National champions wanted:
How likely is it that companies with a global reach will emerge in Ukraine to also become the drivers of an economic breakthrough?
Which companies have the potential to get a global reach and become the drivers of an economic breakthrough in Ukraine
Formally, the largest Ukrainian financial-industrial groups (FIGs) are very reminiscent of Korean and Japanese conglomerates. They generally belong to a specific family and, even if they began their basic business in a specific branch, tend to continuously expand into new areas of operation.
Take billionaire Rinat Akhmetov’s System Capital Management (SCM), the biggest conglomerate in Ukraine, which posted US $11.4bn in income in 2016, includes not just monopolists in power engineering (DTEK) and mining & metallurgy (MetInvest and ZaporizhStal), but also businesses in the farm sector (HarvEast), heavy engineering (Corum), telecoms (UkrTelecom, Vega Telecom, Digital Screens), railway transport (Lemtrans) and marine ports (PortInvest, which manages two company terminals at Pivdenniy Port and in Mariupol), the construction and repair of train tracks (TransInvest Holding), and the production of raw materials for ceramic goods. Akhmetov’s business partner in SCM, Vadym Novinskiy, has a corporation called Smart Holding that, in addition to stakes in MetInvest and HarvEast, has assets in shipbuilding (the Mykolaiv and Kherson wharves), natural gas extraction companies, and a group of enterprises that make fruit and vegetable preserves under the Veres trademark.
The Privat Group’s assets are more diversified. Broad economic diversification is also evident in the conglomerates of other Ukrainian oligarchs, like Dmytro Firtash. But probably the most diversified of all is Prime Assets Capital, the family business of the current president, Petro Poroshenko, with assets ranging from carmaking and shipbuilding to growing produce, manufacturing glass, refining sugar, making confectioneries, and, most recently, running power utilities.
Ukraine’s top tycoons make a point of concentrating assets in all the profitable branches of the domestic economy. However, their conglomerates differ fundamentally from Japanese or Korean ones despite superficial similarities. First of all, they tend to function parasitically, often buying up assets at depressed prices and mostly not investing in adding value to their production or greenfielding new production facilities or new areas of manufacturing. Their political leverage has given them access to preferential treatment at various times and they simply fed on these exclusive advantages instead of using them to strengthen their own—never mind the country’s—competitive position on world markets.
OLD AND NEW GROWTH
What is the likelihood that national champions might develop out of these and other family-owned conglomerates or more specialized companies? Such a possibility should not be ruled out, because these groups all have enormous financial resources at their disposal that could theoretically provide the basis for investing in a new industry. Still, this would require conditions, including preventing their owners from making windfall profits on raw materials by capturing rents that should be going to the entire community or by taking advantage of their monopolist position in a given market.The prospects for turning into national champions by growing beyond their current relatively modest size are also there for family-owned businesses that operate in dynamic sectors or in which Ukraine as a whole has real competitive advantages. In addition to subsidiaries of foreign IT companies, Ukraine has seen plenty of homegrown software development firms emerge over the last 20 years, employing thousands of Ukrainians and boasting annual turnover in the tens and even hundreds of million dollars. This includes such companies as Softserve, with 4,600 employees,1 Ciklum with 2,500, Infopulse and NIX Solutions with 1,500 each, ELEKS with 1,200, EVO, Miratech and Sigma Software with 800 each, and even more companies with smaller workforces. Today, the level of concentration of IT services both in Ukraine and on the world market remains low. The nature of the business and the relative newness of this fast-growing sector are the main reasons for this, and its basis in human capital. In time, however, concentration is bound to pick up pace and Ukrainian companies will have an opportunity to compete for leadership.
Another source of national champions could be certain companies in the machine-building industry that continue to show good potential and to maintain a serious share of the global market in a slew of complex products. This includes companies under UkrOboronProm in the defense industry such as Antonov, as well as Yuzhmash and the Pivdenne Construction Bureau, and TurboAtom. According to the Economy Ministry, TurboAtom manufactures turbines for heating, atomic and hydroelectric stations, and supplies 10% of all turbines for nuclear power plants across the world, making it the fourth largest turbine manufacturer in the world. TurboAtom is also highly profitable: its EBITDA for 2016 was 57.1%. The company supplies its equipment to dozens of countries around the world and competes with such global giants as General Electric, Siemens, Alstom and Voith. Nevertheless, state support in the form of procurements and access to credits and investment capital to upgrade production or build new facilities to compensate for the loss of Russian parts will pay a major role in maintaining the competitiveness of this group of Ukrainian state-owned machinebuilding companies.
