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The Other Europe: A Look at Hungary

After writing my post last week about Poland, I got to thinking about other places in Europe that haven't been much in the news recently but which are also trying to increase their role in the electronics supply chain. Hungary came immediately to mind. (See: The Other Europe: A Look at Poland.)

Much like Poland, boisterous OEM and EMS chatter about Central Europe's low-cost tech opportunities brought to Hungary significant manufacturing investment about a decade ago. Although information from Hungarian Investment and Trade Development Agency (ITD Hungary) is dated, it shows who flocked there. Flextronics, Jabil, Tyco, Elcoteq, GE, Siemens, Philips, and others like them were pretty quick to open shop there, making it one of the region's largest electronic producing countries. (This chart shows electronics production in Eastern Europe.)

The question now is whether Hungary is still attractive today. The answer probably depends on what companies are looking to get from establishing a presence there and what trade-offs they are willing to swap for either geographical access and/or potential savings.

It's no surprise, given the weak economic climate everywhere in the world, that Hungary is bumping along like many other nations. In June, when the most recent data was released, a drop in industrial exports raised some concerns. Hungary's year-on-year adjusted industrial output increased one percent in June, slowing from a 2.3 percent rise in May, according to business press reports. Unadjusted output fell 1.4 percent. Exports slipped 0.6 percent year-on-year in June, coming off an 11.2 percent rise the previous month.

Pressure on wages is also noticeable. A report recently in the Hungarian press noted an increase in business sector “regular wages,” excluding premiums and bonuses; they have accelerated to 5.1 percent in June from 4.4 percent in May. Apparently, this data subset is something the National Bank of Hungary (MNB) mulls over when evaluating inflationary trends, according to reports.

And, even though the region's purchasing managers' index, which measures the health of the manufacturing sector, has started to slow across Central Europe, it's hard to say exactly how the industry is faring in Hungary, especially when companies like German car maker Audi are still placing bets there.

The company is expanding its Hungarian engine factory to the tune of a 900 million euro investment by 2013, a move that, according to various reports, will create somewhere between 1,800 to 2,100 new jobs.

What's even more interesting to me is that an Indian company is high-tailing to Hungary as a way to strengthen its relationship with European auto OEMs. SMR Automotive Mirror Technology Hungary, a manufacturer of automotive components owned by the Indian strategic investor Samvardhana Motherson Reflectec Group (SMR), has built a second manufacturing facility there. The new plant doubles the company's capacity of passenger car rearview mirrors and strengthens ties to European auto partners.

It makes sense to me that Western European and North American OEMs would keep a watchful eye on places like Hungary; their money goes further for labor and operational overhead than it does in their home markets while giving them broader geographic reach in a mature but wealthy market. But, when companies from the Asian sub-continent start scanning for additional growth opportunities here, I can't help but give a curious, “Um, that's interesting” nod. Maybe the conversation has come full circle once again, and Hungary deserves a second take.

Any other Eastern or Central European countries you think would be worth checking in on? Let me know in the comments section and I'll see what I can dig up.

28 comments on “The Other Europe: A Look at Hungary

  1. FLYINGSCOT
    August 29, 2011

    I would say Poland has the edge over Hungary in becoming a European power house.   Hungary has a good academic reputation but I do not imagine it will become a major European player.  The same might be said for other small landlocked former Eastern block countries.  What do you see happening in the states of the former Yugoslavia concerning business growth and investment opportunities?

  2. Susan Fourtané
    August 29, 2011

    Hungary and Poland are cases of countries which have been experiencing changes in many spheres and the manufacturing industry is just one of them. Central Europe presents interesting upcoming and emerging business possibilities and opportunities, but maybe it's too soon to claim they may be big and important players in the electronics supply chain so soon. 

    -Susan 

  3. Jennifer Baljko
    August 29, 2011

    Susan, I think you're right – it's too early to pick winners yet in Central & Eastern Europe, or say which countries will be designated as more important countries. The market hasn't reached full maturity yet, but I think some of this will sift itself out in the next 3-5 years. Government stability, fiscal responsibility, foreign tax breaks, and a perception as open innovation hub may tip the scales and will make some places more attractive than others.

