Budapest Business Journal 2615

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BUSINESS JOURNAL BUDAPEST

VOL. 26. NUMBER 15

JULY 27 – SEPTEMBER 6, 2018

SPECIAL REPORT German Investment Focus SPECIAL REPORT

German Firms Continue to see Good Business in Hungary Economically speaking, Hungary has proved a happy hunting ground for German companies, with many indicating future plans to increase investments and headcount here.  12

SPECIAL REPORT

DUIHK: 25 Years of Helping German Companies Invest and Reinvest

Dirk Wölfer, communications head at the German-Hungarian Chamber of Commerce and Industry, talks about the nature of German investments in Hungary, the challenges faced and the level of government support. 20

SOCIALITE

Daimler’s Dreams for Kecskemét

Spending Time on the Island of Freedom Sziget has become a major European festival; around 50% of visitors come from outside Hungary. There’s even a party train, complete with DJs, that brings fans from Amsterdam all the way to Budapest and its “Island of Freedom”.  22

SP

LR EC I A

EPOR

T

With booming operations in the country – and very close to opening its second plant here – MercedesNEWS Benz Manufacturing Hungary CFO Josip Niksic praises ties with local and national Loose Monetary governments and eyes further Conditions to Remain developments. 13

Until Mid-2019

The latest decision of the ratesetters at the National Bank of Hungary didn’t come as a surprise: they left the base rate at its current record low. All eyes are now on the bank’s September “Inflation Report”.  3

BUSINESS

Cybersecurity, Digitalization and Millennials

Big Four consultancy KPMG’s experts analyze the state of digitalization, economic growth, and the growing influence of Generation Y on the Hungarian market, based on its latest CEO research.  9

2 | 1 News

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Budapest Business Journal | July 27 – September 6, 2018

BBJ

THE EDITOR SAYS

EDITOR-IN-CHIEF: Robin Marshall EDITORIAL STAFF: Zsófia Czifra, Kester Eddy, Bence Gaál,

David Holzer, Christian Keszthelyi, Gary J. Morrell, Rob Smyth, Bálint Szőnyi, Zsófia Végh, Ágnes Vinkovits.

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IN PRAISE OF MULTINATIONALS (AND THEIR TAX DOLLARS) Two issues after we looked at U.S. investments in Hungary (the biggest suppliers of foreign direct investment from outside the European Union), we report on those from Germany, still the largest single investor in this country.

Between them, these two special reports underline how important foreign multinationals, in particular, are to this most open of economies.

It was the Habsburg-era statesman Klemens, Fürst von Metternich (who promoted the concept of the “balance of power” in Europe, and a policy of “divide and conquer” within the Empire) who coined the phrase “When France sneezes, Europe catches a cold”. Over time, America replaced France, and the accuracy of that statement was proved by the sub-prime crisis that first began in the United States in 2007, before expanding into a near-global recession. For Hungary, Germany could well replace America.

But that is the unavoidable downside of being a small trading nation. Size always matters; just think of Hungary’s third biggest trade partner: China. No wonder Hungary looks on askance at the prospect of American and Chinese or American and European trade wars.

But amid all the fabulous facts and figures you will find in this issue, the crucial detail of how much has been invested, by whom and when, one figure in particular stuck out for me. Our interview on Page 13 with Josip Niksic, CFO at Mercedes-Benz Manufacturing Hungary Kft., includes the following quote: “As a BBJ-PARTNERS

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business, and an employer Mercedes-Benz paid a total of EUR 23 million in taxes and contributions in 2017 to the Hungarian state and the local government of Kecskemét.”

In the grand scheme of things, EUR 23 million is not a huge sum of money, but at just shy of HUF 7.5 billion (at least at the time of writing), neither is it an amount to be sniffed at.

There was a time here when nationalist politicians (usually of the right, but never exclusively so) would routinely berate multinationals for profit repatriation, for taking money out of the country. It happens, it is what multinationals do everywhere. I did not hear any Hungarian MPs complaining when MOL received more than HUF 17 billion in dividends from its Balkan subsidiary INA earlier this month, though given the poor relations between the Croat government and the management of MOL, I suspect Croatian MPs were less enamored with the idea.

Multinationals do not just repatriate profits, though. They also invest in terms of infrastructure, in terms of jobs creation and, as the German-Hungarian Chamber of Industry and Commerce has pointed out through its latest survey, they increasingly also want to reinvest in Hungary.

And on top of all that, they also pay their taxes. Auto industry players probably do so more happily than their peers in the banking or telecom sectors, both of whom are hit by sectoral taxes that bodies as disparate as the European Union and the American Chamber of Commerce in Hungary has suggested should be removed. The government thus far appears unmoved by such arguments, and while the bank levy has been lowered, Minister of Finance Mihály Varga said earlier this year there are no plans to repeal it.

But for all the dark mumblings in pro-government newspapers of international retailers, for example, “cooking their books”, the point is that, happily or not, these multinationals pay their taxes. And those taxes benefit all Hungarians. It is yet another reason to be grateful for the presence of these businesses in Hungary.

Robin Marshall, Editor-in-chief

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Budapest Business Journal | July 27 – September 6, 2018

News///macroscope

Loose Monetary Conditions to Remain Until Mid-2019

The latest decision of the rate-setters at the National Bank of Hungary (MNB) didn’t come as a surprise: the Monetary Council left the base rate at its current record low at its regular meeting on July 24. All eyes are now on the bank’s September “Inflation Report”, which could signal the start of a tightening cycle – or not.

Retail Trade Turnover in Hungary (Jan 2017-May 2018) billion forints, at current prices

2017 2018

January February March

707.6 774.6 694.2 749.2 823.5

June

908.6 830.8 891.6 854.3 954.5 872.0

July

901.3

April May

August

922.1

September

897.9

October

925.4

November

925.4 1071.9

December

Source: KSH/MTVA Sajtóadatbank/MTI

ZSÓFIA CZIFRA

Hungary’s central bank left its interest rates unchanged at a record low level of 0.9% on July 24. The decision was in line with expectations.

The National Bank of Hungary, in an accompanying note, reiterated that global market volatility justified a more cautious approach to policy, but kept its dovish overall message.

“The council will ensure the maintenance of loose monetary conditions, necessary to achieve the inflation target in a sustainable manner, by using the current set of monetary policy instruments,” the Monetary Council, charged with ratesetting, wrote in the statement.

“Growth of the Hungarian economy will pick up further in 2018, then, if the assumptions of the current projection hold, it will slow down gradually

from

2019.

The inflation target is still expected to be achieved in a sustainable manner from mid-2019, as the temporary, inflationboosting effects of oil price changes fade,” the note reads.

Tested by the Markets

However, the MNB has somewhat been tested by financial markets, with global rates starting to rise lately. The forint saw all-time lows in early July (it passed the 330 mark versus the euro), which made it the worst-performing currency in Central Europe.

The weakness of the Hungarian currency has partially been attributed to the central bank’s loose monetary policy, which has left the key rate of

0.9% below

the benchmark rate for the region.

Neighboring countries such as Romania and Czech Republic have already started a tightening cycle; base rates stand at 2.5% and 1%, respectively.

A recent Reuters poll projected the bank was unlikely to change its base rate or the -0.15% overnight deposit rate this year.

“Considering domestic fundamentals and the external environment as well, a normalization of loose monetary conditions could start in 2019 at the earliest,” analysts at CIB Bank said in a note after the rate decision.

CIB added that this outlook could change if the European Central Bank shifts to a more hawkish stance, or a weaker forint exchange rate or increasing oil prices result in a jump in inflation.

The central bank has already indicated that the ECB decision could have a significant influence on its policy. After its June meeting, for the first time in a long while, the bank signaled a possible end date of its dovish stance, noting that loose monetary conditions could no longer prevail until the end of its five- to eight-quarter policy horizon.

The European Central Bank earlier said that it will end its EUR 2.6 trillion bond buying program in December.

Inflation the ‘Only Anchor’

Hungary’s central bank targets 3% inflation with a tolerance band of plus/minus one percentage point. The bank said again in its latest note that its only anchor was inflation: the rate was

3.1% in June,

mainly due to the rise in fuel prices.

Analysts has been saying for a while that the MNB could start a tightening cycle first by withdrawing liquidity from the interbank market, via its foreign exchange swap tools, rather than by raising rates.

“According to our expectations, liquidity injections may be gradually scaled down

by June 2019,” Citibank said in a note.

Analysts said the bank was unlikely to change its policy or its rhetoric until its September meeting.

Zoltán Varga of Equilor Befektetési Zrt. said that the Monetary Council’s decision was not a surprise to the market, but all eyes are now on the September “Inflation Report”. Varga also emphasized that the MNB follows the monetary policy of the ECB and the U.S. Federal Reserve Bank.

While the ECB is not likely to announce changes (due on Thursday, just after this paper went to print) at its next rate setting meeting, and current interest rate level might remain unchanged until the end of

the summer of 2019, the Fed has already been in a tightening mode and has already raised its key rate twice this year, with a further 25 basis points raise is expected in September.

András Horváth of Takarékbank said the bank does not expect a tightening

“Growth of the Hungarian economy will pick up further in 2018, then, if the assumptions of the current projection hold, it will slow down gradually from 2019.

The inflation target is still expected to be achieved in a sustainable manner from mid-2019, as the temporary, inflation-boosting effects of oil price changes fade.” cycle to start before the middle of next year. Even then, the MNB first will withdraw its non-conventional tools and only then would come a slow and gradual increase in the key rate. According to him, the base rate will probably remain unchanged until mid-2020.

4 | 1 News

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Budapest Business Journal | July 27 – September 6, 2018

Property Systems Extends New Work Offices Network modern parts are connected by a doublelevel atrium with a glass-roof. Property Systems defines a “work place” as a

The German-owned Property Systems has opened its first New Work shared services office center (NWSO) in Buda with the delivery of 380 work stations at the 4,000 sqm Buda Square Business Center in District II.

