II. Automotive Industry in Hungary – Investment Aspects

Automotive Industry Securing Automotive Investments in the New Member States

Kalman Meszaros, dr. Commercial Counsellor

Brussels, 4th November 2008 I. New Challenges

Long – term: EU – stricter environmental regulations (to reinvent the vehicle from „birth to funeral” from materials used and recycled to intelligent solutions, new fuel for low C02) EU companies in the forefront of Innovation/R&D best poised to succeed, to meet market expectations for less expensive, clean, safe and well performing vehicles – extra incentives needed to shift to clean vehicles Short –term: financial crisis spiralling inte real economy – temporary slump, later catch-up probable, overbridging financial facilities New Member States: for EU to remain competitive essential to exploit potentials of NMS (HR;Know- How;Logistics;Innovation/R&D;New Markets) II. Automotive Industry in Hungary – Investment Aspects

EU: one third of world production; abt. 550 Bn Euro annually – 5 % of GDP vs. Hungary abt. 15 Bn Euro - 15 % of GDP Overview Passenger Car OEMs in CEE (2007)

Volkswagen in Poznan FSO/Chevrolet in Warsaw Production of 75,100 cars Production of 153,300 cars Employees: 4,800 Employees: 3,000

Opel (General Motors) in Gliwice Fiat in Tychy Production of 186,200 cars Production of 346,100 cars Employees: 3,600 Employees: 4,500 Capacity: 300,000Hyundai cars (by 2011) in Nosovice 100 km Fiat in Bielsko-Biala 3,500 employees Skoda (VW) in Mladá Boleslav Powertrain production Production of 623,529 cars 23,559 employees Kia in Zilina PSA and Toyota Kolin Production of 142,335 cars 308,478 cars Employees: 1,200 3,500 employees PSA (Peugeot/Citroen) Trnava Volkswagen (VW) in Bratislava Production of 180,000 cars Production of 248,738 cars Employees: 3,300 Employees: 8,500 Audi (VW) Győr Daimler (Mercedes) Kecskemét Production of 1.913 mengines Production from 2011, 100,000 and 56,982 cars cars Employees: 5,845 Employees: 2,500 REVOZ (Renault) in Novo Mesto 500 km Production of 200,187 cars Dacia (Renault) in Pitesti Employees: 2,632 Production of 222,854 cars Employees: 8,237 GM Powertrain Szentgotthárd Production of 434,617 engines, Employees: 677 Ford Productionin Craiova from mid 2009 Suzuki Esztergom Capacity: 200,000 cars Production of 233,253 cars FIAT Kragujevac Employees: 6,200 Production of 200 th cars Sources: companies Facts and Figures of the Hungarian Auto Industry Production value in 2007: EUR 15.9 bn Total number of companies: 630 (of which 290 with quality certificates) Total number of employees: 110,000 FDI: 15 Bn Euro from abt. 70 Bn Euro total (50 % of No. of companies JV, 75 % of equity in foreign ownership) Production figures in 2007: 290,235 passenger cars 5,045 commercial vehicles and buses ~50,000 motorcycles

Source: Hungarian Central Statistical Office, AHAI Car Manufacturing, Assembly

Suzuki: 233,253 cars assembled in 2007, 300,000 pcs planned for 2008 Audi: 56,982 cars assembled in 2007 (TT coupe, A3 cabriolet) Daimler: 100,000 Mercedes A and B Class from 2011

Engine Manufacturing Audi: 1.913 million engines produced in 2007 (379 variants of 24 different types of powertrain) GM Powertrain: 434,617 engines produced in 2007

World’s 3rd largest powertrain plant operated in Hungary by Audi AUDI – Facts and Plans