    FlyingScot – You raise a good question about the former Yugoslavian countries. Slovenia is already in the EU, and Croatia is slated to join in 2013. Having EU backing is important for these countries to grow and prosper. Slovenia, which is much further along in having EU clout, is attractive geographically and citizens there are relatively wealthy with high purchasing cache. I tend, however, to think of Croatia as a more attractive high-tech distribution hub, mostly because of its extensive Adriatic coastline. I wouldn't be surprised if port infrastructure improvements gain investment attention, particularly in a place like Rijeka, which already has bustling port and is within easy reach to Germany, Austria, Italy, Slovenia via land transportation.

    I believe Serbia, Bosnia-Herzegovina , Macedonia, & Montenegro are further behind on a number of fronts (speculation on my part), but their attractiveness for biz investment may depend on their Balkan neighbors' successes and failures. If their neighbors are unable to convert corporate interest into actual business or places like Poland and Hungary take on higher-skilled production-related capabilities, these countries may be able to win some deals for lower-end manufacturing scene. Just a guess. What have you heard about these places?

  4. Nemos
    August 29, 2011

    I am always wondering, why countries like (Greece, etc.) who has small labor cost comparing with countries from Central Europe. they don't have factories. I saw the map you posted Greece is not even existed in the map!.And the big question is why?  Why, for instance, Jabil chooses Hungary and not F.Y.R.O.M? 

  5. Jennifer Baljko
    August 29, 2011

    Nemos – you raise a good question I'm not sure how to answer. Or at least I may not be able to answer delicately. Living in Barcelona, I've heard more than my share of comments about the state of Southern Europe (apparently that seems to include everything south of Toulouse/Milan/Vienna) and how it's perceived as being less efficient than Northern Europe. Even people here in Catalonia (south of the arbitrary Toulouse dividing line) refer to Spain as North Africa – and they mean it in a cruel, demeaning way. I suspect a similar perception exists with Greece and FYROM. They're those guys down there in the south….

    I don't put a lot of credence into those stereotypes, and I, too, often wonder how money flows around the world and lands in one place but not another. Right – what makes Hungary, Romania or Bulgaria more lucrative options than Greece Spain, Portugal, Italy, Albania, or Macedonia. In theory, they all have desirable geographies for reaching European, North African and Middle Eastern markets, and generally they all have work ethics and sensibilities that look and feel European. Maybe it comes down to something as simple as branding and marketing. Maybe the Polish and Hungarian govts did a better job of selling themselves to the international community 10 years ago and used all the keywords OEMs wanted to hear.

    Personally, I think now is a very interesting time for Southern European countries to make their case. These countries are reeling from the recession, are looking for ways to strengthen their economies, and have a creative and skilled labor force at their fingertips who unfortunately have to accept wages below the EU average wage. I'm not suggesting these countries sell their souls or get in bed with companies who want to exploit their workers, but now's a good time for national redevelopment agencies to start shining up their PR story and making the hard sell to close a major electronics deal.

  6. Daniel
    August 30, 2011

    “The question now is whether Hungary is still attractive today. The answer probably depends on what companies are looking to get from establishing a presence there”

    Jennifer you are right. Each country has their own wide variety of resources and economic benefits. Some may be rich with natural resources; other may be equipped with technology development and some other with low man power cost or good economic growth and single window system for investment. So the main deciding factor is which industry is suited for that particular scenario or situation. For example, for IT connectivity (broadband/DSL) is more important, similarly for manufacturing company’s low cost manpower important. I don’t think any particular country have all these factors together. So the investment purely depends on requirement.

  7. mario8a
    August 30, 2011

    should we expect more conflicts in Europe? has  hungary  a safe environment for investment?

  8. Ms. Daisy
    August 30, 2011

    Jennifer; I agree with you that it is this type of stereotypes coupled will poor country expossure on the world market stage that have kept the myth of southern Europe as backwards. The opportunity is here for the various governments  in southern Europe to re-package their strength (hard working people) and a relatively safe environment to the manufacturers in light of the wave of unrest in the Middle East.

  9. Susan Fourtané
    August 31, 2011

    Jennifer/Flyingscot, 

    I agree with Flyingscot when he says: I do not imagine it will become a major European player [Hungary]. The same might be said for other small landlocked former Eastern block countries.”

