Rocket Science in Kharkhiv

The first time I visited Kharkhiv, an industrial city in north-eastern Ukraine, was on 8 March 2000. I was implementing a sales audit of JSC Obolon Brewery, Ukraine’s largest drinks group, and I spent the day visiting customers and the Obolon sales office and distribution centre. It was bitterly cold, snow covered the ground, and the season was definitely not suited for beer.

Coincidentally, it was International Women’s Day, the first of the new millennium. At the hotel we were staying, a grim block in the outskirts of Kharkhiv, the hotel restaurant was packed with young couples dancing and celebrating. For a tired consultant thinking of home, it was just about the last thing to deal with.

What I remember most about this trip occurred in the hotel room. One of the windows was either broken, or hadn’t been insulated properly, and it was cold. Too tired to go back down 12 floors to a reception that was otherwise occupied, I decided to tough it out. Waking up the next morning, after taking a shower and getting dressed, I went to put on my shoes, which I had left at the foot of the bed. As I reached down to take the first one, a little grey blur jumped out and disappeared somewhere under the bed. It was a mouse! A little grey Kharkhiv mouse had apparently taken shelter in my loafers for the night, and was most rudely awakened by their inconsiderate owner who needed to start work in the morning. I still remember that cold day in March 2000: another story from the road.

Since then, I’ve been to Kharkhiv twice more, once for customer interviews in 2004; once for a due diligence study for the Kharkhiv Tile Plant, Ukraine’s largest ceramic tile factory, in 2007. It’s a city I’ve never really had time to explore, so I was really looking forward to my trip this week. My consulting company, Navigator, started a due diligence and business plan for the CIS leader in ball and roller bearings.

The first thing I decided was that, unlike the last trips, I would stay in a good, city centre hotel. After consulting TripAdvisor, I chose the Chichikov Hotel, located on Gogol Street off the central boulevard. The Chichikov is named after the protagonist of Gogol’s ‘Dead Souls’, a story of wealth and self-discovery in 19^th Century Russia. Apparently a staple of Soviet education (I had never read the book, but all my Ukrainian colleagues had), this book was the inspiration for the hotel, which was excellent in every respect. Modern, understated and casual, with first-class furnishing and cuisine, and attentive, considerate service by every single staff member encountered, the Chichikov will be our hotel of choice in Kharkhiv in the years to come.

The second thing I decided is that even if the schedule would be hectic, I would take some time to walk through the city’s historical centre. And I was glad I did. Despite its vast industrial heritage, Kharkhiv is a university town, with over 5 major universities and polytechnics in various disciplines of science and engineering. You see groups of people talking in cafes or on the street, discussing in a quiet manner which is totally foreign to Kiev or other major cities. Kharkhiv has one of the highest per capita populations of PhD graduates, well above the Ukrainian and Russian average.

The cafes are glorious: small but elegant, with excellent coffee and food, at a very competitive price—less than half Kiev or Athens prices. It’s rare to find a good cafe in Kiev, where pretention is often confused with quality. In Kharkhiv, you see little jewels strung out along the main street or tucked into quiet alleys.

WiFi is free, and available everywhere. People walk the sidewalks, speaking into mobile phones or sit in cafes, reading their textbooks, or tapping away on laptops. There are also some fantastic jazz bars—I wasn’t able to visit any this trip, but in 2007 I stumbled upon a jazz trio which was simply sublime. Next time!

The city shows the typical development of Ukraine after 2000. Buildings have been renovated; designer stores have opened; the city centre has been improved to the extent the Municipality’s limited budget allows.

There are some problems: the roads are among the worse I’ve seen, particularly in the outskirts of the city. Living standards are still low: prices are low because the average per capita income is lower than Kiev. But there is a lot going on—new factories opening, buildings being renovated, new projects launched.

Another major discovery on this trip wasn’t the city itself, but the company I was working in. This company is part of a larger industrial conglomerate, which recently decided to centralise its research and development function, and invest in this area. They reasoned that only by increasing the ‘intellectual value’ of their products to over 50% of total value could they compete with lower-priced Asian imports.

