Hungary Development Department to Hungary

CENTRAL COVERING THE EUROPE CENTRAL EUROPEAN AUTOMOTIVE INDUSTRY AUTOMOTIVE October 1996 REPORT Volume I, Issue 5 ISSN 1088-1123 ™ of its Frankfurt research and Hungary development department to Hungary. The company is look- PROFILE HUNGARY ing for possibilities to work with Suzuki: Profitable & Eyeing Robust Competition; technical universities in Budapest and Miskolc. The the Number One Slot Supply Base Needs More Investment plan is likely to be realized at the beginning of 1997. ITT is Car manufacturing began at Magyar Suzuki’s also working on development Esztergom plant in October 1992. The production Market Highlights: of an inexpensive ABS system for small process includes press work, welding, painting, and cars. [for more on ITT, see Opportunity Spotlight final assembly. In 1995, 12,200 Hungarian built In July of this year, Daewoo Corporation on page 8. ed.] Suzuki cars were sold in the domestic market, giv- purchased 85% of the Hungarian ball bearing Suzuki a 20% market share, second only to ing factory MGM Radax Rt. in Debrecen. UKM Rekard plans to invest DEM 5 GM/Opel. Suzuki’s experience in Hungary has The company’s shares were purchased from million into its Gyor factory over the next been a struggle the Hungarian privatization agency APV Rt. four years. The company produces cardan from the begin- Last year, the factory had income of HUF shafts and gearboxes and is 100% owned by ning. Early on, 3.5 billion and profit of HUF 1.3 billion. the German company UKM Meissen. [for the young factory Over the next five years, Daewoo plans to more on UKM, see Opportunity Spotlight on was exposed to invest USD 30 million to modernize the fac- page 8. ed.] unexpected open tory. The factory will be used to supply market competi- Daewoo’s Poland, Romanian, Chinese, In May 1996, Audi announced that it will tion, and a weak Indian, and South Korean factories. make an additional investment in interna- Hungarian econ- tional retooling and capacity expansion at its omy has resulted UBP-Csepel Iron Foundry Ltd. in engine manufacturing plant in Gyor. Audi in fewer domes- Budapest is currently preparing for the expects to have over DEM 1 billion invested tic sales than installation of an automatic moulding line in its Gyor facility by 1997. planned for. for various types of brake drums and disks Conditions, casting. The company forecasts a 15,000 ton Lamellen und Kupplungs GmbH (LUK), Dr. Frigyes Banki however, are drums and disks capacity for the new line. the world’s largest clutch manufacturer, improving. The Csepel was purchased in October 1995 by announced in June of this year that it will company will record its first profit in 1996. The the U.S. company Universal Brake Parts. [for build a DEM 150 million greenfield clutch CEAR interviewed Dr. Frigyes Banki, a native more on UBP, see Opportunity Spotlight on page 8. facility in Szombathely, in western Hungary. Hungarian and Vice President at Magyar Suzuki. ed.] Magyar Suzuki’s Esztergom factory CEAR: What percentage of your parts ITT Automotive Hungary plans to expects to record its first profit in 1996. The and components are purchased from local increase the size of its Veszprem factory in factory began production of the three-door manufacturers? 1997. The factory’s 15,000 sq. meter produc- Swift model in February 1996. [for more on Banki: At the start of our production in tion area will be increased by 5000 sq. Suzuki, see this month’s Profile on page 1. ed.] Esztergom in 1992 the local contractors’ contri- meters. The expanded capacity will be used bution was only 9%. The 1996 contribution is to manufacture electrical switches. By the In June of this year, RABA Rt. sold two 26%-30%. [Developing local suppliers] was the end of this year, the factory will employ 1000 prototype compressed natural gas (CNG) basic philosophy of this project. If you look at workers. ITT is also planning to move part Continued on page 2 Continued on page 11 CENTRAL Feature Country Continued From page 1 154). Approximately one-half of the 1994 sales were exports. EUROPE engines. The low emission engines are AUTOMOTIVE being tested in buses in Hungary; as of late Hungarian sales of automotive parts and REPORT August they had already seen 4000 kilome- components in 1994 were HUF 43,695 mil- ters of use. Raba has also recently lion, up from HUF 26,443 million in 1992. October 1996 developed and is now producing drop cen- Approximately 50% of these parts and com- Volume I, Issue 5 ter axles for buses Formerly Published as the and low noise Major Foreign Investors Central Europe Business Report axles. [for more on in the Hungarian Automotive Industry From August 1995 to April 1996 RABA, see Opportunity Spotlight COMPANY INVESTMENT LOCAL COMPANY/LOCATION Publisher Ronald F. Suponcic, Jr. on page 8. ed.] Alcoa USD 146 million Alcoa Kofem Kft (aluminum casting, rolling) Szekesfehervar Editor-in-Chief Jeffrey A. Jones, Esq. Audi AG USD 600 million Audi Hungaria Motor Kft Budapest-based (engines) Gyor Perion Battery Central Europe Automotive Report™, 4800 Daewoo USD 30 million MGM Radax Rt (ball bearings) Debrecen Baseline Rd., Suite E104-340, Boulder, CO Factory Co. Ltd. is currently involved Ford Motor USD 170 million Ford Hungary Manuf. & 80303 USA, is published monthly, except (components) Sales Ltd. August, by Central European Trade & in supply negotia- Szekesfehervar Marketing, L.L.C. in Boulder, Colorado. tions with “a few” General Motors USD 287 million Opel Hungary Manuf. Ltd. car manufacturers (engine & car assembly) Szentgotthard The mission of the Central Europe that are planning ITT Automotive USD 40 million ITT Automotive Automotive Report is to provide market, (components) Magyarorszagi Kft to move opera- Veszprem investment, and business information that tions to Eastern Suzuki Motor USD 280 million Magyar Suzuki Corp. can lead to joint venture, greenfield invest- (car manufacture) Esztergom Europe, said Dr. ment, and product distribution United Technologies n.a. United Technologies Janos Agh, (wire harnesses) Automotive Hungary Godollo opportunities in the automotive sectors of Perion’s Sales VAW DEM 80 million VAW Slovenia, Hungary, Czech Republic, Slovak Manager. [for more (engine components) Gyor Republic, Poland, Bulgaria, and Romania. on Perion, see Source: ITDH The Central Europe Automotive Report Opportunity Spotlight intends for its information to be used to on page 8. ed.] increase foreign investment in the Central ponents were destined for export. European auto sector; improve the avail- On September 27, 1996, G.M. plans to Electrical automotive components account- ability, quality, and competitiveness of open a cylinder plant in Szentgotthard. ed for HUF 7,847 million of 1994 sales, up products and raw materials available to significantly from HUF 2,454 in 1992. Over Central European auto manufacturers and Hungary’s 8% import surcharge is sched- 80% of those components were exported. suppliers; strengthen existing Central uled for elimination on July 1, 1997. [for more market figures, see graphs on pages European companies by introducing foreign 3 and 10. ed.] capital, technology, and expertise; and provide opportunities for auto manufacturers Opel Hungary’s Numbers Investment: and suppliers to expand their markets. 1992 1993 1994 1995 Audi, General The entire contents of this magazine are Car production (units) 9,300 13,344 12,282 12,844 Motors, Suzuki, and copyrighted by Central European Trade & Car exports (units) 2,735 3,204 1,101 3,936 Ford are four of the Marketing, L.L.C. with all rights reserved. Engines (units) 22,000 75,000 160,000 265,000 Revenues (mil. Ft) 9,074 20,345 43,093 n.a. largest foreign Reproduction or use in any form, without Exports (mil. Ft) 1,691 8,402 29,151 n.a. investors in Hungary permission is prohibited. Annual subscrip- Employment 514 482 569 670 (see chart on page tions are $195 in the United States & Asia Profits before taxation (mil. Ft) -1343 736 6095 n.a. 2). By the end of and $155 in Europe. Source: Opel Hungary, ITDH 1995, Hungary had attracted over USD A revised Unfair Market Practices Act 12.5 billion in foreign direct investment. Ad & Subscription Sales will come into force on January 1, 1997. [for Per capita, this represents USD 1,233, com- Tel: [1](303) 784-5653 an analysis of the revised Act, see this month’s pared with USD 177 for Poland, and the US Fax: (800) 684-3393 Legal Advisor on page 5. ed.] Czech Republic’s USD 573. Approximately International Fax: [1](510) 927-2630 20% of the FDI in Hungary is greenfield Email: [email protected] Hungarian Automotive Market Figures: investments. “We are very satisfied that we Europe Office: Hungary’s automotive industry (including invested here,” said Eva Lendel of ITT Tel./Fax: [42](7) 374-431 parts and components) saw sales in 1994 of Automotive Hungary, referring to the com- ul. L. Derera 2, I./48 HUF 124,116 million, compared to HUF pany’s DEM 40 million investment in its 830 01 Bratislava Slovak Republic 62,638 million in 1992 (USD 1 = HUF Veszprem factory.

