Czech Republic Information Technology Report Q3 2007: Industry Research Report

Czech Republic Information Technology Report Q3 2007

Published Date: November 2007

Published By: Business Monitor International

Page Count: 38

Order Code: R302-1333

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Market Overview

The Czech Republic IT market is expected to grow at a rate faster than that of the economy as a whole and still considerably faster than Western European markets reaching a value of around US$5.4bn in FY2011. The computer market has continued high growth potential with recent surveys revealing that the Czech Republic lags in computer literacy in some sectors and among certain types of businesses. This is despite already having one of the highest per capita IT spends in the region. The recent approval of the government’s plan to abolish the IT Ministry has raised some questions about IT strategy, but with EU programmes to improve performance across a series of ICT indicators underway, discussions are ongoing on new ways to fund development.

The recently confirmed EU member still offers plenty of growth potential for IT vendors but if this is to be fulfilled then these companies must succeed in delivering products tailored for the key large small and medium-sized enterprise (SME) sector. With the IT market expected to grow at a compound annual growth rate (CAGR) of 10% over the forecast period, vendor focus is turning to new market areas such as SMEs to extend presence. However, the large enterprise and central government sectors will still offer room for development. In the consumer segment, strong demand for PCs has been fuelled by falling notebook prices, and notebook sales are expected to exceed those of desktops for the first time in 2007. While it was among the first countries in the region to adopt information and communication technology (ICT), the Czech Republic lags in some areas, such as IT in schools, where it scores second lowest in the EU. Economic liberalisation will generate opportunities in financial, transport, and retail sectors among others.

Industry Developments

The most recent EU i2010 report reveals uneven advances in ICT indicators in 2006 at the same time as the government has announced the implementation of a major national computer literacy programme. The programme is designed to address low levels of internet usage and below average ICT skills among employees. There is a particular focus on schools where progress remains restricted by low broadband connectivity and low student computer ratios. The government hopes to improve matters by supplying schools and libraries with the necessary computer equipment.

Meanwhile, the government’s Interior Minister Ivan Langer has issued a reassurance that the recent abolition of the IT Ministry does not mean the end of IT development in the Czech Republic. Instead the move was presented as part of the government’s new electronic strategy. As reported last quarter, the Czech Lower House of Parliament in April 2007 finally approved the Government’s bill to abolish the IT Ministry. After abolition, the brief of the former IT Ministry will be distributed between the Interior, Industry and Trade, and Regional Development Ministries. Competitive Landscape

A combination of increasing demand for notebooks, where multinationals have an advantage over foreign vendors, and a decreasing price sensitivity among local consumers has worked in favour of the leading computer vendors. These trends are expected to continue in 2007, with notebook sales likely to exceed desktops for the first time. However, despite this, prices are not expected to drop overall and the market is exhibiting increasing demand for higher-end models with more functions.

In 2006 the top five vendors led by Acer and also including HP, Dell and Fujitu-Siemens claimed around 60% of the market. With declining price sensitivity, vendors are also concentrating more on services as a differentiator, and Computer Sciences Corporation is the latest company to announce that it is opening a new service centre located in Prague. As a result, local computer makers are having to invest to compete with Czech Computer maker Coxconn planning now to invest US$14mn to build an LCD monitor and components factory in Kutna Hora in central Bohemia.

Computer Sales

Lower prices on the Czech market are contributing to faster than anticipated sales growth in desktops and particularly notebooks. In 2006, computer sales (including desktops, notebooks and accessories) had an estimated value of about US$1.4bn, up 8% year-on-year (y-o-y). In 2007 growth is expected to be even stronger, driven particularly by notebooks, which now account for around 40% of total PC sales. Notebook prices declined by up to 20% in 2006 and the cheapest models now retail for around EUR700. The main drivers of lower prices are the appreciation of the Czech crown against the US dollar, along with lower processor prices.

