Defense Dual Use Technologies
1. Cluster Profile
“Dual-use items are items, including computer software and technology, which can be used for both civilian and military purposes, and include all goods which can be used for non-explosive purposes and assisting in any other way in the manufacture of nuclear weapons or other nuclear explosive devices. Controls of export of dual-use items and technologies play a key role in the fight against terrorism and the proliferation of weapons of mass destruction as well as against the abuse of such equipment or technologies.”
Croatian Ministry of Foreign Affairs
1.1. Origins and Evolution
Because of its strategic position, throughout its history Croatia has faced many challenges in defending its territory. Consequently, through the centuries Croatia has developed a rich military tradition and experience in the production of weapons. As early as the 9th century, the Croatian Prince Domagoj boasted a fleet of light and manoeuvrable boats and presented a naval force that controlled the Dalmatian coast. In the 17th century a scholar from Šibenik, Faust Vrančić, invented the parachute and performed the first parachute jump. The oldest Croatian Naval shipyard at Kraljevica was established in the early 18th century. Another Croatian invention that contributed to development of naval warfare was the torpedo, invented in the 19th century by Ivan Lupis Vukić in Rijeka, where a factory was founded some years later. Today, the Croatian defense industry manufactures a number of advanced products such as the M-84 Main Battle Tank from Đuro Đaković, the anti-aircraft missile S-10 CRO from Končar, and HS pistols and assault rifles by HS Produkt.
While its origins are ancient, the present-day Croatian defense industry was profoundly shaped by the 1991-95 Croatian War for Independence (the “Homeland War”), when a UN arms embargo prevented Croatia from buying Western technology, equipment, and arms. As a result, Croatia turned to ramping up domestic arms production and buying arms on the open market, and the country developed a relatively capable domestic defense industry. The Croatian defense industry has the capability to produce tanks, armoured vehicles, mortars and mortar shells, artillery shells, small naval vessels, and various small arms; most of these capabilities were developed after the war broke out.
1.2. Regulation and Markets in Croatia and the European Union
The defense industry is important for the EU because of its technological aspects and influence on economic activity. The competitiveness of the European defense industry is vital for the credibility of the common security and defense policy, which is still evolving. One of the main policy goals of the EU’s defense industry is to develop a competitive European defense technological and industrial base (EDTIB). On July 24, 2013, the EU adopted an action plan for increasing the efficiency and competitiveness of the European defense industry. Initiatives include activities in the following areas: internal market, industrial policy, research and innovation, skills, space, energy and international trade.
As a member of the EU, Croatia has harmonized its legislation in order to adopt EU acquis into its legal system. The defense industry was also affected by EU rules, especially ones governing exports of guns, arms and dual-use items. The EU dual-use items export control regime is governed by Regulation (EC) No 428/2009, which provides for common control rules, a common list of dual-use items as well as coordination and cooperation to support consistent implementation and enforcement of these rules throughout the EU. After joining the EU, Croatia started implementing the principles of the EU joint trade policy, including the previously mentioned regulation on dual-use items, into its own legislation through the Act on the Control of Dual-Use Goods (“Official Gazette”, no. 80/2011 and 68/2013).
EU rules divide dual-use items into 10 categories:
- Category 0 Nuclear materials, facilities and equipment
- Category 1 Special materials and related equipment
- Category 2 Materials processing
- Category 3 Electronics
- Category 4 Computers
- Category 5 Telecommunications and “information security”
- Category 6 Sensors and lasers
- Category 7 Navigation and avionics
- Category 8 Marine
- Category 9 Aerospace and propulsion
The Ministry of Foreign Affairs, based on the proposal of the Commission to control dual-use goods, and Act on the Control of Dual-Use Goods (Official Gazette 80/11, and 68/13.) is responsible for issuing:
- Individual export licenses;
- Global export licenses;
- Transfer permissions;
- Licenses for the provision of the brokerage service;
- License for the provision of the technicians will help;
- Permits for special transit of dual use items;
- International import certificate.
The transfer of dual-use goods within the EU takes place freely except for the goods listed in Annex IV. (Regulation of the Council and (EC) 428/2009). According to the Ministry of Foreign Affairs’ annual report on the exports of dual-use items for 2015, Croatia is not a major producer of sensitive goods and technologies with dual-use purpose, as is evident from the number of issued export licenses for dual use items.
