Economic Perspectives on Hungary

Regional Studies with Prof. Dr Zschiedrich

College of Applied Sciences (HTW) Berlin

1 March 2012

Michael Gross, Philipp Hennig, Philipp Christians, Kasey Navita Phifer

This paper is a written summary of and elaboration on the presentation given by the above named group members for the same class. The presentation was given on 8 February 2012

and the slides can be found on www.knavita.com.

Table of Contents

1. Introduction (Philipp Hennig)

1.1. Country Overview 3

1.2. The Political Transition 5

1.3. The Economic Transition 8

2. Macro-economics (Phillip Christians)

3. Financial incentives (Michael Gross)

4. Case Study of Automotive Industry: Audi (Kasey Navita Phifer)

4.1. The Beginning of the Automotive Industry in Hungary

4.2. Case Study: Audi

4.3. Audi’s Competitors in Hungary

4.4. Audi’s Management Culture

5. Conclusion: Hungary’s Economic Outlook (Kasey Navita Phifer)

6. Appendix

7. References

Per request from the teacher, Mr. Zschiedrich, we have inserted the author’s name beside the paragraph he or she wrote.

2

1. Introduction

1.1. Country Overview

Hungary is a landlocked country in Central Europe. It is situated in the Carpathian Basin

and is bordered by Slovakia to the north, Ukraine and Romania to the east, Serbia and

Croatia to the south, Slovenia to the southwest and Austria to the west. The capital and

largest city is Budapest. Hungary is a member of the European Union, NATO, the OECD,

the Visegrád Group, and is a Schengen state. The official language is Hungarian, also

known as Magyar, which is part of the Finno-Ugric group and is the most widely spoken

non-Indo-European language in Europe.1

Approximately 10 mill inhabitants are living in the Parliamentary Republic of Hungary

with a size of 93,030 km2 which gives a density of 107.2/hm2, that is not even half of the

German density with 229/km2. The total nominal GDP amounted to $147.874 billion in

2011, a small percentage compared to Germany ($3.628 trillion in 2011). Hungarians

currency is still the Forint and it is still discussed whether they will be allowed to adopt

the euro or not.2

Hungary is one of the thirty most popular tourist destinations of the world, attracting

8.6 million tourists a year (2007)3. The country is home to the largest thermal water cave

system and the second largest thermal lake in the world (Lake Hévíz), the largest lake in

Central Europe (Lake Balaton), and the largest natural grasslands in Europe (Hortobágy).

The history of Hungary is quite restless and filled with changes of political power and

civil disturbances. It was integrated in the Habsburg Monarchy which ended 15 march

1848 with a Revolution when Hungary went into a dual monarchy with Austria (1867 –

1918). In World War 1 Hungary was unsuccessfully attacked by Germany and 1918

another Revolution, the so called Aster Revolution, took place but because of the

disarmament of the standing forces the country started to fall apart which led into the next

political system. The Communists took over and created the Hungarian Soviet Republic in

1919 which led to the Treaty of Trianon one year later and Hungary lost 71% of their

territories, 66% of the population, the only harbor and separated sources of raw material

1 Globally speaking: motives for adopting English vocabulary in other languages – Google Books. Google Books. Retrieved 30 November 20112 "Hungary" cia.gov. Retrieved 30 November 20113 "UNWTO World Tourism Barometer". World Tourism Organization. Retrieved 30 November 2011

3

from factories. In the second World War Hungarian leaders weren’t sure what position to

choose so they firstly declared war to the soviet union in 1941 but started negotiations two

years later to surrender which led then to the occupation by the Germans in 1944.4

An estimated 2,000 people were executed and over 100,000 were imprisoned.

Approximately 350,000 officials and intellectuals were purged from 1948 to 1956. Many

freethinkers and democrats were secretly arrested and taken to inland or foreign

concentration camps without any judicial sentence. Some 600,000 Hungarians were

deported to Soviet labor camps after the Second World War and at least 200,000 died in

captivity. Rákosi adhered to a militarist, industrializing, and war compensation economic

policy, and the standard of living fell. The rule of the Rákosi government led to the 1956

Hungarian Revolution and Hungary's temporary withdrawal from the Warsaw Pact. The

multi-party system was restored by Prime Minister Imre Nagy. Many people were shot

and killed by Soviet and Hungarian political police (ÁVH) at peaceful demonstrations

throughout the country, creating a nationwide uprising.

