Hungary Information Technology Report Q2 2008

Market Overview Hungary's IT market is expected to grow modestly by regional standards in 2008 after slowing over the last twelve months due to the difficult political and economic situation. IT spending should have received strong momentum from Hungary's 2007 EU accession, but because of a weak economy and fiscal austerity measures, public spending in particular fell short of expectations.

Despite this, BMI still expects low double digit growth in some sectors over the next few years. Some government projects should be revived, and PC sales will be one bright spot, with double digit notebooks sales growth as prices continue to fall.

The total size of the IT market is expected by BMI to increase from US$3.6bn in 2007 to around US$4.7bn in 2010 at a CAGR of 9%. Government spending should pick up as Hungary belatedly takes advantage of a number of programmes to assimilate Hungary into the EU's broader 'Information Society' across a whole range of social and economic policy areas. The government's second National Development Plan provides the framework for the use of US$28.8bn from the EU's structural and cohesion funds for the period 2007-2013.

The government is likely to focus on ways of improving IT use by enterprises. Low computer penetration, particularly in some demographic segments, still represents considerable PC market development potential for vendors. IT spending should be particularly strong in the financial sector, although opportunities in telecoms and utilities are likely to be fewer than before.

Industry Developments Recent surveys have highlighted that 84% of Hungarians between the ages of 55 and 74 are computer illiterate, leading to policy-maker fears of social isolation. Recently broadband internet and cable TV group UPC Hungary re-launched a campaign called 'Click on it Granny' (Kattints ra, Nagyi). Each participate in the countrywide initiative receives their own computer as well as training in practical IT skills. The programme enrolled around 200,000 students by the end of 2007.

Meanwhile, the recent HUF25bn state tender to provide software to national and local government offices may be challenged after it was alleged that it excluded open source software. The tender, announced by the Central Servicing Directorate, has been criticised by a number of companies who are threatening to take the case to the European Commission (EC). The government claims that the tender is merely a framework agreement, the use of which depends on state institution purchases.

While not directly related to EU entry, one reason for the slowdown in public sector spending in 2007 is the difficult political and economic situation the public sector has faced over the past year. With the objective of joining the euro, the budget deficit has to be lowered. This has had a negative effect on public sector demand. In addition, political instability creates an adverse environment for launching multi-year IT projects.

Competitive Landscape Laptop prices fell at least 10% in Hungary last year, stimulating a 12% annual growth in unit sales.

Fujitsu Siemens said that it sold more than 100,000 computers in 2007, including 75,000 notebooks, around 75% of the total. HP's Personal Systems Group (PSG) reported that unit sales were even in 2007 as between desktops and notebooks. For its part, Taiwanese giant Acer was targeting US$35mn sales in Hungary in 2007, with laptops accounting for around 65% of Acer's revenues in the country.

In the services segment vendors are hoping that 2008 will bring an improvement in the tough competitive environment. The Hungarian services market is currently one of the weaker in the CEE region. However HP reported a 13% increase in services revenues last year, and hopes that government sector opportunities will increase in 2008. HP's main IT services verticals are Telecoms/Media, Industrial Firms and the Financial Sector.

Computer Sales Sales of desktops, notebooks and accessories were put at around US$953mn in 2007 and are expected to grow at a compound annual growth rate (CAGR) of 6% to reach US$1.2bn by 2012. Sales of laptops are growing rapidly and in H107 accounted for 60% of the estimated 200,000 computer units purchased.

Demand is being driven partly by falling prices; down 10% in the last twelve months or so. Desktop sales were down 20% in the same period, but the stock of computers is expected to rise by more than one third over the forecast period. The lower value of the US dollar has reduced the prices of imported computers and components, opening the market so that demand for notebooks is now coming from first-time computer buyers who would previously have bought desktops. Small enterprises are also buying notebooks, with price, rather than advanced functions, still the main purchase criteria.

Software Overall 2007 software sales were calculated by BMI at US$543mn. They are expected to grow at a CAGR of 9% over the forecast period, to around US$898mn. With enterprise demand for core enterprise resource planning (ERP) applications already fairly saturated, Hungary's software opportunity is developing as the market matures. In recent years, programmes such as the state's Economic Development Operative Programme (GVOP) have offered financial incentives and grants to companies to install ERP packages. Companies such as SAP and Oracle have been among the beneficiaries. Now, however, vendors are looking to other areas, such as customer relationship management (CRM), where fast growth is possible. Most Hungarian companies are however SMEs, and the sector plays an important role in the economy and is the most dynamic currently in terms of packaged software. With market maturation, there is also an increased focus on developing applications tailored for specific industry verticals, with the largest opportunity being in the banking and financial sectors.

IT Services The Hungarian IT services market is expected to be worth close to US$1.4bn by 2012, up from US$950mn in 2007, with services taking up more than one-third of IT spending in Hungary, as the market matures. Growth in IT service opportunities over the 2007-2012 period is expected to be driven by two main developments. Firstly, the ongoing project of reforming and streamlining the over-bureaucratic Hungarian public administration system structures will provide many service tenders. Secondly, the global business process outsourcing (BPO) sector's rapid growth since 2000 is likely to continue and play an increasingly important role in Hungary's economic development. An increasing number of multinational companies are now in Hungary and global names, such as General Electric (GE) and Citibank, are fuelling the outsourcing market. Local companies such as Telecom group T-Com are also involved.

E-Readiness A 2007 survey by the CEE Technology Index found that Hungary ranks in the middle of the ranks of 2005 EU accession countries. Hungary scored behind the Czech Republic, Slovenia and Estonia in the survey, which measures indicators such as landline and mobile penetration, internet and broadband usage and the adoption of electronic and e-government services.

A 2007 report published by the Information Society and Trend Research Centre (ITTK) found that areas of ICT weakness remain. The survey found that between one-third to two-thirds of society remained 'digitally illiterate' and more or less indifferent towards the internet and IT. While nearly three-quarters of Hungarian households with internet access have a broadband connection (a high proportion), internet penetration in general is low by European standards. Many villages and settlements in Hungary lack the necessary infrastructure for connection, and meanwhile IT spending as a percentage of GDP is merely average of the eight eastern European EU members who joined in 2004.