Advertisers' Web Sites Klariko Voce www.klarikovoce.hr Generalturist www.generalturist.com Croatia Airlines www.ctn.tel.hr/ctn Teri Crotek Potomac www.croata.hr Orbico Sol Melia Croatia www.istra.com Dubrovnik Airport www.airport-dubrovnik.hr Krka Farma Janaf www.janaf.hr Epsilon www.epsilon.hr Banksoft www.banksoft.hr Kamen Sirac Croatian Privatisation Fund www.hfp.hr HGspot www.hgspot.hr OMV Istrabenz www.omvistrabenz.hr

Heading fast towards European integration, Croatia is the first country featured in our series on EU expansion

There was a great deal of catching-up to do in 2000. With the death of Franjo Tudjman, a decade of political isolation came to a creaking end. Croatians celebrated it as a return to normalcy. Led by the newly elected president, Stjepan Mesic, the country became the 140th member of the World Trade Organization (WTO). Government officials took on a busy agenda of economic restructuring, placing salary caps on public sector jobs and implementing the preconditions for a Stabilization and Association Agreement (SAA) with the EU, a first step toward full integration. Reforms tunneled through the system discarding obsolete legislation and creating a friendlier environment for SMEs. Sectors like shipbuilding showed impressive gains of 36% in 2001, despite adverse market conditions in the 4th quarter. Even tourist arrivals grew in October, scarcely a month after September 11. Tourist revenue, $2.9 billion in the first nine months of 2001, continued to prop up the rest of the services sector. Indicators now suggest that GDP could grow 4% this year. Those who faulted Croatian officials for being overly ambitious have been proven wrong.

"The success achieved up to now in bringing order to public finances and the interest shown by foreign investors justifies our expectations of a more dynamic development strategy," says President Mesic. This includes the promotion of greenfield sites, a strategy that propelled Hungary in the 1990s. FDI needs to target the manufacturing sector, especially factories. Mesic has drawn inspiration from the turnaround in neighboring Slovenia. Commercial ties with Ljubljana are strong, as Slovene firms seek to establish themselves in the Croatian market. The normalization of relations with Serbia is encouraging for Croatia's budding SMEs. Armed with WTO credentials, Mesic's cabinet has signed free trade deals with Poland, Slovakia and the Czech Republic. And while the government tackles the asymmetric liberalization of EU tariffs, political changes at home have ushered in an era of transparency. Far from the obscurantist models of the Tudjman years, software firms like Epsilon are working on future applications for the mobile Internet. Flexibility is the hallmark of homespun entrepreneurs. "Our main asset is knowledge. Old mindsets are changing and our generation must drive Croatia forward," says Bojan Dobranovic, director of Epsilon.

With an economic structure that complements others in Central Europe, Croatia has a good head start. Adriatic ports like Rijeka already serve as export terminals for Hungarian industry. The oil pipeline on the island of Krk has been slated to become a conduit for Russian crude. The pipeline project could transport 15 million tons of oil by 2005. Croatia's geographic position between East and West is not lost on other sectors either. For its future EU partners, Zagreb is a critical piece in its eastward expansion. "Croatia is not a country of cheap labor. This is a country with a long tradition in industry and a highly educated workforce," says Neven Mimica, Minister for European Integration. "By the end of next year we will have fulfilled the conditions outlined by the EU," says Mimica.

Adriatic energetics
The oil pipeline of Krk island will bring Russian crude to Croatia's sea terminals

Croatian pipeline operators were sitting on a bombshell. Officials at Jadranski Naftovod (JANAF) discovered that an underutilized pipeline built in 1979 could soon be redrawing European energy maps. The pipeline connecting the Adriatic island of Krk with two refineries on the continent was working at 25% of capacity. After the breakup of Yugoslavia, energy flows were unidirectional for years. And since sanctions blocked trade with neighboring Serbia, Croatia's pipeline network was reduced to pumping oil to its own hinterland. All this changed with September 11. In an attempt to diversify its energy options, the US stepped up its efforts to harness output from Russian and Caspian oil producers. That is how the port of Omisalj awoke to its potential.