Spontaneous revolutionary militias fought against the Soviet Army and the ÁVH in

Budapest. The roughly 3,000-strong Hungarian resistance fought Soviet tanks using

Molotov cocktails and machine pistols. Though the prevalence of the Soviets was

immense, they suffered heavy losses, and by 30 October most Soviet troops had

withdrawn from Budapest to garrisons in the Hungarian countryside. On 4 November

1956, the Soviets retaliated, sending in over 150,000 troops and 2,500 tanks. During the

Hungarian uprising an estimated 20,000 people were killed, nearly all during the Soviet

intervention. Nearly a quarter of a million people left the country during the brief time that

the borders were open in 1956.

During the invasion, János Kádár (a minister of the revolution who had applied for the

task while in Moscow in captivity) declared the legitimacy of the newly founded

Hungarian Socialist Workers' Party's government, which he led. During the takeover,

Kádár led an attack against the anti-Soviet revolutionaries. 21,600 mavericks (democrats,

liberals, and reformist communists) were imprisoned, 13,000 interned, and 400 killed.

Imre Nagy, the legal Prime Minister of the country, was condemned to death. 5

4 Paul Lendvai, The Hungarians: a thousand years of victory in defeat, C. Hurst & Co. Publishers, 2011 Google Books. Retrieved 30 November 20115 "Hungary's 'forgotten' war victims". BBC News. Retrieved 30 November 2011

4

Kádár introduced new planning priorities. Consumer goods and food were produced in

greater volumes and military production was reduced to one-tenth of the pre-revolutionary

level. This was followed in 1968 by the New Economic Mechanism (NEM), which

introduced free market elements. From the 1960s through the late 1980s, Hungary was

often satirically referred to as "the happiest barrack" within the Eastern bloc. As a result of

the relatively high standard of living, a more liberalized economy, a less oppressed press,

and less restricted travel rights than elsewhere in the Eastern Bloc, Hungary was generally

considered one of the better countries in which to live in Eastern Europe during the Cold

War.6

1.2. The Political Transition

In June 1988, 30,000 people demonstrated against Romania's communist regime's plans to

demolish Transylvanian villages. In March 1989, for the first time in decades, the

government declared the anniversary of the 1848 Revolution a national holiday.

Opposition demonstrations filled the streets of Budapest with more than 75,000 marchers.

Premier Károly Grósz met Mikhail Gorbachev in Moscow, who accepted Hungary's

moves toward a multi-party system and promised that the USSR would not interfere in

Hungary's internal affairs. The Opposition Round Table Consultations with the

representatives of the government, which was founded for the stated goal of introducing

multi-party democracy, market economy and change of power, and defining its

characteristics, started its sessions. In May, Hungary began taking down its barbed wire

fence along the Austrian border – the first tear in the Iron Curtain.7

June brought the reburial of former Prime Minister Imre Nagy, executed after the 1956

Revolution, drawing a crowd of 250,000 at the Heroes' Square. The last speaker, 26-year-

old Viktor Orbán, publicly called for Soviet troops to leave Hungary. In September,

Foreign Minister Gyula Horn announced that East German refugees in Hungary would not

be repatriated but would instead be allowed to go to the West. The resulting exodus shook

East Germany and hastened the fall of the Berlin Wall. On 23 October, Mátyás Szűrös

declared Hungary a republic.

6 Watkins, Thayer. "Economic History and the Economy of Hungary". Department of Economics, San José State University. Retrieved 30 November 20117 "Hungarianhistory.com" (PDF). 30 November 2011

5

The majorities in the decisive bodies of the state party agreed to give up their monopoly

on power, paving the way for free elections in March 1990. The party's name was changed

from the Hungarian Socialist Workers' Party to simply the Hungarian Socialist Party

(MSZP) and a new program advocating social democracy and a free-market economy was

adopted. This was not enough to shake off the stigma of four decades of autocratic rule,

however, and the 1990 election was won by the centre-right Hungarian Democratic Forum

(MDF), which advocated a gradual transition towards capitalism. The liberal Alliance of

Free Democrats (SZDSZ), which had called for much faster change, came second and the

Socialist Party trailed far behind. As Gorbachev looked on, Hungary changed political

systems with scarcely a murmur and the last Soviet troops left Hungary in June 1991. In

coalition with two smaller parties, the MDF provided Hungary with sound government

during its hard transition to a full market economy.

The economic changes of the early 1990s resulted in declining living standards for most

people in Hungary. In 1991 most state subsidies were removed, leading to a severe

recession exacerbated by the fiscal austerity necessary to reduce inflation and stimulate

investment. This made life difficult for many Hungarians, and in the May 1994 elections

the Hungarian Socialist Party led by former Communists won an absolute majority in

parliament.

