DIGITAL CHALLENGERS IN THE NEXT NORMAL - CENTRAL AND EASTERN EUROPE ON A PATH TO DIGITALLY-LED GROWTH - MCKINSEY
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Digital Challengers in the next normal Central and Eastern Europe on a path to digitally-led growth
About McKinsey & Company McKinsey & Company is a global management consulting firm committed to helping organizations create change. In more than 130 cities and 65 countries our teams support clients across the private, public, and social sectors. We help them shape bold strategies, transform the way they work, embed technology where it unlocks value, and build capabilities to sustain change—not just any change, but change that matters: for their organizations, their people, and for society at large. About McKinsey in Central Europe McKinsey & Company opened its first offices in Central and Eastern Europe in the early 1990s, soon after the momentous democratic changes that took place across the region. McKinsey played an active role in the region’s economic rebirth, working with leading business organizations, governments, and non- profit organizations. With offices in Belgrade, Bucharest, Budapest, Kyiv, Prague, Warsaw, and Zagreb, we serve clients across a wide range of industries, including automotive, banking and insurance, retail, heavy industry, high tech, media, and telecommunications. Copyright © McKinsey & Company 2020
Digital Challengers in the next normal Central and Eastern Europe on a path to digitally-led growth Joanna Iszkowska Tomasz Marciniak Borys Pastusiak Kamila Kawecka Margarita Młodziejewska Marcin Purta Milena Malinowska Jurica Novak Ivana Valachovicova
Contents Preface 3 Executive summary 5 Key findings 8 Digital Challengers at a glance 10 Chapter 1: Digitizing the CEE economy 13 Chapter 2: The CEE region’s digital foundations 17 Chapter 3: Labor market in CEE 30 Chapter 4: The impact of COVID‑19 and early responses across CEE 36 Chapter 5: Implications for policymakers, businesses, and individuals 45 Closing remarks 64 Methodological appendix 64 About the authors 65 Endnotes 66 2
Preface
The number of people in Central and COVID‑19 is a human tragedy, affecting to thank the authors of the above
Eastern Europe (CEE) who have all of our lives. It is also having an publications—in particular James
accessed at least one online service increasing impact on the economy and Manyika, a senior partner in McKinsey’s
has risen by 15 percent points since the process of digitization. With this San Francisco office; Klemens Hjartar, a
the start of the COVID‑19 pandemic. in mind, we decided to revisit our data senior partner in Copenhagen; and Paul
At the peak of the pandemic, there on Digital Challengers to see how well Jenkins, a senior partner in Oslo, for their
were almost 12 million new users CEE countries were prepared for the expertise, inspiration, and guidance.
of online services—more than the disruption caused by COVID‑19, and
The work on this report was led by:
population of Slovakia, Croatia, and whether they are now managing to
Tomasz Marciniak, partner; Jurica
Slovenia put together. digitize as fast as their populations.
Novak, McKinsey’s managing partner
The change in customer demand for COVID‑19 was a tipping point for digital in Central Europe; Borys Pastusiak,
digital channels witnessed in the last transformations. Not because it local partner; and Marcin Purta,
months is unprecedented. The ability significantly altered the solutions, but managing partner in Poland. Significant
of businesses and the public sector to rather because it amplified the need to contributions were made by McKinsey
follow their customers and citizens in the implement them fast. This report aims partners across CEE, including:
digital world and to envision new ways of to further strengthen the importance of Tomislav Brezinščak in Croatia;
operating will be crucial to successfully digitization, explain implications of the Alexandru Filip in Romania; András
weathering the crisis and ensuring long- COVID‑19 pandemic, and put forward Havas, Levente Jánoskuti, Daniel Rona
term sustainability and growth in the recommendations on how digital in Hungary; Tomáš Karakolev, Helena
next normal. technologies can fuel faster recovery. Šarkanová, and Dan Svoboda in the
It analyzes Digital Challengers’ level Czech Republic and Slovakia.
In 2018 we published a series of reports of digitization before the pandemic
on the rise of “Digital Challengers” outbreak and showcases acceleration in These individuals worked together
across Central and Eastern Europe. We digital technologies adoption during the with a team comprising consultants
defined the economic potential from first half of 2020. This includes primary Ivana Valachovicova, Kamila Kawecka,
accelerated digitization in ten countries research insights from the McKinsey and Margarita Młodziejewska;
in the region: Bulgaria, Croatia, the Digital Sentiment survey, which communications experts Joanna
Czech Republic, Hungary, Latvia, measures the uptake in digital services Iszkowska and Milena Malinowska;
Lithuania, Poland, Romania, Slovakia, usage by individuals across CEE during graphic designer Małgorzata
and Slovenia. We considered these the lockdown. Furthermore, we provide Leśniewska; and many others.
countries Digital Challengers, as they concrete ideas on how policymakers,
demonstrate strong potential for growth At the same time, we would also like
business leaders and individuals can use
in the digital economy. We pointed out to thank the many area experts from
digital technologies to build resilience
that robust digitization could act as the the public, private, and social sectors
and together contribute to a more
next driver of sustainable growth in the who provided insights and source data,
sustainable, digitally-led CEE economy.
region, potentially contributing €200 and helped advance our thinking. In
The ideas we present build on those particular, we would like to acknowledge
billion of additional GDP by 2025.
outlined in the previous reports and our collaboration with Google on this
Of course, when we made our articles published by McKinsey research, including contributions of
recommendations, we did not foresee & Company and other institutions. analytical inputs and insights leveraged
a pandemic transforming the world. We would like to take this opportunity in this report.
Digital Challengers in the next normal 3
4
Prague, Czech Republic
Executive
summary
The development of Central and Eastern The success of CEE was largely driven
European economies over the past by strong traditional sectors of the
few decades is truly a remarkable economy, dynamic exports, investments
achievement. The ten CEE countries from abroad, labor-cost advantages
analyzed in this report—Bulgaria, and funding from the European Union
Croatia, the Czech Republic, Hungary, (EU). However, many of these engines
Latvia, Lithuania, Poland, Romania, are now gradually powering down.