10 area sqm

New Work meeting room.

GARY J. MORRELL

The center will provide the possibility for startups and those with large space requirements in what is described as a more rural environment than the Pest New Work shared-services offices.

The company is planning further development of its NWSO network in Hungary and the region and aims to become the “leading independent provider of shared-serviced offices in CEE” according to Hubert Abt, the CEO/ principal of Property Systems.

In its latest Pest development 2,500 sqm of space is under construction at the RM2 Business Center at the Váci 16 office center.

Property Systems says it sees the necessity for a presence in the Váci Corridor as

more than

25%

of the Budapest office market is concentrated there; the company says it has plans for further development in the area.

“The existing centers have been developed for different profile companies in different locations in and around Budapest,” said Abt. Property Systems began its operations in 2013 with its first New Work complex at the R70 office center in Rákóczi út. Following that, the modernistic-style complex the Anker Business Center was opened in District VI in the centrally located Anker köz.

The BJ48 Business Center, in a protected building dating back to the end of the 19th century, provides a more classic environment on Bajcsy-Zsilinszky út.

Classic Location

In another classic location, the company established a NWSO at the refurbished A100 building on Andrássy út. The complex consists of 1,700 sqm on two floors in the building, a new wing was constructed in 1999 and the classical and

and has an average of around 200 work stations per business center.

The NWSO network has an 85% plus occupation rate in Budapest with clients spread across the different market sectors: 11% in IT; 10% commerce and production; 8% finance; 8% engineering/construction; and 8% legal. With regard to the length of leases, 70% agree a lease of more than one year and the average client stay is 3.5 years.

“In Budapest we host 87% national entities and 13% international. In Warsaw, the proportion of international clients will be much more as the market is driven by international enterprises. In Kyiv we have over 80% IT-related clients, financed from international sources,” said Property Systems.

The company is financed through a combination of private capital and family money and will have invested around EUR 5 million in the region by the end of the year with a further EUR 5 million planned for 2019. It is planning to put out 20% of the company for public tender, but aims to maintain its independence.

The projection is to have 45-50,000 sqm of NWSO space in CEE by the end of this year. In Budapest this would be 20,000 sqm in nine locations, in Warsaw 20,000 sqm in eight locations, 2,000 sqm of co-working space in Kyiv and the possibility of an additional location. In Prague the company has 3,000 sqm of space with one possible additional location. Further locations could be Bucharest where Property Systems is working with the CE developer Portland Trust and the regional Polish cities of Krakow and Lodz.

Office Development Boom Continues Into Summer Building on a successful first half of the year, established developers are undertaking yet more office projects: a further eight are due to deliver this year with another nine in the pipeline for 2019 according to the Budapest Research Forum (BRF), which comprises CBRE, Colliers International, Cushman & Wakefield, Eston International, JLL and Robertson Hungary.

GARY J. MORRELL

These follow on from GTC Hungary’s latest Budapest development, the 21,500 sqm GTC White House, Horizon Development’s 22,500 sqm Promenade Gardens, purchased by Erste Open-ended Real Estate Fund, both located in the Váci corridor, and

the 13,000 sqm Graphisoft Park South, the latest phase of the research and development park in the outer District III. Total modern office stock in Budapest currently stands at a little more than 3.5 million sqm, consisting of around 2.8 million sqm “A” and “B” class speculative office space with 664,000 sqm of owner occupied space.

Vacancy up Slightly

The current vacancy rate stands at 7.6%, representing a slight rise from the previous record low recorded in the last quarter.

In comparison, total office stock in the equally booming Prague office market stands at circa 3.35 million sqm with a vacancy rate of around 6% according to the Prague Research Forum (CBRE, Colliers International, Cushman & Wakefield, JLL and Frank Knight).

Futureal is due to complete the 12,000 sqm phase of Advance Tower and has started development of a second 7,000 sqm phase in Váci út next year. The company is also due to deliver the 27,000 sqm Corvin Technology & Science Park at the Corvin Promenade project later this year.

As with the previous quarter, the strongest occupational activity was recorded in the Váci Corridor, attracting 36% of demand, followed by South Buda and Central Pest. One of the largest transactions in the second quarter was a

Buda. The company is also due to deliver the 57,000 sqm, built-to-suit, Magyar Telekom headquarters in District IX in the fourth quarter and has an option on a plot adjacent to the complex. Citibank Europe is also to establish its 8,000 sqm headquarters in Promenade Gardens.

Skanska is due to complete the twinphased, 35,000 sqm Mill Park by the end of the year; the project is letting and negotiations are ongoing for a sale to investors. In the current economic environment, the office development boom looks set to continue as developers are able to source finance, conclude the necessary preleases and leases and sell a development on to investors.

20,400 sqm pre-lease,

built-to-suit agreement by Wing for the Univerzum Office Building in South

Promenade Gardens

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Budapest Business Journal | July 27 – September 6, 2018

Hungarian Investment Market Suffers From Lack of Product Investment volumes for the first half year are considered to be disappointing, although a number of deals have been pushed into the second half and consultants expect figures to be close to last year’s volumes, which is significantly lower than the other established Central European markets.

A lack of product remains a barrier to market growth as competition between both domestic funds and international capital intensifies.

GARY J. MORRELL

“Colliers Inrternational registered commercial real estate deals of EUR 350 million during the first half of the year.

Activity has been a liitle slow, although larger deals have been pushed to close in the third quarter. The yearend volume could reach EUR 1.5 billion based on ongoing deals,” said Bence Vécsey, director of investment services at Colliers International Hungary.

The first half year volume of transactions on the Hungarian commercial property market reached

circa

EUR 490 mln,

significantly below the level of EUR 1.1 bln recorded for H1 2017, despite strong interest from investors and significant liquidity on the market according to Benjamin Perez-Ellischewitz, head of capital markets at JLL Hungary.

“This disappointing volume is the consequence of the limited availability of core products of scale. However, several large transactions are expected to close during the second half of the year and due to this robust pipeline we keep our yearly volume forecast at around EUR 1.7 bln-1.8 bln, in line with 2017,” he explains.

“Most of the new international market entrants are focusing on core, centrally located assets with strong covenants and secure cash-flow, which is a highly under-supplied segment of the market.

“The H1 2018 investment volume for Czech Republic stands at EUR 1.075 bln.

For the full year we are expecting circa EUR 2- 2.5 bln. The Czech investment market is expected to show a fall in investment volume compared to 2017; Czech Republic continues to be one the most attractive attractive destinations for property investors, and the lower volumes expected this year are certainly not due to a lack of investor interest or demand for product,” says Kevin Turpin, head of CEE research at JLL. According to Colliers Hungary, office is the leading investment destination domestically, with

56%

of volume,

Hungarian property development and investment company Wing somewhat bucked the trend in acquiring the Infopark D Office Building in the South Buda area of the capital in June, in what was a disappointing H1 for the market.

As a result of the booming occupational market, value-add assets are also of interest for a number of investors who have a deep understanding, but the number of opportunities is also limited. We saw only two transactions with a volume above EUR 40 mln in H1. The limited availability definitely hinders activity,” PerezEllischewitz comments.

Picking up in H2?

According to CBRE, the first half 2018 investment volume was EUR 322 mln, only 40% of the volume transacted in H1 2017.

The consultancy registered

17 transactions

with an average ticket size of EUR 19 mln.

However, CBRE foresee greater transaction activity in the second half with a number of notable deals scheduled to complete and annual investment volume is forecast to hit circa EUR 1.2 bln. This number could further increase subject to ongoing deals closing before yearend.

Despite the solid fundamentals of the Hungarian market, assets are still priced with a significant discount compared to Poland and Czech Republic, where financing is cheaper. Warsaw offices are at least 100 basis points more expensive than in Hungary.

“There has been a significant shift in the make-up of the investment market over the last few years, with the local investors rapidly increasing their exposure to the investment market,” explains Ben Barclay, senior investment consultant at CBRE Hungary.

“In 2017, Hungarian investors accounted for 40% of the entire market, representing a year-on-year increase of 13%, whilst they only accounted for circa 3% of the investment market back in 2007. The majority of this investment has been undertaken by the three local open ended funds, Erste Fund, OTP Real Estate & Diófa Fund, who are under pressure to spend as money continues to flow into all three funds. They are now able to compete with the international capital in terms

of scale and have started to squeeze out some of the potential core capital targeting Budapest, as funds tend to be more aggressive on pricing,” Barclay says.

Domestic money remained the pulling force of the investment market, generating more than 40% of the acquisitions in H1 2018 accorrding to Perez-Ellischewitz.

“This proportion should prevail for the rest of the year and might increase further as they are in due diligence in several large transactions. That said, international investors are also actively looking for opportunities, and we also expect to register new market entrants by the end of the year,” he adds.

Regional Picture

To place Hungary’s results into a regional context, Cushman & Wakefield Poland has traced EUR 3.2 bln in investment volume for the first half year in the country. As much as EUR 1.9 bln was transacted in the retail sector alone; for example, Griffin Real Estate aquired the M1 retail portfolio consisting of 28 assets across Poland for EUR 1 bln.

followed by retail at 40% and industrial with 4%. Local investors accounted for 52% of the total volume although international investors are targeting transactions in Hungary.

As of the end of 2018, CBRE put yields for Hungary at 6% for prime office, shopping center and high streets at 5.75%, and industrial at 7.75%. This compares to 5% for prime offices in Poland, 6% and 5% for prime shopping centers and industrial.

Czech prime offices are estimated at 4.75%, prime shopping centers at 4.5% and high streets at a very low 3.5%.

