"The Latvian economy has stayed too long in the transition period between the post-Soviet orientation and the new geopolitical situation,"
this opinion was expressed during an interview with DB by Uldis Pīlēns, the largest shareholder of UPB holding. He has always been characterised as a pragmatic strategist able to keep his finger on the pulse on all levels and fields of the rich holding — starting from art and vine culture to up-to-date scientific researches in energy. It seems that the moment has come when the company works like a Swiss watch and its founder looks for wider horizons and tries to calculate Latvia’s movement in the geopolitical space.
UPB’s consolidated turnover has hit the highest point in the company’s history. What is the basis for this growth?
I am really happy for this growth, especially because now we are in another, much higher development stage both in terms of competitiveness and international integration, if compared to the previous high point in 2008. Being able to feel the approaching of construction crisis in good time and intuitively, we changed our focus to foreign markets and more complicated products ending up in maintaining a healthy, to our mind, proportion of turnover — 60% external and 40% internal market. Now we are a part of those Latvian companies who have found both sales markets and possibilities for raising competences and competitiveness in the economic space of the European Union and NATO — the place where we all are supposed to be. Our key philosophy is to be maximally integrated into the international division of labour in Europe in not only the construction sector but also energetics, mechanical engineering, as well as in managing complicated projects abroad. At the same time we must get ready for conquering third country markets, including our Eastern neighbours, and try to foresee what could happen in Africa and Chine in the coming four five years.
What do you mean by “international division of labour”? Who is the divider and how can one get there?
Of course, there is no such divider, actually. But when one manages to strengthen its positions in a market, like Sweden or Germany in our case, then it becomes an integral part of this market. It means that other market participants take account of us, include us in their cost inquiries, and invite us to participate in tenders, and so on.
Does it mean a take-off, a foundation under your feet?
Yes. The fact that construction projects where we participate are becoming more and more complicated and bigger but energy projects come along with new technological and efficiency standards suggest that we have succeeded in integrating into this environment. If one or several companies can do that separately, then it should be the national policy that enhances the overall integration in Europe; moreover, this should not affect some separate industry-representing companies only, but the national policy should be targeted at companies in food, forestry, electronics, construction, production of construction materials sectors, that is all currently active industries. To my mind, the Latvian economy in general has stayed too long in the transition period between the former post-Soviet orientation and the new geopolitical situation. Without an explicit will of the state to create such economic model integrated into Europe, just some separate companies will not be able to secure sufficient pace of re-orientation and sufficiently extensive adaption of entrepreneurial environment to the current rules of the game.
What kind of state support is needed?
It is not a support to companies that is needed, but the state must be able to define its policy for more in-depth integrity into the European economy.
Are you speaking about national vision, a defined policy?
That is correct. At no level — is it the President, Prime Minister, Saeima as legislator, local and regional governments or companies — can we give disintegration signals to Europe.
Could this situation be compared to a person who is proud of the education received during the Soviet times and does nothing to improve it with modern knowledge?
Let us quote a classic — the one who is willing to change is going to last. Unfortunately, we have slightly delayed ourselves in this change. We are still stuck in the declaration stage and have not proceeded to the stage of wider integration of the actual economy. Another thing we are missing is a thoroughly developed vision — the state is not thinking cluster-like, it does not facilitate cooperation among companies representing the most complicated industries, which would create an economic model of higher value added presenting more complex products and services. Let us not forget that separate bright achievements of our companies on the international level are only wonderful flashes and not characteristics of the competitiveness of the overall economic model.
What are the advantages of the European market?