2 October 1996 • CENTRAL EUROPE AUTOMOTIVE REPORT © Central European Trade & Marketing, L.L.C. 1996 Car Parts Exports & Imports ORDER TODAY! (million forints) CENTRAL Year Exports Imports TO SUBSCRIBE, FAX ======1991 625.3 1885.7 EUROPE THIS PAGE TO 1-800-648-3393 1992 1754.1 2886.2 (FROM OUTSIDE THE US 1993 1762.2 8506.4 FAX TO (510) 927-2630) 1994 3211.9 11453.5 AUTOMOTIVE 1995 6089.0 8267.5 Indices (previous year = 100) ❑ RENEWAL ❑ NEW SUBSCRIPTION 1992 280.5 153.1 REPORT 1993 100.5 294.7 1994 182.3 134.6 CEAR 1995 189.6 72.2 SUBSCRIPTION ORDER FORM Source: Ministry of Industry & Trade Name Title About 50% of the FDI is located around Company Budapest, and over a quarter is in northwestern Hungary. Well developed Business Activity infrastructure, such as highways and Street Address telecommunications, and excellent access to Western Europe attracts many companies City to the northwestern region. Audi’s engine State manufacturing plant is located in Gyor, a city approximately 100 km from Vienna. Zip/Post Code G.M.’s engine and car assembly plant is in Country Szengotthard on the Hungarian/Austrian border. Telephone Fax Although eastern Hungary’s infrastructure is inadequate, the region should not be E-mail Address overlooked by potential investors. There is SUBSCRIPTION U.S. & ASIA EUROPE good supply of talented workers in the area, and many cities are anxious to attract new ONE YEAR (11 ISSUES) US $195 US $155 business. According to one component Distribution Method Requested manufacturer, the region will become an Printed and Mailed 1st Class Electronic, Delivered by Email important market in 2-3 years. Advertising Information I am interested in Advertising, Please Send a Rate Guide & Media Kit A recent report issued by the World Bank states that Hungary leads the Payment Information Central/East European region in the devel- Check Enclosed Invoice Wire Transfer opment of a market economy. The report Payment due in US Dollars. Checks drawn on US Banks for International US Dollar notes that private property is predominant Money Orders payable to “Central European Trade & Marketing, L.L.C.” Wire funds in the economy. The Hungarian govern- to Colorado National Bank, 1600 28th St., Boulder, CO 80306 USA, Bank Routing ment has indicated that the privatization #102000021, for Central European Trade & Marketing, L.L.C., Account # process will be completed in 1997. 194311741285. Wire Transfer Fees are the responsibility of the Subscriber. Privatization of the energy industry is cur- Guarantee rently underway. We guarantee that you will find the CENTRAL EUROPE AUTOMOTIVE REPORTTM to be useful and informative. If you are not completely satisfied, you may cancel at Economy & Trade: Hungary’s real GDP any time and receive a refund for the unused portion of your subscription. growth for 1996 is expected to be around 1- 1.5%, compared with a 1.5% growth rate in Mail, Fax, or Email This Order To: 1995. GDP per capita in 1995 was USD Central European Trade & Marketing, L.L.C. 4,278. The most recent estimate for infla- 4800 Baseline Rd., Suite E104-340 tion in 1996 is 24%, down from 28% in Boulder, Colorado 80303 USA 1995. In December 1995, the average busi- Phone: [1](303) 784-5653 ness short-term lending rate was 32.2%, International Fax: [1](510) 927-2630 Inside US Fax: (800) 684-3393 and the average long-term rate was 31.5%. Email: [email protected]

