Getting the right message
In a relatively rare interview, Nick Kós, country managing partner of PwC Hungary, talked exclusively to the Budapest Business Journal about the economy over the past year and the months to come, changes within his own company, and the global megatrends set to impact Hungary in the near- to mid-term future.
Q) As a professional services firm, PwC advises companies on doing business in Hungary and that puts you in a very good position to judge the economy. So how would you categorize the last 12 months? What is the mood among the CEOs you work with?
A) Go back a couple of years to when I first came back to Hungary and there was massive uncertainty. There were issues about how we were portraying ourselves as a country; the international press coverage was poor for us. Perhaps government communications have got better, and perhaps the international press has lost some interest. To me the fundamentals were always good: the geographic location, the quality of the workforce, the intellectual capital it represents. But these were lost in the rather bleak picture that was painted for a while.
When good things start happening and people get the right messages the Hungarian economy will respond quickly. This is not Poland, it is a relatively small, export-dominated market and attracting investment is always going to be important in generating growth.
Of course there are a couple of areas of the economy where the approach is perhaps more punitive than in others, but Hungary is not seen as a massive black hole now. Increasing numbers of potential investors are coming to us for support, and that is a very good sign that people see value in the market and are ready to invest.
Our annual CEO survey also showed a more positive mood. Something like 29% were ‘very confident’ about their company’s prospects for revenue growth in the next 12 months, 72% were ‘confident’. Eighty-five percent were ‘confident’ about growth in the next three years. There is definitely a sense of a shift in terms of sentiment in the market. Some 45% are talking about increasing headcount.
That doesn’t mean there aren’t issues. There are still very high taxes on employees, which are not conducive to increasing investment, but we really are quite positive.
Q) We have a newly re-elected government: do you expect more of the same in terms of predictability and transparency in the economic environment, or are you looking for a more consensual approach over the next four year term?
A) I think most of the things the government wanted to do it has done, though if you look at energy, the banking sector, and foreign currency loans, it seems the process is not yet finished.
Some of the fundamentals look very good, such as unemployment, and I say that irrespective of the fact there is an impact in terms of people leaving the country. Perhaps that’s a new thing for Hungary, but for many countries around here, or for Ireland, for example, migration has been an issue for years. We know that has helped the figures, as have the numbers of fostered workers [people on government work schemes], but still, unemployment is 8.3% here; in Spain it is 25%, in Ireland it is 11.7%. That has to be positive.
From the governmental point of view, it has been reelected strongly, the base fundamentals have moved in their favor, down to their actions in some cases, in other parts through good fortune. For the next government cycle, keeping the GDP growth going will be fundamental for them, and that means it will be beneficial for them to support the same things business wants: growth. I don’t pretend to know what the government intends to do, but we need a period of stability in the country and I think it will be supporting business and investment in a way that benefits the country. And that, of course, is a perfectly noble cause.
Q: What are you most and least optimistic about in terms of Hungary’s economy?
A: I am most optimistic about the fundamentals. If you go back two years or a little more and think where we were with the IMF loan, everyone was worried we wouldn’t get a new loan and the economy would collapse. We didn’t get a new loan, we paid the existing loan off early and the economy didn’t collapse. That ability to deal with major international challenges enables us to be more positive about future growth. Hungary is starting to get some recognition for the positive developments in its economy: the return of GDP growth, low inflation. The currency is remarkably stable, all things considered; unemployment is low. It is, fingers crossed, in a very good position to catch a wave of positive investor sentiment as we emerge from a period of deep doom and gloom amid the recession, both globally and in Europe.
On the less positive side, what the CEOs are telling us hasn’t changed. They fear the levels of uncertainty we have seen. We need stability and predictability in regulations. We have seen laws and taxes changed at incredible speed, although our tax advisory business has clearly benefited from the latter! The government still has the ability to surprise negatively with its two-thirds majority. We would like to see it use that power positively.
Q) It has been a busy 12 months for PwC; how has the company performed?
A) Much like the economy, we have come through some difficult years. At times we have had to take actions we have not necessarily been pleased about, but that were necessary to protect the firm and its profitability.
We have now come to a position where we are happy with the business, there is an improved level of quality and, in general, it is now very robust. In some ways we have become a much more Hungarian firm, much more market-focused, though I think you could say the same for any of the Big Four firms.
We do not compromise on quality or integrity, and that would never be our intention, however we need to become somewhat more ‘human’. This is a people business, therefore from that point of view our people are our product, with the knowledge, experience and skills they have. The relationship with the clients is incredibly important, knowing them, understanding their needs, so you can offer the best solution, the solution they want rather than the one you want to give them.
We have emerged from the past couple of years much more capable of going to the market, of identifying opportunities and getting into a position to add value; that is positive for us and our clients. Now we have something more to offer. Purely financially, we still have some challenges on the revenue side, to grow revenue while maintaining profitability. But overall I am pleased with where we are, that we are well positioned to make the most of the journey that is to come.
Q) What does the next 12 months hold for PwC? How do you plan to grow market share and revenues?
