Alexan­der Markus: Ukraine in­vest­ment boom start­ing

Kyiv Post - - Business - BY BRIAN BON­NER BON­NER@KYIVPOST.COM Pluses to do­ing busi­ness in Ukraine Mi­nuses to do­ing busi­ness in Ukraine

Ukraine could be en­ter­ing the golden age of in­vest­ment and not yet know it.

At least that is what Alexan­der Markus, chair­man of the Ger­manUkrainian Cham­ber of In­dus­try & Com­merce, thinks.

Markus, leader of the 105-mem­ber as­so­ci­a­tion, said that he sees sim­i­lar­i­ties be­tween today’s Ukraine and Poland as it was in 2001 — three years be­fore Ukraine’s smaller but richer western neigh­bor joined the Euro­pean Union and NATO.

Ger­many didn’t take the com­pet­i­tive threat of Poland se­ri­ously back then, but has since learned that Pol­ish busi­ness “is very com­pet­i­tive, es­pe­cially in the food pro­cess­ing area,” Markus said, and that Poland is also ahead of Ger­many in some ways.

“Ger­mans only no­ticed the Pol­ish boom af­ter­wards,” he said. “Ukraine is un­der­go­ing a sit­u­a­tion like Poland did 15–20 years ago. It’s very much the same today. Poland is ac­tu­ally a man­u­fac­tur­ing plat­form for the Euro­pean Union … Ukraine will go the same way in the fu­ture.”

In a Sept. 27 in­ter­view with the Kyiv Post, Markus de­scribed a largely si­lent in­vest­ment boom un­der way in parts of Ukraine, led by Ger­man and other in­vestors, and not com­pletely re­flected in of­fi­cial sta­tis­tics.

Top Ger­man sec­tor

“Our es­ti­mate is that we have 30,000 work­places in cen­tral and western Ukraine just in the Ger­man au­to­mo­tive com­po­nent in­dus­try,” Markus said. “No­body knows about this. We have a huge prob­lem that Ukraine doesn’t tell enough about it­self in Western Europe.”

And, in some cases, Ger­man com­pa­nies like to stay si­lent about their suc­cesses in Ukraine to keep away com­peti­tors. “If you found the golden spot, would you go home and tell about this?” Markus asked. “You aren’t crazy, are you?”

He said some Ger­man com­pa­nies have hired scouts to ex­plore the re­gions of Ukraine, look­ing for promis­ing new places to open fac­to­ries or plants be­cause of a de­vel­op­ing short­age of qual­i­fied la­bor in western Ukraine. He ex­pects that, as Ukraine’s roads and other in­fra­struc­ture im­prove, com­pa­nies will mi­grate from western to cen­tral Ukraine.

De­cen­tral­iza­tion a plus

He said that de­cen­tral­iza­tion of govern­ment is a big plus for eco­nomic devel­op­ment be­cause it forces re­gional gov­ern­ments to com- pete with each other for pri­vate in­vest­ment.

“De­cen­tral­iza­tion is the best thing that can hap­pen in Ukraine,” Markus said. “Let’s say I’m build­ing a new plant in the re­gion. I get all my per­mits on the spot. The head of the (lo­cal govern­ment) ad­min­is­tra­tion un­der­stands that I will pay taxes, ev­ery­thing ‘white.’ I pay ev­ery­thing of­fi­cially. He is strug­gling to support me be­cause he un­der­stands that if he can’t con­vince me this is the right spot, I’m mov­ing to the neigh­bor­ing re­gion. De­cen­tral­iza­tion is a good mech­a­nism, and it works.”

Big­gest in­vestors

Pos­si­bly the big­gest Ger­man em­ployer in Ukraine, with 8,000 peo­ple in two plants, is Kromberg & Schu­bert, which makes com­plex wire ca­ble net­works for Ger­many’s vaunted car man­u­fac­tur­ing in­dus­try. Kromberg & Schu­bert have plants in Lutsk and Zhy­to­myr.

But close be­hind is LEONI, an­other Ger­many au­to­mo­tive com­po­nents man­u­fac­turer, which will open its sec­ond Ukrainian plant, in Kolomyia, adding to a work­force that in­cludes 7,000 em­ploy­ees in its plant in Stryi, a Lviv Oblast city of 61,000 peo­ple near the western bor­der.

Two other gi­ants among Ger­man busi­nesses in Ukraine are: Metro Cash & Carry, the Dus­sel­dorf-based food and re­tail gi­ant, which has in­vested an es­ti­mated $500 mil­lion; and Knauf, the Iphofen-based man­u­fac­turer of dry­wall and other build­ing con­struc­tion ma­te­ri­als, which has in­vested an es­ti­mated $350 mil­lion. Low pro­duc­tion costs Close to the Euro­pean Union Free trade agree­ment Low wages Ed­u­ca­tion of em­ploy­ees

A strong com­po­nent of Ger­man in­vest­ment in Ukraine is at the smaller end. Es­ti­mates of the num­ber of Ger­man busi­nesses in Ukraine range from 1,200, ac­cord­ing to the Ger­many Em­bassy, to at least 2,000 ac­tive com­pa­nies, by Markus’ es­ti­mate.

