Perspective of the Ukrainian market for foreign investors in building industry

Content

Introduction

1. Economic situation and investment climate of Ukraine

Economic profile of the investment situation in Ukraine

Feathers of investment situation in Donetsk Region

2. The investigation of the market of building materials

Market of building materials in dynamic

General situation on the market of building materials

Statistical Data for the building material market

Domestic Production of building materials

Third-Country Imports

Joint Manufacture of Building Materials in Ukraine

The analyze of customers and constructions

Advertising of construction service and building materials industry

Exhibitions in the building and construction industry

3. The position of the foreign company “Construction and Trade Corporation” on the Ukrainian market of the construction materials.

Pricing policy

Materials supply

Company’s prospects

Certification procedures

Licensing

Conclusions

List of references

 

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Introduction

After decades of stability and standstill, during the past ten years the economy of Ukraine has been in lingering depression. Taking into account its great economic potential it is difficult to realize. One of the way to economic growth basing on the example of geographic neighborhoods of Ukraine, may by foreign investments. For less well-known nations and especially for developing countries like Ukraine, foreign direct investments is likely to pay an important role in effort to industrialize. Attracting foreign direct investments has been proclaimed by the Government as the one of its main goals. Ukraine hopes to intercept part of its investment flows which direct to West-European countries. Integration into global economy means cooperation and at the same time – competition with the other countries. As far as prospects for Ukraine’s economic development are concerned, it is worthwhile to examine the issue of formation and assessment of the Ukrainian investment climate, which is an important factor determining those prospects. Experts and representatives of the mass media differ in their opinions apropos of the above problem. However, publications of various viewpoints in the press give birth to the following paradox: assessments of Ukraine’s investment climate are unclear, vague and sometimes emotional, though their results can influence behavior of the majority of potential investors. Hence, first and foremost, we would like to determine the subject of analysis.

The topic of the term-paper is “Perspective of the Ukrainian market for foreign investors in building industry ”.

Chapter 1. This chapter contains the investigation of investment climate of Ukraine and peculiarities of investment treatment, legislative system, present economic situation and forecast for economic development. The detail information of the economic and investment situation in Donetsk Region will be presented.

Chapter 2. The chapter contains review of the market of building materials, the detail information of the importing and exporting goods and firms operating on the market. There are the investigation of the market of building materials in dynamic, situation on the market of building materials, statistical data for the building materials market, domestic production of building materials, third-country imports, joint manufacture of building materials in Ukraine, the analyze of customers and constructions, advertising of construction service and building materials industry, exhibitions in the building and construction industry.

Chapter 3. The chapter contains the valuation of the company position on the Ukrainian building market, comparative advantages of company operating, the investigation of the company pricing policy, materials supply, company’s prospects, certification procedures, licensing.

1 Economic situation and investment climate of Ukraine.

As a rule, investment climate is considered as the extent, to which a situation in definite country, region or industry is favorable for inflow of potential investments [1, 10]. Sometimes, such synonyms of investment climate as “investment environment”, “business climate”, “business environment” and “rules of the game” are used. Despite the fact that those synonyms are somewhat incorrect, their usage in the context of public relations can generate tangible practical results influencing the volume of investments obtained by definite recipients.

In general, investment climate is viewed as conditions and factors determining economic environment [2, 30]. As a matter of fact, there are short- and long-term aspects of business activities. Conditions important for short-term transactions and those crucial for long-term ones are basically different. For instance, to successfully execute contracts for the sale/purchase of consumer goods whose level of capital intensity is low, requirements to stability and predictability of business environment are limited to relatively short-term periods. The same is true in case of speculative stock market and foreign exchange transactions.

Should we study investments as purchase of basic assets, such as machinery, equipment, expenses for construction of buildings and premises, and not as purely financial exchange dealings [3, 25], it will be obvious that requirements to stability and/or predictability of investment climate as well as behavior of potential recipients should be of a long-term nature. The above fundamentally alters approaches to assessment of the investment climate.

Investment climate is formed under the influence of different factors. Some academicians divide them into the following groups:

• Natural: geographical location, natural conditions and resources

• Economic: general economic trends (revival, decline, stagnation), taxes and tariffs, quality and cost of manpower, characteristics of banking system and other ingredients of economic infrastructure, dynamics of exports/imports transactions, currency exchange rate, inflation processes etc.

• Political and legal: national legislation and general investment policy of a state, legal traditions and level of development of relevant infrastructure, mechanisms for and scales of state interference with economic development, continuity and consistency of state policy etc.

• Social: sex-age structure of population, social psychology and traditions etc [4, 188-193].

The above mentioned factors differ from each other according to the level of their mobility/inertness. It is rather easy for investors to estimate factors that are inert or relatively stable from the viewpoint of investment activities, such as geographical location of a country or a region with respect to other centers of business activity, natural resources, sex-age structure and geographical distribution of population etc. The reason is that discovery of large deposits of natural resources whose exploitation is economically expedient (like gas and oil fields in the Caspian Sea region) is quite a rare phenomenon and events like transformation of the European political map, which took place in late XIX century, are absolutely unique. Within historical periods marked by identical epochal changes, it is extremely difficult to assess economic and, especially, political and legal factors because of their high mobility. Potential investors pay close attention to those factors, thereby making basic estimation of investment attractiveness of a state/region.

Every investor expects to derive certain profit or other advantages. Hence, I would like to make an effort to estimate Ukraine’s investment climate in the light of actual activity of both Ukrainian and foreign investors, considering the fact that they have different incentives to invest. I would like to base the research on two main aspects – economic and legislative, which can help us to make an opinion about investing in Ukraine. Further I will observe the investment feathers in Donetsk region and show the investment opportunities in construction sphere and building materials industry on the example of “Construction and Trade Corporation” , further it will be called “Company”. So the last part of each chapter of the research will be added up with the peculiarities in building industry, one of the most risky unstable industry in Ukraine.

1.1 Economic profile of the investment situation in Ukraine.

Economic growth in Ukraine has continued at a brisk pace during the year 2001. From January to April 2001, real gross domestic product grew by 8.5% compared to the same period last year. In April alone, GDP was 10.8% above April 2000. The 8.5% monthly growth is the largest monthly growth registered in Ukraine since independence in August of 1991. [11, 36-44].

The major driver supporting the growth in GDP continued to be the industrial output sector. In April, industrial output rose by 20.8% compared to April 2000. During the first four months of this year, industrial output grew by 8.5% year-on-year. Ukraine's performance in this sector is the best for CIS countries, and one of the best for any emerging market. The Ukrainian government has increased its economic forecast for year 2001 as a result of the improvement in output performance. It is now forecasted that GDP will grow by 6.2% in 2001, with industrial production growing by 10.7% and agricultural production by 6.5%. [11, 36-44].

Fiscal policy The government of Ukraine has continued to exhibit sound fiscal policies. Ukraine's consolidated budget showed a surplus of about US$41.2 million. This is according to the government's methodology which includes privatization receipts as revenues. The fiscal surplus was achieved in spite of the fact that privatization receipts have been lower than planned. Privatization receipts amounted to US$230 million, compared with a target of US$360 million, during the five-month period from January to May 2001. Government revenues are expected to be increased by the cancellation of the Kartoteka (rules that authorized the State Tax Administration to unilaterally withdraw funds from the bank account of debtors). The cancellation of the Kartoteka is broadening the tax base as it encourages enterprises to move from the shadow economy to the official economy. [27]

However, to compensate for lower privatization revenues and likely delays in securing international finance from the International Monetary Fund (IMF) and the World Bank, the government expects to reduce government expenditures by about $US300 million during the the rest of the year 2001 [27].

Monetary policy The money supply increased by 6.2% during the period from January to April 2001. This growth rate is consistent with a planned expansion in the money supply of 19% for the entire year. During the same period the inflation rate was 4.3%. This rate is also consistent with the anticipated inflation rate of 13.6% for the year 2001. The purchase of foreign exchange by the National Bank of Ukraine (NBU) provided stability to the foreign exchange market. Local currency remained at the same level of 5.45 UAH/US$. Nevertheless, sound monetary policy during the rest of the year will depend on the success of the government in renewing IMF financing, which would allow Ukraine to serve its external debt without resorting to major purchases of foreign exchange in the inter-bank market[12, 36-44].

Another risk for stability is the possibility that, during the second half of 2001, the balance of payments may deteriorate due to an accelerating growth of imports caused by the high pace of GDP growth and the need to make payments due on the import of national gas. The National Bank (NBU), under a pessimistic forecast which assumes no IMF funding, forecast its reserves would fall to US$770 million by the end of the year [12,36-44].

