká nad Veličkou, Toray Textiles Central Europe, s. r. o. Prostějov, Mehler technologies s.r.o. Lomnice nad Popelkou, Fibretex Nonwovens a.s. Svitavy, PLEAS a.s. Havlíčkův Brod, VEBA textilní závody a.s. Broumov and many others.

Although textile companies raise wages, in 2017 by more than 7.0% to the average wage of about CZK 24 thousand, they are unable to recruit more workers and lack well-educated employees. Companies are therefore poaching their employees from each other.

4.3 MAIN ECONOMIC INDICATORS

The evolution of selected indicators for the monitored period 2008–2017 was varied. The number of units first grew and culminated in 2012 and then declined steadily. In 2009, the number of employees decreased significantly and subsequently stagnated. Revenues and value added declined in 2009 and then continuously grew. The average wage in the monitored period increased steadily and labour productivity saw two decreases in 2012 and 2015 (Chart 4.3.1).

Prices surged in 2011 and then grew slightly until 2014 (Chart 4.3.2). In the following years, there has been a slight decline.

The development of Spread was favourable until 2014 and almost reached positive value. Then Spread stagnated slightly below zero (Chart 4.3.3). In 2017, economic value added deteriorated year-on-year, being positive in 2016. The deterioration in economic value added was mainly due to the development in group 13.9. Positive economic value added was seen only in group 13.1 in 2017.

The year-on-year development of EVA was adversely affected by the increase in risk-free rate rf (caused a decrease of EVA of CZK 104 million) and the decline in EBIT/Revenues (caused a decrease of EVA of CZK 822 million).

The ratio of labour productivity growth to average wage growth had a slightly positive impact on the evolution of EVA in the division. Labour productivity (VA per employee) increased and caused an increase in EVA of CZK 294 million, but the increase in personnel costs per employee caused an EVA decrease of CZK 277 million.

Further data is available on the MIT website in an interactive viewer of economic indicators (https://www. mpo.cz/en/panorama-interactive-table.html).

82 4. CZ-NACE 13 MANUFACTURE OF TEXTILES

Chart 4.3.1 – Major 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

15 000 34 429 2 828 2 715 2 601 2 520 2 424 2 419 2 380

1 000 27 343 26 092 25 634 25 641 25 537 25 449 2 123 25 395 25 012 2 064 10 000 24 744

500 5 000

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

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

50 000 50 000

40 000 40 000

30 000 30 000

58 585 56 624 55 817 54 692

52 401 51 449 50 127 49 488 48 839 48 317 15 340 47 743 20 000 47 439 20 000 14 425

45 903 14 282 13 817

43 983

43 253

12 829 42 444 12 524 12 409

12 044 41 242

40 977 11 804

11 463

36 805

10 000 10 000 31 541 23 609 22 158 21 196 20 767 19 675 19 173 18 731 18 208 16 019 17 213 0 0 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Source: CZSO, MIT calculations * This is an aliquot monthly share computed from annual data

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

120 30

110 20

100 10

90 0

80 -10

70 -20

60 -30 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 50 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Spread -22,33 -17,94 -3,37 -6,57 -2,40 -4,89 -0,37 -1,72 -1,03 -3,06 13 99,4 99,5 100,2 108,1 108,8 108,7 112,3 111,9 111,1 110,5 rf 4,55 4,67 3,71 3,79 2,31 2,26 1,58 0,58 0,43 0,98 13.2 99,4 99,6 99,3 106,3 109,2 107,7 112,4 112,9 113,3 111,4 ROE 1,38 3,10 9,91 8,03 10,72 8,80 10,96 9,46 9,37 7,56 13.9 101,0 102,0 101,1 104,9 108,9 109,3 112,8 112,4 110,9 110,3 re 23,71 21,04 13,28 14,60 13,12 13,69 11,33 11,18 10,41 10,62

Source: CZSO, MIT calculations Source: CZSO, MIT calculations Note: Group 13.1 and 13.3 is not monitored

83 4.4 FOREIGN TRADE 4.4 FOREIGN TRADE

4.4.1 FOREIGNFOREIGN TRADE TRADE

Exports andand importsimports (CZ-CPA (CZ-CPA 13) 13) grew grew steadily steadily between between 2009 2009 and 2017,and 2017,but the but balance, the balance, which was which positive was positivefor the whole for the period, whole grew period, only grew until only 2012, until then 2012, rose then and rose declined and declinedalternately alternately (Chart 4.4.1). (Chart 4.4.1).

Chart 4.4.1 – Exports, imports and foreign trade balance in products by CZ-CPA 13 (CZK million) 70 000 Export Import Trade balance 60 000

50 000

40 000

30 000

66 485

63 819

60 975

58 231 55 680 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 10 805 9 514 8 736 5 967 8 591 7 864 6 505 8 170 0 10 027 2009 2010 2011 2012 2013 2014 2015 2016 2017

Source: CZSO, data as of 9 May 2018

4.4.2 TERRITORIALTERRITORIAL ST RUCTURESTRUCTURE OF FOREIGNOF FOREIGN TRADE TRADE The main export territories are Germany, Italy and Poland. Import territories are again Germany and Italy and, The main export territories are Germany, Italy and Poland. Import territories are again Germany and Italy as expected, China. (Chart 4.4.2). and, as expected, China. (Chart 4.4.2).

ChartChart 4.4.2 – ForeignForeign tradetrade inin CZ-CPACPA 13 productsproducts

ImportImport territoriesterritories inin 2017 ExportExport territoriesterritories inin 2017

otherother otherother 30% 28% GermanyGermany GermanyGermany 31% 28% FranceFrance UnitedUnited 4% KingdomKingdom 3% ItalyItaly AustriaAustria ItalyItaly 11% 4% 11% AustriaAustria PolandPoland ChinaChina 4% RomaniaRomania 9% 10% BelgiumBelgium 4% 4% TurkeyTurkey 4% PolandPoland NetherlandsNetherlands SlovakiaSlovakia 5% 5% 5% 5% Source:Source: CZSO,CZSO, datadata asas ofof 9 MayMay 2018

4.5 RESEARCH AND DEVELOPMENT 4.5 RESEARCH AND DEVELOPMENT R&D expenditure in 2016 amounted to CZK 289 million, which accounted for 1.19% of total R&D expenditureR&D expenditure in the in manufacturing2016 amounted industry. to CZK 289 Compared million, whichto 2015, accounted the volume for 1.19% of funds of total from R&D public expenditure national sourcesin the manufacturing increased significantly industry. Compared and, on tothe 2015, contrary, the volume there ofwas funds a significantfrom public decrease national sourcesin public increased foreign significantly and, on the contrary, there was a significant decrease in public foreign sources in this segment in sources2016, but in the this bulk segment of the infunds 2016, still but consisted the bulk of of business the funds resource still consisted expenditures. of business The share resource of researchers expenditures. (FTE) The share of researchers (FTE) in the total number of researchers in the manufacturing industry sectors is almost 0.79 %, i.e. 62 researchers per year (average for 2010–2016).

84 The companies that received in 2004–2017 a significant amount4. CZ-NACE of special 13-purpose MANUFACTURE State support OF within TEXTILES the national programmes of the Ministry of Industry and Trade (IMPULS, TIP, TRIO) and Technical Assistance of thein the Czech total Republicnumber of(Alfa, researchers Competence in the Centre manufacturings and Epsilon) industry include sectors NYKLÍČEK is almost a 0.79 spol. %, s.r.o., i.e. 62 SINTEX, researchers a.s., JOHNSONper year (average CONTROLS for 2010–2016). FABRICS STRAKONICE s.r.o., PEGAS NONWOVENS s.r.o. and Holzbecher barevna a bělidlo Zlíč, spol. s r.o. Furthermore, SINTEX, a.s. is a participant in the project FIBFAB: Industrialization of bioThe- basedcompanies textile that fabrics received for in clothing2004–2017 applications a significant (Horizon amount 2020),of special-purpose which is aimed State supportat launching within the national programmes of the Ministry of Industry and Trade (IMPULS, TIP, TRIO) and Technical Assistance of the production of biodegradable and sustainable fabrics based on polylactic acid (PLA) for the production of Czech Republic (Alfa, Competence Centres and Epsilon) include NYKLÍČEK a spol. s.r.o., SINTEX, a.s., JOHNSON workCONTROLS and protective FABRICS STRAKONICE clothing and s.r.o., leisur PEGASe clothing. NONWOVENS s.r.o. and Holzbecher barevna a bělidlo Zlíč, spol. s r.o. Furthermore, SINTEX, a.s. is a participant in the project FIBFAB: Industrialization of bio-based textile As part of the OP EIC calls, 45 projects under the National RIS3 Strategy have been approved, i.e. R&D area fabrics for clothing applications (Horizon 2020), which is aimed at launching the production of biodegradable withand sustainable average aid. fabrics In the based period on 2015polylactic – October acid (PLA) 2017, for their the production total aid (European, of work and Czech protective public clothingand private and sources)leisure clothing. was planned at CZK 1.39 billion, of which CZK 0.49 billion from EU grants. Support is mainly aimed at the introduction of process and/or product enterprise innovations (64%), to a lesser extent at the creationAs part of of the new OP appliedEIC calls, research 45 projects results under (17%) the National and the RIS3 implementation Strategy have ofbeen join approved,t R&D projects i.e. R&D (14%). area with average aid. In the period 2015 – October 2017, their total aid (European, Czech public and private Projects are mainly focused on strengthening R&D capacity of enterprises (76%), less on strengthening of sources) was planned at CZK 1.39 billion, of which CZK 0.49 billion from EU grants. Support is mainly aimed technologicalat the introduction cooperation of process of and/orcompanies product (17%). enterprise Virtually innovations all projects (64%), fall to within a lesser the extent Textile at theapplication creation sector.of new applied research results (17%) and the implementation of joint R&D projects (14%). Projects are Concerningmainly focused EU gonrants, strengthening the largest R&D EU aidcapacity for large of enterprises enterprises (76%), was grantedless on strengtheningto JUTA a.s. from of technological the Hradec cooperation of companies (17%). Virtually all projects fall within the Textile application sector. Králové Region (the project Production of innovated textiles for construction and agriculture, total expenditureConcerning EU of grants, CZK 383 the million, largest ofEU whichaid for thelarge EU enterprises grant of CZK was 96 granted million); to JUTA the a.s.largest from EU the aid Hradec for medium Králové- sizedRegion enterprises (the project was Production granted to of RETEX innovated a.s. from textiles the Southfor construction Moravian Region and agriculture, (the project total Strengthening expenditure the of innovationCZK 383 million, performance of which ofthe RETEX EU grant a.s.; of total CZK 96expenditure million); the of largest CZK 217 EU million, aid for medium-sized of which EU grantenterprises of CZK was 76 million)granted. to RETEX a.s. from the South Moravian Region (the project Strengthening the innovation performance of RETEX a.s.; total expenditure of CZK 217 million, of which EU grant of CZK 76 million).

Chart 4.5.1 – R&D expenditure in CZ-NACE 13 (CZK million)

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

50 5

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

Source: CZSO, MIT calculations

4.6 DIVISION SUMMARY AND PROSPECTS

85 4.6 DIVISION SUMMARY AND PROSPECTS

As is evident from economic results, the textile industry has been successful in recent years, the pre-crisis level of sales and value added have been exceeded (by 20% and 22.5%, respectively) in 2017 and there are signs that positive developments will continue in the coming year. One of the main indicators of positive development is the growth of orders both from abroad and from the Czech Republic. The average year-on- year growth in the total number of orders between 2011 and 2017 was around 4.8%. The largest foreign customers are traditionally Germany (about 28.0% of total exports), followed by Italy, Poland, Slovakia and the Netherlands. Companies also manage to find new non-European markets, such as Nicaragua, Salvador or Belize.

The textile industry in the EU, as well as in the Czech Republic, belongs to the traditional divisions of the manufacturing industry. Textile and clothing products are present in all areas of life. It is also a sensitive sector facing strong competition from third (especially Asian) countries on the global market, as well as unfavourable economic situation, because textile and clothing companies are among those most susceptible to economic downturn.

This positive development in the division requires the effective application of research, development and innovation potential. The most significant example of this use is the production of fabrics made of nanofibrous materials, which are of great importance for the future. Another example of the appropriate application of the results of R&D and innovation is the development of other technical textiles, which in recent years grew by an average of about 10% per year. We can say that it has changed the overall character of this division. Today, technical textiles represent a significant majority of the outputs and revenues of textile production (65.0%), and with new markets opening up for new technical textile applications, its share will continue to grow in the future.

The long-term vision of the division until 2020 is contained in the EU document: “European Technology Platform for the Future of Textiles and Clothing (Textile ETP)”. It outlines three main trends in this production in Europe: - Switching from commodity to specialty production with the help of high-tech processes, the use of new fibres and textiles with high functionality adapted to the purpose of use, using highly flexible technologies. Focus on the development of intelligent textiles using electronic components while maintaining easy maintenance by washing and ironing. - Use and distribution of textiles as new (design) materials in different industrial sectors and user areas. - The end of the mass production of textile products and the shift to industrial production focused on customers and their needs, flexible responses to demand with the use of intelligent logistics, distribution and service.

The European Technology Platform is the basis for the Programme of the Czech Technology Platform for Textiles, which was established in 2008 and focuses on two key innovation goals: - Objective 1 – Innovation in the textile and clothing industry: innovation in textile materials (fibres, yarns, textile structures, etc.), innovation in textile technology, processes, multidisciplinary approach to research and development of textile materials. - Objective 2 – Innovation on product output: based on outputs from Objective 1 and cooperation with other industries, development of new textile products; increasing product application in medicine, transport and other non-traditional areas and the search for new areas of textile application.

To accelerate the roll-out of innovation and to improve the economic efficiency of R&D in the textile and clothing industry, it is necessary to focus on co-operating with related user industries and areas such as construction, military equipment, personal and professional protective equipment, healthcare and sports and outdoor equipment. In all the above areas there are requirements to provide for new functional properties of fabrics, or their combinations.

86 4. CZ-NACE 13 MANUFACTURE OF TEXTILES

Another major problem for the textile industry is a significant drop in student interest, making it harder for companies to replace outgoing workers. At present, businesses see lack of interest from among workers with an apprenticeship certificate and professions requiring full secondary and tertiary education. These professions represent the basis for future competitiveness because the benefits that the textile industry still has in functional, protective clothing and technical textiles in the Czech Republic are not permanent, and in the area of product innovation it will be necessary to move forward continuously. The textile industry has a great potential in the area of nanotechnology applications, and this will significantly change the demand for knowledge and skills. There will also be increasing importance of workers who will be able to better combine knowledge in textiles with knowledge of technology and modern machinery, as well as knowledge of customer needs, market trends, logistics and marketing. These non-productive activities are neglected by Czech companies in a number of divisions, although they represent the basis for the competitiveness of most industrial companies in developed countries.

87 88 5. CZ-NACE 14 MANUFACTURE OF WEARING APPAREL 5. CZ-NACE 14 MANUFACTURE OF WEARING APPAREL

5.1 DIVISION CHARACTERISTIC

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 on the product. Essential requirements for fashion collections include rapid production responses to seasonal influences and customer requirements. Production in small series is prevalent, with increasing importance of custom-made ready-made production, including related services, such as fashion consultancy or alteration of garments. Despite the declining number of workers (2017 year-on-year decline was about 4.0%), the sector continues to be important for maintaining women’s employment, especially in regions with a long tradition of clothing production.

Manufacture of wearing apparel belongs to sensitive sectors which are exposed to significant competition on the global market, especially from third countries with their own raw material base and low wage costs.

The main group is 14.1, its share in the division being around 90% (Table 5.1.1). It is a division with dominance of small enterprises with 67 % of revenues, 62 % of added value and 56 % employees.

Table 5.1.1 – Shares of groups in CZ-NACE 14 in 2017 (%, division = 100%)

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

14.1 90.0 89.7 90.2 89.9 87.8 87.8 91.3 92.4

14.2 0.4 0.7 0.6 0.6 2.4 2.0 0.4 1.1

14.3 9.6 9.5 9.2 9.5 9.8 10.2 8.3 6.5

Source: CZSO data, 2017 MIT calculations

5.2 DIVISION DEVELOPMENT

In the apparel sector, besides small production units, the companies that have succeeded are those that have adopted the so-called Northern European business model. This means that companies have retained control over important processes (such as design, business, finance, marketing, quality, etc.) and have moved production to more cost-effective regions. On the other hand, it has to be noted that production in China is already becoming unprofitable due to increasing pressure on wages but also increasing costs of transport and logistics. That is why many companies are starting to return to Europe and produce, for example, in Bulgaria, Belarus or Romania.

89 The growing economy, investment in modern production, and the willingness of people to spend on Czech products also help domestic apparel companies, whose sales in 2017 amounted to about CZK 7.5 billion. The year 2017 was also successful for companies that focus on men’s fashion. Good results have been achieved by many other apparel companies. Significant investors include, for example, TONAK, a.s., Blažek Praha, a.s., Koutný spol. s r.o., Altreva, spol. s r.o., Kara Trutnov, a.s., Anita Moravia s.r.o., Maxis, a.s., Pro Len, s.r.o., KALAS Sportswear, s.r.o., DEVA F-M, s.r.o., etc. In general, there is an increasing interest in sports and leisure wear, in connection with people’s pursuit of a healthy lifestyle. Although Czech apparel manufacturers are attracting more and more customers, the market continues to be dominated by foreign multinational chains that focus mainly on “fast fashion”, i.e. fashion that tries to copy catwalk trends and get them as quickly as possible to people at a low price. Czech companies are estimated to have a maximum of 20% of total apparel sales.

One of the fundamental problems of the division is the deterioration of the age structure of the employees as the absolute number of economically active women and men aged between 15 and 64 is decreasing in the Czech Republic, and workers will grow older and retire, which is already felt by a number of manufacturing companies. This deficiency further exacerbates the negative trend in education, especially in technical education. The growth potential of the apparel industry has begun to run out. Some companies are starting to reduce exports, which is, in addition to rising wage costs, also the result of strengthening koruna. Overall, this leads to a reduction in price competitiveness.

5.3 MAIN ECONOMIC INDICATORS

The number of units increased steadily between 2008 and 2017 (see Chart 5.3.1). Looking closer at the developments in individual groups, it can be stated that their number grew only in CZ-NACE 14.1, but in the other groups it had a decreasing trend. In CZ-NACE 14.2, the largest number of production units was in 2013. In CZ-NACE 14.3, the number of production units was growing until 2012, when it peaked and started declining steadily. The number of employed persons was declining until 2013, when it started to grow moderately. In 2017, however, the number of persons employed was significantly lower than in 2008. Revenues and value added declined in 2009 and then stagnated until 2013. Increase came only in 2014–2017. Very favourable was the development in labour productivity in the reference period, which grew steadily, and so did the average wage.

Prices of CZ-CPA 14 commodities were increasing in the reference period. Stronger price increase over the whole reporting period (except in 2017) was reported by group 14.1 (Chart 5.3.2).

The development of financial results was paradoxical in CZ-NACE 14, when the return on equity began to rise dramatically after the onset of the crisis, which, together with decreased risk, led to a relatively very positive Spread from 2010. The ROE and Spread peaked in 2012; in the following years, the slight increase in risk was reflected in the reduction of these high positive values (see Chart 5.3.3). The year 2017 was successful for the division and the value of the economic value added was still positive, although it dropped very slightly compared to 2016. Positive EVA was seen in groups 14.1 and 14.3. The impact of individual indicators on the development of the EVA was mostly slightly positive or negative and the impacts of the indicators were similar. The ratio of labour productivity growth to average wage growth had a zero impact on the evolution of EVA in the division. Labour productivity (VA per employee) increased and caused an increase in EVA of CZK 244 million, and the increase in personnel costs per employee caused an EVA decrease of CZK 238 million.

Further data is available on the MIT website in an interactive viewer of economic indicators (https://www. mpo.cz/en/panorama-interactive-table.html).

90 5. CZ-NACE 14 MANUFACTURE OF WEARING APPAREL

Chart 5.3.1 – Major economic indicators of CZ-NACE 14 14 000 35 000 Number of units Average number of employees 12 000 30 000

10 000 25 000

8 000 20 000

6 000 15 000 13 160

31 815 12 563

11 739 11 280 27 154 10 789 10 784 10 337 9 895 25 777 25 323 25 081 24 977 24 727 24 580 23 966 4 000 10 000 23 839 8 756 8 257

2 000 5 000

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

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

41 674

10 000 7 760

36 364 20 127

6 864 34 927 6 562 19 192 19 080 6 429 15 000 33 394 6 161 18 231 5 664

5 455 5 451 5 410 5 400 16 981

30 067

15 892 15 767 15 643 15 518 15 460

27 603

26 197

10 000 24 577

5 000 22 455 21 688 17 030 15 958 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 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Source: CZSO, MIT calculations * This is an aliquot monthly share computed from annual data Chart 5.3.2 - Price developments in CZ-CPA 14 (2005 = 100 %) Chart 5.3.3 - Spread (ROE – re) CZ-NACE 14 (%)

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 50 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Spread -24,84 0,17 7,51 11,96 26,25 13,16 18,43 18,58 15,44 13,94 14 101,5 101,6 101,4 101,9 102,8 103,1 104,1 105,0 106,3 106,6 rf 4,55 4,67 3,71 3,79 2,31 2,26 1,58 0,58 0,43 0,98 14.1 101,9 102,1 101,9 102,3 103,3 103,6 104,5 105,1 106,1 106,6 ROE -12,24 7,29 14,82 18,26 32,86 22,62 28,46 27,06 23,94 23,00 14.3 99,1 98,3 98,5 99,4 99,7 99,8 102,2 104,8 108,5 107,1 re 12,61 7,12 7,32 6,30 6,61 9,47 10,04 8,48 8,49 9,06

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

5.4 FOREIGN TRADE

5.4.1 FOREIGN TRADE

The division is export-oriented, the export value increased year-on-year in 2017, but still reached about 76.0% of the value of the imports.

91 5.4 FOREIGN TRADE

5.4.1 FOREIGN TRADE

The division is export-oriented, the export value increased year-on-year in 2017, but still reached about 76.0% ofAlthough the value the of valuethe imports. of total exports increased in 2010–2017, the foreign trade balance in CZ-CPA 14 continued to be negative and was steadily rising, as the growing purchasing power of the population also Although the value of total exports increased in 2010–2017, the foreign trade balance in CZ-CPA 14 continued toincreased be negative the andvalue was of steadily imports rising, that asstill the prevailed growing purchasingover the value power of of exports the population (Chart also5.4.1). increased Constantly the valueincreasing of imports imports that from still prevailedChina, Bangladesh, over the value Turkey of exports and India (Chart have 5.4.1). negative Constantly effects increasing on the overall imports foreign from China,trade balance. Bangladesh, Turkey and India have negative effects on the overall foreign trade balance. In terms of foreign trade by individual groups, in 2017 CZ-CPA 14.1 contributed most to the total turnover In terms of foreign trade by individual groups, in 2017 CZ-CPA 14.1 contributed most to the total turnover as inas previousin previous years; years; its share its share of exports of exports was 88%was and88% its and share its shareof imports of imports was 87.0%. was 87.0%.In this group,In this thegroup, highest the negativehighest negative trade balance trade balancewas also was reached also reached– CZK 15.9 – CZK billion. 15.9 billion.

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

72 088 65 236 54 578 20 000 54 283 49 370 45 963 39 421 37 917 36 997 35 118 35 060 34 879 31 819 25 102 26 875 27 816 25 225 24 396 0 9 835 19 274 - 12 815 - 17 509 17 550 11 605 - 10 122 10 483 -20 000 19 166 ------

-40 000 2009 2010 2011 2012 2013 2014 2015 2016 2017

Source: CZSO, data as of 9 May 2018

5.4.2 FOREIGN TRADE

The5.4.2 largest FOREIGN foreign TRADE customers are traditionally Germany (with exports in 2017 of CZK 24.4 billion), Slovakia, Austria and Poland. In 2017, most CZ-CPA 14 goods were imported from China (CZK 18.9 billion), Bangladesh, GermanyThe largest and foreign Turkey customers (Chart 5.4.2). are traditionallyAs shown in theGermany below (with overview, exports imports in 2017 from of thirdCZK 24.4 countries billion), are Slovakia, starting toAustria dominate and strongly.Poland. In 2017, most CZ-CPA 14 goods were imported from China (CZK 18.9 billion), Bangladesh, Germany and Turkey (Chart 5.4.2). As shown in the below overview, imports from third Chart 5.4.2 – Foreign trade in CZ-CPA 14 products countries are starting to dominate strongly. Import territories in 2017 Export territories in 2017 France Netherlands other Chart 5.4.2 – Foreign trade in CZ-CPA 14 products 4% 3% other China 18% Dovozní25% teritoria v roce 201726% Italy Vývozní teritoria v roce 2017 4% UniFranceted Netherlands Germany Italy other King4%dom 3% 45% 4% Poland 18% other ChinaBan gladesh 4% Poland 7% 25% 26% 15% Italy 4% 4% Austria Cambodia United 7% Slovakia Germany Italy Turkey Germany 4% Kingdom 8% 45% 4% 7% 11% Poland Bangladesh 4% Poland India 7% 4% 15% 4% Austria 7% Slovakia Turkey Germany Source: CambodiaCZSO, data as of 9 May 2018 8% 7% 11% 4% India 4% 92 Source: CZSO, data as of 9 May 2018

5.5 RESEARCH AND DEVELOPMENT5. CZ-NACE 14 MANUFACTURE OF WEARING APPAREL

CZ-NACE 14 is relatively smaller in terms of the volume of R&D expenditure and the number of enterprises 5.5implementing RESEARCH R&D, which amounted AND to DEVELOPMENT CZK 14 million in 2016 (Chart 5.5.1). Compared to 2010, total R&D expenditure decreased by 59%. In 2010–2016, the number of enterprises was around 10. The share of CZ-NACE 14 is relatively smaller in terms of the volume of R&D expenditure and the number of enterprises researchers (FTE) in the total number of researchers in the manufacturing industry sectors is almost 0.16 %, implementing R&D, which amounted to CZK 14 million in 2016 (Chart 5.5.1). Compared to 2010, total R&D expenditurei.e. 12 researchers decreased per year by 59%.(average In 2010–2016, for 2010–2016). the number of enterprises was around 10. The share of researchersThe companies (FTE) that in thereceived total numberin 2004– of2017 researchers a significant in the amount manufacturing of special -industrypurpose sectorsState support is almost within 0.16 the %, i.e.national 12 researchers programmes per ofyear the (average Ministry for of 2010–2016).Industry and Trade (IMPULS, TIP, TRIO) and Technical Assistance of the Czech Republic (Alfa, Competence Centres and Epsilon) include TONAK a.s., KNITVA s.r.o. and DEONA The companies that received in 2004–2017 a significant amount of special-purpose State support within the nationalMEDI s.r.o. programmes of the Ministry of Industry and Trade (IMPULS, TIP, TRIO) and Technical Assistance of theThis Czechis one Republicof the least (Alfa, supported Competence R&D areasCentres within and theEpsilon) OP EIC include calls under TONAK the a.s., National KNITVA RIS3 s.r.o. Strategy. and DEONA In the MEDIperiod s.r.o. 2015 – October 2017, aid for 15 approved projects (European, Czech public and private sources) was planned at CZK 0.09 billion, of which CZK 0.04 billion from EU grants. The aid is mostly directed towards the This is one of the least supported R&D areas within the OP EIC calls under the National RIS3 Strategy. In the periodintroduction 2015 –of October new innovations 2017, aid for(50%), 15 approvednew applied projects research (European, results Czech(23%) publicand participation and private insources) exhibitions was plannedand trade at CZKfairs 0.09 abroad billion, (22%). of which The CZK projects 0.04 billion are mainly from EU focused grants. Theon strengtheningaid is mostly directed R&D capacities towards the of introductionenterprises (50%),of new innovationsstrengthening (50%), cooperation new applied between research ROs results and (23%) enterprises and participation (24%) and in exhibitionsincreasing andinternationalization trade fairs abroad of (22%). SMEs The (22%). projects Virtually are mainly all projects focused fallon strengtheningwithin the application R&D capacities sector of enterprisesTraditional (50%),Cultural strengthening and Creative cooperationSectors. between ROs and enterprises (24%) and increasing internationalization of SMEs (22%). Virtually 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. AAs Inregards the reference European period, aid for projects applicants/beneficiaries, for the manufacture largest of wearing EU aid apparel for SM wereEs was submitted granted onlyto PUMAX, by SMEs. spol. AAs s regardsr.o. from European the Vysočina aid for Region applicants/beneficiaries, (the project Process largest and product EU aid forinnovation SMEs was in grantedPUMAX, to total PUMAX, expenditure spol. s r.o. of fromCZK 40 the million, Vysočina of which Region EU (thegrant project of CZK 18 Process million). and product innovation in PUMAX, total expenditure of CZK 40 million, of which EU grant of CZK 18 million).

Chart 5.5.1 – R&D expenditure in CZ-NACE 14 (CZK million)

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

Source: CZSO, MIT calculations

5.6 DIVISION SUMMARY AND PROSPECTS

93 5.6 DIVISION SUMMARY AND PROSPECTS

The apparel and textile industry is among the traditional divisions of the processing industry not only in the Czech Republic but also in the EU. Numerous EU studies show that the European apparel industry is the industry with the highest level of creativity and will continue to have a significant impact on the EU lifestyle in the future.

In addition to being a large consumer item, apparel is also of strategic importance with significant global investments, particularly in the area of professional and military clothing which requires specific properties. Nevertheless, these investments have been consistently declining in the Czech Republic.

As can be seen from economic results, the clothing industry was successful in 2017, labour productivity growth continued to rise as well as the average wage, in 2017 the 2008 level of revenues and value added was surpassed by 4.9% and 20.7%, respectively. Statistical indicators show that the growth of both global orders and foreign orders will continue this year. This suggests that the apparel industry will be successful in the years to come.

Still, in order to increase competitiveness, it is necessary to focus primarily on: - The manufacture of products with higher value added through the introduction of results of research, development and technological and non-technological innovations into production in small series with tailor-made adjustments according to the wishes and requirements of customers. - The level of strategic knowledge about markets, customers, and trends that shape changes in customer needs and preferences. - Special apparel for demanding occupations and extreme conditions (uniforms, protective clothing for various demanding operations, as well as outdoor clothing for sport and leisure, as more people are actively spending their free time). - Improvement in marketing activities and other direct market activities (business activity). A quick response is important as it decides on the added value margin. In terms of marketing, it is necessary to be able to assess the feasibility of market requirements on the demand side and to be able to work with information on value added of products in the form of new functional materials and new applications. - Development of own R&D capacities and direct cooperation on specific projects with research organizations and universities. For example, the results of research and cooperation with the Technical University in Liberec. - Creation of intelligent clothing, which, in addition to protection against cold and bad weather, has many other features. It can be equipped with electronic sensors and components and can be used, for example, to monitor bodily functions in protective clothing and in medical fields or, using integrated solar cells, to provide the thermal comfort of the wearer, or to communicate with mobile technologies, all this while maintaining easy maintenance by washing and ironing. - Training of workers in the manufacture of wearing apparel and textiles. Although the number of employees in apparel production is declining, the demand for skilled and flexible workers is growing.

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

6.1 DIVISION CHARACTERISTIC

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.

The division is characterized by a high proportion of manual work and lower technological intensity. The leather and footwear industry is a manufacturing industry division which, although there is some improvement, is among the divisions with the lowest value added and the number of employees. Still, it keeps its pro- export orientation, which is the result of its focus on specialized product types and cooperation with foreign companies. The level of imports in this division is consistently higher than the revenue for the sales of own products and services. The importance of primary production is directly dependent on the production of footwear. Typical for the division are micro-enterprises (including self-employed persons), which make up over 80% of the entities, but only 30 % of revenues and 32 % of employed persons. In terms of performance, the most significant are medium-sized enterprises accounting for 54 % of revenues, 44 % of value added and 47 % of employees. Group 15.1 represents approximately two-thirds to three-quarters (number of units) of the selected indicators. (Table 6.1.1).

Table 6.1.1 – Shares of groups in CZ-NACE 15 in 2017 (%, division = 100%)

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

15.1 68.4 71.7 71.7 66.9 66.0 75.0 62.6 74.8

15.2 31.6 28.3 28.3 33.1 34.0 25.0 37.4 25.2 Source: CZSO data, 2017 MIT calculations

6.2 DIVISION DEVELOPMENT

The division consistently shows a decline in production. Compared to 2016, production declined by about 0.6% in 2017. On the other hand, the average number of employed persons increased by about 0.5%. The decline in footwear production continues to be affected by the decline in tannery production and other supply sectors. The result is that all materials and semi-finished goods for footwear production must be imported into the Czech Republic.

In the European context, the Czech Republic has a relatively small market for footwear sales. Manufacturers cannot compete with low-cost Asian competitors on the Czech market and, in order to succeed, they must mainly export. There are already a number of manufacturing corporations with Western European partners. Nevertheless, imports of footwear are almost 20.0% higher than exports (although the volume of imports

95 isAssociating significantly with distorted foreign bypartners re-exports is not mainly only anfrom incentive Asian countries). for the development Associating of with Czech foreign companies partners but is alsonot only an incentive for the development of Czech companies but also a motive for technological innovation. a motive for technological innovation. Many companies also come with more sophisticated products, Many companies also come with more sophisticated products, higher utility value products and modern design.higher utilityMost companiesvalue products also andunderstand modern thatdesign. it is Mostnecessary companies to produce also understanda specialized that product it is necessary and choose to appropriateproduce a specializedmarketing. Thus,product Czech and producers choose appropriateare able to successfullymarketing. exportThus, Czech70-80% producers of their production are able to EUsuccessfully countries, export with Germany, 70-80% of Austria, their production Hungary, Poland, to EU Francecountries, and with England Germany, being theAustria, target Hungary, countries Poland, in the lastFrance four and years. England being the target countries in the last four years. The production of footwear has gradually become a matter of smaller, often family-ownedfamily-owned companies that have focused on specialized products. It is also positive that in recent years Czech manufacturers have been successful in the segment of high quality certified childrechildren’sn’s footwear, becausebecause demanddemand for itit is growing in the Czech market.market.

6.3 MAIN MAIN ECONOMIC ECONOMIC INDICATORS INDICATORS

Chart 6.3.1 – Major 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

840 400 790 6 577 6 542

3 000 6 513 760 6 140 719 5 891 694 661 5 489 5 471 300 5 387 2 000 5 281 200 100 1 000 0 0 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

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

2 386

6 159 2 302 6 076 6 062 6 019

5 936 39 525 39 493 5 912 2 149 5 654

5 621 2 007 5 529 1 998 36 440 5 399 1 924 1 896 1 872

1 795 15 000 1 780 33 544

31 498

2 000

28 174

26 635 25 347 10 000 25 184 23 163 20 393 18 933

1 000 17 193 16 259 15 643 15 468 14 824

5 000 14 194 13 951 13 409 0 0 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Source: CZSO, MIT calculations * This is an aliquot monthly share computed from annual data

For the reference period 2008–2017,2008–2017, the number of units and the number of employees grew. Growth, albeit veryvery modest,modest, was was seen seen in inrevenues revenues and and value value added, added, but inbut 2017 in 2017both decreased.both decreased. In particular, In particular, labour productivitylabour productivity increased, increased, which onwhich average on average grew at grew twice at the twice rate the of rateaverage of average wage in wage the referencein the reference period (Chartperiod 6.3.1).(Chart The6.3.1). division The division thus shows thus someshows stabilization. some stabilization. Producer prices were rising slightly over the reference period (Chart 6.3.2). However, market prices are significantly affected byby thethe high volumevolume of imports from China. Manufacturers have coped with low prices, but at the cost of stagnating revenues. In terms of the development of value added, the volume of purchased material and services grew less. 96 6. CZ-NACE 15 MANUFACTURE OF LEATHER AND RELATED PRODUCTS but at the cost of stagnating revenues. In terms of the development of value added, the volume of purchased materialPositive isand the services development grew less. of Spread, which after 7 years of negative values created value for owners in 2015 (Chart 6.3.3). The division got rid of troubled businesses, thus improving profitability; yet, in 2016, and Positiveespecially is inthe 2017, development there has beenof Spread, an unfavorable which after development 7 years of negative in EVA. The values deterio createdration value in economic for owners value in 2015added (Chart was mainly 6.3.3). dueThe todivision the development got rid of troubled in group businesses, 15.1. Positive thus economic improving value profitability; added was yet, seen in 2016, in group and especially in 2017, there has been an unfavorable development in EVA. The deterioration in economic value 15.1 in 2017. added was mainly due to the development in group 15.1. Positive economic value added was seen in group 15.1The developmentin 2017. of almost all indicators influencing the development of the economic value added was unfavourable, but the development of the EBIT/Revenue and risk margin had a positive impact on the Thedevelopment development of EVA. of almostNo indicator all indicators had a significant influencing impact. the development of the economic value added was unfavourable, but the development of the EBIT/Revenue and risk margin had a positive impact on the developmentThe ratio of labour of EVA. productivity No indicator growth had a significantto average impact. wage growth had a positive impact on the evolution of EVA in the division. Labour productivity increased and caused an increase in EVA of CZK 128 million, but the Theincrease ratio in of personnel labour productivity costs per employee growth to caused average an wage EVA decreasegrowth had of CZK a positive 81 million. impact on the evolution of EVA in the division. Labour productivity increased and caused an increase in EVA of CZK 128 million, but the Further data is available on the MIT website in an interactive viewer of economic indicators increase in personnel costs per employee caused an EVA decrease of CZK 81 million. (https://www.mpo.cz/en/panorama-interactive-table.html). Further data is available on the MIT website in an interactive viewer of economic indicators (https://www. mpo.cz/en/panorama-interactive-table.html).

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

120 35 30 110 25 20 100 15

90 10 5 80 0 -5 70 -10

60 -15 -20 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 50 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Spread -13,91 -5,70 -7,54 -1,97 -0,87 -5,56 -4,05 7,96 0,18 -1,07 15 103,0 103,7 105,0 107,6 109,5 109,7 111,3 111,8 112,7 113,7 rf 4,55 4,67 3,71 3,79 2,31 2,26 1,58 0,58 0,43 0,98 15.1 104,2 104,8 106,4 109,1 111,0 111,5 112,8 111,8 111,7 111,1 ROE 15,01 16,93 10,20 13,59 15,29 16,94 18,10 27,31 19,99 18,56 15.2 101,5 102,4 103,1 105,6 107,5 107,5 109,2 110,7 112,0 114,2 re 28,92 22,63 17,75 15,56 16,16 22,50 22,15 19,35 19,81 19,63

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

6.4 FOREIGN TRADE 6.46.4.1 DEVELOPMENT FOREIGN OF FOREIGN TRADE TRADE Both exports and imports increased in the period 2009–2017, but the external balance of the Czech 6.4.1Republic DEVELOPMENT remained negative OF FOREIGN throughout TRADE (Chart 6.4.1). 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 Bothin the exports domestic and market imports with increased very cheapin the periodAsian competition, 2009–2017, butthey the have external to export. balance There of the are Czech a number Republic of remained negative throughout (Chart 6.4.1). In the European context, the Czech Republic has a relatively small manufacturing cooperation projects with Western partners. In addition, a number of companies are market for footwear sales. If manufacturers wish to fully use their capacity and not compete in the domestic marketswitching with to more very cheapcomplex Asian products competition, with higher they utility have toand export. modern There design. are Therefore, a number of70 – manufacturing80% of Czech cooperationshoemakers’ projectsproduction with is successfully Western partners. exported. 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.

97 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 47 241

43 309 38 969 38 235

34 413 32 555 29 778 28 042

10 000 26 256 24 759 24 468 24 423 21 555 21 081 20 265 17 449 11 146 12 992 0 3 342 8 563 7 018 6 370 1 497 9 119 9 191 ------10 754 - -10 000 9 007 - -

-20 000 2009 2010 2011 2012 2013 2014 2015 2016 2017

Source: CZSO, data as of 9 May 2018

6.4.2 TERRITORIAL STRUCTURE OF FOREIGN TRADE

6.4.2The export TERRITORIAL territories STRUCTUREof the division OF are FOREIGN demanding TRADE markets of Germany, Austria, the United Kingdom and TheSlovakia export (Chart territories 6.4.2). ofDespite the division rising prices,are demanding the largest markets volume of of Germany, imports Austria,was also the from United China Kingdom in 2017, andbut Slovakiamostly at (Chart dumping 6.4.2). prices. Despite Similar rising imports prices, are the also largest from volume Vietnam of andimports other was Asian also countries from China (e.g. in Cambodia2017, but mostlyand India). at dumping Conversely, prices. products Similar imported imports fromare also Ger frommany Vietnam are better and and other therefore Asian countriesmore expensive. (e.g. Cambodia and India). Conversely, products imported from Germany are better and therefore more expensive.

Chart 6.4.2 – Foreign trade in CZ-CPA 15 products Chart 6.4.2 – Foreign trade in CZ-CPA 15 products Import territories in 2017 Export territories in 2017 Import territories in 2017 Export territories in 2017

Netherlands Italy other Netherlands other United other China 3% It3%aly 19% United other China 3% 3% 19% Kingdom 25% 27% Poland King2%do m 25% 27% Poland 4% Germany 2% 4% France Ge40%rman y Indonesia Fra4%nc e 40% Indonesia Slovakia 3% 4% Slovakia 3% Germany 8% Poland Ge15%rman y 8% United Poland 15% United Cambodia 5% Italy Kingdom Austria Cam4%bo dia 5% Vietnam King9%do m Austria It9%aly Vietnam 10% 4% 10% 9% 10% 9% 10%

Source: CZSO, data as of 9 May 2018 Source: CZSO, data as of 9 May 2018 6.5 RESEARCH AND DEVELOPMENT

In 2016 R&D expenditures in this division amounted to CZK 15 million and primarily came from business 6.5resources. RESEARCH The share of researchers AND (FTE) DEVELOPMENT in the surveyed division in the total number of researchers in the Inmanufacturing 2016 R&D expenditures industry sectors in this is less division than 0.09amounted %, i.e. to7 researchers CZK 15 million per yearand primarily(average forcame 2010 from–2016). business resources. The share of researchers (FTE) in the surveyed division in the total number of researchers in the manufacturing industry sectors is less than 0.09 %, i.e. 7 researchers per year (average for 2010–2016).

Given that in terms of R&D expenditure and number of enterprises the division is relatively small, only one company can be found which received significant amount of special-purpose State budget aid within the national programmes of the MIT (IMPULS, TIP, TRIO) and Technical Assistance of the Czech Republic (Alfa,

98 Given that in terms of R&D expenditure and number of enterprises the division is relatively small, only one company can be found which received significant amount of special-purpose State budget aid within the national programmes of the MIT6. CZ-NACE(IMPULS, TIP, 15 TRIO)MANUFACTURE and Technical OF Assistance LEATHER ANDof the RELATED Czech Republic PRODUCTS (Alfa, Competence Centres and Epsilon) in the period 2004–2017. This company is GALA a.s. (the project: CompetenceResearch and Centres development and Epsilon) of nanomaterials in the period in 2004–2017.the manufacture This company of balls). is GALA a.s. (the project: Research andIn the development period 2015 of – nanomaterialsOctober 2017, inonly the 2 manufacture projects under of balls).the National RIS3 Strategy were approved for the OP EIC, which ranks the manufacture of leather and related products among the least supported R&D areas In the period 2015 – October 2017, only 2 projects under the National RIS3 Strategy were approved for the OPin the EIC, National which ranks RIS3 theStrategy. manufacture Their total of leather planned and aid related (European, products Czech among private the and least public supported sources) R&D was areas CZK in2 millionthe National in the RIS3period Strategy. under review,Their total of whichplanned CZK aid 1 million(European, is from Czech EU privategrants. andThe publicaid is aimed sources) at ensuringwas CZK 2 million in the period under review, of which CZK 1 million is from EU grants. The aid is aimed at ensuring participation in exhibitions and trade fairs abroad, i.e. that the projects are aimed exclusively at increasing participation in exhibitions and trade fairs abroad, i.e. that the projects are aimed exclusively at increasing the internationalization ofof SMEs.SMEs.