Slovakia, and Slovenia—increased Moreover, it is clear that CEE is still vastly
per capita GDP by 115 percent in undercapitalized. With labor capacity
the period 2004–2019.1 In 2019, at its limit and strong dependence on
the market openness of these exports, there is little more that the region
Digital Challengers, as we call them, can do with its historical growth engines.
reached 123 percent2 and the average
unemployment rate across the region The pace of digitization
was the lowest in recent history, at just increased slightly, but
4.6 percent. Productivity increased COVID‑19 is accelerating
to €36 per hour worked in 2019 and changes
is catching up with the levels seen in In our 2018 report The rise of Digital
Western Europe. Challengers, we suggested that
Digital Challengers in the next normal 5
12m
digitization was the new lever that CEE as the year-on-year change observed in
countries could use to stay on their 2017–2019 (7.8 percent).
growth trajectory. Our analysis showed During the pandemic, the way people
that CEE can gain significant economic interact, work, travel, spend their
new users of online services benefits from digitization, primarily leisure time, use public services and
appeared in CEE since the start due to productivity gains. According to perform other routine activities has
of the COVID-19 pandemic our calculations, closing the gap with shifted dramatically. As the McKinsey
Western and Northern Europe had the COVID‑19 Digital Sentiment Insights
potential to add as much as €200 billion survey shows, almost 12 million new
in additional GDP by 2025.3 users of online services appeared in
In this report we take the opportunity to CEE—more than the population of
assess the progress of CEE countries. Slovakia, Croatia, and Slovenia put
With the digital economy reaching together.4 Notably, this increase was
€94 billion in 2019, it is clear that CEE not only driven by the young population:
exceeded the “business as usual” the strongest growth was actually
scenario laid out in the previous report by observed among consumers aged over
€2 billion. But it was still €23 billion below 65.5 While it is difficult to judge the
the level of the aspirational scenario. "stickiness" of those behaviors, around
This implies that the region has not yet 70 percent of survey respondents
managed to fully leverage digitization declared they will continue using new
of the public and private sectors, services digitally after the pandemic.
and has not yet significantly boosted This leads us to another important
e-commerce and offline consumer point. Once consumers get used to new
spending on digital equipment. contactless channels, they might not be
In 2017–2019, the digital economy in inclined to go back, particularly since
CEE grew by almost eight percent a year, health and safety measures related to
much higher than the pace of change in COVID‑19 may not disappear anytime
the largest five economies in Western soon. This unlocks great potential for
Europe, or the “Big 5”—France, Germany, companies that had already invested in
Italy, Spain, and the United Kingdom. digitization prior to the outbreak. But
However, the group we use as a primary it also puts great pressure on other
reference in our reports—the Digital organizations, particularly small and
Frontrunners of Belgium, Denmark, medium-sized enterprises (SMEs), which
Estonia, Finland, Ireland, Luxembourg, lag behind on digital adoption, to quickly
the Netherlands, Norway, and Sweden— transform the way they interact with
managed to grow even faster, widening customers and run their businesses.
the gap with CEE even further. COVID‑19 has also impacted the labor
market, with many people losing their
The outbreak of the COVID‑19 pandemic
jobs or being put on temporary furlough.
has been a global humanitarian crisis
While the full effect is not yet reflected
that has upended lives and cast a
in the numbers, this may soon change,
shadow of uncertainty over the future.
particularly as many support programs
There is one thing, however, we can be
and furlough schemes are coming to
sure about: The world that emerges from
an end. According to new analysis by
the pandemic, or as we call it the next
McKinsey Global Institute, around 9.9
normal, will be more digital than today.
million jobs in CEE are at risk due to
This is reflected in our investigation into COVID‑19.6 About 36 percent of these
the digital economy. During the first jobs are also at risk of displacement
months of the COVID‑19 lockdowns, our due to automation by 2030.7 This hints
estimates show that the digital economy at the fact that COVID‑19 may have
in CEE accelerated, capturing 78 accelerated changes that will lead to
percent, or €5.3 billion, of the increase faster automation. Policymakers and
seen in the whole of 2019 within the businesses would be well-advised to
space of just five months. The rate of introduce programs for reskilling and
growth from January to May 2020, at upskilling in order to avoid structural
14.2 percent, was almost twice as high unemployment in the future.
6 Digital Challengers in the next normal
Restrictions imposed during the In our earlier report we stated that the Action needed by
pandemic accelerated digital adoption CEE region had the largest pool of STEM policymakers, business and
by citizens and required companies graduates in Europe. This is no longer individuals in the next normal
and governments to adjust the the case, since the number of students To move closer to the aspirational
way they interact with them. Many graduating in these subjects fell from scenario for the digital economy outlined
decision makers and businesses now 234,000 in 2016 to 216,000 in 2018.11 in our previous report, action is required
see digitization as a necessary step Moreover, higher education attainment by all stakeholders in Digital Challenger
forward. remains lower than among Digital countries. Restrictions imposed during
Frontrunners, with a 14 percentage- the pandemic are a catalyst for digital
CEE’s digital foundations are point gap between the two groups transformation. Not because they have
strong, but the talent pool today.12 Going forward, attracting more significantly changed the solution, but
needs strengthening students to STEM subjects by supporting because they have made the solution all
In our previous Digital Challengers university-industry collaborations could the more important. Now, businesses
report, we said that having a resilient help strengthen the CEE talent pool. need an e-commerce website, online
economy, a strong talent pool, high- One of CEE’s strongest assets is its customer service and cloud and
quality digital infrastructure, and a people. The “brain drain” or migration of automation technologies (including data
vibrant technology ecosystem was the the educated workforce has been a major analytics, AI, robotic process automation,
basis for digitization to become CEE’s challenge for the region in the past. While and improved IT architecture) in order
new growth engine. This time we once this remains an important issue, another to survive. Therefore, many of the
again looked at those aspects. Below, trend has now emerged. In 2018, CEE recommendations that we put forward
we describe what we found. experienced positive net migration for in our report two years ago remain valid
the first time in 30 years13 with migrants today. To successfully achieve a digital
Macroeconomic performance
serving as a new source of talent. transformation, enterprises need a
Since 2004, the gap between Digital
holistic approach, digitizing customer
Challengers and Digital Frontrunners Digital infrastructure
interactions, optimizing operations, and
in terms of GDP at purchasing power CEE continues to enjoy high-quality
modernizing their IT.
