Executive summary
Demand, Supply and
the Information and Communication
Technologies’ Cluster in the Basque Country
I3B - IbermáticaAlejandro Cuesta de las Mozos / Beñat Albisu Barandiarán
SerieCompetitividad
DeustoUniversity Press
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Introduction
This is a summary of the results of several reports on the Information and CommunicationTechnologies (ICT) in the Autonomous Region of the Basque Country (CAPV). Initially, to studyICT supply and demand we analyzed the market, its importance and evolution in recent years in theCAPV, showing qualitative aspects of other sectors’ attitudes to them and conducting a comparati-ve analysis with other countries considered to be benchmarks.
A second study looked at the Information and Communication Technology cluster that unitesthe value chain of sectors and activities operating operate within this field In the CAPV, togetherwith related institutions. The methodology designed by M. E. Porter and his collaborators from theInstitute for Strategy and Competitiveness was essentially used for the analysis.
We made use of a number of statistical sources, reports and studies for the present work. Themost important source of economic information was the Basque Statistics Office – Eustat. As Eus-tat does not gather information from the public administration and the financial sector, both keysectors for ICT demand, we compiled data on an individual basis from companies and bodies inthese sectors in the CAPV.
The two studies required a major effort in gathering information hitherto unavailable in a struc-tured form. We are confident that they will be of use in subsequent analyses providing an objecti-ve overview of the ICT market in the Autonomous Region of the Basque Country and may also beused to devise business strategies and public policies. The wealth of information they contain makethem particularly useful for subsequent studies.
ICT in the Basque Country: an overview of supply and demand
• Definition of ICT sectors
There is no consensus about which sectors are actually involved in ICT supply. A recent reportissued by the International Labour Organization (ILO) comments:
Given the great diversity of products and services associated with the electrical andelectronic appliances and the presence of electronic and electrical equipment in a largenumber of products and services, any definition of the industries that produce these pro-ducts will, to a certain extent, be a subjective one.1
Executive summary
1 The manufacture of electronic components for information technology industries: The change in needs in termsof labour in a globalized economy (Geneva, 2007).
Demand, Supply and the Information and Communication Technologies’ Cluster in the Basque Country
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All sources consulted agreed that, for ICT service companies, the following categories of theCNAE National Consensus of Economic Activities - CNAE 64.2 and the complete CNAE 72 -should be taken into consideration. However, there is no consensus about IT manufacturers. Allsources include the CNAE 30, 32.1 and 32.2 in this group, whereas the CNAE 31.3: Manufactu-re of electrical insulation wires and cables; 32.3: Manufacture of image and sound reception,recording and reproduction devices; 33.2: Manufacture of measuring, verification and controldevices, etc.; and 33.3: Manufacture of industrial process control equipment, are included bysome bodies and not by others. As Table 1 shows, the following sources were consulted: The Bas-que telecommunications cluster, GAIA, a report published in 2006 by the BBVA Foundationtitled “Productivity and internationalization: Spanish growth in view of new structural changes”,e-business match studies, the OECD; and the United Nations’ Uniform International IndustrialClassification (UIIC).
Table 1: The IT manufacturing industry, according to differentstudies and bodies
CNAE
Bodies and studies 30 31.3 32.1 32.2 32.3 33.2 33.3
GAIA X X X X X XIBBVA Foundation report X X X X X X Xe-business match X X XOECD X X X X X X XUIIC X X X X X
marked with an “x” where the CNAE category is considered to be part of the ICT industry
In this report, we decided to study all activities in this considered by sources within this cate-gory. To begin with, they were studied on an individual basis, followed by a global analysis of themall.