Continued on page 10 Publishers of the CENTRAL EUROPE AUTOMOTIVE REPORTTM

Goods are moved to and from Central a freight forwarder who is known in the Europe by truck over the slowly improving region or country,” said Hans de Regt, Daewoo has been one of the most active highway system, by train over busy routes, Deputy General Manager of the Budapest users of the Polish port of Gdynia. Located by ship to several of the main sea ports office of Transforwarding. An experienced on the port’s premises is the Baltic Auto such as Gdynia in Poland and Koper in forwarder is needed to keep up with the Center which is a pre-delivery and inspec- Slovenia, by barge on the Danube River, constantly changing regulations and cus- tion area for imported cars. The center has and by aircraft. In Poland in 1994, for toms in the emerging market economies. a car parking area that can handle 6,000 example, 78% of the goods moved in that cars and facilities are available for dewaxing country were by truck, 16% by rail, 2.6% by Good communication with the forwarder cars and installing car alarms and radios. pipeline, 1.7% by maritime navigation, and can also help avoid costly delays and mis- In 1995, 5000 U.S. cars were imported into .6% by inland navigation. takes. A company must tell its forwarder Poland through Gdynia. Cars from the EU about its product, what the company wants are often shipped into Central Europe via The number and quality of services the forwarder to do, and what day loading rail instead of through ports such as available to companies who need to move and unloading is expected to take place. Gdynia. their goods in Central Europe is improving. “Good information flow from the customer Both local and international freight for- is essential,” said Peter Mrazek of Cargo Daewoo’s Romanian factory, Rodae warders can be found in most all of the Transport in Slovakia. Automobile S.A., receives disassembled car major cities. The freight forwarder can kits from Korean via the Romanian port of perform logistical duties, handle customs Some problems are, for now, impossible Constanta. A typical shipment involves 30 paperwork, arrange for warehousing, pack to avoid in Central Europe. Although containers which are then shipped via rail and unpack goods, and distribute goods for improving, infrastructure weaknesses to the Rodae factory in Craiova. Two to his client. impede the smooth flow of goods. “Freight three rail shipments per day run between forwarding requires speed,” said Cargo Constanta and Craiova. Until recently, As the freight forwarding industry is a Transport’s Mrazek. Unfortunately, materials were transported from Europe to service industry, finding a good forwarder Central European forwarders must rely on Romania via truck, but Rodae has started will involve some trial and error. Inquiries slow moving state agencies such as railways to use rail shipments as well, especially should be made into the forwarder’s range and customs agencies. Border delays are from Germany. Trucks are used for ship- of services, whether they specialize in cer- infamous in the region. Conditions, howev- ments between Turkey and Romania. tain goods, and how long they’ve been in er, are getting better. “The infrastructure the region. “A qualified freight forwarder is different [from the West], but is constant- Rolem S.R.L., a manufacturer of high must have a reputation in a specific market ly improving,” said de Regt. quality wood parts for Mercedes passenger and he must be the right size for his cars, transports finished pieces to Germany client,” said Willie Scholz, Vice President *** from its Romanian factory via four truck of Cargoline (US), a freight forwarding shipments each week. Rolem has found company headquartered in Vienna. “To The auto and component manufacturers that the truck transport is more reliable and find a qualified forwarder a company must in Central Europe use a variety of trans- flexible than rail. The 1800 kilometer jour- test them and see how they react in specific portation modes to get supplies and to ney to Germany takes three days and situations.” distribute their products. Volkswagen Rolem has had no difficulty meeting just-in- Bratislava uses trucks, trains, and barges as time deadlines. A good forwarder will offer a range of a part of its Slovak operations. “Since last services for its client. “Find a reliable part- year we have set up a daily train from the Hungarian cardan shaft and gearbox ner with possibilities to guarantee Volkswagen Wolfsburg [Germany] plant for maker UKM Rekard Rt. also favors the use undistributed flow of goods,” said Slawomir the supply of parts,” said Karl Wilhelm, of truck transportation. The company has Blotny, the Sales and Forwarding Manager Technical Managing Director. “And in had no problems transporting its goods to for Raben Logistics in Warsaw. Such a addition to this we have 2-4 lorries coming Western European markets, especially now partner should provide customs services, to us daily from other suppliers.” that a major autobahn runs from Budapest warehousing, a distribution network, and Volkswagen just recently started shipping to Vienna. [for more on UKM, see this have experience, he said. cars from Bratislava to Germany by boat on month’s Opportunity Spotlight on page 8. ed.] the Danube River. Twenty-percent of the Many problems can be avoided, such as factory’s production is now shipped by boat. Air transport is preferred by Danube missing documents, by choosing a forwarder “It’s interesting, I thought there would be Mold & Die located in Bratislava. The who specializes in your type of product and more problems but it works out well,” said company ships plastic injection and insert who has experience in the region. “Contact Wilhelm. molds from Slovakia to the United States. Continued on page 15 4 October 1996 • CENTRAL EUROPE AUTOMOTIVE REPORT © Central European Trade & Marketing, L.L.C. 1996 Hungary the New Act, abuse is present in contractual relationships if the economically superior LEGAL ADVISOR party 1) stipulates unjustified, one-sided HUNGARY’S REVISED UNFAIR MARKET PRACTICES ACT advantages; 2) forces or influences the other party to accept disadvantageous, discrimina- tory or unaccustomed conditions; or 3) More than five years have passed since business secrets must not be obtained or used restricts, detrimentally to customers, produc- Hungary’s Prohibition of Unfair Market in an unfair manner. Another form of busi- tion, distribution or technological Practices Act came into force. During these ness relationship protection is the prohibition development. The economically superior transitional years the rapidly changing eco- of launching an unfair appeal to other mar- party is also prohibited from refusing to con- nomic arena was by no means devoid of ket participants expressly aimed at disrupting clude a contract without justification, or unfair business an existing economic relationship with a third hampering market access by offering practices. In party, or preventing the establishment of extremely low prices without a higher level of the interest of such a relationship. efficiency. Other prohibitions include a ban preserving the on creating disadvantageous market condi- already existing The New Act’s most important rule in the tions to the competitor without justified basis of a fair chapter on prohibition of unfair influence on cause, and a prohibition of influencing its market econo- consumers’ free choice and of the deceit of economic decisions in order to gain unjusti- my and to consumers defines deceit of consumers as fied advantages. harmonize conduct where the essential features of a Hungarian product (application, use, composition and A market participant is in an economically competition and effect) are presented in a way that is suitable superior position if its goods 1) cannot be antitrust regu- for the deception of consumers. Consumers procured from elsewhere, or can be procured Tamas Kovacs lations with are also deceived if they are not properly under considerably more unfavorable condi- rules of the informed that the goods fail to meet legal tions; or 2) are procured by one who orders European Union, the Hungarian legislature specifications and requirements that are gen- goods which cannot be sold elsewhere, or can approved the revision of the Act and the erally established for the use of such be sold under considerably more unfavorable drafting of a new competition law. products. Lastly, it is prohibited to use busi- conditions than usual for the given trade and ness practices which restrict consumers’ the goods in question. A market participant Act LVII of 1996 on the Prohibition of freedom of choice in an unjustified manner. can also achieve the status of economic supe- Unfair Market Practices and the Prohibition riority if it can pursue its economic activities of Restriction of Competition (the “New The third chapter’s objective is to prevent independently from other market partici- Act”) will become effective on January 1, business partners from entering into agree- pants and their market related actions. 1997. The New Act includes not only tradi- ments that restrict economic competition, tional competition rules, but contains also called antitrust regulations. The New The fifth chapter deals with the supervi- provisions which further protect consumers Act forbids the display of coordinated con- sion of the organizational union of and prevent the formation of cartels for the duct or the entering into a controlling enterprises. An organizational union of exclusion of competition. agreement between market participants enterprises is required to apply for and which may result in the restriction or the obtain permission for the union from the The classic rules of competition are in the exclusion of economic competition. An Economic Competition Office (“ECO”) if (a) chapter dedicated to the prohibition of added feature of the New Act is that such con- the joint net sales revenue of the participants unfair market competition. The main provi- duct is prohibited irrespective of whether the in Hungary in the previous business year sion comprises the general prohibition of agreement was concluded in the Republic of exceeded HUF 10 billion (approx. USD engaging in unfair economic activities — Hungary or outside the country, provided that 65.35 million), and (b) at least two of the specifically, in a way that fails to meet the the effect of the conduct results in the restric- participants individually had net sales rev- requirements of fair business practices and tion of economic competition in Hungary. The enue of HUF 500 million (approx. USD interferes with or jeopardizes the legitimate list of forbidden conduct includes the direct 3.26 million). The ECO may not refuse to interest of competitors and consumers. This or indirect determination of prices or other issue such permission if the organizational chapter also contains rules that prohibit dam- business conditions, the control of manufac- union does not create or enforce economic aging and jeopardizing the reputation and turing, distributing, and investing, dividing superiority, and does not hinder the forma- credibility of another market participant by markets or sources, and the prevention of tion, maintenance, or development of making or spreading false allegations, or by market action. According to Section 12 of economic competition. falsifying a genuine fact or by displaying any the New Act, such an agreement is not violat- other conduct with the same effect. ing the Act if it is of minor importance or the Tamas Kovacs is an attorney with Hogan & parties to the agreement are not independent Hartson’s Budapest office which offers clients a Confidential and business relationships of enterprises. full range of legal services. Bank Center, any kind are protected, among other things, Granite Tower, 9th Floor, 1944 Budapest, against disclosure to others or to the public The fourth set of rules addresses the Hungary; tel: (36 1) 302-9050, without proper authorization. Accordingly, abuse of economic superiority. According to fax: (36 1) 302-9060. ■

© Central European Trade & Marketing, L.L.C. 1996 CENTRAL EUROPE AUTOMOTIVE REPORT • October 1996 5 CENTRAL EUROPE To Our Readers: AUTOMOTIVE REPORT As is evident from the chart on page 2 of this month’s issue, the automotive industry in Hungary is attracting high levels of foreign investment. Many of the world’s biggest vehicle and parts manufacturers have set up operations in Hungary, taking advantage of Hungary’s strategic location, low cost and skilled labor force, and friendliness to foreign investors. Most of the automotive activity is centered around Budapest and in western Hungary. Eastern Hungary, however, is likely to be the next region to be targeted by foreign investors. The region currently suffers from high unemployment due to the demise of its heavy industrial base. Thus, a large supply of highly skilled workers, including many engineers, is available, especially in cities such as Miskolc. Eastern Hungary also offers excellent access to the Ukraine and other states of the former Soviet Union. The region’s infrastructure, however, must be improved before it realizes its potential. One Ronald F. Suponcic, Jr. insider expects that it will take 2-3 years for eastern Hungary to become an important center for new Publisher industrial activity. Several of the industrial parks reviewed in this month’s issue are planned for eastern Hungary. Although the flow of foreign investment into Hungary is improving the sophistication of the local supply base, more investment is needed. As noted by one supplier in Gyor, “the trend is that the Hungarian industry will get more suppliers from abroad, because the capacity [and quality] of the local suppliers is low.” Before the big manufacturers in Hungary can realize their plans to purchase more supplies locally, the Hungarian companies clearly must see greater inflows of foreign technology and capital.

***

As always, please contact us with any requests for coverage of specific issues, people, or companies. Jeffrey A. Jones, Esq. Our mission is to provide you with the information you need to succeed in the dynamic Central ■ Editor-in-Chief European automotive industry.

“The best information available on the automotive sector in Central Europe” Your Company Should Be Included! ADVERTISING RATE GUIDE FEATURE STORIES Effective: September 1996 November 96 Czech Black & White Ads December 96 Slovakia Size inches cm 1x Price January 97 Poland Full Page Display 7.5 x 10 19.05 x 25.40 US $3,200 February 97 Bulgaria 1/2 Page Display 7.5 x 4.75 19.05 x 12.06 US $1,800 March 97 Slovenia 1/4 Page Display 4.95 x 4.75 12.59 x 12.06 US $1,200 Special Reports Directory 2/3 Col. 2.41 x 6.5 6.13 x 16.51 US $400 November 96 Banking Vertical Business Card 2.41 x 3.25 6.13 x 8.25 US $250 December 96 Environmental Frequency Discount: January 97 Real Estate 3 - 5x = 5% 6 - 9x = 10% 10+x = 15% February 97 Travel ! Special Offer: 1st Time Advertisers receive a 50% discount first March 97 Advertising order. Reach automotive manufacturers, suppliers, and investors in Central Europe, the EU, United States, Korea, Russia, and the former Soviet States. CEAR is electronically designed, printed, and distributed. Printed and fax distribution is Black & White, Internet distribution is full color, Ad materials should be supplied either as electronic files or camera ready art to be scanned. Color Ads will be adjusted for B&W Printed distribution. CEAR supports the following files. Macintosh Files: QuarkXPress, PageMaker 5&6, Illustrator 5&6(eps), Freehand 5(eps), Photoshop(tiff, eps); PC Windows 95 Files: QuarkXPress, PageMaker 5&6, Illustrator 4.1, CorelDraw 5&6(tif, eps, bmp, wmf), Photoshop(tif, bmp), WordPerfect 6.1. Camera Ready Art: Art to be scanned should be of the same size or larger than the finished ad size. CEAR supports the following Removable Media: 3.5” Floppy disks; 3.5” 128 &230 MB optical disks; 44, 88, 200 & 270 MB Syquest cartridges; 100 MB Zip disks.

We are the only publication to focus entirely on covering the automotive sector in this region.

6 October 1996 • CENTRAL EUROPE AUTOMOTIVE REPORT © Central European Trade & Marketing, L.L.C. 1996 are imported, customs duties must be paid. Hungary Depending on the size and type of facility to be built, this restriction can significantly FOCUS ON INVESTMENT affect the benefits of the customs-free zone. SETTING UP A CUSTOMS-FREE ZONE IN HUNGARY FOR EXPORT The permit for the customs-free zone has no definite expiration and will remain in In recent (ii) the territory to be declared a cus- effect for as long as the company remains years, Hungary toms-free zone must be at least 2000 sq. m., in existence and is in compliance with the has become an various legal requirements. Local customs important des- (iii) the territory to be declared a cus- officials will inspect the manufacturing tination for toms free zone must be owned or used by facility on a regular basis in order to moni- automotive the recipient of the permit, and tor compliance. In addition, the local greenfield customs authority is entitled to supervise investment. (iv) the recipient of the permit must be various technical aspects of the territory. As a result of a trustworthy. These include the entrance, the fence variety of cus- around the facility, and the method of toms and other It is understood that the last requirement entry of goods and products in and out of Bradley G. Kulman incentives, relates to the recipient’s business reputa- the facility. Hungary as tion (both financial and otherwise) and the managed to attract some of the more signif- recipient should not have any outstanding On an operational level, several compa- icant automotive manufacturing invest- debt to any Hungarian governmental nies have experienced difficulties quickly ments in Central and Eastern Europe. agency, such as the tax authority or the clearing necessary equipment and raw social security agency. materials through the various reviews. Although a well-educated work force and This can cause significant problems for fac- comparatively low salaries have played an The issuance of the permit for a cus- tories that work on a just-in-time basis or important role in attracting these manufac- toms-free zone is a discretionary decision for emergency repairs of important equip- turers, one of the most important elements of the head of the National Customs ment. Therefore, consideration needs to be for some of them has been the potential of Agency. Therefore, in the application for given to maintaining adequate raw materi- establishing a customs-free zone in the permit it is important to make as con- als and replacement parts at the facility at Hungary. A customs-free zone permits the vincing a case as possible for the issuance of all times. automobile manufacturer to import and the permit. Plans for the use of the facility export various items without having to should be appropriately summarized. In Nevertheless, in spite of the problems make any customs payments, as long as addition, projected benefits to the local relating to timely supply, the advantage of such items are not sold into the Hungarian economy, such as increased employment the customs-free zone have convinced sev- market. In addition, in appropriate circum- and purchase of building materials from eral significant automobile manufacturers stances certain tax benefits can be obtained local suppliers, should be highlighted. It is and parts manufacturers to build and from the Hungarian government. Such also important to have the support of, or expand their facilities in Hungary. It is benefits can significantly increase the agreements with, the local government for likely that other manufacturers will also attractiveness of an investment in Hungary. the area where the territory to be declared choose to locate in Hungary as the concen- a customs-free zone is located. tration of manufacturing facilities attracts The basic requirements for establishing a other suppliers. customs-free zone are set out in Act C of Once a territory is declared a customs- 1995 on Customs Procedure and Admin- free zone, it is considered to be outside of Bradley G. Kulman is the resident U.S. istration, Decree No. 10 of 1996 of the Hungary from a customs point of view. partner in the Budapest office of Stroock & Ministry of Finance on the Enforcement of Therefore, equipment and machinery used Stroock & Lavan, a full service, general prac- the Customs Procedure, Act XXIV of 1988 in the manufacturing process may be tice law firm based in New York. The firm’s on Foreign Investments and Act VI of 1988 imported without payment of customs Hungarian practice is focused on foreign on Business Organizations. duties. Similarly, raw materials for manu- investment and privatization transactions, facturing may also be imported, and infrastructure projects, and the representation Pursuant to these requirements, the head finished products may be exported, without of Hungarian entities in transactions with for- of the National Customs Agency is entitled any such payments. eign parties. East-West Business Center, to issue a permit to declare territory within Rakoczi ut 1-3, H-1088 Budapest, Hungary; Hungary a customs-free zone upon the sat- It should be noted, however, that the per- tel: (36 1) 266-9520, fax: (36 1) 266-9279. ■ isfaction of the following conditions: mit for the customs-free zone does not extend to materials used to build the manufacturing CENTRAL (i) the recipient of the permit must be a facility. Items such as bricks, roofing, floor- EUROPE Hungarian company that has its registered ing, lighting fixtures, windows, etc. must be AUTOMOTIVE office in Hungary, bought from Hungarian sources or, if they REPORT

© Central European Trade & Marketing, L.L.C. 1996 CENTRAL EUROPE AUTOMOTIVE REPORT • October 1996 7 Hungary privatization, management, quality, and logistics.” He sees a minimum of 10 years before OPPORTUNITY SPOTLIGHT these markets improve. *** Goodyear Hungary Ltd. is focused on This month’s Opportunity Spotlight features its Western European suppliers find local developing a tire distribution network in six Hungarian parts and components manufac- companies with which they can engage in Hungary. “It’s good in every county to have turers. Excellent opportunities exist for joint production. a key distributor who will then distribute to cooperation with these companies in the form small retail shops,” said Dezso Jutasi, of supply, purchase, and production agree- *** Goodyear’s Sales Director in Budapest. “We ments, and direct investment. believe that tires must be as close as possible Cardan shafts and gearboxes are the main to the customer.” According to Jutasi, it’s ITT Automotive Hungary has invested automotive products made by UKM Rekard difficult to find dealers who will take respon- over DEM 40 million in its Veszprem factory, in Gyor. The company has been privatized sibility for a county and invest in the county. which was opened in June 1994. “We looked since May 1993 and is 100% owned by for locations and found Hungary to be the Germany’s UKM Meissen. Eighty percent of “Those who figure out the best type of best for reaching our customers,” said Eva the company’s production is devoted to parts network will win,” said Jutasi. “With the Lendel, General Manager of ITT Hungary. for agriculture machines. Ninety-five percent market changing so fast, [it’s] difficult to say The factory produces switches, lights, wind- of UKM’s sales each year are to companies in what will work best.” The Hungarian tire shield wiper systems, and sensors for ABS Western Europe, the U.S., and Canada. market is evolving from domination by 2-3 brake systems. The ABS sensors comprise Other markets include Hungary and Hungarian wholesalers, to a network of deal- the largest part of ITT’s production. Romania; cardan shafts are supplied to ers. “The wholesalers don’t like the change,” Romanian car-maker Dacia. Cardan shafts he said. Eighty percent of ITT Hungary’s produc- and gearboxes are produced by UKM based tion is exported to Western Europe. Some is on customer designs or on UKM designs. Jutasi said that many potential customers shipped directly to G.M/Opel in Hungary. UKM has available excess capacity for shaft in Hungary are buying used tires. “We hope ITT has also started developing its aftermar- and gearbox production. this year will be the bottom of the trend,” he ket sales in the region. “We see big potential said. Another trend is that many of the two in Central and Eastern Europe,” said Lendel. Forging and casting parts are purchased in million cars in Hungary are using cheaper Two shops in Moscow currently distribute the Czech and Slovak Republics, and UKM is Eastern European tires. Jutasi said that the ITT products. looking to increase the number of these sup- market share for Western tire makers has pliers. Steel and forged parts are also shrunk over the last two years by at least 3%- ITT’s future production plans involve purchased in Hungary, Italy, and Germany. 4%, and the market share of Eastern expanding into Russia. “Russia is unsure for Some forged parts are investments now,” said Lendel, “we have to supplied by Russian wait, but it will be the next step.” The com- companies. Goodyear Hungary Tire Sales in 1995 pany is also looking to expand into Poland, Ukraine, Romania, and the Baltic states. UKM wants to Type Units Sold localize more of its ITT is looking for suppliers in supply purchases. “I Central/Eastern Europe and in Germany. think the trend is that Passenger (summer) 50,245 The Hungarian company Bakony Muvek Rt., the Hungarian industry Passenger (winter) 10,598 for example, supplies ITT with windshield will get more suppliers Light Truck 4,249 wipers, wiper motors, and horns. According from abroad, because Heavy Truck 3,129 to Lendel, “finding suppliers in this area is the capacity [and quali- not easy.” Although she noted that there are ty] of the local supplier Other 4,374 local companies with good workers and engi- is low,” said Jochen Total 72,595 neers, the companies need more Radke of UKM. Source: Goodyear Hungary Ltd. development capital. “Castings and forgings companies need a lot of investment.” Lendel said that small plastic, metal, and Radke noted that many of these companies European producers has increased by the rubber parts can be easily found in the haven’t invested in their factories for the last same amount. Jutasi thinks this trend will region, but most electrical parts are pur- 20 years. shift in 1997 as the economy improves and chased from Western European companies. Hungarians’ buying power increases. The “It takes time to build up a supplier,” she Regarding expansion into the ex-Soviet demand exists, but Western tires are still too said. She noted that ITT is slowly building Union, Radke says “it’s very difficult for us to expensive. “I don’t think we have any prob- up local suppliers who manufacture sophisti- make some business with these countries lem with image,” said Jutasi. Goodyear is cated electronic components. ITT will help because the have too many problems with one of the biggest tire advertisers in Hungary.