This is the first Ukrainian company I’ve seen, after working here in over 20 leading CIS manufacturers, which has a serious industrial R&D function. With over 200 of Ukraine’s best and brightest engineers and scientists employed on a full-time or project basis (including former designers of the Soviet Union’s ICBMs), the conglomerate has established clear research priorities, budgets, projects and return-on-investment monitoring.

And their efforts have paid off. One of the first new products out the gate was a new rail bearing specifically designed for the harsh conditions of railroad transport in the former Soviet Union. Working with their major customers, the R&D group developed a duplex bearing unit which increases the rated lifecycle from 350,000 km to 800,000 km, and provides improved properties against friction heating and wear. This product included joint research with Western equipment providers, including some of Europe’s top names in the field. This product has been patented, and now being tested in major customers.

I was really impressed. The last time I had the privilege of working in a company with a strong R&D function was at ABB in Sweden 10 years ago. To see this level of engineering in Ukraine, in the face of challenging financial conditions and a competitive environment marked by declining profits, was inspiring. This is exactly what European manufactures need to be doing more of: investing in basic and applied research, with a clear link between customer needs, corporate strategy and R&D priorities.

So, it was a great trip. Apart from the necessity of transiting through Kiev, Kharkhiv is a great place to do business, and a great place to relax after work (in the remote case this might be possible). And I finally got to meet a genuine, bona fide rocket scientist.

Good night Dnepropetrovsk!

My last night in Dnepropetrovsk. Our business dinner ended unexpectedly early, and I find myself in the hotel restaurant, reflecting on how things change-and how things remain the same.

The first time I visited Dnepropetrovsk was almost exactly ten years ago, at the end of November 1999, for a company named Ista Battery. Dnepropetrovsk was a different city then: freezing, grim, caught in the throes of the economic collapse following the Russian ruble devaluation. On Karl Marx Avenue, few stores had anything to sell. At the vast, crumbling Hotel Dnepropetrovsk, a 19-storey Stalinist hulk on the Dnieper river, there was no hot water on the upper floors, and the floor monitors cast a jaundiced eye on all our comings and goings. There were perhaps three restaurants worthy of the name in the entire city of over 1 million, and very few people had money to eat in them.

The snow came early that year, and the temperatures quickly reached freezing. A few Ladas and Zhigulis sputtered and coughed their way down the streets; the world was a perpetual state of grey. Crumbling factories, crumbling apartments, crumbling hopes.

Fast forward to November 2009, and it’s a different place. Karl Marx Avenue is lined with expensive stores: Escada, Ermenegildo Zegna, Levis. Good restaurants are on every block: Nobu, Pastoral, Paris, Charly, Kadri. Wifi connections are everywhere. New shopping centres and office blocks have been built, their marble and granite brightening the crumbling Soviet-era apartments. People are better-dressed, better-fed, optimistic.

Despite the current crisis, there is a feeling of potential in the air. Things are tough, but they will get better, and eventually things will normalise to the point where Ukraine is indistinguishable from other European countries, at least for the young. Indeed, for most of them, this point has already been reached.

My client this time around is another manufacturer. In just 8 years, they have built a plant which is among the largest and most modern of its kind in the world. All-new Western machinery. A sparkling factory floor. Top quality products. A capacity for 7 million units per year. To most Ukrainians, manufacturing comes naturally, instinctively. Their thinking is Cartesian and linear. Their ability to plan and improve a manufacturing process is unlimited by tradition or custom.

Nearly every Ukrainian oligarch I meet begins our meeting with the line: “In the next five years, we will be one of the top 10 companies in Europe.” Many of them have actually achieved this. Some of them grow complacent: they drive around in black Porsche Cayennes and spend their money on extravagance. But most of them buckle down. Seven million batteries is just a start: the next step will be another plant for industrial batteries. Then a lead recycling facility. Then renewable energy solutions. There is no limit to the progression. The only limits are of time, capital and human resources.

Sitting in this hotel restaurant, I feel rather humble. In Greece, my country, we are still arguing about the basics. Should university education be public or private? Should the government re-nationalise ports and telecoms? Should an investor dare to build a soccer stadium and mall in the wasteland of Votanikos? Should a 5,000-room hotel complex be licensed on a barren peninsula in Crete?

