Sustainable Wood Production and Processing

1. Cluster Profile

• Overview

Despite comprising less than 1 percent of the economy, the wood production and processing industries represented more than 8 percent of all Croatian exports. These values have increased by over 31 percent since 2012, demonstrating its importance for foreign exchange earnings. Moreover the industry employs over 27,213 people in directly linked industries and innumerable others in supporting industries. Nonetheless the recent global economic slowdown stands to reduce industry growth in the coming 2015-2016 period.

Beyond the volatility observed in the past year, EU accession has structurally changed the industry, which is marked by an increasing integration into the global value chain. The manner of this integration has precipitated shifts in production and profits across the industry. A rise in the production of fuel wood (a result of EU renewable energy subsidies and eliminated tariffs with trading to the EU) is coming at the expense of (official) production in Industrial Roundwood, which is a main input into the Manufacturing sectors. These subsidies are creating increasing competition for raw input supply and may be increasing illegal logging.

Production of sawn wood has historically been sourced from domestic forests, but now sawmill/planning firms are increasingly gaining raw input from suppliers in neighboring Austria, Slovenia, etc. Participation in these global value chain activities are becoming quite profitable for sawmilling firms, which have benefited from high foreign demand for sawn wood lumber. While the integration into the EU has also helped expand the market for Croatian furniture, it has also had to increasingly contend for raw resources with producers of energy, construction materials and furniture. Going forward it will be important for the wood-based furniture industry to redefine its strategy in order to contend with an increasingly competitive global market.

1.1.1. History of the Industry in Croatia

Wood production and processing has a long tradition in Croatia stemming from the early thirteenth century. In more recent history, furniture and lumber were two of the most important export products of the former Yugoslavia. However, the importance of the wood based economy is perhaps best exemplified by the notoriety of “Stribor” – the sapient head of the forest who presented a set of mutually exclusive choices for the protagonist – in mainstream Croatian literature.

Beginning in the early 1990’s the economy began to adapt to the free market. Government procurement – which had sustained the furniture industry in the former Yugoslavia – was no longer a source of demand, leading many former furniture industry firms to re-establish operations in less capital and knowledge intensive activities (e.g. sawmills and parquet production firms). As time went on, a number of small- and medium-size companies began to rapidly emerge given the relatively low barriers to entry (Maxwell Stamp PLC, 2013A). Since joining the EU in 2013 the industry has undergone another structural shift driven by new market access and reduced tariffs.

From the turn of the century public agents have been actively supporting the wood production and processing industry through acts of Parliament and through the activities of various ministries, including the Ministry of Agriculture, Forestry and Water Management; Ministry of Economy, Labor and Entrepreneurship; Ministry of Regional Development; as well as through Hrvatske Šume, the Food and Agriculture Organization of the United Nations (FAO) and other semi-public agents. Moreover, the development of privately led industry groups has precipitated a number of campaigns to promote the wood based economy. These public and privately led operational strategies are mapped on the timeline below.

Timeline of Government Intervention in the Wood Production and Processing Sector

The sector has also been subject to forestry regulations of the EU since accession in 2013 (Timber Regulation, 2010). Now all enterprises dealing with the procurement of wood material and wood products are regulated under these rules and bear responsibility for the legal sourcing of supply. The effective application of these regulations will increasingly be relevant if problems with illegal logging continue. Leading firms have increasingly turned to certification agencies in order to verify sustainable sourcing. Support of a robust National Quality Infrastructure (NQI) system can assist in developing systems for ensuring traceability of product through the value chain.

1.1.2. Smart Specialization: Wood Production and Processing

Most notably, the Smart Specialization Strategy identifies the Wood Production and Processing Sector as a Sub-Thematic Priority Area (STPA) for the Croatian economy given its share in exports and the natural resource endowments available in Croatian forests. The sector covers an expansive set of industries that produce a range of industrial products (pallets, paperboard, etc.) and consumer products (furniture, wooden tools, etc.). Downstream industries can be split between wood products and wood-based furniture products (see Annex 3 for a schematic product map). The strategy places heavy emphasis on innovative solutions to increase primary production and improved processes for the valorization of wood through new materials and sustainable constructs.