parity (PPP) has narrowed from 60 to digital infrastructure. For instance,
31 percent.8 While economic growth more than 92 percent of populated Policymakers could consider bringing
has been slowing down recently, it still areas are covered by 4G and the share more public services online to meet
remains more than three times as fast of fiber optic broadband has increased the expectations of an increasingly
as the Big 5 and almost twice as fast to 47 percent, overtaking the Big 5 and digital society. Apart from developing
as the Digital Frontrunners. Despite Digital Frontrunner countries. Moreover, internal capabilities, public institutions
recent increases in costs, CEE’s labor connectivity is affordable in CEE. would be well advised to create a
also remains much more affordable: Looking ahead, the biggest source of digital ecosystem in which individuals
with current growth rates, it would take competitiveness will be 5G technology, and businesses can thrive. They can do
almost 18 years for Digital Challengers which enables real-time data analysis this by supporting entrepreneurship,
to reach the level of labor costs seen and the development of the Internet of creating incentives for SMEs to
among Digital Frontrunners in 2019.9 Things (IoT). Current forecasts are that digitize and cooperating with “tech
CEE will only achieve around 20 percent clusters”—sectors that enhance the
Talent pool
5G penetration in 2024—less than half competitiveness of the region.
While Poland and Slovenia topped the
of the level of Digital Frontrunners and What is also important is to boost
2018 global PISA rankings for primary
the Big 5.14 collaboration on the CEE level. In this
and secondary education, seven out
of ten Digital Challenger countries Tech ecosystem report we put forward the idea of
scored below the EU average in math, CEE’s unicorns are worth around €31 creating a CEE Digital Council, similar
science, and reading.10 During the billion.15 2019 marked yet another record to the initiative run by the Nordic
peak of COVID‑19, schools had to year for technology investment in CEE, states, that would drive the digital
move to remote education solutions, with almost €1.5 billion in venture capital agenda and tap into the potential
which uncovered significant gaps attracted to the region.16 This is more of a single digital market. Finally,
in digitization in this sector. Going than five times the level in 2015, and puts digitization in the public sector should
forward, it would be advisable for Digital Challengers ahead of the other aim to improve digital inclusion and
the education system to put more two country groups in terms of growth human development. To this end,
emphasis on digital technologies—not of venture capital.17 However, CEE governments could look into promoting
only because of the threat of future economies remain vastly underinvested: digital skills among the population,
lockdowns, but because in general, the in the 2013–2020 period, investment per on the one hand preparing younger
way children engage with information capita was eight times smaller than in the generations for the demands of the
has changed considerably over the last Big 5 and thirteen times smaller than in future job market, and on the other
decades. Digital Frontrunners.18 helping adults to reskill or upskill.
Digital Challengers in the next normal 7
Key findings
We have revisited the three regions defined in the previous report.
In 2019, the CEE digital economy surpassed the “business as usual”
scenario by €2 billion—but its full potential was not realized
Aspirational
GDP per Digital scenario
capita growth, Challengers
2004–2019, %
276
115%
46% 60% 117
Big 5 Digital
Frontrunners
“Business as
usual” scenario
94
+€2 billion 136
Size of digital economy in 92
Digital Challengers from 2018
report, € billion 76
2016 2019 2025
In Jan–May 2020, the digital economy of Three out of four people in CEE are now
CEE grew almost twice as fast as in digitally engaged
previous years, achieving 78% of the total
increase seen in 2019 in just 5 months
Digital adoption in CEE Use of digital channels
Share of users that No. of sectors accessed
Growth rate of digital Value growth of accessed at least one digitally of the 10
economy, % digital economy, € service surveyed1
+25% +69%
6.8
14.2%
76% 4.2
61%
7.8% 5.3
2.5
Growth, Jan–May Estimated increase
2020 Jan–May 2020
Before Today Before Today
YoY growth 2017–19 Increase in 2019 COVID-19 COVID-19
~2x 78% 12m 40%
growth rate of value growth in 2019 new online service users increase in the number of
achieved within first five in CEE users over age 65 who
months of 2020 access online services, the
highest among all age groups
1. Sectors: banking, insurance, grocery, apparel, entertainment, social media, travel, telecommunications, utilities, public sector.
Source: Eurostat; Euromonitor; IMF 2004–19; McKinsey & Company COVID-19 Digital Sentiment Insights; survey results for the Czech Republic, Hungary, Poland,
and RomaniaStrengths supporting digital growth in CEE are
still valid; education begins to lose the edge
Primary and
Macroeconomic Vibrant tech Quality of digital secondary Higher
performance ecosystem infrastructure education education
60% to 31% decrease €31 billion—estimated 92% of populated 7 out of 10 Challenger 11 percentage-point gap
in GDP per capita gap value of CEE unicorns; areas covered by 4G countries scored between Challengers and
(in PPP) among Digital €1.5 billion—total VC below the European Frontrunners in tertiary
Frontrunners between investment in Digital average (DF, Big 5) in education attainment;
2004 and 2019 Challengers in 2019 math, science, and 234,000 to 216,000 drop
reading in 2018 (PISA in number of STEM
study) graduates between
2016 and 2018
New levers to pull by Migration EU recovery and
CEE on its digitization resilience fund
For the first time in 30 years,
journey CEE immigration exceeded Total €750 billion in
emigration (2018); 34% of grants and loans to fund
CEE immigrants have higher COVID-19 recovery as well
education, more than the as support EU’s green and
average for the whole CEE digital priorities
population (29% in 2019)
All actors across the CEE region have to act to accelerate digitally-led growth
Public sector Business
1 Create CEE Digital Council
• Build a harmonized digital business
5 Adjust business models
• Accelerate digital adoption
environment in CEE • Increase operational efficiency (digital offering
• Induce best-practice sharing and channels, data analytics and AI, improved IT
architecture)
2 Grow a digital ecosystem for businesses
• Support digitization of SMEs 6 Adopt flexible operating models
(eg., agile, remote work)
• Improve early-stage funding availability for
start-ups
• Support development of tech clusters
7 Implement reskilling and upskilling
3 Accelerate public services digitization
4 Invest in digital talent
• Adjust school curricula
Individuals
• Promote lifelong learning (including
underprivileged groups)
8 Engage in lifelong learning and invest in
digital skills
• Leverage positive net migration as a
source of talent 9 Take advantage of remote work modelsWarsaw, Poland
Digital Challengers
at a glance
Since the transition to a market country-level funding in the EU’s new
economy over three decades ago, budget for 2021–27. If it wishes to
Central and Eastern Europe (CEE) support further dynamic development,
has experienced a tremendous continue improving its citizens’ quality
transformation. Between 2004 and of life, and provide a marketplace in
2019 the region’s economy grew by 4.8 which businesses can flourish, CEE now
percent on average on a yearly basis, needs to review its growth strategies.
