ASBIS in FT special report: Infrastructure and politics hinder the region's online advance

By Stefan Wagstyl
Published: October 3 2000 15:36GMT 
The Czech branch of First Tuesday, the global internet club, looks little different from its counterparts around the world.

At a recent meeting at the Fromin nightclub in central Prague beer, wine and conversation flowed freely as three companies presented their wares: Globopolis, a web-based travel guide, Samba, an internet design office, and, a personal finance portal.

About 300 people stood around the dance floor, as entrepreneurs and would-be entrepreneurs mixed with financiers, consultants and hangers-on of all kinds. ’This is the place to be,’ says Tomas Prouza, editor of Penize, who had just given up a regular newspaper job to work on the web.

Prague First Tuesday is one side of the information technology industry in central and eastern Europe. The other are the millions of people who have yet to see a telephone line in their homes. A region which boasts some of the world's most advanced software companies is also home to some of the most technologically-backward districts in Europe.

While mobile phone companies in the cities of Budapest, Prague and Warsaw have introduced internet services sooner than those in some European Union capitals, central Europe as a whole is perhaps three to five years behind western Europe in the spread of mobile telephone networks. Russia, outside the fast-moving metropolis of Moscow, is further behind still.

Yet the information technology gap between west and east Europe is closing. Economic convergence is steadily bringing the Continent's two halves together. So is the need to prepare for EU accession and compete in international markets.

As well as needing to invest to catch up with the west after decades of stagnation under Communism, the region is flush with enthusiasm for new technology. Moritz Gerke, executive vice president of Deutsche Telekom, the German telecoms group which is investing heavily in central and eastern Europe, says: ‘Spending on telecoms is growing much faster than GDP. People put a priority on telecoms and are prepared to spend more of their money on it than people in the EU.’ While the telecoms market is not the same as the IT market, the two overlap extensively.

However, enthusiasm for high technology is not enough to drive markets. Users also need the wherewithal. Even in the region's richest states – the Czech Republic, Hungary, Poland, Slovakia and Slovenia – incomes per head are only about 40 per cent of EU average levels when adjusted for purchasing power. Steve Frantzen, managing director of the central Europe business of International Data Corporation, the IT market research company, says the most important influence on demand for information technology products and services are the ups and downs of the economy. In comparison, the effect of all ‘the internet hype’ is negligible, he says.

ASBIS in FT special report: Infrastructure and politics hinder the reg

IDC expects the region's IT market, worth about $10bn this year, to grow at about 15 per cent annually. Industry executives say the communications market, which is worth about a further $25bn, including equipment and services, is expanding at a similar rate. This compares with growth rates of under 10 per cent in western Europe.

The principal force driving demand will be economic growth. Central and eastern Europe, including Russia, is expected to grow by more than 4 per cent in GDP terms this year, significantly faster than the EU, with about 3 per cent.

At the same time, the former Communist states are expected to invest a growing proportion of their income in IT. According to IDC, the countries of central and eastern Europe have already reached EU levels of investment relative to the size of their economies, spending 2.2-2.6 per cent of GDP on IT, compared with an average of 2.5 per cent in the EU. The figure could reach 3 per cent in coming years, provided economic growth continues and if a recent surge in investment spreads from government institutions and large companies to smaller businesses.

The integration of the region into the world economy is also contributing to IT investment. Multinational companies are the main engine behind this integration, building computer and communications systems of their own and encouraging investment by network providers. For example, Cisco Systems, the internet technology company, says one of its largest contracts in Europe is an order from the Russian railways ministry which is building communications links alongside its tracks.

EU accession is playing its part, particularly in those countries in central Europe which hope to join the union in the next few years. Governments are investing to upgrade to EU standards everything from statistics offices to veterinary laboratories. Companies are introducing sophisticated systems to raise quality control to EU levels.

Central and east Europeans are also preparing themselves for international integration via education. People who have long enjoyed high levels of literacy and numeracy now want top-class IT training. This thirst for knowledge creates both a demand for high-tech educational services and a supply of well-trained computer staff.

Bob Agee, general manager for the region at Cisco, says: ‘People in these countries want to learn, whatever the problems they have.’ Cisco sponsors technology training centres in most European countries. The second largest, with 70 sites, is in Romania. Only the UK has more.

As elsewhere, technological change also drives investment. Walid Moneimne, managing director of business development at Compaq, the US computer maker, says the convergence of the computer, consumer electronic, media, communications and internet industries is creating demand for new products and services.

In some cases, central and eastern Europe's relative backwardness actually creates opportunities for more rapid development than in the EU. For example, central and east European banks do not waste time like some of their western counterparts trying to marry new technology with existing computer systems dating back to the 1960s.

The slower introduction of some new technologies also gives scope for leap-frogging developments in the west. Izzet Guney, telecoms specialist at the European Bank for Reconstruction and Development, says the mobile telephone networks of Moscow, Warsaw and Budapest are more advanced than networks in west European cities because they were installed a few years later. As a result they are more suitable for mobile net-linked services.

However, amid all the forces driving forward IT investment, the region also has some significant barriers to overcome. First, is the relatively low income level. At current rates of economic progress, it will take 10-20 years for even the richest former Communist states – those in central Europe – to reach EU income levels.

Jan Winkler, an executive with Andersen Consulting, the management consultancy in Prague, says: ‘With average salaries at about Kc15,000 a month, and a basic PC costing Kc30,000, computers are too expensive for people to buy for themselves.’

Despite the impressive growth of the past decade, the region's IT and communications markets are about 5 per cent the size of western Europe's, according to IDC.

Computers will spread across the region. But they will more likely be installed where they can be shared – in offices, schools and public buildings rather than private houses. While international company offices may soon match EU levels in IT investment per worker, small businesses will be far behind their western counterparts.

A second potential obstacle is government policy. As in the EU, many states are deregulating telecommunications in ways which gives advantages to the incumbent utility, usually the former national monopoly. Red tape and high costs will slow growth, particularly in communications-linked services, such as the internet.

A third limitation to IT investment is the region's poor infrastructure. Only about one third of homes have a telephone. Roads are poor and railways slow. Companies which waste time and money trying to communicate with telephone-less customers or deliver orders to inaccessible places have less to spend on information technology.

In general, the difficulties are greater in the former Soviet Union, including Russia, than in the fast-growing countries of central Europe.

The Baltic states have developed exceptionally fast, helped by investment from technology-friendly Scandinavia.

The Balkans have been held back by war and slow economic liberalisation but some countries, notably Bulgaria, are trying to make up for lost time by rapid investment.

Everywhere, the big hope is that entrepreneurial companies, local and international, will focus on the potential rewards rather than the problems.

Sergey Kostevich, president of Asbis, a Cyprus-based component distributor, says: ‘The demand is there. It is just a question of fulfilling it.’

Mr Kostevich, a Belarusian academic researcher, is an example of entrepreneurial drive. He started his business supplying friends and acquaintances in Minsk. Now he employs 280 in a region-wide network which is this year forecast to have a turnover of $260m.

The region is increasingly attracting the biggest international IT suppliers, including IBM, Microsoft and Intel. These are gradually winning market share from local companies, particularly in hardware.

In the former Soviet Union there is still a thriving industry in assembling low-cost personal computers from cheap components, but in central Europe, there is a growing preference for branded models.

Local suppliers are holding their own better in software and services, where local market knowledge and language are an advantage. For example, Prokom in Poland and Synergom in Hungary have grown into substantial operations now ready to acquire local rivals.

Mr Frantzen of IDC says that consolidation is already happening and forecasts there will be more to come.