There are challenges, but also nearshoring-opportunities in Ukraine, according to the chairman of German-Ukrainian Chamber of Industry and Commerce, Alexander Markus.
The grey and black economy in Ukraine is known to be large, and it hides a lot of the money changing hands in the country. This means that the purchasing power statistics for Ukraine are always lower than in real life, but if that were to change, according to the chairman of German-Ukrainian Chamber of Industry and Commerce, Alexander Markus, it would mean a great influx of German companies.
Still, even though the purchasing power of Ukraine is limited even including the money being made away from prying eyes, there are plenty of opportunities in Ukraine, Markus told in an interview with Ukraine Nu which can be read here:
We have heard that there is an increasing interest in Ukraine among German companies. Can you confirm that?
It is not so easy to confirm, because how do you measure it? If you look at the figures, no. If you look at the investment sums from Germany, they do not reflect everything, they are always lacking behind. They are not always including reinvestments from profits that German companies had here.
We had a permanent interest in Ukraine from German companies, they always looked to Ukraine and put them on the shortlist for new locations. Lately, I feel, that there will be more chances, not just to be on the shortlist, but actually opening up more concrete companies. A lot of companies have a project in the cupboard, some of these projects will most likely come out in the near future.
Another topic, if you look at the structure of German investment here, German investment is focused on electronics and automotive sectors. The companies are invested in manufacturing because of low costs and low salaries. This made Ukraine interesting. But I spoke to a head of one of these companies and he said: “This carousel is not working anymore.”
They worked somewhere for five years, then to the next one for lower salaries. This is not working anymore because you have less and less low salary countries. It is the same here, this is a challenge you have to be aware of. It means that in the future I see the kind of German investment coming to Ukraine will be different.
We see this, when companies set up second plants. The second plant is not about employing 5000 people to do manual assembly work, it is about something different, it is about manufacturing parts and components and deliver them to Germany.
We are still waiting for the next step, when Ukraine will have higher purchasing power. We will see companies coming here and selling here instead of exporting from Ukraine. We do not see that here. Because of the conflict, the value chain is disrupted. Before 2014, German businesses was looking at Russia and Ukraine as one unit, and this is not working, because there are logistics problems, technical barriers, needlesticks when they stop the lorry at the border and you wait for a week. It is disturbing and makes it difficult to plan.
Can you give an overview of the German companies in Ukraine?
This is not so easy. From a statistical point of view, we have 3400 companies German in Ukraine. Legal entities and representative offices with a German share, which means that it is also including apartments owned by a German. Ukrainian statistics only give these figures. Formerly I say 2500, now I say around 2000 active companies. It is difficult, because we only have the Ukrainian figures, and there is no requirement for German companies to register in German sources.
Most of them are here for 10-15 years, but maybe 200-150 companies being more active in Ukraine for the last year. This is just pure estimation.
Why are German companies looking to Ukraine?
First of all, they are not only looking to Ukraine. They are looking to other countries, you have a longlist and you analyze it, and you will have a shortlist. You then begin contacting structures in the countries and you discuss with them, and you might even go on a fact-finding tour. For any investment attraction company, that is their first goal to be on the shortlist. Why Ukraine is getting more and more on the short list is because of a new term, nearshoring.
The German companies will not leave China, it is a big market, and they will not leave Russia. But if you want to manufacture things with euro prices, and you have learned that the delivery chains and supply chains are not so trustworthy anymore, you remember the ship in the Suez Canal, and now we have a container problem with empty containers in China and no containers in Amsterdam and Rotterdam. It is a problem for German industry, that is why suppliers are looking for other countries.
What is in Ukraine, that you cannot find elsewhere?
Ukraine has many advantages, EU border country, attractive production framework and cost, well educated people, European mentality, even some investment incentives, there are a lot of things that make Ukraine more and more attractive and, in the future, we will have better highways – a very big advantage, because if people come to Ukraine on factfinding and they travel the small roads in villages. They are shocked and they say no.
As this improves, the chances for Ukraine are good.
Maybe you will find this in other countries, but what I personally like a lot is you have a lot of young very motivated people. If you give young people a chance to get educated and work, and if you pay a decent salary, they are highly motivated.
Who are the countries competing against Ukraine on the shortlists?
Countries in Northern Africa, Vietnam, Northern Macedonia. Non-EU countries with non-expensive cost structures. Vietnam is far away so logistics is far away. Maybe the Balkan countries.
Many people ask: “How quickly will Ukraine be an EU member.” For many companies, EU membership would not be an advantage. Because production costs will rise, that is what they saw in Bulgaria, the Czech Republic, Hungary.
One challenge is the exchange rate, the fluidity of the exchange rate. The question is: will the exchange rate be influenced by politics or not. If you have populist trends, it does not end well, and German business men knows this very well. They plan in long term cycles – 10-year cycles – and Ukraine is typically a short-term planning country.
There is a joke: “A Ukrainian and a German person meet in the middle of September. The Ukrainian says: Let’s meet in mid of October. The German replies: Yes, mid of October next year is fine.”
Germans like stability, long term stability, whatever comes that look not very stable or permanent or predictable. I give you an example.
Yesterday I spoke with a German entrepreneur with 5000 people worldwide and he told how they develop locations abroad. They have locations in America, Poland, in China.
First, they take 20 people from this country in the company in Germany. They train them for 3-4 years, and only if they are sure that they have a team, that could set up a new location, they do that. The planning cycle is minimum something 5 years, because they look at a country, look for candidates, they bring them, train language, et cetera.
Rule of law is a topic for sure. I could not deny that. As soon as you are here, as one entrepreneur put it, as soon as you can go to Ukrainian court and get the rightful decision, the situation in this country will change completely.
Corruption from our perspective, is something that you can avoid. It is one of these crimes, that the victim may avoid. It can be difficult, but you can, it is possible, it is actually one of our jobs.
Why should German companies look to Ukraine?
I am sure it will happen anyway because as I said, it is a neighboring country and it has very good and interesting people. The game changer actually would be the purchasing power, that is linked to the rule of law. Because it is not only about rule of law, but also how wide the economy is. If today you would lower the grey or black economy, that is today something like 30-40 percent, to 10 or 15 percent, the income rate would be much higher for Ukrainians, and that would mean that the statistics – German are looking at statistics – would be different.
When they come here, they always say: “Hey, what are all these Porsche Cayennes doing here? How can that be? Look at the statistics!” and that is the challenge with the black or grey economy.