Press Release - AmCham Virtual Conference „Effects of COVID-19 on Croatian Economy“

In June 2020, Kearney, a global consulting company, conducted a study together with the American Chamber of Commerce in Croatia in which it examined the impact of the COVID-19 pandemic on the business operations of companies in Croatia. The research suggests that, as the result of an extremely negative impact of the pandemic on business (on average, it led to a 13% lower revenue, 8% lower investments, and 4% lower number of employees), many companies are expecting accelerated digitalization, as well as for supply chains to be brought closer to home. Moreover, most of the companies which have applied for some sort of state aid report satisfaction with the way the measure was implemented.

The analysis shows that just over half of the companies surveyed had a general contingency plan for emergency situations before the pandemic, which in the current situation proved to be effective in 90% of the cases. Despite the fact that companies generally expect a negative impact on revenue and investments, a reduction in the workforce and cash flow problems in almost 47% of the cases over the next three to six months, there are still examples where companies are increasing investments in digitalization, mergers and acquisitions, and developing transformation measures to get out of the crisis as winners. Almost half of the companies applied for some form of state aid, either for partial compensations for workers’ salaries, state loans or other. Most of the companies which benefited from these measures were satisfied with their implementation.

Effectiveness of the emergency situation plans

More than half of the companies surveyed already had crisis management plans. Compared to small and medium enterprises, the readiness of larger companies is better, as they have business continuity protocols, at least on paper, and more resources available to support measures such as work from home. In more than half of large companies these plans have proved useful, but this share is much smaller in Croatia than, for example, in the Benelux countries where the vast majority, about 80% of large companies, find existing plans useful and effective.

In most of the companies surveyed, more than 80% of employees work from home; 92% of companies did not face any or faced only minor challenges related to work from home. This information indicates the possibility that such working arrangements can be maintained even after the abolition of existing restrictions.

Extremely negative impact on business operations

On average, companies expect a 13% drop in revenue, an 8% drop in investments and a 4% drop in the workforce. The expected drop in investments is lower than in other Central European countries, indicating greater optimism among Croatian companies. The biggest negative impact in the form of declining revenue will be felt by companies in the automotive, transport, industrial and chemical sectors. The opposite trend is mainly experienced by companies from the media and education sectors. These companies will also have the most cash flow problems in the next six months.

Marko Derča, Associate Partner at Kearney, states: “At a time when companies are reducing their number of employees, (for example, start-ups in Germany have reduced their number of workers by 50%) traditional companies can use this opportunity to attract talent, who in the past left for high-tech companies because of higher salaries.”

The post-crisis period is mainly seen in the light of business transformations, accelerating digitalization and bringing supply chains closer to home

Most of the companies surveyed have already started drawing up business transformation plans for the post-crisis period. Almost 43% of them are preparing for internal transformation and market opportunities. First of all, companies expect that the state will not set state borders, and will strive to maintain a single European market. They also expect that the planned measures at the state level will be successfully implemented.

As many as 56% of the companies plan to accelerate the digitalization of internal processes and continue work from home, which is slightly less than the percentage of companies from other CEE countries that plan to do the same (over 63%). Also, 30% of companies plan to introduce more robotic processes, which is also slightly less than CEE companies, where at least 34% of them plan to introduce robotization, especially in the service sector.

"The pandemic has accelerated the process of digitalization, but in Croatia the percentage of companies that accept digital tools in business is lower compared to other countries in Central and Eastern Europe. The exception is online shopping, in which Croatia has results similar to other countries. Croatian companies need to accelerate the digitalization process in order to avoid further lagging behind the countries of Central and Eastern Europe," said Andrea Doko Jelušić, Executive Director of the American Chamber of Commerce in Croatia.

The COVID-19 pandemic has shown that supply chains are not sufficiently resistant to major crises. Therefore, more than half of the surveyed companies plan to bring supply chains and production capacities closer to Croatia, and reduce purchasing from China. Instead of asking for the lowest prices possible, companies in Europe will give priority to geographical proximity and quality in choosing suppliers, which brings Croatian companies new opportunities to increase their added value per employee. Suppliers will enter into partnerships and different ecosystems more quickly, which will further accelerate innovation and increase the need to replace the standard customer-supplier relationship with strategic integration.

Marko Derča, Associate Partner at Kearney, states: "As a result of the crisis, 32% of the companies in Croatia, especially companies from the automotive, transport and industrial sectors, expect to strengthen consolidation activities in the industry, which means that they will be taken over by other companies or they expect to take them over themselves."

Future measures and changes will determine not only the survival of companies, but also their competitive position after the end of the crisis. The companies go through three main phases. The first phase ("survival") includes employee protection, partner relationship management, business continuity plan, and liquidity measures. The second phase (“business continuity”) emphasizes the reduction of internal and external costs, and the adjustment of relationships with partners. The third phase (“victory”), however, is focused on achieving a competitive advantage primarily by improving efficiency and long-term investments. The majority of respondents in the Croatian survey currently put their company in the second phase, while, for example, most companies in Northern Europe are already in the third phase.

Marko Derča, Associate Partner at Kearney, states: "In the situation that emerged from the pandemic, it is clear that today we need a rational approach and courage to prepare for the ‘new normal’, as well as to maintain a competitive advantage in the world after the COVID-19 crisis for future investments and transformation. The crisis brings not only challenges, but also opportunities for victory."

The research was presented today to the Croatian business public at a virtual conference attended by representatives of various Croatian institutions. The conclusions of the research at the panel discussion were commented by Velibor Mačkić, Special Advisor to the President of the Republic of Croatia for Economy, Mislav Blažić, President of the Management Board of PBZ Card, Marko Derča, Associate Partner at Kearney, Dražen Roškarić, Director of the Logistics Sector at Vindija, and Tatjana Skoko, Managing Director at Microsoft Croatia.

The overall study titled The Impact of the COVID-19 Pandemic on Business Operations in Croatia, conducted in June 2020 on a sample of more than 100 Croatian companies, is available at this link.