Eastward job migration
The move could herald the beginning of an eastward migration of white-collar jobs in IT services out of the country. So far, it has been Poland that has benefited from pan-European concerns shifting their back-office functions from the richer, higher-cost Western European nations. Could this luck be shifting further east?
Last week ComArch, based in Kraków, announced the opening of a subsidiary in Ukraine. While the original investment is relatively small, the firm's main shareholder and chief executive officer (CEO) Janusz Filipiak told the Business Journal that expected labor cost increases in this country could persuade the company to shift its general operations eastward in the near future. This represents a major departure for Filipiak, who just a year ago described the Ukrainian market as badziewie (its English equivalent being, more or less, "crap").
The decision follows on the heels of several such announcements by a diverse range of companies, that include the state-controlled insurance giant PZU, clothing manufacturer Redan, and Śnieżka, a paints producer, to name just a few. Indeed, foreign direct investment by Polish companies in Ukraine grew 50 percent last year to reach a figure of $153 million (zł.578.9 million), according to data from the embassy in Kiev. This makes the country the eighth-largest source of FDI inflows into Ukraine. And analysts say the trend is set to continue.
What's more, while most of the investment to date has been in manufacturing, where the trend to cut labor costs through relocation began earlier, this year has seen a flurry of investment in IT. The announcement by Comp Rzeszów, a mid-sized software maker expected to list on the Warsaw Stock Exchange (WSE) later this year, that it was planning to invest zł.80 million (e17.5 million) over four years in developing a regional group that would include large investments in Ukraine, met with skepticism from competitors and analysts.
But last week it was reported that Optimus, a Nowy Sącz-based hardware maker, is nearing the end of due diligence with two Ukrainian firms, each worth around $5 million (zł.18.9 million). The press report went on to say that one of the companies would be acquired by the end of last week.
Optimus CEO Bogdan Wiśniewski appeared to deny the story, the source of which turns out to be a member of the company's supervising board, saying "he did not like to anticipate events." He added, however, that, while not entirely accurate, the report was not far from the truth, as Optimus is definitely considering an acquisition across the eastern border.
"We have been successful on that market and have decided that now is the time to establish a more permanent presence [on the market]," he said, citing trade barriers between the countries as an additional incentive to go local in Ukraine.
Poland's eastern neighbor remains uncharted territory for most investors, but the country has seen dynamic growth in recent years. That is particularly true in the IT industry, which last year alone grew by a staggering 24 percent and reached the value of $2.6 billion (zł.9.84 billion), according to research firm IDC. While the figure remains small in absolute terms, Ukraine's IT industry represents 6.5 percent of GDP, more than three times the ratio in this country, but still less than half that in Germany. This year, Wiśniewski says, the market will reach the size of that in Poland, and untapped growth potential remains huge, as rapid advances in infrastructure have a snowball effect on the IT sector in general.
While there are only three computers per 100 people in Ukraine, Optimus' Wiśniewski says, the telecoms industry is "really happening" and the existing infrastructure already justifies the confidence that it can service even large investments in IT.
Ukraine's potential in this field is much greater than realized in many quarters. Filipiak cites lower labor costs as crucial to ComArch's thinking, but the quality of labor in the country is also exceptionally high for a post-Soviet country and Ukraine boasts a long tradition in high-tech. In the days of the Soviet Union, it was responsible for around 40 percent of all technical development. While that may hardly sound impressive to Poles, many of whom remember the quality of Soviet technology achievements, Ukrainian engineers have added some more recent successes to their credit, having reliably developed software for space and military programs of Boeing and other Western firms.
And recently, major advances in nanotechnology and software development led Bill Gates to describe Ukraine as the fourth most important source of innovation in computer programming. What's more, the Global IQ 2002 Report ranked the skills of Ukrainian programmers as fourth in the world. Microsoft duly proceeded to set up shop in Kiev a year ago.