The project, known as "Druzba Adria", is valued at $150 million and it will increase capacity at Omisalj port to 15 million tons. That means oil tankers of 500,000dwt will be able to bunker here, instead of at other regional terminals like Trieste. Adapting JANAF's existing pipeline network for bi-directional use will cost 40% less than installing new infrastructure elsewhere. "Our slogan is to connect East and West," says Vesna Trnokop-Tanta, the JANAF board president. "The investment into our project is much smaller and we also have more competitive tariffs." An added factor is that environmental regulations are stringent as a consequence of tourism and the country's EU candidacy. Trnokop-Tanta says the Omisalj delivery route for Russian crude will be technologically cutting-edge. "Our sea is very clean and we'd like to keep it that way," says Trnokop-Tanta.

Deregulation of Croatia's energy market is happening fast. Although the national petroleum corporation (Industrija Nafte, INA) still dominates the sector, the retail market is being liberalized. For a country the size of West Virginia, the changes along the roadside are immediately recognizable. Motorists now flock to OMV Istrabenz, which operates filling stations throughout Croatia. Although profit margins for the Austrian-based company remain small, a combination of customer service and quality merchandise is weaning adepts off of INA. "If you visit our new stations, you will see brand new facilities, new restaurants," says OMV chairman Martin Kral.

Privatization of INA, which controls 16% of JANAF, is still in the cards. Restructuring is the only way to modernize the existing refineries and pipelines. The last time the Rijeka refinery was upgraded, for example, was more than ten years ago. The Croatian Fund for Privatization (CPF) has outlined ways in which the state can divest itself of 10 major enterprises in the energy sector. Advised by Price Waterhouse Coopers, the CPF is trying to find solutions for a country that differs from other ex-Socialist nations in transition. Enterprises in Croatia were partially in private hands before the collapse of command economies in Eastern Europe. For Kresimir Starcevic, deputy president of Zagreb's CPF, the selling process here necessitates a tailored approach. "All the companies in which the CPF owns more than 50% will be sold via public tenders. And where we own less than 50%, the CPF will sell shares at the stock exchange," says Starcevic.

Roadside biz: OMV Istrabenz
A chain of full-service stations brings new standards to Croatia's motorways
OMV Istrabenz Zagreb Ltd. was launched in 1992. The company focused initially on two core areas: building and operating a network of gas stations. Currently, OMV Istrabenz runs 30 service stations throughout Croatia. It is a subsidiary of the OMV Istrabenz Holding Company, which in turn is owned by Austria's OMV AG and Slovenia's Istrabenz Plc. These last two hold 50% of its capital.

Today, the Istrabenz Group is a conglomerate of associated companies active in Slovenia, Italy, Croatia and Bosnia-Herzegovina. The Group is composed of 13 petroleum-related firms. Activities include storage and handling of petroleum products, trade in gases and new applications of industrial gases. Other areas include tourism, corporate IT as well as financial asset management. OMV Istrabenz supplies the Croatian market from its storage facilities on the island of Krk, which have a capacity for 60,000 cubic meters. The company imports oil by-products from Algeria, Hungary and Italy. For several years, it has been supplying the UN SFOR troops in Bosnia-Herzegovina with high-quality fuel. In 2001, the group generated the best results in its 53-year history. Its plan is to attain 15% of Croatia's market share.

At the end of 2001, OMV Istrabenz started an ambitious investment cycle expected to reach completion with the 100th gas station. The company first expanded out of the region of Istria where it currently operates 13 gas stations. It runs another 13 sites in central and northern Croatia. The latest investments have been channeled into Dalmatia where four OMV gas stations have been inaugurated. In the next couple of years OMV Istrabenz will also extend its retail network to eastern Croatia and Zagreb, the nation's capital. The wholesale branch includes a group of regional representatives that cover the entire country. They are responsible for the sale of fuel, oil and motor lubricants. The market segment for OMV's wholesale branch includes car services, overland freighters and construction companies, particularly along the newly built highways connecting Zagreb, Split, and Rijeka.

Under the guidance of Martin Kral, chairman of the board since January 2002, OMV Istrabenz plans to expand its network of gas stations as well as wholesale customers. "The very positive image that OMV Istrabenz has established in the Croatian market is key to its development," comments Mr. Kral. "We hope to reach higher standards every day."