Acer leads the local computer market, with sales of more than CZK4bn in 2006 from an estimated 150,000 units sold. HP is in second place. Overall however, local assemblers are likely to retain a strong position in the Czech PC market, despite gradually facing tougher competition from brand-name vendors. The Czech market has already gone through a wave of mergers with just a few large local players remaining and numerous smaller producers. With margins and prices falling, this may well drive further consolidation in the PC industry.

Software

Widening internet access, although generally a positive for the IT sector, creates a problem for software vendors in that it provides another distribution channel for illegal merchandise. In the Czech Republic the piracy rate was estimated to have fallen just 15% in 2006 to around 39%, as compared with around 35% in the EU as a whole. As the Czech Republic is a relatively mature IT market in the region, the focus of software market growth is shifting from basic ERP implementations for large manufacturing accounts and central government, to new markets and product areas. Many larger organisations in the manufacturing and utilities sector have already completed ERP implementations and so the larger vendors are now concentrating more on the SME sector. Vendors are also extending into new functional areas, detecting a market for solutions such as business intelligence, data warehousing and customer relationship management (CRM). BMI has estimated a software market value of US$720mn in 2006, up 16% on the previous year, faster than expected. The market should be worth around US$1.3mn by 2011, although much will depend on success in bringing down a piracy rate which remains above the EU average.

Services

BMI estimates that sales revenue of IT Services rose 13% in 2006 to around US$1.2bn, as EU membership continued to provide impetus in the form of foreign investment inflows and funds from EU programmes. The Czech market was ahead of many other CEE countries in moving to a relatively high level of spending on IT services, and the local market is expected to grow at a CAGR of 10% to close to a value of US$2bn by 2011. Larger and medium-sized enterprises invest in the information technology that will enable them to compete with their European partners. The more sophisticated market means that there is more demand for applications tailored to specific verticals, as well as systems consolidation and platform integration. Foreign multinationals investing in strategic services and outsourcing should continue to be a major driver of the IT Service sector over the forecast period. In a virtuous circle, foreign investment, as well as a continued inflow from EU funds, is creating more opportunities for service providers. Logica CMG is one company moving to exploit this expected opportunity, announcing recently that it is to recruit another 300 staff for its plant in the city of Brno. The company focuses on financial services, telecoms and the public sector.

E-Readiness

Much of the current growth in connectivity is now coming from conversion from narrowband to broadband rather than overall growth in internet usage. Broadband now stands at around 40% of total accounts. A recent survey by the Economist also found that the Czech Republic was in general catching up with Western Europe in terms of such indicators as online availability of public services and broadband connectivity. The Czech Republic lags behind Western Europe in high-speed internet connections, with around seven per 100 citizens, compared with 20 in Western Europe. However, in 2006 the number of broadband users surpassed 1.2mn. Efforts are continuing to close the gap, with government subsidies expected to drive penetration growth in 2006. The Czech Republic ranked third for PCs per household among new EU member states at accession, with BMI’s latest figures forecasting that internet users will approach 5.9mn this year.

A 2005 survey organised by the Ministry of the Interior and Informatics produced the following results:

One-quarter of the population of the Czech Republic aged 18-60 years is literate in IT;
While only 2% of the population aged 60 years and over are information literate, information literacy among young people aged 15-17 years totals 55%;
Only one-third of all primary and secondary school teachers are literate in IT;
Only 1% of the population can be regarded as complete computer professionals (excellent familiarity with the area);
The lowest level of computer literacy is among unqualified labourers (4%);
Three-quarters of the people able to work with computers have acquired their knowledge through the trial-error method (73%);
Two-thirds of the respondents use their computers for self-education purposes (63%), half for playing games (46%) and one-third for shopping purposes (31%);
Two-fifths of the respondents who do not own a computer have no meaningful use for one (47% among the respondents aged 60 years and over);
The internet is most frequently used to search for information or to write simple emails.

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