2. National Supply

2.1. Primary Production

2.1.1. Land Ownership and Management

Primary production is centered around Lika-Gorski Kotar and Slavonia. Upstream industries are increasingly more geographically dispersed – both within Croatia and beyond – as a result of reduced transportation costs and tariffs. Approximately 2.6 million hectares of land in Croatia are forested. Of this amount 500,000 hectares are privately owned – by a fragmented set of nearly 600,000 proprietors – and are estimated to produce 12.5% of the growing stock (Maxwell Stamp PLC, 2013A). The remaining 2.1 million hectares is state owned, of which 80-90 percent is designated for commercial purposes with control given to Hrvatske šume. Hrvatske Šume Ltd. is FSC certified State Owned Enterprise (SOE).

In December 2012 the Ministry of Economy and the Ministry of Agriculture developed a local content policy on the sale of logs, which was implemented through Hrvatske Šume. Most notably this policy established a process for tender and a framework for the sale of product to different categories of buyers.

The process for tender. Log sales are conducted on the basis of contracts and auction. Up to 30 percent of removals are slated for auction, while 70 percent of production is awarded through forward contracts with firms on the year prior to removal. In 2016 an announcement listed 2,000,000 m3 as the total amount available for public tender through contracts (Hrvatske Šume, 2015B). The agreements – which can be signed up until December 31st of the preceding year of effectiveness – specify the price, quantity, varieties and other conditions.

The Hrvatske Šume framework for contracts attempts to differentiate prices and quantities supplied on: past performance, total production capacity of processing facilities, incorporation status (domestic or foreign), and purpose. The purpose criteria are geared towards funneling product to higher value added domestic activities (see Annex 4), such as furniture manufacturing (Posavec & Beljan, 2013). Firms attempting to contract for lower value added purposes are constrained in the amount of raw supply that they can obtain.

In 2014 the government introduced new rules on the sale and export of wood, which were further strengthened in 2015. Recently there were calls by the Chamber of Economy to reform the system processes and frameworks (UDRUŽENJE DRVNO-PRERAĐIVAČKE INDUSTRIJE HGK, 2016).

2.1.2. Production

The primary product of the sector is roundwood, which can be differentiated between those of Coniferous (‘softwood’), and Non-Coniferous (‘hardwood’) origin. Hardwood is generally of higher quality/price and in Croatia is approximately 44% more expensive than softwood (Croatian Bureau of Statistics, 2016). Softwood is typically used in construction and in pulping. Approximately 85% of Croatia’s roundwood is hardwood, while the remaining 15% is softwood (Savjetodavna služba, 2016).20 Estimates have put the revenue from primary production at more than 50 percent of the wood-processing sector turnover (Maxwell Stamp PLC, 2013B).

Roundwood can further be differentiated by its purpose; including both wood for fuel (“Fuel Wood”) and wood for industrial use (“industrial roundwood”). Fuel Wood is an input into the renewable energy sector and into household heating use. Industrial roundwood is the main product feeding into the industrial sectors and notably feeds into sawn wood and pulp wood production process.

The FAO estimates that 5,925,949 cubic meters of roundwood was produced by Croatia in 2015, of which 3,625,665 cubic meters was industrial roundwood. Production quantities of Industrial Roundwood have declined 4.46% since 2012, while Roundwood production as a total has increased at an annualized rate of 1.22% over the same period. Wood fuel comprised a 38% share of this roundwood output and it has been increasing rapidly with a 13.89% Compounded Annual Growth Rate (CAGR) between 2012 and 2015. The increase in production of wood fuel may have implications for downstream use in the manufacturing sector since its production may come at the expense of downstream industrial uses.

2.1.3. Gross Production Value and Price

The Croatian Bureau of Statistics estimates that roundwood production in 2015 was valued at HRK 1,557,882,000. Industrial Roundwood production comprised 76 percent of this with values estimated at HRK 1,195,458,000 (approximately USD$178 million). The vast majority of this Industrial Roundwood was Non-Coniferous (NC) hardwood. In Croatia the average price of Non-Coniferous Industrial Roundwood was HRK 533.62 per m3 (Croatian Bureau of Statistics, 2016). In 2015 Fuel wood averaged HRK 164.42 per m3, which was only 30% the price of hardwood logs. This price, however, does not reflect the margin for producers.

