The Czech industry is facing one of the most difficult periods ever this year. CEOs confirmed an average growth of only 4.1% in their sales. After taking into account the current inflation rate, this means a real fall of a tenth. Unfortunately, companies are failing to fully compensate for dramatically rising costs by increasing the productivity of their labour or fully reflecting them in the prices of their products. That is why the majority of manufacturing firms (65%) will have to deal with a reduction in their profits this year.
Sales of manufacturing companies are expected to increase by only 4.1% this year despite record inflation. Large companies are slightly more optimistic in their estimates than small and medium-sized ones (expected sales growth of 4.7% vs. 3.4%). For both segments, however, this means a real decline in revenues and profits by about one tenth.
"The global crisis covid-19 and the Russian-Ukrainian war fully revealed the weaknesses that the Czech industry suffered from already at the time of its growth. The flow of profits and the influx of orders managed to lull companies into not taking significant steps to change their business models towards greater independence and increased finality and added value, even though we all knew that 'it should be done'. I believe it is still not too late, and it is possible to grasp the current situation as an opportunity. However, this requires finance. The government and banks should accommodate companies with a long Czech tradition and take the necessary regulatory steps where they can influence the development (energy, inflation, interest rates, financing conditions, support for innovation and available skilled labour, albeit from abroad. At this time, it is especially true that quick help is double help," says Alena Burešová, Senior Industry Manager, National Centre for Industry 4.0.
Automotive expert Milan Kulhánek, CE leader for automotive and supply chain, Deloitte, says: "The pressure on our businesses is enormous. It is hard to recruit the right staff, all inputs are increasing, there is a shortage of materials and regulation does not help, either. Established practices are no longer working. We need to look at our businesses as a whole again and stop thinking about individual processes separately."
"The industry is in a situation of unprecedented uncertainty. Prices for raw materials, materials, energy and transport are rising unexpectedly at a rapid pace. Delivery times for materials are lengthening. Selected components are missing from the market at unusually high levels, holding back entire industries. Trade unions are expecting huge wage increases. However, qualified workers are desperately lacking," Antonín Růžička, CEO of Wikov Industry, a.s., lists all the negative influences.
The rapid rise in the prices of almost all inputs of industrial production (from materials and commodities, subcontracting, energy, through the price of human labour, to the rise in the price of money) has necessarily been reflected in the expected level of profits that industrial firms are able to achieve next year.
Although the vast majority of manufacturing companies (82%) will raise their prices - by an average of 11% - this will not offset rocketing costs. Nor will they do so by making savings or increasing the efficiency of their production. Most of them (65%) will have to accept a fall in their profitability. A quarter (23%) of CEOs will be glad to see it stagnate, and only 12% of manufacturing companies will be able to boast an increase in their margins this year.
Petr Vostrý́, Corporate Client Care Manager at Česká spořitelna, advises companies, "with global change it is necessary to think about two things: firstly, how to reduce costs through innovation and digitalisation, and to reduce the energy intensity of production and focus on robotics and automation, and secondly, how to adjust the price to reflect real costs, if the market allows it. There is also a need to respond to other global changes, such as territories where I ship to and from, and also to change the just-in-time system, which is not entirely safe in today's less stable world and can lead to disruptions in production."
Martin Jirman, CEO of ABRA Software, a.s., recommends internal optimization: "If a company wants to avoid becoming more expensive and at the same time not lose profitability, it must optimize internal processes, look for material savings and reduce the energy consumption of what it does." Luboš Lukasík, Director of Corporate Customers, T-Mobile, agrees: "As always in similar situations, it is necessary to optimize individual activities. This is exactly what the principles of digitalization help to do, where the maximum amount of data is collected from production and their analysis is used to identify areas for further improvement. For example, optimising production processes, identifying steps for automation, etc. In this way, scope can be found for optimising the cost of raw materials and energy, as well as the labour required."
Jakub Lichnovský, partner, PRK Partners s.r.o., advokátní kancelář, vidí řešení v regulaci státem: „Je třeba zasáhnout do vývoje inflace a cen energií. Je nezbytné́ realizovat konkrétní kroky a například rozšířit výjimku osvobození plynu od daně pro postižené průmyslové sektory. Existuje také́ dočasný krizový rámec EU, který doplňuje soubor nástrojů státní́ podpory a další možnosti, jako jsou opatření na odškodnění podniků za škody, které jim byly přímo způsobeny mimořádnými okolnostmi.“
Jakub Lichnovský, partner, PRK Partners s.r.o., law firm, sees the solution in state regulation: "It is necessary to intervene in the development of inflation and energy prices. It is necessary to implement concrete steps and, for example, to extend the exemption from gas tax for the affected industrial sectors. There is also a temporary EU crisis framework, which complements the State aid package and other options such as measures to compensate companies for damage directly caused by exceptional circumstances."
Half of the companies (49%) are currently experiencing stagnation in terms of the volume of negotiated orders. A quarter (24%) of companies have more orders than in the same period last year, and more than a quarter of CEOs (27%) of manufacturing companies admit to having fewer orders than they could report a year ago.
A negative trend in the decline of orders can be observed especially among small firms, with a third of directors (31%) admitting a lower volume of orders than in the same period last year. SMEs have poorer negotiating skills with their customers and, due to dynamically rising costs and shorter-term contracts, are on average less competitive than large firms.
It should be noted, however, that what is a current problem for many large companies, innovative and dynamic small companies can grasp as a challenge and cope with the situation better than large corporations. A quarter of small businesses (25%) managed to win more contracts than were agreed in the same period of the previous year, despite the unfavourable conditions.
Currently, manufacturing companies have contracts for seven months; large companies are traditionally better off than small and medium-sized ones, with work secured more than twice as far in advance (11 months vs. 3 months).
"We expect a decline of at least 10%. The reason is of course the global situation," says Pavel Juříček, owner, Brano Group, a. s.
"There is still a great demand for our products, but we are not able to meet it because we are limited by supply chains. However, I am concerned about a very rapid change once our customers' stocks are replenished. So far, everyone is ordering to stock with the fear that orders may be delayed. When the warehouses are full, there will be a quick change," says Michael Dostálek, General Manager, Busch Výroba CZ, s. r. o., describing the situation in his company.