The Biggest Shortcoming of the Manufacturing Industry (So Far) is Its Export Advantage

There is a saying ‘the crazier the German, the bigger the potato’, paraphrasing which we can largely explain the background of the high growth of Croatian manufacturing industry exports in the last two years: ‘the more backward the industry, the greater the export’. This should not be taken completely literally, but the fact is that, in export terms, many Croatian manufacturing companies are currently profiting precisely from what is their greatest flaw – from products with low added value.

Since Croatia’s entry into the EU, Croatian commodity exports grew at modest rates until the Covid-19 pandemic, peaking at six percent in 2019. The first pandemic year, marked by reduced orders from abroad due to lockdowns in major Croatian export markets, ended with a decline in commodity exports of 3.6 percent, and then, at the beginning of last year, an export boom began to occur. Suddenly, last year, exports jumped by 23.4 percent, and supported by inflation this year, exports have already increased by another 34 percent in the first nine months compared to the same period last year.

What happened? The Croatian industry (unfortunately) did not suddenly become turbo competitive in foreign markets with new products, let alone products aimed at the B2C sales segment, but with the disruption of global supply chains, it suddenly became a more interesting supplier for its old customers in Europe. As Eurostat recently reported, more than half of European companies with more than 50 employees reported difficulties in domestic trade related to the decline or cancellation of incoming orders, difficulties in accessing supplier services, and challenges in sourcing raw materials from suppliers.

As German, Italian, and other industrialists lost the ability to quickly procure the cheap raw materials and parts they needed from China, they turned more towards those who are closer and can deliver goods. Nearly five percent of companies engaged in searching for new suppliers. And since most export-oriented Croatian industrial companies operate in the B2B segment, the Croatian industry has proven to be part of the solution to this problem.

– The Croatian manufacturing industry has been characterized by a cost-based competitiveness pattern through the transition, and recent research indicates that this state is still prevalent in most sectors today. Several studies conducted within the Reinduce and Convrh projects of the Croatian Science Foundation have shown that Croatian exports are mainly characterized by a high share of foreign added value, i.e., integration into global value chains in the past. Such a pattern is not an exception, and we find it in most Central European countries, with the exception that in our case, it is still about lower unit values of exports. Therefore, it is not surprising that most of our exports are intended for the B2B segment, explains Nebojša Stojčić, Vice-Rector of the University of Dubrovnik.

The main difference between B2B and B2C companies is their intended customers. B2B sells to companies that resell products, while B2C sells directly to the end consumer. In conditions of rising inflation, when the B2C segment must carefully determine its selling prices to avoid losing customers, the B2B segment is at a significant advantage because it sets its selling prices based on agreements reached with its customers. And due to broken supply chains, customers have not even been asking about prices since last year.

According to data from the Croatian Bureau of Statistics, of the total revenue generated from sales, the Croatian manufacturing industry achieved 52.5 percent abroad last year. A more detailed analysis by sectors of the manufacturing industry shows that the share of sales from exports is generally significantly higher in productions where the B2B sales concept prevails than in those relying on B2C sales. For example, the food industry achieved 26 percent of sales revenue from exports, while the production of machinery and equipment reached a high 85.9 percent.

Since the pandemic disrupted global supply chains and was further compounded by rising geopolitical uncertainties, all additionally garnished with high compliance costs with sustainability criteria and regulatory requirements, numerous European industrial companies are intensively re-evaluating their business structures outside Europe. Turning to European suppliers as an alternative to Chinese ones is the first step in this process.

– This situation is both an advantage and a danger for the Croatian manufacturing industry under current conditions. Namely, by shortening value chains, Croatian manufacturers are presented with an opportunity to exploit advantages on which other Central European countries have based their growth in recent decades, especially when we talk about the so-called new green industries where the pie has not yet been fully divided as is the case with traditional sectors. Such an industrial pattern can bring growth, but in circumstances where our competitive countries are transitioning to a new technological framework and are trying to build an innovation-driven economy, it has limited potential for convergence.

An additional danger lies in the fact that trends of bringing production back to the home country on the wave of digital transformation and so-called slowbalization (slowing down globalization) target precisely those segments of the production chain in which a significant number of our manufacturers operate. All in all, the Croatian industry, and consequently the economy, needs a leap towards high sophistication and added value products and innovations to keep pace with the rest of Central Europe, and the ascent through backward integration (the so-called backward GVC integration pattern), which currently dominates, offers limited opportunities for such a leap, Stojčić believes.

You can read the entire article in the new printed and digital edition of Lider.