International Business : Croatia’s Shipbuilding Industry: Opportunities for Risk Takers


ISSUE: Inspired by the numerous natural harbors along the Adriatic coastline that stretches 400 miles past 1,000 islands, Yugoslavia built an impressive network of shipyards and marine repair facilities before the federation was destroyed by nationalism and war.

The now-independent Republic of Croatia has inherited most of the coast and the entire shipbuilding industry, and investors are pondering whether the former workhorses can be revived in the capitalist era as the country seeks to revamp a thoroughly shattered economy.

However, a global shipbuilding slump, the looming menace of another war and Zagreb politicians’ penchant for interference in business matters have combined to cast doubts on the likelihood of a rescue.


BACKGROUND: After tourism, shipbuilding was the most important economic activity in Croatia during the Yugoslav era. It produced more than 30,000 jobs, 5% of the gross domestic product and more than $800 million in exports at the mid-1980s peak.

Worldwide recession and the virtual standstill that gripped Croatian industry after its 1991 war with Serbian nationalist insurgents meant a drop in construction contracts. Banking disorder that resulted from the breakup of Yugoslavia have exacerbated the crisis, as potential buyers find it difficult to get the necessary loans and credits to finance their projects.

The shipbuilding crisis mirrors the general economic catastrophe in Croatia. The unemployment rate, at 20%, is among the highest in Europe. Military spending continues to drain national resources, and the program of privatizing state industries has been discredited by corruption.

Shipyard jobs have been reduced by more than half, to about 15,000 today, and many of those positions are at risk unless the major yards lure foreign investors.

OUTLOOK: Hyperinflation has been brought under control in less than a year by severely limiting the money supply, but most statistics indicate further contraction of the economy. Also, the 3-year-old standoff between the Croatian government and the Serb rebels, who hold about a third of the country, has been heating up, stirring fears that the government may push to recpature the lands.

Western diplomats say they see little chance of Croatia’s coastal industries being directly affected by the fighting, because the disputed territory lies inland.


Of greater concern to most foreign analysts is the Croatian government’s tarnished record on privatization. Independent economist Drazen Kalodjera estimates that less than 5% of industrial assets have been transferred to private hands since the undertaking began three years ago. Evaluations and bidding are controlled by senior members of the ruling Croatian Democratic Forum, and this often results in sweetheart deals for political backers.

“We have again today an amalgamation of state, ruling party and economy, just as we had four years ago,” Kalodjera complained, comparing the present to the former Communist order.

A Zagreb-based diplomat agreed: “If I were a foreign investor, I would hate to have to go to the Croatian court system.”

STRATEGY: Croatia’s shipyards are judged by industry analysts to be well-equipped with skilled workers who are more affordable since the crisis has depressed the average wage to $120 a month.

On a strictly economic basis, joint ventures with Croatian companies would appear to offer good long-term prospects for investors, Western economic attaches say. They cite a large backlog of orders at one Rijeka yard, hints from Iran and other Islamic oil-producing countries that they might bankroll major tanker projects if Croatia cooperates with Bosnian Muslims, and suggestions that the shipyards might be suitable for servicing U.S. naval vessels.

Still, area conflicts increase risks.

And as one Western diplomat noted, the Croatian government’s current willingness to revise laws and remove impediments to foreign investment should be viewed as a double-edged sword.


“They’re being very flexible now, and my guess is that the Croatian government would pave the way for foreign investment in shipbuilding sooner than any other industry,” the diplomat said. “But politics can change priorities.”