Hungary Investment Sector Breakdown 37%

Office

45%

48% Retail 34%

13%

Industrial

13%

2%

Other

8% 2018

2017

Source: CBRE

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Budapest Business Journal | July 27 – September 6, 2018

EFSI Results Prove Innovative Financing More Than a Buzz-word

More With Less

We have to learn to do more with less, there’s no other way around.

We’re talking here about changing the culture, the philosophy of how this region approaches the use of European funds.

EFSI is designed to explore new markets, develop new products, design new forms of cooperation… to serve new clients that were previously considered too risky.

Exclusive op ed for the Budapest Business Journal

by Vazil Hudak, European Investment Bank Vice President.

When the European Fund for Strategic Investment (EFSI) was launched three years ago, critics labelled it “a fairy tale”, questioning its ability to address investment gaps in crisis-stricken Europe.

“Impossible,” doomsayers said about Juncker’s investment vehicle, backed by a budget guarantee from the European Commission of EUR 16 billion and with EUR 5 bln of the European Investment Bank’s (EIB) own resources.

Results prove the pessimists wrong.

In fact, the EIB – tasked to manage this investment vehicle – has over-delivered.

The EU bank succeeded in mobilizing EUR 335 bln in additional investments across Europe, compared with the original target of EUR 315 bln.

Thanks to EFSI, we are reshaping and modernizing investment culture in Europe.

We’re effectively de-risking investments for private investors, crowding them in on a large scale, at a level of around 65%.

EFSI is a revolutionary project. The first systemic attempt to endorse the use of a financial instrument at the EU level.

The Juncker plan is also underway in Hungary, where we see a great potential.

Projects are designed to help improve the quality of life of citizens, strengthen competitiveness of SMEs and foster innovations.

To date, EFSI financing in Hungary amounted to EUR 332 million, triggering some EUR 1.787 bln of additional investment.

Vazil Hudak To date, EFSI financing in Hungary

amounted to

EUR 332 million, triggering some EUR 1.787 bln of additional investment.

Scale Up

One example among many others: thanks to EFSI, in close cooperation with Hungary’s K&H Bank, we’ve helped PP Tech to scale-up its welding operations and custom metal fabrication. Our mutual project led to an expected

30-40% rise

in its annual turnover and strengthened its market position.

The transition from grants to guarantees is bumpy, especially in cohesion countries. Amplitude of structural and investment funds, deficiency of eligible and bankable

projects are not exactly helping. Current over-liquidity in the financial sector and ultra-low interest rates combined with a lack of experience with innovative financing are another drag.

The response? Enhanced cooperation with our advisory capacities and experts trained in financial innovations. Our task is to help our partners to learn and assist them with transition. All this is orchestrated in close cooperation with national promotion banks, our key allies.

To improve the odds, we’ve deployed our European Investment Advisory Hub (EIAH) or the Hub, designed to improve the quality of investment projects by offering tailored advisory support to European project promoters.

Why all this effort? Simple. Smarter use of EU financial resources is the future.

Ongoing talks about the size and priorities of the next, post-2020 European Union’s budget highlight the need of innovative financing.

We’re talking about projects often highly innovative, undertaken by small companies without a credit history, or they pool smaller infrastructure needs by sector and geography. Through this, we’re helping to create the infrastructure for future growth.

This success led to a decision to extend the duration and capacity of EFSI to EUR 500 bln by end-2020. Thanks to EFSI, Europe will see

1.4 new million jobs

by the end of this decade and will add 1.3% to the EU’s GDP. It’s great news for all of Europe where we all seek acceleration of economic convergence. For this strategy to succeed, the CEE region needs to enhance its economies’ competitiveness. Innovation and research must become a vital part of government mindset; this transition requires reforms and cooperation, on national and regional level.

We’re ready and equipped to encourage this evolution. Our key aim is to accelerate this change, to broaden the scope and boost the impact.

This evolution is not just about money, it involves a change of mind and we at the EIB will help all this to happen.

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Budapest Business Journal | July 27 – September 6, 2018

Business

Startup Offers SMEs Productivity Data Solution Hungarian startup Haris Engineering says it has developed a solution that will allow smalland mediumsized production companies to obtain productivity data via an accelerometer and a smartphone app.

BENCE GAÁL

The startup’s team consists of a range of engineers and LEAN management specialists, and recently won three awards at the Brainbar OxoLabs Blastoff Startup Competition.

The awards came with a prize of Microsoft support through its safe data-cloud technology. Furthermore,

Company ///news Half of SMEs do not Invest in Digitalization control,” he says. “Industrial PLCs [programmable logic controllers] and production sensors are expensive; spreadsheets are too manual to record data and are a poor use of time and productivity.”

User-friendly and Cheap

Haris Operator offers a user-friendly, inexpensive method for any production environment to measure and collate critical data, the company tells the Budapest Business Journal.

The product’s data collection happens through an accelerometer, which transfers the information to a smartphone app, which can be quickly installed, automatically starting to capture speed losses and downtimes. The application offers an option to record any critical notes against the data being recorded by the sensor on the machine, both for immediate action and further analysis and later stage improvements.

Perecz says there is a need for CEE companies to catch-up with productivity in the West.

Péter Perecz of Hungarian “Eastern Europe small- to mid-sized startup Haris Engineering firms are in the core of our strategy, at the Brainbar OxoLabs where wages must still be increased, Blastoff Startup Competition. and the only way to stay competitive is to maximize productivity levels.

Anyone who is looking to improve Haris has also secured the business productivity without the need development support of DesignTerminal for additional engineering and Co. and Impact Works to strengthen maintenance services can benefit public relations and marketing from this solution.” development activity.

The BBJ asked Haris Engineering Company founder and CEO Péter which markets it plans to target.

Perecz explains the importance of the “Our plan is to start in Central Europe, breakthrough, known as “Haris Operator”. but we have connections from other “The fundamental problem in regions, and our long-term goal productivity improvement is that you is the global market,” a company are stopped at data collection and spokesperson says.

Almost half of Hungarian SMEs have not invested in IT developments in the past two years, according to a survey by T-Systems Magyarország, autopro.hu reported.

About 72% of local SMEs do not think that digitalization is important, the representative survey of some 800 companies shows. Just one-in-six companies offer online customer service, but half have their own home page.

Gov’t to Give HUF 50 bln to Hungarian Border Firms Hungary’s government has allocated HUF 50 billion in support for businesses in border regions with large ethnic Hungarian populations in 2019, napi.hu reported. The support will be used for grants and interest subsidies for Hungarian-owned businesses in Croatia, Romania, Serbia, Slovakia, Slovenia, and Ukraine. The Ministry of Foreign Trade and Affairs will hire 20 new staff to execute the program.

Hungary R&D Spending Jumps 21% in 2017 Spending on research and development in Hungary came to HUF 517 billion last year, up 21% from 2016, at current prices, a summary of preliminary data compiled by the Central Statistical Office (KSH) shows, Hungarian news agency MTI reported. R&D spending was lifted, albeit from a low base, by grant money paid out at the end of 2016, KSH noted. In terms of GDP, R&D spending came to 1.35%.

Spending on R&D activities, which account for about 85% of overall R&D spending, was up 17%, while spending on investments in the R&D sector jumped almost 54%. Businesses made up just under two-thirds of total R&D spending. Institutions of higher education and budget-funded research institutes accounted for equal shares of the rest. Close to 61,000 people worked in R&D in Hungary last year, up 12% from 2016. About 70% were researchers and the rest were assistants.

Heat Ventors Looking to Burn Bright at Cooling An innovative Hungarian energy storage solution offers to cut energy use drastically in data centers and elsewhere.

BÁLINT SZŐNYI

Thermal energy systems all over the world are far from maximum efficiency.

In Europe alone, it is estimated some EUR 20 billion or 250 million metric tons of CO2 equivalent greenhouse gases could be saved by optimizing energy storages, according to reports by the International Energy Agency and KPMG. A large chunk of that is wasted in data centers, where permanent cooling is of critical importance. A Hungarian invention, HeatTANK by Heat Ventors

promises a solution that could dramatically cut energy bills at telco sites.

“Traditionally, heat is stored by changing the temperature of the water. Instead of water we use special biomaterials, called phase change materials,” explains Zoltán Andrássy, who co-founded the company together with his partner, Rita Farkas. “By melting and solidification, storage size can be reduced by almost 90% and save 20-40% energy, with a 1.5-3 years return-on-investment.”

HeatTANK also allows better use of changing air temperature as well by producing and storing energy during the night so that it can be used for cooling during the day.

Choosing the Right Material

“We started research at university, while we also studied how other companies on the market operate and detected their errors meticulously,” Andrássy tells the Budapest Business Journal. “We figured it all comes down to choosing the right material to work with, as this is how you can keep costs down and serve price-sensitive customers best.”

The market looks huge: in Hungary only there are more than 15,000 telco sites where the technology could be utilized, whereas more than a million such facilities exist all over Europe. Another target group is bitcoin miners, for whom it is also crucial to keep energy bills down in their vast server farms.

The next step is to get the first pilot projects running using existing prototypes. Heat Ventors is negotiating with several local telcos and players in the energy industry. Andrássy says lucrative contracts are in sight not only in Hungary, but also from neighboring countries, the US and China. “Depending on the technology our potential customers use, energy savings may reach up to 70%,” the co-founder CEO says.

An alternative smaller scale go-to-market route could be developing products for household applications. This would pave the way to selling licenses and blueprints of the technology to manufacturers with access to consumer markets. Negotiations

with Hajdú, a Hungarian water heat storage manufacturer, point in that direction. It sells more than 300,000 storage units per year and projects demand for up to 30,000 HeatTANK units.