The Routex network
Routex is a strategic alliance of five oil majors: Aral, BP, IP, OMV and Statoil. With 17,000 sites in thirty-three countries, Routex is the right choice for cash-free payment. The Routex partnership is a long-term commitment among participating companies. The network was activated in September of 1993 and has since branched out into associated services. As part of the Routex alliance, OMV Istrabenz provides trucking companies with quality fuel and ancillary services. At the same time, the company ensures delivery of its products to participating venues throughout Europe. Each card issued by OMV Istrabenz is Routex-compatible. At present, it is used by more than 1,500 customers in Croatia.

About OMV

With consolidated sales of 7.45 billion euros, a workforce of 5,757 and market capitalization of 2.2 billion euros, OMV is Austria's largest industrial company. It is one of the leading oil and gas groups in Central and Eastern Europe, carrying out exploration and production activities worldwide. Its integrated chemical business produces melamine and geo-textiles, as well as plant nutrients. In addition, OMV holds a 25% stake in the second-largest European polyolefin producer, Borealis, and a 9% stake in MOL, the Hungarian oil company. OMV intends to consolidate its leading position by leveraging its competitive advantages. This includes playing a part in the consolidation process in the region. In 2000, OMV produced 20 million barrels of crude and NGL (natural gas liquids), and 52 billion cubic feet of natural gas. Half of the production comes from Austria. The rest is sourced from Australia, Libya and the United Kingdom. As operator or partner, OMV is involved in exploration projects in five countries: Austria, Australia/New Zealand, Libya, Pakistan and UK, as well as in Albania, Sudan, Tunisia and Vietnam.

A breakthrough for SMEs
Croatian products, from software to anti-corrosives, are going out West. With rising living standards, a stable of young entrepreneurs is changing the country's business outlook

Innovation has often stayed north of the Alps, say many Croatians. Penetrating the East-West barrier was impossible for decades. As a result, the inhabitants of ex-Yugoslavia acquired a taste for foreign goods, praising the quality standards that set them apart. Fashion was considered distinctly French or Italian. Construction materials were hauled in from Germany, bypassing local industry. Integrated solutions came from abroad, just not from Croatia. Few could have foreseen the current breakthrough in sectors like software, engineering or pharmaceuticals. Even neckties. Since 1999, the list of exporting SMEs (small and medium enterprises) has more than doubled.

"There is a new mentality that wants to develop things, to be creative and imaginative," says Bojan Dobranovic. The General Manager at Epsilon, a software firm, Dobranovic believes there is no future without innovation. His firm, which is Microsoft Gold Certified, develops applications for mobile phones and e-business. If Croatian ministry sessions are now fully computerized, it is thanks to Epsilon's corps of engineers. The firm has installed a web-based interface that brings parliamentary hearings to a state-of-the-art. "Flexibility is our first advantage. We have to learn more and learn it fast," says Dobranovic.

Banksoft, a software house focusing on banks, had its own breakthrough at the height of civil war in 1993. It is a survivor of many things, including the latest consolidation wave in Croatia's financial sector. Based in Zagreb, its applications are used by 30% of domestic institutions. A new Internet banking product, ib4banks, is being introduced into the market by two of its corporate clients. "What we sell with our software is know-how about business legislation in Croatia and reporting to the Central Bank," says Irena Ivec, Banksoft's director. Since 1997, retailers like HGspot have been selling hardware to technology-avid Croatians. The SME sector is one of the country's economic motors precisely because of its widespread use of software. "We have a highly educated workforce and strong economic potential," says Hrovje Prpic, HGspot director. His company is projected to sell 70% more computers this year, despite the cutthroat competition.

Teri Crotek showed remarkable resilience to the instability of the 1990s. An anti-corrosive specialist, it may have had chemical insulation down to an art, but how did it weather competition from EU firms? "We are completely computerized and each segment of production is supported by software that enables us to reduce costs," says Mato Markanovic, the President of the Board. Founded in the coastal city of Rijeka in 1991, Teri Crotek is fully self-financing and relies on its own mechanical equipment. Its young team of 500 engineers works in tandem with one of the country's most promising sectors: shipbuilding. But true to its competitive instinct, Teri Crotek has branched out into new fields where it can apply its expertise in thermic insulation or welding. With a deep knowledge base in engineering, the company also takes on grinding jobs at mines and salt works.