Still, high levels of bureaucracy, crime and corruption remain powerful deterrents to investment in Ukraine and, indeed, led ComArch to pull out of its venture there in 1999, which meant "significant losses for us," in Filipiak's words. But now some companies say that Polish firms are better placed to navigate that tough environment than their western European, or North American, competitors.
"As for fears of corruption and official harassment, that is a risk," says Waldemar Pawlak, CEO of Plast-box, a packaging maker that is set to open a $1 million-worth plant in Ukraine by the end of this summer. "But it's not as if everything is perfect back home."
In a way, adds Filipiak, Western companies' reluctance to invest in this unsafe environment in itself creates a niche that Polish firms can fill. He goes on to say that the risks are perceived as too high by many global investors, but companies from this country are also able to benefit from similarities in language and culture that would be considered yet another barrier to many western firms.
"Poland is perceived [in Ukraine] as a Western European country," Filipiak says. "During communism, we delivered high quality goods," he continues. It has been demand for the company's services from within Ukraine that first saw ComArch return to a country where conditions used to be, in his words, "very, very bad." But things are looking up, he adds.
And ComArch could look forward to reaping huge potential benefits from that country's skilled, but cheap, workforce, say market watchers. IT services is an industry where payroll accounts for as much as 60-70 percent of total costs, explains Eugene Schwab-Chesaru, an analyst at Pierre Audoin Consultants (PAC), an IT consultancy.
And while Ukraine hardly enjoys the best reputation in the investment world, Ewa Zborowska, an analyst with IDC, a research firm, says that the reputation of the company is more important than that of the country from which the product comes. And ComArch, she adds, is a "spectacular example" of how Polish companies can be successful on international markets.
After struggling to compete with the largest players on the domestic market, and with Prokom in particular, the Kraków company has been steadily increasing the share of exports in its revenue structure ever since the founding of ComArch Global, a subsidiary based in Washington, D.C. in 1999 (see graph on this page). In fact, the firm's Ukrainian subsidiary is to be its fourth such foreign venture, with the U.S., Germany Dubai, and the United Arab Emirates already among its scalps. The firm also has offices in Russia and Finland.
IDC's Zborowska adds that, once they have established a presence on the market, Polish companies tend to enjoy a good reputation and are not perceived as cheap vendors of low-quality products. And Schwab-Chesaru of PAC volunteered the example of ComArch's solutions for telecommunications firms as a flagship case of a successful Polish venture abroad. That is a particularly salient point in view of Ukraine's booming telecoms sector, which last year jumped nearly 40 percent to $1.8 billion (zł.6.8 billion).
And the market is still undeveloped. Schwab-Chesaru says that "there are not many offshore centers to use all the competencies in information technology [in Ukraine]." And the market is hungry for up-to-date solutions, as the crumbling infrastructure installed in the early years of the post-Soviet era requires urgent upgrading.
In fact, observers of the IT market in that country seem fond of the old anecdote about two marketing specialists sent by a shoemaker to Africa. One reported back with despair, "it's hopeless, nobody here buys shoes," while the other exclaimed enthusiastically, "the market's huge, nobody has bought shoes yet."
But what is probably more important still is the fact that Ukraine offers Polish firms a convenient toe-hold into the increasingly prosperous Russian market. Primarily selling its IT solutions to the telecoms, banking and leasing sectors, ComArch has its eyes set on Moscow's burgeoning market. But the cost of IT staff in Moscow is too high to justify relocating there, says Filipiak. And he is not alone in viewing Ukraine as a useful stepping stone into Russia. Manufacturing companies have long ago blazed the trail that leads from Ukraine into its behemoth neighbor.
"Ukraine is a perfect launch-pad for Russia," says Waldemar Pawlak, CEO of Plast-box, who plans further investment in that country to boost exports to Russia. Paints producers Śnieżka and Polifarb Cieszyn are also looking to their Ukraine operations as a means of entering the Russian market. And as Ukraine and Russia further cement their long established links with further trade agreements, the attractiveness of Ukraine as a way of getting the Polish foot in the Russian door only looks set to increase.
