Kazakhstan IT Sector: An onrush of technology and a lag of legal space
Katerina Kozlenko, Financial Director of Actis Systems Asia
This material is composed on the basis of Research “Occurrence and Prospects of Electronic Business Development in Kazakhstan (since 2000 till May, 2003)” by the program “Regional Monitoring of Internet in Kazakhstan”, prepared by the companies “ActisSystemsAsia” and “Kuhn Consulting”. Studying of an audience of the Internet and its communication environment in Kazakhstan is carried out on a regular basis by the companies "Kuhn Consulting" and "ActisSystemsAsia" almost the fourth year.
Uniqueness of the present research on studying an audience of the Internet and its behavior consists that in it for the first time in the Kazakhstan’s practice are incorporated both theoretical researches, and results of long-term Kazakhstan supervision. Therefore, the received results give the fullest representation for today about an audience of Internet users and its environments in Kazakhstan.
In the present material the technique, terms and some basic results of research are stated.
The Kazakhstan Information Technology (IT) sector represents a growing and dynamic market that is especially attractive for the International market players in view of the slowdown in the global telecommunications sector. Although still relatively small at about$220 million, the Kazakhstan IT market grew by 25 - 30% in 2002. It is expected to reach $275 million in 2003. The major factors for its growth in Kazakhstan were low dependence of the IT sector on fluctuations of the international economy, the increase in the home demand due to the rise of international prices for Kazakhstan’s mineral commodities and growing demand for customized solutions in the private sector.
The times when Kazakhstan’s IT market looked like the Americas of Columbus’ times have passed. However local demand is extremely price-sensitive. Average consumers generally prefer a low-cost computer to a globally recognized brand. Nonetheless, the Kazakhstan market remains one of the promising emerging markets.
There is growing demand for imported equipment in the corporate sector. A continuing growth in the number and purchasing power of small and medium-sized private enterprises is driving demand for legally imported operating systems, software application packages and enterprise management software. Best immediate sales prospects also include peripherals, networking equipment, and internet technology.
A considerable increase in state purchase of computers and software within government regional procurement programmes has facilitated the spread of the Internet in the sphere of education. According to research conducted by Actis Systems Asia, each third Internet user in the country is a student.
Kazakhstan’s government has realized the importance of the internet and information technology in improving the efficiency and effectiveness of government bodies, enhancing political transparency, and improving quality of life in general.
Laws and regulations on IT sector were not a priority for the Kazakhstan authorities but during the last two years a number of important regulatory papers were developed. Some of them adopted by the Majlis and came into force.
The laws On Electronic Document and Electronic Digital Signature and On Informatizaton were passed in January and May 2003, respectively. These acts are supposed to improve the legal aspects of the activities of Internet providers and to spur up the spread of the Internet in the country. At the same time there are some legal problems in the IT sector of Kazakhstan, in common with the whole International Community. These are pirated software and “gray import” issues.
For example actual demand for IT products is difficult to determine due to the high level of pirated software products. Also, the International Planning and Research Corporation (IPR) estimate “gray” imports (shipments through third countries unauthorized by the original supplier) to be as high as 89% of the total market. In recent years, the Kazakhstan government has taken steps to improve enforcement against piracy, but pirated consumer software remains readily available on street markets. Poor IPR enforcement is likely to severely limit the sales potential of legitimate software suppliers in Kazakhstan.
The foundation in 2001 of the Kazakhstan IT Industry Association is perceived as an important step in the industry’s development and promotion of legal improvements to the Kazakhstan IT market. Around 12 companies both Kazakh and local representatives of foreign companies have become the founding members. The goals of the association are to represent the interests of the Kazakhstan IT industry domestically and internationally, to foster conditions for the future growth of the IT market and to protect the corporate interests of IT companies. Among the association members there are as well as the Kazakhstan companies BIPS, ALSI, Actis Systems Asia and GLOTUR.
The ambitious state program named “Formation and Development of National Informational infrastructure Kazakhstan” was launched in 2001 and was aggressively followed to stress the IT sector’s importance for the national authorities. The estimated cost of the program for the period 2001 – 2003 is about $130 million. The target is to create key elements of a national information infrastructure that are able to provide independence and security for the country.
Current Kazakhstan Government priorities for the sector are as follows:
• to make internet access easy for private individuals and public sector organizations.
• to support IT investments stressing support to domestic developers.
• to proceed with legislative and regulatory grounding of the IT sector
Step by step realization of the state doctrine in this field should be achieved through accomplishment of the following programs:
• Information and Telecom Systems monitoring
• Data exchange standardization
• E-Commerce promotion
• Development of information infrastructure for the state authorities
• State finance information and telecommunication integration
• Development of the state databases covering personalities, legal entities and “Kazakhstan Resources”
• Monitoring of social and economic environment in Kazakhstan
Several state-supported projects were implemented in 2001 including the presidential program ”Computerization of Secondary Schools”. According to the Statistical Agency of the Republic of Kazakhstan, around 81 thousand PCs were bought for 8200 schools in this program. There is 1 PC per 40 students on average in Kazakhstan, compared with Russia with only 1 PC per 80 students. The winners of the tender for this project included ALSI, GLOTUR, etc.
