Croatia is Too Close for Investment in Production

According to the worst-case scenario, we will have to lay off a larger number of workers. So far, we have implemented ‘soft’ measures, such as a 10% salary reduction and shortening the workweek to 36 hours

interviewed by Matilda Bačelić
[email protected]

Gorenje is not the largest Slovenian company, although its total revenue of 1.3 billion euros places it at the top, but it is probably the largest multinational from the former state. It has 50 companies abroad where it generates 90 percent of its sales, and in recent years it has been trying with all its might to transform itself from an industrial company into a design giant. The current crisis has caught it in such a position and hit it mercilessly. Sales have sharply declined in almost all markets, prompting Gorenje to seek state aid and announce layoffs, while currently using an ‘innovative’ method of persuading employees that it is better to leave voluntarily. With the arrival of tough times, more and more critics of Gorenje’s management, led by Franjo Bobinec, are criticizing some moves, such as dealing with ownership issues. The Chairman of the Supervisory Board, Jože Zagožen, states that it would be hard to find a better person to lead Gorenje. According to the current estimates of the management, Gorenje can survive another 12 to 18 months if the crisis does not significantly worsen, as the level of indebtedness and illiquidity are not yet alarming. The first ‘man’ of Gorenje in an interview with Lider speaks about the situation in the Croatian market in light of deteriorating political relations, about facing the crisis and the current strategy, without disclosing specific figures considering that official results for 2008 are expected on February 26.

• How does the current Slovenian-Croatian political crisis affect Gorenje’s business?
– There are no analyses on how much sales are falling due to such a situation. Political tensions between the countries, there is no doubt, are not good for economic relations. I often meet with Slovenian politicians, not only as the President of Gorenje’s Management but also as the President of the Association of Managers of Slovenia, and I always say that the relationship between Slovenia and Croatia is not only a political but also a first-class economic issue and that good neighborly relations should be maintained. Croatia is one of Slovenia’s most important foreign trade partners and vice versa. Politics on both sides often lacks sufficient understanding of these matters, but we have become accustomed to this in these areas. I personally greatly appreciate Croatia as a country with great potential, and it is a shame that such things happen.

• Do you think that in the end, economic interest will prevail, or is this still an important political issue for Slovenia? Does the Slovenian government listen to entrepreneurs?
– I believe that the government is aware that it is in our interest for Croatia to enter the EU and for the border to expand further southeast. However, politics is always the art of the possible, and in some situations, other factors decide. I personally believe that things will be resolved very quickly. The Slovenian government is now engaged in ratifying Croatia’s entry into NATO, and it is only a matter of time before Croatia enters the EU. I think that in the end, Slovenia will be a strong advocate for Croatia’s entry into the EU because it is also in its interest.

• How important is the Croatian market to Gorenje?
– About five percent of Gorenje’s total turnover comes from Croatia, which is a significant share considering that our turnover structure is very dispersed. Croatia is among our top ten markets. At this moment, we have liquidity problems and political disagreements, although I believe that the crisis has a much stronger impact on the decline in sales.

• Have you revised your plans for 2009? What are the current forecasts?
– Under these conditions, accurate forecasts cannot be given. We have agreed to review results every three months and see what needs to be done. We have just completed a sales conference with all branches of the sales network worldwide and will make a plan for the second quarter.

• What is your ‘black scenario’ in case the crisis becomes even more serious?
– We have already developed three scenarios for the crisis. Each scenario has its action plan depending on the severity of the decline in demand. According to the worst-case scenario, we will have to lay off a larger number of workers. So far, we have applied ‘soft’ measures such as a 10% salary reduction and shortening the workweek to 36 hours.

• Are EU markets still a priority for you, or has the focus shifted to the East?
– Russia and Ukraine are very important markets for us, but we are also seeing a significant decline there. Ukraine has fallen the most, almost 80 percent. The problem is that the local currencies, the hryvnia and the ruble, have strongly devalued, which greatly affects the demand in these two countries. At this moment, we have even bigger problems in the East than in Western Europe.

• And you have focused on those markets in recent years…
– We have never oriented ourselves solely to the East. Our strategy outlines that all of Europe is our domestic market, but in recent years, the East has grown at much higher rates. Today, our market shares are larger in the East than in the West. In Eastern Europe, Gorenje is one of the leading brands with a market share that varies in different segments between four and 30 percent, while in Southeast Europe, we hold shares of 50 percent and more.

