Hungary Information Technology Report Q1 2008

Market Overview Hungary's IT market slowed last year due to a difficult political and economic situation. IT spending was expected to receive strong momentum from Hungary's 2007 EU accession. However, because of a weak economy and fiscal austerity measures, public spending in particular has fallen short of expectations.

Despite this, BMI still expects low double digit growth in many sectors over the next few years.

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 revive as Hungary stands to benefit from 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.

Take-up by enterprises, and particularly SMEs, of programmes designed too fund IT systems, has been limited for a number of reasons. The government is likely to focus on ways of remedying this. Low computer penetration 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 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.

While other sectors such as finance are expected to support overall market spending, the slowdown in public sector spending is sill concerning, particularly following the winding up of the former IT and Telecoms Ministry (IFM) in 2006. However, IT spending in Hungary will likely continue to receive strong momentum from a number of programmes to assimilate Hungary into the EU's broader 'Information Society' across a whole range of social and economic policy areas.

Competitive Landscape With notebook prices on the Hungary market falling around 10% in 2007, vendors are competing fiercely for the growing number of customers. Taiwanese giant ASUSTeK Computer is now mounting a strong challenge to established vendors, after taking third place in the notebook segment in 2006. The company established a subsidiary in Hungary in 2007 and is planning to launch on the Hungary market a low cost laptop called EeePC. The company aims for 20% market share in 2007.

Meanwhile Acer was targeting US$35mn sales in Hungary in 2007, hoping to sell 50,000 laptops, up from 33,000 in 2006. Laptops account for 65% of Acer's revenues in the country. For its part, Dell is expanding its retail channels, looking to double the share of its sales accounted for by big retailers, and opening its first Dell brand name store in the Central and Eastern European (CEE) region in Budapest.

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 account for 60% of the 200,000 computer units purchased. Demand is being driven partly by falling prices; down 10% in the last qw 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.