Alexander Lopatin, investor and founder of the American-Ukrainian LED Lighting solutions company, ITW Systems, shared the key lessons of doing business after 10 years of work in Ukraine.
Business in Ukraine is an experiment in which a sense of humor and a willingness to counteract unfair competitors is required. What 10 lessons can you learn from it?
1. Adventurism and a sense of humor are a must when starting business in Ukraine.
Business in Ukraine is an experiment. When my Ukrainian partner and I launched a startup in Ukraine in 2010, it was a rather risky undertaking. After all, at that time, the issue of energy efficiency was a novelty in Ukraine.
In the course of doing business, we have faced both unfair competition and an overly complicated administrative system (lack of a transparent legal system and guarantees of return of your investment, or at least predictability of what may happen in the near future).
Over the period of the company’s operation in Ukraine, the governing power has changed three times and the rules of the game have changed at least three times. Sometimes only the spirit of adventurism and sense of humor held us from abandoning doing business in Ukraine. Unpredictability is one of the most pressing problems here, both 10 years ago and today.
It is always a leap into the unknown, which is very risky for business because predictability and clearly defined and understood rules are some of the key criteria that define the attractiveness for investments, along with a system that guarantees the rule of law, a degree of business and investment protection, and fair and just competition.
2. Support for domestic business is a myth, still far from reality
In Ukraine, businesses, especially small- and medium-sized, must rely primarily on themselves. The pandemic situation is a great example of that.
Besides the lack of timely actions by the government to effectively support business during emergencies, there is also a huge tax burden, lack of loyalty programs and the like. In European countries and in the United States doing business is simplified - this applies to both economic and administrative aspects. Giving certain privileges to local enterprises enables them to create new jobs, develop new business and local economy, which results in replenishing the local budget.
And it makes sense. It is not corruption, but rather real support of the domestic businesses by the state. There is a lot of talk about it in Ukraine, but not everything comes to fruition.
3. The only "constant" for Ukrainian business is the tax burden
For the first few years we have invested about $ 1,500,000 in our company.
Since then and until recently, we have reinvested almost everything back into our business. My American partners and I have no other project where we have been only reinvesting for so many years without receiving any dividends, to support the expansion and growth of our business.
In many Western countries, if profit is reinvested, it is not taxed because the money that went back into business supports the country's economy growth. It goes towards job creation, therefore, boosting consumer spending and, in turn, bringing more tax revenue to the treasury. Also involved is the purchasing of new equipment, on which is paid 20% VAT, and the like.
In Ukraine, you are obliged to pay income tax, even if you reinvesting all profit in your business. There are talks about tax on profit distribution as an alternative to tax on unrealized profit from business operations. Again, so far only talks.
4. Getting a credit in Ukraine is a luxury
In the United States, businesses have access to loans at low and very attractive interest rates. For example, there are many different programs to support small- and medium-sized businesses with credit rates as low as 2.28-2.83%.
Often, part of the funding is either provided by or backed up by the government’s guarantee. In Ukraine, credit rates for businesses can reach 30%. In February 2020, the "Affordable loans 5-7-9%" program launched in Ukraine as a new government initiative. But in reality, from 700,000 Ukrainian entrepreneurs, only 2,500 were able to get a loan as a result of this program. The system is so bureaucratized that it is practically impossible to fulfill the formal requirements of the banks.
Fortunately, we managed to grow our business without having to resort to getting loans from the Ukrainian banks and now we are completely self-sufficient.
5. Become a serious industry player - prepare for unfair competition
Unfortunately, in Ukraine, all methods of competition (including “dirty” ones) are employed.
Regretfully, we have experienced it for ourselves. When my American colleagues and partners ask me how I feel about such "attacks" by competition against my company, I say, that in Ukraine when competitors have to resort to such methods, it indicates that you have become a serious player.
From the very beginning, our goal was to create a long-lasting, sustainable business. This requires a reliable and high-quality product and an impeccable company reputation. I am often asked if we have earned much over the years since the company's inception.
A lot - we have earned a reputation of a company with the right values that is a leading manufacturer of reliable and high-quality energy-efficient solutions. I can understand why this does not suit our competitors.
