Russia Information Technology Report Q2 2009 - companiesandmarkets.com adds new report
BMI has downwardly revised its five-year Russia IT spending projections, as the Russian market is buffeted by strong economic headwinds.
Apr 29, 2009
BMI has downwardly revised its five-year Russia IT spending projections, as the Russian market is buffeted by strong economic headwinds. The total size of the Russia IT market is now projected to increase from US$17.4bn to US$29.2bn by 2013. In H108, IT spending continued to be robust, in contrast to signs of reduced corporate expenditure in other parts of Europe, but by the end of the year, consumer and business sentiment had turned.
Low computer penetration, government ICT projects and immense potential for IT spending by Russia´s traditional industries should mean continued growth, albeit slower than previously expected. IT spending per capita should rise from around US$122 to US$211 over the same period. However, the economic slowdown will interfere with Russia´s progress towards a consumer-driven economy, with negative real private consumption growth expected in 2009.
Government IT spending, which has recently accounted for about 30% of total IT spending, is also threatened by the economic crisis and reduced tax revenues. Over recent years, buoyed by the proceeds of high oil prices, the government had announed a series of IT projects. Despite the changes in economic circumstances, affordable computer programmes and an increasing emphasis on IT as an instrument of reform in various economic sectors should help to support flagging demand in some sectors.
Industry Developments The government has created a new regulatory body to ensure more competition in the IT market. The head of the Federal Antimonopoly Service (FAS Russia) recently signed an order to form the FAS Russia Export Council for Development of Competition in IT. The goal of the new administrative body is to ensure more compliance with existing antimonopoly legislation related to the IT industry and develop new proposals to improve government control of IT.
Government IT spending in H108 fell short of implied targets, leaving nearly the entire annual budget to be spent in the remaining three quarters. The shortfall raised questions about the ability of the government to see through its ambitious e-agenda over the next few years, particularly now that the price of oil has slumped from its mid-2008 high of around US$150 per barrel (bbl).
In July 2008, President Dmitry Medvedev chaired a session of the Presidium of the State Council of the Russian Federation devoted to government strategy for ´information society´ development. Medvedev set a deadline for the Russian government to complete the creation of new administrative rules to facilitate electronic circulation of documents. This was in support of its target of mainly electronic document circulation by 2010.
Competitive Landscape PC vendors invested in 2008 to capitalise on rapid revenues growth. Acer hoped to achieve total revenues for Russia and Kazakhstan of US$1.5bn in 2008, representing growth of 68%. To help achieve its target, Acer planned to invest US$20mn, up from just US$1mn in 2007. Much of the money was to go on developing its services network. Meanwhile, HP broke ground on a new US$50mn computer plant in St Petersburg, which it was building in collaboration with Taiwanese EMS giant Foxconn.
Microsoft reported that Russia was its highest growth market among Central and Eastern European (CEE) countries in FY08, with Ukraine in second place, with both markets recording growth of above 45%. Microsoft has continued to build alliances with key partners in Russia and in September 2008 signed a co-operation with Russia Post aimed at joint development of IT infrastructure. Microsoft also recently launched a co-operation agreement with MTS, the largest mobile operator in Russia.
In Q308, Russian IT giant Sitronics announced that it had completed a US$12mn Oracle enterprise resource planning (ERP) implementation project for telecoms company Comstar, involving training 400 Comstar employees. Meanwhile, IBM has enjoyed more success in the banking vertical, signing a threeyear co-operation agreement with Savings Bank of Russia (SBRF) for purchase of hardware and software solutions.
Hardware Due to the steep fall in the value of the local currency, BMI has downwardly revised its projections for US$ denominated hardware spending. Compound annual growth rate (CAGR) for the next five years is now projected to be in the region of 9%, reaching about US$15.4bn by 2013. Despite an adverse economic situation, hardware spending will be driven by a number of strong fundamentals including low PC penetration, rising incomes, government IT initiatives and industrial reform in many sectors.
An estimated 4.3mn computer units were sold in 2008, despite the economic slowdown in the second half of the year. PC sales had continued to grow rapidly in H108, due to a number of reasons including lower prices and more governmnent spending. Notebook sales are driving growth, but desktop sales are also expected to continue to grow. In Q109, Russian President Medvedev said that one in four Russian families had a computer.
Software Russia´s software market was worth around US$3.3bn by the end of 2008. Although Russia has the fifth highest software piracy rate in the world (87%), BMI expects that government efforts to strengthen IP protection as part of the conditions for WTO entry will see this fall closer to average Eastern European levels, boosting the market by US$2.7bn by 2013, at a CAGR of 22%. There are, unsurprisingly, regional disparities, with Moscow some way ahead of its closest rival St Petersburg in terms of enterprise resource planning (ERP) deployments.
