Published : 20 March
1 472 words in that article

176 million Czech crowns (7M€): that’s the price paid at judicial auction on 15th March 2013 by Marek Galvas, unique shareholder of “Truck Development s.r.o.” – company created on 8th March 2013 – to buy Tatra Company, the third oldest car manufacturer in the world.

An old company having great trouble adapting itself to modernity

Created in 1850 in Kopřivnice (Northern Moravia), the Tatra Company started to produce cars in 1897 and trucks in 1898. It came up in 1923 with a backbone tube chassis which has been continuously improved since then and the company became one of the biggest world car manufacturers. Having own smelting plant and spare parts suppliers, Tatra employed several thousand people during the Communist Czechoslovakian period and still produced more than 15 000 trucks in 1989.

The 90’s marked the beginning of a downward spiral for the company. Tatra abandoned the car production in 1999 in order to focus on the truck domain, either civilian or military, but could not stop the production drop despite the efforts of the new shareholders to increase sales.

The American company “Terex Corp.” bought Tatra in 2003 and sold it to the “Tatra Holdings s.r.o.” in 2006. This latter company consists of various shareholders: the British company with Hindi owner “Vectra Ltd”; the American Sam Eyde; the Belgian group “KBC Private Equity”; the Czech company “Meadow Hill s.r.o.” and another American Ronald Adams, Tatra CEO for the past years.

The company split and its subsidiaries (smelting plant and spare parts suppliers) had to find other clients in order to compensate the smaller orders from parent company. Successive cooperation with Renault first, then with American Navistar in 2010 and finally with Dutch DAF last year never conducted to a reverse trend. Despite better sales in 2007 and 2008 thanks to a big contract with the Czech Armed Forces – unfortunately with some suspicion of corruption – the production went down to its lowest level in 2012 with 496 trucks.

Some doubts about the motivations of the main creditor

Weighted down by a huge debt of 1.502 billion CZK (60M€), the Czech truck manufacturer has been driven to judiciary auction by companies “Composite Com”, that bought Tatra receivables for an amount of 650 million crowns, and “Development Agency” who has a 218 M€ claim on Tatra.

However the motivations of “Composite Com” are not clear. Who is behind this group? Looking at the company representation board, you can find names who are very close to two companies linked with Tatra: “Promet Group” that bought two years ago Tatra subsidiary “Tawesco” (production of stamping tools, welding and gauging fixtures for the car industry) and “Excalibur Army” – a maintenance and reconstruction company specialized in military vehicles that bought in last February the former Defense Ministry maintenance company VOP.

Considering the activities of both companies, it might be tempting to liquidate Tatra in order to buy very cheap some interesting facilities.

A good deal for a unique buyer

Moreover, the conditions of the auction itself put forward another question linked with the weak participation. Effectively, when the judiciary auction was notified in late February, the press anticipated the participation of several European (MAN and DAF), Russian – even Indian – companies.

The reality was a little bit different: the office of the Court executor set up the reserve price at 175.135 million crowns, i-e two thirds of the current company asset. The best –and unique- bid of 176 million crowns won the auction in less than a minute. The winner is Mr. Marek Galvas, who is financially supported by a Slovak group “J&T Group”, which is specialized in project financing and investments. But this company did not want to confirm that it will help to pay Tatra’s debt.

Mr. Galvas is well-known from the owners of “J&T Group” because he is manager – or member of supervisory board – of a dozen of companies, three of which are directly part of this company from Bratislava (“První zpravodajské” , “J&T Credits Investments” et “Environmental Services”).

Thanks to his 176 M CZK ticket, Mr. Galvas will own a company strong of 1765 employees (figures of 2012) with a market value of 1.765 billion CZK in spite of a 1.502 billion CZK debt, that is to say a 263 million CZK net value and an immediate benefit of 90 million Czech crowns (3.6 M€). This last figure is obviously completely artificial because the benefit will depend of the strategy retained for the company, which should be made public in one month. Effectively, Mr. Galvas wants to finish the process of transfer of ownership before unveiling any further orientation.

An uncertain future not to be seen through rose-tinted glasses

As a first step, Marek Galvas will appoint a new board of directors and try to get acquainted with the detailed situation of Tatra.

More or less three different strategies can be envisaged:

The status-quo, Tatra will go on with truck production according to the current conditions: a risky option that appears as not very profitable at first sight

For twenty years now, Tatra is struggling to survive in the world truck market. Unfortunately, a deficit in investment led to an aging of the production lines and to a lack of innovation. In front of big companies such as MAN, DAF or Renault, Tatra’s products were less and less competitive.

If the new owner wanted to go on with the truck production, he should heavily invest in the modernization of the company together with the payment of the debt that would be enough to dry out the financial capabilities of a normal investor. Delocalization of some part of the production to less expensive countries such as China or India would not be more satisfying in the middle term because transportation costs would cut off the awaited benefits of that kind of operation.

This option is not very likely because doomed to fail in the middle term without a very important and very expensive modernization of the production lines.

The specialization in subcontracting: a feasible solution whose price would be the loss of truck manufacturer status

Nowadays the main manufacturers already merged at European or World level in order to face the challenges of globalization. Companies in middle-sized States that were not already absorbed by bigger companies – as it is the case for Škoda that was bought years ago by Volkswagen – are more or less destined for failure because they can’t pay alone the price for developing new materials. To survive they have to specialize.

Several Czech companies have already followed this path and abandoned their original manufacturing trade to become flourishing subcontractors. That’s the case, for instance, of former planes manufacturers Aero Vodochody or Letov (which is now associated to the French group Latécoère). Those companies are currently producing subcomponents for bigger groups and are prospering thanks to the excellent qualifications of the Czech engineers and workers together with reasonable labor costs.

Tatra might head in that direction and specialize in production of chassis – that are particularly well-known – or other high value spare parts such as engines or gearboxes. This would suppose a restructuration of the company to focus on that kind of jobs together with huge investments in R&D to keep a high added value capability.

The social cost would be quite high at the beginning but middle-term perspectives of development (3 to 5 years) are good enough to ensure that the company would survive.

Split sales of the company: the choice of immediate profitability versus a major social cost

Despite its huge debt, Tatra still has a high intrinsic value that could whet the appetites of investors without scruples. Terrains, buildings, machine-tools, patents and the technical Museum of Tatra – which is estimated more or less at 300 million crowns – might be sold for a good price to clients interested by those assets immediately available. The benefits might be then sent to fiscal paradises and once the company has been dried out of its most valuable assets, it would be easy to declare bankruptcy.

This solution is neither elegant nor very legal but greediness often minimizes risks. And the major losers would be Tatra employees who would lose their jobs and small creditors who would not be able to recover their money.

It would not be fair to think that the new owner has such idea even before he has taken over the ownership of the company but the recent Czech history is so abundant with cases of this kind that it would not be very professional not to mention it.

Let’s be optimistic for Tatra who deserves to be saved for the future generations because of its history, the quality of its trucks and its know-how. So we will monitor very carefully the first decisions of Mr. Galvas and we’ll report on those webpages.

http://www.opinicus-sro.com/Tatra-et-son-futur-en-point-d?lang=en