3. AS/400 in Eastern Europe               Page 23

4. Spotlight On....

      Hungary....................       Page 31

      Czech Republic............   Page 34

               Poland......................       Page 38

5. Some AS/400 Lore                                   Page 41

About the Author....

(inside back cover - page 44)

1. Eastern Europe, a New Investment Frontier:

“A Taiwan Next Door!”

  Top economies in this emerging market are growing at almost four times the rates of the biggest developed countries; Eastern Europe’s low cost, yet excellently educated “Western”-style labor force, makes it more attractive than many fast-growing Asian markets; $19 billion pumped in by multinationals during 1990-1994, is only a start; a $5 billion IT market in 1996?

Renaissance II.  Eastern Europe, IBM, and the AS/400 are all undergoing a “Renaissance II.”  It’s an economic revival the likes of which has not been seen in the Western world since the explosive growth of the U.S. economy at the last turn of the century.  The top six Eastern European economies have outpaced the leading six industrial countries’ 1995 GDPs by nearly four times! (see the chart).  

And even a wider average 1996 GDPs of some 20⁺ countries which comprise this emerging market will be twice as high as those of the leading industrial economies (3.7% vs. 1.7%).  No wonder that Eastern Europe had attracted $19 billion of private multinational companies’ investments between 1990 and 1994, according to the United Nations’ 1995 “World Investment Report.”  But that was only a modest start, especially compared to the $607 billion which Germany has invested in East Germany since 1990[1], or considering what we saw during our May 1996 whirlwind tour of Central and Eastern Europe. 

Money is only now also starting to pour into the other formerly Soviet-dominated countries.  Heavy investments are being made in the building of the infrastructure necessary to support the 21st century-style information-based economies.  These investments won’t show up on the charts until about two years from now, when the U.N. releases its 1996 investment report.  But there is no doubt that a sense of optimism and vibrancy is in the air everywhere.  Long depressed by the Soviet communist boot, Eastern Europe is quickly becoming one of the world’s hottest markets.  Its cheap labor has always been an attraction for industrialists eager to reduce production costs.  Its highly educated work force has always been an allure for high-tech firms.  But now, Eastern European economies are also starting to grow.  After shrinking 5.4% in 1993 and showing only a modest growth in 1994 (up 1.2%), the average growth doubled in 1995 (to 2.4%), according to Deutsche Bank.  And we figure it will increase by 3.7% in 1996.

“The Nordic firms have discovered a Taiwan next door,” said Jorgen Dan Jensen, deputy managing director of Denmark’s Investment Fund for Central and Eastern Europe, according to the Central European Economic Review (Nov. 1995), a Dow Jones publication.  Denmark’s five million people, for example, traded as much with Eastern European countries in 1994 (about $658 million) as did France, a country with 57 million people.

But the “New World” which the “Vikings” discovered without having to cross the Atlantic, is no longer just theirs for the taking.  We’ve seen many British and German firms, as well as some U.S. multinationals moving into this emerging market, trailing the funds made available by the IMF, the World Bank or the European Bank for Reconstruction and Development.  Some of these multinationals are diversifying their investments away from China, whose growth has started to slow (see the chart), not to mention the increased political instability in that part of the world.   

Banks, Telecoms, Governments - Top IT Users.  Where are most of the IT investments being made?  In the banks and telecoms, it seems, which are growing by leaps and bounds.  Also, the various other government-run programs (e.g., pension and insurance funds, medical and social security systems, etc.).

Primed for Servers. In its initial recovery phase, the Eastern European customers bought a lot of PCs - as a “quick fix” to their IT problems.  Even today, the PCs account for more than 50% of customer spending on computer hardware in some countries (e.g., Czech Republic, Poland, Russia...).  These people bought the PCs because they were cheap and because their telecommunications structure was inadequate. 

Now, not only has the latter improved considerably in most countries (massive investments have been made in the telecommunications area during the last five years - the biggest surprise for us during this research trip), but the PC buying frenzy has created a large “client” base for the more powerful “servers.” 

Add to it an explosive growth of Internet hosts, in which Eastern Europe leads the world, according to Network Wizards, and you’ll see why this market is now “primed” for vendors with premier server offerings.

IBM is well positioned to take advantage of this opportunity with its four server platforms - the S/390, the AS/400, the RS/6000 and the PC.  But it must move quickly and aggressively, as its competitors, especially HP and Microsoft NT, have already staked out strong positions in the biggest markets (e.g., Czech Republic, Russia).  Nor are these two vendors the only ones.  We’ve also seen DEC, Compaq and UNISYS, for example, actively pursuing this huge opportunity.

