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The rise
of Digital
How digitization
can become the next
growth engine for Central
and Eastern Europe

                            The rise of Digital Challengers   1
The rise
of Digital
How digitization
can become the next
growth engine for Central
and Eastern Europe

Jurica Novak
Marcin Purta
Tomasz Marciniak
Karol Ignatowicz
Kacper Rozenbaum
Kasper Yearwood
About McKinsey & Company

We are a global management consulting firm that serves a broad mix
of private, public, and social sector institutions. We help our clients
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make significant and lasting improvements to their performance
and realize their most important goals. We have built on nearly
                                                                                       in Central Europe
a century of experience and added a wide range of new skills
and capabilities to create a firm that is uniquely equipped                  McKinsey & Company opened its first
to this task. For example, our colleagues in McKinsey                       offices in Central and Eastern Europe in
Digital & Analytics work together with clients to drive                   the early 1990s, soon after the momentous
technology-enabled transformations. By combining                        democratic changes in the region. McKinsey
the latest innovations with deep industry, functional,                played an active role in the region’s economic
and technological expertise, we help clients cap-                   rebirth, working with leading business organiza-
ture value from data and succeed in the digital                  tions, governments, and nonprofits. With offices in
age. We are home to thousands of the world’s                   Belgrade, Bucharest, Budapest, Kyiv, Prague, Warsaw,
most talented professionals across the fields                and Zagreb, we serve clients across a wide range of
of digital, analytics, and design. Our cross-              industries, including banking and insurance, retail, heavy
functional teams enable clients to rein-                 industry, and high tech, media, and telecom.
vent themselves through technology.
From optimizing core technology and                  In addition, McKinsey’s Central European Office provides
automating operations to building                  advanced capabilities built around a Digital Lab and an Agile Hub,
entirely new digital businesses,                 hosted in Warsaw and Budapest, respectively. Those capabilities are
we work side-by-side with our                  geared  not only toward client counseling but also toward building and
clients to prepare them to                   transferring capabilities into client organizations. Our Digital and Agile
survive and thrive in a rap-              squads are involved in all areas of digital transformation – including organi-
idly changing world.                    zational and cultural change, user experience, business applications, big data
                                      solutions and analysis, the Internet of Things, artificial-intelligence (AI) solutions,
For more information,               and blockchain technology.
                                 For more information, visit

                             About the Digital Challengers research
                             This report is part of a wider research into the potential of
                             the digital economy in Central and Eastern Europe. In our
                             November 2018 report, “The rise of Digital Challengers: How
                             digitization can become the next growth engine for Cen-
                             tral and Eastern Europe” we cover the regional perspective,
                             joined by additional country reports for the Czech Republic,
                             Hungary, Poland, Romania, and Slovakia.

    Czech Republic                Hungary                   Poland                  Romania                    Slovakia

                                                                                    The rise of Digital Challengers         1
Contents                                          Preface

        EXECUTIVE                                         Our objective in writing this report was to analyze       In the final chapters of our study, we look at the
                                                          the opportunities presented by the digital economy        vital role of collaboration in CEE, emphasizing the
        SUMMARY                    INTRODUCTION           in Central and Eastern Europe (CEE). Using new            importance of capturing regional scale effects,
                                                          research of our own and an examination of pub-            tackling common challengers and sharing best
        PAGE 4                     PAGE 10                lished sources, we define the economic potential          practices (Chapter 4), and examine the implica-
                                                          from accelerated digitization in ten countries in         tions for policy makers, companies, and individu-
                                                          the region: Bulgaria, Croatia, the Czech Republic,        als (Chapter 5). This final section contains a list of
                                                          Hungary, Latvia, Lithuania, Poland, Romania,              actions for these stakeholders to capture the digital

        CHAPTER 1                  CHAPTER 2              Slovakia, and Slovenia. We consider these coun-           opportunity.
                                                          tries “Digital Challengers,” as they demonstrate
                                                          strong potential for growth in the “digital economy,”     The ideas we present build on those outlined in
        Digitizing the             Impact on the labor
                                                          emulating the group of relatively small countries         the previous reports Digital Europe: Pushing the
        economy                    market                 with very high digitization rates that we call “Digital   frontier, capturing the benefits; A future that works:
                                                          Frontrunners,” namely Belgium, Denmark, Estonia,          Automation, employment, and productivity; as well
        PAGE 12                    PAGE 22                Finland, Ireland, Luxembourg, the Netherlands,            as A new dawn: Reigniting growth in Central and
                                                          Norway, and Sweden.                                       Eastern Europe. We would like to take this oppor-
                                                                                                                    tunity to thank the McKinsey Global Institute, as
                                                          Discussion about the opportunities and challenges         well as the authors of the above publications –
        CHAPTER 3                  CHAPTER 4              of digitization has been ongoing for many years.          in particular Jacques Bughin, Senior Partner in
                                                          We aim to provide a fresh and unique perspec-             Brussels, and James Manyika, Senior Partner in
        Key enablers of            Collaboration across   tive: a comprehensive, fact-based analysis that           San Francisco, for their expertise, insights, inspira-
        digitization               CEE is key             attempts to quantify the size and growth rates of         tion and guidance.
                                                          digital economies on a national and regional level
        PAGE 34                    PAGE 56                in CEE and provides realistic scenarios for the eco-      The work on this report was led by Jurica Novak,
                                                          nomic impact of digitization through 2025.                McKinsey’s Managing Partner in Central Europe,
                                                                                                                    Marcin Purta, Managing Partner in Poland,
                                                          Also for the first time in this report, we offer a com-   Tomasz Marciniak, Partner, and Karol Ignatowicz,
                                                          bined perspective, looking at both individual coun-       Local Partner, with significant contributions by
        CHAPTER 5                  REMARKS
                                                          tries and the CEE region as a whole from a digital        McKinsey Partners across CEE: Dan Svoboda,
        Implications for policy    PAGE 88                economy perspective. This approach enables us to          Tomas Karakolev and Michal Skalsky in the
                                                          understand in a quantifiable and comparable way           Czech Republic and Slovakia, Levente Janoskuti
        makers, business
                                                          how the digital economy is evolving across coun-          and Andras Havas in Hungary, Daniel Spiridon in
        leaders. and individuals
                                                          tries and compared to the most relevant bench-            Romania and Tomislav Brezinscak in Croatia.
                                                          marks. Furthermore, we provide primary insights on
        PAGE 62
                                                          the level of digitization in individual sectors across    These individuals worked together with a team
                                                          all ten CEE countries (Chapter 1). A core part of         comprising Consultants Kacper Rozenbaum,
                                                          the study is our investigation of the impact of digi-     Kasper Yearwood and Arkadiusz Żarowski,
                                                          tal transformation on the labor market (Chapter 2).       Communications Experts Joanna Iszkowska and
        APPENDIX                                          Our discussion here covers both the shifts in society     Milena Tkaczyk, Graphic Designer Małgorzata
                                                          caused by the new technology and the increasingly         Leśniewska and many others.
                                                          accessible nature of the labor market as a result of
        PAGE 90                                           the digital transformation. Following this, we turn to    At the same time, we would also like to thank the
                                                          consider a comprehensive yet prioritized list of digi-    many area experts from the public, private, and
                                                          tization enablers, including the relative strengths of    social sectors who provided insights, source data
                                                          the region and key areas on which the region should       and helped advance our thinking. In particular, we
                                                          focus going forward (Chapter 3). Our insights in this     would like to acknowledge the collaboration with
                                                          chapter are based on quantitative analysis and dis-       Google on this research, including contribution of
                                                          cussions with numerous market experts.                    analytical inputs and insights leveraged in this report.
2   Digital Challengers                                                                                                            The rise of Digital Challengers        3
                                                                                                  1   THE CURRENT GROWTH ENGINE OF                                decades to come. Our analysis shows that devel-
                                                                                                      CENTRAL AND EASTERN EUROPE IS                               oping the region’s digital economy across all sectors
                                                                                                      LOSING MOMENTUM                                             would bring significant economic benefits, primarily

