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The math of manufacturing jobs

The automotive industry is perhaps the single most important business segment in Hungary on which GDP growth depends. Now, it could also become a case study on how the government plans to change investment subsidies it gives to global companies.

For the past six months, Audi Hungaria Motor Kft, one of Hungary’s largest exporters, has known that its €900 million new factory enlargement in Győr would be supported by a bundle of state money for two reasons: it raises Hungary’s GDP and it brings new jobs. The expansion, set to be finished in 2013, would allow the company to triple its manufacturing capacity (to 125,000 cars per year from 2013) and would bring production types to Hungary that need much more human labor than the assembly process the plant has been doing for decades. They were right to be confident: the current government, like all previous governments since the transition to a market economy, is happy to spend money on supporting new jobs, especially after the crisis.

This was certain in the case of Audi as well, from the moment its investment was ceremonially announced last September. Yet there is one thing that the carmaker is still uncertain of: exactly how much the government is willing to spend on the 1,800 new jobs the expansion will bring in addition to its current workforce of 5,800.

The guessing game about the exact amount of the subsidy has been on-going since November, when the government said it would decide “soon.” Back then, unnamed industry insiders put the figure at HUF 20 billion, while the latest – unconfirmed – information of Hungarian business daily Világgazdaság puts it at HUF 11 billion (or HUF 6 million per each new job created).

This amount is not only far smaller than expected, but also less than similarly large recent investments received in subsidies. Daimler’s €800 million Mercedes-Benz Kft plant in Kecskemét has received HUF 22.1 billion (HUF 8.8 million per new job), while General Motors Powertrain-Magyarország Kft’s €500 million expansion of its Szentgotthárd motor assembly plant was promised about HUF 7.5 billion (HUF 9.4 million per job).

Audi Hungaria spokeswoman Mónika Czechmeister told the Budapest Business Journal on the web that so far only the framework of the contract has been set and both sides are still working on the details. According to the National Economy Ministry, the final conditions could take form in weeks.

 

New government policy

The question of how much support multinational carmakers’ investments in Hungary receive has become an especially acute issue since Zsolt Becsey, state secretary of foreign economic affairs at the National Economy Ministry, announced in early February that the government would limit the amount of subsidies on foreign investments to an average HUF 5 million per new job, an amount basically equivalent to the payroll taxes paid after an average wage over three years. The state secretary said that the government will cap the rate of its financial support at an average 5% of the investment’s value, while it will calculate subsidy amounts to bring a return in a maximum of five years.

Most admit that big investors do receive large tax breaks and subsidies – even if this is necessary in order for Hungary to be competitive with other players in the Eastern European car-making triangle of Slovakia, Hungary and the Czech Republic. Look at the financials of the two largest carmakers in Hungary, Magyar Suzuki Zrt and Audi Hungaria, it is easy to see this.

 

Tax math

Audi Hungaria, for example, made a profit of €295 million in 2009 (before taxes) and had to pay an overall tax of less than 1.6% compared to its profit. Magyar Suzuki, which had a profit (before taxes) of HUF 2.5 billion (about €100 million) paid slightly more, with the tax burden amounting to 2% of its profit in its 2009 financial year. In comparison, the tax rate for a small Hungarian enterprise at this time was around 20%.

However, there is another side to the story. Large employers such as Audi and Suzuki pay their dues in the form of payroll taxes. While many Hungarian SMEs only pay taxes after a part of the salaries of their employees (and give the rest under the table in a brown envelope), multinationals’ employment is usually entirely above board.

Audi paid out more than €110 million (HUF 27.5 billion) to its employees, and paid payroll taxes of €30 million (HUF 7.5 billion). If the HUF 11 billion grant is awarded to the company, it is almost sure to pay more into state coffers in the first year of operation of the expanded factory.

And that’s just the first year. Suzuki founded its plant in Hungary 20 years ago. In just its last financial year, it paid HUF 12 billion (about €48 million) in wages and other benefits and HUF 4 billion (€16 million) in payroll taxes. And now it is also proposing to use Hungary as its base to expand to Russia, North Africa (see other article) – and maybe even the USA. Audi is also planning a further development phase in 2017–2018 which could double its production capacity at that time (to 1,000 cars a day), according to permits submitted by the company to the regional environmental authority.