The founders are trained engineers, but decided to master business skills in a series of incubation and accelerator programs to scale up their venture. Their determination has been rewarded with six startup competition awards, among them the first prize from EIT InnoEnergy PowerUP! contest. In fact, the latter organization has recently committed itself to fund the project with EUR 150,000. That and an additional EUR 100,000 funding from two Finnish angel investors in the pipeline should put Heat Ventors on the right track to gain market traction and live up it its potential.

S TA R T U P S P O T L I G H T

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Business

WHO’S NEWS

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Budapest Business Journal | July 27 – September 6, 2018

Do you know someone on the move? /// Send information to news@bbj.hu

Kempinski Appoints Executive Assistant Manager

As of June 1, Klaudija Časar Torkar has taken over the position of CEO of ALD Automotive Magyarország Kft, a provider of fleet management and leasing solutions. Časar Torkar has been working in the automotive industry since 1996. She was appointed country manager of ALD Slovenia in 2009, and since March 2014 has been managing director of ALD Bulgaria.

Prior to Časar Torka’s appointment, Viktor Szántó led the Hungarian team for a decade from April 2007.

Silvia Rajniak has been appointed executive assistant manager of Kempinski Hotel Corvinus Budapest.

Rajniak began her career in Slovakia, at the Kempinski Hotel River Park Bratislava, as part of the hotel’s preopening team in 2009. She worked in multiple positions, starting as a personal assistant to the general manager, then assuming the position of training coordinator and later, training manager. She was named as the front office manager of the Bratislava hotel in 2014.

EY Names Innovation Partner

Gabriella Szentkuti

Silvia Rajniak In 2015, she moved to Kempinski Hotel Berchtesgarten in Germany, to once again act as the front office manager during the hotel’s takeover and rebranding. Last year, she was appointed director of rooms and also supported the Grand Hotel Kempinski Riga’s preopening team as essential front office master trainer.

Rajniak is a Slovak national with two children, and is fluent in English and German as well as her mother tongue.

her own volition. Neither Szentkuti nor Microsoft have indicated the reason for her departure.

In December last year, news surfaced about an in-depth investigation conducted by Microsoft headquarters at Microsoft Magyarország, examining contracts between the local unit and several institutions of Hungarian state administration.

Shortly before that, Microsoft unexpectedly terminated contracts with reseller companies that were selling Microsoft products to government institutions.

Microsoft commented very briefly at the time that the company was looking for a “new direction” in its relationships with local partners.

ALD Automotive Welcomes CEO

Mónika Takács arrival is of Mónika Takács as leasing manager.

Takács started her new position on June 21. She gained extensive experience at companies like ECE Projektmanagement Budapest Kft., Jones Lang LaSalle and Horizon Development.

Anikó Borzásiné Danilovics, previously a construction expert at TriGranit, has switched to the project director position at the company. She joined TriGranit in 2000 and has led major projects including the Palace of Arts (now known as Müpa Budapest), the Duna-Pest Residence and Millennium Towers I, II, and III. Further appointments earlier this year included Andrea Czifra as technical coordinator and József Kádas as site manager. Previously they worked in different technical positions at TriGranit.

Attila Kujbus

Microsoft Magyarország Managing Director Resigns After three years in the position, the managing director of Microsoft Magyarország announced she is leaving the company. The move was unexpected, and Microsoft has not yet appointed a successor to the position.

Gabriella Szentkuti joined Microsoft Magyarország four years ago as strategic director. Less than a year later, she was appointed managing director.

A statement released by Microsoft in early July notes that she greatly contributed to the excellent results of the company and that she resigned of

Attila Kujbus, leading associate for auditing services at professional services firm EY, has been appointed partner, now also responsible for innovational developments.

Kujbus has many years of experience in auditing multinational and medium-sized companies.

In recent years, he also took part in several special consulting projects in the fields of retail, industrial manufacturing, and energy.

In addition, he directed and supported the introduction of EY’s domestic and regional digital systems.

“The appointment further motivates me to look for new solutions that can make our auditing even more effective,” commented Kujbus.

“My aim is to strengthen our leading role in the field of electronic auditing services, and to answer the digital era’s challenges for auditing with the utilization of innovative technologies,” he added.

New Appointments Announced at TriGranit Klaudija Časar Torkar

Developer TriGranit has announced several personnel changes related to its new Millennium Gardens office project in Budapest. The latest

Anikó Borzásiné Danilovics

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Business | 9

Cybersecurity, Digitalization and Millennials in CEOsʼ Focus Big Four consultancy KPMG’s experts analyzed the state of digitalization, economic growth, and the growing influence of Generation Y on the Hungarian market during a breakfast briefing based on its latest CEO research.

BENCE GAÁL

Robert Stöllinger, CEO of KPMG Hungary, drew attention to the divergent views about growth. While economists expect growth of 4%, CEOs consider conservative estimates of around 2% more realistic, according to KPMG’s 2018 Global CEO Outlook research.

Stöllinger noted that optimism among the respondents is growing, with 67% of CEOs confident about the three-year growth prospects of the global economy.

“They might be too optimistic; many were optimistic a year before the financial crisis,” he warned, pointing out that the research had been carried out before the escalation of Donald Trump’s trade wars.

On cybersecurity, Stöllinger said: “Some 49% think that the question asked about cyber-attacks should be ‘when’, ADVERTISEMENT

not ‘if’.” Tamás Kórász, KPMG Hungary’s IT advisory partner added

that

33%

of the surveyed companies admitted to becoming victims of such attacks. Kórász believes that the real figures might even be somewhat higher, as not all businesses like to admit to being attacked.

Putting the situation’s importance into perspective, he called cybersecurity a “board-level problem”, noting with concern that some boards lack digital experts. Just as worrying, Kórász also mentioned that less CIOs believe that their companies have prepared for cyber-attacks than CEOs. On the subject of the General Data Protection Regulation, which came into force on May 25, he said 38% of EU companies were not prepared for the introduction, adding that Hungarian numbers were “maybe even a bit worse.”

Robert Stöllinger

IT Familiarity

Ágnes Rakó, KPMG’s partner for smart digital finance, emphasized the need for people to be familiar with IT, as well as their own field. She noted how “Learning IT outside of traditional roles can serve as the basis of the future.” Rakó also called for a strong interaction between IT and finance departments.

Regarding the Hungarian job market, she remarked: “Potential job-seekers are more attracted to opportunities that are

not too manual and repetitive,” referring to possibilities that combine traditional and digital challenges.

While not as popular or developed as in the United Kingdom (where it represents 8% of the grocery-shopping sector), supermarkets’ online shopping systems in Hungary (0.2%) are essential as a learning process, paving the way to other online services, according to Zsolt Müller, director of KPMG’s retail and consumer markets practice.

In other fields, such as device-penetration or internet usage, Hungary is performing remarkably well, Müller says. Calling attention to another, perhaps surprisingly successful aspect, he said: “Contactless payments are more developed in Hungary than in Germany for example,” noting that the ratio of such payments is already

around

60%

of the Scandinavian average.

“The future is here, just not evenly distributed,” he said of the uneven state of digitalization. Assessing how Millennials might shape the Hungarian economy, he said: “Generation Y will become the group with the most purchasing power in Hungary in about eight years.” However, predicting the consumer behavior of the newer generations might be a serious challenge, even to Millennials. “Y does not understand Z,” said Müller.

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Special Report German Investment Focus

German Firms Continue to see Good Business in Hungary  12 Looking After Hungary’s Biggest Investor

 14

German Funds Play Central Role in Real Estate Investment Market  16 DUIHK: 25 Years of Helping German Companies Invest and Reinvest  20

Germany has long been Hungary’s leading trading partner, a relationship that looks set to continue for years to come. Here’s why...

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Special Report | 11

Virtuous Circle and Critical Mass Pushing More Business to the Cloud, SAP Says There has been a step change in the rate at which Hungarian businesses are switching to cloudbased services, says Balázs Ablonczy, the managing director of SAP Hungary and the man responsible for cloud sales across 16 countries in the region for the Germany-rooted enterprise software developer.

Balázs Ablonczy

ROBIN MARSHALL

“We can’t say Hungary has been an early adopter of cloud service, but we are catching up; cloud adoption started very seriously this year,” says Ablonczy, who took on responsibility for regional cloud sales from January 1 this year. He has held the Hungarian MD’s position since 2009.

“I think there are two main reasons for the change: more companies have started being interested and can see the benefits of using cloud services, and more developers are looking at a “cloud first”, making a solution that is up to 90% cloudbased, and in some cases only based in the cloud.”

In other words, Hungary has reached a point of critical mass in terms of service provision, and companies have simultaneously realized that “they must be more open” to the possibilities offered by the cloud, Ablonczy explains.

“It is obvious that the Hungarian market has changed this year; we are seeing much more openness from Hungarian customers.

The growth of the market in Hungary has been around 50% – both for private and public clients – so we are talking about something significant here.”

The growth is in all areas. Ablonczy says customers are now beginning to talk about migrating services that “we did not even dare to dream would be in the cloud” a few years ago, such as transactional data and product line information.

Embracing the Trend

“We are also seeing more and more ‘trendy’ areas embracing the cloud, like

AI, machine learning, IoT, even big data management.”

A big reason behind both the growth and the expanding horizons for what can be done in the cloud comes down to a simple concept, Ablonczy says: trust.

Companies had first to accept their data was secure, and then trust someone else to handle it for them.

“The trust is there now; security was never a question: when you are talking about data protection, it has to be very advanced, even if you are talking about

“We can’t say Hungary has been an early adopter of cloud service, but we are catching up; cloud adoption started very seriously this year.” the latest privacy support required by GDPR rules across Europe. But now people realize that a data center is at least as secure as a small IT room in an office somewhere in Hungary.”

And in a sort of virtuous circle, that level of trust even extends to government, in Hungary and elsewhere, where SAP – and other providers – are delivering services.