                                                                                                      Since the transition to a market economy almost             due to the resulting productivity gains. By closing
                                                                                                      three decades ago, CEE has enjoyed a golden age             the digital gap to Western and Northern Europe,
                                                                                                      of growth. The ten CEE countries examined in this           CEE could earn up to €200 billion in additional GDP
                                                                                                      report – Bulgaria, Croatia, the Czech Republic,             by 2025 – a gain almost the size of Portugal’s entire
                                                                                                      Hungary, Latvia, Lithuania, Poland, Romania,                economy in 2017.7 In this aspirational scenario, the
                                                                                                      Slovakia, and Slovenia – recorded on average a              region’s digital economy would grow to represent
                                                                                                      114 percent increase in GDP per capita between              16 percent of GDP by 2025. That would mean up to
                                                                                                      1996 and 2017, compared to an increase of just              30 percent additional GDP growth, the equivalent
                                                                                                      27 percent in the European Union’s “Big 5” econo-           of one extra percentage point on GDP growth each
                                                                                                      mies: France, Germany, Italy, Spain, and the United         year over the period.
                                                                                                      Kingdom.1 The CEE region has become one of the
                                                                                                      most attractive places to invest in globally.2 This         How would digitization secure this ambitious
                                                                                                      fact has enabled CEE countries to partially close           goal for CEE? Primarily by improving the region’s
                                                                                                      the economic gap to Western Europe, and their               productivity through a digital transformation of
                                                                                                      populations to enjoy a significant rise in living           the public and private sectors, and by boosting
                                                                                                      standards.3                                                 e-commerce and offline consumer spending on
                                                                                                                                                                  digital equipment.
                        AFTER THE SUCCESSFUL                                                          Growth in CEE has been driven by a number of
                     TRANSITION AND DEVELOPMENT                                                       factors, including traditional industries, dynamic          The alternative “business as usual” scenario is one
                   OF A MARKET ECONOMY:                                                               exports, investments from abroad, labor-cost                in which the digital economy in CEE maintains its
          1     The current growth engine of Central and Eastern Europe                               advantages and funding from the European Union.             historical growth rate, expanding by just €60 bil-
              is losing momentum.                                                                     But now these drivers are beginning to weaken.              lion and representing 8.7 percent of GDP in 2025.
                                                                                                      CEE economies are generally undercapitalized                In this scenario, CEE countries would miss out on
     2 Digitization can be the next driver of sustained growth for the
                                                                                                      compared to their more advanced European                    the additional one percentage point of annual GDP
       region, with €200 billion of additional GDP by 2025 at stake.                                  peers. The capital stock, measured as total gross           growth and remain a long way from the “digital
    3 The countries of CEE are uniquely positioned to                                                 fixed assets per employee, is 60 percent lower              frontier” represented by the countries of Northern
      capture this opportunity.                                                                       than the average for the EU Big 5.4 Workforce               Europe, for example.

    4 The business world, governments, and                   For the countries of                     costs are also rising and there are limited labor

      individuals all need to act in order for           Central and Eastern Europe                   reserves left to plug into the economy, with unem-      3   THE COUNTRIES OF CEE ARE UNIQUELY

       the transition to be successful.                (CEE), the potential economic                  ployment at record low levels – on average 6.5              POSITIONED TO CAPTURE THIS
                                                   benefits of digitization are great: up to          percent in 2017, compared to 7.6 percent in the             OPPORTUNITY
      5       Collaboration between                                                                   EU.5 Labor productivity still lags behind Western           Looking at Europe from the perspective of digi-
                                                  €200 billion in additional GDP by 2025.
               CEE countries as Digital                                                               Europe6. And on top of it all, the inflow of EU funds       tization, we distinguish three broad groups of
                                                 This economic boost would lead to greater
                Challengers is key.                                                                   to CEE countries is likely to slow down after 2020.         countries. The first are the ten countries of CEE
                                                 global competitiveness and prosperity for
               6    The time to act is now,      the region’s 100 million people. While the
                                                                                                                                                                  listed above that form the core of this study. We
                      otherwise the region        digital transition also harbors potential
                                                                                                      What does that mean for the countries of CEE? In            call these countries “Digital Challengers” as they
                          may miss the digital                                                        a nutshell, if they hope to continue on their path          demonstrate strong potential for growth in the
                                                 risks in the form of shifts in society, public
                                                                                                      to general prosperity, they need to redefine their          area of “digital” and can emulate the second
                                 opportunity.        and private-sector leaders can take
                                                                                                      growth strategies as a matter of urgency.                   group, consisting of relatively small countries with
                                                      effective actions to mitigate them                                                                          very high digitization rates, which we call “Digital
                                                          whilst pursuing the digital             2   DIGITIZATION CAN BE THE NEXT DRIVER OF                      Frontrunners”: Belgium, Denmark, Estonia, Finland,
                                                                 opportunity.                         SUSTAINED GROWTH FOR THE REGION                             Ireland, Luxembourg, the Netherlands, Norway
                                                                                                      Today, CEE has the chance to make a strate-                 ,and Sweden.8 Finally, there is the EU Big 5, which
                                                                                                      gic choice that will determine its growth path for          typically rely more on their large internal markets