Whether all this means that the eastward migration of jobs will spread from low-paid manufacturing to white-collar jobs, and whether the hype over offshoring of services to this country will end up in tears, remains to be seen.
Last week ComArch, based in Kraków, announced the opening of a subsidiary in Ukraine. While the original investment is relatively small, the firm's main shareholder and chief executive officer (CEO) Janusz Filipiak told the Business Journal that expected labor cost increases in this country could persuade the company to shift its general operations eastward in the near future. This represents a major departure for Filipiak, who just a year ago described the Ukrainian market as badziewie (its English equivalent being, more or less, "crap").
The decision follows on the heels of several such announcements by a diverse range of companies, that include the state-controlled insurance giant PZU, clothing manufacturer Redan, and Śnieżka, a paints producer, to name just a few. Indeed, foreign direct investment by Polish companies in Ukraine grew 50 percent last year to reach a figure of $153 million (zł.578.9 million), according to data from the embassy in Kiev. This makes the country the eighth-largest source of FDI inflows into Ukraine. And analysts say the trend is set to continue.
What's more, while most of the investment to date has been in manufacturing, where the trend to cut labor costs through relocation began earlier, this year has seen a flurry of investment in IT. The announcement by Comp Rzeszów, a mid-sized software maker expected to list on the Warsaw Stock Exchange (WSE) later this year, that it was planning to invest zł.80 million (e17.5 million) over four years in developing a regional group that would include large investments in Ukraine, met with skepticism from competitors and analysts.
But last week it was reported that Optimus, a Nowy Sącz-based hardware maker, is nearing the end of due diligence with two Ukrainian firms, each worth around $5 million (zł.18.9 million). The press report went on to say that one of the companies would be acquired by the end of last week.
Optimus CEO Bogdan Wiśniewski appeared to deny the story, the source of which turns out to be a member of the company's supervising board, saying "he did not like to anticipate events." He added, however, that, while not entirely accurate, the report was not far from the truth, as Optimus is definitely considering an acquisition across the eastern border.
"We have been successful on that market and have decided that now is the time to establish a more permanent presence [on the market]," he said, citing trade barriers between the countries as an additional incentive to go local in Ukraine.
Poland's eastern neighbor remains uncharted territory for most investors, but the country has seen dynamic growth in recent years. That is particularly true in the IT industry, which last year alone grew by a staggering 24 percent and reached the value of $2.6 billion (zł.9.84 billion), according to research firm IDC. While the figure remains small in absolute terms, Ukraine's IT industry represents 6.5 percent of GDP, more than three times the ratio in this country, but still less than half that in Germany. This year, Wiśniewski says, the market will reach the size of that in Poland, and untapped growth potential remains huge, as rapid advances in infrastructure have a snowball effect on the IT sector in general.
While there are only three computers per 100 people in Ukraine, Optimus' Wiśniewski says, the telecoms industry is "really happening" and the existing infrastructure already justifies the confidence that it can service even large investments in IT.
Ukraine's potential in this field is much greater than realized in many quarters. Filipiak cites lower labor costs as crucial to ComArch's thinking, but the quality of labor in the country is also exceptionally high for a post-Soviet country and Ukraine boasts a long tradition in high-tech. In the days of the Soviet Union, it was responsible for around 40 percent of all technical development. While that may hardly sound impressive to Poles, many of whom remember the quality of Soviet technology achievements, Ukrainian engineers have added some more recent successes to their credit, having reliably developed software for space and military programs of Boeing and other Western firms.
And recently, major advances in nanotechnology and software development led Bill Gates to describe Ukraine as the fourth most important source of innovation in computer programming. What's more, the Global IQ 2002 Report ranked the skills of Ukrainian programmers as fourth in the world. Microsoft duly proceeded to set up shop in Kiev a year ago.
Still, high levels of bureaucracy, crime and corruption remain powerful deterrents to investment in Ukraine and, indeed, led ComArch to pull out of its venture there in 1999, which meant "significant losses for us," in Filipiak's words. But now some companies say that Polish firms are better placed to navigate that tough environment than their western European, or North American, competitors.