Government debt External debt service during 2001 will amount to approximately US$1.8 billion. Of this amount US$700 million is due to the IMF. This figure excluded about $US1.0 billion of bilateral debt service due to the Paris Club. The restructuring of the Paris Club debt would be in jeopardy if the resumption of the IMF program were to be delayed. The resulting level of external debt service by the country could not be served without affecting monetary stability. Therefore, the resumption of IMF funding will be an important element to maintain financial stability. Otherwise, to service debt, the NBU would be obliged to expand the money supply by increases in its purchases of foreign exchange [27].

International trade and capital The balance of payments situation for Ukraine has remained favorable during the first quarter of 2001. Ukraine showed a surplus of US$816 million in its foreign trade and services balance, compared to a deficit during the same period last year. During the first quarter, exports of goods and services reached US$4.6 billion, a growth of 15.8% compared to the same period last year. Imports of goods and services declined by 5.4% to US $3.8 billion. Russia remained Ukraine's major trading partner, holding a 25% share in exports and a 40.2% share in imports. Major improvements have been made in reducing the level of barter trade, in favor of cash payments. The volume of goods exported via barter terms fell by 70.1% and the volume of goods imported via barter terms fell by 81%, when compared to the first quarter of 2001[27].

Foreign direct investments (FDI) in Ukraine totaled only US$168 million during the first quarter of 2001, a decline of 5.6% year-on-year. This reduction is due to the political uncertainties which have faced the country, despite the good economic performance. The appointment of Anatoliy Kinakh by the President, his quick approval by the Rada, and the expected announcement of his economic policies in late June 2001 will have an important effect on the future level of foreign direct investment to Ukraine[11,36-44].

Table 1.1 Key Indicators of Social and Economic Development of Ukraine [1, 15]

Negative tendencies of the transitional period in the economy of the Ukraine after the disintegration of the USSR are overcome. The Ukraine endures the investment and industrial boom. After the long falling off the Ukrainian gross domastic production increased (according to preliminary estimations) by 5,5% on the background of the favourable foreign conjuncture and good economic and investment forecasts.

Among the reasons of the economic growth and the readjustment of former volumes of foreign commerce there was the increase of price competitiveness of the economy of the Ukraine. Last year, in spite of the decrease of price competitive advantages of native producers, the exporters’ interests were not damaged; they received great profits. The rates of the growth of the separate branches of industry were fantastic. For example, in comparison with the correspondent period of the previous year, from January till November of 2001 the increase of the real volume of the production output made: 40% in light industry, 38,8% in timber and pulp and paper industry, in food industry – 26,5%, in ferreus metallurgy – 20%, in non-ferrous metallurgy-18,9[11, 36-44].

As a result of the investments swelling during ten months in 2001, in comparison with the correspondent period last year, the ferrous metallurgy production export increased by 34,7%, the non-ferrous industry production export – by 35,8%, the timber and pulp and paper industry production export – by 32,7%. It shows that the main motive power of these industries growth was the outside world. It means that the preservation of the positive dynamics next year is dependent on favorable foreign conjuncture[11,36-44].

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The growing economy attracted 21% more of the foreign products than last year. From January till November 2001 the growing rates of agricultural products import deliveries were the fastest. The import of this production increased 2,7 times , in ferrous metallurgy- 1,9 times, in non-ferrous metallurgy- 1,6 times , in machine building and metalworking - 1,25 times. These were the products of industrial purpose mostly [27].

We should refer the changes in the external conjuncture to the risks of worsening of the economic situation, in connection with the absence of stability at the markets important for the Ukraine (energy resources and metal). In 2001 external conjuncture factor and price factor provided more than 30% of the total increase of gross domastic production in the Ukraine.

In spite of the slump in production the balance income of fuel industry increased in 2001 and made up 32,2% of the general industrial showing. Increase of the real investment made up 70%. Fuel industry enticed one third part of industrial investments. Positive factor of the national fuel industry development in 2001 will be allocation of $1000 mln. for the purchase of organic fuel according to the agreement about allocation of credit signed by the Ukraine and the European bank of reconstruction and development and also receipt of two last parts of the credit of the World bank for the reconstruction of the coal sector in the amount of $70 mln. To defend the home market from the expansion of Chinese ferroalloys in April Cabinet of Ministers increased import customs rates for the separate kinds of ferroalloys up to 15%[21].

After making a brief preview of existing situation, it is necessary to know economic forecast for the next period of time. The source data is State Statistics Committee; forecast was made by International Center for Policy Studies; data are presented in percentage of real change.

Table 1.2. Forecast for economic activity in Ukraine[27].

According to the results of the work of the first quarter of the current year gross internal production increased by 7,7% in comparison with the correspondent period last year. The same growth is forecasted for the second quarter of 2001 year. Political crisis has negative influence on foreign investments but not on inland investments. The main factors of the expected growth of gross internal production will be reduction of the administrative interference into economy, credit activity of the banks and growth of inland investments.

Industrial production growth in the whole for 2001, according to the research is:

• In electric power engineering…………….0,4%
• In fuel industry…………………………...34,9%
• In ferrous metallurgy ……………………..2,0%
• In non-ferrous metallurgy…………………4,0%
• In machine-building and metal-working….2,0%
• In timber and pulp and paper industry…….25,0%
• In building materials industry……………..1,5%
• In light industry……………………………28,0%
• In food industry……………………………2,8%

Direct foreign investments in the Ukraine in 2001 , the total amount of which is $3865,5 mln.,

came from 110 countries. The biggest investors were non-residents, they are presented in the

following table.

Table 1.3 Direct investments in the Ukraine in 2001[11,36-44]

However, local officials assert that in 2000, the amount of budget receipts was UAH 8.4 million higher than that of budget spending [12, 36].

1.2 Feathers of investment situation in Donetsk Region

As far as our company “Construction and Trade Corporation ” operates on the market of Donetsk region it is necessary to investigate all incentives and privileges which are offered there to foreign investors. At first we will observe the dynamic of investment inflows in Donetsk region.

In the following table we can see the dynamic of fixed capital investments in Ukraine’s regions. According to the table and diagram we see the biggest investment flows were passed in Kiev, Donetsk region has the third position.

Table 1.4 Fixed capital investment in the Ukraine, by region [11,36-44].

According to Ukrainian statistics, cumulative foreign investment at the beginning of 2001 was approximately $ 3248 million. The regions with the largest amounts of foreign investment were: Kiev - 31.8 % , Kievskaya oblast – 8.2 %, Donetskaya oblast – 7.9 %, Zaporojskaya oblast – 6.6 %, Poltavskaya oblast – 6.3 %, Dnepropetrovskaya oblast – 5.5 %, Odesskaya oblast – 5.4 %, Krimia – 4.1 %. On the following picture the investment in Ukraine’s regions are presented:

Table 1.5 The amount of investments in Ukraine’s regions [24].

As we can notice, the most amount of investment flows were in Kiev, the Donetsk region had second position. World community knows Donbass as the largest industrial center. The favorable geographical location, access to perspective marketing outlets, the highly professional workforce, special economic zones, industrial potential and riches of our land make the main advantages which provide investment attractiveness of the region. The law of Ukraine "About special economic zones and a special mode of investment activity in Donetsk region" gives a unique opportunity to increase flow of investments to the region, that is important for stable economic development work places creation, implementation of innovative technologies and advanced experience. Due to new investment mechanisms we can provide diversification of the economy and execute a lot of social programs. The Donetsk region co-operates with such world famous companies, as Cargill, MetalsRusia, which have created in the region large scale production capacities. Ukrainian and foreign investors have an equal share as for investing in the economy of the region -the law stipulates for them the same tax and customs privileges.

Donetsk region is one of the most successful Ukraine’s region in attracting foreign investments. Our region has attracted USD 259.4 m. of foreign direct invetment, which is 6,6 % of all FDI into Ukraine. Over 300 companies in Donetsk region managed to attract foreign investment from 14 countries of the world. If you invest in specific industry and/or specific areas of Donetsk region – tax advantages and other investment incentives are waiting for investors. SEZ stimulate investment activity of both local and foreign companies in Donetsk region making tremendous improvements in the structure of our economy. For the largest investors in Donetsk region these opportunities give steady profits and strong base to challenge the future. Donetsk region has an extensive portfolio land and property providing business location. Many of these locations offer the most advantageous business incentives in Ukraine due to the law of Ukraine “About Special Economic Zones and Special Regime of investment Activity in Donetsk Region”.

There are two types of areas offering special incentives to businesses:

• Special Economic Zone

• Tertritory of Priority Development.

Special Economic Zone - “Donetsk” Special Economic Zone

Territory of Priority Development - 27 cites, towns and rural districts.

