Automotive IndustrySecuring Automotive

Investments in the New Member States

Kalman Meszaros, dr. Commercial Counsellor

Brussels, 4th November 2008

I. New Challenges

Long – term: EU – stricter environmental regulations (to reinvent the vehicle from „birth to funeral” from materials used and recycled to intelligent solutions, new fuel for low C02)EU companies in the forefront of Innovation/R&D best poised to succeed, to meet market expectations for less expensive, clean, safe and well performing vehicles – extra incentives needed to shift to clean vehiclesShort –term: financial crisis spiralling inte real economy – temporary slump, later catch-up probable, overbridging financial facilitiesNew Member States: for EU to remain competitive essential to exploit potentials of NMS (HR;Know-How;Logistics;Innovation/R&D;New Markets)

II. Automotive Industry in Hungary –Investment Aspects

EU: one third of world production; abt. 550 Bn Euro annually – 5 % of GDP vs. Hungary abt. 15 Bn Euro - 15 % of GDPOverview

Passenger Car OEMs in CEE (2007)

Sources: companies

100 km

500 km

Audi (VW) GyőrProduction of 1.913 m engines

and 56,982 carsEmployees: 5,845

REVOZ (Renault) in Novo MestoProduction of 200,187 cars

Employees: 2,632

GM Powertrain SzentgotthárdProduction of 434,617 engines,

Employees: 677

Suzuki EsztergomProduction of 233,253 cars

Employees: 6,200

Dacia (Renault) in PitestiProduction of 222,854 carsEmployees: 8,237

PSA (Peugeot/Citroen) TrnavaProduction of 180,000 carsEmployees: 3,300

Kia in ZilinaProduction of 142,335 carsEmployees: 1,200

Fiat in TychyProduction of 346,100 carsEmployees: 4,500

Opel (General Motors) in GliwiceProduction of 186,200 cars

Employees: 3,600

Skoda (VW) in Mladá BoleslavProduction of 623,529 cars

23,559 employees

PSA and Toyota Kolin308,478 cars

3,500 employees

Volkswagen (VW) in BratislavaProduction of 248,738 cars

Employees: 8,500

Volkswagen in PoznanProduction of 75,100 cars

Employees: 4,800

Fiat in Bielsko-BialaPowertrain production

Hyundai in NosoviceCapacity: 300,000 cars (by 2011)

3,500 employees

FSO/Chevrolet in WarsawProduction of 153,300 carsEmployees: 3,000

Ford in CraiovaProduction from mid 2009Capacity: 200,000 cars

Daimler (Mercedes) KecskemétProduction from 2011, 100,000carsEmployees: 2,500

FIAT KragujevacProduction of 200 th cars

Facts and Figures of the Hungarian Auto Industry

Production value in 2007: EUR 15.9 bn

Total number of companies: 630(of which 290 with quality certificates)

Total number of employees: 110,000

FDI: 15 Bn Euro from abt. 70 Bn Euro total (50 % of No. of companies JV, 75 % of equity in foreign ownership)

Production figures in 2007:290,235 passenger cars

5,045 commercial vehicles and buses

~50,000 motorcycles

Source: Hungarian Central Statistical Office, AHAI

Suzuki: 233,253 cars assembled in 2007, 300,000 pcs planned for 2008

Audi: 56,982 cars assembled in 2007 (TT coupe, A3 cabriolet)

Daimler: 100,000 Mercedes A and B Class from 2011

Car Manufacturing, Assembly

Engine Manufacturing

Audi: 1.913 million engines produced in 2007 (379 variants of 24 different types of powertrain)

