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The rise of Digital Challengers

How digitization can become the next growth engine for Central and Eastern Europe

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01.

Central and Eastern
Europe needs a new
engine of growth

The ten economies of Central and Eastern Europe – Bulgaria, Croatia, the Czech Republic, Hungary, Latvia, Lithuania, Poland, Romania, Slovakia, and Slovenia – recorded on average 114% GDP per capita increase between 1996 and 2017, compared to 27 percent in the five biggest European Union economies (the EU “Big 5”: France, Germany, Italy, Spain, and the United Kingdom).

However, CEE economies are generally undercapitalized compared to more advanced European economies. A digital and tech-driven economy could become the “afterburner” that the region urgently needs. These ten countries can now be seen as “digital challengers,” well-positioned to join the “digital frontrunners” – the nine Northern European states that are European leaders in terms of digitization.

Overall:

Digital Challengers and Digital Frontrunners have, on average, much smaller populations than the EU Big 5 countries.

Digital Frontrunners CEE Digital Challengers EU Big 5
Country Average
0
0 (excl. PL)
0 (incl.PL)
0
Total
0
0
0

Because their domestic markets are smaller, Digital Challengers and Digital Frontrunners exhibit much greater market openness than the EU Big 5.

Digital Frontrunners CEE Digital Challengers EU Big 5
Country Average
0
0
0

Despite strong economic growth over the last 20 years, Digital Challengers still lag far behind Digital Frontrunners and the EU Big 5 in terms of GDP per capita.

Digital Frontrunners CEE Digital Challengers EU Big 5
Country Average
0
0
0

Over the past 20 years, CEE has been one of the fastest developing regions in Europe, growing twice as fast as Digital Frontrunners and more than three times as fast as the EU Big 5.

Digital Frontrunners CEE Digital Challengers EU Big 5
Country Average
0
0
0

Compared to the EU Big 5 and Digital Frontrunners, Digital Challengers are significantly undercapitalized, which will limit GDP growth in the near-term future.

Digital Frontrunners CEE Digital Challengers EU Big 5
Country Average
0
0
0

The capitalization gap between Digital Challengers, Digital Frontrunners, and the EU Big 5 is closing very slowly.

Digital Frontrunners CEE Digital Challengers EU Big 5
Country Average
0
0
0

CEE is currently experiencing historically low unemployment levels, indicating that there are limited labor reserves left to plug into the economy.

Digital Frontrunners CEE Digital Challengers EU Big 5
Country Average
0
0
0

Hours worked in CEE are already higher than the EU Big 5 and Digital Frontrunner averages.

Digital Frontrunners CEE Digital Challengers EU Big 5
Country Average
0
0
0

Labor productivity in CEE still lags far behind the EU Big 5 and Digital Frontrunner averages.

Digital Frontrunners CEE Digital Challengers EU Big 5
Country Average
0
0
0
Dive deeper
02.

Digitization is poised to be the
answer to the development
challenge

We see two trajectories for Digital Challengers to grow
their digital economies, which have the potential
to double or even quadruple and supply an additional
EUR 60 billion-200 billion to their collective GDP.

0 0 0 0 Aspirational Business as usual 0 0 0 2016 2025 X% – Share of GDP EUR bn Digital economy in 2016 0

While in 2016 the Digital Economy in CEE accounted for ~6% of GDP, in 2025 it can reach nine-16%, driven by three sources of additional growth:

  • improving productivity by increasing the digitization of the public and private sectors
  • promoting e-commerce
  • increasing offline consumer spending

The countries in CEE are
uniquely positioned to capture
this opportunity

Digital Challengers



EU Big 5

Digital Frontrunners


Sweden

Share of digital
economy
% GDP, 2016 		0 0 0 0

Digital GDP per capita
EUR, 2016 		0 0 0 0

Growth of
digital economy
% 2012-16

Growth of
non-digital economy
% 2012-16
0
0
0
0
SOURCE: Eurostat; Local institutes of statistics; MGI
CEE also has the necessary fundamentals in place for further digitization:
  • 1. Competitive advantages at a macroeconomic level, including a lower legacy technology lock-in
  • 2. Good overall quality of primary and secondary education systems in terms of reading and science literacy scores, almost on par with the Digital Frontrunners
  • 3. A large STEM and ICT talent pool in the region, with over 230,000 graduates in 2016 – more than any of the EU Big 5 markets and twice as many as the entire Digital Frontrunner region
  • 4. Good digital infrastructure with excellent 4G coverage and some of the highest coverage rates in the world for extra-fast broadband
D igi t a l Challengers EU Big 5 Digital Frontrunners Average GDP growth, 2015-2017 A verage hourly labor cost, EUR, 2017 2.5x faster 3.7x lower 0 0 0 +0% +0% +0%
D i g i t a l Ch a l l e n g e r s D i g i t a l F r on tr un n e r s Minimu m Maximu m Math Science Reading 0 0 0 0 0 0 0 0 0 0 550 500 450 400 100 150 50 0 0 0

