- February 2, 2023
- Posted by: Borce Manev
- Category: Founder's Corner
How would you evaluate the impact of 2022 on the North Macedonian ICT segment? Is there growth? What were the key segment characteristics? What are your forecasts and expectations for 2023?
The year 2022 will be remembered as a year full of controversies both for the ICT segment as well as the global economy. While being an eventful year, 2022 did not significantly impact the structure of the Macedonian ICT segment, which as before, remains to a great extent, if not absolutely 98%+ export-oriented, making it directly related to economic trends and events.
North Macedonian ICT, to a large extent, the Western Balkan ICT segment region, is service-oriented 95%+ of the total turnover. The remaining ~5% are product-oriented, mainly focused on the local market, having a statistically small insignificant impact. As with any other service economy, the ICT segment is directly influenced by the global economic chain and directly related to the events in developed economies.
Considering the above mentioned, it would be blunt to discuss any development in the ICT segment without mentioning the factors that impacted the global economy and their influence on the hi-technology segments.
A quick chronological overview of events and impact factors that impacted the WB regional ICT segment:
- End of the Covid-19 crisis and virtualization of the workplace;
- The war in Ukraine that turned into a demographic crisis followed up by an energy crisis culmination in an economic crisis that disrupted the global supply chain;
- Not to be forgotten are the prior 2022 crises, such as the silicium crisis and the trade war between the largest economic superpowers – USA and China.
- Almost instant digitalization, introduced in the Covid-19 crisis, resulted in fast-lane uncontrolled human capital growth in the ICT segment serving as a “silver bullet” to fight “the new normal” at that time.
The recently added human capital muscle did play a crucial role in Covid-19 times for impacted industries (e-commerce, retail, manufacturing, communications, media, and hi-tech companies). Still, it did not take long to become “extra weight” in the post-covid aftermath, with companies struggling to utilize an appropriate value-added level.
End of the first half of 2022, incentivized by economic uncertainty, the crypto-crisis began where there was a massive shift of people exchanging their digital (crypto) currencies for their tangible recognized collateral – money. This created liquidity “headaches,” resulting in bankruptcies one after another for the crypto-exchange companies.
The newly introduced scarcity and technology questioning impacted VC and Investment Banks making them more conservative and reluctant to invest in hi-tech businesses driving innovation. Everything combined resulted in congestion of the stock exchange (especially in the tech segment) and dark recession scenarios.
Western Balkan ICT Segment and North Macedonia, as part of it, had seen growth in the first half of 2022, acting as an alternative destination for companies in the regions impacted by the Ukraine war. This growth was slowed down in the second half of the year as a response to the economic conditions in the Western economies (EU, USA, UK).
My predictions for 2023 are that the WB region will have minimal growth in the first two quarters. The period of stabilization in the year’s first half is expected to be followed by increased economic activity in the third and fourth quarters as the need for industrial compensation will manifest itself.
The WB ICT segment is becoming a go-to destination for developed economies looking to optimize their costs but not sacrifice the quality of production, a tendency that will only continue in the period to come when the region finally gets its recognition.
Large Tech Giants and other technology companies have laid off more than 150.000 employees so far, and this tendency is growing, especially with the recession on the horizon. What is the reason for this unfabulous trend?
Before answering this, I would ask you to remember the names that redefined our world today and contributed significantly to all the innovations we love and use (Alpha, Amazon, Apple, Microsoft, Meta, Facebook, Tesla, Twitter) in many cases in self-sacrificing mode.
The self-sacrificing mode I referred to is increasing the operational capacities to answer the challenges and keep up the innovation while operating in times of chained crises. Unfortunately, accelerated growth often comes with a price of efficiency and effectiveness that, although acceptable previously, is not something companies can bear for long.
The seniors in the ICT segment should not be surprised as history repeats itself. This indeed feels like the .COM crisis in the ’00. Though it may seem scary and dark, it should be noted that exactly this phenomenon is perceived as the birth of the modern service economy(nearshoring, outsourcing) that represents most of the ICT segment in the Western Balkan region and North Macedonia as its member.
The infamous lay-off moves of the tech giants will last longer in people’s memories than in their strategic development plans. They will still have to grow further in modes of reduced risks and increased flexibility.
We should remember that the core principle of the service economy is risk assessment/transfer for increased flexibility as an answer to economic uncertainty. Being majority service-oriented, I expect growth in the ICT segment of the WB in the second half of the year following the principle – “One man’s cure is another man’s poison.”