State orders have become an important demand driver for IT products. Increased government spending on computers contributed to the growth of the sector with more tenders held for government projects and budget-funded public schools in rural areas. In 2001 government and educational institutions accounted for 35-40% of computer demand. Another factor that boosted PC sales was major IT investment projects in mining, banking, financial services and manufacturing.
According to the Kazakhstan Communication Ministry officials the Government of Kazakhstan supports the growth of basic telecom infrastructure and stimulates competition in the supply of telecom and internet services. A favorable enabling environment is also needed to foster the development of a wide range of IT and non-IT business services needed to support the development of e-commerce systems and their use by business organizations, government, and consumers.
Developing a supportive policy and regulatory environment will require active dialogue between government policy makers and private sector participants involved in the IT industry. To increase private sector inputs into the policy-making process, private sector participants will need to join together and form effective IT industry associations. Representatives of the telecom industry are currently organizing a telecommunications association to lobby for changes in some of the basic telecom regulations and laws. Other segments of the IT industry in Kazakhstan could benefit from forming their own associations.
The number of internet users in Kazakhstan increased by almost 100% in 2002 against 2001, exceeding 1.28 million people. In large cities the share of people with Internet access is 33.9%. (Fig. 1)
Kazakhstan’s growing economy and its well-educated part of the population present a large potential demand for internet hardware and services. Every third adult city-dweller has PC literacy in Kazakhstan. At the same time this demand is significantly constrained by a small disposable income. Astana and Almaty, with their relatively strong economies and relatively high income levels will remain the most attractive telecommunications and internet markets.Other fast growing markets include Ust-Kamenogorsk in Kazakhstan’s east, and some settlements of the West oil-producing regions. The IT association is planning significant measures to improve internet connectivity in the regions, as part of its Kazakhstan plan of e-commerce expansion.
In 2002, there were about 300 thousand PCs connected to the Web, a number projected to grow to 500 thousand by the end of 2005. (Table)
The Internet Service Provider (ISP) market is very fragmented, with about 50 ISPs in Kazakhstan. Twenty ISPs provide internet access services in Almaty alone. Representing three of Kazakhstan’s ISPs (the National Operator “Kazakhtelecom”, Nursat and Ducat), they generate about 80% of total revenue. However, consolidation of regional operators, mergers and acquisitions are taking place. The largest ISPs are “Kazakhtelecom” ($350 million revenue). 2001 became the Kazakhtelecom’s landmark in achieving the key tasks of perspective development and realization of a number of priority investment projects that are of great national significance. Digitalization of telephone exchanges is now 34% and of the transport network is now 82%.
Commissioning of the Western FOCL became the most significant event of the year regarding the modernization and development of the telecom network. The launch of the second International Switching Center (ISC) in Astana city up-graded the quality of long-distance and international communication. To satisfy growing needs in access to world information resources the first in Central Asia Internet Data Center (IDC) was established in some cities. This Center offers its service to 50,000 users.
Average internet usage in Kazakhstan is still behind that of the EU and USA, but is increasing rapidly and is a good driver of the hardware sales. Over the last few years the country has seen a rapid growth of ISPs and users.
Also, internet visitors are more often under 25 years (39%) than in the age of “from 25 to 35” (35%) and than 35 years (26%) and above. Territorially, Kazakhstan Internet users are in Astana and Almaty. They account for 33.4% of Internet audience in Kazakhstan. Some increase of activity was registered during the last two years. The front-runners among Internet users in the regions are Shimkent, Ust-Kamenogorsk, Pavlodar, Atyrau, and Karaganda.
Office workers and experts are prevalent in the internet-user audience. Their share accounts for 30% of all internet users. The share of students approximately tripled (27.7%), making them the third largest social group with Internet access. The share of managers and businessmen is 22.8%. The regular internet users are one of the most solvent groups in Kazakhstan.
The most common way of connection to the internet (by the number of answers) is dial-up that accounts for 60.4%. The next most preferred is the allocated channel on a residential telephone line that is 15.9%. Connection through the satellite has not become widespread due to its high cost. It is used only in remote areas, 3.7%. There is a drastic rise in the transactions using TCP/IP Protocols.
In 2000, 69% of internet users in Kazakhstan were corporate and 31% were private, in 2001 53% were corporate and 47% private.
PC Supply and Production
World PC supply has dropped by about 5.1% in 2001 on year-to-year basis. But this picture has nothing to do with the Kazakhstan market. The main beneficiary of these supplies was the government sector due to National Informatization Program state budget allocations being spent.
The total number of computers in Kazakhstan exceeded 600 000 in 2001, a penetration rate of 4.0%. 4 of every 5 companies and institutions in large Kazakhstan cities use PCs.
Imports account for 12% of Kazakhstan’s personal computer market, while low cost products assembled by Kazakhstan manufacturers from foreign components met most of the demand for PCs. PC assembly accounts for 88% of hardware revenues, while peripherals, networking and larger system hardware are dominated by imports.
