Autoparts - EnG Industry Analysis

CARDS 2002 Project
Development of Investment and Business Climate in Croatia
INDUSTRY ANALYSIS
Motor Vehicle
Parts and Equipment Manufacture
The Project is financed by

the European Union.
The project is implemented by: Deloitte Central Europe, Raiffeisenbank Croatia and Emerging
Markets Groups.
CARDS 2002 Project

CONTENTS:
Foreword _____________________________________________3
1. Introduction ________________________________________5
2. Industry Definition, Segments and Boundaries _________ 8
2.1. Definition of Industry Products - Segmentation _______ 8
2.2. Market Size __________________________________11
2.3. Labour supply_________________________________15
3. Porter's Model ____________________________________ 18
3.1. Industry Rivalry Analysis _______________________19
3.2. Market Permeability - Entry Barriers_______________21
3.3. Threat of Substitute Products _____________________23
3.4. Bargaining Power of Suppliers ___________________24
3.5. Bargaining Power of Buyers _____________________26
4. SWOT analysis ____________________________________ 30
5. The industry life cycle ______________________________ 34
6. Competitiveness assessment peer group ______________ 36
7. Conclusion________________________________________ 37

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Foreword
In last several decades, we have witnessed numerous changes in car
industry, of which globalisation of production is certainly the most
important one. For example, in the observed period there has been
intensive trend of migration of important production plants from former
traditional car producing countries, such as Western European countries,
to transition and Asian countries. Growing competition among car
manufacturers worldwide and continuous pressure for reduction of
production costs have the strongest impact on intensification of
globalisation of car production in recent years. So, in last 15 years,
countries in the Central and Eastern Europe, during transition process,
recorded high level of foreign investments in car production, mainly in
green-field projects. At the beginning of last decade, the first foreign
investments in car industry were noticed in Hungary and Czech Republic
and during several last years Slovakia is recognised as the country with
the highest level of foreign investments in car production. In addition to
lower labour costs, the state measures directed to attraction of foreign
investments, such as tax concessions, financial support and construction
of infrastructure also had favourable impact on decision of international
companies to move parts of its production into transition countries. In
addition to capital inflow in the form of direct foreign investments as one
of the preferable methods of funding of balance-of-payment deficit,
positive impacts on domestic economies were far more complex and
significant.
As investments were made mainly in green-field projects,
these investments opened many new workplaces contributing positively

to reduction of high unemployment rate in majority of transition
countries.
Also, since car producing companies owned by foreign
companies engaged large number of local companies as subcontractors,

foreign investments had significant indirect influence on increase of

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employment as well. The mentioned investments were directed mainly to
export oriented production that generated strong growth of commodity
export and balanced international commodity exchange of the countries
recipients of foreign investments. For example, in recent years some
transition countries had trade surplus owing to, among other things,
strong export of cars.
However, during the observed period, in Croatia there were no

significant green-field investment in production of cars and car parts.
Reasons are, in the first place, considerably more expensive labour force
in that time but also the lack of proactive policy of attraction of foreign
investment in the mentioned branch of industry. As the latest research
show that the most of added value in car industry is generated exactly in
production of spare parts and supporting operations, such as research
and development, and only smaller part is generated in car assembly,
our analysis is focused on the segment of production of car parts and
accessories. In spite of past low level of realised foreign investments in
the said branch of industry, our opinion is that there is certain potential
to achieve growth of such investments in Croatia in the medium term.
Our optimism is based, first of all, on comparable advantages of
Croatia, such as highly quality and educated labour force, short distance
to markets and car production plants in countries of Western and Central
Europe and on positive examples of several local companies that
achieved complete integration into international chain of part suppliers
for world well-known car producers. In addition, anticipated further
growth of car production capacities in the world suggests that significant
foreign investments could be expected in the car industry.

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1. Introduction
Based on the Classification of Economic Activities in the European
The industry of
Community (NACE), the industry of manufacture of parts and equipment
manufacture of parts
for motor vehicles and engines (NACE 34.3) is placed within the
and equipment for

motor vehicles and
engines is part of the
group of activities
industry of motor vehicles, trailers and semi-trailers manufacture (NACE

34), which is part of the group of activities related to manufacture of
transport vehicles (NACE DM).
related to manufacture
of transport vehicles
According to the latest data available, during the year 2004 the
transport vehicle manufacture industry generated a Gross Value Added
(GVA) of EUR 450 million, which covers only 2% of Croatia's total GVA.
At the same time, the industry employed approx. 23,000 people, which
is around 1.8% of the total people employed in Croatia.
Table 1: GVA, number of employees and productivity in the transport

vehicle manufacture industry (NACE DM)
Source: wiiw, calculated by author
Combined revenues earned during the year 2004 by the companies

registered in Croatia, whose main activity is manufacture of motor
vehicles, trailers and semi-trailers (NACE 34), totalled HRK 1.55 billion,
while they employed a total of 3,132 people. At the same time,
companies with more than 10 employees and registered under the
NACE 34 generated combined sales revenue of HRK 862 million.

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Expenditures for primary materials amounted to HRK 455 million, while
those for other intermediary goods amounted to approx. HRK 131
million. The abovementioned data lead to a conclusion that the
companies in question generated a gross value added of HRK 387
million during 2004. Approximately 70% of material consumed in the
production of vehicles and trailers was supplied form foreign markets,
which indicates a strong import dependence of this industry.
In analyzing the 2004 total revenues structure for the industry of motor
vehicles, trailers and semi-trailers manufacture, it is evident that 77.2% of
77.2% of the total

revenues for the
industry of motor
vehicles were
generated by
companies dealing in
motor vehicle parts
the total revenues were generated by companies dealing in motor

vehicle parts and equipment manufacture (NACE 34.3). Companies
dealing exclusively in motor vehicles manufacture (NACE 34.1) earned
only 12.2% of the total revenues, amounting to HRK 188 million. The
revenues earned by companies manufacturing vehicle bodies, trailers
and semi-trailers (NACE 34.2) were even lower, amounting to only HRK
165 million, or 10.7% of the total revenues in the industry.
Figure 1: Structure of total revenues in motor vehicles, trailers and semitrailers manufacture (NCEA 34)
12%
11%
77%
Motor vehicles manufacture
Bodies, trailers and semi-trailers manufacture
Motor vehicle parts and equipment manufacture
Source: FINA, Croatian Chamber of Economy

