Thomas White Global Investing
Hungary Stamp
October 8, 2010
A Postcard from Europe
Hungary: Audi and Opel to Invest Despite Struggling Economy

Cars on the assembly line

New car registrations continue to disappoint in Hungary with weak consumer demand forcing the automotive sector to rely heavily on overseas markets.

Hungary has been in the news for all the wrong reasons. There has been speculation in the local media that the Minister of National Economy György Matolcsy might be on the way out. What’s more, the Viktor Orban-led government must make some potentially painful decisions to rein its mounting budget deficit. And the 2011 budget is keenly awaited by those following Hungary’s recovery, with hopes that this Eastern European star can revive itself. So, it comes as no surprise that news about Audi and Opel’s proposed investments in production facilities in Hungary were greeted with welcome relief from Orban.

Audi’s Gyor plant in northwest Hungary is expected to receive a $1.2 billion infusion that will allow the facility to have its own production line. At present, Audi produces the body shells for its cars at its Ingolstadt facility in Germany, and then they are shipped to Gyor where they are assembled and fitted. Having purchased 494 acres of additional land to expand the plant, Audi now plans to produce 125,000 units annually in Gyor, commencing in 2013. Crucially, for a country that had a jobless rate of 10.3% in July, the Audi investment is expected to create around 1,800 jobs. Audi’s news followed an earlier announcement from German carmaker Opel, which too said that it would invest $655 million to expand engine production at the Szentgotthard plant in southwest Hungary, adding another 800 jobs. Apart from this, both investments are expected to create another few hundred jobs down the supply chain.

A jubilant Orban said that the investment would trigger at least a two percentage rise in Hungary’s gross domestic product (GDP). At present, Hungary badly needs the GDP boost. The economy contracted 6.3% in 2009, and this year is barely expected to squeak a rise of 0.9%. Those are miserable figures for a country that was considered one of the rising stars in Europe. The automotive industry has always been a key barometer of the health of Hungary’s economy, even though DaimlerChrysler was the last major investor in the country, back in 2008.

Still, hundreds of other smaller automotive companies have set up shop, catering to the major vehicle manufacturers. Hungary remains attractive when compared to countries like Germany, because of the availability of highly skilled and cheap labor. A weak forint and fairly established infrastructure add to its attractiveness. But these are not enough. In a tough race, companies often look to countries that offer them subsidies in addition to other benefits, and Orban admitted that the state would partly subsidize Audi and General Motors-owned Opel’s expansion plans.

When one considers that vehicle production in Hungary actually fell by a jaw-dropping 47.3% in 2009 to just 180,500 units, the government’s push is understandable. Up to now, the automotive sector has been relying on growth driven by several ‘cash-for-clunkers’ programs in Western Europe, which are slowly drawing to a close. Weak consumer demand and the sluggish Euro-zone economy compound Hungary’s problems. Given that backdrop, every little forint here and there counts. To that extent, Audi and Opel have provided the first baby steps for Hungary on its long road back from recession.

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