All three main political parties advocated economic liberalization and closer ties with the

West. In 1998, the European Union began negotiations with Hungary on full membership.

In a 2003 national referendum, 85% voted in favor of Hungary joining the European

Union, which followed on 1 May 2004.8

1.3. The Economic Transition

After the fall of communism in Eastern Europe, the former Soviet satellites had to

transition from a one-party, centrally planned economy to a market economy with a multi-

party political system. With the collapse of the Soviet Union, the Eastern Bloc countries

suffered a significant loss in both markets for goods, and subsidizing from the Soviet

8 “Hungary Makes Difficult Transition to Democracy. infoplease.com” 30 November 20116

Union. Hungary, for example, lost nearly 70% of its export markets in Eastern and Central

Europe. The loss of external markets in Hungary coupled with the loss of Soviet subsidies

left 800,000 unemployed people because all the unprofitable and unsalvageable factories

had been closed. Another form of Soviet subsidizing that greatly affected Hungary after

the fall of communism was the loss of social welfare programs. Because of the lack of

subsidies and a need to reduce expenditures, many social programs in Hungary had to be

cut in an attempt to lower spending. As a result, many people in Hungary suffered

incredible hardships during the transition to a market economy. Following privatization

and tax reductions on Hungarian businesses, unemployment suddenly rose to 12% in 1991

(it was 1.7% in 1990 ), gradually decreasing until 2001. Economic growth, after a fall in

1991 to −11.9%, gradually grew until the end of the 1990s at an average annual rate of

4.2%. With the stabilization of the new market economy, Hungary has experienced

growth in foreign investment with a cumulative FDI totaling more than $60 billion since

1989.9

The Antall government of 1990–94 began market reforms with price and trade liberation

measures, a revamped tax system, and a nascent market-based banking system. By 1994,

however, the costs of government overspending and hesitant privatization had become

clearly visible. Cuts in consumer subsidies led to increases in the price of food, medicine,

transportation services, and energy. Reduced exports to the former Soviet bloc and

shrinking industrial output contributed to a sharp decline in GDP. Unemployment rose

rapidly to about 12% in 1993. The external debt burden, one of the highest in Europe,

reached 250% of annual export earnings, while the budget and current account deficits

approached 10% of GDP. The devaluation of the currency (in order to support exports),

without effective stabilization measures, such as indexation of wages, provoked an

extremely high inflation rate, that in 1991 reached 35% and slightly decreased until 1994,

growing again in 1995. In March 1995, the government of Prime Minister Gyula Horn

implemented an austerity program, coupled with aggressive privatization of state-owned

enterprises and an export-promoting exchange raw regime, to reduce indebtedness, cut the

current account deficit, and shrink public spending. By the end of 1997 the consolidated

public sector deficit decreased to 4.6% of GDP - with public sector spending falling from

9 "Hungary" cia.gov. Retrieved 30 November 20117

62% of GDP to below 50% - the current account deficit was reduced to 2% of GDP, and

government debt was paid down to 94% of annual export earnings.10

The Government of Hungary no longer requires IMF financial assistance and has repaid

all of its debt to the fund. Consequently, Hungary enjoys favorable borrowing terms.

Hungary's sovereign foreign currency debt issuance carries investment-grade ratings from

all major credit-rating agencies, although recently the country was downgraded by

Moody's, S&P and remains on negative outlook at Fitch. In 1995 Hungary's currency, the

Forint (HUF), became convertible for all current account transactions, and subsequent to

OECD membership in 1996, for almost all capital account transactions as well. Since

1995, Hungary has pegged the forint against a basket of currencies (in which the U.S.

dollar is 30%), and the central rate against the basket is devalued at a preannounced rate,

originally set at 0.8% per month, the Forint is now an entirely free-floating currency. The

government privatization program ended on schedule in 1998: 80% of GDP is now

produced by the private sector, and foreign owners control 70% of financial institutions,

66% of industry, 90% of telecommunications, and 50% of the trading sector.11

After Hungary's GDP declined about 18% from 1990 to 1993 and grew only 1%–1.5% up

to 1996, strong export performance has propelled GDP growth to 4.4% in 1997, with other

macroeconomic indicators similarly improving. These successes allowed the government

to concentrate in 1996 and 1997 on major structural reforms such as the implementation

of a fully funded pension system, reform of higher education, and the creation of a

national treasury. Remaining economic challenges include reducing fiscal deficits and

inflation, maintaining stable external balances, and completing structural reforms of the

tax system, health care, and local government financing. Recently, the overriding goal of