Donetsk city – the capital of Donetsk region, the most successful and developed city in Donetsk region, boasts the best communication links in the region, has an international airport, good quality highways, high production potential 84 % of region’s manufacturing output, 92 % of region’s international trade turnover, 69 % of labor force. “Donetsk” special economic zone is the best location for “greenfield” investments in establishment of high-tech, production. These area has highly developed infrastructure for distribution to the local and international markets, and particularly incentives for exports. There are some differences between incentives within Special Economic Zone and incentives within Territories of priority development:

Table 1.5 Differences between incentives within Special Economic Zone and incentives within Territories of priority development[22]:

Donetsk region has longstanding and strong international trade relations with partners from more than 100 countries of the world which play the important role in the economy of the region. The basic factors indicating a high international trade development level are following: The economy of the region includes more than 150 industries. Among them there are metallurgy, machine-building, chemical and coal industries, agriculture and food-processing industry, other profitable industries with high resource potential. Developed infrastructure with two main trade gates:

• the international airport; the international transportation makes 70 % of freight turnover.

• Mariupol trading port with capacity up to 12 mln. tones of cargo annually. Deep waterways sof the port (average depth 12 m) allow to accept ships with carrying capacity up to 16 thsd. tons . 53 vessels with total displacement of 462,4 thsd.tones belong to Mariupol port.

Risks and guarantees Current Ukrainian legislation provides the following guarantees to foreign investors: The Law of Ukraine "About a mode of foreign investment" dated 19.03.96 № 93/96- ВР[19].

• for foreign investors on territory of Ukraine is established a national mode of investment and other economic activities (article 7)

• in case of a legislation base change of Ukraine on foreign investment within 10 years the state protection of foreign investment earlier stipulated by the legislation of Ukraine is guaranteed. (article 8)

• foreign investment in Ukraine are not subject to confiscation (article 9)

• foreign investment have the right to the indemnification in full, owing to actions of official authorities of Ukraine (article 10)

• in case of the termination of investment activity the foreign investor has the right to return not later than 6 months from the date of the termination of activity of the investment in the invested form without payment of the custom fees. (article 11)

• profit, income received as the result of investment are guaranteed unobstructed and immediate transaction abroad after payment of taxes, fees and other obligatory payments. (article 12 )

Profit repatriation Foreign investors are entitled to repatriate profit, income or other funds relating to investment, without any restrictions, after payment of any taxes due, including tax on profit repatriation. Income earned by nonresidents of Ukrainian origin is subject to withholding tax at the following rates:

• 15% on interest, dividends, royalties, ets.

• 30% on income earned from investment in interest bearing bonds, treasury bills and discounted bonds issued by resident entities; insurance payments, premiums and bonuses: advertising fees; and dividends
• 6% of income earned from freight services

Income (receipts) received by non-residents from investment project implementation on the on the Special Economic Zones territory are assessed to 10% according to Article 13 the Law of Ukraine “About Spetial Economic Zones and Special Mode of Investment Activity in the Donetsk Region”. Foreign investors are guaranteed the legal right to the prompt and unimpeded repatriation of profits and other funds in foreign currency derived from their investment in Ukraine. Conversion of funds for repatriation is conducted through the Ukraine Inter-Bank Currency exchange (UIBC) subject to the possession of the foreign registration statement and confirmation of the amount of profit earned. Investors are advised to deal with a well-established bank, which have an experience of handling such transactions and a license for handling of the operations with currency values. Such banks in Donetsk Region are:

• Joint -Stock Post Pension Bank “Aval'

• Ikar Bank

• Closed Stock Company “First Ukrainian InternationalBank”

• Capital

• Donbirgbank

• Dongorbank

• Donetchina

• Promekonombank

• Donkreditinvest

The works have already started on 78 projects. Actually for their implementation there were invested 1,8 bln.UAH (325 mln. USD), or 67 % of the total cost of projects. The share of foreign investments from 22 countries of the world exceeded 50 % (of the total investments made). On 55 projects the building and assembling construction phase has already been finished and the production started. The total production output (since the beginning of projects implementation) amounted to 2,2 bln. UAH (these are bakery, confectionery and sausages, vegetable oil, modern furniture, clothes, drugs, high quality soap and goods of technical use).The forth part of goods produced is being exported[22].

In fact there have already been created more than 4 thsd. new and retained 7,8 thsd. existingjobs, the salary level is approximately twice the height ofthe rate of average salary in the region. The cost of creation of onejob depends on the branch of industry in view of their great variety and on average equals to 421 thsd. UAH (76,6 thsd.USD). At the same time, when investing in high technologies (metallurgy) the cost of one job reaches the sum of 4 mln. UAH (691 thsd.USD). The activity as for successful functioning of special economic zones is taking place too [22].

The construction of a new meat processing plant in SEZ"Donetsk" has been completed (the investor of the project - LLC "Vozrogdeniye"). The planned production capacity -up to 2000 tons of ready products monthly. 80 new jobs are to be created according to the project.

A new plant on electrical household appliances manufacture is under construction. The investor of the project - OSC "NORD". It is necessary to mention that the law of Ukraine "About special economic zones and special regime of investment activity in Donetsk region "has a stabilising influence on other regions of Ukraine - positively promotes the economy of regions, their companies, budget financing and solve the social problems. It total as suppliers and subcontractors in realization of projects take place 2,5 thsd. companies of Ukraine. The recipient investment capacity of the region equals to 100 bln. USD [24]

Summary So, it is obvious that the economic situation and investment climate in Ukraine is far form perfection. The reasons for cautious attitude of foreign investors to Ukraine are well known and look as follows. At macro-level: general state of national economy, political, legal and economic instability and absence of transparent system for business activities. At micro-level: nature of relations between Ukrainian manufacturers, their foreign partners and sate organizations, lack of experience in the field of cooperation with foreign partners, neglect of respective standards and values because of the national mentality. Different approaches of Ukrainian and foreign entrepreneurs to organization of the investment process, ways and methods used to study the market study and carry on business hamper attraction of FDI to Ukraine. The situation is gradually changing for the better, though many problems remain unsettled. At the same time, foreign investors are potentially interested in Ukraine having great advantages over other CIS states, inclusive of beneficial geographical location (sea ports and location on European transport intersection), reserves of some important natural resources, developed technological potential, educated and comparatively cheap manpower as well as potentially capacious domestic market [14. 19].

The majority of western investors successfully work in the sphere of consumer goods production and trade, where influence of political factors on investment climate is relatively lower. Strong foreign and Russian companies capable of overcoming political risks operate on markets for capital goods and those tending to oligopoly. As a matter of fact, behavior of foreign investors can serve as evidence of adaptation of Ukraine’s economy to standard “rules of the game” in the world market and indicate the nature of its integration into the world economy. To estimate investment climate in Ukraine from the viewpoint of foreign investors it would be expedient to visualize future key directions of the Ukraine’s economic orientation, whether it would be towards Western Europe, the CIS or other countries. Since nowadays this orientation is not clear, it is possible to speak only about more or less favorable climate of investing in certain industry.

At the same time, the decade of accommodation of Ukrainian society to market economic conditions encouraged growth of investments on the part of domestic entrepreneurs. Taking into account the above -mentioned, we can state that at present, Ukrainian manufacturers enjoy more favorable investment climate than two years ago. As a matter of fact, investment environment differs from branch to branch. The analysis we carried out proves that investment climate is better in economic sectors having competitive advantages on domestic and foreign markets, i.e. in metallurgy, machine building, food and consumer goods industries, transportation services and communications. However, strong dependence of Ukraine’s economy on foreign trade transactions due to relatively low purchasing power of domestic consumers deteriorates uncertainty related to assessment of business environment, adversely affecting investment climate in the country. On the other hand, a number of legal documents that can improve Ukraine’s investment climate have been passed recently, such as the law of Ukraine “On Mutual Investment Institutions (Unit Trusts and Corporate Investment Funds)”.

2 The investigation of the market of building materials.

The Ukrainian construction industry possesses considerable potential for growth. Projects in private residential and office construction offer new opportunities for designers, contractors and suppliers; in particular, Western-standard office and apartment renovation remains one of the more profitable activities in this sector, with high-quality renovations drawing prices exceeding $1,000 per square meter. These developments have been accompanied by a heightened demand for building products of a wide assortment and high quality. As domestic production of construction materials continues to decline, foreign participation in the Ukrainian market has been expanding. With the collapse of the Soviet supply system for building materials, the developing Ukrainian construction industry has been looking for new supply sources and links. Since 1991, domestic production of building materials has dropped by approximately 30%. [27] Given the current energy crisis in Ukraine, prices for locally-produced products have increased drastically. The majority of domestic materials are produced under obsolete technologies and are of low quality and out-dated styles. High prices make these products uncompetitive in the domestic market and presents opportunities for western quality products.

