Hungary’s automotive industry: moving on, moving up
Hungarian automotive sector is looking increasingly attractive to global players, who are beginning to value the proximity of high-quality manufacturing in a time of flux
The automotive industry is a cornerstone of the Hungarian economy. Vehicle manufacturing generates around 6% of Hungarian GDP, while automotive suppliers account for an additional 8% to 9%. Around 30% of industrial output derives from this sector.
It is also important to the rest of Europe. Around 90.5% of goods created in the industry are exported to European superbrands.
In 2020, while the world economy suffered the first impacts of the Covid-19 pandemic, the sector’s revenue decreased by just 8% compared to a 25% decline in Europe on average.
Initially attracted by cost savings from lower wages, car brands have continued sourcing parts from Hungary because of the agility of Hungarian manufacturers – many of them SMEs – to meet changing needs quickly where multinational providers might lag.
Following the impact of Covid-19 on supply chains from China to Europe, the Hungarian automotive industry is looking even more attractive to global players. They are beginning to value its proximity, and the ability to have R&D and production in similar time zones at a key time for product development.
"Major players value proximity and the ability to have R&D and production in similar time zones at a key time for product development"
Tamás Győr, head of SME Division, CIB
A new approach to value
Tamás Győr, head of SME Division at CIB, knows that the automotive industry in the region needs the full range of banking products – but says that seeing the right opportunities is a case of looking at the whole picture, rather than past numbers.
“There are so many vectors acting in the automotive industry, and the strengths, direction and time horizon of the vectors vary,” he says. “In the case of each and every company, you try to anticipate the above dimension of all the vectors that are affecting it and try to guess where it will be in the next three to five years.”
At CIB, the team took a holistic approach to assessment of the industry, examining 250 companies. They looked, as usual, at activity and structure, but also considered whether a company:
- specialised in products or processes
- met the expectations set by new trends (CASE: connected, autonomous, shared, electric)
- adapted well to short-term trends
- met the challenges posed by Covid-19
Only then did they examine their financial performance.
Judging a company based on its resilience to challenges is pertinent. The automotive industry had the double blow of Covid-19 and microchip shortages, which has meant its W-shaped recovery is not yet complete.
Equally, in an industry on a trajectory away from traditional products and processes, it’s important to see beyond a company’s margins to find true value.
Győr cites the example of exhaust systems for combustion engines: “They may be being phased out, but in the short term the company will hold value because new exhaust systems competitors are unlikely.”
Conversely, there’s the example of glass, a component part that will still be required in the transition to new vehicle types, but which has low profitability. Even if a company successfully sold a lot of it, they may still need to consolidate in five years’ time.
Of the four megatrends – connectivity, autonomy, shared vehicles and electrification – it’s electrification that has seen the most uptake among consumers in Hungary.
“Currently the proportion of electric car sales in Hungary is around 10%, but out of the stock available it is around 1%,” says Győr. “Of course, there are western European countries that are much better than Hungary – so Hungary in this perspective lags behind.”
The question marks around the scaling up and infrastructure of electrification mean that, on the ground, manufacturers are still in a transitional period.
“The pace of electrification is defined by legislature and not by the industry itself,” says Győr. “The industry would probably choose a more convenient pace of transition.”
In the meantime, Hungarian companies are being used in international research and development into autonomous driving.
Another trend shaping the industry is the relocation of production to Hungary, both from western European countries such as Germany and from China. Original Equipment Manufacturers (OEMs) are trying to find the middle way between cost advantages and supply chain risks.
Many have realised that an automotive supplier that is in the same region as them is a safer bet, even if the parts are slightly more expensive.
“Maybe an OEM can make €9 on the part by manufacturing in China – but if the production of a €40,000 car is held up because that part doesn’t arrive, it is probably worth it to produce it closer,” says Győr. “Naturally, there are parts that never going to be brought back to the continent. Proximity to countries such as Germany places Hungary at a distinct advantage.”
Current success in the Hungarian automotive industry is top heavy: while overall the sector lost 1% in 2020, the turnover of SMEs decreased by 8%, however among the top 20% of domestic suppliers sales grew by 21%, respectively by 53% over the previous three years.
In terms of profitability, the top 20% of domestic suppliers profitability jumped significantly in 2021, from 18% to 22%, and although the average stagnated slightly below 7%, the profitability of SMEs improved from 7.2% to 8.5%.
“It means that those companies – that have the workforce, that can align capacities quickly to the new challenges, and that have the proper connections with the suppliers – can even gain during a crisis and grow both in sales and profitability,” says Győr.
Finance is behind a strategy to level up some of the mid-performing companies in the industry.
CIB can be regarded as a bridge between consultancy and company, providing tools such as a benchmarking, so companies can assess themselves against the industry average and seek out new ways to grow.
The bank has also developed a supply-chain-financing platform – named Confirming – that can be used by automotive suppliers that are delivering to large OEMs. The financing works to settle with the buyer so that the supplier has working capital for their project.
An intimate knowledge of all the moving parts of the industry is key to providing such a product. “If you took the total industry as homogeneous, you’d say the wisest decision is not to finance at all,” says Győr. “But that’s not our approach. Our role is to understand how the industry works – because if we understand then we are not afraid to finance.”
"Our role is to understand how the industry works, because if we understand then we are not afraid to finance"
Tamás Győr, head of SME Division, CIB