HIPA 2018: More Projects, More Jobs, Higher Value-add

Conferences

András Kiss

HIPA, the Hungarian Investment Promotion Agency, produced its best results to date in 2018, a validation of the strategy to focus on higher value added FDI projects, says its president, Róbert Ésik.

HIPA President, Róbert Ésik.

“As far as the highlight figures are concerned, we have been able to close 98 investment negotiations successfully; those projects represent EUR 4.3 billion of capital expenditure and they will create more than 17,000 new jobs in the near future,” Ésik told the Budapest Business Journal in an exclusive interview.

“This basically means we have been able to beat all three KPIs compared to the previous year. This represents a 23% increase as far as the investment volume is concerned, and again, for the third consecutive year represents job creation in excess of 17,000 positions.”

Ésik says that, since 2014, when he was appointed president, more than 75,000 jobs have been or are being created. “That is more or less equivalent to the population of Szombathely.”

The numbers certainly sound impressive, and it comes as little surprise to learn that Site Selection, a U.S.-based magazine focusing on investment, named HIPA the best investment promotion agency in Central and Eastern Europe and Central Asia.

The automotive sector was once again the source of most investments with 36 projects worth EUR 2.7 bln. “What is very interesting and important to point out is that ten projects of the 36 exclusively focus on either engineering or research and development activities. So what we can clearly say is that investors are not looking at Hungary as simply a location for assembly projects, but increasingly as a location for engineering and R&D services.”

Breakthrough Project

One of the breakthrough projects of 2018 was the decision by BMW to develop a factory in Debrecen. “We are now in the situation where we can proudly say that Hungary is the only country in Europe, outside of Germany, where all three premium German OEMs [Audi, BMW and Mercedes Benz] are present and have, or will have, a manufacturing footprint,” Ésik points out.

“We can also say, thanks to the decisions made in 2018, that we can now quote eight OEMs, five of them in the manufacturing area, and three in the services area [Ford, Nissan and Jaguar Land Rover].”

The second most important sector was the electronics industry, with ten projects. Ésik believes this is an increasingly important sector, especially in battery manufacturing, with three out of five makers who have a European operation are based in Hungary: SK Innovation and Samsung SDI from South Korea, and GS Yuasa from Japan. Last year alone, battery manufacturers, or companies that are part of the value chain for them, have invested EUR 0.5 bln in Hungary, the president says.

The business services center sector took third spot, also with ten projects, six of which were newcomers to Hungary. That was followed by the ICT sector, with nine projects. These are again companies that invest into human capital and represent jobs with high local value add, for example companies like Cloudera and evosoft, Ésik points out.

“So, overall in 2018, we again see a dominance of automotive, but in the meantime, a transformation within automotive, a clear shift towards services, engineering and R&D, and also, let us say, a balanced set of results from electronics, business services, and ICT, helping us overall to move towards higher local value add creation.”

Just how much of a move is taking place is, in part, revealed by the salaries that go with all these shiny new jobs.  

“The average wage level of our successful 98 projectshaving a state aid component has increased by approximately 40% compared to the previous year. In 2018 we talk about a figure of HUF 425,000 [per month] on average in gross salary terms. This is again underpinning that the adjustment of our strategy to focusing on higher value ad projects is working out. This increase is higher than the increase of average wages on the market, and, of course, higher than the increase in the minimum wage.”

For the record, the guaranteed minimum wage (for those with skills and qualified at least to secondary level) was raised by 12% in 2018, from gross HUF 161,000 a month to gross HUF 180,500.

Biggest Investor

Germany’s position as the biggest investor in Hungary was also underscored last year: 28 projects came from the EU powerhouse, collectively worth EUR 2 bln.

“This not only means that Germany was the number one investor in 2018; but it also means that in the stock values the share of German investment will increase, because in the FDI stock values the share of German investments is approximately 25%, and in the last year in the flow data their share is close to 45%.”

Individually, the American investment community came second, with 15 projects, but collectively South Korea, India, Japan, and China were responsible for 17 projects, up from 13 in 2017.

“The share of Asian investors has increased and we see strong growth, especially in the battery business, but also in packaging and some automotive-related activities as well.”

With Hungary being such a Budapest-centric country, it is easy to fall into the trap of assuming most investments are made in or near the capital, but Ésik says 80% of projects are targeted at the countryside.  