Chart 6.5.1 – R&D expenditure in CZ-NACE 15 (CZK million)

Government+universities Entrepreneurs Number of enterprises EU+other international organisations 19 20 18 19 7 0 0 18 0 17 6 15 0 15 16 14 0 0 14 0 5

12 4 10 16 17 19 13 3 6 6 6 6 8 13 16 15 5 5 5 6 2 4 1 2 2 2 2 2 0 0 0 1 0 2010 2011 2012 2013 2014 2015 2016 2010 2011 2012 2013 2014 2015 2016

Source: CZSO, MIT calculations

6.6 DIVISION DIVISION SUMMARY SUMMARY AND ANDPROSPECT PROSPECTSS

According toto the the World World Footwear Footwear Yearbook, Yearbook, the theworld world production production of footwear of footwear reached reached 23 billion 23 pairs.billion Among pairs. theAmong top thefour top producers four producers is China, is which China, supplied which suppliedabout 57.0% about of 57.0% all footwear of all footwear to the global to the market, global followed market, by India (9.8%), Vietnam (5.2%) and Indonesia (4.8%). But there is also an increase in wage pressure in these countries.followed byFor India example (9.8%), in Vietnam,Vietnam the(5.2%) minimum and Indone wage siaincreased (4.8%). 3,02But timesthere betweenis also an 2010 increase and 2017 in wage and GDPpressure per capitain these increased countries. only For 2.04 example times. inAmong Vietnam, the thelargest minimum clients wageof companies increased producing 3,02 times footwear between in Vietnam2010 and are 2017 the USA,and GDPChina, per Germany, capita increasedBelgium and only Japan. 2.04 The times. pressure Among on minimumthe largest wage clients brings of risingcompanies costs and hence rising prices for finished products. According to representatives of these major producers, this producing footwear in Vietnam are the USA, China, Germany, Belgium and Japan. The pressure on will lead to shifting production to low-cost countries, such as Cambodia, Myanmar, Bangladesh or Ethiopia. Theminimum Kenyan wage government brings aimsrising to costscreate anda total hence of 70,000 rising jobs prices in the for leather finished sector products. by 2022 becauseAccording it hasto identifiedrepresentatives the manufacture of these major of textile producers, and footwear this will as lead one to of shifting the driving producti forceson of to the low Kenyan-cost countries, industry (besides such as agricultural production, oil and natural gas extraction). Cambodia, Myanmar, Bangladesh or Ethiopia. The Kenyan government aims to create a total of 70,000 jobs Thein the rising leather costs sector of manufacturing by 2022 because footwear it has in identifiedAsian countries the manufacture has, on the otherof textile hand, and had footwear a positive as impactone of onthe the driving increase forces in of global the Kenyan interest industry in European (besides leather agricultural products. production, As a whole, oil and in 2017natural the gas European extraction). Union exportedThe rising approximatelycosts of manufacturing 1.0 billion footwear pairs of in shoesAsian totalingcountries EUR has, 20.6 on the billion, other representing hand, had a positive a year-on-year impact increase of approximately 3.6% in volume and around 7% in value. In the first half of 2017, eight countries accountedon the increase for the in mainglobal share interest (about in European83.3% of thelea therEUR products.20.6 billion) As ofa whole,footwear in exports2017 the from European EU28 –Union Italy, Germany,exported Belgium,approximately France, 1.0 the billion Netherlands, pairs of Spain, shoes Portugal totaling andEUR Great 20.6 Britain.billion, representing a year-on-year

Despite the decline in imports of cheap footwear and other leather products from Asian countries, the main problem in the Czech Republic is still the relatively low interest of retailers in Czech products.

99 and their offer in business networks. In spite of these difficult conditions, there are a number of successful smaller companies and family-type companies focusing on specialized products and perfect customer service. However, it also follows from the above-mentioned reports that the Czech shoemaking industry can still be regarded as a good and efficient exporter, especially with appropriate foreign cooperation.

Many manufacturers continue to build their own retail network and also try to contract outlets. E.g. Botas in Skuteč cooperates with 160 stores, mostly brick and mortar ones, but also with the Intersport chain. In addition, it has four brand-name outlets operated by franchise partners and is planning to open a new store in Brno and also in Berlin, which could become the second brand-name outlet in Germany (the first one is in Leipzig). Another traditional shoe maker is the manufacturing cooperative SNAHA Jaroměř, which plans to produce up to CZK 350,000 pairs of shoes every year. Another successful traditional producer is Moleda, which manufactures the Prestige shoes; in 2016 it sold a total of 161,000 pairs of these shoes, up 8 thousand pairs compared to 2015. The largest producer of children’s shoes is FARE Valašské Klobuky, which in 2016 produced 130 thousand pairs of shoes and increases its production by about 10% per year. Individual manufacturing companies are increasingly making use of online sales through their own online shops or deliveries directly to brick and mortar shops, as they are facing aggressive policy of wholesalers.

Footwear manufacturers have significantly restructured their production and produce clothing accessories and footwear with a higher value added, especially in the segments of work shoes, protective and safety shoes, as well as orthopedic, health, prophylactic and quality children’s footwear. At present, they also produce quality leather ladies’ and men’s walking footwear. Despite the problematic social and economic situation in the Czech Republic, it is gratifying that many customers are returning to quality Czech footwear and demanding it from their retailers. This is most visible in children’s and health footwear segments.

The still persisting problem in the leather industry is the shortage of young workers skilled in footwear and the consequent rising average age of employees.

Important factors for maintaining the competitiveness of the manufacture of leather and related products (as in previous years) 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; - improving education and cooperation with the Ministry of Education, which will lead to increased interest in study in leather industry; - expanding cooperation with national and foreign scientific and technical facilities (research institutes, universities); - introducing new knowledge into practice and using them in product innovation. As an example, we can mention Adidas, which has joined forces with Silicon Valley’s Carbon, and uses light-sensitive plastics to produce shoes using 3D printing technology. These plastics allow to produce a shoe sole in 20 minutes, a 2/3 time reduction. Japan’s Asics is testing the possibility of producing a midsole with microwave technology that can produce a midsole in 15 seconds, saving up to 90% of energy. - development of marketing services.

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 DIVISION CHARACTERISTIC

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, except furniture.

Wood plays a significant role in the national and international economy – it is a versatile raw material and its resources can be continuously renewed. Forests cover nearly 35% of the territory of the Czech Republic, the total supply of wood is approaching 670 million m3 with annual increments of almost 20 million m3, of which about 17.5 million m3 are logged. The wood industry is divided into the following groups: sawmilling and planing of wood; manufacture of products of wood, cork, straw and plaiting materials, except furniture, which includes the production of veneers, OSB boards, joinery and carpentry manufacture and the manufacture of wooden packaging. Lower-quality wood also serves as an ecological fuel. Given the gradual application of increasingly sophisticated technologies, wood is a material with a new future.

As in previous years, the largest share of forests (almost 50%) is owned by the State under the management of the state-owned enterprise Lesy ČR (Forests of the Czech Republic); other significant forest owners include private owners, municipalities and cities. The remaining owners are marginal and statistically insignificant. Recently there have not been any significant ownership changes, except returning property to churches.

Table 7.1.1 – Shares of groups in CZ-NACE 16 in 2017 (%, division = 100%)

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

16.1 22.2 19.9 27.6 29.4 24.6 24.7 20.9 5.7

16.2 77.8 80.1 72.4 70.6 75.4 75.3 79.1 94.3

Source: CZSO data, 2017 MIT calculations

The division is characterized by a high share of small and micro-enterprises. They account for the majority of units, 54 % of employed persons, but only 47 % of revenues and 54 % of the value added. In the wood processing 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.

101 7.2 DIVISION DEVELOPMENT

The wood industry offers thousands of jobs and is an economically important part of the national economy. The Czech Republic has growing forest and timber reserves; therefore, forests offer a wider use of wood in the future, and the Czech Republic aims to sustainably increase its consumption. The level of consumption of raw timber mainly reflects the extent of wood processing capacities. In spite of the high production of its forests, the Czech Republic belongs to countries with lower relative wood consumption due to insufficient wood processing capacities. This results in high prevalence of exports over imports.

The wood processing industry is already preparing for the emergence of Industry 4.0 based on massive digitization and automation. However, it is not very realistic for many companies, especially small and medium-sized sawmills, some of which are also engaged in forestry related to forest growing and logging. However, greater automation could solve the current shortage of workers in the forestry and wood sector, which especially forestry has not only in manual professions.

At present, two international certification systems, PEFC and FSC, are used in Europe. Both certificates guarantee sustainable forest management. In the Czech Republic, there are about 70% of PEFC-certified forests (which is dominant in other EU countries with significant forestry) and roughly 2% of FSC-certified forests. Currently, some wood processors require forest owners to increase forest area managed according to FSC standards. One of the reasons is a broader stakeholder representation, including world-class environmental organizations, and promoting the FSC brand as an eco-friendly certificate. Lesy ČR (Forests of the Czech Republic) and Vojenské lesy a statky (Military Forests and Farms) now work with the Czech FSC representation on adjusting the standards. Forest owners already have selected areas where management could change in order to provide sufficient domestic FSC-certified timber for Czech processors.

7.3 MAIN ECONOMIC INDICATORS

The number of units grew until 2011 and then started to decline. Between 2016 and 2017, their number grew again. The number of employed persons in 2008–2017 is constantly decreasing. After a decline in 2009–2013, revenues and value added rather stagnated and then started growing. Only labour productivity grew more markedly over the period. Average wage also grew, but significantly less (Chart 7.3.1).

Following a drop in 2009, the prices of CZ-CPA 16 producers jumped up in the following years (2011, 2014), mainly due to the development of prices of wood (the input raw material), both in the Czech Republic and abroad (Chart 7.3.2). The prices of product group 16.1 went below the 2005 level in 2008–2009, but from 2011 their growth dynamics outperformed prices in group 16.2. The financial results of the division have been positively affected by growth in return on equity and labour productivity from 2013 onwards. The values of Spread thus turned positive from 2014 (see Figure 7.3.3). In 2017 there was a year-on-year decline in economic value added, but remained positive. The main causes were the increase of risk (decrease of EVA by CZK 267 million) and increase in the share of equity/assets (decrease of EVA by CZK 213 million). On the other hand, the EBIT/Revenue increase was positive (an increase of EVA by CZK 104 million). The effects of changes in other indicators on EVA were an order of magnitude lower. The development of the relation between labour productivity and average wage was very favourable, causing a rise in EVA of CZK 822 billion.

Further data is available on the MIT website in an interactive viewer of economic indicators (https://www. mpo.cz/en/panorama-interactive-table.html).

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

Chart 7.3.1 – Major 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 28 848 28 153 28 050 27 849 27 672 27 553 27 415 54 780 53 900 26 832 53 640 53 181 10 000 20 000 51 069

5 000 10 000

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

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

40 000

60 000

74 841

30 000 66 603 102 542 94 911 94 140 61 773 40 000 92 675 59 529 89 344 86 428 84 344 84 327 84 251 83 238 26 480 53 605 24 776 23 716 23 143 49 557 22 044 48 844

21 378

20 859 20 000 20 848 20 702 46 960 20 206

45 609

44 716 20 000 10 000 22 541 20 272 16 462 16 189 16 408 16 707 17 001 17 565 18 445 19 221 0 0 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Source: CZSO, MIT calculations * This is an aliquot monthly share computed from annual data

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

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 50 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Spread -2,33 -8,09 -4,73 -6,59 -3,65 -3,53 1,59 3,44 7,28 6,26 16 103,4 100,3 103,0 110,3 110,7 111,8 118,4 118,5 117,4 119,1 rf 4,55 4,67 3,71 3,79 2,31 2,26 1,58 0,58 0,43 0,98 16.1 95,8 95,3 102,1 114,3 113,2 116,4 123,1 119,5 115,2 113,6 ROE 20,75 14,89 15,89 16,21 15,52 16,52 22,21 22,29 25,74 25,25 16.2 107,8 103,1 103,6 108,0 108,8 109,1 115,7 117,2 117,4 120,6 re 23,08 22,98 20,63 22,81 19,16 20,05 20,62 18,85 18,46 18,99

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

103 7.4 FOREIGN FOREIGN TRADE TRADE

7.4.1 DEVELOPMENTDEVELOPMENT OF OF FOREIGN FOREIGN TRADE TRADE

Development ofof foreign foreign trade trade in in CZ-CPA CZ-CPA 16 16commodities commodities shows shows that that during during the periodthe period under under review, review, the value the ofvalue exports of exports grew faster grew thanfaster the than value the of value imports, of imports, so the positive so the balancepositive graduallybalance gradually increased increased (Chart 7.4.1). (Chart 7.4.1).

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 39 875 37 936 36 678 15 000 36 460 32 714 30 593 29 762 28 454

10 000 26 324 21 621 20 329 18 255 19 033 17 607 17 925 18 753 17 427 15 594 15 395 11 818 14 666 14 521 14 506 17 120 5 000 15 199 13 932 15 096 0 2009 2010 2011 2012 2013 2014 2015 2016 2017

Source: CZSO, data as of 9 May 2018

7.4.2 TERRITORIALTERRITORIAL ST STRUCTURERUCTURE OF FOREIGNOF FOREIGN TRADE TRADE Territorial distribution of foreign trade has seen little change over the long term. Among the largest foreign Territorial distribution of foreign trade has seen little change over the long term. Among the largest foreign customers of CZ-CPA 16 products in 2017 are EU Member States such as Germany (38 %), Austria (18 %), Slovakia (7customers %), Italy of(6%) CZ -andCPA Poland16 products (4%). Exportsin 2017 toare Germany EU Member mainly States involve such timber, as Germany construction (38 %), joinery Austria products (18 %), andSlovakia pallets. (7 %),Austria Italy is (6%) most and interested Poland in(4%). logs, Exports lumber, to veneer, Germany agglomerated mainly involve products timber, and constructionplywood. Exports joinery of CZ-CPAproducts 16 productsand pallets. into EUAustria countries is most account interested for about in 80 logs, % of lumber,total production. veneer, Inagglomerated 2017, most CZ-CPA products 16 goods and were imported from Germany (23 %), followed by Poland (19 %), Austria (15 %) and Slovakia (9%). plywood. Exports of CZ-CPA 16 products into EU countries account for about 80 % of total production. In 2017, most CZ-CPA 16 goods were imported from Germany (23 %), followed by Poland (19 %), Austria (15 %)Cha andrt 7.4.2 Slovakia – Fore (9%).ign trad e in CZ-CPA 16 products Import territories in 2017 Export territories in 2017 Slovenia Chart 7.4.2 – Foreign trade in CZ-CPA 16 products Switzerland 2% other other 2% 20% France Germany Import20% territories in 2017 Export territories in 2017 2% 23% Netherlands 3% Slovenia Germany Ukraine Switzerland 2% Poland other 38% 4% other 4%2% 20% FranceChina Germany 20% 2%4% 23% Poland NetherlandsItaly 3% Slovakia Russian 19% 6% Germany Ukraine Slovakia 7% federation Poland 38% 4% China 9% 4% Austria 4% Austria 18% 4% 15% Poland Italy Slovakia Russian 19% 6% Slovakia 7% federation 9% Austria 4% Austria 18% Source: CZSO, data as of 9 May 2018 15%

Source: CZSO, data as of 9 May 2018

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 AND DEVELOPMENT 7.5 RESEARCH AND DEVELOPMENT R&D expenditure in 2016 amounted to CZK 47 million, with total R&D expenditure being up CZK 29 million R&Dfrom expenditure2010 (Chart in7.5.1). 2016 Theamounted bulk of tothe CZK funds 47 million, were expenditures with total R&D from expenditure business resources. being up CZKIt can 29 alsomillion be fromobserved 2010 that (Chart the 7.5.1).years 2011, The bulk 2015 of and the 2016 funds are were sp ecific expenditures in that fromthe volume business of resources.funds in this It candivision also besignificantly observed exceedsthat the the years volume 2011, of 2015 expenditure and 2016 in areother specific years. in In that 2011, the this volume was dueof funds mainly in tothis the division public significantlyfunds from abroad, exceeds and the in volume 2015 and of expenditure2016 this was in due other to years.an increase In 2011, in funds this wasfrom due business mainly resour to theces. public The funds from abroad, and in 2015 and 2016 this was due to an increase in funds from business resources. The share of researchers in CZ-NACE 16 in the total number of researchers in the manufacturing industry share of researchers in CZ-NACE 16 in the total number of researchers in the manufacturing industry sectors issectors less than is less 0.2 than %, i.e. 0.2 16 %, researchers i.e. 16 researchers per year per (average year (average for 2010–2016). for 2010–2016). The companies that received in 2004–2017 a significant amount of special-purpose State support within the Thenational companies programmes that received of the Ministryin 2004–2017 of Industry a significant and Trade amount (IMPULS, of special-purpose TIP, TRIO) and State Technical support Assistance within the of national programmes of the Ministry of Industry and Trade (IMPULS, TIP, TRIO) and Technical Assistance of the Czech Republic (Alfa, Competence Centres and Epsilon) include Jesenická Biopaliva, spol. s r.o.; České the Czech Republic (Alfa, Competence Centres and Epsilon) include Jesenická Biopaliva, spol. s r.o.; České dřevařskédřevařské závodyzávody Praha,Praha, a.s.;a.s.; ELTROELTRO ŠŤASTNÝ, ŠŤASTNÝ, s.r.o. s.r.o. and and MATRIX MATRIX a.s. a.s. In the context of the OP EIC calls under the National RIS3 strategy, the R&D aid received by the division is Inrather the contextlow. In theof the period OP EIC2015 calls – Octoberunder the 2017, National total aidRIS3 for strategy, 33 approved the R&D projects aid received (European, by the Czech division public is rather low. In the period 2015 – October 2017, total aid for 33 approved projects (European, Czech public and private sources) was planned at CZK 0.23 billion, of which CZK 0.10 billion from EU grants. Aid is and private sources) was planned at CZK 0.23 billion, of which CZK 0.10 billion from EU grants. Aid is intended especiallyintended especially for the introduction for the introduction of product of product and process and process enterprise enterprise innovations innovations (31 %), (31 creation %), creation of new, of expandednew, expanded or modernized or mode rnizedresearch research centers centers of enterprises of enterprises (28 %) and(28 %)the andpurchase the purchase of information of information systems (15systems %). Projects (15 %). are Projects focused are on focused strengthening on strengthening R&D capacity R&D of capacity enterprises of enterprises (64 %), support (64 %), for supportICT in enterprises for ICT in (15enterprises %) and strengthening (15 %) and strengthening of technological of technological cooperation cooperationbetween companies between (13 companies %). Most (13 of the%). Mostprojects of thefall within the application sector Traditional Culture and Creative Industries (29), while four projects fall within projects fall within the application sector Traditional Culture and Creative Industries (29), while four Sustainable Agriculture and Forestry. projects fall within Sustainable Agriculture and Forestry. In the reference period,period, projectsprojects forfor thethe processingprocessing of woodwood and manufacture of products of wood (except furniture) werewere submittedsubmitted by by large large enterprises enterprises as well as aswell SMEs. as AsSMEs. regards As Europeanregards European aid for applicants/ aid for beneficiaries, largest EU aid for SMEs was granted to Kloboucká lesní s.r.o. from the Hradec Králové Region applicants/beneficiaries, largest EU aid for SMEs was granted to Kloboucká lesní s.r.o. from the Hradec (project Centre for wood-based composite applications; total expenditure CZK 59 million, of which EU grant ofKrálové CZK 30 Regi million)on (project and largest Centre EU for aid wood for large-based enterprises composite was applications; granted to Deufoltotal expenditure Česká republika CZK 59a.s. million, from the of Southwhich Moravian EU grant Region of CZK (project 30 million) Development and largest of EU New aid SW for in large Deufol, enterprises total expenditure was granted of CZK to 35 Deufol million, Česká of whichrepublika EU granta.s. offrom CZK the 9 million). South Moravian Region (project Development of New SW in Deufol, total expenditure of CZK 35 million, of which EU grant of CZK 9 million).

Chart 7.5.17.5.1 – R&D– R&D expenditure expenditure in CZ -inNACE CZ- NACE16 (CZK 16 million) (CZK

Government+universitiesGovernment+universities NumberNumber of of enterprises enterprises EntrepreneursEntrepreneurs EU+other international organisations EU+other international organisations 12 70 12 58 60 10 0 10 4747 50 42 8 42 00 8 40 15 6 6 15 1111 30 5858 1010 20 9 9 18 4646 4 4 8 8 8 8 20 0 7 7 2 11 11 5 5 27 2 2 10 13 5 0 20 0 11 4 5 5 0 0 0 0 1 0 00 0 0 20100 20110 20120 20130 20140 20150 20160 20102010 20112011 20122012 20132013 20142014 20152015 20162016

million) Source: CZSO, MIT calculations

Source: CZSO, MIT calculations

105 7.6 DIVISION SUMMARY AND PROSPECTS

The wood processing industry has a stable position within the manufacturing industry. The quality and price 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. A key issue for the further development of the wood industry is to increase the competitiveness of our producers through the introduction of the latest techniques and technologies and the application of modern management methods. There are also benefits to be gained in the area of strengthening R&D cooperation with foreign partner organizations.

The Czech Republic continues to lag behind advanced EU countries in the use of timber in the construction industry. However, the construction of family houses with a wood-based load-bearing structure has been steadily growing. In 2017, 2,159 wood-based houses were completed in the Czech Republic, which is 7.25% more than in 2016. The share of wooden buildings in the total number of completed family houses is 14.84%. The statistics show that the growth in completed wooden family houses is 2.5 times higher than in houses built with traditional technologies (bricks and brick blocks), which saw a year-on-year increase of only 3%. The main barrier to the further increase in the number of wood-based buildings, also in the area of public buildings, is the fire safety of buildings, which for example limits the maximum height of wood-based buildings to 12 m. However, a number of organizations and construction companies are trying to amend the regulations, so development in the construction of wood-based 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 a few hurricanes, and its price has dropped sharply. The situation on the timber market in the Czech Republic began to change in the second half of 2017 with calamities in the neighbouring countries (mainly in Austria, Germany, Poland and Slovakia) and customers from those countries, who were buying large volumes of infested wood from North Moravia, stopped or significantly reduced their orders. Reduced prices of logs and their availability were favourable for domestic sawmills. Many of the medium-sized and small enterprises would be able to increase logging, which would not be a problem for many sawmills given timber sales. However, the vast majority of enterprises have labour problems and sufficient and timely processing of logs is therefore difficult. In the future, this problem, at least in part, could be solved by more extensive automation, but that will not solve the problem completely.

Export of wood does not fulfill the function of forestry policy and is purely an economic activity. For example export of raw wood to Austria for the first half of 2017 was 1.5 million m3, which was 16% more than in 2016. For strategic reasons, the objective for this industry should be 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. Any additional activity adding value to the processed intermediate product or the final product makes it possible to get more value from the wood material.

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

8.1 DIVISION CHARACTERISTIC 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 traditional industries in the Czech Republic with very good environmental performance. Historically, paper production has been based on renewable sources, and this is true to this day. This section includes the production of pulp, paper and final products of paper.

The paper industry products are indispensable in all sectors of the manufacturing industry, mainly in the manufacture of all types of packaging, in the printing industry, in the chemical industry, in electrical engineering and in the food industry. For many years, the strategy of sustainable development has been actively pursued in this division, and the production of pulp and paper takes place in a virtually closed cycle.

The division is dominated by large enterprises with over 54 % of revenues, value added and one third of employees. Medium-sized enterprises account for less than a third of revenues and value added and 42 % of employees. Table 8.1.1 gives information on the shares of both groups. Group 17.2 accounts for most of the division.

Table 8.1.1 – Shares of groups in CZ-NACE 17 in 2017 (%, division = 100%)

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

17.1 20.2 35.1 34.4 35.6 37.9 40.4 16.7 28.9

17.2 79.8 64.9 65.6 64.4 62.1 59.6 83.3 71.1

Source: CZSO data, 2017 MIT calculations

8.2 DIVISION DEVELOPMENT

The manufacture of paper and paper products is based on the processing of renewable raw materials of predominantly domestic origin (wood) and recyclable secondary raw materials (recovered paper). Paper collection in the Czech Republic is constantly growing and again exceeded 1 million tons. However, its processing for production remained at 2016 level, i.e. 230,000 tons. This balance shows that the Czech Republic is a surplus market in terms of paper and is one of the few European countries dependent on the export of paper.

The Czech paper industry is characterized by production specialising in packaging and wrapping papers, which are then massively exported in the case of some products. However, the bulk of domestic paper and paperboard consumption has to be covered by imports (1,493 million tonnes in 2017), which is much higher

107 than the total domestic production (908 thousand tonnes). In particular, graphic papers and hygienic papers are imported, as well as some materials for the production of corrugated paperboards.

In terms of the development in production and consumption of paper and paperboard, the European market is stagnating. The industry’s drivers are packaging and food paper manufacturers, as food companies are significant purchasers of paper and paperboard packaging. However, there is a sharp drop in the consumption of graphic papers. This is mainly due to the progressive digitization and success of electronic media over the printed ones. The result is a neutral development of paper and paperboard production and consumption in the European market. As a result of the current development, capacities for the production of graphic papers or its renovation for the production of packaging papers are being stopped. This trend was seen especially in 2017 and is likely to continue in the following years.

In 2017, it was confirmed that China is the global and main leader in the paper, pulp and raw materials, producing 111 million tons of paper and paperboard in 2016, accounting for 27% of the total world production of these products. China was the world’s largest producer in 2016. However, it is facing problems with the lack of raw materials, i.e. wood for pulp, as well as scrap paper. More than half of the cellulose and scrap paper has to be imported. It imports 10 million tons of scrap paper only from Europe, making China a truly key market in the sector. In 2017, the Chinese government gradually introduced rigorous checks on the quality of scrap paper, limited import licenses, and banned imports of lower quality mixed paper. These measures, which are primarily aimed at environmental protection, have greatly influenced the world paper market in 2017, including in the Czech Republic.

8.3 MAIN ECONOMIC INDICATORS

Between 2008 and 2017, with the exception of 2009, sales grew. Added value and average wage also grew. The number of units in the division was increasing until 2011, falling in 2012 and 2013, and since 2014 there was again an increase in the number of companies in the division. The number of employed persons formed a very moderate W, with peaks in 2008, 2012 and 2016 (Chart 8.3.1).

Industrial producer price indices developed differently over the reference period. While in relation to the high prices of basic raw materials, mainly pulp, the index of product group 17.1 was above the 2005 level over the whole period (excluding 2009), the index of product group 17.2 was around 100% (Chart 8.3.2).

Spread was fluctuating between positive and negative values between 2009 and 2013 (Chart 8.3.3). Since 2014, there has been a robust growth in Spread, driven primarily by flying growth in ROE. The value of economic value added grew slightly year-on-year in 2017 and reached positive values in both 2017 and 2016. The effects of changes in indicators affecting EVA were very small and their effect on EVA was also small. The development of labour productivity in relation to the development of the average wage is positive. The change in this relation caused a year-on-year increase in EVA of CZK 1.2 billion. The EVA in both groups was positive.

Further data is available on the MIT website in an interactive viewer of economic indicators (https://www. mpo.cz/en/panorama-interactive-table.html).

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

Chart 8.3.1 – Major 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

10 000 979

975 965 950 21 381 929 928 928

895 19 771 19 724 19 362 400 19 218 18 934 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 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

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

50 000

40 000

83 307

40 000 89 387

79 330

77 825

81 620 30 000 70 895 74 117 65 824 64 226 71 261 63 433 20 401 30 000 60 033 59 859 18 675 63 024 62 695 16 601

60 415 53 544 59 515

15 037

57 379

56 902

14 357 13 854 13 211

20 000 13 107 12 794 12 687 20 000 10 000 10 000 28 615 26 325 25 651 24 901 21 602 22 961 23 735 24 017 24 395 24 249 0 0 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Source: CZSO, MIT calculations * This is an aliquot monthly share computed from annual data

Chart 8.3.2 – Price development of 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 50 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Spread -0,23 -0,69 2,71 -1,62 2,34 -1,11 4,00 5,39 7,32 7,17 17 101,4 95,9 97,8 102,3 100,7 99,2 102,3 102,6 102,4 103,4 rf 4,55 4,67 3,71 3,79 2,31 2,26 1,58 0,58 0,43 0,98 17.1 102,2 95,3 107,6 113,9 108,8 110,3 116,9 119,0 118,2 122,1 ROE 8,74 8,90 10,08 8,06 9,88 7,64 12,13 12,98 14,55 14,64 17.2 100,8 95,8 94,3 98,2 97,5 95,6 98,0 98,2 98,0 98,4 re 8,97 9,58 7,37 9,68 7,54 8,74 8,13 7,59 7,23 7,47

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

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, but given the 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, but given the export growth leading ahead of import growth, from 2010 the negative trade balance of foreign trade is decreasing (Chart 8.4.1).export growth leading ahead of import growth, from 2010 the negative trade balance of foreign trade is decreasing (Chart 8.4.1). The negative balance stood at CZK 196 million in 2017. Exports amounted to CZK 58.9 billion and imports to The negative balance stood at CZK 196 million in 2017. Exports amounted to CZK 58.9 billion and imports to CZK 59.0 billion. CZK 59.0 billion.

Chart 8.4.1 – Exports, imports and foreign trade balance in products by CZ-CPA 17 (CZK million)

70 000 Export Import Trade balance 60 000

50 000

40 000

30 000 59 043 58 847 57 929 57 588 56 790 56 258 53 973 50 721 50 237

20 000 47 227 46 984 45 549 45 179 42 752 41 526 40 906 39 466 36 557 10 000 5 701 1 329 1 138 4 349 5 713 4 233 196 4 688 - 3 251 ------0 -

-10 000 2009 2010 2011 2012 2013 2014 2015 2016 2017

Source: CZSO, data as of 9 May 2018

8.4.2 TERRITORIALTERRITORIAL ST STRUCTURERUCTURE OF FOREIGNOF FOREIGN TRADE TRADE The largestlargest CZ-NACECZ-NACE 17 17 customer customer is is traditionally traditionally Germany Germany (21%), (21%), followed followed by byPoland Poland (12%) (12%) and and Slovakia Slovakia (8 %). (8 In%). terms In terms of imports, of imports, our largest our largest supplier supplier is Germany is Germany (32 %), (32Poland %), (13%)Poland and (13%) Austria and (8%). Austria The (8%).territorial The structureterritorial ofstructure foreign of trade foreign in paper trade productsin paper products has been has relatively been relatively stable in stable the long in the run, long the run, main the trading main partners remaining the same (Chart 8.4.2). trading partners remaining the same (Chart 8.4.2).

ChartChart 8.4.2 – FoForeignreign ttraderade iinn CZ-CPACPA 17 pproductsroducts

ImportImport territoriesterritories inin 2017 ExportExport tterritorieerritorie iinn 2017

other other other other 35% GGermanyermany 24% Germany 35% 24% Germany 21% 32% NetherlandsNetherlands 32% 3% Poland FinlandFinland Poland 12% 4% 12% HHungaryungary USAUSA Poland 4% Poland 4% SSlovakialovakia 4% 13% ItItalyaly SlovakiaSlovakia Austria 8% Austria FFrancerance 6% 7% 8% ItalyItaly 7% 8% 4% 5% CChinahina 5% AAustriaustria 5% 5% Source:Source: CZCZSO,SO, datadata asas ofof 9 MMayay 2018

8.5 RESEARCH AND DEVELOPMENT 110 Division 17 is relatively small in terms of R&D expenditures. In 2016, R&D expenditures amounted to CZK 26 million and accounted for 0.11 % of total R&D expenditure in the manufacturing industry. In 2015, compared with other years, the total financial resources increased significantly from CZK 14 million to CZK 55 million; this increase was mainly due to the one-off increase in expenditures from entrepreneurial 8. CZ-NACE 17 MANUFACTURE OF PAPER AND PAPER PRODUCTS

8.5 RESEARCH AND DEVELOPMENT

Divisionsources (Chart 17 is relatively8.5.1). The small share in of terms researchers of R&D (FTE) expenditures. in CZ-NACE In 17 2016, in the R&D total expenditures number of researchers amounted toin CZKthe manufacturing26 million and industryaccounted sectors for 0.11 is 0.12 % of %, total i.e. 10 R&D researchers expenditure per inyear the (average manufacturing for 2010 industry.–2016). In 2015, compared with other years, the total financial resources increased significantly from CZK 14 million to CZKThe companies55 million; thatthis increasereceived wasin 2004 mainly–2017 due a significantto the one-off amount increase of special in expenditures-purpose State from support entrepreneurial within the sourcesnational (Chart programmes 8.5.1). Theof the share Ministry of researchers of Industry (FTE) and in Trade CZ-NACE (IMPULS, 17 in theTIP, total TRIO) number and Technical of researchers Assistance in the of manufacturing industry sectors is 0.12 %, i.e. 10 researchers per year (average for 2010–2016). the Czech Republic (Alfa, Competence Centres and Epsilon) include Obchodní tiskárny, a.s. (now OTK TheGROUP, companies a.s.), Hostýnské that received papírny in 2004–2017 s.r.o., IQ Structures a significant s.r.o., amount SPM -of Security special-purpose Paper Mill, State a.s. supportand CIUR within a.s. the national programmes of the Ministry of Industry and Trade (IMPULS, TIP, TRIO) and Technical Assistance of Within the National RIS3 Strategy, the manufacture of paper and paper products is an R&D area that the Czech Republic (Alfa, Competence Centres and Epsilon) include Obchodní tiskárny, a.s. (now OTK GROUP, a.s.),receives Hostýnské below- averagepapírny s.r.o.,support. IQ Structures In the period s.r.o., 2015 SPM–October - Security 2017, Paper 23 Mill, projects a.s. and falling CIUR within a.s. the National RIS3 Strategy were approved under the OP EIC for implementation with planned total aid (EU, public and Withinprivate theCzech National funds) RIS3 of Strategy,CZK 0.31 the billion, manufacture of which of CZKpaper 0.10 and billion paper isproducts an EU isgrant. an R&D The area aid that is intended receives below-average support. In the period 2015–October 2017, 23 projects falling within the National RIS3 Strategy wereprimarily approved for introducing under the OPproduct EIC for and implementation process enterprise with planned innovations total (89aid (EU,%). Projectspublic and are private focused Czech on funds)strengthening of CZK 0.31 R&D billion, capacities of which of CZK enterprises 0.10 billion (89 is an%). EU The grant. projects The aid isfall intended within primarilythe application for introducing sector productTraditional and Culture process and enterprise Creative innovations Industries. (89 %). Projects are focused on strengthening R&D capacities of enterprises (89 %). The projects fall within the application sector Traditional Culture and Creative Industries. In the reference period, projects for the manufacture of paper and paper products were submitted by large Inenterprises the reference as well period, as SMEs. projects As regardsfor the manufactureEuropean aid of for paper applicants/beneficiaries, and paper products werelargest submitted EU aid for by SMEslarge enterprises as well as SMEs. As regards European aid for applicants/beneficiaries, largest EU aid for SMEs was was granted to S&K LABEL spol. s r.o. from Prague (projects FLEXO 2017; Innovation project DIGI; Expansion granted to S&K LABEL spol. s r.o. from Prague (projects FLEXO 2017; Innovation project DIGI; Expansion of S&Kof S&K LABEL’s LABEL’s export export scope; scope; total total expenditures expenditures of CZK of 94CZK million, 94 million, of which of which EU grant EU ofgrant CZK of33 CZKmillion); 33 million); largest EUlargest aid forEU largeaid for enterprises large enterprises was granted was togranted OP papírna, to OP s.r.o. papírna, from s.r.o. the Olomouc from the Region Olomouc (projects Region Innovation (projects ofInnovation OP papírna, of OPs.r.o., papírna, Innovation s.r.o., of Innovation paper machine of paper PS5, machinetotal expenditures PS5, total CZK expenditures 159 million, CZK of which159 million, EU grant of of CZK 40 million). which EU grant of CZK 40 million).

Chart 8.5.1 – R&D expenditure in CZ-NACE 17 (CZK million)

Government+universities Number of enterprises Entrepreneurs EU+other international organisations 12 60 55

4 10 50

40 8 32 27 30 42 26 6 0 10 16 10 20 4 8 13 14 17 7 7 6 6 0 12 3 10 9 2 2 16 5 9 10 0 5 5 5 1 0 20 0 0 2010 2011 2012 2013 2014 2015 2016 2010 2011 2012 2013 2014 2015 2016

Source: CZSO, MIT calculations

8.6 DIVISION SUMMARY AND PROSPECTS

According to experts from the paper industry, 2017 is considered to be very successful, not only for Czech paper mills. The economy was doing well, which led to an increase in the consumption of packaging papers, packaging and Czech Republic was one of the few countries which saw a slight increase in the consumption of graphic papers. This marked the end of the decline that began during the financial crisis and continued for another 8 years. Total paper and paperboard consumption exceeded 1.5 million tons in the Czech111 8.6 DIVISION SUMMARY AND PROSPECTS

The activity of the Czech Paper Industry Association for 2017 grew again both at EU level as part of the CEPI (Confederation of European Paper Industry Confederation) and in the Czech Republic, in particular through the Confederation of Industry.

At present, the Czech paper industry fulfils all the demanding environmental limits for air, water and waste. Paper technology and paper as a product are very eco-friendly with regard to renewable raw materials for production, multiple recycling of paper fibers and a high level of use of biomass for the production of own energy. The paper industry behaves according to the principles of circular economy and promotes eco-design of products and also actively participates in the upcoming EU’s bio-economic strategy of industry and society.

In 2018, experts expect the existing trend to continue, i.e. increasing consumption and production of packaging and hygiene papers and, conversely, reducing consumption and production of graphic papers, especially news and magazine paper. Investments in the production of packaging papers and packaging and investments in graphic papers will continue.

The perspectives of the sector are largely based on sufficiency of raw materials and energy resources and proposals for systemic measures limiting the inefficient increase of costs of enterprises and discouraging foreign investors from investing in the paper industry in the Czech Republic. This involves in particular constant availability of the basic raw material – wood for the paper industry, which may materialise if wood is used for the production of renewable energy. Severe climatic fluctuations have been a major problem in recent years, making it impossible for wood to be harvested continuously and forests to be FSC-certified. At the same time, the Czech Forest Certification System (PEFC) was again successfully approved as a system that meets globally recognized Sustainability Indicators.

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, periodicals (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 is dominated by small enterprises, which accounted for over 52 % of revenues, 49 % of value added and 44 % of employees in 2017. The most significant group in the division is 18.1, which accounts for around 80% of the value added, revenues, net turnover and assets and over 80% of the personnel cost of equity, number of employees and number of units (Table 9.1.1).

Table 9.1.1 – Shares of groups in CZ-NACE 18 in 2017 (%, division = 100%)

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

18.1 87.8 84.7 83.6 85.7 81.8 79.3 88.4 83.3

18.2 12.2 15.3 16.4 14.3 18.2 20.7 11.6 16.7 Source: CZSO data, 2017 MIT calculations

9.2 DEVELOPMENTS IN THE DIVISION

In 2017, the largest companies (by number of employees) were FINIDR, s.r.o., Státní tiskárna cenin s. p., EUROPRINT a.s., CPI Moravia Books s.r.o., GZ PRODUCTION s.r.o., Typos tiskařské závody s.r.o., Svoboda Press s.r.o., Czech Print Center a.s., GRASPO CZ a.s. and MORAVIAPRESS s.r.o.

In relation to the reproduction of recorded media, the largest companies (by number of employees) are GZ Media a.s., FERMATA a.s., Mentor Media Czech s.r.o., GZ Recordable s.r.o., NORTH VIDEO s.r.o., Digital Cinema s.r.o., HOMO DEVELOPUS s.r.o. and Computer MCL s.r.o. In May 2017, GZ Media a.s. opened a new vinyl plate plant in Canada and strengthened its position as the world’s largest producer of vinyl records. The company also has plans to further expand and increase production capacity. At present, GZ Media a.s. is one of the most important players in the media, printing and packaging industry worldwide.

113 9.3 MAIN ECONOMIC INDICATORS

Revenues declined steadily from 2008 to 2013, with growth starting only in 2014. However, revenues in 2017 did not reach 2008 levels. Added value had a similar trend, its minimum being in 2012 and not exceeding the 2008 level in 2017. The number of employed persons was declining until 2014, when it started to grow moderately. The number of units in 2008–2017 was fluctuating and reached 9,241 units in 2017. Labour productivity was stagnating until 2012, but then jumped in 2013, and has stagnated since 2014. The average wage was growing slightly in the reference period (Chart 9.3.1).

As can be seen from Chart 9.3.2, the prices in the segment are decreasing over the reference period. Industrial producer prices in 2008–2017 did not reach the 2005 level and were influenced by a number of factors, such as higher supply than demand, stiff competition between printing companies, the development of the Internet and electronic media, the high number of titles published at ever lower costs, etc.

