Manufacturing of Road  and Rail Vehicles, Parts and Systems STPA

1. Cluster Profile (Automotive)

Croatia’s automotive components industry developed from the former Yugoslavia’s automotive production industry. Bus manufacturing activity was located in Croatia, Slovenia and Serbia, while truck and passenger car manufacturing was located in Slovenia, Serbia and Bosnia. Car manufacturing activity was located in three former Yugoslav republics – Slovenia, Serbia and Bosnia – through cooperation with Renault, Volkswagen and Fiat.

An automotive component supplier network was created in Croatia in order to support the vehicle manufacturing process in former Yugoslavia. The development of the Croatian automotive sector was built on inherited expertise and a strong tradition in the sectors that provided support to the automotive components manufacturing process. These sectors included metal processing and metal tool production, plastic product manufacturing, glass product manufacturing and textiles. The majority of the local manufacturing facilities are still located in Istria, Varaždin, Brod-Posavina, Split-Dalmatia and Zagreb. These locations now act as the pillars of the Croatian automotive industry.

Although the Croatian automotive industry has a long tradition, it was disrupted in the last 20 years due to the war in Croatia and the global automotive crises of 2008-09. Nevertheless, the industry has managed to expand its market position, growing at a robust 8% a year over the past 10 years.

2. National Supply

2.1 End markets

Croatia automotive parts exports are $810m, exhibiting the regional focus common in the global automotive industry. Germany has traditionally been the largest market for Croatian vehicle parts, though the growth rate in exports to Germany has slowed since the economic crisis.

Slovenia is the second biggest market, a neighbouring country with a developed automotive industry with a large number of OEMs & tier 1 firms. However, Croatia’s exports to Slovenia have been falling year on year, having begun declining prior to the economic crisis.

Slovakia is the third largest market and growing very fast: the pre-crisis period showed explosive growth, though largely because it started from a very low base; however, the growth has since continued, averaging almost 35 percent over the past 5 years. This growth is due to Slovakia’s vehicle production growth, which more than doubled from 2005 to 2007 from 218,000 to 570,000 vehicles per year. By 2013 Slovakia had reached 988,000 vehicles a year. Together, these top three markets account for 65% of Croatia’s automotive parts exports.

Finally, Serbia has emerged as an important export destination, with high growth rates since 2009.

This growth is due to the new FCA (Fiat Chrysler Automobile) vehicle production facility in Serbia,

the result of substantial investment in 2014. This plant produced over 100,000 vehicles in 2014.

2.2 Core products

Croatia’s automotive cluster covers a range of products that have for the most part grown most robustly in the pre-crisis period, exhibiting a limited rebound in the more recent past. However, Croatia’s dominant automotive part – car seats – have exhibited marginally faster growth over the past 5 years. Linked to seats, automotive leather is also a substantial export for Croatia, but has grown less fast recently than during the pre-crisis period. Engine parts have been the fastest growing substantial part, though average growth has declined by about 10% post 2008-9 than the pre-crisis period.

Body and aluminum parts are Croatia’s substantial yet low growth automotive parts, exhibiting zero to negative growth at various points in the past decade.

Diagram 2: Export and annual growth of car parts in Croatia before and after 2009

Source: UN COMTRADE dana

Though Croatia has a broad range of products, they generally tend to fall into a limited number of product groupings around a limited number of common input types. These include:

Leather and textiles

• Chrome-free tanned leather, punch parts, sewed seating covers, leather covered built-in parts
• Seating system components namely headrests, armrests, bolsters.

Rubber/plastic

• Interior: instrument panel, door panels, sun visors, grab handles, floor carpet
• Exterior: bumper body and components, side trims, wheel arch liners, vehicle undercarriage shield, fuel tank guard
• Static and dynamic seals.

Steel/aluminum

• Pump supports, gearbox and alternator supports, axles, turbocharger housings
• Aluminum anti-vibration and braking system components
• Chassis/suspension, aluminum engine components.

Glass

• Windscreen, side glasses, rear glass, partition glass, glass roof top.

Other

• Production and distribution of machines for production technology and molding of tires
• Machining and heat treatments of rings for rotation bearings
• Multilayer ceramic capacitors.

For the most part Croatia’s interior-related parts are exported to all of its main markets, with the exception of France, Austria and the United Kingdom, where they account for a minimal share. In these countries other parts make up Croatia’s exports: engine parts and body/exterior component go to France and the UK, with chassis and electrical parts to Austria.

However, interior components are particularly important for Croatia’s fastest-growing and now third largest market, Slovakia. Slovenia has been a particularly important market for bodies and exterior components; however, this is a declining market for Croatia, experiencing negative growth.

Diagram 3. Product share in top 10 markets (2014)

Source: UN COMTRADE dana

3. Cluster Figures

3.1 Cluster overview

Croatia has more than 130 automotive sector businesses; however, approximately 50 firms are engaged in the automotive parts sector. Vehicle-related businesses, of which parts manufacturers are a sub-group, collectively employ around 10,000 people. While a number of parts manufacturers are located across the country, there is a clear concentration in Zagreb and its neighboring county.