• Comparative analysis
In the Basque Country, the ICT sectors included in the comparative analysis (see table 2) repre-sented 1.6% of total gross value added - less than half of the 3.8% they account for in Spain and4.7% in the European Union, and some way off the 5.7% they account for in Japan and 6.4% in theUnited States and the United Kingdom. Although electronic materials in the CAPV are moreimportant than in Spain as a whole, the negative differences in other activities in comparison toother countries in the analysis are very pronounced. The ICT sector accounts for 1.7% of all per-sonnel employed in the CAPV – some way below the figure of 2.4% in Spain and the 3 and 4 percent in the other countries in the analysis. The computer industry performs a little better, accoun-
2 The OECD definition includes four additional activities as ICT services: CNAE 5143: Wholesale trade of radioand TV electrical appliances; CNAE 5164: Wholesale trade of office machines and equipment; CNAE 5165: Who-lesale trade of other machinery for industry, commerce and shipping; and CNAE 7133: Rental of office machinesand equipment, including computers. The impossibility of obtaining valid information involving a breakdown of thefour CNAE digits meant the four activities mentioned were excluded from this report.
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ting for 1.2% of the total number of employees in the Autonomous Region of the Basque Country,although still behind Spain as a whole and Germany. The region is however ahead of Spain and theUnited Kingdom in terms of electronic materials.
Table 2: Gross Value Added (GVA) according to country and sector of activity,in € millions and in percentages based on total number of sectors, 2004
Millions of euros
Sector of activity CAPV Spain Germany France United Kingdom USA Japan EU25
30: Computer equipment 7 504 4,080 544 2,967 25,518 15,859 13,02032: Electronic material 127 1,060 12,260 5,100 4,722 65,806 60,640 50,42064: Telecommunications 121 16,829 44,690 31,903 43,157 231,749 45,536 228,84572: Computer activities 518 10,251 30,140 36,469 43,991 179,118 55,949 165,777
TOTAL ICT ANALYZED 773 28,644 91,170 74,016 94,836 502,191 177,984 458,062
Total sectors 48,054 753,313 1,994,210 1,489,308 1,501,099 7,735,179 3,117,331 9,659,896
Percentages
Sector of activity CAPV Spain Germany France United Kingdom USA Japan EU25
30: Computer equipment 0.01 0.07 0.20 0.04 0.20 0.33 0.51 0.1332: Electronic material 0.26 0.14 0.61 0.34 0.31 0.85 1.95 0.5264: Telecommunications 0.25 2.23 2.24 2.14 2.87 3.00 1.46 2.3772: Computer activities 1.08 1.36 1.51 2.45 2.93 2.32 1.79 1.72
TOTAL ICT ANALYZED 1.61 3.80 4.57 4.97 6.32 6.49 5.71 4.74
Sources: Eustat and EU-Klems databases.
• ICT demand: Purchases, investment and expenditure
IT demand in the Basque Country in 2005 in the sectors analyzed in this study (see table 3)amounted to €578 million. Public Administration was the greatest purchaser, accounting for 30.8%of acquisitions made during that year; industry was second with 21.5%, followed by the businessservices sector (15.8%). While in Spain the financial sector ranked first with 32.2% of total purcha-ses, it has lost ground in the CAPV in recent years, mainly because of major increases in ICT bud-gets in Public Administration. The public sector is the most ICT-intensive in the region, accountingfor 30.8% of purchases as opposed to 6.7% of its Gross Value Added in relation to the total for thesectors analyzed. In the financial sector, the figure over total IT purchases (14%) exceeded the per-centage represented by its GVA by five points. At the other end of the scale were industry and thebuilding trade, which, accounting for 41.3% and 12% of total GVA analyzed, represented 21.5%and 2.9% in relation to IT purchases.