closing the gap in GDP per capita (in
PPP) to its Western peers from 60 In 2018 we published a series of reports
percent GDP in 2004 to 31 percent on the rise of Digital Challengers in
in 2019.19 This success was driven by CEE. We examined ten countries:
a number of factors, including strong Bulgaria, Croatia, the Czech Republic,
traditional industries, dynamic exports, Hungary, Latvia, Lithuania, Poland,
investments from abroad, labor-cost Romania, Slovakia, and Slovenia.
advantages and funding from the We called these countries Digital
European Union (EU).20 But now these Challengers because of their strong
advantages are beginning to weaken potential for growth in the digital arena
as the region’s labor reserves dry and their potential to emulate other,
up. Moreover, uncertainty surrounds with very high digitization rates.
10 Digital Challengers in the next normalPrior to COVID-19,
Digital Challengers were Digital
catching up with their Frontrunners 62
Western peers in terms 7
of economic performance
—however, a significant
gap remains
Big 5
Total regional population
vs country average, 2019, 324
millions
65
Digital Challengers
Big 5
Digital Frontrunners
101
Digital
Challengers 10
Total GDP, 2019, GDP country average, GDP per capita growth,1 Market openness, 2019
€ trillion 2019, € trillion 2004-2019, % Trade as % of GDP
141
115 123
11.4 2.3 60
3.1
0.3
1.5 0.1 46 71
With low unemployment rates, low capital stock, and high working hours,
Digital Challengers must now leverage automation to close the productivity gap
Unemployment, Average hours worked Capital stock per Productivity, 2019,
2019, % per person employed employee, 2019 GDP per hour
per year, 2019 € thousand worked, €
4.6 1,717
7.3 36
4.7 1,530 1,567 29.2 14.9 70 57
7.9
1. Cumulative, in real terms (€). Nine CEE countries excl. Romania.
Source: Eurostat 2019; OECD 2019, IMF 2004–19
Digital Challengers in the next normal 11In our 2018 reports we asked ourselves percent lower in CEE than in the Big 5.22
whether digitization could become a Workforce costs were also rising, and
new growth lever for the region. Our unemployment in CEE was at record
analysis showed that developing the low levels—on average 4.6 percent in
digital economy across all sectors in 2019, compared to 7.9 percent in the
CEE could generate up to EUR 200 Big 523—which means that there were
billion in additional GDP by 2025 thanks limited labor reserves left to plug into
to increased productivity, a gain almost the economy.24 Clearly, CEE needed a
the size of Portugal’s entire economy in new engine to drive its future economic
2017. growth.
This could be achieved by closing the Just as the economic growth of Digital
gap between Digital Challengers and Challengers was slowing down, a
countries that are digital leaders in global crisis broke out—the COVID‑19
Northern and Western Europe, a group pandemic. COVID‑19 is a human
we call Digital Frontrunners: Belgium, tragedy that affects all of our lives. It
Denmark, Estonia, Finland, Ireland, is also having an increasing impact on
Luxembourg, the Netherlands, Norway, the world economy and the process of
and Sweden. A third group of countries, digitization. CEE is no exception here.
made up of France, Germany, Italy, Besides the economic challenges of
Spain, and the United Kingdom, which declining business activity, growing
we called the “EU Big 5” (a title we have unemployment and expanding
now revised to the Big 5 due to Brexit) budgetary deficits, we are witnessing
typically relies more heavily on their large a shift of virtually every aspect of life
internal markets. These five countries toward online channels.
have relatively high digitization rates but
With this in mind, we decided to revisit
do not rival the Digital Frontrunners.21
our data on Digital Challengers to see
According to our new analysis, the how well CEE countries were doing just
growth engines driving economic before the pandemic, how prepared
development in Digital Challengers they were for the disruption caused by
continued to lag behind the Big 5 COVID‑19 and whether they are now
and Digital Frontrunners in 2019. The still on a path to digitally-led growth. We
CEE market was still undercapitalized present our findings in this report. We
compared with more advanced also put forward our recommendations
European economies. Just before for policymakers, businesses, and
COVID‑19 emerged, the capital stock, individuals about how they can leverage
measured as total gross fixed assets digitization in their efforts to build a
per employee, was on average 50 more resilient CEE economy.
4.8%
Growth of the region’s economy
on average on a yearly basis
between 2004 and 2019
12 Digital Challengers in the next normalBudapest , Hungary
Digitizing the
01
CEE economy
Digitization is a broad concept that in-car entertainment, and portable
means different things to different consumer electronics in bricks-and-
stakeholders. To quantify digitization mortar stores)
in the CEE economy, we use a metric
This metric allows us to model the
developed in our last report on Digital
value of a given country or region’s
Challengers, made up of three basic
digital economy using a bottom-
components:
up approach and country-level
— The value of the information and figures from reliable sources (see
communication technology (ICT) the Appendix for more detail on the
sector methodology used).
— The value of the e-commerce In this chapter we examine how much
market, measured as online sales of progress the CEE region has made in
goods the years 2016–19, and compare that
progress with estimates we made in
— The value of offline consumer 2018. We also discuss the COVID‑19
spending on digital equipment pandemic and how it affected the
(such as purchases of computers, digital economy in the first half of
in-home consumer electronics, 2020.
Digital Challengers in the next normal 13Size and growth of the CEE the same pace of digitization and
digital economy 2017–19 productivity improvement as Digital
Frontrunners.
