Companies are flocking to central Europe, where Viktor Orban’s government is defying Western wariness about China and offering generous benefits to accommodate foreign businesses and stake Hungary’s claim as a global center for electric vehicles (EVs). Investment in the Hungarian automotive industry is dominated by three countries – Germany, a champion carmaker, plus China and South Korea, which lead EV batteries well ahead of European competitors. Companies from those three countries accounted for 29 of the 31 cash subsidies Hungary gave for major investments in the automotive and battery sectors over the past decade, according to a Reuters analysis of government data that shows the scale of German, Chinese and Korean convergence. there. “Cathodes, anodes, separators, assembly lines, the complete battery supply chain is here,” said Dirk Woelfer of the German-Hungarian Chamber of Commerce in Budapest. “This is a foot in the door for Europe.” Recipients of such subsidies have included German automakers BMW ( BMWG.DE ) and Mercedes-Benz ( MBGn.DE ) and battery makers such as China’s BYD and Korean rival Samsung SDI ( 006400.KS ). The median subsidy level was 15% of the investment. In total, Hungary has received more than 14 billion euros ($15 billion) in foreign direct investment in its battery sector alone over the past six years, according to government figures. Large investments are broadly classified as investments worth more than €5-10 million, varying depending on factors such as jobs created. Government incentives and the chance for automakers and battery suppliers to work alongside each other are proving a strong draw, according to interviews with about 20 industry players and consultants in Germany, Hungary, China and South Korea. China’s CATL ( 300750.SZ ), the world’s No. 1 EV battery maker, and Korean battery giants SK Innovation ( 096770.KS ) and Samsung SDI told Reuters that planned proximity to German automakers was a key factor in their decisions to invest in Hungary, as well as the ability to source separators and other components there. CATL is investing $7.6 billion to build Europe’s largest battery factory in Hungary. This plant and BMW’s $2.1 billion plant will be located in the city of Debrecen, which attracts an ecosystem of suppliers from brake and battery cathode manufacturers to industrial machinery. Mercedes-Benz is converting its plant in Kecskemet to produce electric cars, while Volkswagen’s Audi ( VOWG_p.DE ) builds cars and electric motors in Gyor. Such big business could be a boon for Prime Minister Orban’s government as the country faces its toughest economic environment in more than a decade, with inflation above 20%, the economy slowing and EU funds in dead end. However, Hungary’s electric vehicle project also faces tough obstacles, according to many industry insiders. A key concern is the huge demands the massive battery packs will place on the electric grid, which needs to shift from fossil fuels to renewables to meet the net-zero emissions goals of much of the auto industry, the people said. A lack of skilled workers in Hungary to work on battery cell manufacturing could also weigh on capacity, they added. HIPA, the Hungarian Foreign Ministry agency responsible for attracting investment in sectors ranging from batteries and cars to logistics, did not respond to Reuters’ questions about the EV industry.
“CHINA HAS MADE GOOD STEPS”
Hungary’s welcome to Asian battery makers may ease concerns expressed by Brussels and Berlin about the dangers of Europe’s over-reliance on China and other foreign powers, particularly in technologies central to the green transition. But for now, the need to ramp up EV production leaves the European automaker with little choice but to source from Asian players, said Csaba Kilian of the Hungarian Automobile Industry Association. “I absolutely agree that European manufacturers should have their own sources… but it is a competition and China has made good strides,” he added. “There is a learning curve.” Europe should have 1,200 gigawatt-hours (GWh) of EV battery manufacturing capacity by 2031 if current plans materialize, exceeding expected demand of 875 GWh, Benchmark Mineral Intelligence (BMI) estimates. However, of that 1,200 GWh, 44 percent will be supplied by Asian companies with plants in Europe, ahead of domestic companies with 43 percent and U.S. market leader Tesla ( TSLA.O ) with 13 percent, according to a Reuters calculation that based on BMI data. Prospects for the growth of a battery sector in Germany have receded from record energy there as a result of the loss of Russian natural gas, according to auto consultants at Boston Consulting Group and Beryls Strategy Advisors. Hungary offers a comparatively stable energy system boosted by nuclear power, as well as high subsidies and the lowest corporate tax rate in Europe at 9%. The entire battery supply chain has come to the country, said Ilka von Dalwigk, policy officer at the European Battery Alliance, which was launched by the European Union in 2017 to start a domestic industry. “Everything is there. When we look at the projections for 2025 and 2030, it looks like it will have one of the biggest production potentials in Europe,” he added. “It could very well be that Hungary is actually the next big battery manufacturing cluster in Europe.” Asked about concerns about reliance on Asia for technology, an EU official said the bloc – which must approve member states’ subsidies to investors – has a system of cooperation and information sharing on investments from non-EU countries that may affect safety. The European Commission is currently in talks with Hungary about the size of the subsidy the country will offer CATL to build the Debrecen plant, the official added.
‘SENDING THE WRONG SIGNAL’
For some Western companies, setting up shop in Hungary is a difficult decision. German auto supplier Schaeffler said it was on the verge of locating its main electric motor plant in Hungary rather than Germany in August because of the appeal of Hungary’s incentives, but decided on Germany because it feared it would send the “wrong message” to Germans who they fear losing jobs abroad. Other industry players raised a number of concerns about potential pitfalls for Hungary’s burgeoning auto industry as factories ramped up, including the issue of the power grid. Batteries, in particular, are energy-intensive parts of electric vehicle production, requiring large amounts of energy to dry the materials and operate the machine. Hungary’s energy sources in 2021 consisted of 80% fossil fuels, 14.5% nuclear and 3.6% solar, according to a Reuters calculation with data from BP’s World Energy Statistical Review. The mix creates problems for carmakers who will soon need to demonstrate carbon-free credentials in their supply chains under new German and European legislation. Hungarian Foreign Minister Peter Szijjarto met with senior executives from BMW and auto suppliers including Schaeffler and Knorr-Bremse in Munich last month, before the German automaker announced it was stepping up investment in the country. Topics discussed included plans to improve logistics infrastructure in Hungary and increase the amount of renewable energy used for the electricity grid, according to one of the participating companies. When BMW first announced its plan to build its factory in Debrecen in 2018, the government pledged to spend around HUF 135 billion to improve local infrastructure, according to calculations by the German-Hungarian Chamber of Commerce. On the battery side, CATL told Reuters it is considering developing solar power with local partners in Hungary. Despite the risks, Alexander Timmer, a partner at Munich-based Beryls Strategy Advisors who has worked on several automotive and battery projects in Hungary, said the country presented an attractive package. “The combination of cost advantages, government subsidies and proximity to car factories makes Hungary increasingly attractive to battery producers, he added. ($1 = 397.54 forints, $1 = 0.9483 euros) Reporting by Victoria Waldersee in Berlin, Gergely Szakacs in Budapest. Additional reports by Heekyong Yang, Zhang Yan; Edited by Pravin Char Our Standards: The Thomson Reuters Trust Principles.