IT Market. The overall IT market in Eastern Europe is growing by leaps and bounds.  In 1994, IDC estimated the Eastern European annual IT spending to be about $3 billion, and growing at 25% to 30% per year.  This would make it about a $5 billion IT market in 1996. 

Of the above total, we figure that about 66% is being spent on hardware, a much higher total than in the developed countries, where the hardware spending is typically less than 50%.  The customers we’ve talked to spend about 21% of their IT budgets on services, and about 13% on software.  This means that the Eastern Europe 1996 hardware, services and software markets are about $3.3 billion, $1 billion and $650 million respectively.  

Practically Unlimited Opportunities. Given the significant investments being made in the development of the IT infrastructure, and the rapid growth of this IT market, it seems that the degree of a vendor’s success in Eastern Europe is only limited by its investments and its marketing commitment.  Asked what the biggest challenge for IBM in this part of the world is, Horst Breitenstein, the Vienna-based head of IBM Central and Eastern Europe, replied that it is the relative absence of leading Western business partners.  This view was echoed in our discussions with some local business partners.  For the most part, they lamented the low penetration of the “big names” among the independent software vendors (ISVs).

Fragmented Market. One reason for that is, of course, that Eastern Europe is a fragmented market, and Western applications have to be customized for the customers.  Not only does the software have to be translated into more than 20 local languages, but some of them even use a different alphabet (Cyrillic - Russia, Belorus, Ukraine, Bulgaria, Serbia...). 

Furthermore, there are many cultural and regulatory differences even between similar countries (e.g., the Czech Republic and Slovakia, or Slovenia and Croatia, both sets of which, until very recently, were a part of Czechoslovakia and Yugoslavia respectively).  No matter how small their country, the Eastern Europeans thrive on being “special.”  The vendors who are not prepared to treat them as such will face significant roadblocks on the way to success.

All this requires subtlety, understanding, patience and long-term financial commitment by the Western ISVs.  Even more importantly, however, it requires a desire by the “big name” firms to build long-term relationships with the local IT business partners, without whose talents and efforts the success of a foreign company is rather questionable.

Fear of Unknown. One reason for the relative absence of the “big name” firms from one of the world’s hottest markets is fear of the unknown.  Fear of the unknown is understandable and natural to human beings.  For companies whose base may be in Arkansas, Iowa or Oklahoma, to mention some “middle America” states, it can be pretty intimidating to contemplate investing in a foreign market whose languages you don’t understand, and which had been labeled for decades as an off-limits-for-most-Westerners region - the dreaded “behind the Iron Curtain” world.

But such fears can be eased by a simple visit to some the Eastern European countries.  Most American business people would be amazed how “American” these countries have become, while managing to maintain their own cultural uniqueness.  And not just by the presence of the symbols of the American retail culture - Coke, Pepsi, McDonald’s, Pizza Hut...  Or by having Cindy Crawford smile at you from hundreds of billboards.  The U.S. business travelers may be pleasantly surprised by the availability of American telephone jacks and electrical adapters. 

Over the last decade of researching the global IT markets while traveling with a laptop, we have gotten used to having to travel through Western Europe with an accessories kit which grew to be bigger than the laptop itself.  Naturally, we expected to add to our collection of petty national differences on this trip to Easter Europe!  Well, we were wrong.  Hotels, IBM, customer and business partner offices were all equipped with American-style jacks and sockets.  Eastern Europe’s original curse - a lack of a telecommunications infrastructure - has now turned into an advantage over Western Europe, which has to bring forward the legacy of its older systems, any time it contemplates an upgrade.  It’s kind of like being able to start with the PC and Windows software, without having to worry about what to do with your existing mainframe investments. 

Youth at Helm. American business visitors to Eastern Europe may also get energized by seeing so many young people in positions of authority and responsibility.  IT is a young industry globally, but in Eastern Europe it’s a relative infant compared to the developed Western countries.  Nowhere else in our travels around the world have we seen so many “MTV generation” members running their country’s IT centers in banks, governments or insurance companies, or developing solutions for IT vendors, such as IBM or its partners.

These young people are Eastern Europe’s real business treasure.  They guarantee the long-term returns on one’s investment.  If treated right (i.e., if given freedom to experiment and fail), we’ve seen them work their hearts out without regard for “normal” working hours, employment benefits, or negativism which characterizes the expensive, yet spoiled, labor forces in some developed countries.   

