BMI's Executive Summary

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Market Overview

Against the backdrop of ambitious government plans, and a spending boom fuelled by high oil prices, Russia has the potential to become one of the largest IT markets in Europe. BMI has upwardly revised its Russian IT market CAGR to 21% for the period until 2012. The total size of the IT market is now predicted to increase from US$13.1bn in 2007 to around US$13.3bn in 2012. 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 and investors.

The general economic context should be favourable, with high oil prices still above their long-term trend level, and real wages showing significant gains. Government and enterprise spending were continuing to grow strongly throughout 2007. 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 wild card is possible WTO entry, which would likely boost the hardware sector should through cuts in taxes on imports. In any event much will depend on the government's ability to maintain an environment conducive to further development, including an effective customs regime, low import duties, and generally transparent business environment. Specifically with relation to the IT sector 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; however much remains to be done.

Industry Developments

The Russian government is currently reviewing draft IT Ministry (MITC) policy guidelines for the 2008- 2010 period. In August 2007 the MITC submitted a report for the period 2008-2010 which looks at ways of spending its budget more effectively. The key priorities in the Ministry's proposed agenda are developing a competitive IT and domestic ITC equipment sector, increasing product turnover rates, and developing IT Service capabilities.

In a boost to domestic computer production, the Russian Minister of Economic Development and Trade Elvira Nabiullina has promised to eliminate the 10% duty on imported computer parts. Duties of 10-20% on most parts and PCs were cancelled in 2006, while in October 2007 most types of processors were relieved. Under the latest proposal, memory cards, microprocessors, cables and other parts that are currently subject to 5-10% duties will be exempted.

Meanwhile, Russian Federation IT Minister Leonid Reiman has said that a free open source software package will be tested in several schools in 2007 with a view to rollout in three pilot regions in 2008. The government is investing RUB70mn in the pilots in Tatarstan, Perm Territory, and Tomsk.

Competitive Landscape

Soaring computer sales and government tariff reforms are driving new investment by both foreign and domestic vendors. Far East vendors have been particularly active recently in opening production facilities. Although production in the Far East is still cheaper than in Russia, when transport costs are considered Russia and other CEE countries become viable destinations. In the past few months electronic giants like Sony, Samsung and Panasonic have all announced plans to open assembly plants in the Kaliningrad region because of rising sales

However, Russian vendors are showing greater ambition to capture market share. Kraftway has recently built a PC plant in Obninsk which is expected to product 500,000 computers in the next year. Meanwhile, in July 2007 National Computer Corporation (NCC) received US$60mn credit from Alfa Bank to fund various project including a PC plant for its Aquarius computer unit in Shuya. 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.

Hardware

Driven largely by notebooks, computer sales grew strongly in 2007, the true numbers are hard to ascertain because around 20% of PCs sold in Russia are self-assembled. BMI estimated that the hardware market grew from around US$5.5bn in 2006 to US$6.9bn in 2007. The main driver is falling prices, but growing internet penetration is now becoming an additional factor in some areas. Service 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%.

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 to three years. The domestic software market was worth US$1.4bn by the end of 2007. 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$2.8bn in 2007, up from US$2.2bn in 2006. The IT services sector is expected to grow at a CAGR of 22% in the period up to 2012. 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

The 'technopark' programme is the government's flagship policy for development of the IT sector. The main construction phase began in 2007, with a federal budget of around US$74.68mn having 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 Information Technology. A plan was approved in March 2006 to construct the parks in seven regions, and it is expected that the parks will employ19,000 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.

Intra-departmental wrangling over budgets have 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. 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 2007 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 21.4% 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 23mn 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.

Contents

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Chapter 1 - Executive Summary

Market Overview

Competitive Landscape

Industry Developments

Software

Computer Sales

Services

Special Focus: Russia’s Outsourcing Push

E-Readiness

Chapter 2 - SWOT Analysis

Russia IT Sector SWOT

Russia Business Environment SWOT

Chapter 3 - CEE Regional IT Markets Overview

IT Penetration

Market Growth And Drivers

Sectors & Verticals

Chapter 4 - Market Overview

Government Authority

History And Market Structure

Table: Russia IT Market Structure (US$bn)

Hardware

Software

Services

Special Focus: E-Government

End-User Analysis

Industry Developments

Chapter 5 - Industry Forecast Scenario

Table: Russia IT Sector, Q1 2006

Chapter 6 - Economic Forecast

Competitiveness Under The Spotlight

Table: Growth And Output

Exchange Rate Concerns

Chapter 7 - Country Snapshot: Russia Demographic Data

Section 1: Population:

Table: Demographic Indicators (2005)

Table: Rural/Urban Breakdown

Section 2: Education & Healthcare

Table: Education

Table: Healthcare: Vital Statistics

Table: Healthcare: Expenditure

Section 3: Labour Market And Spending Power

Table: Employment Indicators

Table: Consumption And Stratification

Chapter 8 - Competitive Landscape

Company Profiles

IBM Russia

Kraftway

Aquarius

HP

Chapter 9 - BMI Forecast Modelling

How We Generate Our Industry Forecasts

IT Industry

Sources

Chapter 10 - Appendix: Regional Demographic Data

Wages (ave labour force per annum), US$ PPP

Population

Household Spending Per Capita, US$

Private Consumption Per Capita, US$ PPP

Market Size, GDP, US$bn

Competitive Landscape for Europe Information Technology: Sample of  
Companies Ranked

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Company profiles, including SWOT (strengths, weaknesses, opportunities and threats) analyses, business activity, leading products and services. BMI forecasts for all headline macroeconomic indicators, including real GDP growth, inflation, fiscal balance, trade balance, current account and external debt. Company profiles and SWOT analyses covering competitive positioning; leading products, services and brands; annual sales and share of domestic hardware, software and components markets; headline financials and M&A; pan-regional expansion strategies and strategic partners. Companies covered include:

Network of Information Technology Sources

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BMI's European IT Reports are based on an extensive network of multilateral organisations, government departments, IT industry associations, chambers of commerce and company reports. Information sources include: