Analysis of the Current State of the Croatian Industry: Would We Fail Without the Sun and the Sea?

While the public battles over tourist numbers and whether the season has underperformed or we will break another record, the industry behind the media scenes is moving forward. The brilliant results of Končar have certainly caught a glimpse of the spotlight, but one swallow does not make a spring. As some economists have always claimed, a country that rides solely on the wings of tourism, without industry, will never truly stand alongside the West, we attempted to write a small analysis of the state of what another group of economists considers a bad socialist legacy. Indeed, Končar has, and not only he, proven that technology drives industry and its competitiveness. So, how does that industry stand?

In a series of recent texts about the industry, economist Velimir Šonje has shown that contrary to widespread belief, there is industry in Croatia, it is quite diversified and – growing. He states that, like manufacturing industries in other countries, it is facing the problem of adapting to fundamental industrial transformation, but the industry is keeping pace with this fact.

Šonje also states that according to the economic complexity index (Harvard Atlas of Complexity), countries with more industry are ranked higher on the global economic complexity scale. According to this index, the value for Croatia is 0.77, and we are ranked thirty-first in the world between Lithuania and Bosnia and Herzegovina, but also ahead of a considerable number of EU member states (Portugal, Spain, Latvia, Bulgaria, Cyprus, and Greece). We are not far from the group that occupies the 24th to 27th places in the world, which includes some notable names (Estonia, the Netherlands, Poland, Denmark). This, Šonje emphasizes, is further confirmation that we would not fail without the sun and the sea, thus it is not true that we produce nothing.

Growth of Revenue, Profit, Net Margin, Employees…

Business consultant Nikola Nikšić adds figures and indicators that confirm not only that we produce but also that the industry keeps pace even with export competitiveness. To start with a few basic figures – with about 280,000 workers (27 percent of total employment in companies), entrepreneurs from the manufacturing industry in 2023 collectively achieved 39.7 billion euros (24.6 percent) of a total of 161 billion in total revenue, generating 2.4 billion in net profit (26.9 percent of a total of 8.8 billion). In five years (2019 – 2023), total revenues of the manufacturing industry, measured by compound annual growth rate (CAGR), have grown on average by 7.7 percent annually, and net profit by 15.3 percent. And this without significant changes in the number of companies and employees. Revenues increased by 3.6 percent last year, with net profit rising by as much as 35.4 percent and net margin from 4.1 percent in 2022 to 5.4 percent in 2023.

– This is a financially quite healthy sector. The share of net working capital in total assets is 13.9 percent, the current liquidity ratio is 1.45, and the quick ratio is 0.93, indicating more than good liquidity, while the ratio of financing from internal and external sources of 46 to 54 percent suggests an economically reasonable level of indebtedness. Over five years, investments have been financed almost exclusively from operating cash flow, and the net financial debt, which was 2.2 billion euros in 2019, amounted to 1.77 billion at the end of 2023, only 44.5 percent of EBITDA for 2023. In the last three years, the financial excellence rating according to the BEX index, derived from aggregate data, ranges from 2 to 4 (rating very good), return on assets and equity measured by DuPont analysis remains at around 10 percent, and the financial stability rating measured by Kraliček DF test ranges from 1.5 to 2.2 (rating good). It should also be added that for years the manufacturing industry has generated 40 percent of its business revenue from exports and that in five years, the average monthly net salary and compensation have continuously grown from 902 euros in 2019 to 1258 in 2023. In five years, companies in the manufacturing industry have invested a total of 54.6 billion euros in fixed assets, averaging 10.9 billion annually – specifies Nikšić.

According to the NKD 2007 methodology, entrepreneurs in the manufacturing sector are divided into 24 groups of activities, but by combining values and five-year trends in the number of companies, number of workers, total revenues, net profit, and export revenues, two groups of activities stand out, says Nikšić, the production of metal products and the food industry.

In the production of metal products, the number of companies with publicly available financial reports has grown on average by 3.5 percent over five years (from 2.5 thousand in 2019 to 3 thousand in 2023), the number of workers by 5 percent (from 39 thousand in 2019 to 50 in 2023), total revenues have increased by 11.3 percent (to 4.1 billion in 2023), and net profit by as much as 19.5 percent (to 298 million euros in 2023, net profit margin in 2023 is 7.2 percent). This growth has been achieved while maintaining the share of exports in business revenues at 47 percent over all five years, with a 7 percent average annual growth in exports.