“As the involvement gets more complicated, that cooperation with clients will only grow. In the next

couple of years this will spread out widely, using collaborative models of utilization.”

The government is not just an important partner in terms of being a customer, of course. It helps set the framework that encourages others to embrace all aspects of digitalization, the cloud included, and most especially among SMEs. “In the last two years we have experienced a change in the government mindset,” says Ablonczy, pointing to the subsidies – which SAP use too – available for R&D work, and efforts to make SMEs eligible for EU subsidies through the Economic Development and Innovation Operational Program, known locally by its Hungarian acronym of GINOP. The subsidies are important, particularly to small SMEs, because they are more risk averse and less interested in investing in the future, the software boss says.

Investing vs Survival

“At the upper level of SMEs, those at a serious size, we see them going for digital options more and more. Smaller SMEs just want to survive.”

If the Hungarian economy is to become as competitive as, say, Austria, small SMEs will need financial help to digitize in order to remove some of the risks and overcome such short-termism.

“That is why it is very important the government puts digital programs in focus, and not just in its communications, but in providing subsidies supporting SMEs making investments in their future.”

These are not unique problems for Hungary, of course. Ablonczy says in terms of the cloud, the country is roughly on a par with its Visegrad Four peers (Czech Republic, Poland, and Slovakia).

“At the upper level of SMEs, those at a serious size, we see them going for digital options more and more. Smaller SMEs just want to survive.”

Individually, the mainly smaller countries of South Eastern Europe are further behind, though collectively that market is at least as advanced.

“Austria is much more ahead, more open to cloud solutions and turning more and more to them,” he estimates. The hope is that there will be a trickle-down effect further east.

“Austria has been influenced by Germany, where SAP is obviously a major vendor. In Hungary there are a lot of investors from Germany and Austria, and so we expect to see growth not only for line of business use such as HR or customer experience management, but also for ERP [enterprise resource planning] functions and cloud. Hungary has very strong potential for growth; we are certainly finding it much easier to catch the attention of clients.”

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Special Report

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Budapest Business Journal | July 27 – September 6, 2018

German Firms Continue to see Good Business in Hungary Economically speaking, Hungary has proved a happy hunting ground for German companies, with many indicating future plans to increase investments and headcount here.

Assembly Innovation

ZSÓFIA VÉGH

Audi‘s robotic “colleagues”.

Ties between Hungary and Germany have always been strong, be they historical, cultural or economic. Germany remains Hungary’s largest trading partner – the country continued to account for more than one-quarter of Hungary’s exports as well as imports last year in euro terms, according to data from the Hungarian Central Statistical Office.

Positive vibes about the economy are prompting many companies operating here to expand. According to a recent report by the German-Hungarian Chamber of Industry and Commerce (DUIHK), in which more than 200 leaders and managers of German (and other foreign-based firms) were surveyed, the economy has improved compared to 2017. In fact, the assessment of the economic situation has never been so favorable since 2005 as it was last year.

All respondents said they wish to expand further: both by increasing investments and recruiting more staff. The willingness to expand is the strongest

since

2000-2001,

the report says.

Similarly to previous years, it is mainly export-oriented companies in the

Benz plant in Kecskemét this June. The company is building the first full-flex plant of its global production. The EUR 1 bln investment project will also apply green production solutions, and will the conditions of flexible production regardless of the vehicle’s make, and drive. The company says it will create more than 2,500 new jobs through this investment.

It was not only good figures (e.g. production rose by more than 4%) that made 2017 a milestone in the company’s history but also because the company launched investments serving the future generations of employees. (For more on the Mercedes-Benz investments in Hungary, see story opposite.)

manufacturing industry that show higher-than-average growth potential.

The assessment of the business environment has slightly improved compared to last year. The evaluation of the national economy and policy framework and the business environment has improved as well. Even respondents’ dissatisfaction with labor market issues has decreased.

Overall, the assessment of the Hungarian economic situation has improved: in many questions, it has reached the regional average or has surpassed it. For example, due to tax cuts, taxation received a much more favorable rating than last year.

Unresolved Issues

It is true that there are many issues that have remained unresolved: dissatisfaction about labor market potential, for one.

More than two-thirds of the CEOs/

managers of German firms here have been dissatisfied with labor market conditions and especially the availability of skilled workforce.

Fortunately, this has not thus far impacted significantly companies’ investment decisions. Siemens Group in Hungary has been expanding its activities consistently. Both the number of people employed and their overall level of responsibility have increased.

Since 2010, when Dale A. Martin joined the Hungarian team as CEO of Siemens Zrt., the number of employees has practically doubled.

Siemens, which celebrated the 130th anniversary of its business activities in Hungary in 207, has also been expanding. Last year saw the foundation stone laying ceremony of a production hall at the power and gas unit of its Késmárk utca plant in Budapest. The approximately 10,000 sqm production hall, an investment of HUF 10 bln, is now operational, and ready to produce a new type of turbine blades, which will also entail an increase in staff.

Thyssenkrupp, best known for its steering systems, has also expanded significantly. The company, which changed its name to thyssenkrupp Components Technology, boosted its staff in several locations: the number of employees has increased in Budapest, at the headquarters, and in Győr (in western Hungary) as well.

The company has also increased the number of its manufacturing facilities.

This March, a state-of-the-art

HUF 30 billion plant

Groundbreaking ceremony for the second Mercedes-Benz plant.

was opened in Jászfényszaru (72 km east of Budapest), which will create 500 new workplaces. Another plant is under construction in Debrecen (231 km east of the capital): the HUF 11 bln factory will create 250 new jobs as of this summer.

Another foundation stone was laid at the Hungarian site of the Mercedes-

Innovation on the assembly lines is also in evidence at Audi Hungaria in Győr. The company has made further steps towards becoming a smart factory: following the pattern of the humanrobot cooperation that exists at the production line of the four-cylinder Otto engines, further robot “colleagues” have been deployed. In the electricengine production department, the company says it will implement a whole new production concept called modular production.

Audi Hungaria implemented investment projects with a total value of EUR 442 million in the 2017 business year, a

45% increase

compared to 2016. The total cumulative volume of investment since the establishment of the company here comes to EUR 8,753 mln. Audi is one of Hungary’s most attractive employers: at the end of last year the company was employing 12,307 employees.

The general positive sentiment and the effects of improvements is reflected in companies’ commitment to stay here. According to the DUIHK survey, 84% of those asked said they would choose Hungary as an investment location again. This has been the highest value in the past two decades (during which time the figure has ranged between 71% and 84%).

“Siemens has been present in the country for 130 years, showing significant commitment to Hungary,” Dale A. Martin, CEO of Siemens Zrt., tells the Budapest Business Journal.

“We intend to carry on this commitment into the future by contributing to the digitalization of the country and enhancing Hungary’s economic competitiveness. We invest in Hungary and create meaningful jobs. Our local R&D and production capacities qualify us for further expansion,” he adds.

See also DUIHK: 25 Years of Helping German Companies Invest and Reinvest, Pages 20-21

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Budapest Business Journal | July 27 – September 6, 2018

Manufacturing a Future for Mercedes, for Kecskemét and for Hungary With booming operations in the country – and getting very close to opening its second plant in here – MercedesBenz Manufacturing Hungary Kft. has seen a very successful period lately. Praising ties with the local and national governments, the company is eyeing further developments, the Budapest Business Journal learns from Josip Niksic, CFO at Mercedes-Benz Manufacturing Hungary Kft.

In mid-May, Mercedes-Benz Manufacturing Hungary Kft. managing director Christian Wolff announced that more than 190,000 vehicles had rolled out of its plant in Kecskemét during 2017, a rise of 4.1% from the previous year, while the revenue of the unit had also climbed

Fully Flexible

approximately

382,000 sqm

and will include a press shop, a so-called body-in-white shop (the stage at which a car body’s sheet metal components are welded together, prior to painting and moving parts being added), a paint shop and an assembly area. The company expects to launch production in 2020.

The new factory will be what is termed a “Full-Flex Plant” in which “several vehicle architectures from compact models to rear-wheel drive sedans and various drive forms, including electric vehicles, can be flexibly produced on one line,” Hungarian news agency MTI quoted Markus Schafer, a member of the Divisional Board of Mercedes-Benz Cars, Manufacturing and Supply Chain as saying in June.

our well-trained experts – i.e. our Hungarian employees – are professional and committed,” Niksic adds.

Indeed, the background environment could hardly be more supportive, it appears.

The factory has been performing quite outstandingly lately, boosting the economy of the country in total, the CFO says.

“The Kecskemét factory has become a major actor of not only the local/regional economy, but also the overall Hungarian economy over the past years. The company offers jobs for a workforce of

just below

4,000.

more than

EUR 3.6 billion.

Talking to the BBJ, Niksic tags this as a “successful period”, and understandably so.

“Last year saw the initial stage of the preparations for the second Kecskemét plant where the first cars may roll off the assembly line at the end of the decade. The new body shop started to manufacture the new A Class compact cars just recently,” the CFO says.

The plant in Kecskemét appears to be well-located, both geographically, and economy-wise. “Kecskemét proves to be an ideal location for the Mercedes-Benz plant. Constructive work with the local government and the central government gives us long-term predictability, and

developments such as investing EUR 580 mln in a chassis unit and a EUR 1 bln plant expansion, for which the company laid the cornerstone in the beginning of June.

The new factory is expected to create an additional 2,500 jobs on the top of the 4,000 Mercedes-Benz already employs in Hungary. The area of the plant is

Josip Niksic

CHRISTIAN KESZTHELYI

Special Report | 13

‘Truly Good’ Cooperation

“Our cooperation with both the central government, and the local government is truly good,” Niksic underlines.