2.1.4. Exports of Primary Production

Despite the low value of the product, it is apparent that wood fuel exports are driving the production increases in Non-Coniferous roundwood. The rapid increase in wood fuel exports is likely due to the accession to the EU in 2013, where a combination of reduced tariffs, strong demand stemming from renewable energy subsidies (The Economist, 2013) and cheap prices for firewood allowed this low-value product to become more highly profitable. The increase in demand for fuel wood removals thus potentially crowded out some removal of industrial roundwood (FAO, 2014). Typically industrial roundwood is not traded across far distances given high transportation costs of this primary product. International trade of Coniferous (C) industrial roundwood is still only marginal, however this has grown at a fast rate since 2013 indicating some shift in market incentives. Decreases in the export of Non-Coniferous Industrial Roundwood are broadly consistent with the decreases in aggregate production.

2.2. Intermediate Products

After roundwood is processed into industrial roundwood (or firewood) it then enters one of several value chains (see Annex 3). These value chains are mostly captured under the NACE code C.16 for the Manufacture of wood and products of wood, articles of cork, straw and plaiting materials and to a lesser extent C.17 Manufacture of paper and paper products. The products of C16 are often a semi-finished consumer good and so a sub-set of this product is inputted into the C31 Manufacture of furniture value chain.

2.2.1. Manufacture of wood and products of wood

2.2.1.1. Production of Sawn Wood and Pulp Wood

Industrial roundwood can be differentiated between pulp wood (23%) and sawn wood/veneer logs (77%). The latter is relatively high value compared to pulp wood, making sawn wood lumber the most important secondary product. Sawn wood lumber can be cut from industrial roundwood using a number of different techniques – including the Plain Sawn, Quarter Sawn and Radially Sawn techniques – which have opposing effects on quality and resource efficiency (see Annex 3). The qualities of wood – i.e. durability, design, and resource efficiency – from these various cuts and the subsequent drying, planing and refining all affect the grade and value of the lumber and therefore the potential value chains that the product will eventually be suited to enter. Pulpwood production stood at 823,914 m3 in 2015 although this marks a dramatic 37 percent decline since its 2011 high. These resources have instead shifted to fuel wood and non-coniferous sawn wood production. As a result this report will not focus on pulpwood products as much.

Sawmilling (C16.1)

Since joining the EU the production of sawn wood have increased substantially. The growth in coniferous (C) sawn wood production may be partially attributable to an increase in coniferous sawn wood imports from Austria, Hungary, etc. Coniferous sawn wood exports have also increased 472% since 2012. It is assumed that sawn wood is being imported for further processing (i.e. “planing of wood”) before it is re-exported, although this needs to be confirmed by fieldwork. Planing of wood is a labor intensive activity for which Croatia can supply relatively cheap wages.

While the increase in production of sawn wood has been a profitable endeavor for C16.1 firms, it is not a universally positive phenomenon. An increase in NC sawn wood production – despite decreases in NC industrial roundwood production – cannot be explained by imports. The increase of this production may instead be attributable to either:

• A change in production methods from Quarter/Rift sawn methods to Plain sawn methods which reduce waste, but which at the same time reduces quality and value.
• An increase in illegal logging – caused by an increasingly lucrative market – which is making its way into the inputs of the sawmilling industry.

Further fieldwork is needed to confirm what is happening. At the same time, Non-Coniferous sawn wood exports have increased 32% and sales to domestic markets have decreased. This is exerting pressures on furniture industry which is increasingly having to compete for raw material and to source hardwood from imports. In 2015 there were an estimated 25,000 m3 less available for domestic consumption than in 2013. This could be affecting cost structures with implications for the quality and competitiveness of downstream industries.

