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November 2001IDC special paper

EITO Special Paper on Central and Eastern Europe

Analyst: IDC CEMA

Chapter 1

ICT Markets and Trends in Central and Eastern Europe

1Introduction

This chapter makes too big generalization for economies what are in different conditions: historical background, current trends, GDP and its growth, neighbourhood, e.t.c. The countries have different size and location. The diversity has to present more precisely, as it is done in more or less in chapter two.

We can find many conclusions about maturity of IT market on the basis of hardware-software sales figures. The HW prices are the same over Europe and sometimes even cheaper in Western Europe. Package software is cheaper in CEEC, but not significantly. The problem is that IT services’ sales figures are based on salary level. A difference between east and west varies from three to ten times. Therefore rough comparison of these ratios is valid but misleading.

The region of Central and Eastern Europe (CEE) represents a bright spot amid the global economic gloom that has followed the terrorist attacks in the United States. While economic forecasts in CEE have been revised downward, the region as a whole is still expected to record notable expansion through 2003. This message of overall macroeconomic growth is carrying over into information and communications technology (ICT) market development, with the CEE region positioned to withstand a downturn better than other emerging economies in Asia and Latin America. Indeed, short-term ICT market growth projections for many CEE countries remain positive in view of the wide number of factors now driving IT market investment, such as infrastructure development, upcoming European Union membership, liberalization of communications, privatization of key sectors and rising levels of foreign direct investment.

Nevertheless, recent developments in Hungary and Poland indicate that the CEE region is not completely insulated from a worldwide downturn. The economies of both countries have received significant injections of foreign direct investment over the last decade. ICT spending in these countries was already declining during the first half of 2001, with a further slowdown anticipated in light of recent global events.

During 2001, spending on ICT reached EUR 31.39 billion across the ten countries reviewed in this survey, representing year-on-year growth of 13.0%. Poland continued to account for the largest share of regional spending in 2001, followed by the Czech Republic and Hungary. Ongoing investments in the region’s telecommunications infrastructure drove spending on telecommunications network services and equipment to EUR 22.32 billion, equivalent to approximately 71% of overall ICT revenue. Regionwide, ICT investments center on infrastructure reform and upgrade efforts, which are viewed as necessary to economic stability and growth.

A number of factors are influencing ICT market growth in the CEE region. These include the following:

  • CEE countries are restructuring their regulatory and legislative environments to spur investment in key sectors including public administration, banking/financial services, insurance, telecommunications and manufacturing sectors. Meanwhile, extensive public and private sector reforms are underway to modernize industry and a broad range of infrastructure services.
  • International organizations play an increasingly important role in facilitating ICT development in Central and Eastern Europe by providing finance, direction and support. In the run-up to eventual EU accession for several countries of the region, the European Union (EU) is offering much-needed assistance on both policy and funding issues. In terms of financial resources, these are allocated through organizations including the European Investment Bank (EIB) and the European Bank for Reconstruction and Development (EBRD). Such funds are crucial for the computerization of public infrastructure, including the administration, transportation, environmental protection and energy sectors.
  • The transition to market economies has prompted an explosion in the number of small and medium-sized private companies operating in the CEE region. These represent a major - and expanding - source of investment in personal computers, peripherals, networking equipment and packaged software.
  • Foreign direct investment remains a notable driver for the regional ICT market, particularly in key market segments.
  • While piracy and price-sensitivity remain major issues, users in Central and Eastern Europe are now investing more in legal operating systems and packaged applications, such as client server business solutions, integrated ERP software and other cross industry applications. The proliferation of the Internet and associated applications is generating greater demand for application and design tools.
  • The Internet represents one of the major drivers of ICT spending in the regional CEE market, with rapid growth in both the number of providers and users in the last several years. Moreover, local IT companies are reorganizing and revising product strategies to move into this segment, particularly for implementation and support. Localization of Internet-related products has become an important business for many local software firms.
  • The CEE region has seen a surge in the demand for internetworking hardware, servers, network consulting, implementation and communications management services. The high penetration of LANs, increasing demand for Windows NT installations and ongoing upgrades from NetWare to IntranetWare are combining to drive sales of hardware and networking support services.
  • The regional market for IT services has been driven by demand for increasingly complex solutions, incorporating the implementation of new technologies.
  • Notable investment has taken place in all segments of the region’s telecommunications markets since 1991. Nonetheless, teledensity is still low in a number of countries, despite the proliferation of mobile telephony. The growing demand for data and information services such as the Internet, call centers, teleconferencing and collaborative computing will require even higher levels of investment over the next several years.
  • ICT Market Ratios

Despite the notable expansion in IT spending in Central and Eastern Europe over the past decade, the ratio of per country investments to (1) GDP and (2) per capita ICT procurements remains considerably below that of Western Europe. Table 72 illustrates that just the Czech Republic, Hungary and Slovenia have attained levels of ICT investment commensurate with many Western European countries.Please update according to Western Europe figures. Meanwhile, the vast majority of CEE states invest well below 2% of GDP annually into information technology. Similarly, per capita spending across the region is quite low, from the Czech Republic and Slovenia’s high of approximately EUR 154 in 2000, to Romania’s EUR 11. Given these ratios, it will take considerable time for many states in the region to attain ICT penetration rates equal to those of their Western European neighbors.