    These countries you mention, Jennifer, first need to be accepted in the EU before they can become attractive for investment or dream of becoming big and reliable international business hubs. Do they meet the Copenhagen criteria to be accepted in the EU?

    See the Phare Program for financial assistance to applicant countries of Central and Eastern Europe in their preparations for joining the European Union. 

     

    The Copenhagen Criteria: 

     

    What requirements must countries meet to become members of the EU?

    There is no checklist with a precise indication of the conditions a country must meet in order to be admitted to the EU.

    According to Article 49 of the Treaty on European Union, any European state which respects the principles on which the EU is based may apply for membership. There is no definition of what is meant by ‘a European state’ but, when Morocco applied to join the EU in 1987, the application was rejected in an opinion of the Commission on the grounds that Morocco was not a European country.

    The enlargement of the EU on 1 May 2004 prompted the formulation of the ‘Copenhagen criteria’ concept, which is used to define the conditions which applicant states must meet in order to become members of the EU.

    From the conclusions of the Presidency, Copenhagen 21-22 June 1993 – the Copenhagen criteria

    The European Council today agreed that the associated countries in Central and Eastern Europe that so desire shall become members of the European Union. Accession will take place as soon as an associated country is able to assume the obligations of membership by satisfying the economic and political conditions required.

    Membership requires that the candidate country has achieved stability of institutions guaranteeing democracy, the rule of law, human rights and respect for and protection of minorities, the existence of a functioning market economy as well as the capacity to cope with competitive pressure and market forces within the Union. Membership presupposes the candidate’s ability to take on the obligations of membership including adherence to the aims of political, economic and monetary union.

    The Union’s capacity to absorb new members, while maintaining the momentum of European integration, is also an important consideration in the general interest of both the Union and the candidate countries.

    The European Council will continue to follow closely progress in each associated country towards fulfilling the conditions of accession to the Union and draw the appropriate conclusions.

    The Copenhagen criteria are a series of political and economic conditions laid down by the Heads of State and Government of the Member States at the European Council meeting in Copenhagen in 1993.

    Ultimately, however, it is the Council which decides on the accession of a country by unanimous decision after consultation with the Commission and after the assent of the European Parliament, which means that the European Parliament must approve the Council’s decision.

    In outline the Copenhagen criteria can be divided into three conditions, which must be met before a decision is taken on whether a country can become a member of the EU:

     

    1. The political criterion:

    The country must have stable institutions guaranteeing democracy, the rule of law, human rights and respect for and protection of minorities.

     

    2. The economic criterion:

    The country must have a functioning market economy and must be capable of withstanding the pressure of competition and market forces in the European Union.

     

    3. The criterion presupposing the ability to incorporate the entire body of laws and regulations of the EU – the ‘acquis communautaire’:

    The country must be able to assume all the obligations flowing from membership, including the aim of political, economic and monetary union

    What comes closest to a catalogue of concrete requirements which must be met by applicant countries is the third criterion, according to which the countries must be in a position to implement all the EU’s laws and regulations.
    -Susan 

     

  10. Susan Fourtané
    August 31, 2011

    Nemos, 

    A geographical look may give you the answer. Despite not having good economical backgrounds the countries in Central and European locations open doors to a variety of geographical contact options. 

    -Susan

  11. Ashu001
    August 31, 2011

    Susan,

    Looking at the bankruptcy of most Western European nations maybe Eastern Europe should not look for closer economic integration with the West.

    China,The Oil Rich Middle East and Russia look like much-much better options

    Regards

    Ashish.

  12. Ashu001
    August 31, 2011

    Nemos,

    Two major reasons-

    1)Have you heard of the Afternoon Siesta?

    Southern Europe is legendary for it.Eastern Europeans are much-much harder workers than those in Southern Europe.

    2)Socialist  legacy rules-Safety nets and the likes of that are very common in Southern Europe (even if they cant afford them today).This is something which nobody in Southern Europe would like to talk about it(and rather fight about it).

    Eastern Europe today is by far more capitalist and welcoming of Foriegn capital than Southern Europe is(thanks to Red Tape and corruption).After the Iron Curtain collapsed Eastern Europe had to throw the entire socialist yoke and move towards capitalism (which it did in a hurry)-Look at the Baltics-Estonia,LIthuania and Latvia-All 3 regularly feature amongst the best places to do business and freest economies of the world.

