Two years ago, eastern Slovakia chemical maker Chemosvit established a branch operation with the Ukrainian company Luckplastmas to obviate difficulties with imports to the former Soviet region. Although doing business in Ukraine has proven a struggle at times, Chemosvit still claims it was worth taking the risk.
In the last several years, the number of Slovak companies interested in the Ukrainian market has been constantly growing. In 1994, the trade turnover between Slovakia and Ukraine reached 7.5 billion Sk ($220 million), while in 1997 it amounted to 17.3 billion Sk ($509 million).
According to Ukraine's Ambassador to Slovakia, Vasil Fiťkal, Slovakia is one of Ukraine's most important European economic partners. "Slovakia is the only country with which we have annual government talks on business," said Fiťkal. "Thanks to these meetings many mutual problems have already been resolved."
Looking for customers
For several years, Chemosvit has been exporting over 70% of its production. In order to maintain its presence on the eastern markets that had been so important during the communist era, the company needed to establish an operation across the border. "Chemosvit's production capacity far exceeds domestic market demand, so the company has to export the majority of its production," explained Ján Olekšák, Chemosvit's Assistant Director and vice-president of Luckplastmas.
Eastern European countries have erected some strict barriers to imports, said Olekšák, so Chemosvit adopted the strategy of establishing enterprises in different countries to circumvent their import rules. "We also counted on the fact that it would be much easier to cooperate with existing Ukrainian factories than to found a brand new venture," he added.
Chemosvit started casting about for appropriate destinations for direct investment in 1994. The company talked to numerous potential partners with comparable production lines in Bulgaria, Belarus, Russia, and Ukraine.
Although several projects were considered seriously, the decision to choose Ukraine was taken after a government meeting in January 1996 and a declaration of full support from Jevhen Marchuk, then Ukraine's Prime Minister. "We knew what we were going into, there were clear privatization conditions in Ukraine," recalled Olekšák.
In early 1996, Chemosvit founded a joint venture with Luckplastmas and named it Luckchim. The Slovak part chipped in modern technology for polyethylene films, printing and special finishing, and conducted the necessary building modifications. Altogether, Chemosvit sank about $2.1 million into the venture. Luckplastmas brought factory halls, infrastructure and human resources to the deal.
Later, in November 1996, Chemosvit acquired a majority stake in Luckplastmas. "Before the end of December 1996, we already had 50% plus one share of Luckplastmas from the Ukrainian National Property Fund, and later gained a clear majority by buying another 32.3% on the stock exchange, " recalled Olekšák.
After a half-year delay due to lackadaisical construction firms, the company started to produce food wrappings and plastic bags in March 1997. "After gathering the necessary experience and checking on our partner, we went on to buy a controlling stake in Luckplastmas, which became the sole owner of Luckchim," explained Olekšák. Viktor Matkov, General Director of Luckplastmas, said that the joint-venture company was a remarkable step towards the improvement of Luckplastmas.
Human resources
Chemosvit tested several Ukrainian partners in its own plant in Svit in the east of Slovakia. The company hired a Slovak human resources agency to run psychological tests on Luck's entire management, from general director down to sales manager. "I think we were one of the first companies in Slovakia to apply these kinds of tests to such an extent," he said adding that it had been a good thing move, since some unpleasant facts were uncovered by the tests.
But the employees of Slovak Luckplastmas had to undergo more than just tests - Ukrainian employees had to be trained in all the technologies Chemosvit brought into the business. "We are going to educate management as well," said Olekšák.
According to Olekšák, Luckplastmas still lacks a sufficient number of qualified employees. "They don't have that modern kind of thinking and approach towards the business," he said. Matkov explained that after the split of the Soviet Union and the dramatic changes in the country's economy in the early 1990's, many Ukrainian enterprises were closed and people did not have a chance to adapt to the new conditions. "Their growth was blocked, and Ukraine now is like an unploughed field," Olekšák added.
