The slowdown in demand has also hit the Hungarian car industry

English2020. feb 12.Növekedés.hu

Növekedés.hu talked with Gábor Túry, research fellow at the Centre for Economic and Regional Studies of the Institute of World Economics. He discussed the major export markets, domestic factories, global risks and the most important trends of car industry.

From the nineties, the car industry has been a success story in Hungary. Where does the country stand now in the global automotive value chain?

At the end of the eighties, Hungary was the first country in central-eastern Europe to set the legal framework for foreign investments. At the beginning of the nineties, governments did their best to attenuate the economic and social shock. The brown-field investments (that is, using existing physical capital for new production) and green-field investments (using existing capital for continuing production) by foreign companies have enabled this relatively capital- and technology-poor manufacturing industry to restructure itself.

Historically, the car industry had a prestigious position within the manufacturing industry, with significant manufacturing capacities. Just think about the likes of Ikarus, Csepel or Rába brands. Regardless of the political leadership, foreign companies were provided subsidies, which has helped them make significant investments in the industry from the nineties.

Just like other emerging Central European economies, Hungary, too, is producing and exporting cars for Western European markets and for parent companies – almost 100% of the production goes for export.

Besides our favorable labor costs, which are the result of our wages being far lower than in Western Europe, the proximity of our export markets is also a major draw, because these companies consider how production and distribution are generally organized across main geographical markets.

European markets are very similar to North America. The U.S. auto industry has major parts suppliers in Canada, while an increasing part of assembly is taking place in Mexico. Where Hungary stands out relative to its regional peers is the production of parts and main units in the supply chain.

The shift towards car assembly was developed by the Audi factory at Győr, as well as the launch of the Mercedes factory at Kecskemét. The BMW factory at Debrecen will also give auto assembly in Hungary a boost.

The export-focused and enclave nature of this activity is revealed by the fact that, until the 2004 EU enlargement, these factories had been operating at a so-called free trade zone. That is, they built only marginal ties with domestic companies. Suzuki was the only exception which, thanks to its high added value in Hungary, could access the formerly closed Western European markets.

Unfortunately, in the past three decades Hungary has been unable to move away from labor-intensive, low-wage production processes.

Many studies have pointed out that, beyond basic modernization, the CEE-region has not been able to move up in the value chain. Like other [regional] countries, Hungary has remained trapped in the role of supplier.

Are Hungarian factories less modern or efficient than other European countries?

Production standards must be ensured at a global level, so there is no difference between a Brazilian, a Mexican or Hungarian factory in terms of technology.

However, what they produce, that is, the nature of the work, is a different thing, as it determines a factory’s value added. For example, there may be differences in the level of automation: with labor costs being higher in the west, it is worth investing in technologies that replace human labor. However, the final product cannot be different.

Does this mean that the car industry is a big employer in the region?

In the past ten years, employment figures in the domestic car industry have been constantly rising. They have doubled to 98,000 since 2007.

This accounts for 13% of the manufacturing industry, which is a significant share. In this respect, Hungary fares well in Europe, and is preceded only by Sweden, the Czech Republic, Slovakia and Romania.

The weight/significance of the auto industry, however, lies in the added value it creates and its export share, rather than in employment. Conservative estimates indicate the auto sector constitutes more than a quarter of the manufacturing industry, and 20% of all exports.

Also, the auto industry, which has been dominated by foreign companies ever since the nineties, has introduced an industrial and corporate leadership culture in the country that has served as an example and a good perspective for competitive Hungarian enterprises. How much we can exploit this possibility for modernization may determine the future of the car industry. The answer is not that bright; some businessescould emulate it and others couldn’t. This is the root of car industry related problems, which also illustrates the Hungarian economy’s problems of increasing competitiveness and modernization.

The car industry appears quite dependent on economic growth. Have recent negative events impacted domestic production?

Estimates show that demand in Europe, the major market for Central-European car production, will continue to shrink approximately 1% annually.

The industry outlook is affected by a number of factors like trade tensions between the U.S. and Europe, or between the U.S. and China. Value chains are now a global system, whereproduction and sales are regional but manufacturers’ trade relations are interpreted at a global level. 

The Trump administration is trying to come to grips with the globalization of the car industry, which is breaking down the Northern American Trade Deal in many ways. Such protectionism, which preserves the current uncompetitive structures, will have a detrimental effect on the U.S. car industry in the long run.

Stricter environmental standards are also creating uncertainty in markets and for manufacturers as well. Under less favorable economic conditions, the first thing people choose to skip on are consumer durables. Among those items, a car costs the most. So it is usually the car industry that is first affected by an economic slowdown. All the above have an impact on the Hungarian car production, which is well embedded in the European and global value chain.

On the other hand, recent redundancies are not only a sign of what shape the market is in, but also reveal a shift to electro-mobility. For example, the employment figures from two Audi factories, at Szentgotthárd and Győr, reveal a decline in the demand for combustion engines across the market. There is less talk about suppliers, though the consequences [for them] may be even more severe.

When talking about potential consequences, we need to include the type of product, which has an impact on production figures. Constant changes in models, changes in customers’ needs, all lead to the restructuring of the production process. In Bratislava, the demand for locally produced electric cars is causing Volkswagen a headache. Similarly, the flat sales and phasing out of Audi TT at the Győr factory was an end to an era of growth.

Back to the future, what are the underlying trends in the car industry?

In the past ten years, manufacturers have not quite shifted towards going greener. In Europe, for example, the ratio of sales represented by SUVs has increased from 8% to 36% during this period.

Regarding fuel efficiency or aerodynamic drag, these cars fare much worse their non-SUV peers. Wider tires and heavier weight both increase fuel consumption.

Electric cars are still considered a premium in a growing market.

So car makers are trying to cut back on emissions using temporary or hybrid solutions, such as start-stop systems, downsizing, and hybrid or plug-in engines. Yet, electric car deployment is curbed by three factors: high price, the availability of charging points across the country, and available range. However, range is becoming less of a concern, as many e-cars are now capable of covering 400-500 km at one charge.

Obviously, major developments are likely to take place in the battery industry, rather than in the automotive industry. This includes fuel-cell technology, which, due to its high cost, has not been able to expand. However, since it doesn’t require any special metals to be produced, this technology can be a sustainable option in the long run.

Recent anomalies in the climate have also made it clear that unless pollution and greenhouse gas emission rates are decreased, they will have fatal consequences. Recent legislation is trying to adapt to that as well. It is not at all unlikely that the use of internal combustion engines cars will be limited in cities, or will be heavily taxed. As a result, the gap between the price of electric and internal combustion engine vehicles will not be so significant. This means anyone wishing to drive a car in the future needs to be prepared that driving will become more expensive.