Of the Ger­man-Ukrainian Cham­ber of In­dus­try & Com­merce’s 105 mem­bers, Markus clas­si­fies 2/3 as mid­dle-to-large com­pa­nies and 1/3 in the small busi­ness cat­e­gory. The or­ga­ni­za­tion gets 40 per­cent of its fund­ing from the Ger­man Min­istry of Econ­omy and En­ergy and the rest from mem­ber­ship dues and ser­vice fees.

Any busi­ness op­er­at­ing in Ukraine is el­i­gi­ble for mem­ber­ship. Cur­rently, 70 per­cent are Ger­man com­pa­nies, 20 per­cent are Ukrainian, and 10 per­cent are from other Euro­pean coun­tries.

Stud­ied Rus­sian

Markus first ar­rived in Ukraine in 2006, work­ing in pri­vate busi­ness devel­op­ment for the Euro­pean Com­mis­sion, and stayed for 18 months. “I liked it quite a lot,” he said.

He be­came deputy head of the Ger­man-Rus­sian Cham­ber of In­dus­try and Com­merce in Moscow, where he worked for nearly four years be­fore re­turn­ing to Kyiv in 2011. From the Lower-Sax­ony re­gion of north­ern Ger­many, Markus has Cor­rup­tion Cur­rency risks Bu­reau­cracy Un­clear se­cu­rity sit­u­a­tion Le­gal un­cer­tainty

Source: Poll con­ducted by Ger­man-Ukrainian Cham­ber of In­dus­try and Com­merce of mem­ber coun­tries op­er­at­ing in Ukraine

a de­gree in busi­ness ad­min­is­tra­tion and also stud­ied the Rus­sian lan­guage.

Im­prove im­age, brand

Ukraine needs to change its im­age — and, in part, its re­al­ity — of a cor­rupt coun­try with big se­cu­rity risks.

“Ukraine is not telling the Ukrainian story in Ger­many, or not enough,” Markus said. “You hear much more about the Ukrainian story from other coun­tries telling the Ukrainian story in Ger­many,” in­clud­ing Rus­sia.

And it’s hurt­ing busi­ness. Markus re­called one Ger­man au­to­mo­tive com­po­nent pro­ducer telling Pres­i­dent Petro Poroshenko that he could build an ad­di­tional three or four plants in Ukraine, but au­to­mo­bile man­u­fac­tur­ing cus­tomers in Ger­many “do not al­low hav­ing more projects in Ukraine be­cause of the im­age of Ukraine, and be­cause the se­cu­rity eval­u­a­tion is too bad,” even though western Ukraine is 1,000 kilo­me­ters from the Rus­sian war front.

Markus said that Ukraine needs to be much more ac­tive in other areas, in­clud­ing prod­uct brand­ing and pro­mot­ing its strengths abroad. He is a strong pro­po­nent of Ukraini­anGer­man co­op­er­a­tion at the re­gional, rather than cap­i­tal, lev­els. He also said that pri­vate busi­ness, not gov- ern­ment, should drive the devel­op­ment agenda.

The next step for pri­vate com­pa­nies is to or­ga­nize at the re­gional level and de­velop clus­ter ini­tia­tives to share ex­pe­ri­ence.

“That’s how we’re do­ing in­dus­trial devel­op­ment in western Ger­many,” Markus said. “It’s not for state to de­cide what is to be de­vel­oped. The state is not ex­pert enough in this area.”

More­over, he said, the Ukrainian govern­ment sim­ply doesn’t have the money to fund an ex­port pro­mo­tion pro­gram “with bil­lions of hryv­nia in the near­est fu­ture.”

Ukraine also needs to de­velop stronger brands for fin­ished food prod­ucts, where higher profit mar­gins are made, rather than sim­ply re­ly­ing on ex­port­ing less prof­itable raw com­modi­ties.

Early op­por­tu­ni­ties

Many Ger­man com­pa­nies came to Ukraine more than a decade ago, long be­fore Ukraine’s free trade agree­ment with the EU, which only went into ef­fect this year, and they stayed. They saw the op­por­tu­ni­ties early: low pro­duc­tion costs, an EU bor­der and wage lev­els “even more than 10 times cheaper” in some areas than in the EU.

Hold­ing back new Ger­man in­vestors is “a very dif­fi­cult se­cu­rity sit­u­a­tion and po­lit­i­cal sit­u­a­tion,” Markus said. “In Ger­man busi­ness, long-term plan­ning is very im­por­tant. If they are not sure they can plan for 15–20 years, they might not come in.”

But those who dared to come to Ukraine are feel­ing good.

