Lithuania as a Digital Challenger How can digital economy become - PowerPoint PPT Presentation

Lithuania as a Digital Challenger How can digital economy become the new growth engine for the country and the CEE region? Report insights presentation – perspective on Lithuania March 12, 2019

McKinsey client service McKinsey Offices Knowledge experts and support services Tallin We have the biggest footprint in the region The largest and most Riga experienced strategy consulting firm with extensive local footprint Vilnius McKinsey & Over 1800 people in McKinsey Warsaw Poznań & Company in the region Company has a Kyiv Wrocław strong presence 9 local offices with over 270 Prague across the entire CEE consultants, coverage of entire CEE region Ljubljana Budapest Bucharest Recognized and trusted partner 272 Zagreb in public and social space Belgrade Sofia consultants Our people have work experience from projects in CE, but also other regions; covering all relevant sectors McKinsey & Company

10 Digital Challengers in Central Europe Our research into the potential of the digital economy in Central and Eastern Europe resulted in a publication of a pan-regional report and 10 country deep-dives McKinsey & Company

Regional total population vs country Digital Frontrunners average, 2017, millions EU Big 5 Digital Challengers Digital Frontrunners 62 Lithuania 7 (avg.) 55 (avg.) 323 GDP per capita growth, Looking at 1996-2017, % Europe from an EU Big 5 economic perspective, we 3 Lithuania 136 114 can distinguish 58 27 three regions Digital Challengers 101 10 (avg.) McKinsey & Company 4

Production Productivity Labor Capital (GDP) A L β K α Productivity GDP per hour Hours worked per Capital stock Capital expenditures Unemployment, worked, 2017, EUR 1 year per employee, per employee, for fixed assets, 2017, % 2017 EUR mln 2 , 2016 average growth Lithuania in %, 2012-16 cannot count Northern EU on traditional 64 6.1 1573 23 1.1 Digital engines of Frontrunners 3 growth any more and should look 32 7.1 1844 5 3.3 Lithuania for the next growth lever Productivity lags behind Lithuania has limited work capacity reserves – Economy in Lithuania is under- Digital Frontrunners a relatively low unemployment rate, with capitalized and the gap is closing slowly working hours above EU average 1 EUR current prices and purchasing power parities in current prices 2 Net assets per employee, at prices of 2010 3 Belgium, Denmark, Estonia, Finland, the Netherlands, Ireland, Luxembourg, Norway, Sweden SOURCE: Eurostat; OECD McKinsey & Company 5

Digital CEE Digital Frontrunners – Lithuania Challengers EU Big 5 2 Sweden example Share of digital 5.1 6.5 6.9 9.0 Lithuania can economy 1 build on its % GDP, 2016 strong digital economy growth Growth of digital 7.2 6.2 3.1 9.9 dynamic to catch economy up with Digital %, 2012-16 Frontrunners Growth of non-digital economy 2.6 2.6 1.2 2.2 %, 2012-16 1 Digital economy is calculated as sum of sectors: ICT, e-commerce and consumer spending on digital equipment (e.g., computers, smartphones, smartwatches) 2 Spain, France, Germany, UK, Italy SOURCE: Eurostat; Local institutes of statistics; McKinsey Global Institute McKinsey & Company 6

2025 Digital economy growth potential for the CEE Digital Challengers & Lithuania in the aspirational scenario EUR bn 276 The digital economy in 16% GDP 2025 can bring +1 percentage point of GDP growth each year up to 200 billion EUR in 2016 +200 GDP in CEE 10.8 76 CEE Digital and 9 billion in Challengers Lithuania, 6% GDP 19% GDP +1.5 percentage point of GDP adding up to growth each year 1.5 p.p. to GDP +8.8 2.0 growth per Lithuania year Capturing digitization potential in business and public sector 1 5% GDP Acceleration of e-commerce 1 Productivity growth captured by increase of traditional ICT usage (software, hardware, telecommunications) to the level of Sweden – representation of Digital Frontrunners SOURCE: Eurostat; Local statistical offices; IHS; McKinsey Global Institute McKinsey & Company 7

Lithuania Digital Challengers Sweden as a digital frontrunner benchmark Digitization level of selected sectors Low: <~3% Average 1 : 3-10% High: >10% Finance and Lithuania’s insurance digital potential Manufacturing can be Professional and achieved business services by addressing Energy, gaps in the Utilities digitization Wholesale trade level of private and retail trade and public Transportation sectors and warehousing Government and other services 1 Average level of all sectors (excluding the most advanced ICT sector and finance) SOURCE: Eurostat; Local institutes of statistics, McKinsey Global Institute McKinsey & Company 8