 

Hungarian suppliers

As another important element of the government’s new subsidization policy, Becsey has disclosed that the government would calculate the amount of aid based on the number of domestic suppliers the investor involves in production (among other factors). This could bolster Hungary’s SME sector and produce more new jobs through the growth of suppliers – undoubtedly necessary goals once again.

“What the Hungarian government should do to help the Hungarian automotive industry bloom is to help Hungarian SMEs become suppliers,” Hisashi Takeuchi, CEO of Magyar Suzuki, told journalists at the company’s annual business dinner. Suzuki currently has 30 local firms amongst its more than 100 suppliers. “It makes sense logistically to have more local suppliers. It is cheaper, it is easier to solve any problems that may arise and we can check production quality,” he pointed out, adding that finding further tier one and tier two suppliers is not that easy.

In its largest recall yet, Magyar Suzuki had to call back probably hundreds of thousands of the 120,000 cars it had produced between 1997 and 2002 due to the faulty coating of front chassis shock absorbers. The shock absorbers had been supplied by a Hungarian company that had gone bankrupt by the time the recalls had to be made. When the BBJ asked Hisashi Takeuchi about how this experience had affected the company’s perception of Hungarian suppliers, he said: “Not at all. It was only partly the company’s fault. We should have been more thorough in checking the parts.”

The proportion of local suppliers might have been a key issue at the ongoing Audi negotiations as well. Audi spokesman Péter Lőre told the press last November that the government is “encouraging” the firm to raise the number of its local partners, which was at that time around 6.5% of all of its suppliers. According to Világgazdaság’s recent report, this part of Audi’s subsidy deal has already been set, and the partners have agreed on the supplier rate Audi has to meet. The figure agreed is unknown at present.

Of course, involving more local vendors is in the interest of the company as well, because it is more effective both in terms of costs and logistics. According to the BBJ’s information, it is still difficult for many Hungarian suppliers to comply to Audi’s requirements of quality in the needed quantity for the given deadline, as well as in the very flexible service that the company demands.

However, the company has raised its awareness of Hungarian partners in the past few years. For example, the low-value car parts supplier division of the carmaker, which purchases parts especially from the CEE region, has grown to more than 40 staff in a few years, and it also for potential suppliers for the Volkswagen concern, too.

Audi Hungaria’s higher production capacities after the factory enlargement will also bring with it higher demand for car parts, which suppliers will have to keep up with. Audi expects its orders to current local suppliers, who for example manufacture cable batches and seats for Audi, to expand as well. Together with the industry’s other announced investments, in addition to those planned by Audi and Suzuki, demand on Hungary is set to be huge.

The only question is: will it be ready for it? AF, MTD

 

No jobs without government grants?

Few dispute that governments have an important role in supporting new jobs when an economy is coming out of crisis. However, according to fresh data from the Hungarian state employment agency ÁFSz, 66.7% of all new jobs created in Hungary in January of this year were in some form financially supported by taxpayers’ money.

Meanwhile, some economists question the success of centralized efforts to save workplaces and create new ones that would not have been established otherwise. According to researchers of the Economic Institute of the Hungarian Academy of Science (MTA), the previous government spent more than HUF 170 billion on preserving workplaces in the midst of the crisis in 2009 (including the amount it spent on the public work program), but it was only a “symptomatic treatment” of labor market problems. Some 60,000 workplaces were saved, but according to MTA economists, the social gap has further widened and people living in underdeveloped areas and without professional skills were worst hit.

As for creating new workplaces, the previous government has been heavily criticized by a Parliamentary committee investigating measures of the previous administration. As a result of a program aimed at supporting job creating investments, some 1,500 enterprises received non-refundable state grant worth HUF 21.5 billion between 2002 and 2010. During the eight years, that amount made the creation of more than 22,000 new workplaces possible. However, committee vice-chairman László Karakó of the governing Fidesz party questioned whether these grants went to areas where they were really needed.

Based on individual government decision, eight large companies received non-refundable funds for job creation worth HUF 2.1 billion between 2006 and 2010, which was to create nearly 3,000 new workplaces. PF

This article is to be printed in the February 25, 2011 issue of the Budapest Business Journal biweekly.