Environment-Friendly Transport Solutions

1. Cluster Profile

1.1. Overview

According to the International Energy Agency (IEA), the transport sector is the second largest contributor to global CO2 emissions after electricity and heat generation (IEA 2016). Pollution caused by transport accounts for 23 percent of global emissions and, driven mainly by the road sector, has increased by 71 percent since 1990. The negative health effects of pollution also have a severe economic cost, which has been estimated at US$1.7 trillion in OECD1 countries alone (OECD 2014). In response to this challenge, governments and nongovernmental organizations alike have adopted various policy recommendations and action agendas, not least of which is Sustainable Development Goal 13 (SDG 13) of the Paris Agreement on Climate Change. SDG 13 targets, among other things, the application of environment-friendly solutions and approaches to transportation to achieve a zero-emissions economy by 2050 (World Bank 2017).

Transformation and ‘greening’ are already buzzwords in the automotive industry. While the first policies to encourage the development and adoption of electric vehicles (EVs) were enacted almost 50 years ago, until quite recently high costs and low demand limited the growth of EVs and other ‘environment-friendly transport solutions’ (EFTS). However, as can be observed from the proliferation of EVs and plug-in hybrid vehicles (PHEVs) on streets in cities around the world, this has already begun to change dramatically. While EVs and PHEVs today account for about 1 percent of vehicles produced worldwide, by some estimates EV sales will outstrip those of conventional-fuel vehicles within two decades. And, while the rise of EVs and PHEVs is a widely recognized development, the maritime transport industry has also been targeted for greening initiatives. The European Union (EU) h2as identified opportunities to reduce emissions from maritime vessels; these opportunities range from the use of alternative fuels and renewable energy (for example, wind energy, photovoltaics, wave energy, and biofuels) to an emphasis on hybrid technologies (Parliament 2015). Nonetheless, for the maritime sector, the commercial viability of wholesale green solutions remains more distant than in the automotive sector.

While the subject of this report is EFTS, the entire transportation industry is already in the midst of a wholesale shift toward environmental sustainability. For example, a number of countries including China, France, and the United Kingdom have set targets for banning the sale of gasoline-powered automobiles. Thus, although Croatia’s S3 does implicitly draw a distinction between ‘environment-friendly’ and ‘non-environment-friendly’ transportation, it should be noted that such differences are increasingly irrelevant as the entire industry orients itself toward environment-friendly solutions.

1.1.1. History and Significance of the Industry in Croatia

• Automotive Industry

Croatia has an active automotive component manufacturing industry but there are no major original equipment manufacturers (OEMs). Croatia’s automotive industry is a legacy of vehicle production patterns in the former Yugoslavia, where truck and passenger car manufacturing activity was located mainly in Slovenia, Serbia, and Bosnia through collaborations with Renault, Volkswagen, and Fiat. Croatia’s participation in automotive manufacturing was and is limited almost exclusively to the production of component parts. Today, this production calls on significant inherited expertise in metal processing and metal tool production, plastics manufacturing, glass manufacturing, and textiles. Manufacturing facilities are located in Istria, Varaždin, Brod-Posavina, Split-Dalmatia, and Zagreb. The industry has managed to consolidate its market position and has grown at a robust 8 percent a year over the past 10 years.

1.1.1.2. Maritime Industry

Croatia has a long tradition of shipbuilding that has faced significant structural adjustments in recent years. Industrial production in Croatian shipyards dates back to the 19th century but took off after World War II, when commercial fleet orders from the former Soviet Union formed a large proportion of Croatian business. Toward its peak, roughly in the late 1980s, the Croatian shipbuilding industry could boast of being the world’s third largest producer in terms of deadweight (DWT) volumes.3 After the breakup of the Soviet Union and, ultimately, of the former Yugoslavia, Croatian boatbuilding and shipbuilders switched mainly to buyers in Western Europe (Senjanović, 2011). The country’s strong competitive position continued into the 1990s and the early 2000s. In 2005, Croatia had 69 ships on its order book and ranked as the world’s fourth largest ship producer. In fact, shipbuilding was arguably one of a few industries in which Croatia could truly be said to be a world leader (Karačić, 2013).