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Table3: Comparison of expenditure and investment in IT in the different sectors of theCAPV. 2005 or subsequent years. Data in €000s
CNAEs GVA % total Investment % total Expendi- % total Purchases % totalGVA in IT investment ture expenditure on IT purchases
in IT on IT on IT on IT
Industry (10-41) 15,701,676 41.37 99,720 29.06 24,729 10,51 124,449 21.52 Construction (45) 4,556,481 12.01 11,666 3.40 5,223 2.22 16,889 2.92Commerce (50-52) 3,883,373 10.23 61,430 17.90 10,510 4.47 71,940 12.44Hotel and catering (55) 1,810,896 4.77 2,594 0.76 1,881 0.80 4,475 0.77Transpiort-related (63) 608,500 1.60 3,612 1.05 3,052 1.30 6,664 1.15Financial brokerage
(65)* 3,359,680 8.85 42,499 12.39 38,294 16.28 80,793 13.97Auxiliar y financial
services (67) 243,339 0.64 1,772 0.52 1,489 0.63 3,261 0.56Servicies provided
to companies (70-74) 5,042,798 13.29 56,467 16.46 34,773 14,78 91,240 15.77
Public administration (75) 2,535,547 6.68 63,124 18.40 115,080 48,91 178,205 30.81
Drainage (90) 211,922 0.56 228 0.07 271 0.12 499 0.09
Total demand 37,954,212 100 343,112 100 235,302 100 578,415 100
Source: Eustat.
Public administration accounted for 50% of total IT expenditure in 2005; the financial sectorranked second with 16.3% and business service providers third with 14.8%. Industry accounted for10.5% of total IT expenditure. Of the 16,204 million spent on external services in 2005, 1.45% wasset aside for information technologies. The financial sector and Public Administration allocatedmost to IT, with 13.2% and 4.8% respectively; most other sectors do not usually exceed 1%.
Generally speaking, investment in IT between 1995 and 2001 increased in industry and in othersectors, dropping in subsequent years before starting to grow again after 2004. The concentrationof investment by companies between 1998 and 2001 to adapt to the 2000 effect and the introduc-tion of the euro was the main cause of the change in the trend at the beginning of the new millen-nium. Growth was greatest in public administration, with IT investment increasing between 2000and 2006 by 76.13%, the most prominent investor within this sector being the Basque Government,which doubled expenditure during the period. More budget resources were allocated to IT as thesector gradually introduced digital.
The trend towards outsourcing, increases in application maintenance and the move towardsrenting rather than buying computer equipment meant that expenditure grew to a greater extent thaninvestment in the main IT-intensive sectors, and even led to a drop in the latter in some cases. Unli-ke expenditure on information technologies, expenditure on communications remained stable bet-ween 2000 and 2006, except in the case of the Basque Government, which substantially increasedallocations in this budget area.
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• ICT supply in the CAPV
ICT supply sectors enjoyed major growth in sales and employment between 1996 and 2005there was, generally speaking, a major level of growth in sales and employment. During this period,activity in most sectors slowed up between 2001 and 2002, with a drop in sales and lower levels ofemployment. Wage cuts were also a regular feature at this time. The recession originated from thefall off in demand from both the CAPV and other markets.
Table 4: ICT sector performance for 2005 or subsequent years. Data in €000s
CNAEs Net % total No. of % total No. of % totalsales ICT employees employed establish- ICT
sales in ICTs ments establishments
Computer equipment (30) 53,335 2.1 264 1.3 48 2.7 Electrical wires and cables
(31.3) 114,584 4.5 572 2.8 28 1.6Valves, tubes and electronic
components (32.1) 263,317 10.3 2,943 14.4 88 4.9Radio and TV broadcasters
(32.2.) 69,974 2.7 493 2.4 31 1.7Sound and image reception,
reproduction and recording devices (32.3) 36,772 1.4 231 1.1 20 1.1
Measuring and verification instruments, etc. (33.2) 334,984 13.1 2,565 12.5 80 4.5
Process control equipment (33.3) 191,479 7.5 1,295 6.3 39 2.2
Telecommunications (64.2) 345,189 13.5 770 3.8 33 1.9Computer equipment
consultancy services (72.1) 28,933 1.1 552 2.7 91 5.1Computer application
consultancy services (72.2) 645,233 25.2 7,866 38.4 825 46.3Data processes (72.3) 66,477 2.6 958 4.7 153 8.6Data bases (72.4) 43,808 1.7 601 2.9 73 4.1Computer maintenance (72.5) 170,321 6.7 803 3.9 151 8.5Other computer activities
(72.6) 189,944 7.4 590 2.9 122 6.9
TOTAL 2,554.350 100 20,503 100 1,782 100
Sources: Eustat and SABI.