The Ukrainian market for building materials offers sound opportunities for exporters, and especially for investors. The overall market for building materials in Ukraine can be estimated by the average consumption of two main end user groups: general consumers and contractors. Bearing in mind the main idea of this work we will see either it is profitable to invest money in construction service and in the industry of building materials. Investment into the renovation of existing housing and the construction of new housing has served as an efficient way of saving money from inflation for many Ukrainians. The renovation and construction of western-standard apartments, offices, and supermarkets remains a lucrative business in Ukraine. Contractors are consumers of large volumes of building products, and tend to buy regularly. Some western consultants rank the Ukrainian construction market among the top four in all Europe in short-term market potential, and in the top two long-term potential. Approximately 80% of the building materials used by contractors are of European origin, and the remaining share is of Ukrainian origin.

The market for building materials is becoming competitive. German, Italian, Scandinavian, French, and Spanish exporters are aggressively promoting their products in the Ukrainian market. Many well-known European brands are represented at construction shows frequently held in Kyiv. However, the system of distribution is still in the process of development. It consists of a collection of small, poorly-organized stores with low inventories. Even leading distributors cannot serve as one-stop shops, and consumers spend tremendous amounts of time searching for a choice in product, quality, and price. Price and quality often become a decisive factor in consumer preferences.

Ukrainian distributors tend to focus on high profitability, which can seriously impact the marketability of U.S. products. To reduce prices and increase the marketability of building products, several European companies have launched the joint manufacture of building materials in Ukraine.

2.1 Market of building materials in dynamic.

In Soviet days, Ukraine possessed a strong domestic building materials industry, with its abundance in china clay (kaolin), limestone, fire-clays, granite, gypsum decorative stones, and glassy sands. Its most developed sub-sectors are cement, roofing and wall materials, linoleum, and glass. Over the past several years, however, Ukraine's domestic industry has plummeted.

Ukraine's rich resources of mentioned building materials played a major role in the former Soviet building materials industry. Prior to 1990, a market for foreign-made building materials did not exist in Ukraine due to the autarchic nature of the Soviet economy. Local production typically satisfied the demand of the domestic construction industry during Soviet times. However, since 1991 the situation has changed radically. Nearly 50% of domestic state-owned construction enterprises are functionally bankrupt. In 1997, production of construction materials dropped by 29.1% versus 1994; prices for locally-produced building materials increased drastically; and quality is poor at best. Increasing competition from western suppliers, who can provide quality building products on time, has closed the previous price gap between foreign and domestic suppliers. This makes western origin building products the product of choice for most Ukrainian consumers [27].

Building materials may account for up to 56% of the cost of general construction projects. During the past few years, local prices for cement, oil-based paint, bricks, and other building products have more than doubled. As a consequence, the cost of construction projects have typically increased by more than 200%.

Since 1991, all sub-sectors of the Ukrainian construction industry have shrunk dramatically as the state budget for investments has dried up. Much of the housing in Ukraine was poorly-built and is in dire need of reconstruction and renovation. State-owned contractors are still very strong in Ukraine's construction market, however, the decline of state financing has created opportunities for private local and foreign contractors.

An independent study conducted by Davis Langdon Consultancy (DLC) in London for the American firm, Perry & Associates, ranked Ukraine's construction market among the top four in all of Europe in short-term market potential, and in the top two in long-term potential. DLC estimates that Ukraine's construction market amounted to approximately US$ 11.8 billion in 1999 versus their estimate of US$ 5.45 billion for 1997 [27].

2.2 General situation on the market of building materials.

Most local contractors use building materials of foreign origin and new technologies. Building materials of German, Italian, Austrian, Spanish, French, and Scandinavian origin have gained a strong foothold in the Ukrainian market. U.S. building products have increased their market share over the past few years, but remain a small percentage of the overall building materials market.

Building materials cover a broad product range, including insulated windows, doors, garage doors, blinds and fittings, false ceilings, floorings (parquet, linoleum, flooring ceramic and fly-wood tiles), wall papers, wall ceramic tiles, and other interior-decorating materials, paints, sealant and water- proofing materials, heating and insulation systems, piping and bathroom fixtures, exterior wall and roofing materials, ventilation systems, sprinkler systems, automatic garage door openers, and other safety devices, pavement tiles, landscape accessories, and lighting systems.

Most imported building materials are of high quality and design and can be easily adapted to local standards. There is a demand for competitive substitutes of the same quality with lower pricing. Demand for building materials will grow in accordance with the growth of construction and reconstruction projects in Ukraine. Building materials are seasonable materials, so the demand for them is changing according the seasons of the year. During the spring and fall, demand for building materials is higher than that it is in the winter. During the winter, construction/renovation projects typically stop due to unfavorable weather conditions. Because of the low demand for building materials in the winter, prices for these products decrease temporarily.

Kyiv is typically well-supplied with imported building materials while areas remote to foreign borders are poorly-supplied. Local pricing for building materials in remote areas is higher then in the central and western parts of Ukraine. Kharkiv, Dnipropetrovsk, Donetsk, L'viv, Odesa, and Zaporizhzhya offer great potential for foreign exporters and investors interested in expanding their operations in Ukraine. Cooperation with importers located or oriented to industrial areas of Ukraine may turn into lucrative business for U.S. exporters.

2.3 Statistical Data for the building material market.

In 2000, domestic production in construction materials industry amounted to $1.2 billion. However, these volumes are 3-4 times lower than during Soviet times. According to the State Statistical Committee of Ukraine, approximately 42% of Ukraine's construction enterprises worked at a loss in 2000 [27]

.During 1997-1998, many sub-sectors of the building material industry (i.e., wall materials, building bricks, prefabricated reinforced concrete, building metal constructions, construction joinery goods, gypsum, ceramic tiles, and glass) saw declines in production ranging from 10-20%. Production of building bricks, linoleum, and ceramic tiles declined by approximately 30%.

The State Statistics Committee of Ukraine [11,36-44] reported that on average, the production of building materials in the first half of 2001 increased, compared to first half of 2000. In the next two periods there was a growth of building materials manufacture.

• facade ceramic tiles, pipes, and silicate - increased by 31-48%,

• production of cement, ceramic bathroom fixtures, ceramic sinks, wash basins, baths, and glazed ceramic tiles for interior design - increased by 12-19%,

• and production of bricks and ferroconcrete constructions - increased by 5%.

At the same time, production of linoleum, soft roofing materials, and construction glass - decreased by 13-17%.

Average profitability of the manufacturers in 2000 was 14,0%. It is the best index for the last five years. The volume of production in 2001 was 3799,6 mln. UAH, - it is 15 % more than in previous year, but the prices on these goods have increased twice. In the industry of building materials there was invested $57 mln, that is 2,1% more than in 2000 [11,36-44]

As we can see, there is a tendency for growing investments into the building industry. As far as the building is developing industry we can think that building materials will be in demand for the next period of time.

Unfortunately, the State Statistics Committee of Ukraine does not have detailed information on imports and exports of building materials. The only export/import data available is for stone, gypsum, cement, glass, asbestos, and ceramic tiles. This information does not show the real volume of all export/import transactions. It is estimated that an average import of building materials is approximately US$100 million, while an average export equals approximately US$70 million. As far as construction service is concerned, $37.2 m. were exported and $23.4 m. were imported.

Table 2.1 Exports and imports by product line. (Jan.-Mar. 2000) [11, 39]

Product Line

Exports from Ukraine
(in US$ thousands)

Imports 

 to Ukraine

Share  in average  volume  of

Exports 

Imports

Stone, gypsum, cement, glass,
asbestos

26564.37

35364.40

0.97

1.00

to include: 

-stone, gypsum

8619.46

8519.28

0.32

0.24

-ceramic tiles

10200.82

12464.08

0.37

0.35

-glass 

7744.09

14381.04

0.28

0.41

Domestic Production of building materials

Ukraine is rich in china clay (kaolin) (Dnipropetrovsk and Vinnytsya oblasts), gypsum decorative stones and granite (Vinnytsya, Cherkaska and Kyiv oblasts), glassy sands (Kharkiv, Donetsk, Chernihiv and L'viv oblasts), graphite (Kirovohrad oblast), and various limestone and fire-clays. There are over 7,500 large and medium-size enterprises and organizations in the Ukrainian construction sector. Of these, approximately 6,400 enterprises are construction organizations, 60 are project-research institutions, and the remaining 1,100 enterprises deal with the production of building materials. Only 20% of these enterprises and organizations are state-owned. There are also 9,696 small businesses and joint ventures in the construction sector [27]

The construction industry in Ukraine is very monopolized: "Ukrbudmaterialy" amalgamates 350 plants and factories in the building materials industry, "UkrCement" operates 28 joint stock companies in the cement industry, "Kyivmiskbud" holding company built approximately 90% of residential and social-cultural buildings in Kyiv. "Ukrmontazhspetsbud," "Ukragroprombud," "Ukrtransbud," and "Ukrmetrotunelbud" operate approximately 10-15 production enterprises each. There is a new trend of joining enterprises into industrial associations to provide members with advocacy support via legal advice, to coordinate training programs, licensing procedures, distribution of information, and to protect the rights of its members. In March 1998, the Ukrainian Association of Assembly and Construction Enterprises was established. The Association includes 300 members and issues the "Assembly Plus Technology" magazine.