The global shipbuilding sector has since seen a shift in production toward East Asia, particularly China and the Republic of Korea; this shift has precipitated, in large part, in a restructuring of the Croatian shipbuilding industry. Amid a shift in global ship production to East Asia and a resulting decline in profitability, Croatia started to lose its leading competitive position. To try and win tenders, Croatian shipyards were forced to offer lower competitive prices while operational costs and efficiency remained largely the same. Several plans were laid out for the restructuring of Croatia’s large shipyards, with options considered including the separation of ancillary production, privatization, or closure. However, these restructurings failed to solve the complex problems in the industry. In 2000, the government started subsidizing the industry and doling out grants to large shipyards, usually for technology updates. As part of the EU accession process, Croatia was committed to carrying out the restructuring process of the state-owned shipyards. The privatization process was a necessary step that would enable these companies to compete on the international market in line with the existing EU regulations and legislation. Additionally, the restructuring process was supposed to resolve crucial issues such as low productivity, low financial potential, technological backwardness, and overall operational inefficiencies. Large shipyards that have been subject to restructuring and privatization are Brodosplit, 3. Maj, Kraljevica, Brodotrogir, and Uljanik. In the document ‘Retrospective of the Rehabilitation and Restructuring Process of the Shipbuilding Industry in the Republic of Croatia’, the Ministry of Economy, Entrepreneurship, and Crafts (MINGPO) states that: “After the restructuring process, the Government will continue to support shipbuilding on the basis of aid rules for shipbuilding related to innovation, use of new technologies, and the like, for which the shipyards will apply individually” (Restructuring of Croatian Shipbuilding, n.d.).

Notwithstanding recent and ongoing restructuring attempts, shipbuilding remains an important industry in Croatia. The Croatian Shipbuilding Corporation (CSC) estimates that the sector accounts for up to 1.8 percent of gross domestic product (GDP) and as much as 15 percent of Croatian exports (CSC, 2017). Furthermore, it is estimated that the multiplicative effect of the shipbuilding industry on the rest of the Croatian economy is around 2.8. This means that the value of HRK 1 million generated in shipyards results in total production in the Croatian economy of HRK 2.8 million (Karačić, 2013).

1.1.2. Smart Specialization Strategy and the STPA

EFTS is one of three STPAs related to transport; the other two are Intelligent Transport Systems and Logistics and Added Value Manufacturing of Road and Rail Vehicles Parts and Systems. While the three STPAs are closely related, their existence underscores the perceived significance of this topic: “Transport and mobility are important areas for Croatia that can make substantial contributions to meet global challenges in relation to smart, green and integrated transport” (Government of Croatia, 2016). The S3 divides areas of activity among the three STPAs as follows: the Added Value Manufacturing of Road and Rail Vehicles Parts and Systems STPA covers the manufacture of automotive and rail components upstream of OEMs, the Intelligent Transport Systems and Logistics STPA covers intelligent transport systems (ITS), and the EFTS STPA covers environment-friendly approaches to the automotive and maritime sectors.

The S3 defines two pillars within the EFTS STPA: (a) specialized vehicles such has EVs (even if they are otherwise part of the regular automotive value chain) and electric bikes and (b) maritime vessels. Within the STPA, the S3 also lays out a range of indicative key enabling technologies (KETs) that can be leveraged to support private sector growth and that are meant to serve as the main drivers of growth and development of the automotive and shipbuilding industries and their activities.

The following chapters of this report take stock of the current situation of the Croatian EFTS STPA and map the set of relevant actors, agents, and organizations that represent the ‘cluster’ associated with this sector.

2. National Supply Profile

The EFTS STPA consists of close to 240 firms, of which the vast majority are in the maritime industry. A total of 233 companies are involved in the manufacture of ships and boats, 2 companies produce EVs, and 3 produce electric bikes. This rather unusual configuration is due to the division of topics in the S3, in which upstream suppliers of automotive parts are treated separately from downstream OEMs and ITS and placed in different STPAs.  (A strategic segmentation analysis of upstream component manufacturers was carried out in the Added Value Manufacturing of Road and Rail Vehicles Parts and Systems STPA.) As stated in the S3, the automotive industry in the EFTS STPA is represented only by “specialized vehicle producers (e.g., Rimac Automobili Ltd., Greyp Bikes ltd., DOK-ING Automotiv), especially ones dealing with electric propulsion and mobility” (Government of Croatia, 2016).