Looking at it from the perspective of this city, we are frivolous and spoiled. We complain about forest fires, yet every day drivers toss their cigarette butts from their cars. We expect other countries to admire our history, but seem to have forgotten that our historical achievements required sacrifice and self-discipline to achieve them. The notion of arête, of the search for excellence, has largely been forgotten. Instead, we spiral into mediocrity, into the drone of morning TV and failed expectations, empty words in a hollow echo chamber.

This city started only a short time ago from nothing. Generations of Soviet planning had turned Dnepropetrovsk into a vast zone of grey, crumbling concrete. People were disciplined to follow orders. The concept of market cost or market price had not meaning. Just 20 years after the fall of the Berlin Wall, this city has made tremendous progress. Immeasurable, if compared with our western standard of living.

And a small group of business entrepreneurs built one of the most modern factories in the world from scratch, in 8 years, from nothing, and show no signs of slowing down. I have two more meetings tomorrow morning, then sprint for the airport and the long flight home. I return to Greece inspired, with different expectations, and a higher standard of achievement than I had when I left just a week ago. Of all the places to find inspiration, I found it in this industrial city on the banks of the Dnieper River, 10 years after I first arrived.

Good night Dnepropetrovsk!

Back from Rubezhnoye

I returned last last night after a gruelling 13-hour trip back from the corrugated packaging factory in Rubezhnoye, Ukraine where I was working all week. It’s a client we’ve worked with since 2002, and this time my colleague and I were reviewing the implementation of a EUR 151 million business plan, and helping out with a large procurement contract.

Rubezhnoye is a small industrial town located about 150 km NE of Donetsk, near the Ukrainian-Russian border in Lugansk Oblast. It’s not like other cities in Ukraine, where you can find WiFi, western cafes and restaurants, and all the comforts of home. There is no internet, except for a highly overloaded satellite uplink which serves the 50-odd managers in the plant. Accessing any kind of news is impossible, and walking down to the newsstand to buy the Financial Time or Herald Tribune is an option which simply doesn’t exist.

So, after a week without news, I returned to Athens to find – NOTHING HAD CHANGED! Republicans still squabbling with Democrats about the $ 700 billion credit bailout, Obama still sniping away at McCain, who was sniping back: the only news was about whether they would be sniping at each other from the same room, since there was some doubt as to whether the first debate would take place. How anyone can take the two US Presidential candidates seriously on the financial crisis when they’ve taken massive campaign contributions from investment banks and Fannie Mae is beyond me.

In Greece, the Vatopedi scandal, involving an illegal land claim by the Vatopedi Monastery, followed by an even more illegal land swap, was still smouldering. Unfortunately, it looked as though ultimately no one was responsible. I have the feeling that the media in this country are already looking for the next big issue.

In Ukraine, there was some news, but again nothing really new. The Orange coalition had collapsed the week before. My estimate is that Iulia Timoshenko and Viktor Yanukovich will form a caretaker government until sometime next May or September, when conditions will be ripe for an election. Everyone party is scurrying around to raise cash to finance this election. The Gazprom gas price hike looms over everyone, yet nobody knows exactly what will happen – except that most likely, some Ukrainian politicians (and Gazprom) will make money, and Ukrainian citizens and companies will pay for it.

In short, it’s business as usual. Crooked government in the US, Greece and Ukraine. Dishonest or inept politicians across the political spectrum. The intersection of money-rich campaign donors (and even monasteries!) bribing politicians, so they in turn can make yet more money. A depressing state of affairs.

Yet in Rubezhnoye, the real economy continues at speed. A new packaging plant and paper machine are being built that will increase output, creating new jobs and enabling Ukraine to produce new packaging materials, supporting the movement of goods and economic growth. My client pays its taxes, pays its workers competitive salaries, and contributes to the environment: over 80% of packaging material is wastepaper, gathered from recycling points across Ukraine and Russia. Starbucks and Pizza Hut and WiFi may be missing, but life goes on without them, and pretty well, I would say. If only someone could do something about these politicians….