GM Powertrain: 434,617 engines produced in 2007

World’s 3rd largest powertrain plant operated in Hungary by Audi

AUDI – Facts and Plans

In 2007 1.913 million engines produced, 15 new, innovative engine models introduced56,982 cars assembled (41.5 % increase on 2006)New TT model introduced in 2006, new A3 cabriolet introduced in 2007Turnover in 2007: EUR 5.87 billion (16.7% increase on 2006)Hungary’s largest exporterEmploys 5,845 people24 different engines in 379 variants of four-, six- and eight-cylinder engines for the VW concern in a 375 th. sq meter areaSince 1993 Audi has invested a total of EUR 3.3 billion in Hungary, and is planning to invest 200-250 mn EUR per year is planned until 2011Audi Hungária is going to manufacture the 10-cylinder, 560 HP engine for the luxurious sports car Lamborghini Gallardo

Source: AUDI

Suzuki in Hungary

1991 – Foundation of Suzuki Hungary in Esztergom on a 35,000 m2 plot1992 – Serial production Swift models1999 – The 250,000th Hungarian-made Suzuki2000 – Wagon R+ launched2003 – Introduction of Ignis2004 - Awarded for the biggest reinvestment (EUR 100 million) by the Prime Minister2005 – new Swift; 146,870 cars were manufactured, record turnover of EUR 1,262.3 million was reached2006 - production of new SUV the SX4 launched

Number of employees: 6,200Production in 2007: 233,253 cars; (Swift, SX4, Ignis, Wagon R+)By having invested EUR 199.44 mn in 2007 total volume of investments reached EUR 1.27 bnProduction of the Splash started in February 2008 (planned production: 60,000 per annum)Production planned for 2008: 300,000 units

The company will invest EUR 800 millionto manufacture 100 thousand Class A and B compactMercedes cars yearly in Kecskemét, Hungary

Production will start in 2011 employing 2500 people

A large number of suppliers are expected to followthe company, generating a new wave of investmentsin the sector

Why did Mercedes choose Hungary?Good location and developed infrastructureGood quality of labourA large network of automotive suppliers already presentProfessional services

The Largest Foreign Investment in Hungary:

Daimler AG, 2008

II.1. Supplier Network

AFL Karsai PlastAjkai Elektronika KirchhoffAlbert Weber Lé BelierAlcoa LearAsahi Glass MagyarmetBakony MichelsBenteler MusashiBorg Warner PlasticorBourns PlastimatBridgestone RábaContinental Teves SCI SanminaDenso SEWSDiamond Electric SuoftecEuro Excedy Toyo SeatGedia U-ShinGestamp ValeoHammerstein VideotonHankook VisteonITW Siewer Wescast

Arcelor GM PowertrainAutoliv Győri PlastB.O.S. HirschlerBPW Rába KravtexDana Magna SteyrDekorsy NemakDelphi Packard RábaEdag Rekard ProduktEMT Rudolph LogistikErbslöh Schaeffler AGEuro Exedy SemperformEuro Elzett VeritasEybl VisiocorpFederal Mogul Vogel und Noot

Arvin Meritor FESTO Schwarzmüller

AVL GE Lighting Siemens VDO

Cascade Hokushin Tauril

Clarion Ibiden ThyssenKrupp

Continental Catalyst Lear Toyo Seat

Continental Temic MGM Vogel Sitze

ContiTech Michelin Webasto

Draexlmaier Mono-Ipolyfabric Zollner

EMT NABI

Excel Csepel PEMÜ

Central Transdanubia

Western Transdanubia

Ada-Cast Firth RixsonAkzo-Nobel Coating Ganz FoundryARRK GibbsBosch Hi-LexDelphi-Calsonic Knaus TabbertDelta-Tech KovácsExir Lear

LeoniMitsubaModinePrec-CastRemySaia-BurgessSalgglasShinwaStanley ElectricStarter BatteryTechnoplastZF

BHGCabTecRatipurInterplus

Continental Phoenix KaloplasticCsaba Metál Knorr-BremseEckerle KunplastEmika LinamarHirschmann ThyssenKrupp

CaroflexCarrier TransicoldEagle OttawaEismannEMCON Technologies/Arvin MeritorEuroszolF.SeguraHajdu AutóHübnerIsringhausenLé BelierMichelinNiefPhoenixSchaeffler AG