    Regards

    Ashish.

  13. Susan Fourtané
    August 31, 2011

    Ashish, 

    Actually, when I was telling about the geographical location I was thinking of the proximity with Asia and at the same still have access to European countries like Germany and Austria. But it's a fact that if the Eastern European countries want to be integrated in the business European hub they do need to have what the Copenhagen Criteria asks to the EU candidates and memebers. 

    -Susan 

  14. Nemos
    August 31, 2011

    “Have you heard of the Afternoon Siesta?” I totally disagree with your point of view also you said :”Eastern Europeans are much-much harder workers than those in Southern Europe.” what is your reference on what you said ? Do you know what are the working conditions in the private sector in Greece? Do you Know how many hours works a worker per week?

    Furthermore, about the “Afternoon Siesta”  exists when you are not working, and this is very rare during the week. And why it is wrong to have a nap during the weekend ?

     


  15. Nemos
    August 31, 2011

    Only the planet Mars has now a stable and safe environment.

  16. Ariella
    August 31, 2011

    Nemos, I gave your comment 5 stars.

  17. mario8a
    August 31, 2011

     

    Do they have McDonalds in Mars?   MarsDonalds?

    Otherwise I think  is not that safe environment.

     

     

  18. Jennifer Baljko
    September 1, 2011

    Ashish, Nemos:

    I'm with Nemos in this. While the siesta idea is alive in some pockets of southern Europe, it doesn't seem to be reducing individual worker productivity on a broad basis. In fact, Spain and Italy have slightly higher labor producivity per person employed than Germany, and slightly lower labor productivity than France. Greece is lower than Germany, but all three countries – Greece, Italy, & Spain outdo Poland, Hungary, Romania & Bulgaria, at least according to this report issued yesterday by Eurostat. Sorry if the font is small, here's the link if you want to see more closely

    http://epp.eurostat.ec.europa.eu/tgm/graph.do?tab=graph&plugin=0&pcode=tsieb030&language=en&toolbox=type

    Labour productivity per person employed

    GDP in Purchasing Power Standards (PPS) per person employed relative to EU-27 (EU-27 = 100)

    (here's a note for reading the chart: GDP per person employed is intended to give an overall impression of the productivity of national economies expressed in relation to the European Union (EU-27) average. If the index of a country is higher than 100, this country's level of GDP per person employed is higher than the EU average and vice versa.)

    And, look at  Luxembourg! Those guys blow everyone in the EU 27 far and away with its productivity. Was surprised to see that

     

     

  19. Jennifer Baljko
    September 1, 2011

    Hi Susan,

    Thanks for the info on he Copenhagen Criteria. I hadn't heard much about it those specific points, but I do follow the EU accession talks fairly closely (or at least I have been doing so with Croatia, which I have a personal interest in given my very Slavic sounding last name).

    A few quick points:

    – Investment and development in these markets doesn't historically trend by whether countries are EU members or not. In Poland, Hungary, Romania & Bulgaria, high-tech investment started pouring in long before any of them were officially EU members. Poland and Hungary entered the trading block in 2004, and Romania and Bulgaria joined in 2007.  Expensive tech production plants were opening there in the late 1990s, early 2000. Tax break incentives and perceptions of an attractive low-cost, skilled-labor, business-friendly environment seem to be the driving factors behind high-tech expansion choices, not necessarily their official EU status or affiliation. An EU badge of approval may give some countries an edge when companies consider future economic expansion and create a sense of trusted political and fiscal stability. Or the opposite may be true – once countries apply for EU membership and eventually join the EU and/or switch to the euro, they may in fact become less attractive possibilities; it's a know fact that costs for the local popualtion increases as the nation tries to maintain a high EU operation and performance standard.

    – At least in Croatia's case (Croatia was recently approved to join the EU in 2013 and will be going up for individual EU country approval over the next year or so), EU accession talks didn't revolve much on Croatia's economic viability. Yes, some chapters needed to be closed on their banking and financial structures, as is the case with all EU applicants, but German companies and financial instituitions have had very significant investment in Croatia for many, many years prior to official accession conversations. The sticking points in Croatia's entry centered mostly on the country's willingness to hand over people who were deemed war criminals and who participated in crimes against humanity committed during the Croatian-Serbian-Bosnian Homeland War.

