Hungary- Auto Assembling

Unit

Chetan Sharma
043017
IMG-4

Fore School of Management

B-18, Qutab Institutional Area,
New Delhi, India
Hungary- Auto Assembling Unit

From: Chetan Sharma

Roll No. 043017
Batch: IMG4
Overview:

The Auto Industry is growing worldwide at a very high speed, with a commitment for a
cleaner environment and reduced carbon emission. Automakers are constantly developing
more efficient engines and drive-trains to reduce fuel consumption, and a wide range of
sophisticated emissions-control technology is putting cleaner automobiles on the road
everywhere. Hungry, with its location in heart of Europe, is an ideal bridgehead for investors
seeking to expand their business in central and Eastern Europe. The country is crossroads
where the four points of the compass meets. The high level of political and economic stability
is an expression for Hungary’s successful transition into modern market economy.
Manufacturing forms an important component of the Hungarian economy and was
responsible for around 80% percent of Hungary's exported commodities, even though most
of Hungary's industries must import the raw materials used in the manufacturing process.
The engineering industry—which is dominated by automobile and automobile parts
production—accounts for roughly one-third of industrial output. Financial services are
provided by a competitive and largely privatized bank, which is improving with time, with
internet and mobile phone account access. With Hungary’s EU membership, the investors
are finding themselves in the market of 450 million people. The automotive sector has
played a major role in the economic success. It is one of the most important branches of
Hungarian production.
Hungary was seen in the early part of the past decade as a star performer among the
transition economies of Eastern and Central Europe, lauded by international organisations,
financial media and markets for its far-reaching market-oriented reforms that began in the
1990s. Economic growth since 1995 was associated with sweeping economic measures,
beginning with devaluation of the Hungarian forint to encourage exports, and followed by an
extensive privatization program, through which most important public assets were sold, often
to foreign buyers; restrictions on public sector wages and new employment; reduction or
removal of state subsidies on higher education and medical treatment. This growth trajectory
was dramatically affected by the global crisis in 2007-08, since it was associated with a
sharp decline in exports and reversal of capital flows.

Political and Economic Conditions:

 1) Communist rule to Democratic society:

Once a major component of the Hungarian economy under communist rule, industrial
enterprises struggled in the early 1990s to come to terms with operating in a free market.

2) Growth of Industrialization:

Prior to World War II, the Hungarian economy was primarily oriented toward agriculture and
small-scale manufacturing. Hungary's strategic position in Europe and its relative lack of
natural resources dictated a traditional reliance on foreign trade. In the early 1950s, the
communist government forced rapid industrialization following the standard Stalinist pattern
in an effort to encourage a more self-sufficient economy. Most economic activity was
conducted by state farms and state-owned enterprises or cooperatives. In 1968, Stalinist
self-sufficiency was replaced by the "New Economic Mechanism," which gave limited
freedom to the workings of the market, reopened Hungary to foreign trade, and allowed a
limited number of small businesses to operate in the services sector. Although Hungary
enjoyed one of the most liberal and economically advanced economies of the former Eastern
Bloc, both agriculture and industry began to suffer from a lack of investment in the 1970s.
By the late 1990s, however, investments in many industries and the expertise and education
of Hungarian workers contributed to resurgence in the industrial sector. From 1999 to 2000
alone, industry expanded 18.3 percent, the third straight year of double-digit growth in this
sector.

3) Accelerated Privatization and FDI:

Simplified and accelerated privatization led to significant inflow of foreign capital in industry,
energy, and telecommunications sectors, and a number of Greenfield investments were
launched. Hungary's early openness to foreign direct investment (FDI) led to a sustained
period of high growth and made Hungary a magnet for FDI in the late 1990s and early parts
of this century.

With more than $60 billion in FDI since 1989, Hungary has been a leading destination for
FDI in central and Eastern Europe, although this level is beginning to decline. The largest
U.S. investors include GE, Alcoa, General Motors, Coca-Cola, Ford, IBM, and PepsiCo, with
the overall level of direct U.S. investment estimated at $9 billion. As a result of extensive and
continuing liberalization, the private sector produces about 80% of Hungary’s output.