Of the Croatian exports that are considered goods and technologies with dual-use purpose, most fall into Category 5 – Telecommunications and “information security”.
The value of Croatian exports of dual use items has been falling rapidly in the last 3 years since Croatia joined the EU.
Since losing access to Central European Free Trade Agreement (CEFTA) markets, Croatia has been struggling to raise its competitiveness and compete in the global dual-use exports arena. Croatian exports of dual-defense items have also been affected by the EU-imposed economic sanctions against Russia in 2014. The sanctions related to dual-use items also include Iran.
2. National supply
The Croatian defense industry has the task of maintaining Croatia’s defense potential and improving the military capabilities of its Armed Forces. Croatia continues to align its military with NATO military institutions. This transition process includes a reorientation of the armed forces towards NATO-compatible doctrine and interoperability, reduction of active duty personnel and modernization of the armed forces. To accomplish its goals, the Croatian Ministry of Defense (MOD) developed a modernization plan. In general, equipping and modernization will be accomplished by first upgrading existing equipment (as long as it can meet NATO standards) and second through domestic production of arms and equipment. What the MOD cannot acquire from domestic sources, it will seek to acquire on the global market.
The Croatian defense industry posted significant growth in 2015. According to the annual report published by the Ministry of Economy, exports of weapons and military goods increased 37 percent between 2014 and 2015. The value of exported weapons and related military goods exports exceeded €130 million, including €32 million earned through the overhaul of foreign military vessels; Viktor Lenac Shipyard completed an overhaul of U.S.S. Mount Whitney, the command ship of the American Sixth Fleet. The next upgrade of the ship is also scheduled to take place at the same shipyard in 2016. Exports of other services, such as transportation and intermediary services, also contributed to the final result with €1 million.
Export figures are increasing steadily and, aside from 2014, the industry has reported high growth rates over the last 5 years. For example, in 2011, Croatia exported weapons and military equipment worth €50 million. In 2012, exports climbed to €72 million while in 2013 they reached €110 million. 2015 was a record year for Croatian military exporters, as exports exceeded €130 million.
The number of export licences for military products issued by the Ministry of Economy follows the same pattern and has almost doubled in the last 7 years. The number of import licences was declining until 2014 when the trend reversed.
The fall in the imports is explained by the fact that after the financial crisis Croatia ran huge deficits which caused the country to finally enter the EU Excessive Deficit Procedure in 2013. Throughout the whole period defense spending was hit hardest by government implemented austerity measures. Planned defense expenditures of 2 percent of GDP per annum for the period 2010-2012 actually dropped to below 1.5 percent by 2012.
According to the Croatian Chamber of Economy’s (HGK) analysis of the companies that have been granted export licenses by the Ministry of Economy, the list of top exporters includes Dok-Ing (de-mining machines and fire extinguishers), Šestan-Busch (combat helmets, protective suits, military and special equipment), Čateks (fabrics for special military and police purposes), Varteks (uniforms), Galeb (specialized underwear), Kroko International (military and police uniforms and protective vests), Inkop (military and police boots), and Adria Mar Shipbuilding (design, construction and overhaul of military ships and special purpose boats).
However, the largest Croatian defense exporter is HS Produkt from Karlovac. HS Produkt exported more than 400,000 handguns, mainly to the United States. Also, about 15,000 VHS assault rifles were exported to Iraq. HS Produkt accounted for as much as 80 or 90 percent of Croatian military exports in 2011, but the company’s share dropped to between 60 and 70 percent in 2015.
3. Croatian Dual Defense Use Cluster figures
The definition of the Croatian Defense Use Sub-Thematic Priority Area as defined in Croatia’s Smart Specialization Strategy relies upon the sector definitions used in international best practice and takes into consideration sector specifics related to defense dual use items manufacturing and production. In that respect, for the purpose of this analysis the Croatian Dual Defense Cluster has been defined through a list of representative companies provided by the Ministry of Economy and Croatian Chamber of Economics’ Centre for Industrial Development (CIRAZ). Companies included in the analysis cover activities corresponding to the following statistical NACE codes.
Part of the rationale for the inclusion of some of the companies in this STPA was to: “provide solutions and new strategic directions for declining industry sectors (e.g. textile industry orientation towards products and solutions in protective clothing and anti-riot program – certain companies in Croatia already specialize in various solutions for anti-riot programs: Croshield, Kroko International and Madlerd).”
