Now is your chance to grow
in Central and Eastern Europe

When speaking of Europe, it is important not to think of a single, homogeneous region. Grasping the colourful diversity of this region is a vital key to help investors unlock the door to attractive investment opportunities in one of the world’s most dynamic economic regions: Central and Eastern Europe (CEE), say Klaus-Ulrich Feiler and Vladimir Preveden of Roland Berger Strategy Consultants

Central and Eastern Europe consists of 19 very different countries. However, three criteria — political status, size and economic growth — help us lend some kind of structure to this region.

Political status

Politically, Central and Eastern Europe breaks down into three groups. The so-called “EU 8” are the new members of the European Union (EU). Estonia, Latvia, Lithuania, Poland, the Czech Republic, the Slovak Republic, Hungary and Slovenia all joined the EU in 2004. The second group — Croatia, Romania and Bulgaria — are currently negotiating for accession to the EU. Romania and Bulgaria are scheduled to join in 2007 and Croatia in around 2009. The remaining group of countries in the region has neither a clear agenda nor a timeline for EU accession at the present time.

Size

In terms of size, Russia, Poland and Ukraine merit a separate category. A population of 144 million puts Russia in its own league, followed by Ukraine with 47 million people and Poland with 38 million people. GDP of €597 million and €238 million respectively in 2005 make the Russian and Polish economies the strongest ones in the region. Ukraine, with GDP of €65 million, has been overtaken by Hungary and Romania and now occupies fifth place only. While this fact reflects on a lower standard of living in Ukraine, it also points to huge untapped growth potential in this country.

Economic growth

In 2005, the overall rate of economic growth in Central and Eastern Europe was 5.4% — streets ahead of the 1.4% expansion witnessed by the EU in the same year! The Baltic states of Lithuania, Latvia and Estonia stand out with average growth of 8.8%. Russia (5.7%) and the Slovak Republic (5.6%) are roughly in line with the CEE average.

The groundwork is done

The telco market is largely liberaliSed
Of a global telecommunications market worth €1.1 billion in 2005, the USA accounted for €243 million (21.6%), Western Europe for €256 million (22.7%) and Central and Eastern Europe for EUR 90 million (8%). In the latter region, however, telco market growth rates vary from 7% in Slovenia to 29% in Romania, against 6%* in Western Europe. A closer look at the region’s telco industry shows that the groundwork for economic transformation and further development has certainly been done. Most national markets have already been liberalised. Only Slovenia, Belarus, Russia and Ukraine have yet to complete the process of deregulation. Having said that, incumbent telcos have been fully privatised only in the Czech Republic, Estonia, Hungary and Bulgaria, though a substantial proportion of the corresponding companies has also been privatised in Latvia, Slovakia, Slovenia, Croatia and Romania.

The laggards are Belarus, Bosnia and Herzegovina, Serbia and Montenegro, Russia and Ukraine, where the incumbents are still mostly state-owned and where privatisation is at best still in its very early stages. Both the new EU members and the candidates for accession are aligning their economic policy with the EU framework. Essentially, this means that they are seeking to promote competition by simplifying licensing procedures, unbundling local loops, prescribing interconnection, liberating pricing structures, etc, while giving greater protection to consumer interests by improving information and transparency, etc. Moreover, national regulatory agencies face stiff penalties if they do not comply. These policies should definitely accelerate market development.

Western market leaders already well represented

Growth opportunities still in niche segments
Prominent Western telco carriers were among the first foreign movers to invest in Central and Eastern Europe. The largest investors are Deutsche Telekom from Germany and the British Vodafone Group, each of which owns interests in four Central and Eastern European states. Orange from the UK is present in two countries. Telekom Austria owns local companies in four southeast European countries. Telenor, Telia Sonera/Tele2, Telecom Italia, France Telecom, Spanishowned Telefonica and the Greek OTE likewise have at least a toehold in the region thanks to minor equity stakes. These companies have elected to pursue acquisition strategies rather than build up their own operations. However, there are still investment opportunities in the continent’s eastern borders, in countries like Ukraine and Russia.

