Eastern El Dorado?

Along with low costs and a huge internal market Ukraine also offers a springboard to Russia.

More and more Polish companies are looking to expand their activities eastwards, especially to Ukraine. A vast consumer pool of nearly 50 million inhabitants, the proximity of the Russian market and cheaper labor costs all pull Polish entrepreneurs to Ukraine - Polish investments in the country more than doubled between 2002 and 2005. The trend shows no signs of slowing, as the likes of Inter Groclin Auto, Empik Media & Fashion, PKM Duda and PZU all plan significant investments across the southeastern border.

Zbigniew Drzymała's recent announcement is a typical expression of the way businesses in Poland see opportunities in Ukraine. The president of Inter Groclin Auto, a producer of car upholstery, which supplies its products to the likes of Volvo, Mitsubishi, Renault, Mercedes and Audi, has said that the company will move its production to Ukraine due to more favorable business conditions. According to company sources, Groclin alone accounts for two percent of Poland's exports to the EU.

"We have no other choice, with growing costs and falling profitability in Poland, and we want to grow, and maintain our competitiveness and market position," Drzymała told Puls Biznesu. Inter Groclin Auto is already present in Ukraine, with a production unit in Uzhhorod in Transcarpathia in which it has already invested zł.80 million.

Itching to expand

But it is not only for the lower production costs and cheaper labor that more and more Polish companies are heading east. With further growth and expansion in Poland no longer possible or made harder by tough competition, and expansion into Western markets too costly, Polish entrepreneurs see expansion into Ukraine as the logical next step.

"In our strategy to launch production in Ukraine we wanted to strengthen our products' position on the Ukrainian market," paint producer Śnieżka's spokesperson Magdalena Olszewska said.

By investing in Ukraine, Polish companies hope to make use of their experience of economic transition in the same way as the Spanish come to Poland to make use of their knowledge of post EU-accession effects on construction and real-estate markets.

"The Ukrainian market is today what Poland was at the beginning of the 1990s. We see a possibility to build a second Duda there, but in a much shorter time," the vice president of meat producer PKM Duda Roman Miler said. The president of Empik Media & Fashion (EMF), Maciej Dyjas, thinks likewise. "Bukva [a Ukrainian bookstore chain that EMF acquired this year] looks like Empik did in late 1990s," he said.

Size matters

Experience and knowledge of the problems faced by a transition economy are one thing, but size matters as well. "Nearly 50 million people live in Ukraine, and there are a number of cities with around or over one million inhabitants," Dyjas emphasizes. EMF has spent $11 million this year in acquiring majority shares in two chains - Bukva and Kinderland. The first, which has 27 stores all over Ukraine, is to become a "Ukrainian Empik" in the future, while the two Kinderland stores in Kiev are to be rebranded to start a Smyk chain in the country.

Dyjas promises that next year two to three "Bukva by Empik" stores will be opened in the country and possibly up to five Smyk outlets will begin operation. EMF is currently negotiating possible locations in cities such as Donetsk, Dnipropetrovsk, Kharkiv, Lviv, Odessa and Kryvyi Rih.

EMF's plans in Ukraine are ambitious. "We think that there is potential to establish operations worth a few hundred million złoty in Ukraine," Dyjas said. Currently the two acquired companies have a revenue of zł.35-40 million, and Dyjas thinks it would be realistic to increase that to zł.200 million in a few years' time.

Room to grow

Meat producer Duda has equally ambitious plans. According to the company's investment strategy, PKM Duda could spend up to zł.100 million on expansion in Poland's eastern neighbor. Even the ban on meat imports from Poland doesn't seem to stop Duda. The company bought the pig farm Swinokompleks Zoria and plans to acquire further stock producers to increase their annual production from 25,000 to 250,000 pigs in two years' time. Also the acquisition of a Ukrainian meat producer is to take place in the coming months. "It's worth investing big money there," PKM Duda's president, Maciej Duda, said.

He wants to achieve leadership status in pig stock production and meat production in the country. "The market has huge growth potential," Duda claims. Meat consumption per capita in Ukraine in 2005 was 39 kg, while in Poland it was 71.8 kg. Also the meat deficit in Ukraine last year was more than 500,000 tonnes.

There are already examples of Polish success in Ukraine. Paint producer Śnieżka has a 15-percent market share in the country. According to the State Statistics Committee of Ukraine, 42 percent of emulsion products produced in the country come from Śnieżka's plant in Yavoriv. As is the case with meat consumption, the annual use of emulsion products is also at a much lower level than in Poland and Western Europe (two and a half to three liters per year per capita in Ukraine compared with Poland's eight to nine liters).

"This data allows us to view the Ukrainian market and its growth prospects positively," Olszewska explained. The company also has a second plant in the country - a solvents factory, which was opened in 2005.

Wage rise

Although Śnieżka's Olszewska underlines that while one of the company's success factors was the high quality of its products combined with an acceptable market price, price is becoming less of a factor than it used to be. The country's per capita GDP is growing at a rapid pace. It jumped from $1,390 (zł.4,134) in 2004 to $2,024 (zł.6,020) in 2006 and is expected to grow further to over $3,200 (zł.9,518) by 2009.

"Wages in Ukraine grew by 50 percent in the last 12 months," the president of IMX - the Ukrainian subsidiary of Infovide-Matrix - Alexey Krokos said.

For this reason, Dyjas is confident that expanding the Smyk children's stores and Empik bookstores into Ukraine will work out. "Eastern Ukraine especially is fairly rich, there is a middle class in the cities there," EMF's Dyjas points out.

Apart from being a large consumer market, Ukraine can serve as a gateway to Russia. The president of Forte furniture manufacturers, Maciej Formanowicz, is already taking advantage of this. "The Donetsk region, where we have established our plant, is located near the border, which makes it easier to export furniture to the Russian market," he said.

Selling sophistication

Polish companies are also entering the market with more sophisticated products. Earlier this month Polish insurance giant PZU announced that it will invest $50 (zł.149) million in 2007 in the growth of its Ukrainian subsidiary PZU Ukraina. At the same time, the merged IT companies Infovide and Matrix.pl have established a subsidiary in Ukraine, as part of the entity's regional expansion. "We are doing a project for PZU Ukraina and will also do a project for Donbas Industrial Union [the owner of Huta Częstochowa] in Poland," IMX's president Krokos said.

These investments could signal a changing trend. The rapidly growing wages mean that Ukraine will be less and less attractive as a source of cheaper labor. "In Central and Eastern Ukraine you can't really talk about lowering production costs," Krokos said. However, as a Ukrainian living in Poland, he believes that Polish investors in Ukraine can take advantage of their greater understanding of business management and corporate culture to make gains over their domestic competitors.