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There is a similar distribution in the structure of workforce employed,
There is a similar
distribution in the
structure of
workforce
employed
whereby the industry of motor vehicle parts and equipment manufacture

employed almost 75% of all workforce employed within motor vehicles,
trailers and semi-trailers manufacture in 2004. Slightly less than 20% or
approx. 570 workers were employed in motor vehicles manufacture,
while only 240 people, approx. 8%, worked in manufacture of vehicle
bodies and various types of trailers.
Figure 2: Structure of workforce employed in motor vehicles, trailers and

semi-trailers manufacture (NCEA 34)
18%
8%
74%
Motor vehicles manufacture

Bodies, trailers and semi-trailers manufacture
Motor vehicle parts and equipment manufacture
Source: FINA, Croatian Chamber of Economy
During the year 2004, the motor vehicles and trailers industry imported
During the year
2004, the motor
vehicles and
trailers industry
imported EUR
1.376 million
worth of
products
EUR 1.314 million worth of products, which amounted to almost 10% of

the total imports. Such high level of imports within the industry was
mostly generated by import of automobiles, which have been seeing
significant increase in sales during the last five years, bringing the total
to more than 70,000 new vehicles sold in 2004. Import of used vehicles
from EU countries has also been making significant impact lately. For the
same period, the export of these products amounted to a mere EUR 116
million, most of which was covered by export of parts for the automobile
industry.

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Table 2: Foreign trade, 2004.
Source: Central Bureau of Statistics, Croatian National Bank, calculated by author
From 1993 to the end

of 2002, the industry
saw a total of slightly
over USD 11 million of
FDI
Since the commencement of foreign investment in Croatia, i.e. from

1993 to the end of 2002, the industry of motor vehicles and trailers
manufacture saw a total of slightly over USD 11 million worth of foreign
investment, although invested in no more than five companies.
2. Industry Definition,
Segments and Boundaries
2.1. Definition of Industry Products Segmentation
The automobile parts
production may be
divided into the socalled first-tier
production and
second-tier
production.
Based on the situation on the market, i.e. the relations between buyers
and suppliers, as well as the ways of entering the market, the automobile
parts production may be divided into the so-called first mounting
production and production of spare parts.
The first mounting production is a direct business arrangement

between the automobile manufacturers and buyers, without any
First-tier production
can be divided into
first-tier and second-tier
suppliers

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participation of wholesalers or other agents. Auto manufacturers give

their suppliers exact specifications as to the quantity, type, dimensions
and material for the products to be supplied. Also, auto parts suppliers
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are often suggested to choose certain suppliers of material to be used in
their production. At the same time, the production system is under a
constant supervision by auto manufacturers, and so are the financial
business results. First mounting production can be divided into first-tier
and second-tier suppliers. First-tier suppliers mostly have direct long-term
arrangements with auto manufacturers or are involved in joint ventures.
Also, such suppliers meet all the relevant international standards, as well
as manufacturer-specific standards, and have already undergone longlasting quality and production system tests by their customers. First-tier
suppliers have lately been increasingly involved in the vehicle
development stage.
The so-called second-tier suppliers' business arrangements with auto

manufacturers or first-tier suppliers are generally more short-term-based,
and such suppliers are still in the process of monitoring production
systems and acquiring all the necessary certificates. Also, second-tier
suppliers mostly manufacture only one segment for auto manufacturing.
There has lately been an increasingly evident trend of the so-called
synchronized production, whereby parts are manufactured precisely
based on the current needs of the factory, which significantly reduces
storage costs, but increases the importance of suppliers in the production
process.
Second-tier
production is the
production of spare
parts for
automobiles
Production of spare parts can be divided into original parts production

and no name parts production.
The first type is quite similar to first mounting production as regards the
ways of entering the market and manufacturing, and it also involves
direct business arrangements with auto manufacturers, who buy the
products and distribute them further on through their dealers to end-

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buyers. The production of original spare parts is nevertheless subject to
strict norms and standards as specified by auto manufacturers.
No name spare parts are manufactured without auto manufacturers'
licences. Such products are distributed the same way as consumer
goods, i.e. through networks of wholesalers and retailers. Due to the
characteristics mentioned, price competitiveness bears the greatest
importance here, and since the production process is not subject to a
complex certification procedure, there are more manufacturers and thus
more competition. The production of no name spare parts is a segment
that generates the least value added in the auto industry. Currently, the
production of no name spare parts still covers a significant portion of
the total auto parts production in Croatia.
Figure 3: Auto parts production structure
Auto parts production
First- mounting
production
First-tier suppliers
Second-tier suppliers
Spare parts production
Original spare parts

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No name spare
parts
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In addition to classification as provided above, auto parts can also be
divided based on the Standard International Trade Classification (SITC)
and other customs regulations that commonly classify auto parts as
follows:
parts for internal combustion engines with spark ignition
parts for internal combustion engines with compression ignition
various types of brakes and all parts thereof
radiators for motor vehicles
mufflers and exhaust pipes
gearshift and steering mechanism parts
steering systems
transmission parts and components, excluding gearboxes and
drive shafts
other parts and equipment for motor vehicles
2.2. Market Size

According to the records from Croatia's Ministry of Economy, Labour
There are currently
63 companies
manufacturing parts
and equipment for
motor vehicles,
mostly for
automobiles
and Entrepreneurship, there are currently 63 companies manufacturing

parts and equipment for motor vehicles, mostly for automobiles. The said
companies employed a total of 7,085 workers, 83% of which were
employed directly in production, while the rest worked in other areas of
business. In 2004 these companies earned combined total revenue of
EUR 270 million, while the revenue from operating activities amounted to
EUR 160 million. When reduced by intermediary consumption and raw
material costs, the industry of motor vehicle parts and equipment
manufacture generated a gross value added of approx. EUR 70 million.

