The rise of Digital Challengers How digitization can become the new growth engine for and Central and Eastern Europe (CEE) Report insights presentation - perspective on 22 January 2019
Regional total population vs country average, 2017, millions Digital Frontrunners EU Big 5 62 Digital Frontrunners 7 (avg.) Digital Challengers Looking at Europe from an economic perspective, we can distinguish three regions 323 Eu Big 5 55 (avg.) Digital Challengers 101 GDP per capita growth, 1996-2017, % 117 58 114 27 10 (avg.) 7 2
Production (GDP) Productivity Labor Capital A L β K α, similarly to other CEE markets, cannot count on traditional growth levers any more and should look for the next growth engine Northern EU Digital Frontrunners 3 Productivity GDP per hour worked, 2017, EUR 1 Productivity lags behind Digital Frontrunners Unemployment, 2017, % Hours worked per year per employee, 2017 64 6.1 1,573 has limited work capacity reserves low unemployment rate, with working hours above EU average Capital stock per employee, EUR mln 2, 2016 Capital expenditures for fixed assets, average growth in %, 2012-16 23 1.7 22 6.2 1,643 2 0.3 Economy in is undercapitalized and the gap is closing slowly 1 EUR current prices and purchasing power parities in current prices 3 Belgium, Denmark, Estonia, Finland, the Netherlands, Ireland, Luxembourg, Norway, Sweden 2 Net assets per employee, at prices of 2010 SOURCE: Eurostat; OECD 3
CEE Digital Challengers EU Big 5 2 Digital Frontrunners Sweden example can build on its strong digital economy growth dynamic to catch up with Digital Frontrunners Digital GDP per capita, 2016, thousand euro Growth of digital economy %, 2012-16 0.45 8.2 0.75 6.2 3.27 3.1 4.15 9.9 Growth of non-digital economy %, 2012-16 2.1 2.6 1.2 2.2 1 Digital economy is calculated as sum of sectors: ICT, e-commerce and consumer spending on digital equipment (e.g., computers, smartphones, smartwatches) 2 Spain, France, Germany, UK, Italy SOURCE: Eurostat; Local institutes of statistics; McKinsey Global Institute 4
The digital economy in 2025 can bring up to 200 billion EUR in GDP in CEE and 8 billion in, adding up to 1 p.p. to GDP growth per year Digital economy growth potential for the CEE Digital Challengers & in the aspirational scenario EUR bn CEE Digital Challengers 2016 76 6% GDP 3.2 7% GDP +200 +7.9 Capturing digitization potential in business and public sector 1 Acceleration of e-commerce 2025 276 16% GDP +1 percentage point of GDP growth each year 11.1 16% GDP +1 percentage point of GDP growth each year 1 Productivity growth captured by increase of traditional ICT usage (software, hardware, telecommunications) to the level of Sweden representation of Digital Frontrunners SOURCE: Eurostat; Local statistical offices; IHS; McKinsey Global Institute 5
Avg. Digital Challengers Sweden as a digital frontrunner benchmark Digitization level of selected sectors Low: <~3% Average 1 : 3-10% High: >10% s digital potential can only be achieved if public and private sector leaders act to address digitization gaps to Digital Frontrunner benchmarks Finance and insurance Manufacturing Professional and business services Energy, Utilities Wholesale trade and retail trade Transportation and warehousing Government and other services 1 Average level of all sectors (excluding the most advanced ICT sector and finance) SOURCE: Eurostat; Local institutes of statistics, McKinsey Global Institute 6
Improve the quality and coverage of digital infrastructure To strengthen 's Digital Challenger status, further efforts need to be channeled in 5 key areas Strengthen both primary and secondary education quality Invest in digital and soft skills for the general population Increase the adoption of digital tools in the public and private sectors Support the development of a thriving innovation and entrepreneurship ecosystem and the environment to run a digital business 7
Percentage of populated areas coverage by 4G - measured as the average coverage of telecom, % of the country 72 87 98-26.5% Compared to Digital Frontrunners, exhibits gaps in terms of 4G network coverage and ultra fast broadband subscriptions Household covered by the standard fixed broadband (availability) % of the households 95 Share of ultra fast broadband subscriptions >= 100Mbps % of the households 20 Price index of broadband price (synthetic score) 7 80 94 83 98-2,5% 26-73,1% 87-8.0% SOURCE: DESI 2018, World Economic Forum Avg. Digital Challengers Avg. Digital Frontrunners 8
Scores in Math, Reading, Science Literacy & English Proficiency, PISA (OECD) Synthetic scores, 2016 Gap to Digital Frontrunners Math 441 477 505-12.7% There is a clear gap in overall primary & secondary education quality between and Digital Frontrunners Reading Science 432 446 473 507 477 506-14.8% -11.9% Avg. Digital Challengers Avg. Digital Frontrunners 1 Digital Frontrunners: Belgium, Denmark, Estonia, Finland, Holland, Ireland, Norway, Luxemburg, Sweden SOURCE: OECD, PISA, World Bank 9
Number of STEM graduates per 100.000 inhabitants, 2016 296 303 lags behind Europe in terms of the relative size of its STEM and ICT talent pool Information and Communication technology graduates, % of all graduates 166 3.1 244 143 226 215 221 Digital Frontrunners Average 1 Digital Challengers Average 4.5 3.0 3.6 1.0 3.9 3.7 3.6 1 Digital Frontrunners: Belgium, Denmark, Estonia, Finland, Holland (data for 2015 assumed), Ireland, Norway, Luxemburg, Sweden SOURCE: Eurostat, Unesco Institute for Statistics 10
Citizens with advanced digital skills 1 by age groups, vs. Digital Frontrunners 2 % Digital Frontrunners 2 100 Across all age groups in, the percentage of people with advanced digital skills is far below Digital Frontrunner benchmarks 80 60 40 20 60% 68% 72% 82% 88% 0 16-24 25-34 34-44 45-54 55-64 1 Advanced digital skills - analysis and data collection using digital tools, the use of online tools such as banking or e-commerce, use of online communication 2 Belgium, Denmark, Estonia, Finland, the Netherlands, Ireland, Luxembourg, Norway, Sweden SOURCE: Eurostat, McKInsey & Company analysis 11
S SME L Large Corporates The private sector in is less advanced in the use of digital tools than Digital Frontrunners; SMEs do not fully use the potential of digitization Digital Challengers Digital Frontrunners 1 Selected digital tools % of enterprises using the tool, 2016 Analyzing big data L S L S L S 7 9 13 23 22 37 Cloud computing services 6 13 18 31 35 63 Selling online 7 15 14 21 31 43 Paying to advertise online 18 27 24 34 32 43 1 Belgium, Denmark, Estonia, Finland, Netherlands, Ireland, Luxembourg, Norway, Sweden SOURCE: Eurostat 12
exhibits some of the lowest e-government penetration and uptake results in Europe, clearly below the CE regional average E-government uptake: Individuals interacting with public authorities online, % of individuals aged 16-74 100% 90% 80% 70% 60% 50% 40% 30% 20% HU HR SK LU UK CZ CEE PL IE SI IT FR EU Big 5 BE FI ES DF DE LT LV SE DK NL EE Digital Frontrunners Digital Challengers EU Big 5 Regional averages 10% RO 0% 30% 35% 40% 45% 50% 55% 60% 65% 70% 75% 80% E-government penetration: Government Digitization Index 1 1 The Government Digitization index is a proxy for the Digitization level of the back- and front office. It involves 4 areas: 1) Availabilityand Usability of public eservices, 2) Transparency, 3) Availability and usability of cross-border services, 4) Availability of key digital enablers, such as electronic Identification (eid), electronic Documents and others 85% SOURCE: Eurostat, European Commission 13
Examples on following pages Public sector Private sector 1 2 3 Build skillset for the future by developing a wide-ranging reskilling strategy, updating youth education for the future and actively counteracting brain drain Support technology adoption in the public sector (e.g. speeding up the development of online public services and its adoption) Support technology adoption among businesses (e.g. promote digitization benefits and digital transformation) 10 recommendations to digitize 6 7 8 Actively adopt technology and innovation (e.g. adapt your business model to meet the demands of the digital economy) Embrace a pro-digital organizational culture Invest in human capital (e.g. prepare your talent strategy for the digital economy) 4 Strengthen regional cross-border digital collaboration (e.g. create a strong digital pillar within regional collaboration platforms) Individuals 5 Further stimulate the startup eco-system through e.g. improving entrepreneurial talent pool and increasing access to capital) 9 10 Prepare for the digital economy invest in life-long learning Take advantage of digital tools in all aspects of your life 14
Czechitas in Czech Republic Skills Norway Rails Girls Sofia in 1. Example: Multiple examples seen of measures undertaken by policy-makers across Europe to build skillsets for the future The Digital Academy is a project that educates and inspires women and girls to pursue opportunities in tech and computing fields. It is a requalification course and a mentoring program for future data analysts with no requirements on previous experience/knowledge. The goal is to find jobs for the participants in cooperation with local companies. The main target groups are elderly people over 65 year and immigrants from nonwestern countries. Skills Norway is a national agency focusing on (among others) improving basic skills in the adult population in the areas of literacy, numeracy, oral communication, and the use of ICT. As part of its Digidel 2017 program, it supported groups that do not use ICT as part of their everyday life, and help them acquire the skills needed to master these technologies. Rails Girls Sofia is a project making technology more approachable for women in. The organization provides a community, free workshops and study groups where women and girls can learn the basics of web programming and develop their projects. Since the project started in 2013, around 1000 women have been trained through 14 weekend workshops and over 300 study group meetups. 1 Polish: Fundacja Platforma Przemysłu Przyszłości 15
