COVID Does not Halt Growth of Asian FDI in Hungary


Róbert Ésik

Despite the undeniable economic impact of the coronavirus pandemic (in its latest report, the World Bank estimates Hungary’s GPD will have fallen by 5.9% in 2020), the award-winning Hungarian Investment Promotion Agency (HIPA) returned some surprisingly positive figures.

Up to and including 2019, HIPA had broken records in each successive year. The investment volume for 2020 was still the third best, and the number of new jobs created only 579 fewer than in 2019.

2020 had started well, before the pandemic hit, and border closures and lockdowns threatened to deliver a year without significant foreign direct investments.

“But then we started to realize that there are projects and investments that are resilient to the crisis, there was an economic action plan initiated and we launched COVID-specific investment subsidy programs,” HIPA CEO Róbert Ésik tells the Budapest Business Journal in an exclusive interview.

“Finally, towards the end of the year, specific sectors of the economy started to recover really fast. All in all, that resulted in many new projects, and of course a lot of work for us, but we were able to close a year that was close to being our best ever.”

Indeed, in one metric, the number of projects handled, HIPA did set a new record at 907, a huge increase from the 101 managed in the previous year. That is slightly misleading though, as in addition to its usual work with multinational foreign investors (who contributed 97 projects, only one behind the 2018 total), HIPA also administered two COVID-specific subsidies (see separate box).

Around 80% of the 810 projects that fell under this category were Hungarian SMEs. As Ésik puts it, these do not represent “typical business for us, but again 2020 was not a typical year and we tried to contribute with our activities to the economic recovery. Even without the COVID-specific programs, we were close to EUR 2.5 bln of capex, all told, those 907 projects resulted in investments worth almost EUR 4.1 billion, creating over 12,900 new jobs,” Ésik says.

Big Spenders

Looking at the details of the 97 large investment projects that were not related to the COVID-specific subsidies, interesting trends can be identified.

In 2019, South Korea became Hungary’s biggest foreign investor for the first time. That is a trend that has developed further this year.

“In 2020, four Asian countries, China, Korea, Japan and India, represented approximately 50% of the investment volume and 35% of new jobs.” But traditional long-term partners were still highly visible, the CEO says.

“The German investment community played an important role because, in terms of number of projects, they are in first spot with 20 different investments worth EUR 438 million, creating close to 1,500 jobs. And the American investors ranked number one in the total number of new jobs, which was close to 2,500.”

The growing importance of electromobility to the Hungarian economy was also underlined in 2020. Electronics/battery manufacturing was the number one sector in terms of investment value, job creation and number of projects, giving one-third of volume and one-third of jobs, over all.

“We had major reinvestments, such as Doosan, which was the biggest project in terms of investment value with EUR 206 mln. And we had new entrants such as Semcorp, from China, with its investment [in Debrecen, 231 km east of Budapest] of EUR 184 mln.”

Automotive continued to play an important role, though mainly through expansion projects. Notable among these was Mercedes Benz, which at the beginning of the pandemic announced it was investing in a new press shop at its Kecskemét factory (98 km southeast of Budapest).

Towards the end of the year, it further announced it was bringing production of the EQB, a fully electric sports utility vehicle, to Hungary. That will represent a milestone for the automotive industry here when it becomes the first fully electric vehicle put into serial production, perhaps as early as the fall of 2022.

“We only had one major automotive greenfield project, which was China’s Chervon-Auto, which is setting up a facility in Miskolc [186 km northeast of the capital],” Ésik says.

The third significant sector was the food industry, which has grown in strategic importance because of the pandemic.

“We have seen that approximately 10% of the entire volume and 10% of all projects are related to the food industry.” One of the major projects here was the expansion of the Nestlé facility in Bük (208 km west of the capital).

Future Trends

There have also been some important new trends among the figures, Ésik points out, including the rise of future-proof jobs.

“I am really happy to report that high value added services projects represented the highest proportion ever. If I take into account business services center-related, ICT-related, and R&D-related projects, altogether these represent more than one-quarter of all investment projects at 25, and these created more than 3,000 new jobs.”

The next trend could potentially be even more significant in the long-term, and is a first in the seven-year history of HIPA.

“2020 was the first year where we were able to record significant greenfield investments from China. In fact, China was number one in terms of investment volume, representing almost 30% of share in capital expenditure.”

China aside, electromobility and Korean investments (both from new players and major reinvestments) continue to be significant elements of the Asian dominance.

One final trend last year saw HIPA help to plug gaps left by some multinationals reducing capacities in the country.

“We are also very proud that we have been able to contribute to the development of regions that have been negatively affected by previous factory closures or headcount reductions.”

Examples include German company Bock investing EUR 1.7 mln and creating 100 jobs in repurposing a closed factory in Nemesvámos (121 km southwest of Budapest, relatively close to Lake Balaton) and Korea’s Sangsin EDP spending EUR 28.8 mln creating 150 jobs in Jászberény (87 km east). In Gödöllő (30 km northeast), Korea’s Iljin Materials is spending EUR 11 mln and creating 19 jobs, and China’s Shenzhen Kedali (KDL) is investing EUR 40 mln and adding 330 jobs.

