Story of Ukrainian company Ugears’ success in EU market

One fourth of all Ugears models are bought by Europeans. The EU is a market where sales of models are steadily growing. The director of the company told how he managed to create a product that is known all over the world.

In 2014, the Ugears startup began its journey on the crowdfunding platform Kickstarter. Today, it is a successful Ukrainian company with two hundred employees

At the moment, Ugears produces half a million models per year, bought by people aged 25+ years around the world. Everyone collects them – from grandchildren and granddaughters to old parents. “When we first released a wooden colouring model, I brought home 10 pieces. I did not hear my two daughters for two hours. So, I realized that the product will be successful,” says a co-founder of the company Hennadii Shestak.

Delo.UA talked with the head of Ugears about the business as is. A quarter of all models are bought in the EU states. And it is one of the markets with the steadily growing consumption. We discussed the requirements which the Ukrainian product must meet to be allowed entering the EU market, and how the business was affected by the cancellation of duties with the occurrence of the free-trade zone.

How many models does Ugears produce on a monthly basis?

It all depends on the model, since they are of different complexity, but we produce 55 to 60 thousand on average. Even though it is not the season, it still does not suffice to meet the demand.

And when is the peak period of supplies?

The last quarter of the year, when everyone buys gifts for the New Year and Christmas. Since December, there have also been active supplies to China because they are preparing for their New Year.

What share in your supplies do the European Union, America and Ukraine have?

The leaders in sales are the USA, China, Russia and England.

Ukraine accounts for 8 to 10%. North America, i.e. the USA and Canada, has 33%. We supply 25 to 26% of all models to the EU states.

One fourth of all Ugears models is bought in the EU states. Leaders are France, Germany, Holland, Spain and Austria.

One third of Ugears model sales fall on Russia, Australia, New Zealand and the countries of Asia.

Can you tell me how much did the sales of Ugears models grow last year?

The company’s turnover increased by 80% in 2017. But this is not that much compared to the previous years: before that, our turnover grew many-fold in annual terms. Two years ago, we grew by nine times.

Can you imagine what development sickness we experienced? Yes, we went crazy, I lived at work. We tried to meet demand, constantly hired new employees, very quickly involved them in work.

This year, I think the company’s sales will grow by another 30 to 35%.

How soon did you return the money invested at start-up?

In fact, very quickly. Somewhere in five months.

For how long one model is developed and produced?

Now we have 35 models. For the last calendar year, in particular from April 2017 till April 2018 we had 16 more. That is, we developed almost half of all our models during a year.

A period from the idea of a new model to its production launch takes approximately nine months. This is like to give birth to a child.

Each model goes through four stages, namely development, design, engineering work with files, adaptation to serial production. Then comes the development of packaging, instructions, general design. All this is done by different people, and all this takes nine months.

How do you control the quality of models?

After production, we check each model, every detail, every line.

Once we received a letter from a potential partner from Japan, and this, in my experience, is one of the most difficult markets in the world. He asked for our price list, and then said that the goods made in Ukraine cannot be so expensive. Like, such a high price can be for the goods made in Germany or, at worst, in Italy. But Ukrainian companies allegedly cannot produce goods at this price, because it implies a very high quality. We stopped the dialogue. But a few weeks later, he wrote us an excuse letter, said that he had bought our models on Amazon, collected and was pleasantly surprised by the highest quality.

For this reason, it was difficult for us to start, because it is a very negative attitude towards us because we are a Ukrainian company. Nobody believes in Ukrainian producers. In the first year of work, this was felt very strongly.

We were openly told that we were a dark country in the third world and simply cannot produce a cool and expensive product.

Returning to quality control, we had situations when, due to an error, the whole batch was thrown out and recycled so that models with a defect did not get anywhere. All the staff stood and cried. And, believe me, it was a lot of money, about EUR 25 to 30 thousand. But if we released this batch, then the mistake would have been repeated for the second and third time.

Do you personally test the model?

To be honest with you, I do not have time for every model. So many models are produced that I would have to sit for a month to test all of them.

Employees of Ugears, who are engaged in quality control, thoroughly know the drawings of models, they manually scan all the wooden plates – Ed.

Is it difficult to meet the European requirements for product quality?

The requirements are roughly the same in the prosperous countries of the “golden billion” (USA, EU states, Canada, Australia, New Zealand and Israel. – Ed.).

Among the key requirements in the EU are the requirements for mechanical compliance; they check that the model cannot cause injuries during assembly. Laboratory tests, biochemical analysis, radioactivity testing, and the test of heavy metals content are also conducted. In Ukraine, products are tested for the content of only 9 heavy metals, and in the EU – 19.

We receive certificates after passing the test for the quality label, which are accepted by the EU states.

We have certificates that confirm the quality for the US and the EU. At this moment, this is enough.

Permits are needed for each batch?

You need to get a certificate for production. If a company does not change the material, the production, then the certificate is valid for three years, if I am not mistaken. If the company changes something, it must notify about it. Specialists arrive, look, whether everything meets the requirements, give their opinion, and the production receives a new certificate. And all costs are incurred by the company.

