Low-cost labor, talented engineers, modern contract production at new factories having well-organized processes and back-yard production at time-worn workshops – Ukraine has this all. Nevertheless, most of the major domestic hardware startups prefer factories of the Celestial Empire rather than native Penates. Editorial Office of Innovation House is puzzling out what factors have an effect on location selection, and in which case production in Ukraine is actually more cost efficient than in china, and vice versa.
“We deal with designing and help our customers to choose production as well. We calculate the cost with allowances made for the batch size, complexity, logistics. Decision of what production to choose is made based on the detailed calculations,” – said Alex Nesterenko, CEO and Founder of hardware development bureau ARTKB, R&D-Manager and Cofounder of Hushme startup. ARTKB is engaged in designing for Petcube, Ecozy, Concepter, and when this is done, it helps to find the best possible production considering the specific features of goods. Company has its own office in China and has an idea of how to work with manufactures in this country. But when it comes to location selection, ARTKB may give a few pointers on other locations, in view of economic feasibility, production specialization and marketing area.
Marketing area and logistics
It is possible to make arrangements for delivery from China to any place in the world. In Ukraine this process runs much longer and more expensive. Therefore, China is so attractive for companies that focus on the USA, Asia, South America. “I shall send goods to the USA, England. And in China all the industry is tooled for this. You push the button – your batch is sent. And you are guaranteed that it will be delivered, what is more – in due time, and it will be customs-cleared,” – said Henry Teterin. Henry sells his inventions (namely Bike Lift&Carry shoulder-carrying strap for bicycle) on platforms like Amazon, and wholesale distributors place orders for them. He does not cooperate with Ukraine and CIS countries. For this very reason, production location in Ukraine, expressed in logistical terms, makes no economic sense for him. “To send using Nova Poshta (express delivery company) – too costly. Ukrposhta (Ukrainian national postal operator) – unreliable and way too long.”
It is possible to make arrangements for delivery from China to any place in the world. In Ukraine this process runs much longer and more expensive.
Concepter also has also what to say about marketing areas and logistics. iBlazr flashes got to Kickstarter and upon the production, company had to send its product all over the world. “To “implement” Kickstarter – it means that thousands of persons all over the world shall receive product near their houses. In Ukraine we have customs issue, one shall take out products to Poland, where they shall be distributed before shipment, the cost goes up, the quality goes down. Our postal services – considerable expenditures. We have logistics company in China with offices around the world. We have distributed product to these offices and further we may quickly deliver them to distributor or ultimate consume,” – Vlad Tislenko, CEO of Concepter, explained how the processes inside the company are organized.
“Smart blinds” SolarGaps, invented by Yevgen Erik from Ukraine, are partly produced in our country, partly in China. Inventor has no intentions to completely relocate production to China – Europe is one of his main marketing areas, therefore production shall be closer to it. The geographical location of our country contributes to cooperation with the European market.
The geographical location of Ukraine contributes to cooperation with the European market
Ajax Systems company has similar situation. Security systems of Ajax are being sold like hotcakes both in Ukraine and in European market, so there is simply no concern about production in China. And this is not just about the logistics, but about duties and product perception as well. “We pay no duties for the import from Ukraine to Europe. Moreover, we operate in the field, where Chinese systems are not highly valued. Europeans understand that upon the breakup of the USSR many engineers, who used to make fabulous things, remained in our country. Norwegians, for instance, see no great difference between Ukraine and Czech Republic,” – told Valentine Hrytsenko, CMO of Ajax Systems.
Components and supply chain
China – is often integrated production, and if factory does not produce something, it knows who to turn nearby. Factories may assemble everything in one place and give the finished product. In Ukraine, as a rule, this is represented by cooperation with several contractors and logistics.
Even those businesses that produce their products in our country, place orders for component parts from China. This requires strict control at work commencement stage and slows down process, if company decides to change something in the product.
“I believe that the root problem of electronics assembling in Ukraine is the lack of manufacturers nearby. Especially for startups that are just starting to produce, – told Alex Neskin, Founder and СТО of Petcube. – At the first stages of mass production launch, there are always something to be improved or changed. You may waste plenty of time for the iteration and delivery of details from China.”