Locally assembled PCs dominate the Kazakhstan market, and dozens of local computer companies are estimated to control half the market. According to the IT Association the fastest growing local PC producers in the year 2002 were ALSI, GLOTUR, Imanali and LOGYCOM. Among world brands Hewlett Packard, IBM and Compaq have enjoyed the largest growth. Hewlett Packard has become international vendor #1 in the market.
Demand in the Kazakhstan PC market is extremely price sensitive. Lower cost local producers compete successfully with foreign brands in the low end of the market, and have forced importers to lower their prices. Cost-saving considerations have brought some foreign equipment manufacturers round to the idea of setting up assembly operations in Kazakhstan and thus be able to compete with local suppliers.
The business and state sectors still need more computers than residential customers and educational organizations. (Fig. 2)
Demand for High Performance Equipment.
As the Kazakhstan economy gains strength an increasing number of companies with up-to-date management are looking for advanced IT systems. Rising need for internet access, shared resources, networking and applications solutions have generated a substantial demand for computer systems and servers.
Kazakhstan’s rapidly expanding software market in 2001 was estimated at $16-20 million, and growing at an annual rate of 25%. The best sales prospects are for Data Management products, which currently account for 35% of the software sector and Enterprise Resource Planning (ERP) – 15%. There are no means for accurate evaluation of software demand due to the high level of pirate software that some industry estimates put as high as 80%.
The packaged software sector experienced a major boost during 2002, rising by 18-20%. Growing demand has been reported for basic operating systems, integrated ERP and application tools for database development and management.
IT Services Demand
Kazakhstan companies spent around $65 million on information technology services in 2002. Kazakhstan companies BIPS, ALSI, Imanali-soft, AlphaTech, ActisSystems Asia and PlusMicro are mentioned as leading local players with 10% of the market. But the maturity of this segment is pending still.
Information system development expenses made up around a quarter of all money spent on IT services. The picture of this segment is still defined by large projects that were launched by banks or petroleum enterprises. International companies’ presence on the local IT services market is still scant. Most of them still focus on the development and technical support for the local partner’s networks. The only exception is Hewlett Packard rated among the top five suppliers of IT services to customers in Kazakhstan. Cisco Systems, Samsung Electonics and LG Electonics work vigorously in Kazakhstan.
Enterprise management systems services are among the most requested IT services in Kazakhstan. A steady rise in demand for these services is forecasted for the next five years. The ERP/CRM segment has steady development in Kazakhstan due to the progress towards a clearer strategic IT vision of the management among local companies.
Consulting and outsourcing services were the most dynamically developing sector of the market during last three years and its volume is forecasted to treble by 2005.
Almaty remains the center of the programming industry followed by Astana and Karaganda. The segment is relatively small by world standards but is well positioned for future expansion. Expected Kazakhstan programming market growth is about $80 million by the year 2003 (international vendors development centers not included) with penetration rate up to 35% in the total volume of software development.
Realization of the governmental informatization program is stimulating the development of electronic commerce. Potential future business partnerships/ business opportunities were identified in the area of e-commerce. Initial discussions on launching a pilot e-procurement system for Almaty City as a way to streamline and create transparency in the procurement process are under way now. Potential partnerships among donors and the private sector were identified for business training and awareness related to internet and IT technologies.
The following are the major groups of IT end-users in Kazakhstan:
• Government agencies and institutions
• Kazakhstan exporters of raw materials and commodities.
• Kazakhstan companies, with progressive management seeking to increase operational monitoring/control efficiency (banking, telecom companies, freight industry, food processors)
• Small and medium size Kazakhstan companies, which are growing in number and becoming an economic force in the country. (Fig. 3)
Almaty, Atyrau and Astana are the most important computer markets to date. However there are heavily populated industry centers in western oil-producing regions that start to become a focusing interest of IT products and services suppliers and distributors. The longer-term opportunities for expansion in the regions under the healthy economic conditions are more than promising. (Fig. 4)
Summing up of the developments in the Kazakhstan IT market described above will bring us easily to the main trends formulation that are as follows:
• Continued economy growth spurred IT spending by industrial enterprise.
• State-financed procurement increased considerably.
• Organizational and financial support of the program “Forming and Development of National Informational infrastructure” by the Kazakhstan Government.
• A decline of PC prices resulted in a small market growth in dollar terms.
• Laptop and server markets grew faster than the desktop market.
• Distributors are expanding from their traditional markets in Almaty into Kazakhstan’s regions.
• Demand for Enterprise Management Software increased with local IT companies’ expansion deeper into the sector providing enterprise solutions not only hardware delivery.
• Internet (private and corporate) is booming.
• The level of software piracy remains extremely high.
• High dynamics of the mergers-acquisitions-reorganization process inside the Kazakhstan business community prevents the local IT market from predictable and steady growth.
Brief description of the growing Kazakhstan IT sector could cover only the main tendencies in the market development and perspectives. During the year 2002 a dozen brand name market research companies (local and foreign) devoted efforts to describe Kazakhstan’s IT potential and provide to the clientele a comprehensive description of the status quo. But as far as it is publicly known none of these reports had a generally negative evaluation of the Kazakhstan IT market perspective.
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