Hungary special report 2015: Manufacturing on the march
Hungary’s medium-sized industrial firms are becoming more competitive and exporting on a European scale.
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Quietly but assuredly, Hungary is building an economy fit for the 21st century. A resurgent export sector is being driven by rising industrial production. Hungary has become a key production base for automobile majors such as Audi, Mercedes-Benz, Suzuki and General Motors. Beneath the surface, an army of medium-sized industrial firms is on the march. Locally born and bred, they have fast become vital suppliers to leading carmakers, forming a thriving Hungarian version of Germany’s famed Mittelstand.
“These firms, notes László Bencsik, chief financial and strategic officer at OTP Bank, the leading commercial lender, “are starting to export and to be competitive on a European scale.” That’s becoming increasingly widespread, from high-tech and IT down to manufacturing, chemicals and fashion. According to the Hungarian Central Statistical Office, the domestic auto sector generated €15 billion ($17.8 billion) in export sales in 2013, supporting 115,000 jobs across 700 companies.
Audi plant in Gyor,
Ambition and achievement
Hungary is not the only nation in Central and Eastern Europe (CEE) to boast a successful auto sector, built to satisfy the needs of leading European, US and East Asian carmakers. But few can match the country’s industrial aspirations, underscored by prime minister Viktor Orbán’s determination to see Hungary finally marry ambition with achievement in the modern era.
Manufacturing has had a curiously stop-start existence in the modern era. Under Soviet rule, Hungary was a leading producer-exporter. Companies like Raba made sturdy buses and trucks prized in markets from India to Africa to the Middle East. When the Berlin Wall fell, the likes of General Electric were quick to enter the Hungarian market, taking a stake in local lighting producer Tungsram in 1989. An army of consumer electronics names arrived, from Philips and Siemens to Samsung and LG. Carmakers followed. Audi, present in the country since 1994, makes 2 million engines a year at its factory in Gyor, in the northwest, which also turns out sports coupes and convertibles. In March 2012, Mercedes invested €800 million in a state-of-the art facility that exports cars to the US, Western Europe and Asia.
There are solid reasons behind the country’s industrial pre-eminence. Hungary boasts an impressive range of top-class engineering and science colleges, including the University of Szeged and Budapest University of Technology and Economics, as well as a hard-working labour force, and low labour and production costs. Heinrich Pecina, senior partner at Vienna Capital Partners (VCP), a leading Austrian private equity house with investments across the local industrial space, points to the country’s abundant and untapped potential. “There is skilled labour galore across the manufacturing, chemicals, engineering and financial services sectors,” he says. “And the country’s workforce is linguistically skilled: most people speak German or English or both.”
In many ways, the most curious aspect of Hungary’s manufacturing sector is that it isn’t already the most powerful of its kind in the region. The past quarter-century has been a tale of breakthroughs and industrial success but also one of missed opportunities. Hungary rightly boasts a solid reputation as a carmaker, but it let some of its regional advantage slip in the 1990s and 2000s, as it focused on growth in areas such as financial services.
Reasserting its place at the apex of the regional auto industry was one of premier Orbán’s primary ambitions after the elections of 2010. So far, the plan has proved mightily successful. In its latest quarterly outlook on the country, published in December, Barclays noted that a double-digit annualized increase in the export of machine goods in the first nine months of 2014 was a direct result of new inward investment in the auto sector. “Hungary’s strong industrial performance is mainly attributable to car manufacturing which is expected to remain a stable base of growth” in the years to come, notes Erste Bank analyst Gergely Gabler, who also points to strong signs of rising growth in the long-embattled construction sector.
The country is also rebuilding trading relations with former Soviet states, and forming new and robust ties with nations from the Middle East to Africa to Asia in a concerted effort to create a robust, export-based economy, while slowly reducing its dependence on the sluggish eurozone. A notable example here is Raba, which now runs a thriving joint venture with Volvo, exporting buses and trucks to Egypt, Russia and the Gulf.
