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Sunday, June 9, 2013

Industrial Park? Or Industrial Cemetery?

One of our neighbors invited me to visit his company in an industrial park outside Kilkis. Our neighbor is well to-do; he doesn't keep his company for financial reasons but for other motives.

For me, it was a bit like watching the movie Titanic. One moment, you saw the shipwreck at the bottom of the ocean and the next moment, David Cameron converted it visually to the luxury liner which it once had been. I looked around at what I saw, an Industrial Cemetery, and simultaneously I imagined what it once must have been, a thriving Industrial Park. And then my brain went into overdrive with questions what would need to happen to return it to a thriving Industrial Park.

It is a quite large industrial park. The entrance road leads to a large gate with a small house and a guard inside. A bit like entering the HQ of the CIA. I imagined that, many years ago, the guard was probably quite busy checking the arrivals and opening/closing the gate. Today, the guard seemed to be happy to see a car coming by and he simply waved us through.

It was hard to tell whether all companies located in the park had gone out of business. I guess one or the other was still in operation but it certainly looked like all had gone out of business. During the time of our visit, I did not see one other human being around. Overall, the park looked like in the TV documentation "One million years after mankind disappeared". Well, maybe not one million but certainly quite a few years.

Our neighbor's company makes heating units as they are used in toasters, grills, stoves, etc. At its peak, over 60 people worked there. The work stations are still all there but total staff today is down to a grand total of three. Had this been the result of the crisis? No, our neighbor said. It was the Chinese who caused the decline. The Chinese came with the same products but at only one-tenth of the price. Hard to believe but that's what he said.

I remembered a similar visit to a similar company in Salzburg almost 20 years ago. A very prestigious company with a very prestigious ownership family. The only problem was that they had started making losses. I had asked an expert to come with me to assess the company's future. The expert looked around and, after only a short time, he said to the owner: "You know, virtually all this production will be in Slovakia & Co. in a few years' time". The owner refused to believe it. He should have.

What had the expert advised? To move all the standard production to Slovakia as soon as possible and to keep in Salzburg only those functions which the Slovaks could not (yet) perform in a satisfactory way: R&D, product development, prototype production, marketing, sales, etc. Had the owner accepted this advice, he would not have gone bankrupt a couple of years later.

That was force majeure then in Salzburg and it seems to be force majeure today with our neighbor's company. No point in hanging on to an activity when the underlying business model has lost its raison d´etre. Our neighbor understood that but, as I said, he wasn't hanging on to his business because he needed to make money.

But what could be a new business model which would return the area into a thriving industrial park? I couldn't come up with any facts but I certainly had a few dreams.

I dreamed that one could declare the entire area as a Special Economic Zone (SEZ). An SEZ with its own economic framework and regulations, all of which such that an investor would consider it as an optimal place to do business. Perhaps a one-stop process where the investor is promised that he can get all necessary permits within a maximum period of, say, 90 days. Perhaps free labor negotiation between investors and employee representations. Perhaps a communal commitment to get the infrastructure back into shape. Perhaps a commitment that earnings re-invested into tangible assets are exempt from taxation. Etc., etc. etc.

It wouldn't seem so difficult to turn the area into an optimal place to do business (provided the will was there!) but who would want to open an operation there and for what purpose?

This is where, in my opinion, smart brains in places like a Ministry of Economics or a think tank or a consulting firm are called for. Someone would have to figure out what type of products would find a market if they were produced there at internationally competitive levels of productivity and costs. A market either in Greece or outside the country (exports). What comes to mind first of all are products which Greece presently imports but which could just as well be produced in Greece if only there were competitive business conditions.

Now suppose that these smart brains would identify a dozen such products. They could then develop business plans for new operations with financials which show realistic revenues, expenses and profits. And profits at a level which makes for an attractive return on the investor's investment. They could go public with those business plans and invite bids from potential investors.

Would a foreign investor trust those business plans? Probably not. The foreign investor would probably fear that Greece could change the promised rules of the game any time it wants to. He might also be worried that Greece might eventually exit the Eurozone, thereby devaluing his investment.

But what if Greece came up with a new Foreign Investment Law; a law of constitutional rank so that it cannot be changed any time of the day? What if that law guaranteed the foreign investor all those terms and conditions on the basis of which he makes his investment? What if the law also protected the foreign investor against the risk of a Grexit?

I suppose the foreign investor would still not trust the situation. After all, how could Greece protect him against a Grexit?

Wait a minute, isn't Greece a member of the EU? Doesn't the EU have an interest that investments are spread more evenly throughout the EU so that employment within the EU is more balanced than it is today? Wouldn't that be enough of a reason for the EU to issue guarantees for the political risk of such investments? Guarantees which give investors the security that, if Greece should ever change the terms of the law (or even grexit), he can get his money back from the EU?

If the EU issued such guarantees, it would have all the rights in the world to audit the SEZ on a regular basis to check compliance both on the part of Greece as well as on the part of the foreign investor. If Greece started to fiddle around with the law, the EU could threaten to withdraw all financial support. If the foreign investor tried to pull fast ones by adopting 'Greek ways of doing business' (corruption, cheating on labor agreements, etc.), the EU could simply terminate its guarantee. Would any investor want to take the risk of losing that protection? I doubt it. Much more likely, the investors would adhere to transparent business practices and thereby become role models for the rest of the economy.

Actually, if such an SEZ works well, it by itself could become a role model for the rest of the economy. If the rest of the economy sees that things are going very well in an SEZ, the rest of the economy might be motivated to copy the economic framework applied there. The rules of the game within an SEZ might rub off on the rest of the economy over time.

