Trends in the Russian IT Market

INTERNATIONAL COPYRIGHT, U.S. & FOREIGN COMMERCIAL SERVICE AND U.S. DEPARTMENT OF STATE, 2002. ALL RIGHTS RESERVED OUTSIDE OF THE UNITED STATES.

Summary:

The Russian Information Technology (IT) sector represents a growing and dynamic market for U.S. suppliers, which is especially attractive in view of the downturn in other areas of the global economy. Although still relatively small at about $3 billion, the Russian IT market grew by 18 percent in 2001 and is expected to reach $3.9 billion in 2002. Driven by the growth in the hardware segment, and to a certain extent by IT services, the market is projected to grow by 20 percent in 2003.

The main trends of the hardware market in 2000-2001 were strong growth in laptop and server sales, a sizable increase of government purchases and increase in sales to Russia's regions. Imports account for 15 percent of Russia's personal computer market, while most of the demand for PCs was met by low cost products assembled by Russian manufacturers from foreign components. PC assembly accounts for 76 percent of hardware revenues, while peripherals, networking and larger system hardware are dominated by imports.

The total number of computers in Russia exceeded 11 million in 2001, a penetration rate of 7.5 percent. While this was healthy increase over the 6.4 percent rate of 2000, there is evidently significant potential for growth.

Russia's rapidly expanding software market in 2001 was estimated at $600-800 million, and growing at an annual rate of 25 percent. The best sales prospects are in Enterprise Resource Planning (ERP) products, which currently account for 30 percent of the software sector. The true demand for software is difficult to determine, due to high level of pirated software, which some industry sources estimate as high as 88 percent.

In 2001 the market for outsourcing software services was estimated at $120-150 million with the growth rate of 20 percent. Government and the software industry are cooperating to position Russia as a global leader in 'offshore' software development, with estimated growth rate of 50 percent over the coming few years. Some Russian industry experts estimate that the eventual market for software developed in Russia could grow as high as $20 billion to $60 billion per year, and both government and industry are keen to develop the potential of this sector.

Total annual turnover of the Russian system integration market in 2001 was estimated in the $170 - 220 million range, and is projected to grow to $230-270 million in 2002. This market sector is maturing and new entrants will likely face a serious competition from long-established companies.

The number of regular Internet users in Russia was estimated 6.2 million at the end of 2001, an Internet penetration rate of just 4.3 percent, although Russia's well-educated population represents a huge potential demand for Internet hardware and services. However, this demand is significantly constrained by low disposable incomes. In 2001, there were about 5 million PCs connected to the Web, a number projected to grow to 7 million by the end of 2003.

Russia's potentially huge IT market has already attracted large international firms. Many major U.S. companies already present in the market; their products are available either directly or through representatives or distributors. However, Russian consumers are, of necessity, extremely price-sensitive and generally prefer a low-cost computer to a globally-recognized brand name. Nonetheless, the Russian market remains one of the promising emerging markets for American firms. Should Russia's economic performance continue its upward trajectory, and consequently salary levels continue to rise, demand for imported computers will increase significantly.

Currently, there is growing demand for imported equipment in the less price-sensitive corporate sector. In addition, there has been a dramatic increase in government procurement of state-funded PC for delivery to educational institutions under various federal and regional programs. A continuing growth in the number and purchasing power of small and medium-sized private enterprises is driving demand for legally imported operating systems, software application packages and enterprise management software. Best immediate sales prospects also include peripherals, networking equipment, and Internet technology. End Summary.

Market Overview

Russia's 145-million population has about 11 million computers, compared to the 140 million computers in the United States. Thus, on a per capita basis, Russia has around one seventh the rate of computer ownership as the United States. However, the Russian population enjoys a high level of education, with a very high proportion of science and engineering majors. Consequently, interest in IT runs very high, and there is little doubt of the huge potential demand for PCs, Internet access and B2C e-commerce should incomes rise from their current depressed levels.