PISA (OECD), range of country scores, 2012-2015 average

Number of STEM graduates, thousands, 2016

0 0 0 0 0 Digital F r ontrunners 0 0 Digital Challengers
0 SOURCE: DESI 2018 Share of populated areas covered by 4G,% Share of ultrafast broadband sub- scriptions >= 100 Mbps, % Share of house- holders covered by ultrafast broadband, % 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0% 0 Digital Frontrunners D i g i t a l Challengers Average SI CZ HR HU RO BU L V L T PL SK 0% 0% 0 0 0 0 0 0 0 0 0 0 0 0 0 0
There are also multiple areas in Digital Challenger
countries where improvements are necessary to
enable further digitization. Going forward the focus
should be on seven enablers:
  • 1. Increase the adoption of digital skills and take-up of internet services by CEE’s general population
  • 2. Increase the adoption of digital tools by CEE’s small, medium, and large enterprises
  • 3. Leverage and grow CEE’s ICT specialist labor pool
  • 4. Increase the provision of trainings to develop/upgrade ICT skills of employees by CEE enterprises
  • 5. Develop, implement, and promote e-government solutions in CEE’s public sectors
  • 6. Foster entrepreneurship in CEE to stimulate the startup ecosystem
  • 7. Improve & standardize CEE’s ICT regulatory environment to ensure investment attractiveness and easy scalability across the region
Basic digital skills % OF POPULATION AGED 16-74, 2017 Digital Frontrunners (avg.) Digital Challengers (avg.) 0 0 0 ... sending/receiving email 0 0 0 Individuals using the Internet in the last 12 months 0 0 0 Individuals who have written a computer program 0 0 0

SHARE OF ICT SPECIALISTS, 2016 % of employed population (avg.)

74 years old 15 years old 34 years old Digital Frontrunners (avg.) Digital Challengers (avg.) Outliers below Digital Challengers average Markets close to Digital Challengers average SI 0 LT 0 LV 0 HR 0 BU SK 0 RO 0 HU 0 CZ 0 PL 0 0 0 Average for Digital Frontrunners Average for Digital Challengers 0 0 0 0 0 0 0 0
ADULT PARTICIPATION RATE IN EDUCATION AND TRAINING IN THE LAST 12 MONTHS Percentage of participants 25-64 years old, 2016 SI 0 CZ 0 HR HU 0 RO 0 BU 0 LV 0 LT 0 PL 0 SK 0 0 Average for Digital Frontrunners Average for Digital Challengers 0 0 0% Outliers above Digital Frontrunners average Outliers below Digital Challengers average Markets close to Digital Challengers average
E-GOVERNMENT PENETRATION & UPTAKE Individuals accessing public services online, percentage of individuals aged 16-74 Government Digitization Index SI CZ HR HU RO BU LV LT DE ES BE PL IT UK LU FR FI DK SE NL EE SK Digital Challengers average EU Big 5 average Digital Frontrunners average 100% 90% 80% 70% 60% 50% 40% 30% 10% 0% 30% 35% 40% 45% 50% 55% 60% 65% 70% 75% 80% 85% 20% Digital Challengers Digital Frontrunners EU Big 5
DIGITAL INTENSITY SCORE * Percentage of enterprises, 2016 DIGITAL CHALLENGERS DIGITAL FRONTRUNNERS 0% 0% V ery high V ery low High Low 0% 0% 0% 0% 0% 0%
* The Digital Intensity score is based on counting how many out of 12 technologies are used by each enterprise. Selected examples of technologies included in the score: internet usage by a majority of the workers; fixed broadband speed > 30 Mbps; mobile device usage by more than 20% of workers; website presence; presence on social media; e-sales usage for at least 1% of turnover; ERP and CRM software adoption.
W O R L D E C O N O M I C F O R U M N E T W O R K R E A D I N E S S I N D E X Synthetic score, 1-7 (best) Importance of ICTs to gov’t vision Gov’t success in ICT promotion Gov’t procurement of advanced tech Laws relating to ICTs Intellectual property protection 0 0 0 0 0 0 0> 0 0 1 2 3 4 6 5 7 0 Digital Frontrunners (avg.) Digital Challengers (avg.)
EARLY STAGE STARTUPS Global Entrepreneurship index Number of startups per million citizens, 2018 SI CZ HR HU BU L V L T PL SK RO 0.28 0% Average for Digital Frontrunners Average for Digital Challengers 0.39 0 . 6 6 0 0 0 0 0 0 0 0 0 SI CZ HR HU RO BU LV LT PL SK 0 0 0 0 0 0 0 0 0 0 x4 Average for Digital Frontrunners Average for Digital Challengers 5 8 21 5 Outliers below Digital Challengers average Markets close to Digital Challengers average
Dive deeper
03.

Action is needed from the
business world, the public sector,
and individuals

Implications for public sector 1 Implications for business 2 Implications for individuals 3

Build a skillset for the future by developing a wide-ranging reskilling strategy, updating youth education for the future, promoting lifelong learning and mid-career training and actively counteracting brain drain.