The majority of the parts industry is focused on exports – which is to be expected in light of the fact that the products are part of a long and complex automotive value chain. There is a clear dominance in the leather and textiles product category for car interiors. However, there are only two major suppliers in this product. Of these, a single firm, Boxmark Leather, has exports of $360 m (or 45%) of Croatia’s total automotive parts exports of $810 m.

3.2 Firm profiles

Croatia’s automotive cluster is made up of a mix of foreign direct investors that have expanded into Croatia, and home-grown firms. Some of the latter trace their origins to the state-owned enterprises of the ex-Yugoslavia, while others have started later from purely private origins.

The table below provides a summary of some of the most prominent automotive parts manufacturers in Croatia.

Table 4: Main automotive parts manufacturers

Source: Company sources

3.2.1 Interior components

The interior segment includes seats, instrument panels, arm rests, headliners, etc., that generally has high level of outsourcing. The product segment’s margins have come under pressure by generally rising raw material costs. Croatia’s exports have been strong growth, growing much faster in its main markets than those markets have on average, but declining faster in Slovenia than the average for that market.

3.2.2 Bodies and parts

This product segment includes vehicle frames and bodies, characterized by generally limited levels of outsourcing and high fixed costs. Croatian firms have seen similarly stronger growth in its main markets than the market average, with a similar decline in Slovenia as for interiors.

4. Industry Functioning

4.1 Tier 2 components

4.2 Tier 1 component/assembly

Croatia is also the fifth largest country in South East Europe in tier 1 component production. While many countries in SEE show a decline between tier 2 and Tier 1 products (particularly Bulgaria), Croatia has around the same production in both areas. This is mainly due to the presence of Boxmark Leather, which is a tier 1 firm connected directly to global value chains.

Croatia’s main export market for tier 1 products is by far Germany, followed by Slovakia and Slovenia. The vast majority of these exports are car seats, a product in which Croatia is a regional leader.

5. Cluster Profile (Rail)

5.1 Origins

The history of railways in Croatia began in 1860 when the first 42 kilometer railway was built, as part of the Vienna – Trieste corridor. Today Croatia has 2,604 kilometers of railways, with coverage that is just in line with the EU average. However, other indicators such as electrification level, quality of service, maintenance level, aging equipment and technology updates point towards a sector that is lagging behind other European countries. Even though the national strategy papers envisage a balanced development of all transport segments, most part of the government investments from 1990 to 2000 were related to the road infrastructure, while railways continue to be underinvested.

Manufacturing of rolling stock in Croatia has a long history, starting from 1894 when the first factory, TZV Gredelj, was established in Zagreb (and still continues to operate today). Further development of the railway network led to further growth of a domestic rolling stock sector, but all under state ownership and management.

The privatization process started in 1990, affecting the majority of the supply sector but not Hrvatske željeznice (Croatian Railways), the state-owned passenger and freight operator, also responsible for including infrastructure management. Hrvatske željeznice and its investment in rolling stock modernization remained the major domestic market for the railway manufacturing sector in Croatia.

5.2 Market liberalization

Prior to EU accession, Croatia started aligning its traffic legislation to European traffic policies and relevant directives. Following this process, Croatia has undergone market liberalization, which imposed separation of infrastructure management and transport operations and opening up access to the rail transport market for new suppliers. This included dividing Croatian railways into three different companies – HŽ Infrastruktura (managing infrastructure), HŽ Putnički prijevoz (operating passenger transport) and HŽ Cargo (operating freight transport). All three companies are state owned, but there are new international operators on the market: Adria Transport (Croatian), Rail Cargo Carrier Kft (Hungarian) and Rail Transport Service (Austrian).

Market liberalization has brought a fundamental change in the railway system in Croatia, with new international operators coming to the market carry a significant opportunity for local railway equipment manufacturers that have historically been dependent on Croatian Railways.

5.3 Prospects for growth

The majority of the railway network is in Croatia is characterized by lower speeds due to inadequate maintenance or obsolete signaling and safety and telecommunication instruments. Being an EU member provides an opportunity for the Croatian railway sector to modernize its key international corridors, particularly given the approximately EUR 2 billion in funding that are available through the EU.

Modernization of the Mediterranean corridor has already started with two major investments in total value of over EUR 240 million, which is to be co-financed by the EU structural funds. It is expected that large investments in infrastructure will be followed by further modernization of the rolling stock, which would generate demand for local railway equipment producers. The majority of the rolling stock in Croatia is more than 20 or even 30 years old and will not be fit for use on the planned modern rail infrastructure.

6. National supply

However, demand also tends to hinge on a number of large, often public, railway investments. Therefore the industry tends to see supply volatility, based to Croatian firms’ success in winning substantial supply contracts (or, in the case of tier 1 and 2 parts firms, the success if foreign OEM’s in winning contracts).

6.1. End markets

6.1.1 Domestic

Unlike the automotive parts sector, Croatia’s railway equipment industry is strongly reliant on the domestic market, mainly for wagons and vans and signaling equipment. Because the industry has its own OEMs, Croatia is also a substantial importer of railway equipment parts (which are also likely also inputs into its tier 1 manufacturers).

