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Hungary Remains a Vital Link in Global Supply Chains

Inside View

Richard Lock, Founding Partner Lakatos, Köves & Partners Law Firm

The importance of the automotive industry within the Hungarian economy is now well established. The OEMs were inevitably followed by parts manufacturers and the whole supply chain ecosystem needed to maintain volume production. The advantages and attractions Hungary offered have remained broadly unchanged: a location with good links to the West European market and a well-skilled and relatively cheap workforce.

Recent years have seen the tensions and contrasting fortunes of incumbents and disruptors with a number of key issues generating those tensions; new technologies (most obviously electric vehicles and digitalization); automation of manufacturing; international trade tensions and resulting concerns about over-extended supply chains and, in 2020, COVID related disruptions.

Korean investors have been important in Hungary for many years but the emergence in the last couple of years of South Korean companies as the largest contributors to Hungary’s FDI is notable and much of that investment relates to electric vehicle technology and in particular battery manufacture. For lawyers, this activity generates work in many areas: company formation, site acquisition, construction law, permitting, subsidy applications, employment law, tax and all other issues arising when establishing a major manufacturing presence.

The new FDI screening regulations introduced in Hungary require care and attention but are not considered likely to present substantive obstacles to continuing investment, not least because investment in manufacturing is welcome (often benefitting from grants and subsidies) and, unlike the situation in some of the other countries which have recently introduced such rules, there is little risk of local technology and expertise being lost and on the contrary, these investments will bring technologies and expertise.

In addition, innovation is giving rise to work for regulatory lawyers, most obviously through the telecommunications, cybersecurity and data privacy issues raised by the increasing connectedness of vehicles, energy related issues as electric vehicles increase in number, and new competition law issues, mainly associated with vertical agreements and dominance.

At the end of Q3, the automotive sector was said to be back at full capacity and German investors in Hungary have expressed optimism about the prospects for 2021 but, notwithstanding those healthy signs, there is clearly stress within parts of the sector and we see increasing time spent on cash management issues (factoring, supplier credit etc.) and anticipate restructuring and insolvency work involving, for example, parts manufacturers whose margins have been squeezed and are, therefore, vulnerable if and when volumes decline.

All of the above factors have an impact on the automotive industry and its supply chain but seem likely to leave Hungary well placed. It is already attractingsignificant investment by the disrupters, such as the Koreans mentioned above. Large plants operated by the incumbents (e.g. Audi, Suzuki, Mercedes) are mostly state-of-the-art and already being adapted to new industry demands.

As supply chains are reconfigured, Hungary remains an attractive location. Principal drivers of that supply chain reconfiguration are the need for Asian (Korean, Japanese and Chines principally) parts manufacturers to be nearer their European customers, and the interest of some European manufacturers who had off-shored their production to bring it back to Europe. For both groups, the attractions of Hungary as a manufacturing base remain relevant.

I have focused on the automotive industry, reflecting the central importance of that sector in the Hungarian economy, but many of the same issues apply equally to other important sectors, for example pharmaceuticals.

In a time of such uncertainty there are also clearly risks that could disturb this relatively positive picture. Hungary cannot be immune to any recession. There are concerns about the labor force – whether enough people are available (although the level of automation in the new factories mitigates this concern), whether they will have the necessary skills and whether the local pay rates will continue at levels which give Hungary a competitive advantage. Time will tell whether thecurrent standoff between Hungary and the EU on “rule of law” issues will affect investor sentiment negatively.

www.lakatoskoves.hu

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