The trajectory of Hungary’s foreign direct investment has reached a tipping point.
“We’re not looking for manufacturing FDI any more,” deputy foreign minister Levente Magyar said in an event in London in mid-June. “We have enough of that.”
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Hungary has strength in FDI numbers. EU membership, low costs and taxes, as well as red carpet treatment all contributed to luring waves of manufacturers to the country: in the first instance, mostly from western Europe and the US, and more recently from Asia too.
However, raw data can be misleading. Local value-add remains limited, fuelling the idea of a low-cost manufacturing base in the EU. Besides, automotive has cannibalised manufacturing activity and investment, exposing the country to the ebbs and flows of the European car market. As a result, the economy has been underperforming compared with other countries in the region. And Hungarians continue to leave for a better life abroad: 41,300 in 2024 alone, a record high, according to the national statistics agency.
The government is now trying to extract more from foreign manufacturers to move up the value chain and add momentum to the economy.
“Mainly, we’re looking for research and development and high value added FDI,” Magyar said.
Chinatown on the Danube
Chinese and other Asian investors, which have characterised the latest wave of manufacturing FDI, are notoriously jealous of their intellectual property. Ripple effects tend to be limited, but a recent project by Chinese car powerhouse BYD fuels hopes for a different outcome this time.
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Back in May, BYD announced it is moving its European headquarters to the country. At the same time, it committed to investing about €250mn in two research and development projects on electric mobility in its new base in Budapest, creating 2000 jobs, national investment promotion agency Hipa said in a statement.
The announcement furthers the role of Hungary as a major hub for Chinese investment in the EU. Figures speak volumes: the country was the largest EU destination for FDI by Chinese manufacturers since 2015.
Companies in electric mobility have been particularly active. BYD is building an EV plant in Szeged. But it’s in battery production where the country has seen the biggest influx of Chinese investment. CATL raised at least $4.6bn in its secondary listing in Hong Kong on May 20 to finance a €7.3bn, 100GWh gigafactory in Debrecen, eastern Hungary. Once up and running, it will join the existing operations of South Korean firms SK Innovation in Komaron (17.5GWh) and Ivancsa (30GWh) and Samsung in Göd (40GWh).
Economic monoculture
Hungary’s fast-growing battery cluster plays to the strength of its automotive sector, where carmakers from Germany and elsewhere are natural clients of EV battery producers.
However, the government’s ambition to turn Hungary into a battery powerhouse has faced criticism.
“It’s economic nonsense, it’s a monoculture economy,” argues Dóra Győrffy, a professor of international political economy at Corvinus University in Budapest, who notes that the automotive sector as a whole accounts for 20 per cent of GDP. Some estimates put it at 30 per cent by 2030, thus limiting diversification and exposing the whole economy to the volatile outlook of the European car market, he adds.
Győrffy also argues the country is an ill fit for battery manufacturing, and ultimately adds little value to the production of Chinese players.
The energy intensity of battery manufacturing reinforces the country’s dependence on energy imports, with much of them still coming from Russia. On top of that, the country lacks the minerals and the technology required. Even workers are partially recruited from abroad — 500 from the Philippines will work at the CATL plant in Debrecen — as low unemployment rates, combined with an ageing population and high brain drain have left the Hungarian market in a very tight place. “Everything flows out: the final products, the profits, even the wages in the form of remittance,” emphasises Győrffy.
Even if the employment is local, it’s far from the high-value-added functions, argues Márton Czirfusz, co-founder at Periféria Policy and Research Center, a think-tank in Budapest. “Unskilled roles make up about 80 per cent to 90 per cent of new job creation,” he says.
Ripple effects through the local economy are further limited by the fact that Asian investors are known for bringing over their own suppliers even in the more accessible functions like construction.
“In battery manufacturing, the norm is that the companies bring the suppliers from their own countries. CATL is bringing its suppliers; the Koreans have brought theirs. Each tier of the supply chain is controlled by Asian companies, not local ones,” Czirfusz tells fDi.
Mounting FDI in battery manufacturing risks perpetuating existing dynamics. According to OECD data, only Slovakia adds less domestic value to exports than Hungary in central and eastern Europe.
The EU’s transition to electric mobility hinges on the technology of Chinese EV and battery firms, particularly in the wake of the collapse of Northvolt.
As such, the strategic value of Hungary’s gigafactories goes well beyond Hungary itself; and yet it has to work for the country too. The government’s new focus on high-value-added investment and BYD’s R&D commitments are encouraging steps. More will have to follow to unlock the full potential of Hungary’s FDI trajectory.