It is considerably more stable. This market’s dynamics — ups and downs — account for one-and-a-half to two per cent only. That is why it is important to be there — it poses no raging phenomena like Russia with the extreme rouble fluctuations, re-orientation of economy towards authoritarianism and so on. The European market is comparatively safe, but one must consider that it requires additional intellectual effort as we are still learning in this market — both the rules of mental game and the nuances of legislation. We are learning how countries protect their markets, how countries assess the reputation of investors and the offered quality. It is not as simple as we have imagined it here in Latvia — it is not enough with drawing investments, also the quality of investments and reputation of private investors must be taken into consideration, as this is what builds the base for economic contacts in the actual future, the space of mental tradition. Of course, also investors from Kazakhstan, Russia, Belorussia, and Ukraine are welcomed but the proportion plays an important role here. If we want to be in this Western world which is remarkably closer to us mentally then this must be defined clearly. And these are those integration or disintegration signals.
Stills, defenders of the new economy point to Europe’s excessive dependence on the financial dictation. Isn’t it able to destabilise the situation?
The world depends on the financial dictation in general. But capital drain from Russia for certain reasons is one thing; the other is the space of economic and political stability. Why is Scandinavian economic model, despite its relatively high tax burden and complicated rules of the game, or the German or Swiss models able to attract investors more intensively than economic models of other European countries? Of course, all depend on the visions of financial investors, on their calculations and even emotional condition. That simply must be taken into account. And actually this is the thing we ask in general from the state — we cannot change the rules, but we can signal to this financial environment for our readiness to change according to those rules which are on the global agenda today by maintaining the self-esteem of our country.
Drain of workforce is still a painful issue in Latvia. Is it possible to stop it?
It is necessary that politicians speak to the leaders of those countries to which our workforce moves sooner and more intensively. I would like to see the President and Prime Minister speak about that with David Cameroon and Angela Merkel and other political leaders of Europe. Because Germany wants to integrate up to one million incomers each year and, of course, immigrants from the Baltic States and Poland are those who integrate best. That has been proved by thorough researches conducted in Germany. If issues related to controlled migration, education, investment policies will not be discussed with leaders of these states in good time, we can end up in a very unpleasant situation when we cannot control the workforce drain anymore. We know the countries which our people go to, and the situation as such will be a big challenge for the construction of whole national economy in the near future. But I do not see that on the list of our economic priorities. This is a very important topic for discussions, but I cannot see the political willingness to discuss it. By allowing the qualified workforce to leave the actual economy, we place it on the lower stage of development, which on its part closes door to a more in-depth and equal integration in Europe. We are left in the so-called grey room which is also related to the issue of our security, after all. Keeping of qualified workforce in the whole territory of the state including regions is of especial importance for the existence of the state.
Coming back to UPB, export and local market proportion of 60:40 respectively has been kept for several years already. If it is more profitable to work in foreign markets, why do you maintain so large share in the internal market?
We are a Latvian company and absolutely largest number of our employees is Latvian citizens residing in Latvia. And we are aware of our social responsibility — being away from home and from family, being an inventory of airports or a part of construction site in Scandinavia or full-time participant in the traffic on German autobahns is additional stress, psychological burden. These are the reasons for this proportion. To produce as much materials sold abroad as possible here in Latvia — this is our philosophy, our concept, and our signal of identity. We have about 300 employees working out on business trips on rotational basis; within the group of companies they ensure work for one thousand employees here in Latvia.
A frequently mentioned problem in the local market is the lowest price principle in tenders. What is the decisive factor in tenders abroad?
I would not dare to declare that there is no lowest price principle in public procurements abroad. But here are much detailed technical specifications, pears are not compared to apples, because the commissioner engages many experts with extremely high level of competence and they evaluate also the reputation and qualification of the tenderers. That is why the blame does not rest only on the cheapest offer principle; it is often the issue of commissioner’s competence and quality of tender documentation.
Do you act only as sub-contractors or also as general contractors in foreign markets?
We work only as sub-contractors for several reasons. One thing is that our client usually is the general contractor. Another reason is that general contractors face much more responsibility for the object in terms of time. It means organisation of higher-level service in these markets. Although UPB is a comparatively big company in Latvia, it is still a medium-size company in Europe. This next, the much bigger step in the market is possible, but it can be made in ten even fifteen years when considerably wider presence is gained in these markets. But this is not the actual philosophy of the company and it is not on the agenda of our key issues. It is more important to bring this concept to third country markets — with our engineers, products, and project management group which has gained competence in the Switzerland and Germany. This experience allows us to re-orientate also to markets outside the European Union.
