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View of Prague from the Lesser Town Bridge Tower. Photo by Govisity.com available at Flickr.com under Creative Commons license

07:30 pm | 18. July 2019

Czech Inventor, Chinese Investor: A Cautionary Tale

A fever for investment from China in the Czech Republic in recent years led to lack of vigilance over forced technology transfers and hostile takeovers.

By Martin Hala

In March this year, the Council of the EU passed a new framework to screen foreign direct investments coming into the European Union in order to safeguard “security, public order and strategic interests.” While European officials make no mention of China in the new legislation, related concerns over technology transfers, particularly to state-owned companies, respond largely to China’s growing presence in Europe — and its keen interest in accessing cutting edge technologies. 

Apparently paddling against this current of greater caution toward China, Italy this year became the first G7 country to formally endorse China’s signature foreign policy program, the so-called Belt and Road Initiative (BRI). Since coming to power in June last year, Italy’s populist coalition has pinned its hopes on a high-profile pivot to China that might bring much-needed investment from China. In the Czech Republic, this enthusiastic pivot to China by a new administration might instill a sense of déjà vu. For some, the experience with Chinese investment has brought sobering lessons from which Italy might do well to learn. 

THE PIVOT AND THE PROMISE

Appearing on Chinese state television in March 2016, on the eve of an official state visit to the Czech Republic by Chinese President Xi Jinping, Czech President Miloš Zeman said his predecessors had been “too submissive” toward the European Union when it came to pursuing independent relations with China. Zeman’s words were meant to underscore a new era of Czech receptiveness to Chinese business and diplomacy, against a stifling EU skepticism. In the midst of Xi’s visit, Chinese state media happily reported further words of encouragement from the Czech president, who said his country would willingly serve as a “safe harbor” for Chinese business cooperation in Europe.

The abrupt turn toward China during the Zeman presidency was sold to a somewhat bewildered Czech public under the buzzword “economic diplomacy,” the idea being that the country must seek fresh trade opportunities (read, beyond the EU) in the aftermath of the 2008 financial crisis, which depressed domestic consumption.

The Czech government has since pushed to make inroads on the trade front. CzechTrade, the government agency charged with developing international trade and cooperation under the Ministry of Trade and Industry, set up its Beijing office in 2014, and only last year opened an office in the southern economic hub of Guangzhou.

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Czech President Miloš Zeman, pictured in 2018. Photo by Pawel Kula for Sejm RP, available at Flickr.com under Creative Commons license.

Five years of "economic diplomacy" have brought lackluster results. The massive investment promised by China never materialized, and since 2016 investment flows from China to the Czech Republic have actually declined. In fact, Denmark, whose GDP in 2018 was 2.6 that of China's, is a bigger investor in the Czech Republic. 

When it comes to Czech opportunities with China, the focus has instead been on Chinese investment. During Xi Jinping’s 2016 visit, Zeman’s office published on its official website a list of projects that it claimed would draw a total of 100 billion Czech crowns (CZK) in Chinese investment that year alone — amounting to roughly $4 billion. 

By the time the first anniversary of Xi’s visit rolled around in March of last year, however, the real investment numbers were far less flashy. Something closer to two billion Czech crowns had materialized, a paltry two percent of the original advertised. All of these transactions, moreover, were acquisitions of existing assets — the majority in real estate — rather than greenfield investments that promised to bolster domestic production capacity. 

How had the calculations been so far off base? 

As it happened, President Zeman’s office calculated into its total the potential value of all memoranda of understanding (MOUs) signed during and on either side of Xi’s visit. The office, in other words, had been counting its chickens before they hatched. 

MOUs are of course not the same thing as contracted agreements, and most of them will never bring tangible results. But that does not mean they aren’t impactful in other ways — not necessarily positive. The MOUs with China can in fact allow potential investors to take a broad measure of an economic landscape, whether we’re talking about the Czech Republic or Italy, and to hone in on areas and technologies that might be of strategic interest. 

The politically-driven openness towards Chinese investors, together with a flurry of business-related exchanges, delegations and forums — all under the auspices of policy frameworks like 16+1 and the Belt and Road Initiative (BRI) — has offered them a rather detailed mapping of potential opportunities. And this whetting of appetites can lead to unfortunate and unintended consequences.

Meet innovator Jan Procházka, the man some have referred to as the Czech Republic’s own Elon Musk.

The Innovator

One of the projects heralded as an example of productive Chinese investment was a planned factory for innovative high-capacity lithium batteries in the region of Northern Moravia, known as the Czech Rust Belt (and the birthplace of Sigmund Freud). 

Here, a small Czech company called HE3DA, short for “High Energy 3D Accumulator,” developed technology for a new type of industrial batteries that would be more stable, cheaper and capable of holding greater electrical power per charge.

The technology was years in the making, and its potential applicabilities have risen along with the global shift towards electrification in the automotive industry — an area China has defined as a top priority. The automotive industry is a well-developed sector in the Czech Republic, and the country also boasts large deposits of lithium, a key component in high-capacity batteries. 

The politically-driven openness towards Chinese investors . . . . has offered them a rather detailed mapping of potential opportunities.

 

HE3DA’s director and chief inventor, Jan Procházka, is a great admirer of South African business magnate Elon Musk, and has sometimes been compared to him in Czech press. But the media-shy Procházka has been quick to admit during his occasional interviews that he is more of a scientist than a businessman. And his somewhat suspicious partners in the quest to mass-produce his innovative batteries seem to prove his point. 

Procházka’s current business partner, investor Radomír Prus, boasts a colorful history that includes a stint in the Seychelles, where for a time he was hiding from the Czech police. Prus, who claims he fell victim to the Czech “insolvency mafia,” has since been cleared by the courts. But his backing for Procházka’s batteries has apparently not been sufficient to get HE3DA on track. 

