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?

The Ukrainian Week - - CONTENTS - Olek­sandr Kra­mar

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.

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