In 2007 1.913 million engines produced, 15 new, innovative engine models introduced 56,982 cars assembled (41.5 % increase on 2006) New TT model introduced in 2006, new A3 cabriolet introduced in 2007 Turnover in 2007: EUR 5.87 billion (16.7% increase on 2006) Hungary’s largest exporter Employs 5,845 people 24 different engines in 379 variants of four-, six- and eight-cylinder engines for the VW concern in a 375 th. sq meter area Since 1993 Audi has invested a total of EUR 3.3 billion in Hungary, and is planning to invest 200-250 mn EUR per year is planned until 2011 Audi Hungária is going to manufacture the 10-cylinder, 560 HP engine for the luxurious sports car Lamborghini Gallardo Source: AUDI Suzuki in Hungary

1991 – Foundation of Suzuki Hungary in Esztergom on a 35,000 m2 plot 1992 – Serial production Swift models 1999 – The 250,000th Hungarian-made Suzuki 2000 – Wagon R+ launched 2003 – Introduction of Ignis 2004 - Awarded for the biggest reinvestment (EUR 100 million) by the Prime Minister 2005 – new Swift; 146,870 cars were manufactured, record turnover of EUR 1,262.3 million was reached 2006 - production of new SUV the SX4 launched Number of employees: 6,200 Production in 2007: 233,253 cars;(Swift, SX4, Ignis, Wagon R+) By having invested EUR 199.44 mn in 2007 total volume of investments reached EUR 1.27 bn Production of the Splash started in February 2008 (planned production: 60,000 per annum) Production planned for 2008: 300,000 units The Largest Foreign Investment in Hungary: Daimler AG, 2008

The company will invest EUR 800 million to manufacture 100 thousand Class A and B compact Mercedes cars yearly in Kecskemét, Hungary

Production will start in 2011 employing 2500 people

A large number of suppliers are expected to follow the company, generating a new wave of investments in the sector

Why did Mercedes choose Hungary? Good location and developed infrastructure Good quality of labour A large network of automotive suppliers already present Professional services II.1. Supplier Network

Central Hungary Arvin Meritor FESTO Schwarzmüller Northern Hungary Central Transdanubia AVL GE Lighting Siemens VDO Ada-Cast Firth Rixson Cascade Hokushin Tauril Akzo-Nobel Coating Ganz Foundry AFL Karsai Plast ARRK Gibbs Clarion Ibiden ThyssenKrupp Ajkai Elektronika Kirchhoff Bosch Hi-Lex Albert Weber Lé Belier Continental Catalyst Lear Toyo Seat Delphi-Calsonic Knaus Tabbert Alcoa Lear Continental Temic MGM Vogel Sitze Delta-Tech Kovács Asahi Glass Magyarmet Exir Lear Bakony Michels ContiTech Michelin Webasto Leoni Benteler Musashi Draexlmaier Mono-Ipolyfabric Zollner Borg Warner Plasticor Mitsuba Bourns Plastimat EMT NABI Modine Bridgestone Rába Excel Csepel PEMÜ Prec-Cast Continental Teves SCI Sanmina Remy Denso SEWS Saia-Burgess Diamond Electric Suoftec Salgglas Euro Excedy Toyo Seat Shinwa Gedia U-Shin Stanley Electric Gestamp Valeo Starter Battery Hammerstein Videoton Technoplast Hankook Visteon ITW Siewer Wescast ZF

Northern Great Plain

Caroflex Carrier Transicold Eagle Ottawa Western Transdanubia Eismann EMCON Technologies/ Arcelor GM Powertrain Autoliv Győri Plast Arvin Meritor B.O.S. Hirschler Euroszol BPW Rába Kravtex F.Segura Dana Magna Steyr Hajdu Autó Dekorsy Nemak Southern Great Plain Hübner Delphi Packard Rába Isringhausen Edag Rekard Produkt Continental Phoenix Kaloplastic Lé Belier EMT Rudolph Logistik Southern Transdanubia Csaba Metál Knorr-Bremse Michelin Erbslöh Schaeffler AG Eckerle Kunplast Nief BHG Euro Exedy Semperform Emika Linamar Phoenix CabTec Euro Elzett Veritas Hirschmann ThyssenKrupp Schaeffler AG Eybl Visiocorp Ratipur Federal Mogul Vogel und Noot Interplus II.2. Human Resources

