Czechia’s manufacturing sector is a much-needed source of resilience amid broader economic stagnation. Nevertheless, the country lags its peers in environmental sustainability and digitisation.
Czechia is a leading manufacturer within not only Central and Eastern Europe, but the whole of the European Union. A quarter of Czech gross domestic product (GDP) is value added from manufacturing, compared to the EU27 average of 15 per cent.
More than half (52 per cent) of Czech manufacturing value-added comes from medium- and high-tech whereas the EU27 average is 41 per cent, and the country also leads EU averages for human capital and industrial competitiveness.
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“The development of the Czech manufacturing sector in the transition and EU accession years was largely driven by foreign investment, which was keen to take advantage of the newly-open economy, comparatively lower labour costs, and its strong industrial heritage,” Zuzana Zavarská, an economist at the Vienna Institute for International Economic Studies (wiiw) and the author of its October forecast for Czechia, tells Emerging Europe.
“Through these foreign investment inflows, Czech industry experienced rapid productivity growth, and integrated tightly into European production networks as assemblers of medium to high-technology products.”
Czechia’s embeddedness in global value chains facilitates access to state-of-the-art technologies and know-how, and its government spends the second most on research and development (R&D) relative to GDP of any EU country. Special tax allowances for R&D expenditures allow for a deduction of up to 100 per cent.
Robust auto production drives growth in manufacturing
It is integration with international networks that has allowed the Czech automotive sector to become the main contributor to manufacturing activity, Zavarská says. Auto production currently accounts for over 20 per cent of Czech manufacturing value-added.
Czechia’s auto sector also accounts for 13.7 per cent of manufacturing employment. Czechia’s most notable auto manufacturer is Škoda Auto, now owned by Volkswagen and the group’s second most profitable brand after Porsche. Hyundai and Toyota also make cars at plants in Czechia.
Away from the automotive sector the production of metal products and machinery remain important and account for 14.8 percent and ten per cent of manufacturing employment, respectively. In October, Škoda Group (a separate entity owned by the Czech investment group PPF) signed a 320 million euros contract with Uzbekistan Railways for 30 four-car electric trains.
Even as the Czech economy contracted in the first half of 2023 and is expected to recover to only 0.1 per cent growth for the year as a whole, manufacturing has offset other weaknesses and propped up exports.
“The Czech manufacturing sector is performing fairly well, especially if one considers the strong headwinds it has been facing,” says Zavarská. “It managed to maintain modest growth in the first half of 2023, driven by the strong performance of the automotive and transport equipment sectors.”
“Other parts of manufacturing remained weak, with most sectors shrinking,” she cautions. “The outlook is rather pessimistic, however, reflecting the slowdown of economic activity in Czechia’s most important trading partner, Germany.”
Challenges and opportunities
Despite the sector’s strength, Czechia still lags behind its peers in its green transition and digitisation. It continues to import much of its oil from Russia and subsidises coal and other fossil fuels thanks to a strong carbon industries lobby, and its energy efficiency is below EU levels.
Zavarská recommends the government directly support hydrogen technology value chains to leapfrog from being a coal-oriented economy to being a leader in green innovation, although she cautions such policies must be complemented with a safety net to protect the large share of Czechia’s workforce adversely exposed to the changes brought on by the green transition.
Digitisation has been hampered by a shortage of information technology (IT) specialists, relatively low IT adoption by public authorities, and high mobile data prices due to the market oligopoly.
Luckily, it has a solid ecosystem of high growth start-ups and established players in the digital sector, including Kiwi.com, Avast, Rohlik group, and JetBrains. Czechia ranked seventh out of the 23 countries in emerging Europe for information technology competitiveness in the latest Emerging Europe IT Competitiveness Index but placed first for the business empowerment sub-score thanks to ribust support for industry development.
About 22 per cent of Czechia’s Recovery and Resilience Facility (RRF) is allocated to the digital transformation, including direct businesses support, but much work to digitise the public sector remains.
Accelerating the green transition and digitisation will increase manufacturing efficiency and sustainability in the long-term, ensuring that the sector remains as it is: a much-needed source of resilience in the Czech economy.
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