Success at Kamen Sirac seems engraved in stone. There is no need for anti-corrosives here, even if the company was ravaged during the years of civil war. Kamen Sirac specializes in connective materials such as hydrated limestone. It has recently launched a new fertilizing product that will be part of the company's "green line". Founded as a family-owned enterprise in 1878, the company began to turn around in 1999. A strategic investment by Austria's W&P allowed for the construction of new processing facilities at its quarries east of Zagreb. The company packages stone aggregates for sale at do-it-yourself shops throughout Europe, from ceramic adhesives to restoration materials.

Some SMEs have come to Croatia from across the border. Krka Pharma is a Slovenian company that established a Croatian subsidiary as a joint-stock company back in 1992. Out of Zagreb, Krka is fast becoming one of Central and Eastern Europe's specialist in generic drugs. Its market share has grown to 7.5%, a substantial achievement considering the brutal landing of foreign pharmaceuticals in the last few years. "When I came here in 1999, Croatia only had 20 foreign pharmaceuticals registered, whereas now there are more than 50," says Mladen Pavletic, the Managing Director. Although Krka Pharma synthesizes veterinary products and cosmetics as well, most of its drugs are meant for human consumption. Its R&D department is developing homeopathic or over-the-counter products, which currently account for 10% of output.

"We proved it was possible to make a high-quality product in Croatia," says Marijan Busic. The talk is neither about stone aggregates nor anti-corrosives, but about neckties. Busic is member of the board at Potomac, a Croatian textile firm established in 1990. The company sells handcrafted neckties with original designs. Its Croata 4 line retails in Tokyo for $500 apiece. Most people ignore that it was Croatian soldiers who first introduced the necktie to Paris in the 17th century. That makes Croatia the official homeland of the cravate, as the hanging piece of cloth came to be known. Potomac has thus turned fashion lore into a marketing concept. It was no easy task selling luxury products at first, particularly from a former Socialist country. "Western markets were a bit skeptical and confused. That's why we say that we aren't just selling a product, but a whole philosophy," says Busic. Potomac is launching a new suit line this fall.

Food processing industries, along with shipbuilding and tourism, are critical for Croatia. Klariko Voce, a family-owned agribusiness firm, typifies the new spirit of export-oriented SMEs. The company's fruits, vegetables and jams travel as far as Australia. It also supplies local food industries with fruit additives for the manufacture of yogurt brands. "Our big advantage is that we have our own onsite production facilities," says Andrija Klaric, president of the board at Klariko Voce. Since it controls all the aspects of production, the company is able to package its products according to the special needs of each market.

Orbico, a company with annual turnover of 250 million euros, acts as a distributor of foodstuffs and home appliances. Josip Roglic's father started out as sales representative for Varta Batteries, later forging alliances with Procter&Gamble, Kraft, Danone and General Electric. "You need to diversify to survive in this market," says Klaric. Today, Orbico also has interests in the Croatian tourist sector where it operates three hotels as well as a chain of pizzerias. Roglic is one of those Croatians who thinks his country has earned its EU credentials in record time. He predicts full EU membership by 2008. "A turnaround is on the way, but it will take more hard work," says Roglic.

Full sail for tourism
With a geography of pristine beaches and granite towns, it's not difficult to see why Croatia's tourist sector is undergoing a revival

The sea is Croatia's ultimate lure. Crystal-clear beaches, many of them sheltered from the roads, dot the coastal map. From the quaint peninsula of Istria in the north to the wild Kornati islands of Dalmatia, sailboat holidays have become a market niche in an industry known for its fickleness. Add to that the pleasures of an unspoiled countryside and you have a tourist jewel in your hands--only hours away from European capitals.