8 October 1996 • CENTRAL EUROPE AUTOMOTIVE REPORT © Central European Trade & Marketing, L.L.C. 1996 Another challenge faced by Goodyear is sales. RABA currently provides technical German company Accumulatorenwerke how to establish a Western company culture support to several Russian companies. Hoppecke that produces and markets stand- in Central Europe. “Changing the mentality by batteries. Strategic cooperation will take generations,” said Jutasi. Goodyear RABA is involved in joint ventures with agreements have been a key to Perion is organizing two training programs to devel- Western companies and is interested in remaining competitive. The company is op selling skills and technical knowledge of cooperating with other companies. “We are interested in entering into agreements with their products. looking for partners and partners are looking other companies. “If someone has some- for us,” said Nagy. The company is involved thing to offer, [we’re interested],” said Agh. Goodyear sold 75,000 units in Hungary in joint ventures with axle maker BPW and “We have had good experiences when it last year and expects to sell the same in engine manufacturer Detroit Diesel Corp. comes to technology exchange.” 1996. The company also hopes to expand its RABA is cooperating with Bosch for the sales to Western companies operating fleets development of an engine that will meet *** in the region. “It’s a buyers market,” said EURO-3 emission standards. Jutasi. “We must find out what the customer UBP-Csepel Iron Foundry Ltd. manufac- will buy.” Approximately 70% of RABA’s supplies tures metal products for the truck, bus, and are purchased on the domestic market. Of tractor industries. UBP is 100% owned by *** the remaining 30% supplied by foreign com- the U.S. company Universal Brake Parts. panies, 50% are raw materials and 50% are The foundry has an 8-10 ton capacity; cast- RABA Rt. manufactures front and rear finished products such as turbo chargers, ings are made out of gray and ductile iron. axles for trucks, buses, and agriculture and transmissions, cabs, and fuel pumps. To UBP’s traditional product is engine blocks. construction equipment. The company also reduce its transportation costs, RABA tries With the drop in bus production by UBP’s produces diesel engines, bus chassis, and to purchase its foreign supplies from the main customer, Ikarus, engine block produc- trucks. Of the USD 400 million worth of Czech and Slovak Republics, Slovenia, ex- tion has dropped from a high of 50,000 per goods exported by Hungary to the U.S. last Yugoslavia, and Russia. “Our policy is to year to less than 3,000. year, 25% were RABA products. RABA’s work with several suppliers,” said Nagy. “We main factory is located in Gyor. are always looking.” Other products include gearboxes manu- factured under licenses from MAN and ZF, RABA’s turnover in 1995 was HUF 23.6 *** steering wheel supports made from ductile billion, and profit (before taxes) was HUF iron and composites, and truck tire hubs and 826 million. The company had 6400 workers Perion Battery Factory Co. Ltd. produces rear axles. Steering wheel supports are made in 1995, down from 12,000 in 1991. Forty- lead acid, Ni-Cd, and dry cell batteries. The for Ikarus and other bus companies. Hubs nine percent of RABA is held by the company’s shares are 50.1% owned by are sold mainly to RABA Rt., and rear axles Hungarian Investment and Development employees, 47.7% by management, and 4.2% are exported to U.S. companies. Bank, 32% is held by the Hungarian State by the local council. Perion’s main cus- Holding Company (APV), and the remain- tomers in Hungary are Suzuki and UBP is undergoing internal reorganiza- der is held by local authorities and small G.M./Opel. The company also constructs tion and will soon have two independent investors. The APV is handling RABA’s pri- and sells battery manufacturing machines divisions. Finished goods will be produced vatization. and equipment, and sells its technical know- by an automotive parts division, and castings how to customers. “Selling know-how is and casting parts will be produced by a sepa- Approximately 70% of RABA’s produc- something that has come into the Perion rate division. tion is exported. In addition to the U.S. and company profile recently,” says Dr. Janos traditional ex-Comecon markets, RABA sells Agh, Sales Manager of Perion. UBP imports raw materials such as sand, its products in Italy, Germany, England, pig iron, and additive materials. Steel and South Africa, South Korea, Japan, China, Together with the International Battery scrap casting pieces are purchased from sup- Thailand, Indonesia, and Malaysia. The Division of Johnson Controls, Perion has pliers in Hungary. The company plans to be company hopes to re-establish ties with com- developed an environmentally friendly ISO 9002 certified by the end of this year. ■ panies in ex-Yugoslavia. “We would like to battery recycling system called the Scrap play an active role in this area, partly by sup- Reclamation System (MRH). In conjunc- plying spare parts for the 10,000 RABA tion with its battery sales, Perion expects trucks already sold in ex-Yugoslavia, partly sales of its MRH system to enhance To report news of acquisitions, joint by selling new products,” said Karoly Nagy, its competitiveness. ventures, sales contracts, new offices, RABA’s Marketing Coordination Manager. In 1992 Perion signed a technical assis- or job changes write to Opportunity The company also has traditional ties with tance agreement with Japan’s Furukawa Spotlight, CEAR at 4800 Baseline Rd. Russia. Approximately 100,000 Ikarus buses Battery Co. Ltd. in order to obtain a new Suite E104-340, Boulder, CO 80303 with RABA engines and axles travel the battery design and a quality assurance sys- roads of Russia. Nagy said that huge tem. The cooperation enabled Perion to USA, or E-Mail to [email protected]. demand exists for RABA’s spare parts, but become a supplier to Magyar Suzuki. Perion financial problems hinder the increase in is also involved in a joint venture with the