The economic headwinds represent a challenge for software vendors, as enterprises have an increased tendency to focus on the bottom line and defer spending on systems. However, in 2008 companies in key sectors such as telecoms continued to invest in software. In the current economic environment, vendors will want to pitch the potential efficiency savings offered by new applications.
Services Russia´s IT services sector was booming in the first half of 2008, as the market segment continud to grow from a low base. After a downward revision to account for currency movements and a deteriorating economic situation, BMI estimated a value of US$4.3bn in 2008, up from US$3.5bn in 2007. The IT services opportunity is expected to grow to around US$7.9bn by 2013.
Systems integration is the largest IT services component, with as much as one-third of segment revenues and, together with implementation of hardware and software, probably accounts for about half of all IT services. However, more value-added services such as consulting and applications development are growing fast. Outsourcing is also on the rise, although below the levels in some other CEE countries.
Special Focus: IT Parks The ´technopark´ programme is the government´s flagship policy for development of the IT sector (see Industry Developments). The main construction phase began in 2007, with a federal budget of around US$74.68mn initially assigned for the project, which is being co-ordinated by the Federal Agency for IT (see below). A new phase of funding for 2008-2010 worth some US$850mn was announced in 2007.
The ´technoparks´ were initially intended to be exclusively ´IT Parks´, but are now actually open to enterprises in other sectors such as nano- and bio-technology, as well as IT. A plan was approved in March 2006 to construct the parks in seven regions, and the parks were expected to employ 19,000 people by 2008 and some 75,000 by 2011. Investment will be US$985mn, and the Russian IT and communications minister, Leonid Reiman, predicted that the output of the technoparks would be US$749mn by 2008, reaching US$4.4bn by 2011. So far, the St Petersburg project is the most advanced.
Intra-departmental wrangling over budgets has caused some delays to many projects. State financing is expected to make up only around 20% of the funds required by the programme, which overall are likely to exceed RUB100bn. One proposal floated - for tax breaks - was not included in the current programme.
E-Readiness Internet penetration was estimated by BMI to have reached around 29.9% by end-2008, representing more than 42mn internet users, up from 35mn users in 2007. By the end of 2008, BMI estimates that there were around 7.2mn broadband users, mostly DSL, and this is expected to increase to 26.6mn by 2013.
The government´s ambitious policy is that every locality in Russia should be provided with fixed-line telephony infrastructure, cell phone coverage and internet by 2015. According to the Ministry of IT and Communications (MITC)´s target, every populated area in the country should be provided ´irrespective of its economic ´weight´ and population´. IT and communications minister Reiman has described the ´digital divide´ as a very challenging issue for all CIS countries, and one that the Russian government was seeking to overcome.
This article was originally posted by Companiesandmarkets.com and is the property of VerticalEdge Ltd.
Low computer penetration, government ICT projects and immense potential for IT spending by Russia´s traditional industries should mean continued growth, albeit slower than previously expected. IT spending per capita should rise from around US$122 to US$211 over the same period. However, the economic slowdown will interfere with Russia´s progress towards a consumer-driven economy, with negative real private consumption growth expected in 2009.
Government IT spending, which has recently accounted for about 30% of total IT spending, is also threatened by the economic crisis and reduced tax revenues. Over recent years, buoyed by the proceeds of high oil prices, the government had announed a series of IT projects. Despite the changes in economic circumstances, affordable computer programmes and an increasing emphasis on IT as an instrument of reform in various economic sectors should help to support flagging demand in some sectors.
Industry Developments The government has created a new regulatory body to ensure more competition in the IT market. The head of the Federal Antimonopoly Service (FAS Russia) recently signed an order to form the FAS Russia Export Council for Development of Competition in IT. The goal of the new administrative body is to ensure more compliance with existing antimonopoly legislation related to the IT industry and develop new proposals to improve government control of IT.
Government IT spending in H108 fell short of implied targets, leaving nearly the entire annual budget to be spent in the remaining three quarters. The shortfall raised questions about the ability of the government to see through its ambitious e-agenda over the next few years, particularly now that the price of oil has slumped from its mid-2008 high of around US$150 per barrel (bbl).
In July 2008, President Dmitry Medvedev chaired a session of the Presidium of the State Council of the Russian Federation devoted to government strategy for ´information society´ development. Medvedev set a deadline for the Russian government to complete the creation of new administrative rules to facilitate electronic circulation of documents. This was in support of its target of mainly electronic document circulation by 2010.
Competitive Landscape PC vendors invested in 2008 to capitalise on rapid revenues growth. Acer hoped to achieve total revenues for Russia and Kazakhstan of US$1.5bn in 2008, representing growth of 68%. To help achieve its target, Acer planned to invest US$20mn, up from just US$1mn in 2007. Much of the money was to go on developing its services network. Meanwhile, HP broke ground on a new US$50mn computer plant in St Petersburg, which it was building in collaboration with Taiwanese EMS giant Foxconn.