The domestic sector of building materials includes the production of cement, soft-roofing and roofing materials, stone, granite, crushed stone, wall materials, building bricks, prefabricated reinforce concrete, building metal constructions, construction joinery goods, gypsum, ceramic tiles, and glass. The production of cement, asbestos cement, soft roofing and roofing, granite, crushed stone, and glass are the most developed domestic sub- sectors. Production of these materials depends on locally- supplied raw materials, needs low investments, and has a 3-5 year pay back period. Ukrainian cement and granite are well-known for their quality and are exported by Ukraine to many European countries. Ukrainian crushed stone is used in the road construction industry and is exported to Russia.

Domestic production of interior/design materials, paints, flooring and wall tiles, ventilation systems, pipes and fittings, and bath-room fixtures is very underdeveloped in Ukraine. Unfortunately, most of these enterprises lack new technologies and modern equipment. As a consequence, these products are not competitive in the Ukrainian market.

The production of security and fire safety systems, energy- efficient heating, and insulation systems did not exist in Ukraine. During the last few years, a several joint manufactures of insulated windows, doors, roofing materials, cement-based building mixtures and wall panels emerged in Ukraine. A few Ukrainian companies launched the manufacture of building materials under the western technologies.

A poor representation of locally-produced products offers a real opportunity for foreign exporters and investors in the Ukrainian market. Ukrainian building materials manufacturers are running at capacity levels of 15-25%. Until recently, the domestic building materials industry was notorious for its outmoded technologies and energy efficiency. Official estimates show that more than 40% of building materials producers are in severe need for modernization.

Domestic Production of Cement

Cement production is a major hard currency earner in Ukraine's construction industry and is one of the most developed sub-sectors of the building material industry. There are 13 large cement plants in Ukraine with an annual capacity of 23 million tons [27]. Well-known factories in the cement industry include: Amrosivsky, Balaklevsky, Dniprodzerzhynsky, Ivano-Frankivsk, Kamyanets-Podilsky, Kramatorsk, Kryvorizhsky, Mykolaiv, Yenakyivo, and Zdolbynovsky. Factories in Dnipropetrovsk, Donetsk, Khmelnytsky, Ivano-Frankivsk, and L'viv produce the largest volumes of cement. It is estimated that the Ukrainian cement industry has enough raw materials (chalk, lime, clay, silica) for the next 100 years of cement production.

Domestic Production of Roofing Materials

Production of soft-roofing is the second promising sub-sector of the Ukrainian building materials industry. According to the State Statistics Committee of Ukraine, this sub-sector produced 6,995,000 square meters of soft-roofing material in May 2000, up from 5,892,000 square meters in May 1999. Volyn, Odesa, and Kyiv produce the largest volumes of soft-roofing materials in Ukraine. To meet market demand, several Ukrainian production enterprises have established joint manufactures of soft-roofing materials with European partners. "Hipron" in Bila Tserkva and "Finprofil" in the Kharkiv oblast were the first Ukrainian enterprises to launch production of modern roofing materials. In March 1998, the Finnish company Rautaruukki established a manufacturing plant in Kyiv.

The production level of roofing materials, other than soft- roofing (e.g., corrugated asbestos slates) still remains high in Ukraine. It is important to note that corrugated asbestos slate is considered ecologically harmful to human beings and most western countries have ceased production of this product. Ukrainian production of corrugated asbestos slates should slowly decrease and the demand for new technologies in roofing materials will increase.

Domestic Production of Granite

Ukraine is notorious for the quality of its granite. According to "Infobusiness" Association of Entrepreneurs, approximately 150,000 cubic meters of granite is mined annually at 55 quarries in Ukraine. "Ukrbudmaterialy" is Ukraine's major producer of granite. Of the 22 industries currently active in this industry, the most well-known include: Beletsky Factory, Khust Stone Processing Enterprise, Minselkhozprod, Hoskomzhylkomunkhoz, Hoskomgeology private and joint stock companies, factories in Kapustynsk, Tokovsk, Yemelyanovsk, Kornensk, Yantsevsk, Korostyshevsk, and Holovynsky. A few of these enterprises have installed western-style modern equipment. The granite from these factories is exported to Italy, Germany, Austria, Hungary, Greece, France, Great Britain, Turkey, Poland, Japan, Bulgaria, and Israel.

Domestic Production of Wall Materials

In terms of production volume and number of employees, the wall materials industry was previously one of the largest in the country. Until recently, the production of building bricks was the most important sub-sector of the building materials industry. In 1997, Ukrainian production of construction materials used for walls decreased by approximately 10%. During 1997-1998, the largest volumes of wall products were produced in Kharkiv, Dnipropetrovsk, Kyiv oblast, L'viv, and Ivano-Frankivsk. Production of bricks declined by approximately 19% in 1997. However, in Crimea, Kyiv, Chernivtsi, Sevastopol, and Odesa production of bricks is not declining.

Domestic Production of Other Building Materials

Other developed sub-sectors of the building materials industry include: production of prefabricated reinforced concrete, metal constructions, construction joinery goods, gypsum, ceramic tiles, and glass. Approximately 459 Ukrainian enterprises are involved in the manufacture of prefabricated reinforced concrete with an average annual manufacturing capacity of 25 million cubic meters. This includes the manufacture of building panels with an average annual capacity estimated at nearly 10 million square meters.

Third-Country Imports

Unfortunately, neither the State Statistics Committee nor the State Committee on Architecture and Construction have detailed information on third-country imports to Ukraine. To estimate the share of imported building materials, CS-Kyiv used information provided at numerous construction shows/fairs held in Ukraine

Representation at local construction and building material exhibitions is dominated by European companies. Approximately 250 companies and joint ventures frequently participate in construction shows in Kyiv. Most of these companies represent foreign-made building products. More than 70% of the participants display imported products, while less than 30% represent products of domestic production.

Countries with the largest number of representation include: Germany, Italy, France, Scandinavia, and Spain. Many of exhibitors at local shows have already established a presence in Ukraine and operate through authorized dealers and distributors. Some companies have set up joint-ventures with Ukrainian companies and have launched local manufacture of building materials.

There is a broad range of building products imported into Ukraine: insulated windows and doors, false ceilings, floor- covering, wall-covering, other interior-decorating materials, paints, plasters, cement mixtures, sealant, water-proofing materials, insulation materials, heating systems, piping and bathroom fixtures, exterior siding and roofing materials, ventilation systems, sprinkler systems, automatic garage door openers, and safety devices.

Germany

During the past several years, German companies have taken advantage of their proximity to Ukraine and have gained a strong foothold in the market. Products are represented through either Ukrainian distributors or German representative offices. German technologies are being utilized for the local manufacture of panels, made of metal-plastic and aluminum materials. German suppliers of building materials represent a broad range of products in Ukraine: plastic and metal panels, paints, metal constructions, insulated doors and windows, various fittings, roofing materials, heating systems, wall covering materials, plastic pipes, and cement-based mixtures.

U.S. Market Position

During the past several years, American companies have strengthened their position in the Ukrainian building materials market. However, it is not easy to compete with German, Italian, French, and Scandinavian companies which have gained a strong foothold in the Ukrainian market for building materials. American companies prefer to work through established Ukrainian distributors. There are only a few Ukrainian distributors which represent products produced in Europe under U.S. technology or by U.S.-European joint manufacture. Ukrainian distributors will advertise such products as being of European origin. It is not so easy to determine the real share of U.S. origin products in the Ukrainian market. In addition, CS-Kyiv assumes that not all U.S. companies operating in the Ukrainian market are known to the Embassy, due to their weak participation in construction shows to poor advertising.

The assortment of U.S-origin products available in Ukraine is not as wide as that of those from Germany. Products offered by U.S. companies include: false ceilings, doors and windows, roofing materials, panels, sun-protection films, roofing materials, lighting systems, insulation materials, and electric tools.

The U.S. trading company Tortola operates in the Ukrainian market in conjunction with the Ukrainian company, D.I.T. Company. Tortola has opened four stores in Kyiv and offers the following products: ceramic tiles, wall paper, linoleum, fixtures, windows, and doors, housewares and electric home appliances. Some of these products offered are of U.S. origin, but most are of European origin.