2.1. Production

2.1.1. EVs and Electric Bikes

Croatia has only two companies—Rimac Automobili and DOK-ING Automotiv—that are involved (and then somewhat on the margins) in the production of EVs. Neither has concrete plans for serial production; Rimac Automobili has produced about half a dozen specially customized EVs on a one-off basis, while DOK-ING Automotiv has only produced an EV prototype. Rimac Automobili was founded in 2009 and its core business is production technology solutions and components for EVs, rather than EVs themselves. Rimac Automobili also makes electric bikes, while DOK-ING Automotiv manufactures electric scooters.

More broadly, Croatia’s automotive industry includes product manufacturers that have been recovering from the setback of the global financial crisis. The component that accounts for most of Croatian parts production is car seats. A related product, automotive leather, is also a significant export for Croatia, but this sector has recently expanded less quickly than it had during the precrisis period. Engine parts have been the fastest growing major part for Croatian manufacturers, though average growth is still about 10 percent less than that of the precrisis period. Finally, body and aluminum parts experienced zero growth or contraction at various points in the past decade.

2.1.2. Maritime Industry

The Croatian shipbuilding and boatbuilding industry has a long history and is export oriented. The Croatian maritime industry consists of 233 companies related to the manufacture of both boats and ships and employed just under 6,700 people in 2016.

During field research, several companies reported taking initiatives related to the production of environment-friendly vessels, and new financial instruments are making such initiatives more likely. To stimulate demand for environment-friendly vessels, the European Investment Bank (EIB) has launched a dedicated credit line called the Green Shipping Loan Programme (EIB). This financial instrument is aimed at supporting investments in sustainable shipping (for example, alternative fuels such as liquefied natural gas [LNG], hull treatment, ballast water treatment systems, and so on). Relevant institutions in Croatia have set up a working group that would decide on activities and further steps. It is expected that this initiative will spur additional demand for environment-friendly vessels.

• Its first project was a technologically advanced (and eponymous) catamaran, ‘iCat’, which was created as a joint project between the company, the University of Zagreb, and the Končar Institute. Designed as an ultralight catamaran with capacity for up to 80 people, iCat does not emit harmful gases owing to advanced technology in hull construction and electric drive. iCat is used for passenger transport, and unusually low ship gassing allows the catamaran to sail in deeper waters than would normally be feasible. The vessel is designed to achieve significant savings in operating costs. The iCat catamaran could be used for several purposes—short-distance ‘hop-on’ lines used primarily for passenger transport around the islands, charter transport, or special experience tours. Another iCat project, ‘Babycat’, is an electric, zero-emissions catamaran with an integrated solar roof intended mainly for use in protected natural areas. The company was granted HRK 1.4 million in the latest R&D tender8 for prototyping an electric ship with solar roof and 10 hours of driving autonomy.

• One of Croatia’s large shipyards, it is changing its business model from the traditional production of large ships to that of cruisers, yachts, schooners, and sailing boats. The company has accumulated technical skills and knowledge to manufacture almost any kind of vessel but, in terms profitability and business sustainability, has identified the abovementioned products as the most attractive. The company has invested in various R&D projects mainly focused on new composite materials and environment-friendly solutions.

2.2. Exports

The Croatian maritime industry is predominantly export oriented; as stated earlier, 63 percent of the industry’s turnover is generated by exports. While year-on-year trends do not give a full picture of the health of the industry due to the cyclical nature of the boatbuilding and shipbuilding sectors, it is notable that the 2016 figure for Croatian maritime exports (US$154 million) represented a more than 40 percent decline from 2015 and was also significantly down from the preceding years.

By value, the majority of Croatian exports are made up of large ships, including passenger and cargo ships. The share of large ships (including cruise ships, container ships, barges, and ferries) among Croatia’s export portfolio is 72 percent. Another 22 percent is made up of pleasure and sporting vessels, including yachts. The smallest export segment for Croatia consists of fishing boats and factory ships; the share of such vessels among Croatia’s maritime exports has fallen from 16 percent in 2013 to only 6 percent in 2016.