Hungarian economic policy has been to prepare the country for entry into the European

Union, which it joined in late 2004.12

Prior to the change of regime in 1989, 65% of Hungary's trade was with Comecon

countries (Council for Mutual Economic Assistance). By the end of 1997, Hungary had

shifted much of its trade to the West. Trade with EU countries and the OECD now

comprises over 70% and 80% of the total, respectively. Germany is Hungary's single most

10 "The Political and Economic Transition in Hungary" (PDF) Retrieved 30 November 201111 "Hungary" cia.gov. Retrieved 30 November 201112 „Government at a Glance 2011: Information by country” OECD Retrieved 30 November 2011

8

important trading partner. The US has become Hungary's sixth-largest export market,

while Hungary is ranked as the 72nd largest export market for the U.S. Bilateral trade

between the two countries increased by 46% in 1997 to more than $1 billion. The U.S. has

extended to Hungary most-favored-nation status, the Generalized System of Preferences,

Overseas Private Investment Corporation insurance, and access to the Export-Import

Bank.

With about $18 billion in foreign direct investment (FDI) since 1989, Hungary has

attracted over one-third of all FDI in central and eastern Europe, including the former

Soviet Union. Of this, about $6 billion came from American companies. Foreign capital is

attracted by skilled and relatively inexpensive labor, tax incentives, modern infrastructure,

and a good telecommunications system.

By 2006 Hungary’s economic outlook had deteriorated. Wage growth had kept up with

other nations in the region; however, this growth has largely been driven by increased

government spending. This has resulted in the budget deficit ballooning to over 10% of

GDP and inflation rates predicted to exceed 6%. This prompted Nouriel Roubini, a White

House economist in the Clinton administration, to state that "Hungary is an accident

waiting to happen.”

Hungary, as a member state of the European Union may seek to adopt the common

European currency, the Euro. To achieve this, Hungary would need to fulfill the

Maastricht criteria. In foreign investments, Hungary has seen a shift from lower-value

textile and food industry to investment in luxury vehicle production, renewable energy

systems, high-end tourism, and information technology.

The austerity measures introduced by the government are in part an attempt to fulfill the

Maastricht criteria. These measures include a 2% rise in social security contributions, half

of which is paid by employees, and a large increase in the minimum rate of sales tax

(levied on food and basic services) from 15 to 20%.

The Hungarian Central Statistical Office reported a decrease in real wages in the first five

months of 2007. Gross average income rose by 7%, while net average income increased

by 1%. When adjusted for inflation, this corresponded to a 7% decline compared with real

wages a year before. The drop was due mainly to the 2006 austerity package; however,

9

state measures to combat the black economy may also have had an impact on pay

developments. 13

Hungary's low employment rate remains a key structural handicap to achieving higher

living standards. The government introduced useful measures in the key areas, namely

early retirement, disability and old pensions.

Sources and so on

13„Country Mutual Agreement Procedure Statistics 2006-2010” OECD Retrieved 30 November 2011

10

2. Macro-economics

11

3. Financial Incentives

Challenges for Hungary

Hungary experienced difficult periods of economic development despite being frontrunner

in change processes. They faced decrasing economic growth and a decrease in income per

capita, growing inflation and higher expenses of public capital than income. They were in

need for short-term financial restructuring, further reforms in health-, education and social

sector as well as a new definition of the government‘s role

Hungary faced an increase of income but also a radical cut of public expenses. Here the

public sector,, private business and people were strongly affected. Yet leaded to the

recovery of the household deficit and further consolidation processes.

Hungary managed to improve its international business relations and attractiveness for

foreign investments. This boosted production and export.

Main Advantages for Foreign Business

There are certain advantages for foreign businesses to settle down in Hungary. It is a

strategic location to seek new markets. It is an ideal base for investors eyeing more distant

markets or planning further expansion within central Europe or the European Union. It is

definetaly a ideal bridgehead to access Eastern European markets due to adequate

relations and experiences of Hungarian companies. Also there is a strong bond of

Hungarian economy towards Europe and EU and further integration in the domestic

market of the EU. A main advantage is its closeness to four countries poised to join the

EU. That means a single market of 500 million consumers due to EU accession

Solid and effective economy:

Haungary has a stable and effective economy. They have a stable political and macro

economical framework. This lead through successful foreign trade relations, a double-

digit export growth and a improved balance of trade

There is a steady stream of foreign capital across the various sectors of the economy . In

numbers this means 2.5-3 billion Euros per year / 90 billions US Dollar in 1990-2007.

