Ukraine and the Cheaper Trap

October 17, 2006

On Friday, October 13th, Al and I had the pleasure of giving an all-day seminar in Kiev, Ukraine. It was the first trip for both of us.

Ukraine is a country of almost 50 million people, about the size of Italy, and it has enormous potential. The growth in the main city of Kiev is unbelievable. Everywhere you look there are construction cranes working on new building projects. With at least 50 at work in Kiev, we nicknamed it the U-Crane of Cities.

Ukraine is a big, sophisticated, highly-educated country just like Italy, France or Germany. But the GDP of the Ukraine pales in comparison to these other countries. What Ukraine lacks is not size, education or determination. What Ukraine lacks are strong global brands.

Look what Italy has done with fashion brands: Prada, Gucci, Versace. Look what France has done with wine and water brands: Dom Pérignon, Mouton Rothschild, Evian. Look what Germany has done with automobile and engineering brands: Mercedes-Benz, BMW, Braun. A country’s economic strength comes from its ability to build global brands.

That’s why globalism has been a boon for the smaller counties of the world. The global marketplace allows companies from these countries to build strong, narrowly-focused brands and sell them worldwide, thereby becoming big, powerful and profitable countries. Look what some smaller countries have accomplished with global brands. The Netherlands and Heineken. Finland and Nokia. Austria and Red Bull. Switzerland and Rolex. Sweden and Ikea.

Can you name one Ukrainian global brand? I can’t. Furthermore, Ukraine as a country has not yet established a position in the mind of the global consumer. What is Ukraine? The recent Orange Revolution did put the country on the world stage, but the subsequent poisoning of Viktor Yushchenko, the firing of former prime minister Yulia Tymoshenko and amnesty granted to Viktor Yankovych has given the revolution some setbacks. But as the political situation becomes more stable and less corrupt, the business community needs to work on building brands for the future.

Unfortunately in developing countries the business community focuses on becoming a cheaper source of labor for the brands of other countries, not building their own brands. While in the short term this approach can lead to an economic windfall, in the long term it can lead to stagnation. Sure, the country’s economy grows, but then wages rise and much of the work moves to countries with cheaper labor forces.

That’s the cheaper trap. In the short term, a country can be economically successful by building better products or services cheaper. But in the long term, companies eventually find other countries to do the work cheaper, leaving the country with little growth prospects and no brands on which to build a future.

If you are thinking what I am thinking, you are right. The cheaper trap is currently facing both India and China. Both countries are thriving by making high-quality products and services cheaper. But what both countries lack are strong brands to build for the future.

Sure, there are a few well-known companies like Tata and Infosys in India or Lenovo and Haier in China. But these are companies not brands. There is a difference. A strong brand must be narrow in focus and own something in the mind. The range of products that companies make in India and China is mind boggling.

A global brand also has to have a name that works in English, the second language of the world. While a global brand name does not need to be an English word, it does have to sound right and to be easy to spell for an English speaker.

Pschitt! lemonade from France is not going to make it as a global brand. Neither will Bimbo bread from Mexico or Daiwoo from Korea. Tokyo Tsushin Kogyo would never make it as a global brand either, but luckily the company changed its name to Sony. And today Sony has become the most powerful electronics brand in the world by pioneering such products as the transistor radio, the Walkman, Trinitron televisions and PlayStation game consoles.

But Sony has failed to keep its brand narrowly focused. As a result Sony has racked up a lot of sales, but not a lot of profits.

When your brand is unknown or has been weaken by years of line extensions, you are forced to sell on price. And when you sell on price, you don’t make much money. In the last 10 years, Sony has had revenues of $578 billion, but profits of only $9.6 billion or just 1.7 percent of sales. By comparison, the average net profit margin of the 500 largest U.S. companies last year was 6.7 percent.

So what can Ukraine do? Political stability is job number 1. And that is happening and improving everyday. The rise of strong, charismatic, determined free-market and anti-corruption leaders such as Yulia Tymoshenko are a great help.

Ukraine needs to establish its country brand in the mind and launch global brands to ensure its future success. While we were in town, the city was filled with Scottish men in kilts. Apparently there was a big futbol game. The Scots and the Ukrainians have a lot in common. Both have a history of struggle against dominating neighbors. The Scots with the English. The Ukrainians with the Russians.

To get everybody in the mood, maybe the men of Ukraine could wear orange skirts.