Digitisation: Will Czechia ensure its future growth?

As the country searches for ways to accelerate growth, digitisation presents a significant opportunity. But to effectively navigate the digital transformation ahead, Czechia must act without hesitation, writes David Randl from McKinsey Prague.

In the past 20 years, the former socialist country achieved strong economic development and growth. Gross domestic product per capita grew by 71% between 1996 and 2019, driven by export-oriented industries and foreign investments, a growing, well-educated workforce with labour-cost advantages, as well as funding from the European Union. 

But the growth boost provided by many of these factors is largely exhausted. The Czech economy still lags the developed EU economies in capital per employee, but this gap will take many years to close. The labour-cost advantage is waning, and with the low unemployment rate, it would be challenging to increase employment further.  

In comparison, digitisation offers a faster and future-proof way to improve productivity. 

The current pandemic massively boosted digital adoption in the Czech Republic, but the opportunity to drive growth and competitiveness by accelerating the economy’s digitisation is much greater. But the country needs to take a lesson from other countries and act as quickly as possible.

Great potential ready to be awaken

According to The Rise of Digital Challengers, a 2018 report from McKinsey & Company, the Czech digital economy accounted for 7.8% of the nation’s GDP and grew at triple the speed of the rest of the economy. While ahead of the CEE average of 6.5% at the time, it lagged behind the so-called Digital Frontrunners such as Sweden, where the digital economy represented 15% of GDP. 

In the report, McKinsey estimated that by closing the gap to these Digital Frontrunners — nine nations who advanced in digitisation at a great speed in the past — by 2025, Czechia could add 16 billion euros to its digital economy over its “business as usual” growth. This would correspond to around 50% higher GDP growth and approximately 70% higher rate of productivity increase compared to prior years.

Revisiting the topic amid the coronavirus pandemic in 2020, McKinsey found that while the Czech digital economy grew almost 5% above the scenario, significant potential remains: the Czech digital economy grew 7.1% p.a. between 2017 and 2019, but the Digital Frontrunners saw an 8.3% progress in the same period. And the country lagged in the region too as CEE expanded its digital economy by 7.8 per cent. 

The Czech digital economy was boosted by a factor of 1.2× between January and May last year, catalysed mainly by the government restrictions aimed at curbing the spread of COVID-19. During the first months of 2020, the country observed 1.3 million new online services users, with increased engagement especially among the elderly. Four out of five Czechs are now online.

However, Czechia will require a broader digital transformation to reach its potential, especially in asset-heavy sectors such as manufacturing, retail, and the hefty public sector. These lag farthest behind their Digital Frontrunners’ benchmarks, even though they could account for a significant share of the Czech digital economy.

Let’s put automation to work

Continuing technology-driven productivity growth is critical to compensate for the demographic trends restricting the labour supply. 

Pre-Covid, Czechia has reached its peak employment level and was constrained by a record low unemployment rate of 2% in the first quarter of 2020. Even with the COVID-19 impact, the unemployment rate of 2.9% in the last year’s fourth quarter was still among the lowest in Europe. 

In addition, Czechia is ahead of the EU average in hours worked per employed person, with 10% more hours worked annually over the past decade. Assuming flat employment projections, flat hours worked, and no contribution from other factors such as subsidies and taxes, future GDP would be driven just by productivity growth, slowing down to 1.1% — or less than half the growth since 1996. 

“Even with the end of the COVID-19 pandemic, a technology-driven boost to productivity will be necessary to compensate for the demographic trends threatening the labour supply.”

Thus, automation, a specific aspect of digitisation, is highly relevant for the Czech economy. The process improves operational efficiency and can help create new digital industries, especially by embracing artificial intelligence. McKinsey estimated that up to 52% of workplace activities today – the equivalent of approximately 2.4 million jobs – could be automated in Czechia using technology that already exists. According to McKinsey’s middle technology adoption scenario, the equivalent of 1.1 million jobs in the Czech Republic would be automated by 2030.

Such development could support the growth of accommodation, manufacturing, transportation, agriculture and construction that have a high potential for automation while recently facing labour shortages.

On the flip side, employees will find that many professions will alter significantly. New skill requirements are emerging, and in some extremes, workers in specific occupations may find that their specialisation is no longer required. So, going forward, it will be crucial for the country to ensure rapid reskilling of workers and mitigate the risk of spikes in unemployment. 

AI spearheading future growth

Beyond increasing productivity by automation, McKinsey suggests technology reskilling could also grow employment from the already high base. Despite a high job vacancy rate in the Czech Republic, there are demographic groups with relatively low activity levels. Assuming benchmark activity levels of Sweden, one of the most active labour markets in Europe, Czechia has around 700 000 people in untapped labour reserves. 

The benefits of embracing digitisation don’t stop here — automation can help companies improve their industrial operations, optimise knowledge work, better understand forces of nature, and increase the scale and speed of discovery in areas such as R&D.

The McKinsey Global Institute report “A future that works: automation, employment, and productivity” examines many other cases of automation driving performance gains in workplace settings. Examples include inventory tracking and automated checkout when customers take products from the shelf. These solutions improve customer experience and space productivity while decreasing working capital, resulting in an average estimated ROI of 14 per cent.

5 areas to meet the needs of a fast-growing technology:

According to McKinsey

• Collaborate to innovate

• Adopt AI at scale

• Offer thought leadership on regulation

• Promote data access

• Ensure the necessary talent is in place

Furthermore, new digital industries based on the Internet of Things, big data, and artificial intelligence could trigger a whole new wave of growth in the Czech economy. These technologies are already sufficiently developed and gaining momentum across industries and society. Even still, in the group of the nine Digital Frontrunners, McKinsey calculated the potential impact of adopting AI at scale at 1.4% of GDP annually — that is beyond the high base of digitisation at which they already operate, and which we used as the aspirational benchmark for the Czech Republic. 

AI’s potential is high because of three core characteristics: it can be rolled out pervasively across industries and sectors, it tends to become more effective and efficient over time, and it can be a driver of innovation leading to an array of new products and services. 

Times call for immediate action

Czechia has strong foundations for accelerating digitisation. In some areas, such as financial services and manufacturing, the country already achieved higher digitisation rates than the five largest European economies. It has a large STEM and ICT graduate talent pool, high-quality digital infrastructure, and a legacy technology lock-in that is milder than in Western and Northern Europe. In key digitisation-enabling areas — such as the adoption of digital skills and tools among individuals and enterprises or participation rates in adult learning — Czechia performs above the CEE average.

But to catch up with the Digital Frontrunners, the country will have to mobilise all stakeholders. Companies need to increase their adoption of digital tools, taking advantage of digital solutions for improving their productivity and profitability and reaching new customers. This step can challenge industry boundaries, creating new, global ecosystems of services as a result. 

“In the group of the nine Digital Frontrunners, McKinsey calculated the potential impact of adopting AI at scale at 1.4% of GDP annually.”

The public sector needs to embrace technologies increasing efficiency and improving its services to both companies and citizens. Individuals need to invest in lifelong learning for upskilling and reskilling enabling them to take advantage of new job opportunities. Policymakers also play a crucial role in the whole process as they can promote the adoption of technology in both the public and private sectors, support workers through the reorientation, and facilitate the emergence of ecosystems for startups and digital innovators.

To effectively navigate the digital transformation ahead, all stakeholders will need to move fast. We are at the cusp of a Fourth Industrial Revolution and at a point in time where the rules of the digital game are crystallising, and new ecosystems are being defined. 

The best time for drawing up digital strategies and developing toolkits for the digital transformation ahead is now.