ELECTRONIC MANUFACTURING INVESTMENTS IN UKRAINE:

POTENTIAL & REQUIREMENTS

July 7th, 2005

SUMMARY:

- INVESTMENT POTENTIAL OF ELECTRONIC MANUFACTURING IN EASTERN EUROPE

- WHY UKRAINE IN EASTERN EUROPE ?

- EXISTING INVESTMENT CLIMATE

- WHY TOLLING REGIME IS NOT AN OPTION FOR HIGH TECH INDUSTRY ?

- BASIC CONDITIONS NEEDED TO INVEST AND TO OPERATE IN UKRAINE

- SOLUTIONS DEVELOPED IN CENTRAL EUROPE DURING EU PRE-ACCESSION PERIOD.

- EXAMPLE OF HUNGARY

- PROPOSAL OF INDUSTRIAL PARKS: REQUIREMENTS AND BENEFITS

INVESTMENT POTENTIAL OF ELECTRONIC MANUFACTURING IN EASTERN EUROPE

Electronic manufacturing global leaders are starting to reshape their global capabilities to reduce time to market and to balance risks on capabilities .

Attracting this new High Tech Foreign Direct Investment flows is a global battle. 

In the next decade, Ukraine will have to compete with China, Russia, India, China, Thailand, Malaysia…which are becoming major players in high technology...

EEWG intends to develop the East European manufacturing environment to become alternative to China in order to serve the growing Europe Middle East Africa (EMEA) customer base :

1.8 billion customers.

In EMEA zone, Eastern Europe is the most favorable place to grow new R&D and manufacturing capabilities.

WHY UKRAINE IN EASTERN EUROPE ?

- Proximity with EU

- Freight access (ocean, air, road)

- Skilled and competitive labor force

- Performing Education system

- Raw material (Steel, Alloys, Plastics, Chemicals, Energy…)

- Democratic and legitimate government with EU integration focus

It is a historical moment for Ukraine to attract major industrial players from high tech industry.

Ukraine can become the main regional leader for attracting high tech investment during the next decade.

EXISTING INVESTMENT CLIMATE

In spite of these favorable conditions and promising international context, Ukraine is not able to offer appropriate business conditions for investment.

- Competitiveness of import process in Ukraine (import duty, customs process..)

- No Supplier base in Ukraine

- No preferential agreement between Ukraine and EU

- Difficult Taxation context (VAT refund, corporate tax..)

- Bureaucratic process

- Poor logistic infrastructure

HIGH TECH INVESTORS

UNDERSTAND UKRAINIAN GOVERNMENT WILL NEED SOME TIME TO UPGRADE ITS PUBLIC ORGANIZATIONS AND INFRASTRUCTURES DURING THE EU PRE-ACCESSION

PERIOD.

Please find the basic conditions to invest and to operate

needed to unblock high tech investments in Ukraine.

Priority Number 1: CAPACITY TO MANAGE LARGE MATERIAL FLOW IN AND OUT.

The key element for our industry is to be able to bring in the country from all around the world and from Ukraine necessary components to perform high volume manufacturing and to reexport as soon as possible.

Manufacturers needs a simplified customs process based on EU or international standard.

Priority Number 2: COMPETITIVE IMPORT PROCESS

In our electronic manufacturing services (EMS) industry, value of components in electronics product is around 85 % to 90%.

Labor costs is only 5 %. Import duties for components are around 5 % to 10 % in Ukraine.

To be competitive, Electronics manufacturers should have full import duties and VAT exemption if they reexport all their production..

Priority Number 3:COMPETITIVE TAXATION

- VAT applicability on investment is not acceptable and a discouraging measure.

- Promissory notes system is expensive for large importer/exporter: 0.25 % to 0.5 % for VAT amount.

- Customs fees for all imports and exports: 0,2 %

- Corporate tax should be in line with other Central European countries.

Priority Number 4:STATES GUARANTEE FOR INVESTORS

Investors will need full protection against legislative changes.