Government Sector:

Recently state orders have become an important demand driver for IT products. Increased government spending on computers contributed to the growth of the sector with more tenders held for government projects and budget-funded public schools in rural areas. In 2001, government and educational institution accounted for 30-35 percent of computer demand. An important and visionary 9-year Russian government sponsored program, called 'E-Russia' was recently approved, and $2.5 billion earmarked for its implementation. It aims at increasing the use of Internet technology in government and education, and development of the information and communications infrastructure across Russia. Another factor that boosted PC sales turned to be major IT investment projects in insurance, banking, financial services and manufacturing.

Top governmental priorities for the next few years are as follows:

• To provide a better Internet access to more Russian people and public sector organizations;
• To stimulate investment in the development of Internet technologies, including support to domestic developers;
• To build a legislative and regulatory framework for the sector. The bill on electronic commerce and the bill on electronic document flow, which are now being prepared in the State Duma, along with the already passed law on electronic signatures, should improve the legal environment for Internet providers and boost the country's use of Internet technology.

Following are several examples of state-supported projects implemented in 2001:

• The Presidential program "Computerization of Rural schools". According to the market research firm IDC, around 60,000 PCs were bought for this program and more than half of them were shipped in the last quarter of 2001. The winners of the tender for this project included Croc, DellSystems, IVK and Kraftway.
• According to the Interfax news agency, the Russian Education Ministry plans to buy more than 3 million dollars worth of computer equipment for a program called "Federal Experimental Platforms for the Unified State Exam". Centers to carry out state exams were built in 5 regions in 2001; another 12 centers will be built in 2002. Among the contractors for this project there are Dell Systems, which will deliver 109 personal computers for $190,000, Moscow-based X-Ring supplier, IVK and St. Petersburg distributor Lanck.
• In 2001, tenders were held for the delivery of computer equipment and software for the CyberPocht@ project. CyberPocht@ was designed to set up public Internet access stations at post offices in remote regions of Russia. At the time of this report 1,400 workstations with pre-installed Microsoft MS Office2000 were set up, including 500 in rural areas. Compaq Computer was selected as a PC supplier, successfully outbidding domestic manufacturers, and Xerox Corporation supplied printers. Some equipment was leased for a period of up to three years, other equipment was supplied by national long-distance provider Rostelecom. Another 300 public Internet outlets are to be opened by the end of the first quarter of 2002.

Meanwhile, Xerox CIS is reportedly doing well in the Russian market. In 2001, the company sold around 115,000 units of equipment in Russia and Newly Independent States, including 70,000 laser printers, a 150% growth from 2000. The company also sold 20,000 copying machines, with sales of digital and analog models surging 300% and 85% respectively. The slowest growth was observed in the supplies segment, sales of which rose 15-20%. Total 2001 sales in Russia and the CIS countries exceeded $117 million, a 36% growth attributed to effective work with regional partners and focus on promising market segments.

Internet is Booming. Average Internet usage in Russia still lags behind that of EU and USA, but it is increasing rapidly and is a major driver of hardware sales. Over the last few years the country has seen a rapid growth in the number of Internet service providers and users. In 2001, the number of Internet users in Russia jumped to 6.2 million and Internet access services market grew by 50 percent to $220 million. The ratio of female Internet users grew to 40% of total users. By some estimates the total number of Internet users will reach 26 million by 2010.

Local PC Production: Locally assembled PCs dominate the Russian market, and 30 local computer companies are estimated to control 45% of the market. According to the market research firm IDC, the fastest growing local PC producers last year were Formoza, Aquarius, and R-Style. Among foreign producers, IBM, Compaq and Hewlett Packard enjoyed the largest growth. Aquarius boosted its turnover last year by 80% to $80.57 million. Another assembler, Excimer-DM reported 46% annual growth and plans to assemble 120,000 computers in 2002, which may account for 5-6 percent of the market. The company sells computers under Intel and Excimer brands, combining them with Intel and VIA Technologies processors.

Demand in the Russian PC market is extremely price sensitive. Lower cost local producers, which had benefited from the 1998 devaluation of the Russian ruble, compete successfully against imports in the low end of the market, and have forced importers to lower their prices. Consequently, imports have risen only slightly in value because of the drop in PC prices. The need for cost savings has motivated some foreign equipment manufacturers to set up assembly operations in Russia, and thus be able to compete with local suppliers.

