Economic perspectives on hungary (ppt)

Regional Studies Prof. Dr. Zschiedrich

HTW-Berlin 8 February 2012

Michael Gross

Philipp Hennig

Philipp Christians

Kasey Navita Phifer

Outline

Country Overview

Transition Process

Current Economy

Financial incentives

Case Study of Automotive Industry: Audi

Conclusion: Hungary’s Economic Outlook

2 Gross - Hennig - Christians - Phifer 8 Feb 2012

Outline

Country Overview

Transition Process

Current Economy





Country Overview – Republic of Hungary

Population: 9,979,000

Capital: Budapest

Political System: Parliamentary Republic

Geography: ½ flat to rolling plains of the Pannonian Basin, highest elevation 183 m

Religion: mostly catholics 55% protestants 20%

Member of NATO, OECD, EU and IMF

EU member since 2004 but no Euro yet (Forint)

Country Overview – Republic of Hungary Was integrated in Habsburg Monarchy 15 March 1848 Hungarian Revolution

Austria- Hungarian dual monarchy (1867 – 1918)

1914 – 1918 WW1 attacked by Germany unsuccessfully 1918 Aster Revolution in Budapest

Mihály Károlyi first prime minister Disarmament led to falling appart

1919 Communists took power Hungarian Soviet Republic

1920 Treaty of Trianon losing 71% terretories, 66% population and seperating

sources of raw material from factories and the only port

Country Overview – Republic of Hungary WW2

1941 decleration of war to soviet union

1943 negotiations to surrender

1944 occupation by germans

Communist era 1947 – 1989

Communist satelite state

Militaristic, industrial, compansating policies

Hungarian Revolution 1956

Withdrawl from Warsaw Pact

Outline

Country Overview

Transition Process

Current Economy





Transition Process in Hungary Political Transition

The third Hungarian Republic 1989 – present Causes:

Demonstrations, riots with more than 75,000 people Opposition Round Table Consultations for introducing

Multi-party democracy Market economy Change of power

Take down of barbed wire fence to Austria Even more than 250,000 people asking soviets to leave September 1989 East German refugees could go to west which

brought Berliner Wall down

October 23ed Hungary became Republic Firs free elections march 1990 (centre- right won)

Transition Process in Hungary Hungarian Democratic Forum (MDF) provided sound

government to transition to market economy

Declining living standards

Removal of subsidies recession

Fiscal austerities to reduce inflation

May 1994 Hungarian Socialist Party majority

1998 EU negotiations

2003 national referendum with 85% favouring EU

May 1st 2004 member EU

Transition Process in Hungary Economic Transition

1. The Way Out (1989 – 1996) Significant steps towards macroeconimic stabilisation

Creation of workplaces

Reducing corruption level

Attract FDI

Privatisation cheap but obligation to modernise/add investment

Tax reduction for greenfield investments and reinvestments

High level of infrastructure investment

Cut social spendings and pensions

Still negative economic growth

Transition Process in Hungary 2. Development (1996 – 2002)

Tax reductions for advanced workplaces/research institutes

Accumulation of capital multinational

Economic growth was 2xEU avarege

3. Stagnation (2003 – 2004)

Compansation to workers and pensioners (public sector)

inflation, declining FDI, less competitiveness/effectivenes

Transition Process in Hungary EU Access Joined May 2004

Required democratic, economic and institutional reforms have resulted in the creation of a market economy

EU-Membership should facilitate access to EU-Funds

2005/06 budget deficit (10% of GDP) Fiscal consolidation by tax increase, decreasing subsidies,

streamlining public sector

2008 deficit at 3.4% of GDP Domestic consumption & GDP growth declined

Outline

Country Overview

Transition Process

Current Economy





Current Economy Cost-efficient transport infrastructure – optimal connection to

Western and Eastern Europe (rail- and highway)

Traditional supplier of Western Europe

Developed social infrastructure

(health, education, culture, leisure)

Developed network of industrial parks

Highly-skilled labour force

Highly-qualified labour force

with good foreign language skills

8 Feb 2012 Gross - Hennig - Christians - Phifer 14

Current Economy


Graph inflation inflation rate at 4.1 percent in Dec 2011

1992 until 2010, the average inflation rate 12.01 %

reaching an historical high of 31 % (June 1995)

record low of 2.3 % (March 2006)


Government debt

2010: State debt over 80% of GDP (67,1% in foreign currencies)

1,5 Million foreign currency private debtors in Hungary

• 2014: Public deficit under 2% of GDP

• 2014: State debt under 65-70% of GDP

• Relieving the credit burden of the population


Hungary is paying back its debts towards the EU and the IMF by November 2011 without contracting new ones.

