German Businesses Ready to Continue With Innovation-focused Investments in Hungary

BBJ: What was the short-term impact of the pandemic on German-Hungarian economic relations, and to what extent have things got back to normal?

Barbara Zollmann: Both countries are highly export-oriented; therefore, they were hit hard by the breakdown of international supply chains. By now, most of these have been restored, bilateral trade has grown by more than 20% in the first half of the year, while private and corporate demand has recovered. Still, for some goods, for example, semiconductors or construction materials, there are imbalances left between global demand and supply, which hinder an even faster return to pre-pandemic production levels.

BBJ: What about the long-term effects of the crisis? Global supply chains were disrupted due to COVID; many companies started to look for new partners in their closer vicinity. Could Hungary become an even more critical business partner for Germany in the wake of the pandemic?

BZ: Our own surveys show that more and more German companies are considering reducing supply chain risks by diversifying their supplier base in the wake of the pandemic. In most cases, this means expanding the range of suppliers rather than pulling out entirely from a specific region. However, Central and Eastern Europe could be an attractive target region for near-shoring, as it offers an advanced technological and economic landscape at reasonable costs and distances. Hungary could undoubtedly be one of the economies to benefit from such diversification efforts.

BBJ: Wages have been rising in Hungary by two figures per year, and the minimum wage will hit a new high soon as well. Could this make the country less attractive to German investors?

BZ: German investors directly provide about 220,000 jobs to Hungarians, typically offering above-average remuneration. In general, we see substantial wage rises across the CEE region. Therefore, the rise in wages and minimum wages in Hungary is positive for retaining talent in the market. For all investors, wage pressure should not be a disadvantage as long as it goes hand in hand with productivity increases. The Hungarian labor market provides a favorable balance of qualification levels, costs, as well as work culture and shall remain attractive for German investors for many years.

BBJ: The Hungarian government has moved from a “Made in Hungary” to an “Invented in Hungary” principle, meaning that policies favor investments that drive innovation and create high value-added jobs. Has this approach made a difference already? Do German companies regard the country as more than an assembly plant but rather a strategic hub for innovation?

BZ: Absolutely. Many German companies have already brought state-of-the-art innovation and R&D activities to Hungary. Thousands of Hungarian engineers are employed in the R&D centers of German investors, particularly in the automotive sector. In many cases the innovations generated in Hungary are not only used in the local manufacturing units, but the global value chains of the respective corporate groups. The Hungarian government actively stimulates higher value-added activities with incentives, and we see rising interest by companies to expand such activities in Hungary.

BBJ: Mercedes announced that from 2030 on it would produce only e-cars. How will the e-mobility paradigm shift affect the operation of German automotive companies in Hungary? Will there be enough skilled labor, or is downsizing in sight as a result?

BZ: All of the German car makers are heavily focused on the transformation of the industry towards sustainable mobility solutions. This will certainly affect their Hungarian units as well, from the product portfolio to needed skills, production site layout, and supplier networks. This means major challenges for the education system but also for the readiness of local suppliers to adapt to the changing value and production chains. At the end of the day, this could raise the competitiveness of the entire Hungarian economy without a net loss in jobs.

BBJ: According to a recent analysis by The Economist, Germany might be facing an economic downturn due to a growing labor shortage in general, with the active population to fall by four million in 10 years. More specifically, this will affect automotive, where the e-shift demands skilled labor. Other phenomena such as de-globalization and trade hurdles make the outlook even less rosy. Do you agree with such doomsday prophecies? Could this impact German-Hungarian economic relations?

BZ: Germany and Hungary are both reliant on international markets, and they face very similar risks such as the demographic challenge or increasing protectionism and regionalization in international trade. However, innovation and technological progress can help to offset the decline in the labor force. As for the global trade system, a strong and united European Union is the best answer to protect the interests of every European economy in the tough global competition.

BBJ: Do you have any items you would like to see on the legislative agenda of the Hungarian government?

BZ: The German-Hungarian Chamber has a 25-year record in monitoring and analyzing the business sentiment and the expectations of the German and foreign business community in Hungary. Our periodical surveys show that companies put a strong focus on education and training as well as supplier networks, which should remain a focus of legislation in the medium term. Moreover, we support any efforts by the Hungarian government that address major global trends and challenges such as digitalization, sustainability or demographics because they play an increasing role in shaping the business environment and the future competitiveness of the economy.

This article was first published in the Budapest Business Journal print issue of October 8, 2021.