1.2ICT Category Comparison

Table 30 indicates that the regional ICT market is still largely hardware-oriented. Spending on IT hardware represented approximately 59% (EUR 5.40 billion) of overall IT revenue (excluding communications) in 2001, down slightly from the 60.4% recorded in the previous year. Individual country markets are now slowly maturing into a solution-driven phase of development, led by the need of companies to operate more efficiently and profitably in a market economy. As a consequence, notable gains have been recorded in spending on packaged software, IT services and communications technology.

Consistent with major investments into the region’s telecommunications infrastructure, expenditure on telecommunications network services and equipment accounted for more than 71% of overall ICT market revenue in 2001. Moreover, sales of datacommunications, packaged software and IT professional services are generating an increasing proportion of regional and country-by-country ICT revenue.

1.2.1IT Hardware

As indicated previously, the countries of Central and Eastern European have spent the past decade investing in basic information technologies to establish infrastructure and to compensate for the deficits in spending of the communist era. While the current trend in IT spending is for more capital to be invested in software and services in order to more efficiently utilize this hardware base, the region’s markets remain heavily oriented towards basic IT hardware, such as personal computers (PCs) and PC-related technologies (PC add-ons, peripherals). This hardware focus reflects the relatively low levels of IT penetration in many CEE countries. It also mirrors the requirements of the solution-driven era of IT market development, in which the expanded usage of packaged software applications, networking solutions and the Internet demands higher processing speeds and storage capacity. IT hardware accounted for just over 59% of IT revenue (excluing communications) in 2001.

1.2.2Personal Computers

Within the hardware segment, PCs continue to represent the driving force of demand for information technology in Central and Eastern Europe. In 2001, PC shipments (desktops and portables) in the countries examined in this survey reached 1.93 million units. The ongoing boom in regional PC sales reflects a number of factors, including: (1) the relatively low installed base of machines, (2) notable IT investment by the small/medium business (SMB) sector, (3) increased demand from home users, as a result of rising wages, (4) major IT investment projects in sectors spanning public administration, insurance, banking/financial services and manufacturing, (5) overall economic growth, and (6) increased Internet usage.

  • The PC market of Central and Eastern Europe remains very small in comparison with Western Europe. In the past year, the regional CEE market –comprising the ten countries examined in this survey– was similar in size to the Dutch PC market. Market values are also considerably lower than in Western Europe, due largely to regional price-sensitivity and the relative prominence of low cost local assemblers.
  • Despite the high percentage of locally assembled PCs still shipped across the CEE region, name brand vendors continue to gain share. This growth is a combination of expansion in channel networks, good penetration of key corporate and public sector accounts, establishment of local offices, competitive pricing and an increasing focus on the dynamic SMB segment. Additionally, name brand vendors are benefiting from PHARE-sponsored and other EU-related projects, as these require PC hardware that has been produced in the EU. In 2001, as in the previous year, international vendors competed directly with local firms in the dynamic SMB and consumer sectors, running high-profile media campaigns and reducing the average sales prices (ASPs) on entry-level desktop and notebook products. The resulting competition forced local assemblers throughout the region to cut margins and reduce PC prices, resulting in liquidity problems for smaller players and an increase in mergers and acquisitions by larger local and international vendors.
  • The notebook segment continues to record strong expansion across the CEE region, buoyed by the large project market and increasing demand from the emerging SMB sector as ASPs continue to fall and the price differential with desktop PCs narrows. Despite this growth, the average penetration of notebook PCs in the CEE region is approximately half that of most West European countries.
  • Over the next several years market consolidation is expected to increase and local assembly to dwindle, as local firms seek to partner with international vendors or exit the PC market entirely. Between 2001 and 2003, the regional PC market, comprising the countries examined in this survey, is forecast to expand by more than 32% in volume terms, to exceed 2.5 million units.

1.2.3Systems and Servers

The growing need to share resources, network sites, access the Internet and implement cross industry application solutions has generated notable demand for computer systems and servers in the CEE region in the past several years. During 2001, the systems and server market for the countries examined in this survey reached a value of EUR 812 million, equivalent to 2.6% of regional market revenue.