THE INVESTOR

Just as HE3DA was in need of deeper pockets, a potential investor materialized from China — at least as shrouded in mystery as Radomír Prus. Procházka has named the mystery investor simply as “Mr. Hu,” confessing that he really knows precious little about him. Other sources have referred to him variously as “Guo Huabin,” or “Chu Juanbin.” 

Part of the confusion arises from the differences between the Chinese Pinyin system of romanization and the official Czech transliteration. But the ambiguity remains a constant, and no one seems to know for sure exactly who “Mr. Hu” really is. We do know that the investor represented a Dusseldorf-based investment firm called CDC Germany Investment GmbH, the German-based arm of a Chinese company called CDG. The managing director of the Dusseldorf company is listed in German records as “Hu Yuanbin,” of Toronto, Canada, who could very well be Procházka’s “Mr. Hu.” 

CDC reportedly deposited 50 million Euro into the bank account of a HE3DA subsidiary established in anticipation of a future joint venture with the Chinese partner. The understanding, apparently, was that a second 50 million would follow. 

Then came a scheduled visit by the Chinese investor to Procházka’s laboratory. 

“We were overjoyed to secure a strategic partner,” Procházka told Czech media. “In the spirit of the investment agreement, we disclosed all of our accounting, and also the technical details of the batteries. The only thing we kept to ourselves was our black powder.”

The “black powder” is a special material required for the battery’s cathode, produced with HE3DA’s proprietary technology. It is, you could say, Procházka’s “secret sauce.” 

We continue with Pocházka’s story

They came with Czech and Chinese lawyers. We went to the lab, and they were asking a lot of questions, trying to divert our attention — and then at one moment, a Chinese professor stuck his hand into the box, grabbed a sample, and stuffed it in the pocket of his fashionable suit. We were lucky to catch him right there.

THE LAWSUIT

After the incident, Procházka explained, he held a meeting with the Chinese investor. The Chinese side, he said, kept reassuring him that the relationship was still friendly and cooperative and that the “deal was on.” Shortly after they left, however, Procházka learned that they had initiated a lawsuit against HE3DA Technologies, his subsidiary. 

“They had to be preparing this for months in advance,” Procházka said. 

The lawsuit brought the case to the attention of the Czech media. E15, a leading Czech economic paper, reported on August 15, 2017, that “the German investment firm CDC is suing HE3DA for some 130 million CZK.” HE3DA responded the same day by issuing a statement on its website, outlining its version of events. The statement was direct in its charge of industrial espionage:

Today it’s perfectly clear that there wasn’t a business intent, but rather industrial espionage where the Due Dilligence process was just a cover to obtain information to attack our company. The whole project to capture our technology must have been planned from the very beginning with the purpose not of participating in the company’s development, but rather of liquidating it, of capturing its intellectual property and moving the technology and production to China.

For the soft-spoken Procházka, this was a strong statement. But it didn’t stand for long. Within two or three days, the company removed the message from its website under circumstances that remain unclear. 

On October 28, 2017, the Czech Republic’s National Day, Czech President Miloš Zeman awarded Procházka a state medal, ostensibly for his contributions to the country. Zeman, however, has developed a reputation for awarding his friends and supporters with state medals of this kind, and in this case there was speculation whether the President’s Office was attempting to gloss over a potentially embarrassing story that casts a shadow over the merits of Zeman’s pro-Beijing investment stance. With presidential elections looming up ahead in 2018, it would have been an inauspicious time for a trade-related debate centering on one of the Czech Republic’s most prominent innovators.

 

Procházka believes his story is part of a much larger strategy pursued by China to acquire advanced technologies.

 

THE LESSON

For his part, Procházka has continued to speak out. In November 2017 he spoke to the leading investigative portal Hlídací pes (or “Watchdog”) and repeated his story about what he remains convinced was an attempt at industrial espionage. 

“They bought the investment option,” he explains, “so they could get to our books and know all about us.”

The next part of the strategy, he says, was to urge HE3DA into a costly short-term expansion, leading them to believe that this would be offset by the promised injection of cash. “They let us invest for two months in expensive equipment, and as we became weak financially, they attacked,” he says. 

“This is an effective strategy to capture a company. When you’re in debt for your purchases, nobody is willing to speak up for you. It’s brilliant, yet diabolical!”

Procházka believes his story is part of a much larger strategy pursued by China to acquire advanced technologies. He points to the example of Altair Nanotechnologies, an American maker of lithium ion battery technologies. Altair was bought by Chinese bus manufacturer Yinlong, which pushed out the original investors and moved the production to China.

Similarly, another U.S.-based maker of lithium ion batteries, A123 Systems, was bought in 2013 by China’s Wanxiang Group. Wanxiang moved production to China. In an interesting twist, however, A123 Systems opened a production line in Ostrava in 2017, very close to where Procházka’s HE3DA factory is set to finally open later this year

Attending the opening ceremony in Ostrava, where dignitaries included the Czech State Secretary of the Ministry of Industry and Trade, Chinese Ambassador Ma Keqing said that “the investments celebrated today are a perfect European example of the Belt and Road Initiative which is building the 21st century Silk Road between China and its global trading partners.” 

The city’s mayor, meanwhile, was sanguine about the promise of advanced technologies, telling those gathered that the plant would mean “a turning point in the rebirth of Ostrava.” 

18. July 2019
Author
Martin Hala

Martin Hala is a Prague-based sinologist and director of Sinopsis (sinopsis.cz), a website tracking China-related issues in the Czech Republic. He has taught at universities in Prague and Bratislava, and has conducted research in China, Taiwan, and the U.S.