“We make a joint effort to ensure that Kecskemét becomes a hub of European car manufacturing, innovation, and vehicle industry to attract even more young people to start their careers with us. The current challenge for both the city and our company is to improve local housing conditions to help make Kecskemét and the Mercedes-Benz factory even more attractive,” he adds, clearly seeing room for further improvement.

As a business, and an employer MercedesBenz paid a total of EUR 23 million in taxes and contributions in 2017 to the Hungarian state and the local government of Kecskemét,” Niksic says.

During the press conference announcing last year’s figures this May, Niksic pointed out that the share of Hungarian suppliers to the Kecskemét had risen to more than 50% in 2017, a firm indicator of how local companies are benefiting from the presence of the automaker and rising up its value chain.

In addition to the ongoing developments at the original factory, where production of A-Class models had recently replaced the B-Class autos formerly produced here, the company has been ploughing back its profits into

“We make a joint effort to ensure that Kecskemét becomes a hub of European car manufacturing, innovation, and vehicle industry to attract even more young people to start their careers with us. The current challenge for both the city and our company is to improve local housing conditions to help make Kecskemét and the Mercedes-Benz factory even more attractive.”

Looking into the future, parent company Daimler AG appears to have some serious plans for Hungary.

“Daimler AG made a strategic decision ten years ago to set up shop in Kecskemét. We have come to stay. We plan for the long-term, and would like to offer jobs to even more people, and thus ensure the livelihood of even more families,” Niksic tells the BBJ in answer to a question about the future of the company in here.

“Our plant continues to play a major role in the city’s economic achievements, and results. A good example is the second Mercedes-Benz plant that greatly contributes not only to the growth of our staff, but also to the number, and the order books of suppliers in the region,” he adds.

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Special Report

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Budapest Business Journal | July 27 – September 6, 2018

Looking After Hungary’s Biggest Investor The Budapest Business Journal sat down with Róbert Ésik, the president of the Hungarian Investment Promotion Agency to discuss how important Germany is to the Hungarian economy, and what HIPA does to try and ensure even more FDI from that source.

ROBIN MARSHALL

BBJ: What share of total FDI into Hungary comes from Germany?

Róbert Ésik: According to the data of the Hungarian Central Statistical Office, Germany is Hungary’s most important external trading partner; its market share is 26.9% of the whole Hungarian foreign trade turnover. Germany is in the first place with 26.9% in our imports and 27.3% in our export shares. Germany is the biggest investor in Hungary in respect of foreign direct capital stock present in the country. In 2015, foreign direct investment from Germany came to EUR 21.7 billion, which is 28% of the FDI. BBJ: Typically, what are the most popular fields?

RÉ: A significant part of German investors are related to the automotive industry, but a strong presence of German companies in the electronics sector can be observed as well. Three out of the four OEM companies in our country are related to Germany: Audi, Mercedes and Opel. Nineteen out of the world’s TOP 100 Tier 1 companies are German, and 11 of them have a manufacturing unit or a development center in Hungary, for example Robert Bosch, Continental, ZF, ThyssenKrupp, Schaeffler and Infineon.

We have also recently been able to announce and start exciting and important projects in the field of manufacturing and development. For example, Bosch is expanding its Budapest Engineering Center with a EUR 120 million investment.

In the new building complex housing creative spaces, innovation zones, and relaxation areas, Hungarian engineers will develop Bosch’s self-driving systems and the Budapest unit will also have a considerable role in the German company’s electromobility-related R&D activities.

Continental is constantly developing its units in Hungary with high-tech manufacturing and R&D. It established a Deep Machine Learning Competence Center in Budapest.

Róbert Ésik The new center will be an integrated part of the global network of the Advanced Driver Assistance Systems (ADAS) business unit.

BBJ: How has this changed over the years? How might it change in the future?

RÉ: Germany’s role in the Hungarian economy has been strong for decades.

According to the latest survey of the GermanHungarian Chamber of Commerce and Industry (DUIHK) on the Hungarian business environment, German investors reported a

“Germany is the biggest investor in Hungary in respect of foreign direct capital stock present in the country.

In 2015, foreign direct investment from Germany came to EUR 21.7 billion, which is 28% of the FDI.” better economic situation than last year.

Since 2005, the national economy has never received such a good evaluation as this year. The evaluating companies intend to carry out further expansion in respect to investments and staff numbers. In both cases, these are the most important expansion plans since 2000 and 2001. Similarly to last years, it is mostly large, export-oriented

manufacturing industries that show a willingness for above-average expansion.

The objective of HIPA is to make the Hungarian investment environment even more attractive, and, in addition to the “Made in Hungary” projects, to increase the proportion of “Invented in Hungary” investments that generate higher added value and promote the investments of companies using modern industrial technologies.

Modern technologies represented and established by German companies and their quality-oriented business policy are consistent with all these aspirations.

BBJ: What type of requests do German companies most often turn to you with?

RÉ: We provide a large variety of management consultancy services to investors. We maintain a close relationship with them regarding preparations and implementation of their investments, and we also manage “daily issues” like dealing with public authorities.

Within the framework of our policy advisory activities, we collect company feedback in order to prepare policy proposals to further improve the business environment. German companies are very active when it comes to this topic. In addition to individual companies, DUIHK is also one of our strategic partners. It will be the third time this year that we have jointly organized the “Konjunkturforum” (Prosperity Forum) to discuss future opportunities for development and strategy related to the taxation system, labor market and supplier development.

BBJ: The Deutsche Wirtshaftsclub (DWC) opened its Debrecen section in early June. Do you see any likelihood of the city becoming an eastern hub for German investments?

RÉ: The main reason for the establishment of the Debrecen section was the fact that, among foreign investors, the largest share is from Germany. For example, thyssenkrupp will produce the most modern springs and stabilizers in Debrecen, Continental Powertrain unit voted for the city and creates 450 jobs, the foundation stone of Krones new factory was laid last week. The development of the southern industrial zone, the direct flight connection between Debrecen and Munich and Dortmund, and the international school to be built next year ensure a good base for investors coming from Germany.

I think not only Debrecen but also Miskolc could be very attractive for German companies. This is also proven by Bosch, which was established in Miskolc in 2001. It employs almost 2,400 people, and last year added a new operational unit, the Regional Service Center involved in packaging

“HIPA’s aim is not only to promote cooperation but to support the digitalization of domestic SMEs during the period of global technological change.

Continuous innovation is essential for companies to secure their place or to progress on the supplier pyramid. The most recent trends require next generation suppliers, and automotive corporations are increasingly expecting suppliers to assume a greater share of the development processes, such as product development and R&D.” activities, among others, to their profile of developing and manufacturing electric hand tools. In this way, Robert Bosch Power Tool has put Miskolc on the map for other investors, as the Miskolc unit is the Bosch group’s biggest hand tool plant in the world.

BBJ: How can you help Hungarian SMEs join the German supplier value chain?

RÉ: HIPA’s aim is not only to promote cooperation but to support the digitalization of domestic SMEs during the period of global technological change. Continuous innovation is essential for companies to secure their place or to progress on the supplier pyramid. The most recent trends require next generation suppliers, and automotive corporations are increasingly expecting suppliers to assume a greater share of the development processes, such as product development and R&D. We support our partners by operating an online database of qualified suppliers, by organizing supplier training tailored to integrators’ needs, and by providing professional consultancy and intermediation.

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Lidl Takes Action on Energy Drinks, Plastics German global discount supermarket chain Lidl is considering restrictions of the sale of energy drinks to children under the age of 14, hvg.hu has reported.

In several Lidl stores in Europe there is already a restriction on the consumption and purchase of energy drinks due to their high caffeine and sugar content.

The retailer has also said it will stop selling single-use plastic products by the end of 2019, according to mfor.hu. In order to protect the environment, Lidl will also stop selling plastic straws, disposable plastic cups, plastic plates and plastic earbuds. Instead of the single-use plastic items, Lidl plans to make its own alternative and recyclable items. Lidl will also renew the packaging method of its own-brand products to eliminate plastic foil.

Meanwhile, Lidl is opening the first of the stores it took over from CBA at the end of last year, napi.hu reported.

The shop in Máriaremete in District II is already open, while a second unit in Budaörs will open at the end of July.

Krones to Build HUF 15 bln Plant in Debrecen German packaging and bottling machine manufacturer Krones AG will build a HUF 15 billion factory in Debrecen (231 km east of Budapest), its first European plant outside of Germany, managing director of Krones Hungary Pascal Mannche said on July 17, hvg.hu reported. The Hungarian government is supporting the investment with a HUF 5.5 bln grant, State Secretary of the Ministry of Foreign Affairs and Trade Tamás Menczer said. The plant will cover 15 hectares and have a 40,000 sqm production hall for 500 employees. Test production could start in Q1 2019, he added. Krones is the first company to build a plant next to the newly developed international airport.

Bosch to Expand Bp Development Center German engineering giant Bosch laid the cornerstone for a HUF 37 billion expansion of its Budapest development center on July 10, magyaridok.hu reported. The investment, scheduled to be completed in 2021, will add 90,000 sqms to the area of the facility. The center will create new opportunities for the development of electric and self-driving vehicles, and a 10,000 sqm test track will also be built next to the center. Bosch has invested HUF 130 bln in Hungary over the past two years and concluded partnership agreements with 14 local colleges and universities. The Budapest development center already employs almost 2,500 engineers, Oliver Schatz, its head said. Klaus Peter Fouquet, president of Robert Bosch AG, said Hungary is of key importance to Bosch both in production and in development, adding that the company spent almost HUF 55 bln on the latter area in Hungary last year; of the more than 13,000 people

employed by Bosch in the country, 2,600 work in R&D. The investment will create almost 2,000 jobs for highly-qualified workers, he added. Bosch is the biggest foreign employer in Hungary, operating nine units in the country.