1. Example: Shkolo is a case-inpoint of an organization supporting the digitization of the school system in Created in 2016 Awarded Best Startup Prize by Invest Agency Challenge (mission of company) Minimize bureaucracy Engage students Engage parents Solutions Optimize back-office administrative tasks at schools Release time of teachers for more value-adding tasks Allow parents tracking progress of their children and involve them in kids achievements and issues Engage children utilizing new technology SOURCE: Press search, company statements 16
3. Examples: A number of n companies are active in the space of digitizing traditional business activities Provides big data and advanced analytics solutions for the traditional cargo transport industry Supports demand forecasting and predictive operations optimization Offers AI-as-a-service to various traditional industries Provides solutions supporting and automating demand forecasting, risk management and decision making Offers software tools for web, mobile and desktop applications development Supports fast development of apps by offering a platform allowing organizations to leverage pre-design UI components SOURCE: Press search, company statements 17
4. Close cooperation with the countries of Central and Eastern Europe can help accelerate the development of the digital economy in The CEE region in numbers 1.4 trillion GDP 101 12th million citizens economy in the world Four arguments for the benefit of collaboration between Digital Challengers: I II III IV As the CEE region, Digital Challengers represent 1.4 trillion in GDP. Enabling n enterprises to seamlessly tap into this potential can reap significant benefits., like other CEE markets, exhibits high levels of market openness and comparable levels of digitization. This adds relevance to the shared experiences on what has worked well in digital investments and regulatory policy between the countries in the region. faces the same challenges as many other CEE markets, importantly the brain drain and need to reskill the workforce in the long term. Joint efforts across the region can help in finding and implementing the most effective solutions. has developed different strengths related to the digital economy than other CEE markets. Sharing best practices can accelerate digitization. 1 Np. Digital North Initiative w ramach Nordic Council czy Inicjatywa Digital 9 18
8. Example: Open communication and a set of dedicated support tools help AT&T to re-skill its employees Challenge Implementation of technologies requiring new skills in the field of data processing and cloud analytics, programming, management, etc. Solutions Partnerships with universities such as Georgia Tech and Udacity, with a scholarship program at 32 other universities Internal recruitment platform, showing the demand for positions and abilities, combined with a system of certified training to improve skills for employees Impact Re-skilled employees filled half of all positions related to the management of the new technology The company has shortened the product development cycle by 40%, accelerating revenue generation time by 32% SOURCE: Press search, company statements 19
Automation potential in is estimated at 48-53%, translating into ca. 1.4-1.5 m FTE Which would require re-skilling of the n labor force Change in working hours 2016-2030, % Time to act is now as automation will impact the labor market in 48-53% 1.4-1.5 m of working hours FTEs Basic cognitive skills Physical and manual skills Social and emotional skills 17 16 22 Direction of skill shift Technology skills 52 Note: Skill change for Western Europe SOURCE: McKinsey Global Institute 20
The growth rate of the non-digital economy in in 2012-2016 ~2% The rate of growth of the digital economy in in 2012-2016 8% The rate of growth of the digital economy in Sweden may aspire to such a growth rate in the future 10% as a Digital Challenger 3.2 bn euro Value of the digital economy in today 7.9 bn euro Potential additional GDP generated by 2025 in due to the acceleration of digitization 7% 16% Digital economy share of GDP today and potentially in 2025 21
The Rise of Digital Challengers: How digitization can become the next growth engine in Central and Eastern Europe Available at: digitalchallengers.mckinsey.com Thank you