ANDRII GULYI: “UKRAINE LOSES UP TO UAH 100BN A YEAR DUE TO MIGRATION”
If you look at the world statistics for 2021, you will see that only 25% of companies that went public were profitable, said business intelligence head at the production accelerator INDAX, Plank Electrotechnic CEO and expert at the Ukrainian Startup Fund and Startup.Network Andrii Gulyi.
With extensive experience in IT (developer at SoftServe and Inoxoft, Product Owner at lifecell) Andrii chose to build a career in the UFuture ecosystem a few years ago. Today, he plays a key role in the company in its production projects and strategies.
How do the investors look at the companies now? Are their assessments differ from what was 10 years ago, for example?
– 10 years ago companies had to make money. Today, investors appreciate their growth – expansions, markets, teams. Last year, the team had 10 people, this year 50, and the next 700 – that’s what the investors appreciate. Eventually, with some time, they are expected to be efficient too and with net profit.
So the idea is to win promising resources, from a good team to some production, and money doesn’t matter?
– Money matters, but with the global excess liquidity – when the huge funds for potential investments are concentrated in the hands of individual investors and companies – the boom is here to stay for some time. If we look at the industries that are most capitalized today, they are all related to IT.
I think Ukraine should develop sectors and niches where there are the biggest capitalizations: software development, combination of traditional industries with IT – agrotech, fintech, biotechnology. Actually any “tech” should be supported. We can combine the resources that Ukraine already has, with IT and innovations. For example, 20% of new companies that come with their ideas or the first prototypes to the Ukrainian Startup Fund are designed for the farmers. Technologies can be scaled and deployed anywhere around the world.
How do you choose production startups? INDAX is, in fact, the first production accelerator in Ukraine and maybe in the world. What projects do you invest in?
– INDAX is, first of all, Vasyl Khmelnytsky’s initiative and UFuture’s project. We look for promising production companies, learn their operational situation, and prepare together for a meeting with the investor. If the project successfully pitches, we invest so-called “smart money”. In 5 years we can potencially attract international investors, for example, by selling our share to European companies. We prefer sectors that are traditionally well developed in Ukraine: construction and construction products, chemical industry, polymers, engineering and more. People consume more and more physical goods every year, and more and more niches appear. For manufacturers, this is a huge window of opportunity.
So world consumption is not declining? Neither the pandemic nor the trends like environmental friendliness and moderate consumption of the goods have forced people to consume less?
– Consumption has increased and will continue to increase. 20 years ago we had much less choice than today. We live in a world where there are no cars for 50 years, people change cars every 5 years. People do not wear clothes for 20 years, but change them every season. This accumulates negative effects in ecology. But there are also positive ones – opportunities for productions that are ready to adapt, change rapidly, and follow customer demand. Amazon, AliExpress allow you to sell millions of products even for specific niches.
But why in Ukraine are we talking not about a boom, but about the decline of industry?
– Production is a very specific business. Compared to non-productive businesses, it is, firstly, much more capital-intensive, and secondly, it takes more time. If in Ukraine the producer can attract loans at 15% per annum, in neighboring Poland – at 3%. At the same time, the company in Poland will receive ome compensations and benefits from the government. Thus, the payback period of production in Ukraine is much longer. In general, the cost of error in the manufacturing sector is much higher than in any other sector. And this is the main reason why many entrepreneurs do not want to step in. We have a number of bankruptcies of the production segment in Ukraine.
"The cost of error in the manufacturing sector is much higher than in any other."
In addition, we compete with technologically strong countries, both abroad and at home. In the domestic market, the Ukrainian producer is not protected at all, we compete here on with foreign producers.
Nevertheless, you believe that Ukraine’s chances are in highly competitive niches?
– I would say that the world is open for Ukrainian goods. And examples such as Ajax security systems are proof of that. Neither logistics nor competition is an obstacle if you make a world-class product. You can sell it in any country, from Australia to Greenland.
"We need to focus on the types of products that have bigger added value. A ton of grain and a ton of Ajax systems are two completely different product categories. And when I talk about the raw materials economy, I mean not only growing grain, but also working as an outsourced programmer. If you can capitalize on your business 10-100 times, that's an example to follow."
What are the main reasons for the decline of Ukrainian industry today?
– If we visit any production plant in Ukraine, the average age of the employee will be 50+ years. Production companies in Ukraine have a huge staff shortage. Even if we have the best equipment, in 5 years there will be no specialists to work with it: there is no knowledge transfer from mechanical machines of the 1970s to modern ones. At the same time, we sponsor technical specialists for other countries. How? The state invests about $23 K in one technical specialist, and at the age of 22 he decides to go to Poland. This is a 100% loss. If we look at the general trends, we can say that Ukraine loses up to UAH 100 bn annually due to labor migration.
I would say that the main problems are:
- migration and aging of staff;
- lack of support from the government (we are actually open to all world competitors);
- old production capacities and infrastructure;
- high taxes and, at the end, the transition of companies to the grey zone.
And there are no personal barriers that prevent Ukrainian producers from being successful – lack of business education, stereotypes, perhaps lack of markets knowledge?
– I would say that a business owner should have two main skills: to make a product and “sell” a business. The first one is fine, more or less, and the second one is missing. The owner must be able to work with investors: to explain how his business will grow, what niches it will occupy. If a company comes to an investor, it must speak to him in the language of numbers: profit, margin, and so on. We must continue to teach the manufacturers these important skills for them – finance, analytics and the like. Because we will all end up in the global market, and we have to operate with terminology that is clear to everyone.
What can bring Ukrainian industry out of the decline? What are your three key tips?
- Full-fledged launch of industrial parks.
- Reducing the tax burden on wages.
- Access to capital: at least, continuing the “5-7-9” program.
What can you say about work at Plank Electrotechnic, how difficult is it to manage a production facility, a team?
– Well, for the first time I was called Andriy Mykolayovych. I felt 20 years older (laughs). But that is the norm in this business. Secondly, as I said, it is a specific business. In IT, you can take all the laptops and go to work in Thailand for a month. In production, moving even to a neighboring city takes months. It is difficult, problematic, and costs a lot. You can’t make quick changes, you have to be less tolerant of failures. Investing in IT startups, investor may not earn money on 9 of them, and the 10th will give him x100. It is not the way it works in the manufacturing sector. In INDAX, 8 out of 10 projects must work according to planned norms and profitability; one project can go bankrupt, one more can work without abrupt and positive changes.
"In a startup you can get money for an idea, and in real business you get money for experience in the segment, for efficiency, profitability, markets. There are many more criteria for the production projects."
Do you see any positive news for Ukrainian producers, apart from expanding consumption?
– We have 600 million rich people with European passports nearby – this is a window of opportunity.With the broken logistics from China, we can offer our low cost products to the world, or we can place the capacity of foreign manufacturing companies in our country – this is also a window of opportunity.
We have been living for 30 years without having an opportunity of planning even for a year. Ukrainians are adaptive and ready for change. If we go to Europe, we will see a much calmer life there. They have stable wages, free access to capital, inflation for them – a strange beast that they last saw 10 years ago. Ukrainian entrepreneurs meanwhile need to change every quarter. And this is a great advantage. We need to adapt very quickly, to catch up with our neighbors, and we are ready for this marathon.
Ilona Makedon, UFuture’s press service