4      The rise of Digital Challengers                                                                                                                                           The rise of Digital Challengers     5
for economic growth. These five countries have digi-               straight to payment cards. Today, the region has              of technology by both public and private sectors.        6   THE TIME TO ACT IS NOW, OTHERWISE THE
    tization rates that are relatively high but not as high            one of the highest contactless payment adoption               They can improve the ecosystem for startups                  REGION MAY MISS THE DIGITAL OPPORTUNITY
    as the Digital Frontrunners.                                       rates in the world.10 So, while it may be more dif-           and the opportunities for digital innovation – for           We believe that in order to benefit fully from the digital
                                                                       ficult for Digital Challengers to compete in the tra-         example, by creating regulatory sandboxes. They              transformation, the time for CEE to act is now. Our
    In 2016, the digital economy of Digital Challengers                ditional economy, they enjoy a level playing field in         can also support workers by setting in motion                sense of urgency is based on three factors.
    accounted for 6.5 percent of their GDP.9 This is almost            the digital economy                                           programs aimed at “reskilling” and “upskilling”
    on a par with the EU Big 5 (6.9 percent) but well behind                                                                         workers.                                                     First, Digital Challengers are currently booming eco-
    Digital Frontrunners such as Sweden (9.0 percent).              • A vibrant emerging digital ecosystem. We have                                                                               nomically, with thriving private sectors. In 2017, Digital
                                                                      already seen multiple digital success stories              5   COLLABORATION BETWEEN CEE COUNTRIES                          Challengers saw their highest levels of GDP growth in
    Notably, Digital Challengers are enjoying great                   across the region, with a number of digital-native             AS DIGITAL CHALLENGERS IS KEY                                more than a decade. This positive environment gives
    momentum in their digital economies. Between                      companies achieving unicorn status (valuation of               The countries of CEE will only be able to capture the        new digital initiatives a head start. History shows,
    2012 and 2016, the region’s combined digital econ-                more than $1 billion). Thanks to its strong talent             full potential of the digital transformation by coop-        however, that booms do not last forever. Indeed,
    omy grew by 6.2 percent a year, twice as fast as in               base, CEE is becoming a hub for gaming devel-                  erating closely with each other, due to at least four        there are already multiple signs that limitations on
    the EU Big 5. The news for specific sectors of the                opers and software development houses, many                    factors:                                                     growth will emerge in the region, such as negative
    economy in CEE is also good. Although most indus-                 of which are among the fastest growing com-                                                                                 demographic trends limiting the positive effects from
    tries in Digital Challenger countries lag behind their            panies in the region. Moreover, incumbents in                  • Scale effects: Together, Digital Challengers               a growing labor force.
    equivalents in Digital Frontrunner countries in terms             traditional industries are beginning to follow suit,             represent €1.4 trillion in GDP, making them the
    of digitization, some are almost level with EU Big 5              successfully adapting digital solutions both inter-              equivalent of the twelfth-largest economy in the           Second, we find ourselves on the cusp of a Fourth
    benchmarks – for example, financial services and                  nally and in their client offerings                              world.                                                     Industrial Revolution, in which new technology will fun-
    information and communication technology (ICT).                                                                                                                                               damentally transform the economy and the labor mar-
                                                                4   THE BUSINESS WORLD, GOVERNMENTS, AND                             • Similar starting points: The countries of CEE              ket. This seismic change will drive growth and create
    Digital Challengers have the foundations for further            INDIVIDUALS ALL NEED TO ACT IN ORDER FOR                           have high levels of market openness and similar            many new professions – big data scientists, machine-
    digitization. In particular, these include the following:       THE TRANSITION TO BE SUCCESSFUL                                    levels of digitization, besides their cultural and         learning engineers, new technology designers to name
                                                                    To realize the aspirational digitization scenario                  historic commonalities.                                    just a few. But it will also create serious challenges.
    • Good primary and secondary education in terms                 described above, all stakeholders in Digital Challenger                                                                       Our analysis shows that up to 51 percent of workplace
      of math and science literacy scores, according to             countries need to be actively engaged in the digital             • Common challenges: The region’s countries                  activities in CEE today – the equivalent of around 21
      the international PISA ranking – almost on a par              transformation. Businesses could increase their                    face many similar challenges, such as the “brain           million jobs – could potentially be automated by 2030
      with Digital Frontrunners                                     adoption of digital tools, improving their productivity            drain” and need to reskill the workforce.                  (depending on the economy, future regulation, and
                                                                    and ultimately their bottom line. They would also be                                                                          the labor market) using technology that already exists
    • A large STEM (science, technology, engineering,               well advised to take advantage of digital solutions for          • Best practices: Each CEE country has devel-                today. This creates both an opportunity for increased
      and mathematics) and ICT talent pool, with over               reaching new customers and expanding into regional                 oped different areas of digital specialization, each       productivity and challenges for the labor market. To
      230,000 graduates in these subjects in 2015 –                 and global markets. This export potential is especially            with their own advantages. Sharing best practices          avoid potential spikes in unemployment, immediate
      more than any of the EU Big 5 markets and twice               relevant in CEE, where the size of the domestic mar-               can accelerate the process of transformation.              action is needed, such as updating the education sys-
      as many as the entire Digital Frontrunner region              kets limits growth opportunities.                                                                                             tem to teach the skills that will be required in the future
                                                                                                                                     In the future, Digital Challengers could work together       and creating a support system for lifelong learning.
    • High-quality digital infrastructure with excellent            The public sector can play a role in the trans­                  on digital policy solutions across the region. Efforts
      4G coverage, some of the best coverage rates                  formation by using digital technology to achieve                 could include allowing access to standardized pub-           Third, we are at a point in time where the rules of the
      in the world for ultra-fast broadband and good                faster, smoother processes and services for both                 lic datasets to fuel innovation and support the digi-        digital game are crystallizing and new ecosystems
      affordability for ordinary citizens                           companies and ordinary citizens. Individuals must                tization of enterprises. Cross-border infrastructure         emerging. This is the moment for drawing up digital
                                                                    be active, too; investing in lifelong learning will enable       projects would also be possible, such as the intro-          strategies and developing toolkits for the digital trans-
    •   A legacy “technology lock-in” that is milder than           them to take advantage of new opportunities on                   duction of fiber optics or 5G technology infrastruc-         formation ahead. Many companies, countries and
        in Western and Northern European countries.                 the labor market. Individuals also need to embrace               ture. The countries of CEE, marching shoulder-to-            regions have realized this and are busy developing
        Having joined the digitization race rather late, CEE        increasing flexibility in their career paths.                    shoulder with other countries interested in further-         their long-term digital agenda. If the countries of CEE
        economies are less tied up with older technol-                                                                               ing digitization, could likewise form a coalition at a       wish to compete and capture the €200 billion digital
        ogy. For example, the CEE region almost entirely            Policy makers can support the process on a wide                  European level to ensure that their digital interests        opportunity, they need to come together urgently and
        bypassed the use of payments by check, going                range of fronts. They can promote the adoption                   are heard.                                                   devise a robust long-term digital strategy of their own.

6   The rise of Digital Challengers                                                                                                                                                                                  The rise of Digital Challengers       7
WHY IS DIGITIZATION KEY FOR CEE?                                         HOW TO CAPTURE THE POTENTIAL?

                                                                                                                                                                                                                                                                                                   KEY FINDINGS
                          1        THE GROWTH ENGINE OF CENTRAL AND EASTERN EUROPE IS LOSING MOMENTUM                                                           ALL STAKEHOLDERS NEED TO ACT FOR A SUCCESSFUL TRANSITION                                                                       4
                                                        Productivity        CEE has historically low                     Economy in CEE is under-
                                                                                                                                                                  Implications for policy makers               Implications for business leaders              Implications for individuals
                                                        lags behind         unemployment and working                     capitalized and the gap is
                                                        Europe              hours above EU average                       closing very slowly                          Build skills sets for the future,            Adapt business models to meet the              Individuals can
                                                                                                                                                                      including updating youth edu-                demands of the digital economy,                prepare for the
                                   CEE Digital                                                                                                                        cation for the future, promoting             including leveraging digital tools in          advent of the digital
                                                                31              6.5               1,791                   5.4                       0.8               lifelong learning, and counter-              revenue and cost management                    economy by invest-
                                                                                                                                                                      acting brain drain                                                                          ing in lifelong learning
                                                                                                                                                                                                                   Prepare talent strategies for the fu-          to improve their
                                                                                                                                                                      Support technology adoption                  ture, including an update approach             skills sets and taking
                                                                                                                                                                      by the public sector                         to recruiting and actively driving             advantage of digital
                                   EU Big 5                 53                  9.2               1,592                  13.0                       0.7                                                            reskilling and upskilling                      tools in all aspects of
                                                                                                                                                                      Support technology adoption                                                                 their lives
                                                                                                                                                                      by companies                                 Leverage contractors or freelanc-
                                                                                                                                                                                                                   ers to fill talent gaps using digital
                                   Digital                                                                                                                            Strengthen regional cross-                   platforms
                                   Frontrunners             64                  6.1               1,573                  22.6                        1.7              border digital collaboration
                                                                                                                                                                                                                   Form strong digital collaborations
                                                                                                                                                                      Improve the ecosystem for                    within industry associations
                                                    Productivity, GDP     Unemployment,        Hours worked          Capital stock            Gross capital           startups
                                                    per hour worked,         2017, %            per year per        per employee,          formation, average                                                      Embrace a pro-digital organizational
                                                         2017, €                              employee, 2017        2016, € million        % growth 2012–16                                                        culture