Spread, positive in 2008, was falling steadily until 2011. In 2012 there was a change and from this year Spread was again positive (Chart 9.3.3). Interestingly, the change in revenues and value added only occurred in 2013 or 2014, labour productivity changed in 2013, but Spread improved already in 2012 and 2013. There were other factors such as falling personal costs, depreciation, etc., which caused margin growth. Since 2014, the developments in Spread, revenues, value added and productivity have been the same. Looking at the development of economic value added in 2017 it declined year-on-year (down CZK 440 million), but both values are still positive. The main reasons for this development were the decline in EBIT/Assets (resulting in a decrease of EVA of CZK 260 million) and a group of EBIT breakdown indicators – debt (resulting in a decrease of EVA of CZK 298 million). The labour productivity to wages ratio has had a very negative impact on the development of EVA. It caused a decline of CZK 462 million. Further data is available on the MIT website in an interactive viewer of economic indicators (https://www. mpo.cz/cz/panorama-interaktivni-tabulka.html). Chart 9.3.1 – Main economic indicators of CZ-NACE 18 Chart 9.3.1 – Main economic indicators of CZ-NACE 18 10 000 30 000 Number of units Average number of employees 10 000 30 000 9 000 Number of units Average number of employees 25 000 89 000 25 000 78 000 20 000 7 000 6 000 20 000

6 000

5 000 15 000

9 241

9 092

27 851 8 954 5 000 8 949 15 000 8 932

8 773

8 730 8 687 4 000 8 673

8 557 25 967 24 829 24 010 9 241 23 421 9 092 23 019

10 000 27 851 8 954 8 949 22 658 8 932 22 627 8 773 22 123 22 098 8 730 8 687 4 000 8 673 8 557

3 000 25 967 24 829 24 010 23 421

10 000 23 019 22 658 22 627 22 123 23 000 22 098 5 000 2 000 1 000 5 000 1 0000 0 0 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 0 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 50 000 80 000 Sales (CZK m) Value added (CZK m) Average monthly wage (CZK) 5045 000 80 000 Sales (CZK m) Value added (CZK m) 70 000 LabourAverage productivity monthly wage from (CZK) the VA (CZK/month)* 45 000 40 000 70 000 Labour productivity from the VA (CZK/month)* 60 000 4035 000 60 000 3530 000 50 000

50 000

30 000

25 000 40 000

46 472 25 000 40 000

45 976

45 412

20 000

42 170 30 000

41 550 66 520 41 380

65 355 40 625 64 877

39 667 63 325 13 179 13 051 12 920 46 472 12 755 45 976 12 590 37 153 45 412 12 250 12 170

20 000 11 951 35 863 56 666 11 249

15 000 55 586 11 109 54 994 54 454

42 170 30 000 53 265 66 520 41 550 41 380 52 027 65 355

40 625 64 877 39 667 63 325

13 179 13 051

12 920 20 000

12 755

12 590 37 153 12 250 12 170 11 951 35 863 56 666 11 249

15 000 55 586 11 109 54 994 54 454

10 000 53 265 52 027

20 000

10 000 10 000 25 959 24 216

5 000 23 631 22 973 22 347 22 281 22 231 22 104 21 721 10 000 21 197 25 959 24 216

5 000 23 631 22 973 22 347 22 281 22 231 22 104 21 721

0 0 21 197 0 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 0 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Source: CZSO, MIT calculations Source:* This is CZSO,an aliquot MIT calculationsmonthly share computed from annual data * This is an aliquot monthly share computed from annual data

114

Chart 9.3.2 – Price development of CZ-CPA 18 (2005 = 100%) Chart 9.3.3 – Spread (ROE – re) CZ-NACE 18 (%) Chart 9.3.2 – Price development of CZ-CPA 18 (2005 = 100%) Chart 9.3.3 – Spread (ROE – re) CZ-NACE 18 (%) 110 25 110 25 20 100 20 100 15 90 15 90 10 80 10 80 5

70 5 0 70 0 60 -5 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 60 -5 Spread 20081,69 -20090,09 -20102,01 -20113,09 20120,68 20131,14 20146,03 10,382015 20166,97 20175,06 50 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 rfSpread 1,694,55 -4,670,09 -3,712,01 -3,793,09 0,682,31 1,142,26 6,031,58 10,380,58 6,970,43 5,060,98 50 18 200899,4 200999,7 201091,9 201191,6 201291,4 201391,3 201492,0 201590,9 201689,7 201789,6 rfROE 20,034,55 16,704,67 14,373,71 14,153,79 14,562,31 14,562,26 17,951,58 23,310,58 19,850,43 18,220,98 1818.1 99,4 99,7 91,9 91,6 91,4 91,3 92,091,9 90,991,1 89,789,9 89,689,8 reROE 20,0318,34 16,7016,79 14,3716,38 14,1517,24 14,5613,89 14,5613,42 17,9511,91 23,3112,94 19,8512,88 18,2213,16 18.1 99,4 99,7 91,9 91,6 91,4 91,3 91,9 91,1 89,9 89,8 re 18,34 16,79 16,38 17,24 13,89 13,42 11,91 12,94 12,88 13,16 Source: CZSO, MIT calculations Source: CZSO, MIT calculations Source:Note: the CZSO, data MIT was calculations not monitored for group 18.2 Source: CZSO, MIT calculations Note: the data was not monitored for group 18.2

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

9 241 9 092 27 851 8 954 8 949 8 932 8 773 8 730 8 687 4 000 8 673 8 557 25 967 24 829 24 010 23 421

10 000 23 019 22 658 22 627 22 123 3 000 22 098 2 000 5 000 1 000 0 0 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

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 45 976 20 000 45 412

42 170 30 000 66 520 41 550 41 380 65 355 40 625 64 877 39 667 63 325 13 179 13 051 12 920 12 755 12 590 37 153 12 250 12 170 11 951 35 863 56 666 11 249

15 000 55 586 11 109 54 994 54 454 53 265 52 027

20 000

10 000 10 000 25 959 24 216

5 000 23 631 22 973 22 347 22 281 22 231 22 104 21 721 21 197 0 0 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Source: CZSO, MIT calculations * This is an aliquot monthly share computed from annual data

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

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

110 25

20 100

15 90

10 80 5

70 0

60 -5 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Spread 1,69 -0,09 -2,01 -3,09 0,68 1,14 6,03 10,38 6,97 5,06 50 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 rf 4,55 4,67 3,71 3,79 2,31 2,26 1,58 0,58 0,43 0,98 18 99,4 99,7 91,9 91,6 91,4 91,3 92,0 90,9 89,7 89,6 ROE 20,03 16,70 14,37 14,15 14,56 14,56 17,95 23,31 19,85 18,22 18.1 99,4 99,7 91,9 91,6 91,4 91,3 91,9 91,1 89,9 89,8 re 18,34 16,79 16,38 17,24 13,89 13,42 11,91 12,94 12,88 13,16

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

9.4 FOREIGN TRADE 9.4 FOREIGN TRADE 9.4.1 DEVELOPMENT OF FOREIGN TRADE 9.4.1 DEVELOPMENT OF FOREIGN TRADE Trade with CZ-CPA 18 products is negligible as most products are intended for the domestic market. Exports jumpedTrade with in 2014 CZ- CPAand then18 products fluctuated is atnegligible lower levels. as most By contrast, products the are value intended of imports for jumpedthe domestic sharply market.in 2011 andExports then jumped stagnated in 2014until 2015and thenand thenfluctuated began atto lowerdecline levels. slightly. By The contrast, foreign the trade value balance of imports has been jumped high sincesharply 2014 in 2011 due toand increased then stagnated exports until(Chart 2015 9.4.1). 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

400 848 778 751 724 300 604 548 530 529 526

520 510 503

200 438 373 378 339 350 337 319

261

100 9 203 222 - 5 55 148 0 77 -100 2009 2010 2011 2012 2013 2014 2015 2016 2017

Source: CZSO, data as of 9 May 2018

9.4.2 TERRITORIAL STRUCTURE OF FOREIGN TRADE

The main trading partner is traditionally Germany, with 61% of CZ-CPA 18 exports and 44% of imports. Significant export partners are also the Netherlands (12%) and Slovakia (5%). Imports import partners are China (13%) and Japan (13%), see Chart 9.4.2. 115 Chart 9.4.2 – Foreign trade in CZ-CPA 18 products

Dovozní teritoria v roce 2017 Vývozní teritoria v roce 2017 Poland Italy 3% 3% Switzerland other 4% 10% Switzerland Germany Belgium 1% other 61% 5% Germany 10% 44% United Arab USA Emirates 5% 2% Japan 13% Sweden Slovakia Netherlands China 2% 5% 12% 13% Hungary 3% Poland 4%

Source: CZSO, data as of 9 May 2018

9.5 RESEARCH AND DEVELOPMENT

Division 18 is relatively small in terms of R&D expenditures. R&D expenditure in 2016 amounted to CZK 14 million. In terms of the origin of resources, in 2016 R&D expenditures were from business resources, while 9.4.2 TERRITORIAL STRUCTURE OF FOREIGN TRADE The main trading partner is traditionally Germany, with 61% of CZ-CPA 18 exports and 44% of imports. Significant export partners are also the Netherlands (12%) and Slovakia (5%). Imports import partners are China (13%) and Japan (13%), see Chart 9.4.2.

Chart 9.4.2 – Foreign trade in CZ-CPA 18 products

Import territories in 2017 Export territories in 2017 Poland Italy 3% 3% Switzerland other 4% 10% Switzerland Germany Belgium 1% other 61% 5% Germany 10% 44% United Arab USA Emirates 5% 2% Japan 13% Sweden Slovakia Netherlands China 2% 5% 12% 13% Hungary 3% Poland 4%

Source: CZSO, data as of 9 May 2018

9.5 RESEARCH AND DEVELOPMENT

Division 18 is relatively small in terms of R&D expenditures. R&D expenditure in 2016 amounted to CZK 14 million. In terms of the origin of resources, in 2016 R&D expenditures were from business resources, while domestic and foreign public expenditures were negligible. The share of researchers in CZ-NACE 18 in the total number of researchers in the manufacturing industry sectors is less than 0.03 % (average for 2010–2016), so the number is negligible.

The companies that received in 2004–2017 a significant amount of special-purpose State support within the national programmes of the Ministry of Industry and Trade (IMPULS, TIP, TRIO) and Technical Assistance of the Czech Republic (Alfa, Competence Centres and Epsilon) include CICERO Stapro Group s.r.o., Polygra a.s. and NOVATISK, akciová společnost. Although this is a very small division in terms of R & D expenditure and the number of researchers, CZ-NACE 18 is successful in terms of the number of Horizon 2020 projects. There are two companies in this sector: A-ETC, s.r.o., which is a member of the consortium and eponymous project BIOWYSE and T.S.R.ACT, s.r.o., which is involved in BrainHack.

Within the RIS3 National Strategy, printing and reproduction of recorded media is among less-supported R&D areas. In the period 2015–October 2017, 11 projects (of which 6 project by OPTAGLIO 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 0.39 billion, of which CZK 0.15 billion is an EU grant. Most aid is allocated for the introduction of product and process enterprise innovations (60 %), creation of new, expanded or modernized research centers (18 %) and creation of new applied research results (18 %). The aid is focused on strengthening R&D capacities of enterprises (96 %). All projects fall within the application sector Digital Economy and Digital Content.

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 aid for applicants/beneficiaries, largest EU aid for SMEs was granted to OPTAGLIO a.s. from the Central Bohemia Region (projects OPTAGLIO Forensic Security Research Center; Development of Research and Development of Security Press; Support of sale of own products of

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

OPTAGLIO s.r.o. in foreign markets; FACILITATING THE ENTRY INTO FOREIGN MARKETS WITH OPTAGLIO PRODUCTS FOR THE PROTECTION OF STAMPS AND VOUCHERS; FACILITATING THE ENTRY INTO FOREIGN MARKETS WITH OPTAGLIO PRODUCTS FOR THE PROTECTION OF BRAND-NAME GOODS; facilitating the entry of OPTAGLIO s.r.o. into foreign markets; total expenditure of CZK 157 million, of which EU grant of 77 million); largest EU aid for large enterprises was granted to OTK GROUP, a.s. from the Central Bohemian region (project IML label innovation, total expenditure of CZK 75 million, of which EU grant of CZK 19 million).

9.6 SUMMARY AND PERSPECTIVE OF THE DIVISION

The CZ-NACE 18 division is a relatively small industry in the Czech Republic, which has undergone a very stormy development in the last twenty years and is growing relatively fast. The sector is characterized by high competition among the different product types and, as many other sectors, is currently significantly affected by developments in digital technology. Digitization, along with the growing use of the Internet and social networks, brings about a decline in a number of printed products and the growth of electronic media. On the other hand, there is a growing demand for packaging products and labels. In 2017, the CZ-NACE 18 division was not as successful as the manufacturing industry as a whole, but the overall development is quite good; revenues increased, added value per employee increased, as did the average wage in the sector. Currently, the global printing industry remains in a transition phase, the industry is in good shape, and both printers and suppliers are relatively optimistic about the future, according to some surveys. The revival after the 2008 recession is slow but continuous and the printing industry is focusing on how to make the best possible use of the integration of digital communication and technological innovation. Major opportunities are available on the market, particularly in the packaging market, and in those market segments where service providers can adapt to provide higher added value more quickly. Globally, the digital press is booming and, according to SmithersPira’s current global forecast, digital printing will continue to grow. Whereas in 2012 digital printing reached 2.1% of the total value of the global print market and lithographic prints accounted for 48.1%, in 2022 digital printing is expected to grow to 20%, and lithographic prints will drop to 39.5%. Currently, digital printing is at 16.2% of the total value of the global printing market, which is USD 785.1 billion. In the Czech Republic, digital printing has potential in the packaging industry as well as in the field of functional printing. In addition, investment in textile printing technologies is also significant. There is also potential in the use of large-format digital installations. Further development of the printing industry continues to depend on the future development of the entire economy not only in the Czech Republic but also in the neighbouring countries, especially in Germany. From a technological point of view, the field will be significantly influenced by the interdependence of scientific disciplines in the field of natural sciences and higher interest in nanotechnology. The main anticipated trends in the printing industry will include further upgrading of classical print techniques, the development of digital printing techniques and the use of existing printing techniques to create functional structures. Printing technologies will be modernised not only through the purchase of new machines and equipment, but also through upgrades and additional configurations. What changes can be expected in the Czech Republic for print products? According to some entrepreneur surveys, the Czech Republic could see strongest growth in packaging, as well as labels, books and advertising printing. Overall, the market is expecting a shift towards personalisation of products and services and pressure on flexibility and speed. In connection with the development and changes in print volumes, companies will need to strengthen trade and focus on skilled human resources and “finishing”.

117 118 10. CZ-NACE 20 MANUFACTURE OF CHEMICALS AND CHEMICAL PRODUCTS 10. CZ-NACE 20 MANUFACTURE OF CHEMICALS AND CHEMICAL PRODUCTS

10.1 DIVISION CHARACTERISTIC

Breakdown of the CZ-NACE 20 division by individual groups: 20.1 Manufacture of basic chemicals, fertilizers 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. Chemical products are used in all areas of the economy. The chemical sector is strongly interlinked with other manufacturing industries such as plastics and rubber, textile, electronics, construction, paper and pulp industries, the automotive industry 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, fertilizers and nitrogen compounds, plastics and synthetic rubber in primary forms (i.e. basic petrochemical industry, manufacture of inorganic and organic chemicals and polymers). The group includes the ten largest chemical companies in the Czech Republic.

It is followed by 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, powders and pastes used for soldering or welding, auxiliary preparations for coating metals, cement additives, activated carbon, lubricating oil additives, vulcanization accelerators, catalysts, anti-knock preparations, antifreeze and de-icing products, transmission liquids and many other chemical products.

Next is group 20.4, which includes manufacturers of soaps and detergents, cleaning and polishing agents, perfumes and toilet preparations.

The division is strongly dominated by large enterprises, which accounted for over 67% of revenues, 63% of value added and 54% of employees in 2017.

119 Table 10.1.1 – Shares of groups in CZ-NACE 20 in 2017 (%, division = 100%)

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

20.1 57.6 62.2 75.4 78.8 76.3 78.4 53.1 65.9

20.2 2.0 1.4 0.9 0.8 1.0 0.9 2.3 2.6

20.3 7.5 7.2 5.5 5.0 4.4 4.0 8.1 4.4

20.4 13.3 11.2 7.2 5.4 8.7 6.8 15.6 10.3

20.5 16.8 15.8 9.3 8.5 8.6 9.0 17.7 16.3

20.6 2.9 2.2 1.7 1.4 1.0 0.9 3.3 0.5 Source: CZSO data, 2017 MIT calculations

10.2 DIVISION DEVELOPMENT The Czech chemical industry has managed to cope with the consequences of the financial crisis in previous years, optimized its product portfolios, made the necessary process and organizational restructuring and responded to the emerging market opportunities in the world.

An important Czech manufacturer of artificial resins, SPOLCHEMIE – Spolek pro chemickou a hutní výrobu, a.s. (Association for Chemical and Metallurgical Production) started production in new membrane electrolysis. In this context, production in the original amalgam electrolysis was discontinued. State-of-the-art technology meets the European Union’s legislative requirements in advance. 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. Modernization also makes it possible to double the existing production of these products. The company also confirmed the position of one of the largest exporters of the Ustí Region and the whole of the Czech Republic in the traditional Exporter of the Year 2017 competition and has been one of the key players of the European chemical industry for more than 160 years. The founding of the company had a key influence on building the structure of the Czech chemical industry during the industrial revolution in the 20th century and on the development of the city of Ústí nad Labem itself. The company deals with the production of epoxy and alkyd resins, special epoxy systems and hydroxides and special chemical derivatives.

Unipetrol has started the construction of a new polyethylene unit in Záluží. It is the largest investment in the history of the Czech petrochemical industry and its commissioning is planned for 2018. Unipetrol is the most important refining and petrochemical group in the Czech Republic and one of the main players in Central Europe. In the Czech Republic, it is the largest oil producer, one of the most important plastic producers and the owner of a gas station network under the Benzina brand.

In 2017, Spolana, a.s. permanently shut down the obsolete amalgam electrolysis and started the production of mercury-free PVC. Spolana is the only producer of PVC and caprolactam in the Czech Republic; it also produces high quality industrial fertilizer SPOLSAN® (ammonium sulfate) and supplies inorganic compounds and other chemical products.

Precheza, a.s., a major European manufacturer of high quality titanium dioxide and other inorganic pigments, one of three titanium dioxide producers in CEFTA, has intensified the production of titanium dioxide. Titanium dioxide is its key production and trade item, as its sales account for about 86% of the company’s total turnover. The company also produces iron pigments (8% of total turnover), sulfuric acid (1% total turnover) and other chemicals. More than 90% of the total production is exported.

Synthomer a.s. Sokolov has expanded its production of acrylic acid and other chemicals. The company is focused on the production of acrylic acid and its esters, acrylic polymers. The key product is acrylic monomers (70% of total revenues). Major buyers of acrylic monomers are mainly companies focusing on paints, building

120 10. CZ-NACE 20 MANUFACTURE OF CHEMICALS AND CHEMICAL PRODUCTS materials, flocculants, detergents and superabsorbents. To a lesser extent, the products are used in the fiber and plastics industry.

DEZA, a.s. has modernized hydro-refining. It is the only company in Central Europe that processes crude benzole and crude tar. By its processing capacity it is one of the world’s leading companies in the industry.

SILON, s.r.o. has announced plans to invest in the plant in Planá. The company is a leading manufacturer of polyester strands and technical compounds (finished plastic blends). Additionally, the company designs, manufactures and sells effective polyolefin and polyester fiber compounds for use in construction, automotive, hygienic and medical applications and general processing.

10.3 MAIN ECONOMIC INDICATORS

The number of units was increasing from 2008 to 2012. In 2013 it declined and then remained stable, or grew slightly. The number of employed persons saw a decline in 2009 and then was more or less stable until 2014. In 2015, there was a slight increase. However, the development of revenue and added value is decisive for the division. Revenues as well as the value added dropped significantly to their minimum in the crisis year of 2009. Then, there was a three-year growth period followed by a decline in revenues in 2013. In 2014 revenue peaked, followed by a decline in 2015, which lasted until 2017. Added value also saw fluctuations, peaking in 2015. Average wages increased over the period 2008 to 2017, but labour productivity was very volatile (Chart 10.3.1).

CZ-CPA 20 price developments were significantly affected by CZ-CPA 20.1, whose prices grew dramatically after 2009, but the growth slowed down from 2013 and fell dramatically in 2016 (Chart 10.3.2). Lower and relatively stable price growth was seen in CZ-CPA 20.3, while CZ-CPA 20.4 prices were oscillating, and in CZ-CPA 20.5 they began to decline steadily from 2012. In 2017, prices in the division were approximately at 2010 level.

The financial situation of the division has been gradually improving, with return on equity gradually increasing (with fluctuations in some years) while risk is decreasing, so the Spread has turned to positive since 2014. However, Spread declined in 2016 due to lower ROE, which was mainly due to a fall in labour productivity. In 2017, there was again an increase in Spread (Chart 10.3.3). Positive value of Spread means a positive value of economic value added. Division 20 is one of the few where EVA increased in 2017 year-on-year, namely by CZK 2.8 billion. The main driver of the positive development in EVA was the year-on-year development of EBIT/Revenues, which caused an increase of EVA by CZK 3.8 billion. By contrast, the labour productivity in relation to wage had a significant negative impact on EVA, causing a fall of CZK 7.3 billion.

Further data is available on the MIT website in an interactive viewer of economic indicators (https://www. mpo.cz/en/panorama-interactive-table.html).

121 Further data is available on the MIT website in an interactive viewer of economic indicators (https://www.mpo.cz/en/panorama-interactive-table.html).

Chart 10.3.1 – Major 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

15 000 1 837 1 819 1 815 1 796 1 765 1 762 1 761 1 742

800 31 283 30 180 29 642 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 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

200 000 140 000 Sales (CZK m) Value added (CZK m) Average monthly wage (CZK) 180 000 120 000 Labour productivity from the VA (CZK/month)* 160 000 140 000 100 000 120 000

80 000

100 000

60 000

186 573 80 000 130 398

178 624 125 034

171 577 171 392 169 835 166 060

164 664

161 850 111 253 152 791

60 000 45 196 96 943 101 013 96 276 93 444 41 967 40 000 89 176 36 638 126 074 34 392

31 808 31 616 77 561 30 584 28 774 40 000 28 069 66 946 22 262 20 000 20 000 24 928 25 459 26 472 27 249 28 661 28 182 28 754 29 367 31 136 33 099 0 0 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Source: CZSO, MIT calculations * This is an aliquot monthly share computed from annual data

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

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 -25 20 112,7 104,0 118,0 128,2 137,1 137,9 138,5 122,5 115,1 118,6 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 20.1 115,0 103,7 124,4 137,1 149,1 151,0 152,3 129,5 118,6 123,1 Spread -17,73 -21,66 -4,17 -6,32 -1,09 -3,60 4,12 10,55 6,14 8,22 20.3 107,4 111,1 111,5 118,4 126,7 128,9 132,4 132,8 131,2 130,5 rf 4,55 4,67 3,71 3,79 2,31 2,26 1,58 0,58 0,43 0,98 20.4 103,3 101,1 95,4 96,1 99,7 102,1 104,2 103,3 102,6 100,6 ROE 4,31 1,73 12,40 8,92 12,64 9,73 16,47 21,03 16,08 17,15 20.5 115,6 107,8 107,6 113,2 113,1 106,3 101,2 98,2 99,3 103,4 re 22,04 23,40 16,57 15,24 13,73 13,33 12,35 10,48 9,94 8,93

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

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

10.4 FOREIGN FOREIGN TRADE TRADE 10.4.1 DEVELOPMENT OF FOREIGN TRADE 10.4.1 DEVELOPMENT OF FOREIGN TRADE The CZ-CPA 20 product group has consistently reported higher imports than exports; its negative balance Thehas doubledCZ-CPA 20 in product the last groupfive years. has consistently In 2017, foreign reported trade higher in chemical imports products than exports; followed its negative the development balance has of doubledthe Czech in economy the last five due years. to the In increasing 2017, foreign demand trade for in chemicalchemicals, products especially followed in the theCzech development Republic. Exports of the Czechgrew moreeconomy than due imports to the inincreasing 2017, leading demand to fora declinechemicals, in theespecially negative in thebalance Czech of Republic. foreign Exportstrade (Chart grew more than imports in 2017, leading to a decline in the negative balance of foreign trade (Chart 10.4.1). 10.4.1).

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

300 000 Export Import Trade balance 250 000 200 000

150 000

277 040 267 856 100 000 261 406 249 548 224 100 211 452 201 173 172 479 170 290 167 688 159 747 50 000 157 958 151 588 151 191 139 315 117 178 131 058 92 975

-50 000 61 858 77 069 60 261 50 510 66 142 38 084 - - - 116 268 - - - - 101 659 106 750 -

-100 000 - -150 000 2009 2010 2011 2012 2013 2014 2015 2016 2017

Source: CZSO, data as of 9 May 2018

10.4.2 TERRITORIAL STRUCTURE OF FOREIGN TRADE 10.4.2 TERRITORIAL STRUCTURE OF FOREIGN TRADE In 2017 Germany and Poland remained the dominant territories for both export and import of chemical In 2017 Germany and Poland remained the dominant territories for both export and import of chemical products. InIn exports exports they they are are followed followed by Slovakia,by Slovakia, Hungary Hungary and Italy.and InItaly. imports In imports important important countries countries include France,include theFrance, Netherlands the Netherlands and Italy and (Chart Italy 10.4.2). (Chart 10.4.2).The trade The in trade CZ-CPA in CZ20- commoditiesCPA 20 commodities is mainly is withmainly the with EU countries.the EU countries.

CCharthart 10.4.10.4.22 FoForeignreign ttraderade in pproducts,roducts, CCZZ-CCPAPA 20

ImImportport tterritorieserritories iinn 2017 EExportxport tterritorieserritories iinn 2017

ootherther 31% Germany ootherther Germany 31% Germany 32% Germany 22% 32% 29% 22% FFrancerance 2% PPolandoland Poland USA Russian Poland USA 14% Russian 8% 3% federation 8% ItItalyaly federation France Austria 4% France Austria 7% SSlovakialovakia 4% Italy 4% 7% Hungary Italy 7% 4% Hungary 10% 7% 10% 5% 7% SSlovakialovakia 4% Netherlands BBelgiumelgium Netherlands 6% 5% 6%

SSource:ource: CZCZSO,SO, ddataata aass ooff 9 MMayay 2018

123 10.5 RESEARCH AND DEVELOPMENT

In 2016, R&D expenditure in Division 20 amounted to CZK 906 million, down 23% from 2015 (Chart 10.5.1). This decrease was due to the decrease of R&D expenditures from bussiness resources by CZK 191 million and also by the decrease of public foreign resources by CZK 32 million. The amount of support from the State budget was relatively stable in the monitored period; on the contrary, foreign public resources from abroad saw largest fluctuations.

The companies with CZ-NACE 20 as their main economic activity that received in 2004–2017 a significant amount of special-purpose State support within the national programmes of the Ministry of Industry and Trade (IMPULS, TIP, TRIO) and Technical Assistance of the Czech Republic (Alfa, Competence Centres and Epsilon) include Explosia, a.s., GeneProof a.s., Contipro Biotech s.r.o., BOCHEMIE a.s., Lučební závody Draslovka a.s. Kolín and Synthesia, a.s. There are three companies involved in Horizon 2020 projects in this sector. Contipro a.s. is involved in two projects: DRIVE and N2B-patch. Furthermore, RANIDO, s.r.o. is involved in BioMates, and UNIPETROL RPA, s.r.o. has the COMSYN project.

Within the National RIS3 Strategy, the manufacture of chemicals and chemical products is an R&D area that receives average support. In the period 2015–October 2017, 79 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 0.93 billion, of which CZK 0.46 billion is an EU grant. Most aid is for introducing enterprise innovations, product and process (36%), creating new applied research results (35%), and creating new, expanded or upgraded research centres in companies (23%). The aid is mainly aimed at strengthening the R&D capacity of enterprises (65%) and, to a lesser extent, the cooperation of research organizations and enterprises (31%). All projects fall within the application sector Chemicals and chemical industry.

Projects focusing on the production of chemicals and chemical products were submitted by enterprises of all sizes (large, small and medium-sized) in the reference period. As regards European aid for applicants/ beneficiaries, largest EU aid for SMEs was granted to Euro Support Manufacturing Czechia, s.r.o. from the Ústí Region (the project Line for preparation and formation of inorganic materials for heterogenous catalysts, total expenditure of CZK 161 million, of which EU grant of CZK 56 million) and Explosia a.s. from the Pardubice Region (the project Impact of new energy additives on properties of propellants, development of an R&D centre at Explosia II.; total expenditure of CZK 106 million, of which EU grant of 52 million).

Chart 10.5.1 – R&D expenditure in CZ-NACE 20 (CZK million)

Government+universities Number of enterprises Entrepreneurs EU+other international organisations 100 1 400 1 183 1 166 90 1 127 1 200 47 1 011 55 80 962 958 55 1 000 906 70 56 112 15 23 60 800 50 86 87 86 89 86 89 600 982 1 059 1 027 40 85 808 856 820 836 400 30 20 200 10 99 79 87 90 84 0 78 47 0 2010 2011 2012 2013 2014 2015 2016 2010 2011 2012 2013 2014 2015 2016

Source: CZSO, MIT calculations

10.6 DIVISION SUMMARY AND PROSPECTS

124The chemical industry is an important part of the manufacturing industry in the EU and worldwide. According to the latest Cefic (The European Chemical Industry Council) data, the global turnover of the chemical industry for 2016 is worth EUR 3,360 billion. At the moment China holds the leading position with EUR 1,331 billion (39.6%), followed by Europe with EUR 597 million (17.8%) and NAFTA (North American Free Trade Agreement, including Canada, USA and Mexico) with 15.7%.

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 global chemical industry, followed by NAFTA with 24%, and China with 13.2%. Also, in the last 20 years EU sales have increased by 50%, but its world market share has fallen in 2016 to half the 1996 level1.

According to 2017 Cefic data, the European chemical industry is represented by 29 thousand companies and 1.14 million jobs. Two-thirds of its output are used to supply other sectors of the manufacturing industry. There are other important links with the agriculture and services sectors. At EU level, the chemical industry (except pharmaceuticals) is the fifth largest industry2. Germany and France are the two largest manufacturers of chemicals in Europe, followed by Italy and the Netherlands. These four countries together represented 61.7% of chemical sales in the EU in 2016. The EU’s current chemicals industry is showing a promising trend as production has reached its peak for the last eight years. In the first half of 2017, production in the chemical sector in the EU grew by 3.1% compared with the same period in 2016 but still does not reach 2008 levels.

1 Source: Cefic 2 Source: Eurostat SBS 10. CZ-NACE 20 MANUFACTURE OF CHEMICALS AND CHEMICAL PRODUCTS

10.6 DIVISION SUMMARY AND PROSPECTS

The chemical industry is an important part of the manufacturing industry in the EU and worldwide. According to the latest Cefic (The European Chemical Industry Council) data, the global turnover of the chemical industry for 2016 is worth EUR 3,360 billion. At the moment China holds the leading position with EUR 1,331 billion (39.6%), followed by Europe with EUR 597 million (17.8%) and NAFTA (North American Free Trade Agreement, including Canada, USA and Mexico) with 15.7%.

The EU chemical industry is energy intensive and subject to strong competitive pressures. It faces challenges such as increased international competition, rising prices of energy and inputs, pressure to more efficiently use resources, significant cumulative regulatory costs, especially in the area of emissions and new chemical legislation, and the need for innovation. As an energy-intensive division, 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 challenge for the chemical industry in Europe will be to secure the necessary investment in its development to succeed in global competition. While in the last 20 years, investment construction in Europe has been stagnant, it has doubled in the US, and has increased many-fold in China (1996–2016). Another challenge is to focus the chemical industry towards a circular economy and increased use of chemicals in recycle streams, in transport or as part of energy-efficient buildings.

The Czech chemical industry has seen significant development over the last 25 years and has maintained its weight in the national economy. The Czech chemical industry has been fully privatized and foreign capital has entered a significant part of the industry.

The Czech chemical industry has been globalized for a long time, and to a large extent controlled by automated systems. Industry 4.0 can be used as a further opportunity to increase competitiveness, productivity, the share of skilled work, including related activities (e.g. logistics), and to increase the safety of chemical processes. It is necessary to cooperate, both nationally and at European level, in creating the right conditions – the legal framework, regulation, standardization and cyber security. Key issues of further development include additive manufacturing, sensors and advanced technologies.

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. The conditions of greenhouse gas emission trading will also play a key role in future development.

1 Source: Cefic 2 Source: Eurostat SBS

125 126 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 DIVISION CHARACTERISTIC

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

The pharmaceutical industry makes a significant contribution to the development of the global economy. It is a strong sector that is one of the pillars of industrialized economies and is increasingly seen as an important sector in developing countries as well. It contributes to employment, trade, R&D and technology capacity building.

The pharmaceutical industry is among hi-tech, most R&D-intensive processing divisions, with large amounts of money being invested into the development of new drugs every year (mostly 15 to 20% of annual revenues). Its production portfolio is very wide and it is made up of original medicines which are patent-protected, and generic medicines whose patent-protection has ended. In the Czech Republic, the key producers concentrate, mainly due to high costs, on generics; the Czech Republic is among the leading producers of generic drugs.

The most significant group in the division was the manufacture of pharmaceutical preparations (Table 11.1.1).

The division is dominated by large enterprises, which account for over 73 % of revenues, 72 % of value added and 70 % of employees.

Table 11.1.1 – Shares of groups in CZ-NACE 21 in 2017 (%, division = 100%)

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

21.1 14.7 11.8 8.9 9.0 17.6 14.7 13.4 20.7

21.2 85.3 88.2 91.1 91.0 82.4 85.3 86.6 79.3 Source: CZSO data, 2017 MIT calculations

11.2 DIVISION DEVELOPMENT

According to the data of the State Institute for Drug Control, the pharmaceutical sector is represented by approximately 80 companies, mainly with foreign participation.

Pharmaceutical companies include Sanofi, Teva, Roche, Novartis, Baxter, Pfizer, Merck & Co, Janssen, GlaxoSmithKline, Takeda or AbbVie. Innovative drug manufacturers are present on the Czech market, but their manufacturing activity is limited. The Czech Republic has been a demanding market in recent years, the

127 impact of the recession in the euro area and the reconciliation of healthcare spending and affordability has caused considerable pressure on market participants. Given the high value of innovative and patented drugs, sales have shifted towards generic medicines.

Teva Czech Industries, s.r.o., formerly known as Galena, is a major pharmaceutical manufacturer with a very long history. Its headquarters are located in Opava – Komárov, in the north-east of the Czech Republic. Its broad portfolio includes generic medicines – mainly antiasthmatics, cytostatics, immunosuppressants, hypolipidemics, antihypertensives, etc. - in the form of tablets, capsules and liquid dosage forms, as well as OTC drugs, APIs and plant extracts. The products meet recognized quality standards and are exported to a number of countries around the world, including the US and Western Europe. More than 1 500 employees are involved in company successes and in working towards its ambitious objectives. The company became part of the Teva multinational group in 2006.

The French pharmaceutical company Sanofi launched the sale of the European division of generic medicines Zentiva by separating the division into an independent company. Zentiva is based in Prague, operates in more than 50 markets, has a strong position in Eastern Europe, especially in the Czech Republic, Slovakia and Romania. Production plants are located in Prague and Bucharest and annually produce and distribute more than 350 million packs of medicines. In 2017 the non-prescription Paralen 500 was the best-selling drug in the Czech Republic, followed by Ibalgin which placed fourth. Zentiva’s factory in Dolní Měcholupy has been producing medicinal products since 1930; its headquarters and R&D centre are in Prague. Sanofi suffers from the end of patent protection of its best-selling medicines.

The subsidiary of Roche was established in 1992 and focuses on the marketing and sale of medicines in oncology, virology and hematology. The company employs 190 people and imports production. Novartis Czech Republic, Pfizer, Merck & Co (MSD), Janssen, GlaxoSmithKline, AstraZeneca, Takeda, and AbbVie also have a similar structure.

According to the Sprinx Index data, the ten largest companies account for approximately 40% of the market.

11.3 MAIN ECONOMIC INDICATORS

In 2008–2017, selected indicators saw a decrease in the number of units and employees in 2014 and 2015. In contrast, revenues, value added, labour productivity and average wage grew in this period, which continued until the end of 2017 (Chart 11.3.1).

The price trend was neutral. In 2012, prices reached their maximum. Over the last few years, the stagnation or slight decline in prices has been triggered by the situation in the pharmaceutical market, which has stagnated or declined slightly (Chart 11.3.2).

The efficiency of the division, as measured by Spread, was highest in 2008. Until 2011, the division saw alternating positive and negative values of Spread. In 2012 and 2013, it was slightly below zero. From 2014 to 2017 Spread was positive, although its value in 2017 was lower than in 2014 (Chart 11.3.3).

The economic value added was positive in 2017; however, it saw a year-on-year decline (down CZK 1.4 billion). The decline was due to a decline in EBIT/Revenues, which caused an EVA decrease of CZK 2.0 billion. This was reflected in a fall in the EBIT/Assets (resulting in a fall in EVA of CZK 1.7 billion) and a decrease in ROE (an EVA decrease of CZK 1.4 billion). Only group 21.2. reached positive EVA in 2017.

Further data is available on the MIT website in an interactive viewer of economic indicators (https://www. mpo.cz/en/panorama-interactive-table.html).

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

Chart 11.3.1 – Major 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

90 88 88 87 86 86 86 83

40 80 78 9 982 9 855 9 688 9 566 9 539 9 533 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 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

45 000 140 000 Sales (CZK m) Value added (CZK m) Average monthly wage (CZK) 40 000 120 000 Labour productivity from the VA (CZK/month)* 35 000 100 000 30 000 80 000

25 000

20 000 60 000

40 311 37 105 12 978 36 426 35 800 11 833 11 790 34 480 34 294 15 000 34 242 110 284 33 733 108 551 11 170 10 968 10 950 10 827 10 728 10 431 103 573 101 928 97 565 10 080 96 430 30 918 30 890 94 894 40 000 94 574 87 378 86 967

10 000

20 000 5 000 28 773 29 156 29 672 30 470 30 476 31 372 32 230 32 619 34 550 0 0 27 158 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Source: CZSO, MIT calculations * This is an aliquot monthly share computed from annual data

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

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 Spread 13,44 -8,61 9,13 -1,24 -0,28 -0,25 2,22 4,82 6,11 1,96 50 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 rf 4,55 4,67 3,71 3,79 2,31 2,26 1,58 0,58 0,43 0,98 21 101,4 105,8 102,4 104,4 107,2 106,4 104,7 105,5 105,4 105,0 ROE 24,29 3,19 18,71 9,84 9,11 7,08 9,69 10,74 11,64 7,36 21.2 101,4 105,8 102,4 104,4 107,2 106,4 104,7 105,5 105,4 105,0 re 10,85 11,81 9,58 11,08 9,40 7,33 7,47 5,93 5,53 5,40

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

129 11.4 FOREIGN TRADE 11.4 FOREIGN TRADE

11.4.1 11.4.1 DEVELOPMENT O FOF FOREIGN FOREIGN TRADE TRADE

In pharmaceuticalpharmaceutical commodities,commodities, importsimports have have consistently consistently been been higher higher than than exports. exports. Exports Exports rose rose sharply sharply in 2014in 2014 and and continued continued to togrow grow at aat slower a slower pace. pace. The The situation situation was was similar similar for for imports. imports.

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

120 000 100 000 Export Import Trade balance 80 000

60 000

109 017 104 448 102 415 40 000 96 851 78 368 76 838 76 426 73 462 73 107 60 956 60 428 58 876

20 000 57 356 38 946 33 188 33 652 32 890 27 365

0 -20 000 43 186 43 238 43 539 45 743 39 496 40 572 39 422 - - - 48 061 44 020 ------40 000 - -60 000 2009 2010 2011 2012 2013 2014 2015 2016 2017

Source: CZSO, data as of 9 May 2018

11.4.2 TERRITORIAL STRUCTURE OF FOREIGN TRADE 11.4.2 TERRITORIAL STRUCTURE OF FOREIGN TRADE In 2017, traditionally the largest customerscustomers includeinclude GermanyGermany (in(in particularparticular medicines and pharmaceutical products such as cotton, gauze, or bandages) with a share of 26%, followed by Denmark (medicines, antiserums) with 18 % and Slovakia (medicines, pharmaceuticalpharmaceutical products)products) withwith 12%.12%.

In 2017, Germany was the largest importimport partner (19%, mainly medicines and vitamins), followed by France (medicines) with a share of 9%. These were followedfollowed byby aa groupgroup ofof countriescountries withwith aa shareshare ofof 5%5% toto 6%.6%.

ChartChart 11.4.11.4.22 – FFoorreigneign ttraderade iinn CZ-CCPAPA 21 pproductsroducts Import territories in 2017 Export territories in 2017 Import territories in 2017 Export territories in 2017

other other other other France 25% 40% France 25% Germany 40% 3% Germany 3% 26% 26% Germany Netherlands Germany Netherlands Denmark 19% 4% Denmark 19% 4% 5% 5% Poland Poland 4% Ireland France 4% Denmark Ireland France Denmark 5% 9% Russian 18% 5% 9% Russian Slovakia 18% Italy federation Slovakia USA Italy federation 12% United USA 6% 4% 12% United 6% 6% 4% United Kingdom 6% United Kingdom Kingdom 5% Switzerland Kingdom 5% Switzerland 4% 5% 4% 5%

Source: CZSO, data as of 9 May 2018 Source: CZSO, data as of 9 May 2018

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

11.5 RESEARCH AND DEVELOPMENT

Total R&D expenditure in this division in 2016 amounted to CZK 1.1 billion, with total R&D expenditure being up 8 % from 2010. Over the reference period, with the exception of 2013, each year the volume of funds exceeded CZK 1 billion. The bulk of the funds were expenditures from entrepreneurial resources; the least stable component were public expenditure from abroad. These fluctuations were mainly due to the approaching end of the EU programming period, and it can be assumed that after 2016 the spending will again grow as a result of drawing on the funds from the new operational programmes. The share of researchers in the surveyed division in the total number of researchers in the manufacturing industry sectors is less than 2.92 %, i.e. 230 researchers per year (average for 2010–2016).

The companies that received in 2004–2017 a significant amount of special-purpose State support within the national programmes of the Ministry of Industry and Trade (IMPULS, TIP, TRIO) and Technical Assistance of the Czech Republic (Alfa, Competence Centres and Epsilon) include Bioveta, a.s.; VAKOS XT a.s.; SEVAPHARMA a.s. and VIDIA spol. s r.o. There are two companies participating in Horizon 2020 projects: BioVendor - Laboratorní medicína a.s., which is a participant in the project DIAGORAS (chair/bedside diagnosis of oral and respiratory tract infections, and identification of antibiotic resistances for personalized monitoring and treatment), Zentiva, k.s., a participant in the project ORBIS (Open Research Biopharmaceutical Internships Support).

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 2015–October 2017, 16 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 0.36 billion, of which CZK 0.18 billion is an EU grant. Most of the support is intended for new, expanded or upgraded research centers (55%), new registered results of applied research (27%) and introduction of product and process enterprise innovations (15%). The aid is mainly aimed at strengthening the R&D capacity of enterprises (85 %) and, to a lesser extent, the cooperation of research organizations and enterprises (13 %). All projects fall within the application sector of Pharmaceuticals, Biotechnology, Health Care Equipment, Life Sciences.

In the reference period, projects for the manufacture of basic pharmaceutical products and pharmaceutical preparations were submitted by large enterprises as well as SMEs. As regards European aid for applicants/ beneficiaries, largest EU aid for SMEs was granted to AUMED, a.s. from Prague (project Research and development of a new black cough vaccine, total expenditures of CZK 47 million, of which EU grant of CZK 32 million), and largest EU aid for large enterprises was granted to SOTIO a.s. from Prague (project Establishment of a development center of modern cell therapies, total expenditure of CZK 150 million, of which EU grant of CZK 75 million).

Chart 11.5.1 – R&D expenditure in CZ-NACE 21 (CZK million)

Government+universities Number of enterprises Entrepreneurs EU+other international organisations 30 1 400

1 138 1 200 1 116 1 124 25 1 054 1 076 1 075 12 1 984 6 88 71 66 1 000 6 20

800 15 27 27 28 27 27 600 1 050 951 1 100 25 951 898 982 23 928 10 400

5 200

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

Source: CZSO, MIT calculations

11.6 DIVISION SUMMARY AND PROSPECTS 131

According to EFPIA (European Federation of Pharmaceutical Industries and Associates), the global pharmaceutical market reached an estimated value of 763 million euros in 2016 and this sector expects1 growth of sales by an average of 4.4% per year to the projected USD 1.2 trillion in 2020. The North American market (USA and Canada) remains the world’s largest, followed by Europe and Japan. The market and research is growing rapidly in the emerging economies of Brazil, China and India, leading to a gradual migration of economic and research activities from Europe.

