Out of the woods

Out of the woods

It took a reality check from Mother Nature to give Egons Mednis the clarity to ensure his IT business ELKO survived the financial crash. And he and Latvia’s fifth largest company haven’t looked back since, as Colin Donald reports

When the Latvian economy suffered cardiac arrest in 2008, the president of ELKO, now the country’s fifth largest company, could have been forgiven for panicking.

The IT market ELKO operated in dropped by some 40-50% and over 18% was wiped off Latvian GDP, a slump that was echoed – though not quite matched - in some of the company's key export markets.  As a wholesaler of hardware, Egons Mednis knew that the company he had founded in his student days was suddenly vulnerable, as customers rapidly shelved upgrade plans.

But Mednis did not panic. He did what he does most weekends and retreated to the peace and tranquillity of the Dikli Palace, a czarist-era mansion in the rural heart of Latvia’s northern Vidzeme province. Mednis had bought the property and its surrounding 20 hectares of countryside in 2000, and taken as much care in restoring it to its former glories as he took to build up his international business. It is now one of the finest country house hotels in the Baltic states.

“It was a disastrous time, unbelievable. Everything was going down and nobody knew when it would stop and how it would finish, or even if it would finish at all.

“Then when I entered the woodland and saw the animals, and heard the birds singing, and the mushrooms are growing, everything just happening exactly as normal, I got it all
into perspective.

“Maybe some people don’t understand the value of this experience, but ever since I went hunting with my father and grandfather as a boy I have been a nature-lover. I have always enjoyed hunting or just sitting in a seat in the forest, and switching off. Nature helped me to manage internal company problems, and to organise my mind, and maybe allowed me to create some new ideas.”

Rural therapy obviously worked. ELKO has not only survived to celebrate its 20th anniversary this year, it has thrived. The crash forced the company to retrench, but as good leaders should, Mednis used the crisis to effect an overdue internal restructure, a rationalisation that he believes helped the company bounce back, in 2012 regaining the US$1bn turnover it had achieved in 2008, before the financial crisis devastated IT markets across ELKO’s operating territory.

“Yes we had to decrease our costs but what we decided to do was not to save on the development of infrastructure, even if turnover-wise business was not increasing. We tried where possible to keep people, and keep them busy with overhauling our internal processes for two years. Up until then everything had been growing, growing growing, but the back office wasn’t keeping up. This was the time to focus much more on internal things. It has helped us become much more competitive as since about 2000 we felt we had been running behind the very fast train of economic growth.

“We did this homework and we went out of the crisis in much better shape than before.”
So it was a blessing in disguise? Mednis gives one of his frequent, modest smiles. “Almost.”
Last year the company, which has over 340 employees, achieved 20% growth, a feat that it expects to match in 2013-14.

Given that the IT product cycle is as fast as it is unpredictable, even without economic near-meltdown, ELKO’s ability to be both big and nimble is itself a tribute to the man who founded the company with three fellow IT students from Riga Polytechnic in the
early 1990s.

It was a heady time, just after the fall of the Soviet Union. The young entrepreneurs chose the IT sector because that was what they knew about, not because they foresaw the sector dominating all aspects of modern life.

“At that time we couldn’t plan even one year ahead, let alone longer into the future. It was a time of a lot of changes but we were young and motivated to reach out and do something. We had nothing to lose, nobody in the whole country had any business experience. The old Soviet system was broken and we were seen in Western Europe as a kind of wild area.
“Yes we made compromises and made mistakes that wouldn’t be allowed today, but everyone was learning at that time, it was the right time to take chances, and we got burned a few times, for example when we received fake payment documents from some of our then business partners.”

The firm had been born in 1993, wholesaling hardware first in Latvia, then in the other Baltic nations. Their big break came as a the result of programme agreed by Soviet leader Mikhail Gorbachev and German Chancellor Helmut Kohl, which gave Mednis the opportunity to study IT in Germany. The contacts made then were behind the company’s first joint venture with a supplier based in Regensburg allowing the budding firm to supply a large tender with a Latvian bank.

Now the company trades in nine eastern European countries, including Russia, its biggest market, and one relatively unscathed by the financial crisis that struck much of the
western world.