Not to sound rude, but tides will shift, and the economy will recover. Still, people’s memories fade slowly, especially the ones caught up in the aftermath, presenting unique opportunities for service companies.
How would these processes impact the Macedonian ICT segment? Can we expect companies to lay off staff and foreign companies to close their local operations?
As in any other crisis, this one will also have its “winners” and “losers” in the aftermath of it. Perhaps for the first time, we can use the fact that we (North Macedonian economy) are a small economy in development with relatively low cost/income in the ICT segment compared to developed and established economies offering a very attractive “cost per value” ratio.
As a result, I expect the ICT segment in North Macedonia to grow but, unfortunately, not in parallel with the workforce’s salaries, which will grow faster in conditions of limited availability and increased demand.
The only challenge I see in the North Macedonian ICT segment is its limited quantity that will find its place in large corporate strategies only as part of the Western Balkans. This also applies to other countries of the WB region being significantly small on their own.
To summarize, I believe the economic activity of foreign companies in the region will increase cumulatively. We can expect new players to enter the segment, but also, we can expect some of the already existing ones to reduce in size as a natural consequence of competitiveness. Most concerned in this case are companies operating in the domestic market-facing global competition.
One of the main characteristics of the ICT segment in North Macedonia is outsourcing or engaging Macedonian talent to work on foreign initiatives. Is there a sign that salary growth in the segment can cause many foreign companies to look for alternatives in low-cost destinations such as Asia and the Pacific?
The Western Balkan and North Macedonia region as part of it, though to a large extent service-oriented, is not classical outsourcing. This may not be the right word to describe it because of the association between the low-cost regions of Asia and the Pacific.
The reason for my statement is the level of education, know-how, and problems that are traditionally addressed and solved in this region are very similar to those of South East Europe (Ukraine, Romania, Poland, etc.), more known for higher value-add services rather than classical outsourcing.
Though prices in Asia and the Pacific are very attractive, the cost/value ratio is still on our side, especially given the cultural closeness, time zone, and geographical proximity to developed economies. If we need to compare regions, a more relevant comparison would be with South America as an alternative to Asia and the Pacific.
How much does the government “Fund for Innovation and Technological Development – FITD” intended for start-ups will add value to the ICT segment? How far are we from the potential that Romania, Bulgaria, and Serbia have?
Our government’s enthusiasm and willingness to invest will indeed be recognized. Though the spark is there, we should bear in mind that these funds have limited financial capacity, which is especially small for hi-tech companies in the segment of digital products emphasizing the need to attract private VC investing in the hi-tech segment if we want to get close to equalize the odds.
Currently, the available FITD and other governmental funds are suitable only for SEED investment and, in some rare cases, Series-A.
Taxation of the ICT segment and the North Macedonian economy as a whole are all present in debates, but it seems like the industry’s request is not entirely fulfilled by the government. What would you suggest in this part that would positively impact the ICT segment in the coming period?
Tax politics is only one part of the legal framework that impacts the business climate for an industrial segment, equally important for all industry segments, and more so for the ICT segment.
Compared to the rest of the world, we should know that we are perceived as a low-tax system having a flat taxation policy of 10% across the board that is proven as a very competitive tax-systems in Europe and the world.
Improvements are to be noted in the legal framework, not from a tax perspective but from a legal frame perspective where we have legal alignment with developed economics.
Ones that should be pointed out are North Macedonia becoming a member of the NATO alliance and the Open Balkan initiative, opening different opportunities for growth and access to previously inaccessible business domains as well as untapped talent pools.
As per challenges specific to the ICT segment, the ones that stand up are the way and level of social contribution calculations on personal income – salary. How the system functions for the moment is that “theoretically,” there is no ceiling or maximum amount on which these contributions are paid as part of salaries.
The ICT segment, known for its high salaries, is very volatile on this subject, especially given the framework in neighboring countries with a reasonable limit. This phenomenon negatively impacts GROSS to the NET conversion of salaries, especially in the upper segment – the senior segment, which is the most crucial for growth as these employees are the producers and anchors of knowledge and know-how.
This phenomenon results in questioning the life choices of the most mobile and desired staff on the planet, where they would live after the virtualization of the workplace because they can literally work from anywhere. Action is needed to retain these professionals as part of the legal system and to stay in the country while having many options physically.
Last but not least, the region should think of simplifying workforce import or, simply said, enabling foreigners to be employed in the region by having the simplified and more liberal procedure as an answer to the current economic shifts.