During the last years the biggest multinational manufacturers and service providers settled

12

down here, bringing also their suppliers and subcontractors . Up to date the highest

Foreign Direct Investment (FDI) in this region: was 47 billion Euros

Since the early 1990´s, based on privatisation, there where investments in new industry

facilities and high quality products

Source: ITD Hungary ( Hungarian Investment and Tade Development Agency)

The Hungarian government startet to support foreign investments. The Government was

interested in further establishing a business- and investment friendly environment and in

adapting to the market demands They created a more cost efficient, through EU-conform

policy, investment stimulation. One thing was effective public services and decreasing

administration charges for companies. One of their main advantages are low labor costs

and company friendly tax concessions

A subvention package for investments of minimum 10 million Euro includes:

•Direct subventions: based on individual analysis and decision, not to reimburse

•Tax remission: exemption from 80% of business taxes for 10 years

•Subvention of employment generation: for particular weak regions, not to reimburse

•Subvention of education: 25-90% of costs, not to reimburse

•Amount of subvention depends on investment value, 100% for 50 million Euro

investments

13

Hungary ist he Land of Welcome for Foreign Investors:

Hundreds of foreign companies have located in Hungary and the numbers continue to

increase. 18.000 100% foreign-owned companies and 27.000 companies with foreign

participation

New Structure for Foreign Direct Investment •Advanced technology and innovation:

There was a shift to advanced production technology of goods with higher added value

and establishment of high class services. The biggest export volume do have hightech

goods. This amounts to up to 12 billion Euros. R&D centers where established , regional

centers for business services, software evolution, biotechnology and so on.

Throughout Hungary there ispresence of the largest multinational car manufactuers

The investment in the automotive sector was 11% of Foreign Direct Investment stock.

Depending on that there was growth in the associated service sectors Regional service and

R&D centers. Production and assembly facilities were established, as well as their major

international suppliers and their subcontractors

Source: ITD Hungary ( Hungarian Investment and Tade Development Agency)

14

Most Attractive Investment Opportunities

Here are some examples of the most attractive Investment Opportunities. For the

Automotive Industry there is a longstanding tradition in Hungary. Audi, Suzuki, GM and

their Supppliers. This makes up to 100`s equipment manufacturers

In the Electronics sector there are constant innovations in information technology,

consumer elektronics, communication and auto electronics. They main companies here in

this sector are Nokia, Siemens, Motorola.

In the information technology there is a 10 % growth rate and an ever increasing role of

outsourcing. Nokia, Siemens snd Motorola relocated their R&D activities.

Many cultural achievements were invented by Hungarian scientists, e.g. radio, electric

train; conduction at universities

For the Biotechnology sector there is a long tradition in life sciences. Hungary has a high

concentration of highly qualified specialists and reseachers in synthetic chemistry and

biotech

There are Several hundred high-quality logistical service providers for easy access of each

center. Hungary has the role as a transit country and is full of industrial parks

Some of the world’s biggest companies already settled down in Hungary. Among

these are:

•Accor

•Audi

•AVIS

•Bosch

•Diageo

•Duolog

•Getronics

•Le Bélier

15

•Nief Plastic

•The Michelin Group

Business Relations to Germany

Hungary has some specific advantages with regard to Germany. Inbetween the 1000 km

wide radius of small and middle class companies. Hungary has a lot of similarities in

culture, values, mentality, creativity and motivation alleviate the collaboration of business

men. There are close political relations with Germany, but also with Austria and

Switzerland and cooperations with several governments. For Hungary Germany is trade

partner No. 1. Mostly within the automotive industry. As a conclusion to that there is an

increasing export from Hungary to Germany. In 2008 it was + 20 %. And vice versa it

was + 12 % with a focus on machines, means of transport and consumer goods. The vivid

exchange is particulary with Bavaria, Baden-Württemberg, Hamburg, NRW and Hessen

The German affiliates in Hungary are a relevant part of its economy (e.g. Audi, Robert

Bosch, Kirchhoff-Group, ThyssenKrupp Steel AG). Hungary has a high satisfaction with

qualification of. Yet crucial about business chances, economic policy and tax system

Legal Framework for Investments

Business foundation: The decision for an appropriate legal form here is GmbH, AG or

branch

•Estate acqusition: considering planning- and environmental law as well as regulations of

local administration departments (e.g. coverage with buildings)

•Archeological evaluation of the building ground

•Building license and construction contract: „Grundsatzbau-genehmigung“ to clarify

planned building and technical feasability and to fix conditions

•Licence to bring into service: approval of operation (retail, host industry) or a licence for

location (production including certain dangers for environment or people)

Tax System of Hungary

16

Hungary created a complex tax system which refines continuously to serve the economic

demands and fits into the EU standards . The Tax agreements (OECD) with more than 50

countries which invalidate the Hungarian tax system if it is less beneficial. The appliance

and interpretation of tax agreements mainly influence the decisions about foreign

investments. They have a demanding registration period for data with a limited amount of

details. Up till now extensive fines for incomplete and delayed tax payments

The Current taxes are corporate- and bonus tax, personal income tax and purchase tax,

local business tax, social security tax.