© Central European Trade & Marketing, L.L.C. 1996 CENTRAL EUROPE AUTOMOTIVE REPORT • October 1996 9 Feature Country Continued From Page 3 Esztergom: An industrial zone is planned and development programs. High unem- for 56 hectares of land located near the ployment has resulted in a large supply of Suzuki car factory. The city, north of skilled workers. The area marked for the The unemployment rate for 1996 is Budapest near the Slovakia border, is an industrial park is 70 hectares of land linked expected to be 10.4%, slightly lower than important industrial and export base. Good to Miskolc by a 4-lane highway. Possibil- the 1995 rate of 10.9%. When broken roads and infrastructure exist. The mini- ities exist for linking the park to the main down by region, the unemployment rate in mum size of plots is expected to be .3 rail line, and an airport is 8 kilometers Budapest was 5.9%, compared with 20% in hectares. away. The plans are for an export oriented parts of eastern Hungary. park focused on hi-tech branches such as Szentgotthard: The city, located near the precision engineering. The average monthly wage of a Slovenian and Austrian borders, is an eco- Hungarian worker in 1995 was approxi- nomical, educational, and medical center of Ajka: Located in western Hungary, mately USD 315. With employer and the region. The first phase of the park has approximately 30 kilometers from ITT employee contributions, the rate rises to been developed on 43 hectares of land near Automotive’s factory in Veszprem. Good over USD 490. Net real earnings of the Budapest/Graz railway line. Another highway access. Area of 120 hectares is Hungarian workers dropped by 12.2% in 11 hectares are available for small and planned for the park, which will focus on 1995. In 1995, there were 7 strikes and medium-sized companies. Full infrastruc- electronics, telecommunications, engineer- lockouts in Hungary, involving 172,048 ture is provided. The park will offer ing, and vehicle building industries. workers, and resulting in approximately excellent access to G.M.’s engine and car 1,707,979 lost work hours. In 1994, there assembly factory in Szentgotthard. Debrecen: Second most populated town were only 4 strikes and lockouts. in Hungary and important industrial center. Zahony: Located in the northeast corner Good railway and highway links to Hungary’s exports (including services) of Hungary on the Ukraine border. A Romania and Ukraine. Park is planned in a grew in real terms in 1995 by approximately highway and railway run through Zahony 210 hectare area near the airport. Many 15%, and are expected to grow 8% in 1996. into the Ukraine, providing excellent con- local universities can supply intellectual Imports in 1995 grew by -1% and may nections with the states of the former Soviet capital. Daewoo recently purchased ball shrink by approximately 2% in 1996. Over Union. In order to exploit the existing bearing maker MGM based in Debrecen. 60% of Hungary’s 1995 imports and exports capacity of the transshipment facilities, and were with EU trading partners. Former to ease high unemployment, several feasibil- More information can be obtained about Comecon partners accounted for less than a ity studies have been undertaken regarding these and other industrial parks in Hungary quarter of Hungary’s exports and imports. reconstruction possibilities. Special from the Association of Hungarian allowances and preferences may be granted Industrial Parks, Konkoly Thege u. 29-33, Industrial Parks: In addition to the two to investors. Three greenfield sites have 1121 Budapest, Hungary; tel: (36 1) 1699- operating industrial parks in Hungary—the been marked out for possible development. 499, fax: (36 1) 160-0396. Loranger Industrial and Education Park in Szekesfehervar and the Gyor Industrial Miskolc: The city is located in northeast- Park—many other parks are planned or ern Hungary in the second largest industrial Continued on page 14 being developed in Hungary. Below are center of the country. Good access is pro- short descriptions of the proposed parks vided to Slovakia, Ukraine, and Romania. and the cities in which they will be located. Miskolc University is a center for research Central Europe In 1996-97

1996 Nov. 13-16 Warsaw, Poland Int’l Fair of Tools & Machinery Oct. 7-11 Ljubljana, Slovenia Int’l Exhib. of Modern Nov. 19-22 Poznan, Poland Investment Opportunities in Electronics Polish Cities Oct. 9-13 Katowice, Poland Int’l Car Fair Nov. 19-21 Bratislava, Slovakia Metal Surfaces Treatment Technology & Materials Oct. 17-19 Bucharest, Romania Int’l Technical Fair Nov. 21-23 Bydgoszcz, Poland Int’l Fair of Polyurethanes Oct. 17-22 Bratislava, Slovakia Int’l Car & Car Accessories Salon Nov. 23-25 Szczecin, Poland Int’l Specialist Fair of Transport & Forwarding Oct. 17-22 Bratislava, Slovakia Int’l Car & Car Accessories & Workshop Equip. Exhib. Nov. 28-30 Olsztyn, Poland Electronics Fair Oct. 28-30 Bucharest, Romania Int’l Exhib. of Inventions, Scientific Research, & New Technologies 1997 Nov. 6-10 Nitra, Slovakia Int’l Plastics Exhib. (incl. injection equip.) April Celje, Slovenia Car & Maintenance Fair Nov. 7-10 Wroclaw, Poland Fair of Electronics, Telecom, April Ljubljana, Slovenia Fair of Farm Vehicles & & Electrical Eng’g Supplementary Equip.

10 October 1996 • CENTRAL EUROPE AUTOMOTIVE REPORT © Central European Trade & Marketing, L.L.C. 1996 Profile Continued From Page 1 vendors to supply us. It depends on their ket. That’s our target. Today we are the second, wishes or need to find Hungarian partners. enjoying 18%-19% of new car sales in Hungary. the other large scale projects like Audi’s Opel is number one. Our target is to reach engine manufacturing project and GM/Opel’s The [Hungarian Investment and Trade 25%. That’s the number one challenge. project, the localization level of these compa- Development Agency] organizes many semi- Another challenge is to keep abreast of the over- nies is rather limited when compared to the nars in Western Europe to bring together all development of the automotive industry in Suzuki project. Hungarian subcontractors with Western the coming years. To preserve and develop our European partners. Our subcontractors will position. On the Hungarian market, competition There are many incentives given by the be a part of these seminars because Magyar is very tough, with 70-76 different car manufac- Hungarian government to generate and devel- Suzuki itself is not able to provide [enough turers and hundreds of models competing. op the local subcontractor industry. business] for local subcontractors—50,000 to Therefore, that’s the real challenge. Investment promotion funds contribute to the 60,000 vehicles is not enough for a subcontractor. infrastructure or development of certain CEAR: How will Suzuki become number one regions. Job creation funds [and] regional CEAR: What are the advantages of manu- in new car sales? development funds are available for compa- facturing in Hungary? Banki: First, by producing a competitive prod- nies who are going to establish manufacturing Banki: Number one is the proximity of the uct. Of course, Hungarian [customers] learned plants in connection with the automotive European market. That is a very important for 40 years that the [locally produced] product is industry. This industry is considered a genera- advantage. And the second is the available not competitive and poor in quality and after- tor for overall industrial development. It is a human resources. The productive capabilities sales service. We must convince the Hungarian rapidly developing branch in Hungary. Of of the Hungarian technicians, engineers, and customers that a Magyar Suzuki car is a competi- course, the Suzuki project had a very impor- workers. And, of course, very important is the tive product and quality-wise it is in line with the tant effect on accelerating the subcontractor development of the infrastructure and the best European and overseas car manufacturers. industry in the country. service industry. In comparison to other Second, is to utilize the advantage of being a Central European countries, these are local manufacturer. We should have some com- CEAR: How does Suzuki help local parts better developed. petitive advantages as far as the after-sales and components manufacturers find foreign service is concerned. We have a very strong partners? CEAR: Why have Japanese companies nationwide network of dealers and availability of Banki: The basic approach is to, first, invite been slow to invest in Hungary? spare parts is quite excellent. Suzuki’s Japanese subcontractors and vendors Banki: The investment needs in the Far to enter into cooperation agreements with East region and the investment possibilities CEAR: What specific strategies will Hungarian subcontractors. Cooperation for Japanese companies in [that region], that’s Suzuki use? based on technology transfer, like license or the main reason. And, of course, [there are] Banki: [One strategy is to] produce so-called know-how agreements. Many Japanese com- certain cultural tradition gaps between our limited versions of models. Limited version panies have found partners. That’s one nations. But through Japanese trade houses, means to produce 500-600 units with extra col- reason why we’ve succeeded in increasing to Japan plays a very important role in the global ors, parts, options. For instance, we produced such a substantial [level] the amount of and international market. It’s very interesting last year on the Hungarian market a Swift model Hungarian contribution to Suzuki’s products. if you look at the present policies of the with three doors. We experienced that the cus- Japanese production companies overseas and tomers we tried to approach at the beginning, There are also many Western European in Europe. They are always together with the the middle class, [didn’t have the necessary] pur- relevant trade house. chasing power due to the economic problems Magyar Suzuki’s Numbers They are hand in and restrictive economic policies. But there is a hand. The trade new social strata—the rich—who buy second or 1992 1993 1994 1995 1996(est.) houses and behind third cars for the family and [it’s not necessary Production 992 13,021 19,412 35,000 52,000 them the production for these cars to have five doors]. We’ve been Domestic sales (units) 929 12,537 16,065 12,178 15,000 companies. There’s very successful with the three door model. And, Exports (units) —- —- 3,309 23,873 37,000 no example of a pro- of course, [we’ll use] the modern up-to-date Sales (Ft billion) 0.6 9.6 15.5 35 53 duction company Domestic 0.6 9.6 13.3 14 14 medias, electronic and written, to maintain the Export —- —- 2.2 21 39 from Japan operating interest of the customers. We never will stop this Employment 345 489 857 1,200 1,400 without a trade process. Never. Source: Magyar Suzuki, ITDH house. The largest trade house in Japan CEAR: What other methods will Suzuki use companies that could supply Suzuki. EU established offices here in 1971-1972. They to boost its sales? member countries’ contribution is 15%-16% already have 25 years experience in the Banki: Of course, financing options. These of the total value of the car. Michelin, for Hungarian market. interest-free financing and leasing arrangements instance, supplies us with complete tires, alu- are very well known. Every competitor uses the minum rims included. A German steel CEAR: What are Suzuki’s biggest challenges same promotion activities. But we use very effi- manufacturer is an important partner who in this market? cient actions. And, of course, so-called fleet supplies us with special steel coated plates. Of Banki: The biggest challenge is how to be the sales are very important to sell cars to public course, we are going to invite more European number one company on the Hungarian car mar- Continued on page 14