According to EFPIA, the research-based pharmaceutical industry can play a crucial role in Europe’s recovery towards growth and its future competitiveness. The European pharmaceutical industry is the fifth largest division within the EU manufacturing industry. The pharmaceutical industry is among hi-tech divisions with the highest value added per employee, substantially higher than the hi-tech divisions of the manufacturing industry. At the same time, the pharmaceutical industry is the sector with the highest share of R&D investment from net sales. Pharmaceutical companies invest almost CZK 2 billion a year in the Czech Republic. Experts agree that the Czech Republic benefits from its location in the heart of Europe, the friendly approach of doctors to clinical trials, well-kept medical records and still relatively low costs. This area is becoming increasingly focused on rare diseases. According to the research organization EvaluatePharma, global sales of rare disease drugs reached USD 127 billion in 2017 and should reach USD 217 billion by 2022. The share of these drugs in the global drug market should increase from the current 16% to 21% over the same period. The French pharmaceutical group Sanofi has bought the American company Bioverativ, which focuses on haemophilia and other rare blood diseases. Two years ago, Shire (Ireland) spent USD 32 billion on the acquisition of the American biopharmaceutical company Baxalta. In 2017, Novartis scored the greatest success in this field, with sales of its targeted cancer therapy exceeding USD 12 billion. With USD 11 billion, it was closely followed by Celgene. The sale of the Irish pharmaceutical company Shire to the Japanese drug maker Takeda has recently been announced, which is the largest acquisition in the pharmaceutical industry to date.

1 Source: World Industry Outlook, Healthcare and Pharmaceuticals, The Economic Intelligence Unit, 2016 10.6 DIVISION SUMMARY AND PROSPECTS

This area is becoming increasingly focused on rare diseases. According to the research organization EvaluatePharma, global sales of rare disease drugs reached USD 127 billion in 2017 and should reach USD 217 billion by 2022. The share of these drugs in the global drug market should increase from the current 16% to 21% over the same period. The French pharmaceutical group Sanofi has bought the American company Bioverativ, which focuses on haemophilia and other rare blood diseases. Two years ago, Shire (Ireland) spent USD 32 billion on the acquisition of the American biopharmaceutical company Baxalta. In 2017, Novartis scored the greatest success in this field, with sales of its targeted cancer therapy exceeding USD 12 billion. With USD 11 billion, it was closely followed by Celgene. The sale of the Irish pharmaceutical company Shire to the Japanese drug maker Takeda has recently been announced, which is the largest acquisition in the pharmaceutical industry to date.

Generic prescription drug sales reached USD 26 billion in 2015 and are expected to reach USD 112 billion in 2020. The combination of large sales volumes and low margins divides the generic segment into 20 top companies.

1 Source: World Industry Outlook, Healthcare and Pharmaceuticals, The Economic Intelligence Unit, 2016

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

12.1 DIVISION CHARACTERISTIC

Breakdown of the CZ-NACE 22 division by individual groups: 22.1 Manufacture of rubber products; 22.2 Manufacture of plastics products.

The plastics industry has seen significant development in the Czech Republic in recent years and has also strengthened its position in the manufacturing industry. Due to close links to automotive, electrotechnical, packaging and construction industry, the CZ-NACE 22 division has been growing in most economic indicators in recent years. The industry’s perspective lies in a good raw material base and supply links to downstream industries. In the Czech Republic this industry mainly focuses on commodity types: polyethylene PE, polypropylene PP, polyvinyl chloride PVC and polystyrene PS (EPS). Most enterprises are part of multinational corporations.

From the historical point of view, modern synthetic polymer materials are the youngest construction materials, but they represent the most important segment of all materials, according to the volume of production and consumption. In competition with classical materials, the polymers have succeeded due to their ease of workability, low density and a generally favourable price/performance ratio. Its production and processing requires much less energy and labour than metals. Many metals are superior in their chemical resistance. Generally, polymers have very good electro-insulating properties, they are characterized by the ability to dampen shock and vibrations. Selected polymers also benefit from their transparency. On the other hand, there are also some factors that limits the applicability of polymers – for example, low temperature resistance, a significant change in mechanical properties with temperature, greater thermal expansion or electrostatic charge generation. Plastics and rubber have a wide range of uses - for packaging materials, in construction, automotive, electrical and agricultural industries, and are increasingly used in the textiles and footwear industry.

It is a division with dominance of large enterprises with 64% of revenues, 63% of added value and 51% employees. The second group is medium-sized businesses with a quarter of revenues and added value and a third of employees.

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 2017 (%, division = 100%)

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

22.1 26.9 40.0 40.9 45.7 43.1 38.2 24.6 20.4

22.2 73.1 60.0 59.1 54.3 56.9 61.8 75.4 79.6 Source: CZSO data, 2017 MIT calculations

133 12.2 DIVISION DEVELOPMENT

The economic indicators of this industry segment indicate that it is a division with one of the most stable developments. The Czech sector has built the position of one of the most important players. The division of plastics industry in the Czech Republic has been one of the major drivers of the Czech economy and the manufacturing industry for many years.

Major companies operating in the division include: Saar Gummi Czech, s.r.o. (SGC), which is one of the European leaders in the production of automotive seals, now investing in the construction of the fifth new hall and an expansion of production. It anticipates the use of these new capacities, for example, for new contracts to produce seals for the new Škoda Octavia and Volkswagen Golf models, which will be produced from 2019. The company is one of the key plants of 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 by extrusion technology.

Continental Barum, s.r.o. is preparing to open a new production building in the Continental Production division. Continental Barum, s.r.o. has been a member of the group since 1993 and is the largest employer in the Zlín region, employing about 5 thousand people. It specializes in the production of premium Continental tyres, but also includes the most well-known local brand Barum. Other brands manufactured here include Matador, Uniroyal, Semperit and General Tire. All manufactured car tyres from Otrokovice account for 6.6% of European tyres and 11.6% in the truck category, where the Otrokovice plant covers more than 11% of the demand on the European continent. According to the Continental Barum survey conducted in 2017 on a sample of 1920 cars in Prague, Brno, Ostrava, Plzeň, Liberec, Olomouc, České Budějovice and Zlín,18% of Czech drivers use Barum tyres. The first truck tyres in Otrokovice were made by the industrialist Tomáš Baťa in 1932. They were quickly followed by car tyres and a few years later Baťa’s company had changed the Czechoslovak tyre market. As one of the first in the Czech Republic, they make parts of steel moulds for the production of tyres on a 3D printer.

Fatra, a.s., a major plastics processor (PVC, PE and PET), whose history dates back to 1935, produced approximately CZK 3.77 billion in products and services in 2017 and more than 75% of the production was directed to foreign markets. Fatra, a.s. uses modern plastics processing technology at Napajedla and Chropyně, where it employs more than 1,300 employees. In 2017, work began on the construction of a new rolling mill. Fatra expects this plant to enhance its position on the market in the sale of floor coverings LINO FATRA, THERMOFIX, FATRACLICK and RS-CLICK and FATRAFOL waterproofing films. It is currently a member of the AGROFERT group. Fatra, a.s. is also known as the manufacturer of legendary inflatable toys.

The first production plant of Nexen Tire Europe, s.r.o. outside the Asian continent is being built in the Czech Republic – in the Triangle industrial zone near the North Bohemian town of Žatec. The construction of a modern factory complex began in the first half of 2017, with production to commence in the second half of 2018. Thanks to the new production plant, up to 1,500 new jobs will be created in the Ústí Region. The planned annual production capacity will reach 12 million tyres in the final phase. Part of the plant will be a R&D department, which will test the products in the first phase. Gradually, it should focus on innovative activities related to material research.

Gumotex, a.s. has placed first in the 23rd year of the Exporter of the Year contest, also winning the title “Supplier for the Car of the Year 2017 in the Czech Republic”. GUMOTEX ranked 4th in the CZECH TOP 100 in the category Chemical, Pharmaceutical, Rubber and Plastics Industry.

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

12.3 MAIN ECONOMIC INDICATORS

Production characteristics indicate that this is one of the most stable divisions. Revenues fell only in 2009 and were growing steadily since then. Value added, labour productivity and average wage were also growing in 2009–2017. Labour productivity peaked in 2016. The number of employed persons, following a larger decline in 2009, showed moderate declines in 2012–2013. In other years, the number of employed persons grew and reached its peak in 2017. The number of units recorded a sharp increase in 2010; in the following years it was rather decreasing (Chart 12.3.1).

Prices of CZ-CPA 22 commodity were decreasing until and reached their minimum in 2010. The prices of this product group were mainly influenced by the prices of rubber on international markets. In 2017, CZ-CPA 22 prices still did not reach the 2005 levels (Chart 12.3.2).

The development of Spread in this division is very positive. In 2008–2015, it grew steadily, becoming positive for the first time in 2010. This was due to a fairly balanced risk reduction and increasing return on equity. In 2016 and 2017, there was a slight decrease in Spread (Chart 12.3.3).

It is one of the most efficient divisions. In 2016 and 2017, it posted strong positive economic value added, although its year-on-year decline was CZK 4.8 billion. The main reason was the decrease in the value of the EBIT/revenues indicator, which reduced the economic value added by CZK 6.4 billion. Interesting developments were seen in the relation of labour productivity and average wages, when its impact on EVA was negative in the amount of CZK 1.0 billion.

Further data is available on the MIT website in an interactive viewer of economic indicators (https://www. mpo.cz/en/panorama-interactive-table.html). Chart 12.3.1 – Major economic indicators of CZ-NACE 22 Chart 12.3.1 – Major economic indicators of CZ-NACE 22 4 500 100 000 4 500 Number of units 100 000 Average number of employees 4 000 Number of units 90 000 Average number of employees 4 000 90 000 3 500 80 000 80 000 3 500 70 000 3 000 70 000 3 000 60 000

2 500

60 000

50 000

2 500

2 000

4 244 50 000

4 058 92 204

3 907

40 000 88 141 2 000 87 352 4 244 3 663 84 316 3 617 3 592 3 574 3 572 4 058 92 204 79 685 79 575 78 748 3 385 77 806 3 907 40 000 1 500 76 700 88 141 75 744 3 262 87 352 3 663 84 316 3 617 3 592 3 574 3 572 30 000 79 685 79 575 78 748 3 385 77 806

1 500 76 700 75 744 3 262 30 000 1 000 20 000 1 000 20 000 500 10 000 500 10 000 0 0 0 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 0 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 350 000 90 000 350 000 Sales (CZK m) Value added (CZK m) 90 000 Average monthly wage (CZK) 80 000 Average monthly wage (CZK) 300 000 Sales (CZK m) Value added (CZK m) Labour productivity from the VA (CZK/month)* 80 000 300 000 70 000 Labour productivity from the VA (CZK/month)* 250 000 70 000 250 000 60 000 60 000

200 000

50 000

200 000

50 000

40 000

150 000

82 079 81 396

80 738

320 811

79 651

40 000

150 000 304 210 297 876

71 155 82 079 81 396

282 002 80 738

68 780 320 811 79 651

30 000

86 661 84 221

304 210 258 418 63 389 79 780 297 876 254 551 62 074 245 425 73 694 100 000 71 155 282 002 68 780 30 000 227 935 86 661 55 633

64 190 223 804 62 813 84 221

258 418

58 469 63 389

79 780 254 551

51 281

62 074 55 055 245 425 52 155 100 000 73 694 20 000 48 951 193 842

227 935 55 633

64 190 223 804 62 813

58 469

51 281

55 055

52 155 20 000 48 951 50 000 193 842

10 000 28 741 26 679 25 083 24 442 23 725 50 000 23 401 22 750 22 449 20 930 21 332

10 000 28 741 26 679 25 083 24 442 23 725 23 401 22 750 22 449 0 0 20 930 21 332 0 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 0 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Source: CZSO, MIT calculations *Source: This is CZSO,an aliquot MIT calculationsmonthly share computed from annual data * This is an aliquot monthly share computed from annual data

Chart 12.3.2 – Price development of CZ-CPA 22 (2005 = 100%) Chart 12.3.3 – Spread (ROE – re ) CZ-NACE 22 (%) Chart 12.3.2 – Price development of CZ-CPA 22 (2005 = 100%) Chart 12.3.3 – Spread (ROE – re ) CZ-NACE 22 (%) 120 30 135 120 30 25 110 25 110 20 100 20 100 15 15 90 10 90 10 80 5 80 5 70 0 70 0 -5 60 -5 60 -10 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 50 -10 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Spread -20084,50 -20091,33 20104,53 20115,53 20128,87 10,212013 13,322014 15,852015 14,942016 11,242017 50 22 200898,2 200994,8 201093,6 201197,4 100,52012 100,12013 102,82014 101,52015 201699,0 201799,3 Spreadrf -4,554,50 -4,671,33 3,714,53 3,795,53 2,318,87 10,212,26 13,321,58 15,850,58 14,940,43 11,240,98 22.122 100,098,2 97,994,8 96,193,6 104,697,4 112,3100,5 109,7100,1 111,3102,8 106,6101,5 100,499,0 99,899,3 ROErf 12,164,55 14,874,67 18,223,71 18,513,79 19,422,31 21,022,26 22,911,58 23,740,58 22,390,43 19,000,98 22.222.1 100,097,6 93,797,9 92,796,1 104,694,6 112,395,8 109,796,2 111,399,3 106,699,1 100,498,0 98,599,8 reROE 16,6612,16 16,2014,87 13,6918,22 12,9818,51 10,5619,42 10,8121,02 22,919,58 23,747,89 22,397,45 19,007,76 22.2 97,6 93,7 92,7 94,6 95,8 96,2 99,3 99,1 98,0 98,5 re 16,66 16,20 13,69 12,98 10,56 10,81 9,58 7,89 7,45 7,76 Source: CZSO, MIT calculations Source: CZSO, MIT calculations Source: CZSO, MIT calculations Source: CZSO, MIT calculations Chart 12.3.1 – Major 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 92 204

3 907 40 000 88 141 87 352 3 663 84 316 3 617 3 592 3 574 3 572 79 685 79 575 78 748 3 385 77 806

1 500 76 700 75 744 3 262 30 000 1 000 20 000 500 10 000 0 0 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

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

200 000

50 000

150 000 40 000

82 079 81 396

80 738

320 811 79 651

304 210 297 876 71 155 282 002

30 000 68 780 86 661 84 221 258 418 63 389 79 780 254 551 62 074 245 425 100 000 73 694

227 935 55 633

64 190 223 804 62 813

58 469

51 281

55 055

52 155 20 000 48 951 193 842 50 000

10 000 28 741 26 679 25 083 24 442 23 725 23 401 22 750 22 449 20 930 21 332 0 0 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Source: CZSO, MIT calculations * This is an aliquot monthly share computed from annual data

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

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 50 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Spread -4,50 -1,33 4,53 5,53 8,87 10,21 13,32 15,85 14,94 11,24 22 98,2 94,8 93,6 97,4 100,5 100,1 102,8 101,5 99,0 99,3 rf 4,55 4,67 3,71 3,79 2,31 2,26 1,58 0,58 0,43 0,98 22.1 100,0 97,9 96,1 104,6 112,3 109,7 111,3 106,6 100,4 99,8 ROE 12,16 14,87 18,22 18,51 19,42 21,02 22,91 23,74 22,39 19,00 22.2 97,6 93,7 92,7 94,6 95,8 96,2 99,3 99,1 98,0 98,5 re 16,66 16,20 13,69 12,98 10,56 10,81 9,58 7,89 7,45 7,76

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

12.4 FOREIGN FOREIGN TRADE TRADE

12.4.1 12.4.1 DEVELOPMENT O FOF FOREIGN FOREIGN TRADE TRADE Exports of CZ-CPA 22 commodities grew between 2009 and 2017. Imports also grew, but not as evenly as Exports of CZ-CPA 22 commodities grew between 2009 and 2017. Imports also grew, but not as evenly as exports. The result was a steady small but positive foreign trade balance, which peaked in 2013 (see Chart exports. The result was a steady small but positive foreign trade balance, which peaked in 2013 (see Chart 12.4.1). 12.4.1).

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

193 600 184 696 182 267 182 238 172 303 170 867 165 690 154 010 151 911 143 264 134 771 134 224

50 000 128 238 126 567 118 429 112 204 98 793 95 478 11 362 6 225 7 657 17 140 15 026 16 578 16 856 3 315 0 12 393 2009 2010 2011 2012 2013 2014 2015 2016 2017

Source: CZSO, data as of 9 May 2018

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

Chart 12.4.2 Foreign trade in products, CZ-CPA 22

Import territories in 2017 Export territories in 2017

other other 31% 28% Germany Germany 136 37% 33%

Italy Spain 3% 3% USA Slovakia Poland 4% Hungary Italy France Poland 9% China 9% United 3% 5% 5% 7% 6% Kingdom France Austria Slovakia 4% 4% 4% 5%

Source: CZSO, data as of 9 May 2018

12.5 RESEARCH AND DEVELOPMENT

Chart 12.4.2 Foreign trade in products, CZ-CPA 22

Import territories in 2017 Export territories in 2017

other other 31% 28% Germany Germany 37% 33%

Italy Spain 3% 3% USA Slovakia Poland 4% Hungary Italy France Poland 9% China 9% United 3% 5% 5% 7% 6% Kingdom France Austria Slovakia 4% 4% 4% 5%

Source: CZSO, data as of 9 May 2018

12.5 RESEARCH AND DEVELOPMENT

R&D expenditure in 2016 in Division 22 amounted to CZK 1,051 million, with total R&D expenditure in this division being up 56% from 2010 (Chart 12.5.1). The bulk of the funds were expenditures from business resources. Public foreign spending between 2010 and 2015 was increasing year-on-year at a rapid pace, mainly due to the drawing of public funds from the OPEI; it can be seen that the pace of growth slowed down slightly in 2016. However, if companies are successful in obtaining projects from new operational programmes (OP EIC and OP RDE), there could be a significant increase of funds from abroad. The share of researchers in the surveyed division in the total number of researchers in the manufacturing industry sectors is less than 4.3 %, i.e. 339 researchers per year (average for 2010–2016).

Within the National RIS3 Strategy, the manufacture of rubber and plastics products is an R&D area that receives average support. In the period 2015–October 2017, 77 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 1.10 billion, of which CZK 0.40 billion is an EU grant. Most aid is for introducing product and process enterprise innovations (78%), to a small extent for creating new applied research results (9%). The aid is mainly focused on strengthening R&D capacities of enterprises (89 %). All projects fall within the rubber and plastics application industry.

In the reference period, projects for the manufacture of rubber and plastic products were submitted by large enterprises as well as SMEs. As regards European aid for applicants/beneficiaries, largest EU aid for SMEs was granted to Plastic Parts & Technology s.r.o. from the Pardubice Region (the project Innovation of the production of optical parts for light sources, total expenditure of CZK 88 million, of which the EU grant is CZK 31 million) and TRW-Carr s.r.o. from the Central Bohemian Region (project Innovation of the product and process of production of safety belts for passenger cars, total expenditure of CZK 101 million, of which EU grant is CZK 25 million).

137 mainly due to the drawing of public funds from the OPEI; it can be seen that the pace of growth slowed down slightly in 2016. However, if companies are successful in obtaining projects from new operational programmes (OP EIC and OP RDE), there could be a significant increase of funds from abroad. The share of researchers in the surveyed division in the total number of researchers in the manufacturing industry sectors is less than 4.3 %, i.e. 339 researchers per year (average for 2010–2016).

Chart 12.5.1 – R&D expenditure in CZ-NACE 22 (CZK million)

Government+universities Number of enterprises Entrepreneurs EU+other international organisations 90 1 400 1 204 80 1 200 1 061 52 1 051 70 11 21 1 000 850 60 36 800 674 695 683 50 11 8 62 40 81 600 1 077 77 79 77 978 976 65 66 30 747 55 400 628 626 545 20 200 10

0 67 56 49 67 72 76 55 0 2010 2011 2012 2013 2014 2015 2016 2010 2011 2012 2013 2014 2015 2016

Source: CZSO, MIT calculations

12.6 DIVISION SUMMARY AND PROSPECTS

According to the latest PlasticsEurope 2017 data, the plastics industry is one of the main pillars of the European economy, with more than 60,000 companies and 1.5 million European employees, with a turnover approaching EUR 350 billion.

Worldwide, 335 million tonnes are produced (including thermoplastics, polyurethanes, and other plastics except PET, PA, PP and polyacrylic fibers). China is leader in plastic production and processing, followed by Europe and NAFTA1.

The 2020 outlook expects an increase in the volume of manufactured plastics to 400 million tons; in 2050 it should be already 700 million tons. The production of plastics in Europe will be around 60 million tonnes in 2020, over 1.2 million tonnes in the Czech Republic. In Europe, the most important sectors are packaging (almost 40%), construction (almost 20%), automotive (10%), electrotechnical industry and agriculture2.

The key packaging application sector is undergoing a phase of mergers and acquisitions. Estimates of world production growth by 2020 are around 3.5% per annum with a higher growth rate in bioplastics3. Construction, which uses plastics due to a wide range of advantageous properties (durability and corrosion resistance, effective insulator, lower cost, easy installation or hygienic water transport), is also expected to see dynamic growth in the context of the global population growth. In the automotive industry, efforts are being made to use light but solid thermoplastics. At the same time, additive production is important, which can be expected for the production of specialized components. The growing role of plastics can also be expected in healthcare, namely in vascular surgery, orthopedics, ophthalmology, dentistry and pharmacy.

The development of the US plastics industry is focused on shale gas. New shale gas ethylene plant opened in the USA – Dow, Exxon Mobil and Chevron. Nova commissioned a 450,000-tonne shale gas LLDPE production unit in Canada; Ineos commissioned a similar unit in the US with a capacity of 470,000 tonnes. Nova and Borelias are planning to build a steam cracker in Texas with the start of production in 2020. The Brazilian Braskem plans to build the largest PP unit in the US, also due to start production in 2020. German BASF focuses on engineering plastics, as well as Solvay, and will focus on engineering plastics with special properties.

1 Source: PlasticsEurope Market Research Group (PEMRG)/Conversio Market & Strategy GmbH 2 Source: PlasticsEurope 2017 3 Source: Smithers Pira

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

The Czech sector has built the position of one of the most important players. The division of the Czech plastics industry has been one of the most important drivers of the Czech economy and the manufacturing industry for many years, mainly due to close ties to large customers, especially the automotive, electronics and packaging industries, construction and other industries. This division is considered progressive and dynamic within the Czech economy, despite the predominantly less technology- and knowledge-based activities and disciplines in a global and European context (predominance of commodity over engineering plastics).

The long-term global trend is a growing waste problem. In December 2015, the Commission adopted the EU action plan for the Circular Economy. In it, it has identified plastics as a key priority and committed to developing a strategy that will address the challenges associated with plastics in the value chain and take into account their entire lifecycle. In 2017, the Commission confirmed that it will focus on the production and use of plastics and that it aims to ensure that by 2030 all plastic packaging is recyclable. In July 2017, China announced to the World Trade Organization that by the end of the year it would ban the import of 24 categories of waste and recyclable materials4.

The European Commission published the strategy for plastics and other documents on the circular economy on 16 January 2018. The result is the Strategy for Plastics, which represents the basic vision of the new look at plastics in the circulatory 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 – i.e. to be reusable, repairable and recyclable. By 2030, all plastics should either be reusable or recyclable. Recycling will also help reduce greenhouse gas emissions and reduce the EU’s dependence on f o s s i l f u e l i m p o r t s . A n o t h e r t a s k i s t o r e d u c e t h e l e a k a g e o f p l a s t i c s a n d m i c r o p l a s t i c s i n t o t h e e n v i r o n m e n t .

4 MFA, 2018

139 140 13. CZ-NACE 23 MANUFACTURE OF OTHER NON-METALLIC MINERAL PRODUCTS 13. CZ-NACE 23 MANUFACTURE OF OTHER NON- METALLIC MINERAL PRODUCTS

13.1 DIVISION CHARACTERISTIC 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.

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 and porcelain products.

The main export items continue to be glass, ceramic and porcelain goods and a selection of concrete prefabrication products. Tiles and refractory materials and products are also an important export item. In the Czech Republic, these groups benefit from a good raw materials base and modern production units. Despite its increasing share in total exports, most building materials (cement, lime, plaster, bricks, ceramic roof tiles, natural stone and concrete products) are mainly intended for the domestic market and form the foundation of building production.

Large businesses are characteristic for the division. They account for more than half of the revenues, value added and employees of the division. Medium-sized enterprises account for about a third of revenues and a quarter of value added and employees. The most significant groups are 23.1 and 23.6 (Table 13.1.1).

Table 13.1.1 – Shares of groups in CZ-NACE 23 in 2017 (%, division = 100%)

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

23.1 39.5 36.9 34.3 33.1 34.3 35.8 42.4 34.9

23.2 5.9 4.9 4.5 4.5 4.8 3.9 5.8 0.7

23.3 6.2 6.7 6.7 6.8 5.7 6.5 6.1 3.7

23.4 7.3 5.0 4.7 4.2 4.0 3.8 9.0 20.1

23.5 5.7 10.4 7.4 7.9 11.1 11.4 3.2 0.2

23.6 27.5 25.7 31.2 32.2 28.1 29.0 25.3 14.2

23.7 1.4 1.8 1.6 1.4 1.1 1.1 2.2 23.7

23.9 6.5 8.6 9.7 9.9 10.8 8.4 6.1 2.4 Source: CZSO data, 2017 MIT calculations

141 13.2 DIVISION DEVELOPMENT

In assessing the development of the glass industry and industrial production of building materials in 2017, it is necessary to take into account their immediate interconnection with the construction sector, where the key segments of the CZ-NACE 23 group have in essence partly followed the development of building production.

In addition to the production of cement and concrete, the production of ceramic tiles and floor tiles and the manufacture of concrete products and refractory material products have been the most successful in the past two years. Most notably, this rise is evident in the production of cement, which is an unofficial barometer on the development of building and investment construction.

Production of glass is also continuously increasing. The development of the glass and ceramic industry is built not only on tradition, but also on innovations and the ability of glassmakers to adapt to market requirements. Manufacturers are deliberately looking for new markets and offer their products to new clients. The division is developing and innovates its products, technologies, selected materials and design. It also invests heavily in production technologies, mainly to reduce the significant energy intensity of production. Therefore, the energy efficiency of melting aggregates increases. Flue gas cleaning equipment, dust treatment filters, heat recuperators, etc. are installed. Manufacturing companies innovate their melting processes according to the latest BAT standards. Examples include AGC Flat Glass Czech a.s. in Teplice, which produces flat glass, using probably the most efficient glass melting unit in the world, with the lowest specific energy consumption. It responds flexibly to the demand for special glasses by domestic and foreign automakers and develops new generations of safety and heat-insulating glass for the construction of new and reconstruction of existing buildings.

At present, the glass and ceramics industry employs approximately 24,000 workers and has a turnover of almost CZK 50 billion, with exports of 80–90% of its production abroad. Traditional foreign customers of domestic porcelain include Germany, Japan, South Korea and Russia. Further growth in the glass and ceramics industries is greatly hampered by the shortage of skilled workers in the labour market. The division would greatly benefit from improved media image of Czech glassmaking, which was significantly damaged by the collapse of Bohemia Crystalex Trading and Porcela Plus nine years ago. Given that the bulk of large manufacturers, mainly flat, packaging and technical glass, are owned by multinationals with a significant export orientation, industry representatives are calling for more stability by adopting the euro.

The dominant companies of the division are flat glass manufacturers for the automotive and construction industries and manufacturers of technical and packaging glass. These companies also invest heavily in expanding their production. Due to the stabilization of the industry and the increasing interest of buyers, smaller companies are also starting to invest. Among the leading glass and ceramics manufacturing companies are AGC Flat Glass Czech a.s., Owens-Illinois Manufacturing Czech Republic, a.s., Vetropack Moravia Glass a.s., Crystalex CZ s.r.o., Kavalierglass, a.s., THUN 1794, a.s., Český porcelán, a.s., Lasvit, s.r.o, Moser, a.s., LAUFEN CZ, s.r.o., PRECIOSA ORNELA, a.s. and others.

The building materials industry constitutes the material base for the construction industry, which in the long run, together with the follow-up investment construction, contributes to the balanced development of territory, including the environmental impact and the creation of business conditions in other economic sectors. This includes for example transport infrastructure, the construction of civil engineering works, both during the construction of building and, in particular, the use and maintenance of the building throughout its useful life.

142 13. CZ-NACE 23 MANUFACTURE OF OTHER NON-METALLIC MINERAL PRODUCTS 13.3 MAIN ECONOMIC INDICATORS 13.3 MAIN ECONOMIC INDICATORS The development of the division was rather problematic in 2008–2017. Revenues and value added declined The development of the division was rather problematic in 2008–2017. Revenues and value added declined significantly in 2009. In 2009–2013, they were more or less stagnant. In 2014, they increased and then significantly in 2009. In 2009–2013, they were more or less stagnant. In 2014, they increased and then stagnated. InIn 2017, 2017, the the levels levels of both of bothindicators indicators were still were below still 2008 below levels. 2008 In 2013–2017,levels. In 2013 labour–2017, productivity labour wasproductivity mostly slightly was mostly increasing. slightly On increasing. the other On hand, the otherthe average hand, thewage average was increasing wage was throughout increasing throughoutthe period. Thethe numberperiod. Theof employed number ofpersons employed declined persons sharply declined during sharply the crisis. during Since the 2010, crisis. it has Since grown 2010, very it moderately has grown onvery average. moderately Until 2011,on average. the number Until of2011, units the grew number and then of units declined grew until and 2017, then when declined it decreased until 2017, again when year- it on-year by 24 units (Chart 13.3.1). decreased again year-on-year by 24 units (Chart 13.3.1). CZ-CPACZ-CPA 2323 product product prices prices saw saw relative relative fluctuations fluctuations in individual in individual commodity commodity groups. groups. In 2017 In they2017 were they mostly were belowmostly or below at the or 2008 at the levels 2008 (Chart levels 13.3.2). (Chart 13.3.2). After the problematic years 2008–2013, when Spread was negative, the division recovered and, since 2014, After the problematic years 2008–2013, when Spread was negative, the division recovered and, since 2014, has seen positive Spread (Chart 13.3.3). This was due to the decrease in risk and a surge in ROE. has seen positive Spread (Chart 13.3.3). This was due to the decrease in risk and a surge in ROE. In the period 2017/2016, the value of economic value added was still positive, but decreased significantly Inby theCZK period 3.1 billi 2017/2016,on. The main the negative value of factor economic was thevalue decrease added inwas EBIT/Revenues, still positive, but which decreased caused EVAsignificantly to drop by CZK 3.23.1 billion. EVAThe mainwas positive negative in factor groups was 23.1, the 23.3, decrease 23.5, in23.7 EBIT/Revenues, and 23.9 in 2017. which Improvements caused EVA to in drop EVA bywere CZK seen 3.2 billion.in groups EVA 23.3was positiveand 23.4. in Thegroups development 23.1, 23.3, 23.5,of the 23.7 relation and 23.9 between in 2017. labour Improvements productivity in EVAand wereaverage seen wage in groups was unfavourable, 23.3 and 23.4. causing The development a fall in EVA of of the CZK relation 0.9 billion. between labour productivity and average wage was unfavourable, causing a fall in EVA of CZK 0.9 billion. Further data is available on the MIT website in an interactive viewer of economic indicators Further(https://www.mpo.cz/en/panorama data is available on the MIT -websiteinteractive in -antable. interactivehtml). viewer of economic indicators (https://www. mpo.cz/en/panorama-interactive-table.html ).

Chart 13.3.1 – Major 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 6 121 6 107 6 097 5 951 5 818 57 572 57 148 56 774 56 618 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 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

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 81 354 160 279 75 993 75 639 52 014 50 877 72 538 149 597 48 014 60 000 47 874 141 907 30 000 141 107 67 148 66 893 44 263 66 497 65 757 65 472 135 144 64 949 41 636 40 532 130 329 39 658 39 588 39 443 128 633 127 576 125 407

124 108

40 000 20 000 30 873

20 000 10 000 28 733 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 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Source: CZSO, MIT calculations * This is an aliquot monthly share computed from annual data

143

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

Chart 13.3.2150 – Price development of CZ-CPA 23 (2005 = 100%) Chart 13.3.320 – Spread (ROE – re) CZ-NACE 23 (%) 140 150 20 130 140 120 15 130 110 120 15 100 110 90 10 100 80 90 10 70 80 60 5 70 50 60 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 5 50 23 109,42008 107,22009 104,32010 103,92011 104,12012 103,72013 103,42014 103,72015 105,02016 106,02017 0 23.1 107,8 100,9 98,8 100,2 99,7 99,3 98,0 97,2 100,4 102,9 23 109,4 107,2 104,3 103,9 104,1 103,7 103,4 103,7 105,0 106,0 0 23.123.2 107,8106,6 100,9109,6 107,198,8 100,2108,4 110,799,7 111,999,3 112,098,0 111,597,2 100,4112,9 102,9111,5 -5 23.223.3 106,6109,7 109,696,1 107,186,1 108,486,1 110,788,7 111,988,7 112,092,7 111,592,5 112,997,5 111,5102,6 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 -5 23.323.5 109,7108,1 110,896,1 104,586,1 86,198,8 88,796,8 88,794,4 92,793,4 92,593,4 97,593,5 102,693,6 Spread -20081,37 -20093,75 -20102,51 -20112,81 -20123,09 -20133,08 20140,40 20153,07 20164,87 20171,33 23.523.6 108,1107,5 110,8108,4 104,5107,3 106,798,8 106,096,8 105,594,4 105,393,4 106,593,4 107,693,5 108,793,6 Spreadrf -4,551,37 -4,673,75 -3,712,51 -3,792,81 -2,313,09 -2,263,08 0,401,58 3,070,58 4,870,43 1,330,98 23.623.7 107,5103,3 108,499,9 107,3100,6 106,799,1 106,096,1 105,594,3 105,391,2 106,591,3 107,688,9 108,786,2 rfROE 12,554,55 4,678,78 3,719,77 3,799,09 2,318,08 2,268,58 11,731,58 13,360,58 14,580,43 11,220,98 23.723.9 103,3126,3 122,499,9 100,6120,8 123,799,1 133,496,1 135,994,3 135,591,2 133,491,3 129,788,9 126,586,2 reROE 12,5513,92 12,538,78 12,289,77 11,919,09 11,168,08 11,668,58 11,7311,33 13,3610,29 14,589,71 11,229,89 23.9 126,3 122,4 120,8 123,7 133,4 135,9 135,5 133,4 129,7 126,5 re 13,92 12,53 12,28 11,91 11,16 11,66 11,33 10,29 9,71 9,89 Source: CZSO, MIT calculations Source:Note: Group CZSO, 23.4 MIT is calculations not monitored. Source: CZSO, MIT calculations Note: Group 23.4 is not monitored. Source: CZSO, MIT calculations 13.4 FOREIGN TRADE 13.4 FOREIGN TRADE 13.413.4.1 DEVELOPMENT FOREIGN OF FOREIGN TRADE TRADE 13.4.1 DEVELOPMENT OF FOREIGN TRADE The division is characterized by a high foreign trade balance, which accounts for more than one third of its 13.4.1 DEVELOPMENT OF FOREIGN TRADE exports.The division Both is exportscharacterized and imports by a high are foreign constantly trade growing balance, (Chart which 13.4.1). accounts The for trading more thanin and one marketing third of itsof Thebuildingexports. division Bothmaterials is exports characterized and and products imports by a on high are the constantlyforeign European trade growing market balance, (Chartare which governed 13.4.1). accounts byThe uniform tradingfor more Europeanin thanand marketingone rules third and of its exports. Both exports and imports are constantly growing (Chart 13.4.1). The trading in and marketing assessingbuilding materials the properties and products of building on materials the European and products market areare subjectgoverned to harmonizedby uniform EuropeanEuropean standards.rules and ofassessing building the materials properties and of products building onmaterials the European and products market are are subject governed to harmonized by uniform European European standards. rules and assessingMost major the manufacturers properties of buildingof building materials materials and are products currently are fully subject competitive to harmonized on foreign European markets, standards. with a Mostview tomajor further manufacturers manufacturers intensifying theseof of building building activities materials materials in the arecoming are currently currently period. fully fully competitive competitive on on foreign foreign markets, markets, with with a aview view to to further further intensifying intensifying these these acti activitiesvities in in the the coming coming period. period. Chart 13.4.1 – Exports, imports and foreign trade balance in products by CZ-CPA 23 (CZK million)

Chart80 000 13.4.1 – Exports, imports and foreign trade balance in products by CZ-CPA 23 (CZK million)

8070 000 Export Import Trade balance Export Import Trade balance 7060 000

6050 000

5040 000

74 077

71 921

40 000 71 242

69 472

30 000

61 312 60 054

74 077 57 046 71 921 71 242

54 400 69 472

30 000 51 500

47 399 20 000

45 638

61 312 60 054

42 934

42 660

57 046 40 419 39 777 54 400 37 280 51 500 33 527

20 000 47 399 29 875 45 638 42 934

10 000 28 583 42 660 26 678 40 419 39 777 26 283 26 538 21 535 37 280 21 625 20 873 33 527 19 766 19 635 29 875

10 000 28 583

0 26 678 26 283 26 538 21 535 21 625 20 873 19 766 19 635 0 2009 2010 2011 2012 2013 2014 2015 2016 2017 2009 2010 2011 2012 2013 2014 2015 2016 2017 Source: CZSO, data as of 9 May 2018 Source: CZSO, data as of 9 May 2018 13.4.2 TERRITORIAL STRUCTURE OF FOREIGN TRADE 13.4.2 TERRITORIALTERRITORIAL STRUCTURE STRUCTURE OF FOREIGNOF FOREIGN TRADE TRADE Germany is the Czech Republic’s largest trading partner in both the exports and imports of virtually all the Germany is the Czech Republic’s largest trading partner in both the exports and imports of virtually all the Germany is the Czech Republic’s largest trading partner in both the exports and imports of virtually all the products in this division. Givenproducts the in unfavourable this division. share of transport costs to the resulting product price, the importance of other neighbouringGiven the unfavourable countries increases.share of transport That is whycosts Slovakia, to the resulting Poland andproduct Austria price, are the also importance important of trading other partnersneighbouring for the co exportsuntries ofincreases. building materialsThat is why (Chart Slovakia, 13.4.2). Poland and Austria are also important trading partners for the exports of building materials (Chart 13.4.2).

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

Given the unfavourable share of transport costs to the resulting 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 2017 Export territories in 2017

other other 35% 24% Germany Germany 28% 26%

Austria 4% Hungary Slovakia France Poland 3% 4% 10% 16% United Italy Poland Italy Belgium Slovakia Kingdom 5% 7% 6% 4% 5% 7% France China 5% 6% Austria 5%

Source: CZSO, data as of 9 May 2018

13.5 RESEARCH AND DEVELOPMENT

Division 23 has moderate R&D expenditure. In 2016 R&D expenditure in Division 23 amounted to CZK 547 million, with total R&D expenditure in this division being up 40 % from 2010 (Chart 13.5.1). The bulk of the funds were expenditures from business resources. Furthermore, from 2012 there is a slight year-on- year decrease in national public funds. The share of researchers (FTE) in the surveyed division in the total number of researchers in the manufacturing industry sectors is less than 2.23 %, i.e. 176 researchers per year (average for 2010–2016).

The companies with CZ-NACE 23 as their main economic activity that received in 2004–2017 a significant amount of special-purpose State support within the national programmes of the Ministry of Industry and Trade (IMPULS, TIP, TRIO) and Technical Assistance of the Czech Republic (Alfa, Competence Centres and Epsilon) include HELUZ cihlářský průmysl v.o.s., BETOSAN s.r.o., KB - BLOK systém, s.r.o., Prefa Brno a.s. and CRYSTALEX a.s. There are two companies participating in Horizon 2020 projects: AGC Flat Glass Czech a.s., a member of the project “DOMUS: Design OptiMisation for efficient electric vehicles based on a USer- centric approach”, as well as ŽPSV a.s., which participates in the project GeoDust: Utilization of secondary raw material in geopolymers production.

Within the National RIS3 Strategy, the manufacture of non-metallic mineral products is an R&D area that receives average support. In the period 2015–October 2017, 54 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 1.06 billion, of which CZK 0.39 billion is an EU grant. Most of the aid is intended for introducing product and process enterprise innovations (88%). The aid is mainly focused on strengthening R&D capacities of enterprises (93 %). Most of the projects fall within the Glass and Ceramics application sector (63%), almost a quarter (24%) falls within the application sector of Traditional Culture and Creative Industries.

In the reference period, projects for the manufacture of non-metallic mineral products were submitted by large enterprises as well as SMEs. As regards European aid for applicants/beneficiaries, largest EU aid for SMEs was granted to SKLÁRNY MORAVIA, a.s. from the South Moravian Region (the project Start of the production

145 production of unique innovated VIOLET enamel in the company SKLÁRNY MORAVIA; total expenditure of ofCZK unique 286 million, innovated of whichVIOLET EU enamel grant in is the CZK company 100 million), SKLÁRNY while MORAVIA; the largest total EU expenditure aid for large of enterprisesCZK 286 million, was ofgranted which toEU Pittsburghgrant is CZK Corning 100 million), CR, s.r.o. while from the largestthe Ústí EU Regionaid for large(project enterprises New generation was granted of specialto Pittsburgh foam Corningproduct CR,FOAMGLASS, s.r.o. from total the Ústíexpenditure Region (project of CZK 86 New million, generation of which of EUspecial grant foam is CZK product 21 mill FOAMGLASS,ion). total expenditure of CZK 86 million, of which EU grant is CZK 21 million).

