Online Extra: Central Europe: Tech Hot Spot

The industry's giants are increasingly drawn to the region for both the growth opportunities and the local talent

It's no wonder that multinational technology companies are drooling over Central and Eastern Europe. Home to more than 100 million people, the swath of countries reaching from the Baltics to the Balkans enjoys booming economic growth, a highly educated population, and a palpable appetite to catch up with the West.

For sellers of everything from PCs and consumer electronics to networking equipment and enterprise software, Central and Eastern Europe is one of the hottest markets on the planet. Sales of info-tech hardware, software, and services across the region are set to top $15 billion this year and should hit $21 billion by 2009, predicts researcher IDC. That equates to 10% annual growth -- about twice the rate in Western Europe.

"We're seeing double-digit growth there, comparable to China," says Alfonso Di Ianni, who heads the Central and Eastern European unit of database and applications giant Oracle (ORCL ).


  Of course, sales in the former Soviet satellites are still dwarfed by Western Europe and North America. But tech outfits hungry for revenue don't want to pass up any opportunities. Consumers in the region will likely gobble up 82 million mobile phones and 14 million PCs this year, forecasts market researcher Gartner.

And every zloty or forint spent on hardware typically translates into more than twice that amount in local sales of software and services. That's why multinationals such as Cisco Systems (CSCO ), Nokia (NOK ), and SAP (SAP ) are beefing up their operations in the region to grab surging demand.

They're also laying on a growing number of engineering and service jobs in Central and Eastern Europe to take advantage of wages roughly half typical levels in Western Europe. Some of these new employees provide support to nearby customers, while others develop or customize products for markets in the region. But the majority are there to serve employees and clients spread all over the world.

"We find excellent language and technical skills here," says Craig Smith, manager of client-services delivery for IBM (IBM ), which runs a 300-person business-process outsourcing center in Krakow, Poland, along with other facilities in Budapest and Bratislava.


  Indeed, multinationals have put their footprints all over the region. Electronics giant Philips (PHG ) is developing a 500-person facility in Lodz, Poland, to handle its European finance activities. Tech-services company Accenture (ACN ) has major support centers in Prague and Bratislava. Rival Siemens Business Services (SI ) has gobbled up local IT specialists in Romania, Slovakia, and Serbia to flesh out its presence.

Even new-age Internet outfits are setting up shop. Job-finding site (MNST ) just opened a customer-support center in Krakow, and online marketplace eBay (EBAY ) is rolling out a new Polish Web site to take advantage of booming demand for online shopping in the region's largest country.

One of the most prominent tech employers in Central Europe is French telecom-equipment maker Alcatel (ALA ), which first ventured into Romania in 1991, two years after the fall of the Berlin Wall. It now operates a major research and development center in Timisoara that develops optical products, broadband gear, and communication systems for railroads. Alcatel's long presence in the market has helped it nab 100% share of the mobile-network market in Romania, as well as a growing portfolio of big contracts to rewire railway-control networks throughout the region.


  Alcatel's experience in Romania is typical of Western outfits that moved early to tap into Soviet-era technical talent. Dan Bedros, the colorful executive who runs Alcatel's Romanian operations, worked previously as the manager of an Eastern Bloc computer factory in Timisoara. He jumped into telecom when Alcatel took over the factory 15 years ago.

Since then, it has churned out phone equipment that helped triple fixed-line penetration in Romania to 30% and mobile penetration to more than 55%. Of the $1.75 billion spent upgrading Romania's telecom system over the last decade, he notes, two-thirds of the value accrued to Alcatel's Paris headquarters and one-third stayed in Romania in the form of local jobs.

Alcatel is using its base in Romania to target telecom growth in countries from Estonia to Kosovo. These aren't bare-bones networks: Alcatel is already rolling out souped-up wireless networking in Romania and will soon begin deploying third-generation (3G) wireless. The Romanian facility also has nabbed work all over Central Europe, upgrading the communication systems for antiquated railroads. Alcatel has won contracts in Poland, Romania, Latvia, Hungary, and Bosnia -- all part of a regional plan to digitize railroad networks in compliance with European Union regulations.

"These are huge software projects," says Bedros. "This is the best place in the world to invest because we don't have very good infrastructure."


  That may be true for railroads, but when it comes to human talent, Central and Eastern Europe offer Western companies huge bang for their buck. That's why Oracle decided last year to open its largest European call-center operation in downtown Bucharest. The company has been on the ground in Romania since 1992, when it acquired a tiny, local database distributor. Since then, it has developed a network of more than 100 local partners and thousands of certified Oracle technicians who install and support the company's software -- a business pegged at about $400 million annually.

From there, the decision to build three new support operations was a natural, says Stefan Cojanu, the country manager for Oracle Romania. The company taps into an ample supply of multilingual workers, who telemarket training programs to distributors and partners and take inbound calls from Oracle customers. Oracle's Bucharest call center already employs more than 300 people -- many of them women enjoying better job opportunities than they would likely face elsewhere.

Offering good local jobs also helps keep talent from fleeing to other countries. "We are replacing brain drain with brain gain," says Cojanu.


  It's a similar situation for IBM in Krakow. The computing and services giant has operated there since 1996 but is now accelerating hiring as outsourcing takes off. IBM's Krakow center, based in a mirrored-glass skyscraper on the edge of town, employs 300 people who do accounting and financial operations for corporate clients from 19 countries around Europe. IBM declines to comment on costs, but industry averages suggest that Krakow's lower wages let IBM serve clients for about one-third less than it would cost to do so from Western Europe.

Krakow's plentiful supply of university grads -- and its reputation as a hot spot for music and nightlife -- have now pushed IBM to go further. In October, it opened a new software R&D center there, its first in Central and Eastern Europe, where engineers will develop security and systems-management tools. Economic incentives from the Polish government will help IBM build the facility to 200 employees over the next two years.

But Big Blue's rationale extends well beyond economics. "This is one of the fastest-growing markets for us anywhere in the world, and we need to enhance our local presence," says spokesman Jonathan Batty.


  Such considerations underscore the most important aspect of setting up shop abroad, whether by a startup or a multinational, and whether in Eastern Europe or elsewhere. "You have to make the decision to invest based on sound business principles, not just government incentives or current labor costs," says Oracle manager Di Ianni. Low-cost workers are a factor, but not enough. "If that's all you're looking for, you'll have to keep moving constantly to cheaper places," he says.

In the case of Central and Eastern Europe, surging local markets and top-notch talent are drawing multinationals. Chances look good that they'll stick around for the duration.

By Andy Reinhardt in Paris, with Patricia Kranz in Prague

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