As we stated in the introduction,
the CEE economy, with its relatively Now, we are in a position to assess the
high GDP growth and historically low progress of CEE countries25 (Exhibit 1).
unemployment, thrived in the years Our analysis shows that the CEE digital
2017–19. Nonetheless, productivity economy exceeded the business as
lagged behind Western countries, as usual scenario by €2 billion, growing
a diminishing labor supply and low to €94 billion in 2019 and contributing
capitalization challenged the traditional seven percent to total GDP. However,
drivers of growth. this is €23 billion below the level of the
aspirational scenario, indicating that
In our previous Digital Challengers
CEE countries have not yet launched
report, we looked at digitization as a
the necessary digitization initiatives
potential new lever that could sustain
that would bring them closer to the
future growth and become a regional
more ambitious goal.
trademark. To evaluate the potential
growth of the CEE digital economy, we In 2016 the CEE digital economy was
presented two scenarios: a business valued at €76 billion, or 6.5 percent of
as usual scenario, which assumed total GDP. This was comparable to its
that historical growth rates for CEE role in the Big 5 (6.9 percent of total
countries would remain unchanged, GDP) but somewhat further behind
and an aspirational scenario, which the Digital Frontrunners (7.3 percent).
described the digital economy’s Our snapshot from 2019 shows that
potential if Digital Challengers achieved the digital economy’s share of GDP in
Exhibit 1
In 2019, the CEE digital economy surpassed the “business as usual” scenario by €2
billion—but its full potential was not realized
Size of digital economy in Digital
Challengers from 2018 report
Aspirational
€ billion
276 scenario
117
94
+€2 billion
“Business as
136 usual” scenario
92
76
2016 2019 2025
Source: Eurostat; Euromonitor; McKinsey analysis
14 Digital Challengers in the next normalExhibit 2
Digital Challengers’ economies are accelerating, but not as
fast as those of Digital Frontrunners
Share of digital Digital GDP per Growth of digital
economy, 2019 capita, 2019 economy, 2017–19
% of GDP € %
Digital
7.3 929 7.8
Challengers
Big 5 7.8 2,452 4.6
Digital
Frontrunners 8.7 3,865 8.3
Source: Eurostat; Euromonitor; local institutes of statistics; McKinsey Global Institute analysis;
McKinsey analysis
CEE was 7.3 percent (Exhibit 2), in other unprecedented challenge for the services and production. During this
words, at the level of Digital Frontrunners global economy. At the time of writing, period, the only way many companies
three years earlier. This is less than one in Europe alone, COVID‑19 has could continue their commercial
percent below the Big 5, but the gap infected over 3.8 million people and activity was through online channels.
between CEE and Digital Frontrunners caused more than 210,000 deaths.26 Sales shifted from physical to
has widened from 0.8 percent to 1.4 e-commerce, while operations were
Not all countries have been affected
percent. Digital GDP per capita in CEE conducted using communication
equally. CEE countries have on average
is now €929, four times less than the technology such as videoconferencing.
1,400 cases per million inhabitants,
average for Digital Frontrunners. Digital services became indispensable.
while the Big 5 have more than double
CEE managed to increase its rate of this (3,800 per million) and Digital The question, however, is whether
digital GDP growth from 6.2 percent Frontrunners more than triple.27 These COVID‑19 also increased digital GDP
in the period 2012–16 to 7.8 percent differences are partially due to lower on a country and regional level. The
in 2017–19. This means that Digital rates of testing in Digital Challengers, data for 2020 is still incomplete, so we
Challengers were digitizing almost at 83 tests per thousand inhabitants, have used estimates in our analysis
twice as fast as the Big 5 over the 46 percent less than in Digital (for detailed methodology see the
past two years. However, digitization Frontrunners.28 However, a significant Appendix). Our calculations confirm that
in CEE was slower than among Digital contributing factor was the CEE’s digitization did indeed speed up during
Frontrunners, which managed to boost early implementation of the mandatory the pandemic: around 76 percent of the
their rate of digital GDP growth to 8.3 wearing of masks outdoors and strict digital GDP achieved in the whole of
percent, thus increasing their lead over lockdown measures, including full 2019 in CEE was already generated in
Digital Challengers. Evidently, Digital border closures, limitations on social
the first five months of 2020 (Exhibit 3).
Challengers still have plenty of room for gatherings, heavy restrictions on
The digital economy grew by EUR 5.3
improvement. all nonessential services, restricted
billion between January and May 2020,
availability of public services, and
or more than 14 percent, compared to
COVID‑19 impact on the nationwide school closures.
the same period in 2019. As the overall
digital economy Large-scale lockdowns meant long- economy was shrinking over the same
The coronavirus outbreak is both term closures for bricks-and-mortar period, the contribution of digital to
a humanitarian crisis and an stores and long interruptions to total GDP increased from seven percent
Digital Challengers in the next normal 15in 2019 to nine percent in 2020, thus us with a unique challenge, we should
achieving the business as usual target nonetheless take the lessons of
for 2025. This will likely change once 2020 into account when planning the
the economy is up and running again. path forward. Rather than returning
But, be that as it may, it is clear that to business as usual, governments,
lockdowns prompted a tremendous organizations, and individuals would
digital shift. be well advised to acknowledge both
the volatility of today’s world and the
While the pandemic has sparked a importance of digitization in improving
massive crisis, one that now presents our future resilience.
Exhibit 3
In Jan–May 2020, the digital economy of CEE grew almost twice as fast as in previous
years, achieving 78% of the total increase seen in 2019 in just 5 months
Growth rate of digital economy, Value growth of digital economy,
% €
6.8
14.2%
~2x 78%
growth rate of value growth in 2019 achieved
7.8% 5.3 within first five months of 2020
Growth, Jan–May 2020 Estimated increase Jan–May 2020
YoY growth 2017-2019 Increase in 2019
Source: Eurostat; Euromonitor; McKinsey analysis
In 2020, the CEE digital economy is expected to contribute even more to
total GDP due to faster growth of digital combined with shrinking GDP
-6.4%
Estimated drop in 2020 GDP 1 in
8.9%
Estimated share of CEE’s
CEE countries vs 2019 digital GDP in 2020
1. Assuming Digital economy to grow at the same rate as between 2017–2019 between Jun–Dec 2020
Source: European Commission, Eurostat, Euromonitor, McKinsey analysis
16 Digital Challengers in the next normalSplit, Croatia
The CEE region’s
02
digital foundations
Digitization is a complex topic, digital infrastructure, and vibrant
involving many different dimensions technology ecosystem. In this chapter
and processes. In order to strengthen we examine those areas to see whether
digital transformations, all economic they have stood the test of time, and
actors must play an active part, from determine what impact the COVID‑19
policymakers, large corporations, and pandemic has had on them.
