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China Continues to Show Interest in Hungary, With More Opportunities on the Horizon

Government

Minister of Foreign Affairs and Trade Péter Szijjártó (left) at the foundation stone laying ceremony for the Semcorp development.

Chinese companies are choosing Hungary as an investment location in growing numbers. The experience of the Hungarian Investment Promotion Agency (HIPA) shows that they do so with good reason, and the intensity of investor interest is also a telling sign that the trend is likely to continue.

PEX Automotive has recently announced that it will expand the capacity of its Hungarian operation at Szigetszentmiklós (just 22 km south of central Budapest) with a EUR 15 million investment to make more auto parts. More importantly, the company, a member of Baolong, one of the largest Chinese automotive supplier corporate groups, plans to turn the site into the European hub for its automotive sensors division, launching e-mobility and intelligent automotive-related production in the near future.

The announcement fits the trend of growing Chinese investor interest in Hungary; similar news stories have hit the headlines in conveyor belt fashion in the past few years. In 2020 and 2021 alone, a total of 17 such projects were handled by HIPA, representing an investment volume of EUR 714 mln and creating nearly 2,300 new jobs. Among these were investments from Chinese corporate giants like Semcorp and Lenovo that picked Hungary as the location for their first European presence.

A good indicator of the strength of the economic ties is that China has become Hungary’s fifth most important trade partner. Bilateral trade volume was up in 2020 by more than 25% year-on-year. As of 2019, heavy capital inflow had made China the 10th biggest investor with foreign direct investment of some USD 2.9 billion, equivalent to 3.2% of the total FDI volume, according to data from the Hungarian Central Statistical Office. In light of the above, it is hardly surprising that the Asian economic powerhouse topped the charts in 2020 as far as investment volume was concerned in Hungary.

Chervon Auto, a manufacturer mainly of automotive parts, also decided to set up shop in Hungary. Its factory in Miskolc, a city 195 km northeast of the capital by road, is the first outside China. As Simon Wächter, head of strategic projects and business development, explains to the Budapest Business Journal, Chervon Auto made its choice after careful consideration, having weighed both strategic and financial factors.

Decision Matrix

The strategic criteria focused on geographical location, government and municipality capabilities, as well as availability and quality of labor force. The financial aspects were examined based on operational costs, labor costs and government support. Mid- and long-term factors also played a role, such as competition for the labor force from larger greenfield investments.

“Hungary and Miskolc offered the most suitable location to us,” Wächter says. “The Hungarian government has compelling arguments with a well thought-through incentive structure, low tax environment for corporations, and a very welcoming and open policy towards Chinese investors. In volatile times like now, it is extremely important to have a strong and reliable commitment from the government towards Chinese investors.”

Indeed, the record low corporate tax of 9% as well as the decreasing tax burden on labor, which now accounts for just 13% for employers, do seem to sweeten deals. Add Hungary’s stable economic and political environment and her “EU entry gate” status to the equation, and the all-time-high FDI to Hungary in 2021, which amounted to some EUR 5.9 bln, is a rational consequence.

Apart from the labor pool available at a reasonable cost, Wächter also praises the guidance and support of HIPA and local experts. “This helped us make the process much smoother, and such a structured and supportive approach is crucial for first-time investors like us,” he notes.

Chinese investors in Hungary are most active in the automotive, electronics, and chemical industries. One particular driver behind deals has been e-mobility. In this regard, Hungary is definitely among the global frontrunners; together with Germany and Poland, these three countries account for 80% of the total battery supply with a high likelihood of materializing by 2030.

The EV Charge

What is more, according to fDi Markets, an online database of cross-border investments, Hungary is among those leading Europe’s EV battery charge. The country attracted the third most greenfield FDI projects in this respect in 2020-2021, just falling slightly short of the performance of the United Kingdom and Germany.

Chinese projects in Hungary power this e-engine of the economy significantly. To name but two examples, Semcorp is building a lithium-ion battery separator film plant in Debrecen worth EUR 183 mln, which was the largest single deal closed with the involvement of HIPA in 2020. Chervon Auto is also placing its bet on e-transformation: its EUR 51 mln greenfield investment will pave the way to producing two million components per year, a considerable part of which will take advantage of the determination of the automotive sector to go fully electric.

Placing factories closer to OEMs’ headquarters has also become essential due to the disruption of global supply chains exposed by the coronavirus pandemic. The CEE region is reaping the benefits, therefore, of the recent appeal of on-shoring. Wächter confirms that Chervon’s example showcases the trend.

“We can see a general consolidation in the supply chain. Therefore, it is crucial to have a manufacturing footprint in both regions and reach a significant market share from the beginning,” he says.

“Chervon can have a first-mover advantage and bring in relevant technical knowledge and experience from the Chinese market into Hungary, and thus Europe as a whole. With our state-of-the-art factory, we can provide the best technological solutions of the highest quality with a localized production network to our customers, and we are very excited to start with it as soon as possible.”

Eastern Opening

Asian capital didn’t find its way to Hungary by accident. The Hungarian government’s “Opening to the East” policy launched in 2010 marked the beginning of a new era that aimed to end total dependence on capital inflows from the West.

The figures would seem to underline the policy’s success: last year, 60% of the total FDI volume to Hungary came from Asian countries. At the same time, Hungary has become the number one investment destination for Chinese companies in Central Europe. In the past three years, South Korea and China have topped the Hungary-bound FDI country ranking twice (2019 and 2021) and once (2020), respectively.

The first wave of Chinese investments targeted existing businesses that were taken over, as in the case of Joyson Safety Systems, KUKA (Midea Group), SEGA (Henan Machinery), and Wanhua BorsodChem. This was followed by greenfield investments from behemoths such as BYD and Huawei.

The Hungarian government has also made considerable efforts to forge closer economic relations. It has signed strategic cooperation agreements with nine Chinese firms. The deals signal the willingness of these businesses to accomplish higher value-added production, get integrated into vocational training and tighten relations with domestic suppliers.

HIPA’s one-stop-shop management consultancy service model is a perfect fit to serve the needs of investors, guiding them every step of the way. This includes site and reference visits, site selection advisory and a full range of services until an informed investment decision is made, including incentives management. Hungary has been doing very well in regional rankings in terms of investment locations, and since HIPA says it is determined to continue along this path, Chinese investors can also keep looking forward to prime business conditions and tailor-made investor advisory services.

The Route to Attracting Chinese Business

The foundation of the first Hungarian-Chinese Bilingual School in 2004 was just the start, albeit a symbolic one, of forging closer relations between the two countries. Things picked up speed in the 2010s, after the announcement of the Opening to the East policy, Hungary’s effort to intensify business with Asia.

The establishment of the Bank of China’s regional hub in Budapest in 2014 was a clear sign that economic cooperation was truly deepening. One year later, Hungary was the first European country to sign the One Belt One Road (OBOR) or Belt and Road Initiative (BRI). This economic and commercial development project focuses on improving connectivity and cooperation among multiple countries spread across Asia, Africa and Europe.

A flagship project under the BRI is the more than EUR 2 bln upgrade of the Hungarian section of the Budapest-Belgrade railway link, which will be financed mainly by Chinese capital. 2017 marked the meeting of the 16+1 forum in Budapest, a cooperation framework also known as China-CEEC (that has since become the 17+1) that aims at finding common economic ground between the Eastern giant and Central and Eastern Europe.

Hungary is now firmly on the radar of Chinese businesses: in 2021, some 20 of them were considering the country as a potential investment location.

This article was first published in the Budapest Business Journal print issue of March 11, 2022.

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