Orbán and Merkel Discuss Opportunities for Cooperation Prime Minister Viktor Orbán and German Chancellor Angela Merkel held talks in Berlin on July 5 as part of Orbán’s official visit where the two sides discussed a variety of topics ranging from economic cooperation to border security, Hungarian news agency MTI reported. Orbán said at a joint press conference following the meeting that they went through an intense discussion where the tone had been „friendly”.

The Hungarian PM praised Germany’s contribution to Hungary’s economic development through trade and investment ties. Both leaders agreed that more focus should be put on closer innovation and technological cooperation and working groups will be set up in both countries to strengthen this area. Orbán said Hungary was open towards creating a common European defense policy. Hungary is ready to cooperate with Germany in modernizing the defense industry and has already signed contracts with German firms about military procurements, he added. Merkel noted that the topic of migration was an area where „the approach of Germany and Hungary significantly differ”. Orbán agreed that as they are viewing the world from a different perspective they are also seeing things differently, but this would not hamper cooperation. There will be closer cooperation in the area of research and development, for example in the field of electric and self-driving cars, portfolio. hu reported. Merkel and Orbán agreed that they will not support protectionism in trade policies, and they both support lower tariffs.

Audi Launches Serial Production of Electric Motors in Hungary German carmaker Audi launched serial production of electric motors at its base in Győr (121 km west of Budapest) on July 24, Hungarian news agency MTI reported. Audi Hungária managing director Achim Heinfling, Audi AG board member for production and logistics Peter Kossler and Minister of Foreign Affairs and Trade Péter Szijjártó participated at the ceremony. The electric motors are being turned out on a modular assembly line in an 8,500 sqm production area, Audi AG said in a statement. About 100 people are working on production of the motors, but headcount will rise to more than 130 by yearend. Production capacity will be about 400 electric axle motors a day at the start, but will gradually increase as a single shift soon changes to three shifts. The first electric motors will go into the Audi e-tron, Audi’s first all-electric model to be built at the company’s plant in Brussels.

INSIDE VIEW

German investors preparing for future challenges in automotive industry Martin Wodraschke Co-Head of CMS Auto-Tech Group, Head of German Desk CMS BUDAPEST

Hungary is positioning itself to be a key proving ground of autonomous vehicles by attracting the investments of German companies. By creating tax breaks, subsidies and investing in infrastructure, the government has taken leaps be a key player in the development of the autonomous vehicle.

However, there will still be several challenges faced by the auto industry in the coming years. Some of the key factors that will determine success in the industry will be the infrastructure available, data protection/cyber security, liability and protecting technology.

The government of Hungary has developed special incentives for employers by creating a social tax allowance and vocational training contribution allowance. R&D is being encouraged through VIP cash subsidies and R&D&I tax allowances. They have also introduced a new 250 hectare proving ground in Zalaegerszeg, which will be available to automotive companies who wish to test conventional or autonomous vehicles. These investments have not gone unnoticed, as German companies have increased investment in Hungary.

Bosch announced plans to increase the size of its development center in Budapest by 90.000 sqm for roughly HUF 37 billion. Daimler also confirmed the start of construction of a second plant in Kecskemet. Finally, Deutsche Telekom has also announced plans to increase the development of 5G in Hungary, which is a welcome sign as experts state 5G will be vital to autonomous vehicles.

Infrastructure (5G): The commitment made by Deutsche Telekom is important to ensuring Hungary has the proper 5G infrastructure to be a proving ground of autonomous cars. The first step being instituted by Deutsche Telekom is introducing Narrow Band-IoT. This precursor to what will eventually become a fully functioning 5G network will make the transition to 5G easier. As the technology develops companies will be

able to build on and utilize the Narrow Band-IoT that has been put in place.

Data Protection/Cyber Security: With more fluid ownership and use, cars will begin collecting more data on more people, in a larger area. As this data is saved by companies to be used by AI, it also has the potential to attract attention from nefarious actors. Hackers theoretically could collect the movement patterns of whole cities, or specific individuals, and sell it to the highest bidder. Auto companies will have to ensure appropriate security or risk data breaches that could alienate users.

Liability: Deciding liability will benefit from the increased data, from the autonomous car involved in an accident and possibly surrounding autonomous vehicles also collecting data. This may not be enough though, as the parties involved will have increased to include manufacturers, AI developers, data providers and more. Automation levels will be heavy factor in these cases. For vehicles with low-level autonomy, the existing liability regime can be applied.

But if vehicles reach level 5 Autonomy, with AI making most driving decisions, liability becomes a complex question.

Parties with potential liability may be at the mercy of their properly drafted contractual liability clauses.

Protecting technology in the field of automated vehicles: All auto companies are trying to achieve the same outcome.

Sensory collecting information is being developed by many different companies at a very rapid pace. Some are investing in SONAR, others LIDAR, almost all are using cameras. Furthermore, once the data is collected, the AI interpretation is done in its own unique way. This has led to some AI handling certain conditions better than others. This makes the technology invaluable, as is shown by the various attempts by individuals to steal plans and create their own start-ups as seen in the Levandowski, Waymo, and Uber case. The industry will be a battlefield for years to come as companies compete to get a competitive edge.

The recent investments in R&D projects and flexible production lines show there is a massive change going on in the automotive industry with regard to eMobilty and autonomous driving technology. The German OEMs and the major suppliers with their investments give Hungary the chance to develop as a new hot spot for these new technologies. The government has played its part through investments and grant incentives. Let us see whether Hungary can compete with other countries and establish itself as the place to invest in these innovative areas.

cms.law

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News///in brief German-Hungarian

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Budapest Business Journal | July 27 – September 6, 2018

German Funds Play Central Role in Commercial Real Estate Investment Market

Eiffel Palace in Budapest.

German institutional investors helped drive the development of Budapestʼs commercial real estate market, only to disappear from the scene in the wake of the financial crisis. Now they are returning, but will they find suitable product?

GARY J. MORRELL

A notable investment deal at the top of the market was the purchase by the Germany-based investor and asset manager, Corpus Sireo, of the landmark 14,500 sqm Eiffel Palace for circa EUR 54 million from the Hungarian National Bank. Corpus Sireo completed its first acquisition

in Budapest in 2016 with the purchase of the Park Atrium office building.

Corpus Sireo had previously concentrated its CEE acquisition strategy on core product in Poland, especially Warsaw, but says it would now also consider purchases in office and retail in Budapest; the city now offers good product with a yield differential according to Corpus Sireo.

“The acquisition of Bank Center by GLL and Allianz in 2006, Allianz’s

purchase of

50%

of Allee in 2008, and more recently the deals of KGAL and Corpus Sireo on Eiffel Square, Park Atrium and Eiffel Palace have been landmark transactions,” comments Benjamin Perez-Ellischewitz, head of capital markets at JLL Hungary.

“All those assets ticked all the requirement criteria of the typical German institutional investors: assets with scale, income security and fantastic addresses and buildings,” he says.

The German and Austrian institutional investors were at the fore-front of the development of the Hungary commercial real estate investment market, the first to emerge in the CEE region. This was a natural geographic expansion of funds from the German-speaking countries, as they took advantage of the opportunities to acquire higher yielding investment grade assets.

However, these funds subsequently shied away from Hungary in the aftermath of the economic crisis, and turned instead towards the Polish and Czech markets that provided more investment opportunities of the required size and quality.

In their absence, the void has been filled

by Hungarian investors who have been purchasing the class “A” investment grade assets that are the traditional targets of the German institutionals.

Sourcing Challenge

With the German funds now returning to the booming Budapest market, the challenge remains sourcing investment grade product of the required size; unlike Hungary, these can be found in, for example, Polish secondary cities.

“German investors played a pivotal role in the development of the real estate market till 2010. Until then, their market share was basically identical to the current market share of the local investors (i.e. circa 40%),” say Perez-Ellischewitz.

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Taking Their Time

“The institutional German investors took their time to re-enter the market, with the majority of their acquisitions starting in 2017, all of which were focused on core offices,” he adds. “The two-closed ended German investors, KGAL & Corpus Sireo, significantly increased their exposure, with the two funds spending

INSIDE VIEW

Actions against tax fraud bring a better world for the good-faith taxpayers too Judit Jancsa-Pék Tax Advisor, Partner

over

HUF 115 million

Benjamin Perez-Ellischewitz “After 2010, their presence fell back drastically and their purchase power was practically replaced by the Hungarian investors. Between 2010 and the purchase of 50% of Allee by Allianz and the market entry of KGAL and Corpus Sireo in 2016, German investors have simply disappeared.”

Approaching 50% of investment acquisitions are being completed by Hungarian funds, which provides more security for the market and makes it less reliant on a positive attitude from foreign investors towards Hungary.

“Budapest has always been an attractive proposition for German capital, but CBRE would argue that it is not quite as important as it once was, primarily due to the increased liquidity within the market provided by the local Hungarian funds,” says Ben Barclay, senior investment consultant at CBRE Hungary.

“In 2006/2007, German investors were responsible for 18% of the transactional volumes, whereas over the last

18 months

they have accounted for just circa 10% of transactions,” he notes.

“However, their presence does help attract other sources of core European capital, as other investors can use their presence as leverage when selling Budapest as an investment destination to their particular investment committees. This is particularly

last year, which included the acquisitions of the Europa Capital Portfolio and Eiffel Palace respectively.”

Over recent years, core German investors have been much more active in Poland and in Czech Republic than in Hungary. Perez-Ellischewitz sees the purchase by Deka Immobilien GmbH of the 116,000 sqm The Park in Prague in 2016 and the acquisition of the 120,000 sqm MLP industrial portfolio in Upper Silesia in 2015 as significant deals.

Likewise, Union Investment bought the 99,000 sqm Magnolia Shopping Center in Wrocław in 2017, the 58,000 sqm Palladium in Prague and the Riviera Center shopping mall in Gdynia, Poland.

