Ukraine’s West Attracts Electronics

UZHHOROD, Ukraine -- A major international electronics manufacturer has launched construction of an electronic components plant in western Ukraine in a move that looks to capitalize on Ukraine’s inexpensive labor, tax breaks and the huge consumer market located next door in the EU.

The move could be a step toward turning Ukraine into a leading regional hub for the supply of electronics products, on par with Asian electronics manufacturing giants, but some market experts say the Ukrainian authorities are still doing too little to provide foreign electronics producers with enough incentives to enter the country.

United States based Jabil Circuit, a global designer and manufacturer of electronics components for diverse industries, announced Oct. 2 that it had launched the construction of a 26,000-square-meter electronic components plant in the western Ukrainian city of Uzhgorod.

The facility, which Jabil Circuit said will employ up to 1,500 highly qualified Ukrainian specialists, is to be located in the Transcarpathian Special Economic Zone (SEZ), which enjoys tax and custom duty breaks meant to stimulate economic growth and business development in the region.

The new plant will represent a significant addition to the company’s existing production capacities in Uzhgorod, where it already employs 940 workers at two facilities. Jabil Circuit has been renting these two facilities since December 2003.

Jabil Circuit plans to put its new plant into operation by the spring of 2007.

“Our intention is to first develop a high-tech park in Ukraine in order to build a fully integrated design and manufacturing solution line for our worldwide customers in the automotive, consumer and telecommunications industries,” Philippe Costemale, general director of Jabil Circuit Ukraine Ltd., told the Post Oct. 17.

Costemale said that Ukraine’s skilled, cheap labor force, the short export distance to the rest of Europe and the availability of raw materials, could easily allow Ukraine to develop as a large electronics supply base, and potentially turn the country into a leader on the world electronics manufacturing market.

“But the clock is ticking, and this will not happen if appropriate legislation is not put into place to facilitate investment,” he said.

According to Costemale, the new leaders in the electronics manufacturing industry, such as India, Malaysia and Brazil, “are developing appropriate investment conditions to successfully attract high-tech investors that manufacture for export, and they combine that attractiveness with having a huge domestic market.”

He said that many global high-tech industry leaders have visited Ukraine in the last several years to consider investment in the country.

But “most of them have been discouraged by the lack of responsiveness from the Ukrainian authorities to provide the appropriate customs regimes and tax incentives similar to those existing in Central European countries.”

According to Costemale, frustrated by not receiving a simplified customs regime from the Ukrainian authorities, a lot of investors who were considering manufacturing electronic components for export in Ukraine froze their projects in the country or reoriented them to Romania, Bulgaria or Russia.

He said that most other global electronic products manufacturers operate in the U.S., Europe and Asia.

Singapore-based Flextronics International Ltd. is Jabil’s only other competing foreign electronics manufacturer in Ukraine, according to Costemale.

Petro Reminets, the general director of an electronics plant that Flextronics is putting up in the same SEZ where Jabil is building, agrees that Jabil is his company’s only competitor.

Flextronics started building its electronics plant in the west Ukrainian town of Mukachevo in 2004, but construction works were frozen due to the government’s temporary cancellation of the special economics zone only to be restarted several months later.

According to Reminets, the facility will launch operations before the end of 2006, employing more than 2000 specialists.

He told the Post on Oct. 23 that the new Flextronics plant will produce components for such international companies such as Philips, Epson, Nokia and others, adding that all of its production will be exported to Europe.

Volodymyr Prykhodko, the general director of the Transcarpathian Regional Investment Agency, which promotes investment projects in the region’s SEZ, said that Jabil Ukraine has exported “hundreds of millions of dollars” worth of its products from Ukraine to the EU.

He said that Jabil Ukraine has already invested $29.5 million in Ukraine for construction of its new plant in Uzhgorod and plans to invest a total of $45 million to build a second plant that will employ an additional 2,500 people.

“This is a solid and transparent investment,” Prykhodko told the Post.

Jabil representatives, however, refused to provide the Post with exact sales figures, citing commercial confidentiality.

Like Costemale, Prykhodko said that Ukraine is capable of becoming a production leader in the market of electronic components.

He said that Jabil Ukraine currently imports inexpensive input components from abroad and exports very expensive output to the EU.

“Very expensive products are being manufactured by Jabil on the territory of Ukraine,” said Prykhodko.

He also said that the high educational qualifications of the indigenous labor force and proximity to European markets could give Ukraine an advantage over other, more distant regions where electronics are produced on a massive scale.

Citing “China, for example, which is very distant from the European market,” he said.

“For instance, roughly 90 percent of a mobile phone’s body is produced by Jabil in Ukraine, after which it takes only two days to deliver the goods to Finland, the Netherlands or anywhere else in Europe for final assembly as the most popular brands, like Nokia, Siemens, and so on.”

According to Prykhodko, it is unfortunate that the Ukrainian government has no policy to stimulate the domestic electronics market or the development of Ukrainian electronics brands.

Costemale said that for manufacturers that export 100 percent of their products, VAT and customs duties should be suspended for a minimum of 180 days for the temporary import of electronic components that are used for the production of the finished or semi-finished products made in Ukraine.

He also said that imports of manufacturing equipment should be fully exempt from customs duties, “because high tech requires constant investments.”

Customs duties for electronics exports, currently at 0.2 percent of a product’s value (the same as for imports), should also be canceled, he said.

According to Costemale, as of now Jabil is not enjoying any of the above benefits, except for the right on VAT suspension for 90 days, which is granted to all the businesses operating in SEZs, as per a Cabinet resolution of 2005.

However, Costemale said, even the VAT suspension now enjoyed by Jabil involves a great deal of red tape, and every export operation demands approval from the tax authorities, banks and other bodies. “We can put up with this while we are exporting our products on a relatively small scale. But when we start exporting on a large scale, such bureaucracy will be impossible for us to deal with,” said Costemale.

“Two world leaders in electronics manufacturing, Flextronics and Jabil Circuit, have decided to invest in new capabilities in Ukraine,” said Costemale. “Their success can send a very positive signal to the international investment community.”

Jabil provides electronics design, manufacturing and product management services to global electronics companies such as Phillips, Nokia, Hewlett-Packard, IBM and others, and operates production facilities in 20 countries, employing a workforce of around 65,000.

Source: Kyiv Post