                          2        DIGITIZATION CAN BE THE ANSWER TO THIS CHALLENGE                                                                             COLLABORATION BETWEEN CEE DIGITAL CHALLENGERS IS KEY                                                                           5
                                   Realizing the aspirational scenario would translate                                                                          There are four reasons why cooperation is necessary to capture the full potential of digitization
                                   into an extra 1 percentage point on GDP growth                                                                               in the CEE region
                                   each year through 2025 in CEE
                                                                                                                                            276                                                                                   The countries of CEE have high levels of
                                   Digital economy growth scenarios                                       +200                          16% of GDP
                                                                                                                                                                                                                                    market openness and similar levels of
                                   for Digital Challengers, € billion                                                                                                                                               Similar            digitization
                                                                                                                                                                Each CEE country has develo­
                                                                                                                                                                ped digitally in different areas,
                                                                                                                                    Business as usual           sharing best practices can
                                    Digital economy                                                                                                             accelerate digitization
                                         in 2016                                                          +60                                 13                                                       Best                           Scale
                                                                                                                                                                                                     practices                        effects
                                            76                                                                                           9% of GDP                                                                                                         Together, Digital Challengers
                                                                                                                                                                                                                                                         represent €1.4 trillion in GDP,
                                       6% of GDP           2016                                                              2025                                                                                                                    making them the equivalent of the
                                                                                                                                                                                                                                                   12th largest economy in the world
                                                                                                                                                                The region’s countries face a number
                                   THE COUNTRIES IN CEE ARE UNIQUELY POSITIONED TO CAPTURE THIS OPPORTUNITY                                                     of challenges, importantly the “brain
                                                                                                                                                                drain” and the need to reskill the workforce
                                   Despite a lower size of the digital economy, Digital Challengers        Digital Challengers have the necessary fun-
                                   can build on a strong historical growth momentum                        damentals in place for further digitization:

                                                 Digital economy       Digital GDP    Growth of digital
                                                                                                                                                                THE TIME TO ACT IS NOW – OTHERWISE THE REGION MAY MISS THE DIGITAL
                                                  as a share of        per capita,       economy,           Good primary and secondary education
                                                  GDP, 2016, %           2016, €        2012–16, %

                                   CEE Digital                                                              A large STEM and ICT graduate talent pool
                                   Challengers          6.5               746               6.2
                                                                                                            High-quality, affordable digital infrastructure
                                                                                                                                                                Digital Challengers are en-               The Fourth Industrial Revolution             The global rules of the digital
                                   EU Big 5             6.9             2,264               3.1                                                                 joying an economic boom                   will transform the economy and               game are crystallizing – to com-
                                                                                                            A milder legacy technology lock-in                  – this could give new digital             labor market – an immediate                  pete, Digital Challengers need to
                                                                                                                                                                initiatives a headstart                   response is needed                           develop a clear digital agenda

                                   Sweden               9.0              4,152              9.9             An already emerging, vibrant digital ecosystem

                                                                                                                                                                SOURCES: McKInsey Global Institute; Eurostat; McKinsey analysis

              8               The rise of Digital Challengers                                                                                                                                                                                                    The rise of Digital Challengers     9

                                                                                                                                                                                                           VS. COUNTRY AVERAGE, 2017, MILLIONS

                                                                                                                                                                                        Frontrunners                  7

         Digital Challengers

                                                                                                                                                                  EU Big 5

         at a glance                                                                                                                                                  323

         The year 1989 was a very special date in the history       114 percent between 1996 and 2017. The main growth
         of Central and Eastern Europe (CEE). It has now been       drivers during this period were traditional industries,              MARKET
         almost three decades since momentous changes in            dynamic exports, investments from abroad, labor-cost
         the countries of the region resulted in political trans-   advantages, and funding from the EU. But now these
                                                                                                                                         TRADE AS
         formation and the introduction of market-based             drivers are beginning to weaken. The economies of                    % OF GDP 137
         economies. Coincidentally, it was about 1989 that          CEE are generally undercapitalized compared to more                                                                                                                 Challengers                    10
                                                                                                                                                   128      67
         British physicist Timothy Barnes-Lee was putting the       advanced European economies. The capital stock,                                                                                                                                                  (avg.)
         finishing touches to a new system designed to help         measured as total gross fixed assets per employee,
         scientists share data across a then little-known plat-     is on average 60 percent lower here than for the EU
         form. That platform – known today as the World Wide        Big 5.13 Workforce costs are also rising and there are
                                                                                                                                                                                                                                      GDP PER
         Web – has since been central to the development of         limited labor reserves left to plug into the economy,                GDP COUNTRY                                   TOTAL GDP,                                     CAPITA
         the internet and the dawning of the digital age.           with unemployment in CEE at record low levels – on                   AVERAGE, 2017                                 2017                                           GROWTH
                                                                    average 6.5 percent in 2017, compared to 7.6 percent                 €                                             €                                              1996–2017,
                                                                                                                                         trillion 0.1                                  trillion 1.4                                   %          114
         From the perspective of digitization, we can distin-       in the EU as a whole.14 Working hours in the region are
         guish three broad groups of countries in Europe. The       above the EU average,15 while productivity lags behind                     0.4 2.6                                       3.3    13.2                                          58      27
         first are the ten countries of CEE that form the core      Western Europe.16 Moreover, the inflow of EU funds to
         of this study: Bulgaria, Croatia, the Czech Republic,      CEE countries is likely to weaken after 2020. Clearly,
         Hungar y, Latvia, Lithuania, Poland, Romania,              CEE needs a new engine to drive its future economic
         Slovakia, and Slovenia. We call these countries            growth.
         “Digital Challengers” as they demonstrate strong
         potential for growth in the area of “digital” and emu-     Based on our research, we believe that digitization
         late the second group, which consists of relatively        can be the answer to this challenge, becoming the
         small countries with very high digitization rates. We      region’s new growth engine. The current level of                                                                                    CAPITAL STOCK
         call this second group “Digital Frontrunners”: Belgium,    digitization in CEE is almost on a par with the larg-     UNEMPLOYMENT,                                                             PER EMPLOYEE,
                                                                                                                              2017, %                 6.5            9.2            6.1                 2016, € million              5.4            12.9           22.6
         Denmark, Estonia, Finland, Ireland, Luxembourg, the        est EU countries.17 The pace of development of the
         Netherlands, Norway and Sweden.11 Finally, there is        digital economy and the existence of key enablers
         the EU Big 5 – France, Germany, Italy, Spain, and the      of digitization, such as high-quality primary, sec-
         United Kingdom – which typically rely more on their        ondary, and higher education, digital infrastructure
         large internal markets. These five countries have digi-    almost as good as in Digital Frontrunner countries,                                                                                 PRODUCTIVITY,
         tization rates that are relatively high, but not as high   a milder “technology lock-in” than in Western and         WORKING HOURS                                                             2017, GDP per
                                                                                                                              PER YEAR, 2017                                                            hour worked, €
         as the Digital Frontrunners.                               Northern Europe and a vibrant digital ecosystem,
                                                                    mean that CEE countries are well positioned to take                             1,778          1,592           1,573                                              31             53             64
         Since the early 1990s, our group of Digital Challengers    advantage of the potential of digitization to boost                            Digital           EU          Digital                                           Digital           EU           Digital
         have enjoyed significant economic growth. Gross            their productivity – and, in so doing, increase the                          Challengers        Big 5     Frontrunners                                       Challengers        Big 5      Frontrunners
         domestic product (GDP) per capita12 grew by                prosperity of their populations.