Several joint U.S.-Ukrainian manufactures have been launched during the past few years. They mostly deal with the production of insulated windows and doors. Ukr-West Window Ltd. is a joint venture between American Industrial Development Corporation (AIDCO) and Production Association Orizon of Smela, Cherkassy Region, Ukraine. The joint venture produces energy efficient polyvinyl chloride (PVC) windows and doors using U.S. technology, equipment, and materials. Ukr-West Window imports PVC extrusions and window and door components from the United States and Europe. All cutting, welding, and assembly of the PVC frames is done at the Smela plant.

There are two additional joint American-Ukrainian manufacturers of windows and doors in Ukraine:

• Best International (Zaporizhzhya) produces plastic-aluminum insulated windows and doors using materials imported from the U.S., Canada, and Europe

• Interwindows (Odesa) produces windows, doors, and related aluminum products.

In 1997, the American company "OTIS" established the joint venture "Ukr-Otis" for the manufacture of modern elevators in Kyiv. This joint venture can easily meet the demand of Ukrainian collective end-users and construction project developers.

In 1998, the Western NIS Enterprise Fund invested in the renovation of the Slobozhanska Budivelna Keramika (Slobozhanshchyna Construction Ceramics) plant in the Sumy oblast. The plant was shut down in 1996 and was badly in need of investors. The plant was modernized with a modern mass mixing machine, forming complex, and two mills for clay mass preparation work. The plant's new production capacity equals 30 million items annually. Bricks produced at the plant will be packaged in modern packaging materials to prevent them from absorbing water. This joint U.S.-Ukrainian manufacturing venture will work to satisfy the increasing demand of the Ukrainian market and neighboring countries.

2. 4 Joint Manufacture of Building Materials in Ukraine

During the past few years, several German, French, and Austrian enterprises have set up joint manufacturing ventures in Ukraine.

In March 1998, the Ukrainian-German joint venture "Stroimak- Knauf" was established for the joint manufacture of wall panels to meet local demand and to export to Russia. The joint venture has a capacity of 8 million square meters of gypsum board a year which is likely to satisfy meet the local demand for gypsum wall boards.

"Evroviknobud," a Ukrainian company has launched the manufacture of metal-plastic windows, doors (external, internal and balcony), protection rollers, insulated windows, and display stands. The company uses imported components and the technology of German company "Schuco International". In 1994, the Ukrainian company, "Kwin-Swing" established the joint manufacture of metal-plastic windows and constructions with a German partner "Khipping" company. The company also utilizes the technologies of "Heroal" and "Neher" German companies. The Ukrainian company "Klenovyi List" set up the manufacture of metal-plastic windows under the technology of the German company "Gealan" with use of fittings from the German company "Roto". Another German-Ukrainian manufacture of insulated windows is "Fenster," which is based in Kyiv. The joint stock company "Ardex" represents the "Poliram" trademark - dry cement-based products manufactured in Ukraine from additives manufactured by the German companies "Wacker- Chemie GmbH" and "Bayer AG".

Italian and Finnish companies have established joint manufacturing of soft-roofing materials. The French company Lafarge re-equipped the Mykolaiv cement enterprise. In 1997, the U.S. company, OTIS launched the production of modern elevators in Ukraine and can easily meet the demand of Ukrainian collective end-users. AIDCO, an American company established the joint manufacture of insulated windows.

The Ukrainian company "Budcomplect" Ltd. has been manufacturing pavement tiles under the technology of the British company "Creative Impressions" since 1995.

Several Finnish companies have established joint manufacturing of soft-roofing materials. In March 1998, the "Rautaruukki" Finnish concern launched a new manufacturing subsidiary "Ranilla-Kyiv" company in Kyiv. The steel plates for the Kyiv enterprise are supplied by "Rautaruukkii" concern from Finland. In addition to roofing materials, the Kyiv subsidiary produces steel constructions. "Ranilla-Kyiv" has a developed distributorship network throughout Ukraine. "Finprofil" (Kharkivska oblast)is the second joint Finnish-Ukrainian enterprise to produce roofing materials. The establishment of these joint Finnish-Ukrainian enterprises has led to a decrease in the price of roofing materials available in Ukraine from US$12.50 to US$14.00 per square meter in 1996 to US$9.50 to US$10.00 per square meter in 1998. In 1997, the "Finprofil" company paid US$22 million for the import of steel plates from Finland. According to Ukrainian directors of the above-mentioned joint ventures, the use of the steel plates produced in Ukraine could help reduce the price of locally- produced soft-roofing materials.

"Lafarge" Group, the world's second largest producer of cement and concrete, and the largest producer of monolith blocks, roofing materials and cement mixtures, purchased a 41% share of the "Mykolaivcement" company (Mykolaiv oblast). It plans to invest approximately US$150 million into production at "Mykolaivcement". The full production capacity of the "Mykolaivcement" plant is 62% of the overall Ukrainian cement production volume. The "Lafarge" Group has the potential to control the Ukrainian cement market.

2.5 The analyze of customers and constructions

If the company wants to reach a success, it is necessary to investigate the needs of potential consumers, the situation on market in whole. The Ukrainian construction industry fell on hard times in 1991 as a result of the dislocation of production and distribution cycles, energy shortages, and the Ukrainian government's insolvency. The centralized supply system has severely hampered the supply of building products, and thus increased their cost. New supply and distribution channels were established by construction associations, corporations, and companies to help satisfy the demand for building materials. During last few years, a large-scale distribution network has developed. The largest concentration of construction companies is centered in Kyiv where there are approximately 460 contracting firms, 230 design firms, and 400 distributors of building materials and trading companies.

Western-standard apartment, office, shop, and supermarket renovation remains a lucrative business. Approximately 80-90% of the building materials used in renovations are of foreign origin, which double the cost of renovations. The remaining percent of building materials are purchased from Ukrainian manufacturers. Generally, building materials account for 56% of the overall cost of a construction project. Building material prices (both domestically and foreign made) have increased dramatically of the past few years [27]. This has led to a significant increase in the cost of construction services.

End-users of building materials can be classified into two major groups: indirect and direct end-users. Direct end-users may be sub-divided into general consumers and collective consumers. General consumers shape the market into two distinct spheres: - the market for the "average" Ukrainian citizen, - the market for the "nouveau riche."

The general consumer in Ukraine expects construction materials of good quality, but within an affordable price range. Many average general consumers are renovating their apartments and "dachas" (summer houses) on their own. The most frequently demanded products include: wall coverings, floorings, ceramic tiles, paints, insulated materials, and bathroom and kitchen fixtures. General consumers primarily purchase these building materials in specialized retail stores. Unfortunately, not all the products shown in catalogs or on display may be available for sale. Much time may be wasted on finding even the most basic of goods. The general consumer cannot find all the materials necessary for a renovation at a one stop shop. Because of the high prices charged at small specialty shops, bazaars keep a strong foothold in distribution of inexpensive building materials. In Kyiv alone, there more then a dozen bazaars where building materials of local, Polish, and Turkish origin may be purchased for a reasonable price.

Ukraine's "nouveau riche" includes both Ukrainian and Western businessmen who demand Western-standard office and living space (which often goes for at least US$1,000 per square meter). Typically, new residential construction uses expensive imported materials; apartments are elaborate, consisting of at least 5-6 rooms. This new "elite class" is spending large amounts of money on the construction of new, single-family luxury "cottage" homes, which boast spacious rooms and gardens, swimming pools, high fences, and state-of-the-art security systems. This sub-group of general consumers prefer to renovate their residential premises with the assistance of local or foreign construction contractors.

Direct collective end-users include private local and foreign companies, Ukrainian state-owned companies, institutions, and organizations. The number of local and foreign private companies operating in the Ukrainian market is increasing due to the high demand for renovation and construction services. Collective end- users use the services of local or foreign construction contractors. The general cost of construction services often includes the estimated cost of building materials before the contract is signed. Price, quality, and styles in modern construction design, as well as the preferences of their clients play a major role in the final cost of a construction project. Local and foreign construction contractors are indirect end-users of building materials. These are private and state-owned local contractors and foreign private contractors.

Contractors are the most prized category of customers for distributors of building materials, as they buy in large volumes and on a regular basis. Usually, foreign contractors sub-contract to small Ukrainian contracting companies or employ local construction specialists. There are roughly more than a dozen foreign construction contractors in Ukraine which deal with the construction and renovation of state-owned property, commercial property, single family homes, industrial premises, and warehouses. Some of these contractors provide architecture, design, and consulting services. Others prefer to work with completed designs. Turkish Austrian, British, German, Polish, South Korean contractors have been very active in the Ukrainian construction market. Perry & Associates is one U.S. company that has a strong foothold in Ukraine's building materials and construction markets. "Kyivmskbud" company is one of the largest Ukrainian state-owned contractors of construction services, and LKS company (a German- Ukrainian JV) is a leading private contractor.

