Manufacturing Continues to add Weight to Hungary’s Economy

Nóra Gyöngy-Kovács

In a 10-year period between 2009 and 2019, manufacturing’s share of GDP has grown 1.3% from 20.2% in 2009 to 21.5% last year. On average, manufacturing industry accounted for 22.2% of Hungary’s GDP over the past three years.

The trend actually shows a slight decrease in the past couple of years: in 2017, it was 23.1%; in 2018, it was 22.1%; and in 2019 it was 21.5%.

Based on last year’s figure, Hungary places fifth in the European Union in terms of the weight of the industry following Ireland, the Czech Republic, Slovenia and Germany. Based on the number of those employed in manufacturing, Hungary ranks fourth, after the Czech Republic, Slovenia and Slovakia.

Within manufacturing, the automotive sector has the dominant role. Thanks to the country’s location, its skilled and low-cost labor as well as cost-effective production, Hungary has proved an attractive place for automotive investments.

The companies already here continue to develop their operations, bringing in more complex and developed functions and technologies or, in some cases, research, development and innovation centers.

Flagship Sector

From roughly HUF 3.6 billion in production value in 2010, this flagship sector of the Hungarian economy had grown to more than HUF 9.5 bln in 2019. The automotive sector accounted for 28.9% of manufacturing industry last year, while its share of exports was 90.6%.

Strategic agreements between market players and the government are also seen as a proof of the importance of this sector. The majority of these are linked to the automotive industry: out of 83 such deals, 29 were signed with players of this sector.

For the first time in the history of the Hungarian Investment Promotion Agency, the number of working capital investments in Hungary in 2019 exceeded 100, the Budapest Business Journal learnt from HIPA.

Last year, a total of 101 projects resulted in EUR 5.35 million investment in Hungary, creating 13,493 new jobs. There are three major trends behind the figures.

In terms of investment, 2019 was the year of countries targeted in Hungary’s Eastern Opening foreign relations pivot, and most especially South Korea, Japan and China.

Besides the traditionally strong German and U.S. circles, Asian investors have become more dominant. South Korea was placed first both in terms of the volume of investments made (50%) and the number of jobs created (30%). Together with Japan and China, a total of 19 investments originated in East Asia, which account for 38% of the newly created jobs.

With the expansion of Far-Eastern countries comes the growth of electromobility. Last year, 10 investments decisions involving eight large electric car batteries companies were made, including those of Samsung SDI, SK Innovation and Toray, worth EUR 2.85 bln, which accounts for more than half of the total volume, HIPA says.

Electrifying Input

Adding the automotive industry’s e-mobility related investments to the production of batteries for electric vehicles, and a total of 60% of investment volume and 40% of the jobs created can be attributed. Among these is, for example, Audi’s e-transformation project which aims at expanding production capacities for electric engines.

The third trend is the continuous growth of business services centers or BSCs. Last year, 14 investment decisions in this field were made, which is more than ever before, HIPA notes. They will create 2,500 high added-value jobs in the period ahead.

There are two new players among the 14 investors, at least as far as BSCs are concerned. Sanofi and Tesco have long been present in Hungary in production and retail, but only recently have they entered the BSC sector.

To ensure the supply of new investments and, just as important, reinvestments, the government has created some attractive incentives. Among these are an attractive taxation system (including the 9% corporate tax), flexible labor market regulations and a subsidy system which supports job creation as well as innovation.

As of last October, the support system has shifted its focus to productivity, so the creation of new jobs is no longer a prerequisite for someone to receive asset-based, non-refundable cash grant granted by individual government decisions.

Driving Manufacturing Forward, but for how Long?

The automotive sector’s share within the industry is significant: together with suppliers and related services it constituted 30% of all industry in 2019, contributing 15% of GDP and 25% of exports. It also provides employment to some 20.000 people.

“Still, its role within the industry is a two-edged sword,” says Nóra Gyöngy-Kovács, senior analyst at Equilor Befektetési Zrt. During growth periods, it has produced excellent figures but even before the coronavirus crisis hit the markets, it had lost momentum first in China, then in the EU as well.

“Due to its heavy reliance on the automotive sector, the Hungarian economy is highly exposed to demand changes and situations such as the current one,” Gyöngy-Kovács notes.

For long, the general view was that this sector was unstoppable and in many ways it was true; factories and manufacturers were operating very profitably.

But its future is less bright, not least because the majority of cars produced in Hungary have internal-combustion engines whose future, with electric cars gaining ground everywhere, is relatively short-lived. That makes investments like Audi’s e-transformation project, mentioned above, all the more important.

Also, Hungary has less skilled workforce than many Western countries, which, the analyst says, means less value-added jobs or function are brought here than might be.

“With diversification and by improving knowledge-based skills, the country could decrease its exposure,” Gyöngy-Kovács adds.