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Table 3: Basic indicators for the industry of auto parts manufacture in
Croatia
Source: Ministry of Economy, Labour and Entrepreneurship, calculated by author
According to the customs records, EUR 115 million worth of motor

vehicle parts and equipment was imported that year, while the export
amounted to more than EUR 81 million.
Since the motor vehicle manufacturing is completely globalized today,

Globalization in the
auto industry is
caused by the
increasing
competition among
the manufacturers
which first of all applies to automobile manufacturing, we believe there is

no need to define the size of the domestic market. Globalization in the
auto industry is caused by the increasing competition among the
manufacturers, as well as the constant need to lower the price lower of
the final product. The last ten years have seen manufacturing facilities for
automobiles, parts and equipment relocate to transition countries
(Slovakia, Czech Republic, Poland, Hungary), as well as some Asian
and Latin American countries, which was triggered by significantly lower
labour costs than in the economically developed Western countries and
Japan. The fact that total exports by motor vehicle parts and equipment
manufacturers in question cover almost 99% of their total operating
revenues indicates that Croatian manufacturers have managed to
capture
their
positions
within
the
international
chain
of
auto
manufacturers and suppliers. Therefore, the demand for the products

manufactured by Croatian auto parts and equipment manufacturers, as
well the volume of potential foreign investments, will be greatly dpendent
on the situation on the global market.

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Based on a research by PriceWaterhouseCoopers, the global capacities
The global
production capacities
for automobiles are
expected to grow to
86.47 million units
by the year 2010
in automobile and light commercial vehicle manufacturing in 2005 were

80.41 million units, while the utilization of the capacities was approx.
77%. The global production capacities for automobiles are expected to
grow to 86.47 million units by the year 2010, while the capacity
utilization rate should be increased to approx. 80%. It is important to
note that the increase in capacities and especially the utilization rate will
be greatly influenced by oil prices on the global market, which have
been highly volatile during the last several years.
The Asian-Pacific
region has the
largest automobile
in the world
The Asian-Pacific region has the largest automobile production

capacities in the world, with a total of more than 28.6 million vehicle
units per year. The capacities in this region are expected to grow to a
total of 32.6 million units by 2010, primarily driven by production
increase in China.
In 2004, the countries of the European Union had a total automobile

In 2004, the
countries of the
European Union had
a total automobile
production capacity
of 22.63 million units
per year.
production capacity of 22.63 million units per year. Among the EU-25
countries, Germany had the largest automobile production capacity (6.3
million units per year), followed by France (4.2 million), Spain (3.5
million) and Great Britain (2.3 million). The total production capacity in
the EU-25 countries is expected to grow to 23.85 million units per year
by the end of 2010, with capacities decreasing in the EU-15 countries,
but strongly increasing in the new EU member countries, driven by high
The demand for

Croatian
manufacturers'
products is likely to
be highly dependent
on the situation in the
European auto
industry
foreign investment inflow in these countries. If we add the production

capacities in other Eastern-European countries, which have not yet joined
the EU, and Russia, then the total European
automobile production
capacity would currently stand at approx. 26.3 million vehicle units.

Also, considering the intensity of economic cooperation and foreign
trade between Croatia and the EU-25 countries and other countries in

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the region, the demand for Croatian manufacturers' products is likely to
be highly dependent on the situation in the European auto industry.
Among the countries in the region, Bosnia and Herzegovina, Serbia and
Montenegro, Romania and Turkey are expected to slightly increase their
production.
North America has the third largest vehicle production capacities,

North America has
the third largest
vehicle production
capacities
currently standing at approx. 19 million units per year. The production

capacities in this region are expected to decrease in the following five
years, which is primarily caused by the production facilities being further
relocated to countries with lower labour costs and continued decrease in
domestic demand growth.
The automobile production capacities in the Latin-American countries
currently stand at approx. 4.1 million vehicles per year. The capacities
are expected to grow slightly in the medium term, by about 200.000
automobiles.
Table 4: Estimates of world automobile and light commercial vehicle

Source: PWC

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2.3. Labour supply

In analysis of availability of labour force for work in production of car
parts and accessories, we included highly qualified personnel, i.e.
graduated mechanical engineers and marine architects and qualified
workers that can be classified as follows:
founders, tinners and welders
toolmakers and metal processing machines operators
industrial machinery operators
Fitters and mechanicals.
As records of the Croatian Central Employment Office (HZZ) show, in

the end of 2005 there were 209 unemployed graduated mechanical
engineers and marine architects. The city of Zagreb, Primorsko goranska County and Split Dalmatinska County have the highest
number of highly educated personnel. As official statistics show, 193
new unemployed graduated mechanical engineers and marine architects
were recorded in the past year, and regional dispersion is the same as
for unemployed persons. However, it is noticed that some regions of
Croatia are deficient in the mentioned labour force, such as county in the
northern part of Croatia and Liko-Senjska County. At the national level,
the unemployment rate of the mentioned personnel is quite low and
therefore some changes in educational and scientific systems are to be
expected to avoid that shortage of high quality engineers becomes an
obstacle for realisation of investments and development of some
branches of industry as well.
In the end of 2005, at the Croatian Central Employment Office (HZZ)

there were 12,667 persons qualified for work in production of car parts,

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mainly in production segment and processing of various metals. Number
of unemployed persons with qualifications analysed varies in different
counties but it is generally proportional to population in a county. In the
past year, 10,685 new unemployed persons were registered, mainly in
Osjeko - baranjska County and Brodsko posavska County and in the
city of Zagreb.
Table 4: Number of unemployed persons, end of 2005

County
Zagrebaka
Krapinsko-zagorska
Sisako moslovaka
Karlovaka
Varadinska
Koprivniko-krievaka
Bjelovarsko-bilogorska
Primorsko-goranska
Liko-senjska
Virovitiko-podravska
Poeko-slavonska
Brodsko-posavska
Zadarska
Osjeko-baranjska
ibensko-kninska
Splitsko-dalmatinska
Istarska
Dubrovako-neretvanska
Meimurska
Vukovarsko-srijemska
Grad Zagreb
Total:
Graduated
Qualified working
engineers
force
29
760
321
902
512
464
368
661
479
134
551
242
428
428
1,361
501
1,076
635
212
244
822
1,243
12,344
3
3
3
1
44
1
2
6
4
10
7
33
5
1
5
52
209
Source: CES, calculated by author

