Market Overview
As oil rich Russia seeks to diversify her economy, the country’s IT market is now the fastest-growing in the Central and East European (CEE) region. Accelerating growth in computer sales in 2007 after strong growth in 2006, and immense potential for IT spending by Russia’s traditional industries all provide strong grounds for vendors to invest. Buoyed by a spending boom fuelled by high oil prices, and with WTO membership hopefully on the horizon, Russia is beginning to live up to its potential status as one of the largest IT markets in Europe. BMI expects the Russian IT market to register a compound annual growth rate (CAGR) of 14% over the forecast period up to 2011, while the total size of the IT market is predicted to increase from US$9.6bn in 2005 to around US$18.3bn in 2011. Moreover, services and software should account for around 36% of spending.
In the past year, Russia’s government has started to give IT a much higher place in national policy priorities, rolling out some significant programmes. Under the new ‘computer for every home’ programme the government is offering a 39% tax rebate for families purchasing computers. Meanwhile, the ‘Internet in Every School’ programme is expected to succeed in its primary goals this year. While purchasing power remains relatively low in the consumer sector, incomes are rising and the low level of computer penetration, at just 9% in 2005, should also mean opportunities for vendors. However, many challenges remain and further government action is needed in areas such as protecting intellectual property rights (IPR) and creating a sound legal framework. The government is taking some action to address these, most recently establishing a working committee to look at e-commerce legal framework (see Industry Developments). However, much remains to be done.
The government is also placing an increasing emphasis on IT as an instrument of reform in various economic sectors. It is estimated that the Government has as much as US$350bn in reserves for investment to apply IT to improving areas such as education, healthcare, defence and the power sector. Moreover, an ambitious series of IT-oriented ‘technoparks’ is being rolled out, and laws are being passed to provide tax and other incentives for companies specialising in IT. The general economic context should be favourable, with high oil prices still above their long-term trend level, and real wages showing significant gains in 2006. The banking sector offers huge potential for IT vendors over the next few years.
Industry Developments
The ‘Internet in Every Classroom’ programme is on course to achieve its goal of connecting every school by the end of this year. According to First Deputy PM Dmitry Medvedev’s report to President Putin, the number of general education institutions with broadband internet access reached 35,125 as of mid-2007. The remaining 17,627 institutions are expected to be hooked up before the end of this year. The achievement is substantial if one considers that within two years (2006-2008) all Russian schools will have obtained unlimited broadband access to the World Wide Web.
The Ministry of IT and Communications also launched a new ‘computer for every home’ programme in February 2007. The programme, developed together with Russian Post, Intel and Microsoft, is designed to facilitate growth in PC penetration among inhabitants of small cities, and those in the countryside and remote regions of Russia. Russian Post has pledged to deliver all computers within seven days of the order being placed.
Meanwhile, the IT Ministry and the Central Bank have announced that they will set up an interdepartmental working group to draft proposals on improvement of the legal framework for e-commerce. The work group will consist of officials from the Finance Ministry, Interior Ministry, Economic Development Ministry and other agencies. By the end of the year the committee expects to have developed a full concept of electronic trading and provided draft proposals on improvement of legislation in this field.
Competitive Landscape
The recent opening of a new computer hardware plant for Kraftway, one of the largest domestic Russian manufacturers, is a sign of the growing ambitions of domestic vendors. Russian IT markets, which until relatively recently mainly distributed foreign made equipment, are now increasingly investing in their own domestic manufacturing facilities. The Kraftway Plant in Obninsk, Kalulga region, will produce 500,000 units during the next year with a one million peak capacity.
Foreign vendors have also been enjoying rapid growth, with leading vendor Acer expecting revenues of more than US$1bn in 2007 in the CIS markets. Turnover in Q107 was reportedly up 47% year on year in Russia and Kazakhstan. In 2006, the company enjoyed 44.9% growth and captured a 15% share of the Russia market and 24.9% share of the notebook market. Part of the company’s success rests on an extensive distribution network with 2,340 authorised partners in Russia.
Hardware
Growing broadband penetration, with BMI expecting around 12mn broadband subscribers by the end of 2012, is now becoming a driver of computer sales especially with falling prices. Services providers are therefore joining forces with electronics retailers to benefit from the chain. Most recently Sky Link, the largest CDMA provider in the CIS, announced a joint initiative with retail electronics giant Eldorado on cooperation. Under the agreement, Eldorado will sell notebook equipment preinstalled with high speed modems supporting Sky Link’s datacoms and internet access services.
In February 2007, the Ministry of IT and Communications launched a new ‘computer for every home’ programme. With average monthly earnings at around the US$400 level, inhabitants of the remote regions will be able to order computers at a set price of around $300-350, at least 10% below the lowest market prices. Russian as well as foreign manufacturers may participate in the scheme, and schools are also permitted to take advantage of the programme to acquire computer equipment. Hardware spending CAGR in the next five years will be in the region of 13%. BMI estimated that the hardware market grew from around US$5.3bn in 2005 to U$6.1bn in 2006. The market is very competitive, with local companies in a strong position, but leadership rankings change almost every quarter. Local computer assemblers control about 80% of the PC market. The market leaders by volume of sales are K-Systems, Kraftway, Depo Computers, Aquarius and Formoza.
