VW-Skoda Deal Tests Privatization

AN outline of the future of foreign investment and its role in privatization of Czech industry is slowly emerging, with Volkswagen AG's purchase into Czechoslovakia's state automaker, Skoda, as a much-watched test case. By accepting the offer of the robust German firm over that of ailing state-owned Renault-Volvo, the Czechoslovak government demonstrated that economic, not political considerations would prevail, despite deep-seated domestic fears of German economic colonization.

As Czech Premier Petr Pithart explained, ``In this country matters were solved politically for too long. We cannot afford to do this; we had to opt for a clearly more economically advantageous offer.''

Seen in this light, there was no contest - Volkswagen's commitment to a 9.5 billion deutsche-mark (US$6.35 billion) investment over 10 years was two-and-a-half times the rival bid of Renault-Volvo. The money is unquestionably important, since Skoda boasts a 1.4 billion crown (US$50 million) debt - the highest in Czech industry - and its inability to pay suppliers has threatened its very existence.

But the government's choice of Volkswagen was not due solely to the dazzle of the deutsche mark. It was also influenced by social factors. The Germans' comprehensive social and employment program calmed fears of the impact of large-scale layoffs and rallied Skoda workers to support their bid. They threatened to strike if Renault-Volvo's less reassuring offer won.

The VW offer also comforts Czech pride. While Renault-Volvo wanted to harness Skoda's skilled, cheap labor to assembly of their own models, Volkswagen pledged to preserve and develop the Skoda brand name. Annual production of Skoda's boxy Favorit, a Czechoslovak status symbol, will be more than doubled to 400,000 over the next six years. Cars will be sold from Skoda's own dealerships through VW's vast European distribution network.

While explicit legislative conditions for direct foreign investment do not yet exist in Czechoslovakia, the VW-Skoda accord shows that the system allows for flexibility.

Richard Gledhill, head of privatization services at British consulting firm Price Waterhouse, which advised Skoda in its choice of a foreign partner, thinks the agreement represents a milestone in the privatization process.

``It was always recognized that the Skoda negotiations would set the rules and provide the lessons for the future of privatization. That the Czech government has satisfactorily completed its major flagship privatization with a leading Western company ... is very exciting,'' he says.

Jiri Danhelka, Skoda's spokesman, says the government agreed to make exceptions to certain laws, such as that governing the transfer of hard currency, to allow the new venture to function. This case-by-case approach characterizes the government's large privatization bill, but until the bill comes into effect, individual investment ventures will largely shape the process themselves.

The Skoda-VW venture already plans to jettison the state firm's network of nursery schools, kindergartens, recreational and vacation premises and other services for employees. These will be grouped in a state enterprise attached to the Skoda-VW joint-stock company, of which VW will own 70 percent by 1995.

Although in theory the state company will remain part of the venture, Mr. Danhelka says the aim is to sell off the services or hand them over to the trade unions and municipal authorities as quickly as possible. With this, he says, will come ``a more healthy focus on activities that are economically efficient - like producing automobiles.''