Most important element – rich heritage in inventors, innovators (Janos Csonka, carburettor, 1890;Jozsef Galamb, mass production Ford-T 1905-15;Ferenc Pavlics, moon craft, Mars vehicles 1961-88; Ferenc Anisits, BMW diesel engine development 1981-99), manufacturers (Ikarus, Csepel Auto, Raba) – EIT in Hungary High productivity, efficiency Ambitious, dedicated workforce with competitive wages Availability (unemployment rate abt. 7,5 %, over 10 % in N-E Hungary) Hungary Ahead in Labour Productivity GDP in Purchasing Power Standards per person employed relative to EU-27 (EU-27 = 100)

Slovakia 80 Hungary 70 Czech Rep. 60 Poland 50 Romania

40 Bulgaria

20 2001 2002 2003 2004 2005 2006 2007(f) 2008(f)

Source: Eurostat Competitive Wages for High Productivity

Monthly average gross earnings in the Automotive Sector

Avg. Gross Avg. Gross Earnings Earnings in No of in HUF EUR employees Vehicle Component Manufacturers 196,362 781.35 38,852 Vehicle Manufacturer Companies 219,727 874.32 62,771

Monthly gross wages by occupation in the Automotive Sector

Gross wages Gross wages Job in EUR Job in EUR Head of Technical Dept. 1,505 High voltage electr. technician 704 Head of R&D Department 1,823 Programmer 1,039 Chemical Engineer 1,139 Turner 515 Mechanical Engineer 1,182 Tool manufacturer 555 High voltage Electr. Engineer 1,124 Welder 447 IT specialist 1,276 Forger 423 Mechanical Technician 805 Storeman 459 1 EUR = 251.31 HUF

Source: Hungarian Central Statistical Office, Public Employment Service in Hungary, 2007 Unemployment Rates by Micro Regions (in percentage)

19.23 11.83 17.17 20.53 13.19 19.08 13.1 13.46 18.1 16.09 19.86 13.63 13.42 11.63 18.0 17.26 16.85 12.08 11.44 12.25 17.55 12.47 15.7 14.45 17.85 14.39 14.6

12.77

11.31 12.44 12.61 11.72 11.41

11.66 11.51 12.11 13.37 12.05 12.69

14.62 Source: Public Employment Service, as of September 2007 II.3. Logistics, infrastructure

Besides HR and dense suppliers’ network a major factor at investment decisions Hungary is among Top logistic centers in Europe (subregional hub) Fast expanding highway network Industrial/ Logistics Parks, Clusters (Pannon Automotive Cluster), Automotive Competence Centers (4 ACC’S) Hungary Scores Third in Logistics

Cushman & Wakefield evaluated the European logistics sector: Hungary ranks third in the key cots-benefit factors

C&W: CEE is a much sought- after logistics and distribution location

Hungary offers plenty of land and a healthy supply of available properties

Source: Cushman&Wakefield: European Distribution Report, 2008 Expanding Highway Network Industrial Parks in Hungary

With indication of the year when the title of ‘Industrial Park’ was granted

Kazincbarcika

Salgótarján

Miskolc Eger Nyíregyháza

Győr Debrecen

Szombathely Tatabánya Szolnok Veszprém

Zalaegerszeg Székesfehérvár Year of granting Kecskemét Békéscsaba the title (number of titles won) 1997 (28) 1998 (45) 1999 (37) Kaposvár Szekszárd 2000 (21) 2001 (13) 2002 (13) 2003 (5) Pécs Szeged 2004 (1) 2005 (15) 2006 (11) 2007 (9)