Can you reveal which markets are financially more profitable and in which markets your presence is determined by other factors?
It is just like in the nature — at first, there is a seed, then the plant, and then fruits. We assess each market according to the development stage. Sweden could already be referred to as our domestic market, because the mental environment has approved us as their market element. No one is trying to increase the production capacity to squeeze companies like us out of the market. Then there are markets where we are in the conquering stage — like Great Britain where this is the first year for UPB Ltd. The initial stage completely differs from markets where we feel stable. While we are considering acquiring of some production units in Sweden that would allow our expansion, then only first objects of reference are made in Great Britain to prove our competence.
Market conquering is most likely sponsored by other sectors?
Entering into any market is an investment — similar to investment in technology, employee education, new products. It means participation in fairs, new communication with potential clients, registration of company. One cannot expect an instant return, not speaking about profit. One must count on that. The market conquering and stabilising phase lasts approximately five years and only then one can understand if the attempt has been successful. Still, it is not so very complicated — all companies must invest in development, market research, marketing and personnel training continuously.
What are the whales holding the group of so diverse companies?
As boards of various group’s companies re-group, it can be observed that the positions of finance specialists continue strengthening in the board. Actually it means that financial management and financial discipline plays a very important role, especially in foreign markets where we have to consider also currency fluctuations. Another aspect is that people related with project management become part of company board more often. They are experts who know the market mentally, via communication. And then it is the industry strategic management group that creates the policy of the group of companies. We have to be able to both manage the group of companies in the current markets and open up new ones.
UPB entered the energy sector very ambitiously. What is the situation now?
This is an interesting topic. We have managed to stabilise our positions despite the number of changes in alternative energy sector both in Latvia and abroad. Cogeneration plants have stabilised as transfer technology — it means more efficient gas combustion, and efficient production of heat, cold and electricity. To our small and medium-size cogeneration plants, we predict a good future. Europe cannot give up Russian or any other gas, but can use it more efficiently. So this is our direction. We have performed experiments in Croatia with thermal water gas — by incinerating the gas we produce heat and electricity. In cooperation with Russian scientific-technical institutes we have conducted a joint research; with Finns and Britons we have cooperated in studying wood gas technologies. We have entered Slovenia, Great Britain and Sweden with our cogeneration plants. We have participated in big turnkey projects in Latvia, Italy, and in a mozzarella factory in Tirol in cooperation with our Swiss company. The global and also European wish to be more efficient by using more up-to-date and mobile technologies — this is the niche where we work and see our chances. It is true that the Latvian energy legislation has made the local market slow down. But our key markets are outside the country, therefore we can dissociate from the rather short-sighted understanding of the model of balancing the alternative and traditional energy in the Latvian legislation. Losers are those who participate in the market for speculative reasons. Ant it is not bad if market gets rid of speculators as it allows more responsible players to join this niche.
What is your prognosis for the situation in the construction sector in the local market?
We must take into account the component of European money in the Latvian economy. According to the experience, the first year of a new EU programming period is a running start or projecting period, which means a year lost in real life. That means that participants of the construction sector try to fill up their order portfolio and compete with a remarkably lower price. In other countries the role played by the European funds’ money is not so big and these cycles can be felt much less. For us it means that we have to try to balance the decline in the local market with activity and projects in foreign markets. 2016 and 2017 will be years of speeding up capacities, and there is no doubt we will participate in that. Then we will be able to plan our next development stage slightly different also in foreign markets.
It reminds of a complicated dance — finding the rights steps in the right direction.
Well, business is just like tango — one must find both the right steps and the right partner to dance this complicated dance.
Source: Dienas Bizness