“We can clearly see some new regional centers strengthening, such as Debrecen, for example, or Miskolc, which means we have been able through our projects to contribute to the reduction in regional economical differences between the western and the eastern part of the country.”

That should be a trend that continues, the HIPA leader believes, saying that infrastructural investments due to be completed this year or shortly afterwards – Route 67 to Kaposvár, the M44 to Békéscsaba, and the highway to Zalaegerszeg – will see “additional opportunities open up for new investors”.

Part and parcel of the drive to open up areas and reduce regional economic differences has been the introduction of incentives for companies bringing R&D activities to Hungary and technology intensive development (i.e. new technologies, but not necessarily new jobs).  

Ésik says the number of technology intensive subsidized projects has increased by a factor of seven, so from one to seven, and for R&D it has increased from four to ten.  

“It means these new incentives work, companies are interested and we have more and more successful cases.” Does the success of these incentives mean more might follow? The president says HIPA is “continuously evaluating” its incentive system, including benchmarking it against other investment agencies.  

Fine Tuning

“Based on this, we plan some fine tuning during the course of this year, because we believe we should continue with our focus on quality versus quantity as far as the FDI investments are concerned.”

Given the success of 2018, the obvious question is what might 2019 look like. “We continue to see a strong interest in Hungary; we are in discussion right now with 120 different companies about investments that could potentially represent up to EUR 7 bln of capital expenditure, creating potentially up to 18,000 new jobs,” says Ésik.

“The second trend we can observe is the drastic increase in terms of the high value ad projects, and if I only take into account the projects which are in the area of services, related to R&D, info communications or business services then we could see an increase of 60% year-on-year; last year we already had 29 projects alone in these three service sectors, resulting in the creation of almost 4,800 jobs. This is a trend we would like to continue to focus on, potentially even strengthen if possible.”

HIPA also plans to continue with its drive to reduce regional differences, focusing on areas Ésik says have been “traditionally under-represented in our results” and those areas that have higher labor reserves: the southwest, some parts of the southeast, and some areas in the north and northeast of Hungary.

That also ties in with another continuing trend: the tightening labor market. It is not a feature unique to Hungary, being rather a CEE-wide problem, but how does Ésik convince potential investors their workforce needs can be met?

“In terms of labor reserves, there are several parts of the population that can be considered. Of course, one part is the unemployed, to which in Hungary you can add those people on public work schemes. If you look at the demographics in Hungary you may observe that the activity rate in Hungary is still six-to-eight percentage points lower than, for example, in Germany or Czech Republic, which means some parts of the population, especially mothers returning from maternity leave, youngsters under the age of 25 and people over 55 where we still have some reserves. Adding all these together, theoretically the number of people in work and paying taxes could increase up to five million [from the current 4.5 million].”

Mobilizing Reserves

Targeting, Ésik says, is vital. “The question and the focus should be on how to mobilize those reserves; that is number one. Number two is that regionally there are still big differences; we have some parts of the country where there is basically full employment, and there are still regions where unemployment reaches high single digit or even double digit value.”

Directing investors towards suitable site locations in regions with higher unemployment is an obvious “here and now” solution to the labor issue, but the agency also has a longer-term function, acting as a go between for investors and government, passing on the need, for example, for an education system that produces people with good language ability, but also STEM (science, technology, engineering and mathematics) skills.  

“HIPA has a special role to link the private sector with the public sector, and in that sense one of our duties is to make sure that smart ideas and proposals are reaching political decision makers,” the president acknowledges.  

“We consider policy advocacy as one of our activities, so if something is important for the investment community, we try to understand that, analyze that, and make some proposals to that, developing suggestions and opinions together with the business community. So, whether its infrastructure related, education related, taxation related, we are dealing with those topics in order to be able to improve the competitiveness of the country.”

Five years ago, when he left a private sector career that had seen him work in senior roles for Siemens, Nokia and Amazon, could he have believed the 2018 picture would look like this?

“I think this is a set of results I would have signed up for,” he says with a laugh, acknowledging that the results have exceeded his expectations.  

He says he is particularly proud of the past year. Securing the BMW investment, for example, required 14 months of negotiations, during which time the automaker was looking at more than 160 locations in Europe. The relationship that led to the opening of the Jaguar Land Rover hub goes back even further.

“We have been in contact with them since 2014, and the fact is that, although manufacturing went to one of our competitors, we have stayed in contact, and they have decided to bring engineering to Budapest. This is a great achievement.”

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