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ELECTRONIC MANUFACTURING INVESTMENTS IN UKRAINE: POTENTIAL & REQUIREMENTS July 7 th , 2005

ELECTRONIC MANUFACTURING INVESTMENTS IN UKRAINE: POTENTIAL & REQUIREMENTS July 7 th , 2005.

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ELECTRONIC MANUFACTURING INVESTMENTS IN UKRAINE: POTENTIAL & REQUIREMENTS July 7 th , 2005

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  1. ELECTRONIC MANUFACTURING INVESTMENTS IN UKRAINE:POTENTIAL & REQUIREMENTS July 7th, 2005

  2. 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

  3. INVESTMENT POTENTIAL OF ELECTRONIC MANUFACTURING IN EASTERN EUROPEElectronic 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.

  4. 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 focusIt 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.

  5. 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

  6. HIGH TECH INVESTORSUNDERSTAND 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.

  7. 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 PROCESSIn 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..

  8. 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 INVESTORSInvestors will need full protection against legislative changes.

  9. 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 transactionsNumber of exports per month – 345 exports, 700 different shipping transactionsNumber of full truckloads inbound and outbound per month – 89 Number of current part numbers – 6184In a plant like in Jabil Circuit Hungary, we manage 6 to 10 different customers, with large diversity of products from automotive, consumer or telecommunications…

  10. 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.

  11. 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.

  12. 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

  13. EXAMPLE OF HUNGARYFrom 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.

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

  15. CENTRAL EUROPE: BENCHMARK TAXES AND INCENTIVES DURING EU PRE-ACCESSION PERIOD MINIMAL INVESTMENT REQUIREMENT TO GET INCENTIVES PACKAGE INCENTRAL EUROPE: 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.

  16. CENTRAL EUROPE: BENCHMARK TAXES AND INCENTIVES DURING EU PRE-ACCESSION PERIOD PROPOSAL: HIGH TECH INVESTORS would 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 crossing VAT exemption Import duties exemption Tax exemption (to be discussed) Investor could be established solely in a industrial park.

  17. 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 components Max 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

  18. 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 ISTNokia 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, addingthat 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…

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