Hungary: from low-cost, high-profit manufacturing base to riskier EV production center

Investing in Hungary – the positives and the negatives

These are eye-catching investments, yet the full picture is more nuanced – for every “good news” press release about a new plant or R&D center in Hungary, there is often another company which has quietly decided that the country currently does not tick all the right boxes as a production base.

Hungary already has a well-developed electric mobility industry ecosystem, as the examples we have highlighted demonstrate. Yet beyond this essential precondition, investors need to weigh up the main advantages and risks associated with investing in the country.

The positives

• Low corporate tax: Hungary’s current corporate tax rate of 9 percent is the lowest of any European country that is an OECD member, and less than one-third of Germany’s rate of 29.9 percent. This huge differential is a key reason why Hungary has proved such an attractive destination for German OEMs and suppliers.

• Generous state subsidies: At a national and local level, Hungary’s government is committed to providing targeted assistance to foreign investors in key industries, often at the outer limit of EU state aid rules. Schaeffler’s recently opened plant at Szombathely is a typical illustration, receiving support worth around €14.9 million as a greenfield development.

• Relatively low-cost labor: According to recent data compiled by the EU, an hour’s work in Hungary cost on average €10.40, compared with €37.90 in France and €37.20 in Germany. However, investors should also take note that Hungary’s average hourly labor costs rose 16.6 percent in the third quarter of 2022, the steepest increase of any EU country. In addition, there is a large disparity in wages between West and East Hungary

The negatives

• Skills shortages: There is a dearth of highly qualified workers in Hungary, with some critics blaming the government’s increasingly strict anti-migration policies. The problem is compounded by the ease with which employees can move to neighboring EU countries in search of better pay and conditions. For example, Hungary’s metalworkers’ union VASAS estimates that the country’s automotive industry workers earn on average about one-quarter of the equivalent salary in Germany. As a result, there is currently hardly any qualified personnel available in western Hungary.

• Political tensions with the EU: Some analysts suggest that the various ongoing disputes between Budapest and Brussels could damage Hungary’s attractiveness as a foreign investment destination, especially for EU-based companies. Within the automotive industry, investments in key electric mobility technologies could potentially be affected.

• Proximity to war in Ukraine: Regardless of the Hungarian government’s equivocal position, there is no escaping the fact that, as a neighbor of Ukraine, the country is especially vulnerable to the war’s economic impact. Automotive investors will need to bear in mind the consensus among military and strategic experts that the conflict is unlikely to end soon. And in the event of an end to the conflict in Ukraine’s favour, a possible “Marshall Plan” could lead to another shift of incentives for production re-location.