    – Many Europeans I've talked with question how countries like Romania and Bulgaria got the EU nod ahead of more developed places such as Croatia and Macedonia. Their argument is that Romania and Bulgaria had been consistently further behind in many of the EU standards that are used to measure “EU worthiness.” I don't have personal opinion on that nor do I think it even matters at this point, but I do sometimes wonder how the EU decides which countries can join this elite group, and when they can join.

    So while the Copenhagen Criteria may carry some weight and be an official type of document countries need to prove something against, I don't think it's the end-all-be-all when it comes to high-tech investment strategies

  20. Susan Fourtané
    September 1, 2011

    Are you exchanging stars with Nemos, Ariella? 😀 

    Mars will remain a safer and clean environment until the humans start its colonization in 2030. Actually, they are already polluting the space in that part of the universe, too, with all the space trash they are leaving floating out there. 🙁 

    -Susan

  21. Susan Fourtané
    September 1, 2011

    Only the planet Mars has now a stable and safe environment.”

    Nemos, 

    That until humans start polluting it in 2030. 

    -Susan 

  22. Ariella
    September 1, 2011

    Technically, Susan, you can say it's already been polluted by humans. I believe the devices sent out to explore the surface are still there, as it would have been rather complicated to get them back. But I don't believe it affects the environment. I also have serious doubts about the possbility of colonization. Unless we develop warp speed or something close to it by then, it takes too long to get there and to get basic supplies over.

  23. Ashu001
    September 1, 2011

    Susan,

    I understand what you are getting at here.

    Important thing is which markets are actually growing???

    Do you want to be part of a market which is rapidly shrinking(like Western Europe) or a market which is robustly growing(like Asia).The choice is actually quite easy and simple to make for most entrepreneurs.

    Regards

    Ashish.

  24. Susan Fourtané
    September 2, 2011

    Ashish, 

    I understand Jennifer's blog discusses about Eastern and Central European countries and their future in the electronics supply chain. Of course you are right about Asia being robustly growing but at any time I considered a comparison with Asia within this discussion.

    I have only pointed out about the Copenhagen Criteria to point out that some of these countries in question are not ready to be potential hubs as they have local issues to be fixed before they can be stable business-wise speaking. There is a reason why they haven't been accepted as members of the EU yet.

    -Susan 

  25. Susan Fourtané
    September 2, 2011

    Ariella, 

    One of the main goals of the International Space Station that is already full functioning and with enough food supplies is to have a closer “home” to prepare the exploration and building of a base on Mars that is already scheduled for 2030. I didn't make up this, they are facts from NASA and the other Space Agencies collaborating with NASA in these projects.

    Building a base on Mars in part of the project. Meanwhiele, in the ISS they are going to start growing some of the food, too, and they will also be growing food on Mars and the Moon.  

    http://earthsky.org/space/filling-the-pantry-for-the-first-voyages-to-mars

    -Susan

  26. Susan Fourtané
    September 2, 2011

    “I do sometimes wonder how the EU decides which countries can join this elite group, and when they can join.”

    Jennifer, 

    The answer to that question is in the Copenhagen Criteria document which is the one followed by the EU at the time of deciding about considering membership application or membership acceptance. 

    At the time of high-tech investment some points established in the Copenhagen Criteria give the investor a sort of guarantee that the economy of the country is not going to collapse so easily.  

    -Susan 

  27. Ariella
    September 2, 2011

    From what I've seen there are plans for a manned voyage to Mars in 2030. But landing there involves a lot less thancolonization. Nor is it necessarily a natural progression.  The US sent men to the moon back in the 60s, and no one is living there even now. I didn't do extensive research on this, but did check http://en.wikipedia.org/wiki/Colonization_of_Mars which says, “Early human missions to Mars, such as those being tentatively planned by NASAFKA and ESA would not be direct precursors to colonization. They are intended solely as exploration missions, as the Apollo missions to the Moon were not planned to be sites of a permanent base.” 

    So Mars should be able to rest easy even beyond 2030.

  28. Ashu001
    September 2, 2011

    Susan,

    Your points are well-taken and appreciated here.

    Ashish.

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