Spain: Tech Slump? What Tech Slump?

The country is turning into the hottest IT market in Europe

To a tech industry hungry for growth, Spain is the new El Dorado. Consider PC City, a unit of British retailer Dixons Group PLC, which tiptoed into the country three years ago, buying up a four-store operation. Now, the chain boasts a total of nine stores -- selling everything from scanners to laptops to CD burners -- and plans to add six more by yearend. Its 2002 sales nearly doubled from the year before, to $30 million. "It's not just the massive growth now," says sales director Esther Gálvez. "It's about even more growth in the future."

Indeed, Spain now ranks as Western Europe's fastest-growing technology market. PC sales surged 29% in this year's first quarter, vs. just 6% for Europe as a whole, says researcher IDC. Internet usage also is booming: While just 16% of Spain's 41 million people were online in 2000, the figure reached 26% by the end of last year, according to Forrester Research Inc. If growth continues at its current pace, Spain will soon close the gap with countries such as France and Italy, where one-third of the population is now online.

Just ask Carlos Barrabés. The Huesca retailer qualifies as one of Spain's e-commerce pioneers, having taken his mountain-climbing equipment store online in 1995. For years, most of his Internet business was from customers in the U.S., Britain, and Scandinavia. But sales to Spaniards through have doubled since last October. To accommodate the growing traffic, the 33-year-old entrepreneur has plowed $140,000 into new servers and beefed-up Net connections. "The volumes of business that we had always dreamed of are finally becoming possible," says Barrabés.

The volumes are also showing up for tech multinationals. Giant Hewlett-Packard Co., Spain's leading PC seller with nearly one-fifth of the market, saw first-quarter sales climb 35%, to 99,000 units, according to IDC. "The opportunities we see in Spain are really huge," says Santiago Cortés, managing director for HP Spain. The same goes for German software giant SAP, which boosted revenues 8% in Spain in 2002, more than double what it managed in the rest of Europe.

What's driving the Spanish surge? Thanks to massive investments by telecom and cable providers, the Internet is no longer the exclusive domain of the nation's large companies and urban elite. Working-class and rural Spaniards are snapping up PCs, while small businesses are buying servers and hardware as they venture online for the first time. One million households now have broadband connections, compared with 882,000 in Britain, says London-base researcher Ovum Ltd. These trends have given rise to an IT market expected to top $11.4 billion this year, says IDC. "Now that the technology is available, you've got all this pent-up demand finally moving into the marketplace," says Paul Jackson, senior analyst in the consumer-markets practice at Forrester.

The government of Prime Minister José María Aznar is also doing its part. For starters, it is Spain's biggest IT customer, with a $1.6 billion budget for 2003. To stoke demand, the government has introduced tax breaks for small and midsize businesses that upgrade to high-speed online connections. It has also earmarked $392 million this year for programs to extend broadband service to 1,800 rural areas without cable or digital subscriber line service and to bring computers and Net connections to schools and public libraries.

The question now is whether Spain can harness its growing prowess to develop a homegrown info-tech sector that exports products and services around the world. So far, signs are mixed. Laptop maker Airis, based in Guadalajara, Spain, now sells its wares in 11 European and South American countries and expects sales this year to climb 50%, to $700 million. But Madrid's Indra Sistemas is more the norm. Spain's largest IT services group took in a respectable $925 million in revenues last year, but just 30% came from outside Spain, primarily Latin America. That's a far cry from globe-straddling rivals such as Paris-based Thales (a part-owner of Indra), whose 2002 sales were 77% outside France.

Even giants such as former telecom monopoly Telefónica have stumbled in forays to non-Latin countries. The company has pulled out of Austria, Italy, and Switzerland, and last year canceled a joint venture with Finland's Sonera Corp. to build a 3G network in Germany, resulting in a $4.87 billion write-down in July, 2002. Telefónica's Internet affiliate, Terra Lycos, has also seen its share of troubles: Although it's the top Net access provider in many Latin countries and a leading portal across Europe, it continues to lose money.

Still, all this tech investment is definitely having an impact at home. The Spanish central bank recently affirmed its forecasts of 2% growth in gross domestic product this year, just as Germany and the Netherlands were declaring they had officially slipped into recession. The boom also could help Spain's perennial battle against unemployment, which has hovered at around 11% for the past two years. Companies in the IT sector, which employ some 133,000 people, say they can't train workers fast enough.

Buyers like Alejandro Mercader, a Madrid travel agent, have money in their pockets and are ready to spend. Browsing for laptops at a store in early May, Mercader said he was ready to shell out as much as $3,500 to replace his current PC. "The marketplace is changing, and I have to be able to change with it." Such sentiments are buenas noticias for Europe's troubled tech sector.

By Paulo Prada in Madrid, with Andy Reinhardt in Paris

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