Microsoft reported that Russia was its highest growth market among Central and Eastern European (CEE) countries in FY08, with Ukraine in second place, with both markets recording growth of above 45%. Microsoft has continued to build alliances with key partners in Russia and in September 2008 signed a co-operation with Russia Post aimed at joint development of IT infrastructure. Microsoft also recently launched a co-operation agreement with MTS, the largest mobile operator in Russia.
In Q308, Russian IT giant Sitronics announced that it had completed a US$12mn Oracle enterprise resource planning (ERP) implementation project for telecoms company Comstar, involving training 400 Comstar employees. Meanwhile, IBM has enjoyed more success in the banking vertical, signing a threeyear co-operation agreement with Savings Bank of Russia (SBRF) for purchase of hardware and software solutions.
Hardware Due to the steep fall in the value of the local currency, BMI has downwardly revised its projections for US$ denominated hardware spending. Compound annual growth rate (CAGR) for the next five years is now projected to be in the region of 9%, reaching about US$15.4bn by 2013. Despite an adverse economic situation, hardware spending will be driven by a number of strong fundamentals including low PC penetration, rising incomes, government IT initiatives and industrial reform in many sectors.
An estimated 4.3mn computer units were sold in 2008, despite the economic slowdown in the second half of the year. PC sales had continued to grow rapidly in H108, due to a number of reasons including lower prices and more governmnent spending. Notebook sales are driving growth, but desktop sales are also expected to continue to grow. In Q109, Russian President Medvedev said that one in four Russian families had a computer.
Software Russia´s software market was worth around US$3.3bn by the end of 2008. Although Russia has the fifth highest software piracy rate in the world (87%), BMI expects that government efforts to strengthen IP protection as part of the conditions for WTO entry will see this fall closer to average Eastern European levels, boosting the market by US$2.7bn by 2013, at a CAGR of 22%. There are, unsurprisingly, regional disparities, with Moscow some way ahead of its closest rival St Petersburg in terms of enterprise resource planning (ERP) deployments.
The economic headwinds represent a challenge for software vendors, as enterprises have an increased tendency to focus on the bottom line and defer spending on systems. However, in 2008 companies in key sectors such as telecoms continued to invest in software. In the current economic environment, vendors will want to pitch the potential efficiency savings offered by new applications.
Services Russia´s IT services sector was booming in the first half of 2008, as the market segment continud to grow from a low base. After a downward revision to account for currency movements and a deteriorating economic situation, BMI estimated a value of US$4.3bn in 2008, up from US$3.5bn in 2007. The IT services opportunity is expected to grow to around US$7.9bn by 2013.
Systems integration is the largest IT services component, with as much as one-third of segment revenues and, together with implementation of hardware and software, probably accounts for about half of all IT services. However, more value-added services such as consulting and applications development are growing fast. Outsourcing is also on the rise, although below the levels in some other CEE countries.
Special Focus: IT Parks The ´technopark´ programme is the government´s flagship policy for development of the IT sector (see Industry Developments). The main construction phase began in 2007, with a federal budget of around US$74.68mn initially assigned for the project, which is being co-ordinated by the Federal Agency for IT (see below). A new phase of funding for 2008-2010 worth some US$850mn was announced in 2007.
The ´technoparks´ were initially intended to be exclusively ´IT Parks´, but are now actually open to enterprises in other sectors such as nano- and bio-technology, as well as IT. A plan was approved in March 2006 to construct the parks in seven regions, and the parks were expected to employ 19,000 people by 2008 and some 75,000 by 2011. Investment will be US$985mn, and the Russian IT and communications minister, Leonid Reiman, predicted that the output of the technoparks would be US$749mn by 2008, reaching US$4.4bn by 2011. So far, the St Petersburg project is the most advanced.
Intra-departmental wrangling over budgets has caused some delays to many projects. State financing is expected to make up only around 20% of the funds required by the programme, which overall are likely to exceed RUB100bn. One proposal floated - for tax breaks - was not included in the current programme.
E-Readiness Internet penetration was estimated by BMI to have reached around 29.9% by end-2008, representing more than 42mn internet users, up from 35mn users in 2007. By the end of 2008, BMI estimates that there were around 7.2mn broadband users, mostly DSL, and this is expected to increase to 26.6mn by 2013.
The government´s ambitious policy is that every locality in Russia should be provided with fixed-line telephony infrastructure, cell phone coverage and internet by 2015. According to the Ministry of IT and Communications (MITC)´s target, every populated area in the country should be provided ´irrespective of its economic ´weight´ and population´. IT and communications minister Reiman has described the ´digital divide´ as a very challenging issue for all CIS countries, and one that the Russian government was seeking to overcome.
This article was originally posted by Companiesandmarkets.com and is the property of VerticalEdge Ltd.