small and medium-sized enterprises
(SMEs), right down to individual Competitive advantages
citizens. Together, they can build a A resilient economy
digital ecosystem that both stimulates CEE has long been recognized as one
digital adoption within their region and of the most fast-developing regions
attracts investors from abroad. in the world. The market-oriented
In our Digital Challengers reports, economic reforms of the 1990s and
published two years ago, we identify subsequent accession to the European
four key areas of digitization where CEE Union has allowed the CEE countries
enjoys a competitive advantage over to modernize and become an attractive
other, more advanced digital economies. target for foreign direct investment
They are its resilient economy, strong (FDI). Since 2004, when most Digital
talent pool, high-quality and affordable Challengers joined the European Union,
Digital Challengers in the next normal 1718 years
the GDP per capita (PPP) gap between almost 18 years for Digital Challengers
them and the Digital Frontrunners has to reach the level of labor costs seen
fallen from 60 to 31 percent.29 Some among Digital Frontrunners in 2019.31
countries, including the Czech Republic,
As mentioned before, labor productivity
Time it would take for Digital Hungary, Lithuania, Poland , Slovakia,
in CEE grew by 4.7 percent from 2010–
Challengers’ labor costs to and Slovenia, have even managed to
19, overtaking both Digital Frontrunners
reach the 2019 level of Digital overtake some more mature economies
and the Big 5.32 However, with a gap in
Frontrunners in Western Europe. While GDP growth
productivity of 37–48 percent between
in CEE has shown signs of slowing down
CEE and other countries in 2019, the
in recent years, it remains more than
difference remains significant. This is
three times as fast as in the Big 5 and
likely due to the low capital stock per
almost twice as fast as among Digital
employee in CEE, which is three times
Frontrunners.30
below that of Digital Frontrunners. In
One of the most prominent features practical terms, this means that CEE
that has attracted investors to CEE is its have less equipment and fewer assets
affordable workforce. With an average that could automate some of their
hourly wage of €10, CEE labor costs are manual labor. The availability of low-
three to four times lower than in other paid workers has allowed CEE countries
countries (Exhibit 4). The difference in to circumvent the need for higher
hourly rates between Denmark, the EU efficiency. However, with historically low
country with the highest labor costs unemployment, at 4.6 percent (2019),
in 2019, and Bulgaria, which had the which equates to low labor reserves,
lowest labor costs, is as much as €39. this will soon no longer be a viable
Despite the much faster increase in option.33 This is a call to action for all CEE
costs in CEE from 2016–19, at around governments and businesses to increase
eight percent a year, it would take their investment in innovation.
Exhibit 4
Digital Challengers have smaller economies but they are
growing fast—labor costs are significantly lower
Average GDP growth, Average hourly labor
2017–19, % cost, 2019, €
Digital
Challengers +4.2 10.2
1.8x 3.8x
Big 5 +1.3 30.8
faster lower
Digital
Frontrunners +2.4 38.5
Source: Eurostat, 2017–19
18 Digital Challengers in the next normalA strong talent pool five percentage points in 2018. In the system also employs a host of innovative
The backbone of every digital society same year, CEE actually managed solutions, such as digital knowledge
is a good education system. This fact to exceed the average for the Big 5, databases, digital textbooks, digital
is apparent when one looks at Digital achieving higher maximum scores for class diaries, and online learning
Frontrunner countries, which are mathematics, reading and science platforms.
known for their top-ranking schools. (Exhibit 5). Within this, the results
Another example of best practice is
In our earlier reports we found that vary greatly between the countries in
found in Croatia, where young people
CEE’s strong talent pool is one of its CEE. Poland and Slovenia are the two
aged 16–24 topped the digital skills
key advantages. Indeed, its results best performers in the region, Poland
coming 11th in the global ranking and statistics by Eurostat in Europe, with
in the area of primary and secondary
Slovenia 13th. The other CEE countries 96 percent of young people having
education are comparable to those of
are advised to try to emulate best basic or above basic digital skills. In
other countries. However, the region
practices from Digital Frontrunners addition to a good standard of digital
lost its position of having the largest
such as Estonia, which ranked fifth education in schools, the country
pool of STEM (science, technology,
in the global ranking in 2018 and has has introduced its Croatian Makers
engineering, and mathematics)
one of the most innovative models of program, the largest non-governmental
graduates in Europe.34
education in the world. Estonia launched educational program in the European
Data from the OECD Program for the “ProgeTiger” project in 2012, which Union. This program has supported the
International Student Assessment introduced computer programming at all digital education of more than 150,000
(PISA) study, which measures the quality levels of education, from kindergarten to children and educated more 3,000
of K-12 schools,35 indicates that the lifelong learning. Interestingly, teachers teachers in the country, free of charge.37
distance between Digital Challengers in Estonia are entrusted with managing Indeed, it has been so successful
and Digital Frontrunners has remained the syllabus in a fairly autonomous way, it has now been extended beyond
roughly similar to that identified in our which translates to a greater sense Croatia’s borders to neighboring
previous report: the gap has increased, of ownership and responsibility for countries, including Serbia, Bosnia and
but only by one percent, making it students’ progress.36 The Estonian Herzegovina, and Kosovo.
Exhibit 5
Quality of primary and secondary education does not
differ significantly between Digital Challengers and
Digital Frontrunners
PISA results, avg. scores for math, reading, and science (min./max.), 2018
Max. Digital Challengers
Min. Big 5
Digital Frontrunners
550
530
516 523 523
502 512 511 505
500 504
481 483
476 470 477
468
450
430
420 424
400
0
Math Reading Science
Source: OECD, 2018
Digital Challengers in the next normal 19Exhibit 6 One of the key assets of digital
Digital Challengers have the second-biggest STEM economies are their highly-skilled
graduate pool in Europe and a similar share of ICT technical graduates, as reflected by
graduates the number of STEM graduates (Exhibit
6). In our earlier report we highlighted
Number of STEM graduates,1 in ’000s, 2018 that the CEE region has the largest
pool of these graduates in Europe. This
is no longer the case, as the number
3.8% 4.2% 3.5% 4.9% 4.3% 3.9% 1.3% of students graduating these subjects
fell from 234,000 in 2016 to 216,000
220 216
202 in 2018. CEE is now outranked by the
199
United Kingdom, France, and Germany
in terms of share of population.