Market and Education.  A strong antidote for fear of the unknown is - greed.  Once the leading ISVs realize the tremendous business opportunities which the Eastern European markets offer, exemplified by the explosive revenue growth of an IBM Hungarian business partner (shown above), chances are they will overcome their parochial inhibitions. 

But first they have to get educated.  This is where the hardware vendors can help themselves and the ISVs, too.  The observations, analysis and conclusions such as those in this report, for example, are not necessarily intuitively obvious.  They will possibly come as a revelation to many ISVs.

In addition, the hardware vendors can help themselves by playing the role of matchmakers - between the Western ISVs and the local partners.  Being a good matchmaker in business is no trivial task.  It takes diligence, patience, but above all - investment!

Customize, Don’t Standardize Marketing.  Last but not least, the IT vendors must invest in image building, both for their companies and for their products.  Once again, this takes patience, diligence, but above all - investment!  One must not assume that just because a company or a product is household name in the West, that the same is true in Eastern Europe. 

Western Gaffes. Possibly the worst mistake a foreign vendor can make in Eastern Europe is to simply take its Western marketing and advertising campaigns and translate them into local languages.  Sometimes, comical reactions can result with tragic business consequences.

·When Ralston Purina used the image of a bunny for its Eveready Energizer batteries’ ads in Hungary, the local customers thought the company was selling toy rabbits, not batteries!

·When a U.S. baby care company advertised bath soap, it showed a young woman holding her baby.  But the ad scandalized Hungarians who saw an unwed mother.  The model was wearing a ring on her left hand.  Eastern Europeans wear their wedding rings on their right.  “And then Western marketers wonder why people here won’t buy their products?,” a Hungarian ad executive said to the Wall Street Journal, seemingly reveling in the ignorance of Americans.

·Closer to home (i.e., the IT market), one IBM executive told us that his company insisted on conformity of corporate and products’ image.  Armonk insisted on running the “standard” IBM corporate ads in the Russian market.  The ads were simply translated into Russian.  But the translation was so bad, that the confused Russian customers didn’t know if they should laugh or just ignore the ad.  Fortunately, one of them thought well enough of IBM to point out the ad’s ludicrousness to this non-Russian speaking Western executive. 

Reverse Gaffes. Sometimes, the cultural differences can be comical in reverse, too. 

·A senior diplomat at the U.S. Embassy in Belgrade, Yugoslavia, for example, showed us an ad by a local company which sells mobile telephones and provides Internet access.  “They could use a new PR firm,” the diplomat suggested with a chuckle. 

The name of the firm? 

MOBTEL! 

In the local language, the name is quite innocuous.  But to an English-speaking person, it may connote doing business with the mob.

·“Oh, that’s nothing,” commented the publisher of a leading Belgrade newspaper, with whom we shared the MOBTEL laugh.  “There was once a Macedonian confectionery firm whose name was S.H.I.T.”

And in the Albanian language, the same word, minus the periods between the letters, apparently means “(for) sale,” and thus can be often seen in store windows.

  A few years ago (July 1990), the San Francisco Chronicle reprinted an Air France internal memo/joke as an editorial about the foreigners’ unintended misuse of English.  Here are a few highlights:

·Similar to the IBM gaffe in Russia, Coca-Cola launched a multi-million campaign in China, whose proud slogan was: “Bite the wax tadpole!” - the English translation of what the native Chinese thought the Coca-Cola company was telling them.

·An Italian gynecologist advertised his practice as: “A specialist in women and other diseases.” 

·A Romanian tailor had the following English-language sign posted for his overseas customers: “Drop your trousers here for best results.  Ladies may have a fit upstairs.”

·“Don’t enter a woman if dressed as a man,” an Eastern European hotel restroom sign warned.

  h well...

Whoever said that international marketing was easy... r

 

2. IBM in Eastern Europe: An Incumbent Facing a New Frontier

  A $600 million-business in 1995, growing to $750 million in 1996?; doing business in 20 countries; 9 support centers in 7 countries; over 500 local dealers (PS, POS); over 200 local agents (AS/400, RS/6000); over 90 VARs

Deep Roots.  Even before it was “kosher” to do business in Eastern Europe, IBM was there.  It was in Hungary in 1936, when Tom Watson, Sr., was still the company’s CEO.  It was in the U.S.S.R. in the 1970s, during a brief thaw in the Cold War.  It was in the former Yugoslavia in the early 1960s when Marshall Tito was still the boss.  It was there when the Soviets modeled their own mainframe technology after the IBM S/360s, and when they smuggled IBM PCs behind the “Iron Curtain.”  IBM was the incumbent vendor even before it (re)opened its offices in Eastern Europe.  And IBM was among the first to return when Eastern Europeans’ “Velvet Revolutions,” and the guns of Bucharest, tore down the “Iron Curtain.” 