The Ukrainian supply system for building materials differs from the west. Buyers must deals with a collection of small, poorly- organized stores which are characterized by low inventories, poor customer service, and high prices. Utilizing distributors helps to expand foreign supply links and the assortment of products. For instance, the Ukrainian firm "Altis Ltd." is a distributor of roofing materials from Italy ("Imper"), France ("Ondulin"), Belgium ("Aqualine"), Finland ("Ranilla Profil"), and insulation materials from Finland, Turkey, Austria, Estonia, and Italy. "Agromat" a Ukrainian company is a distributor of ceramic tiles and bathroom fixtures of Spanish, Slovakian, Czech, Swedish, Finnish, and Polish origin.

There are approximately 10 leading building materials stores: Remax, Buddetal (German-Ukrainian JV), Skandi (Swedish-Ukrainian JV), Dom Ekspo, Domostroy, Vist, BudMax, Agromat, Enran, and Sergo. These stores are rated high by consumers based on stock availability, assortment, price, and customer service. Major distributors work through their own network of shops and usually conduct wholesale and retail trade directly from their warehouses. Distributors of windows, doors, roofing, flooring materials, and false ceilings often provide installation and after-installation/repair services for general consumers. There are a few "elite" stores located in the center of Kyiv and Donetsk, but prices are nearly double average retail prices.

Even the highly ranked stores lack a choice of products and brand names products, and as a result they also lack a choice of quality and price. Stores often cannot offer consumers a sufficient quantity and assortment of product. There are no one- stop shopping centers where consumers may find a broad range of products and services to meet their needs. To find specific building materials, or even basic ones, consumers must spend tremendous amounts of time visiting multiple stores.

Some contractors establish direct supply contracts with foreign or local suppliers/manufactures of building materials. Unfortunately, materials selected at stores may not actually be available for sale. Purchase orders may be placed with delays of up to one month in the actual delivery of product. However, only contractors are serviced on the basis of a purchase order, with the full amount being paid on the day of the purchase order. This practice creates definite difficulties and delays in construction project implementation. Unfortunately, general customers are not "privileged" to purchase orders, and must be satisfied with the assortment of brands and prices that are available to them.

Some major Ukrainian construction contractors operate enterprises that produce building materials. These end-users of building materials are very interested in using western technologies and establishing joint manufacturing ventures. The establishment of joint manufacture or use of western technologies in the production of building materials may give the advantage of low priced, western quality building products.

Familiarizing Ukrainian customers with a new brand name requires a broad advertising campaign. Participation in construction shows is a effective way of advertising building material products. Well-known distributors of building materials and those established in the market often participate in construction exhibitions. Approximately 30% of a show's participants are foreign exporter companies seeking partnership with Ukrainian trading companies.

2. 6 Advertising of construction service and building materials industry

There are approximately 500 advertising agencies in Ukraine. Many of them perform a wide range of services that Western companies are accustomed to. Ukrainian television and radio advertising is on the rise, and is considered one of the best means for advertising in Ukraine. Newspaper advertising remains popular with half of the space in journals and publications consisting of advertisements. There is a wide range of publications devoted to construction and building materials industry. Foreign exporters may consider advertising in the following publications: "Budmaister" magazine, "Construction newspaper," "Inform-Bulletin of Derzhbud of Ukraine," "Our Home" magazine, "Odesa Budivelna," "House" magazine, "Construction and Reconstruction" newspaper, and "Market for Construction Materials" register. Construction companies and distributors also take advantage of advertising in such foreign publications as the local English language newspaper "Kyiv Post". A regular advertising campaign may also include also newsletters mailed to potential customers.

Summary The Ukrainian market for building materials offers sound opportunities for exporters, and especially for investors. The overall market for building materials in Ukraine can be estimated by the average consumption of two main end user groups: general consumers and contractors. Investment into the renovation of existing housing and the construction of new housing has served as an efficient way of saving money from inflation for many Ukrainians. The renovation and construction of western-standard apartments, offices, and supermarkets remains a lucrative business in Ukraine. Contractors are consumers of large volumes of building products, and tend to buy regularly. Some western consultants rank the Ukrainian construction market among the top four in all Europe in short-term market potential, and in the top two long-term potential. Approximately 80% of the building materials used by contractors are of European origin, and the remaining share is of Ukrainian origin.

The market for building materials is becoming competitive. German, Italian, Scandinavian, French, and Spanish exporters are aggressively promoting their products in the Ukrainian market. Many well-known European brands are represented at construction shows frequently held in Kyiv. However, the system of distribution is still in the process of development. It consists of a collection of small, poorly-organized stores with low inventories. Even leading distributors cannot serve as one-stop shops, and consumers spend tremendous amounts of time searching for a choice in product, quality, and price. Price and quality often become a decisive factor in consumer preferences.

Ukrainian distributors tend to focus on high profitability, which can seriously impact the marketability of U.S. products. To reduce prices and increase the marketability of building products, several European companies have launched the joint manufacture of building materials in Ukraine.

3 The position of the foreign company “Construction and Trade Corporation” on the Ukrainian market of the construction materials.

So, after investigating the present economic situation in Ukraine, position of the construction service and building materials industry we approach to the main idea whether it is prospective for foreign investors to make business on the Ukrainian market. On the example of the company “Construction and Trade Corporation” , which further will be called “Company”, we will revel all advantages and disadvantages of the company’s operating on the Ukrainian market. The “Company” is joint venture , investing money in the construction service of Ukraine. The Company have been working on the Ukraine market for the six years and during its operating have been occupied with banking industrial premises, church construction. It is leading and well-known company, gained strong reputation with the help of their qualified works and affordable prices. The main staff is gained from Turkey that means additional technologies and experience.

Firms seeking to enter the construction market in Ukraine need to be aware of Ukrainian regulations, especially with regard to certification. The November 10, 1994 law concerning town planning assesses severe penalties to violations: for example, conducting construction work without either 1) permission to carry it out, or 2) government-approved planning documentation, can incur a fine of up to 50 percent of the total value of the project. Manufacturing or using construction materials that violate government standards is subject to a fine of 25 percent of the value of the completed construction. In addition, violating government standards during the construction process and conducting construction work without a license are also actions liable to considerable fines. Older buildings considered to have historical value are also protected by strict regulations: firms wishing to obtain contracts on such projects are well-advised to highlight relevant experience in historical renovation in their marketing approaches.

The construction and construction materials market in Ukraine is becoming increasingly competitive. Firms seeking to penetrate the market need to understand that simply offering a low price will, by no means, guarantee success in the current environment. The “Company” offers a combination of competitive prices, high-quality materials, as well as excellent service in product installation, maintenance and repair. In fact, as the market becomes more saturated, extra services offered by a company may play a role even more decisive than price.

3.1 Pricing policy

Price, in addition to quality, is becoming a decisive factor in attracting the Ukrainian customers. low purchase power of general Ukraine’s customers is a crucial factor in the pricing policy of the majority of companies. However, the majority of suppliers of western-made building products in the Ukrainian market keep prices at a high level. Company always orients on the customer in choosing the building materials. The average Ukrainian consumer expects construction materials of high quality, but within an affordable price range. However, the majority of suppliers of western-made building products in the Ukrainian market keep prices at a high level. This quest for high profitability can seriously impact the marketability of U.S. products. These suppliers orient on "elite" customers - recently emerged "nouveau riches" and contractors.

There are a number of factors which influence the determination of a price in Ukraine. Generally, the wholesale price of a Ukrainian importer trice exceeds the initial purchase price. If a distributor operates through a wide network of specialized and department stores, the price will increase by 25%, which is then taken by the stores as a commission. The “Company” sales its materials accompanied by their own serves, not like a store. They discuss all kinds of materials and their prices with the clients in order to avoid misunderstanding, all using materials are approved by the customer.

3.2 Materials supply.

The “Company” uses the following advantages of the operating on the Ukrainian market.

• availability of inexpensive local raw resources for the manufacture of building materials: kaoline, limestone, fire- clays, granite, gypsum decorative stones, and glassy sands;

• constantly increasing demand of the local market and the markets of bordering countries in building materials;

• vicinity to other Eastern European markets and suppliers of modern components for manufacture in Ukraine;

• availability of cheap and well-educated workforce, possibility of conducting scientific developments of the products and cooperation with Ukrainian scientific enterprises.

As far as the “Company ” investor it uses all incentives for importing materials and goods, which was mentioned in previous chapter.

