Before the crisis of 2014, Oleksandr Hnatush had for 10 years been importing yarn. But because of political and economic upheavals, the business became unprofitable. Instead, Oleksandr and his partner have launched their own factory under the VIVCHARI brand, and began to export. An MC Today correspondent, with the support from UopenEU project of the EU Delegation to Ukraine about the prospects and advantages of the free trade area between Ukraine and the EU, asked him about how his company was able to enter the European market in a short time and establish trade with the EU.
We launched our business because of crisis
I first began to think about my own yarn manufacturing business some ten years ago, but back then, the Ukrainian market was swamped with imported products with which we could not compete. Since 2003, me and my partner have been in this business, too, bringing yarn from Germany, Italy and India and selling it wholesale in Ukraine.
By the end of 2014, because of the crisis in our country, our sales declined twentyfold. We had two options to choose from: accepting an offer from our foreign partners and joining the company as their employees in Italy, promoting their products in CIS markets, or taking a risk and launching an own manufacturing business.
We calculated that now, because of the surge in exchange rate, the Ukrainian-made yarn would cost much less than imported analogs, and therefore, the business promises to be profitable. Especially since after ten years as entrepreneurs, we didn’t want to work for hire. So, we decided to start manufacturing yarn ourselves.
How much launching a yarn manufacturing business costs
In early 2015, we registered the VIVCHARI trademark and opened a sales office in Kyiv. The manufacturing facilities were built closer to sources of raw materials: we make wool yarn in the Odesa Oblast, and cotton and flax yarn in the Rivne Oblast.
We looked for wool processing and yarn production equipment among used machinery, even buying some spinning machines at the price of scrap metal. On the average, one machine cost us some 10-25 thousand hryvnias.
It wasn’t easy to find specialists who knew how to operate yarn production equipment. Unfortunately, graduates in our country tend to choose economist and other office professions, while applied specializations are not considered prestigious.
The youngest turners we were able to find were 57-59 years old.
In total, we spent close to 300 thousand hryvnias to buy equipment and first consignments of raw materials and to open a sales office. In the second month of operation, our business began to pay out and generate sales revenues of 500 thousand hryvnias per month. The first profit amounted to about UAH 10,000-15,000.
Before 2014, most our customers were “analog”, but today, they gave way to the “digital generation”
The most difficult year for our business was 2017. It was when the consequences of the 2014-2015 crisis made themselves felt: individual savings have probably exhausted, resulting in declining purchasing capacity of people. Then we realized the miscalculation we made in the beginning, assessing the market too optimistically and not being prepared for declining demand. That year, our sales dropped by 25%. But “the bottom” is already behind: in 2018, sales are growing again, and the market gradually comes back to life.
Our first customers were our partners from the previous business venture, to whom we were selling imported products: owners of small stores and manufacturing enterprises. The most difficult part was to convince them that the quality of Ukrainian-made yarn may not be inferior to that of foreign make.
The search of new clientele in our business has its specifics: this market is quite conservative. The initial customer base we put together during 2003-2014 was rather “analog”. These are people of over 50 years of age, and there were instances when a response to an email would come a year or a year and a half later. But the customers we gained after 2014 were of the “digital generation”, and the Internet as a promotion and communication channel works very well with them.
Nevertheless, personal meetings and contacts established at trade fairs are very important in our industry. During a year, we visit about six events of this kind, presenting our products.
We began exporting yarn six months after launching production process
Having established the production and sales in Ukraine, we began thinking about exporting our yarn abroad. Our first foreign partners were Ukrainians from Spain and the Czech Republic. Seeing a new manufacturer appearing in Ukraine, they approached us themselves and proposed to become distributors of our products. That was how we made our first export shipment, six months after launching production process.
Later, we started to look for customers ourselves; like in Ukraine, we establish contacts at trade fairs, send out emails with an offer, and then mail samples. Sometimes, we travel on business and present our products in person: a two-week trip to the Baltic States brought us several new customers. The easiest of all is to do business with “foreign” Ukrainians: there are no problems with the differences in mentality.
Today, 20-25% of our products is exported, and this figure is gradually increasing. We do business with partners in Austria, Spain, Moldova, Poland, Czech Republic, Estonia, Latvia, Lithuania. We work on the one hundred percent prepayment basis: after a customer receives samples and decides to make a purchase, we invoice him, and after receiving the payment, make the shipment.
The biggest demand for wool yarn is in northern countries. In Estonia, for example, summer begins in July and ends in early September, and for the rest of the year, people need warm clothes. Estonians love everything natural: yarn from uncolored fibers or dyed in natural colors. And bright colors are popular mostly in kid’s clothes.
Southern countries prefer flax and cotton, but wool is in demand, too. For example, highland regions of Spain have quite cold winters.
Export difficulties lie on the Ukrainian side only
In the past 3-4 years, requirements to export-import operations with EU states were simplified and liberalized. For example, after the EU-Ukraine Association Agreement was signed and the free trade area came into effect, we no longer have to apply to the chamber of commerce and industry for a certificate of product’s origin. It expedites the shipment process by two weeks.
But difficulties and rudiments of bureaucracy still remain. The NBU’s foreign exchange policy is beyond my comprehension: to document a consignment worth €3,000-4,000, one invoice is not enough – they need a full-fledged contract. In this respect, a telling example is Estonia, where all transactions can be done electronically, and that’s what we should strive for.
The more simplifications will be in place, the better small and medium-sized businesses will feel. In our country, there are many home-based and family enterprises making ceramic dishware, décor items, homemade textiles, decorations, garments.
But without education in economics, they have almost zero chances to start exporting, all because of the difficulties in communication with a bank and doing the required paperwork. Moreover, all these difficulties are not on the EU’s part but on the part of Ukrainian legislation.
The prospects of Ukrainian goods in the EU are rosy. Ukraine has all chances to become a site manufacturing goods for Europe.
Firstly, the EU has customs limitations for Chinese-made goods. Secondly, we have an excellent geographic location: logistics from Ukraine are much less expensive than deliveries from China. We have both energy and human resources. The most important thing is for the government not to steer off the existing liberalization course.
The original article was published on MC Today