Chart 13.5.1 – R&D expenditure in CZ-NACE 23 (CZK million)

Government+universities Number of enterprises Entrepreneurs EU+other international organisations 70 700 625 597 3 60 600 537 12 547 468 2 2 500 50 391 403 16 40 400 2 15

590 61 300 558 30 57 58 57 59 58 509 526 52 411 200 355 357 20

100 10

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

Source: CZSO, MIT calculations

13.6 DIVISION SUMMARY AND PROSPECTS 13.6 DIVISION SUMMARY AND PROSPECTS Building materials are needed for any type of construction. The total amount of materials consumed in BuildingEurope formaterials construction are needed purposes for any exceeds type of construction.2 trillion tonnes The totalper amountyear, making of materials construction consumed industry in Europe the for construction purposes exceeds 2 trillion tonnes per year, making construction industry the industry with industry with the highest consumption of raw materials. The materials and their combinations give the highest consumption of raw materials. The materials and their combinations give aesthetic expression andaesthetic provide expression static strength and provide and durability static strength of all buildings and durability and building of all structures.buildings and Building building materials structures. also playBuilding an important materials role also in sustainableplay an important development role thanksin sustainable to their energy development performance thanks and todurability, their energy which determinesperformance the and energy durability, consumption which determines of buildings the throughout energy consumption their life. of buildings throughout their life. It is clear that the production of building materials, which also includes consumed energy and raw It is clear that the production of building materials, which also includes consumed energy and raw materials, hasmaterials, a major has impact a major on impactthe environment. on the environment. By researching By resear the chinguse of the materials, use of materials, their combinations their combinations and new technologies,and new technologies, significant significant improvements improvements in the environment in the environment and the qualityand the of quality life can of belife achieved.can be achieved. Recent advancesRecent advances in nanotechnology, in nanotechnology, modelling, modelling, analytical analytical disciplines disciplines and many and other many technologies other technologies bring hope bring of discoverieshope of discoveries of breakthroughs of breakthroughs in the production, in the production, properties propertiesand use of andbuilding use ofmaterials. building The materials. trends thatThe research and development of building materials should focus on in the coming period will also include new trends that research and development of building materials should focus on in the coming period will also or improved building products for building adaptation to climate change and for circular economy within sustainableinclude new development. or improved building products for building adaptation to climate change and for circular economy within sustainable development. One ofof the the main main obstacles obstacles to effectiveto effective knowledge knowledge development development has so has far beenso far the been fragmentation the fragmentation of research of activities, both at the industrial and academic levels. Improving the coordination of R&D activities and research activities, both at the industrial and academic levels. Improving the coordination of R&D activities cooperation between all stakeholders can therefore lead to the development of mutual communication and understanding,and cooperation which between also entails all thestakeholders potential for can breakthrough therefore innovationlead to solutions.the development of mutual communication and understanding, which also entails the potential for breakthrough innovation solutions. Every year,year, 800,000 800,000 tonnes tonnes of of construction construction waste waste is isgenerated generated in thein the EU, EU, but but only only half half of that of that is recycled. is recycled. The upcomingThe upcoming trends trends and benefitsand benefits of circular of circular economy economy or European or European regulation regulation on landfilling on landfilling thus currently thus currently create the ideal environment for innovation and new technologies in the field of recycling of building materials. create the ideal environment for innovation and new technologies in the field of recycling of building Inmaterials. glass production, basic technology remains essentially unchanged. Generally the same processes and raw materials are used, although different melting technologies, especially with greater energy efficiency, are

146 13. CZ-NACE 23 MANUFACTURE OF OTHER NON-METALLIC MINERAL PRODUCTS adapted. Glassmaking has been undergoing continuous development over the long term. It innovates the underlying existing processes with a view to higher energy efficiency and higher demands on product quality. At the same time, the availability of some of the materials used is also increasing. The main changes can be found in the shaping, further processing and finishing of glass. As a result, glass gets new functional properties and for example flat glass and packaging glass gets additional possibilities and future prospects. As a result of these changes, glass and ceramics industry is developing new generations of utility, packaging, safety and flat glass, from new types of primary glass fibers, glass fiber fabrics and composite material products, to application of chemical and nanotechnology research in glass and ceramics. Today, flat glass controls the penetration and reflection of electromagnetic waves. Architects can correct heat, light, shortwave radiation, etc. inside buildings according to project needs through glass building envelopes. Another glass has antiseptic properties and successfully kills bacteria in its surroundings. Glass is also a basic material in solar panels, chemical laboratories and households. Modern glass with a thickness of several nm isolates buildings or leads light, etc.

Glass industry and the building materials industry can be assessed as stabilised, promising and well placed to further maintain and improve their starting position in the competitive European market. However, the successful development of activities in the Czech Republic and abroad requires the continuous growth of the technical level and the utility properties of products and the high efficiency of the whole production and commercial process.

Important factors for maintaining the competitiveness of the division 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; - improving education and cooperation with the Ministry of Education, which will lead to increased interest in study in the technical and technological fields of the building materials industry and in construction; - expanding cooperation with national and foreign scientific and technical facilities (research institutes, universities); - introducing new knowledge into practice and using them in product innovation; - development of marketing services.

147 148 14. CZ-NACE 24 MANUFACTURE OF BASIC METALS 14. CZ-NACE 24 MANUFACTURE OF BASIC METALS

14.1 DIVISION CHARACTERISTICS

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 is one of the key sectors of the Czech manufacturing industry. It is closely intertwined with the supplier and customer sectors, construction, mining, energy and transport sectors. Steel companies employ a large number of workers of all educational backgrounds, around 20,000 direct jobs and a large number of jobs in downstream industries. The situation in the steel industry has direct and indirect impacts not only on the Moravian-Silesian region, which is home to the three largest steel companies in the Czech Republic (ArcelorMittal Ostrava, a.s., Třinecké železárny, a.s. and Vítkovice Steel, a.s.), but on the whole economy.

In terms of size, large enterprises are most important and account for up to 75% of the division. CZ-NACE 24.1 has the largest share in the division (49% of revenues). The share of CZ-NACE 24.4 and CZ-NACE 24.5 is similar and represents approximately 14% to 16 % of revenues, followed by CZ-NACE 24.2 and CZ-NACE 24.3, which account for about 10% of the revenue of the division (Table 14.1.1).

Table 14.1.1 – Shares of groups in CZ-NACE 24 in 2017 (%, division = 100%)

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

24.1 43.2 41.1 49.1 51.2 56.2 52.8 40.2 6.9

24.2 11.3 13.5 10.3 10.4 11.6 10.2 10.4 3.7

24.3 8.2 8.6 9.7 9.6 7.2 8.5 7.8 4.0

24.4 9.6 11.8 16.2 15.3 11.1 13.2 9.1 11.2

24.5 27.8 25.0 14.7 13.5 14.0 15.4 32.6 74.1 Source: CZSO data, 2017 MIT calculations

14.2 DIVISION DEVELOPMENT

The development in the Czech and EU steel industry has been constant since 2008. While the situation is improving, the steel industry will certainly not restore its production volumes to 2007 levels. At present, production volumes are at less than 90% of the 2006–2007 levels, which creates sustained pressure to maintain competitiveness given certain overcapacity.

149 In 2017, crude steel production in the Czech Republic fell by about 14% year-on-year to 4.56 million tons. The reason for the decline was the planned renovation and technical downtime in the two largest metallurgical plants of ArcelorMittal Ostrava, a.s. and Třinecké železárny, a.s. Long rolled products, such as rolled wire, shaped steel or special rod steel accounted for nearly two-thirds of production. While total exports fell by 8% to 4.63 million tonnes in 2017, imports were at record highs – up 9.4% to 7.24 million tonnes. The value of Czech steel exports increased by 6% to CZK 96 billion. The value of the exports increased despite the drop in volume due to rising prices on world markets. Almost a quarter of the exports went to Germany, followed by Poland, Slovakia, Italy and Hungary. The largest non-European market is the United States with 130,000 tonnes last year, with the US buying especially high value added products.

In 2017, ArcelorMittal Ostrava a.s. produced 1.8 million tons of steel (down almost 700 thousand tons from 2016). The result was significantly affected by the blast furnace shutdown and the repair and refurbishment of the tandem furnace. Production in 2018 is estimated at 2.3 million tonnes of steel.

In early May 2018, the European Commission approved the acquisition of ArcelorMittal Ostrava a.s. and now it is necessary to find a new reputable owner of Ostrava’s steelworks and ensure that production continues and jobs are preserved.

In 2017 Třinecké železárny, a.s. completed a CZK 720 million investment to modernize block I and universal mill (for rolled billets and rails), and the renovation of the billet mill and straightener of blocks and slabs for CZK 220 million. At the same time, the company renovated the blast furnace gas treatment plant. As a result of the renovations, production of steel saw a year-on-year decrease of 50 thousand tonnes.

Vítkovice Steel a.s. has also been doing well; since 2016 it has had a positive EBITDA and the sales across its product range have been rising. The production volume of sheet metal and baked items was 401 thousand tonnes per year, the volume of sheet piles increased to 146 thousand tonnes. The company continued to invest in environmental measures in 2017. Without a grant, it invested CZK 47 million in the modernization of the heavy profile line, which has reduced the consumption of natural gas by 17% and reduced the volume of CO2 and NOx emissions by 42%. Vítkovice Steel a.s. expects total investment in production in 2018–2020 at CZK 710 million.

Recently, industry has been very worried about the rise in US import duties on some aluminium and steel products. On 8 March 2018, US President Donald Trump announced flat-rate tariffs of 25% on imports of steel products and 10% on imports of aluminium products. The relevant measures have entered into effect and apply, among others, to EU countries. In the Czech Republic, US tariffs mainly threaten domestic steelmakers, who are afraid of having their exports restricted and of cheap steel from third countries redirected from the US to the European market, which is the most important for them. The largest Czech metallurgical enterprises, Třinecké železárny, a.s. and ArcelorMittal Ostrava, a.s. expect that the sale of certain products to the USA will fall due to the introduction of aluminium and steel import tariffs.

14.3 MAIN ECONOMIC INDICATORS

The unfavourable development of the division in 2008–2017 is evident from the development of selected indicators. Revenues and value added were the highest in 2008 and then stagnated at a significantly lower level. After a surge in 2009, the number of employees stagnated or slightly declined. The average wage grew, except in 2009. After a catastrophic fall in 2009, labour productivity was growing until 2014, but then declined again and in 2017 it was below the 2008 level (Chart 14.3.1).

Price development in CZ-CPA 24 is determined by prices of steel producers (CZ-CPA 24.1 to 24.3). In 2009– 2017 prices were rather stagnant, except in CZ-CPA 24.4 (Chart 14.3.2).

150 grew, except in 2009. After a catastrophic fall in 2009, labour productivity was growing until 2014, but then declined again and in 2017 it was below the 2008 level (Chart 14.3.1). Price development in CZ-CPA 24 is determined by prices of steel producers (CZ-CPA 24.1 to 24.3). In 2009– 14. CZ-NACE 24 MANUFACTURE OF BASIC METALS 2017 prices were rather stagnant, except in CZ-CPA 24.4 (Chart 14.3.2). The financial position of the division was mainly influenced by return on equity, whose development was in Thethe formfinancial of a position W curve of (Chart the division 14.3.3). was Spread mainly was influenced positive byonly return in 2014. on equity, The efficiency whose development of the division was was in the form of a W curve (Chart 14.3.3). Spread was positive only in 2014. The efficiency of the division was very very poor. poor. The economic value added was negative in 2016 and declined further by CZK 1.6 billion in 2017. This was Themainly economic due to thevalue increase added inwas risk, negative namely in risk 2016-free and rate declined (down CZKfurther 0.5 billion)by CZK and1.6 riskbillion premium in 2017. (down This wasCZK mainly1.0 billion). due toThe the third increase factor inwas risk, the namely decrease risk-free in EBIT/Revenues rate (down CZK (down 0.5 CZK billion) 0.5 andbillion). risk There premium were (down also CZK 1.0 billion). The third factor was the decrease in EBIT/Revenues (down CZK 0.5 billion). There were also positive effects, such as improved asset turnover (up CZK 0.5 billion). The fall in labour productivity in 2017 positive effects, such as improved asset turnover (up CZK 0.5 billion). The fall in labour productivity in 2017 caused a decrease in EVA ofof CZKCZK 0.70.7 billionbillion andand anan increaseincrease inin thethe averageaverage wagewage byby CZKCZK 0.50.5 billion.billion. Further data is available on the MIT website in an interactive viewer of economic indicators Further(https://www.mpo.cz/en/panorama data is available on the MIT -websiteinteractive in -antable.html interactive). viewer of economic indicators (https://www. mpo.cz/en/panorama-interactive-table.html).

Chart 14.3.1 – Major 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

992 46 394 46 314

970 20 000

44 617 44 566 44 363 44 311 928 927 43 932 43 877 43 608 908 891

400 860 758 701 200 10 000

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

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

150 000

40 000

75 069

70 517

70 106 240 142 68 920 100 000 30 000

64 465

61 021 211 672

59 373

199 420 199 366

56 655

194 332

192 275 190 568

181 920 181 201 46 679 20 000 48 275 39 425 37 244 36 325 33 249 32 684 31 763 144 552 29 435

50 000 38 521 25 270 21 197 31 182 29 396

10 000 28 380 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 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Source: CZSO, MIT calculations * This is an aliquot monthly share computed from annual data

151

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

170 25

20 150 15 130 Chart 14.3.2 – Price development of CZ-CPA 24 (2005 = 100%) Chart 14.3.310 – Spread (ROE – re) CZ-NACE 24 (%) 110 5 170 25 0 90 20 150 -5 15 70 -10 130 10 -15 50 110 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 5 -20 24 113,4 94,3 98,3 111,7 109,3 105,9 108,5 105,2 97,9 107,8 0 90 -25 24.1 114,2 87,6 93,9 111,0 108,0 103,6 106,2 101,4 93,4 105,2 -5 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 24.2 117,6 108,5 107,6 117,8 115,4 108,4 109,7 105,0 97,3 104,3 Spread -4,12 -22,61 -14,83 -12,00 -15,09 -6,83 1,27 -4,39 -3,52 -5,18 70 -10 24.3 104,1 93,5 92,7 98,5 96,4 93,7 96,9 94,5 90,4 101,1 rf 4,55 4,67 3,71 3,79 2,31 2,26 1,58 0,58 0,43 0,98 -15 24.450 129,0 108,0 122,8 139,8 135,6 135,8 140,6 146,6 132,5 147,0 ROE 7,86 -2,85 2,83 3,86 -1,94 4,51 12,30 6,06 6,34 6,34 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 24.5 109,9 109,8 106,5 111,1 113,9 114,8 116,0 115,7 113,0 111,8 re -20 11,98 19,76 17,66 15,86 13,15 11,34 11,03 10,44 9,85 11,51 24 113,4 94,3 98,3 111,7 109,3 105,9 108,5 105,2 97,9 107,8 -25 Source: CZSO,24.1 MIT 114,2 calculations 87,6 93,9 111,0 108,0 103,6 106,2 101,4 93,4 105,2 Source: CZSO, MIT calculations2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 24.2 117,6 108,5 107,6 117,8 115,4 108,4 109,7 105,0 97,3 104,3 Spread -4,12 -22,61 -14,83 -12,00 -15,09 -6,83 1,27 -4,39 -3,52 -5,18 24.3 104,1 93,5 92,7 98,5 96,4 93,7 96,9 94,5 90,4 101,1 rf 4,55 4,67 3,71 3,79 2,31 2,26 1,58 0,58 0,43 0,98 24.4 129,0 108,0 122,8 139,8 135,6 135,8 140,6 146,6 132,5 147,0 ROE 7,86 -2,85 2,83 3,86 -1,94 4,51 12,30 6,06 6,34 6,34 14.4 FOREIGN24.5 109,9 109,8 106,5 TRADE111,1 113,9 114,8 116,0 115,7 113,0 111,8 re 11,98 19,76 17,66 15,86 13,15 11,34 11,03 10,44 9,85 11,51

Source: CZSO, MIT calculations Source: CZSO, MIT calculations 14.414.4.1 DEVELOPMENT FOREIGN OF FOREIGN TRADE TRADE 14.4Foreign FOREIGNtrade in CZ-CPA TRADE 24 commodities showed increasingly higher imports over exports, as a result of which the foreign trade balance deteriorated steadily (Chart 14.4.1). 14.4.1 DEVELOPMENT OF FOREIGN TRADE 14.4.1 DEVELOPMENT OF FOREIGN TRADE Chart 14.4.1 – Exports, imports and foreign trade balance in products by CZ-CPA 24 (CZK million) Foreign trade in CZ-CPA 24 commodities showed increasingly higher imports over exports, as a result of which Foreign300 000 trade in CZ-CPA 24 commodities showed increasingly higher imports over exports, as a result of the foreign trade balance deteriorated steadily (Chart 14.4.1). which250 000 the foreign trade balance deterioratedExport steadilyImport (Chart 14.4.1).Trade balance 200 000

150 000 Chart 14.4.1 – Exports, imports and foreign trade balance in products by CZ-CPA 24 (CZK million)

262 810

100 000 237 956

233 174 223 089 216 653

300 000 213 217 211 087

50 000 181 567 152 895 152 189 149 824 143 623 141 065 139 713 132 989 113 877 130 347 Export Import Trade balance 121 745 80 279 64 464 63 393 92 742 71 375 67 690 89 542 94 333

250 000 ------43 446 0 - 200 000

-50 000

150 000

-100 000

262 810

100 000 237 956

233 174 223 089 216 653 213 217 -150 000 211 087 50 000 181 567 152 895 152 189 149 824 143 623 141 065 139 713 132 989 113 877 130 347 121 745 80 279

2009 2010 2011 2012 2013 64 464 2014 2015 2016 2017 63 393 92 742 71 375 67 690 89 542 94 333 ------43 446 0 - Source: CZSO, data as of 9 May 2018 -50 000 -100 000 14.4.2-150 000 TERRITORIAL STRUCTURE OF FOREIGN TRADE 2009 2010 2011 2012 2013 2014 2015 2016 2017

MostSource: CZSO,of the data trade as of 9 Maywas 2018 with EU countries. The main export and import partners were Germany, Poland, Slovakia and Italy (Chart 14.4.2). An exception was only imports of semi-finished products from Russia. 14.4.2 TERRITORIAL STRUCTURE OF FOREIGN TRADE 14.4.2 TERRITORIAL STRUCTURE OF FOREIGN TRADE Most of the trade was with EU countries. The main export and import partners were Germany, Poland, Most of the trade was with EU countries. The main export and import partners were Germany, Poland, Slovakia and Italy (Chart 14.4.2). An exception waswas onlyonly importsimports ofof semi-finishedsemi-finished productsproducts fromfrom Russia.Russia.

152 14. CZ-NACE 24 MANUFACTURE OF BASIC METALS

Chart 14.4.2 – Foreign trade in CZ-CPA 24 products

Import territories in 2017 Export territories in 2017

other United other 24% Germany Kingdom 26% Germany 26% 4% 27% Belgium Hungary 3% 4% Poland USA France 4% 3% 16% Italy Poland 14% Austria 7% Slovakia Italy Slovakia Austria 4% 12% 5% 7% 9% Russian federation 5%

Source: CZSO, data as of 9 May 2018

14.5 RESEARCH AND DEVELOPMENT

In 2016, R&D expenditure in Division 24 amounted to CZK 159 million, down 40 % from 2010. During the period, the bulk of the funds were expenditures from business resources (Chart 14.5.1). Compared to the other divisions in the manufacturing industry, domestic public expenditure was relatively high in CZ-NACE 24 in 2010–2015, but in 2016 there was a significant decrease in these funds from CZK 76 million to CZK 12 million year-on-year. The share of researchers (FTE) in the surveyed division in the total number of researchers in the manufacturing industry sectors is less than 1.26 %, i.e. 99 researchers per year (average for 2010–2016).

Within the National RIS3 Strategy, the manufacture of basic metals is an R&D area that receives average support. In the period 2015–October 2017, 21 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 1.34 billion, of which CZK 0.42 billion is an EU grant. Most aid is for introducing enterprise innovations, product and process (77 %), creating new applied research results (13 %), and creating new, expanded or upgraded research centres (10 %). The aid was mainly focused on strengthening R&D capacities of enterprises (87 %). All projects fall within the Metallurgy application industry.

In the reference period, projects for the manufacture of basic metals were submitted by large enterprises as well as SMEs. As regards European aid for applicants/beneficiaries, largest EU aid for SMEs was granted to TOP ALULIT s.r.o. from the Central Bohemian Region (the project Innovation of products and processes of TOP ALULIT s.r.o., total expenditure of CZK 79 million, of which the EU grant of CZK 28 million); largest EU aid for large enterprises was granted to Constellium Extrusions Děčín s.r.o. from the Ústí Region (the project Constellium Extrusions Děčín: Innovation in the production of high strength aluminum alloy products for the new generation of cars; total expenditure of CZK 553 million, of which the EU grant of CZK 100 million).

153 products for the new generation of cars; total expenditure of CZK 553 million, of which the EU grant of CZK 100 million).

Chart 14.5.1 – R&D expenditure in CZ-NACE 24 (CZK million)

Government+universities Number of enterprises Entrepreneurs EU+other international organisations 350 35 314 322 298 294 15 300 11 30 5 0 242 250 227 25 0 0 200 20 181 231 233 232 159 160 0 150 15 29 179 27 27 23 24 100 10 21 21 147

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

Source: CZSO, MIT calculations

14.6 DIVISION DIVISION SUMMARY SUMMARY AND PROSPECTSAND PROSPECTS Over the last 25 years, steel division has managed to cope with a range of challenges related to Over the last 25 years, steel division has managed to cope with a range of challenges related to privatization, privatization, transformation, competitive pressure on the European market, volatility in raw material and transformation, competitive pressure on the European market, volatility in raw material and energy prices, environmentalenergy prices, demands,environmental and the demands, consequences and theof theconseq economicuences recession of the ineconomic 2008. However, recession the in division 2008. facesHowever, new challengesthe division in facesthe form new of challenges unprecedented in the pressure form of ofunprecedented globalization and pressure regulation. of globalization and regulation. The current situation in metallurgy, as well as in other fields, requires a new approach, both in terms of ecology,The current technology situation and in standards, metallurgy, Industry as well 4.0 as requirements,in other fields, protection requires againsta new approach,unfair commercial both in practicesterms of and promotion of interests at national, European and global level. ecology, technology and standards, Industry 4.0 requirements, protection against unfair commercial Althoughpractices andin 2017 promotion the steel of interestssector was at national,performing European better thanand globalin 2016, level. it is a pity that last year domestic producers failed to make full use of the rising prices of steel products. However, for the year 2018, the prospectsAlthough inare 2017 optimistic, the steel primarily sector due was to performing economic growth better inthan our inmost 2016, important it is a pitymarkets, that includinglast year Germanydomestic andproducers Poland. failed to make full use of the rising prices of steel products. However, for the year 2018, the prospects are optimistic, primarily due to economic growth in our most important markets, including The competitiveness measures are based on the most up-to-date technologies, efficient production and aGermany skilled workforce. and Poland. These include, in particular, measures relating to: - restoring a level playing field on the market, -The ensuring competitiveness effective trade measures defence are instruments based on the (and most fair uptrade)-to- dateto prevent technologies, unfair trade efficient practices, production particularly and a skilledin China workforce. and other These countries, include, in particular, measures relating to: - full use of research and development results, investing in state-of-the-art technologies, radical innovation - restoring a level playing field on the market, solutions, quality and optimization of the metallurgical product range. The future of steelmaking will be in - higherensuring value effectiveproducts andtrade sophisticated defence instruments products, (and fair trade) to prevent unfair trade practices, - as particularly well as efficient in China solutions and other in countries, environmental issues, circular economy and energy-related agendas - (accessibilityfull use of and research price acceptability and development in terms ofresults, competitiveness). investing inThe state agreed-of- carbonthe-art tradingtechnologies, system reform,radical whoseinnovation national solutions, implementation quality legislation and optimization is in preparation, of the willmetallurgical have a significant product impact range. on The the sector.future of steelmaking will be in higher value products and sophisticated products, - as well as efficient solutions in environmental issues, circular economy and energy-related agendas (accessibility and price acceptability in terms of competitiveness). The agreed carbon trading system

154 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 DIVISION CHARACTERISTIC

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.

Division CZ-NACE 25 includes the manufacture of “purely” metal products, which are usually static, as well as the manufacture of weapons and ammunition.

The breadth of products and technologies that are included in this division is tremendous – from pins to nuclear reactors. Despite the variety of products of CZ-NACE 25, however, all production groups in the division have a unifying feature in that the original material input consists of traditional metal semi-finished products manufactured in CZ-NACE 24 Manufacture of basic metals, metallurgical metal processing and foundry industry. A closer analysis of the production of individual manufacturing companies involved in metalworking reveals 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 2017 (%, division = 100%)

Group Personnel Value Net turn- Own Assets Number of Number of Revenues CZ-NACE costs added over capital total employees units

25.1 19.2 15.8 18.7 18.5 13.0 16.1 18.9 6.9

25.2 6.6 5.5 6.3 6.8 6.7 7.0 6.1 1.0

25.3 1.8 1.4 1.7 1.0 1.4 2.3 1.3 0.3

25.4 2.9 3.8 2.8 3.2 3.3 3.5 2.8 0.2

25.5 5.5 5.6 5.8 6.7 6.5 6.4 5.0 5.1

25.6 24.4 24.8 21.4 19.1 26.1 23.6 25.9 28.8

25.7 19.2 22.5 21.1 20.9 18.4 18.3 19.6 53.9

25.9 20.4 20.5 22.1 23.7 24.6 22.7 20.4 3.9 Source: CZSO data, 2017 MIT calculations

155 Most significant for the division are medium-sized enterprises with a share of more than one third of revenues, value added and employed persons. Large enterprises account for a smaller share of the division. Small enterprises make up approximately 20% of the division.

Groups 25.9, 25.7 and 25.6 contribute most to the division’s revenues, and their significance is quite similar. Group 25.1 has a slightly lower share. The significance of the individual groups in other indicators is shown in Table 15.1.1.

15.2 DIVISION DEVELOPMENT

The manufacture of fabricated metal products has a permanent place in the whole manufacturing industry. Especially for the mechanical engineering and automotive industries, this sector is one of the most important suppliers of components for the assembly of final products and equipment.

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 materialized energy and its price development on world markets is thus indirectly reflected in the cost components of the sector’s manufacturers. Also, the development of world raw material prices has an impact on total costs.

Czech armament companies have been developing dynamically over the last two years. 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. However, a number of companies have reached the limit of their capacities. The lack of skilled workers in the labour market hinders further development. Sellier & Bellot’s revenues reached CZK 3.8 billion in 2016, and the 2017 plan of CZK 4.1 billion was exceeded. Munička exports up to 95% of its production, supplying it to seventy-five countries. The largest customers are US and EU, mainly the UK and Germany.

15.3 MAIN ECONOMIC INDICATORS

The development of selected economic indicators (Chart 15.3.1) in 2008–2017 was very positive (except in 2009).

The development of the CZ-CPA 25 commodity price index is quite stable. The table under Chart 15.3.2 clearly reflects the influence of the prices of the input material, with CZ-CPA 25.1 and 25.2 (with relatively high weight of processed material, mostly steel) being unstable as opposed to groups with a higher share of different technologies (CZ-CPA 25.5, 25.7).

The development of the relative economic value added (Spread) suggests an interesting development in the efficiency of the division. In 2008–2011, Spread was negative, with its bottom in 2009. Between 2012 and 2017, Spread was positive, i.e. businesses created value for their owners, but Spread was growing until 2015 and declined in the following years (Figure 15.3.3).

The value of economic value added declined year-on-year in 2017 but was still very positive. Individual groups showed different EVA values; 25.1 to 25.3 were negative and the remaining groups were positive. However, only 25.1 and 25.3 showed an improvement in EVA. EVA was influenced mainly by a fall in EBIT/ Assets (CZK -2.2 billion), an increase in the value of the Equity/Assets (CZK -1.7 billion) and increase in the risk-free rate (CZK -0.9 billion). By contrast, the development of the relation between labour productivity and average wage was very favourable, causing a rise in EVA of CZK 2.1 billion.

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

Further data is available on the MIT website in an interactive viewer of economic indicators (https://www. mpo.cz/en/panorama-interactive-table.html).

Chart 15.3.1 – Major 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

45 727 45 191 20 000 44 931 100 000 44 281 44 076 43 276 42 717 41 000 39 174 38 059 190 604 187 493 184 315

15 000 180 649 178 152 174 284 173 302 167 304 159 832 159 894 10 000 50 000 5 000 0 0 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

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

30 000 68 667 390 328 66 659 126 125 63 952 120 464 61 648 150 000 358 815 354 010 113 503 105 113 332 330 56 067 54 763

93 537 52 801 309 885 308 363 91 444

303 086 51 272 88 320

84 411

292 358 49 173

78 806

20 000

46 488 72 326 100 000 267 144 240 725

10 000 27 955 26 116

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 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Source: CZSO, MIT calculations * This is an aliquot monthly share computed from annual data

Chart 15.3.2 – Price development of 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 -10 25 108,4 105,0 103,0 105,8 107,7 107,6 110,1 109,8 108,8 111,0 -15 25.1 112,1 103,0 96,7 101,0 104,0 101,9 104,4 104,0 102,7 106,8 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 25.2 113,0 110,9 110,5 108,6 106,7 105,7 106,4 106,8 109,1 112,1 Spread -0,93 -9,79 -3,00 -1,19 2,18 3,74 8,12 8,62 6,26 3,60 25.5 110,2 112,1 108,6 109,7 111,3 112,8 116,6 114,0 108,7 109,2 rf 4,55 4,67 3,71 3,79 2,31 2,26 1,58 0,58 0,43 0,98 25.7 105,3 106,5 105,4 107,7 108,1 109,7 112,0 113,2 115,2 115,5 ROE 18,63 11,23 14,93 16,46 16,80 17,92 21,39 20,43 17,56 15,23 25.9 107,6 99,3 100,2 103,0 104,8 103,7 107,6 106,2 101,6 104,7 re 19,56 21,02 17,93 17,66 14,62 14,18 13,27 11,80 11,30 11,63

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

157 15.4 FOREIGN TRADE 15.4 FOREIGN TRADE

15.4.1 DEVELOPMENTDEVELOPMENT OF OF FOREIGN FOREIGN TRADE TRADE

Foreign trade in CZ-CPACZ-CPA 25 commodity shows increasing values of both exports and imports in 2009–2017.2009–2017. The foreign trade balance, which was positive, reached its maximums in 2013 and 2014. The foreign trade balance in 2017 was almost double that of 2009 (see Chart 15.4.1). balance in 2017 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

100 000 228 862 227 480 220 232

202 886

184 570 173 496 166 070 164 338 164 124 158 569 138 829 138 371

50 000 121 337 120 541 113 756 113 182 98 881 84 210 64 029 62 792 64 516 63 142 59 740 61 662 50 942 37 127 0 39 948 2009 2010 2011 2012 2013 2014 2015 2016 2017

Source: CZSO, data as of 9 May 2018

15.4.2 TERRITORIALTERRITORIAL STRUCTURE STRUCTURE OF FOREIGN OF FOREIGN TRADE TRADE

Traditionally, thethe largestlargest exportexport (37%)(37%) andand import (38%) partner was Germany. This is due to the mutually beneficial geographic position of both countries and economic links (the same multinational companies beneficial geographic 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%) operatingand Austria in (5%).the territories Import partners of the includetwo states). China Significant (9%), Poland export (6%), territories Italy (6%) are and also Slovakia Slovakia (5%), (8%), see Poland Chart (6%)15.4.2. and Austria (5%). Import partners include China (9%), Poland (6%), Italy (6%) and Slovakia (5%), see Chart 15.4.2. Chart 15.4.2 – Foreign trade in CZ-CPA 25 products Chart 15.4.2 – Foreign trade in CZ-CPA 25 products Import territories in 2017 Export territories in 2017 Import territories in 2017 Export territories in 2017

other other other29% other26% 29% South Germany 26% Belgium Germany SouthKorea Germany38% Belgium3% Germany37% Korea 38% 3% 3% 37% 3% United France KUnitedingdom France3% Kingdom4% 3% 4% Netherlands Austria Slovakia Austria Italy China Poland Italy Poland China Netherlands4% Austria5% Poland Slovakia8% Austria4% 6% 9% France 6% 6% Poland6% 9% 4% 5% 6% 8% 4% 6% France4% Slovakia 4% Slovakia5% 5% Source: CZSO, data as of 9 May 2018 Source: CZSO, data as of 9 May 2018

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

15.5 RESEARCH AND DEVELOPMENT

R&D expenditure in 2016 in Division 25 amounted to CZK 1,052 million, with total R&D expenditure in this division being up 34 % from 2010. The bulk of the funds were expenditures from business resources. National public spending has been falling 2010, and in 2016 there is a significant drop in funding from foreign public sources, which is due to the transition to the new programming period. If companies are successful in obtaining projects from new operational programmes (OP EIC and OP RDE), there could be a significant increase of funds from abroad. The share of researchers (FTE) in the surveyed division in the total number of researchers in the manufacturing industry sectors is less than 3.9 %, i.e. 306 researchers per year (average for 2010–2016).

The companies that received in 2004–2016 a significant amount of special-purpose State support within the national programmes of the Ministry of Industry and Trade (IMPULS, TIP, TRIO) and Technical Assistance of the Czech Republic (Alfa, Competence Centres and Epsilon) include VÍTKOVICE POWER ENGINEERING a.s., První železářská společnost Kladno, s.r.o., VARIEL, a. s., and MODELÁRNA LIAZ spol. s r.o. There are two companies in this sector which are involved in Horizon 2020 projects: Elbee Mobility s.r.o., engaged in the project Elbee - a worldwide unique drive-from-wheelchair vehicle, and AdvaMat s.r.o., engaged in the project ICARUS: Innovative Coarsening-resistant Alloys with enhanced Radiation tolerance and Ultra-fine-grained structure for aerospace application.

Within the National RIS3 Strategy, the manufacture of fabricated metal products is an R&D area that receives second largest volume of aid. In the period 2015–October 2017, 223 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 4.44 billion, of which CZK 1.63 billion is an EU grant. Most aid is for introducing enterprise innovations, product and process (78 %) and creating new, expanded or upgraded research centres (17 %). The aid is mainly focused on strengthening R&D capacities of enterprises (94 %). Most projects fall within the application sector Mechanical Engineering and Mechatronics (96 %).

In the reference period, projects for the manufacture of fabricated metal products were submitted by large enterprises as well as SMEs. As regards European aid for applicants/beneficiaries, largest EU aid for SMEs was granted to HAJDIK a.s. from the Zlín Region (projects Innovations in the field of galvanic plating of plastics; Testing of lacquered plastic parts with one-layer and two-layer system; total expenditure of CZK 216 million, of which EU grant of CZK 76 million); and largest EU aid for large enterprises was granted to Cooper-Standard Automotive Česká republika s.r.o. from the Vysočina Region (project Innovation in Cooper- Standard Automotive Czech Republic; the total expenditure of CZK 360 million, of which EU grant of 90 million.

Chart 15.5.1 – R&D expenditure in CZ-NACE 25 (CZK million)

Government+universities Number of enterprises Entrepreneurs EU+other international organisations 160 1 400 1 207 1 142 140 1 200 66 1 052 96 120 915 11 1 000 879 15 100 786 771 18 800 29 54 80 143 145 600 1 075 129 133 129 133 133 968 1 001 60 783 750 603 558 400 40

200 20 154 159 117 111 0 78 66 40 0 2010 2011 2012 2013 2014 2015 2016 2010 2011 2012 2013 2014 2015 2016

Source: CZSO, MIT calculations

15.6 DIVISION SUMMARY AND PROSPECTS 159 Metalworking as well as 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 increases. 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 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. 15.6 DIVISION SUMMARY AND PROSPECTS

Metalworking as well as 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 increases.

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 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.

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

16.1 DIVISION CHARACTERISTIC

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 one of the key sectors of the Czech economy. A distinctive feature of manufacturing processes in this section is the design and use of integrated circuits and highly specialized miniature technologies. It is relatively heterogeneous, with group 26.5 consistently accounting for the largest share of value added (more than half). Moreover, electronics and electrical engineering is a subcontractor for many other sectors, in particular the automotive and engineering industries. One of the highlights of the division is that every third electronic microscope is produced in the Czech Republic.

Most of the production of the division is created in large enterprises (71% of revenues, 76% of value added and 75% of employees in the division). The shares of the individual groups in the division are different for selected indicators. Dominant groups, however, are 26.2 and 26.5. Shares of groups in individual indicators are shown in Table 16.1.1.

Table 16.1.1 – Shares of groups in CZ-NACE 26 in 2017 (%, division = 100%)

Group Personnel Value Own Assets Number of Number of Revenues Net turnover CZ-NACE costs added capital total employees units

26.1 15.2 14.8 4.8 3.2 8.8 7.1 16.9 27.2

26.2 12.4 10.9 50.6 48.9 24.1 27.6 13.3 8.2

26.3 14.6 12.6 5.2 4.1 9.6 7.0 13.7 23.7

26.4 8.1 7.5 11.3 11.0 13.3 10.1 8.9 8.5

26.5 43.4 48.7 26.6 31.6 39.2 45.5 39.6 23.2

26.6 0.8 0.8 0.3 0.3 0.8 0.6 0.8 1.8

26.7 5.5 4.6 1.0 0.9 4.0 2.0 6.6 3.7

26.8 0.1 0.1 0.1 0.0 0.1 0.1 0.1 3.6 Source: CZSO data, 2017 MIT calculations

161 16.2 DIVISION DEVELOPMENT

The most important producers of the CZ-NACE 26.1 are ON Semiconductor Czech Republic, s.r.o. in 26.1, Foxconn CZ s.r.o. and Inventec (Czech) s.r.o. in 26.2, CommScope Czech Republic s.r.o. and ADC Czech Republic, s.r.o. in 26.3, Panasonic AVC Networks Czech, s. r. o. in 26.4, Continental Automotive Czech Republic s.r.o., FEI Company, s.r.o and TESCAN Orsay Holding, a.s. in 26.5, UJP Praha in 26.6 and Meopta-optika s.r.o. in 26.7. 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.

According to GfK, for the entire year 2017 the turnover of the domestic electronics and appliances market amounted to CZK 77.06 billion, which is 3.1 % more than in 2016. Trends in individual segments were long- lasting. Also growing are sales of smartphones, office equipment (especially inkjet printers with high capacity cartridges) and large and small household appliances, which traditionally have the highest growth. Only slight growth was seen in the case of consumer electronics (in the TV category, the shift in demand towards larger diagonals and technologies with higher image quality) and cameras, but this is a success, given the previous developments. Last year, the IT market fell slightly. In particular, conventional tablets are being overtaken by smartphones with ever-larger diagonal, or hybrid and convertible models.

Gartner survey show users’ tendencies to delay the purchase of new devices. The decline in traditional forms is likely to continue, but improvements should be made thanks to new technologies. These include, for example, gaming laptops and desktops that make up for the slump in the traditional segment.

Group 26.5 has also been consistently successful; it has a high added value, especially in the area of electron microscopy, where famous Brno companies cooperate with the Brno Technical University and the Institute of Instrumentation. Last year, the Thermo Fisher Scientific (now includes the FEI Company) presented the Quattro scanning electron microscope and the Talos F200i electron microscope designed for material sciences, as well as the Glacios transmission electron microscope, i.e. a system for observing quick-frozen samples. Cryo-electron microscopy was awarded the Nobel Prize last year.

Tescan Orsay Holding, a.s. annually produces about 300 microscopes. Most are exported. Last year, the company launched a model that, in addition to its large resolution, also offers the option of machining the sample with an ion beam or examining it with additional detectors.

16.3 MAIN ECONOMIC INDICATORS

The development of selected indicators in 2008–2017, such as revenues, number of employees and added value and labour productivity, has the form of a W-curve. Lower values of indicators were mostly recorded in 2009 and 2013 (Chart 16.3.1). The labour productivity growth in 2009 to 2014 was very positive.

In 2009–2017, producer prices in the CZ-NACE 26 division show a downward trend, which is generally attributable to the increase in utility value while simultaneously reducing prices as a result of increased production. Due to the considerable influence of transnational chains in this sector, there is also the effect of transfer pricing policies between parents and their subsidiaries (Chart 16.3.2).

Efficiency measured by Spread shows the impact of value optimization by multinational companies. In 2008– 2013, Spread was negative but with an improving trend. In 2014 and 2015, Spread was above zero, but in the following years it was again negative.

Creation of economic value added in 2016 and 2017 was negative, and in 2017 its value fell further. The main reason for this was the decrease in the EBIT/Assets value and the increase in the risk-free rate. Also, the development of labour productivity and average wage relation was negative in terms of economic value added generation.

162 the development16. CZ-NACE of labour 26 productivity MANUFACTURE and average OF COMPUTER, wage relation ELECTRONIC was negative AND in terms OPTICAL of economic PRODUCTS value added generation. Further data is available on the MIT website in an interactive viewer of economic indicators Further data is available on the MIT website in an interactive viewer of economic indicators (https://www. mpo.cz/en/panorama-interactive-table.html(https://www.mpo.cz/en/panorama-interactive). -table.html).

Chart 16.3.1 – Major 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 3 264 3 259

1 500 3 251 3 244 49 649

20 000 46 043 45 079 45 003 44 885 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 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

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 40 000 340 234

77 104

314 753

74 585 308 162

72 122

298 691 296 432 71 031 289 354 30 000

67 789 277 172

272 044

268 026

61 090

100 000

243 346

20 000 48 950 44 662 39 052 36 786 35 907 34 126 32 007 31 281 39 802 25 086 50 000 22 512 18 903 33 685 15 986 31 500

10 000 29 335 27 754 27 220 26 145 25 631 22 202 23 687 23 802 24 719 0 0 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Source: CZSO, MIT calculations * This is an aliquot monthly share computed from annual data

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

110 30

20 100 10

90 0

-10 80 -20

70 -30

-40 60 -50

50 -60 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 26 95,0 95,2 93,5 91,3 90,9 90,1 91,1 91,2 91,1 90,7 Spread -41,57 -54,47 -25,26 -21,89 -5,67 -3,96 7,16 1,26 -1,06 -2,58 26.1 95,6 90,0 89,4 88,4 83,5 82,1 85,1 82,6 85,4 83,6 rf 4,55 4,67 3,71 3,79 2,31 2,26 1,58 0,58 0,43 0,98 26.3 100,8 99,0 98,3 96,5 97,5 97,0 96,4 96,1 96,7 97,2 ROE -20,15 -35,14 -7,64 -3,50 6,81 7,11 15,06 10,07 7,25 5,34 26.5 94,3 97,5 95,7 94,7 96,3 96,5 96,8 96,8 96,5 95,5 re 21,42 19,33 17,62 18,38 12,48 11,08 7,90 8,81 8,32 7,92

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

163 16.4 FOREIGN TRADE 16.4 FOREIGN TRADE

16.4.1 DEVELOPMENTDEVELOPMENT OF OF FOREIGN FOREIGN TRADE TRADE

Trade inin CZ-CPACZ-CPA 2626 productsproducts showedshowed veryvery slightslight W-curve,W-curve, withwith bottomsbottoms inin 20132013 andand 2016 (Chart 16.4.1). Foreign trade resultsresults correspondedcorresponded toto thethe revenuesrevenues ofof thethe division.division.