“What we see today is that the ex­ist­ing Ger­man in­vestors are ex­pand­ing and build­ing new plants,” he said. “The mood is ab­so­lutely op­ti­mistic,” he said, fu­eled by a 25 per­cent in­crease in Ger­man ex­ports to Ukraine in the last year.

The char­ac­ter of Ukraine-Ger­man trade is also en­cour­ag­ing. While Rus­sia mainly ex­ports oil and gas to Ger­many, Ukraine’s ex­ports are more di­ver­si­fied — led by auto com­po­nents, agri­cul­tural com­modi­ties, food­stuffs and so on.

And Ger­man in­vest­ment in Ukraine and Rus­sia is also dif­fer­ent.

Ger­man busi­nesses are in­vest­ing in Rus­sia just to sell in­side the coun­try while, in Ukraine, “com­pa­nies that are in­vest­ing here are in­vest­ing to ex­port — to get the higher value added in the EU.”

Con­se­quently, man­u­fac­tur­ing from Ukraine aimed at the EU mar­ket “has to be much higher qual­ity” to meet stan­dards. Ger­man au­tomak­ers, for in­stance, al­low “no more than five parts per mil­lion in dam­aged prod­ucts” in com­po­nents. “It is one of the high­est qual­ity stan­dards world­wide, and this is made in Ukraine.”

Ger­man ex­ports to Ukraine are led by ad­vanced engi­neer­ing, which is an en­cour­ag­ing sign about Ukraine.

“This shows that Ukrainian in­dus­try is mod­ern­iz­ing and buy­ing high­end Ger­man engi­neer­ing prod­ucts,” he said.

Chal­lenges ahead

In food, for in­stance, Ger­mans are “im­port­ing more at a cheaper price. That is some­thing Ukraine has to work on. A ma­jor task for Ukraine should be not only to de­liver hal­f­ready goods that will be pro­cessed or pack­aged in plants in Ger­many, but to de­velop their own brands,” Markus said. “The (high­est profit) mar­gin is in the last me­ters.”

While low pro­duc­tion costs and borders with the EU are ad­van­tages, Markus said that Ukraine must do more to im­ple­ment the free trade agree­ment to re­al­ize its ad­van­tages.

For in­stance, he said, “there is no sin­gle ac­cred­ited food lab­o­ra­tory in Ukraine. Ev­ery food cer­tifi­cate to im­port to EU stan­dard has to be done by a lab­o­ra­tory in the Euro­pean Union. It’s ridicu­lous.”

In an­other ex­am­ple, he said that Cologne, Ger­many, each year holds one of the largest in­ter­na­tional ex­hi­bi­tions on food prod­ucts and only last year, for the first time, did a Ukrainian rep­re­sen­ta­tive at­tend.

Ukraine should make reg­u­lar ap­pear­ances, he said, in Ger­many’s re­gions.

“It is not enough to go to Ber­lin,” he said. “Real busi­ness in Ger­many is not in the cap­i­tal.”

Ger­man ap­proach

Ger­man busi­nesses, he said, have mostly suc­ceeded in avoid­ing Ukraine’s pow­er­ful bil­lion­aire oli­garchs be­cause the cap­i­tal­ists from his homeland are in­vest­ing di­rectly, rather than be­com­ing fi­nan­cial in­vestors or buy­ing shares and form­ing joint-stock com­pa­nies.

“They have a busi­ness idea and have a busi­ness model,” Markus said. “They are in­vest­ing 100 per­cent on their own.” To do so, they need a land plot, le­gal frame­work, source ma­te­ri­als, in­fra­struc­ture, good work­force and mar­kets. They are not work­ing in areas where the oli­garchs are so in­ter­ested.”

Es­ti­mates of Ger­many’s for­eign di­rect in­vest­ment vary sig­nif­i­cantly, from $1.7 bil­lion to $3.8 bil­lion.

One rea­son is that some of the in­vest­ment isn’t be­ing counted by Ukraine, Markus said.

He knows com­pa­nies that sup­ply ad­di­tives to make food tastier and other prod­ucts. Some of those com­pa­nies re­ported 30 per­cent growth last year in the food pro­cess­ing in­dus­try.

The num­bers don’t show up in of­fi­cial sta­tis­tics of­ten be­cause “the mid­dle Ukrainian en­tre­pre­neur doesn’t re­port the real fig­ures,” Markus said. “The ma­jor strat­egy is duck and cover. ‘I will not be seen be­cause some­body might knock on the door.’ That’s why we may not see the boom.”

Alexan­der Markus is the chair­man of the Ger­man-Ukrainian Cham­ber of In­dus­try and Com­merce, a 105-mem­ber as­so­ci­a­tion. He said many Ger­man busi­nesses in Ukraine are “ab­so­lutely op­ti­mistic.” (Kostyan­tyn Ch­er­nichkin)

Newspapers in English

Newspapers from Ukraine

© PressReader. All rights reserved.