Jan Macháček

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Czech Business Weekly

LG.Philips - first crash test for incentives

06. 02. 2006
It seems to be the eternal curse of all politicians. Whenever something good is happening with the economy, they can’t resist taking credit for it, saying it was they who arranged all the goodies, or at least that their help was crucial to the process.

Therefore, politicians shouldn’t be too surprised when things go bad with those same goodies that people try to hold them responsible.

The archetypical example is for politicians to claim glory for economic growth and job creation. Then, when economies go down, they try to distance themselves from the disappearing jobs.

This is the case with the flailing LG.Philips Displays television-screen factory in Hranice, North Moravia. It closed, then resumed, production on two of its three lines.

This particular deal was a flagship of the investment incentives policy of Miloš Zeman, the former Social Democratic (ČSSD) prime minister. It seems unavoidable that the company, which in return for incentives valued at over Kč 1 billion (E 34 million) had pledged to employ more than 3,000 people by the end of 2007, will go under very soon, as its parent company has filed for bankruptcy protection.

This comes not even three years after production began at the brand-new Hranice complex. Therefore, the ČSSD can’t be surprised that people will hold the party accountable for the region’s troublesome social situation.

The government has said that it will somehow come to the rescue, but its pledge to help LG.Philips Displays survive seems unprofessional and even funny. The government said that it’s willing to help the company through the Czech Export Bank with a bridge loan of up to Kč 300 million, or with the same amount provided by state-controlled company Osinek, which was originally established as a vehicle for restructuring the North Moravian steel industry. Osinek would be in control of financial flows; the company must guarantee it has enough customers for TV screens.

If there were enough customers, there would be no need to save the company. Besides, all eventual state aid to a market participant must first be approved in Brussels, and the company would have to be separated from its poor Dutch mother. It’s also unclear whether, under European law, the parent company’s Czech assets must be included in bankruptcy proceedings (see story, page 5).

On the other hand, this spectacular failure doesn’t show that the Czech government’s investment incentive policy is nonsense. The world would be a better place without the vicious circle of investment incentives, but if everyone else around the globe is providing them, we have no option but to do the same. The story of the Hranice factory isn’t one of incentives; it’s a story of globalization.

Japan’s Matsushita was among the first investors in the 1990s to set up in an industrial zone in Plzeň, West Bohemia. It successfully produced classic TV screens; now it also produces flat screens. For some reason Philips didn’t diversify in the Czech Republic. That’s Philips’ internal problem and the failure of one private company. We shouldn’t blame the policy of incentives.

Can we expect similar failures from other gigantic investors like carmakers TPCA and, soon, Hyundai? It’s not very probable, but the lesson from Philips is that people should be aware that such a scenario could materialize and can’t be ruled out. Companies come and go, live and die. And in a globalized world, these things happen quickly.

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