As the European Union prepares to increase its ranks
from 15 countries to 25 on Saturday, speculation has arisen over
how the new members will affect the union's economic and business
climate, with some companies looking forward to fresh opportunities
and others fearing that they will have to scramble against the
mounting competition.
Stalwart members such as France, Germany and the UK have
expressed fears that local jobs and investment, especially in key
growth areas such as technology, will be siphoned off to the
ambitious and lower-cost new kids from the former Soviet bloc.
But concerns of a Robin Hood effect - where money and contracts
are moved from wealthy countries to poorer ones - are overblown,
analysts say.
In the IT sector in particular, efforts to reduce costs by moving
operations offshore to cheaper markets such as China and India have
long been afoot. Likewise, "nearshoring", where businesses place
investment and jobs just a hop, skip and jump over their borders
into lower-cost neighbours, is an opportunity already being
seized.
"Changes have already been happening and they have little to do
with the enlargement of the EU," said Andrea Di Maio, research vice
president at Gartner.
For example, Scandinavian businesses have begun to see
advantages of moving operations to the Baltic states, which have
similar cultural and educational backgrounds, and countries such as
Estonia have already proved to be fierce competitors with a high
rate of technology services and penetration, Di Maio said.
When Cyprus, the Czech Republic, Estonia, Hungary, Latvia,
Lithuania, Malta, Poland, the Slovak Republic and Slovenia
officially join the EU on Saturday, there will be no thunder and
lightning marking massive change in how business is done in Europe,
instead transitions already under way will become formalised, Di
Maio said.
Steven Frantzen, IDC's regional managing director for Central
and Eastern Europe, the Middle East and Africa, concurred.
"We won't see a surge in IT investment [after Saturday's
expansion], in part because of the EU funding schedules," Frantzen
said.
The existing EU funding period offers little in terms of IT
spending, he said, as projects in areas such as transport, health
care and infrastructure are being given a higher priority. IDC
expects a 1% to 2% increase in annual IT spending in the region
from 2007 to 2013, however, when more EU money will be directed
toward IT spending, Frantzen said.
Additionally, Eastern Europe's IT sector is expected to get an
indirect boost from current investments to improve the region's
telecom sector, as well as moves to include accession countries
into existing European supply chains, and establish operations in
"green field" markets, he said.
Furthermore, IT suppliers can reap a harvest by tapping into new
government IT contracts as well as providing hardware and software
sales to companies in accession countries that need to upgrade
their systems to comply with new regulations, Di Maio said. The
most lucrative of these include sales of customer relationship
management and enterprise resource planning software as well as
software aimed at financial compliance, he added.
"Software will be the low-hanging fruit, along with hardware for
companies that need to update their legacy systems," Di Maio said.
Government contracts, greased with EU funds to help jump-start
projects such as e-government and Internet growth, are also being
targeted by IT vendors.
Vendors expect to see around €1.67bn in EU funds directed toward
IT investments in the region over the next four years.
While these areas certainly create market opportunities -
companies like Hewlett-Packard, Microsoft and Oracle have already
dug in their heels by targeting sales in the region - Eastern
Europe still only comprises 8% of the total IT market, with
expectations that it will grow to 10% by 2007, according to
Gartner.
"These countries will not be as much as a threat as India - not
in a million years." Di Maio said.
Indeed, India, China and Russia are still being seen as the
low-cost, high-skill magnets of IT investment.
The sheer size of India and China, and the IT skills they
provide are not matched by the new EU countries, Di Maio said. Even
Poland, which spends the most on education as a percentage of its
gross domestic product, is just a local threat.
What's more, as the Eastern European countries become further
integrated into the EU economy, their local wages will increase,
making them less competitive against their far eastern rivals,
Frantzen said. While they can still benefit by offering larger EU
markets a geographically close, lower-cost manufacturing and
services alternative with a similar culture, they need to quickly
position themselves with specialised skills.
But even if they gain specialisation, India, China and Russia
will continue to prove fierce competition. Indian companies such
as Infosys Technologies are even inching up on the accession
countries' home turf, establishing their own operations in the
region to offer nearshore services to Western Europe, Frantzen
said.
Perhaps even more disappointing news for EU market advocates is
that Europe overall still has a ways to go before it is truly
competitive in terms of creating an information society, according
to a new World Economic Forum report.
In fact, a majority of European countries fail to match the US
on competitiveness, when judged by criteria such as developing
centres of innovation and research and development and building
network industries.
While the EU expansion certainly offers IT market opportunities
such as lower-cost nearshore manufacturing and services, new
customer pools, and added investment, significant growth will take
time, especially when considering the momentum of Asian rivals and
the strength and experience of the US.
"The wheels of progress will continue to turn but there is still
a lot to be done," Frantzen said.
Scarlet Pruitt writes for IDG News
Service