4) EU Membership:

Close relationship with the economies of the EU helped pave the way for Hungary's EU
accession in 2004. As part of its EU membership agreement, Hungary agreed to meet the
economic criteria necessary to adopt the euro. In 2005 and 2006, however, it became clear
that not only was a high budget deficit hurting the economy (nearly surpassing 10% of GDP
in 2006), but that Hungary was moving away from meeting euro entry requirements, and
would be subject to EU excessive deficit procedures.

5) Decrease in GDP growth:

In October 2008, the effects of the global financial crisis spilled into Hungary. Despite its
success in reducing its fiscal deficit, years of high budget deficits and Hungary’s high
external debt levels fuelled investor risk aversion, and negatively affected the foreign
exchange, government securities, and equity markets in Hungary. The country was hit hard
by global de-leveraging, and weak demand for government bonds. A sharp decline in the
share of non-resident investors in the government securities market raised concerns that
Hungary would be unable to meet its external financing requirements. In order to increase
investor confidence and ensure liquidity in domestic financial markets, Hungary concluded a
$25 billion financial stabilization package with the IMF, EU, and World Bank in November
2008.

Under the agreement, Hungary committed to further fiscal consolidation, financial sector
reforms, and enacting banking sector support measures. Terms also included periodic
assessment of macroeconomic and fiscal targets. Taking into consideration the worsening
global economic and financial crisis, the IMF and the EU revised their projections of
Hungary’s GDP decline in 2009 to minus 6.7%, and agreed to increase the 2.9% deficit
target to 3.9% for 2009. Public debt was expected to increase to 83% of GDP in 2009 before
returning to more sustainable levels through fiscal tightening. Hungary's economic
competitiveness and offset lost government revenue due to the deeper-than-expected
recession. These measures included reforms to the pension and entitlement systems, as
well as tax changes to shift the tax burden from labour to wealth and consumption. In
addition to cuts in taxes for businesses and employees, tax changes included raising the
value added tax (VAT), and a proposal for the introduction of a property tax. In 2009 GDP
declined by 6.3%, and the Hungarian Government was able to meet the 3.9% deficit target.

6) Global Political Risk Index (GPRI), January 2010 :

Highly stable countries (those with an index number at, or higher than, 80) possess all or
most of the following characteristics like efficient state institutions, Government effectiveness
high degree of political legitimacy among the population, sound economic performance and
policies, absence of significant anti-state opposition, rare instances of political violence, low
level of social, ethnic, or religious tensions and infrequent occurrence of humanitarian
emergencies and capacity to mitigate natural disasters.

GPRI INDEX for Hungary is 76

7) National Security:

Hungary's key national security focus since joining NATO in 1999 has been contributing to
the stability of the region while integrating its armed forces into NATO's force structure.
Hungary takes a keen interest in NATO expansion and in the transatlantic link. It shares a
more acute sense of the threat than many other European countries and is watching events
in the Balkans, Ukraine, and Russia with great interest. Hungarians believe that Hungary's
own security and that of its ethnic minorities in neighbouring countries will be best served by
a peaceful, unified region, which will be achieved when EU and NATO membership is
extended to the entire region.

Recommendations:
Hungary has a strong geopolitical position with very harsh economic conditions.
Geographical conditions are favourable for penetration in the European market. The natural
resources are not found in ample quantities, but as initially it was a hub for automotive
industry, so resources factor will not be barricade. Economic policies are very weak, as only
3mn out of 10mn total population are paying taxes, GDP growth rate has gone negative in
the years of recession, Financial deficit are very high, already have taken loan from IMF.
Hungarian economy looks curiously lopsided, with a handful of highly successful big foreign
investors, chiefly in the auto industry, are keeping the rest of the country afloat for now.

The earlier growth trajectory was dramatically affected by the global crisis in 2007-08, since
it was associated with a sharp decline in exports and reversal of capital flows. The period of
growth had also been associated with growing public and private indebtedness, which
became more difficult to service after currency devaluation. The drying up of private capital
markets led to severe liquidity problems.

The very harsh economic conditions led to social and political turmoil, with even policemen
going on strike demanding their pay and arrears. The Social Democratic party implementing
these measures was thoroughly defeated in the elections, which delivered a resounding
majority to the centre-right Fidesz Party that had campaigned on a promise of less austerity.

Due to this extreme economic instability, which has also started affecting political and social
factors badly, therefore FDI’s have started showing disinterest for investing their money in
Hungary.