Ukraine and the Cheaper Trap

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.

Comments

[V-+a%S(p#E*rsT=`hE..]gra_Te[]

Laura, your genius and writing skill is simply breathtakingly beautiful. And I like that new photo of you on your blog.

I agree with everything I have ever heard you and your dad say.

I need to come here more often. You are so right about brand as position in mind. To me, "brand" is what is burned into the brain as you use a product to solve a problem or enhance a life.

If you drive a Cadillac and hate it for some reason, no branding advertising is going to change your mind about Cadillac.

Brand must be based on innovation and high usability. Brand cannot be based on price, except in cases like Walmart I suppose.

[Bodia]

I'm from Ukraine and I agree with the most statements. Except one: that Tymoshenko is anti-corruption leader. She was fired because of corruption (she tried take-away big plant from one owner to give it other) and on the last parlament elections she have sold more than 50% of places in her party to different oligarches of Kuchma's period.
Tymoshenko and Yanukovich are the same politic problem in our country.

[Mack Collier]

Laura does Ukraine have an abundance of any particular natural resources that the country could use in their efforts to build global brands?

[Gordon]

What about firms that try to build a global brand without much emphasizing its country of origin (COO)? In Taiwan, few of the OEM firms have had success in building their brands on the world stage. I'd say that it is extremely difficult to decouple brands from their COO. BenQ is a case in point. I'd love to know your views on this Laura! You can see a photo and a post of what I'm talking about here:

http://orxilinasia.blogspot.com/2006_08_01_orxilinasia_archive.html

[Laura]

Thanks for all the well stated comments. I don't know the Ukraine just sounded right to me. No one said anything or corrected us while there. But your point is well taken. And I have changed the post so to be accurate for future readers.

[Nancy Friedman]

Fascinating post. But it hasn't been "THE Ukraine" for more than 15 years, when it stopped being a Soviet republic; it's simply "Ukraine" now. (Ukrainians are sensitive!)

[Joao Plantier]

Dear Laura,

Portugal also lacks a strong global brand. We were caught in the cheap trap in several industries, including the shoe industry (italian shoes actually come from Portugal) in the textile industry (Hugo Boss and Lacoste had factories in the North of Portugal) and even in the automobile industry (Volkswagen was once responsible for 11% of Portugal's Exports).
Now that most foreign companies are moving their production to India, China and East Europe our companies are trying to build brands that are strong enough to fight in the market place.
My questions are:
1.once you fall in the cheap trap, how can you build a strong global brand?
2.Was it Italy's image in the world that allowed Prada to become a fashion icon? Or was it Prada and other fashion companies that built Italy's image as a fashion country?
Best regards,
João

[Scott Miller]

All good points, Laura. I've been to Ukraine twice, and it's very clear this country has great, friendly, intelligent, caring people, yet they are plagued with problems. Key among them is that smoking and beer consumption are out-of-control, with men walking around the streets even in the afternoon holding beer bottles like sodas. Most people do not have vehicles, and their living conditions would be considered slums anywhere else. A huge part of the problem is the ongoing corruption of government, and anyone making a good living in that country is almost always in some manner doing it illegally.

One last minor point, it's not correct to call it "the Ukraine," just as we do not refer to "the Canada." ;-) (Saying "the United States" is okay because it's plural, but we do not say "the America.")