20 April 2011
1.7 Challenges facing exporters
Heavy reliance on the European economy
With a majority of trade being conducted within the EU and inward FDI originating from Europe, the Czech economy is heavily reliant on the European market. This explains why the Czech economy has suffered in the fallout from the world economic crisis even without incurring any excessive debt or credit-financing itself. New-to-the-market Hong Kong companies should take heed of the economic risk stemming from such high economic dependence, despite recent nascent signs of recovery in Europe. In particular, while foreign investment flows are resuming and there are early signs of a recovery in the Czech economy, the global recession will continue to take its toll over the near term. The need to further patch up bank balance sheets and the rise in corporate defaults, and thus continued pressure on the European banking system, all indicate that downside financial and economic risks will linger for a while, not to mention the threat of a much-feared contagion of the sovereign debt crisis originating from Southern European countries.
A small domestic market with increasing quality requirements
Success on the Czech market can be complicated by the lack of a sizable domestic market. Czechs, in general, have deeper pockets when compared to their neighbours such as the Poles, but be that as it may, the 10.5 million-strong Czech consumer base could effectively pose a significant risk to business survival. Given a small population, Czech retailers usually have in their stores a wide spectrum of products, ranging from mostly mid-ranged to several high-end ones. Against this backdrop, their orders for each single item are usually small. In other words, their order quantity may not be on a full-container-load basis and shipment consolidation is usually required. This may affect the competitiveness of Hong Kong exports when economies of scale (i.e. cost advantage) cannot be so realised. This challenge of small order quantity could become acute, when increasing quality requirements following the EU’s view to toughening up the existing environmental regulations are taken into account.
Growing trend of direct trade with China
The Czech Republic has traditionally close ties, both economic and cultural, with the Chinese mainland, thanks to their common political background. Goods bearing a label “Made in China” are generally accepted and have no problem selling in the Czech market. Although the 2007 Chinese export recalls and 2008 milk scandal may have shaken consumer confidence in Chinese-made products, Czechs still find Chinese-made products a best buy given their enticing price-quality ratios amid the global crisis. This situation may pose a threat to Hong Kong companies especially when the Czech retail industry continues to consolidate in the midst of the current crisis. The outcome of a more concentrated retail market could mean greater power to place larger orders and further inclination towards direct sourcing from mainland manufacturers, thus bypassing traders.