They Might Be Giants

05 April 2011

 "Globalisation" - a serious candidate for the most overused buzzword of the last decade, however it is the best catchall term we have for how interconnected our world has become in terms of knowledge, capital flows, trade, services and labour. Initially Polands competitive advantage lay in its low production costs but as competition from cheaper markets takes effect, firms must look further afield for new sales markets and begin to focus on innovation as a source of growth. In this article we'll look at Poland's place in the global economy and profile a Polish company that is successfully navigating these international waters.

Plugging Poland in
According to a 2011 globalization index prepared by Ernst and Young and the Economist Intelligence Unit, Poland currently ranks 25th out of 60 of the largest economies in the world in terms of its connections to the other countries in the survey. While relatively high this is still behind other OECD countries in the region like Hungary, Slovakia and Czech Republic.

Poland's primary conduit for plugging itself into the global economy is of course the European Union. 79% of the country's exports and around 62% of imports are with the trading bloc. Foreign direct investment (FDI) into Poland totaled around 10 billion Euros in 2010 with around 83% of that again coming from EU countries such as Germany, UK, Spain and France. However "Making the most of Globalisation", part of a 2010 OECD report on Poland, suggests potential disadvantages from it focusing too much on the EU connection. In its assessment Poland does not take full advantage of its geographic location between Western Europe and the CIS states (Commonwealth of Independent States - Former Soviet countries) and overall its ability to export to long distant markets is weak.

"A combination of factors might explain Polish firms' poor capacity to benefit from dynamic overseas markets, such as relatively small firm size, insufficient capacity to innovate, limited access to finance, insufficient management skills and a lack of experience in conducting business over long distances." - 2010 OECD report: Poland

Despite introducing significant market oriented reforms and investing EU structural funds on new infrastructure, Poland suffers from an over reliance on its relatively cheap well-educated workforce as a source of its comparative advantage. The industry of business process outsourcing or offshoring for example has successfully attracted large levels of foreign direct investment (FDI) into Poland, however the danger is that this model could quickly disappear as lower cost competition arises from other developing nations.

The key according to most economists is to instead create comparative advantage and a sustainable growth model through knowledge and innovation. Value added products flowing from in-house research insulate companies' balance sheets for years allowing for further research and development (). This in turn drives exports and inR&Dternational trade with nations all over the world, who demand the technologies Poland is developing rather than focusing its geographical proximity, cheap labor and low cost manufacturing costs.

The primary incubators of that innovation are lean, focused private companies searching for the hugely profitable opportunities that arise from technological breakthroughs. Privatisation of previously state owned companies can be an important driver as it attracts foreign capital and increases efficiency and competitiveness in large organizations with significant R&D budgets. Equally important are small to medium enterprises, which are entrepreneurial and flexible enough to respond to new ideas and technologies.

Case study: Eko Export S.A.
We interviewed Mr Zbigniew Bokun, Business Development Director at Eko Export, a homegrown Polish company with an innovative and environmental product, who take full advantage of Poland's geographical position. They import raw materials from Russia, Kazakhstan and Ukraine, process in their production plant in Bielsko-Biala and export almost 100% of production to the USA and Europe.

They specialize in the production of "Microspheres". These are spherical aluminium and silicon particles, filled with carbon dioxide and nitrogen, which are a by-product of burning coal in electric power plants. The microspheres have a number of properties including resistance to high temperatures, good thermal and acoustic insulation and they are light. They have applications in a wide variety of industries including the automobile industry (composites, tyres), energy and technology industries (Drilling fluids, propellers, coatings and composites of spacecraft), ceramics (Insulation materials) and many others. As Zbigniew Bokun puts it "Microspheres are used in everything from golf balls to spacecraft".

The firm was started 27 years ago by the Bokun family and from the very start they focused on export production (Entering the US market in 2009), as microspheres were not widely used in Poland. At first they started on a relatively small scale sourcing raw materials from lagoons near Polish electric power plants. Then from 2005 to 2010 they conducted an extensive and expensive investigation of lagoons around Eastern Europe, testing each for the quality and composition as a source of raw material.

What were the key moments in your development as a firm with global reach?
The turning point was 2009. We took a decision to enter NewConnect (The Polish stock exchange focused on small to medium sized firms) and created a new product line, Refining, based on our patented idea. As a result, we were able to double efficiency while maintaining very low costs. We were able to mix two different (with regard to chemical composition and the granulation curve) microspheres from lagoons, which are a distance from each other of thousands of kilometres, often from other countries, however resulting in a product, which meets the customers' requirements.

This gave us a competitive advantage, in terms of a doubled production capacity (ca. 20 K tonnes per annum), as well as the possibility of modifying the microspheres. We became the biggest company in this field in the European Union.

In 2009, we established contact with our American partner. It is a big company listed in the New York stock exchange, with worldwide range. Their first visit in Poland was a turning point for Eko. We heard a lot of compliments regarding the manner of production, testing finished goods in our laboratory as well as production capacity. Immediately after the first visit, we started a fruitful cooperation, which has been maintained and developed.

80% of our customers are mainly big worldwide concerns from various industrial branches. At the beginning, they were cautious towards our company, however, after a period of trial deliveries (six to twelve months), there was no problems with the quality of the microsphere, way of packing and "Just In time", deliveries, (fast) reactions to requests and orders of the customer, implemented by our Export Department, trust was increasing along with the numbers of ordered products and prices which we have imposed for our microsphere. At present, we are the only suppliers for many concerns, which not so long ago we didn't think possible.

In 2009, as a result of entering NewConnect and then in the year 2010, into the Warsaw Stock Exchange, we were able to increase the scale of our activity (due to the resources gained from issuing shares). We also used the opportunity of financing from EU funds. We finished another modernisation of the plant relying on the assembly of the automatic transport line and using waste heat in order to heat the wet microsphere warehouse all year round. We were also able to increase prices for our products.

What are the main people problems you have encountered operating an international business?
A great problem is cooperation (transportation logistics) with transportation companies regarding deliveries by trucks. These are mainly companies from Belarus, Lithuania and Ukraine. Transporting over distances of more than 6 thousand kilometres on damaged roads and severe winters poses many problems.

What role does IT in helping you with your supply chain?
The company is currently implementing an IT platform connecting suppliers, processing of the raw materials, modification, quality analysis, stocking and logistics of deliveries, directly with the systems of supplying end recipients. The system allows the Company to service external orders as well as quality control over raw materials gained by the suppliers as well as particular parameters of finished goods assigned for transportation. Automation of the entire production process increases the satisfaction of customers considerably.

How has having a base in southern Poland helped or hindered your global ambitions?
The south of Poland is a wonderful location. Infrastructure, transportation etc. are OK, as well as access to capital, employees etc. I believe the location is optimal.

Eko Export is an example of the type of innovative, fast growing firm that will create long-term, knowledge based growth in Poland. Beyond the quality of their product, they had the vision and guts to execute a risky expansion strategy into the US, with American partners and finance from NewConnect. Polish domestic companies with international ambitions can look to their example, if they too hope to become global giants.