Summary
- German, Chinese, and S.Koreans make for Hungary
- They dominate auto investment and subsidies
- Orban’s Hungary eager to attract foreign business
German automakers and Asian battery suppliers are convening in Hungary in a multi-billion-dollar marriage of convenience to push their electric ambitions.
The companies are gathering in central Europe, where Viktor Orban’s government is ignoring Western wariness of China and offering huge benefits to host foreign operations and reinforce Hungary’s claim as a global hub for electric vehicles (EVs).
Investment in the Hungarian auto industry is being controlled by three countries – Germany, a champion automaker, along with China and South Korea, EV battery leaders, way ahead of European rivals.
Companies from those three countries have composed 29 out of the 31 cash subsidies issued by Hungary for major investments in its auto and battery sector over the past 10 years, based on a Reuters’ analysis of government data that shows the scale of German, Korean, and Chinese convergence there.
“Cathodes, anodes, separators, assembly lines, and the full battery supply chain is here,” said Dirk Woelfer of the German-Hungarian Chamber of Commerce in Budapest. “This is a foot in the door to Europe.”
Recipients of such subsidies included the likes of German automakers Mercedes-Benz (MBGn.DE) and BMW (BMWG.DE), and battery makers including China’s BYD and Korean rival Samsung SDI (006400.KS). The median subsidy level has been 15% of investment.
Overall, Hungary has accepted over 14 billion euros ($15 billion) in foreign direct investment into its battery sector alone in the past six years, based on government figures.
Major investments are generally classified as those worth over 5-10 million euros, differing with factors such as jobs created.
State incentives and the opportunity for carmakers and battery suppliers to work in close proximity to one other is proving a strong pull, according to interviews with about 20 consultants and industry players in Hungary, Germany, China, and South Korea.
China’s CATL (300750.SZ), the world’s leading EV battery maker, and Korean battery giants Samsung SDI and SK Innovation (096770.KS), all told Reuters that the intended proximity to German carmakers was a major factor in their decisions to invest in Hungary, along with being able to acquire separators and other components there.
CATL is investing $7.6 billion to set up Europe’s biggest battery factory in Hungary. This plant and the $2.1 billion BMW factory will both be located in the city of Debrecen, which is alluring an ecosystem of suppliers, ranging from manufacturers of brakes and battery cathodes to industrial machinery.
Mercedes-Benz is turning its factory in Kecskemet to make electric cars, while Volkswagen’s (VOWG_p.DE) Audi is producing cars and electric motors in Gyor.
Such large business could offer a boon for Prime Minister Orban’s government as the country experiences its toughest economic environment in over a decade, with inflation running above 20%, the economy weakening and EU funds in limbo.
Yet the Hungarian EVs project also encounters difficult obstacles, according to most industry insiders. One major concern is the heavy demands that massive battery plants will lay on the electricity grid, which needs to pivot away from fossil fuels towards renewables to reach the net-zero emissions targets of much of the auto industry, the people said.
A lack of skilled workers in Hungary to work in battery cell manufacturing could also weigh on capacity, they added.
HIPA, the Hungarian Foreign Ministry agency in charge of attracting investments in areas ranging from cars and batteries to logistics, did not reply to Reuters’ questions about the EV industry.
‘China Has Made Good Steps’
Hungary’s welcome to Asian battery makers might aggravate concerns aired by Brussels and Berlin about the perils of Europe becoming too dependent on China and other foreign powers, especially in technologies crucial to the green transition.
Still, for now, the need to boost EV output leaves the European auto industry no choice but to source from Asian players, said Csaba Kilian of Hungary’s automotive association.
“I absolutely agree that European manufacturers should have their own sources … but it’s a competition, and China has made good steps,” he added. “There is a learning curve.”
Europe should have an EV battery manufacturing capacity of 1,200 gigawatt hours (GWh) by 2031 if current plans become successful, eclipsing the expected demand of 875 GWh, Benchmark Mineral Intelligence (BMI) estimates.
But of that 1,200 GWh, 44 percent will be supplied by Asian companies with factories in Europe, ahead of homegrown companies at 43 percent and U.S. pioneer Tesla (TSLA.O) with 13 percent, according to a Reuters calculation based on BMI data.
The prospect of building up a battery sector in Germany has been held back by record energy there owing to the loss of Russian gas, according to autos consultants at Boston Consulting Group and Berylls Strategy Advisors.
Hungary provides a comparatively dependable energy system maintained by nuclear energy, along with high subsidies and Europe’s lowest corporate tax rate of 9%.
The entire battery supply chain has come to the country, said Ilka von Dalwigk, policy manager at the European Battery Alliance, founded by the European Union in 2017 to set up a homegrown industry.
“Everything is located there. When we look at the forecast for 2025 and 2030, it looks like it will have one of the largest production capacities in Europe,” she added.
“It might very well be that Hungary is in fact the next big battery production cluster in Europe.”
Queried about concerns about reliance on Asia for technology, an EU official said the bloc – which must approve member state subsidies to investors – had a system in place to collaborate and share information on investments from non-EU countries that may affect security.
The European Commission is currently holding talks with Hungary over the size of the subsidy the country will give to CATL for setting up the Debrecen plant, the official added.
‘Sending The Wrong Signal’
For some Western companies, launching operations in Hungary is a difficult decision.
German autos supplier Schaeffler said it was on the verge of building its primary electric motor factory in Hungary instead of Germany in August due to the appeal of Hungary’s incentives, but settled on Germany for fear of sending “the wrong signal” to Germans who dread a loss of jobs to overseas.
Other industry players aired a set of concerns over potential pitfalls for the growing Hungarian auto industry as factories increased, including the power grid issue. Batteries, especially, are highly energy-intensive parts of EVs to make, requiring huge amounts of power for the drying of the materials and machine operation.
Hungary’s sources of energy last year consisted of 80% fossil fuels, 14.5% nuclear, and 3.6% solar, based on a Reuters calculation of data from the BP Statistical Review of World Energy. The combination spells trouble for carmakers who will soon be required to present carbon-free credentials across their supply chains under new German and European legislation.
Hungarian Foreign Minister Peter Szijjarto had a meeting with senior executives from BMW and auto suppliers including Schaeffler and Knorr-Bremse in Munich in November, ahead of the German carmaker disclosing it was beefing up its investment in the country.
Topics discussed included plans to enhance logistics infrastructure in Hungary and boost the amount of renewable energy used for the power grid, according to one of the firms that attended.
Buy Crypto NowWhen BMW first disclosed its plan to set up its Debrecen plant, in 2018, the government pledged to spend around 135 billion forints on improving local infrastructure, calculations by the German-Hungarian Chamber of Commerce showed. On the battery side, CATL told Reuters it was looking to develop solar power with local partners in Hungary.
Despite the risks, Alexander Timmer, a partner at Munich-based consultants Berylls Strategy Advisors who has developed several autos and battery projects in Hungary, said the country put up an appealing package.
“The combination of cost advantages, state subsidies, and closeness to automakers’ plants make Hungary increasingly attractive to battery producers,” he added.
($1 = 397.54 forints; $1 = 0.9483 euros)