                                                                                                                                                 EU BIG 5: France, Germany, Italy, Spain, United Kingdom
                                                                                                                                                 Digital Frontrunners: Belgium, Denmark, Estonia, Finland, Ireland, Luxembourg, the Netherlands, Norway, Sweden
                                                                                                                                                 Digital Challengers: Bulgaria, Croatia, the Czech Republic, Hungary, Latvia, Lithuania, Poland, Romania, Slovakia, Slovenia

10   The rise of Digital Challengers                                                                                                                                                                                      The rise of Digital Challengers                11
Chapter 1

         the economy

                          The digital economy of Digital
                       Challengers accounts for 6.5 percent
                   of GDP. While this is almost the EU Big 5
                markets (6.9 percent), it lags behind Europe’s
               Digital Frontrunners such as Sweden (9.0 percent).
         Digital Challengers can build on the historical growth of
        their digital economies (6.2 percent a year from 2012 to 2016),
        which outstripped both Digital Frontrunners (5.9 percent) and
       the EU Big 5 (3.1 percent).
      The development of the digital economy in CEE is having a
      significant economic impact – indeed, digitization could become
      the next major growth driver for the region. Digital Challengers
       could even close the gap to Digital Frontrunners, growing the
        region’s digital economy by as much as €200 billion so that it
         represents 16.2 percent of GDP.
              This could potentially deliver up to 30 percent
               additional GDP growth, the equivalent of an extra
                  one percentage point GDP growth each year
                     through 2025.

12   The rise of Digital Challengers                                      The rise of Digital Challengers   13
The term “digitization” is widely used by economists.      per capita in CEE, at €746, is more than four times                 Box 1.
         Yet its precise meaning is a topic of much discussion,     lower than the average for Digital Frontrunners and                 The McKinsey Digitization Index                                                    Digital asset spending
         particularly when it comes to measuring the impact         almost six times lower than in Sweden.                              – drivers of digitization at sector
         of digitization on economies.18 Consequently, uncer-       The digital economy of Digital Challengers accounts                 level (referenced on the
                                                                    for a smaller
                                                                    Exhibit 1. share of GDP than in EU countries, the
         tainty reigns about the scale of the digital economy                                                                           next page)                                                                     Hardware spending
                                                                    EU Big 5 and Digital Frontrunners – but it is growing
         in CEE.                                                    The digital economy of Digital Challengers                                                                                                        Share of total expenditure spent on ICT
                                                                    accounts for a smaller share of GDP than that of                                                                                                hardware (e.g., computers, servers)
         In this report we shed light on just how big the digital   the EU Big 5 and Digital Frontrunners – but it is
         economy is in CEE. We strike a balance between the         also growing faster.19                                                                                                                       Software and IT services spending
         various definitions of “digitization.” For us, it repre-                                                                                                                                              Share of total expenditure spent on software and IT
                                                                                  Share          Digital       Growth     Growth of
         sents the sum of three components:                                      of digital     GDP per        of digital nondigital                                                                         services (e.g., enterprise resource planning software)
                                                                                economy,         capita,      economy,    economy
                                                                              2016, % GDP       2016, €      2012–16, % 2012–16,%
         • The value of the information and communication                                                                                                                                                 Telecommunications spending
           technology (ICT) sector                                  Digital                                                                                                                            Share of total expenditure spent on telecommunications
                                                                    Chal-          6.5            746             6.2            2.6                                                                 (e.g., broadband access, mobile data services)
         • The value of the e-commerce market, measured
           as online sales of goods

         • The value of offline consumer spending on digital        EU Big 5       6.9           2,264            3.1            1.2
           equipment                                                                                                                                                                        Digital asset spending per worker

         We choose this definition for two main reasons. First,
         it is relatively comprehensive – broader than just the     Front-         7.3           3,276            5.9            2.0                                                  Hardware spending on workers
         ICT sector, yet more concrete than, say, “all activi-                                                                                                                      ICT hardware (e.g., computers, servers) expenditure per full-time-equivalent
         ties related to digital data.” Second, reliable data is                                                                                                                   employee (FTE)
         available for each of the three areas it covers and
         so its total value can be calculated (see Appendix                                                                                                                    Software and IT services spending per worker
                                                                    Sweden         9.0           4,152            9.9            2.2
         for details). This enables us to use a bottom-up                                                                                                                     Software (e.g., enterprise software licenses) and IT services expenditure per FTE
         modeling approach, drawing on data collected at a
                                                                    SOURCE: Eurostat; local institutes of statistics; McKinsey Global                                  Telecommunications spending per worker
         national level.                                            Institute analysis; McKinsey analysis                                                            Telecommunications (e.g., broadband access, mobile data services) expenditure per FTE
         ECONOMY IN CEE                                             However, the digital economy in CEE is growing
         As mentioned in the Introduction traditional growth        faster (6.2 percent a year between 2012 and 2016)
         drivers in CEE are facing increasing limitations, such     than in the EU Big 5 (3.1 percent) and even Digital                                     Digital capital deepening
         as a finite labor supply, undercapitalized econo-          Frontrunners (5.9 percent). While this is a positive
         mies, and productivity levels that lag behind more         indicator, room for improvement remains. Despite
         advanced economies. The question we ask in this            starting from a larger basis, Sweden was able to                                  Hardware assets per worker
         study is: Could digitization become the new growth         grow its digital economy by 9.9 percent a year                                  ICT hardware assets (e.g., servers, computers) per FTE
         driver for the region in the years to come?                between 2012 and 2016, for example. In terms of
                                                                    growth rates, CEE countries – most of which are                            Software assets per worker
         To answer this question, we must first identify where      still classified as “developing countries” – also                         Software assets (e.g., workers’ software licenses) per FTE
         the digital economies of CEE are today. According to       appear to be benefiting from the general momen-
         our analysis (Exhibit 1), the digital economy accounted    tum in their economies. With a little extra effort,
         for 6.5 percent of total GDP in the region in 2016.        Digital Challengers could accelerate the
         While this is almost with the EU Big 5, it lags behind     pace of growth of their digital economies
         Digital Frontrunners, where its share of GDP is almost     and close the gap to, or even overtake,
         40 percent higher. In per capita terms, the differ-        some of the more digitally advanced
         ences are even more pronounced. The digital GDP            economies.

14   The rise of Digital Challengers                                                                                                                                                                                               The rise of Digital Challengers    15
SECTOR-LEVEL DIGITIZATION                                               the workforce by incorporating per-employee spend-         Going forward, the priority for each sector will                              DIGITAL POTENTIAL IN CEE TO 2025
         Before identifying potential levers for accelerating the                ing. In addition, digital capital deepening is measured    be to catch up with their counterparts in more                                As we have seen, Digital Challengers lag behind
         digital transformation in CEE, we should look at how                    by comparing total hardware and software stock in          digitally advanced countries. In Exhibit 3 we com-                            Digital Frontrunners in terms of the overall size of their
         digitization has taken place around the world. It would                 a per-worker perspective. The results at sector level      pare the digitization level of the biggest sectors in                         digital economy, with clear gaps at a sector level.
         appear that no standard route exists to achieving high                  are weighted for the economic size of the sector and       Digital Challenger markets with their counterparts                            The size of these gaps has slowly been decreasing
         rates of digitization. Most markets, including Digital                  compared to the global “digital frontier,” which we        in Sweden (taken as a benchmark for Digital                                   in recent years, but CEE has not yet entered the fast
         Frontrunners, have digitized unevenly, showing large                    take to be the ICT sector in the United States.21          Frontrunners) and other selected Western Europe                               lane. Looking ahead, we see two potential trajecto-

