KYIV – Companies from Germany, the locomotive of Europe, are investing more money in Ukraine and are expanding operations deeper into the nation.

Two thirds of companies taking part in a survey of the new German-Ukraine Chamber of Trade and Industry say they are expanding investments in Ukraine this year. Answering this chamber survey, 78% of the companies see ‘clear conditions’ for growth in Ukraine.

German Factories Migrate toward Ukraine’s Center

At the same time, labor shortages in Western Ukraine are pushing German manufacturers to open factories further east from the EU border.

“Ten years ago, they wanted 30 km from the border for quick logistics,” Alexander Markus, chairman of the chamber, said of export-oriented companies. “Now brain drain is becoming a problem. Visa free travel is good for Ukraine, but let’s see what this means for the labor market.”

He cited two German auto part manufacturers that are building factories in central Ukraine.

In 2005, Kromberg & Schubert opened a factory in Lutsk, 100 km from the Polish border. The company employs 6,000 workers in Lutsk. But when it decided to build a second factory in Ukraine, the company chose Zhytomyr, a five hour drive from the Polish border. The factory opened there last year. It now employs 2,000 people at the new plant. With a combined workforce of 8,000 employees, it is the biggest German employer in Ukraine today.

President Petro Poroshenko breaks the ice with female employees at inauguration last October of the new Kromberg & Schubert auto parts factory in Zhytomyr. (UNIAN/Mikhail Palinchak)

Similarly, when Leoni opened its Ukraine factory in 2003, it chose Stryi in Lviv Oblast. That auto parts factory now employs more than 6,000. This summer, Leoni opens its second factory, in Kolomyya, Ivano Frankivsk Oblast, three hours east of Stryi. In 2018, they plan to employ at least 2.000 people there.

With 43,000 Ukrainians now working in international auto parts factories, every second or third new German car contains Ukrainian parts.

Ukraine Needs to Promote its Strengths in Germany

Markus said that Ukraine should leverage this little known relationship to promote investment here.

“Ukraine need to develop its own profile through the cluster development approach – what are our strengths? where are we good?” he said. In the Chamber survey 56% of companies called Ukraine’s current economic environment ‘good’ or ‘very good.’ Moreover, almost two-thirds expect an increase in turnover this year.

But, without positive promotion, Ukraine’s image is defined by negatives, largely the war and corruption.

“There is a lot of anti-Ukraine news in the media,” said Markus, saying this keeps investors away. “How many concrete inquiries from investors do I get? the kind of investor who says ‘I am thinking of Ukraine, Macedonia, Mexico?’ About one a month.”

From his office behind the National Opera, Alexander Markus, chairman of the German-Ukraine Chamber of Trade and Industry, sees established German companies expanding here, while newcomers face board resistance back home. (James Brooke)

Ukraine Exports to Germany Shift

Partly due to the new free trade pact with the European Union, partly due to Kyiv’s loss of the Donbas, Ukraine’s exports to Germany have shifted from heavy industry to light industry.

In 2012, 29.2% of Ukrainian exports to Germany were metallurgical products (primarily raw steel). In 2016, the main sectors were automotive components (24.7%) and agricultural products (10.7%). Metals fell to third place (9.6%). There were closely followed by two other growing sectors -- ready-made clothes (9.2%) and processed food and feed products (7.6%).

"Today we see not only positive development of economic relations between Ukraine and Germany, but also the apparent shift of Ukrainian exports of energy-intensive heavy to light industry,” said Markus. “Ukrainian businessmen are able to produce high-quality components for cars, shoes or dresses.”

The opening last October of the Chamber, formally known as Auslandshandelskammer, or AHK, is one of several initiatives to promote German investment here.

In Berlin: Ukrainian IT and Renewable Energy

Last week, in Berlin, a forum on renewable energy in Ukraine was held at Ukraine’s embassy.

Ukraine needs 12 billion euros in energy investment by 2020, said Serhiy Savchuk, head of Derzhenerhoefektyvnosti, Ukraine’s state energy efficiency agency. He said he had a list of 45 projects with a total potential investment of 700 million euros that "are ready and waiting for partners."

This week, Wolfram Rehbock, a German lawyer based in Kyiv, is holding an IT promotion forum in Berlin, Discover Ukraine 4.0.

In the tortoise and hare race with Russia, Ukraine is pulling ahead in exports of goods, said Markus.

“The German Association of Electronic equipment manufacturers ZVEI stated, that Ukraine already in 2013 exported to Germany two times more electronic goods than Russia exported to Germany,” he said. “In Ukraine, more manufacturers are integrated into the Western value added chain. In Russia, manufacturing is only for the Customs Union market of Russia, Kazakhstan, Armenia and Belarus.”

For comments and story ideas, please contact UBJ Editor in Chief James Brooke at james.brooke@theubj.com

Slider Photo: Worker monitors production at the new Kromberg & Schubert auto parts factory in Zhytomyr, while President Petro Poroshenko tours the plant last October. (UNIAN/Mikhail Palinchak)