Challenges- Employment

Employment rate: 55% of 15-64-year-olds (only every second)

EU-average: 64,6%

1 million people work illegally

Objectives

• Converting illegal employment into legal one

• Creation of one million tax-paying new jobs

• Tax and social system encouraging working

• flexible working regulations and competitive business environment


Hungarian- German Economic Relations

Germany is Hungary’s most important economic partner

Turnover about 35 bn EUR

Germany’s export to Hungary 16.8 Mrd EUR

Germany’s share in Hungarian exports over 25%: 18 Mrd EUR


Main industries: automobile, renewable energy, logistics, aerospace German Investments:

Audi 900 Mio. €, Daimler 800 Mio. €, Opel 500 Mio. €

Relatively low production costs

Highly-qualified work force

Special taxes for automotive industry

Government measures:

reduction of burdens of companies,

dual vocational training,

cutting red-tape and corruption


Hungarian- German economic relations

Foreign trade Vital foreign trade due to:

Very open economy

Central location in Europe (East-West bridge)

Settlement of big multinational companies


top customers of Hungary:

Germany (26%),

Italy (5.3 %),

Austria (5 %),

France (4.7 %),

United Kingdom (4.5%)

top suppliers:

Germany (25%),

Russian Federation (9%),

Austria (6%),

China (5.7%)

Foreign Direct Investment German FDI in Hungary: 15 billion EUR


Direct Foreign Investment


1990 2010

Privatisation

Green-field Investments

Reinvestments

Outline

Country Overview

Transition Process

Current Economy





Analysis of Investment Opportunities and Tax System

Agenda Challenging situation in Hungary Facts about Hungary Main Advantages for Foreign Business Foreign Direct Investment (FDI) Investment Opportunities Investors‘ Testimonial Business Relations to Germany Legal Framework for Investments Tax System of Hungary Recap & Outlook Sources: 1) ITD Hungary: „Hungary: The added value“, 2007 2) BrückeBulletin: „Ungarn“, 2008 3) Wirtschaftsministerium und ITDH: „Das ungarische Steuersystem“, 2002

Challenges for Hungary

Hungary experienced difficult periods of economic development despite being frontrunner in change processes: Decrasing economic growth and income per capita, growing inflation, higher

expenses of public capital than income

Need for short-term financial restructuring, further reforms in health-, education and social sector as well as a new definition of the government‘s role

Increase of income but also a radical cut of public expenses strongly affected public sector, private business and people.

Yet leaded to the recovery of the household deficit and further consolidation processes.

Improved international business relations and attractiveness for foreign investments boosted production of manufacturing and export.

Facts about Hungary A great place to live and work with a high quality of life and expat satisfaction.

A great place for foreign investors:

Main Advantages for Foreign Business (1) Strategic location to seek new markets:

• Ideal base for investors eyeing more distant markets or planning further expansion within central Europe or the European Union

• Ideal bridgehead to access Eastern European markets due to adequate relations and experiences of Hungarian companies

• Strong bond of Hungarian economy towards Europe and EU and integration in the domestic market of the EU

• Closeness to four countries poised to join the EU

• A single market of 500 million consumers due to EU accession

Main Advantages for Foreign Business (2) Solid and effective economy: Stable political and macro economical framework: successful foreign trade

relations, double-digit export growth, improved balance of trade

Steady stream of foreign capital across the various sectors of the economy (2.5-3 billion Euros per year / 90 billions US Dollar in 1990-2007)

Settlement of the biggest multinational manufacturers and service providers, yet also their suppliers and subcontractors

Highest Foreign Direct Investment (FDI) in this region: 47 billion Euros to date

Based on privatisation (starting in the early 1990s) and investments in new industry facilities and high quality products to date • Innovation power and establishment of R&D centers and business services

• Common technological principals and high quality of manpower (advanced professional education and inventive people)

• Excellent and continuously improving infrastructure

Main Advantages for Foreign Business (3) Investment support by the Hungarian government: Interested in further establishing a business- and investment friendly

environment and in adapting to the market demands

More cost efficiency through EU-conform policy of investment stimulation

Effective public services and decreasing administration charges for companies

Low labor costs and company friendly tax concessions

A subvention package for investments of minimum 10 million Euro including:

• Direct subventions: based on individual analysis and decision, not to reimburse

• Tax remission: exemption from 80% of business taxes for 10 years

• Subvention of employment generation: for particular weak regions, not to reimburse

• Subvention of education: 25-90% of costs, not to reimburse

Amount of subvention depends on investment value, 100% for 50 million Euro investments

Land of Welcome for Foreign Investors:

Hundred of foreign companies have located in Hungary and the numbers continue to increase. 18.000 100% foreign-owned companies and 27.000 companies with foreign participation.

