Concluding the report (CI No 2,912) from our sister publication, Computer Business Review. Three factors are likely to encourage the emergence of small personal computer manufacturers in Eastern Europe. First, personal computers can be assembled with relatively little investment from standard, easily available components. Coopers & Lybrand recently warned the big US manufacturers that European retailers are starting to realize they can do just this. The trend is already being seen in countries such as Germany, where the local supplier Vobis Microcomputer AG is strong, in Turkey, where a local manufacturer, Escort AS, outsells IBM Corp and Hewlett-Packard Co, and in Greece, where the number one supplier is a Greek assembler, Altec SA. In Russia, VIST is strong. In the East, a local assembly market is being helped by the second factor, the availability of a skilled but relatively cheap labor force. The third factor is the national interest of governments: several countries are concerned that international companies are exploiting their markets, and as a result are encouraging establishment of local manufacturers.
Local labor
Many of the major international computer companies can argue, of course, that they already put a lot into the local enconomies. Partly to exploit the local labor, partly to reach local markets, and partly to placate governments, several now have manufacturing plants to match their eastern sales outlets. There is further cause for optimism for local businesses. All the evidence in the computer industry shows that, in the corporate market, if not in the home personal computer market, every dollar spent on IT hardware or shrink-wrapped software is at least matched by an equivalent amount of spending on installation, maintenance, support and local or specialist software. This will feed into the local economy, creating a secondary, if not a primary, industry based on information technology. Not all of this, of course, will go to local companies: major services companies such as Electronic Data Systems Corp, are highly active in the region. Given its large gross domestic product – $618,000m in 1994, Russia has a tiny IT market. According to IDC, just $1,000m of equipment was installed in 1994. But those suppliers that are active are reporting record revenues – among them IBM, Hewlett- Packard, ICL Plc, and Digital Equipment. The Russian market has attracted considerable inward investment, and most major hardware and software companies have established substantial subsidiaries. At present, personal computers account for most hardware and software sales, with strong focus on well-known international brands. This is being driven by the Government, which, while it wants to encourage development of local brands, also wants to encourage inward investment and be sure the systems it buys are of good quality. Although not as large as some of the brand leaders, VIST, a local Russian personal computer assembler, has proved a successful supplier. According to Russia Data Services in Moscow, some 590,000 locally assembled personal computers were built in 1995, with VIST taking the lion’s share. Another local company, CROC, beat internationally successful distributers such as Merisel in the numbers of computers it distributed. The biggest IT market in Eastern Europe is Poland – in 1994, the market was worth $804m. It is, according to Steve Frantzen of IDC, fundamentally different to other markets in the region. This is because of its relative maturity and the role of the government, which insists that local companies are involved in government contracts. This has encouraged the development of the kind of software companies and systems integrators seen in Western Europe and North America. A particularly strong sector is banking, where several banks have pledged themselves to develop systems equal to those in the West.
The Czech Republic market has been booming for several years, and spends more as a percentage of gross domestic product than any other Eastern bloc country. In 1994, the market was worth just under $1,000m. A significant feature is that it is not dominated by government policy or government spending. Large capital projects, especially in the financial sector, have helped to drive sales and have also encouraged the development of local software and services companies. As in Poland, these companies play a key role in generating new hardware sales. The Czech market is also not so entirely based on personal computers as some. The small size of Slovakia, with its population of just 5.4m people, makes it relatively insignificant as a computer market. But its recent economic performance, with low inflation and political stability, has encouraged growing investment. In 1994, hardware sales were in more than $100m, almost entirely for personal computers. But Growth can be related to where the government has agreed its budget says Franzen.From 1989 to 1993, Hungary, like the Czech Republic, proved a highly successful market for those attempting to move into Eastern Europe. But recently, its $700m IT market has started to slow, partly due to overall economic factors, and partly because its first wave of computerization has passed. In some respects, Hungary is the most mature market in the region, and as in Western economies, the biggest growth area is in services. As elsewhere, there is a strong focus on personal computers, backed by a local software industry, and Hungary has fostered an international reputation as a center for skilled programmers. As long ago as 1981, it began to promote advanced software products and offered to complete difficult software projects for Western firms, but the opportunity for Hungarian programmers may be diminishing – Chinese and Indian programmers are far less expensive. As the second largest of the former USSR republics, the Ukraine has a large but backward economy. Sales, once again mainly personal computers, are among the lowest per capita in Eastern Europe. In 1994, says IDC, about $90m of computers were sold. The approach of most Western companies is to deal with Ukraine through their Russian subsidiaries. Sales of computers to Romania totaled about $69m in 1994, which is relatively large in relation in relation to its Gross Domestic Product. Like most of the smaller Eastern European countries, Romania is viewed by many Westerners as a satellite economy supplied through Russian or German subsidiaries. Along with the Czech Republic, Poland, Slovakia and Hungary, Bulgaria has a relatively high level of computerization compared with other Eastern European countries, partly because the government is attempting to encourage inward investment. A local company, Selenics OOD, for example, has developed a digital video telephone using its own software, camera and computer board. It sells at a fifth of the price of equivalent Western components. Some Western companies – notably IBM – are also exploiting the fact that Bulgaria was one of the industrial centers for manufacturing computers supplied to the Eastern bloc. IBM has moved some of its disk drive production to Bulgaria. The Bulgarian Telecommunications Company is also aggressively pursuing a $300m modernization policy, and is installing a high bandwidth digital communications network in its larger cities. The Internet Market analysts all agree that sooner or later, the market in Eastern Europe must explode, rather than show the steady growth of recent years. It is this belief, rather than immediate profits, that is sustaining the steady interest and investment of the international computer suppliers, software companies and service companies. IBM, for example, is saving considerable amounts of money, and building up local goodwill and infrastructure, through its manufacturing activities. It began scouring the East for procurement possibilities as long ago as 1993, and is now able to source many components more cheaply than rivals. Two factors are expecting to provide a surge in growth. First, the market for computers will move from the first to the second stage – when computers in the workplace become ubiquitous, rather than only for privileged users in the larger organizations. Second, the small office and home market must at some point take off. Sales in this sector are responsible for driving the growth of many of the world’s top personal computer companies, and the same pattern should repeat itself in the East. The advance of the Internet could act as a catalyst, and encourage computerization to advance even faster.
By Andrew Lawrence