"As for fears of corruption and official harassment, that is a risk," says Waldemar Pawlak, CEO of Plast-box, a packaging maker that is set to open a $1 million-worth plant in Ukraine by the end of this summer. "But it's not as if everything is perfect back home."
In a way, adds Filipiak, Western companies' reluctance to invest in this unsafe environment in itself creates a niche that Polish firms can fill. He goes on to say that the risks are perceived as too high by many global investors, but companies from this country are also able to benefit from similarities in language and culture that would be considered yet another barrier to many western firms.
"Poland is perceived [in Ukraine] as a Western European country," Filipiak says. "During communism, we delivered high quality goods," he continues. It has been demand for the company's services from within Ukraine that first saw ComArch return to a country where conditions used to be, in his words, "very, very bad." But things are looking up, he adds.
And ComArch could look forward to reaping huge potential benefits from that country's skilled, but cheap, workforce, say market watchers. IT services is an industry where payroll accounts for as much as 60-70 percent of total costs, explains Eugene Schwab-Chesaru, an analyst at Pierre Audoin Consultants (PAC), an IT consultancy.
And while Ukraine hardly enjoys the best reputation in the investment world, Ewa Zborowska, an analyst with IDC, a research firm, says that the reputation of the company is more important than that of the country from which the product comes. And ComArch, she adds, is a "spectacular example" of how Polish companies can be successful on international markets.
After struggling to compete with the largest players on the domestic market, and with Prokom in particular, the Kraków company has been steadily increasing the share of exports in its revenue structure ever since the founding of ComArch Global, a subsidiary based in Washington, D.C. in 1999 (see graph on this page). In fact, the firm's Ukrainian subsidiary is to be its fourth such foreign venture, with the U.S., Germany Dubai, and the United Arab Emirates already among its scalps. The firm also has offices in Russia and Finland.
IDC's Zborowska adds that, once they have established a presence on the market, Polish companies tend to enjoy a good reputation and are not perceived as cheap vendors of low-quality products. And Schwab-Chesaru of PAC volunteered the example of ComArch's solutions for telecommunications firms as a flagship case of a successful Polish venture abroad. That is a particularly salient point in view of Ukraine's booming telecoms sector, which last year jumped nearly 40 percent to $1.8 billion (zł.6.8 billion).
And the market is still undeveloped. Schwab-Chesaru says that "there are not many offshore centers to use all the competencies in information technology [in Ukraine]." And the market is hungry for up-to-date solutions, as the crumbling infrastructure installed in the early years of the post-Soviet era requires urgent upgrading.
In fact, observers of the IT market in that country seem fond of the old anecdote about two marketing specialists sent by a shoemaker to Africa. One reported back with despair, "it's hopeless, nobody here buys shoes," while the other exclaimed enthusiastically, "the market's huge, nobody has bought shoes yet."
But what is probably more important still is the fact that Ukraine offers Polish firms a convenient toe-hold into the increasingly prosperous Russian market. Primarily selling its IT solutions to the telecoms, banking and leasing sectors, ComArch has its eyes set on Moscow's burgeoning market. But the cost of IT staff in Moscow is too high to justify relocating there, says Filipiak. And he is not alone in viewing Ukraine as a useful stepping stone into Russia. Manufacturing companies have long ago blazed the trail that leads from Ukraine into its behemoth neighbor.
"Ukraine is a perfect launch-pad for Russia," says Waldemar Pawlak, CEO of Plast-box, who plans further investment in that country to boost exports to Russia. Paints producers Śnieżka and Polifarb Cieszyn are also looking to their Ukraine operations as a means of entering the Russian market. And as Ukraine and Russia further cement their long established links with further trade agreements, the attractiveness of Ukraine as a way of getting the Polish foot in the Russian door only looks set to increase.
Whether all this means that the eastward migration of jobs will spread from low-paid manufacturing to white-collar jobs, and whether the hype over offshoring of services to this country will end up in tears, remains to be seen.