Who could be such foreign investors? Let's not dream that true foreign investors would immediately jump on the opportunity to open up an operation in Greece. They probably wouldn't.

But remember! Don't Greeks themselves have a lot of money stashed away in foreign bank accounts? How much do they earn on that in, say, Switzerland these days? 2%? 1%? Perhaps even less? What if they saw that they could earn, say, 10% on some of their money by investing in an SEZ? Greeks recognize a good business opportunity when it presents itself. Wouldn't it be fair to assume that Greeks would soon recognize that there are good business opportunities in an SEZ?

Now to a very serious point. The rest of the EU might scream 'foul play'; 'distortion of competition'; etc. Yes, they probably would. They might even find reasons to sue the violation of EU treaties before a European Court.

Before they sued, they would be well advised to think this through. If the Greek economy does not get back on its feet and generate more economic value that it does today, the EU will have little choice but to send money to Greece on an ongoing basis. Remember the term 'transfer union' which scares the daylights out of every German? Could it not be explained to every German that the cost to his own pocket is much lower when Greece is helped to become a value-generating economy than it would be if Greece remained an economic basket case?

The cost to EU tax payers of a model as described above is no more than a few signatures on a guarantee. No tax payers' monies would have to flow to Greece. Instead, private investors' monies would do that. And the more investors' monies flow to Greece to finance profitable investments there, the less the risk of a future Grexit.

As monies flow to Greece for new productive investment, employment will go up. Remember! When employment goes up, so do income taxes and social contributions. And, by golly, the state's revenues go up as well!

So much for my dreams. We spent a couple of hours with our neighbor getting more and more depressed. When leaving, I asked myself whether my dreams had a realistic chance of ever becoming true. My brain said 'of course!' My gut said 'probably not!'

5 comments:

  1. Couldn't agree more and with this "perhaps a commitment that earnings re-invested into tangible assets are exempt from taxation"

    I have written to Frances Coppola specifically about banks

    http://coppolacomment.blogspot.co.uk/2013/05/the-equivalence-of-debt-and-equity.html

    MS


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  2. There something that seems to be forgotten in all these discussions:real knowhow. Many years ago (early 90's) I worked in a robotics company. Of all the companies that we installed a robot only one, making metal beds, survived. The death of industrial production in Greece had already started. What was the difference? The bed maker got his son to learn how to expertly program the machine. He got to be better than us and only then the robot went into production.
    Productivity hit the roof and because there was no need for manual handling (as in the case of say iPads) he remained competitive. If this knowhow is not created within a company nothing can save you. In many cases (60% of cases) automation can beat the Chinese. I guess that the Salzburg company had the same problem:prestigious owners and robotics/automation often don't mix

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  3. Really impressing! So, there are real solutions to real problems after all. I wondered why they ( the government) never do what they are supposed to do, until I read a book from an MIT professor which described ‘why nations fail’. I want to deal with this solution you propose. I am willing to ACT. I want to IMPLEMENT your proposal. I am a low to middle class, coming from low class, mechanical engineer in Greece who wants to see things change. Really change! Actually I always wondered why we don’t produce machinery for example, which we certainly need. I read once a report from the EU which also wondered why Greece doesn’t produce the machinery it needs. I run my own very small construction company which I hoped could get me further, till the crisis came. Actually I would like to have a machinery producing factory of my own, but I never had the money to do that. I actually started the construction company to collect that money. Now 40 years old, I discover I will never be able to do anything that big in my country. Crisis took our lives back at least 10 years. I don’t have experience in international banking or international business which could have helped me obviously with business knowhow. I want to ACT. I want to implement your solutions. But I don’t have experience in that. I don’t have money. What should be the roadmap? Would you, Sir, be willing to give some further advice? Greece has many people like me who would give their most valuable assets ( that is their time and mind, we don’t have any money) to pursue a dream. We don’t have knowhow. We do have will though. What should be the first steps? What should I DO first?

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    1. I have written quite a bit about the book "Why Nations Fail". Their argument is that it is not geography nor religion nor races which make the difference. Instead, it is the State of Law, the respective strong institutions and a shared belief of the people that the State of Law and strong institutions are the pillars of a well-functioning society.

      I know from my own experience that there are many, many Greeks who feel like you. I once gave a talk to students at the Aristotle University in Thessaloniki. There was an enthusiastic discussion afterwards. One question floored me. A young teacher asked: "We know our country is in trouble. We know that there are many things which need to be changed. We want to help in that process but someone should tell us what to do!"

      What can YOU do first? If I only had an answer for that because it is Greek leadership which should suggest answers. There are several internet platforms (e.g. 'Greece is changing!) where motivated people get together and spread positive news. There would be the EU Task Force to contact. There would be your Chamber of Commerce. I recently attended a XING meeting in Thessaloniki. All the people there were young entrepreneurs with a forward-looking mindset. I also visited an export consulting firm where I was most impressed by what they were doing (see link).

      I guess I have only 3 suggestions: engage yourself, engage yourself and, again, engage yourself. Personal engagement creates personal engagement on the other side and, before you know it, you have a multiplier effect.

      http://klauskastner.blogspot.co.at/2011/09/speech-to-group-of-young-greeks.html

      http://klauskastner.blogspot.co.at/2013/04/global-greece-effort-to-promote-greek.html

      PS: below is my blog inventory with the most important pieces of 2011. Review 'Future strategies for Greece'. You my find some ideas.

      http://klauskastner.blogspot.co.at/2012/09/what-this-blog-is-all-about.html

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  4. Thank you for your reply and your inspiring blog!

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