Support technology adoption in the public sector. Speed up the development of online public services and its adoption. Digitize back-end government processes. Develop digital skills amongst public sector employees. Standardize government data and open it to third party collaborators.

Support technology adoption among businesses. Promote digitization benefits and digital transformation. Incentivize companies, especially SMEs, to use digital tools. Encourage development of digitization support ecosystems.

Strengthen regional cross-border digital collaboration. Create a strong digital pillar within regional collaboration platforms. Ensure standardized & flexible digital policy solutions across the region. Cooperate in managing societal shifts related to the changes in the labor market

Improve startup eco-system by improving entrepreneurial talent pool, increasing access to capital and strengthening the position of major CEE cities as startup hubs.

Actively adopt technology and innovation. Adapt your business model to meet the demands of the digital economy. Leverage digital tools in day-to-day operations, e.g., use the internet and advanced analytics to improve revenue, digitize internal operations, and build cybersecurity capabilities.

Invest in human capital. Prepare your talent strategy for the digital economy. Update approach to recruiting. Actively drive re-skilling and up-skilling.

Embrace a pro-digital organizational culture. Start the change from the top - ensure role modeling. Be bold in experimenting with technologies. Make decisive investment.

Prepare for the digital economy and take advantage of digital tools in all aspects of your life:

  • Continuously update your digital skills and actively learn how to work with new technology.
  • Invest in skills that are hard to automate, e.g., focus on developing social and emotional skills, teamwork and creativity.
  • Use digital tools and resources to access global knowledge.
  • Be prepared to change sector or occupation.
  • Leverage digital platforms to find freelance jobs, sell goods, gain additional sources of income; e.g., creators can tap into global audiences for their content using online video streaming platforms.
  • Take advantage of falling entry barriers and access to capital to become an entrepreneur.
  • Build a personal presence online, e.g., utilize professional networking and recruitment platforms, use personal websites to market your own brand.

Dive deeper
04.

Acting together in the CEE region is key

The countries of CEE can only capture the full potential of digitization by cooperating closely with one another. There are four reasons why cooperation is necessary:

Together, Digital Challengers represent EUR 1.4 trillion in GDP – making them the equivalent of 12th-largest economy in the world.

The region’s countries face a number of challenges, most importantly the “brain drain” and the need to reskill the workforce.

The countries have high levels of market openness and similar levels of digitization.

Each of the CEE countries has developed digitally in different areas, so sharing best practices can accelerate digitization.

Best practices 4 Scale 1 Common challenges 2 A similar economic situation 3
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05.

The time to act is now

In order to fully benefit from the digital transformation, the time for CEE’s public and private sectors to act is now. There are three main reasons for this:

In 2017 the Digital Challengers saw their highest levels of GDP growth in more than a decade. This positive environment gives new digital initiatives a head start.

We are on the cusp of a Fourth Industrial Revolution, a sea change in which new technology will fundamentally transform the economy and the labor market. New growth will bring jobs in new fields, such as big data science, machine-learning engineering, and new technology design.

A radically altered technological landscape will also present serious challenges: Our analysis shows that up to 51 percent of workplace activities in CEE today – the equivalent of around 21 million jobs – could potentially be automated by 2030 (depending on the economy, regulation, and the labor market), using technology that already exists. This creates both a productivity increase opportunity and a challenge related to transitioning the labor market to new job pools; immediate action would be required to address the latter. Responses could include updating the education system to teach the skills needed in the future and creating continuing education services that support lifelong learning.

This is the time to develop a clear digital agenda and a toolkit for navigating the digital transformation ahead. Many companies, countries, and regions have realized this and are busy developing long-term digital strategies. If they wish to compete and capture their EUR 200 billion digital opportunity, Digital Challengers need to come together and do the same.
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Authors

Jurica Novak

Managing Partner in Central Europe

Advises clients in banking, telco, consumer goods, private equity, insurance, and other industries primarily on strategy, digital, corporate finance, and governance.

Marcin Purta

Managing Partner in Poland

Expert with 20 years of experience in strategic consulting, advising clients on growth strategies based on advanced analytics and digital innovations in sectors such as TMT, retail, energy, and logistics.

Tomasz Marciniak

Partner

Leader of the Strategy and Corporate Finance Practice, and the Banking and Insurance Practice in Poland as well as the Electric Power and Natural Gas Practice in Central and Eastern Europe.

Karol Ignatowicz

McKinsey Alumn

Advises clients in TMT, retail, basic materials and other industries primarily on strategy, digital transformation, turnarounds and operational improvements topics.

Kacper Rozenbaum

McKinsey Alumn

Advises clients in energy, telecommunications, and technology on the topics of strategy, turnarounds, and digital transformations.

Kasper Yearwood

McKinsey Alumn

Advises clients in retail, energy, and finance on the topics of strategy, digital transformations, and advanced analytics.

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