• What is still Gorenje’s strategic goal?
– Our general goal is to be among the top five in all of Europe. In every market where we are present, we want to be among the top five to six largest manufacturers. So far, we are among the top three to four manufacturers in all countries of Central and Eastern Europe, including the western Balkans. In Western Europe, we are among the eight largest and hold four percent of the total European market.

• Considering that the household appliance industry is very saturated and competitive, whom do you need to surpass to achieve this?
– The main players in this industry are Bosch Siemens, Electrolux, Whirlpool, and Indesit. After the big four, there is Miele, which does not sell as much because it has a high average price, then Turkish Arcelik, and after that, we are equal to the Spanish Fagor, Thomson Brant, Candy, etc. Gorenje is already much stronger than some of these manufacturers today.

• On what has Gorenje grown faster than the competition in recent years?
– On fantastic design and new technologies.

• Some criticize you for betting everything on design; how has your investment in collaboration with renowned designers like Pininfarina, Ora Ito, and Swarovski paid off? How is the sale of premium products progressing, and will you focus solely on that segment in the future?
– A few years ago, luxury lines accounted for only one to two percent of our total sales, while today they account for 10 to 12 percent and are experiencing higher growth than traditional products. Gorenje wants to position itself as a leader in design and innovation.

• How much do you invest annually in the development of new products and design?
– About three to five percent of total turnover.

• The collaboration with the tech giant Apple was quite a surprise. When will the current prototypes, such as the Made for iPod line or Qube, hit the market?
– Apple has embraced the idea of combining our refrigerator with the iconic iPod touch very well, and Gorenje is the first company to sign such a contract in the field of home electronics. We are still developing the concepts of Black Qube, White Qube, and Gorenje Made for iPod refrigerator. These are revolutionary views on living space architecture and lifestyle, and we are still exploring their potential. If there is enough market interest, we will start production.

• What is the value of the Gorenje brand?
– At the end of last year, the European Brand Institute estimated the value of the Gorenje brand at 445 million euros. By this measure, we are undoubtedly the strongest Slovenian brand.

• Last year you acquired the Dutch ATAG. How will this improve Gorenje’s results?
– In 2008, ATAG achieved planned profit, so we expect it to pay a dividend of around 10 million euros, of which six million was already paid out last year.

• Have you given up on another acquisition that you announced for last year?
– Due to intense consolidation in the industry, there are not many companies that interest us, but we are carefully monitoring all opportunities that may arise for future acquisitions.

• How do you comment on the drastic drop in Gorenje’s stock price on the Ljubljana Stock Exchange?
– Our stock price has fallen by more than 70 percent, but although we are suffering from the negative impact of the crisis, such a drop has nothing to do with Gorenje’s business. The Ljubljana Stock Exchange is very small and poorly liquid, and global influences automatically spill over.

• The state had already put you on the ‘sale list.’ Will there soon be a sale of 26 percent of state shares in Gorenje?
– I think that in the short term, there will not be, precisely because of the current low stock price. When their price rises again, we could expect that because the state’s goal is not to remain in Gorenje’s ownership structure in the long term.

• Are you afraid of a hostile takeover?
– A hostile takeover is theoretically possible because Gorenje has about 20,000 shareholders, but the question is how larger shareholders, such as the state, the investment fund KD (which holds about eight percent), and 150 Gorenje managers associated in the company Ingor, which has five percent of the shares since the recapitalization two years ago, would react to that.

• You say that in a crisis, long-term development and the people who must be motivated should not be forgotten. How do you plan to achieve this in conditions where you are forced to lay off employees?
– A leader must be a role model for all employees. The crisis is a challenge for everyone. That is why we have intensified communication among employees at all levels in terms of achieving common goals. I trust all my associates and know that we will succeed in overcoming all difficulties.

• You have invested significantly in the region, primarily in Serbia, with investments exceeding 50 million in recent years. Why have you bypassed Croatia, and do you plan any investments in that market in the future?
– Croatia was too close for us, while Serbia has proven to be a better location due to cheaper labor. Additionally, from Valjevo, where we opened a refrigerator factory, we have a good logistical position for the markets of Romania and Bulgaria.
I believe that with new products we will further improve our position in the Croatian market; we have excellent service, several sales centers, and we work well with Croatian traders.

• Has the crisis affected the reduction of planned investments by Gorenje?
– Everything we planned and did has been done. In Valjevo, we did not plan to build a new washing machine factory this year, but only to buy land, and we have done that. The construction of the factory is planned for the next two to three years.