New Structure for Foreign Direct Investment Advanced technology and innovation:

• Shift to advanced production technology of goods with higher added value and establishment of high class services

• Biggest export volume with hightech goods (12 billion Euros)

• Establishment of R&D centers, regional centers for business services, software evolution, biotechnology etc.

• Presence of the largest multinational car manufactuers: Investment in the automotive sector (11% of FDI stock)

• Growth in the associated service sectors (regional service and R&D centers)

• Establishment of production and assembly facilities as well as their major international suppliers and their subcontractors

Most Attractive Investment Opportunities (1) Automotive Industry:

Longstanding tradition in Hungary; Suzuki, Audi, GM, etc. and their suppliers; 100s of Hungarian equipment manufacturers

• Electronics: Innovation in information technology, consumer electronics,

communications, auto eletronics; Nokia, Philips, Siemens etc.

• Information technology: 10% growth rate in IT; ever-increasing role of outsourcing;

relocation R&D activities (Nokia, Siemens, Motorola, etc.)

Most Attractive Investment Opportunities (2) • R&D and Innovation:

Many cultural achievements were invented by Hungarian

scientists, e.g. radio, electric train; conduction at universities

• Biotechnology: Tradition in life sciences; concentration of highly qualified

specialists and reseachers in synthetic chemistry and biotech

• Logistics:

Several hundred high-quality logistical service providers for

easy access of each center; role as a transit country; industrial parks

Investors‘s Testimonial

Accor

• Audi

• AVIS

• Bosch

• Diageo

• Duolog

• Getronics

• Le Bélier

• Nief Plastic

• The Michelin Group

Business Relations with Germany Specific advantages of Hungary with regard to Germany

Inbetween the 1000 km wide radius of small and middle class companies

Similarities in culture, values, mentality, creativity and motivation alleviate the collaboration of business men

Close political relations with Germany, but also with Austria and Switzerland and cooperation with several governments

Germany is trade partner No. 1

• Increasing export from Hungary to Germany (+20% in 2008) and vice versa (+12%) with a focus on machines, means of transport, consumer goods

• Vivid exchange particulary with Bavaria, Baden-Württemberg, Hamburg, NRW and Hessen

• German affiliates in Hungary as relevant part of its economy (e.g. Audi, Robert Bosch, Kirchhoff-Group, ThyssenKrupp Steel AG)

• High satisfaction with qualification of manpower in Hungary, yet crucial about business chances, economic policy and tax system

Legal Framework for Investments

Business foundation: Decision for an appropriate legal form: GmbH, AG, branch

Estate acqusition: considering planning- and environmental law as well as regulations of local administration departments (e.g. coverage with buildings)

Archeological evaluation of the building ground

Building license and construction contract: „Grundsatzbau-genehmigung“ to clarify planned building and technical feasability and to fix conditions

Licence to bring into service: approval of operation (retail, host industry) or a licence for location (production including certain dangers for environment or people)

Tax System of Hungary (1) A complex tax system which refines continuously to serve the economic demands and fits into the EU standards

• Tax agreements (OECD) with more than 50 countries which invalidate the Hungarian tax system if it is less beneficial

• Appliance and interpretation of tax agreements mainly influence the decisions about foreign investments

• Demanding registration period for data with a limited amount of details yet extensive fines for incomplete and delayed tax payments

Current taxes: corporate- and bonus tax, personal income tax and purchase tax, local business tax, social security tax, etc.

• Corporate (18%) and bonus tax (20%): governmental companies, Ags, GmbHs, KG, OHG etc.; based on the untaxed results (incl. amortisation)

Tax System of Hungary (2) Financial incentives and tax concessions due to creation of production and employment, e.g.

• Minimum 12 million Euro investment: 100% for 10 years

• Investment located in a certain business region: 100% for 5 years

• Minimum 4 million Euro investment: 50% for 5 years

Tax concessions for investments with development intent Premise: highly relevant for national economy

Minimum 40 million Euros in any region or 20 million Euro in particular weak regions

Recap & Outlook

„When business men asking for most attractive industries and most adequate investment goals, Hugary can offer all

that.“ (Ábel Garamgegyi, Hungarian Secretary for international business relations)

It says, that 7% of the FDI stream to East Europe until 2011.