Fundamental problem in Ukraine – componential database
“If we produce systems in China with their supplier database, then everything could be done faster and terms and conditions could be better too, – Valentine Hrytsenko agrees with this. – We receive constitutive elements under direct contract, with no interleaves in the form of distributors, therefore quality of constitutive elements may suffer due to this this – they may be “diluted” by something of poor quality.”
There is much tension around the quality control issue in any company, especially when production is being launched. When both assembly and development are nearby, it is much easier to ensure quality control.
Ajax Systems has leased 100% of production line, on which SMD-soldering is being produced. Employees are on site and keep track of everything. A short time ago company took decision to purchase own production line and to get rid of dependence on the contractor – investment will be paid off for a year and there will be stock for the ramp up, since from month to month demand for products grows.
There are several ways to control production in China. First, to go there and to check products with your own hands. “I checked the first batch with my own hands, – said Henry Teterin. – there is no need to do this at subsequent stages, but it is preferable to involve third-party expert.”
There are companies in China that render product control services
Secondly, there are companies in China that render product control services. If they have terms of reference, they will check products in quantity defined by the customer and will do photo and video report.
Thirdly, this is own team. Petcube tells that at each stage of their production, their team experts are sent on business trip. They personally check everything. “More than two years ago we opened office in China. At first we had Project Manager, who controlled the production. Now we duplicate basic engineering roles to speed up the process of making changes or new products launching,” – told Alex Neskin.
The cost and duration of passing through certification depends on the country. Certification of electronics in China is faster and cheaper – it may be passed through in a couple of weeks and for $3,000, in Ukraine and Europe it may last for many months and may cost you $10,000, Alex Nesterenko said.
“As of today Ukraine, unlike China, is not tooled for “turn-key” contract production, and it is necessary to search for the contractors for every trash,” – Alex Nesterenko affirmed. Other companies mention this problem too.
What is more, Ukrainian production facilities are not always able to ensure adequate details fabricability level. “My first product complicated inside. It is impossible to manufacture it under our conditions – there are no workshops that cast plastic, there are no production facilities able to make proper equipping and cut internal metal parts using CNC,” – said Henry Teterin.
Ukraine, unlike China, is not tooled for “turn-key” contract production
Petcube says that company had problems even with the prototype – the first contractor brought it in a paper case, and plastic analogue, manufactured by advertising agency looked good only from a distance. When five years ago company was thinking about serial production of products in Ukraine, it just had no other options. “But situation has changed. In recent years, two large factories, so-called “tier one manufactory” were opened in Ukraine – Jabil and Flextronics. They exist all over the world, these are factories of Foxconn level. I was surprised by the production level, process customization, training of specialists working at this factory compared to China, for instance,” – Chief Technology Officer of Petcube said.
When it comes to large-scale product portfolio and complex specific software for devices, what is important is that R&D and production cooperate as close as possible – this simplifies updating and testing processes. The same is true for Ajax Systems. The brand has a broad range of models (16 devices), firmware differs depending on the region. For each mass production device software is being developed, it is also immediately tested on-site, firmware are constantly updated – at these stages strict quality control of engineers is needed.
The cost of production is affected by such factors as cost of labor, component availability, logistics. Ajax Systems produces about 30,000 devices per month (as of July-August). Upon the availability of direct contracts and low-cost labor in Ukraine, production location in our country is economically sound for the company.
Production in Ukraine is more cost-efficient for large batches of goods
For startups or those, who produce their goods in small quantities, cost of small batches is put first. Henry Teterin said that production of small batch up to 1,000 piece either of no interest for the factory, or too expensive.
Alex Nesterenko places emphasis to yet another factor when it comes to production selection – long-standing relationship. Too much time and efforts are spent for relationship building and if you already have such relationship at some place, you shall not ignore it.
Production in Ukraine is cost-efficient for companies focusing on domestic market, CIS countries and Europe. Advantage of Ukraine – low-cost labor and good engineering school. This is also a plus point for those, who are able to afford own production line. But to become an attractive place for increasing number of domestic hardware startups, country shall develop logistics services and contract production, with the focus not on major customers only, but on small batches that are so interested for startups as well.