© Central European Trade & Marketing, L.L.C. 1996 CENTRAL EUROPE AUTOMOTIVE REPORT • October 1996 11 Hungary it is abolished in July 1997. The customs duty and the other customs fees are assessed on the customs value of the goods which is ACCOUNTING generally the transaction value increased by any costs incurred up to the Hungarian bor- & FINANCE der (such as packaging, transportation, insurance, and under certain conditions roy- TAXES AND CUSTOMS UPDATE alties). Import VAT is assessed on the customs value increased by the customs Tax holi- A tax credit equal to 85% of the 18% cal- duties and costs incurred before the products days and tax culated tax is available for off-shore reach their first destination in Hungary. exemptions companies that meet certain conditions. Excise duties are assessed on the customs are no longer value increased by the customs duties and available for Tax depreciation is made at fixed rates set the import VAT. new foreign by the law ranging from 2% to 33%. Sample investors in rates are 2% for buildings, and 14.5% to Customs duty on new passengers cars Hungary, but 33% for most machinery and equipment. ranges from 9% to 43% depending on engine a number of Investors having head offices or premises in size, whether the car has a catalytic convert- tax incentives an entrepreneurial zone may write off 100% er, and the country imported from. It ranges are available of the cost of machinery and equipment put from 9% to 13% for trucks and from 3% to and can apply into operation for the first time in the zone 10% for spare parts. Preferential rates apply Balazs Bekes to the automo- following qualification of the zone as an for products imported from the European tive sector. entrepreneurial zone, and may write off 10% Union and the Visegrad countries. Excise Investors are entitled to a tax credit equal to for buildings and structures. duty on cars ranges from 10% to 32%, 50% of the 18% calculated tax if they make depending on engine size and whether they an investment worth at least HUF one billion Tax losses can be carried forward for 5 have a catalytic converter. for the manufacture of products. This tax years and used as deemed appropriate by benefit can be used within 5 years from the the taxpayer. In the case of an exploitation The general rate of VAT in Hungary is date the investment is put into service and created with no legal predecessor, losses of 25%. This rate applies to all automotive applies if income from export in one of those the first year of operations and the subse- products. Usually VAT subjects can set off years has increased by 25% (but at least quent two years can be carried forward VAT incurred on their purchases against the HUF 600 million) as compared to the indefinitely. VAT collected on their sales. However, previous year. input or import VAT incurred on the pur- Effective from January 1, 1995, the chase or importation of passenger cars is not Investors with a head office or premises Hungarian corporate tax consists of the 18% deductible unless car sales are a part of the in a region of high priority (a region where calculated tax levied on taxable profits and purchaser’s business. the unemployment rate exceeds 15%) or in the 23% supplementary tax levied on divi- an entrepreneurial zone are entitled to a tax dend distributions. However, the 23% Companies with foreign ownership can credit equal to 100% of the 18% calculated supplementary tax rate can be limited to the freely acquire real estate in Hungary for the tax when the investment serves the manufac- withholding tax rate set forth for dividends in purpose of their business activities. turing of products. This benefit can be used international double taxation treaties signed within 5 years from the date the investment by Hungary. This rate is set at 5% (under Hungarian companies may borrow is put into service and applies if income from certain conditions) in the tax treaty with the money abroad without the prior approval of export in one of those years has increased United States, Germany, and France, and at the foreign exchange authorities provided compared to the previous year (i) by at least 10% with Japan. Therefore, the effective the loan has a duration of more than one 1% for taxpayers established in an entrepre- corporate tax rate for profits distributed to year and does not exceed USD 50 million. A neurial zone; or (ii) by an amount equal to at shareholders residing in these countries and thin capitalization rule applies for loans least 5% of the production cost of the project owning 100% of the Hungarian distributing granted by a shareholder that holds more for taxpayers established in a high priority company is respectively 21.9% and 25.45%. than 25% of the Hungarian borrowing com- region. Only one entrepreneurial zone has Domestic Hungarian tax law does not pany when the loans exceed 4 times the been created in Zahonyi in northeast require a withholding tax on dividends paid borrower’s equity (registered share capital + Hungary. Taxpayers having head offices or to corporate shareholders. retained earnings + profits for the year) stat- premises in a region of high priority or in an ed in the balance sheet at the end of the entrepreneurial zone can benefit from a tax Goods imported into Hungary are subject previous fiscal year. credit equal to 6% of the value of equipment to customs duty, 2% customs clearance fees, put into service and operated in those 3% statistical fee, VAT, and in some cases Balazs Bekes is a Senior Tax Manager of the premises and for the year the equipment is excise duties. There is also a customs duty Tax & Legal Department of Deloitte & put into service. surcharge equal to 7% of the customs duties. Touche’s Budapest office. Varmegye u. 3-5, H- This surcharge has been imposed since 1052 Budapest, Hungary; tel: (36 1) 267-2062, March 1995 and will decrease regularly until fax: (36 1) 267-4182 ■ 12 October 1996 • CENTRAL EUROPE AUTOMOTIVE REPORT © Central European Trade & Marketing, L.L.C. 1996 Hungary HUNGARIAN SUPPLIERS OF PARTS & COMPONENTS

The Hungarian suppliers of automotive parts and components listed below are potential trading partners, joint venture partners, or direct investment candidates.

Company Product Contact Phone/Fax

1. Precast Ontodei aluminum castings Laszlone Fazekas tel: (36 47) 322-553 fax: (36 47) 322-137

2. Kaloplasztik injection moulded Tamas Elekes tel: (36 78) 461-200 plastic products fax: (36 78) 461-752

3. Tauril injection moulded Jeno Groff tel: (36 1) 260-8137 & pressed rubber fax: (36 1) 262-1994 products

4. Taurus Palma injection moulded & Gabor Davida tel: (36 42) 342-511 pressed rubber products fax: (36 42) 311-264

5. Glasunion windshields Zoltan Feher tel: (36 32) 311-655 fax: (36 32) 310-474

6. Ikarus Prestecnika cold pressed Bela Horvath tel: (36 1) 163-7880 body parts fax: (36 1) 164-2099

7. Bakany Gepipari cardan joints, axle Sandor Takacs tel: (36 34) 310-740 shafts, gear wheels fax: (36 34) 316-740

8. Ferro-Fem valves, exhaust Gyula Csiszar tel: (36 89) 324-244 inlet valves fax: (36 89) 313-015

9. Armafilt air & oil filters Marton Mendel tel: (36 1) 270-3655 fax: (36 1) 149-8553

10. Mom Gepipari hydraulic operation Istvan Feher tel: (36 72) 402-557 cylinders, brake fax: (36 72) 486-259 cylinders

11. Danuvia Gepipari hydraulic elements Tibor Simai tel: (36 1) 251-4222 fax: (36 1) 183-2763

12. Berva Finomsz. pneumatic Andras Beres tel: (36 36) 411-556 components, shock fax: (36 36) 411-112 absorbers 13. Jarmualkatresz es air brake devices Imre Bukta tel: (36 49) 312-622 Szerelvenygyarto fax: (36 49) 312-256

14. Elcometal special joining Czako Horvath tel: (36 62) 324-333 elements fax: (36 62) 474-333

15. Technocar springs, spiral springs Janos Balint tel: (36 22) 372-302

16. Raba Sarvar pedal systems Vilmos Simon tel: (36 94) 327-297 fax: (36 94) 327-296

17. ABF clutch operation Istvan Bencze tel: (36 27) 342-292 cables, wires fax: (36 1) 129-0767

18. KVJ Muvek exhaust systems, Jeno Kiss tel: (36 25) 311-273 silencers fax: (36 25) 311-273

19. Elzett Door locks & Laszlo Szikora tel: (36 1) 140-9380 lock parts fax: (36 1) 1290-692

20. Bakony Muvek distributors, ignition switches, Andras Juttner tel: (36 88) 423-648 spark plugs, wiper motors fax: (36 88) 427-916