         variations between different sectors and individual                                                                                countries.22 The biggest gap is found for utilities,                          ries for further digitization in CEE (Exhibit 4).
         companies.                                                              The McKinsey Digitization Index shows us that              manufacturing, government, and professional
                                                                                 the digital economy of CEE has developed unevenly,         and business services. The finance and insur-                                 In the first, “business as usual” scenario, the region’s
         The digital economy in CEE is                                           with three distinct industr y groups emerging              ance sector exhibits the smallest gap. Notably,                               countries maintain their historical growth rates for the
         growing faster than in the EU Big 5                                     (Exhibit 2). The first group of sectors, exhibiting the    almost no gap exists between CEE and selected                                 digital economy. The digital economy expands by
         and even Digital Frontrunners                                           highest digitization rates, can be considered “digital     countries in Western Europe in government.                                    €60 billion to reach nine percent of GDP by 2025.
                                                                                 leaders.” This group comprises two medium-sized                                                                                          The gap to Digital Frontrunners (measured as the
         To understand which sectors drive digitization at a                     industries: ICT and finance and insurance. The sec-        Support from the government can play a signifi-                               digital economy’s share of GDP) remains almost
         “macro” level, we need a multidimensional view. The                     ond group, which we call “digital followers,” includes     cant role in the development of the digital econ-                             unchanged, while the gap to the most dynamic mar-
         McKinsey Global Institute (MGI) Industry Digitization                   large sectors such as manufacturing and wholesale          omy. Several CEE countries have national digiti-                              kets, such as Sweden, widens.
         Index offers such a perspective, assessing digitiza-                    and retail trade, alongside medium-to-small sectors        zation strategies in place. However, they are not
         tion at the level of individual sectors (Box 1 on page                  such as mining and transportation and warehous-            consistent across the region, which may also con-                             The second scenario is an aspirational one. If Digital
         15).20 It uses eight indicators to capture different ways               ing. The final group are “digital novice” sectors such     tribute to differences in digitization between coun-                          Challengers closed the gap to Digital Frontrunners,
         in which companies are digitizing. For instance, digi-                  as the arts and entertainment, accommodation               tries. We explore examples of national strategies                             they would see their digital economy grow by
         tal assets include spending on computers, software                      and food services, and agriculture. This group also        supporting the digitization process in Chapters 4                             €200 billion to reach 16 percent of GDP by 2025.
         and telecommunications equipment, and the stock of                      includes medium-to-large public sectors such as            and 5.                                                                        This translates into an extra one percentage point
         ICT assets. The Index also includes the perspective of                  healthcare, education, and government services.

                                                                                                                                            Exhibit 3.
                                                                                                                                            Exhibit 3
         In terms2.of digitization, the CEE economy has developed at different speeds, with digital leaders, digital
         Exhibit                                                                                                                            Large gaps in the digitization level of sectors exist between the CEE region, Western Europe, and Digital
         followers  and digitally less advanced   sectors emerging                                                                          Large gaps in the digitization level of certain sectors exist between CEE and Western EU countries/Digital
         CEE   has digitized  unevenly   in terms of sectors – with leaders, followers, and novices emerging.                               Frontrunners.

          Industry sectors in CEE, by degree of digitization and % of GDP                                    Government                                                               Low: 10%
                                                                                                                                                       Finance and
                                                                                                             Education                                 insurance
                                                                                                             Arts & entertainment
                            12                                                                                                                         Services
                                                                                                             Accommodation and food
                            10                                                                               Manufacturing
                             8                                                                               Trade (retail and wholesale)

          Share of GDP, %

                                                                                                             Professional services
                                                                                                             Utilities                                 Transport
                             0                                                                                                                         Government
                                                                                                             ICT sector
                                                                                                                                                                                        CEE        Selected countries from Western          Sweden as a Digital
                                 Digital novices             Digital followers      Digital leaders          Finance and insurance
                                                                                                                                                                                                   Europe (France, Germany, UK)             Frontrunner benchmark

          SOURCE: Eurostat; local institutes of statistics                                                                                  SOURCE: Eurostat; local institutes of statistics

                                                                                                                                            1 Average of digitization score for all industries excluding digital leaders (ICT and FIG sectors) - 2.73%
16   The rise of Digital Challengers                                                                                                                                                                                                              The rise of Digital Challengers   17
GDP growth each year, or a one-third increase in                                      Exhibit 4.                        We see two trajectories for CEE to grow
         the projected growth rate.23 The additional €140 bil-                                 Scenarios for digital             its digital economy: a business-as-usual
         lion – on top of the €60 billion impact of maintaining                                economy growth in CEE.24
                                                                                                                                 scenario bringing an additional €60
         the historical growth rate – breaks down as follows:
                                                                                                                                 billion of GDP, or an aspirational scenario
         • An extra €120 billion from the increased pro-                                                                         with €200 billion of GDP at stake
           ductivity achieved by closing the gap to Digital                                                                      € billion
           Frontrunners in the digitization of the public and
           private sectors                                                                                                       Share of GDP, %

         • An extra €20 billion from additional growth in
           e-commerce and offline consumer spending on
           digital equipment

         The first of these amounts – the extra €120 billion
         – comes from Digital Challengers increasing their
         ICT spending as a share of sector GDP to the level
         of Digital Frontrunners. To achieve this, they must
         speed up the digital transformation in their econo-
         mies, especially in the sectors that lag farthest
         behind their Digital Frontrunner benchmarks and at
         the same time account for a significant share of the
         total national output. This includes asset-heavy sec-
         tors such as manufacturing, public sectors such as
         healthcare and education, and localized industries
         such as agriculture. The second amount – the extra
         €20 billion – comes from faster growth in e-com-
                                                                                                                                                                                           Business as usual

         merce and offline consumer spending on digital
         equipment (see Appendix for details).

         If Digital Challengers closed the gap
                                                                    NEW DIGITAL INDUSTRIES – THE NEXT
                                                                    GROWTH HORIZON
                                                                    But it doesn’t stop there. While accelerating the
                                                                                                                                                                   +60                              9%
         to Digital Frontrunners, they would                        digitization of CEE’s current industries promises sig-
         see their digital economy grow by                          nificant economic gains, a whole new wave of digi-
         €200 billion to reach 16 percent of                        tization could be triggered by new digital industries

                                                                    based on the Internet of Things (IoT), big data and
         GDP by 2025.
                                                                    artificial intelligence (AI). These innovative fields rep-           Digital economy

         Capturing this potential will depend on all stake-         resent a substantial economic opportunity, poten-                    in 2016
         holders embracing digital technology in the coming         tially over and above even our aspirational sce-
         years. For companies, it will mean taking advantage        nario. While the full size of the opportunity in CEE
         of solutions enabling growing sales through digital        is still unknown, solutions that already exist today
         channels, including boosting their export capabili-        based on the IoT, for example, have the poten-
         ties. For both public and private organizations, it will   tial to boost the digital economy by €160 billion.25
         mean improving operating efficiency by integrating
         automation and streamlining solutions. For individu-       In the vast majority of cases, the additional eco-           2016                                                                       2025
         als, it will mean investing in developing the skills       nomic value generated by these solutions stems
         needed in the digital economy. We explore these            from their use of data for improved decision-making,
         aspects in more detail in Chapters 2, 3, and 5.            product and service innovation, and the exchange of

18   The rise of Digital Challengers                                                                                                                                           The rise of Digital Challengers   19
Examples of how the Internet of Things creates value

         information between vehicles, home appliances and            Box 2.                Human health                Devices (wearables and ingestibles) to monitor and maintain
         the like, leading to increased operating efficiency.26       Examples of how IoT   Devices attached to or      health and well-being, disease management, increased
         We explore a number of use cases in different IoT            creates value.        inside the body             fitness, higher productivity
         verticals in Box 2.