Managing constant change, if not crisis, has been a hallmark of ELKO’s two decades. That is partly the nature of IT. When the business started, it was a supplier of components mainly (hard drives, processors and graphic cards) as well as some monitors and peripherals. By 2000 the market was different, and ELKO moved into notebook PCs as a key partner for Acer and Lenovo, and they have since transformed themselves again, with the shift away from PCs to smartphones and tablets. Along the way there have been economic disruptions to cope with, such as the 1995 Latvian bank crisis which caused ELKO’s German partner to withdraw from the partnership it saw as “a little bit too risky”. ELKO bought out its shares and as an independent moved into Russia in 1995, as well as into Ukraine in 1998, just as the latter country was entering its own major financial crisis.

More recent upheavals have been technological, and Mednis’ countryside contemplation is focused on managing and anticipating market trends. “Windows 8 was not successful” he says. “The new generation is moving more to these ultra-light devices which are used not primarily for content creation - the main purpose of a PC - but also for this consumption of information: watching films, exchanging information on social media, it’s not so much creating content, a lot of users are consuming this technology in ways that mean changes in the market generally. If you are only using this content through the internet and all these wifi access possibilities, you don’t need more screens, and smart phones are enough.

“We are now focusing on servers, solutions, networks, storage products, and cloud-computing-related software. This segment is looking like replacing classical components. Last year was the first year the amount of PCs and notebooks declined and this solutions segment has grown and it’s definitely one of our key focus areas, it’s an area where we are growing faster than other companies.”

As well being the strongest partner for such companies as Acer, AMD, Asus, HGST, Intel, Lenovo, Microsoft, Seagate, Sony, Western Digital and many others, Mednis believes that ELKO’s success stems from “A readiness and an ability to change, to adapt, to learn, to try new areas”.

“In terms of products this is very very important. Also, during the downturn we made a lot of improvements internally, and we have quite developed internal systems, that are closely linked to our partners and our vendors. All of our sales information goes directly to a database and is used for planning of production. These ecosystems are very well connected, and very well integrated.”

All businesses talk about being customer-focused, but ELKO prides itself on having a knack in this area. “It’s very important to keep a fair attitude to our partners and vendors and financial partners, and of course to our customers. So that even if you don’t have good news – you can’t make a delivery or whatever - it’s important to communicate that and to provide the proper information at the right time in order to find some solution.

“Of course our business is very price-sensitive and very competitive, but often the advantage is not about price, it comes down to the package of services and information flow, and finally private contacts and relationships which are very important in our territory.”

The firm’s focus is now on “deepening” its operations and product ranges in its established markets rather than seeking further geographic diversification, with the aim of always being the leading wholesalers and preferred partners in any relationship. That said, ELKO’s pioneering tendencies are resurfacing. It is opening a subsidiary in, Almaty, Kazakhstan a country whose  economic potential has been picked up by the firm’s antennae.

Mednis has no intention of going up against giant and well-established competitors in Western Europe and Scandinavia, especially as he sees the West’s economy going nowhere fast. “The European problems could be here for many years, five years [since the crash] is already a long time and we don’t see a clear end of this story, it could last for another two or three more years.” Even the Eastern European markets he says are “frankly stagnating” at present, but their growth potential excites him more.

ELKO will therefore concentrate on boosting profitability in its Baltic home, also in its biggest market Russia and Ukraine.

“CIS countries present the biggest portion of our business.

Russia is around 65% and the Ukraine 15%.

“Russia is a very different story to Eastern Europe. They had local credit, local banks who weren’t providing this crazy financing, like in Western Europe where the debt was so huge. Russia was quite fast down, but it was a very fast recovery. Generally in the second half of
2009 it was already back on track.”

This year he concedes growth forecasts have been downgraded from 6% to about 2%, but ELKO’s share of the market has increased steadily.

“Eastern European countries are where we can use our knowledge, our potential. Maybe because these markets are not so established, you have to be a little bit more flexible, infrastructure is not so developed, you have to be more proactive.

“For us the aim is to have an international structure backed by our good infrastructure and back office that makes us able to exploit international possibilities, and at the same time not being so big and too inflexibile that we can’t adapt to local specifics and local requirements. This is the key. Our strategy to use the advantage that comes from being present in many countries, but at the same time having this local face so we are not seen as foreigners but accepted as locals.”