The most disturbing thing is that while business practices are often unfair, businesses in Ukraine do not have any effective working means to protect their reputation at the legislative level.
6. The media can be a tool in the hands of competitors
Our company became a target of an information attack. One of the central TV channels broadcasted a program containing unsubstantiated and untrue facts about our company and product. At the same time, all of our attempts to present our facts and arguments were simply ignored.
Through our sources, we learned that that program or, rather, dirty information campaign, was paid for by our competitor. Unfortunately, this practice is quite common, and there are no effective methods in Ukraine to counter or prevent the dissemination of false information in Ukraine. Similarly, there are no effective means to protect business reputation from false accusations.
Perhaps, this should not surprise anyone, because some of the leaders of Ukrainian “dirty” PR industry are now holding key positions in government.
7. Participation in business associations makes sense, but not in all of them
It is unlikely that a voice of one company will be heard but when there are dozens or hundreds of them, it is another story. Business associations and organizations are the "unified voice" that is heard and taken into account at the highest level.
Every now and then, partners share complaints or express doubts about the advisability of joining such organizations. This is indeed a fair statement for many public associations.
But based on our experience, I can say that it is the support of the American Chamber of Commerce in Ukraine, the US Embassy and US Congressmen, that has helped us fend off attacks and solve a number of business problems through their active involvement in dialogue with the government.
Of course, in order for Ukrainian and foreign businesses to feel protected from ufair business practices and informational attacks, this should be regulated by the state at the legislative level.
Until this is implemented, companies can only count on support from a reputable and influencial business association.
8. Price is not the only important criterion - businesses are gradually beginning to give preference to quality over cheapness
Businesses are often trying to stay afloat by keeping the prices low. But the low price of the product is often achieved by cutting cost on virtually everything - on specialists, materials, contractors. The quality of the product reflects the quality of the company.
We initially did not want to be in a market segment where low cost is the most important criterion for choosing a product and supplier, so we chose one where quality and reliability are important.
The segment of lighting solutions in which we work is quite saturated, so it was not easy. At the beginning, it took a lot of effort to explain to prospects what they get by choosing our solution, and why it is advantageous and overall cost-effective for them.
Now, having hundreds of successfully implemented projects, we have excellent supporting arguments - the savings that our customers enjoy, as a result, speak for themselves. What is nice, is that the trend of recent years shows that business in Ukraine is learning to appreciate quality, rather than blindly chasing the lowest price. Yes, this trend is set by international companies, since for them price is not the most important factor in making a selection, but local entrepreneurs are gradually adopting this approach.
We have a number of examples where a customer first chose a cheaper solution, but when faced with problems of quality and reliability, came back to us. As they say, the stingy pays twice.
9. Ukrainians are able to conquer the world with their intelligence and hard work
Our company has about a hundred employees. These are production personnel, engineers, designers, back office, sales department - all Ukrainians. We did not have to resort to foreign specialists.
At the same time, we export our products to countries around the world and there have been no serious complaints about the quality. The Ukrainian workforce, and specifically those on our team, knows how to create a quality and innovative product. To get the job done, they are willing to work extra hours and can impress with their efficiency.
Ukrainian specialists are valued around the world, and the key problem for the country, in my opinion, is the outflow of personnel abroad and the risk of losing this colossal intellectual stratum.
It is a vicious circle - without loyal and transparent conditions for business, which is overloaded with taxes and bureaucracy, Ukrainian companies cannot afford to pay high salaries and to offer similarly attractive work conditions and opportunities to retain valuable workers, as companies can do abroad.
10. Investment attractiveness is a good but still unattainable goal
This year, when economic indicators have fallen, in part due to the pandemic, it is especially critical for Ukraine to create an attractive investment climate for international and Ukrainian donors, creditors and investors.
However, the main conditions for attracting investments are not the existence of another investment guide or a change in branding, but above all, it is the rule of law, fair competition, guarantees of investment, business and business reputation protection.
Businesses do not need “investment nannies”, but rather predictability, stability, security and normal working conditions. Then, business will develop and expand, the economy will grow, and the lives of Ukrainians will improve.