A) As a firm we say we want to be loved in our markets, feared by our rivals, and envied by our own network. That has become something of a mantra for us.
There are three things we need to focus on, and have been doing so for the past two years: one, create relationships in our new reincarnation in Hungary; two, improve delivery, both the quality of the work we do and the offers we have so clients can find the right solutions; three, take pride in what we do. Fundamentally for us, our people are our weakest or strongest link; in the past we have not done enough to recognize what they do. So now we make sure we celebrate our successes, often with our clients, by the way, but always with our people. If we do these three things, we will do very well with our existing customers but also in expanding our client base in Hungary.
Q: Before the elections the government started to hint it was happy to look at integrated reporting where it was appropriate, particularly for multinationals. Are you optimistic it will follow up on that, and in what time frame?
A: We have seen that when this government decides to do something, it generally does it. I can’t comment on a timeframe, but we would like to see progress in this area. We support it from the point of view of it building trust in the reporting, which makes it easier to raise capital and drive sustainable growth. We are seeing more companies move to an integrated reporting framework; in fact, we ourselves produce integrated reports.
Q: In April the European Parliament reached preliminary agreement on a revised directive and a new regulation on statutory audits, aiming to strengthen quality, reinforce independence, and improve supervision. Do you welcome these moves, and how do you think this might play out in Hungary?
A: We support anything that creates more transparency, and strengthening statutory audits is good. However, I am not sure all of the changes as proposed will have the desired effect. In fact, they could actually reduce competition. From our perspective in dealing with customers, we understand the threat of over familiarity, but we absolutely rely on our integrity and self-regulate very strongly. And the reality is that companies get the best service from people who understand their business.
It also concerns me that in order to attract the very best candidates I have to be able to offer a business that is interesting to them. If we go down the route of restricting firms to offering audits as a commodity, you lose some of that.
Q: PwC is a global organization, able to gather information from all over the planet: what will be the next transformative global trend for business, and when might its effect be felt in Hungary?
A: We spend a lot of time looking at global megatrends, and there are three on the agenda: technological advances, demographic changes, and shifts in economic power.
In the mid- to long-term, if you look at the changes in demographics in the next 30 years, your manufacturing workplace and your markets will be in completely different locations. For us as an export economy it will become very important over time to know exactly whom we are competing with and to where we are exporting.
Mid-term, economic power shifts are already happening with the emergence of India and especially China as a retail destination, where the purchasing power of the Chinese middle class is rapidly growing. Businesses will need to attract a very different type of client base, with changes to their marketing strategy and so on.
Rapid technological changes will have a great impact and will be immediate. And historically Hungary has made an incredible contribution from that point of view. Think of Prezi, which transformed what was a fairly bland technology, or NNG; what it is doing, putting its sat-nav technology into cars directly, is amazing. This country is well set up to benefit from this trend, but businesses need to think how they will deal with it, and with the changing profile of business everywhere. We talk about digitalization a lot now.
So there are huge challenges ahead: changing markets; changing manufacturing and sales and distribution destinations; and massive technological challenges. Navigating through all that will take particular skill sets. And a strong nerve!
Box: Making an office a home.
“People keep saying ‘If times have been so tough, how have you been able to move in here?’” says Kós of the newly renovated Eiffel Palace Office Building, in the heart of the capital’s central business district. “But actually, from a cost perspective, because of the use of space and the rental agreement, this commercially was a very sound decision.”
But the benefits go way beyond a simple improvement to the bottom line.
“The real point is the impact of the building. It is much more open, much more informal. There’s lots of glass. People are walking around smiling and waving to each other. I’m excited to come to work here in the mornings.”
And then there is environmental impact. “I am proud of the fact that the office was built to the highest standards; from a CSR perspective it is very green, and has won a number of awards.” Indeed, it is expected to get double environmental certification (LEED Gold and BREEAM Very Good), which developers Horizon Development Kft. says would make it unique in Central and Eastern Europe.
The eight story, 2,675 sqm building originally dates back to 1894, when it was built as the headquarters for the prominent daily Pesti Hírlap’s publishing and print house (the plot was originally bought for the princely sum of 216,105 forints and 33 deniers).
Renovations of the building were begun in March 2013 and finished by the end of that year. PwC moved in during March of this year. “It has a lovely balance,” says Kós. “It combines the old elegance of Budapest with modern needs. Everything is wireless and mobile. It is very much in tune with the technical demands of today. If it contributes to improving the image of Budapest’s financial district and the rejuvenation of District 5, I will be very happy.”
Box: Prime Numbers: 2 times GDP
“Back before 2008 we were seeing 10, 15, 25% annual growth; I do not think those days will return,” warns Kós. That said, though, growth is very much on the agenda.
“Two times GDP is typically seen as a target. That is something we would see as a minimum for us; you would be expecting about 4-5%, and we’d like more than that. Some parts of our business should see double digit growth, the business as a whole possibly 7-10% if we really stretch to gain our strategic goals.”
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