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

700 000

600 000 Export Import Trade balance

500 000

400 000

300 000

644 971

606 344 603 239 574 458 562 340 556 871 529 050

200 000 504 460 486 129 479 759 473 774

467 194 456 371 447 139 430 201 427 913

353 067 100 000 342 182 38 991 24 590 26 171 10 885 12 565 45 861 28 780 5 469 38 627 - - - 0 -

-100 000 2009 2010 2011 2012 2013 2014 2015 2016 2017

Source: CZSO, data as of 9 May 2018

16.4.2 TERRITORIAL STRUCTURE OF FOREIGN TRADE 16.4.2 TERRITORIAL STRUCTURE OF FOREIGN TRADE The main export territory was Germany with a 34% share. It was followed by the United Kingdom, France, the NetherlandsThe main export and Slovakia.territory Importswas Germany are mainly with froma 34% China share. (45%) It was and followed from Germany by the United(11%). Kingdom, France, the Netherlands and Slovakia. Imports are mainly from China (45%) and from Germany (11%). Chart 16.4.2 – Foreign trade in CZ-CPA 26 products Chart 16.4.2 – Foreign trade in CZ-CPA 26 products Import territories in 2017 Export territories in 2017 Import territories in 2017 Export territories in 2017

USA other other USA3% other20% other32% 3% 32% Malaysia 20% China Germany Malaysia4% China45% Germany34% 4% 45% 34% Netherlands Italy Netherlands4% Italy3% 4% 3% South Korea Austria France South4% Korea Germany Austria3% Ireland Poland France6% 4% Germany11% 3% Ireland4% Poland4% 6% United 11% United 4% 4% KUnitedingdom Slovakia Netherlands KUnitedingdom Kingdom5% Slovakia5% Netherlands6% Kingdom7% 5% 5% 6% 7% Source: CZSO, data as of 9 May 2018 Source: CZSO, data as of 9 May 2018

16.5 RESEARCH RESEARCH AND AND DEVELOPMENT DEVELOPMENT

R&D expenditureexpenditure in in 2016 2016 in Divisionin Division 26 amounted 26 amounted to CZK to2,334 CZK million; 2,334 sincemillion; 2010, since the total2010, R&D the expenditure total R&D has been increasing. The increase in total R&D expenditure in this division between 2010 and 2016 was 96 %. expenditure has been increasing. The increase in total R&D expenditure in this division between 2010 and The bulk of the funds were expenditures from business resources. It can be said that between 2010 and 2016 the2016 division was 96 maintained %. The bulk a relatively of the funds stable were level expendituresof public funds from from business abroad. resources.The share ofIt researcherscan be said (FTE) that between 2010 and 2016 the division maintained a relatively stable level of public funds from abroad. The

164 share of researchers (FTE) in the surveyed division in the total number of researchers in the manufacturing industry sectors16. CZ-NACE is less than 26 12.2 MANUFACTURE %, i.e. 956 researchers OF COMPUTER, per year ELECTRONIC(average for 2010 AND–2016). OPTICAL PRODUCTS The companies that received in 2004–2017 a significant amount of special-purpose State support within the innational the surveyed programmes division of in the the Ministry total number of Industry of researchers and Trade in (IMPULS, the manufacturing TIP, TRIO) andindustry Technical sectors Assistance is less than of 12.2the Czech %, i.e. Republic 956 researchers (Alfa, Competence per year (average Centres for and 2010–2016). Epsilon) include UJP PRAHA a.s., Meopta - optika, s.r.o., ON SEMICONDUCTOR CZECH REPUBLIC, s.r.o., and RAMET a.s. There are eight companies in this industry Thethat companiesparticipate that in areceived total of in 10 2004–2017 projects undera significant Horizon amount 2020, of which special-purpose makes it a State very supportsuccessful within sector. the nationalArgotech programmes a.s. participates of the in Ministry a total ofof Industry 3 proje andcts: TradePICTURE, (IMPULS, REDFINCH TIP, TRIO) and andPIXAPP. Technical Other Assistance companies of the Czech Republic (Alfa, Competence Centres and Epsilon) include UJP PRAHA a.s., Meopta - optika, s.r.o., implementing a Horizon 2020 project are: TESCAN Brno, s.r.o. (project ELENA); OPTOKON, a.s. (project ON SEMICONDUCTOR CZECH REPUBLIC, s.r.o., and RAMET a.s. There are eight companies in this industry that participateCLONETS); FEIin a Czech total Republicof 10 projects s.r.o. under(project Horizon SeNaTe); 2020, LESPROJEKT which makes-SLUŽBY it a s.r.o.very successful(project DataBio); sector. Argotech PSI spol. a.s.s r.o. participates (project SE2B); in a SQStotal Vláknová of 3 projects: optika PICTURE,a.s. (project REDFINCH VisIoN); Tecoand PIXAPP. a.s. (project Other I- MECH).companies implementing aWithin Horizon the 2020 National project RIS3 are: Strategy, TESCAN the Brno, manufacture s.r.o. (project of computerELENA); OPTOKON, electronic a.s. and (project optical CLONETS); products isFEI an Czech R&D Republicarea that s.r.o. receives (project above SeNaTe);-average LESPROJEKT-SLUŽBY support. In the period s.r.o. 2015(project–October DataBio); 2017, PSI 114 spol. projects s r.o. (project falling SE2B);within SQS the Vláknová optika a.s. (project VisIoN); Teco a.s. (project I-MECH). National RIS3 Strategy were approved under the OP EIC for implementation with planned total aid (EU, Withinpublic andthe privateNational Czech RIS3 Strategy,funds) of theCZK manufacture 1.42 billion, of computerwhich CZK electronic 0.66 billion and is anoptical EU grant. products Aid isis andivided R&D areainto thatthe creationreceives above-averageof newly registered support. applied In the researchperiod 2015–October results (47%), 2017, the 114introduction projects fallingof product within andthe Nationalprocess enterpriseRIS3 Strategy innovations were approved (27%) underand the the creation OP EIC for of implementationnew, expanded withor modernized planned total research aid (EU, centres public and(20%). private The aidCzech is mainly funds) aimedof CZK at 1.42 stren billion,gthening of which the R&D CZK capacity0.66 billion of enterprises is an EU grant. (75 %)Aid and, is divided to a lesser into theextent, creation the cooperation of newly registered between appliedresearch research organizations results and (47%), enterprises the introduction (19 %). Most of product projects and fall process within enterprise innovations (27%) and the creation of new, expanded or modernized research centres (20%). The aidthe isapplication mainly aimed sector at Electronics strengthening and Electricalthe R&D Equipmentcapacity of (99enterprises %). (75 %) and, to a lesser extent, the cooperationIn the reference between period, research projects organizations for the manufacture and enterprises of computer (19 %). Most electronic projects and fall optical within theproducts application were sectorsubmitted Electronics by large and enterprises Electrical Equipment as well as (99 SMEs. %). As regards European aid for applicants/beneficiaries, largest EU aid for SMEs was granted to TOMS – Technology s.r.o. from the Liberec region (projects InLaboratory the reference for the period, development projects of for optical the manufacture systems and ofproduction computer technologies, electronic and total optical expenditure products of were CZK submitted by large enterprises as well as SMEs. As regards European aid for applicants/beneficiaries, largest 69 million, of which the EU grant of CZK 34 million); largest EU aid for large enterprises was granted to FEI EU aid for SMEs was granted to TOMS – Technology s.r.o. from the Liberec region (projects Laboratory for the developmentCzech Republi ofc optical s.r.o. systemsfrom the and productionSouth Moravian technologies, Region total (projects expenditure Small of Dual CZK 69Beam million, research of which andthe EUdevelopment grant of CZK FEI 34 Czech million); Republic, largest s.r.o.,EU aid Transmission for large enterprises Electron was Microscope granted to research FEI Czech and Republic development s.r.o. from FEI theCzech South Republic, Moravian s.r.o., Region total expenditure(projects Small of CZKDual 196 Beam million, research of which and EUdevelopment grant of CZK FEI 74 Czech million). Republic, s.r.o., Transmission Electron Microscope research and development FEI Czech Republic, s.r.o., total expenditure of CZK 196 million, of which EU grant of CZK 74 million).

Chart 16.5.1 – R&D expenditure in CZ-NACE 26 (CZK million)

Government+universities Number of enterprises Entrepreneurs EU+other international organisations 2 500 2 334 120 33 1 975 1 874 100 2 000 24 42 1 522 80 1 500 28 1 233 1 191 1 149 60 40 2 139 18 30 1 728 101 100 104 104 1 000 1 645 94 95 97 1 284 40 931 926 964 500 20

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

Source: CZSO, MIT calculations

165 16.6 DIVISION SUMMARY AND PERSPECTS

Industry 4.0 is currently a hot issue. Its basic feature is the digitization of products, the manufacturing process, and downstream services. The electronics industry faces this challenge being in 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.

The transition to automation and digitization 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 sustainability and increased productivity of industrial production and services and increase the demand for skilled work.

Due to high investments, companies with foreign capital will very likely be among the pioneers. This is why the development of the division is very much dependent on the development in Germany and the whole of the European Union.

On its website, Market Research.com shows five most fundamental trends in the electronics industry for the upcoming five-year period, according to a report by the Business Research Company on the market for electrical and electronic products in 2017. They are: - Outsourcing of product design - Virtual reality - Robotics and automation - Technology of the Internet of Things (IoT) - Smart TVs

By spreading to all areas of the economy and society and with unequal user ability to use and control these technologies, creators of all systems will increasingly be required to ensure user comfort, intuitive control and security of these technologies.

According to Cisco’s analysis, in 2018 some interesting uses of blockchain and IoT technologies will appear in computer security, where blockchain technology can play a crucial role.

Companies in CZ-NACE 26 are very dependent on a sufficient number of technically-educated people. For this reason, the interest in education in technical fields must be promoted effectively. At the moment, perhaps thanks to the electrical industry, it is beginning to attract the young generation that is leaning toward modern technology. This can be a great opportunity for Czech companies.

There is necessary to further support research projects and invest in science and innovation. Similarly, the inflow of foreign direct investment, especially with higher value added, should be further stimulated.

166 17. CZ-NACE 27 MANUFACTURE OF ELECTRICAL EQUIPMENT 17. CZ-NACE 27 MANUFACTURE OF ELECTRICAL EQUIPMENT

17.1 DIVISION CHARACTERISTIC

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 a 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, signaling 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 3/4 of revenues and employees and 70% of value added. The share of medium-sized enterprises is 12% in revenues, 16% in added value and 20% in the number of employees. Small enterprises account for the rest.

The most important group, as measured by revenue share, is 27.1. Other major groups are 27.4, 27.9 and 27.3. The importance of the groups is shown in Table 17.1.1.

Table 17.1.1 – Shares of groups in CZ-NACE 27 in 2017 (%, division = 100%)

Group Personnel Value Net turn- Own Assets Number of Number of Revenues CZ-NACE costs added over capital Total employees units

27.1 49.1 49.1 43.8 42.4 40.5 45.9 46.7 70.2

27.2 1.9 2.2 4.4 4.5 6.7 4.6 1.4 0.3

27.3 9.4 8.6 10.0 10.0 8.7 8.9 10.6 2.3

27.4 16.4 18.8 20.5 22.8 18.0 17.3 15.0 2.4

27.5 5.5 5.0 5.8 5.7 6.2 5.0 6.4 5.0

27.9 17.7 16.3 15.5 14.6 19.9 18.3 20.0 19.8 Source: CZSO data, 2017 MIT calculations

167 17.2 DIVISION DEVELOPMENT

Among the most important companies are: 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., MD Elektronik s.r.o., 27.4 - Automotive Lighting s.r.o., HELLA AUTOTECHNIK NOVA, s.r.o., 27.5 - Miele technika s.r.o., Mora Moravia, s.r.o., 27.9 - AVX Czech Republic, s.r.o.1

As can be seen from economic indicators, this division is most affected by group 27.1. Manufacture of electric motors, generators, transformers and electricity distribution and control apparatus. Products with a long innovation cycle formed the basis of the Czech (Czechoslovak) electrical equipment industry before the Velvet Revolution.

In the context of CO2 reduction, alternative drives, especially electromobility, and the associated need for energy storage, are predicted to have a promising future. The Czech Republic, as a country with a developed automotive industry, should take up the innovations in the field of electromobility. There are already emerging projects in this area related to batteries. HE3DA builds its battery plant in Horní Suchá (project M.E.S., 1.2GWh per year) and plans to expand to 15 GWh in the future. Concerning energy, Solar Global, a.s. has built a 1.2MWh battery as part of its solar power plant near Prakšice, Uherské Hradiště. The Li-ion battery was supplied by the Dutch company Alfen. A large battery was also built by E.ON, a similar project is also planned by ČEZ.

In connection with the European Union’s endeavor to improve the urban environment and the resulting support for alternative-drive vehicles, in particular electric cars, growth in groups 27.1 and 27.2 can be expected. The European Commission is aware of the importance of energy storage necessary for greater use of renewable sources.

17.3 MAIN ECONOMIC INDICATORS

The development in the number of units (enterprises) increased slightly from 2008 to 2010 and then was decreasing until the end of the period (Chart 17.3.1). The number of employees (except declines in 2009 and 2012) has been increasing steadily. Increases in sales and added value were excellent, increasing throughout the period (except in 2009). In this period, average wage and labour productivity continued to grow (except in 2013 and 2016). Overall, the division developed very favourably.

Prices in the division and practically in individual groups stagnated in 2008–2017 (Chart 17.3.2). The overview of indices of industrial producer prices shows the highest increase in prices in 2011 in group 27.3, when they reached maximum. The prices in other groups were rather fluctuating, but without significant spikes. In group 27.4, there has been strong competition in the market (in particular sue to imports from China) in recent years.

The efficiency of the division (as measured by Spread) is very good. Negative Spread values were only in 2008 and 2009, otherwise the division generated value for owners (Chart 17.3.3). Best Spread values were reached in 2015.

EVA shows a very good value between 2016 and 2017, but it was lower in 2017. In 2017, EVA was not positive only in 27.3. The year-on-year decline in EVA was due to groups 27.1, 27.2, 27.3 and 27.9. On the other hand, groups 27.4 and 27.5 showed an increase in EVA. The decline in EVA of the whole group was due to the decline in labour productivity and, conversely, the increase in the average wage in 2017. There were also positive changes, such as asset growth, but were not enough to offset EVA declines.

Further data is available on the MIT website in an interactive viewer of economic indicators (https://www. mpo.cz/en/panorama-interactive-table.html).

1 Source: Albertina

168 Further data is available on the MIT website in an interactive viewer of economic indicators 17. CZ-NACE 27 MANUFACTURE OF ELECTRICAL EQUIPMENT (https://www.mpo.cz/en/panorama-interactive-table.html).

Chart 17.3.1 – Major economic indicators of CZ-NACE 27 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

15 556 107 115 15 149 99 271 99 112 14 829 14 753 14 702 101 151 97 381 95 517 94 179 93 283

6 000 13 773 40 000 90 726 13 288 85 972 12 689 12 185 4 000 11 592 20 000 2 000 0 0 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

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

200 000

40 000

150 000

323 041

69 426 68 947 67 979 67 868 30 000

292 622 289 005 63 550 62 414 276 711 58 994 57 424 81 568

248 485 75 338

100 000 74 556

71 823 239 619

235 595

50 155

63 333 63 263

20 000 60 106

45 692 207 674 55 219 204 359 48 735 45 578 168 683

50 000 30 345

10 000 28 255 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 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Source: CZSO, MIT calculations * This is an aliquot monthly share computed from annual data

Chart 17.3.2 – Price development of 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 27 107,3 103,9 107,5 109,1 108,3 108,5 108,8 108,0 105,8 107,1 -5 27.1 103,2 104,9 104,8 106,4 107,2 107,5 107,5 105,8 104,1 103,7 -10 27.2 139,8 118,8 114,7 108,9 106,8 110,3 114,8 115,5 109,2 117,6 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 27.3 116,6 103,2 119,9 124,7 120,8 118,1 115,2 117,5 111,5 120,3 Spread -5,45 -3,06 6,32 4,66 4,56 5,81 9,15 10,71 8,22 7,05 27.4 95,3 94,3 91,5 90,1 89,6 90,7 91,6 89,5 86,8 84,1 rf 4,55 4,67 3,71 3,79 2,31 2,26 1,58 0,58 0,43 0,98 27.5 100,7 101,2 101,6 102,1 102,7 103,9 104,9 104,1 104,4 105,2 ROE 11,21 12,55 20,36 18,43 17,12 17,43 20,60 20,95 17,30 16,31 27.9 107,3 111,7 109,8 110,3 110,3 111,0 115,4 115,6 117,5 117,9 re 16,67 15,62 14,04 13,76 12,56 11,62 11,45 10,24 9,07 9,26

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

169 17.4 FOREIGN FOREIGN TRADE TRADE

17.4.1 DEVELOPMENT OF FOREIGN TRADE 17.4.1 DEVELOPMENT OF FOREIGN TRADE Imports and exports of CZ-CPA 27 commodities grew steadily between 2009 and 2017 (Chart 17.4.1). The Importsforeign tradeand exports balance of was CZ-CPA still positive, 27 commodities but the maximum grew steadily was reachedbetween in 2009 2014. and The 2017 commodity (Chart 17.4.1).structure The of foreign trade balance was still positive, but the maximum was reached in 2014. The commodity structure of exports was clearly dominated by product group 27.1 Manufacture of electric motors, generators, etc., with exports was clearly dominated by product group 27.1 Manufacture of electric motors, generators, etc., with a 33%33% share,share, followed followed by by the the product product group group 27.3 27.3 Manufacture Manufacture of ofwiring wiring and and wiring wiring devices. devices. This This was was also also the casethe case for imports. for imports.

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

389 467

150 000 361 995

348 745

337 806

301 407

295 296 276 828 272 312

100 000 261 103 246 081 230 544 215 263 203 713 193 207 182 915 174 380 50 000 166 167 128 724 107 263 45 656 49 097 88 060 79 106 87 642 85 167 91 583 0 63 166 2009 2010 2011 2012 2013 2014 2015 2016 2017

Source: CZSO, data as of 9 May 2018

17.4.2 TERRITORIAL STRUCTURE OF FOREIGN TRADE 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 relationsThe dominant of companies position under in exports foreign and control imports (Chart was 17.4.2).held by OtherGermany, export which territories is mainly have due a much to the lower ownership share, namelyrelations France, of companies Slovakia, underetc. In imports,foreign control China placed (Chart second, 17.4.2). but Other with export half the territories share. It is have well aheada much of lowerother countriesshare, nam – Poland,ely France, Italy, Slovakia, Hungary etc.and InAustria. imports, China placed second, but with half the share. It is well ahead of other countries – Poland, Italy, Hungary and Austria. Chart 17.4.2 – Foreign trade in CZ-CPA 27 products

Chart 17.4.2 – ForeignImport trade terr iintori CZes- iCPAn 2017 27 products Export territories in 2017 Import territories in 2017 Export territories in 2017

other other 31% Germany other other30% 31% Germany31% 30% Germany 31% 40% Netherlands Germany 40% Netherlands3% Hun3%g ary Romania China Hungary3% 3% 16% RomaniaJap an Italy China Uni3%te d Slovakia France Poland 3% 4% 16% Kingdom 5% 6% Japan3% Italy United Slovakia France Poland5% Austria 4% Kingdom4% 5% 6% 3% Hungary Austria Poland 4% 5% Austria 4% 4% 4% Hungary4% Austria Poland 4% 4% 4% 4% Source: CZSO, data as of 9 May 2018 Source: CZSO, data as of 9 May 2018

170 17. CZ-NACE 27 MANUFACTURE OF ELECTRICAL EQUIPMENT

17.5 RESEARCH AND DEVELOPMENT

R&D expenditure in 2016 in Division 27 amounted to CZK 3,799 million, with total R&D expenditure in this division being up more than 170 % from 2010 (Chart 17.5.1). The bulk of the funds were expenditures from business resources; in 2016 we can see a decrease of public expenditure from the Czech Republic and from abroad. This decrease was offset by an increase in business expenditures. The share of researchers (FTE) in the surveyed division in the total number of researchers in the manufacturing industry sectors is 13.9 %, i.e. 1,090 researchers per year (average for 2010–2016).

Within the National RIS3 Strategy, the manufacture of electrical equipment is an R&D area that receives above-average support. In the period 2015–October 2017, 113 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 1.80 billion, of which CZK 0.71 billion is an EU grant. The aid is for introducing enterprise innovations, product and process (49 %), creating new applied research results (29 %), and creating new, expanded or upgraded research centres (15 %). The aid is mainly aimed at strengthening the R&D capacity of enterprises (75 %) and, to a lesser extent, the cooperation between research organizations and enterprises (19 %). Most projects fall within the application sector Electronics and Electrical Equipment (96%).

In the reference period, projects for the manufacture of electrical equipment were submitted by large enterprises as well as SMEs. As regards European aid for applicants/beneficiaries, largest EU aid for SMEs was granted to CONTEG, spol. s r.o. from Prague (projects Expansion of the Conteg research and development center; Introduction of innovative industrial switchboards and cooling systems; total expenditure of CZK 84 million, of which EU grant of CZK 32 million); largest EU aid for large enterprises was granted to ŠKODA ELECTRIC a.s. from the Pilsen Region (projects Functional safety of electrical equipment of rolling stock; New research base for traction equipment of ŠKODA ELECTRIC a.s. vehicles; Development of a new insulating system of electric motors; Development of a traction battery system; total expenditure of CZK 162 million, of which EU grant of CZK 65 million).

Chart 17.5.1 – R&D expenditure in CZ-NACE 27 (CZK million)

Government+universities Number of enterprises Entrepreneurs EU+other international organisations 3 799 160 4 000 11 3 351 3 500 140 3 036 25 3 000 33 120

2 500 100 2 049 1 882 2 000 35 80 1 619 17 3 734 136 1 402 3 205 127 127 130 1 500 29 2 894 60 122 123 125 21

1 000 1 870 1 752 40 1 476 1 292 500 20

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

Source: CZSO, MIT calculations

17.6 DIVISION SUMMARY AND PROSPECTS

Electrical engineering is typically a subcontracting and assembly industry. It is characterized by a high share171 of value added in production, it processes relatively small volumes of materials, 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. Strong competition forces manufacturers to innovate their products, look for production savings and new trends in the industry. The potential ability of domestic manufacturers to compete with foreign electrical equipment companies, whether on the domestic or foreign markets, is largely determined by the ability to invest in technical development, product innovation and human resources. It is expected that the electrical equipment 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 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. At present, the so-called “shared economy” is also reflected in the electrical equipment industry. Companies are increasingly renting equipment for a limited time. This helps owners use the full potential of their property, while consumers may consume only as much as they need. The electrical equipment industry is a highly globalized industry. In addition to many economic advantages, globalization and the creation of global manufacturing centres have several disadvantages. For example, an earthquake in Asia may delay the manufacture of cell phones due to the production of diodes or other components, which has mostly been moved to Taiwan, or would cost several times more elsewhere. The Czech Republic as a member of the European Union is influenced by its policies. In late 2017, in the context of climate protection, the industry-led EU Battery Alliance was created (including some companies operating in the Czech Republic, such as HE3DA, Saft), involving companies from the whole battery production value chain. The availability of state-of-the-art battery types is the key issue for the competitiveness of EU industry. Other added value of European batteries should include sustainable raw material extraction, production, take-back of old batteries, their recycling or re-use. Experts estimate that battery prices will fall by up to 70% within 15 years. At present China is the largest manufacturer of 17.6 DIVISION SUMMARY AND PROSPECTS

Electrical engineering is typically a subcontracting and assembly industry. It is characterized by a high share of value added in production, it processes relatively small volumes of materials, 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. Strong competition forces manufacturers to innovate their products, look for production savings and new trends in the industry. The potential ability of domestic manufacturers to compete with foreign electrical equipment companies, whether on the domestic or foreign markets, is largely determined by the ability to invest in technical development, product innovation and human resources.

It is expected that the electrical equipment 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 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.

At present, the so-called “shared economy” is also reflected in the electrical equipment industry. Companies are increasingly renting equipment for a limited time. This helps owners use the full potential of their property, while consumers may consume only as much as they need.

The electrical equipment industry is a highly globalized industry. In addition to many economic advantages, globalization and the creation of global manufacturing centres have several disadvantages. For example, an earthquake in Asia may delay the manufacture of cell phones due to the production of diodes or other components, which has mostly been moved to Taiwan, or would cost several times more elsewhere.

The Czech Republic as a member of the European Union is influenced by its policies. In late 2017, in the context of climate protection, the industry-led EU Battery Alliance was created (including some companies operating in the Czech Republic, such as HE3DA, Saft), involving companies from the whole battery production value chain. The availability of state-of-the-art battery types is the key issue for the competitiveness of EU industry. Other added value of European batteries should include sustainable raw material extraction, production, take-back of old batteries, their recycling or re-use. Experts estimate that battery prices will fall by up to 70% within 15 years. At present China is the largest manufacturer of batteries, which produces 55% of the batteries in the world. Another big battery market is being created in the US. According to the European Commission, by 2030 every third vehicle in Europe will have zero emissions, i.e. an electric drive. InnoEnergy SE estimates that by 2025 the European battery market can reach EUR 250 billion.

All of these expected trends provide an opportunity that European industry should not miss.

172 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 DIVISION CHARACTERISTIC

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.

An important part of the Czech manufacturing industry is CZ-NACE 28 Manufacture of machinery and equipment n.e.c. It covers a very wide range of equipment that subject materials to mechanical or thermal effects or perform manufacturing processes on materials (e.g. handling, spraying, weighing or packing), including the manufacture of components that produce and use 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. The division also covers the manufacture of special equipment for passengers or freight. The development, production, sale and export of CZ-NACE 28 equipment is an indicator of the state and further development of the Czech economy.

The division is dominated by large and medium-sized enterprises. Large enterprises account for about 50% of revenues, value added and employees. Medium-sized enterprises had a share of about one third. The rest are small enterprises.

The most important group is group 28.2, which accounts for more than one-third of the selected indicators in the division, with the exception of the number of units, which make up nearly two-thirds. Other large groups in terms of the number of enterprises are 28.1 and 28.9, others are less significant (Table 18.1.1).

Table 18.1.1 – Shares of groups in CZ-NACE 28 in 2017 (%, division = 100%)

Group Personnel Value Own Assets Number of Number of Revenues Net turnover CZ-NACE costs added capital total employees units

28.1 24.3 22.6 23.5 24.0 28.6 28.2 23.8 10.9

28.2 35.4 39.1 39.9 38.8 37.1 32.8 35.2 61.7

28.3 6.0 6.1 6.2 6.9 5.5 5.9 6.5 5.3

28.4 9.9 9.2 8.0 8.1 9.7 9.3 9.6 4.7

28.9 24.4 23.0 22.5 22.2 19.1 23.7 24.8 17.4 Source: CZSO data, 2017 MIT calculations

173 18.2 DIVISION DEVELOPMENT

An important representative of the economically successful group 28.2, which has the largest share of revenues for own products and services of the whole division, is class 28.25 Manufacture of non-domestic 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, 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 International Institute of Refrigeration, which provides the Member States with the latest knowledge in the fields of: cryotechnology, gas liquefaction and separation, heat and mass transfer, refrigeration equipment, cryobiology, cryomedicine, food technology, refrigerators and freezers, refrigerated land transport, air conditioning, heat pumps and energy recovery.

One of the major suppliers and exporters of engineering products is ALTA Invest, a.s., which supplies technological equipment for mechanical engineering, metallurgy, power engineering, mining and building materials industry. ALTA Invest owned the assets of Czech machine tool makers, which it has gradually sold. The last sale took place in January 2018, when the engineering company Toshulin from the Alta group bought the manufacturing company TOS Kuřim – OS, a.s. together with ČKD Blansko – OS, a.s.

Zetor, the traditional Czech producer of tractors, has won a huge EUR 0.5 billion contract in Russia. The company will supply six thousand Forterra tractors from 2018 to 2022. Zetor agreed on cooperation with the Russian company Kovrov Electro Mechanical Plant. Its subsidiary Zetor Engineering has been engaged in the development of military technology since 2014. Now it is working on a platform for highly mobile track and wheeled vehicles, which it presented at International Fair of Defense and Security Technology in Brno.

The global turbine market suffers from overcapacity and a drop in prices. Pilsen producer Doosan Škoda Power, s.r.o. has successfully returned to the African market. It delivers a 150-megawatt steam turbine to modernize a gas-fired power plant in Nigeria. The company also returned to Southeast Asia some time ago. It works with Chinese partners on some Asian projects.

The Vítkovice Machinery Group has achieved positive results (as do most companies in the group), especially Vítkovice Heavy Machinery. At present, the holding is stabilized, but the balance is fragile because of great dependence on banks. The group is trying to find a strong international partner.

18.3 MAIN ECONOMIC INDICATORS

In 2008–2010 the number of units grew, while the number of employees declined (Chart 18.3.1). In the following years, until 2017, both indicators again showed a contradictory development, with the number of units declining as the number of employees grew. Added value and sales saw a decline in 2009 and then continued to grow, with the exception of revenues in 2016. The average wage increased steadily throughout 2008–2017. With some exceptions, labour productivity grew and reached its maximum in 2017.

The development of the price index (Chart 18.3.2) showed stagnation or very modest growth in 2008–2017.

For most years, the Spread in the division was negative, including 2017 (Chart 18.3.3). Spread turned positive in 2012, 2014 and 2015, driven by return on equity.

In 2017 only group 28.2 had a positive economic value added. Other groups showed negative EVA values. In 2017, the whole division as well as all groups saw a year-on-year decrease in EVA of a total of CZK 3.3 billion.

174 18. CZ-NACE 28 MANUFACTURE OF MACHINERY AND EQUIPMENT N.E.C. billion. The decrease was due to a drop in Spread (lower ROE and increase in risk). ROE was negatively Theaffected decrease by EBIT/Assets. was due to a drop in Spread (lower ROE and increase in risk). ROE was negatively affected by EBIT/Assets. Further data is available on the MIT website in an interactive viewer of economic indicators Further(https://www.mpo.cz/en/panorama data is available on the MIT -websiteinteractive in -antable.html interactive). viewer of economic indicators (https://www. mpo.cz/en/panorama-interactive-table.html ).

Chart 18.3.1 – Major 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 5 194 128 087 125 200 5 055 124 843 121 872 4 869 120 528 118 686 117 536 117 197

2 000 111 668 40 000

1 000 20 000

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

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

250 000 50 000

200 000 40 000

150 000 366 594 30 000 340 118 65 592 339 333 65 277 64 108 327 175 62 767 60 256 307 025 97 709 306 152 58 346 93 051 296 736 92 376

91 418

54 973 54 558

279 981 84 148

80 144 77 823

74 524

49 053 254 992 48 638

100 000 70 098 20 000 66 661 239 221 31 114 29 447 28 246

50 000 10 000 27 750 26 834 26 461 25 177 24 312 23 515 23 471 0 0 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Source: CZSO, MIT calculations * This is an aliquot monthly share computed from annual data

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

120 20

110 15 100

10 90

80 5

70 0 60

50 -5 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 28 106,6 108,5 106,8 107,0 107,9 108,8 109,5 109,5 109,6 110,4 -10 28.1 104,5 105,3 102,7 103,5 106,8 107,6 107,3 106,7 105,6 105,0 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 28.2 108,1 110,8 109,0 109,4 109,3 110,4 112,5 112,8 112,5 113,0 Spread -5,58 -7,52 -1,93 -0,70 2,42 -0,43 2,89 2,38 -1,40 -3,27 28.3 101,6 104,1 104,0 105,1 105,4 104,1 104,0 105,3 109,0 115,2 rf 4,55 4,67 3,71 3,79 2,31 2,26 1,58 0,58 0,43 0,98 28.4 104,4 104,9 104,9 104,4 104,4 106,8 108,4 108,5 108,7 108,9 ROE 10,73 7,71 12,29 12,56 13,47 10,63 13,84 12,16 7,98 6,44 28.9 108,2 109,9 108,0 107,4 107,1 107,3 106,3 106,5 108,1 109,9 re 16,31 15,23 14,22 13,26 11,05 11,06 10,95 9,78 9,39 9,71

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

175 18.4 FOREIGN FOREIGN TRADE TRADE

18.4.1 DEVELOPMENT OF 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. For the whole Foreignperiod 2009trade into CZ-CPA2017, 28the products balance showed of foreign a steady trade growth was positive, in both exports growing and at imports. the end For of the the whole period period and 2009 to 2017, the balance of foreign trade was positive, growing at the end of the period and peaking in 2017. Graduallypeaking in increasing 2017. Gradually export volumes increasing of CZ-CPA export 28 volumesproducts areof CZindicative-CPA 28 of products the continuous are indicative improvement of the of thecontinuous quality, technicalimprovement level ofand the competitiveness quality, technical of levelthe products and competitiveness (Chart 18.4.1). of the products (Chart 18.4.1).

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

495 355

473 572 200 000

444 202

416 506

376 372

350 663 343 823 338 839 335 796 332 153 310 036

100 000 281 622 255 054 247 104 244 093 240 350 196 898 170 917 151 532 84 724 141 419 95 446 105 363 73 176 121 319 103 558 0 106 471 2009 2010 2011 2012 2013 2014 2015 2016 2017

Source: CZSO, data as of 9 May 2018

18.4.2 18.4.2 TERRITORIAL S TRUCTURESTRUCTURE OF OFFOREIGN FOREIGN TRADE TRADE

The mainmain trading trading partner partner in inCZ-CPA CZ-CPA 28 commodities28 commodities in 2017 in 2017 was Germanywas Germany (Chart (Chart 18.4.2). 18.4.2). Exports Exports were evenly were distributedevenly distributed – diversified – diversified from Slovakia from Slovakiato the USA. to theImports USA. also Imports showed also good showed diversification good diversification in other countries. in other countries. Chart 18.4.2 – Foreign trade in CZ-CPA 28 products Chart 18.4.2 – Foreign trade in CZ-CPA 28 products Import territories in 2017 Export territories in 2017 Import territories in 2017 Export territories in 2017

other other 36% 26% other other Germany 36% Germany 26% Germany38% Germany33% France 38% 33% 3% France USA A3%ust ria 4% USA Slovakia 3% USA Austria Japan China 4% 5% Poland 4% Italy Italy FranceSlovakia 3% USA 6% China8% 4% Japan 8% 4% 5% 5% Poland 4% Italy Italy France 6% 8% United 4% 8% 4% Spain 5% Poland Kingdom Spain4% United 4% 5% 4% Poland Kingdom 4% 5% Source: CZSO, data as of 9 May 2018 Source: CZSO, data as of 9 May 2018

18.5 RESEARCH RESEARCH AND AND DEVELOPMENT DEVELOPMENT In 2016, R&D expenditures amounted to CZK 3,956 million, ranking CZ-NACE 28 among the largest divisions inIn the2016, manufacturing R&D expenditures industry. amounted Compared to toCZK 2010, 3,956 total million, R&D rankingexpenditures CZ-NACE increased 28 among in this the division largest by divisions almost 58in the%. Sincemanufacturing 2012 there industry. is has been Compared a gradual to 2010, decline total in nationalR&D expenditures public funds, increased which hasin thisbeen division offset by almost 58 %. Since 2012 there is has been a gradual decline in national public funds, which has been offset

176 18. CZ-NACE 28 MANUFACTURE OF MACHINERY AND EQUIPMENT N.E.C. an increase in business resources. The share of researchers in the surveyed division in the total number of researchers in the manufacturing industry sectors is less than 14.9 %, i.e. 1,172 researchers per year (average for 2010–2016).

The companies that received in 2004–2017 a significant amount of special-purpose State support within the national programmes of the Ministry of Industry and Trade (IMPULS, TIP, TRIO) and Technical Assistance of the Czech Republic (Alfa, Competence Centres and Epsilon) include TOS KUŘIM - OS, a.s.; ZKL Brno, a.s.; Jihostroj a.s.; Poličské strojírny a.s.; AMF Reece CR, s.r.o.; Doosan Škoda Power s.r.o. a TAJMAC-ZPS, a.s. In this division, there are 6 companies participating in Horizon 2020 projects, of which 3 are participating in two projects at the same. From this point of view, the division can be considered successful. These companies are Doosan Škoda Power s.r.o., (projects TURBO-REFLEX and FLEXTURBINECCC), M a v e l, a.s. (projects MOTOR and EXPERTISE) and Jihostroj a.s. (projects PROPCONEL and ARGOS). Three other companies are involved in one project: FERRAM STROJÍRNA, s.r.o. (project CloudiFacturing); ZETOR TRACTORS a.s. (project DataBio); FOTON, s.r.o. (project AVA).

Within the National RIS3 Strategy, the manufacture of machinery and equipment is an R&D area that receives most aid. In the period 2015–October 2017, 265 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 4.86 billion, of which CZK 2.05 billion is an EU grant. The aid is for introducing enterprise innovations, product and process (44 %), creating new applied research results (30 %), and creating new, expanded or upgraded research centres (20 %). The aid is mainly aimed at strengthening the R&D capacity of enterprises (80 %) and, to a lesser extent, the cooperation between research organizations and enterprises (15 %). Most projects fall within the application sector Mechanical Engineering and Mechatronics (94 %).

In the reference period, projects for the manufacture of machines and equipment were submitted by large enterprises as well as SMEs. As regards European aid for applicants/beneficiaries, largest EU aid for SMEs was granted to EVECO Brno, s.r.o. from the Southern Moravian Region (project EULALIE – Modern and eco- friendly energy source for fuel mix, total expenditure of CZK 158 million, of which EU grant of CZK 99 million); largest EU aid for large enterprises was granted to VALEO Heat exchanger s.r.o. from the Central Bohemian Region (project Introduction of a new production of EGR coolers in the company, total expenditures of CZK 380 million, of which EU grant of CZK 95 million).

Chart 18.5.1 – R&D expenditure in CZ-NACE 28 (CZK million)

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

Source: CZSO, MIT calculations

18.6 DIVISION SUMMARY AND PROSPECTS

One of the important parts of Czech general mechanical engineering is energy engineering, which is 177 currently experiencing development due to increasing global demand for energy. Energy engineering includes the production and supply of equipment across a wide range of industries across general engineering, from the production of turbines, fittings, compressors and pumps to lifting and handling equipment. The involvement of Czech power equipment manufacturers in supplier consortia is often easier if they are owned by multinational companies which, through their connections and influence, open the way to foreign contracts. At the same time, many purely Czech companies are successful exporters of energy equipment thanks to the many years of tradition and rich references. The manufacture of non-domestic cooling and ventilation equipment is a class with 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 the consumer, air-conditioning ensuring building comfort, pharmaceutical production and health care, low temperature and gas liquefaction techniques or 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 limiting factors of further development include the shortage of workers in most companies, which causes overload of production capacities. This also contributes to the development of automation, digitization and faster adoption of new technologies in mechanical engineering as well. One of the important trends in mechanical engineering is also the rapid development of new types of materials and production technologies.

18.6 DIVISION SUMMARY AND PROSPECTS

One of the important parts of Czech general mechanical engineering is energy engineering, which is currently experiencing development due to increasing global demand for energy. Energy engineering includes the production and supply of equipment across a wide range of industries across general engineering, from the production of turbines, fittings, compressors and pumps to lifting and handling equipment.

The involvement of Czech power equipment manufacturers in supplier consortia is often easier if they are owned by multinational companies which, through their connections and influence, open the way to foreign contracts. At the same time, many purely Czech companies are successful exporters of energy equipment thanks to the many years of tradition and rich references.

The manufacture of non-domestic cooling and ventilation equipment is a class with 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 the consumer, air-conditioning ensuring building comfort, pharmaceutical production and health care, low temperature and gas liquefaction techniques or 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 limiting factors of further development include the shortage of workers in most companies, which causes overload of production capacities. This also contributes to the development of automation, digitization and faster adoption of new technologies in mechanical engineering as well. One of the important trends in mechanical engineering is also the rapid development of new types of materials and production technologies.

178 19. CZ-NACE 29 MANUFACTURE OF MOTOR VEHICLES, TRAILERS AND SEMI-TRAILERS 19. CZ-NACE 29 MANUFACTURE OF MOTOR VEHICLES, TRAILERS AND SEMI-TRAILERS

19.1 DIVISION CHARACTERISTIC

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 share in the manufacturing industry, revenues, number of employees and exports are steadily rising. Large businesses are typical for this segment and make up about 95%.

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. For example, in 2017, Barum Continental produced 20.4 million tyres for passenger cars, roughly 1.28 million tyres for trucks and another 125 thousand industrial tyres (the Czech Republic was the 11th largest tyre exporter in 2017; we were down 1 place year-on-year, while Spain increased production). AGC Automotive Czech a.s. has produced a record-breaking 32 million auto glasses and is one of the largest auto glass plants in Europe. Vehicle light manufacturers (Hella CZ, s.r.o., Automotive Lighting, s.r.o., Varroc Lighting Systems, s.r.o., Koito Czech, s.r.o. and since April 2017 also Mobis Automotive Czech s.r.o.) produced approximately 20 million pieces. The Czech Republic became the largest supplier of components for German car makers in 2017; the Czech imports of car parts were, for the first time in history, higher than those from Spain.

In terms of sales of new vehicles, customers bought over 271 thousand new passenger cars, 19.4 thousand light commercial vehicles, 804 buses and 10 thousand trucks. Imports of used vehicles grew to 170 thousand passenger cars and 11 thousand light commercial vehicles.

In the year 2017, 750 thousand used passenger cars were sold in the Czech Republic, which represents an increase of more than 7% compared to 2015. At the average price of CZK 202,400 per vehicle, the total volume of the used car market was almost CZK 152 billion. The number of used car vendors in the Czech Republic is declining. According to the Association of used car vendors, 67 vendors ceased their activity and their number thus dropped below 300.

The number of vehicles in the Czech Republic again grew, reaching over 5.59 million passenger cars, 561,000 light commercial vehicles, 20.8 thousand buses and 186,000 trucks (in the EU in 2015 there were 256 million passenger cars, 38 million light commercial vehicles, 820,000 buses and 36 million trucks).

179 In terms of State revenues, CZK 202 million was collected for registration of passenger cars with EURO 2 and older emission standards. The collection of fuel consumption tax for the last six years increased by more than CZK 11 billion to CZK 91.7 billion. The consumption of transport energy sources has continued to grow. In 2017, for example, the Czech Republic registered the sales of 1,601 thousand tonnes of gasoline, 4 ,897 thousand tonnes of diesel, 67.7 million m3 of CNG, and electric car owners charged more than 1 GWh.

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). In the Czech Republic, over 185,000 motor vehicles (passenger cars, trucks and buses) were disposed of in eco-friendly manner in 2017. Over 36,000 tons of worn tyres were delivered for further treatment (members of the Eltma collective system). Car batteries also represent an important commodity (Kovohutě Příbram nástupnická a.s. recycled over 58 tons of lead batteries). In Germany, 2,000 tonnes of car batteries are processed annually from car wrecks, as well as 1 thousand tonnes of glass and 9.5 thousand tonnes of tyres (half is recovered as energy). Also, electromobility will increasingly reflect in the growing demand for processing recycling capacities. China estimates that it will be necessary to process up to 170,000 tonnes of battery waste in 2018.

The most significant group in the division is 29.3, which accounts for more than 53 % of revenues, net turnover, value added and total assets. It even accounts for three quarters of all the persons employed and two thirds of the personal costs in the segment (Table 19.1.1). This is a division with one of the largest shares of large businesses in revenues (95%), value added (94%) and the number of employees (89%).

Table 19.1.1 – Shares of groups in CZ-NACE 29 in 2017 (%, division = 100%)

Personnel Value Own Assets Number of Number of Group CZ-NACE Revenues Net turnover costs added capital total employees units

29.1 29.5 48.7 45.8 46.1 56.1 47.6 21.7 8.2

29.2 1.6 1.0 0.8 0.7 0.9 0.9 2.0 16.6

29.3 68.7 50.3 53.4 53.1 43.0 51.6 76.2 75.7 Source: CZSO data, 2017, MIT calculations

19.2 DIVISION DEVELOPMENT

The automotive industry has a rich history. For example, we can mention 155 years since the foundation of Brano Group a.s. (25 years since its privatization), 120 years since the production of the vehicle NW Präsident (the first factory mass-produced car in the Czech Republic), 110 years since the first bus service started in our country, 111 years since the start of production of cars in Liberec by Christian Linzer, 110 years since the establishment of Reichenberger Automobile Fabrik, 95 years since the start of the WIKOV car production, 90 years since the start of production of AERO ENKA cars and the renaming of “Kopřivnická vozovka” to Tatra a.s., 70 years since the end of Walter car production, 60 years since the end of production of buses in Tatra, 50 years since the death of one of the most important automotive designers of the 20th century, Hans Ledwinka, 45 years since the production of Škoda RTO buses and Praga V3S trucks in Avia Letňany, 30 years since the start of production of Škoda Favorit, 25 years since joint venture Motorpal - Robert Bosch, founding of companies such as Fehrer Bohemia s.r.o., Johnson Controls Automobilové součástky, k.s., Witte Nejdek, 10 years since Continental AG bought Siemens VDO production plants (thus becoming the second largest employer in the automotive industry in the Czech Republic).