3.3 Company’s Prospects.

Ukrainian corporations which can provide construction services and coordinate the work of building materials enterprises prefer to establish joint-ventures with foreign partners or purchase licenses for modern manufacture rather than purchasing building materials from foreign producers. Given the fact that European companies are very active in launching joint manufactures of wall panels, soft-roofing materials, insulated windows, joiner's fitting and materials in Ukraine, the Ukrainian demand for these products will likely be satisfied in the near future. According to "Derzhbud" (the State Committee for Construction, Architecture, and Housing Policy) and "Ukrbudmaterialy" (which amalgamates 350 plants and factories in the building materials industry), there are many promising investment projects in Ukraine. "Derzhbud" estimates that it will take 3-5 years to recoup investments made into these projects.

Investment opportunities for the “Company” in the Ukrainian construction industry can be identified at each step of building materials production process. Capital investment in re-equipping enterprises and the introduction of energy-efficient technologies are needed in the following areas:

• extraction of raw inputs (limestone, kaoline, granite, glassy sands, etc.);
• ore dressing;
• super-rolling, faggoting, molding, auto-loading, roasting (for bricks production);
• molding and glazing (for tiles production);
• packaging.

There is a growing demand for high-quality, but affordable building products. For the “Company” that is provider of construction materials, the most promising prospects include:

• Decorative security window grating. Especially in many innervated buildings, the existing security window grating is old and often thoroughly rusted. Designs range from simple to elaborate, depending on the tastes and finances of the consumer.

• Affordable, high-quality pipes and fittings. Experts estimate that less than 10 percent of the demand for these items is satisfied, despite the large number of firms active as suppliers. Stainless and galvanized steel, cast iron and even copper pipes and fittings are widely used. Polymer pipes, being more durable than stainless steel pipes, are especially useful in industries subject to a corrosive environment. In general construction, polymer pipes are not extensively used because Ukraine lacks the necessary normative base for such piping. In individual cottage construction, however, polymer pipes are becoming increasingly popular.

• Security and fire safety systems. Many citizens rely upon a variety of security devices and alarms for their homes and cars; such items include car alarms, house alarms, advanced technology locks, and closed-circuit TV systems. The rapid growth of banks and the western-standard office buildings has been accompanied by an increased demand for safes, sophisticated turn-key security and access control systems, smoke detectors and sprinkler systems. U.S. firms should note that the importation of security and safety equipment requires certification from the Ukrainian Ministry of Internal Affairs.

• Energy-efficient heating, insulation and ventilation systems.

• Insulated doors and windows. In apartment renovation, padded double-doors are commonly used for both security and insulation. Furthermore, balcony renovation, which has become popular among many apartment- dwellers, has increased the demand for different types of wood, as well as large window panes.

• Floor and wall tiles. Over the past several years, the tile market has expanded significantly. The demand for high-quality, decorative imported tile is increasing, despite differences in price (locally-produced tile costs $8-14 per tile, while the price for imported tile ranges from $14-28 per tile) [27] Currently, tiles produced in Greece, Spain, Italy, Poland and the Baltic States dominate the market.

The “Company” provides all kinds of construction service, including architecture, design, and consulting services, it deals with the construction and renovation of state-owned property, commercial property, single family homes, industrial premises, and warehouses. Usually, it sub-contracts to small Ukrainian contracting companies or employs local construction specialists. It can help the “Company” provide the best qualified service for the client.

3.4 Certification procedures

The “Company” always holds the certification procedures for building materials are mandated within the UkrSEPRO state certification system. According to this system, approximately 50 different building materials are required to be certified in Ukraine. These include products which may have harmful effects on human life and health, or those that may effect the durability of constructions made of them. The certification of other building materials may be implemented on a voluntary basis, or if the certification of products is stipulated by the terms of the partnership/supply/purchase contract.

3.5 Licensing

Licensing of products, technology, technical data, and services is being widely introduced in Ukraine. Due to the long list of activities subject to licensing, the large number of government agencies involved in the licensing process, and obscure and contradictory instructions, licensing is viewed as one barrier in the way of foreign investment - the typical business has to secure roughly a dozen licenses. Efforts are being made to reduce the number of licenses required. The Law of Ukraine "On Changes in the Law of Ukraine On Entrepreneurship" establishes licensing provisions and restrictions.

Summary. We have investigated the position of the “Company” on the Ukrainian market of building materials, reveled the main advantages of the Company’s operating on the construction market. It is obvious that the Company has gained good profile and strong position, it is experienced with well-qualified staff. The company’s strategy is aimed on the Kiev market and it has all necessary components for successful operations. The “Company” provides all kinds of construction service, including architecture, design, and consulting services, it deals with the construction and renovation of state-owned property, commercial property, single family homes, industrial premises, and warehouses. Usually, it sub-contracts to small Ukrainian contracting companies or employs local construction specialists. It can help the “Company” provide the best qualified service for the client.

Conclusions

The main idea of the work was realize whether it is prospective for foreign investors operate on the Ukraine market in the construction industry. We have examine the investment climate in Ukraine, the situation of investments, the market of building materials and position of foreign and Ukrainian firms on the construction market. Having investigated the economic situation and investment climate in Ukraine we can make the general conclusion that it is far from perfection, but the situation begin to improve. There are many positive tendencies in economic development and legislative system. There are some reasons for cautious attitude of foreign investors to Ukraine: general state of national economy, political, legal and economic instability and absence of transparent system for business activities, nature of relations between Ukrainian manufacturers, their foreign partners and sate organizations, lack of experience in the field of cooperation with foreign partners, neglect of respective standards and values because of the national mentality. Different approaches of Ukrainian and foreign entrepreneurs to organization of the investment process, ways and methods used to study the market study and carry on business hamper attraction of FDI to Ukraine. The situation is gradually changing for the better, though many problems remain unsettled. At the same time, foreign investors are potentially interested in Ukraine having great advantages over other CIS states, inclusive of beneficial geographical location (sea ports and location on European transport intersection), reserves of some important natural resources, developed technological potential, educated and comparatively cheap manpower as well as potentially capacious domestic market. To estimate investment climate in Ukraine from the viewpoint of foreign investors it would be expedient to visualize future key directions of the Ukraine’s economic orientation, whether it would be towards Western Europe, the CIS or other countries. Since nowadays this orientation is not clear, it is possible to speak only about more or less favorable climate of investing in certain industry.

As far as construction service and building materials industry is concerned, there are many opportunities for foreign investors on the construction market. The overall market for building materials in Ukraine can be estimated by the average consumption of two main end user groups: general consumers and contractors. Investment into the renovation of existing housing and the construction of new housing has served as an efficient way of saving money from inflation for many Ukrainians. The renovation and construction of western-standard apartments, offices, and supermarkets remains a lucrative business in Ukraine. Contractors are consumers of large volumes of building products, and tend to buy regularly. Some western consultants rank the Ukrainian construction market among the top four in all Europe in short-term market potential, and in the top two long-term potential. Approximately 80% of the building materials used by contractors are of European origin, and the remaining share is of Ukrainian origin. Ukrainian distributors tend to focus on high profitability, which can seriously impact the marketability of U.S. products. To reduce prices and increase the marketability of building products, several European companies have launched the joint manufacture of building materials in Ukraine.

Demand for building materials will grow in accordance with the growth of construction and reconstruction projects in Ukraine. Most local contractors use building materials of foreign origin and new technologies. Building materials of Turkish, German, Italian, Austrian, Spanish, French, and Scandinavian origin have gained a strong foothold in the Ukrainian market. The Ukrainian market for building materials offers sound opportunities for exporters, and especially for investors. The overall market for building materials in Ukraine can be estimated by the average consumption of two main end user groups: general consumers and contractors. The contractors are more preferable groups because of the consumption in big volumes. The most prospective materials are: decorative security window grating, stainless and galvanized steel, cast iron and even copper pipes and fittings are widely used. polymer pipes, being more durable than stainless steel pipes, are especially useful in industries subject to a corrosive environment, polymer pipes, security and fire safety systems, smoke detectors and sprinkler systems, energy-efficient heating, insulation and ventilation systemsm, insulated doors and windows, floor and wall tiles.

We have investigated the position of the company “Construction and Trade Corporation” on the Ukrainian market of building materials, investigated the main advantages of the Company’s operating on the construction market. It is obvious that the Company has gained good profile and strong position, it is experienced with well-qualified staff. The company’s strategy is aimed on the Kiev market and it has all necessary components for successful operations. The Company provides all kinds of construction service, including architecture, design, and consulting services, it deals with the construction and renovation of state-owned property, commercial property, single family homes, industrial premises, and warehouses. Usually, it sub-contracts to small Ukrainian contracting companies or employs local construction specialists. It can help the Company provide the best qualified service for the client.

So we have examined the Ukraine’s building market from all positions and made the main conclusion on the example of the “Construction and Trade Corporation”. In spite of market risk and instability it provides sounds prospective for the companies with qualified staff, modern technologies and flexible management. In order to be successful in the industry of building materials it is necessary to investigate general processes in construction industry, because it is closely connected with all process which occurs in the building sphere.