Underdeveloped landline business and Internet leave room for growth

Infrastructure development remains a pivotal issue. A sample of 16 Central and Eastern European countries shows that only 26 out of 100 inhabitants have landline connections. That is less than half of the corresponding figures in Western Europe (54%) and the USA (60%). Here again, however, a broad spread exists within the region itself. Croatia tops the list with 43 lines per 100 inhabitants, whereas Romania comes bottom with just 20. Internet connectivity is in an even worse state: In Central and Eastern Europe as a whole, only 10 out of 100 households have access to the Internet at home, against 61 in Western Europe and 65 in the USA. The Czech Republic — the region’s top country on this score — turns in an impressive 53, while Bulgaria can manage only 0.3! A rather different picture emerges in the mobile phone segment. 49% of the inhabitants of Central and Eastern Europe own mobile phones (against 90% in Western Europe and 61% in the USA). Fascinatingly, the Czech Republic has a penetration rate of 104%, while only 24% of Belarussians have their own mobiles. Mobile penetration correlates closely with the standard of living.

Combined with the region’s strong economic growth rates, this fact is a clear indicator of huge growth potential in the telco sector. In other words: Attractive investment opportunities are still there for the taking! Broadband is not yet an issue in the region. Penetration rates are very low and prices high. Even here, however, growth rates are encouraging despite the fact that genuine competition is yet to take shape.

New technologies, new business models

Slow change in the region’s competitive landscape
Unlike their Western European peers, Central and Eastern European consumers have simply skipped the stage of ubiquitous landline telephony. Many people now only use mobile phones. Generally speaking, landline coverage is poor as things stand. Networks need to be upgraded to support broadband services. A window of opportunity is therefore open to small startup companies in the WLAN and WiMax segments. Bearing in mind the low landline penetration rates and large proportion of rural areas in some of the region’s countries, WiMax could experience disproportionately high growth. Intel, for example, is currently testing WiMax in the Russian region of Tatarstan. Similarly, the Trans-World Communications Group plans to launch a nationwide WiMax network in Ukraine by 2007.

Klaus-Ulrich Feiler, Partner at Roland Berger Strategy Consultants and head of its International Telecom practice

Mobile network coverage is relatively high, with some markets in the region already close to saturation. Fiercer competition among mobile operators is driving prices down and opening up fresh opportunities for mobile content providers. Also, we see a brand new trend toward virtual mobile network operators waiting in the wings. Among the trendsetters in Central and Eastern Europe are Matrix-Telecom and Central Telegraph in Russia, Zetcom in Latvia, and Privat:Mobile and Jeans Mobile in Ukraine. In Poland, more than 50 companies have signaled their interest, while TDC/easyMobile has announced that it will target its offerings at the Czech Republic, Hungary and Slovenia. As they upgrade their infrastructure, most carriers will opt for next-generation networks (NGNs) with IP platforms. In 2005, several contracts were signed for network upgrades to NGNs. Examples include Croatian Portus and NetCentrex, Magyar Telekom and Marconi, and Slovak Telekom and Alcatel.

The bottom line

Dr. Vladimir Preveden, Managing Director of Roland Berger Strategy Consultants’ office in Zagreb, Croatia, and member of the International Telecom practice.

The time is ripe to seize att ractive market opportunities in Central and Eastern Europe
Looking back over the period since Central and Eastern European markets gradually began to open up in 1989, it is fair to say that the groundwork has been done.

Politically as well as businesswise, the region has laid a firm foundation for further strong growth and integration in the European Union. Back in the early 1990s, committing to this region was often a risky business indeed. Today, however, we believe that both the timing and the climate for investing in Central and Eastern Europe have never been better. Fast-moving companies with proven business models and an entrepreneurial spirit face a wealth of opportunities to stake their claim in this truly dynamic growth region.

Roland Berger Strategy Consultants is one of the world’s leading strategy consulting firms. We advise major international industry and service enterprises as well as public institutions on all issues of business management — from strategy to new business processes and structures.

 

 

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