We have also recorded sales or production milestones, namely: Škoda produced the 20 millionth car and the 10 millionth gearbox. Škoda Auto started producing Octavia in Algeria. For the first time in history, Škoda’s worldwide supplies exceeded 1.2 million vehicles (for the fourth consecutive year, more than 1 million vehicles per year were delivered to customers).

180 19. CZ-NACE 29 MANUFACTURE OF MOTOR VEHICLES, TRAILERS AND SEMI-TRAILERS

In 2017, the automotive industry faced a shortage of skilled workers, especially in technically oriented fields (in the Czech Republic there were over 200,000 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. Also, the number of new graduates is insufficient. Due to the lowest unemployment in the Czech Republic in the last few years, companies have been increasing wages and are trying to recruit 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. Companies also face a lack of drivers, 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 both in terms of qualifications and language barriers. A partial solution is to accelerate the issuing of work permits to foreigners.

Despite the drop in production in Germany by 100 thousand vehicles where the Czech Republic exports one third of components, there was no decrease in revenues or exports. Czech manufacturers have been able to increase exports to the EU and beyond.

In the EU, 2.5 million people were employed in the automotive industry in 2016, most of them in Germany (over 857 thousand), followed by France (216 thousand) and Poland (187 thousand). Czech Republic with 168 thousand placed 5th (up 1 place year-on-year, overtaking Great Britain).

19.3 MAIN ECONOMIC INDICATORS

The long-term trend in 2008–2017 of all economic indicators is unique among the divisions of the manufacturing industry (Chart 19.3.1). However, revenues and value added of the indicator “stumbled” in 2009. The number of employed persons declined not only in 2009 but also in 2013. The average wage grew steadily throughout the period and reached very high values. According to the annual report of the Automobile Industry Association, in 2017 the average wage of its members reached CZK 37,399 (up by 7.1 % year on year, i.e. CZK 2,466). This is 30% more than the national average. For example, in 2017 the average gross wage in VW Bratislava was 1,854 euros, in PSA Trnova it was 1,485 euros, and in KIA Slovakia it was 1,354 euros. In the US, the average hourly wage in the automotive industry was USD 21.68.

The price indices of the division and all its groups are below the 2005 level (excluding 29.2 in 2015 and 2016, but 29.2 has a small weight in the division, Chart 19.3.2). The decisive development is in groups 29.1 (where prices, with the growth rates in recent years, did not reach 2005 levels in 2017) and 29.3. The price index was influenced not only by the development of new car prices but also by type composition.

The development of the Spread, i.e. the efficiency of the division, is very good, reaching positive values since 2010, although its value has been decreasing in recent years (Chart 19.3.3). The main reason behind

Spread’s development is the ROE development and lower risk (re).

The year-on-year development of economic value added is slightly positive when its value rose by 2.5% in 2017. In terms of individual groups, it is positive that the EVA of all groups is positive. Groups 29.1 and 29.2 recorded EVA growth, only group 29.3 caused a drop in the EVA of the division. Although the value of Spread declined, causing a slight decrease in EVA, the value of investments (equity) rose and outweighed the negative effect of Spread. Concerning the changes in sub-indicators, the increase in risk-free rate and a decrease in margin had a negative effect. Their negative impact outweighed the growth in investment and asset turnover.

Further data is available on the MIT website in an interactive viewer of economic indicators (https://www. mpo.cz/en/panorama-interactive-table.html).

181 Further data is available on the MIT website in an interactive viewer of economic indicators (https://www.mpo.cz/en/panorama-interactive-table.html).

Chart 19.3.1 – Major 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

800 120 000

100 000

600 1 292 1 256

1 209 80 000 173 349 1 126 1 125 1 114 1 105 165 721 1 061 157 038 947 1 004 154 510

60 000 146 577 141 337 141 247 400 140 861 137 568 133 803 40 000 200 20 000 0 0 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

1 400 000 140 000 Sales (CZK m) Value added (CZK m) Average monthly wage (CZK) 1 200 000 120 000 Labour productivity from the VA (CZK/month)*

1 000 000 100 000

800 000 80 000

600 000 60 000

1 317 033

1 213 648

109 074 107 715 1 112 577

99 444 101 186 400 000 993 344 40 000 84 173 226 797

832 894 77 941 77 345 213 190 77 251 785 487 189 724 749 524 173 946 691 175 141 506 62 388 61 243 131 342 130 463 126 729 627 041 113 081 99 728

200 000 578 570 20 000 34 878 24 622 25 368 26 697 27 535 28 565 29 511 30 470 31 450 32 718 0 0 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Source: CZSO, MIT calculations * This is an aliquot monthly share computed from annual data

Chart 19.3.2 – Price development of CZ-CPA 29 Chart 19.3.3 – Spread (ROE – re) CZ-NACE 29 (in %) (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 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 29 90,6 91,0 86,6 84,9 85,3 86,8 90,1 89,7 87,8 85,7 Spread -5,88 -9,71 1,58 6,02 4,55 2,12 10,63 14,92 12,32 11,73 29.1 93,5 85,4 81,9 79,4 78,3 77,8 78,4 80,7 82,2 83,6 rf 4,55 4,67 3,71 3,79 2,31 2,26 1,58 0,58 0,43 0,98 29.2 96,3 96,5 93,6 95,4 97,3 97,6 99,6 100,2 100,0 99,7 ROE 8,98 5,61 13,91 17,99 14,76 13,04 19,20 22,69 19,06 18,41 29.3 88,6 91,6 86,9 85,2 86,2 88,1 92,2 91,1 88,3 85,3 re 14,86 15,32 12,33 11,97 10,21 10,92 8,57 7,77 6,74 6,68

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

182 19. CZ-NACE 29 MANUFACTURE OF MOTOR VEHICLES, TRAILERS AND SEMI-TRAILERS

19.4 FOREIGN TRADE 19.4 FOREIGN TRADE

19.4.1 DEVELOPMENTDEVELOPMENT O FOF FOREIGN FOREIGN TRADE TRADE

The developmentdevelopment ofof foreign foreign trade trade in in the the commodity commodity CZ-CPA CZ-CPA 29 is29 markedly is markedly positive, positive, posting posting growth growth not only not inonly exports, in exports, but also but in importsalso in andimports foreign and trade foreign balance; trade however, balance; foreign however, trade foreignbalance tradeis comparable balance tois imports,comparable which to imports,is unique which among is theunique division among (Chart the 19.4.1).division (Chart 19.4.1).

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

1 100 000 Export Import Trade balance 900 000

700 000

500 000

1 014 1 014 024 942 462

824 534

300 000

730 704

595 350 559 203 548 923 522 425 509 120 463 767 465 101 423 162 433 342 388 179 401 372 369 265 100 000 361 439 301 016 274 068 285 135 260 482 294 334 261 943 227 727 195 942 192 237 236 040

-100 000 2009 2010 2011 2012 2013 2014 2015 2016 2017

Source: CZSO, data as of 9 May 2018

19.4.2 TERRITORIALTERRITORIAL STRUCTURE STRUCTURE OF FOREIGNOF FOREIGN TRADE TRADE

InIn 20172017 the the largest largest markets markets for for Škoda Škoda were were Germany Germany (173,302), (173,302), Great Great Britain Britain (80,056), (80,056), Poland Poland (66,582), (66,582), Russia (62,302),Russia (62,302), France (27,272),France (27,272), Turkey (24,996), Turkey Italy(24,996), (24,700), Italy Austria (24,700), (24,254), Austria Spain (24,254), (24,230), Spain Israel (24,230), (23,351) Israel and Slovakia(23,351) (21,017).and Slovakia The biggest(21,017). markets The biggest for Hyundai markets (HMMC) for Hyundai in 2017 was(HMMC) Germany in 2017 (45,239 was cars), Germany Great (45,239 Britain (43,963),cars), Great Spain Britain (31,641) (43,963), and ItalySpain (30,270). (31,641) and Italy (30,270). A completecomplete overview overview of of the the territorial territorial structure structure of exportsof exports and and imports imports of CZ-CPA of CZ -29CPA is provided29 is provided in the chartsin the below.charts below.

Chart 19.4.2 Foreign trade in products, CZ-CPA 29 Chart 19.4.2 Foreign trade in products, CZ-CPA 29 Import territories in 2017 Export territories in 2017 Import territories in 2017 Export territories in 2017

other other o29%ther o24%ther Germany 29% 24% Ge34%rman y Germany Hungary 34% Belgium Ge35%rman y Hun4%gar y Be3%lgium 35% Romania4% 3%Italy Rom4%an ia It4%aly 4% Poland 4% Poland France Pol11%an d Slovakia South Korea Pol5%an d France Fr4%anc e Slovakia 11% Slo6%vak ia South6% Kor ea 5% Fr6%anc e 4% Slovakia Spain Spain 6% 8% 6% 6% United 8% Spa5%in Spa5%in KingdomUnited 5% 5% King7%do m 7% Source: CZSO, data as of 9 May 2018 Source: CZSO, data as of 9 May 2018

183

19.5 RESEARCH AND DEVELOPMENT

The automotive industry is also one of the important sectors in research and development. In 2016, R&D expenditures amounted to CZK 7,818 million, accounting for almost 16% of the total R&D expenditures in the Czech Republic. According to CZSO data, total R&D expenditure was up 127 % in this sector compared to 2010. 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 less than 24%, i.e. 1,895 researchers per year (average for 2010–2016).

The companies that received in 2004–2017 a significant amount of special-purpose State support within the national programmes of the Ministry of Industry and Trade (IMPULS, TIP, TRIO) and Technical Assistance of the Czech Republic (Alfa, Competence Centres and Epsilon) include TATRA, a.s., Technic Tube, a.s. (formerly ZKL Hanušovice, a.s.), TESLA BLATNÁ, a.s., BRANO a.s., SVOS, spol. s.r.o. and Škoda Auto a.s. There are four companies involved in Horizon 2020 projects in this sector. Senior Flexonics Czech s.r.o. with the project HEATSTACK, Škoda Auto, a.s. with the project ITEAM, VALEO AUTOKLIMATIZACE k.s. with the project ENABLE-S3 and TRW Automotive Czech s.r.o. with the project STREAM-0D.

The manufacture of motor vehicles (except motorcycles), trailers and semi-trailers is the 3rd most supported R&D area under the National RIS3 Strategy. In the period 2015–October 2017, 40 projects falling within the National RIS3 Strategy were approved under the OP EIC for implementation with planned total support (EU, public and private Czech funds) of CZK 2.33 billion, of which CZK 0.75 billion is an EU grant. Aid is divided into the introduction of product and process enterprise innovations (66%), creation of new, expanded or modernized research centres (20%) and creation of new applied research results (12%). The aid is mainly focused on strengthening R&D capacities of enterprises (95%). 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. Largest EU aid for SMEs was granted to AUFEER DESIGN, s.r.o. from Prague (the project Centre for Industrial Research and Verification of Comprehensive Units through modular technology AUFEER DESIGN, total expenditure of CZK 100 million, of which EU grant of CZK 50 million), and for large companies KOVOVÝROBA HOFFMANN, s.r.o. from the Zlín Region (the project Development of New production processes of complex high-strength car body parts using controlled local modification of technological properties; Introduction of production of a new type of high-strength bodywork; total expenditure of CZK 445 million, of which the EU grant of CZK 123 million).

The Government has approved a statement on strategic cooperation with BMW AG to support the planned construction of a test centre in the Sokolov region. For about EUR 250 million, the company should use Sokolovská uhelná plots to build a test centre for autonomous vehicles, which will create several hundred new jobs, including for top experts.

184 The Government has approved a statement on strategic cooperation with BMW AG to support the planned construction of a test centre in the Sokolov region. For about EUR 250 million, the company should use Sokolovská uhelná plots to build a test centre for autonomous vehicles, which will create several hundred 19. CZ-NACE 29 MANUFACTURE OF MOTOR VEHICLES, TRAILERS AND SEMI-TRAILERS new jobs, including for top experts.

Chart 19.5.1 – Expenditure on research and development in CZ-NACE 29 (CZK million) Government+universities Number of enterprises Entrepreneurs EU+other international organisations 9 000 80 7 818 8 000 7 100 6 70 6 501 6 499 7 000 36 60 54 25 6 000 50 4 610 5 000 3 993 7 40 3 455 73 4 000 4 7 780 69 72 70 71 7 013 61 0 6 398 6 355 30 60 3 000 4 472 20 2 000 3 890 3 377 1 000 10

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

Source: CZSO, MIT calculations

19.6 DIVISION SUMMARY AND PROSPECTS 19.6 DIVISION SUMMARY AND PROSPECTS Czech Republic InCzech terms Republic of manufacturing, the Czech Republic produced a record number of vehicles exceeding 1.4 million motorIn terms vehicles of manufacturing, (up 3.6% year the-on Czech-year) Republic and 24,690 produced trailers a(up record 5.3% number year-on of-year). vehicles Škoda exceeding Auto a.s. 1.4 produced million motor vehicles (up 3.6% year-on-year) and 24,690 trailers (up 5.3% year-on-year). Škoda Auto a.s. produced a record number of 858,103 cars (up 12.5%), Hyundai Motor Manufacturing Czech s.r.o. produced a record a record number of 858,103 cars (up 12.5%), Hyundai Motor Manufacturing Czech s.r.o. produced a record number ofof 356,700 356,700 cars cars (down (down 0.5%), 0.5%), and andToyota Toyota Peugeot Peugeot Citroën Citroën Automobile Automobile Czech s.r.o. Czech (TPCA) s.r.o. produced (TPCA) produced199,078 cars 199,078 (down 9.6%).cars (down The only 9.6%). Czech The truck only manufacturer, Czech truck Tatra manufacturer, Trucks a.s., increased Tatra Trucks production a.s., increased by 11.7% productionto 1,481 units. by 4,63111.7% buses to 1,481 were units. manufactured 4,631 buses in 2017 were (down manufactured 2.9%). Production in 2017 (downof Iveco 2.9%). Czech Produc Republic,tion a.s. of Ivecoreached Czech a record Republic, production a.s. reached of 3,885 a busesrecord (up product 4.2%),ion production of 3,885 of buses SOR Libchavy(up 4.2%), spol. productio s.r.o. droppedn of SOR to Libchavy454 buses spol. (down s.r.o. 38.8%) dropped due toto 454the busestermination (down of 38.8%) supplies due to to the the Prague termination Transport of supplies Company. to theProduction Prague of KHMC, s.r.o. (KH Motor Centrum) increased to 49 buses, involving in particular conversions of vans to Transportbuses (up 4.3%).Company. More Production than 930 trailers of KHMC, and s.r.o1,124. (KH semi-trailers Motor Centrum) for trucks increased were produced to 49 buses,by PANAV, involving a.s. and in particularSCHWARZMÜLLER conversions s.r.o. of In vans addition, to buses AGADOS, (up 4.3%). spol. s.r.o.More sold than over 930 22.6 trailers thousand and 1,124 trailers semi for- trailerspassenger for carstrucks or werelight commercial produced by vehicles PANAV, (most a.s. andin its SCHWARZMÜLLER history). The Czech s.r. Republico. In addition, is the 2nd AGADOS, largest spol.car producer s.r.o. so inld theover world 22.6 thousandon per-capita trailers basis for (after passenger Slovakia) cars and or thelight 15th commercial in the world vehicles in absolute (most interms. its history). The Czech Republic is the 2nd largest car producer in the world on per-capita basis (after Slovakia) and the 15th in the world in absoluteTable 19.6.1 terms. – Production of vehicles in the Czech Republic, 2012–2017

Vehicle category / year 2012 2013 2014 2015 2016 2017 Table 19.6.1 – Production of vehicles in the Czech Republic, 2012–2017 VehiclePassenger category cars and / year light commercial 2012 2013 2014 2015 2016 2017 1,174,267 1,128,473 1,246,506 1,298,236 1,344,182 1,413,881 vehicles Passenger cars and light commercial vehicles 1,174,267 1,128,473 1,246,506 1,298,236 1,344,182 1,413,881 Trucks 1,499 767 821 850 1,326 1,481 Trucks 1,499 767 821 850 1,326 1,481 Buses 3,229 3,691 3,893 4,517 4,388 4,631 Buses 3,229 3,691 3,893 4,517 4,388 4,631 Source: Automotive IndustryIndustry AssociationAssociation (AutoSap) (AutoSap)

As part of the production of car parts, not only in CZ-NACE 29, but also in other related branches, there was As part of the production of car parts, not only in CZ-NACE 29, but also in other related branches, there was an increase in revenues, employment and export, as also confirmed by the Annual Report of the Automobile Industry Association.

185 For the support of low-emission transport, calls for the purchase of alternative fuel vehicles and related infrastructure from the Operational Programme Entrepreneurship and Innovation for Competitiveness (responsible ministry: MIT – only electric vehicles and charging stations for business entities) and the Integrated Regional Operational Programme (MMR – buses, trolleybuses , trams, recharging stations and CNG fillers for transport companies) and the National Programme Environment of the Ministry of the Environment (electric cars, plug-in hybrids and CNG and LPG vehicles for regions, cities and their subordinate organizations). In total, over CZK 3.5 billion was allocated to these calls.

In 2017, the Government approved the Memorandum of the Future and also the Action Plan “Czech Automotive Industry 2025”. It deals with three areas: electromobility, autonomous vehicles and digitization. A total of 25 measures have been proposed as part of the plan, mainly concerning non-emission vehicles, standardization and legal aspects of automated driving, high-speed internet, digital and mobile services, and research and development for the automotive industry.

In 2018, several firms submitted applications for investment incentives. Škoda Auto, a.s., in connection with the full use of its capacity, announced that part of the production will be produced in Osnabrück, Germany. The reason was lack of own production capacity in Europe. The Fabia bodywork for the Mladá Boleslav car factory was painted in this plant. In this context, Škoda also announced the construction of another plant in Europe. Czech companies have long faced shortage of labour and have to reject new orders. For this reason, some companies moved their production capacities abroad. Also, forwarding companies point out that there are no drivers in the Czech Republic, which causes problems in company logistics. Also, truck sales are lower.

European Union Sales of new vehicles in the EU grew year-on-year to 15.14 million units in passenger cars (up 3.4% year- on-year) and to 1.996 million units in light utility vehicles (up 3.3% year-on-year); by contrast, there was a decrease in trucks over 3.5 tons to 368.4 thousand units (down 0.5% year-on-year), while buses remained almost unchanged (almost 41 thousand units). In terms of alternative drive vehicles, 97,571 battery electric vehicles were registered (up 53.7% / 34,092 units). Despite a significant increase, these vehicles account for only 0.6% of total vehicle registrations. Plug-in hybrids saw an increase in sales to 115,405 units (up 28.9% / 25,873 units year-on-year). Vehicles using other alternative fuels (CNG, LPG and biofuels), saw a year-on-year increase in sales to 204,863 vehicles (up 16.4% / 28,824 units year-on-year). In 2017, CO2 emissions of new passenger cars grew year-on-year by 0.4g to 118.1g/km for the first time after 10 years, despite an increase in the share of alternative fuel vehicles (especially electric vehicles and hybrids) to 5%. The increase was due to a drop in sales of diesel vehicles and a significant increase in gasoline vehicles. In 2017, the EU’s vehicle fleet has exceeded 260 million cars and 40 million light utility vehicles.

In terms of foreign trade, the EU has seen another successful year. 5.9 million vehicles were exported, totalling EUR 139 billion, and 3.7 million vehicles were imported. This contributed to positive foreign trade of EUR 90.3 billion.

The following legislative and non-legislative proposals were submitted: - GEAR 2030 final report, which was prepared by representatives of the European Commission, the Member States and the entire automotive sector. It contains a prediction and further direction for the European automotive industry and recommendations for its support towards low and non-emission transport, autonomous vehicles, improving conditions in foreign trade, supporting structural changes in employment, and proposals for measures to support R&D.

- Second mobility package. It contains further CO2 limits for new passenger cars and light utility vehicles after 2020.

– Amendment to Directive 2009/33/EU on the promotion of clean and energy-efficient road transport vehicles (mandatory shares of low-emission and emission-free vehicles for contracting authorities in the purchase of new vehicles)

186 19. CZ-NACE 29 MANUFACTURE OF MOTOR VEHICLES, TRAILERS AND SEMI-TRAILERS

– Action plan for the deployment of alternative fuel infrastructure. The aim is to increase the ambition of national plans, strengthen investment and promote consumer interest in low-emission vehicles.

– Revision of the Combined Transport Directive. Support for combining different modes of transport for freight (e.g. trucks and trains), which will enable companies to more easily apply for incentives. In the transport of goods, the combined use of trucks, trains and ships will be promoted.

– Amendment to Regulation (EC) No 1073/2009 on common rules for access to the international market for coach and bus services, which aims to stimulate the development of long-distance bus lines throughout Europe and to offer alternatives to the use of private cars, thereby further reducing transport emissions and reducing congestion of the road network.

– Assessment of the need to review Regulation (EC) No 1222/2009 of the European Parliament and of the Council on the labelling of tyres with respect to fuel efficiency and other essential parameters. The Commission will review customer awareness of the quality and use of national tyres and may propose a revised Tyre Labelling Regulation within a reasonable period of time.

Worldwide production and sales In 2017, over 97 million vehicles were produced worldwide (up 2.4% / 2.24 million units year-on-year). Since 2010, China has been the largest producer, accounted for over 30% of global production in 2017 (more than 29 million vehicles). The second largest producer was the US with 11.2 million, followed by Japan (9.7 million) and Germany (5.6 million). The Czech Republic dropped 2 places due to a significant increase in production in Russia and Iran. The largest year-on-year increase was seen in China (896,640), Brazil (543,316) and Japan (488,933).

When comparing the years 2017 to 2007, the number of vehicles increased by a third (by 24 million vehicles). China accounts for the largest share, where production increased by 20 million vehicles, followed by India (2.5 million vehicles) and Mexico (2 million vehicles). Conversely, Japan and France saw a decline of 1.9 million and 790 thousand vehicles, respectively. In 2007, the share of world production in the first three countries was as follows: 1. Japan 15.83%, 2. US 14.71%, 3. China 12.12%. In 2017 the share was as follows: China (29.82%), USA (11.50%) and Japan (9.96%). By contrast, the largest drop in production was seen in Canada – 171 thousand, South Korea – 114 thousand and Germany – 101 thousand vehicles.

In terms of sales, China has dominated for several years, as Chinese customers bought more than 29.1 million vehicles in 2017; as a result, its share exceeded 30%. The second largest market was the United States (18.16%, 17.6 million vehicles), followed by Japan (5.4%, 5.2 million vehicles). The European Union contributed 18.17% with 17.7 million vehicles.

In 2017, VW became the largest carmaker when it surpassed 10.74 million of vehicles produced. The second largest was a new alliance Renault-Nissan-Mitsubishi, which produced 10.61 million vehicles, followed by Toyota Motors with 10.47 million vehicles and General Motors (GM) with 9.6 million vehicles.1 Škoda ranks 16th in terms of number of vehicles produced.

A fun fact is that VW produced its 150 millionth vehicle. VW recalled almost 300,000 vehicles affected by the Dieselgate affair from US customers. VW has agreed to spend more than USD 25 billion on the claims of owners, environmental regulators, states and retailers in the United States, and offered a buyback of about 500,000 vehicles in the USA. The buyback will continue until the end of 2019. In Houston, nearly 1 million vehicles were damaged by a hurricane. In Australia, the production of Toyota and GM Holden has ended (after 54 years, Toyota ends the production of cars in Australia, which was the first country outside Japan where the carmaker started production).

1 https://www.statista.com/statistics/275520/ranking-of-car-manufacturers-based-on-global-sales/

187 Car makers also announced the following investments: Hyundai in the US, Ford Motor and Anhui Zotye Automobile in China and VW in China.

Perspectives In early 2018, the sales of passenger cars in the EU continued to rise. For the whole year, moderate growth or stagnation in sales of new vehicles is expected. The resulting agreement on Brexit and import conditions from the EU to Great Britain will be significant for the Czech Republic. In 2017, the Czech Republic exported over 180 thousand vehicles (about 15% of our production) to the UK. Also, export of car parts is not negligible.

Alco crucial are negotiations between the US and the EU on the proposed tariffs on the import of European vehicles into the US. For the EU, the US is the largest market, especially for German vehicles. Any drop in exports to the US will be felt mainly by Czech suppliers of auto parts. Predictions of US vehicle sales also point to stagnation in 2018. One of the problems may be that by the end of 2017 car debt in the US amounted to USD 1.2 trillion, up USD 400 billion from 2008, and this amount is steadily rising.

From 1 July 2018, China will reduce the import duty on most cars to 15% from the current 25%. Import duties on car parts will also be lower, as announced by the Chinese Ministry of Finance. This step will help mainly manufacturers of premium cars such as BMW, Mercedes-Benz and electric car manufacturers. The Czech Republic has virtually no car exports to China, unlike neighbouring Slovakia (about every 9th car from VW Bratislava was exported to China).

In terms of employment, the shortage of workers is continuing in virtually all sectors. Workers are headhunted, wages rise and benefits are offered to both new and existing employees. The Government is trying to attract workers from abroad, specifically from Ukraine, Mongolia or Vietnam. Therefore, companies are increasingly installing robots. In the Czech Republic, there were only 101 robots per 10 thousand employees in 2016. In Germany the number is 3 times as high. In 2016, automotive companies installed around 103,300 robots worldwide (35% of global supplies). In 2017, industrial robot installations are estimated at about 350 thousand, of which about 35% will be used in the automotive industry.

Legislation lays down new CO2 emission limits for passenger cars and light utility vehicles, and newly for trucks (“third transport package”). The resulting text of the Regulation will have a significant impact on the domestic and European automotive industry. The proposal for a 15% share of electric cars and hybrids in 2025 would mean producing approximately 2.4 million of these vehicles. The production of electric cars requires fewer people, both in the primary production and aftermarket. It also means less work for the servicing industry (estimates are a reduction of 1 thousand jobs per 1 million electric vehicles).

Following the implementation of the National Action Plan for Clean Mobility (NAP CM), the working groups on electromobility (both battery and hydrogen), CNG, LNG, LPG, continued to meet; at the same time, the update of this NAP was being prepared following the current legislation (e.g. new CO2 emission targets, mandatory allowances for renewable energy in transport, mandatory share of low-emission vehicles, cooperation in cross- border infrastructure construction, roaming and payment interoperability, and technological developments). Another related document is the Action Plan for the Automotive Industry, involving meetings of working groups on electromobility, autonomous driving, education, research and development and digitization. The aim is to support the transition of the Czech automotive industry to low-emission mobility and the introduction of autonomous vehicles into operation.

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

20.1 DIVISION CHARACTERISTIC

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; 30.9 Manufacture of transport equipment n.e.c.

This division includes the manufacture of other means of transport, such as the production of boats and speedboats, the production of rolling stock and locomotives, aircraft and spacecraft and the manufacture of parts thereof, as well as the manufacture of motorcycles, mopeds and bicycles, including electric bicycles, wheelchairs and children’s strollers.

In terms of the share of total employment, revenues and exports, the division is a smaller one. The railway industry already accounts for almost half of the revenues in this division (up 1.3% year-on-year). The aerospace industry has also improved slightly. Conversely, shipbuilding and the manufacture of transport equipment saw a slight decrease. In terms of the number of employees, the most important is railway industry with 44.6%, which represents almost 10 thousand employees (Table 20.1.1).

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 export territories and are also successful in obtaining orders not only for national but especially foreign customers. This way we often follow on from long-term cooperation with foreign customers.

Table 20.1.1 – Shares of groups in CZ-NACE 30 in 2017 (%, division = 100%)

Personnel Value Own Assets Number of Number of CZ-NACE group Revenues Net turnover costs added capital Total employees units

30.1 0.5 0.5 0.7 0.5 0.4 0.6 0.9 18.4

30.2 46.8 47.6 49.1 50.5 55.8 58.0 44.6 7.7

30.3 40.6 38.1 34.1 32.7 27.0 28.3 38.4 10.0

30.4 2.6 4.3 3.8 3.6 7.0 5.4 2.7 0.7

30.9 9.4 9.5 12.4 12.7 9.9 7.6 13.4 63.3 Source: CZSO data, 2017 MIT calculations

Significant enterprises within CZ-NACE 30.1 are: BARKMET a.s., which specializes in the construction and production of steel vessels. It offers welding of metal structures and piping, and plasma cutting. It also manufactures container ships, chemical tankers, towing tugs, pontoons, yachts, floating houses etc. The company ČESKÉ LODĚNICE, a.s., which has been on 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

189 has shipyards in Děčín-Křešice. Marine Sport, s.r.o. deals with the sale of boats, motorboats, inflatable boats, marine engines, marine accessories and yachting accessories. Furthermore, it specializes in warranty and post-warranty service.

CZ-NACE 30.2 is represented by ŠKODA TRANSPORTATION a.s. with its products being on the market for more than 150 years. Today, ŠKODA TRANSPORTATION focuses on the production of vehicles for public transport and railway. CZ LOKO, a.s., ŠKODA VAGONKA a.s., ČKD KUTNÁ HORA, a.s., 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.

In CZ-NACE 30.3, the largest companies are AERO VODOCHODY AEROSPACE a.s., ZODIAC GALLEYS EUROPE S.R.O., HONEYWELL AEROSPACE OLOMOUC s.r.o., LETOV LETECKÁ VÝROBA s.r.o. – the oldest aviation producer in the Czech Republic, EVEKTOR, spol. 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.

CZ-NACE 30.9 is represented by companies such as: BOHEMIA BIKE, a.s., the manufacturer of the Czech bicycle brand Leader Fox, DAMA SPORT, s.r.o. (CONDOR bicycles) – production of bicycles for children and adults. Shimano Czech Republic, s.r.o., production of bicycle components. Other well-known companies are: JAWA MOTO spol. s r.o. - the oldest existing Czech company that has been producing motorcycles since 1929, producer of road or off-road motorcycles, D-ANA s.r.o., JRM DIVIŠOV – production, BLATA, s.r.o. – sale of speedway motorcycles and spare parts. Other manufacturers of motorcycles are e.g. KUBERG s.r.o. and BLATA, s.r.o. (also quadbikes).

20.2 DIVISION DEVELOPMENT

Manufacturing in this division has a historical tradition in our country. In 2017 we celebrated, for example, 200 years since the premiere of a bicycle boat designed by Josef Božek, 195 years since the founding of the Prague Shipping Company, transporting the goods on the Prague line, 165 years since the founding of the production of railway wagons in Smíchov by František Ringhoffer II. (later called ČKD Tatra Smíchov), 145 years of operations of Krnovské engineering and repair shop and Legios, 135 years since the start of production of trucks in Tatra Kopřivnice, 125 years of rack rail from Tanvald to Harrachov, 120 years since commencement of tram operation in Liberec, 95 years since the start of production of bicycles in Rokycany (factory later called Favorit), 85 years since the start of production of moto-bicycles in the former CZ Strakonice, 80 years of Prague Ruzyně Airport (now Václav Havel Airport Prague), 70 years since the first flight of Z 26, 65 years since the establishment of Jihlavan a.s., 60 years since the establishment of the Mechanization of Track Management in Prague and MESIT a.s., 50 years since the start of production of chassis in ČKD Kutná Hora, 45 years since the end of the MIG 21 licence production and the start of production of the two-seat glider VT-109 Pionýr, 25 years since the establishment of KOSTKA - kolobka, s.r.o. and INTREA - PIKO spol. s r.o., 20 years since the establishment of 4EVER, s.r.o. and REMERX s.r.o., VELOSTEEL TRADING, a.s., JAWA Moto spol. s r.o., and since the end of the T3 tram production, 20 years since the establishment of Honeywell Aerospace Olomouc s.r.o., and the start of the production of Aero L-159 Alca aircraft, 5 years since the opening of the headquarters of the Agency for the European Global Navigation Satellite System (GSA) in Prague.

This year there was a change of ownership of Škoda Transportation, when CEIL (the sole shareholder of Škoda Transportation, a.s.) sold 100% of Škoda Transportation shares to PPF.

In air racing, for example, Martin Šonka won the races in Abu Dhabi (1st place), Porto (1st place), Lužice (1st place), Indianapolis (4th place), Chiba (3rd place). place), Petr Kopfstein in Chiba (2nd place), Kazan (4th place) and Indianapolis (5th place).

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

Fun facts in this division are for example - the testing of the Coradia trainset using hydrogen as a fuel on the test circuit of the Railway Research Institute in Velim, - the start of construction of a test polygon to test modern security technologies being developed by AŽD, - the construction of a new CZ LOKO chassis plant, - IRIS certification of ZKL, a bearings manufacturer (specification of requirements for the quality management system of manufacturers of components for the railway industry). The certification is supported by the largest manufacturers in the industry. - As the only company in Europe, ČKD Kutná Hora a.s. has received a certification as a supplier of welded parts “Transportation and Power Generation Accreditation Program”. - The first Czech technology nano-satellite VZLUSAT1 was taken to the Earth’s orbit via the Indian rocket PSLV-C38 (Polar Satellite Launch Vehicle). Its mission is to test new products and technologies on Earth’s orbit. The satellite was developed by the Research and Testing Aviation Institute (VZLÚ) in cooperation with Czech companies and universities. - Czech Sport Aircraft, a.s. has officially marketed its 600th aircraft. - Evektor, spol. s r.o. has successfully completed the audit of the China Civil Aviation Authority to supply lightweight sports aircraft SportStar SL to the local market and to present an electrically powered lightweight aircraft SportStar EPOS at the EXPO Astana in Kazakhstan. - The Czech Republic is the third largest producer of hot air balloons in the EU. - The civilian unmanned airplane Primoco UAV has reached a new record of over 9 hours of continuous flight. - The first electric locomotive EffiLiner 3000 was introduced. - The production of the JAWA 350 OHC motorcycle was commenced and design work on the JAWA TVP 1000 motorcycle continued.

This industry as a whole has seen fluctuations. The increase in the number of units in the division between 2008 and 2017 was influenced by suppliers in the aviation and railway industry and also by the manufacturers of bicycles and electric bicycles. In terms of the number of workers, there was a slight decrease in the number of employees in 2017. The year-on-year drop in revenues of about 10% was influenced by reduced sales in the railway industry, where revenues fell by 20% year-on-year (about CZK 6 billion) and reached the 2010 levels, and air transport, which saw a minimal decrease. By contrast, revenues grew year on year in the shipbuilding and aviation industries.

Concerning shipbuilding, in 2017, for the first time, the revenues of manufacturers of small boats and speed boats outpaced the revenues of those producing large ships, tankers, etc. In the rail industry, revenues dropped due to completion of major contracts in 2016. Deliveries of rolling stock continued, particularly for Central European customers. ZODIAC GALLEYS EUROPE S.R.O. became the largest company in the aviation industry, when it exceeded CZK 5 billion (it manufactures kitchen modules and wardrobes mainly for the Airbus A320 aircraft family). The Czech aviation industry is benefiting from the growth of foreign aircraft manufacturers’ production (in 2017 the US manufacturer Boeing delivered to customers 763 planes – up 15 units year-on- year; Airbus delivered 716 planes – up 30 planes year-on-year). The growth of ultralights continued in both the US and Europe. Concerning the production of two-wheeled vehicles, especially bicycles and electric bicycles, Czech companies benefit from growing demand in Western Europe. The sales of conventional motorcycles and mopeds have been stagnating in recent years, with the largest increase in interest being in electric motorcycles and electric mopeds. Electric scooters are also becoming more and more popular.

20.3 MAIN ECONOMIC INDICATORS

In the years 2008–2017, the number of companies engaged in manufacturing in this sector was constantly increasing. This is mainly due to supplier companies in the aviation and railway industry and we must not forget the manufacturers of bicycles and electric bicycles (Chart 20.3.1). The number of employed persons in 2008–2010 was decreasing. In 2011 the trend reversed and the number of employed persons grew until

191 2016. In 2017, it slightly decreased. Revenues were mostly increasing in 2008 to 2017. However, in 2010 and 2017 they fell. Value added developments have not been so good. Periods of moderate growth were followed by periods of moderate decrease. The highest value was achieved in 2015. Labour productivity has fluctuated, with growth decrease periods, and the value in 2017 is practically at 2008 level. The only indicator with a growth trend (except 2010) was the average wage.

CZ-CPA 30 practically replicates the price development of rolling stock manufacturers, the most significant commodity within CZ-CPA 30 (Chart 20.3.2).

The development of the financial position of the division, characterized by the Spread indicator, shows that this indicator had a significantly negative value in the pre-crisis period in 2008. However, with the onset of crisis in 2009 it turned into black numbers. Spread values were positive until 2016, although with a downward trend, despite fluctuations, which was confirmed in 2017 (Chart 20.3.3). The year-on-year development in the value of economic value added was negative in 2017 compared to 2016.

Further data is available on the MIT website in an interactive viewer of economic indicators (https://www. mpo.cz/en/panorama-interactive-table.html).

Chart 20.3.1 – Major economic indicators of CZ-NACE 30 900 25 000 Number of units Average number of

800 employees 700 20 000 600 15 000

500

400

778 23 198 23 136 22 685

741 10 000 22 024

20 695 20 650 671

650 19 721 300 19 424 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 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

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

40 000

50 000

40 000

30 000

65 107

64 397 79 902 60 446 21 417 59 300 75 310 20 591 57 697 73 017 72 571 18 967 30 000 68 350 52 852 66 471 66 349 16 890 50 966 16 655 64 442 16 238 16 097 20 000 14 445 14 387

59 028 58 682

13 527

43 650

42 915

42 196 20 000 10 000 33 493 30 272 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 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Source: CZSO, MIT calculations * This is an aliquot monthly share computed from annual data Chart 20.3.2 – Price development of CZ-CPA 30 Chart 20.3.3 – Spread (ROE – re) CZ-NACE 30 (%) (2005 = 100%)

120 30

25 110 20

100 15

10 90 5 192 80 0 -5 70 -10

60 -15 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Spread -9,36 10,90 6,37 9,05 7,47 5,48 3,71 3,25 6,70 -5,37 50 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 rf 4,55 4,67 3,71 3,79 2,31 2,26 1,58 0,58 0,43 0,98 30 107,6 109,5 109,3 108,8 108,9 108,4 108,2 107,9 107,6 109,1 ROE 4,66 24,05 23,65 27,47 26,44 24,47 18,66 16,21 17,21 6,30 30.2 108,7 110,9 110,5 109,4 109,3 108,8 108,6 108,3 108,0 109,5 re 14,01 13,15 17,28 18,42 18,98 18,99 14,95 12,96 10,51 11,67

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

Chart 20.3.1 – Major economic indicators of CZ-NACE 30 900 25 000 Number of units Average number of

800 employees 700 20 000 600 15 000

500

400

778 23 198 23 136 22 685

741 10 000 22 024

20 695 20 650 671

650 19 721 300 19 424 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 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

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

40 000

50 000

40 000

30 000

65 107

64 397 79 902 60 446 21 417 59 300 75 310 20 591 57 697 73 017 72 571 18 967

30 000 68 350 52 852 66 471 66 349 16 890 50 966 16 655 64 442 16 238 16 097 20 000 14 445 14 387

59 028 58 682

13 527

43 650

42 915

42 196 20 000 10 000 33 493 30 272 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 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Source: CZSO, MIT calculations 20. CZ-NACE 30 MANUFACTURE OF OTHER TRANSPORT EQUIPMENT * This is an aliquot monthly share computed from annual data Chart 20.3.2 – Price development of 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

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

20.4 FOREIGN TRADE 20.4 FOREIGN TRADE 20.4.1 DEVELOPMENT OF FOREIGN TRADE After20.4.1 a declineDEVELOPMENT in 2010, exports OF FOREIGN of CZ-CPA TRADE 30 products started to grow until 2015, although this growth was moderated in 2013. In 2016, exports fell almost to the 2014 level. In 2017, exports grew again (Chart After a decline in 2010, exports of CZ-CPA 30 products started to grow until 2015, although this growth was 20.4.1). Imports did not have a clear trend either. The foreign trade balance was steadily positive and moderated in 2013. In 2016, exports fell almost to the 2014 level. In 2017, exports grew again (Chart 20.4.1). Importspeaked indid 2015. not have a clear trend either. The foreign trade balance was steadily positive and peaked in 2015.

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 55 169 51 475 48 057

20 000 46 232 41 400 40 304 38 156 35 405 35 027 32 336 31 886 29 236

10 000 26 354 24 960 24 775 25 121 22 294 21 457 21 308 20 142 18 821 20 092 15 344 15 862 13 896 13 948 7 111 0 2009 2010 2011 2012 2013 2014 2015 2016 2017

Source: CZSO, data as of 9 May 2018

20.4.2 TERRITORIALTERRITORIAL STRUCTURE STRUCTURE OF FOREIGNOF FOREIGN TRADE TRADE From territorialterritorial perspective,perspective, the the export export of of the the products products is is mainly mainly directed directed to to EU EU member member states, states, especially especially to Germanyto Germany (16%) (16%) and and France France (12%). (12%). USA USA (10%) (10%) is third, is third, see see Chart Chart 20.4.2. 20.4.2.

Key importimport supplierssuppliers are are USA USA (32%), (32%), followed followed by byGermany Germany (12%), (12%), China China (8%), (8%), Austria Austria (7%) and(7%) Slovakia and Slovakia (6%). It(6%). can beIt can assumed be assumed that, even that, in theeven following in the following period, main period, production main production will continue will to continue be traded to mainly be traded with EUmainly countries, with EU although countries, imports although from theimports US have from taken the USa relatively have taken important a relatively role in important recent years. role in recent years.

Chart 20.4.2 Foreign trade in products, CZ-CPA 30 193 Import territories in 2017 Export territories in 2017

other other Germany USA 33% 22% 32% 16% Taiwan France 4% Poland 12% Canada 4% 4% USA France Germany Russian 10% United 5% 12% federation Austria China Kingdom Slovakia 6% 7% 8% 6% 7% Slovakia United Arab 6% Emirates 6% Source: CZSO, data as of 9 May 2018

Chart 20.4.2 Foreign trade in products, CZ-CPA 30

Import territories in 2017 Export territories in 2017

20.5 RESEARCH AND DEVELOPMENT

R&D expenditure in 2016 in Division 30 amounted to CZK 1,711 million, with total R&D expenditure in this division being up 16 % from 2010. The bulk of the funds were expenditures from business resources. In addition, it can be observed that from 2010 to 2014 the expenditures from public foreign sources increased, mainly due to the public funds from the OPEI, and these expenditures can be assumed to again increase after 2016 due to the OP EIC funds. The share of researchers (FTE) in the surveyed division in the total number of researchers in the manufacturing industry sectors is less than 5.78 %, i.e. 455 researchers per year (average for 2010–2016).

The companies that received in 2004–2017 a significant amount of special-purpose State aid within the national programmes of the Ministry of Industry and Trade (IMPULS, TIP, TRIO) and Technology Agency of the Czech Republic (Alfa, Competence Centres and Epsilon) include První brněnská strojírna Velká Bíteš, a.s., CZ LOKO, a.s., EVEKTOR-AEROTECHNIK a.s., AERO Vodochody AEROSPACE a.s. and Aircraft Industries, a.s. In this division, there are 5 companies participating in Horizon 2020 projects; the division can be considered successful in this respect. These companies are: První brněnská strojírna Velká Bíteš, a. s. with its project DISRUPT, ZODIAC GALLEYS EUROPE S.R.O. with its project CRiSTA, JIHLAVAN, a.s. with its project SOLUTION, DT - Výhybkárna a strojírna, a.s. with its project S-CODE and LA composite, s.r.o. with its projects LATTE and DREAM.

