Industry Snapshot

The environment-friendly technology, systems, and equipment (“green tech”) industry is a subset of the energy sector. Globally, the market for green tech specifically is worth EUR 2.5 trillion and growing. By 2025, the market could be worth more than EUR 5 trillion.

Croatian companies occupy a small part of the green tech market. The Croatian green tech sector included 69 firms with 7,795 employees and revenues of EUR 774 million in 2015. Only one solar photovoltaic manufacturer is active in Croatia. Croatia can manufacture large wind turbines. However, it has not been able to build on this experience and enter the world market.

Yet it is profitable. The green tech sector has high profit margins and profitability (in terms of return on assets and return on equity). Firm equity and total revenues have been growing at 1.4 percent annually.

Emerging Strategic segments

Renewable energy technologies have contributed to the growth of a sustainable waste management and recycling industry. Recycling materials and recovering energy reduce resource consumption. Opportunities lie in integrating products and services into comprehensive offerings, using technologies like “internet of things” (IoT), sensors, and smart grids.

Services offered in emerging green tech strategic segments are highly differentiated and customized to specific customers. As the world’s population grows and moves into cities, waste management and energy recovery from waste become central to sustainable development. City residents consume more energy than their rural counterparts. Each city has a unique topography, climate, and network of energy producers and consumers.

Interoperability is essential. Emerging green tech segments require companies to manage entire integrated systems balancing demand and supply in real time. Comprehensive solutions providers need sophisticated software, reliable communication infrastructure, the ability to integrate heterogeneous technologies and devices, and skilled workers.

Buyers expect a total cost of ownership (TCO) projection before they buy. TCO includes running costs and costs of maintenance in addition to the sales price alone. Companies in this segment must be able to provide this information. Moreover, firms will increasingly need to guarantee TCO. They will do so by selling ‘technology services’ on a subscription basis, rather than selling a product at a fixed price.

There are two emerging strategic segments in the green tech sector: “waste-to-energy” and “smart waste management.”

• “Waste-to-energy” plants burn solid waste, producing steam that generates electricity or heat. “Waste-to-energy” is prevalent in Europe. There, “waste-to-energy” plants are integral parts of distributed energy systems and microgrids.
• “Smart waste management” is an emerging data-driven approach to improving waste management efficiency. A new generation of advanced sensors, IoT-enabled smart bins, communications software, and other waste infrastructure have appeared. They are helping municipalities track waste, optimize routes, and lower costs.

The strategic segments are interrelated. “Waste-to-energy” is a vital part of distributed energy and microgrid systems, which need to manage waste. Conversely, “smart waste management” firms could gain from adopting technology compatible with smart grid networks. Firms with complementary offers could supply integrated energy solutions that incorporate both “waste-to-energy” and “smart waste management.”

But each emerging strategic segment has a unique value chain that reflects the technological innovation required to be competitive globally.

“Waste-to-energy”

The emerging “waste-to-energy” strategic segment requires:

• Technical sophistication. The systems integration aspect of this segment creates the potential for new barriers because the complexity of energy management systems requires technical sophistication.
• Focus on smaller communities. Capital investments are lower for smaller communities (such as university campuses, industrial zones, and residential neighborhoods). Solutions for smaller communities are highly differentiated and purchased on a standalone basis rather than at volume.
• Scale. Supplying energy solutions at the community level—even the smaller community level—requires access to distribution and transmission infrastructure. It also requires the ability to navigate laws regulating utilities and energy assets.

“Smart waste management”

The emerging “smart waste management” strategic segment requires:

• Integrated IoT solutions. The “smart waste management” strategic segment involves integrating data collection and IoT technology into waste management.
• A network of relationships. Providing “smart waste management” solutions requires establishing and maintaining a network of service relationships with firms and municipalities.
• Municipal buyers of IoT and sensor-based “smart waste management” technology want a common architecture. It needs to be compatible with other IoT-enabled solutions, including traffic and lighting management.
• Ease of use. End users need user-friendly interfaces to “smart waste management” systems. They need to have confidence and comfort in using the system. Setting preferences and managing consumption cannot look or feel complicated.

Making Croatia Competitive

Where is the value chain weak?

Croatian companies’ ability to enter emerging strategic segments will depend on their ability to evolve to meet advanced buyers’ demands. Many characteristics of the newer global value chains are not yet well-developed in Croatia.