The Defense Dual-Use cluster is represented by 41 companies that can be broadly categorized into seven main categories: firearms and weapons, Personal Protective Equipment (“PPE”, including footwear and textiles), equipment, transport (ships and vehicles) and Command, Control and Communication (3C).
Methodology: An analysis was conducted by using Portfolio intelligence database provided by Bisnode. The database offers financial data on Croatian companies gathered through collection of data from mandatory regulatory fillings of Croatian companies submitted yearly to Fina (the Croatian Financial Agency – the payment and financial intermediary services provider) through a standardized GFI-POD form.
Looking at the breakdown of activities of companies in the Defense Dual-Use cluster, almost 76 percent have been classified as manufacturers, owing to the tradition of manufacturing in ex-Yugoslavia. In addition, almost 60 percent are classified as small companies according to the Croatian Accounting Act (i.e., having fewer than 50 employees and revenue of less than €10 million per year) reflecting the history of small family ran businesses and crafts characteristic of the manufacturing industry in Croatia.
The table shows the financial distribution in the seven main categories of products (textile, equipment, footwear, weapons, ships, vehicles, and 3C) covered by the 41 companies in the Defense Dual-Use STPA. The weapons category is so far the only category, along with ships, that has increased its income and profitability.
4. Industry Functioning
Croatia’s EU accession had a negative effect on Croatian textile producers, as evidenced by negative revenues CAGR of -2.21% over the last 3 years. The loss of regional CEFTA markets (located mostly in Southeastern Europe) that have traditionally been main destinations for Croatian exports, as well as Russian sanctions on EU import products, still pose challenges for textile manufacturers. In 2015, however, Croatian textile companies managed to slow down the decline in profitability after a substantial drop in 2014.
The sector is moderately concentrated with the top 10 companies accounting for 50 percent of the total revenue generated within the sector in 2015. The textile sector is one of the biggest employers within the manufacturing industry, with 11,254 workers. The sector has responded to diminishing profitability with reductions in head count, which recorded a negative CAGR of -0.39 percent.
The footwear industry is sharing the same fate as the textile industry and is having a difficult time adapting to the loss of its traditional markets in the former Yugoslavia. For example, an industry giant like Borovo that once employed 23,000 people is down to 700 today, and is struggling with overcapacity issues and old production facilities that are significantly influencing its margins. There are some positive exceptions, however, notably Haix obuća d.o.o., a prime example of a successful footwear manufacturer. Owned by Haix, a German company that is a global leader in the production of functional shoes for firefighters, police and task forces, the company is reaping the benefits of technology and know-how transfer, as well as access to more advanced western markets. Some other companies are trying to group their efforts in securing public tenders. For example, Borovo d.d., Inkop d.o.o. and Jelen Professional have developed a partnership to address challenges they face when going to public tenders alone.
4.3. Machining and weapons
The machining and weapons production sector has been dominated by a single company, HS Produkt, which accounted for 70 percent of Croatian defense industry exports in 2015. The company exports most of its products to the United States, one of the most demanding markets in the world, indicating high sophistication and product quality.
Machining and weapons Geographical Distribution
4.4. Motor vehicles
In 2012, transportation products had a share of 9.1 percent of products exported, with an RCA of 1.1 and a 5.1 percent annual growth rate. Two manufacturing sectors most directly connected with transportation covering NACE rev. 2 categories C29 (manufacture of motor vehicles, trailers and semi-trailers) and C30 (manufacture of other transport equipment) had a combined share of around 13.36 percent of total gross value added and around 6.57% percent of persons employed of all manufacturing activities in 2012. The relevance of these sectors is even more significant considering that they have a medium to high technological intensity, and are often characterized as being not labor intensive and relying on automatization for boosting competitiveness.
The sector has traditionally been dominated by Đuro Đaković Specijalna Vozila d.d., a member company of the Đuro Đaković group. The company has been known for its production of M-84 tanks and rail cargo wagons. When the Croatian army agreed to purchase 84 8×8 AMW’s worth €112 million as a part of the EU offset program, Đuro Đaković was given the opportunity to adopt Finnish technology to be able to produce the vehicles in Croatia. Unfortunately, the company hasn’t been able so far to generate any relevant sales contract.
