As predicted, the global information communication technology (ICT) market enjoyed its first upturn in 2003 since the bubble burst. Unlike the heady 1990s, however, it is developing countries that are powering the industry. While the US remains the main producer and consumer of software, technology companies are all looking at emerging markets such as China, India, Russia and Brazil to make the most of cheaper costs and the growing middle-class consumer market.
According to ICT intelligence firm IDC, emerging markets are expected to see tech sales grow by 11% a year for the next five years, reaching $230bn and it is easy to see why the 260 million (and rising) middle-class consumers in China and India would be appealing.
But it is not just the demand for gadgets and gizmos that is driving the shift from West to East, it also an increase in the demand for IT services. Asia-Pacific leads other regions in growth, with a compounded annual growth rate of 9.7% from 2003 through to 2008. Gartner Dataquest forecasts that the region’s IT services market revenue will reach $43.9bn in 2008, up from $31bn this year, as more companies adopt technology.
China’s growing competencies in developing technology areas, such as operating systems, software applications, storage media, wireless communications and satellite positioning, could mean that it surpasses India’s top outsourcing position. Although the Indian software industry has recorded an average annual growth of 40% for the past eight years, it has largely concentrated on software exports alone.
China, by contrast, has concentrated on bolstering its domestic market and a far broader definition of IT, which includes software, hardware and the rest of IT and telecommunication infrastructure. By 2007, Gartner predicts that China will match India and pull in $27bn for IT services, including call centres and back office work. Narayana Murthy, chairman of India’s leading software company Infosys warns his compatriots that they ignore China at their peril: “While stressing its need to boost infrastructure and skills, China is closing on India’s lead in software services fast.”
Nearshore v offshore
Outsourcing IT services and functions to cheaper locales is forecast to increase from $1bn in 2002 to $24bn by 2007, but Asia will not be the sole beneficiary. Many companies are favouring near-shoring to central and eastern European and African countries. Technology analyst Datamonitor predicts that the most popular near-shore destinations will be the Czech Republic, Poland, Hungary, the Baltics and North Africa.
Datamonitor call centre analyst Peter Ryan says that an educated and increasingly multi-lingual workforce and economic stability are proving attractive to Western firms. “EU-based firms are impressed with central and eastern Europe’s and north Africa’s educated labour pool that is growing in its multilingual capability. An available workforce that is located relatively close to major EU centres, combined with modern telephony infrastructures work in favour of near-shore call centre outsourcing.”
Mr Ryan predicts that the Czech Republic, Poland and Hungary will attract higher-end care for German and English-speaking customers. Romania and Bulgaria will attract more routine customer care queries, with Romania focusing on Italian and French customers and Bulgaria on the UK and Germany. The Baltics will remain the choice for Scandinavian-servicing firms, and Morocco and Tunisia will focus on French customers. Mr Ryan predicts, though, that Morocco will diversify into Spanish and English speaking services.
Elsewhere in Africa, Ghana, Uganda, Senegal and South Africa are becoming increasingly popular destinations and inward investments are getting bigger and bolder. Affiliated Computer Services, a Dallas-headquartered outsourcing company, for example, is building a new data-input centre in Accra, Ghana, that will employ 2000 workers.
Unctad’s World Investment Report 2004 confirms that central and eastern Europe and many developing countries are increasingly benefiting from the offshoring trend. Between 2002 and 2003 their share in the total number of related FDI projects rose from 37% to 51%.
Such investments are helping the region to develop an ICT reputation. The European Information Technology Observatory (EITO) says that the Czech ICT market is already comparable to that of Ireland’s and Greece’s. Recent investments include E500m by DHL, which has opened its largest global IT operations centre in Prague. Activities will gradually move to Prague from the UK and Switzerland and the centre will eventually employ 1000 staff.
As demand for ICT is driven by the increasing diffusion of integrated networks and systems for enhanced web-based applications like e-government, internet commerce and e-business, it is not surprising that new EU member countries Poland, the Czech Republic and Hungary offer strong ICT market development.
EITO forecasts that the Baltic ICT markets will grow by 7.8% this year, reaching a market value of E2.9bn. Already one of the most advanced ICT markets in eastern Europe, e-government initiatives and the development of new services in mobile communications in Estonia, Lithuania and Latvia are winning investments.
New member states provide a platform for firms that wish to establish a foothold for expansion further east. “This makes them natural transition points for international players seeking to eventually expand into countries like Romania, Serbia and Ukraine, all potentially very lucrative,” says John Gole, IDC Central and Eastern Europe/Middle East telecoms programme manager.
Intel, the Californian semiconductor firm, has already opened an office in Romania and Intel EU regional manager Juergen Thiel explains why: “Romania’s information technologies sector has progressed greatly in the past year and the country has one of the most dynamic markets in central and eastern Europe.” Intel has also opened a regional office in Almaty, Kazakhstan – proving just how far east investments are now going.
