One Croatian company goes from strength to strength.
”Prior to our business in exporting wagons we had about 400 employees, and today we’ve got 562. This year alone, we’ve employed 30 people, and in the cooperations directly linked with us there are an additional 350 to 400 people.”
As Darko Bicak/Poslovni Dnevnik writes on the 14th of September, 2018, the Đuro Đaković Special Vehicles (ĐĐSV) company from Slavonski Brod has recently achieved remarkable growth in operations with almost full production output in exports, and expectations for the upcoming period are even more optimistic. As this Croatian company, whose main product range is railway wagons, tanks and vehicles, has managed to position itself on an extremely demanding European market. Poslovni Dnevnik talked with Bartol Jerković, the CEO of ĐĐSV.
How did your company come to a position in which almost its entire wagon production is being exported?
There are currently about half a million freight wagons around Europe, and many of them are aged 30 or over. This means that many railway fleets are in the phase of modernisation and that this is a great opportunity for wagon manufacturers. During the crisis years, from 2008 to 2011, the annual volume of all shipped wagons in Europe declined dramatically, from 18,500 to 6,400. Thereafter, the trend continued to move this industry from Western to Eastern Europe, and since 2011, we’ve had a continental growth of orders from a stable 3.3 percent per year.
There are currently 14 [such companies] in the EU and only 12 serious players in this sector. Of these there are three big ones: GBX in Poland, Astra Rail in Romania, and Tatravagonka in Slovakia, covering 75 percent of the market. The remaining nine of us are smaller players specialising in special orders and we therefore accept smaller series. The nine of us make 1,600 wagons per year, out of which we cover a quarter [of the market]. In order to make the same kind of impression as our competition does, we’ve got to look at the fact that [the big players] are EU countries which have been in the Union longer than us and mostly have a rounded steel industry, while we have to import most of our material. Currently, we export 95 percent of our revenue.
Are you competing with China, India, and similar countries that have a strong and inexpensive industry?
Wagons are goods that imply a lot of weight and (12-18 m and 22t) and come at a relatively low price, so they’re not suitable for imports from China and the Far East because the cost of the wagon exceeds 10 percent of its whole value.
The price of standard wagons ranges from 80 to 100,000 euro, and this sector works with minimum profit margins of 3-7 percent, so it’s clear that transportation at greater distances doesn’t really pay off. Another important reason is the high standard of quality of wagons and certificates required by the EU market, and in particular the targeted development of wagon configurations with the requirements of individual customers. Our competitive advantage is that we’re able to develop and produce a new type of ”user-tailored” wagon within a year, which is a few months faster than our competition. The market seeks quality and low prices, but delivery speed is one of the key things when it comes to competitiveness.
How many concrete contracts did you have in the past period, and what does your order book look like now?
In the period from 2015 to 2018, we concluded a total of 16 contracts with seven customers from France, Germany, and Austria for a total of 1255 wagons. The overall value of the entire job stood at 116 million euro.
By the end of the first half of the year, we delivered a total of 735 wagons, while 520 were in various stages of development and production. Our main contractor was HŽ until 2011, and I hope they will be again in the future. In the period from 2000 to 2011, we delivered a total of 1,200 wagons. But in 2013, due to the crisis and its disadvantages, we didn’t export any wagons. At that time, we turned more heavily towards exports, and in the following year, 100 wagons were delivered.
Until 2016, that number had grown to 260, and last year we contracted 390 wagons. Our expectations for 2018 are much higher because 635 wagons have been contracted so far. This is also apparent in our revenues of 290 million in 2017, and this year I expect 10 percent more [revenue]. Over the next year, growth of a further 10 percent is expected.
What are your capacities and can you meet the increased demand for wagons?
Our company has gone through the investment cycle and modernisation over the last period by increasing our capacity, but also in the sense of getting all of the necessary certifications.
Wagons are a means of transport and there are some very rigorous security standards. So besides the quality standard that the company itself needs to have, we need to have special certificates for each new series of wagons. Individual model testing and paperwork costs up to 300,000 euro. In the last 3-4 years, more than five million euro has been invested, of which 40 percent was on painting, which, among other things, had to meet stringent NATO standards for the production of combat vehicles. At present, our capacity is 40 wagons per month and when necessary, more, and I hope that the trend of 500 wagons per year will be maintained and increased. In the case of larger contract inputs, we could meet the capacity of up to 600 or even more wagons, with smaller adaptation of the entire system and an expansion of cooperation.
What are the trends in rail freight today, compared to the period 10 or 20 years ago?
The main difference is that once the main cargo buyers were railway companies, and today they are, in 95 percent of cases, leasing homes. They’re quite different in their approach to business, they’re a lot more pragmatic and brutal. They become global players who have 60-70 thousand wagons in their fleets. This changes the whole industry because smaller rail operators don’t pay for wagons, as they usually hire a precisely specified wagon for a certain time. As the market grows, I think that for the smaller players in the coming period, the most stable business will be in the maintenance and reparation of those huge wagons that are on the market. On the other hand, wagons were sometimes standardised and you could even make more goods, while today, everything is personalised and each order is different.
Your company, Đuro Đaković Special Vehicles, has a rail and military program. What’s the current situation with military components?
As much as these two programs are different, they’re largely technologically compatible. Mechanical engineering is unique. Given that both niches are market-sensitive, our systemic goal was to maintain both programs with the same share in revenue. Unfortunately, most often this isn’t the way in which we have cycles, in which 90 percent of the total business is just in one segment. At this point, we’ve got 3-5 percent of the revenue left to MORH, mostly on systematic maintenance of tanks and BOVs, and about so much in cooperation with the producer of Kongsberg and Patriot fighters. For example, in 2012, we almost did no work with wagons like the AMV 8×8 Patria and did little to maintain the tanks. Our revenue was 794 million kuna. A real and big change would have occurred with some more important work for MORH and this would greatly change the structure of the business, and of course the revenue and the business results.
How has the development of ĐĐSV and Đuro Đaković Group in general developed in the last 10 years?
According to the current situation, ĐĐSV accounts for about half of the ĐĐ Group, excluding other companies owned by Đuro Đaković, who are not owned by ĐĐ Group. We, ĐĐSV, had far fewer people than we have today before we started with exporting wagons. At that time, there were about 400 employees, and today there are 562 of us. Just this year alone, we increased the number of people by 30 and I estimate that with the collaborations of corporations that are directly related to us, there are an additional 350-400 people. At its height in 1990, Đuro Đaković had about 15,000 employees in 30 related companies, out of which, at this location, there were 12,000 people in Slavonski Brod. Today, in the Industrial Zone Đuro Đaković, there are 50 companies with about 5,000 employees at this location. What’s interesting is the fact that in ĐĐ Energy and Infrastructure, the electricity consumption in 1990 is equal to what it was in 2017, which would mean that the production levels are very similar but with a lot less workers.
What is the situation with the tender for the new BOV in Kuwait, in which you and Patria were bidders?
The project is still open, but for several years now there’s been no decision made on its launch. Preparing military orders always takes a long time, and in the Arab world it can take even longer than the standard time frame.
There were two players in the competition: American General Dynamics, one of the world’s largest military companies, and Đuro Đaković. Our results have been better according to all the tests, but ultimately it’s always a political decision. It’s difficult to say if that situation will go in our favour, or when and just how it will go. Our point is that as long as we aren’t getting official information back from Kuwait about the project being abolished, or that the Americans have won the contest, we feel that we’re in and we’ve got a chance to get that job. Through a general agreement with Patria, we agreed to work in Kuwait as a ”prime contractor”.