• Croatian green tech products have insufficient technological content. Croatian firms need to increase the technological content of green tech products, particularly in advanced sensors, communication networks, and systems integration.
• Croatia lacks suppliers of energy management systems that provide user-friendly systems integration and have ongoing service and maintenance relationships. The need extends to monitoring and control systems at various levels of complexity through the value chain.
• Croatia needs to ramp up R&D related to sensors. R&D aimed at improving sensors would help boost the Croatian sector. Advanced sensors also have applications in other areas, including the defense dual-use and automotive sectors.

Areas for reform

Certain aspects of the industry ecosystem limit Croatia’s competitiveness in green tech.

Demand conditions

Croatia lacks a robust domestic market. Establishing a strong presence in the local market would aid expansion within the EU and neighboring countries.

Factor conditions

Labor productivity is low. Gross domestic product (GDP) per person employed in Croatia is 54 percent of that in Slovenia. It is 49 percent of that in Slovakia, and 39 percent of that in the Czech Republic. From 2000 to 2014, productivity increased by only 20 percent while real wages increased by over 70 percent.

Specialized labor is scarce. Only 5,300 students a year earn engineering degrees in Croatia, and only 2,900 in sciences, math, and computing. Moreover, Croatia has a net negative migration rate.

Access to finance is limited. Typical short-term loans have interest rates of 4.7 percent in Croatia, compared with an average of 2.3 percent in the Eurozone. The Croatian Bank for Reconstruction and Development (HBOR) does offer concessional loans. It charges interest rates of 2 percent to small- and medium-sized enterprises (SMEs) investing in priority regions of the country and 4 percent to other SMEs.

Firms struggle with the cost of capital. Companies find it hard to obtain long-term finance to expand and fund R&D. The weighted average cost of capital for wind and solar energy dropped 3.9 percent between 2014 and 2016. However, the risk premium for wind and photovoltaic energy in Croatia is 10.3 percent. It is only 6.5 percent in Bulgaria and Romania. Thus, the difficulty in accessing finance may lie in the perceived risk of the green tech industry.

Strategy, structure, and rivalry

There is only one firm in the waste management sector. EcoMobile is the only firm in the “smart waste management” segment. Most of its clients are in Croatia.

Related and supporting industries

Research does not align with private sector needs. Technical research faculties exist in Zagreb, Osijek, Split, and Rijeka. The IRI Cluster at the Technical Faculty in Split brings together university researchers and companies that have limited R&D resources. It would be beneficial to ensure that research goals and private sector priorities align.

Recommendations

As with the broader energy sector, Croatia could improve its position in emerging green tech strategic segments by:

• Conducting a testbed pilot. A joint energy – green tech testbed pilot would create a complete microgrid platform. Croatian companies would supply the components. They could then export the integrated solution. The pilot should target Croatian islands. Due to geography, climate, and seasonal travel patterns, Croatian islands offer ideal conditions for microgrids. Relevant line ministries or government corporations could run the pilot (via a ‘level 2’ fiduciary implementing body) through public procurement. Estimated timeframe: 3 years.
• Conducting an innovation competition to find the most suitable partners for the testbed pilot. The Ministry of Economy Entrepreneurship and Crafts (MoEEC) could run the competition (via a ‘level 2’ fiduciary implementing body) as prize financing. Estimated timeframe: 2 years.
• Conducting technology scouting to fill the knowledge gap on complex components and technologies in the new energy systems. Technology scouting would also help match innovative technologies with industry requirements. MoEEC could implement this recommendation (through a technical assistance program) as a matching grants scheme. Estimated timeframe: 3 years.
• Offering business mentoring. Relevant topics include innovation, recognizing opportunities, perceived risk, entrepreneurship, and networking. MoEEC (through EBRD) or the Croatian Chamber of Economy could implement the mentoring program (through a technical assistance program) as a matching grants scheme. Estimated timeframe: 2 years.
• Conducting precompetitive visits to target markets where Croatian firms seek to establish commercial relationships for “waste-to-energy” and “smart waste management” solutions. MoEEC and other relevant agencies could implement this recommendation through public institutions, government agencies, and the private sector. Estimated timeframe: 2 years.
• Providing financial security for foreign tenders. Participating in foreign tenders requires firms to cooperate. Solutions rely on complementary markets and the products or services of many suppliers. However, a unified proposal takes time and resources. It is often necessary, therefore, to provide financial security to encourage firms to develop innovative export products. MoEEC (via a ‘level 2’ fiduciary implementing body) could coordinate services and guarantees to cover the cost of bidding for foreign tenders. Estimated timeframe: 5 years.