In 1998 and 1999, companies were compelled to make major investments to adapt theirsystems to the year 2000 so as to avoid any possible effects associated with the change of millen-nium. At the same time, most of them also adapted their system to the euro, which had to be avai-lable as of 1st January 2002. Both aspects compelled companies to modify or, in many cases, repla-ce the computer systems they already had, involving heavy investment. The increase in demand forICT gave rise to a shortage of professionals and, consequently, to wage increases. By mid-2001,companies required ICT with new systems and with limited short- and mid-term investment. Com-pany managers were increasingly dissatisfied with these technologies after having been obliged toinvest in asset renewals with no clear returns on the money spent. Finally, there was excess supply
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as a result of the concentrated demand during the previous period, and high wage costs from thesituation in the sector requiring ICT. The general worldwide crisis came when the technology bub-ble burst, and dotcom companies collapsed, which had been set up and were flourishing at the endof the previous decade. This led to lower sales in the ICT sector as well as wage cuts. Althoughgrowth in demand subsequently sparked a recovery, in 2005 some activities were still recordingfigures lower than the ones clocked up in 1999 and 2001.
Total net sales in Information and Communications Technologies in 2005 amounted to €2,554million (see table 4). Three of the fourteen subsectors analyzed (computer application consultancyservices, 25.2 %, telecommunications, at 13.5%, and valves, tubes and electronic components, with10.3%) accounted for practically 50% of total ICT sales and nearly 57% of ICT personnel. Com-puter application consultancy services accounted for 38.4% of all ICT employees in the BasqueCountry and 46% in workplaces. A group of activities (computer equipment, radios and televisions,sound and image reception, reproduction and recording devices, computer equipment consultancyservices, data processing and databases) did not exceed €100 million in sales out of the total num-ber of companies operating in these activities.
In 2005, the ICT sector contributed approximately 2% to the Basque regional GDP, employing20,503 professionals, around 2.2% of the total workforce. The companies involved are generallysmaller, with fewer than 50 employees, and in some cases most have fewer than 10 employees.Only two of the companies in the sector - Euskaltel and Ibermática – registered net sales of morethan €100 million.
After 2001, profits at companies in the ICT sector filing their accounts and which we analyzedvia SABI declined substantially; many of them actually ended with negative balances, mainly in the2002 financial year. Furthermore, 2003 saw a reduction in the number of employees and net salesfigures. Business profits and sales began to recover after 2004, although many companies were stillreturning figures lower than the ones registered in 2001.
GVA generated and employment in ICT supply are largely unimportant in the BasqueCountry, with 7 subsectors out of 14 analyzed being virtually insignificant in terms of totalturnover (less than €100 million) and size (only two exceed €100 million, one of them operatingexclusively on a local level).
The Information and Communication Technology cluster in the Basque Country
Our analysis focused on the activities included in Gaia. GAIA is the Association of Electronicand Information Technology Industries of the Basque Country, a non-profit-making entity of a pri-vate and professional nature, set up in 1983 and currently comprising 170 companies offering pro-ducts and services in the fields of electronics, IT and telecommunications.
• Value chain and key players in the cluster
As Fig. 1 shows, the value chain of the ICT cluster begins with the manufacture of electroniccomponents, the essential basis for the production of electronic equipment, computer hardware andtelecommunications equipment. This equipment is either marketed directly or introduced by com-panies involved in systems integration. Included in the IT sector, software manufacturers make pro-ducts that are distributed and introduced either directly or via partners. Service companies close thevalue chain by offering consultancy, engineering and systems integration in electronics, IT andcommunications, with telecommunications operators also acting in the latter area.
