Hungary

Rising labor costs and fierce regional competition in central Europe for foreign direct investment have Hungary altering its image from that of a mere site for basic manufacturing to a research-and-development-driven haven for the assembly of ideas.

In the cutthroat business of attracting foreign direct investment, a country's got to put its best foot forward, especially in these times of decreasing worldwide foreign direct investment or FDI. In Hungary's case, its best "foot" has always been its head.

After being occupied over the centuries by everyone from the Mongols to the Turks to the Germans to the Soviets, Hungary is a nation of people that has always needed to use intelligence to adapt and to survive.

"This has always been a multinational country, which is why we're so open to different values and different technologies," says Dr István Csillag, Minister of Economic Affairs and Transport. "These factors helped shape the level of education in this country. We can compete with the rest of the world only if the level of education here remains at least on the same level as in larger, more developed countries."

Japanese Emperor Akihito (left) and Hungarian Prime Minister Peter Medgyessy

Once separate cities split by the Danube River, Buda and Pest now form Hungary's political, economic and cultural center

After the Iron Curtain fell in 1989 foreign investment poured in, lured by Hungary's talented labor pool. Global giants - including General Electric, Audi, Suzuki and Sanyo - all set up shop here. By the mid-1990s Hungary was one of the strongest and most stable political and economic entities in Central Europe.

Today, while rising labor costs and fierce competition for FDI from neighboring countries like Poland and the Czech Republic - as well as Southeast Asia and China - have had some investors

rethink the financial viability of remaining in Hungary, other companies have decided the time is right to reinvest. Magyar Suzuki Corporation, the largest Japanese investment in Hungary - having invested over US$428 million since it founded its production facility in 1990 - has plans to boost its capacity from 85,000 units to 120,000 units by 2005.

Hungary's central-left government, elected in April, is currently working on measures to help maintain the country's reputation as a global economic player and as an intelligent choice for foreign investment.

"Our recently adopted four-year government program focuses on increasing economic output which is the basis of sustainable growth," says Prime Minister Péter Medgyessy. "The on-going inflow of FDI has a crucial and decisive role in the continuing growth of productivity, while it also contributes to up-to-date technology transfer."

"There is a slogan I would like to have for our country," says Csillag, "'Smart Hungary for Smart Investors'."

Japan continues to be a vital partner

Bilateral relations between Hungary and Japan have progressed steadily since the political changes - and Japan has played a key role in helping Hungary catch the eye of foreign investors.

"These were historic times as we were in the middle of our restructuring process and nobody knew what the outcome would be," comments Csillag. "To have Japanese companies settle here showed the rest of the world that this was a great center for investors. We are proud that this cautious, skilled nation of smart investors came to Hungary and kept their investments here."

The total amount of FDI from Japan has reached the billion dollar mark. It is the largest level of investment Japan currently has in Eastern and Central Europe. Japanese investments account for about 4 percent of the total FDI in Hungary - but in terms of new investments the level is closer to 15 percent.

"Early on after the political system changed, a few Japanese companies in the auto manufacturing and electronic engineering sectors decided to invest in Hungary," explains Kazuo Matsumoto, Japan's ambassador to Hungary. "Since then, many other Japanese companies have followed suit after having seen the success of the pioneer companies."

At its height in the late 1990s, about 75 percent of Japan's investments in Central and Eastern Europe were in Hungary. The majority are located outside Budapest in off-the-beaten-path towns like Dunaújváros, Nagykáta, Tatabánya and Kisber - where the labor supply is more bountiful than in the capital city.

Nagykorös, a small town 60 kilometers southeast of Budapest, is one such location. Although many Hungarians could not locate Nagykrös on a map, Japan's Sanshin found and selected it as the site for a $5 million manufacturing investment. Established in 1999, Sanshin Hungary is part of Sanshin's global manufacturing network - which includes plants in Malaysia, Indonesia, China, and Japan.

Under the guidance of managing director Kozo Mano, the 4,200 square meter Nagykrös plant manufactures car audio tuners for aftermarket sales, car audio for OEM clients, and printed circuit boards (PCB).

Existing OEM clients include Panasonic Germany, Clarion Hungary and Alpine Hungary. New business is also coming from clients in England and Slovenia, which should boost sales beyond last year's $50 million.

"In this economic environment, we cannot rely only on a few customers but must increase Electronics Manufacturing Services (EMS) as well as aftermarket sales," says Mano.

Mano says he expects that the cost of operating in Hungary will continue to increase over the next few years. "We hope we can remain here," he adds. With a workforce of 380 employees, Sanshin is one of the largest employers in town.

As Hungary enters the EU, the question of whether or not Sanshin and other manufacturers will find it workable to remain in Hungary will only grow as an issue.

In addition to the continued monetary investments of Japanese companies in Hungary, relations were further secured in the political arena following the July visit of Emperor Akihito and Empress Michiko as part of their four-nation Central European tour.

"The visit has been the most important event in the history of our bilateral relations," says Matsumoto. "I have a feeling we are entering a new stage of cooperation between the two countries."

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