137 At the same time, the proportion of ICT
103 graduates among all graduates in CEE
97
has risen from 3.6 to 4.2 percent, the
highest level after Germany and the
Digital Frontrunners.38 Importantly, the
quality of ICT programs, in particular
programming, is considered to be
UK Digital France Germany Digital Spain Italy among the highest in the world,39
Challengers Frontrunners and the winners of international
programming competitions regularly
ICT graduates, as % of all graduates come from the CEE region.40
1. Incl. Bachelor, Master and doctoral level. When discussing higher education, it is
Source: Eurostat, 2018 also important to consider attainment
levels. In 2019, 29 percent of the
population aged 25–34 in Digital
Challengers had degrees—a three
Exhibit 7 percentage-point improvement on
For the first time in the last 30 years,1 CEE experienced more 2015. Over the same period, Digital
immigration than emigration Frontrunners improved their score by
four percent, widening the distance
Net migration in Digital Challengers, 1989–2019 from Digital Challengers to 14
Immigration less emigration, in ’000s percentage points in 2019.41 This may
200 not be a dramatic shift, but it once again
indicates that the CEE talent pool is
100
not growing as fast as it could, thereby
0 undermining one of the region’s key
-100 advantages.
-200 We identify another trend, however,
that could help counteract this
-300 widening gap. In 2018, for the first time
-400 in 30 years, CEE experienced more
immigration than emigration (Exhibit
-500
7), meaning that more people moved
-600 to the country than left it.42 Poland was
the key driver of this new migration
-700
trend, granting the most visas in the
-800 whole of Europe in 2018.43 Over half of
-900 the newcomers state that work was the
1989 91 93 95 97 99 2001 03 05 07 09 11 13 15 17 19 primary reason for their migration—a
much higher level than in other
countries high in the ranking, where
1. Except in 1999, likely due to the Second Chechen War. family reasons were the leading factor.
Source: Eurostat, 1989–2019 In addition, more than 52 percent of
20 Digital Challengers in the next normalpeople migrating to Poland had higher productivity, competition, and new
education, which is 21 percentage market opportunities.
points more than the level found in
In our previous Digital Challengers
the Polish population in general.44
studies, we reported that CEE was well
The question remains whether those
connected, its digital infrastructure
migrants manage to find work in their
forming a strong foundation for the
own professions or have to resort to
digital economy. This holds true
low-skilled jobs due to language and
today, with 47 percent of households
cultural barriers. However, given that
connected to fixed broadband—around
the ICT sector often operates in English
one percent higher than among Digital
and coding languages are international,
Frontrunners.45 In terms of mobile
immigration could represent a valuable
coverage, 4G coverage has grown to
new source of digital talent for Digital
92 percent, reducing the gap from 14
Challengers.
percentage points to just six, mainly due
High-quality digital infrastructure to improvements in Romania, Croatia,
In today’s world, connectivity is no Bulgaria, and Slovakia.46 In ultrafast
longer merely one product among many broadband, CEE increased subscriptions
offered by the telecommunications to 23 percent, compared to 31 percent in
industry. It is part of the fabric of the Digital Frontrunners47 (Exhibit 8). These
digital economy, linking individuals, improvements in infrastructure are due
communities, businesses, and to multiple initiatives across the region,
economies. Digital infrastructure, such as the Polish National Broadband
such as mobile connectivity and fixed Plan, which aims to connect every
broadband, is not only a platform household to broadband Internet before
for interaction but also a driver of the end of 2020.48
Exhibit 8
Digital Challengers are catching up with Digital Frontrunners in terms of mobile
coverage, but lag behind on ultrafast broadband subscriptions
Digital Challengers Big 5 Digital Frontrunners
Share of populated areas Share of households covered Share of ultrafast broadband
covered by 4G,1 2017–19, by ultrafast broadband (fiber subscription >= 100 Mbps,1
% optic),1 2017–19, % 2017–19, %
92% 98%
94%
80%
47%
40% 46%
30% 31%
14% 23%
17%
2017 2019 2017 2019 2017 2019
Gap to Digital Gap of 6–14 points Advantage of 1–4 points Gap of 6–8 points
Frontrunners:
1. Excl. Norway.
Source: DESI, 2017–19
Digital Challengers in the next normal 21Apart from its good quality, CEE digital Reduced latency and increased
infrastructure has one other defining network capacity will support the
feature: its low price. In most Digital development of the Internet of
Challenger markets, the amount spent Things (IoT) and artificial intelligence
on broadband represents a smaller (AI),53 which should lead to massive
share of household earnings than improvements in efficiency, real-
in Digital Frontrunner markets, with time data analysis, and new market
Romania leading with the highest opportunities. Nonetheless, due to
score.49 This means better value for the competitive environment in the
money for CEE citizens and businesses, telecommunications industry and the
which are increasingly dependent on fact that customers are not willing to
access to the Internet. pay a high premium for extra speed
While it might appear that CEE has might limit return on investment.54 The
already mastered the connectivity low prices enjoyed by customers in CEE
challenge, in fact there are more exacerbate the problem. This may be
technological disruptions ahead. Large- why Digital Challengers are forecast to
scale deployment of 5G is just around have just 19 percent 5G penetration by
the corner, with 92 percent of global 2024, less than half the level of Digital
operators planning deployment by Frontrunners and the Big 5.55
2022.50 Under the EU 5G Action Plan, A vibrant technology ecosystem
the first auctions for the 5G spectrum The CEE technology ecosystem is
should happen this year, with countries booming, with a number of start-up
obliged to introduce the technology unicorns and a large pool of rising
in at least one city.51 The investment stars. Various tech clusters are
required for the deployment of 5G will emerging on a regional and country
almost double the costs for operators; level, strengthening the credibility—
in addition, the spectrum costs are and visibility—of specific sectors and
almost four times as high for 5G than individual players on the international
for the previous generation.52 stage. However, due to the small size of
Peak 5G speeds are expected to be the individual markets, CEE start-ups
up to 100 times faster than 4G LTE suffer from limited access to funding,
networks, allowing users to download indicating a need for intervention by
content in a matter of seconds. policymakers.
