IT hopes and fears of the ‘new’ EU

As the European Union (E.U.) 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 E.U. members such as France, Germany and the U.K. 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 neighbors, is an opportunity already being seized, they add.

“Changes have already been happening and they have little to do with the enlargement of the E.U.,” said Andrea Di Maio, research vice president at Gartner Inc.

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 like 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 E.U. on Saturday, there will be no thunder and lightening marking massive change in how business is done in Europe, instead transitions already under way will become formalized, 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 E.U. funding schedules,” Frantzen said.

The current E.U. 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 percent to 2 percent increase in annual IT spending in the region from 2007 to 2013, however, when more E.U. 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 vendors 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 E.U. funds to help jump-start projects like e-government and Internet growth, are also being targeted by IT vendors.

Vendors expect to see around US$2 billion in E.U. funds directed toward IT investments in the region over the next four years.

While these areas certainly create market opportunities — companies like Hewlett-Packard Co., Microsoft Corp. and Oracle Corp. have already dug in their heels by targeting sales in the region — Eastern Europe still only comprises 8 percent of the total IT market, with expectations that it will grow to 10 percent 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 just aren’t matched by the new E.U. countries, Di Maio said. Even Poland, which of the new E.U. countries spends the most on education as a percent of its gross domestic product, is just a local threat, he added.

What’s more, as the Eastern European countries become further integrated into the E.U. 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 E.U. markets a geographically close, lower-cost manufacturing and services alternative with a similar culture, they need to quickly position themselves with specialized skills, he said.

But even if they gain specialization, India, China and Russia will continue to prove fierce competition. Indian companies like Infosys Technologies Ltd. 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 E.U. 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 U.S. on competitiveness, when judged by criteria such as developing centers of innovation and research and development and building network industries.

While the E.U. 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 U.S.

“The wheels of progress will continue to turn but there is still a lot to be done,” Frantzen said.