Export patterns in the four-year period between 2013 and 2016 are characterized by significant fluctuations. Excessive fluctuations can cause significant operating issues for companies. The year-to-year variations for Croatia’s main three categories of export vessels are described below.

• Cruise ships, excursion boats, ferry boats, cargo ships, and barges (HS 8901). After a period of relatively constrained fluctuation, exports in this category declined sharply to US$110 million in 2016. The largest single export destination is the Marshall Islands, which was the destination of 40 percent of exports in this sector. However, this figure is somewhat misleading since the Marshall Islands, along with Liberia and Panama, maintain one of the largest open registries for merchant shipping vessels flying flags of convenience. Other export destinations are the Netherlands, Colombia, and Sweden.
• Yachts and vessels for pleasure or sports (HS 8903). Export volumes in the pleasure boat sector have also seen wide fluctuations. Exports surged to US$93 billion in 2015 but fell about 70 percent the next year. The top export destinations for this segment were the United States, the Cayman Islands, and the Marshall Islands.
• • Fishing vessels and factory ships (HS 8902). In comparison with the fluctuations in the other two sectors, this export category can be characterized by constant and rather drastic shrinkage between 2013 and 2016. Exports fell each year for four years straight, shrinking dramatically from US$38 billion to only US$9 billion. Norway and Russia were the largest export destinations for this category of vessel.

3. Industry Functioning

The mapping and analysis of the EFTS STPA was conducted on the basis of (a) industry NACE codes for the maritime industry and (b) firm-level data for companies involved in the production of EVs and electric bikes. There are no NACE codes for the latter category of products.

3.1. Economic Geography

3.1.1. Number of Firms

The overwhelming majority of the companies in the EFTS STPA are classified as small companies. Totally 93 percent of the 167 companies involved in the production of ‘ships and floating structures’ are classified as small or micro enterprises—meaning that they have fewer than 50 employees. The shipbuilding sector in Croatia essentially consists of a handful of large or medium shipyards (for example, Brodosplit, Uljanik, 3. Maj, Brodotrogir, and Viktor Lenac) supported by more than 200 components and auxiliary service suppliers. The dominance of small and micro enterprises is even more pronounced among the 66 companies involved in the value chains associated with the production of ‘pleasure and sporting boats’. In this area, all of the companies are identified as ‘small’ or ‘micro’. In the ‘specialized vehicle’ category, four of the five firms (DOK-ING Automotive, Torp, Greyp, and Visiobike) are classified as small, with Rimac Automobili being the lone exception.

3.1.2.

Clustering of Firms

Firms in the EFTS STPA follow an expected geographic pattern, given the areas of activity of most of the companies. Unsurprisingly, shipyards are concentrated along the coast, primarily in Istria, around Split and Šibenik, and on the island of Korčula. Input providers and companies involved in other activities such as design are located mainly in Zagreb and Rijeka. Producers of EVs and electric bikes are located in Zagreb with the exception of Torp, which is located in Rijeka.

Figure 11: Distribution of 15 Largest Shipbuilding Companies and Producers of EVs and Electric Bikes

3.2. Profitability Analysis

The construction of ships and ‘floating structures’—the dominant activity in the EFTS STPA—is a loss-making industry, though the sector’s performance has been showing some improvement. The Croatian maritime industry generates around EUR 500 million in revenues each year, and almost 99 percent of this derives from companies engaged in the building of ships and floating structures, as defined in the NACE classification system. Pleasure and sporting boats thus account for a miniscule portion (1 percent) of total shipbuilding turnover. Between 2014 and 2016, the ship and floating structures sector continued to grow at a slightly faster clip in terms of both revenues (with a compound annual growth rate [CAGR] of 3.6 percent for ships versus 2.6 percent for pleasure and sporting boats) and employment (5.1 percent versus 2.0 percent), while companies involved in the building of pleasure and sporting boats saw their net profits increase at a faster rate (38.2 percent versus 34.1 percent). The net profit trends, while positive, belie an important fact; net profits of companies in the pleasure and sporting boat category almost tripled between 2014 and 2016, while firms involved in the building of ships and floating structures have been paring down years of accumulated net losses.