FARMS, FIRST AND FOREMOST
Another sector in which Ukraine could well become a powerful world player is the agro-industrial complex (AIC) and in particular the food industry. For instance, the presence of major international corporations like Nestlé SA, Kraft Foods, Unilever, Mars, and Groupe Danone, whose annual revenues are in the tens of billions of dollars, shows that there is room for some serious players in the food segment to produce consumer goods and are a kind of calling card for certain countries on the world market. Take Nestlé, whose head office is in Switzerland: today, the company makes and sells instant coffee, mineral water, chocolates, ice cream, bouillon, dairy products, baby food, pet food, pharmaceuticals, and cosmetics. Yet the company’s history started with a small plant making condensed milk. In Ukraine itself, the food giant has a broad range of food products under such trade names as Nescafe, Nesquik, Nestlé, Maggi, Purina, Torchyn, and Svitoch—the last two Ukrainian brands that it bought out over the years.
Today, Ukrainian companies specializing in confectioneries have already gained a good reputation on world markets and are
looking to expand further. For instance, the 2017 Global Top 100 for makers of sweets saw three Ukrainian makers added to the list: Roshen in 24th place, the Konti Group in 43rd, and AVK in 67th. The Roshen Corporation, which employs around 10,000 and had sales of US $800 million last year, was hot on the heels of the biggest French confectioner, Cemoi, which is 23rd with US $900mn in sales. German giant Haribo, with 7,000 employees and sales of US $3.2bn, was in 10th place. By comparison, 5th place Nestlé had sales of US $9.1bn, while top place Mars has 34,000 employees and sales of US $18.0bn.
As Ukrainian food makers pay more attention to more highly processed products and entering export markets around the world with them, more Ukrainian companies could find a place on the world market for processed food. Moreover, we’re talking about both companies that until recently belonged to some of the country’s wealthiest oligarchs and companies that are smaller but are nevertheless relatively big in Ukraine. The Ukrainian Week has written about the steady growth of exports of sugar, meat and dairy products—especially butter—from Ukraine lately. Exports of processed meat have also been growing, albeit on a much smaller scale. For instance, 83,500 kilograms of kovbasa (smoked sausage) were sold abroad for all of 2016, whereas in just the first three quarters of 2017, 184,500 kilos were sold.
If this trend keeps up, a slew of leading companies in Ukraine’s food industry will both expand deliveries and look for new opportunities to produce and sell more highly processed products. For instance, today, the vertically-integrated Globino food group includes enterprises that constitute a closed production cycle, from building facilities to producing and selling the finished product. The Molochniy Allians [Diary Alliance] Group includes companies that produce cheeses, milk and fermented milk products, enterprises that collect raw milk and process it and milk products, as well as companies that sell these products both domestically and abroad. Incidentally, the company already dominates the baby food market in Ukraine. Some of the country’s biggest exporters of meat products are also moving towards greater processing. For example, Myronivskiy Khliboprodukt [Myronivka Grain Products] has been aggressively exporting hundreds of millions of kilos of poultry meat and has its own processing plants, Ukrainskiy Bekon and Lehko with 400 workers, specializing in the processing of poultry, beef and various types of kovbasa, as well as partly processed pork and poultry. In 9 months of 2017, sales of kovbasa and other ready-to-eat meat products were up to 27.2mn kilos: cooked bologna-style sausages, partly smoked sausages, knackwurst-like sausages, frankfurter sausages, pelmeni, liver pastes, meat for shashlyk or shishkebobs, and partly processed poultry meat. In addition to traditional oil products where it has key positions on world markets, Kernel has also been busy expanding the production of canned vegetable products and natural sauces under the Marinado brand. The company also has one of the largest herds of dairy cows in the country and claims that this sector is quite profitable. This means Kernel will likely be expanding production and possibly begin exporting dairy products from Ukraine as well.
Despite their relatively low level of processing, the presence of major companies and national traders who can continue to supply the most basic products grown by Ukraine’s AIC—grain, flour made of it, and edible oils—to foreign markets, means a lot even for such an agriculturally-oriented country, in terms of defending the interests of domestic producers on external markets. In any case, it’s far better than to be under the monopolist pressure of leading international corporations who control trade in these products. Today, this role can be played not only by private companies like Nibulon, UkrLandFarming or Kernel, but also by DPZKU, the state food and grain corporation of Ukraine. Despite issues with paying off credits it took from China, DPZK could be an important instrument for promoting Ukrainian farm products on global markets.