Within the National RIS3 Strategy, the manufacture of other transport equipment is an R&D area that receives average support. In the period 2015–October 2017, 23 projects falling within the National RIS3 Strategy were approved under the OP EIC for implementation with planned total support (EU, public and private Czech funds) of CZK 1.32 billion, of which CZK 0.53 billion is an EU grant. The aid is divided into the creation of new registered research results (56%), the creation of new, expanded or modernized research centers (28%) and the introduction of enterprise innovations (product and process) – 14%. The aid is mainly focused on strengthening R&D capacities of enterprises (88 %). Projects fall within automotive (57%) and aerospace industry (35%).

Projects for the manufacture of other transport equipment were submitted by enterprises of all sizes (large and SMEs) in the period. In terms of European aid for applicants/beneficiaries, SMEs that received most aid include Czech Sport Aircraft a.s. from the Zlín Region (projects CSA-Research for the improvement of flight and safety features of light sport aircraft); participation in international exhibitions and fairs; total expenditures of CZK 171 million, of which EU subsidy CZK 75 million) and for large enterprises it is AERO Vodochody

194 The companies that received in 2004–2017 a significant amount of special-purpose State aid within the national programmes of the Ministry of Industry and Trade (IMPULS, TIP, TRIO) and Technology Agency of the Czech Republic (Alfa, Competence Centres and Epsilon) include První brněnská strojírna Velká Bíteš, a.s., CZ LOKO, a.s., EVEKTOR-AEROTECHNIK a.s., AERO Vodochody AEROSPACE a.s. and Aircraft Industries, a.s. In this division, there are 5 companies participating in Horizon 2020 projects; the division can be considered successful in this respect. These companies are: První brněnská strojírna Velká Bíteš, a. s. with its project DISRUPT, ZODIAC GALLEYS EUROPE S.R.O. with its project CRiSTA, JIHLAVAN, a.s. with its project SOLUTION, DT - Výhybkárna a strojírna, a.s. with its project S-CODE and LA composite, s.r.o. with its projects LATTE and DREAM. Within the National RIS3 Strategy, the manufacture of other transport equipment is an R&D area that receives average support. In the period 2015–October 2017, 23 projects falling within the National RIS3 Strategy were approved under the OP EIC for implementation with planned total support (EU, public and private Czech funds) of CZK 1.32 billion, of which CZK 0.53 billion is an EU grant. The aid is divided into the creation of new registered research results (56%), the creation of new, expanded or modernized research centers (28%) and the introduction of enterprise innovations (product and process) – 14%. The aid is mainly focused on strengthening R&D capacities of enterprises (88 %). Projects fall within automotive (57%) and aerospace industry (35%). Projects for the manufacture of other transport equipment were submitted by enterprises of all sizes (large and SMEs) in the period. In terms of European aid for applicants/beneficiaries, SMEs that received most aid include Czech Sport Aircraft a.s. from the Zlín Region (projects CSA-Research for the improvement of flight 20. CZ-NACE 30 MANUFACTURE OF OTHER TRANSPORT EQUIPMENT and safety features of light sport aircraft); participation in international exhibitions and fairs; total expenditures of CZK 171 million, of which EU subsidy CZK 75 million) and for large enterprises it is AERO AEROSPACEVodochody a.s. AEROSPACE from the a.s.Central from Bohemian the Central Region Bohemian (projects Region AVA’s Center (projects for AVA’sIndustrial Center Development for Industrial and Innovation;Development advanced and Innovation; L-39NG aircraftadvanced systems; L-39NG total aircraft expenditure systems; oftotal CZK expenditure 549 million, of of CZK which 549 EU million, subsidy of CZK 174 million). which EU subsidy CZK 174 million).

Chart 20.5.1 – R&D expenditure in CZ-NACE 30 (CZK million)

Government+universities Number of enterprises Entrepreneurs EU+other international organisations 45 2 500 40 1 992 1 848 2 000 8 35 1 715 1 711 1 643 34 18 30 1 475 15 1 453 37 1 500 4 23 25

20 41 1 781 38 38 39 39 40 1 000 37 1 398 1 507 1 704 1 284 1 613 15 1 369 10 500 5 188 203 231 191 0 109 61 61 0 2010 2011 2012 2013 2014 2015 2016 2010 2011 2012 2013 2014 2015 2016

Source: CZSO, MIT calculations

20.6 DIVISION SUMMARY AND PROSPECTS

In the shipbuilding industry – the manufacture of large ships, we are dependent on foreign contracts and domestic carriers also need to improve the navigability of the Elbe River. The market for small boats and speedboats is growing, which is reflected in the revenue growth of companies involved in their manufacture or assembly.

In the railway industry, revenues decreased due to the end of tram supplies for Prague and several contracts for Czech Railways. There are more than 1,600 trams in the Czech Republic with an average age of over 17 years. In recent years, the largest investment was the purchase of 250 T15 trams for the Prague Transport Company (the first were delivered in 2009). Transport companies continue to renew their tram fleets (e.g. Brno as well as Ostrava have announced the purchase of 41 trams). It is good news for locomotive and railway car manufacturers that Czech Railways has announced investments of several billion CZK in fleet renewal and Railway Infrastructure Administration has announced investments of over CZK 1 billion in crossings security. National manufacturers are involved in both the supplies of new vehicles and the refurbishment of foreign railway cars and locomotives.

In the aviation industry, we expect further growth in response to rising aircraft orders announced by Boeing and Airbus. Also, other aircraft manufacturers have announced a growing demand for new aircraft. Ultralight sales in the US grew from USD 270 million in 2014 to USD 330 million in 2017. The International Civil Aviation Association anticipates a 10% increase in air travel spending for 2018, which should reach USD 871 billion (about 1% of the world’s GDP). For example, in 2017 the number of flights above the Czech Republic was the highest in the last 25 years, up 2% year-on-year to 853 thousand. The Czech Republic is also a major producer of drones, producing several hundred units a year and aiming to produce a thousand.

In the space industry, there are about 70 companies and research centers involved in space activities in the Czech Republic. In addition, there are a number of applications and technologies built on space activities. The Czech Republic is a member of ESA (European Space Agency). Czech start-ups can use for example the ESA

195 BIC Prague program, which supports the use of space technologies on Earth or companies that want to take their technologies into space.

Motorcycle production has fallen in the EU since 2001 from 1.5 million units to about 500 thousand. In recent years there has been an increasing interest in electric scooters and electric mopeds and electric quadbikes (in 2017 about 28,000 sold in the EU). Sales of other motorcycles reached several thousand units. In the Czech Republic, sales are in the order of hundreds per year. In terms of manufacture, we only have statistics for JAWA, which produced 1,331 motorcycles, up 122 year-on-year. Other manufacturers do not publish their statistics. According to ACEM statistics, there are more than 35 million motorcycles and mopeds in the EU.

Also, bicycle manufacturers see growing interest in electric bikes. Unlike conventional bikes where sales are stagnating or declining, electric bicycles have seen significant growth in sales. Approximately 12 million bicycles are produced annually in the EU (the Czech Republic accounts for about 3% of EU production). For electric bikes the Czech Republic accounts for about 8%. Production estimates for the Czech Republic are about 300 thousand bicycles and over 100 thousand electric bicycles. For comparison, China produced over 30 million bicycles in 2017.

The Czech Republic is also becoming a major manufacturer of shopping carts. The company Wanzl has opened a new 2D factory with precision wireframe production for other manufacturing plants in Europe (the company manufactures, for example, shopping carts, rack systems, or parking boxes for shopping carts).

The above information shows that the division will be successful also in the next period. For information, we provide an overview of new or existing contracts of companies in this division in 2018: - launch of a 90-ton ship (hull). Engine, navigation, electrical systems and other necessary technologies will be installed in the Dutch yard. The ship will sail with cargo across large European rivers). Work continues on other large ships for foreign buyers. - 10 Viaggio Comfort five-car sets for Czech Railways, - 12 shunting locomotives for Czech Railways, - 10 ForCity Smart Artic trams for Helsinki, Finland - 14 low-floor modern ForCity Classic trams, - 25 electric single-level units RegioPanter for Slovak Railways, - 7 six-car metro sets for St. Petersburg, - 50 new motorized universal cars for the Railway Infrastructure Administration, - CZK 1.4 billion to increase safety at crossings, - AERO Vodochody AEROSPACE a.s. signed a contract for technical and commercial cooperation on the L-159 with Israel Aerospace Industries Ltd., - components for Airbus and Boeing (multiple Czech suppliers), - production of aircraft engines especially for foreign aircraft manufacturers.

196 21. CZ-NACE 31 MANUFACTURE OF FURNITURE 21. CZ-NACE 31 MANUFACTURE OF FURNITURE

21.1 DIVISION CHARACTERISTIC

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. Various raw materials, from solid wood, veneers and wood-based materials, to metals, plastics, textiles, leather and glass, are used in the production of furniture. Furniture is defined as a free- standing or built-in unit used for storage, lying, sitting, working, eating, hobby or other purpose intended for the interior or exterior. 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, great emphasis is placed on health protection. A major issue is formaldehyde emissions; therefore in EU countries the migration of substances from these products must meet the European standard. The popularity of wood as the dominant element in the interior is increasing, mainly due to its positive influence on our mental well-being.

The division is dominated by small enterprises (41% share in revenues, 43% share in value added and 44% share in employees) and medium-sized enterprises (39% share in revenues, 37% in value added and 39% in employees).

21.2 DIVISION DEVELOPMENT

The results of the Czech furniture industry are still largely influenced by export success. Compared to last year, domestic consumption of furniture saw a slight decrease, but compared to the previous years, the changes are equal.

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%. At the same time, the number of people employed in the sector fell by almost 30%. The reason for the low interest in these branches can be the low average wage, which, despite the fact that it grows year after year, was CZK 22,682 in 2017. Czech furniture makers also think that the young generation has negative approach to manual labour. Vocational secondary schools are usually attended by pupils with poor grades who do not have an interest in the subject, but have not been accepted by any other school. At the same time, furniture makers are very dissatisfied with the current state of education, where joiners learn to work only with manual tools and not the “big” machines that are normally used in practice. Furniture makers are therefore increasingly motivated to work not only with vocational secondary schools but also with primary and nursery schools where they develop children’s relationship to manual work. In vocational secondary schools, some furniture companies offer scholarship programs as a motivation for clever pupils.

197 and not the “big” machines that are normally used in practice. Furniture makers are therefore increasingly motivated to work not only with vocational secondary schools but also with primary and nursery schools where they develop children’s relationship to manual work. In vocational secondary schools, some furniture companies offer scholarship programs as a motivation for clever pupils.

21.3 MAIN MAIN ECONOMIC ECONOMIC INDICA INDICATORSTORS The evolution of selected indicators in 2008–2017 was differentiated. Good growth was seen in revenues, valueThe evolution added, labour of selected productivity indicators and average in 2008 wage–2017 (Chart was 21.3.1); differentiated. after a decline Good in 2009,growth revenues was seen and valuein addedrevenues, stagnated value added,until 2013, labour and productivity started growing and onlyaverage from wage 2014 (Chart onwards. 21.3.1); Until after 2011, a thedecline number in 2009, of units hasrevenues increased and sharplyvalue added and then stagnated started utontil decrease. 2013, and The started number growing of employees only from saw 2014a downward onwards. trend Until until 20132011, and the further number stabilized of units at morehas increased than 25 thousand sharply persons.and then started to decrease. The number of employees saw a downward trend until 2013 and further stabilized at more than 25 thousand persons. Price developments in 2008–2015 saw moderate growth. In 2017, it slightly decreased (Chart 21.3.2). Price developments in 2008–2015 saw moderate growth. In 2017, it slightly decreased (Chart 21.3.2). The developmentdevelopment ofof Spread, Spread, and and thus thus of of economic economic value value added, added, reached reached a minimum a minimum in 2015 in 2015 and andthen then quickly grewquickly to grewpositive to positive values in values 2016. in In 2016. 2017, In however, 2017, however, it was again it wa negatives again negative (Chart 21.3.3). (Chart 21.3.3).The main The reason main for thereason decrease for the in decrease Spread was in Spread the decrease was the in decrease ROE (margin in ROE decrease). (margin decrease). Further data is available on the MIT website in an interactive viewer of economic indicators Further data is available on the MIT website in an interactive viewer of economic indicators (https://www. mpo.cz/en/panorama-interactive-table.html(https://www.mpo.cz/en/panorama-interactive). -table.html).

Chart 21.3.1 – Major 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 20 000

5 000

4 000

15 000 8 241

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 25 479 25 418 25 209 6 208 6 095

5 879 10 000 2 000 5 538 5 000 1 000 0 0 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

50 000 60 000 Sales (CZK m) Value added (CZK m) Average monthly wage (CZK) 45 000 50 000 Labour productivity from the VA (CZK/month)* 40 000 35 000 40 000 30 000

25 000 30 000

20 000 44 658

53 443

41 722 49 837 40 927 39 256 46 158 13 027 20 000 12 278 36 369 43 168 35 299

11 274

15 000 34 632 34 392 34 350 10 843 33 958

40 093 10 355 38 833

9 887 9 764

9 595 9 545

9 448

36 083 35 428 33 700 10 000 33 108 10 000 22 682 20 987 19 558 18 999 18 414 17 917

5 000 17 564 17 334 17 155 17 076 0 0 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Source: CZSO, MIT calculations * This is an aliquot monthly share computed from annual data

198 21. CZ-NACE 31 MANUFACTURE OF FURNITURE

Chart 21.3.2 – Price development of CZ-CPA 31 (2005 = 100%) Chart 21.3.3 – Spread (ROE – re) CZ-NACE 31 (%)

Chart120 21.3.2 – Price development of CZ-CPA 31 (2005 = 100%) Chart 21.3.325 – Spread (ROE – re) CZ-NACE 31 (%)

120 25 20 110 20 15 110 15 100 10

100 10 5 90 5 90 0 80 0 -5 80 -5 70 -10 -10 70 -15 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 60 Spread-15 -3,89 -7,96 -12,59 -11,04 -4,28 -4,17 -2,36 -1,07 1,09 -0,70 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 60 Spreadrf -4,553,89 -4,677,96 -12,593,71 -11,043,79 -2,314,28 -2,264,17 -1,582,36 -0,581,07 1,090,43 -0,980,70 50 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 rfROE 13,234,55 4,677,70 3,718,74 3,799,50 11,162,31 11,142,26 14,131,58 14,180,58 16,060,43 13,790,98 50 31 103,5 105,8 105,6 106,4 106,2 107,1 109,1 109,2 109,0 107,8 reROE 13,2317,12 15,667,70 21,338,74 20,549,50 11,1615,44 11,1415,31 14,1316,48 14,1815,25 16,0614,97 13,7914,49 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Source: 31CZSO, 103,5 MIT 105,8 calculations 105,6 106,4 106,2 107,1 109,1 109,2 109,0 107,8 Source: CZSO,re MIT calculations17,12 15,66 21,33 20,54 15,44 15,31 16,48 15,25 14,97 14,49

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

21.4 FOREIGN TRADE 21.4 FOREIGN FOREIGN TRADE TRADE 21.4.1 DEVELOPMENT OF FOREIGN TRADE 21.4.1 DEVELOPMENT OF FOREIGN TRADE 21.4.1 DEVELOPMENT OF FOREIGN TRADE The development of foreign trade in CZ-CPA 31 commodities is marked by the transfer of seats used in The development of foreign trade in CZ-CPA 31 commodities is marked by the transfer of seats used in Themotor development vehicles into of foreign CZ-CPA trade 29 inMotor CZ-CPA vehicles 31 commodities (except motorcycles), is marked by thetrailers transfer and of semi seats-trailers, used in motorwhich vehiclesoccurredmotor ve into inhicles 2016. CZ-CPA into Otherwise, 29CZ -MotorCPA until29 vehicles Motor 2015 (exceptexports,vehicles motorcycles), imports(except andmotorcycles), (onlytrailers until and 2014)trailers semi-trailers, foreign and semitrade which-trailers, balance occurred which were in 2016.increasing,occurred Otherwise, in which2016. untilwasOtherwise, mostly2015 exports, untilthanks 2015 importsto exports,the seats and imports (onlyfor moto until andr 2014) vehicles(only untilforeign (Chart 2014) trade 24.4.1). foreign balance The trade werelargest balance increasing, furniture were whichincreasing, was mostlywhich wasthanks mostly to the thanks seats tofor the motor seats vehicles for moto (Chartr vehicles 24.4.1). (Chart The largest24.4.1). furniture The largest importers furniture in theimporters Czech inRepublic the Czech are Republic mainly large are mainly specialized large specializedfurniture companies. furniture companies. On the other On hand,the other Czech hand, furniture Czech manufacturersfurnitureimporters manufacturers in the supply Czech furniture Republic supply to furnitureare all mainly major to largedomesticall major specialized specializeddomestic furniture specialized chains. companies. chains. On the other hand, Czech furniture manufacturers supply furniture to all major domestic specialized chains. Chart 21.4.1 – Exports, imports and foreign trade balance in products by CZ-CPA 31 (CZK million)

Chart80 000 21.4.1 – Exports, imports and foreign trade balance in products by CZ-CPA 31 (CZK million)

8070 000 Export Import Trade balance Export Import Trade balance 7060 000

6050 000

5040 000

70 244 4030 000

64 870

55 401

70 244

30 000 50 471

64 870

20 000

46 321

44 832

40 910 40 528

55 401

36 336

50 471

30 677 30 281

20 000

29 217 46 321

10 000 44 832

26 444

24 253 24 343 24 172 23 562 40 910 40 528

22 297 21 895 24 724 20 579 6 720

36 336 19 877 19 773 19 015 6 921 12 164 30 677 30 281 10 000 29 217 0 26 444 24 253 24 343 24 172 23 562 22 297 21 895 24 724 20 579 6 720 19 877 19 773 19 015 6 921 2009 12 164 2010 2011 2012 2013 2014 2015 2016 2017 0 2009 2010 2011 2012 2013 2014 2015 2016 2017 Source: CZSO, data as of 9 May 2018 Source: CZSO, data as of 9 May 2018

21.4.2 TERRITORIAL STRUCTURE OF FOREIGN TRADE 21.4.2 21.4.2 TERRITORIAL S TRUCTURESTRUCTURE OF OFFOREIGN FOREIGN TRADE TRADE Exports are mainly to Germany (35%), Slovakia (11%), France (6%) and Austria and the United Kingdom. Exports are mainly to Germany (35%), Slovakia (11%), France (6%) and Austria and the United Kingdom. Imports areare dominateddominated byby PolandPoland (27%),(27%), GermanyGermany (19%)(19%) andand ChinaChina (15%).(15%). Imports are dominated by Poland (27%), Germany (19%) and China (15%).

199 Chart 21.4.2 – Foreign trade in CZ-CPA 31 products

Import territories in 2017 Export territories in 2017

other Romania other 28% 2% 19% Poland 27% Lithuania Germany 2% Sweden 35% 3% Austria USA 4% 3% Slovakia Italy Germany Poland 5% 7% 19% Slovakia China 4% France 11% 15% United 6% Kingdom Austria 5% 5%

Source: CZSO, data as of 9 May 2018

21.5 RESEARCH AND DEVELOPMENT

In 2016 R&D expenditure amounted to CZK 30 million, the total volume of funds in this section has been declining since 2011, with the exception of 2015. The share of researchers in the surveyed division in the total number of researchers in the manufacturing industry sectors is less than 0.26 %, i.e. 20 researchers per year (average for 2010–2016).

The companies with CZ-NACE 31 as their main economic activity that received in 2004–2017 a significant amount of special-purpose State support within the national programmes of the Ministry of Industry and Trade (IMPULS, TIP, TRIO) and Technical Assistance of the Czech Republic (Alfa, Competence Centres and Epsilon) include BORCAD cz s.r.o., MERCI, s.r.o., Dřevojas, výrobní družstvo and KOVO, výrobní družstvo.

Within the National RIS3 Strategy, the manufacture of furniture is an R&D area that receives below-average support. In the period 2015–October 2017, 22 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 0.35 billion, of which CZK 0.14 billion is an EU grant. The aid is intended primarily for introducing product and process enterprise innovations (84 %). The aid is mainly focused on strengthening R&D capacities of enterprises (85 %). Projects fall within the application sector Traditional Cultural and Creative Sectors.

In the reference period, projects for the manufacture of furniture were submitted only by SMEs. As regards European aid for applicants/beneficiaries, largest EU aid was granted to ALFA 3, s.r.o. from the Pardubice region (project Innovation of ALFA3 production, purchase of a robotic line, total expenditure of CZK 94 million, of which the EU grant of CZK 33 million).

200 21. CZ-NACE 31 MANUFACTURE OF FURNITURE

Chart 21.5.1 – R&D expenditure in CZ-NACE 31 (CZK million)

Government+universities Number of enterprises Entrepreneurs EU+other international organisations 18 80 72 16 70 13 14 60 53 12 0 47 50 42 42 0 39 10 0 40 0 0 8 16 16 30 15 15 15 15 30 55 13 50 0 6 36 44 42 20 39 4 30 10 2 6 0 4 3 3 0 0 0 0 2010 2011 2012 2013 2014 2015 2016 2010 2011 2012 2013 2014 2015 2016

Source: CZSO, MIT calculations

21.6 DIVISION DIVISION SUMMARY SUMMARY AND PANDROSPECTS PROSPECTS The Czech furniture industry has been growing for the seventh consecutive year. Czech furniture is The Czech furniture industry has been growing for the seventh consecutive year. Czech furniture is successfully exported,successfully mainly exported, by medium mainly andby mediumlarge enterprises. and large The enterprises. Association The of AssociationCzech Furniture of Czech Makers Furniture strives to expandMakers thestrives world’s to expand awareness the ofworld’s the excellent awareness quality of theof Czech excellent furniture quality and of thus Czech simplify furniture the way and for thus small businessessimplify the to way foreign for smallmarkets. businesses The good to resultsforeign of markets. the furniture The good industry, results however, of the relyfurniture mainly industry, on export success.however, Domestic rely mainly consumption on export ofsuccess Czech. Domesticfurniture isconsumption even slightly of lower Czech than furniture it was inis even2016. slightly The Association lower ofthan Czech it was Furniture in 2016. Makers The seesAssociation the solution of Czech of this Furniture situation Makersin educating sees thethe Czech solution public of aboutthis situation the existence in of different quality of furniture and at the same time in educating the furniture makers to invest more in their brand.educating the Czech public about the existence of different quality of furniture and at the same time in educating the furniture makers to invest more in their brand. The largest furniture importers in the Czech Republic are still mainlymainly largelarge specializedspecialized furniturefurniture outlets.outlets. In 2017,In 2017, the the average average price price for onefor onekg of kg exported of exported furniture furniture was CZKwas 76.10. CZK 76 By.10. contrast, By contrast, the price the of price imported of furnitureimported has furniture been declining has been for declining the second for the year. second In 2017, year. the In price 2017, fell the to CZKprice 50.08 fell to per CZK kg. 50.08 It can per be saidkg. Itthat the trend of importing cheaper and less quality furniture still persists. can be said that the trend of importing cheaper and less quality furniture still persists. The performance of the division showed a further increase over the previous year, but not as significant as expected.The performance Furniture of production the division rose showed from aCZK further 44.64 increase billion in over 2016 the to previousCZK 44.68 year, billion but in not 2017. as significantOne possible causeas expected. may be Furniture the lack of production skilled workers rose fromin the CZK industry. 44.64 billion in 2016 to CZK 44.68 billion in 2017. One possible cause may be the lack of skilled workers in the industry. Further growth in the furniture industry is likely to depend on investment in modern technologies and robotics. At the same time, furniture makers face a problem with forest certification. Most buyers, led by retail chainsFurther such growth as IKEA, in the XXX furniture Lutz and industry others, is already likely to require depend that on woodinvestment products in modern be made technologies from FSC-certified and forests.robotics. In At the the Czech same Republic, time, furniture however, makers such forest face a areas problem are lacking,with forest because certification. Czech forests Most are buyers, dominantly led PEFC-certified.by retail chains If such the situation as IKEA, doesXXX Lutznot change,and others, the producers already require of wooden that furniturewood products who supply be made the products from toFSC these-certified outlets forests. will be In forced the Czech to start Republic, sourcing however, the materials such from forest abroad areas where are lacking, the share because of FSC-certified Czech forests isare greater dominantly than in thePEFC Czech-certified. Republic, If the or theysituation will face does extinction. not change, the producers of wooden furniture who supply the products to these outlets will be forced to start sourcing the materials from abroad where the share of FSC-certified forests is greater than in the Czech Republic, or they will face extinction.

201 202 22. CZ-NACE 32 OTHER MANUFACTURING 22. CZ-NACE 32 OTHER MANUFACTURING

22.1 DIVISION CHARACTERISTICS

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.

CZ-NACE 32 is characteristic for high material intensity, groups differ both in terms of input raw materials, production technologies as well the final products. Some groups depend 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.). The use of new techniques and technologies and compliance with the required legislation means that the products of individual groups are practically free from dangerous or harmful substances that endanger the population or the environment.

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.

In 2017, the share of revenues was 47% for large enterprises, 25% for medium-sized enterprises and 28% for small enterprises. The share of value added was 44% for large enterprises, 27% for medium-sized enterprises and 29% for small enterprises. The share in the number of employees were similar (45% large enterprises, 28% medium-sized enterprises and 28% small enterprises).

The most significant groups in terms of revenues and number of employees are 32.5 and 32.4, which together account for more than 60% of the division. The third group is 32.9 (Table 22.1.1). CZ-NACE 32.1 has the largest share of the number of production units, but also has the second lowest share of the average number of employees. This is due to the nature of production because it includes an assortment of hand-made products produced by individuals or micro-enterprises.

Table 22.1.1 – Shares of groups in CZ-NACE 32 in 2017 (%, division = 100%)

Group Personnel Value Own Assets Number of Number of Revenues Net turnover CZ-NACE costs added capital total employees units

32.1 4.6 6.2 6.5 6.7 7.7 6.8 6.1 32.2

32.2 2.7 2.5 2.0 2.0 2.1 1.8 2.9 3.4

32.3 7.8 7.3 6.9 5.9 5.3 5.0 8.5 5.4

32.4 23.7 25.0 34.5 35.8 33.5 38.2 21.0 6.0

32.5 42.4 39.7 32.1 31.6 31.2 31.6 39.4 26.9

32.9 18.8 19.2 18.0 17.9 20.2 16.6 22.1 26.1 Source: CZSO data, 2017 MIT calculations

203 22.2 DIVISION DEVELOPMENT

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. The development in the division is strongly associated with a lack of modernization coupled with a lack of innovation in the sector. This is mostly due to limited financial resources of organizations. 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. In this respect, the division should benefit for example from the construction of new plant(s) with highly efficient production and modern machinery with the possible participation of foreign capital.

22.3 MAIN ECONOMIC INDICATORS

In the monitored period 2008–2017, the number of units was increasing steadily (Chart 22.3.1). Most of the indicators were growing, with the exception of 2009 and 2012 for the number of employees, and in 2009 and 2017 for revenues. Added value also grew throughout the period except 2011. The development of labour productivity and average wage, which have been increasing over the period, are favourable.

The price level oscillated in the reference period with a moderate growth trend. The highest price indices were seen in group 32.9, which significantly affects the price level of the division. CZ-NACE 32.4 Manufacture of games and toys was stagnant or rather in decline, which is due in particular to strong competition and high supply of these products on the market (Chart 22.3.2).

Chart 22.3.1 – Major economic indicators of CZ-NACE 32 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 20 000 9 404 9 160 8 952 8 778

4 000 8 656 8 601 40 029 8 575 39 822 8 544 38 906 38 600 38 007 37 767 37 495 8 028 37 384 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 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

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

30 000 58 636 66 669 65 829 22 983 57 408 22 276 63 106 52 949 52 572 59 813 19 926 19 571 50 117 18 487 55 246

17 574 17 521 47 699 47 619 17 145

20 000 53 011 16 362 16 305 45 864

44 233

49 667

48 452

20 000 47 422

41 015

45 545 10 000 25 714

10 000 24 323 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 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Source: CZSO, MIT calculations * This is an aliquot monthly share computed from annual data

204Chart 22.3.2 – Price development of CZ-CPA 32 (2005 = 100%) Chart 22.3.3 – Spread (ROE – re) CZ-NACE 32 (%)

130 20

18 120 16 110 14 100 12

90 10

8 80 6 70 4 60 2

50 0 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 32 105,0 107,1 107,5 108,3 108,5 108,5 108,0 108,5 109,7 110,6 Spread 4,34 7,65 6,62 4,96 5,08 4,14 2,27 3,17 6,31 3,12 32.4 104,3 100,6 99,9 100,3 101,4 102,1 98,3 97,7 99,3 101,2 rf 4,55 4,67 3,71 3,79 2,31 2,26 1,58 0,58 0,43 0,98 32.5 98,7 101,6 102,3 102,5 102,0 101,5 102,6 102,8 103,5 103,2 ROE 16,43 18,62 15,93 15,20 15,82 14,35 13,78 14,16 16,22 13,14 32.9 107,9 113,1 113,5 116,3 117,2 117,2 118,3 121,6 123,1 125,2 re 12,10 10,97 9,31 10,25 10,74 10,21 11,50 10,98 9,91 10,01

Source: CZSO, MIT calculations Source: CZSO, MIT calculations Note: Groups 32.1, 32.2 and 32.3 are not monitored.

Chart 22.3.1 – Major economic indicators of CZ-NACE 32 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 20 000 9 404 9 160 8 952 8 778

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 22. CZ-NACE 32 OTHER MANUFACTURING 50 000 50 000 40 000

40 000

The Spread indicator, which reflects the overall efficiency of the division, has been positive throughout the reference

30 000

period30 000 (Chart 22.3.3). Its development was uneven, reaching the maximum in 2009 (2016) and the minimum in 2014. 58 636 66 669 65 829 22 983 57 408 22 276 63 106 52 949 52 572 59 813 19 926 19 571 50 117 18 487 55 246

17 574 17 521 47 699 47 619 17 145

20 000 53 011 16 362 16 305 45 864

44 233

49 667

48 452

20 000 47 422

41 015

Economic value45 545 added (EVA) recorded a sharp decline of CZK 1.1 billion between 2017 and 2016, even 10 000 25 714

10 000 24 323 though it remained positive. Of the individual groups, the largest drop in EVA was seen in group22 766 32.4 (down 21 742 21 462 20 774 19 912 19 744 18 895 17 960 CZK 0.70 billion) and 32.5 (down CZK 0.4 billion). In terms of indicators,0 the decline resulted in a drop in return on equity2008 (down 2009 2010CZK 20111.2 2012billion), 2013 mainly2014 2015 due 2016 to 2017 a drop in EBIT/Assets2008 2009 (down2010 2011 CZK 2012 0.9 2013 billion), 2014 2015 which 2016 2017led to aSource: decline CZSO, in MIT margin calculations (down CZK 1.0 billion). * This is an aliquot monthly share computed from annual data Further data is available on the MIT website in an interactive viewer of economic indicators (https://www. mpo.cz/en/panorama-interactive-table.html ). Chart 22.3.2 – Price development of CZ-CPA 32 (2005 = 100%) Chart 22.3.3 – Spread (ROE – re) CZ-NACE 32 (%)

130 20

18 120 16 110 14 100 12

90 10

8 80 6 70 4 60 2

Source: CZSO, MIT calculations Source: CZSO, MIT calculations Note: Groups 32.1, 32.2 and 32.3 are not monitored.

22.4 FOREIGN TRADE 22.4 FOREIGN FOREIGN TRADE TRADE 22.4.1 DEVELOPMENT OF FOREIGN TRADE 22.4.1 DEVELOPMENT OF FOREIGN TRADE 22.4.1 DEVELOPMENT OF FOREIGN TRADE Exports, imports and the balance of foreign trade in CZ-CPA 32 commodities saw very favourable Exports, imports and the balance of foreign trade in CZ-CPA 32 commodities saw very favourable Exports,development imports until and 2016. the balance In 2017, of all foreign indicators trade showed in CZ-CPA a smaller 32 commodities decline. saw very favourable development untildevelopment 2016. In 2017,until 2016. all indicators In 2017, showed all indicators a smaller showed decline. a smaller decline. Chart 22.4.1 – Exports, imports and foreign trade balance in products by CZ-CPA 32 (CZK million) Chart 22.4.1 – Exports, imports and foreign trade balance in products by CZ-CPA 32 (CZK million) 140 000 140 000 Export Import Trade balance 120 000 Export Import Trade balance 120 000 100 000 100 000 80 000

80 000

60 000 126 479

60 000 122 793

60 000

118 219 126 479

122 793

126 479

118 219 122 793 106 774

118 219

106 774

92 102 40 000

106 774

92 102 81 638 40 000 81 404 81 031

40 000 92 102

73 975

71 272 81 638 81 404 81 031

67 029

81 638 65 912 81 404 81 031

73 975 71 272

58 440 73 975 67 029 71 272

65 912 55 261 54 751

20 000 51 727 67 029 50 485

65 912

58 440 55 261 44 569 54 751 44 841 44 244 58 440 40 862 51 727

20 000 41 762 50 485 55 261 54 751

20 000 51 727 50 485 44 569 33 662 44 841 44 244 40 862 41 762 44 569 44 841 44 244 40 862 41 762 10 692 16 544 26 653 33 662 19 544 33 662 16 544 10 692 26 653 0 19 544 10 692 16 544 26 653 0 19 544 0 2009 2010 2011 2012 2013 2014 2015 2016 2017 2009 2010 2011 2012 2013 2014 2015 2016 2017 Source: CZSO, data as of 9 May 2018 Source: CZSO, data as of 9 May 2018 22.4.2 TERRITORIAL STRUCTURE OF FOREIGN TRADE 22.4.2 TERRITORIAL STRUCTURE OF FOREIGN TRADE 205 The largest foreign buyer of CZ-CPA 32 products is traditionally Germany with an export share of 33% 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. (Chart 22.4.2). Other major buyers include Austria, Slovakia and the United Kingdom. Major import partners are China and Germany. Major import partners are China and Germany.

Chart 22.4.2 – Foreign trade in CZ-CPA 32 products Chart 22.4.2 – Foreign trade in CZ-CPA 32 products Import territories in 2017 Export territories in 2017 Import territories in 2017 Export territories in 2017

other China other other China 28% other China20% Russian 28% other31% 20% Russian Germany 31% 20% federationRussian Germany 31% federation Germany33% federation3% 33% 3% Germany Italy Germany Italy Germany19% Italy4% 19% Poland 19% 4% Poland Poland5% 5% Austria Denmark 5% France Austria USA Austria France Austria8% Denmark Austria France6% Slovakia 4% USA Austria7% 6% Slovakia 8% 4% Italy 5% 7% 6% Slovakia7% 4% Italy 5% 7% 7% Italy4% United 7% 4% Poland United 4% Poland Hungary KingdomUnited Poland4% Hungary Kingdom 4% 6% 6% 6% 6% Source: CZSO, data as of 9 May 2018 Source: CZSO, data as of 9 May 2018 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.

Major import partners are China and Germany.

Chart 22.4.2 – Foreign trade in CZ-CPA 32 products

Import territories in 2017 Export territories in 2017

other China other 28% 20% Russian 31% Germany federation 33% 3%

Germany Italy 19% 4% Poland 5% France Austria Denmark Austria USA 6% Slovakia 8% 4% 7% Italy 5% 7% 4% United Poland Hungary Kingdom 4% 6% 6%

Source: CZSO, data as of 9 May 2018

22.5 RESEARCH AND DEVELOPMENT

R&D expenditure in 2016 in Division 32 amounted to CZK 557 million, with total R&D expenditure in this division being up 93 % from 2010. The bulk of the funds were expenditures from business resources. Since 2012 there has been a decline in the volume of public funds from the Czech Republic. Public expenditure from abroad reached its peak in 2012. The share of researchers (FTE) in the surveyed division in the total number of researchers in the manufacturing industry sectors is less than 2.77 %, i.e. 218 researchers per year (average for 2010–2016).

The companies in Division 32 that received in 2004–2017 a significant amount of special-purpose State support within the national programmes of the Ministry of Industry and Trade (IMPULS, TIP, TRIO) and Technical Assistance of the Czech Republic (Alfa, Competence Centres and Epsilon) include Medical Technologies CZ a.s., ProSpon, spol. s r.o., L I N E T spol. s r.o., MEDIN, a.s. and BTL zdravotnická technika, a.s. There are two companies in this sector which are involved in Horizon 2020 projects: Nanopharma, a.s. is involved in three projects, CanBioSe, NanoSurf and NEMOSINE, and Woodcomp Propellers s.r.o. is involved in ARGOS.

Within the National RIS3 Strategy, Other manufacturing is an R&D area that receives below-average support. In the period 2015–October 2017, 64 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 0.60 billion, of which CZK 0.25 billion is an EU grant. Aid is divided into the introduction of product and process enterprise innovations (48 %), creation of new, expanded or modernized research centers (24 %), creation of new applied research results (16 %) and participation in exhibitions and trade fairs abroad (10 %). The aid is mainly focused on strengthening R&D capacities of enterprises (79 %). Projects mainly fall within the application sector Traditional Culture and Creative Industries (52%) and Pharmaceuticals, Biotechnology, Health Care Equipment, Life Sciences (44%).

In the reference period, projects for Other manufacturing were submitted by large enterprises as well as SMEs. As regards European aid for applicants/beneficiaries, largest EU aid for SMEs was granted to MZ

206 22. CZ-NACE 32 OTHER MANUFACTURING

Liberec, a.s. from the Liberec Region (projects MZ Development Center Liberec; New generation system of multifunctional medical units with the possibility of automated user setting; Strengthening of the position of MZ Liberec, a.s. on foreign markets; total expenditure of CZK 58 million, of which EU grant of CZK 30 million); and largest EU aid for large enterprises was granted to BioVendor – Laboratorní medicína a.s. from the South Moravian Region (project Research and development in the field of in vitro diagnostics; total expenditure of 64 CZK million, of which EU grant of CZK 32 million).

Chart 22.5.1 – R&D expenditure in CZ-NACE 32 (CZK million)

Government+universities Number of enterprises Entrepreneurs EU+other international organisations 60 600 557 11 50 500 452 403 358 46 356 40 400 345 22 289 18 6 7 30 300 516 8 53 51 314 49 47 44 248 20 42 41 200 282 305 348 214

100 10 92 92 67 57 44 0 32 30 0 2010 2011 2012 2013 2014 2015 2016 2010 2011 2012 2013 2014 2015 2016

Source: CZSO, MIT calculations

22.6 DIVISION DIVISION SUMMARY SUMMARY AND PANDROSPECT PROSPECTSS

The CZ-NACECZ-NACE 32 division is characteristic for a very wide range of products, often diametrically different in terms of production technologytechnology and final use. This division has a particular problem in a small number of investment activitiesactivities that that would would be be aimed aime atd technologyat technology development development and researchand research and development, and development, which iswhich reflected is reflected in the currentlyin the currently low demand low demand for high-skill for high professions.-skill professions. In terms of selected economic indicators, it can be stated that development is positive in all groups of this 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 as well as the number of employees are increasing. Exceptions areare CZ-NACE CZ-NACE 32.1 32.1 Manufacture Manufacture of jewellery, of jewellery, bijouterie bijouterie and related and articles related and articles 32.3 Manufacture and 32.3 ofManufacture sports goods, of sportswhere goods, the number where ofthe employees number of has employees decreased. has Nevertheless, decreased. Nevertheless, here too, we here can too,see wean improvingcan see an situation. improving situation. CZ-NACECZ-NACE 32.532.5 also also saw saw positive positive development development in 2017. in Czech2017. companies Czech companies manufacturing manufacturing healthcare technologyhealthcare aretechnology successful are in successful the Europe, in thethe AmericasEurope, the and Americas the Far East, and andthe withFar East, the EGAP and with insurance the EGAP tools, insurance they also t haveools, thethey prospect also have of thefurther prospect expansion. of further Overall, expansion. this group Overall, accounts this forgroup more accounts than 27.0% for more of the than division’s 27.0% foreign of the tradedivision's turnover. foreign Among trade theturnover. most successfulAmong the ones most is successfulLINET spol. ones s r.o., is LINETwhich spol.increases s r.o., its which turnover increases and the its products of this manufacturing company, such as medical beds, are already known in more than 100 countries turnover and the products of this manufacturing company, such as medical beds, are already known in around the world. more than 100 countries around the world. Although CZ-NACECZ-NACE 32.4 Manufacture of games and toys is among groups with the best economic results, in 2017 there was a significant drop in revenues,revenues, value added and exports. This group accounts for more than 45.0% of CZ-NACE 32 foreign trade turnover. Despite this fluctuation, these results indicate good prospects 45.0% of CZ-NACE 32 foreign trade turnover. Despite this fluctuation, these results indicate good prospects even for the nearest future. even for the nearest future. Producers of musical instruments (CZ-NACE(CZ-NACE 32.2)32.2) were also successful in 2017. The number of their orders (especially from abroad) is increasing, which is also true of PetrofPetrof spol. s r.o.,r.o., the traditional producers of pianinos and pianos from Hradec Králové. The company exports musical instruments to more than a dozen countries, and in response to late payment culture on Western markets, it has shifted its attention mainly 207 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, seek new opportunities for foreign capital entry or investment incentives. They should focus on the renewal or expansion of existing contacts, pianinos and pianos from Hradec Králové. The company exports musical instruments to more than a dozen countries, and in response to late payment culture on 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, seek new opportunities for foreign capital entry or 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 support.

A continuing challenge for CZ-NACE 32 is the import of cheap, low-quality and often unhealthy products of competitors, which is particularly true of toys where the Czech Trade Inspectorate regularly identifies most shortcomings.

208 PROCESSORS

Prepared at MIT by: Technology 4.0 Section, Industry, Entrepreneurship and Construction Section.

External cooperation: Czech Statistical Office, Ministry of Agriculture (MoA), Institute of Agricultural Economics and Information (ÚZEI).

Contributors: Confederation of Industry of the Czech Republic, Czech Beer and Malt Industry Association, Association of Textile-Clothing–Leather Industry, Forestry and Woodworking Industry Association, Association of Czech Pulp and Paper Industry, Association of Chemical Industry of the Czech Republic, Association of Glass and Ceramics Industry of the Czech Republic, Union of Glass and Fashion Jewellery Producers, Czech Cement Manufacturers Association, Steel Union, Association of Foundries of the Czech Republic, Steel Union, Association of Manufacturers and Suppliers of Medical Devices, Electrical and Electronic Association of the Czech Republic, Association of Engineering Technology, Automotive Industry Association, Association of the Czech AeroSpace Industry, Association of the Czech Railway Industry, Association of Czech Furniture Manufacturers.

Reviewers: Ing. Martin Hronza, Ing. Ivan Neumaier, Ing. Martin Lešek, Ing. Alena Fedorová, Ing. Petra Truchlá and Ing. Lucie Szczeponková.

209 PANORAMA OF THE MANUFACTURING INDUSTRY OF THE CZECH REPUBLIC 2017 Published by Ministry of Industry and Trade of the Czech Republic, Na Františku 32, 110 15 Praha 1, CZ Number of pages 210 First edition, Prague 2018 Print: Calamarus s.r.o., Pod Táborem 54/10, 190 00 Praha 9, CZ © Ministry of Industry and Trade of the Czech Republic, 2018

ISBN 978-80-906942-5-5

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