4.5. Ships and boats
Ships and Boats Performance Analysis
The shipbuilding sector has kept its importance for the overall manufacturing production and export due to the successful process of privatization and restructuring. The majority of its revenues were generated by a small number of high-value ships manufactured by a few large shipyards in Croatia. As of July 31, 2015, 43 ships and floating objects were on order with a total value more than $1.6 billion. Most of these ships are a product of the R&D capacity in shipyards and are one-of-a-kind ships like cutter suction dredgers, jack-up platforms, passenger sailing ships and navy patrol vessels.
The sector has undergone significant restructuring in the last couple of years. After Croatia’s EU accession, legislation on state subsidies changed dramatically and some industries that had enjoyed government subsidies had to be privatized. The sector itself was being buffeted by Asian competition in less advanced ships, such as bulk carriers, that were the traditional products of Croatian shipyards. After privatization, shipyards turned to more sophisticated products such as sailing yachts, dredgers, LNG and chemical tankers and navy vessels that allowed them to be competitive on the global market again.
Figure 39 – Ships and Boats Geographical Distribution
- Cluster Agents
Šestan Busch d.o.o.
Šestan-Busch offers wide range of thermoplastic and composites products. In a field of equipment for army produces ballistic security equipment, biologic chemical protective items and plastic parts. Šestan Busch sold more than 300,000 anti-ballistic helmets to global markets.
Kroko proizvodnja i razvoj d.o.o.
The company has over 19 years of experience in manufacturing and selling military police equipment and supply the Ministry of Defense, Police, Justice and other state institutions. Product quality has been recognized beyond Croatia, and the company sells its products and services to Germany, Switzerland, Kuwait, Saudi Arabia, Montenegro, Kosovo, South Africa and elsewhere.
Croshield is a company specialized for the development, manufacturing and distribution of high quality and innovative body armor. The company offers a wide range of ballistic protective solutions for military, law enforcement and civilians worldwide.
Haix obuća d.o.o.
Haix is considered a top brand of functional shoes for fire fighters, police, and task forces worldwide. The new Haix Fire Hero is considered the safest and most innovative fire fighter boot in the world.
Borovo has been producing transmission/driving belts and various rubber technical goods for over 60 years, and its tradition of producing rubber footwear (working, protective, sports and civilian) is 75 years old.
5.2. Ships and Boats
Adria-Mar Brodogradnja d.o.o.
The company specializes in the design, construction and repair of naval vessels, special service craft and related equipment and production of all types of patrol boats, fast missile corvettes, mine sweepers, transport boats.
RIS Marine d.o.o.
The company RIS Marine produces and trades inflatable boats. RIS Marine also offers services and repairs for all types of vessels. Their inflatables are characterized by a high level of quality and durability and so are frequently used by military and police in salvage operations.
Đuro Đaković specijalna vozila d.d.
Đuro Đaković Special Vehicles is a member of Đuro Đakovic Group. Continuing on a 90 year tradition in the production of railway wagons, the company has been manufacturing the main battle tank M-84 since 1981. The company is the only producer of armored combat vehicles in Croatia and is a prime contractor to the Croatian Ministry of Defense for its MBT Program and the AMV 8×8 vehicle in cooperation with the Finnish Patria.
Dok-Ing is a producer of robotized and special purposes systems and equipment. The company designs and manufactures remotely controlled systems for demining and firefighting purposes as well as special vehicles for the mining industry. The demining systems were sold to more than 20 countries worldwide, a number of government agencies and humanitarian organizations, as well as to commercial companies. Altogether, more than 250 light and medium size demining systems have been produced so far.
5.4. Weapons and equipment
HS Produkt d.o.o.
HS Produkt is a world-famous manufacturer of pistols and assault rifles. The HS 2005 pistol (manufactured in over 50 models) has entered several armies and police forces in the world as official weapons, including the United States and Croatia. HS Produkt’s current production capacity allows for production of about 30,000 pistols per month with a trend of continued growth. The company exports 90 percent of its production to the United States. HS Product designed, produced and sold more than 1 million pieces of world class Semi-Automatic Pistols type HS or XD.
RIZ Odašiljači d.d.
RIZ-Transmitters Co. is a Croatian company established in 1948 for the production of Radio Broadcasting Equipment. RIZ ranks among the world’s major manufacturers of this type of equipment. Serving European, Middle Eastern, African, Asian and American market requests, RIZ-Transmitters Co. has specialized in turnkey projects. A wide range of radio broadcasting transmitters covering SW, MW, LW as well as FM, supported with additional equipment, are installed and operational all over the world.