In 2001, Hewlett Packard agreed with Russian PC maker Aquarius to use two production facilities of the latter for the local assembly of HP computers. This deal should help HP to access one of the most prospective sectors for government procurement. Russian legislation prevents federal agencies from purchasing imported computers when there is an analogous Russian alternative.

Competition among importers for less price sensitive corporate sales has also intensified as evidenced by an increase in the number of tenders.

Demand for High Performance Equipment: As the Russian economy gains strength, an increasing number of large, well financed and well managed firms are seeking sophisticated computer systems. The trend for servers is toward high performance equipment. Demand for accessing the Internet, combined with the need to share resources, network office sites and implement cross-industry applications solutions have generated a notable demand for computer systems and servers. IBM and Sun Microsystems sold a number of high performance servers to Russian companies, with Sun shipping $7 million worth through Verysell, a well-known Russian distributor.

Software Sales: The packaged software market experienced a major boost during 2001, rising by 18-20 % to $350m. Growing demand has been reported for basic operating systems, integrated ERP (Enterprise Resource Planning) and application tools for database development and management.

Russian ERP-systems market

Year	1999	2000	2001	2002
Market size, $m	60-70	80-90	110-120*	160-170*

Source: PC Week, January 2002
* estimated

According to investment firm Brunswick Warburg, Russian enterprise solutions account for 55 % of the market, with Galaktika being a market leader. Since Russian software houses do not currently compete in the market for large ERP systems (23% of the total software market) there is a demand for imported software in this and mid-range segment.

Enterprise Management Systems	Type of client in Russia
SAP R/3 Oracle Applications BAAN J.D. Edwards Navision SunSystems Scala Platinum Galaktika 1C: Enterprise Parus	50 and up to several thousands of users corporate centers of management. Majorcorporations - Rostelecom, Kamaz, TNK,Magnitogorsk Steel Plant, Yukos 1-300 users up to 10 million transactions per year scalability Saint Spring, Konfi,1-20 users up to 1 million transactions per year only Russian accounting is required users: Slavneft, Ice Fili, MGTS

Source: Brunswick UBS Warburg, PC week

Integration between Local and Foreign Software Products: There are some positive examples of integration of Russian and Western software. Russian diamond monopoly Alrosa contracted Moscow-based systems integrator IT Co. to automate 5,400 work places based on IBM's Lotus Notes/Domino software platform and Russian BOSS Referent workflow and document management system.

The market for Computer Aided Design (CAD) software is very promising in Russia. Industry estimates of the Russian market for heavy-duty CAD systems range from $12 million to $15 million. According to Interfax news agency, PLM Solutions, a division of EDS that provides product lifecycle management software, has signed a contract to deliver a CAD solution to Russian military aircraft maker OKB Sukhoi. PLM Solutions signed a contract to deliver Unigraphics CAD software to the Komsomolsk-na-Amure Aviation Production Association. The two Russian aircraft makers already have more than 150 Unigraphics workstations.

IT Security Market almost doubled in 2001 reaching $40 million. Internet security has become tremendously important worldwide and Russia wants to be competitive in the sector. Industry experts think that the information security industry is very flexible and ready to respond to any demand increases.

Anti-virus protection is one sector where Russian software companies are very competitive and have had export successes. Kaspersky Lab. Company with its core product is AntiViral Toolkit Pro (AVP) has entered the international market and developed strong partnerships with Microsoft, Novell, Check Point Software, and ISCA. The distribution network of Kaspersky Lab includes over 40 countries worldwide.

Software Outsourcing represents a fast-growing sector, in which Russia has a significant cost advantage. Russia has many highly qualified software engineers and researchers with experience in developing complex projects and with excellent programming skills. More are in the pipeline in Russia's university system. According to Brunswick Warburg, the share of foreign orders varies from 20% to 100% of the total outsourcing revenues of the major market players. Moscow remains the center of the offshore programming industry followed by St. Petersburg and Novosibirsk. The industry is relatively small by world standards, but is well positioned for future growth. Established in 2001, the National Association of Software Developers may also serve as a catalyst in promoting the image of Russia as a center of outsource software development. The Russian government is very supportive of the sector, as it is a way to encourage Russia's software talent to remain at home.

