The FINANCIAL — Political disagreement, budget deficit and expected entrance of a new competitor to the local market were named by different experts as the main reasons causing the collapse of Elit Electronics, the largest Georgian consumer electronics importer. Experts spoke with The FINANCIAL about the main mistakes made by the company’s management
Background
On September 1, Elit Electronics closed 34 of its stores. Company Director Anzor Kokoladze told EurasiaNet, an online magazine operated by the Open Society Institute, that the company’s accounts were frozen on August 10. Elit Electronics tried to keep operating on a cash basis, but then officials took action to seize its cash on August 21. The retailer was formally “sequestered” on September 1, precipitating the store closings. According to Kokoladze, the company really owes the government GEL 120,000 (about USD 71,000) due to an accounting error. Elit Electronics employs over 1,000 people directly; and the company estimates that an additional 900 people are affected indirectly.
Elit Electronics, founded as LLC in 1996, was reorganized in JSC recently. Admission of shares in the trading system Georgian Stock Exchange was expected in September 2008, but after the war with Russia, the company changed its plans.
According to Eter Kokoladze, Head of the Sales Department of Elit Electronics, direct effects include a destroyed store located in Tamarasheni and Gori. Total losses reached GEL 1.8 million the company told The FINANCIAL in September 2008.
According to Invest in Georgia Anzor Kokoladze is the single owner of the total stocks. He was up till recently managing a 150 million budget annually. But the conflict with the tax department has changed his life, business and future plans dramatically.
The Navtlugi Railway Station Rehabilitation project planned by Elit Electronics is now suspended. The company won a competition for a 49-year leasing of Tbilisi Junction building. Elit Electronics was offered a leasing fee to the amount of USD 22,000 monthly. The company was planning to invest USD 15 million.
Eter Kokoladze, Head of the Sales Department of Elit Electronics told The FINANCIAL that “During the war with Russia there was serious decrease in sales and trade. In such a critical situation as this it’s very important and necessary for businesses to take out banking credits, which help the business stay afloat. We are currently debating the matter.”.
The company became a borrower. Now it is responsible for a USD 15 million credit line from different banks. TBC Bank, one of the creditors has already claimed its partnership in management of the company. But this decision was not welcomed by borrowers. Ia Gogoladze, Advertising Manager of Elit Electronics, says “it was a surprise, and the Bank’s decision was unexpected.”
“I think that the cooperation of TBC will really help Elit Electronics to overcome problems,” David Narmania, CEO of Caucasian Institute for Economic and Social Research, says.
“Despite the current recession and financial problems TBC Bank still remains a stable institution in the sector. It has useful activities for buying shares of Elit Electronics and running the company. In the case of TBC Bank and Elit Electronics’ collaboration the Bank will restore giving out credits which will increase the number of realization, whereas Elit Electronics by itself could not convince banks to continue giving out credits,” Narmania mentions.
Gogoladze says that the company was ready to discuss the conversion of the debt into shares. But as she says it was not proposed by the Bank.
“Our company always used credit lines. From its beginning, for all its 13 years the company never abolished the terms for paying interest rates. As a result no bank had any clue about our problems until the entrance of tax-paying inspection and the then stated fine,” Gogoladze declares.
“We should not forget that relationships are always important for the development of business,” Akaki Kheladze, Doctor of Graduate Studies at Caucasus University (CU), told The FINANCIAL.
“We know that the owner of Elit Electronics was in close relations with Zurab Nogaideli, former Prime Minister, one of the leaders of the President’s opposition. These two people are from Achara and were cooperating,” says David Narmania, CEO of the Caucasian Institute for Economic and Social Research.
As Akaki Kheladze, CU, says “Making a wrong decision when choosing a partner is a management’s mistake.”
But Narmania does not think that Elit Electronics became a victim of political disagreement. As Nogaideli presently is not such a strong figure in politics that the Government would go to such steps for.
“As for me I could not see his political orientation and do not even know his political work plan. I do not think that Nogaideli is viewed as a dangerous figure by our government,” he notes.
“In Georgia and even in our neighbouring countries running business is not based on the theses of business ability, knowledge and intelligence that we read in books. Any company reaches achievement with the help of key success factors but after abolishing them you should foresee that you will face problems. When the company fails in estimating the subjective or objective reality, this is the reason for a sick management team,” Kheladze says.