Engineered Wood and Pulp Wood

Croatia produces more marginal quantities of engineered woods. Although production had been in decline from 2004-2012, it has recently been increasing since joining the EU. Since then production quantities have leveled off. Beyond engineered lumbers, Croatia also makes marginal quantities of Chips and Particles, pellets and charcoal, and pulp from paper. These have recently experienced high growth rates, although they started from a relatively low base.

 

Semi-Finished

Croatia has historically also had comparative advantage in semi-finished products (i.e. parquet) and industrial products (wooden containers). The most notable growth and volume in this category comes in the Manufacture of assembled parquet (C16.22), which had a 2014-2015 output growth of 29 percent. In 2013 Croatia was the world’s fourth largest producer of wooden parquet, however the industry was particularly susceptible to the 2008 financial crisis (Maxwell Stamp PLC, 2013A).

2.2.1.2. Price and FDI

It is important to note that the production of non-coniferous sawn wood is driven by the steadily increasing global price of Non-Coniferous hardwood. While wood is differentiable and cannot be given a single unit value, prices can be observed at a more generalizable level through proxy indicators. The UK non-coniferous woods import price is one such indicator that grew 43% in the decade up to 2013. These price increases are partially driven by the EU renewable energy subsidies, which have increased the demand for fuel wood at the expense of industrial roundwood (The Economist, 2013). As a result of these price effects, the export rate has increased and it has incentivized resource seeking foreign direct investment by firms seeking to reduce costs through vertical integration.

At the same time the Plywood wholesale price from Asia can be used as a proxy indicator for engineered woods. The global price of engineered woods was observed to be falling since 2012. This is partially due to the advent of Oriented Strand Board (OSB), a low cost method of making engineered woods out of low quality materials. OSB has rapidly been gaining market share in the construction material markets of the United States (Prestemon, Wear, & Foster, 2015). It is likely that European producers of engineered wood will face increasing cost pressure from OSB manufacturers in the coming years.

2.2.1.3. Export of Wood Products (C16)

As a whole the export value of wood and articles of wood has been increasing substantially as a result of joining the EU. The increase of exports of Coniferous sawn wood are particularly noticeable since hardly any had registered prior to 2013. Yet NC sawn wood still comprise the majority of the volume exported. The main countries that Croatia exports intermediate wood products to include; Italy (28%), Egypt (12%) and Slovenia (10%). These countries are also competitive furniture manufacturers. It is most notable that Italy – a country with generally higher cost structures for labor, etc. – is able to compete successfully in the manufacturing of furniture.

2.2.2. Finished Products

2.2.2.1. Furniture Manufacturing (C31)

Further along in the value chain, the Croatian furniture industry has traditionally been very reliant on wood sector inputs. Changes in the upstream industries for wood and articles of wood are expected to have an effect on the cost of inputs for this industry. Production statistics for furniture manufacturing are broken down by both product and type of buyers. The production of seats has traditionally been quite strong, however growth has slowed recently. Wooden office furniture – a product largely intended for institutional buyers – has low levels of production although some increase in production since 2013.

While the production quantities are useful to get a sense of the direction of the industry, it is also important to differentiate the types of furniture, which are not captured through the statistics. These types include solid wood furniture, furniture deriving from engineered woods, and furniture that are a composite of different materials (Maxwell Stamp PLC, 2013A). Furniture made from engineered woods demands lower quality inputs – thus reducing the barriers to entry – and larger economies of scale to compete with low cost manufacturers in Asia. Croatia’s high quality wood supply conversely makes it more feasible to produce solid wood furniture, where it can hold a distinct advantage for input supply costs and access to high-value markets.

2.2.2.2. Export of Finished Products (C31)

While it is difficult to estimate the value of wood inputs in the volume and value of furniture – given a more varied set of inputs into the production process – a decomposition of the trade data is available for certain categories of wooden furniture. Wooden seats are the largest identifiable export category although they have been in relative decline since 2008. The lowest identifiable export category is for wooden furniture for offices, which has seen a notable decline in export performance since its height in 2003. Germany is the single largest export destination for Croatian wooden furniture, although France, Austria and Italy also have notable shares.