Mutual relations between Slovaks and Ukrainians, Olekšák said, tended to be very good. "Ukrainian people are open and honest, they want to work," he said. "Obviously, some employees will have to be dismissed, but most of them are very adaptable." Matkov, however, was less enthusiastic, saying that " relations between us are mostly professional. But there is absolutely no problem in cooperation with the Slovak partner."
Investments and revenues
In 1996 and 1997, Ukraine had a 6.3 % share on Chemosvit's total exports, up from less than 3% in 1995. Even during the communist era, Ukraine was one of the biggest importers of Chemosvit's products. "It is also easier to enter the Russian market from Ukraine," said Olekšák.
Chemosvit's major investments in its Ukraine operation should be completed by the end of the year. The planned investments include modernization of the two main production lines, and are expected to begin producing returns within two years. Luckplastmas produces not only for the Ukrainian market, but also for all European countries. "Thanks to the new modern technology at Luckplastmas, our products match Chemosvit's quality, thus meeting West European requirements," explained Olekšák.
Chemosvit's investment strategy has been to pour money into the production of polyethylene and polypropylene-based films used as wrapping in the food industry and for condenser production in the electronics industry. At the same time, the company is committed to overhauling other existing capacities. According to its contract with the Ukrainian National Property Fund, Chemosvit is obliged to invest a total of $4 million into Luck before 2000.
"Since the existing foil-making lines are outdated and cannot reach the quality we need, we will have to spend several times more to modernize them," said Olekšák. In addition to money, he continued, Chemosvit also had to supply the necessary know-how, to re-organize the management system and the sales and financial operations, and to create a functional information network. "And it's not as if we could expect a return on all these investments within three or four years," he said.
Problems
Olekšák said that the state administrations of both Slovakia and Ukraine were still passing laws that hindered potentially successful businesses. "When we first came to Ukraine, we were shocked by the country's lousy legislation," he said, "but after last year's experiences in Slovakia, I would now say the two countries do not differ greatly in this area."
Another big problem, according to Matkov, is the border crossing between Slovakia and Ukraine, where many annoying factors stretch waiting times beyond reasonable limits. Chemosvit and Lucplastmas both say they have experienced bizarre and unconventional interpretations of existing laws during roadside checks. "Ukraine's customs, import and other laws and regulations are often perplexing and vague, and they don't differentiate between the character and nature of merchandise," explained Olekšák. "There are also many problems with product certification, as well as the various problems every company has," added Matkov.
But the main problem remained the widespread insolvency of Luckplastmas's customers. Olekšák said that many customers take delivery of the company's products, use them for their own purposes, but then refuse to pay. "The worst offenders are schools, hospitals and the various state administration institutions that suffer from insolvency," Olekšák added.
"Sometimes it seems to me that the Ukrainian business vocabulary doesn't include the phrase 'deliver on time'," said Olekšák, adding that sluggish delivery companies had been responsible for dragging the reconstruction work out by an additional six months. As a result of these problems, Chemosvit had to postpone the launch of its foil production to the second half of 1997. According to Matkov, "the reconstruction was taking a little bit too long, but this was due mostly to the [Ukrainian] companies that performed the reconstruction." In its dissatisfaction with the Ukrainian contractors, Chemosvit brought in a Slovak construction company to finish the work.
Olekšák concluded, however, that "despite all the problems, anyone who wants a cut of this huge and unsaturated market in the future must simply be here physically. This is an investment for the next millennium."
Nestled in the heart of Ukraine's Volynkaia region., Luckplastmas is located in Luck, a town of 250,000 that lies 450 kilometers east of the Slovak border. In 1990, the company employed around 2,500 people, but since December 1996, this number has dropped to the current 950 employees.
Chemosvit is currently planning production of plastic cups and rubber-coated rollers. "We would like other companies to join us and find their place in our factory, because there are many opportunities here for businesses," said Olekšák. He stated that companies could benefit from such advantages as a fully privatized factory with complete infrastructure. "We have some activities already in progress, and some contracts will be signed in the near future," explained Matkov.