         Artificial intelligence (AI) is another new digital indus-                         Home                        Home controllers and security systems, household chore
         try poised to contribute significantly to the next wave                            Buildings where             automation
         of digital disruption. Globally, we are already seeing                             people live
         increased investment, job creation, and business
         impact for early adopters. Funding for AI-based
         services, software, and hardware are booming:                                      Retail environment          Stores, banks, restaurants, arenas, and anywhere else
         the McKinsey Global Institute estimates that in                                    Spaces where consumers      consumers consider or make purchases: Self-checkout, layout
         2017, €33 billion was invested in AI, three times the                              engage in commerce          optimization, real-time and in-store personalized promotions,
                                                                                                                        smart CRM, inventory shrinkage prevention
         amount for 2016. This was partly fueled by expec-
         tations of an emerging AI market, predicted to be
         worth more than ~€45 billion by 2020. 27 A push                                    Offices                     Energy management and security in office buildings, improved
         can also be seen in the labor market for AI-related                                Spaces where knowledge      productivity, organizational redesign and worker monitoring,
         jobs. Of the five fastest-growing job titles claimed by                            workers work                augmented reality for training
         LinkedIn members in the United States, three are
         AI-related.28 Countries are also already busy shap-
         ing their strategies on how to capture this value – we                             Factories                   Places with repetitive work routines: operating efficiencies,
         explore examples of such initiatives in Chapter 5.                                 Standardized production     optimizing equipment use and inventory, health and safety,
                                                                                            environments                predictive maintenance
         AI can unlock value for different industries in the
         future, but even now it is used in a number of appli-
         cations across a range of sectors. The field is also                               Workplace                   Mining, oil and gas, construction, operations optimization,
         starting to pick up in CEE. This can be seen already                               Custom production           equipment maintenance, health and safety, IoT-enabled R&D
         in the private sector, with many success stories of                                environments
         enterprises specializing in AI and automation solu-
         tions emerging across the region. For instance,
         Romanian software provider UiPath is a global leader                               Vehicles                    Vehicles including cars, trucks, ships, aircraft, and trains:
         in robotic process automation and a CEE “unicorn”                                  Systems inside moving       condition-based maintenance, usage-based design, pre-sale
                                                                                            vehicles                    analytics, after-sales improvements
         – a company valued above $1 billion.29 Global giants
         are also investing in AI development centers in the
         region, for example Amazon30 and Chinese appli-
         ance manufacturer TCL in Poland.31                                                                             Smart meters and demand management, distribution and
                                                                                                                        substation automation, congestion lanes, smart parking
                                                                                            Urban environments          meters and pricing, centralized and adaptive traffic control
         AI promises to have a positive impact on both busi-
         ness, in the form of increased productivity, and con-
         sumers, by providing more personalized and efficient
         products and services. By contrast, its impact on the                              Outdoors                    Outdoor uses include railroad tracks, autonomous vehicles
         labor market is a matter of ongoing debate, as we                                  Between urban               (outside urban locations), and flight navigation, real-time
                                                                                            environments (and outside   routing, connected navigation, shipment tracking
         explore in the next chapter.32
                                                                                            other settings)

20   The rise of Digital Challengers                                                                                                               The rise of Digital Challengers   21
Chapter 2

         Impact on the labor

                       As employment growth in CEE slows
                    down, an increase in productivity levels is
                 needed. Due to negative demographic trends,
               up to 21 percent of current GDP growth is at risk.
          Digitization in the form of automation technology can help
         relieve pressure on labor reserves in CEE .
      We estimate that 49–51 percent of work activities could be
     automated using technology available today, the equivalent of
     approximately 21 million jobs.
      Growing adoption of automation technology will drive a significant
      shift in demand for skills, leading to a potential labor market
          Sectors such as manufacturing, logistics, agriculture and
           trade will experience the biggest need for workforce
                   Demand for technology skills, social skills,
                     and emotional skills will grow the most.

22   The rise of Digital Challengers                                       The rise of Digital Challengers   23
AUTOMATION                                                                                                            49–51%
                                                                                                                                                                                          POTENTIAL                                                                                                                                                       20.8
                                                                                                                                                                                                                                                                                                                of working time is spent
                                                                                                                                                                                                                                                                                                                on activities that could
                                                                                                                                                                                                                                                                                                                be automated
                                                                                                                                                                                          AMONG DIGITAL
         Long-term historical GDP growth in CEE has been
         driven by two factors: increasing employment and                                                                                                                                                                                                                                                                                                 equivalent

         rising productivity. While the latter was the main con-                                                                                                                                                                                                                                                                                          number of jobs
         tributor by far, growth of the working population was
         still responsible for around 17 percent of GDP growth                                                                                                                                                                                                                                                            While few occupations are fully automatable,
         between 2005 and 2017.33 However, a growing con-                                                                                                                                                                                                                                                                 60% of all occupations have at least 30%
                                                                                                                                                                                                                                                                                                                          technically automatable activities
         sensus exists that the CEE region has now reached
         “peak employment.” Negative demographic trends
         such as declining birthrates, emigration, and aging                                                                                                                                                                                                                                        SHARE OF OCCUPATION TYPES WITH GIVEN
         could hinder the future development of the region. If                                                                                                                            % OF ACTIVITY THAT COULD BE                                                                               AUTOMATION POTENTIAL
         the negative employment projections of –0.1 percent                                                                                                                              AUTOMATED                                                                                                 % of 820 occupation types
                                                                                                                                                                                                                                                                                                    0%                                                                  100%
         per year are correct and productivity growth rates
         remain at historical levels, GDP growth could be up                                                                                                                              Predictable physical                                   75                                       100% 1

         to 21 percent lower in the period to 2030 than over                                                                                                                                                                                                                              >90%              9

                                                                                                                                                                                                                                                                 AUTOMATION POTENTIAL
                                                                                                                                                                                          Processing data                                        71                                       >80%                     19
         the past dozen years (see Exhibit 5).34
                                                                                                                                                                                                                                                                                          >70%                           27
                                                                                                                                                                                          Collecting data                                        65                                       >60%
         We are likely to see occupations
                                                                                                                                                                                                                                                                                          >50%                                          41
         changing due to automation rather                                                                                                                                                Unpredictable physical                                 39                                       >40%                                                50

         than disappearing completely, and                                                                                                                                                                                                                                                >30%                                                       60
         many employees will need to learn
                                                                                                                                                                                          Applying expertise                                     29                                                                                                         72
                                                                                                                                                                                                                                                                                          >10%                                                                    91
         how to work more closely with                                                                                                                                                                      Interacting with stakeholders        22                                           >0%                                                                        98


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         in the period to 2030 as a result of negative                                                                        stand the likely future impact of digitization on the
         demographic trends.                                                                                                  labor market in CEE. One area of interest is the            TOTAL AUTOMATION POTENTIAL
                                                                                                                              potential of automation technology to relieve pres-         IN EQUIVALENT NUMBER OF JOBS
          Simulated long-term impact of employment growth                                                                     sure on labor reserves. A McKinsey Global Institute                                                                                              FTE million                                               Automation potential, %
          on GDP, compound annual growth rate, %
                                                                                                                              analysis studied around 800 professions, looking at                             5.6–5.7                                                                                           Manufacturing             64–66
                                                                                                                              the feasibility of automating the tasks that involve            of all jobs
                                                                                                                                                                                                                                    3.1–3.2                                                              Trade (retail & wholesale)       50–53
                                    0.5                                                                         −21%          using technology already in existence today (see            at risk (up to
                                                                                                                                                                                          14.7 million)                                     2.5–2.6                                                                                       52–56
                                                                                                                              Appendix for details). By calculating the potential                                                                                                                                Agriculture
                                                                                             –0.1                             for automating specific tasks and the share of those                                                                     1.5–1.6                                                  Construction              47–54
                                                                                                                              tasks in the total working hours for each profession,                                                               1.5–1.6                                                       Transportation            59–66
                                    Employment growth
              Productivity growth

                                                                     productivity growth

                                                                                           – projected growth

                                                                                                                              we are able to estimate the potential of automation
                                                                     Assumed historic

                                                                                                                                                                                                                                                      1.4–1.5                                              Public administration          37-43
                                                                                                                              for each profession. The result? Up to 49–51 per-
                                                        GDP growth

                                                                                                                 GDP growth

                                                                                                                                                                                                                                                          0.8–0.9                                                Healthcare               33–38
                                                                                                                              cent of workplace activities in CEE – the equivalent
                                                                                                                              of approximately 21 million jobs – could potentially                                                                         0.7–0.8                                       Accommodation & food             49–64
                                                                                                                              be automated by 2030.                                                                                                        0.7–0.8                                                Education               23-30

