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Country Border Poses High Hurdle for Would-be Hungarian Champions

Analysis

Mangalica meat is an area where some Hungarian exporters are enjoying international success.

Photo by Waidelotte / Shutterstock.com

Exploring and conquering new markets is an obvious means of growth and development for companies; in Hungary, it is also a crucial aspect of the national economy.

Recent years have reshaped several segments of the business world, revealing that there are still hurdles facing Hungarian businesses that want a more substantial international presence. In fact, many are seeing challenges in the most rapidly developing sectors in maintaining their existing domestic positions.

The second half of 2023 is expected to bring an overall uptick in the national economy, in large part due to the hope that Hungarian companies can stoke their international markets or expand their business further. This situation highlights a gap between companies that have already mastered the feat of crossing the border, and those, especially smaller, firms looking for new avenues, which may well grow concerned about retaining their existing markets.

Prime Minister Viktor Orbán announced a national strategy of “outvestment” to balance investments (kifektetés vs. befektetés in Hungarian). Orbán’s reasoning is that the profits international companies claim in Hungary far outweigh their spending, and the best way to rectify that is for Hungarian companies to claim shares in foreign markets and bring their profit home.

In terms of producing so-called champions, companies that can successfully enter and operate profitably in foreign markets, Hungary has ground to cover, especially in the innovative segments that have been picking up momentum in recent years.

According to a study based on Austrian examples (the neighboring country being a designated example by the central bank in terms of economic performance), National Bank of Hungary (MNB) expert Róbert Hausmann highlighted several differences.

“Hungarian SMEs show favorable figures in regional comparison but are well shy of their Austrian counterparts of similar size,” Hausmann wrote.

Bouncing Back

The most recent statistics give some degree of support to government hopes. The Central Statistical Office (KSH) released figures showing that Hungarian foreign trade continued its return to form in May, having sunk into negative territory in the summer of 2021 and only returning to the positive this February. May saw a surplus of EUR 1.1 billion year-on-year. In a month-on-month comparison, exports swelled 13%, while imports were up 7.3%.

The past years, especially the impact of the pandemic, have highlighted the apparent inevitable rise of technology and of research and development, which are set to be definitive in a multitude of industries.

Research released by the Hungarian Export Promotion Agency (Hepa) ranks Budapest 167th among the region’s cities in terms of start-up ecosystems. On the same list, Bratislava is down at 269, but Bucharest is up at 108, and coveted Vienna is number 71.

While inflation and the overall uncertainty in outlook weigh heavily on retail volumes, the pandemic sparked significant changes in trade channels. Electronic sales were already rapidly developing; the need to limit personal interaction only augmented this boom.

The customer response is clear; a study conducted by GKid Research & Consulting showed growth in online commerce in 2022 of more than 115% year-on-year.

However, what may trouble Hungarian vendors is that a lot of the market growth is generated by international or even regional players implementing their models to serve Hungarian customers. As Norbert Madar, a senior consultant at GKid, explains, Hungarian customers don’t focus on where the company they buy from is based.

Quality Trumps All

“As long as there’s quality in service, working and localized customer support, they’ll be happy to spend their money,” he says. Take the likes of Czech Alza or Kifli, both making inroads in Hungary through innovative models of service.

Madar points out that, unlike Hungary, the customer base in other markets is more conscious of supporting local businesses, meaning a Hungarian company is already at a disadvantage regarding its expansion efforts when looking for sales abroad. The survey also found that only 14% of Hungarian webshops sell their wares abroad, and less than half (45%) said they have plans to do so in the future.

Research by the Ministry of Foreign Affairs and Trade found that there are sectors where Hungarian companies are competitive. These include traditionally strong fields such as automotive or electronics, with food, health, and chemicals also looking like options. The main hindrance, which the government and the MNB have repeatedly emphasized over the years, is that a large percentage of the added value in successful industries is owned and controlled by foreign players, leaving Hungarian businesses in a vendor role rather than in a position where they can build their own international markets.

A good starting point is to look to markets where major Hungarian players, such as established multinationals like OTP Bank or MOL, have already paved the way. This mainly means the region, with eyes set on the developing Balkan countries. Hepa, which above promotion efforts also provides financial support to companies looking to go multinational, states that it is constantly monitoring ongoing developments to seek out promising candidates in viable sectors.

In terms of the food sector, the production value of the industry reached HUF 3.235 trillion in 2018, which ranks Hungary at the 92nd spot based on its population, according to Hepa’s roundup. The country is the 34th largest global exporter, with most of that stake claimed by the big players. Large enterprises constitute 85% of the sector’s entire turnover and more than 90% of revenues from exports.

Champion producers in the food segment that have identified niche markets are doing well. Hungary is the fourth-largest exporter of game in the European Union, after Poland, Germany and Spain, according to a publication compiled by the National Agriculture Chamber. Local producers are now looking to export dove meat to Singapore, among other countries. There is also well-established demand for products like mangalica pork (from the unique, hairy Hungarian pig breed) or alcoholic beverages in Europe and more distant markets.

This article was first published in the Budapest Business Journal print issue of July 28, 2023.

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