“Usually radicalism is disadvantageous as a regulatory environment is very powerful. My advice for any other companies is not to make fatal mistakes that can expose their existence in danger. The case of Elit Electronics is a good example for other companies. A wise decision maker is a person who can take into account the examples and mistakes of other companies. Of course it is not good what happened to Elit Electronics but on the other hand we saw the precedent and it can help others not to make the same mistakes,” Kheladze declares.
“Currently the Georgian Government faces serious difficulties with protracted budget deadlock. They have started warning companies to pay even GEL 10-15. I think that is the main reason for the current difficulties of Elit Electronics,” Narmania mentions.
“In 2007 the financial policy entered Elit Electronics and fined them GEL 14,000,000. “Of course we do not agree with their decision and appealed in different instances. According to that act we were responsible for paying GEL 120,000 and we recognized that. GEL 80,000 was the basic sum and 40,000 the fine. Later, in the process of our controversy the department of receivership abolished a part of our sum and left GEL 7 million. We appealed against their statement in the Supreme Court and the process is ongoing,” says Ia Gogoladze, Advertising Manager of Elit Electronics.
Narmania notes that the case of Elit Electronics is not unique. Many other companies have been fined and more will be in the future.
“I can tell you from my own example that as an individual I had to pay GEL 18 more, which was caused by a mistake in the tax code and because of this I received a letter informing me of inspection and that if I didn’t pay this fine I would have my property confiscated. That’s why I think that in the case of Elit Electronics we had more of a problem with this issue than with political persecution,” he mentions.
Narmania mentions that when in 2004 the Government accepted new tax paying codes they maximally liberalized it. It abolished some of the taxes but lots of acts were left equivocal. “Accordingly, companies are automatically abrogating it. Taxpaying inspection is fining organizations for abrogation and the sum of the fine is not small. As we hear the sum of the fine of Elit Electronics is GEL 7 million.”
“According to the statement of the Georgian Government regarding taxpaying codes, we were putted encashment, but the company still lasted working with cash calculation. On August 21 all of the branches of Elit Electronics were inspected by authorities in order to withdraw cash. After that the entire turned sum of the company moved to the budget. If the company would have continued working it would not have been able to pay for its leases, salaries, public utilities and would not have been able to buy new products. All these things would finally have caused the bankruptcy of our company. Accordingly we decided to interrupt work until the issue gets cleared up,” Gogoladze notes.
Overcoming recession
“The global recession can be considered the least likely reason for the current problems of Elit Electronics. The recession was in its middle stage and the worse effects were already over when Elit Electronics started experiencing the problems it faces now. The crisis would have affected the financial conditions of Elit Electronics but not on such scales that could rock the very existence of Elit Electronics. The recession could affect daily operations and routine works of the company, for example reduction of staff, number of sales and price policy. But it could not have caused the bankruptcy of Elit Electronics,” says Kheladze, CU.
“After the Russo-Georgian war in 2008, the company changed its strategy and became focused on averting the recession. We managed to attract more credit lines from foreign partners and a restructuring of existing debts. We also managed to restructure credit lines with local banks. The company conducted an audit in order to attract investments. The agreement was almost concluded. From April 2009 the company started increasing sales by 15-20% per month. From June we started seeing profits from our sales. We think that the company has come out of the recession, but the developed events inflicted serious damage which we may or may not be able to recover from in the near future,” Gogoladze informs.
Gogoladze says that the company is still optimistic about reaching an agreement with the taxpaying service and getting the results of previous development. “We hope to reach agreement with the taxpaying service yet,” she says.
She notes that the decision of the City Court is not just and they are thinking of appealing against it.
“We are optimistic about the decision of the Supreme Court, but it is a long termed process. We hope to reach agreement with the taxpaying inspection and pay the GEL 7 million step by step, over a 5 year term,” Gogoladze says.
Kheladze predicts that the most likely outcome is that the company will pay their debt. “It is hard to say who will become the new shareholder and owner of the company though.”
“Presently for us the most important thing is to survive” Gogoladze notes.
Written By Madona Gasanova
Discussion about this post