The Nickname That Czechia Wants to Shed

For several years, the Czech Republic has struggled with the label "montovna" or "assembly plant." What does it mean to be an assembly plant, and how do we eliminate this label?

Two engineers follow assembly process uses SCADA system
Photo: leonidkos / stock.adobe.com

“The Golden Czech Hands” is the old famous saying that, for centuries, refers to the above-average abilities of the Czech craftsmen and industry. But the Czech golden hands need to be joined by the Czech golden heads. Otherwise, the Czech Republic risks remaining the assembly plant of Europe forever.

The home of industry

The biggest winners of the Industrial Revolution in Austria-Hungary were primarily the lands of the Bohemian Crown. A simple statistic illustrates the extent of the Czech industry and its size: when the Austrian monarchy collapsed in 1918, over 70% of all industry was in the Czech Republic (then Czechoslovakia).

Interwar Czechoslovakia continued to develop industrially. A rocket boom was experienced by giant modern industrial enterprises such as the Škoda and Tatra automobile factories, the heavy equipment and locomotive manufacturer ČKD, and the shoe and clothing company Bat’a.
Thanks to the fact that there were no significant battles on the territory of Czechoslovakia, the post-war industry continued its First Republic tradition. The communist regime then continued the historical tradition only by developing heavy industry.

Today’s Czech industry occupies a similarly prestigious position as in history. It employs around 40% of the economically active population and accounts for over 30% of the Czech GDP. And that is the root of the problem the Czechs are trying to solve.

Services and knowledge are the way forward

Many economists nowadays point out that the Czech industry was created (primarily during the communist era) for a world that no longer exists. After the collapse of this world, the Czech industry was not able to reorient itself quickly enough to the new world, in which a knowledge-based economy and high-added value are dominant.

Thus, the Czech economy remained an assembly plant for the Eastern Bloc even after the fall of the regime, which turned it into an assembly plant. It can produce high-quality and precise end products from imported parts, which again go abroad. There they are sold to end customers through advanced marketing and other services.

That means the higher margin associated with the product’s sale ends up somewhere other than the Czech Republic, where the product was originally produced. Translated into numbers: the share of domestic value added per product produced in Czechia is only 58%.

Thus, the Czech Republic only gets the 58% of the final price. And that is not much. For example, according to OECD statistics, neighboring Poland is at 69%, and Germany is at 77%. Countries like the USA are at the top of the list, receiving 91% of the final price.

The fight for survival begins

But the worst thing is that this number steadily decreases in the case of Czechia. In 1998 it was 74% and in 2008 it was 62%. The newly emerging knowledge-based economies, full of digitization and robotization, are wiping out similar “assembly plant” countries. As many economists point out, as third-world countries become more and more advanced, they will catch up with the Czech Republic in terms of the precision of their products. Czech products will then not be able to compete on quality, let alone cost.

Well, how does the Czech Republic get out of this problem? It has to adapt to what it threatens the most. It needs to innovate, robotize, and, above all, focus on quality education for the future generation. And it is essential to say that the Czech Republic has something to boast about in this respect. For example, it is home to Průša Research, a global leader in the manufacture, sale, and maintenance of 3D printers. It is also the center of Europe’s nuclear and fusion research and home to developers whose applications save lives across Europe.

But the Czech government is also responding. It has launched several programs to attract workers to the Czech Republic who will bring high-value-added work. Perhaps the most interesting is the government’s “Nomad” program, which aims to attract digital nomads, i.e., IT workers who move from place to place for long periods and make a living from highly skilled work via the Internet, into the Czech Republic.

The ultimate recipe for success?

General recipes for increasing the added value of a business exist and are well known. The basic principle for Czechia to follow is to offer its own products, where not only the physical part of the production but also the non-physical part (management, development, design, marketing) are Czech-based.

The next step is a significant increase in investment in research and development. The Czech Republic invests around 2% of its GDP in this area every year, but abroad, it is usually between 3% and 4%. If the Czech Republic wants to catch up with the most advanced countries in the world, it will have to increase this investment. The current Czech government has already raised this investment and is slowly taking steps towards the 3-4 % goal.

Czech companies must then focus more on services related to the late production and sale of goods. It is also necessary to understand what happens to the product when it is sold (marketing) or after it has been sold (customer services, maintenance). These services also give more added value than the assembly itself.

And for all this, you need educated and qualified people to handle all these activities. In this area, too, the long-term trend of declining university enrolments has been broken, and the Czech Republic is on the right track in education. The right track is also indicated by the comprehensive education reform planned by the government.

As always, only time will tell whether the Czech Republic recovered in time and did not miss the European industrial train. Now, however, everything shows that the Czechs are adapting slowly, but pretty well, to new trends. Perhaps by around 2030, the modified saying will be true: Golden “Czech Hands and Heads.”

Marek Koten

A Ph.D. student in economics, specializing in nuclear energy from the Czech Republic, he also serves as a political consultant to the Czech government and the U.S. Republican Party.

Latest from Business