                                                                                                                                                                                                                                                                                        0.6               Professional services           35–41
                      Historical growth,                                     Simulated growth,                                The areas most susceptible to automation are physi-
                         2005–2017                                              2018–2030                                                                                                                                                                                               0.3–04             Telecommunication              35–40
                                                                                                                              cal activities in highly structured and predictable envi-
                                                                                                                              ronments and tasks such as data collection and pro-                                                                                                          0.3             Finance & insurance            35–41
          Note: Projection assuming historical productivity growth and
          projected changes in employment growth                                                                              cessing. These types of activities are most common in                                                                                                                                                               Below average   Above average
          SOURCE: McKinsey Global Institute analysis; McKinsey
          analysis                                                                                                            manufacturing, warehousing, and simple administrative
                                                                                                                                                                                                                                                                                              SOURCE: McKinsey Global Institute analysis

24   The rise of Digital Challengers                                                                                                                                                                                                                                                                                                  The rise of Digital Challengers          25
jobs. While less than two percent of all occupations      speed and extent of their use will depend on a num-         Exhibit 6.
         can be automated entirely, around 60 percent of all       ber of factors, including technical feasibility, cost,      Industries with the highest job vacancy rates could benefit from automation, unlocking economic growth
                                                                                                                                Industries with the highest job vacancy rates could benefit from automation, unlocking economic growth
         occupations have at least 30 percent of their constitu-   labor-market dynamics, social acceptance and the            stifled
                                                                                                                                stifled by inadequate labor
                                                                                                                                        by inadequate  laborsupply
         ent activities that could be automated. That means        regulatory environment.                                                                                                                  Industries with the highest job
                                                                                                                                                                                                            vacancies and automation potential
         that we are likely to see occupations changing due to
         automation rather than disappearing completely, and       Particularly in Digital Challenger markets, where           Industries with highest job          Job vacancy rate,                    Automation potential,
                                                                                                                               vacancy rate in CEE                  Q4 2017, %                           % of working hours
         many employees will need to learn how to work more        labor costs are still relatively low compared to

         closely with technology than they do today.               Western Europe, investments in technology may               Construction                          2.8                                 47–54
                                                                   be delayed. However, Western companies with
                                                                                                                               Real estate                           2.6                                 42–43
                                                                   production plants in CEE may begin considering
         Particularly in Digital Challenger                        the possibility of “reshoring” part of their value-                                               2.4
         markets, where labor costs are still                      chain processes, most of which are manufac-
                                                                                                                               Agriculture                                                               52–56

         relatively low compared to Western                        turing-related, to automated plants in their home           Accommodation and food service 2.4                                        49–64
         Europe, investments in technology                         countries. The European Reshoring Monitor is
                                                                                                                               Professional services                 2.2
         may be delayed.                                           a Eurofund initiative that aims to identify exam-
                                                                   ples of this phenomenon. Based on these, we                 Manufacturing                         2.2                                 64–66
         This effect will be felt to a varying degree across all   can see that this is already occurring in CEE. 35
         sectors and occupations. For our Digital Challengers,                                                                 Information and communication         2.2                                 35–40
         automation could have the biggest impact on manu-         Opportunities and challenges of automation
                                                                                                                               Transportation and storage            2.1                                 59–66
         facturing, transportation and warehousing, where,         Automation brings opportunities as well as challenges.
         according to our estimates, up to 66 percent of all       As we saw in Chapter 1, technology can contribute           SOURCE: Eurostat; McKinsey Global Institute
         activities performed today could be automated (see        significantly to productivity, leading to stronger
         page 25). The use of industrial and service robots,       economic development. In the labor market, employees        previous tasks now performed by technology. This         people return to the labor market within a year of
         3D printing, automated production lines, autonomous       could be able to focus on more value-adding activities;     may lead to a change in the requirements placed          their jobs being automated: 25 percent, 50 percent,
         vehicles and drones will lead to significant changes      for example, doctors and nurses could spend more            on them (for example, they will need to work more        66Minimum
                                                                                                                                                                                             percent,   or 100 percent. If only 50 percent of the
                                                                                                                                                                                                   estimation range
         in these sectors.                                         time with patients rather than performing administrative    closely with technology), while in extreme cases         people   who
                                                                                                                                                                                           Maximum      lose their
                                                                                                                                                                                                    estimation rangejobs to automation manage to
                                                                   tasks.36 Additionally, as the workforce transitions to      workers may find themselves out of a job. For those      find a new job within a year, the unemployment rate
         Manufacturing, which is the biggest sector in CEE in      new job pools, a positive effect may be seen on both        affected, finding new positions may be challenging,      may rise temporarily to ten percent (see Exhibit 13).
         terms of the number of people employed, accounts          job vacancy and unemployment rates.                         and they will have to acquire new skills.                If just 25 percent manage to find a new job within a
         for a significant number of jobs susceptible to auto-                                                                                                                          year – a pessimistic scenario – the unemployment
         mation – around 5.7 million in total. Other sectors       Industries with the highest job vacancy rates could         To illustrate the risk of a “labor market mismatch,”     rate may peak temporarily at almost 25 percent.
         with high automation potential include mining, agri-      benefit from automation, as it may solve the problem        we estimate the potential impact of automation on
         culture, accommodation and food services, trade           of the inadequate labor supply. In recent years, rela-      unemployment (Exhibit 7). Here, we assume that by        In light of the above, it is important that CEE coun-
         and utilities. Automation will have the least impact on   tively low unemployment rates and a growing num-            2030 technologies that already exist today will have     tries ensure the rapid reskilling of their workers to
         education and healthcare, areas where human con-          ber of job vacancies in Digital Challenger markets          improved to such an extent that it will be cost-effec-   prepare them for the changes ahead and to mitigate
         tact and emotional skills play a key role. These skills   have created a favorable labor market situation for         tive to use them to replace humans for the activities    the risk of spikes in unemployment. In Chapter 3,
         are hard to replace by robots – at least, at present.     employees, and challenges for employers.37 Sectors          in question and introduce corresponding organiza-        we identify the need for effective labor reskilling as a
                                                                   such as manufacturing, transportation, agriculture          tional solutions. We also assume that, by this point     key enabler for digitization. Furthermore, we explore
         Automation mainly affects low- to medium-skilled          and construction – all areas with a high potential for      in time, both managers and rank-and-file staff will      a number of successful reskilling programs and ini-
         jobs. Consequently, people with lower levels of edu-      automation – have faced the biggest labor short-            have gotten used to handing some tasks over to           tiatives, including examples from the CEE region.
         cation and low to medium wages are likely to be           ages38 (Exhibit 6). Digitization and the implementa-        machines. In many sectors, it is also likely to take     Additional examples appear in Chapter 5.
         more affected by having some aspects of their jobs        tion of technology could help companies in these            this long for appropriate legislation to come in.40
         automated.                                                sectors overcome workforce-related barriers and                                                                      SHIFTS IN SOCIETY DRIVEN BY NEW
                                                                   achieve growth.                                             Based on the assumption that 49–51 percent of            TECHNOLOGY
         Speed and extent of automation                                                                                        workforce activities are automated by 2030 (the          So far, automation has not caused a spike in unem-
         Many of the technologies for automation are not yet       At the same time, some employees will find that             fastest adoption rate), we posit four reemployment       ployment. However, it will be a driving force of
         ready for broad application in the workplace. The         their professions alter significantly, with many of their   scenarios, in each of which different percentages of     change in the labor market. Progressive digitization

26   The rise of Digital Challengers                                                                                                                                                                      The rise of Digital Challengers        27
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