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Carmakers park production here

The importance of Hungary’s mighty automotive sector continues to grow, as production rises and more firms locate in the country. Automakers are not only attracted by the low wages: A skilled local workforce and a high standard of quality also help.

Credited with providing more than a quarter of Hungary’s manufacturing output, and more than one-fifth of total exports, the auto making business is a vital part of the country’s economy, and the sector’s importance is growing. Among the many attractions for carmakers, Hungary’s skilled labor force and the quality of production cannot be ignored.

The estimated production of 431,936 vehicles last year, boosted by the recent addition of Daimler (Mercedes-Benz), was more than double the production of 211,218 autos in 2011.

Four global original equipment manufacturers (OEMs) have production plants located here. In 2014, Daimler Mercedes-Benz produced 150,000 units at its plant in Kecskemet, Suzuki in Esztergom produced 146,704 units, Audi’s Győr plant rolled off 135,232 cars, and Opel made more than 350,000 engine components at its Szentgotthárd facilities. Autos produced in Hungary are exported worldwide with some of the main destination markets being Europe (Germany, Spain), North America (USA, Mexico), Latin America (Brazil) and Asia. About 15 of the top-20 global Tier 1 & Tier 2 suppliers also have a presence in Hungary, including Bosch, Hankook, Continental, and ThyssenKrupp, among others.

In all, Hungary’s automotive production sector includes more than 700 firms, employing close to 135,000 people and generating more than €20 billion a year, according to the Hungarian Investment Promotion Agency.

One reason for the concentration of key automotive players in Hungary is the country’s proximity to Western Europe, which allows for strategic planning flexibility with OEM headquarters and a reasonable radius for logistic cost considerations. Hungary is a near-shore solution for these markets. Budapest is about a six-hour drive away from Munich, but wages here are about one third of what they are in Germany. PwC Partner Armin Krug notes that being close to Germany is a benefit: “It allows for short notice changes in engineering, you have the engineers close by; it’s all about flexibility.” This means that OEMs can quickly adjust their portfolio for optimal production as conditions change and the companies can leverage invested capital and human resources with lower costs and better allocation. Many key suppliers are within a 300 km radius of OEM production facilities.

Among regional markets Hungary is distinguished by its production of small premium cars. These are quality compact models. Both Mercedes and Audi have launched small premium models out of Hungary, the B, GLA, CLA and A3 models for example, taking advantage of the low cost environment here, especially cheaper wages. The weak forint in Hungary also helps in terms of exports to eurozone economies.

Skills and quality matter

While location and low cost conditions benefit Hungary’s positioning in the market, two other elements are repeatedly recognized as defining characteristics: Hungary’s skilled and highly educated workforce, and the high level of quality output. Players comment that their facilities here in Hungary reach production and quality standards dictated by headquarters in much less time than it takes for plants located elsewhere.

The top-notch automotive industry players already present here contribute to Hungary’s good reputation in this industry.

“This reputation attracts Tier 1 and Tier 2 suppliers as well and has wider benefits for the economy,”

says Csaba Kilián, CEO of the Hungarian Automotive Industry Association (MAGE). All in all, MAGE estimates that more than 6,000 new jobs were created over two-to-three years by the establishment of Mercedes and Audi in the country. According to the association’s analysis, investment in Hungary on behalf of its member companies totaled more than €2 bln in 2014. MAGE aims to continue to attract more investment to Hungary and support companies’ growth by targeting labor issues, R&D and Innovation, development of the supplier industry and benchmarking over the upcoming years.

The goal is to make sure Hungary stays competitive with production locations in Asia and Latin America, as well as the neighbors: Some of the same characteristics that make Hungary attractive have also lured carmakers to Czech Republic, Poland, Romania, and Slovakia.

Kilián recalls Mercedes’ entry to Hungary, which was the country’s largest greenfield investment at that time. He was working with Hungary’s governmental agency and remembers that Hungary was not even being considered until the agency became aware of Mercedes’ plans from a small newspaper publication in Germany that reported another nearby country being very close to winning the bid. Kilián later discovered that the story had come from one of the competing governments, counting their chickens before they had hatched.

Mercedes had reviewed more than 50 possible locations before narrowing its selection down to Poland and Romania, considering more than 45 indicators such as labor force, education levels, infrastructure, political environment, and each country’s economic background, among others.

 Hungary was not in the running at the time, but the Hungarian government got to work and spent five months negotiating the deal.

“They were satisfied with the education level here,” says Kilián. The plant’s location is also convenient logistically to reach Western European markets and Kecskemét is well connected to universities and by roadways and close enough to Budapest to facilitate a supply of labor force.

Viktoria Ruska of Suzuki mentions that the skilled labor forces as well as the Hungarian state support were key factors in the OEM’s decision to establish here. A decision that has paid off, as Ruska notes:

“Our plant here is among the top three Suzuki plants worldwide, which means we outperform even some Japanese plants.”

István Pintér, chairman and CEO of Rába Automotive Holding, supplier of heavy duty truck axel components, points out that quality is an even more important aspect for small- and medium-sized enterprises in the local supply chain who need to be able to deliver consistent quality and provide reliable delivery to their client base. “This is your own challenge (as a supplier), because your clients do not care about your problems.” He adds that in addition to quality, on time delivery and price are also major considerations. Some 97% of Rába’s output is exported, as there are no major truck production operations located in Hungary.