An early arrival in the Russian market, CA-based high technology company Mirantis, recruits and manages dedicated software and design teams on behalf of foreign client corporations. Intel and Motorola set up their own software development centers while GE and Sun Microsystems use outside contractors.

The "Gray" IT Market

The actual demand for IT products is difficult to determine due to the high level of pirated software and of 'gray' imports (shipments through third countries unauthorized by the original supplier), estimated by some trade sources to be as high as 90% of the total market. In recent years, the Russian government has taken steps to improve enforcement against piracy, but pirated consumer software remains readily available in street markets. Recently, Microsoft has achieved at least two success in protecting its intellectual property rights, but the overall record is patchy. Poor IPR enforcement is likely to severely limit the sales potential of legitimate software suppliers in Russia.

Formation of the IT Industry Association in 2001 is perceived as an important step in the industry's development. Around 34 companies, both Russian and the local divisions of foreign firms, have become the founding members. The goals of the association are to represent the interests of the Russia IT industry domestically and internationally, to foster conditions for future growth of the IT market, and to protect corporate interests of IT companies. The association member list includes IBM, Intel, Hewlett-Packard, Microsoft, and the Russian firms IBS, and Marvel.

Market Trends

Following are the main trends which characterized the Russian IT market in 2001:

• Government procurement increased considerably.
• Continued industrial growth spurred increased IT spending by industrial enterprise.
• A significant decline of PC prices resulted in a small market growth in dollar terms.
• Laptop and server markets grew faster than the desktop market.
• Distributors are expanding from their traditional markets in Moscow and St. Petersburg into Russia's regions
• Demand for Enterprise Management Software increased.
• Positioning of the Russian offshore programming sector as an export industry enjoys full government support. The National Association of Software Development was formed.
• Internet was booming.
• The level of software piracy remains extremely high.

Import Market

Russia is very receptive to U.S. IT products. Companies such as Microsoft, IBM, Hewlett Packard, Sun Microsystems, Novell, and Oracle are present in the Russian market and their products are available either directly or through representatives or distributors. The United States is considered to be the leading supplier of IT networking hardware to Russia and also a major player in the market for software application solutions, system software and hardware supporting software. Most legally imported products into Russia come through official U.S. firms' representatives and distributors. Some local experts on computer and office equipment expect at least 20% growth in U.S. imports by the end of 2002, although this prediction rests on an assumptions of continued economic growth in Russia and aggressive marketing efforts by U.S. suppliers.

Imports from third countries are also growing, although their current market share is small. U.S. firms are encountering increasing competition in the Russian market from Asian computer manufacturers and European software vendors. Globally recognized IT suppliers have gained market share by direct distribution or by establishing local subsidiaries.

End Users

Russian corporations spend very little on IT compared with their Western counterparts. According to market research firm Executive Data Corporation, Russian medium and large enterprise spent $288,200 on average in 2001, and will increase the spending to $432,300 by 2004. Because of the visibility that they give vendors, retail sales are viewed as important in the Russian market, although they are not currently very profitable. However, they might become more attractive should consumers' purchasing power increase. Moreover, retail can become important both for diversification and brand positioning of any computer vendor. Russian corporate clients often view company's retail sales as a barometer of the company success and commitment to the market.

The era of large scale privatizations and huge and unruly corporate takeovers is largely over in Russia. Russian managers and entrepreneurs are currently focused on improving the operational efficiency of the assets they hold, and are increasingly receptive to IT solutions to enhance their competitiveness.

Following are the major groups of IT end-users:

• Multinational companies
• Government agencies and institutions (participants of E-Russia program);
• Russian exporters of basic commodities (oil and gas industry, metallurgy, energy and construction industry);
• Russian companies, with progressive management seeking to increasing operational efficiency (telecom companies, freight and automotive industry, food processors).
• Small and medium size Russian firms, which are growing in number and becoming an economic force in the country.

Moscow and St. Petersburg have been the most important computer markets to date. However, there are large population centers in Russia's vast regions, which have been attracting the interest of suppliers and distributors. The longer-term opportunities for expansion in the regions are, under the right economic conditions, almost limitless.

