Helping Automotive Back Into Overdrive

Conferences

That Hungary’s economy has long been powered by the automotive sector should be news to no one. While it has not been as hard hit as the tourism and hospitality sectors, most carmakers have seen near total shuts downs of their production lines. How quickly they can get back to work will obviously have a large effect on the country’s overall performance.

Róbert Ésik, CEO of Hungarian Investment Promotion Agency.

For a more detailed look at the global figures, see our box “UNCTAD’s Grim Statistics”. The short take away is that FDI flows globally could be down by up to 40%, according to the UN agency. Since automotive is a heavy source of investment worldwide, it will clearly suffer, and by extension so will Hungary.

“It is very difficult to give specific figures at this stage,” says Róbert Ésik, CEO of Hungary’s award-winning Hungarian Investment Promotion Agency, the body charged with bringing that FDI to Hungary.

“What we see in automotive is that companies are putting off decision making processes under the circumstances; site visits are being rescheduled or delayed, and financial decisions postponed.”

There were some local press reports that BMW Group, for example, was delaying the opening of its purpose-built Debrecen factory by a year. “What I can tell you is that BMW has confirmed its commitment to Debrecen and construction of the site is on-going,” Ésik insists.

“This is a complex project with long time lines. There might be changes as far as the end of the project is concerned, but according to the statement of BMW Group, this could be measured in months. I do not think this is a major change that will have any significant impact on the Hungarian economy.”

He adds that he was due to be meeting with BMW executives later in the week that we spoke. “I think the commitment from their side will be reemphasized.”

No Universal Picture

Ésik’s brief, of course, extends far beyond automotive. HIPA is involved with all those investing or reinvesting in the country, and while the likes of hotels and airlines are clearly suffering, there is no universal picture. No one in automotive, Ésik says, is talking about canceling projects for the time being. A select few sectors, such as the food industry and homecare product manufacturers, are actually seeing their position strengthen as demand rises.

The field with the second highest weight in the Hungarian economy after manufacturing is the business services sector, and although the pandemic and “stay at home” orders have made life more difficult, they have not brought about an early hibernation.

“We continue to hold site visits, but do them virtually,” Ésik explains. “With electromobility we continue to see interest in site selection and investment.”

And even within automotive itself, there has been recent good news: This month it was announced Turkish parts manufacturer Yaris Kabin will invest EUR 20.3 million in a factory in Iváncsa (50 km southwest of Budapest), with the government supporting the investment, which will create 150 jobs.

Yaris Kabin will also undertake research and development at the base. The Turkish parent company expects its Hungarian unit to generate revenues of EUR 15 mln a year, according to Ádám Németh, managing director of the Hungarian subsidiary. Production at the factory is scheduled to start from early 2021, mainly targeting the German and Italian export markets.

Elsewhere, it was confirmed in March that Mercedes-Benz AG is once again reinvesting at its Kecskemét factory site, this time building a 23,000 sqm press plant worth more than EUR 100 mln. It is expected to start operating in 2022 and will strengthen the Kecskemét factory’s position in the Mercedes-Benz global production chain, while also ensuring the compact vehicles manufactured in Hungary will have more locally made parts.

Multiple Roles

HIPA, as its CEO likes to say, has three main roles: One, to promote Hungary as an investment location; two, helping clients with on-going projects; and three, making policy proposals to government.

“It’s fair to say that, under the circumstances, the third point has jumped in importance significantly,” Ésik admits.

That might be to help a company with a specific issue, or it may be something more generic, such as how the Labor Code can be made more flexible so home office can be better integrated or adapted better to the situation.

“We always aim to perform this bridging role between the private sector and the state; we are now receiving a lot of requests in this domain.”

That process isn’t one way, however; the state has put together a significant economic action plan, the total value of which is 18-20% of GDP.

“It is one of, if not the largest, economic stimulus plans in the history of our country,” Ésik says.

It rests on four pillars: Protecting those jobs already created since 2010; supporting the creation of new jobs and additional investment; supporting the relaunch of the strategic industrial sectors that have been hardest hit; and providing financing solutions for companies.

Preserving Jobs

“A lot of jobs were created between 2010-19, 820,000; the more we can preserve the better,” Ésik says. Thus, for employees whose work hours have been cut by between 15-75%, up to 70% of the wages can be paid by the state (up to a maximum of double the minimum wage). There is also a dedicated program aimed specifically at R&D professionals.

All of the incentives on offer before the pandemic are still available for new investors or existing companies reinvesting, and HIPA has not been neglecting what is perhaps the most visible of its roles.

