No Fear for Those Offering Sustainable and Environmentally Friendly Solutions to the European Market

In the second half of this year, Croatian exporters enter with a dose of optimism, but also with increased caution. The optimism stems from good export results achieved in the first few months of this year, while the caution primarily arises from Germany entering a technical recession and forecasts from leading German economic institutes that the strongest European economy will not record any growth this year compared to last.

Despite this, Germany was also the largest Croatian export market in the first quarter of this year. The value of Croatian goods exported to Germany in the first three months amounted to 711 million euros, which is 8.2 percent higher than in the same period last year. However, the fear that the recession, or at best stagnation, could spread from Germany to other countries, which would result in a decline in Croatian goods exports to the EU, is also reflected in the survey on the export expectations of Croatian exporters for the next three months, recently conducted for Lider by the Hendal agency.

The survey conducted on a sample of companies that are exporters among 400 standard Hendal business respondents from the most represented sectors in the Croatian economy showed that most exporting companies are not overly optimistic regarding their export expectations for the next three months.

Decline in Purchasing Power is Felt

Respondents from the manufacturing industry, dominant in our exports, mostly (about 65 percent of them) expect the value of their exports to remain unchanged. About ten percent of manufacturers predict that their exports in the next three months will be lower than in the first half of the year, while around 25 percent hope for increased exports. The most optimistic respondents are from the information and communication sector, among whom just under half predict that their exports will continue to grow, while the others expect to remain at the same level as since the beginning of the year. Conversely, the greatest pessimism is present among companies engaged in accommodation services and food preparation and serving. As many as 60 percent of them expect their exports to be lower than before.

The German Industry Association (BDI) presented its view of the current economic situation in the country last week. They say that companies are investing more in equipment and patents, and that external trade will be the backbone of the German economy in the second half of the year. They estimate that German exports of goods and services will increase by two percent this year, while the real value of imports will stagnate due to falling energy and raw material prices.

There are two particularly painful points for the German economy this year. The first is personal consumption, as consumers are pressured by high inflation and falling real wages, which is not only a German specificity but is happening throughout Europe.

– The consumption of more expensive products, including high-end products and organic products, in our segment of the food industry in Europe is declining. At the same time, the assortment in the private label category is experiencing growth. This is a concrete example that supports the thesis of declining purchasing power and increasing caution among citizens across the European Union. We notice these fluctuations in all markets where we are present – testifies Denis Nemčević, CEO of the Spider group, which exports teas in both the higher and lower segments.

Seeking New Markets

Since the B2C segment is less represented than B2B in Croatian goods exports, the decline in purchasing power among European residents is a smaller problem for most. A much greater danger comes from the second painful point of the German economy, which is the decline in construction activities, a consequence of rising interest rates this year and still very high material costs that have persisted since the disruption of global supply chains during the pandemic, and then further exacerbated by inflation. Nikola Požgaj, director of the Požgaj group, a manufacturer of a wide range of wood products, noticed signs of stagnation in the German market, as well as in the Italian market, as early as the beginning of last autumn, which was a signal for his company to rapidly free itself from dependence on the German market and seek new ones.

– The current situation varies greatly from market to market; however, the largest market in the EU, Germany, is in a deep recession in the construction sector, as no one wants to invest in the purchase or construction of real estate this year due to high interest rates. Unfortunately, the decline in construction work is such that 60 percent fewer building permits have been issued than in the same period last year, which actually means that the market will practically come to a standstill. We can see this, and from experience, we know that it will last throughout 2024 – emphasizes Požgaj, who has turned to the markets of Scandinavia, Switzerland, the USA, and China with the aim of reducing the share of the German market in revenues from 50 to 30 percent by the end of the year.

New Customer Demands

The situation in the German construction sector is also reflected in customers related to the construction industry, and consequently on Ferro-Preis from Čakovec, a manufacturer of cast components.

– Some of our customers have significantly reduced orders in 2023 and are cautious with forecasts. This primarily applies to customers related to the construction industry, given the significantly reduced activity in the construction sector in Germany and some other EU countries. Consequently, the demand for construction machinery, equipment, and cranes has decreased, which negatively impacts the production of these machines and reduces the need for castings – states Renato Martinjak, sales and marketing director at Ferro-Preis.

In response to the reduction in orders, the company recently successfully certified according to the ISO 50001:2018 standard, thereby taking on the obligation and responsibility to continuously improve its energy performance, i.e., to take measures to reduce energy consumption, which is an integral part of the company’s sustainable business strategy. In a situation where contracting electricity prices for such a large energy consumer is a special challenge, reducing consumption by increasing the efficiency of production lines significantly impacts strengthening competitiveness in foreign markets. And this is not only about price competitiveness but also regarding the new demands that customers are placing.

– We notice that more and more of our foreign customers are environmentally conscious and there is an increasing demand for sustainable and environmentally friendly construction solutions. Therefore, many of our foreign customers are seeking precise confirmation of the CO₂ footprint in the production of steel structures, specifically for each project. In response to this trend, our company is actively adapting and exploring new technologies and materials that reduce the negative impact on the environment. Additionally, we are currently completing the construction of photovoltaic power plants at our factories in Rugvica and Sesvete, which will compensate for our CO₂ emissions, while also reducing the negative impact of rising prices and uncertainty in the electricity market – notes Miroslav Bajkovec, director of Bajkomont.

Historic Opportunity for Končar

Bajkomont is among those Croatian companies that have increased exports to the German and French markets this year. However, if we were to look for a domestic company that has overcome both recession and inflation through export growth, it would certainly be Končar. Energy, green transition, and everything surrounding it is currently an opportunity for Končar that arises once in several decades. For Končar, this year, notes Gordan Kolak, its CEO, began with more than double the amount of newly contracted jobs compared to the same period last year. In the first quarter of 2023, open orders, backlog, reached a record amount of 1.2 billion euros. Particularly good results are recorded in solutions from the segment of transmission and distribution of electricity. The green transition in Europe is in full swing, accompanied by unprecedented demand for transformers.

– In all our business areas, from electric power, rail segment to digital solutions and platforms, the emphasis is on solutions and components that contribute to the green energy and mobility transition. Over the past year, we have built three largest solar power plants in Croatia, developed and installed a battery storage system for electricity on the island of Vis, contracted a 65 million euro project for the revitalization of the Haditha hydroelectric power plant in Iraq, delivered the first medium-voltage transformer with a carbon footprint certificate for a customer in Spain, contracted the development and production of battery and hybrid trains, secured a new certificate for cybersecurity of critical infrastructure, and made numerous other breakthroughs, especially in the EU market, which accounts for over 73 percent of our total exports. This has further positioned us as a relevant European high-tech manufacturer of equipment and solutions for implementing the green energy transition at the EU level, which contributes to national economic power and relevance and the overall international perception of Croatia at the EU level – emphasizes Kolak.