The export of prefabricated buildings – a product that has similar factor intensities and production processes to furniture– is also beginning to register on trade statistics in Croatia and is the only product that is increasing export performance despite the global slowdown. The main export destinations of prefabricated buildings made entirely or mainly of wood is Switzerland, which imported USD$3.4 million of Croatian-made prefabricated wooden buildings.

2.2.3. Export Indicators for Statistical Codes

In the chart below, the vertical axis represents the world growth of imports between 2011 and 2015. The horizontal axis represents Croatia’s share in those imports for a select group of wood products. Croatian prefabricated buildings – including non-wooden constructs – have been rapidly gaining global market share between 2011 and 2015. Sawn wood has increased its market share by 11% in this same period, while world import growth only increased 3%. Product categories placed in the right quadrants indicate areas where Croatian industry is increasing its market share, while those in the left quadrants are product categories where it is decreasing. Similarly those in the top quadrants are product segments that are becoming more traded globally, while those in the bottom are product categories that are becoming less traded.

Beyond the growth rates, a number of calculated indicators can help reveal where the industry holds an advantage. The table below shows the Revealed Comparative Advantage (RCA) of the Croatian wood industry in the observed period. By analyzing values in the RCA, we can conclude that the Croatian wood products industry has traditionally been more specialized than the furniture industry, however this dominance was diminished in 2015 when the sector’s exports took a dive compared to the rest of the economy. The furniture industry was not as susceptible to these shocks and was able to maintain shares in the export basket to a greater degree. These statistics are useful to view in the context of the Herfindahl–Hirschman (HH) Market Concentration Index, which measures competition between Croatian suppliers in the export market. The index shows a moderately concentrated industry, albeit with a steady increase in domestic competition for the wood products (C16) industry, meaning that more firms existing within the industry are sharing equally in the export revenues of the industry. This could be due to shrinking size of large wood firms or more likely the increasing number/export share of small wood firms. The HH index for Furniture (C31) has been increasing since 2013 which shows that firms are increasingly not sharing in the export revenues of the industry. This could be due to the growing size of large firms or the shrinking/exit of small firms.

Comparative advantage can also be observed at the more granular 6 digit product level. Croatia is the third largest exporter of Beech tree products and is also a significant global supplier of Oak. In 2014 its export RCA for sawn/chipped/sliced Beech and Oak was 204 and 83.1 respectively (Simoes & et alia, 2016). However, Croatia also has high RCA in the export of Beech (53.7) and Oak (54.5) in the rough, which underlies the export of a very valuable and scarce Natural Resource for value addition in other countries. Croatia has a very strong but slightly declining RCA for Assembled Mosaic Flooring Panels (134) and a relatively strong – but also declining RCA for regular assembled floor panels (16.5). It should also be noted that it reveals a comparative disadvantage for Office Furniture and Kitchen Furniture sales, which may perhaps indicate that the industry is not set up to sell to institutional buyers. The revealed competitiveness (or not) of these products underlies a more nuanced participation of firms in various strategic segments.

3. Cluster Figures

According to Financijska agencija (Croatian Government Financial Agency, FINA) statistics in 2015 there were only 641 firms engaging in A02 Forestry and Logging activities, while there were nearly 2,192 engaging in the manufacture of wood products (C16), and 1,129 engaged in the manufacturing of furniture (C31). The manufacturing of wood/wood products represents both the largest turnover and the largest number of firms engaged in the sector.

3.1. Geographic Distribution of the Industry

Primary forestry and logging activities are centered around Lika-Gorski Kotar and Slavonia where much of the country’s forest reserves are located. In order to reduce transportation costs associated with moving bulky logs, sawmilling activities often happen near the point of removal, thus there is a strong correlation between A02 logging firm locations and C16.1 saw milling firm locations. This correlation is considerably weaker between A02 firms and C31 firms as a result of a) a strong export pull for sawmill products, b) less transportation costs associated with wood products than for industrial roundwood, and perhaps c) a more varied range of inputs to the furniture industry. This is a trend that has important ramifications for the natural resource value retention in national accounts.

