Hungarian Hankook factory is to be the springboard to Europe

€„Success in Europe means global success,” Hankook Chief Executive Officer Cho Choong Hwan said in an interview in Budapest before the plant's ground-breaking ceremony July 14, when he repeated the company's forecast for full-year earnings. While Hungary should give standing ovation to South Korean tyre maker Hankook, which chose Hungary as the location for its first plant in Europe, a number of business leaders warned that with current tax hikes the government was going against the wind in the region, the Financial Times said on Tuesday. The factory is Seoul-based Hankook's first in Europe. The company, which expects to boost worldwide revenue by 15% to $3 billion this year, is building a plant in central Hungary to serve the European Union and make 10 million tires a year by 2010.

Hankook, which will compete with tire plants in Hungary owned by Michelin & Cie. and Bridgestone Corp., aims to use the factory to help it become the world's No. 5 tiremaker in six years, up from its current No. 8 spot by 2012. "It was a good step to set up a production base in eastern Europe, especially if Hankook Tire can use the cost advantage as there will be a cost game in the entire industry," said Kim Hag Ju, an analyst at Samsung Securities Co. in Seoul. Michelin, the world's largest tiremaker, in September opened a Ft 14.5 billion plant in eastern Hungary. Bridgestone, the second-biggest tiremaker, will start production at its 190 million-euro factory in Tatabánya, west of Budapest, this year. Carmakers Kia Motors Corp. and PSA Peugeot Citroen have also been taking advantage of lower labor costs in eastern Europe by setting up factories in the region.
Hankook chose Hungary for its tire factory after neighboring Slovakia refused to give cash grants and tax breaks it originally pledged worth 21% of the plant's value. Although many business leaders said that a tax hike package signed into law this week could hurt the country's ability to keep up with east Europe's stiff competition for foreign investment. "There is a tax race in the region and we are going against the wind here," said Les Némethy, president of the American Chamber of Commerce in Hungary and director of Euro-Phoenix, an investment adviser. The Hungarian plant will initially employ 1,500 people and is expected to produce 5 million tires by 2008, replacing deliveries from plants in Korea and China, Cho said. "Later we'll find new European partners and hope Hungary will to be our biggest plant in the future," Cho said.

Hankook's Hungarian investment "makes a lot of sense from the cost perspective," said Mike Dean, a Credit Suisse analyst in London who covers Continental AG, the No. 4 tiremaker. Hankook, whose sales rose 20% the past three years, has outpaced the global tire industry's annual 3% to .5% growth, Cho said. Hankook expects to produce 70 million tires worldwide by 2008, up from the current 58 million. „We'll maintain double-digit growth in Europe and plan to lift our market share here to 6.8% by 2020 from the current 4.5%,” he said. Still, rising raw material costs may sap margins and Hankook expects profit to fall this year. Cho predicted rubber and steel thread prices to rise by 17% to 18% this year, up from a 14% company forecast in January. „The European market is highly competitive and gaining market share will be very difficult,” Credit Suisse's Dean said. „As will be raising prices, which is getting inevitable with rubber prices going through the roof.” Cho declined to give a new forecast for 2006 profit. He said in January net income will fall for the first time in at least five years to $221 million. Hankook had $2.6 billion of sales in 2005, and expects 22% of revenue to come from Europe this year, Cho said. The company, which spends 5% of its revenue on research and development, also plans to set up a research unit next to the Dunaújváros plant, where it expects to employ 80, the chief executive said. Hankook's sales for the three months ended March 31 climbed 3% to 489.7 billion won, while profit slipped 0.2% to 56.5 million won, the company said May 15.

Hungary drew a record €5.4 billion in foreign direct investment last year, topped only by Poland, which won €6.2 billion. But competition in central and east Europe is heating up. Romania showed the greatest increase in FDI last year, reaching €5 billion, while the Czech Republic attracted €2.6 billion. Slovakia's reforms, including the introduction of a flat 19% tax, have made the small country “a serious rival to its larger neighbours". Poland, the Czech Republic and even Austria - in a testament to the pressure of tax competition - have also lowered corporate rates, the paper said. “Surrounded by countries that have lowered taxes in order to draw investment, Hungary bucked the regional trend when it introduced higher rates of corporate tax as part of an austerity package aimed at reducing its high budget deficit." (Bloomberg, Portfolio.hu)