A vibrant technology ecosystem:
The CEE technology ecosystem
is booming, with a number
of start-up unicorns and a
large pool of rising stars.
22 Digital Challengers in the next normalExhibit 9
In 2019, there were 7 CEE unicorns and multiple rising stars
Poland Hungary Romania Croatia Czech Rep. Latvia Lithuania Bulgaria Slovenia Slovakia
Unicorns Allegro Ui Path Infobip Avast Vinted
CD Projekt eMag
Rising Applica AImotive Elefant.ro Bellabeat Twisto Lokalise CityBee Remix Geneplanet Sli.do
stars2 Booksy Prezi Qualia Liftago Mintos Tesonet Gtmhub Eligma Photoneo
Brainly Tresorit Rimac Sonarworks OfficeRnD Sinergise Minit
Docplanner Bitrise Nanobit
Huuuge Commsignia
Infermedica Sharp3D
Nomagic
Packhelp
Large LogMeIn Kiwi.com Telerik Outfit7
exits3 Socialbakers
1. Unicorns: companies founded since 1990 with $1 billion valuation. Incl. companies that dropped below the $1bn mark after going public.
2. Rising stars: non-acquired, non-public start-ups founded since 2000, with minimum €1m in total funding, funded since 2015, maximum
valuation €800m.
3. Large exit: acquisitions/IPOs of VC-backed start-ups. The term "large" is subjective and can change based on the region. In case of CEE
countries, it includes €100m+.
Source: Dealroom, 2019
The CEE ICT sector is growing, with a Europe.58 In cybersecurity, the three top
larger share of high-growth enterprises companies in the region—Avast (based
than among Digital Frontrunners. The in the Czech Republic), ESET (Slovakia)
share of employment in such companies and (Romania)—together have more
is also higher, most likely due to the than one billion users globally,59 ten
lower costs and better availability of times the population of the whole CEE
labor in CEE. The region’s unicorns region.
are worth almost a total of EUR 31
Lithuania is the EU’s largest fintech
billion and mainly stem from Poland
hub, with more than 210 companies
and Romania, followed by the Czech
in 2019—a large number for a country
Republic, Croatia, and Lithuania.56 In
of just three million inhabitants.60
addition, there is a vast number of rising
Lithuania’s success is not accidental,
stars (Exhibit 9), which have already
however: the Bank of Lithuania
received more than EUR 2.8 billion in
facilitated market entry for newcomers
investment.57
by streamlining the licensing process
If we consider both established players and automating the number of
and emerging start-ups, a number supervision procedures. Organizations
of clusters becomes apparent in and communities such as ROCKIT,
CEE. Gaming studios, cybersecurity Fintech Hub LT, FINTECH Lithuania,
software firms, and fintech companies in and Blockchain Centre Vilnius also
particular are making their mark on the created spaces for exchanging
global stage (Exhibit 10). For example, knowledge and STEM within the fintech
thanks to rapid growth, CD Projekt Red, space.61 The areas of e-commerce,
a Polish video game developer best education technology, and telemedicine
known for its series The Witcher, has are also now kindling investors’ interest
become the biggest gaming studio in in CEE (Exhibit 11).
Digital Challengers in the next normal 23Exhibit 10
CEE gaming cluster—example companies
Poland Slovenia
Chess & Checkers was founded in 2015. Huuuge Games released its first game Outfit7 is a Slovenian video game
Initially developed as a side project, it in 2014. Since then, the company has developer, the creator of the Talking Tom
turned into a prosperous business. The focused on creating real-time easy-to-play, and Friends app and media franchise. The
company develops board games for cell mobile social games. The most famous company has up to 410 million monthly
phones with Android and iOS software. game created by the company is Millionaire active users playing 23 games, which
Chess & Checkers games have been Casino, which contributed to the rapid generated US$130 million in revenue in
downloaded over 70 million times. growth of the company’s value in 2017. 2019.
Huuuge Games employs more than 600
Reality Games is a gaming studio
people and has 1.5 million daily active users
developing mobile games based on live,
and 150 million player connections.
real-world Big Data. In 2015, Reality Games
launched its first game, Landlord Real Ten Square Games is one of the biggest
Estate Tycoon, with over 12 million players. mobile games development companies in
The primary goal of Reality Games is to add Poland. Founded in 2011 in Wrocław, the
value to multiple segments of the gaming company is experimenting with unique 3D
industry. For players, the company develops game ideas targeted at the social Web. Ten
engaging and entertaining games. For Square Games had quickly developed into
developers, it offers game engine services a company employing nearly 250 people. It
and serves as an aggregator of API s from has released 200 different games and has
different sources. 21 million active players. The most popular
games developed by the company are
Fishing Clash, Wild Hunt, and Let’s Hunt.
1 2
CEE digital fintech cluster—example companies
Poland Latvia Lithuania
Blue Media has 20 years of experience Creamfinance makes money available by FinBee is a peer-to-peer lending platform
developing innovative services in the providing one-click loans to consumers that has been providing services to
field of electronic payments. More than 6 globally. The company has experienced individuals and companies in Lithuania
million clients receive electronic invoices continuous growth since its foundation. and the Czech Republic since 2015. The
generated by Blue Media’s online systems. Creamfinance has developed in-house company connects small businesses that
The company processes 3 million payments scoring technology that is rated among the are overlooked by banks and need finance
yearly, totaling more than PLN 270 million. top three worldwide for speed and accuracy to grow with investors who want to lend to
The Blue Media payment system BlueCash of credit scoring. them and earn great returns.
(instant transfers) is offered by over 100
FinBee Verslui is the first and most
banks and handles more than 200,000
active crowdfunding platform in Lithuania,
transfers every month.
serving thousands of retail and institutional
investors, and SMEs. It was the first to
implement SME support mechanisms
initiated by the state’s business support
agency INVEGA. Its activity is supervised by
the Central Bank of Lithuania.
Source: Company sites, chessandcheckers, outfit7, LinkedIn
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