The City of Zagreb (black dots) is an outlier in this distribution due to the low prevalence of forest and a high concentration of manufacturing industry. Conversely, the spatial correlation between saw millers and Furniture manufacturers is much higher, suggesting a stronger dependence of Furniture firms to the outputs of the sawmilling firms.

It is important to note the high concentration of furniture firms around urban locations of Zagreb (black dots) and around Split (red dot) to a lesser extent (see Annex 2).

3.2. Revenue

Using revenue figures from the Croatian Chamber of Economy (Hrvatska Gospodarska Komora, HGK), it is possible to depict export and domestic sale of sawmilling (C16) and furniture (C31) firms by county. In 2015 the city of Zagreb had the largest total revenue from the sale of wood with approximately 1.1 billion HRK in revenue. This is followed by Sisak-Moslavina and Primorje-Gorski Kotar counties. Sales in the latter are more export oriented, while sales in Zagreb are more domestically oriented.

Furniture revenues were highest in Međimurje County (HRK 704 million), followed by Virovitica-Podravina, Bjelovar-Bilogora and the City of Zagreb. The largest exporters of furniture are Međimurje County (HRK 412 million), Virovitica-Podravina (HRK 264 million) and Primorje-Gorski Kotar counties (HRK 186 million). Although the city of Zagreb has the most companies in furniture production, exported values are significantly lower (HRK 96 million) than in the aforementioned counties.

At the industry level, the average revenue per (C16.1) sawmill is HRK 6.1 million, while in (C31) furniture manufacturing average revenues were only HRK 4.9 million. The values of furniture would be significantly lower if the production of seats and manufacture of mattresses were excluded, which have an average income of HRK 44 million per business entity.

3.3. Employment

In terms of regional distribution, Annex 2 maps out the distribution of employees and firms by County. The highest share of employees in the primary sector is visible in Varaždin, Osijek-Baranja, Vukovar-Srijem and Zagreb County. The highest share of employees in the manufacturing of wood is in Primorje-Gorski Kotar county and Zagreb County. Finally the highest share of employees in the furniture manufacturing sub-sector is located in the Virovitica-Podravina, Primorje-Goranski Kotar and Međimurje County.

Labor productivity is estimated to be higher in C16 than C31. At the sub-activity level, the highest labor productivity was in the production of parquet while the lowest production is the production of kitchen furniture. From 2014 to 2015, there was a decline in employment as a result of reduced export demand. In 2015 the average annual income for employees working in the wood based industries was highest in A02 Forestry and Logging (Croatian Bureau of Statistics, 2016).

4. Industry Functioning

4.1. Size of Firms by Sub-Sector

Using FINA statistics an analysis on the size of firms can be undertaken to identify the economies of scale at which firms are presently operating. Although a large number of firms are of unknown size, available data approximates that 97% of all business entities are small enterprises. Medium and large firms together comprise the remaining 3%, and are more concentrated in sawmilling, veneer/wood-based panel and other furniture making activities. The existence of these few large firms in a sea of small firms may indicate that they are operating in a segment that has relatively high barriers to entry and different economies of scale necessary for existence. There are a number of firms engaged in the manufacture of office and shop furniture, however nearly all of them are small enterprises, which may contribute to weak export performance in this category.

4.2. Aggregate Growth Analysis

Using FINA statistics an annualized growth rate was constructed for number of firms, total revenue and employees in each NACE category. Shifts in the functioning of the industry at the firm level can be detected by analyzing the relative changes in these rates. In C16 and C31 growth in revenue has far exceeded firm growth, suggesting that there are high barriers to entry; likely due to the change in policy instituted in 2012 and to new and stricter EU regulations. Only in A02 has firm growth exceeded revenue growth, suggesting relatively low barriers to entry. Meanwhile employment in the primary sector has shrunk, likely the effect of a reported staff reduction at Hrvatske Šume (Presscut-Tobacco Report, 2016).