Corporate amounts to 18% and bonus tax is 20%. Governmental companies, Ags, GmbHs,

KG, OHG are based on the untaxed results including. amortisation

The companies recieve financial incentives and tax conpensassions due to creation of

production and employment. For a minimum of 12 million Euro investment you recive

100% for 10 years. An Investment located in a certain business region recives100% for 5

years . An investment of minimum 4 million Euro recieves 50% for 5 years

In addition to that there is a tax concessions for investments with development intent. This

is highly relevant for national economy. Minimum of 40 million Euros in any region or 20

million Euro in particular weak regions.

Recap & Outlook

„When business men asking for most attractive industries and most adequate investment

goals, Hugary can offer all that.“

(Ábel Garamgegyi, Hungarian Secretary for international business relations)

It says, that 7% of the FDI stream to East Europe until 2011.

Hungary should rank on the 2nd position and keeps frontrunning in FDI per capita in the

next years.

17

4. Case Study of Automotive Industry: Audi

Hungary is very well-developed as a center for automotive industry production and

manufacture within the European Union. As stated previously in chapters two and three, the

environment is very suitable for manufacturers. Hungary, while opening up to more

international and global trade in the last half of the twentieth century, has become a favorable

location for the automotive industry.

The country is very centrally located within the European Union and also offers a skilled and

qualified workforce to be employed in the factories (more about co-operation with university

will be covered later in this chapter). As mentioned in chapter three on financial incentives in

Hungary, the automotive industry also enjoys tax breaks and special privileges for setting up

business in the country (since obviously, their manufacturing plants create jobs for

Hungarians as well as increase the GDP and create revenue for the government via taxes).

4.1. The Beginning of the Automotive Industry in Hungary

After the dissolution of the Eastern Bloc, three global car manufacturers established

themselves in Hungary: Suzuki, Opel and Audi. Suzuki and Opel began producing

automobiles in Hungary in 1992. Surprisingly, the two companies were the first to produce in

Hungary since before World War II. Today, 17% of total Hungarian exports come from Audi,

Opel and Suzuki. The automotive sector employs circa 90,000 people in more than 350 car

component manufacturing companies.14 As is plain to see, the automotive industry is a large

part of the Hungarian economy.

With those three main companies manufacturing automobiles as well as the associated

component suppliers (mainly engine manufacturing today), the automotive industry became

the main pillar of Hungarian manufacturing and the automotive industry is a large portion of

Hungary’s gross domestic product even today.

However, since then, Opel has shifted its activities to powertrain production. Hungary has not

lost its attractiveness, as Daimler AG has decided to open a plant in Kecskemét, 86 kilometers

from Budapest, to manufacture new compact models in the near future.

14 Hungarian Investment and Trade Agency, via www.hita.hu

18

In terms of parts production, Hungary is focused mainly on building engines. Both GM and

Audi have established major factories with the same focus (the case study of Audi in Hungary

will be discussed in further detail later on in this chapter), and Suzuki has announced similar

plans to establish large factories. Additionally, a supplier base for other relevant parts is

present, and mainly driven by the existence of the global vehicle manufacturers. Historically,

Hungary served as a base for component production for delivery to the domestic commercial

vehicle industry, but also to the Russian producer AvtoVAZ.15

Despite the financial crises of 2007 and the uncertainties of the Euro currency of recent, the

automotive industries are still retaining Hungary as their favorite place of production despite

suffering slightly from the recessions. Daimler recently announced the opening of a new

Mercedes-Benz plant in Kecskemet, central Hungary, which is expected to boost the

country’s industrial output and exports in 2012. With the first models scheduled to roll off the

production lines during this first quarter of the year, Daimler looks certain to further boost

Hungary’s economy.16

The installation of production lines had been completed last May, the production system was

optimized and the first test models were turned out last autumn (of 2011). Mercedes-Benz