Given its deep roots in this part of the world, you would think that IBM is by far and away the dominant computer company.  Well, think again...

IBM is the No. 2 IT vendor in Russia and Poland (behind HP) - the largest countries in the region with a combined population of about 187 million.  IBM is No. 1 in the Czech Rep. and Hungary - the richest countries in the area[2], with a combined population of only 21 million - nine times smaller than Russia’s and Poland’s.  In addition, Russia and Poland are farther from Vienna and have many regional centers, while business in the Czech Rep. and Hungary is more concentrated in the capitals - both only a 40-minute “puddle hopper” flight away from the headquarters of IBM Eastern Europe.

It may seem perfectly rational, therefore, from the profitability standpoint, that IBM should be focusing on the latter two countries.  But in emerging markets, market share has to rank higher than the bottom line!  Emphasizing the Czech Rep. and Hungary (which received an IBM disk plant investment - in Székesfehérvár), instead of Russia and Poland, is like stressing Vermont and New Hampshire while snubbing Texas and California! 

The Czech Rep. and Hungary, however, is also where the money seems to be (IMF, World Bank, EBRD).  Which means that IBM seems to be picking the low-hanging fruit, instead of developing the bigger, but relatively poorer markets. 

Judged by the Western European results, which ranged from revenue declines to meager growth in the 1990s, IBM Eastern Europe’s 25% growth looks great by comparison.  But that’s a complacency trap which its executives should avoid.  Their challenge is not to be lulled by such comparisons.  In addition to picking the low hanging fruit, they should try to “reach the stars through hardships” - “per ardua ad astra,” as the Latin proverb suggests, i.e., get more aggressive in Poland and Russia.  

Good 1995/1996 Results. We figure that IBM’s Central and Eastern European 1995 revenues were about $600 million.  That’s about 16% of the total market, but less than one percent of the company’s worldwide 1995 revenues.  In 1996, even if this IBM region manages to grow its revenues by 25% to $750 million, as we suspect it will, the “Big Blue” will still fall behind its competitors, as we expect the market to grow by 30% to about $5 billion (based on IDC’s 1994 forecast). 

There is a race for the IT supremacy in Eastern Europe in which “no prisoners are taken.”  Companies with great past track records, such as IBM’s, could still end up as respectable “also rans” in this fast moving market.  Especially if its top executives have their eyes on China and Southeast Asia, while competitors pick their pockets in the potentially more profitable Eastern Europe.  An incumbent vendor’s success in this emerging market is only limited by its own imagination; its understanding of it, or commitment to it.

No Pain, No Gain.  As did the explorers of new Western frontiers a hundred or more years ago - the American pioneers who crossed the Mississippi, or the Rio Grande in their quest for riches - today’s multinational companies must live and die by their swords in “emerging markets.” 

And, as did the pioneers of the American frontier, sometimes the multinationals will also fall on their swords.  Seasoned bureaucrats in the developed industrial countries, who try to play the roles of explorers of the world’s “emerging markets,” are particularly prone to the latter predicament.  For, they have all the “wrong” kinds of experiences, and none of the “right” kinds of intuitions.

IBM will succeed in Eastern Europe if it relinquishes its corporate hold on decisions which its local entrepreneurs can make, and challenges them to deliver the value for the money they invest.  If Armonk fails to realize that, well... stand by for a 16% market share to drop to... pick a lower percentage. r

AS/400 - the Birth.  It was the time of glasnost (“glasnost”= openness) and perestroyka (“perestroika”= restructuring) in the former Soviet Union.  But also that of Cold War.  It was the time IBM was talking openness, but delivering proprietary systems.  It was the era the Big Blue still looked big and invincible almost everywhere except in its mid-section, where DEC seemed omnipotent.  It was the year after IBM’s “year of the customer” (1987), which gave competitors a chance to boast that “every year is the year of the customer” if you don’t do business with IBM.  It was the time of the Seoul Olympics and that of soul searching; the last of Reagan’s presidency.  It was the year before the Berlin wall came down, ushering new hope and joy in Eastern Europe.  It was the year before freedom was reinvented...

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