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Published: 30-08-2008
The Budapest Times

The central Hungarian town of Kecskemét is to be the site of a new assembly line for Mercedes-Benz compact car models. The parent company, Stuttgart-based Daimler AG announced the EUR 800 million plant last Wednesday.

When announcing the deal, Hungarian Prime Minister Ferenc Gyurcsány did not reveal any specifics about the sweeteners offered to Daimler, saying only: “The company will receive the usual incentive package for investors to build its new factory, including tax breaks, training allowances and cash. The details will be released after the contract is signed and EU approval has been received”.


Some media estimates pegged the figure at around HUF 40 billion (EUR 167.92 million).

The PM held a press conference last Friday to reassure taxpayers, saying that Hungary will recoup its investment returned in four years, mainly through tax revenues.


–“I understand there is plenty of guessing going on about how much taxpayers’ money the state will spend to support this investment,” he said. “We will stick to the basic rules and until the final agreement is signed with everyone, including the EU, we will not release details,” he added.

In a statement, the company said it will also be pumping a further EUR 600 million into its Rastatt plant in southern Germany to increase production capacity. Daimler wants to double the number of compact cars in its range from two to four. The Hungarian plant is expected to start producing the new generation of Mercedes-Benz A and B class compact models by 2012.


“Mercedes-Benz is going to offer an even wider range of exciting premium cars with the high levels of comfort, safety and overall quality that are characteristic of the brand, in the particularly fuel-efficient compact-car segment,” said Daimler’s chairman Dieter Zetsche last Wednesday. “We are planning a new plant in Hungary to boost our competitiveness and to gain access to the potential of the Eastern European markets,” he added.




Disappointment


The announcement ends months of speculation over where the new facility would be located. Also in the running were Romania, Poland and Serbia. The mayor of the Polish city of Ujazd, Tadeusz Kauch, reportedly expressed surprise at the decision: “The Hungarian offer came at the last minute. We thought we might lose the bid to Romania but not to Hungary, which has higher labour costs”.


Until only days before the announcement, there had been no mention in the media that Hungary was a serious contender. Some local papers had reported as far back as last winter that the plant was certain to go to Timisoara in Romania. There is now a lot of speculation over what kind of attractive incentive package played a part in securing what is Hungary’s largest greenfield investment to date.


Daimler said its decision was based on Hungary’s stability, infrastructure and workforce. Gyurcsány said that all the countries bidding for the investment had offered the maximum incentives possible under EU law. The chief operating officer of Mercedes-Benz, Rainer Schmückle, told the German-Hungarian Chamber of Commerce that the Hungarian plant “will meet our corporation’s high requirements in

respect of quality and quantity”.


The head of the Bács-Kiskun County Chamber of Commerce and Industry, József Gaál, said: “The intention of the Kecskemét local government to decrease local business tax from 2% to 1.6% by 2011 is a compelling reason, as it will be very good for the car maker”. The local business tax is a controversial local levy based on a company’s turnover. It often tops the list of complaints from foreign companies with subsidiaries in Hungary. The local council in Kecskemét hopes to see 2,500 employed directly and several thousand more jobs created indirectly as a consequence of Daimler’s decision. If the HUF 40 billion subsidy figure holds true, each job created will cost HUF 16 million (EUR 67,000).

Last year, the Hungarian government offered an incentive package to the tune of HUF 16 billion (EUR 66.49 million at the current rate of exchange) to attract the South Korean tyre maker Hankook to Dunaújváros. That company’s investment of HUF 130 billion (EUR 540.25 million) is one of few that are comparable to the scale of the new Daimler deal at EUR 800 million (HUF 190.98 billion).




Economic ripples already


The announcement of the Daimler investment last week was credited in large part for a 1% increase in the value of the forint. Furthermore, with an estimated production capacity of 100,000 cars, the new plant could have a significant effect in the long run on Hungarian GDP.


To assuage fears of job losses at home, Schmückle added that the Hungarian plant will supplement the production capacity at the Rastatt plant, which makes 280,000 cars a year and employs 6,000. The staff level at the German factory “should remain roughly the same”, he said.




Well trodden path


Daimler was one of the only major car makers that had not yet set up some sort of production plant in Central Europe. Hungary is already home to Suzuki, which has produced over 250,000 of its Swift model since it set up in 1991. Now producing the Ignis, SX4 and Splash models, too, the Japanese car maker expects to produce over 300,000 units in Hungary in 2008 alone.


General Motors started producing Opel Astras in Hungary in 1992, although it now only produces engines and transmission systems. Audi assembles its TT Coupe, Roadster and A3 Cabriolet models in Hungary, and has produced over 400,000 units since it set up shop here in 1993. Having ploughed some EUR 3.3 billion into its Hungarian operations over the years, the German car maker is one of the country’s largest investors, and is responsible for 9% of Hungary’s total exports.


Mercedes-Benz, like other manufacturers, is upping its production of smaller, cleaner cars in advance of a tightening of EU emissions standards and the increasing price of oil.

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