Good overall quality of the primary and secondary education systems (mathematics, reading and science literacy PISA 1 average of 475, slightly behind Digital Frontrunners’ score of 505) A large pool of graduates in scientific and technical faculties (STEM 2 ) Over 245 graduates per 100.000 inhabitants per year, 7th place in the EU, better than Four strengths Germany or Sweden supporting Lithuania’s Digital Challenger Well developed digital infrastructure Approx. 98% of the population with 4G access, at the level of Digital Frontrunners status A favorable structure of economic growth – Based on the competitiveness of work, openness to the development of new sectors and the implementation of ambitious goals in the area of digitization 1 Program for International Student Assessment (PISA) 2 STEM – science, technology, engineering, and mathematics SOURCE: Eurostat, OECD McKinsey & Company 9

Number of STEM graduates per 100.000 inhabitants, 2016 303 296 245 244 Lithuania exhibits a 226 221 relatively bigger 206 STEM graduate talent pool compared to 143 Digital Frontrunners – although with room for improvement in terms of the share of ICT graduates in the Digital Digital Frontrunners Challengers student population Average 1 Average Information and Communication 2.0 4.5 3.0 3.6 1.0 3.9 3.7 3.6 technology graduates, % of all graduates 1 Digital Frontrunners: Belgium, Denmark, Estonia, Finland, Holland (data for 2015 assumed), Ireland, Norway, Luxemburg, Sweden SOURCE: Eurostat, Unesco Institute for Statistics McKinsey & Company 10

Gap to Digital Frontrunners Percentage of populated areas coverage by 4G – measured as the average coverage of telecom, % of the country -0.3% 98 98 87 Lithuania Household covered by the standard fixed broadband (availability) stands out in % of the households terms of -1.8% 98 96 94 access to ultrafast broadband in Share of ultra fast broadband subscriptions >= 100Mbps comparison to % of the households Digital +4.2% 27 26 20 Challengers countries and Digital Price index of broadband price (synthetic score) Frontrunners 94 87 83 +8.8% Avg. Digital Challengers Avg. Digital Frontrunners SOURCE: DESI 2018, World Economic Forum McKinsey & Company 11

Development of digital and soft skills among the general population However additional work needs to be done The adoption of digital tools in public and private sectors in three major areas Support innovation and entrepreneurship developments and further ease of running a digital business McKinsey & Company 12

Citizens with advanced digital skills 1 by age groups, North EU 2 Lithuania vs. Northern Europe 2 Lithuania % 70 Across all age 6% groups in 60 Lithuania, the 10% percentage of 50 people with 22% advanced digital 40 skills is below 30 Northern 53% European 20 42% benchmarks 10 16-24 25-34 34-44 45-54 55-64 1 Advanced digital skills - analysis and data collection using digital tools, the use of online tools such as banking or e-commerce, use of online communication 2 Belgium, Denmark, Estonia, Finland, the Netherlands, Ireland, Luxembourg, Norway, Sweden SOURCE: Eurostat, McKinsey & Company analysis McKinsey & Company 13

Participation rate in education and training in the last 12 months % of 25-64 years old , 2016 Gap to Digital Frontrunners Participation 54 rate in education and 36 training and 28 -48% ICT skills development among enterprises’ Enterprises that provided training to develop/upgrade ICT skills personnel in of their personnel % of enterprises, 2017 Lithuania is 29 lower than in -62% 15 11 Digital Frontrunners Avg. Digital Challengers Avg. Digital Frontrunners SOURCE: Eurostat, World Economic Forum McKinsey & Company 14

Selected digital tools % of enterprises using the tool, 2016 The private Cloud Paying to sector in Analyzing computing Selling advertise big data services online online Lithuania is less advanced in the Lithuania 12 16 22 32 use of digital Digital SME 9 13 14 24 tools than the Challengers Digital countries of 13 35 21 32 Frontrunners 1 Northern Europe despite their Lithuania 20 34 29 38 performance Digital above Digital Large 22 31 31 34 Challengers Challengers Digital 37 63 43 43 averages Frontrunners 1 1 Belgium, Denmark, Estonia, Finland, Netherlands, Ireland, Luxembourg, Norway, Sweden SOURCE: Eurostat McKinsey & Company 15