Hungary was the leading European destination for Chinese FDI in 2024 for the second consecutive year, capturing 31% of the total, according to a report by the Mercator Institute for China Studies and Rhodium Group. That activity was significantly fueled by EV investments, including world-leading manufacturer BYD’s commitment to set up its first EUR 5 billion European plant in Szeged (175 km southeast of Budapest by road) to assemble 150,000 EVs per year.
It is not the company’s first project in the country, though; its bus manufacturing facility in Komárom (100 km west of the capital) was established in the spring of 2017. That location might be up for more capital influx as the government recently designated a plot next to BYD’s Komárom factory as a “strategic investment zone,” a telling sign of new ambitions.
The latest announcement of BYD opening a EUR 260 million innovation and service center in Budapest marks a new milestone in BYD’s European strategy. According to company chairman Wang Chuanfu, the Budapest center will focus on three core activities: sales and after-sales services, vehicle certification and testing, and adapting models to meet European needs. This includes redesigning interiors, recalibrating safety systems, and tailoring infotainment and driver-assist technologies to meet EU regulations and consumer expectations.
Perhaps most significantly, the center will employ 2,000 people, 90% of whom will be engineers, which paves the way for the country’s much-anticipated move up the value chain.
In traditional auto manufacturing hierarchies, Central and Eastern Europe has long played the role of a low-cost assembly provider for Western European brands. The so-called “smile curve” of value creation initially placed Hungary at the bottom, characterized by high volume and low innovation. German OEMs then began investing in more high value-added activities, and now, with BYD’s R&D center, the country can further position itself as a knowledge hub.
The move may encourage a more technologically advanced local supplier ecosystem while also offering Hungarian engineers the opportunity to contribute to global automotive trends, such as electrification, software-defined vehicles, and autonomous driving. For German stakeholders, it took some time to launch local innovation operations. Asian companies are notorious for keeping such activities at home, making BYD’s decision a pleasant surprise.
Yet this development is not without inherent risks. Though moving up the smile curve is good news, Hungary’s economic structure remains heavily reliant on exports to Germany. Germany’s automotive industry is facing a slowdown with roadblocks to the EV transition, falling demand, and rising Chinese competition.
In fact, according to the Munich-based Ifo Institute for Economic Research, sentiment in the German automotive industry deteriorated further, with a decline in its business climate index for the sector from -30.7 in April to -31.8 points in May, as reported by Reuters.
Promising as it sounds, BYD’s victory march may be heading toward a policy landmine zone. The European Commission is preparing investigations into whether Chinese subsidies, especially those backing the Szeged car plant, violate EU competition rules. If found non-compliant, both BYD and the Hungarian government could face sanctions, jeopardizing future expansion.
Additionally, Hungary’s growing dependence on China does not mitigate its pre-existing dependence on Germany. While BYD offers diversification in terms of corporate partners, its products are still primarily aimed at Western European markets, particularly Germany, the very economy currently struggling with stagnation and declining automotive sales.
Hungary’s automotive sector, a pillar of its export-driven economy, is entering dangerous territory against the backdrop of global trade tensions. With the United States threatening to impose tariffs of up to 50% on EU vehicles and components, economists at ING and the International Monetary Fund warn that Hungary could be among the most severely affected countries in Europe.
According to ING, Hungary’s deep integration into the German automotive value chain makes it highly vulnerable to both direct and indirect shocks. The IMF echoes these concerns. As Alfred Kammer, the fund’s European department director, pointed out recently, a German automotive slowdown, triggered by U.S. tariffs or falling global demand, could inflict 5 to 10 times more economic damage on Hungary than on Germany itself.
Given that German brands like Audi and Mercedes-Benz, soon to be joined by BMW, dominate Hungary’s manufacturing landscape, any disruption in transatlantic trade could quickly send shock waves through the Hungarian economy.
The IMF’s latest regional outlook highlights the region, and particularly Hungary and Slovakia, as the most exposed economies to U.S. trade policy shifts. It warns that Hungary’s high dependence on auto, battery, and electronics exports to vulnerable markets could significantly dampen GDP growth.
IMF experts stress that Hungary and the entire region need to embrace a strategy based on three pillars: maintaining an open trade policy, preserving stable macroeconomic fundamentals and implementing domestic structural reforms. Enhancing government efficiency and cracking down on corruption would also significantly help and have the potential to boost GDP by 6.6 to 9.3% in the medium term.
ING further adds that the tariff war is so unpredictable that it “doesn’t make sense to speculate” on how all this would play out. “Anything is possible […]. We maintain our long-held view that, in time, the economic toll of an escalating trade war on the U.S. will become too severe to sustain elevated tariffs indefinitely. After a brief lull, brace yourself for the next turbulent chapter,” it says.
This article was first published in the Budapest Business Journal print issue of June 16, 2025.
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