Impact of global crisis on Czech enterprises

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Impact of global crisis on Czech enterprises

• 25 November 2008
• Jirí Prokop

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Are you prepared for the worst?
Source dshort.com based on SP 500 data, DJIA
data used for 1929-32 performance
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Czech Republic affected by two channels
Capital markets crunch
Less lending
Economic Slowdown in Czech Republic
Foreign economic slowdown
Less demand for exports
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Impact through capital markets

• Czech banks are in good shape because of low
  exposition to risky assets or troubled foreign
  banks as they have rather focused on growing
  local retail and corporate market.
• Capital adequacy ratios dont indicate negative
  trend or significant problems.
• Our capital market is generally not much
  dependent on foreign capital markets. Average
  loan to deposit ratio in Czech banking system is
  well below 1 indicating there should generally be
  sufficient liquidity in our banking system.

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Impact through capital markets (cont.)

• However, some are dependency on foreign capital
  markets. Combined with restricted local
  interbank market (today well over 90 is
  overnight lending), the result is that increased
  reluctance of banks to lend to corporate and
  retail lending. Over CZK 170 billion of short
  liquidity was withdrawn from corporate sector in
  last two months. Cut of repo rate by CNB to 2.75
  had limited effect.
• Situation could improve if banks loosen lending
  to corporate and retail sector, however, this
  seems unlikely at this moment. Development of
  capital ratios in IV/08 and I/09 will also be
  important in this respect.
• Liquidity problem is having negative impact on
  corporate sector in that it does not have
  sufficient liquidity gt development,
  construction, construction materials, automotive
  components, or any company that needs financing
  or refinancing.

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Impact through real economy

• Our economy is highly exposed to foreign demand
  export accounts for appr. 80 of our domestic
  product. Appr. 85 of exports ends up in EU.
  Significant slowdown in EU therefore will
  necessarily impact our economy and companies.

Source European Commission
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Impact through real economy (cont.)

• What makes our economy particularly sensitive is
  dependence on automotive sector. It makes 20 of
  our domestic product. Plus many other sectors are
  dependent on automotive sector (logistics,
  transportation, steelmaking etc.)
• European automotive market traditionally market
  for 15 to 16 million units annually. This is
  projected to drop by 20 (to less than 12 million
  units) in 2009.

Source ACEA European Automobile Manufacturers
association
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Changes in market demand

• Some industries (such as food and tobacco) are
  affected less than the economy as a whole while
  other industries feel the cycle more (industries
  manufacturing capital or deferrable goods such as
  houses, cars or furniture)
• Market decline alone rarely leads to crisis,
  however, crisis often develops if the market
  decline is coupled with other factors such as
  lack of financial control, previous boomy
  management decisions, pressure on margins,
  aggressive financial policy
• Many companies will get in trouble an in many
  cases decreased gross margins will not be
  sufficient to pay for fixed costs or loans used
  to finance huge capacity expansions.

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Causes of troubles in a company

• Most common causes of corporate decline and
  crisis
• Changes in market demand
• Pressure on margins
• Inadequate financial control
• Aggressive financial policy
• Poor management.

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Restructuring initiatives

• Dont ignore the decline but act on it. Effective
  corporate management is about change. If no
  attempt is made to act on the causes of decline,
  a crisis will develop.
• Cut cost, refocus on cash management. Improve
  financial control, restrict authority to spend
  money, incur credit or otherwise commit the
  business.
• Introduce organizational structure with clear
  accountability. Break up the firm in units under
  separate profit responsibilities. Remove
  unnecessary layers of management. Break up the
  firm in units under separate profit
  responsibilities.
• Reassess people and decide who should be changed
  and when. Implement effective reward system.
  Reduce size of backoffice such as corporate,
  training, marketing, public relations (but not
  finance).
• Improve business processes in procurement,
  conversion, logistics, sales, marketing.
  Outsource processes that can be done more
  effectively outside.

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Restructuring initiatives (cont.)

• Redefine the business. Ask What businesses are
  we in? and What businesses should we be in?
  Focus on businesses which are profitable and
  which you understand.
• Diversified companies refocus on core business
  and dispose noncore assets or businesses.
• Vertically integrated companies split.
• Refocus geographically, away from international
  operations toward domestic, or vice versa.
• Companies refocus on most profitable customers or
  processes or they refocus on new products and
  markets.

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Contact

• Jirí Prokop
• Partner
• Ernst Young
• Tel. [phone]
• Fax [phone]
• E-mail jiri.prokop_at_cz.ey.com

Information in this presentation is intended to
provide only a general outline of the subjects
covered. It should neither be regarded as
comprehensive nor sufficient for making
decisions, nor should it be used in place of
professional advice. Ernst Young, s.r.o.,
accepts no responsibility for loss arising from
any action taken or not taken by anyone using
this publication.