"Sailing is the future of our offer," says Maja Pecarevic, board president at Generaltu-rist. Owned entirely by Diners Club, the local operator has anticipated tourist trends by investing in sailboats. It has opened training centers for young Croatians to improve standards in the hospitality industry. Civil war in ex-Yugoslavia put a freeze on the sector that lasted almost a decade. Dubrovnik's airport was shelled by Serbian forces to inflict damage on the economy of the breakaway republic. As a result, charter flights stopped taxiing into this strip of the Mediterranean and infrastructure was neglected. Croatia has made a resounding comeback, however. And the projected fallout from September 11 never materialized. In fact, passenger volume at Croatian Airlines grew 17% in 2001. The national airline, which depends on flights to holiday destinations, saw its net losses decrease to $11.5 million, down from $25 million in 2000. The medieval city of Dubrovnik has now been restored back to perfection. Its main Venetian-style corso is alive again with the summer Renaissance festival. Even its airport, largely destroyed in 1991, has been redesigned to meet EU standards. "In its best years, the Dubrovnik airport processed 1.5 million passengers," says Peovic Tonci, the General Manager. "Taking into account the scenery surrounding the city, it still has the most potential."

For Minister of Tourism Pave Zupan-Ruskovic, the revival of Croatian tourism is partly due to the current negative perception of long-distance travel. German and Italian visitors are rediscovering the stone buildings along the coast, renting them from local families in the summer months and coming back for more. "We'd like those small buildings to be reconstructed into villas or hotels," says Ruskovic. Sol Meliá, the international tour operator, is pushing the idea of boutique hotels after taking management at 27 sites in the region of Istria. A native of Rovinj (Rovigno for Italians), Odete Sapac is in charge of the company's marketing arm. "We want to introduce Rovinj and Umag as the best destinations in the Mediterranean," says Sapac. Sol Meliá has invested here for its proximity to Italy and its archaeological wealth. Tourists can visit a Roman amphitheater in the morning and then retire to their pine-covered hotel at night. "We want to balance the high standards of our customers with our untouched nature," says Sapac.

An interview with Mato Markanovic, President of the Board of Teri Crotek

Can you tell us more about Teri Crotek's role in the industry, your competitive advantages, key challenges and plans for the continuing growth of your company?
Teri Crotek is the only company of this kind that cooperates with all the shipyards in Croatia. We have many programmes within our production and one of them is the anti-corrosion protection of the ships. In the last 20 years we have been working mostly on ships built for the Western markets.

Are you the only company in Croatia that produces anti-corrosion programmes?
No, other companies do this also but the second largest company is five times smaller than us. Because we cover all these programmes we can say that today we are a company that is organised in a modern way. We are completely computerized and each segment of production is supported by our computer system which enables us to minimise the labour force and reduce the costs.

The relationship between the Government and the shipping industry had been intense lately, especially with the new Minister of Economy focusing on the profitability of the industry. How do you think this will affect your business?
This will not affect our business because we do not depend on just one particular region, our activities are very diversified. We also export a large proportion of our production. We have a very specific and recognised product: anti-corrosion protection of cargo tanks and balast tanks. We are known even to the biggest producers of paints in the world.

Can you tell us more about international competition in the markets you are looking into?
We do not have foreign competition but we are looking forward to the liberalisation of the market because we provide a service that could be very competitive in the Western market once the borders are completely removed. The average age of our employees is 28. Our engineers are between 25 and 30. We have our own educational programme for our employees. We also have state-of-the art technology and equipment.

Is there a strong desire to work with other shipbuilding nations and industries in the world?
We do have contacts with various companies around the world but it is a big problem to obtain work permits. Every time a ship we have worked on is delivered to the buyer we are remembered and this is the best way of establishing business contacts. The only problem is the fact that there are different regulations abroad and also that we need to obtain specific permits in order to start our operations. We are the only company in this sector that has had ISO-9002: 1994 for four years now. Now we plan to implement ISO-9002: 2000.

What do you think about the trend of entrepreneurship in Croatia and the development of SMEs?
They will profile themselves according to the marketplace of course. We are now going through the period of transition and it is really important for the people and businessmen to change their mentality first. I think that only the ones who realize that they have to initiate some change will succeed. This process will accelerate because there are many people with a vision and who are ready to further educate themselves. Young entrepreneurs need to have the right approach towards the ownership, the quality of the products and the services.

How do you envision Croatia's future?
A certain part of our economy and industry has been through the process of transition and it is ready for cooperation with the rest of the world. We have a well developed industry. We have a crucial geographical position. Over the last ten years many things have changed, both the entrepreneurs and the politicians have changed their ways of thinking. Croatia has a bright future ahead and it is the most prosperous of all the countries in the region.