21. Ganz electrical switches Istvan Monar tel: (36 1) 210-1190 for heating, brake fax: (36 1) 210-1189 light lamps

22. Autovill starters Otto Szalavan tel: (36 1) 140-1540 fax: (36 1) 140-1542

© Central European Trade & Marketing, L.L.C. 1996 CENTRAL EUROPE AUTOMOTIVE REPORT • October 1996 13 Profile Continued From Page 11 Banki: The number one surprise was the Feature Country Continued From Page 10 dramatic change [in the local market circum- agencies, state-owned companies, and large- stances]. When Suzuki Motor Corp. decided to scale companies. This requires a special sales establish here the assembly line in 1991, it was a Tips from Insiders: promotion action to convince them. closed market with very, very strict import restrictions. There was a big shortage of cars. 1. From a big components manufacturer: CEAR: What will Suzuki do to make its cars The people had to wait 1-2 years to have a car. “Szekesfehervar is full and has become expensive.” the most competitive possible? After the system transformation there was a Banki: If we are not competitive, if we don’t dramatic change. The speed of this change, 2. Keys to success in Hungarian market: aggressive marketing and reliable have excellent quality, if we don’t perform that was the big surprise. Just after starting products. excellent after-sales service, we lose everything. production, the company was exposed to real It’s very important through the media, daily competition without any special protection. 3. The suppliers that will survive are those that can supply systems. papers, weeklies, and magazines to convince According to the agreement between the EU Competition is reducing the number of the public that we are here and we are compet- and Hungary, the import duty is continuously single part suppliers itive. We produce a quality decreasing and in 1996 it is 4. Need good government contacts to get product and we are below 10% for cars from the “In 1996 we can appropriate permits and approvals Hungarian. We produce a EU. And the Hungarian gov- when doing business in Hungary. Hungarian product. say that we are ernment decided to suspend the 5. Training: “A must and need in over the worst and import surcharge system from Hungary,” says a major tire distributor. CEAR: What markets are most difficult stage the first of July next year. Of most important to Suzuki? course [the surcharge system] is 6. Hungarian market is becoming “over sensitive” to price. Banki: We produce cars of our company a temporary measure, but tem- for Hungary and Western development.” porarily it protected and 7. There’s room for more automotive- Europe. Our neighboring provided some advantage for related companies to invest in the Gyor area. CEFTA countries are impor- the local manufacturers. It was tant markets. We export to Slovenia, 8% but it will be totally eliminated next year. Macedonia, China, and Singapore. We have a Therefore, Magyar Suzuki cars should face dealer in Ukraine, and even in Russia. We very tough competition without any local pro- Some information provided by: believe that we will have a better market duction protection. That was a surprise. And Hungarian Investment and Trade chance in the Russian Federation. It’s very not a good surprise. Development Agency, National Bank of important to conquer these markets because Hungary, Ministry of Industry & Trade, there is a great shortage of passenger cars in Another surprise was the worsening living Central Statistical Office ■ those markets. But our Suzuki philosophy is standards in Hungary. This missing purchasing not just to sell a car but to provide good after- power. We calculated a moderate but continu- sales service. That’s why we are at this moment ous development of sales, since when we cautious with markets like the Ukraine, Russia, started here there was a shortage [of vehicles]. SELL YOUR and other CIS countries. And if you look at it this moment, the average age of the passenger car in Hungary is around PRODUCT AROUND CEAR: Will Suzuki use its Hungarian facto- 12 years. You can imagine the potential need. ry to supply the Russian market? But there is no money. That’s one reason why THE GLOBE, Banki: Yes, or find some long-term coopera- we should find export markets. According to 24 HOURS A DAY tion partner in Russia. We are looking for the original plan, 50% domestic and 50% for this partner. Russia today produces not more export, that was the sales target at the begin- Increase Sales With An than 250,000 to 300,000 units per year for ning. This today is a dream. Internet Web Site & Ad 250 million people. There’s huge market potential. Huge. CEAR: What kind of sales growth do you see Reach Hundreds of over the next five years? Thousands Of Customers CEAR: Do you have plans for expanding Banki: If you look at new car sales in Worldwide your Hungary factory? Hungary, 1994 was the last successful year with Banki: Multinational companies with around 85,000 new car sales. Last year it was established facilities are sentenced to develop. around 68,000. And this year we expect a slight Inexpensive & Gets Results With no development, there’s no chance for decrease. In 1996 we can say that we are over survival. In the medium-term, not to mention the worst and most difficult stage of our compa- CETM Internet Services the long-term. ny development. This will be the first year we 4800 Baseline Rd., Ste. E104-340 calculate a profit. In the coming years, we cal- Boulder, CO 80303 USA CEAR: What is the biggest surprise Suzuki culate more stable macro and micro economic Tel. [1](303) 784-5653 has faced since starting operations in conditions here in Hungary. We believe that Fax. [1](510) 927-2630 Hungary? the overall Hungarian economy is over the email: [email protected] worst period. ■

14 October 1996 • CENTRAL EUROPE AUTOMOTIVE REPORT © Central European Trade & Marketing, L.L.C. 1996 ❑ REFERRAL CENTRAL ❑ COMMENTS HUNGARY ❑ ADDRESS CHANGE FACTS & FIGURES

EUROPE SEND A FREE COPY TO Form of Government: Republic YOUR FRIENDS AND ASSOCIATES Prime Minister: Gyula Horn AUTOMOTIVE FAX THIS PAGE TO 1-800-684-3393 Capital: Budapest or from outside the US Population: 10.3 million fax to [1] (510) 927-2630 REPORT Labor Force: 5.4 million Land Area: 93,030 sq. km. Referral Name or New Address______Boundaries: Austria, Slovakia, Ukraine, Company ______Romania, Serbia & Montenegro, Croatia, Address ______Slovenia City ______State ______Ports: Budapest, Dunaujvaros Zip/Post Code ______Country ______Highways: 158,711 km Referred by or Old Address ______Railways: 7,785 km Company ______Inland Waterways: 1,622 km Address ______Major Industrial Branches: automobiles, City ______State ______buses, mining, metallurgy, chemicals, tex- Zip/Post Code ______Country ______tiles, construction materials, food processing, pharmaceuticals Comments & Suggestions: ______Main Imports: fuels & energy, machinery & transportation equipment, raw materials & semi-finished goods, consumer goods, ing heavy molds by air would seem cost pro- food & agriculture Special Report Continued From Page 4 hibitive, Danube claims that its molds still Main Exports: raw materials and semi-fin- Speed is essential for Danube. “We gener- cost 35% less than a mold made in the U.S. ished goods, machinery & transportation ally can’t wait 30 days for delivery of a Sholtis said Danube gets good rates by equipment, consumer goods, food & agri- mold,” said Todd Sholtis of Danube. “We negotiating with export/import companies culture, fuels & energy have to get it in 2-3 days.” Although send- and airlines. ■ Currency: Forint (USD 1 = HUF 154)

To submit opportunities for publication write to Trade Leads, CEAR at: INVESTMENT 4800 Baseline Road, Suite E104-340 Boulder, Colorado 80303 USA OPPORTUNITIES or E-Mail to [email protected] Opportunity Investment Contact Phone/Fax Supplier of seats for Suzuki cars & spare parts USD 1.5 million Csaba Kilian (36 1) 118-0051 for Ikarus seeks joint venture partner (re: 02/Aut/96) technology transfer, joint manufacturing Battery manufacturer seeks joint venture partner USD 2.7 million Csaba Kilian (36 1) 118-0051 for processing used vehicle starter batteries (re: 01/Aut/96) Manufacturer seeks manufacturing cooperation ——————— Csaba Kilian (36 1) 118-0051 on a supplier base or subcontracting in the form (re: 07/El-En/96) of technology transfer or joint venture in field of electronics (circuit boards) and mechanics (die casting, machining, sheet metal processing, plastic injection moulding) Manufacturer of precision fittings, iron castings, and ——————— Csaba Kilian (36 1) 118-0051 metal ware, seeks joint venture partner for joint (re: 11/Eng/96) manufacturing, subcontracting, technical cooperation Company engaged in the forging of deep forged ——————— Csaba Kilian (36 1) 118-0051 of deep forged parts, spiral springs, and tube rims seeks joint venture partner Company engaged in metal casting seeks partner for ——————— Csaba Kilian (36 1) 118-0051 joint manufacturing or subcontracting (re: 16/Met/96) Developer of continuously variable transmission ——————— Istvan Szenpetery (36 1) 118-3335 seeks investor for production

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