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Table 5: Number of registered new unemployed persons, 2005
County
Zagrebaka
Krapinsko-zagorska
Sisako moslovaka
Karlovaka
Varadinska
Koprivniko-krievaka
Bjelovarsko-bilogorska
Primorsko-goranska
Liko-senjska
Virovitiko-podravska
Poeko-slavonska
Brodsko-posavska
Zadarska
Osjeko-baranjska
ibensko-kninska
Splitsko-dalmatinska
Istarska
Dubrovako-neretvanska
Meimurska
Vukovarsko-srijemska
Grad Zagreb
Total:
Graduated
Qualified
engineers
working force
7
4
1
4
3
1
9
34
437
393
627
399
545
316
463
465
116
419
256
1,019
334
1,351
325
869
229
149
314
618
1,041
10,685
2
2
10
5
4
7
39
12
1
4
2
42
193
Source: CES, calculated by author

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3. Porter's Model
Bargaining
Power of
Suppliers
MODERATE
Entry
Barriers
Competitive
Rivalry
Threat of
Substitutes
SIGNIFICANT
SIGNIFICANT
WEAK
Bargaining
Power of
Buyers
VERY
STRONG

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3.1. Industry Rivalry Analysis

For a detailed analysis of competitive rivalry within the industry we have
chosen the 20 most important companies in the automobile parts and
equipment manufacture, based on the 2004 operating revenue data
from the database of Croatia's Ministry of Economy, Labour and
Entrepreneurship. The said database includes data for companies,
whose basic business activity is production of automobile parts and
equipment, and which earned combined revenue of EUR 160 million
from operating activities.
The concentration ratio (CR) in the automobile parts and equipment

The concentration
ratio (CR) in the
automobile parts and
equipment
manufacture
indicates that this is a
highly concentrated
industry
manufacture indicates that this is a highly concentrated industry, where

the two most important companies (CR2) generated almost 56% of the
total operating revenues generated by all the companies analyzed. In
addition, the top 20 manufacturers' operating revenues cover more than
94% of the total revenues in the industry, which also indicates that this is
a highly concentrated industry.
Another method for determining the level of concentration for an industry

is the Hirschmann-Herfindahl index (HHI). The HHI is calculated by
squaring the market share of companies competing in the market and
then summing the resulting numbers. If the HHI is higher than 1800, the
The HHI indicates a
high level of
concentration in this
industry
industry is considered to be highly concentrated. If the HHI is lower than

1000, the industry is considered to be not concentrated. Based on the
2004 indicators, the HHI for the industry of motor vehicle parts and
equipment manufacture is 2355, which indicates a high level of
concentration in this industry, or in other words, low rivalry among the
competitors.

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Table 6: Operating revenues and number of employees in the 20 most
important automobile parts manufacturers in Croatia, 2004.
Source: FINA, Croatian Chamber of Economy, calculated by author
In addition, considering the fact that the Croatian manufacturers are

greatly differentiated by various segments of production, depending on
The Croatian
manufacturers are
greatly
differentiated
whether they are first mounting or spare parts manufacturers and on

the materials used in the production, we can say that the intensity of
rivalry among the competitors is low. At the same time, it has been noted
that several of the most important domestic auto parts manufacturers,
who have long-term contracts with first-tier buyers, have started including
other smaller domestic auto parts manufacturers in the production
process, which leads to a significantly faster development of the entire
industry. In light of the growing trend of delivering modules to factories,

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i.e. multiple products to automobile manufacturers, we can expect the
level of cooperation among auto parts manufacturers to grow further.
However, since most domestic auto parts manufacturers sell most of their
products in foreign markets and considering the high level of
globalization of the auto industry, it wouldn't be appropriate to exclude
international competition and analyze only the level of rivalry on the
domestic market. At the international level, the high exit costs and
barriers and the relatively slow market growth increase the intensity of
rivalry among auto parts manufacturers. On the other hand, the high
We can safely
conclude that global
level of rivalry within
the global auto parts
manufacturing
industry is high
differentiation and the relatively small number of renowned suppliers in

each segment of auto parts manufacture reduce the effects of industry
rivalry. Nevertheless, we can safely conclude that global level of rivalry
within the global auto parts manufacturing industry is high, partly due to
the development of auto industry in Far East (China, South Korea) and
transition countries (Slovakia, Hungary, Czech Republic...).
3.2. Market Permeability - Entry Barriers

The main barrier for companies entering the auto parts manufacture is
The substantial initial
investment required
to start production,
considering the high
capital intensity of
this industry
the substantial initial investment required to start production, considering

the high capital intensity of this industry. In auto parts manufacture, the
latest and highly specialized technology is used, which requires
substantial initial investment in order to start production. In addition, such
specialized technology significantly increases exit costs in the possible
event of leaving the market. The effort also requires substantial initial
investment in human resources, additional and constant training for
employees. Since the margins in the auto industry are low, large-scale

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production is needed to recover the investment and reduce marginal
production costs through economy of scale.
Since access to supply and sales channels in auto industry is rather

limited, and especially as regards the first-tier production and original
parts production, there are additional obstacles for new companies
attempting to position themselves within the auto parts manufacture
industry. Also, the numerous requirements in terms of standards and
certification, including the regular as well as customer-specific ones,
increase the level of initial investment needed to start production, thus
producing additional barriers for entry of new market players.
The know-how is a
major key to
achieving
competitiveness
In addition, since this is one of the most complex productions in terms of

technology, the know-how is a major key to achieving competitiveness,
which is another barrier for entry of new market players.
In addition to the above mentioned barriers for entry of new auto parts
manufacturers, which are present the global level, there are some
There are some
specific barriers in
Croatia, and these
are first of all the
insufficiently
transparent taxation
system and the
unpredictable
business conditions
specific barriers in Croatia, and these are first of all the insufficiently
transparent taxation system and the unpredictable business conditions.
There are significantly more taxes and contributions, such as fee for
forestry preservation and lots of utility fees what represent high level of
fix costs, than in other countries, especially at regional or local level,
which increases production costs and makes it more difficult for
manufacturers in Croatia to planned their production, which then creates
another barrier for entry of new companies into the industry. The
unpredictable business conditions in Croatia make it difficult to plan in
the long-term and increase uncertainty, thus increasing the risks for
investment. According to the experience so far, domestic companies
have often had to struggle with sudden increase of electricity price,

