The COVID‑19 pandemic triggered a sharp global economic downturn and some of the hardest times in decades.
But from hardship, new opportunities arise.
For Ukraine, one of them is the chance to capitalize on the trend of European companies seeking to build production capacities closer to the European Union borders. German companies are no exception.
Alexander Markus, chairman of the German-Ukrainian Chamber of Industry and Commerce, an association with 165 members, believes that if Ukraine will seize these opportunities and fix its major problems, such as its weak rule of law and endemic corruption, there is a good chance to attract many foreign investors.
“Opportunities in Ukraine today are really huge because the global value chains are changing and will be changing more,” said Markus in his Sept.18 interview with the Kyiv Post.
Making products for E.U. countries in Asian countries such as China or Vietnam is already viewed by German companies as risky because of the ongoing pandemic lockdowns and logistical issues. They need a “backup plan” and are looking for new production sites while asking the million-dollar question: Where to go next?
Markus is observing another clear trend among German companies –central European countries such as Poland and are becoming less profitable due to growing labor and production costs.
These two trends can help Ukraine to turn opportunities into real successes.
But Ukraine has to position itself to capitalize on “the advantages coming from different changes,” said Markus.
Business relations
Trading ties between two countries are strong — among the 27 members of the European Union, Germany was Ukraine’s top trading partner last year. In 2019, the trade turnover reached $9.4 billion, a 17.3% share among all of Ukraine’s E.U. trading partners.
However, over the past few years, the number of German companies operating in Ukraine slightly decreased due to the global crisis and is now around 2,000, according to Markus. Overall, German companies in Ukraine employ 55,000–60,000 people with the biggest share — nearly 60% — in the automotive supplier industry, working at plants of companies like Leoni and Kromberg&Schubert located in western Ukraine.
At the same time, in Russia, which has waged war on Ukraine since 2014, the number of German companies is three times higher and their chamber of commerce has some 900 members.
But those companies that already chose Ukraine to build their factories did not change their mind even after attempts to lure them to Russia.
“We have a company that is building a second plant here and when they were in the process (of deciding) they received offers from different Russian cities to come there,” said Markus.
Markus is sure that there is a whole professional network of people in Russia “screening what German companies are doing in Ukraine” and they are aggressively making their proposals with detailed plans of tax and profit preferences in order to lure them.
But many companies say that they “will never invest in Russia” because it is “too risky and it has no democratic development.”
Better environment, more investments
While Ukraine positions itself as a country with ideal conditions for the agrarian industry, there are only 50 German farmers growing wheat, corn, rapeseed, beets and sunflowers across the country.
The largest German investors in Ukraine are in the wholesale and retail sectors, like the Metro Cash&Carry supermarket chain or manufacturer of building materials Knauf. Other companies deciding to go into logistics such as HHLA port of Hamburg, which is building a 150-million-euro container terminal at the Odesa Sea Port.
But most of the companies from Germany that have entered Ukraine during the last 15 years are not focusing on Ukraine’s domestic market. They are concentrated on producing in Ukraine but then exporting abroad.
The main reasons? Ukraine has low purchasing power, a volatile exchange rate, tax issues and an unstable political situation.
It all can be changed only “if Ukraine tackles two or three topics — a reliable framework for the rule of law, no returning of bribery and corruption, a secure complaint system (through which issues are actually resolved),” Markus said. If so, more German and international companies will enter the country.
Currently, only one of five German companies would choose to enter Ukraine given that they also have the option to enter Poland, Serbia or Romania.
When it comes to concession projects in sea ports and other infrastructure initiatives that are ambitiously advertised by today’s Ukrainian government, Markus did not hear about major interests from German companies.
He says the investments for such long-term projects are too risky for most Germany companies.
The same could be said of Ukraine’s large-scale privatization. According to Markus, German investors would consider such projects only if Ukraine would show at least a few examples of fair privatizations of big industrial enterprises, and the winner would be a well-known international company with a good reputation.
“We don’t have it until now. We have privatizations but with winners that are ‘no name’ companies,” he said.
The view on HHLA container terminal in Odesa Sea Port. Based in Hamburg, Germany, the company since 2015 has invested $150 million in the port’s largest container terminal. (cto.od.ua)
Entering Germany
The chamber not only helps German companies to enter Ukraine but also Ukrainian companies interested in Germany’s market.
For Ukrainian companies, Germany’s most attractive sectors are information technology, machine-building, food and feed manufacturing, Markus said. Behind them are the textile, fashion, and creative industries.
But the main problem of Ukrainian companies that want to enter Germany is that most of them think they will fail even before entering. He often hears from Ukrainian businesspeople saying “no one is waiting for us there.”
It is a part of the larger issue of Ukraine where people don’t believe in their country and themselves, he says.
“If they are going as tourists and telling that the country is chaotic, corrupt, if they are telling negative stories and don’t believe in themselves, nothing will change,” said Markus. Every person has to “always be an ambassador” of their country.
Cultural communication differences between German and Ukrainian partners can also cause misunderstandings, Markus says. The approaches are different, yet this is not only unique to Ukraine, but common to most other Eastern European countries.
In Germany, for example, every phone discussion is followed by an email that confirms the discussion while in Ukraine a phone conversation typically will suffice, according to Markus.
“Very often a German writes a long email and the Ukrainian partner doesn’t understand why he is reading this email because they’ve already agreed on everything by phone or Skype,” he said.
Another issue of business cooperation between the two countries has to do with Ukraine’s brand management abroad.
For example, Markus named a Ukrainian entrepreneur who wanted to sell in Germany bubliks, traditional Eastern European bread rolls. He wanted to sell these under the brand Roma, which sounds like Italy’s capital. As it turned out, Roma was the name of the entrepreneur’s son.
“If you are very famous you can say this and everyone wants to know the name of your son, but if you are not so famous maybe it won’t work,” he said.
No rose-colored glasses
While most Ukrainians had high hopes last year for the new government formed by Ukraine’s comedian-turned-president Volodymyr Zelensky and for rapid systemic changes in the country, the German business community in Ukraine was more skeptical and had “no big expectations.”
These not-so-big expectations happened to be correct as Ukraine has recently been moving backwards with many of its economic and legal reforms, especially after Zelensky appointed a new government in March.
“This government is not developing a strategy, a road map, an actual plan. It’s always reacting to something,” he said.
The same problem was after the EuroMaidan Revolution deposed President Viktor Yanukovych in 2014, when there was a belief that strategic reforms could be discussed and implemented publicly.
“It doesn’t work. Because if you have too many discussions you will never do anything,” said Markus.
In Ukraine, Markus said “the turbo regime is lacking a clear strategic plan.”
Since the previous government has been fired in March, the German business community has been cautious. They became extra careful when they witnessed this summer the firing of progressive reformers like the head of Ukraine’s Customs Service Max Nefyodov, Ukraine’s Finance Minister Oksana Markarova and central bank Governor Yakiv Smolii.
“That was a situation when we had a big question mark.”