Hungary should rank on the 2nd position and keeps frontrunning in FDI per capita in the next years.

Outline

Country Overview

Transition Process

Current Economy





Automotive Industry in Hungary Car manufacturers (and suppliers, parts manufacturers, etc.)

thrive in Hungary Central location (within EU) & skilled workforce Tax incentives & financial subsidies Suzuki and Opel began producing automobiles in Hungary

in 1992 (the first produced there since before World War II !!)

Today, 17% of total Hungarian exports come from Audi, Opel and Suzuki

Automotive sector employs ca. 90,000 people in more than 350 car component manufacturing companies


Automotive Industry in Hungary

Approx. 90% of manufactured vehicles are exported

+ 80% of engines and components are exported

Around 86% of exports are to countries of the EU. Hungary has a particularly strong export relation with Germany, and among countries outside the EU with Russia. Source: http://www.hita.hu/Content.aspx?ContentID=6bb51be9-d37e-4e95-94bf-de29c6a83875


Automotive Industry in Hungary

Key Export Products Key Export Products


Source: www.hita.hu

Case Study: Audi

Audi is positioned as the premium brand of VW

The four rings of its logo each represent individual car companies that banded together to create the union

Audi founder: August Horch (1868–1951) - established the company A. Horch & Cie. in Cologne - soon left the company and started Horch Automobil-Werke GmbH a few years later in 1909

Audi is Hungary’s largest exporter

Total investments in Hungary are over € 3,300 million (until 2007)

Audi built EU’s largest engine manufacturing plant (3rd largest in the world) in Györ


Case Study: Audi Audi assembles the Audi TT, Audi TT Roadster & A3

Cabriolet in Hungary.

The plant also delivers engines to carmakers Volkswagen, Skoda, Seat & Lamborghini


Audi‘s Competitors in Hungary

Daimler-Benz invested €800 million in building a plant in Kecskemét - creating ca. 2,500 jobs - w/ capacity for producing 100,000 compact cars per year

Opel produced 80,000 Astra & 4,000 Vectra cars between 1992 – ‘98 in Szentgotthárd Today, the Opal plant produces about half million engines and cylinder heads a year.


Audi‘s Support in Hungary

The automotive industry also ensures that it has a well-qualified and highly skilled labor force to hire from by working closely with universities

Audi can essentially be certain that it will find workers for specific jobs / needs it requires

Different universities & colleges have different specialties and areas of expertise

Pooling together resources and knowledge creates more demand from auto manufacturers for research and co-operation


Different regions in Hungary focus on different competencies in order to align their academic and industrial priorities


Goals of Academic & Regional Co-operation

To form horizontal co-operation among the universities involved in research and education in automotive engineering, thus:

Creating a higher level of networking in order to better utilize the research & education infrastruccture

Unifying the education curricula (same understanding and content of educational disciplines)

Sharing the main competency fields depending on demand of local industry (shown in next slide)

Forming enough support for international R&D projects


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University Primary competence Secondary competence

Budapest University of

Technology and Economics

• Vehicle technology

• Auto-electronics

• Mechatronics

• Production

Kecskemét College • Material technology

• Production

• Vehicle technology

Miskolc University

• Drive systems

• Mechatronics

• Production

technology

• Materials

Óbuda University • Vehicle engineering

• Mechatronics

Pannon University • Mechatronics

• Fuels and lubricants

• Informatics

Széchenyi Egyetem

• Engine and driveline

• Production and

manufacturing

• Mechatronics

Audi‘s Support in Hungary Cooperation with universities can have some

disadvantages:

Time lag from creation of new study program to when the students graduate & enter the work force

Demand for skilled workers can be higher than supply

Automotive industry requires not only engineers, but also marketing, sales, translators, etc. which may be difficult to find


Outline

Country Overview

Transition Process

Current Economy





Conclusion: Hungary‘s Economic Outlook

Generally positive if they can minimize gov. spending

Should try to protect itself from macro economic vulnerability (auto industry suffering in recessions, for example)

Best to consolidate loans, minimize debt & be more self-standing (protectionist but still open)

Hungary‘s future looks to be full of positive economic growth and prosperity, heavily fueled by industry


Thank You for Your Attention


References http://www.encyclopedia.com/topic/Hungary.aspx

http://www.hita.hu

http://www.state.gov/r/pa/ei/bgn/26566.htm

http://wikipedia.org


Economic perspectives on hungary (ppt)

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