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communal charges and other costs. Auto parts manufacturers' margins
are low and they usually have long-term business arrangements, which
makes them extremely sensitive to even a slightest change in the business
conditions.
In growing efforts to reduce costs, there are increasing requirements to

deliver auto parts based on the current customer needs, which reduces
storage costs, but subsequently increases the importance of traffic
infrastructure. The road infrastructure in Croatia has improved as a result
of substantial government investment during the last several years, which
improves competitiveness of domestic manufacturers. However, locations
outside of the major cities are suffering from deficient road and rail
infrastructure, which creates barriers for entry of new companies in the
industry.
There are significant

barriers for entry of
new auto parts
manufacturers in the
market
We can conclude by saying that there are significant barriers for entry of
new auto parts manufacturers in the market, which are resulting from the
specific characteristics of the auto industry, as well as from certain
Croatia-specific characteristics.
3.3. Threat of Substitute Products

There are no evident threats as to the possibility of new products that
could replace automobiles and therefore automotive parts. Currently
There are no evident
threats as to the
possibility of new
products that could
replace
automobiles
there are no evident threats as to the possibility of new products that

could replace automobiles and other motor vehicles. Nevertheless, high
prices of oil could have a significant impact on demand automobiles,
which would eventually translate into a reduced demand for domestic
auto parts and equipment. Also, there is a certain risk for some of the
domestic manufacturers, especially considering the fact that companies

the European Union.
Markets Groups.
24
CARDS 2002 Project

are underinvested, in terms of possible greater technological discoveries
and the orientation towards manufacturing automobiles that are
substantially different from today's standards, such as the hybrid vehicles
or those run by alternative fuels. Such possible developments on the
market would probably have a short-term impact on the demand for the
products manufactured by those domestic manufacturers that wouldn't be
able to adapt to such new development in time.
3.4. Bargaining Power of Suppliers

In auto industry, the bargaining power of suppliers is greatly dependent
on the bargaining power of buyers. As regards the first-tier production
and original parts production, the bargaining power of buyers is so high
that they often instruct their suppliers in terms of what and whose
materials to use in production. Auto parts manufacturers often get from
Provide suppliers
with substantial
bargaining power
their buyers a list of several companies, which meet all the production
standards and have all the necessary certificates, from which to choose
their supplier. If the supplier is not explicitly specified in the contract
between the manufacturers and their buyers, it is mostly possible to use
the material supplied exclusively by renowned suppliers, who have all
the necessary certificates. The abovementioned limitations imposed on
auto parts manufacturers in regard to supplier selection and the inability
to make quick changes provide suppliers with substantial bargaining
power.
However, there have lately been strong pressures in the global industry,
mostly coming from competitors in Asia, to increase productivity and cut
production costs for all participants in the supply chain for car factories.
Therefore, suppliers for auto parts manufacturers are usually in no

the European Union.
Markets Groups.
25
Suppliers for auto

parts manufacturers
are usually in no
position to
unfoundedly increase
their prices despite
their high bargaining
power
CARDS 2002 Project

position to unfoundedly increase their prices despite their high
bargaining power. Even more so, they are forced to follow the trends in
the global auto industry, increasing their productivity and cutting
production costs.
Many auto parts manufacturers are now faced with higher prices of raw
material, which have been pushed up by the increase of oil prices on
global markets during the last several years. In addition to the higher
prices caused by higher transportation costs in all the segments of auto
parts production, the most significant increase was noted with domestic
companies manufacturing plastic parts, since the material used to make
plastic is produced in the oil refinement process. The market shock
created by the surging oil prices brought certain short-term problems for
domestic manufacturers before they managed to adapt to the new
situation on the market. A part of the increase in their operating
expenses, caused by higher prices of raw material, domestic auto parts
manufacturers have successfully transferred to buyers, while they covered
the remaining part from their internal reserves, i.e. productivity
improvement. Several years ago, the prices of most metals rose abruptly,
as a result of surging demand on the Chinese market, which brought
certain problems for domestic auto parts manufacturers. Due to such
price volatility, domestic manufacturers, in agreement with their buyers,
have started including a special clause in contracts protecting them from
possible new market shocks, or even forming the price on the date of
delivery based on agreed formula.
The prices of
machinery and
equipment used in
production take up a
major part in the
structure of total
costs...

the European Union.
The prices of machinery and equipment used in production take up a

major part in the structure of total costs of domestic auto parts
manufacturers, since they are constantly forced to invest in production
facilities, modernization of equipment and human resources. The Asian
Markets Groups.
26
CARDS 2002 Project

countries have lately been increasing their production of capital
equipment,
especially
the
CNC
machines,
and
are
becoming
considerable competitors to the EU countries and the United States,

pushing the prices of machines slightly down.
We can conclude that the bargaining power of suppliers of domestic

The bargaining
power of suppliers of
domestic auto parts
manufacturers is
moderate in all
segments of
production
auto parts manufacturers is moderate in all segments of production.

Despite the fact that the number of certified suppliers of raw material is
relatively low, which increases their bargaining power, the current trends
in the global auto industry are preventing them from fully utilizing their
position.
3.5. Bargaining Power of Buyers

In motor vehicle parts and equipment manufacture, the suppliers are at
the same time manufacturers of certain parts, while buyers depend on
the type of production. In case of first-tier production and original spare
parts production, the buyers are automobile factories directly or their
official suppliers, who buy products from multiple manufacturers,
assemble the products in modules and then deliver them to factories. In
no name spare parts production, products are mostly sold through
standard distribution channels, i.e. through wholesalers and retailers.
The buyers have

extremely strong
bargaining power
against their
suppliers
In motor vehicle parts and equipment manufacture, the buyers have

extremely strong bargaining power against their suppliers, which is
especially evident in the segment of first-tier production and original
spare parts production.
In the above mentioned segment of auto parts manufacture, the business

the European Union.
Markets Groups.
27
CARDS 2002 Project

relations between suppliers and buyers are typically long-term and
assume a close cooperation between the partners, with the suppliers
being constantly subjected to supervision by the buyers or an
independent third party (a company authorized for certification).
Automobile factories usually have contracts with several suppliers for the
same segment of production in order to minimize the risk of shortages
and stoppages in production, caused by suppliers' failure to comply with
delivery deadlines.
At contracting with automobile manufacturers, the crucial thing for auto

parts suppliers is to have international certificates. In addition to the
typical international certificates (such as the ISO standards), suppliers
must have specific certificates for each automobile manufacturer or
group of manufacturers. First-tier suppliers must have these certificates at
negotiating with an automobile manufacturer. Second-tier suppliers and
new market players must be prepared to invest time and money in
obtaining all the certificates required for a certain segment of auto parts
manufacture.
Prior to contract signing, the supplier is subjected to a detailed

