Ukrainian IT sector: cheap man-hours for saleMaksym Prazdnikov
Recently, Prime Minister Volodymyr Groysman underlined the importance of the country's IT sector, calling it a bailout for the economy. According to the top official, by 2025, export revenues from the IT sphere will more than double, to $8.4 billion a year. At first glance, such predictions are flattering, but what if we read between the lines?
Today, Ukraine has already established itself as one of the world's major IT outsourcers. Every year, Ukraine is among top-rated freelance markets in terms of the volume of orders executed and the number of employees involved. Moreover, the country has its own serious players of European scale who are searching for and hiring for foreign clients whole teams numbering hundreds of people. This is already not some remote job from home but quite a wealthy business generating hundreds of thousands of dollars a month's turnover for a medium-sized company.
Many in Ukraine seem to not be completely aware why the IT sphere is growing so rapidly
However, IT outsourcing is the most unreliable way to earn money on the digital market. To understand this, you don't need to go far enough, just look at India, the global leader in the sector. The country has grown a whole class of people living in large cities and working in big companies serving a variety of foreign firms. This is both IT-start-ups and the FMCG sector - all who need commercial systems or other software products. Nevertheless, programmers in India are already experiencing considerable difficulties due to job cuts. At some point, it turned out that simple scripts and other typical tasks can be copypasted while service functions are becoming more and more automated. Soon, even the development of uncomplicated software for specific purposes will be entrusted to neural networks. For the most low-skilled IT specialists from India, this means they need to up their skills to be able to work on full-fledged software components, or to become part of the country's unemployment records.
Many in Ukraine seem to not be completely aware why the IT sphere is growing so rapidly. First, it is due to the general development of the industry. Now we are seeing development not only of online commerce, social networks or messengers that we can witness as users. At the same time, the demand for IT products in the B2B segment is also increasing. And many entrepreneurs already know, that in the growing market it is difficult to fall, even if you are not really effective.
The second point is cheap workforce. Today, Ukrainians can compete even with Indians, because they are often ready to work for a rate of 1.5-2 times lower. On the one hand, income at the level of $2,000 a month for relatively simple tasks is a good offer on the Ukrainian labor market, and no one will be asking for more. However, cheap labor cannot be an eternal advantage - the China case shows that even in a large economy with stable population growth, this factor is gradually drying up.
And so, we are returning to the growth trends of the IT industry as a source of foreign exchange earnings for the country. It is obvious that today, and even tomorrow, the sphere will keep growing, no matter the regulations on the market. However, it is worth realizing that, like in other industries, Ukraine also sells "raw material," albeit specific, because this is about man-hours. Such a trade is able to bring benefits in the short term, but it certainly cannot be effective long-term.
Recently, Apple released its quarterly report showing that they generate $1,300 of profit per second. For a year, they earn an amount roughly equal to half of Ukraine's GDP. This single company with a staff of about 125,000 employees earns half of what an entire country does, with a population of about 40 million people. The main reason for such gap is the focus on the production of the final product. Alas, one cannot say that Ukraine is a full-fledged player in the global IT market until we launch at least one "unicorn," a start-up that will grow to a capitalization of one billion dollars.
Today, Ukraine can and should focus on the IT sector. However, in parallel lines with this focus, it is also necessary to shift accents and start giving the world specific software products and technological solutions rather than trading in raw materials in the form of man-hours
And if we really want to make of our country a global IT hub, it is not enough for the government "not to interfere." It is necessary to actively assist technology companies. First, it is about a set of adequate, understandable and simple mechanisms for registering and doing business. Unfortunately, brilliant programmers are rarely keen in bureaucratic nuances. Ideally, they seek to register their business online and work for at least a few years without checks and much paperwork. Also, special tax conditions for IT-firms are needed. Here, a good tool could be a tax on the withdrawn capital, which business owners will not pay if they decide to reinvest their profits. Because, if companies don't take their money today, then tomorrow the country will potentially receive much more money.
For example, The Wall Street Journal recently reported that the average salary in Alphabet, the parent company of Google, is $197,000 a year. The holding employs about 90,000 people. If you take the risk and assume that a similar company would appear in Ukraine, even with half the pay for its staff, the salaries alone would bring about $133 million in military tax annually. That's not to mention the VAT that people would pay when buying goods and services within their own country - one can safely assume that this would not be another $1 billion a year. And this is not yet taking into account the single social contribution, profit tax and other positions. As a result, the total profit for the budget from the operations of a single company of this scale would have been measured in tens of billions of dollars. But in order for a garage startup to grow into such a corporate monster, appropriate conditions must be created.
Today, Ukraine can and should focus on the IT sector. However, in parallel lines with this focus, it is also necessary to shift accents and start giving the world specific software products and technological solutions rather than trading in raw materials in the form of man-hours. Because even the optimistic $8.4 billion of export earnings from IT by 2025 is not so much showing a prospect as it is a shortage of billions in profits.
Maksym Prazdnikov is an economic expert