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Figure 1: Key players in the Basque ICT Cluster
Source: Compiled by the authors.
The report reviews the main features and importance of key players in the ICT cluster in theBasque Country. An analysis of the business scenario is followed by a report of the situation regar-ding the regional and local authorities.
Table 5 provides a summary of the main conclusions of a SWOT analysis of the Basque ICTcluster.
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Strengths include the Basque authorities’ firm commitment (the Basque Government in parti-cular) to being the driving force behind the Information Society. Major budgets are being allocatedto ICT and innovation, and this is helping to generate clear opportunities for Basque companies inthe cluster. The existence of the knowledge required to develop the ICT cluster is another majorstrong point; the network of centres specializing in these technologies and the coverage providedby a complete range of training options and quality ensure the supply of professionals, who are themain raw material in this cluster. Some cluster member companies also have interests in other mar-kets, which, while still being somewhat limited, is surely a good starting point for internationaliza-tion.
Company size is one of the main weaknesses of the ICT cluster. Most of the companies con-cerned are very small, with fewer than 25 employees and there are no large companies in any of thesectors that might act as leaders and drive the rest forward; only two companies have turnover abo-ve €100 million. Another problem is the limited relevance and tradition in component manufactu-re and related basic research. Together with current labour costs in the manufacturing industry, thismakes competitiveness in ICT manufacturing activities difficult. Moreover, the lack of telematicinfrastructures and the cost of installing them are slowing down the development of the Informa-tion Society.
Table 5: SWOT analysis of Basque Telecommunications Cluster
WEAKNESSES
Companies too small.
No leading companies to stimulate or lead sec-tor as a whole forward.
Limited B2B cooperation involving clustermembers.
High costs of unskilled labour.
Limited tradition in basic research and in thecomponents industry.
Poor infrastructures and insufficient demand.
THREATS
Competition in computer services fromcountries with low labour costs and skilledprofessionals.
The industrialization of software productionprocesses.
The non-existence of entry barriers.
Companies taken over by multinationals andrelocated.
Possible brain drain of skilled professionals toother countries.
STRENGTHS
Basque authorities committed to promoting theInformation Society.
Major network of technology centres and R+Dunits.
Offer of quality training available at all levels:vocational, university and post-graduate trai-ning.
High sales levels outside the CAPV.
OPPORTUNITIES
ICT already successfully introduced in Basquebusiness.
The maturity of the information society.
Budgets and programmes for the promotion ofinnovation and ICT in Basque Public Adminis-tration.
Low labour costs of ICT specialists.
No shortage of ICT researchers or graduates.
Source: Compiled by the authors.
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Apart from the demand-related opportunity generated by the ICT budgets allocated by regio-nal and local authorities, Basque business needs to invest in these technologies if they are to inno-vate in business and improve their competitive levels. Furthermore, the low labour costs of ICT spe-cialists, and the sheer number of them accessing the job market every year, may provide an oppor-tunity for services that require closer relocation, meaning that developing countries may notnecessarily be the best viable alternative.
Finally, potential and current external threats essentially involve relocation. The evolution ofsoftware production from a cottage industry favours its productification which means it does notnecessarily have to be produced close to the customer market and production may be transferred toother countries with lower labour costs and ICT specialists, such as India. The lack of entry barriersmay favour such courses of actions, as well as the purchase of the larger companies (given theirrelatively small scale) by multinationals. A further problem is the potential brain drain of skilledprofessionals, attracted by better wages and more possibilities for professional development inother countries.
So the ICT cluster would seem to be in a precarious situation as regards company size,the scale of its activities and its share of the Basque economy. If it this cluster is to exist assuch in the Basque Country and play a leading role in the development and construction ofthe Information Society, measures are required to strengthen it, consolidate the strengths thathave been identified, eliminate or correct the weaknesses, overcome threats and encourage compa-nies to exploit existing opportunities.
SerieCompetitividad