Central Hungary

Southern Transdanubia

Southern Great Plain

Northern Great Plain

Northern Hungary

II.2. Human Resources

Most important element – rich heritage in inventors, innovators (Janos Csonka, carburettor, 1890;Jozsef Galamb, mass production Ford-T 1905-15;Ferenc Pavlics, moon craft, Mars vehicles 1961-88; Ferenc Anisits, BMW diesel engine development 1981-99), manufacturers (Ikarus, Csepel Auto, Raba) – EIT in HungaryHigh productivity, efficiencyAmbitious, dedicated workforce with competitive wagesAvailability (unemployment rate abt. 7,5 %, over 10 % in N-E Hungary)

Hungary Ahead in Labour Productivity

GDP in Purchasing Power Standards per person employed relative to EU-27 (EU-27 = 100)

20

30

40

50

60

70

80

2001 2002 2003 2004 2005 2006 2007(f) 2008(f)

Source: Eurostat

Hungary

Slovakia

Czech Rep.

Poland

Romania

Bulgaria

Competitive Wages for High Productivity

Avg. GrossEarnings in HUF

Avg. GrossEarnings in

EURNo of

employeesVehicle Component

Manufacturers 196,362 781.35 38,852

Vehicle ManufacturerCompanies 219,727 874.32 62,771

JobGross wages

in EUR JobGross wages

in EURHead of Technical Dept. 1,505 High voltage electr. technician 704

Head of R&D Department 1,823 Programmer 1,039

Chemical Engineer 1,139 Turner 515

Mechanical Engineer 1,182 Tool manufacturer 555

High voltage Electr. Engineer 1,124 Welder 447IT specialist 1,276 Forger 423Mechanical Technician 805 Storeman 459

Monthly gross wages by occupation in the Automotive Sector

Monthly average gross earnings in the Automotive Sector

Source: Hungarian Central Statistical Office, Public Employment Service in Hungary, 2007

1 EUR = 251.31 HUF

13.42

14.62

12.77

17.85

13.37 12.05

12.61

11.31

19.2319.0813.19

17.1711.83

15.7

13.4613.63

18.1

20.53

16.09

17.55

19.8618.0

13.1

17.26

14.45

16.8512.25

12.08

12.47

12.44

14.39

12.1111.51

11.72

12.69

14.6

11.66

11.41

Unemployment Rates by Micro Regions

(in percentage)

11.6311.44

Source: Public Employment Service, as of September 2007

II.3. Logistics, infrastructure

Besides HR and dense suppliers’ network a major factor at investment decisionsHungary is among Top logistic centers in Europe (subregional hub)Fast expanding highway networkIndustrial/ Logistics Parks, Clusters (Pannon Automotive Cluster), Automotive Competence Centers (4 ACC’S)

Hungary Scores Third in Logistics

Cushman & Wakefield evaluated the Europeanlogistics sector: Hungary ranksthird in the key cots-benefit factors

C&W: CEE is a much sought-after logistics and distributionlocation

Hungary offers plenty of land and a healthy supply ofavailable properties

Source: Cushman&Wakefield: European Distribution Report, 2008

Expanding Highway Network

© Ministry of Economy and Transport, 2008

SzolnokTatabánya

Győr

Salgótarján

Veszprém

Eger

Kaposvár

SzékesfehérvárZalaegerszeg

Szombathely

Kecskemét

Debrecen

Nyíregyháza

Miskolc

Szeged

Békéscsaba

Pécs

Szekszárd

Kazincbarcika

Year of granting the title (number

of titles won)1997 (28)1998 (45)1999 (37)2000 (21)2001 (13)2002 (13)2003 (5)2004 (1)2005 (15)2006 (11)2007 (9)

With indication of the year when the title of ‘Industrial Park’ was granted

Industrial Parks in Hungary

Intermodal Logistics Centres and Logistics Development Areas in Hungary

Modern warehouse facilities and logistic parks

II.4. Automotive R&D

Priority area in Hungary, especially in hi-tech manufacturing and knowledge intensive services - among top-scorers in EU re total employment – EIT in HungaryIn automotive business scores of companies have relocated some of their R&D businesses to Hungary – still much unexploited potential