Production of EVs and electric bikes is in its pioneering phase and quantities sold are still at very low levels. This is particularly the case for EVs; Rimac Automobili has sold no more than five customized ‘hyper cars’. All key financial indicators for the five ‘specialized vehicle’ companies in the EFTS STPA show strong positive trends; revenues in particular have increased by 70 percent over a three-year period. However, profitability has seen a decline, which is not entirely surprising for innovative companies in their early stage of business cycles. Similarly, electric bike sales of the three Croatian companies in the sector have also shown strong growth, with revenues increasing more than 172 times from 2014 to 2016.

3.2.1. Assets, Debt, and Revenue

3.3.1.1. Revenue

Revenue in the maritime industry has been relatively stable, while that of the few firms producing specialized environment-friendly vehicles has skyrocketed. Total revenue in the maritime industry reached EUR 500 million in 2016 and showed a positive growth trend in 2014–2016 with a CAGR of 3.59 percent. Firms producing ships and floating structures account for close to 97 percent of total revenue. Among the small sample of firms that make up the ‘specialized vehicles’ pillar of the EFTS STPA, total revenue was EUR 7.5 million and increased by a factor of five over the same period, while the revenue of firms producing electric bikes grew at a CAGR of 459 percent (albeit from a very low base). It is important once again to note that the core business of Rimac Automobili is technology solutions, not the production of EVs.

3.3.1.2. Assets

Total assets in the maritime industry recorded a slight growth in 2014–2016, with a CAGR of 1.63 percent. This growth was driven mostly by an increase in the assets of firms in the ships and floating structures sector, while assets in the pleasure and sporting boat industry stayed relatively constant. Close to 98 percent of total assets belonged to firms in the ships and floating structures sector. Among the handful of companies in the ‘specialized vehicles’ industry, assets grew by almost 80 percent.

3.3.1.3. Debt

The maritime and ‘specialized vehicles’ industries within the EFTS STPA displayed contrasting trends on debt. Total debt in the maritime industry fell over 2014–2016, representing a CAGR of −2.71 percent. In contrast, the five companies producing ‘specialized vehicles’ increased their financial leverage, and their total debt increased almost five times over the same interval. Companies manufacturing electric bikes and scooters accumulated debt at a slightly faster rate.

3.2.2. Employees

The Croatian shipbuilding industry employs close to 7,000 people, most (96 percent) of whom work in the ships and floating structures segment. Employment in the industry has edged upward, with a CAGR of 4.97 percent reported in 2014–2016. There were 116 employees in the specialized vehicles in 2016—four times more than in 2012.

3.2.3. Cost Structure and Margins

Profitability has been one of the main challenges in the Croatian maritime industry. Even in the relatively healthy pleasure and sporting boats sector, net profits rose dramatically to 2015 but have since eased off slightly, falling in 2016 to −1.8 percent (see Figure 20). Large shipyards are driving the negative net profits of the ships and floating structures sector. This sector’s profit margins were −16.91 percent in 2014 and a still negative −4.36 percent in 2016, although the numbers are trending in a positive direction. Long-term restructuring of the shipbuilding industry, together with privatization, is aimed at turning around the sector and improving its overall operational efficiency.

Traditionally, the largest Croatian shipyards have been 3. Maj, Brodosplit, Uljanik, Brodotrogir, and Viktor Lenac. Their 2016 revenues together with profit margins are shown in table 8. Three out of five largest shipyards have managed to operate profitably.

Although large shipyards have struggled with profitability, a number of medium and small companies are doing very well and even attained margins of up to 24 percent. Higher profitability results mainly from a lower level of complexity of their business. These companies are mainly suppliers of specific products to large shipyards.

Some maritime companies will likely continue to face challenges with the loss of government subsidies in 2018. In the past, Croatian shipbuilders received significant public subsidies, but these are expected to end in 2018.

The profitability of vehicle producers has fluctuated but been mostly positive. The small number of firms in this area of the EFTS STPA makes it impossible to draw definitive conclusions about the wider sector in which they are active. Nevertheless, it is possible to note that the profitability of the two companies engaged at some level in EV production have seen profitability decline from 5.75 percent in 2014 to −0.41 percent in 2016. Electric bike and scooter manufacturers have had negative profit margins, but their numbers have been trending upward. The latter firms are mostly start-ups and the sector is a new one in Croatia.