Prior to contract
signing, the supplier
is subjected to a
detailed inspection
and supervision, the
so-called audit
inspection and supervision, the so-called audit. Audits mostly consist of

inspection of product quality and quality management, supervision of
processes in the company, including financial reports and cost
calculation (financial audit). Since the current trends are such that
factories do not inspect the parts prior to vehicle assembly, product
audits, as well manufacturing process audits, have lately become rather
strict, mainly covering the inspection of production methods, materials
used in the process, workforce capacity, etc. Prior to contract signing,
and even prior to commencement of negotiations, first-tier suppliers
conduct a financial audit in order to confirm the financial standing of

the European Union.
Markets Groups.
28
CARDS 2002 Project

their prospective partner. The next stage of the financial audit includes
analysis of production costs calculation which analyzes all cost items,
including both fixed and variable costs. If business cooperation is
established, unit prices for products are set based on the financial audit
and it is common to include in the contract a schedule of price decrease
over the course of future cooperation. Most auto parts buyers require
from their suppliers to lower their process by a certain percentage, and
they found such request on the fact that improvement of productivity and
increase in production volume decrease the unit production costs. In auto
industry, contracts most commonly stipulate gradual 5-10% decrease in
product prices cumulatively over the medium term.
Contracts are mostly made for the period of five to ten years. First-tier
suppliers participate in final product development, along with suppliers
of other arts and automobile factories. Also, mutual and continuous close
cooperation is understood, as well as constant employee training and
improvement. In addition, when defining the cooperation and terms for
suppliers, auto manufacturers take into consideration suppliers' ability to
support them in case of a possible entry into new markets or
development of new products.
Automobile manufacturers have lately been pressuring their suppliers to

Automobile
manufacturers have
lately been
pressuring their
suppliers to deliver
not individual parts
but finished
modules
deliver not individual parts but finished modules, which cuts vehicle
assembly costs and reduces possibilities of defects in the final stage of
automobile manufacturing. There is also a trend of the so-called
synchronized production, where suppliers are pressured to fully adjust
their deliveries to auto manufacturers' daily needs, which allows for
substantial savings in production due to reduced storage costs.
In no name spare parts production, bargaining power of buyers is still

the European Union.
Markets Groups.
29
CARDS 2002 Project

significant, but is far less evident, especially as regards control and
supervision over supplier, which is expected considering that these are
usually not long-term business arrangements. Also, manufacturers most
often distribute their products to end buyers through wholesale/retail
networks, which make price competitiveness a major factor in this
segment of production, especially considering the higher level of
competition among manufacturers.
Bargaining power of buyers is exceptionally evident within the entire

auto industry. In first-tier production and original spare parts production,
buyers apply constant pressure on suppliers not only to lower prices but
In no name spare
parts production,
bargaining power of
buyers is significant
as well, but is mostly
evident in the pricing
segment
also to harmonize the entire auto parts production with their needs. Such
production harmonization includes not only the quality and quantity of
orders, but, lately, even the synchronized delivery of modules, the
capacity to support the buyer in case of entry into new markets and
participation in development of new products. In addition, contracts in
this segment are typically made for long-term periods, which additionally
increase auto parts suppliers' dependence on auto manufacturers or firsttier suppliers. In no name spare parts production, bargaining power of
buyers is significant as well, but is mostly evident in the pricing segment,
since business arrangements are mainly short-term and the terms and
conditions for establishment of business cooperation are not as stringent
as in first-tier production.

the European Union.
Markets Groups.
30
CARDS 2002 Project

4. SWOT analysis
Croatia's comparative advantages in motor vehicle parts and equipment
manufacture include the following:
Proximity to the EU market and car assemblers one of Croatia's
major
advantages,
especially
in
comparison
with
Asian
countries, which, on the other hand, are more price competitive

due to lower labour costs. Relative proximity to automobile
factories located in EU-15 countries, favourable geographic
position and intensive investment in infrastructure modernization
give domestic manufacturers a substantial initial advantage. In
addition to transportation cost reduction, being close to buyers
has lately become increasingly important due to shifting toward
synchronized delivery of parts to buyers according to their daily
needs, all aimed at reducing storage costs as much as possible
prior to vehicle assembly. Being close to buyers respectively car
assemblers in Italy, Germany, Slovenia and lots of new
capacities in new members of EU allows an easier and cheaper
cooperation in product development and control of production
processes.
Quality that meets European standards most domestic

manufacturers have all the necessary certificates and the quality
of their products meets the high standards in the auto industry.
This is proven by the fact that the majority of domestic production
is exported to EU markets. Quality that meets European standards
and lower labour costs than in Western Europe give Croatia
significant comparative advantage.

the European Union.
Markets Groups.
31
CARDS 2002 Project

Highly qualified workforce quality and availability of highly
qualified workforce, i.e. engineers, with a competitive labour
price, which is of great importance when capital intensity of the
industry is considered.
Government incentives for development of auto industry

although time-limited, as these incentives are direct government
subsidies to manufacturers doing business in Croatia, they have a
significant effect on the technological modernization and
improvement of competitiveness, which is particularly important
in the current situation where domestic manufacturers are
relatively underinvested. This subsidy includes direct financial
help to domestic producers in order to modernize their capital
equipment. Also, loans from Croatian Bank for Reconstruction
and Development provide for a greater availability of funds at
more favourable conditions intended for providing working
capital and financing export. There is also a proactive approach
to realization of foreign investment in Croatia's automobile
industry, which includes not only fiscal relief but also access to
industrial zones and acceleration of procedures for obtaining
necessary permits.
In comparison with other countries, Croatia's major weaknesses in motor

vehicle parts and equipment manufacture are as follows:
Unstable business conditions have negative impact on long-term

planning and long-term contracting with buyers. Frequent
changes of levels of the various charges and energy prices
resulting from administrative decisions have an adverse effect on
domestic production in the segment, since business arrangements

the European Union.
Markets Groups.
32
CARDS 2002 Project

in automobile industry are mostly defined for the long term. This
problem is mainly evident at regional and local levels.
Untransparent taxation there are numerous charges imposed,
contributions to various state companies and various communal
charges,
all
putting
an
additional
burden
on
domestic
manufacturers, while their European buyers do not allow these

charges be included in production costs calculation. According to
experience of domestic companies, a certain number of
arrangements failed for this reason. Also, such charges are seen
as hindrance for foreign investment in Croatia.
Higher operating costs compared to major competitors