Employment in high-tech manufacturing and knowledge intensive services (KIS) sectors as a percentage of total employment

Hungary

EU-15

EU-25

Source: Eurostat, High-tech Statistics 2007

Hungary Ahead in R&D

Arvin Meritor – Budapest - exhaust system developmentAudi - Győr - engine developmentAVL Autokut – Budapest - engine and powertrain dev.Bosch – Miskolc - electronic hand-tools designingBosch – Budapest - electronic developmentsContinental - Veszprém - electronic instrum. dev. for carsDenso - Székesfehérvár - fuel supplying system dev.Draxlmaier - Érd - vehicle compartment designingEDAG – Győr - vehicle subunits developmentGE Lightings – Budapest - car lightingsKnorr Bremse – Budapest - electronic brake-system dev.Magna-Steyr – Győr - engineering centreTemic–Telefunken - Budapest - car electronic developmentThyssenKrupp – Budapest - electronic steering gear dev.Visteon – Székesfehérvár - vehicle parts and subunitsWET - Pilisszentiván - electronic subunits development

Automotive R&D

II.5. Incentives

Business environment, tax regime, intensity ratio deemed favourable by investors Attractive „soft” factors (educational, cultural, shopping, leisure, sport opportunities) and supportive government/authorities’approach (licenses, permissions, one-stop service)Besides good fundamentals incentives are also a matter of consideration at major investment decisionsComplementary incentive schemes and special incentive package

Attractive Tax Regime

Major business organizations across Europe assessed the attractiveness of their domestic tax regimes:

Hungary ahead of major competitors

Ranking Country

11. Hungary

…

15. Slovenia

16. Latvia

…

19. Lithuania

20. Poland

…

22. Czech Republic

23. Romania

Source: Attractiveness of European Tax Regimes, 2007, KPMG International

*after 2011: 10%+ 10 % for medium enterprises+ 20 % for small enterprises

25%*25%* 30% 40% 50%

VasVeszprém Fejér

Somogy Tolna

Baranya

Pest

Budapest

Nógrád

Heves

Borsod-Abaúj-Zemplén

Szabolcs-Szatmár-Bereg

Hajdú-Bihar

Békés

Jász-Nagykun-Szolnok

Csongrád

Komárom-Esztergom

Maximum intensity ratios:

Győr-Moson-Sopron

ZalaBács-Kiskun less

developed regions

Competitive Incentive System

Development tax allowance• for investment projects from 4 million EUR

• Investment volume: - in case of manufacturing, R&D and SSC projects at least EUR 10 million

- projects between EUR 10-25 million if not eligible for EU co-financing• Job creation potential

- in case of manufacturing industry: from EUR 10 million and 25 new jobs created- in case of an R&D project: from EUR 10 million and 10 new jobs created

• Subsidy for job creation: non-refundable subsidy up to EUR 1,04 million• Training subsidy: non-refundable subsidy up to 50% of eligible costs

• Direct costs deductible from corporate tax-base; tax-free employment of PhD, MSc or MBA students; up to EUR 2 million tax-free development reserve for 5 years

Employment-related incentives

Tailor-made incentive package of the Hungarian Government

Development tax-allowance

R&D – related incentives

Types of Incentives

Elements of the package:

1) Cash subsidy based on Individual Governmental Decision

2) Development tax allowance

3) Training subsidy

The Hungarian Government is ready to providea tailor-made incentive package for large investments

(investment value at least EUR 10 million*)

Special Incentive Package

*For investments between EUR 10-25 million the project will be subsidised from tender application if possible

Major Automotive Companies in Hungary

HanKooK

HanKooK

For your kind attention

Kalman Meszaros, dr.

Embassy of Hungary/ ITDH1180 Brussels Av. Du Vert Chasseur 44Belgium

Phone: +3223435044Fax: +3223445415E-mail: itdbrussels@skynet.beInternet: www.itd.hu

Thank you