Building The Muscle To Be A Tech Player

Ukraine has a bunch of cornfields, a bunch of old steel mills, and not much else. Right? Well, Ukraine also has a budding technology sector, and -- after the U.S., India, and Russia -- the fourth largest number of computer programmers in the world. It was a main center of the Soviet programming industry. The first computer built in continental Europe was made in Ukraine in 1951. Even today, scientific institutes each year churn out some 50,000 science or technology graduates. Not surprisingly, Ukrainians don't see why their country can't become a big player in the global technology market, like India. "We want Ukraine to become a technological country again, not just a country with agriculture and tank production," says Yuri Sivitsky, chairman of Softline, one of Ukraine's largest software producers.

What are the chances? While Ukraine isn't likely ever to rival India, it certainly has the potential to become a player. Just look at Softline. Founded by mathematicians in 1995, it has 500 employees, up from a dozen in 1998. Revenues are set to hit $10 million this year, up 70% from 2003. Its clients include Ingersoll-Rand Co. (IR ) and Hugo Boss.

The offshore programming industry, although small, is growing fast. According to Market-Visio, a research firm in Moscow, Ukraine's software exports will grow 43% this year to $100 million. Around 10,000 programmers are employed in the industry, working for customers such as Boeing (BA ), DaimlerChrysler (DCX ), General Electric (GE ), Citibank (C ), and NASA. Much of the work is customized business software. But gaming is also growing. Kvasar-Micro, Ukraine's largest info tech company, recently landed an order to develop a computer game for mobile handsets.

Ukraine's main selling point is the quality of its mathematical education. Another is cheap labor. An average programmer in Ukraine earns $500 a month, not quite as low as India, but half the level in Moscow and a fraction of programming salaries in the West. But the edge Ukraine gets from high education and low wages is offset by other factors. Around 90% of all software on sale in Ukraine is pirated, so domestic makers can't get the revenue they need to grow. Other problems are a lack of business skills, venture finance, and government support. But things are looking up. Management skills are improving as Ukrainians gain Western experience and earn MBAs. The government is mulling tax incentives for tech investment and starting to tighten piracy laws.

Some of the biggest names in the global technology industry have started to wake up to Ukraine's potential. "Ukraine is building up quickly," says Gerard J. Kleisterlee, CEO of Dutch electronics giant Royal Philips Electronics (PHG ), which makes an array of high-tech goods there. Flextronics International Ltd. (FLEX ), a Singapore electronics powerhouse, recently set up a software design lab in Ukraine, and CEO Michael E. Marks is enthusiastic about the nation's potential as an engineering and design power. If he's right, Ukraine has a digital future.

By Jason Bush in Kiev

    Before it's here, it's on the Bloomberg Terminal.