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Car industry grows in sophistication

PwCʼs top specialist in the region’s automotive industry explains how Hungary’s work in the areas of R&D and innovation promises sustainable increases in production, exports and GDP.

Armin Krug, partner and automotive industry specialist at PwC Magyarország. (Photo: Mátyás Pődör)

The Hungarian auto industry has plenty of room to grow – in the number of vehicles produced, but even more so in sophistication, according to one of the foremost experts on the sector.

“The movement will go in the direction of innovation to increase the value chain,” believes Armin Krug, a partner and specialist in the automotive industry with PwC Magyarország, the local unit of the top global consulting company.

For Krug, the key to staying competitive is not a matter of being the cheapest carmaker in the region. Instead, he said, Hungary will do best by focusing on its existing strengths as a center for research and development and innovation – areas that are less about cutting costs and more about raising value. Krug believes the Hungarian car industry has already been steering in this direction, and the trend bodes well for the future.

The automotive industry is the fastest growing sector in the Hungarian economy, producing roughly a quarter of the country’s manufacturing output and more than a fifth of its exports. In May, when Hungary announced its first quarter-on-quarter drop in GDP in four years, there were concerns about the country’s dependency of automotive production, which slowed slightly during the quarter. In fact, much of the problem was probably due to the smaller amount of European Union funding available as compared with 2015.

“Production as such was not on hold. I’m not aware of any problems with the OEMs,” said Krug. He maintained that Hungary’s original equipment manufacturers (OEMs) – Audi, Daimler, Opel and Suzuki – and their suppliers were still working at a steady clip during the first quarter. Already, production figures have improved since May.

While he acknowledged that the future impact of Brexit is hard to determine, and added that other external shocks could impact the market, Krug said that demand is still strong enough to fuel continued growth in Hungary’s automotive production sector for some time.

“We are at pre-crisis car sales in Western Europe. No one really predicted that sales would come back so quickly,” he said.

Wages, demand for labor grow

The increase in demand has naturally been putting pressure on the components of supply, including labor. As OEMs add production shifts at their factories, and the number of smaller firms supplying the OEMs grows, the pool of capable workers is shrinking, driving wages upward.

“Wages are kind of low, but over the last four months real wages grew rapidly, and that trend will probably continue,” said Krug. The Hungarian Central Statistical Office announced on June 21 that the average net wage in Hungary was up by 7.8% year-on-year in the period of January-April – the biggest rise in more than 12 years.

Although Hungary’s lower wages have traditionally been one reason why carmakers would come here, Krug said market-based increases in compensation for labor due to growing competition is a good thing, because it attracts workers to the sector.

In fact, he said, the bigger concern is that there are not enough capable workers available, due to growing employment levels in Hungary and increasing competition for workers from other European Union countries.

“They need to open the pipeline to new people and to raise efficiency,” Krug said.

Unfortunately, it would be hard to raise efficiency at Hungary’s OEMs much, as the factories here are all pretty much state-of-the-art, and Hungarian workers in those factories are already at the same productivity levels as workers in German automotive factories, according to Krug.

As for bringing in potential new workers, Krug noted that there are a variety of effective training programs in local universities and high schools that are already helping. Another answer could involve building factories in places where there is less competition for workers.

“Although big automotive companies in the western part of the country are now seeking commutes of as much as 100 kilometers, Hungarian workers are generally very immobile,” he said. “That’s why clients are looking into the eastern parts of the country,” which is also close enough to the border with Ukraine to attract workers from that country.

Krug said there is a chance that another OEM could locate in this country. He pointed out that, of all the German premium carmakers BMW is the only one without a factory here. Even though BMW chose to pass up Hungary before ultimately deciding to build in Mexico in 2014, the reasons for coming here are still strong, he said.

“When Daimler decided to come to Central Europe, it was making one of the riskier decisions in the more than 100 years of the company’s history, but it has paid off,” said Krug.

Innovation and value added

If a new OEM like BMW were to open in Hungary, it would probably not be to build traditional models but rather to produce the next generation of vehicles, such as cars with electric power trains, according to Krug. He explained that most stakeholders in the sector realize that Hungary’s real strength involves adding value through innovation and research and development.

As an example, he noted that Daimler owns a vast amount of unused land around its plant in Kecskemet, and could easily build more production halls, but it does not appear to be planning such expansions right now. Instead, Krug said, it seems more likely that it will develop new R&D facilities there and may produce electrical and alternative power trains.

While a new OEM might be nice, Krug maintained that most of the growth in the sector is likely to be a move toward greater sophistication. Instead of competing by offering the lowest wages, Hungary will compete with innovation through firms that employ a lot of engineers – often smaller, more nimble companies. He said this direction promises “sustainable growth” for the long-term future of the sector.

“From a strategic point of view the government understands this,” Krug said. “The government looked at the market and saw we needed to support SMEs.”

He explained that those small, innovative companies that have the ideas and brain power to be leaders in transportation engineering often have insufficient knowledge of management and marketing – as well as insufficient capital. Recognizing this, the government is making an effort to steer state and EU funds toward these SMEs, instead of simply supporting more production halls.

The government has also announced plans to build a new test-driving track in Zalaegerszeg, and there is hope that this could be the place where driverless cars become a reality. Krug noted that firms like Bosch, ThyssenKrupp and Knorr Bremse are already working on assisted driving technologies, which can eventually lead to autonomous driving.

These firms seem to be bullish on their future here: Knorr Bremse announced on June 21 that it is expanding its plant in Hungary through a €17 million investment, and ThyssenKrupp on April 20 broke ground on a €95 mln plant in Jászfényszaru, where 500 workers are to be employed in the manufacture of camshafts and steering systems.

Other advances that are being investigated by Hungarian firms are electric power trains, like the ones that locally owned Evopro is working on for buses. And there are also advances being made in areas like “smart city” development – including transport without vehicles, using moving platforms – by firms like Bosch, a company that employs more than 1,000 engineers in the country.

By developing the kind of R&D facilities that can push forward such cutting-edge advances, Hungary can help guarantee that the vehicle production sector contributes to the GDP for a long time. According to Krug, “This is the kind of growth that is sustainable.”