Operating costs in auto industry, which include labour costs,
utility services and costs related to real estate acquisition, are
higher in Croatia than the average for the countries in the region
and most new European Union members. It is important to note
that there's a high labour price in Croatia in the segment of lowqualified workforce, while costs for qualified workers are at the
same level as in the other more advanced transition countries.
The main opportunities for development of motor vehicle parts and

equipment manufacture in Croatia are as follows:
Growing demand for products with higher level of finishing

auto parts buyers have lately been insisting on being supplied by
products that are technically more complex and modules that are
immediately ready for assembly. Automobile factories are aiming
to procure such products in order to cut their production costs
and reduce the possibility of defects at assembly. This trend
enables domestic manufacturers to shift toward manufacturing

the European Union.
Markets Groups.
33
CARDS 2002 Project

technologically more complex products with higher value added,
thus increasing their profits. Also, we have lately seen a growing
trend of stronger manufacturers intensifying their cooperation
with other domestic companies and suppliers toward efforts to
manufacture finished modules.
Possibility of linking with manufacturers in other countries

favourable geographic position and globalization of auto
industry opens up opportunities for Croatian manufacturers to link
with other companies in the region that possess substantial
capacities for auto parts production, especially in Austria,
Hungary, Italy, Slovenia and Romania. There already are
examples of such cross-border business cooperation, and further
opportunities are seen in setting up of international clusters in EU
member countries and membership candidates. Despite the high
level of competitive rivalry internationally, the current trends in
auto industry are forcing manufacturers to intensify cooperation.
Potential threats for Croatia's motor vehicle parts and equipment

manufacture include:
Competition from countries with lower labour costs Croatia

could face fierce competition in this industry from countries with
lower labour costs in the medium term, especially from Slovenia,
Turkey, Bosnia and Herzegovina, Serbia and the countries of the
Far East. Despite the fact that Croatian manufacturers generally
have a higher level of quality than the manufacturers in these
countries, which mostly have second-tier production, the strong
investment cycle in these countries could improve the quality and
level of finishing for their products, which would result in

the European Union.
Markets Groups.
34
CARDS 2002 Project

increased competition pressures on domestic manufacturers.
5. The industry life cycle

We have done analysis based on the top 23 companies in the industry.
Based on the fact that there is no local automotive industry in Croatia we
should place local industry in a global context. Globally, worlds
The industry is placed
in mature phase within
the industrial life
cycle...
automotive industry has consolidated in 6 global alliances. General

motors, VW Group, Ford group, Daimler Chrysler, Toyota, Renault
Nissan, while FIAT Group, Peugeot-Citroen, Honda, BMW and Daewoo
Group are still independent. The main source of growth comes through
M&A activities within the industry. Tier 1 and Tier 2 suppliers are forced
to search for additional added value or cost reductions. (Source: PWC,
BCG and S&P Industry Survey) All of this is characteristics of the mature
phase of the industry life cycle. In spite of that over the past few years,
Central and Eastern Europe have become major sales markets for the
automotive industry. Sales in the region grew by an annual average of
7.3% to 3.4 million units in 2004 alone. The region also has
experienced dynamic growth as a production location. In the past 10
years, car output has risen by an average of 6% a year. Based on the
Roland Berger analysis, the future sales forecast to grow by 6.9%
annually until 2010 for countries in Eastern Europe. (Source: Article:
Going East: auto industry growth in Russia, Jurgen Reers partner,
Automotive Competence Center, Roland Berger Strategy Consultants).

the European Union.
Markets Groups.
35
CARDS 2002 Project

List of the top 23 companies in the industry based on revenues:
List of companies
ELODA D.O.O.
FEROIMPEX D.O.O.
KONAR - ALATI D.D.
IVANALTVORNICAALUMINIJAD.O.O.
SELK DD
FEROIMPEX AUTOMOBILSKA TEHNIKA D.O.O.
ZM-VIKOM D.O.O.
ELCON - OTPREMA D.O.O.
SAS STROJOGRADNJA D.O.O.
LIPIK GLAS D.O.O.
KOSTEL PROMET D.O.O.
ESCO D.O.O.
DIV D.O.O.
MARIO-LASER D. O. O.
METALNI LIJEV TCG D.O.O.
SAINT JEAN INDUSTRIES D. O. O.
DALIT-CT D.O.O.
MUNJA D.D.
AD PLASTIK D.D. SOLIN
P.P.C. BUZET D.O.O.
ELCON D.D.
HSTEC D.D.
VALCAR D.O.O.