So what does this mean for the flow of ICT investments to western Europe? EITO predicts that converging networks and systems and the growth of e-business expenditure should help the western European ICT market to grow by more than 3% in 2004.
Within western Europe, markets in France and Germany are still performing below the ICT average, while Spain is predicted to enjoy the strongest growth. The report also warns that constraints – among them a weak economic recovery, budget restrictions, and a lack of skills and technology culture – will inhibit ICT investment, especially for small and medium-sized enterprises.
The FDI reality check
With the ICT sector having moved from 31% growth a year to decline and losses, Oxford Intelligence believes that the industry has had to take a reality check. Global business is recovering and new technologies are coming through once more, offering a new phase of growth. The explosive growth in outsourcing and, from an FDI perspective, the even stronger presence of India and central and eastern Europe as competitive locations for a range of business operations has led to the need for a growth in innovation centres in the developed world to create added value in an increasingly competitive market.
Michel Lemagnen is research director of Oxford Intelligence
- For statistics on the ICT, creative and medical equipment industries, see Databank, page 94
Inward investment agencies
As new markets and outsourcing create competition, western economic development agencies face a greater challenge. An Oxford Intelligence 2001 study on the future of North American software companies in Europe revealed that only 18% of inward investors interviewed had used a development agency to assist them in their international investment projects, 36% were unaware of any development agencies and 60% did not believe that agencies would be interested in helping them.
In 2001 it was clear that inward investment agencies could not keep pace with the international dynamism of the software industry. Oxford Intelligence’s latest study, International Investment Strategies and Location Benchmarking Report – The Software Industry 2004-2005, was due to be launched in October and, hopefully, should reveal that improvements have been made in this respect.
Oxford Intelligence believes that inward investment agencies have become more professional. The overall standard of inward investment agencies seems to have become a lot more professional since 2001; in particular, they have become much better at understanding and responding to the needs of smaller, entrepreneurial companies. The agencies have also made significant efforts locally to create a more attractive and supportive business environment for ICT companies, both indigenous and foreign-owned.
The new study will be completed in March 2005 and will have specific sections focusing on key growth segments, such as creative industries, digital media, entertainment software and security. There will also be a focus on different types of investment projects, such as shared service centres, contact centres and software development centres. One of the key things that the new research will seek is evidence that these improvements are leading to delivery of real value and benefits to investors and to see if there has been an increase in the awareness and usage of inward investment agencies.
Bright Future for creative industries
Global entertainment and media (E&M) industry spending will grow 6.3% a year to E1400bn in 2008, according to PricewaterhouseCoopers (PwC). Buoyed by sales in the Asia/Pacific region, the creative industries sector’s growth prospects looks brighter than at any time since the late 1990s.
“After a few years of economic uncertainty, our projections for industry growth are encouraging across the board, highlighted by particularly swift gains in the video games and internet advertising and access spending segments,” says Wayne Jackson, PwC’s entertainment and media practice analyst. “However, while the global outlook is stronger than in the previous few years, budgetary pressures, such as rising energy costs and increased defence and domestic security spending, will limit the resources available to the entertainment and media industry.”
The US remains the largest entertainment and media market, with 5.4% annual growth predicted to reach $680bn in 2008, followed by the Europe, Middle East and Africa region, which is predicted to reach $549bn in 2008. In third place, the Asia/Pacific region will grow the fastest at 9.8% a year, increasing to $366bn in 2008.
Key findings by segment include increased DVD spending to reach $108bn in 2008, up from $75.3bn in 2003; a 5.9% annual increase in television advertising, to $178bn in 2008; large increases in subscription spending in Asia/Pacific; increased spending on licensed digital music spending; and 20.1% growth in global video game spending.
The computer and video game industry continues to demonstrate the most dynamic growth of all the creative industries. According to the Entertainment and Leisure Software Publishers Association (ELSPA) the UK is the third largest interactive software market in the world after the US and Japan. By region, the western European market was $1.2bn smaller than the US’s but $3.7bn larger than Japan’s in 2003. This is likely to increase, as the 10 new EU member states become more sustainable markets.
The UK also heads the table for DVDs sold. UK consumers spent a total of E3bn ($3.7bn) on DVDs, France spent E1.7bn, Germany E963m; the Netherlands E452m; and Spain E437m.
Just as DVDs have revitalised home video, PwC predicts that next-generation technologies will reinvigorate maturing segments and drive growth. Digital television is replacing analogue, thus expanding the potential market for advertisers and subscribers; online and wireless games are bridging the gap until new console platforms are introduced in 2006-2007; and digital audio broadcasting and satellite radio are attracting new advertisers.
Growth potential has led many inward investment agencies to promote creative industries. To capitalise on the UK’s E83bn sector, a new creative industries forum on intellectual property has been formed. In Ireland, the creation of a digital media hub in Dublin helped to convince US computer games developer TKO Software to establish its international headquarters there. Other successes resulting from government support of the industry include Electronic Arts’ decision to open a studio in Montreal, Canada.