“Even under the current difficult circumstances, we have in the last three weeks made five major announcements, one of which was from the automotive sector [Yaris Kabin].”

Some help here has come from the European Commission, which on March 19 announced it would allow member states to create special subsidy programs for up to EUR 800,000 of what might otherwise, in more normal times, be considered state aid.

“We have reacted fairly quickly in introducing our own program: On April 20 this was launched by HIPA, offering the possibility to companies of temporary measures in place until the end of this calendar year.”

Quickly, indeed: In a month, HIPA considered its options, notified and got the approval of the EC, made presentations to government, which passed the necessary regulatory changes, worked out the application and documentation processes and published those on the agency website.

Thus, an investment in Hungary of EUR 1.6 mln or higher will attract a state subsidy of EUR 800,000, and unlike other subsidy scheme, where the money follows the action, this is an up-front cash payment.

“We are trying very hard to deliver liquidity up front and asking for contractual commitments,” the CEO says. “The program has led to a lot of interest. Based on the data from yesterday evening [May 19], we have received 552 applications for a potential total investment of EUR 746 mln, maintaining close to 97,600 jobs and with potential subsidies of EUR 352 mln.”

Indeed, it has been so attractive the government has already decided to double its original budgetary allocation of EUR 140 mln.

Strategic Support

The support for strategic industries is split between those suffering the most (airlines, hotels) and those proving increasingly important (food, medical equipment), companies that Ésik says “will be strategically even more important going forward.”

The financing solutions offered under the forth pillar are of critical importance, the HIPA CEO explains. “Companies do not go bankrupt because they produce losses; they go bankrupt when they do not have liquidity anymore.”

This is an area that has less to do with HIPA and more Eximbank, for example, but tools on offer include preferential loans, providing financial guarantees, and also insurance products, some of which can be combined with HIPA subsidies.

The big question, naturally, is when we might see a return to pre-COVID productivity levels. Ésik admits that is hard to judge, not least because it involves several components.

“One is realizing all the social distancing processes that need to be designed. This can be done fairly quickly, but it might lead to changes in capacities. Second, and more important, is how the market demand will look. Right now it is difficult to make any prognosis on when they will get back to the levels seen before the pandemic hit. For sure, this year will be impacted.”

One interesting theory is that local suppliers that are agile enough, and meet strict quality criteria, might be able to benefit from the relaunch as OEMs ramp up production and run down their pre-shutdown supplies.

“OEMs might want to shorten their value chain, so they could consider using more components locally, instead of bringing them in from other continents; […] security of supply might have a greater weighting [than price].”

UNCTAD’s Grim Statistics

In late March, UNCTAD (the United Nations Conference on Trade and Development) updated its forecasts of economic impact and revisions of earnings of the largest multinational enterprises (MNEs). It now suggest that the impact of the COVID-19 pandemic could mean foreign direct investment flows fall by 30-40% during 2020-2021, much more dramatic than previous projections of 5-15%.

Some 61% of the top 100 MNEs that UNCTAD tracks have issued earnings revisions, confirming the rapid deterioration of global prospects. And 57% have warned of the global impact on sales; problems clearly go far beyond disrupted supply chains. In addition, the top 5,000 MNEs, which account for a significant share of global FDI, have now seen downward revisions of 30% on average for 2020 earnings estimates.

The hardest-hit sectors are the energy and basic materials industries (-208% for energy, with the additional shock caused by the plunge in oil prices), airlines (-116%) and the automotive industry (-47%).

Hungary Account Deficit at EUR 561 mln in Q4 Debt

Hungary Account Deficit at EUR 561 mln in Q4

Moldovan Pensions to be Increased as of April 1 World

Moldovan Pensions to be Increased as of April 1

Schoenherr Names Miklós Klenanc as Head of Local M&A Practic... Appointments

Schoenherr Names Miklós Klenanc as Head of Local M&A Practic...

Hungarian Wine Marketing Agency to Host Summit Drinks

Hungarian Wine Marketing Agency to Host Summit

SUPPORT THE BUDAPEST BUSINESS JOURNAL

Producing journalism that is worthy of the name is a costly business. For 27 years, the publishers, editors and reporters of the Budapest Business Journal have striven to bring you business news that works, information that you can trust, that is factual, accurate and presented without fear or favor.
Newspaper organizations across the globe have struggled to find a business model that allows them to continue to excel, without compromising their ability to perform. Most recently, some have experimented with the idea of involving their most important stakeholders, their readers.
We would like to offer that same opportunity to our readers. We would like to invite you to help us deliver the quality business journalism you require. Hit our Support the BBJ button and you can choose the how much and how often you send us your contributions.