Hungary recruited 2,000 workers by December 1st last year, and plans to hire an additional

workforce of 500, mostly from Kecskemet and the region. Further helping the economy, it

was reported that around a dozen local suppliers have won contracts worth €100 million to

provide mostly car parts. Mercedes-Benz is expected to be the third largest automobile and

parts manufacturer in Hungary beside two other carmakers working mostly for exports: Audi

produced 1,648,000 engines and 38,000 models at its Györ plant last year and Suzuki turned

out 170,000 cars in Esztergom during the same time period.17

4.2. Case Study: Audi

First, here are a few general facts and figures about the company. Audi is positioned as the

premium brand of Volkswagen (VW), a German car manufacturer. The four rings of its logo

each represent individual car companies that banded together to create the union known today

15 Ernst & Young. The Central and Eastern European Automotive Market: Hungary.16 “New Mercedes plant expected to boost Hungarian exports in 2012”. Real Deal Hungarian online business & financial newspaper17 Ibid.

19

as Audi. The founder, August Horch, was born in 1868 and died in 1951. August Horch

established the company A. Horch & Cie. in Cologne, but soon left the company and started

Horch Automobil-Werke GmbH a few years later in 1909.

Audi is Hungary’s largest exporter and was the first car and automotive parts manufacturer to

enter Hungary after World War II. Audi’s total investments in Hungary are over € 3.3

billion.18 Audi built EU’s largest engine manufacturing plant (3rd largest in the world) in Györ.

More about manufacturing plants owned by competitors will be covered later in the chapter,

showing in detail how the various universities and auto manufacturers co-operate with one

another as part of Hungary’s automotive industry.

4.3. Audi’s Competitors in Hungary

Audi actually co-operates with its competitors in Hungary, ensuring that only one large

company is in each area, and each company specializing in a certain method of manufacture.

In this way, the automotive industry ensures that it will not lose money through unnecessary

competition with one another.

As a domestic producer with a market share of 28% in 2009, Suzuki benefits from producing

locally. It also benefits from its focus on small cars, as the Hungarian population tends to buy

affordable cars like those produced by Suzuki. However, with only 9.9 million inhabitants,

Hungary cannot offer the sales opportunities that several other CEE countries can. That’s why

every automotive manufacturer produces mainly for export, shipping their products to

Germany, France, Russia and other European countries.

The recession did hit the automotive industry fairly hard. As shown in Figures 1 and 2 in the

Appendix, the number of light vehicles (cars for personal use) sold and produced were

reduced sharply.

With Hungarians’ cars having an average age of more than 11 years, more than 3 million

people could potentially replace their vehicles within the upcoming years. Moreover, with a

car density of 360 vehicles per 1,000 people, the demand for cars has become obvious as new

car sales increased continuously between 1996 and 2006.19

18 Figures taken from the year 2007, www.wikipedia.org.19 Ernst & Young. The Central and Eastern European Automotive Market: Hungary.

20

As a producer of affordable cars, Suzuki held the dominant market share for the past 11 years.

The Japanese carmaker committed itself to various cooperative ventures with other companies

in Hungary to extend its capacities.

In 2003, the company decided jointly with Fiat to build SUVs for both brands that would be

identical in construction, namely the Suzuki SX4 and the Fiat Sedici. In addition, Suzuki

began assembling the Opel Agila and producing the Suzuki Splash in 2008.

These two are also based on an identical platform. Audi Hungaria (Volkswagen’s Hungarian

branch of their Audi brand) owns one of the biggest engine production facilities in the world,

which is located in Györ. In 2008, the Hungarian plant produced almost 2 million engines to

supply all Audi models as well as other VW brands both within Hungary and in other

countries. Moreover, the premium models, the TT Coupé and the Roadster, have been

assembled in Gyor since 1998.20

In 2007, the A3 Cabriolet, which is based on the same platform, was added to the assembly

portfolio. Lately, Audi announced plans to increase investment in its engine R&D facility.

The GM powertrain facility in Szentgotthárd supplies different GM brands in Europe.

Daimler will start production of the new generation of Mercedes-Benz A and B class models

in Hungary in 2012. This decision was influenced by, among other things, the labor cost

advantage, a suitable portfolio of suppliers and a convenient logistical infrastructure. The

compact model production is very important to Daimler, which is attempting to match the

tastes of potential Eastern European customers. These customers tend to prefer the B and C1

segments. Daimler is also focused on strengthening these segments across Europe.