Priority area in Hungary, especially in hi-tech manufacturing and knowledge intensive services - among top-scorers in EU re total employment – EIT in Hungary In automotive business scores of companies have relocated some of their R&D businesses to Hungary – still much unexploited potential Hungary Ahead in R&D

Employment in high-tech manufacturing and knowledge intensive services (KIS) sectors as a percentage of total employment

Hungary

EU-15 EU-25

Source: Eurostat, High-tech Statistics 2007 Automotive R&D

Arvin Meritor –Budapest - exhaust system development Audi -Győr - engine development AVL Autokut – Budapest - engine and powertrain dev. Bosch – Miskolc - electronic hand-tools designing Bosch – Budapest - electronic developments Continental - Veszprém - electronic instrum. dev. for cars Denso - Székesfehérvár - fuel supplying system dev. Draxlmaier - Érd - vehicle compartment designing EDAG –Győr - vehicle subunits development GE Lightings – Budapest - car lightings Knorr Bremse – Budapest - electronic brake-system dev. Magna-Steyr –Győr - engineering centre Temic–Telefunken - Budapest - car electronic development ThyssenKrupp – Budapest - electronic steering gear dev. Visteon – Székesfehérvár - vehicle parts and subunits WET - Pilisszentiván - electronic subunits development II.5. Incentives

Business environment, tax regime, intensity ratio deemed favourable by investors Attractive „soft” factors (educational, cultural, shopping, leisure, sport opportunities) and supportive government/authorities’ approach (licenses, permissions, one-stop service) Besides good fundamentals incentives are also a matter of consideration at major investment decisions Complementary incentive schemes and special incentive package Attractive Tax Regime

Major business organizations across Europe assessed the attractiveness of their domestic tax regimes: Hungary ahead of major competitors

Ranking Country 11. Hungary … 15. Slovenia 16. Latvia … 19. Lithuania 20. Poland … 22. Czech Republic 23. Romania

Source: Attractiveness of European Tax Regimes, 2007, KPMG International Competitive Incentive System

Maximum intensity ratios:

Borsod-Abaúj- Zemplén

Nógrád Szabolcs- Szatmár-Bereg Heves Komárom- Győr-Moson- Esztergom Budapest Sopron Hajdú-Bihar

Jász-Nagykun- Vas Pest Veszprém Fejér Szolnok

Zala Békés Bács-Kiskun less Tolna Somogy Csongrád developed regions

Baranya 25%* 30% 40% 50% + 10 % for medium enterprises + 20 % for small enterprises *after 2011: 10% Types of Incentives

Development tax-allowance tax allowance • for investment projects from 4 million EUR Tailor-made incentive package of the Hungarian Government

• Investment volume: - in case of manufacturing, R&D and SSC projects at least EUR 10 million - projects between EUR 10-25 million if not eligible for EU co-financing • Job creation potential - in case of manufacturing industry: from EUR 10 million and 25 new jobs created - in case of an R&D project: from EUR 10 million and 10 new jobs created Employment-related incentives

• Subsidy for job creation: non-refundable subsidy up to EUR 1,04 million • Training subsidy: non-refundable subsidy up to 50% of eligible costs

R&D – related incentives • Direct costs deductible from corporate tax-base; tax-free employment of PhD, MSc or MBA students; up to EUR 2 million tax-free development reserve for 5 years Special Incentive Package

The Hungarian Government is ready to provide a tailor-made incentive package for large investments (investment value at least EUR 10 million*)

Elements of the package:

1) Cash subsidy based on Individual Governmental Decision

2) Development tax allowance

3) Training subsidy

*For investments between EUR 10-25 million the project will be subsidised from tender application if possible Major Automotive Companies in Hungary

HanKooK HanKooK Thank you

For your kind attention

Kalman Meszaros, dr.

Embassy of Hungary/ ITDH 1180 Brussels Av. Du Vert Chasseur 44 Belgium

Phone: +3223435044 Fax: +3223445415 E-mail: [email protected] Internet: www.itd.hu