While the above reveals structural shifts in the industry, it does not identify magnitudes of the margins. In a perfectly competitive environment (economic) profits tend to zero over time. Where barriers to entry exist and where firms or countries have some competitive advantage, profits can remain positive and persistent over the course of successive years. By calculating the average profit/loss per firm it is possible to get a clearer view of who is keeping the margins in the value chain. From these calculations it is apparent that firms further downstream are capturing most of the value in this industry and have some monopolistic advantage. Higher value added sectors – such as furniture manufacturing – are operating in a more perfectly competitive environment. At the same time the HH market concentration index is rising, thus suggesting that while domestic competition of firms is increasingly weak, global competition is high. The dramatic rise in firm profits across all sub-sectors between 2013 and 2014 may be due to recent changes in the law.

4.3. Foreign Direct Investment

In recent years foreign investors have increasingly played a role in the Croatian wood production and processing industry. With a domestic market estimated at 200-300 million euro, a range of resource seeking companies – such as Calligaris (Italy), Kronospan Group (Switzerland) and the Hass Group (Germany) – are purported to have set up primary production plants in Croatia (Maxwell Stamp PLC, 2013A). These linkages have enabled technology transfer and collaboration with other European countries, including Italy (Wood-Technological Institutes Cosmo Pesaro and Cates Udine), Austria and the German wood sector in Bavaria (Maxwell Stamp PLC, 2013A).

In the primary production sector, Faunis Selva, a German-owned company invested in Croatia for resource seeking motivations. Lipovljani Lignum, an Italian-owned company, likely also invested locally as a result of the domestic content requirements and the transport costs associated with the movement of raw materials. In upstream markets, LPT (Dutch), Hilding Anders (Swedish/ Belgian) and DI Klana (Italian) made efficiency seeking investments in furniture manufacturing plants. The vertical integration model of these European companies may serve as a template for Croatian furniture firms wishing to secure a more reliable source of input supply.

More recently, the Croatian furniture industry has purportedly struggled from the introduction of low cost furniture brands – such as IKEA – to the domestic market. Hopes of local producers supplying the retail giant have not eventuated. The procurement requirements are not conducive to the current Croatian industry, which is operating at smaller economies of scale and with different cost structures.

4.4. Conclusions

As a whole, the Wood Production and Processing sectors have witnessed success in recent years as integration into the European economy has created increased demand for Croatian wood. The wood production industry has a comparative advantage in high quality wood, owing to the ample natural resources of the country. While the industry has been susceptible to the global economic shocks, the industry maintains a distinctive advantage in primary production and in intermediate product processing. In fact, over the past three years the sawmilling industry has become much more profitable through integrated into the global value chain; a mixture of FDI and outsourcing contracts have centered on linkages with firms in Slovenia, Austria, Italy, and Germany. Croatian sawmills are even increasingly sourcing raw inputs from abroad for further refinement and re-export.

However, integration into the EU economy has also precipitated a shift in the structure of the industry with a higher portion of resources being committed to the renewable energies (through fuel wood) sectors at the expense of manufacturing sectors. Increasingly intermediate sawn wood products are being sent for exports to furniture manufacturers in Italy and Egypt. These shifting incentives have benefited upstream firms disproportionately with large profits being accumulated by firms operating in those industries over the past three years.

While the downstream furniture industries are expanding their exports they have been increasingly concentrated in a few firms. Meanwhile individual firm profits have tended towards zero. Thus while there is a relative decrease in competition in the domestic sector, the remaining firms are increasingly competing with foreign firms in a perfectly competitive global market. This is also reflected in the RCA values which show stagnation at levels just above ‘competitiveness’ in most categories. There is also much indication to suggest that (typically small sized) furniture manufacturers are not well positioned to sell to large institutional buyers nor are they systematically innovating with their sales techniques. More encouragingly, the production of prefabricated buildings – a product that has similar factor intensities and production processes to furniture – is also beginning to register on trade statistics in Croatia. This is the only product in the grouping that is increasing export performance over the past year despite the global slowdown.

More broadly, the 2015 global economic slowdown presents an opportune time for a retrospective stocktaking to map how the industry has evolved and to assess how it may reposition itself to improve performance in an increasingly competitive and volatile global market. It is apparent that in order to improve the competitive position of furniture manufacturers, a realignment of actors and segments will need to take place.