20 Ibid.21

4.4. Audi’s Management Culture

As with every international company, or foreign-owned company operating internationally,

the question of how to manage (and who to appoint for the task) is a complicated and difficult

one to pose. Should the home company employ its own people and transfer current employees

to the new facility? Or should the company rather employ native workers and rely on expert

opinions from within the country they are operating?

The case of German-owned companies operating in Hungary is one that has indeed been well-

researched, though mostly by Hungarian persons in Hungarian universities. One of these

people, Ágnes Bogulya, is an associate professor at the University of Pécs Business and

Economics Department, and has extensively studied German-Hungarian cultural conflicts

within the workplace. She posits that:

Hungarians tend to assume that their German colleagues consider

themselves to be superior, better trained and better prepared, and of higher

proficiency to accomplish the job. Hungarians are especially sensitive to

situations where (according to their perception) their professional adequacy

and competence are questioned, and they react with overwhelming

emotions. However, the question rises whether the attitude of Germans

towards Hungarians is really contemptuous or not. Are not the Hungarians

themselves the ones who sustain the “arrogant, over-confident German”

stereotype, a preconception that in turn may behave as a self-fulfilling

prognostication? Or do they suffer perhaps from lack of self-confidence?21

It obviously would not help if all persons in management positions were German. When Audi

first moved into Hungary, this was of course the case. But after a relatively smooth transition

process, qualified Hungarians were hired into certain higher-up positions within the company.

Especially in culturally crucial positions such as customer relations and advertising, native

Hungarians were chosen for the position - and speaking German or English fluently was

regarded as a major bonus.

Audi's Hungarian branch is a sizeable portion of Audi AG's overall business, and it is

important that it is successful due to its key position as manufacturer and exporter to the rest

of Europe. According to the Audi AG 2010 shareholder report, sales outside Germany

21 "Hungarian – German Cultural Conflicts at Work", Ágnes Borgulya.22

increased 19% while sales within Germany increased only minimally (barely even one

percent). This demonstrates the importance of Audi's reliance on exports.

23

5. Conclusion

By opening its borders and loosening restrictions, Hungary has greatly improved its own

economy. The fact that the large majority of industrial goods are produced for export helps

boost its gross domestic product while at the same time strengthening Hungarian political ties

to the rest of Europe.

The automotive industry is, by nature, very vulnerable to fluctuations in the global market and

macro economy. Now that Hungary has opened up to the world market and international

trade, it will continue to experience such fluctuations in macro-economic activity and

competition from abroad (especially Asian countries).

The changes Hungarians have endured in the past few decades only proves their hardiness and

hard work ethic. In less than half a century, the economy has opened up from a closed,

homogenous communist society into a modern and competitive country.

24

6. Appendix

Appendix 6.1: Light vehicle sales by brand (in units), 2007 and 2009

Appendix 6.2: Light vehicle production by brand (in units), 2007 and 2009

25

Appendix 6.3: Total Hungarian Automotive Exports

Source: www.hita.hu

Appendix 6.4: Hungarian Automotive Export Countries

Source: www.hita.hu

26

Appendix 6.5: Important industrial regions for automotive manufacturers: strong supplier characteristics are shown

Source: Prof. Dr Laszlo Palkovics "Tendencies and Trends in the Automotive Industry"

27

7. References

Borgulya, Ágnes. "Hungarian – German Cultural Conflicts at Work". Lecture presented at the

International Critical Management Studies Conference.

www.organizzazione.unina.it/cms7/proceedings/proceedings_stream_10/Borgulya.pdf.

Accessed 25 Feb 2012.

Ernst & Young. The Central and Eastern European Automotive Market: Hungary.

http://www.ey.com/GL/en/Industries/Automotive/The-Central-and-Eastern-European-

automotive-market---Country-profile—Hungary. Accessed: 28 Jan 2012.

Hungarian Investment and Trade Agency. http://www.hita.hu. Accessed 27 Jan 2012.

Palkovics, Prof. Dr Laszlo. "Tendencies and Trends in the Automotive Industry: World &

Europe Opportunities and Challenges for Hungary". http://ec.europa.eu/. Accessed 25

Feb 2012.

Real Deal Newspaper, All Hungary Media Group. “New Mercedes plant expected to boost

Hungarian exports in 2012”. http://www.realdeal.hu/20120110/new-mercedes-plant-

expected-to-boost-hungarian-exports-in-2012. Accessed 27 Jan 2012.

Prof. Dr Laszlo Palkovics "Tendencies and Trends in the Automotive Industry".

http://ec.europa.eu/. Lecture presented 12 Mar 2009, accessed 25 Feb 2012.

28