One can get a certificate for a batch, but if the supplies are stable, then it is expensive. However, it is more difficult to receive a certificate for production. After all, with the certification of the batch, only the product itself is checked, and with the certification of production, production is also checked. It means that there are much more requirements.

Did you have to change something after the certification test?

There were recommendations, we listened. I will not say what exactly we changed, sorry, we have many followers who have chosen the way of copying us. Thus, we keep some things in secret.

Has anything simplified for the company after the agreement on the free-trade zone with the EU entered into force?

There are no duties, and it’s fine. We started exporting when they already canceled the duties. But earlier, they were about 10%. We export not only to the EU, but also to countries where duties are working for us. This is Russia, India, Mexico, countries of South America. The lack of duties in Europe makes the product more affordable, and it is easier for us to promote it on this market.

What is the difference in price for your models for the end consumer, depending on whether there are duties in the country or not?

I will say this: in the EU, there are really no fees, but there are higher costs and higher taxes there. Therefore, a retailer must make a larger markup. Therefore, the absence of the 10% duty actually helps us; it eliminates the high costs on taxes and so on. In turn, in India retail behaves more modestly, because there are fewer taxes and more options not to pay them.

The highest taxes are in France and Italy. I cannot imagine how our partners work in these countries. The most pleasant, from the tax point of view, are the Baltic states, Bulgaria, Poland, Czech Republic and Cyprus.

What is the price gap on the shelves?

In Ukraine, prices are understated about twice as compared with other countries. From the point of view of business, it is wrong. It is my tactical mistake as a manager. But on the other hand, I understand that if we raise prices, our product will be hardly affordable on the domestic market.

But because of this, we are forced to monitor our partners in Ukraine very thoroughly. After all, there were cases when private entrepreneurs, for example, from Mariupol, said that they wanted to sell our models in their online store inside the country. We sell at low prices, but the models are actually delivered to neighbouring countries, to the US, to the EU at a high price. As soon as we record such cases, we immediately stop co-operation.

What kind of wood do you use in the production process? Is it the Ukrainian wood?

We use birch (linden is also good for Ugears models, but it is more expensive. – Ed.). We do not buy raw materials in Ukraine, unfortunately. We do not have raw materials of the required quality. In Ukraine, the climate is slightly warmer than we need. We buy from our neighbours, where the climate is colder. Partly we buy in the EU, work with plants from the Baltic states, tried softwood from the southern states of the EU. There is cool material in Finland, but too expensive. If using it, we do not comply with our cost threshold.

I hope that in three months we will launch production of the provision of raw materials in Ukraine and we will satisfy our own needs at least by 50%. The premises, equipment for purchase are already being prepared. We will continue to import the wood, but we are going to process it, cut it into plates for the production of models.

The production includes 60 machines, which produce wooden models. In the near future, the company intends to purchase more – Ed.

How do you sell your models?

In other countries we have dealers and distributors. Dealer is the direct seller, it sells directly to the consumer. A dealer has its own online store or physical store, or a dealer trades through local trading platforms such as Amazon, Rozetka analogues, OLX and marketplaces. A distributor sells our models to its retail partners, for example, to supermarkets. It happens that in one country, for example, in the USA, we have both a dealer and a distributor.

If we consider Europe, then we have 20 partners there. There are partners who cover several countries, for example, Belgium and Holland.

How are you looking for partners? Or do they find you on their own as in the case of an entrepreneur from Japan?

Obviously, to earn, you need to have an interesting product. Dealers and distributors often monitor products and contact potential partners.

After the first campaign at Kickstarter, we received a number of proposals for cooperation. There are exhibitions too. There are three world exhibitions in which we participate: in Germany, the United States and Hong Kong. At exhibitions, they approach us and say that they want to work with us. If we do not have partners there, we start a dialogue. But, of course, we look at what kind of company it is, what is its experience. We do not work with amateurs, no matter what the money they offer.

What is the situation with competition?

We have many followers. But I’m calm about it. Competition does not allow relaxing.

On some markets, there is a struggle with Lego. We are becoming visible, and they are “hitting” us with guerrilla marketing.

We learn from Lego, but also want to “bite off” the market share, for sure.

Tell us about your partnership with Disney

We signed a contract and developed five models for them (four have already been approved by Disney. – Ed.). They gave samples, and we developed the mechanics of models. I have no right to show them to you.

For us, by the way, it is very important that for 22 years we are the first company which brand Disney agreed to leave on the packaging next to its own. We fought for it for a long time, even sacrificed part of the profits. This is very important for the recognition of our product and our country.

The first models will be shipped in September this year. And our models will be on the shelves of 700 Disney official stores in November.

Who came to whom? Was it difficult to persuade them to cooperate?

Disney knocked on our door. Negotiations lasted eight months, we needed to pass a fairly tough audit. They checked everything – the company’s financial statements, workplaces, interviewed employees without the presence of line managers. It was necessary to meet something about 400 requirements to pass the audit. And we passed it without a single remark. Auditors themselves, to put it mildly, were surprised.

Disney takes it very seriously.

The original article is published on Delo.UA under the communication campaign “Moving forward together”