The domestic market has proven to be a reasonable source of income in the recent past, with a new $240 m supply contract from 2015-17 being an example. Furthermore, Croatia’s rail sector is also in need of fresh investment, with investment overdue in both its infrastructure and rolling stock. However, while this does present a potential opportunity, it is reliant on an overhaul of the finances of the country’s railway companies. This reinvestment will also not necessarily translate into guaranteed business for Croatia’s industry, as the contracts will be eagerly pursued by other global suppliers.

6.1.2 Exports

Despite the importance of the local market, global sales are playing an increasingly important role for the Croatian railway supply sector, growing strongly over the past decade. The sector’s global markets are widely spread, covering a number of markets in the region but also beyond.

The sector’s export growth surged from a low base in the first half of the past decade, to then settle at a new and much higher equilibrium, from which it has been averaging 17 percent growth over the past 5 years.

Nonetheless, some volatility continues in large part due to large ticket sales in certain years of wagons and/or locomotives. However, within this volatility are fairly steady – and increasing – railway parts and signaling equiment sales, largely going to Austria and Germany.

Diagram 7: Export product performance

Source: UN Comtrade

6.2 Core products

The Croatian railway supply industry includes manufacturers of rolling stock and locomotives, related parts, and suppliers of signaling systems.

Rolling stock includes end products and individual components or subsystems, such as:

• Traction equipment (for locomotives and powered rolling stock)
• Bogies/wheelsets and suspension
• Body structures
• Braking systems.

As with automotive, spare parts form an important part of this product segment; however to a higher degree: while spare parts generally account for approximately 15 percent of automotive tier 1 manufacturers’ revenues, railway operators report to spend up to 30 percent of their annual budgets on spare parts.

The signaling and control segment includes electro-mechanical or electrical signaling and safety equipment for railways or tramways. This includes train operation, supervision and protection systems, and rail telecommunication systems. This includes equipment that is part of the rolling stock or the rail infrastructure. The equipment can be part of the on-board equipment of rolling stock and locomotives or part of the infrastructure (or both).

Diagram 8: Croatia’s main export products and growth rate

Source: UN Comtrade

7. Industry figures

7.1 Cluster overview

Croatia has around 14 railway parts manufacturers that collectively employ around 2,150 people. In geographical terms, railway manufacturers are mainly located in the north of the country, with a clear concentration in Zagreb and its neighboring county. The total turnover of the industry in 2015 amounts $ 182 m, with almost 40 percent generated by exports.

7.2 Firm profiles

The largest companies in the industry, such as Končar and Đuro Đaković, are successors of the former large state owned enterprises and are largely focused on production of railway equipment for Croatian railways. However, others suppliers remain state-owned, or formally by HŽ Cargo and HŽ Infrastruktura – Gredelj and RŽV. The third group of companies are fully private and usually younger firms, operating in specific railway equipment segments as well as other industries, such as the automotive sector.

The table below provides a list of railway parts manufacturers in Croatia, together with a level of their export activities. When comparing export levels of different product segments, railway parts how clearly with the highest export focus. Electrical signaling, goods and wagons are primarily manufactured for the local market, predominantly represented by HŽ Putnički prijevoz and HŽ Cargo.

The level of foreign investments in the sector is low, Lipik Glas is the only company with foreign ownership (Italian).

Table 6: Main automotive parts manufacturers

Source: Company sources

7.2.1 Parts

The railway parts segment include components for locomotives and wagons.

7.2.2 Signaling

7.2.3 Vans and wagons

8. Industry Functioning

The Croatian rail supply industry is a relatively diverse sector, participating in all major railway supply product segments. This is somewhat surprising in light of the relatively small sector size, where a certain concentration would be expected. Some of this is a product of legacy, with some of the more dominant firms having started off as state-owned enterprises, and so they exist in part as a result of the advantages that can come from state-related support. The bankruptcy filing of TZV Gredelj in 2012 could indicate that companies with such a diversified product and service offering may not be able globally competitive in the long-run. However, TZV Gredelj’s recent challenges may be a result of firm-specific drivers rather than structure problem with Croatia’s rail supply sector.

However, many of the sector’s companies have been able to maintain their position in supplying the domestic market, recently demonstrated by KONČAR’s $240 m contract for 32 local/intercity and regional transport EMUs and 12 diesel electric multiple units between 2015-17.

Perhaps more interestingly, Croatia’s sector has been doing well in the global market, growing almost 40 percent a year over the past decade. This is from an initially very small base; however the past five years have seen the industry maintain 17 percent growth from a much higher base. So while Croatian railway supply firms may enjoy an outsized advantage in securing domestic contracts, this does not apply to exports, where they must compete in markets against global firms.

There are emerging signs that the Croatian railway parts supply sector, in particular, is becoming increasingly competitive. This is partially demonstrated by the high degree of exports as a share of their revenues (compared to other major product segments), but also the reduction in parts imports despite growing exports. Some of these exports are not only finished goods but parts themselves, but this implies that tier 2 parts suppliers are better able to meet the needs of Croatian tier 1 parts exporters.

Diagram 10: Railway supply imports and exports

Source: UN Comtrade