Nikšić states that with more than 100 million in revenue in 2023, the leading two companies are Omco Croatia and HS product, the first being foreign-owned, the second domestic. In the food industry, the number of companies with publicly available financial reports has grown on average by 1.1 percent over five years, as has the number of workers (to 50 thousand in 2023), total revenue by 8 percent (to 7 billion in 2023), and net profit by 16.7 percent (to 331 million euros in 2023) with a net margin in 2023 of 4.6 percent. The share of export revenue in business revenues has been at 21 percent (1.5 billion euros in 2023) over the last three years. For this to be possible, companies have invested a total of 1.7 billion euros over five years. With more than 100 million in revenue in 2023, there are 16 companies, 12 in full or domestic ownership (Podravka, Vindija, most members of Fortenova’s food division, MI Pivac, Mlin i pekare, Kraš, Gavrilović, Franck), and four in foreign ownership (Dukat, Ledo plus, Empwr and Mlinar).

Best by Categories

To get the full picture with specific names, Nikšić notes that, for example, in the beverage production sector in 2023 compared to 2022, the highest growth in the number of workers was achieved, 8.3 percent (6 thousand in 2023), and with revenues exceeding 100 million euros, the leaders are Zagrebačka pivovara, Coca Cola HBC Hrvatska, and Heineken Hrvatska in foreign ownership, and Jamnica plus in domestic.

In the machinery, equipment, furnace, and tool production sector, the highest growth in total revenue was achieved last year, even 25 percent, to 1.8 billion. In this group, the leaders in revenues above 100 million euros are Harburg – Freudenberger Belišće in foreign ownership and Klimaoprema in domestic ownership.

In the electrical equipment production sector in 2023, the highest growth in net profit margin was achieved, 65.9 percent (to 8.7 percent). Over five years, the net profit margin has grown on average by 8.7 percent annually. This strong growth dynamic from 4 companies with more than 100 million euros in revenue for 2023 (Končar DIST, Končar energy transformers, Vertiv Croatia, Elka), was most contributed by Končar’s flagship DIST, the only one of the four ‘electro-heavyweights’ in majority domestic ownership, whose revenues in 2023 increased by as much as 77.6 million euros, to a total of 328.6 million.

Nothing Without ‘Rolled-Up Sleeves’

– In addition to all this, considering that for confirming the global competitiveness of certain economies, activities, and companies, one of the key factors is export, I also mention two groups of activities with an exceptionally high share of exports in business revenues: leather production, with an export share in 2023 of 76 percent. Thus, regardless of modern times, still without rolled-up sleeves (industrial activities) with smart motivation and using 3H (hand, heart, and head), understanding and respecting the comparative advantages of certain communities, all packaged in actionable strategies and their implementation, there are no healthy, excellent, sustainable, stable, and secure economies. Croatian tourism is a great ‘showcase’ for the food industry and other directly related (agriculture, packaging…) and supporting activities (logistics and transport, health services, sports, recreation, arts, and entertainment…).

In the search for strengthening self-sufficiency in conditions of uncertainty and instability, the EU is a great opportunity for most groups of activities in the manufacturing industry. The same applies to the green and energy transition, especially considering the availability of non-repayable funds from various EU funds and other global sources of financing. Croatia is a small economy, and to take advantage of the previously mentioned advantages we have and opportunities from the environment, it is important how a few of our largest business groups, in full or majority direct or indirect state ownership, will behave, organize, and act. Will Končar, which after a long period of stagnation has transformed brilliantly in recent years, increased its level of excellence and improved the economic effects of its operations, continue in the same way and fully prove itself as a true engineering system in the global market, which as a vertical integrator unites and encourages the development of many domestic companies from industrial, but also related (construction, IT…) activities? Can Podravka, after recent acquisitions, significantly stronger than before, follow Končar’s path in its business segment, for which it has comparative advantages that Croatia has in that segment? Can HEP and HŽ undergo entrepreneurial transformation (if they were looking for examples of successful transformations of such companies, they would find them in Lithuania during the previous major economic crisis that began at the end of 2007) and take on the role of key investors, promoters, and bearers of development in the field of green transition, energy, and sustainable (rail) transport? – asks Nikšić, proving that the industry is not dead; on the contrary, it is agile and transforming quite well.