WHY TOLLING REGIME IS NOT AN OPTION FOR HIGH TECH INDUSTRY ?

As reference, Jabil Circuit has built in 2000 a Greenfield Plant in Eastern Hungary, now employing 2,800 workers and will export in 2005 more than 700 millions USD.

Number of imports per month – 1700 imports, 6843 different receiving transactions

Number of exports per month – 345 exports, 700 different shipping transactions

Number of full truckloads inbound and outbound per month – 89

Number of current part numbers – 6184

In a plant like in Jabil Circuit Hungary, we manage 6 to 10 different customers, with large diversity of products from automotive, consumer or telecommunications…

It would be impossible to handle all these businesses with Tolling regime conditions offered in Ukraine.

First reason: Our customers asked Jabil to purchase and to own the components.

Jabil Circuit needs to have a stand alone and mature plant in Ukraine with full autonomy for purchasing and procurement.

Second reason: In tolling regime, we need to provide technology schemes and certification for each products.

Considering the diversity, short life cycle and recurrent technology changes, it is almost impossible to manage high volume and diversity.

Third reason: Additional costs to handle material flow in tolling regime : promissory notes, scrap, additional staff, administrative complexity to handle multi-products manufacturing in multi customers environment.

SOLUTIONS DEVELOPED IN CENTRAL EUROPE DURING EU PRE-ACCESSION PERIOD.

Foreign Direct Investment has been a very efficient accelerator to renovate economies of Ireland, Scotland and more recently Hungary, Poland, Czech Republic, Slovakia… on their way to EU membership.

All these economies have been using the same model to attract investors:

Creation of Industrial Parks prepared for investors doing Manufacturing for exporting.

Industrial parks, special economic zones, science parks and technological free zones have been policy instruments that are used to attract FDI, job creation, foreign exchange, technology transfer, industrial production and economic growth and well-being.

During Pre-accession to EU, Central European Governments have been free :

To set up industrial zones granting them infrastructure, customs, fiscal and financial advantages complying with the provisions regarding tariff and non-tariff barriers, unfair trade practices, export subsidies, state aids, agricultural and industrial activities and rules of origins.

THE MAIN RULES TO DEVELOP INDUSTRIAL PARKS SOLUTIONS:

- ONLY MANUFACTURING ALLOWED

- 100 % EXPORT ORIENTED

- NO COMPETITION DISTORTION IN DOMESTIC MARKET

- COMPLIANCE WITH WTO AND EU PRE-ACCESSION RULES

EXAMPLE OF HUNGARY

From 1989 to 2002, foreign investors established over 30,000 companies and invested nearly 26.5 billion in Hungary, accounting for nearly one-third of all foreign direct investment (FDI) in the countries of Central and Eastern Europe during this period.

In Hungarian Industrial parks, activities pursued in industrial customs-free zones were restricted to manufacture involving materials and parts imported abroad for the purpose of exporting the manufactured product.

These Customs free zone allowed these specific manufacturing export oriented company to import goods into Hungary, without paying the VAT or duty taxes before reexporting.

Hungary had up to 130 customs-free zones before EU integration.

In 2002, 47 percent of Hungarian exports originated in these zones, which regularly produce a trade surplus.

Jabil Circuit Greenfield Plant built in 2000 under Customs-free status is now employing 2,800 workers and will export in 2004 more than 700 millions USD.

CENTRAL EUROPE: BENCHMARK TAXES AND INCENTIVES DURING EU PRE-ACCESSION PERIOD

INCENTIVES PROPOSED DURING EU PRE-ACCESSION PERIOD BY CENTRAL EUROPEAN COUNTRIES  

COUNTRIES Hungary Poland Czech Rep Slovakia

 Incentives 10 years corporate tax 10 first years Full 10 years Full corporate 10 years corporate Tax

  exemption corporate tax exemption tax exemption exemption

  5 years local tax    

  exemption      

         

  Subsidies Economic Subsidies for training: Subsidies for training:  

  develop. negotiable 50 % of the cost  

         

  Subsidies for Job Subsidies for job Subsidies for job Subsidies for job

  creation: creation: creation: creation:

  max. USD 350.000 negotiable USD 4750 per job USD 3200 per job

         

Imported raw materials Duty and VAT suspension Duty and VAT suspension Duty and VAT suspension Duty and VAT suspension

and components Max duration for reexport Max duration for reexport Max duration for reexport Max duration for reexport

  2 years 2 years 2 years 2 years

       

EquipmentDuty free and VAT free import of new machinery equipment

Duty free and VAT free import of new machinery equipment

Duty free and VAT free import of new machinery equipment

Duty free and VAT free import of new machinery equipment

         

Industrial Parks/ yes on request Yes on request Yes on request yes on request

customs free zones        

Customs office on site yes yes yes yes

         

CENTRAL EUROPE: BENCHMARK TAXES AND INCENTIVES DURING EU PRE-ACCESSION PERIOD

MINIMAL INVESTMENT REQUIREMENT TO GET INCENTIVES PACKAGE INCENTRAL EUROPE:

Hungary Poland Czech Rep

Minimum investment Minimum investment Minimum investment

 USD 14 million anywhere in Hungary

USD 48 million or 500 jobs creation

 USD 8.3 million in developed regions

 USD 5 million in priority regions  

 USD 4.2 million in priority regions

Incentives solutions have been a very efficient and successful tool to attract foreign investment, to create job and to modernize the economy in order to meet EU standard.

CENTRAL EUROPE: BENCHMARK TAXES AND INCENTIVES DURING EU PRE-ACCESSION PERIOD

PROPOSAL:

HIGH TECH INVESTORSwould be very favorable to get some Industrial Park status complying with

following requirements:

Minimum investment: USD 20 Million.Activity strictly restricted to manufacturing

Activity strictly restricted to Exporting

Industrial Park should provide following business conditions:

Simplified customs process and border crossingVAT exemption

Import duties exemptionTax exemption (to be discussed)

Investor could be established solely in a industrial park.

CENTRAL EUROPE: BENCHMARK TAXES AND INCENTIVES DURING EU PRE-ACCESSION PERIOD

SHORT TERM SOLUTIONS TO UNBLOCK INVESTMENTS PROJECTS

Duty and VAT suspension for Imported raw materials and componentsMax duration for reexport: 2 years

 

Duty free and VAT free import of new machinery equipment and other investment items

Simplified border crossing and customs clearance

CENTRAL EUROPE: BENCHMARK TAXES AND INCENTIVES DURING EU PRE-ACCESSION PERIOD

Latest News…

“Joji Thomas Philip & Monica Gupta in New Delhi | June 09, 2005 10:17 IST

Nokia India Pvt Ltd, the Indian arm of the world's largest telecom handset and network major Nokia Global, is planning to invest around $100-150 million in setting up a special economic zone in Sriperumbudur, TamilNadu.

The department of commerce granted an approval in principle to the project on Tuesday. When contacted, Sanjeev Sharma, MD, Nokia India, confirmed the plan to set up a sector-specific SEZ."We have been allotted 210 acres for setting up the SEZ in Sriperumbudur. This is the same area that has been allotted to us

for setting up the handset manufacturing unit. As per our request, the government has now granted us SEZ status," he said.The SEZ will be used for the manufacture and assembly of electronics, telecommunication equipment, IT hardware,

development of software, research and development activities and other services in telecommunications."At present, Nokia is in discussions with its partners worldwide to bring them to India -- to the SEZ -- to set up their

manufacturing units here," he said, adding that since talks were on, it was too early to specify which suppliers and vendors

would set up units in the SEZ.” CELESTICA, TOP 4 World electronics manufacurers announced 150 million USD in

Romania after benchmarking Eastern Europe  countries including Ukraine. 

Clock is ticking…

COUNTRIES Hungary Poland Czech Rep

Corporate tax 16% 19% 26%