  • As in previous years, standard Intel architecture servers (SIAS) dominated volume sales on the CEE computer systems and server market during 2001, while installations of reduced instruction-set computing (RISC) machines generated the majority of market value, particularly in the midrange and high-end segments. Due to declining ASPs, the penetration of RISC machines has expanded in the low end of the server market in the past two years. The shift down-market by RISC is heightening the competition between SIAS and RISC machines in the higher end of the workgroup server market. While RISC machines are currently gaining share in this segment, IDC believes that SIAS technology will start to compete successfully with RISC systems as machines running Windows 2000 Datacenter on IA32 systems or 64-bit Windows 2000 on IA64 systems are introduced.
  • SIAS servers running Windows 2000 or Windows NT increased their share of Intel-based sales last year. NT, especially, has made notable inroads into markets oriented towards low-end SIAS, where the product is preferred over Novell Netware due to its affinity with Exchange, low-cost commodity nature and good scalability and manageability. One of the drivers of NT growth in the enterprise segment is the relatively small size of ICT budgets in CEE organizations compared to their Western counterparts. Servers employing Unix operating systems continued to dominate midrange and high end systems segments. Unix will remain the leading OS within high-end decision support and Internet applications for some time. Linux is also making notable inroads into the CEE market, and now represents an important competitor for NT.
  • Through 2003, shipment volume in the CEE region will remain concentrated in the low-end of the market. Expansion will be fueled by a combination of improving conditions for SMBs, higher penetration of Internet-related businesses - including Internet service providers (ISPs) and E-commerce platforms - and improving price/performance ratios on low-end systems, as competition for share between SIAS- and RISC-based systems drives product innovation. SIAS market expansion will also be driven by the rapid adoption of rack-optimized servers. These devices have enabled the ‘horizontal scaling’ of the Internet infrastructure in which an array of small servers ‘scale out’ to handle pieces of a larger workload, such as Web serving, proxy serving, application serving or caching.
  • Coupled with price declines, advancements in technology mean that midrange servers will increasingly be shipped in preference to high-end systems. Midrange systems serve as the backbone for business critical applications. Several key factors are driving end-user demand for these machines: (1) high-availability features, (2) disk-sharing technologies, and (3) advanced server management capabilities. At the higher end of the midrange market, a combination of server consolidation, data warehousing/data mining, enterprise resource planning, supply chain management and Internet commerce are driving sales.

1.2.4LAN and Internetworking Hardware Technology

Spending on local area network (LAN) hardware technology in Central and Eastern Europe reached EUR 443 million in 2001, equivalent to 1.4% of overall market revenue.The regional LAN hardware market has been experiencing a dramatic migration from Ethernet technology to faster technologies like Fast Ethernet and ATM, and this trend is set to continue over the next several years. Additionally, the demand for more intelligent LAN hardware products, such as switches, routers and remote access switches (RAS) is expected to expand considerably over the next several years.

  • The LAN hardware market in Central and Eastern Europe is reshaping business by allowing users to share resources, collaborate on projects and modernize their computer systems towards Western European standards. This regional adaptation of the LAN market paradigm largely depends on two conditions: PC market growth and modernization of the telecommunications infrastructure. Countries that have sustained expansion in both of these areas now lead the CEE region in terms of connectivity and workforce modernization. Furthermore, this internetworking between PCs, workgroups and businesses has encouraged steady growth in several related areas, such as the Internet, electronic commerce and enterprise resource planning applications.
  • As international investment continues to pour into Central and Eastern Europe, private corporations and joint ventures have been pressured to develop similar work environments to those of the West. Additionally, companies that are competing with these firms must modernize to increase productivity in order to stay competitive.
  • The modernization of private networks continues, with outdated cabling replaced by newer unshielded twisted pair (UTP), coaxial cable and fiber lines. These allow businesses to install networks able to operate at greater speeds and without the hindrances to bandwidth posed by many older buildings.
  • In 2001, LAN data remained the dominant type of wide area network (WAN) traffic in Central and Eastern Europe, carried on the majority of WANs regionwide. Combined, legacy data was carried on 53% of WANs last year in the Czech Republic, Hungary and Poland, up from 37% in 2000. Usage of WANs for voice traffic increased to 19% last year in the same countries.
  • As interface card shipments rise throughout the region, the year-on-year ratio for installed base connectivity will increase. This growth will be furthered by the trend towards international internetworking and an increase in E-commerce.
  • The management of bandwidth will gain in importance for IT departments as LAN technologies are implemented in the CEE region to handle voice, video and data transactions. Hardware solutions, such as switches and routers, will be utilized to ensure certain amounts of data quality and speed to end-users. As prices decline for technologies during investments by companies will drive the value of the LAN hardware market.
  • Factors inhibiting growth in the region’s LAN hardware market include the high costs associated with the maintenance and installation of interface cards, hubs, switches and routers.

1.2.5Office Equipment