the European Union.
Markets Groups.
36
CARDS 2002 Project

6. Competitiveness
assessment peer group
Appendix

the European Union.
Markets Groups.
37
CARDS 2002 Project

7. Conclusion
In spite of past low level of realised foreign investments in the said
branch of industry, our opinion is that there is certain potential to
achieve growth of such investments in Croatia in the medium term. Our
optimism is based, first of all, on comparable advantages of Croatia,
such as highly quality and educated labour force, short distance to
markets and car production plants in countries of Western and Central
Europe and on positive examples of several local companies that
achieved complete integration into international chain of part suppliers
for world well-known car producers. In addition, anticipated further
growth of car production capacities in the world suggests that significant
foreign investments could be expected in the car industry.
Considering the high volume of foreign investment already realized in
other transition countries, especially in vehicle assembly plants, and the
already completed process of positioning of the world's leading
Croatia should focus
on attracting investment
in segments of auto
parts manufacture,
development of new
products and vehicles
for special purposes
manufacturers in transition countries, Croatia should focus on attracting

investment in segments of auto parts manufacture, development of new
products and vehicles for special purposes. This statement is backed by
the latest research indicating that more than of value added in
automobile industry is generated in the production of auto parts and in
other branches related to vehicle development and other ancillary
activities, while only a smaller portion of the value added is generated in
the vehicle assembly segment. In Croatia there already are several
examples of foreign investment successfully realized in the vehicle
development segment, supported by the availability of skilled workforce
in the area of engineering and IT and at lower labour costs than in
Western European countries. Also, the tradition in manufacturing special
vehicles, such as combat and fire-fighting vehicles, provides good

the European Union.
Markets Groups.
38
CARDS 2002 Project

foundations for further development of this segment. The capacity to sell
these types of vehicles on the markets in the region has a positive effect
on Croatia's attractiveness in terms of foreign investment aimed at
special-purpose vehicle production.

the European Union.
Markets Groups.
Appendix:
CROATIA
Company 1
Company 2
Company 3
Company 4
Company 5
Company 6
Company 7
Company 8
Company 9
Company 10
Company 11
Company 12
Company 13
Company 14
Company 15
Company 16
Company 17
Company 18
Company 19
Company 20
Company 21
Company 22
Company 23
Simple average

the European Union.
CARDS 2002 Project

Revenue in 2004 in
EBITDA 2003
EBITDA 2004
Revenue growth 03/04
1.190.281
271.100
5.105.227
5.955.859
16.342.319
1.271.049
6.583.101
135.328
6.184.393
9.149.197
4.771.708
2.825.593
11.719.568
1.276.265
9.141.745
1.888.596
2.929.648
2.967.711
59.253.040
38.554.715
11.387.589
2.595.660
3.215.726
8.900.670
6,26%
6,47%
3,57%
10,60%
3,52%
3,25%
39,17%
-3,47%
11,12%
1,36%
14,63%
11,71%
25,35%
22,65%
11,93%
7,86%
28,04%
14,03%
14,72%
13,29%
2,71%
-8,24%
6,59%
11,36%
10,97%
-30,73%
2,73%
2,13%
2,21%
3,15%
13,12%
-36,53%
2,98%
22,68%
29,96%
23,09%
1,10%
4,94%
-81,72%
10,73%
33,74%
13,94%
5,80%
-1,09%
6,67%
3,14%
3,29%
Markets Groups.
-2,08%
350,81%
57,47%
-18,97%
-20,63%
28,99%
53,84%
308,75%
22,14%
35,11%
32,47%
69,92%
0,11%
2,41%
7,37%
13,63%
-37,24%
20,45%
-25,48%
43,42%
CARDS 2002 Project

SLOVENIA
Revenue in 2004 in
CIMOS D.D.
PS CIMOS TAM Ai, D.O.O.
TBP D.D.
TPV D.D.
AGIS ZAVORE D.D. PTUJ
AKRAPOVI, D.O.O.
ARSED D.O.O.
KLS, D.D.
SOGEFI FILTRATION D.O.O.
TPV JOHNSON CONTROLS D.O.O.
Simple average

the European Union.
205.433.000
36.251.000
27.759.000
4.477.000
6.529.000
16.930.000
29.637.000
5.798.000
14.454.000
47.523.000
39.479.100
EBITDA margin
12,58%
6,15%
9,19%
21,17%
9,43%
33,47%
3,91%
26,14%
15,97%
4,29%
14,23%
Markets Groups.
Gross margin
18,95%
29,30%
30,52%
50,99%
47,93%
60,60%
13,09%
46,75%
34,85%
8,93%
34,19%
Growth rates - last 5 years

16,05%
22,05%
7,43%
-18,51%
8,04%
13,56%
51,65%
21,08%
22,18%
-3,92%
13,96%

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CARDS 2002 Project

Development of Investment and Business Climate in Croatia

The Project is financed by

CARDS 2002 Project

The Project is financed by

CARDS 2002 Project

As investments were made mainly in green-field projects,

these investments opened many new workplaces contributing positively

Also, since car producing companies owned by foreign

companies engaged large number of local companies as subcontractors,

The Project is financed by

CARDS 2002 Project

However, during the observed period, in Croatia there were no

The Project is financed by

CARDS 2002 Project

Community (NACE), the industry of manufacture of parts and equipment

and equipment for

industry of motor vehicles, trailers and semi-trailers manufacture (NACE

Table 1: GVA, number of employees and productivity in the transport

Source: wiiw, calculated by author

Combined revenues earned during the year 2004 by the companies

The Project is financed by

CARDS 2002 Project

77.2% of the total

the total revenues were generated by companies dealing in motor

Source: FINA, Croatian Chamber of Economy

The Project is financed by

CARDS 2002 Project

whereby the industry of motor vehicle parts and equipment manufacture

Figure 2: Structure of workforce employed in motor vehicles, trailers and

Motor vehicles manufacture

EUR 1.314 million worth of products, which amounted to almost 10% of

The Project is financed by

CARDS 2002 Project

Table 2: Foreign trade, 2004.

Source: Central Bureau of Statistics, Croatian National Bank, calculated by author

From 1993 to the end

Since the commencement of foreign investment in Croatia, i.e. from

The first mounting production is a direct business arrangement

The Project is financed by

participation of wholesalers or other agents. Auto manufacturers give

CARDS 2002 Project

The so-called second-tier suppliers' business arrangements with auto

Production of spare parts can be divided into original parts production

The Project is financed by

CARDS 2002 Project

Figure 3: Auto parts production structure

Auto parts production

Spare parts production

Original spare parts

The Project is financed by

CARDS 2002 Project

2.2. Market Size

and Entrepreneurship, there are currently 63 companies manufacturing

The Project is financed by

CARDS 2002 Project

Source: Ministry of Economy, Labour and Entrepreneurship, calculated by author

According to the customs records, EUR 115 million worth of motor

Since the motor vehicle manufacturing is completely globalized today,

which first of all applies to automobile manufacturing, we believe there is

manufacturers and suppliers. Therefore, the demand for the products

The Project is financed by

CARDS 2002 Project