“Hungary-made goods still have a great reputation in former Soviet states,” notes Gyula Pleschinger, a member of the Monetary Council of the Central Bank of Hungary (MNB). “It may have been a mistake in the early 1990s to forget about our trading relations with eastern nations and to focus only on Western Europe. The current government understands the importance of those eastern markets and we have been making large efforts on one hand to increase our trading ties with Korea, China and Japan, and to improve business relations with Russian-speaking and Arabic countries, many of which were forgotten by Hungarian firms in recent decades.”
Nor is Hungary likely to become overly dependent on the future prospects of a single sector. A host of fast-growing industries, from agriculture and chemicals to electrical equipment and pharmaceuticals, are growing in power, mostly based in strategic clusters around the north and west. Underpinning it all is a supportive government keen to further the development of its industrial base with subsidies and tax incentives, and a hard-working, highly educated and multilingual populace increasingly likely to seek its fortune at home rather than in Western Europe or North America.
Little wonder foreign multinationals from the US to East Asia to Germany are busily expanding their presence in one of the region’s most economically vibrant and politically stable markets. Incentives are also trickling through the system, supporting not just global multinationals and domestic powerhouses such as energy giant MOL Group, but also an army of smaller corporates now embedded in the local and, increasingly, the regional and global industrial supply chains.
Many of these firms found financial succour in recent years from the central bank’s Funding for Growth scheme, launched in 2013 and recently extended to the end of 2015. The FGS scheme is set to channel at least $6.5 billion in low-interest investment capital to the country’s best and brightest mid-cap firms. The government’s clear commitment to industry, growth and job creation is a considerable comfort to long-term foreign investors – and a further sign of Hungary’s long-term economic potential.
“SMEs are Hungary’s future, and they are increasingly becoming key parts of the global supply chain,” says Péter Virovácz, head of the macroeconomic department at Századvég Economic Research Institute, a leading economic consultancy “The country’s main future growth sectors are set to include manufacturing, agriculture, tourism and retail. The government really wants Hungary to become a regional powerhouse. It’s looking to bring in more investment to the manufacturing sector. Our Global Competitiveness Index performance as ranked by the World Economic Forum is improving every year.”
The tech future
Like many emerging markets, Hungary’s next step is to go upmarket, retaining its manufacturing pedigree while becoming a hotbed for industrial and technological innovation. In recent years, Hungary has started to churn out the sort of high-functioning tech firms more redolent of Silicon Valley. Prezi, founded in 2009, has quickly become a leader in cloud-based presentation software, with 45 million users globally and employing 70 people in Budapest and San Francisco. Another local startup, Gravity R&D, specializing in recommender systems, has recently opened offices in San Jose and Tokyo.
Prezi offices, Budapest
It’s high-end firms like these that bode well for Hungary’s future, and highlight the quality of graduates being produced by leading domestic science and engineering colleges. Once upon a time, the best brains in the country would have headed overseas on graduation in search of jobs able to sate their ambition. Some still go but more stay. Salaries may be lower than in Germany or the US, but other advantages – the ability to buy an affordable home, and to own equity in the firm you work for, while remaining closer to friends and family – more than make up for any financial shortfall for many of the country’s brightest young minds.
It’s this marriage of rising production and high-end start-ups that is creating such optimism about the future. “The government is determined to turn Hungary into an R&D hub, as well as a key regional manufacturing centre,” notes the MNB’s Pleschinger. “There’s no reason why both these ambitions can’t be achieved. Hungarians are open-minded, friendly, multilingual, well-educated and hard working. Everything you need to get both of those sectors working in synch and at full capacity.”
Adds Századvég’s Virovácz: “In innovation terms, Hungary is ahead of everyone else in the region. It’s a knowledge-based economy now, and by channelling more funding toward our SMEs, we will create domestic value as well as innovation, and knowledge. Five years from now, Hungary will be a hotbed of innovation, marrying skilled employment and a stable political system with a genuine vision of Hungarian economy and growth. Our future is bright, positive and stable.”