12 November 2007

Investor comes full circle

By Eric Jansson
Published by Financial Times, 12 November 2007

Matt Sertic's friends had egged him on for years. Fellow Croats had quit communist Yugoslavia to live in and work in the US, and they loved it. Gloria Kolaric, one of his friends who had gone ahead, laughingly recalls telling him, "OK, either come now or I'm giving up on you."
Mr Sertic packed up. In 1985, he quit his job as an economist at a metal works in Sisak, 50km south of Zagreb. He moved first to Arizona and then to California. He could scarcely have imagined that, 22 years later, he would return as a US investor in an independent Croatia to open a factory on the same site as the old metal works.
Applied Ceramics, the Silicon Valley-based company of which Mr Sertic today is president and primary owner and Mrs Kolaric is director of quality, serves a specialised niche in the information technology sector. It manufactures spare parts of ceramics, quartz, silicon and sapphire for clients in the global semiconductor industry, leading makers of microchips.
"It was actually the last thing in my mind that we would start doing something here. There is no market for our products in Croatia. But by coincidence I met an instructor from the technical institute in Sisak who told me they were training people to work on CNC machines, which is exactly the kind of person we are looking for in the States," Mr Sertic says.
Computer Numeric Control (CNC) machines, programmable devices used to fabricate product components, are essential to the company's manufacturing process, so Applied Ceramics spotted an opportunity. The company flew 19 trainees from Sisak to Silicon Valley, taught them more, and now employs them on a new production floor based in privatised facilities at the metal works, which Applied Ceramics purchased and converted. It has invested $12m in the effort so far.
After years of trepidation, US investors have begun to discover Croatia, just as American tourists have begun to do in greater numbers. Moreover, as Mr Sertic's return to Sisak exemplifies, Croatia's large and well-educated diaspora continues to find new ways of doing business back in the old country. Both the US and the diaspora are rich potential sources of investment.
Applied Ceramics has arrived as part of the first big wave of post-war US business investment. Entirely by chance, at the same Sisak metal works, Texas-based Commercial Metals Company has just moved in as well, with a $90m investment in a newly privatised steel pipe manufacturer. That purchase was preceded last year by the $2.5bn acquisition of Pliva, a Croatian drugs maker, by Barr Pharmaceuticals.
"We have seen three significant US investments in Croatia in the past 18 months," says Robert Bradtke, the US ambassador in Zagreb. "This is a sign of increasing interest in Croatia by American investors. After a period four or five years ago when they might have thought business here was too difficult, they now see real opportunities in Croatia."
Foreign direct investment in 2007 already looks certain to exceed last year's figure of รข‚¬2.7bn, the country's biggest year ever for FDI. Yet Damir Polancec, deputy prime minister, expresses a common view when he says that Croatia's overall level of FDI is "unsatisfactory".
This eagerness for FDI does not necessarily imply a simple investment environment. Mr Sertic says Applied Ceramics' investment has been costlier than planned and more difficult than anticipated. "In the beginning it looked like we might save some money by coming here, but now it seems we will not," he says.
Incentives offered by the state can be illusory, he warns, and because the rule of law is weak, "negotiation" with officials is commonplace. "You find everything is more or less negotiable. If you yell more, you find that you may pay less. If you do not yell, you will certainly pay," Mr Sertic says.
He praises his local private partners as "very forthcoming, very eager to help". But he adds that unfamiliarity with the needs of IT companies such as his own has led to some difficulties, such as hesitancy at local banks to offer credit lines. After a time-consuming search, Applied Ceramics reached an arrangement with Austrian-owned Hypo Alpe Adria.
Applied Ceramics may be in a better position to weather unwanted surprises than some other foreign investors. Mr Sertic's Croatian background means that he has a network of trusted local friends to call upon. As for costs, even if they rise marginally above the expected level, heavy global demand for the company's specialised products provides a degree of cushion.
Despite some difficulties, Mr Sertic is evidently bullish on Croatia. In addition to the factory building where Applied Ceramics now works in Sisak, he has purchased a neighbouring tower block previously used a metallurgical institute. He plans to rent it out as workshop space for young local entrepreneurs.

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