3.3. Productivity and Innovation

3.3.1. Productivity

Productivity is about 50 percent higher among companies involved in ships and floating structures than among those making pleasure and sporting boats, but overall productivity in Croatia still trails behind global peers. Productivity per employee in the EU is at a bit over EUR 150,000 while in Korea it reaches EUR 220,000—double or triple the Croatian figures of around EUR 75,000. Many Croatian shipbuilding companies are former state-owned enterprises (SOEs) that may have inherited shortfalls in operational efficiency as well as a high level of labor intensity. Meanwhile, among ‘specialized vehicles’, companies involved in the manufacture of EVs enjoy higher productivity than those making electric bikes. Overall productivity of specialized vehicle firms almost doubled in 2014–2016.

3.3.2. Innovation

The Transport TPA is one of the most prominent research priorities within the Seventh Framework Program (FP7) of the European Commission. Croatian applicants have been granted EUR 6.47 million for project implementation, which is 7.23 percent of the total FP7 allocation in Croatia. According to EC data, out of the 608 projects in which Croatian researchers and entrepreneurs participate as partners, 62 projects fall within the Transport TPA. Most of these are collaborative R&D projects with several specific activities. The EFTS STPA is represented by a relatively small number of applicants, mostly large companies (Uljanik Shipyard participates in 7 FP7 projects) and scientific organizations (the University of Zagreb participates in 11 FP7 projects). There is also a significant contribution of R&D-based small and medium enterprises such as Alveus d.o.o. and Rimac Automobili d.o.o. Until now, within the framework of the Horizon 2020 program, Croatian institutions participated as partners in three projects in this field.

4. Cluster Figures: Market-Based Actors

4.1. Core Firms

4.1.1. Notable Firms

4.1.1.1. Maritime Firms

Many of the largest maritime transport companies are successors of former large SOEs whose production mainly consisted of large passenger and cargo ships. These include large shipyards such as Uljanik d.d., Brodosplit d.d., Viktor Lenac and Brodotrogir, which have all been privatized during the restructuring process.

Table 10: Maritime Firms

4.1.1.2. Specialized Vehicle Firms

4.2. Other Agents

4.2.1. Input Providers

The shipbuilding industry is connected to various providers of different equipment. Some of the main input providers are listed in Table 11.

Table 11: Input Providers

4.2.2. Buyers

The largest domestic buyers of the Croatian maritime industry are the fleet operators listed.

• Jadrolinija is a fleet operator that runs passenger ships, catamarans, and ferryboats along the Croatian coastline. The company’s routes mainly link islands to the mainland, with a few additional lines between larger islands. Jadrolinija’s business is extremely seasonal and dependent on tourist traffic. Jadrolinija operates more than a third of the ships managed by domestic operators. Another firm, Rapska plovidba, offers a similar service to that of Jadrolinija, but its routes are geographically limited to the island of Rab.
• Brodospas is the second largest fleet operator in Croatia and is specialized in ships that supply oil platforms. The company maintains an international presence, particularly in the Middle East, the North Sea, and West Africa.
• Atlantska plovidba, Tankerska plovidba, Uljanik plovidba, and Jadroplov are involved in maritime freight transport across the world. Their fleets consist mainly of bulk carriers and tankers.
• Jadranski pomorski servis is a company specialized in hauling and rescue activities.

Passenger transport is predominantly operated by the fully state-owned company Jadrolinija, which operates only in Croatia. Freight transport companies have been privatized and operate globally. The structure of local demand is presented in Figure 26.

4.3. FDI in the STPA

World Bank analysis showed that only a small portion of FDI in Croatia consists of investments in sectors based on knowledge and R&D. FDI in Croatia is primarily attracted by sectors such as trade and financial sectors that do not necessarily promote knowledge transfer (World Bank 2006).

According to the Croatian National Bank data, there is no FDI in the maritime industry (Hrvatska narodna banka 2017). In the automotive segment of EVs, Rimac Automobili has received several rounds of foreign equity investments. In September 2017, the company received a EUR 30 million investment from a Chinese battery manufacturer to launch new products, finance expansion plans, and increase the production capacity of both Rimac Automobili and its sister company Greyp. This is the largest FDI to come to a Croatian technology company.