‘Eastern Opening’ Policy Reaping Dividends With China

Interview

Hungarian forint (HUF) and Chines Yuan Renminbi (RMB) bank notes.

Photo by Mc_Cloud / Shutterstock.com

For the first time, China became the leading investor in Hungary in 2020. The Budapest Business Journal asked the Hungarian Investment Promotion Agency (HIPA) to chart the rise in influence in terms of FDI of the Asian giant.

BBJ: When were trade relations between China and Hungary first established? When did they begin to become significant?

HIPA: The very first written trading relations between the two countries root back to the 19th century, nevertheless 1949 should be considered as the beginning of the present relationship, when the two countries established an embassy in each other’s capital. Chinese-Hungarian trading relations received a new boost when the government of Hungary announced its new strategy regarding the Eastern markets in 2010, initiating the “Eastern Opening” policy. Since that time, Hungarian diplomacy has turned with attention to the countries of the Far-East and in the first place to China, working for the comprehensive enhancement of economic, political and cultural relations with the country. As a consequence, Hungary was the first European country to sign a cooperation agreement for China’s “One Belt One Road” initiative in 2015. The effectiveness of the policy can be measured by the growing number of Chinese investors present in Hungary. In 2020, a record number of greenfield investments arrived from China. In fact, China was number one in terms of investment volume, representing almost 30% of share in capital expenditure. Arising from the two countries’ bilateral engagement, continuity in the increasing trend of Chinese investments’ magnitude can be expected.

BBJ: How much FDI came into Hungary last year, and how many jobs will this create?

HIPA: Despite the fact that 2020 is deemed an extraordinary year for well-known reasons, Hungary did very well, considering the FDI volume and the number of newly created jobs. Indeed, the number of projects handled by HIPA set a new record at 907, which is a massive increase comparing to the 101 successfully closed projects in the previous year, although it includes a large number of projects related to the temporarily available COVID-specific funds, aimed mostly at Hungarian SMEs, on top of the usual FDI deals. This resulted in a total investment worth almost EUR 4.1 billion, creating 12,900 new jobs.

Regarding China-related investments, the first production unit of the Semcorp Group outside China, a lithium-ion battery separator film plant to be established in Debrecen (Hungary’s second-largest city, 231 km east of Budapest) is notable. The investment of more than EUR 183 million will create 440 new jobs and was the largest Chinese investment in 2020. The Hong Kong based Lenovo also decided to expand its portfolio with its first European in-house manufacturing unit in Hungary. The company will manufacture products for data centers and desktop systems in its new facility in Üllő (just 28 km south of the capital), in an investment worth EUR 24.7 mln, creating 1,000 new jobs.

BBJ: What are the most significant sectors for Chinese investment in Hungary, and who are the biggest players? Where in the country do they invest?

HIPA: Chinese companies are present in almost every sector; however, by the number of employees and annual turnover, the chemical industry, the automotive industry, electronics and information and info-communications technology (ICT) are the highlights. The top 10 Chinese-owned companies from the above-mentioned industries jointly achieved HUF 1.13 billion annual turnover in 2019 and maintained stable jobs for almost 16,000 employees in Hungary. It is also notable that our Chinese partners have locations all around the country. Therefore, we are proud that, although Hungary is an unusually capital-centric country, Chinese corporations were open-minded enough to also see the potential business opportunities in countryside locations, which resulted in diversity in their choice of sites.

Among the top 10, we can mention such trusted and reputable companies as the Wanhua-owned BorsodChem Zrt., a chemical raw material manufacturing company with HUF 459 bln net turnover and 2,900 employees, operating in Kazincbarcika (207 km northeast of Budapest). The tech giant Huawei is seated in Budapest with more than 200 employees. The automotive industry features several outstanding Chinese companies, such as S.E.G.A. Hungary Kft., a member of the Henan Machinery Investment Group, which manufactures starters and alternators in Miskolc (186 km northeast of the capital) with more than 1,900 employees and exceeding HUF 128 bln net turnover. The leading global automotive supplier Yanfeng in Pápa (166 km west from Budapest) manufactures interior parts for premium brands.

BBJ: How many projects are you working on now that originate from China?

HIPA: It is important to stress that Asian related FDI has been showing a strengthening tendency for years. While in 2019, South Korea was the number one in investment volume, last year China took over the lead. In 2020, among large FDI deals, the second largest number of projects (15) was also related to Chinese companies. In terms of investment volume, China took first place with a share of 27.1% (EUR 663.82 mln), followed by Germany with a share of 17.9% (EUR 437.53 mln) and South Korea 17.8%, (EUR 436.28 mln). In terms of newly created jobs, U.S. companies finished first with 24.7% of total job creation (2,496 jobs), followed by China with 21.3% (2,158 jobs) and Germany at 14.4% (1,454 jobs). It is also a reason for growing confidence that in 2020, as well as greenfield projects, a significant amount of reinvestment activity was recorded, like Huawei’s new R&D center in Budapest, which will focus on artificial intelligence, streaming, image processing, signaling technologies and extremely large distribution systems.

Hungary has been particularly strong in the automotive sector, which accounts for approximately 30% of the country’s production industry output. The same ratio can be seen in last year’s Chinese investments, as five projects come from this sector. For instance, Chevron Auto established its first plant outside China in Hungary. The value of this greenfield investment, aimed at serving European partners more efficiently, is more than EUR 50 mln. The new plant in Miskolc (186 km north-east from Budapest) will have a capacity to produce up to two million vehicle parts per year and nearly 150 new jobs will be created. Another traditionally strong industry among Chinese investments is the electronics sector, where four projects were realized. Last but not least, the chemical industry last year had five investments.

At the moment, we are negotiating with almost 20 Chinese companies that are considering Hungary as a potential investment location but have not yet made their final decision. These projects could result in a EUR 1.2 bln investment volume and approximately 8,000 new jobs. On these grounds, we hope that we will not just maintain, but improve the outstanding results of the previous year.

BBJ: What sort of subsidies or incentives are you able to offer Chinese investors? Are any of these unique to China?

HIPA: The Hungarian government equally supports investors from every corner of the world by providing a stable political and economic environment, and a clear agenda on economic development and FDI strategy. As a consequence, there are no unique subsidies or incentives which are only accessible to Chinese investors. One of Hungary’s competitive advantages over other countries in the region is the government’s strong commitment to streamlining business processes, and increasing the competitiveness of the already reputable value chains in Hungary. To help achieve this, Hungary ensures a wide-range of incentives, both refundable and non-refundable, to facilitate FDI and also reinvestments by enterprises already present in the country. The main types of incentives are cash subsidies (either from the Hungarian Government or from EU funds), tax incentives and low-interest loans. These subsidies and incentives are also diversified based on the purpose of the investments, like helping the aims of a project in a specific activity, which could be R&D or employee training.

HIPA offers a one-stop-shop management consultancy service to address all the needs of investors, including but not limited to providing various information packages: on business environment, taxation, legal questions, HR availability, site-selection advisory and even the recommendation of potential suppliers. We support our clients both administratively and financially, since HIPA is the managing body of a wide range of incentives as well.

This article was first published in the Budapest Business Journal print issue of  March 12, 2021.

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