The formula seems to be working exceptionally well, though Mednis admits that ELKO will struggle to match last year’s 20% growth. “We are partly compensating for this decrease with new segments and we have added new products for smartphones and tablets. This is a nice business and still growing, but still when the overall market is slowing down, it is difficult to provide 20% growth on an annual basis.”

No doubt that Egons Mednis is a hard-driving businessman and a tough competitor, but his approach seems based on considering matters carefully and deeply. I expect him to say that he at least had an inkling, during the years of the Baltic bubble, that the good times
were illusory.

“No, I wasn’t aware that the growth was unsustainable.” He admits. “I couldn’t believe that three or four years after joining the European Community something like this could happen in a stable society. Of course we knew about the real estate bubble it was something far far away.

“A lot of the signs we can see today were showing it, but we saw prices in Europe and nobody was really very worried. It was worldwide sentiment, the problem wasn’t created here.

“I can’t blame people. You have to imagine the mentality of people here who came from being in the Soviet Union where the better lifestyle of Western Europe was always something forbidden. Then after 10-15 years since we were able to move across the border, we felt we had learned to manage things and were accepted as partners or members of the European club.

“Those economies were booming and everything was growing so of course people in the Baltic states thought ‘this is paradise’, everything works, everyone can afford a car, an apartment, to travel for vactions. Banks were happy to provide the finance.

We felt ‘we have arrived’, and everything will go well for many many years and all loans will be paid back and we can take new ones. I can’t blame people for not having the experience and the practice of recognising this for what it was. For this to happen in a system like the European community was definitely a big shock.”

Aversion to the possibility of further shocks has made Mednis a strong supporter of Euro entry, which he sees as desirable for a small, open country that has difficulty managing its internal monetary policy.

Characteristically however he also sees the issue from the point of view of less well-travelled Latvians, whose fears about slight decreases in small incomes he empathises with.

Dealing with sudden adverstity and communing with nature have helped to make him philosophical as well as businesslike.

He regrets the mass illusion that caused the Baltic bubble. More to the point, he learned from it.

Because the region’s troubles didn’t kill the business, they ended up making it stronger.

Palace passions and vintage tastes

While Egons Mednis cares deeply about boosting his business, this passion is more than matched in his parallel career as a high-end hotel proprietor.

Mednis bought the then crumbling Dikli Palace in 2000, and the separate private company he started as Dikli Pils since spent US$2.5m on restoring it “from cellar to attic”, transforming the 1896 manor house and surrounding outbuildings into a 42-room, four-star hotel, spa and business conferencing destination.

For years he had been passing it by and regretting its advancing state of disrepair, but it was not until he was invited to attend a business meeting at a small luxury country house hotel near London that he was inspired to take the major step of acquiring the former czarist-era hunting mansion.

“It was at an old castle in the English countryside, in a very nice area with a golf course and old parkland and trees. I got it into my brain that you can build whatever you want, in whatever style you like, but all that history, all those old trees, and the atmosphere you just can’t create this for any money.”

“I was inspired to buy the Dikli Palace because I love to be at one with nature. Like my father and grandfather I am a hunter and a fisherman, and loved to come to this place during the hunting season, and I thought why should only foreigners like the Swedes and the Germans restore old properties? I bought it as a business project, although we didn’t have any experience in the hotel business. I wanted to try something different, something new and interesting. There was also a patriotic reason: if we Latvians didn’t take care of our heritage, who would?

“Maybe it’s not perfectly tidy and regular as it might be in Germany or somewhere where every field is neatly drained, but I think it is a great asset to this country, and being here amongst the wonderful flora and fauna, I can come here and just switch off, and I like all of our guests to have that experience.”

Buying the hotel has increased Mednis’s passion for the antique in all areas, but especially vintage cars. He has a “small collection” of Jaguars (“a brand that intrigues me”) and a
1952 Rolls Royce. For the last eight years the resort has hosted the Dikli Retro Rally, a
summer event that attracts vintage car racing teams from across the Baltic states and neighbouring countries.