Sales Prospects

Good opportunities and best immediate sales prospects for U.S. companies in the Russian IT market exist in the following market segments:

• Hardware: computer peripherals, laptops, servers and Internet technology devices.
• Software: database management systems including ERP systems as a result of growing interest in office automation, growth in the number of medium-scale businesses and rising number of individual end-users.
• Services: project services including reengineering and training services. Project services are not susceptible to piracy and this segment is expected to be growing. Outsourcing IT services and software development.
• Internet applications, including e-business, entertainment, trading and banking.

Market Access

Analysts reckon that up to 90% of Russian electronics and home appliance imports are brought into the country under so-called 'gray' import schemes. The Russian State Customs Committee recently introduced special customs declaration rules for electronics and home appliances. The Order # 1132 allows 50 types of goods to be declared by the importing firm using a preliminary declaration form and with payment of customs fees before the goods are actually brought into the country. These goods include virtually the whole range of home electronics, photo equipment, timepieces, as well as computers and components for them.

According to Interfax, this system came into force in February 2002 and has been implemented at 22 customs points in various regions of Russia. There are about 20 major importers of electronics and home appliances willing to use this new mechanism, all of whom are members of the Russian Association of Electronics, Appliance and Computer Retailers and Producers. The customs committee claims a new procedure gives legal importers an additional competitive advantage over importers using gray import schemes.

Computer hardware sold in Russia must conform to Russian standards of minimum safety and quality requirements and must carry a conformity mark, indicating that the product has been tested and approved for use in Russia. While the process can be time-consuming, it is relatively transparent and the requirements are not especially onerous. U.S. exporters generally experience few problems. Compliance testing is typically performed at commercially-operated testing stations in Russia, and the results passed to Gosstandart of Russia (State Committee of the Russian Federation for Standardization and Metrology) who issue the certificate.

Some computer distributors have been in existence for more than 10 years and therefore posses extensive experience and know-how. Their detailed knowledge of the market and many business connections enable them to find both a buyer and a seller for every product in their range. They may operate on an exclusive basis and may cover a large part of the country so that they can make a thorough analysis of sale possibilities and can evaluate the product against competing products with regard to both price and quality.

Trade Promotion Opportunities

There are several ways to approach promotional prospects in Russian IT market including participating in trade fairs specialized in high-tech products, advertising in professional trade magazines and direct mail with ample information about the products, including specifications, prices and delivery conditions.

Below there is a list of upcoming trade shows that could be useful for promotion of U.S. IT products.

ComTek
April 23-26, 2002
Moscow, Expocetner
Organizer ITE LLC

SvyazExpoComm 2002
May 13-17, 2002
Moscow, Expocenter
Organizer: E.J. Krauze

NETCOM2002 ? Networking and Communications
September 24-27, 2002
Moscow, Expocenter
Organizer: ITE LLC
http://www.net-com.ru

In May 2002, the U.S. Commercial Service in Moscow is arranging an U.S. Product Literature Center (catalog show) at the "Sviazexpocomm" trade show in Moscow. If you are unable to visit the show but would like to test the market for your product, you are welcome to display your company literature at our booth. Please contact CS Moscow specialist Irina Lakaeva and visit our website: http://www.buyusa.gov/russia/en for additional information.

On October, 2002 CS Moscow plans to organize a trade mission to Moscow and invites interested U.S. companies to explore the existing opportunities in the Russian ICT market. All trade mission participants will have an opportunity to network and establish contacts with key persons involved in implementation of USD 2.5 billion program "Electronic Russia 2002-2010" which is intended to boost e-commerce and Internet use in the country. The companies will meet Russian ICT community, the representatives of the American Chamber of Commerce and participate in business round table on E-Russia. The delegates will also attend Infocom 2002, a leading trade event in the area for information technologies supported by the Ministry of Communications of Russia.

The U.S. Commercial Service (CS) Moscow encourages U.S. companies wishing to do business in Russia to utilize our services. For more information about our services and programs, please see our website at: http://www.buyusa.gov/russia/en/ or http://www.BuyUSA.com

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