Hungarian “whirlpool” bath and garden spa maker Wellis is creating 800 jobs in a EUR 24 mln investment into a shuttered factory in Ózd (156 km northeast). Wellis is the largest manufacturer of such equipment in Europe, and Ésik describes this as perhaps the most unusual project of 2020.

“As a result of our negotiations, we were able to guide them to Ózd, where they have decided to invest. The other option would have been for them to expand in the area of Dabas [53 km southeast of the capital], where they are based, but I think this was a win-win scenario for the country and the company. This was HIPA’s first ever project in the massage pool sector. I do not know whether this will become a trend, but it was certainly unusual for us.”

Hungary remains an unusually capital-centric country, which makes HIPA’s efforts to match investors with suitable countryside locations such as these all the more important. Looking at the regional distribution of the 97 investment projects, Ésik says Budapest and the surrounding Pest County remain the most successful areas.

“But immediately behind them we find Borsod-Abaúj-Zemplén County [in the northwest, on the border with Slovakia], where one-eighth of all projects in 2020 went, and we had at least one successful project in each county of the country,” the CEO explains.

“Reducing regional differences continues to be one of our priorities, and [.…] we will continue to focus on our university cities for business services type of investment. We will be announcing two new R&D centers in the countryside relatively soon.”

One area which had been of concern was the relative lack of mobility of the Hungarian workforce, especially that based in the countryside. One perhaps surprising side effect of the pandemic is that some of the pressure here seems to have eased.

Partly that is due to the fact that, following the inevitable lay-offs that came with the economic downturn triggered by COVID lockdowns, as well as the return of many Hungarians who had been working abroad, there are more workers around.

But it also stems from the fact that, having been forced to embrace the idea of remote working, many non-manufacturing employers have found the potential workforce has increased.

“Previously, labor mobility was about how people get to the office, how we can find housing solutions near the office; this has been replaced with how we can provide flexible work conditions and potentially recruit people who do not necessarily come to the office on a daily or weekly basis.”

Ésik emphasizes, however, that the office continues to be important to build company culture, team spirit and efficient communications.

“Maybe they will invest more in common areas, and there will be less space required for office desks, but the elimination of the common office is not on the agenda of any of the major companies we work with,” he says.

2021 Expectations

What, then, are the expectations for 2021? The short answer is HIPA expects another busy year. The agency will target projects “that require a high local value added, no matter whether in manufacturing or services sector, and we try to position Hungary successfully, especially for those projects that represent future proof technological solutions,” Ésik says.

“Our expectation is to position Hungary as an attractive investment location and maintain our leading position in the region. Our aspiration is to try to contribute to the relaunch of the national economy, through the successful completion of the already initiated COVID-specific subsidy programs.”

On that first point, the CEO says HIPA is constantly in consultation with companies looking for investment locations in the region.

“We are currently talking to 78 companies who are thinking about larger investments, either in excess of EUR 50 mln or excess of 250 people. These projects represent more than EUR 13 bln and close to 32,000 new jobs.”

The dominant sector is again electromobility but the healthcare industry and medical technology are also important contributors, as well as the services industry.

“Interestingly, three-quarters of the volume and half of the jobs are related to Asian investors. Based on this, I do expect that the dominance of Asian investors will continue in 2021, although we are still at the beginning of the year.”

Why does HIPA believe it is having such success with Asian investors? Is it down to the country’s “Opening to the East” policy, launched in 2010, which saw it deliberately court new markets further East, or is something else at play here?

“It is partly word of mouth because, especially for the Asian investors, reference is a very important topic and the experience of others who have invested earlier is a very important factor when it comes to their final decision,” Ésik explains.

“On the other hand, in the past few years we have been able build up very important ecosystems in certain industrial fields. We have become one of the major hubs for electromobility and we now have companies knocking at our door saying that ‘We realize you are an industrial leader in this field and that’s why we have your country on our shortlist of potential locations’,” he says.

“So, either they have heard the positive experience of others, or they have analyzed their value chain and they have come to the conclusion that a) many of their customers and, b) many of their partners and suppliers are located in the area.”

COVID-specific Incentive Programs

“In 2020 we were able to launch two COVID-specific investment incentive programs, both of which have become an important element of the economic action plan of Hungary, which was put in place to facilitate the relaunch of the economy,” HIPA CEO Róbert Ésik explains.

The first program was based on a temporary framework agreed by the European Commission, and allowed HIPA to give a maximum of EUR 800,000 in financial support to companies that have committed to maintain staff and carry out investments.

The second is a compensation scheme that aims to support firms that have suffered financial losses because of the pandemic but are still ready to commit to additional investments and maintaining jobs.

“Altogether, 1,338 companies have applied under these two programs: 810 have already received the financial support from us or have a signed agreement.” The remainder are still being evaluated.

This article was first published in the Budapest Business Journal print issue of January 29, 2021.

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