Software
SAP has announced that it is to open a new software development centre in Russia to improve access to customers over the next two - three years. The domestic software market was worth US$1.2bn by the end of 2006, up 16% year-on-year (y-o-y). 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 WTO entry will see this decrease closer to average Eastern European levels, boosting the market to US$2.6bn by 2010. In addition, the rapid growth of internet penetration is stimulating demand for security solutions, while there is growing demand from the corporate sector for enterprise resource planning (ERP) and customer relationship management (CRM) applications. The corporate market is moving beyond demand for single function applications such as accounting, to broader solution packages, and not only large and medium but also smaller enterprises offer potential for development.
The small business market is emerging as the primary battle ground for enterprise application vendors in the Russian market, with local companies emerging to challenge the multinationals. While market leaders SAP and Oracle primarily focus on the large Russian organisational sectors, the rise of local companies such as automation-management software vendor IC has been fuelled more by concentrating on smaller Russian businesses, which have traditionally considered such applications beyond their means. Now SAP in particular is starting to develop an interest in the small business market.
Services
Russia’s IT services sector is growing, from a low base, with BMI calculating a value of about US$2.3bn in 2006, up from US$2.0bn in 2005. The IT services sector is expected to grow at a CAGR of 15% in the period up to 2011. Russian vendors continue to dominate the market, with companies such as Croc (the market leader), R-Style, Open Technologies, Borlas, Optima, and Lanit all in the top ten, along with HP. Other foreign vendors such as IBM, SBS and Logica-CMG are also winning significant contracts, however, and the market remains diffuse, with the top 40 companies accounting for less than 50% of spending.
Special Focus: Techno Parks
More information has been released about progress with the ‘technopark’ programme, which is the government’s flagship policy for development of the IT sector. According to the government, the main construction phase will begin in 2007, with plans now being prepared for 7 technology parks as approved by a presidential decree. The preparation period is expected to take 3-6 months, during which the government will look to attract initial investment and prepare the land for construction. A federal budget of around US$74.68mn has been assigned for the project, which is being co-ordinated by the Federal Agency for IT (see below.)
The ‘technoparks’ were initially intended to be exclusively ‘IT Parks’, but are now open to enterprises in other sectors such as nano- and bio-technology, as well as in Information Technology. A plan was approved in March 2006 to construct the parks in seven regions, and it is expected that the parks will employ 19,000 people by 2008 and 75,000 by 2011. Investment will be US$985mn, and the Russian IT Minister predicts that the output of the technoparks will be US$749mn by 2008, reaching US$4.4bn by 2011.
In March 2006, Chairman of the Government (prime minister) Fradkov finally signed a resolution giving the go-ahead to a state programme for development of IT in Russia up to 2010. The development of the IT sector is a key component of the government’s plan to double GDP by 2010. A critical part of the IT strategy are the plans outlined last year for an archipelago of ‘IT parks’ in Moscow and St Petersburg, and in Kaluga, Nizhnii Novgorod, Novosibirsk and Tyumen Regions, and in the Republic of Tatarstan.
However, intra-departmental wrangling over budgets caused some delays to the project, and to get the programme approved the sponsoring IT and communications ministry had to make several compromises with the economic development and trade ministry. While the programme stipulates some form of state backing, the volume of support is not pledged, and will be decided on a case by case basis. However, state financing is expected to make up only around 20% of the funds required by the programme, which overall are likely to exceed RUB100bn. Another proposal floated at one stage - for tax breaks - was not included in the current programme. Each of the technoparks will have a management company and a board, which will include members of the federal and regional executives and IT entrepreneurs.
E-Readiness
In a policy address in March, an IT Ministry spokesperson restated the Government’s ambitious policy that every locality in Russia should be provided with fixed line telephony infrastructure, cell phone coverage and internet by 2015. According to the Ministry’s target, every populated area in the country should be provided ‘irrespective of its economic ‘weight’ and population’.
The internet penetration rate per unit of population was estimated by BMI to have reached around 21% by end 2007, representing around 30mn internet users, up from 26mn users in 2006. By the end of 2007, BMI estimates that there will be around 12mn broadband users, mostly DSL.
Russian IT and communications minister, Leonid Reiman, has described the ‘digital divide’ as a very challenging issue for all Commonwealth of Independent States (CIS) countries, and one that the Russian government was seeking to overcome. Out of 150,000 populated settlements in Russia, 40,000 towns and villages do not have telephone services, but according to Reiman, there will be no neighbourhoods without telephone services left in Russia by 2008. In May 2006, he also outlined plans to equip schools with telephone and internet services, saying that a programme was to be launched within the next year to provide high-speed internet access by way of a dedicated line in each Russian school. Reiman also stated that the programme for providing internet access to the general public at post offices was continuing. Ministry figures showed that there were around 10,000 such access points in Russia at the beginning of 2006, with that number expected to double by the end of the year. The focus of the programme is ‘hardly accessible areas’ rather than major cities.
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