One of the major obstacles to further development of the investment market is the limited supply of investment grade product, despite the substantial pipeline in, for example, the office market. Investment consultants representing Hungary at MIPIM, the industry-leading fourday real estate exhibition, conference and networking event at Cannes in the south of France in March cited a key challenge as the low supply of class “A” investment stock in central locations of the required size to meet the requirements of international institutional investors.

“A number of significant transactions are currently under offer, but as of H1, CBRE believe that the most significant transaction to have closed is the acquisition of Premier Outlet Center in Biatorbágy, which saw the return of the first German open ended fund to the market within the cycle, and was supported

by CBRE,” Barclay notes.

Premier Outlet Center

LeitnerLeitner Considering the low direct tax rates on corporations (9%) and on private persons (15%), the reducing social security charges (19.5%) and the reduced sectoral taxes, Hungary has a more and more attractive tax environment, even in a wide international comparison. At the same time, Hungary is continuing to play increasing attention to compliance and introducing new actions – mainly administrative measures – against tax evasion. This, especially during implementation, undeniably triggers significant costs and administrative burden for the stakeholders.

The new era of digitalization, however, enables control solutions that will finally reduce manual administration and the “competitive advantage” of tax fraud too.

Stability and a fair competitive market are surely among the most important factors for good-faith businesses when deciding about the location of their investments and long-term operation.

Germany is the most significant investor (almost 30% of the entire FDI) and the most important foreign trade partner (about 28% of export) for Hungary.

More than 6,000 German companies operate in Hungary, employing a total of more than 300,000 people, according to a survey by the GermanHungarian Chamber of Industry and Commerce (DUIHK). Therefore, German companies’ level of satisfaction and their willingness to invest in Hungary had always been very important to the Hungarian economy.

Online cash registers (from 2013), the Electronic Public Road Trade Control System (“EKAER”, 2015) and from now on the online invoice data reporting (July 2018) are 21st-century solutions, providing maximum control mechanisms for the Hungarian Tax Authority. Their role in the struggle against the black economy, for the reduction of VAT GAP is unimpeachable. Although Hungary proves to be a pioneer in such digital tax control solutions, this fits to the mainstream world tendency supported

by OECD and EU. Considering their efficiency, the spread of such solutions is highly expected in surrounding economies soon. In recognition of its important goals, failures lead to serious penalties: 40% of the product

value for failures in EKAER, HUF 500,000 per invoice in the online invoice data reporting.

However, the fact that such digital tax control systems give an immediate insight to the tax authorities into business transactions requires a change of attitude in business administration: as failures can be visible to the authorities immediately, the internal processes should be developed to ensure correct handling even before the reporting itself. The time of the instant tax audit from distance has already started. Our business information is analyzed by risk assessment software supported by artificial intelligence tools. Being aware of this, the importance of internal control mechanisms, health checks and system analyses significantly increases.

Do not hesitate to ask professional support from renowned advisors in reviewing and improving your corporate processes in the field of taxation.

Keeping in mind the above, nowadays everyone focuses on the implementation of online invoice data reporting in Hungary. Although much software still requires development to meet the new requirements, their default settings generate the need for actions in business too; for example, in consideration of self-billing problems, discounts, invoice correction chains, collective invoice corrections and bonus policies.

Regardless of this, do not forget that preparation won’t end with the proper operation of the invoicing software.

You should also be ready for errors and warning messages from the tax authority. An error management process should be determined and documented, preferably within the invoicing policy of the company.

Considering the consequences, if you are not sure of the perfect operation of your invoicing processes, outsourcing could be the best solution.

LeitnerLeitner is one of the most influential tax consulting, accounting and auditing companies in Central Europe; in Hungary we work in the Hungarian, German and English languages. You may rely on our specialized full-scope tax advisory, tax compliance, invoicing outsourcing, accounting, payroll and audit services.

If you need support not only in Hungary, we take advantage of our renowned international Taxand network covering more than 40 locations, which has been tried and tested in a number of joint projects.

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true with regards to a recent transaction, where a German open ended fund acquired Premier Outlet Center with the support of CBRE. This was the first German open ended fund coming to the market within this cycle, and helps reinforce Budapest as an investment destination for core capital,” Barclay explains.

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Trustworthiness Pays Well: German Law Firms in Hungary With the economy doing well and continuing to attract foreign capital, law firms with a strong German background are also flourishing. While the Hungarian legislative system could be improved regarding predictability, market players tell the Budapest Business Journal, things are moving in a good direction. ÁGNES VINKOVITS

Big law firms with a strong connection to Germany operating in Hungary are expanding, thanks to the economic climate that keeps foreign money flowing into the country and, not least, to their expertise and trustworthy background.

very well,” Sárközy points out. Márton Karika from Bán & Karika Attorneys at Law, a firm that became a member of

Different Mentalities

Yet, being a member of an illustrious group of firms is not enough in itself, nor does it come for free. “First of all, you have to speak the investor’s language

György Zalavári Quandaries are still apparent among all law enforcement bodies, including judges, yet this will become clearer over time, Nádasdy predicts.

As an example, he mentions the change of the Code of Civil Procedure early this year. After this, courts had been rejecting lawyers’ proceedings en masse.

Keeping Up-to-date

“We find the information coming from our international network very useful as it serves a good basis for comparing the effectivity and maturity of the different legal systems.”

The four law firms the BBJ has interviewed mostly deal with a wide range of corporate law cases and all agree that their international network and experience enable them to handle cross-border and more complex cases.

“Our German background is a serious guarantee for German investors in Hungary,” Sándor Sárközy partner at Rödl & Partner says.

György Zalavári, senior partner at ECOVIS shares this view, saying that “it is obvious” that cases that run in several countries at the same time would not form part of their portfolio if they were just a local Hungarian law firm.

“We find the information coming from our international network very useful as it serves a good basis for comparing the effectivity and maturity of the different legal systems,” he says.

familiar with the German law, too, since similar terms might cover different things in Germany and here, he adds.

Zalavári agrees. “Some legal procedures or concepts that are self-evident for businesses here might be outlandish or cover a different content for the management of a foreign company. This could easily lead to difficulties or misconception if the parties or their legal representatives do not realize the situation in time.”

Still, as part of global networks, intercontinental cases also appear in the practices of most of the law firms we asked, imposing an even more complex challenge.

“In such cases, our focus goes beyond pure legal services, as European clients take a different style in communication and general approach than those who, for example, come from the Far East,” Zalavári explains.

Zoltán Nádasdy German ‘act legal’ international network early this year, agrees, adding that it is not the headquarters being in Germany that matters so much, as the perfect language command, which “is an important factor for German-speaking clients”.

However, understanding German mentality and needs, which can differ from the Hungarian in many ways, is also a must, according to Sárközy.

“German thinking is more structured and detailed,” Zoltán Nádasdy, co-head of Noerr’s Budapest office notes. German standards regarding work discipline and effectivity are high, quick and professional administration has to be provided, while clients also have to be permanently updated. All these have to be part of the daily routine for Hungary-based offices too. “As such, foreign clients have a trust in us as well,” Karika says.

But while there are differences in the approach, the similarities are equally, if not more important, Sárközy points out.

“To a German investor, you do not have to explain what employee representation means in a company’s life, since they already know it from their home country and are often used to even stricter regulations.” Still, it is better to be careful with some legal terms and it is useful to be

Although the institutions of the German legal system bear a resemblance to those in Hungary, international legal support has, of course, its special flavors.

“The extended administrative deadlines that sometimes occur are more difficult to explain and make understood, not to mention some inevitable anomalies which are so well-known for the Hungarian lawyers,” Karika says.

According to Sárközy, clients still find the Hungarian legal and investment environment far too bureaucratic but the biggest problem is the frequent changes of the legislative environment which they have to adapt to from time to time.

“They want predictability,” Nádasdy agrees adding that the long period of rapid legislation at the beginning of the decade “was very demanding for everyone”. Although this fast pace has

Márton Karika fortunately eased somewhat, since big legislative changes were made, the judicial practice still has to catch up.

Sándor Sárközy “It is unfortunate, when law enforcement bodies are not prepared for the changes. In this very case, the large number of rejections can be considered as a criticism.” However, as the former regulations were old and obsolete, and so the changes fundamental, it is understandable if the implementation of the new laws become smooth only after some time. “Such anomalies could happen in any other country, too,” Nádasdy notes, “though in Germany, for example, these problems would probably not take that long [to resolve].”

Others also say that a lot of very old regulations, including many that had been inherited even from the era before 1990, had to change.

“After the change of regime, the legal system was not coherent in some cases.

The previous Civil Code, for example, covered the catching of bees, which nowadays does not have to be regulated at such a high level, while it excluded lease contracts as well as franchise agreements,” Karika says.

However, the new regulations are more up-to-date and adapted to the technological and economical challenges, our interviewees agree.

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Budapest Business Journal | July 27 – September 6, 2018

Hands-on German Investors Help Pioneer Hungarian Organic Wine Audi, Mercedes, Siemens, Bosch – all are famous names synonymous with big-money, German industrial investment in Hungary. But far from the high-tech production lines, in small vineyards tucked away in the countryside, a few entrepreneurial Teutonic winemakers are creating their own contribution to local economies while pioneering innovation in vitiand viniculture.

KESTER EDDY

Take away wine, and Villány doesn’t exist: the main street of this little, south-Hungarian town has traditional cellars hugging its flanks, while dotted in and around its outskirts massive, imposing, clearly expensive (and invariably EU-funded) facilities ensure even

It was a step-by-step learning process. “Almost from the beginning I did spontaneous fermentation, I didn’t use yeasts. Later I tried, because people came to me and said you have to use yeasts.”

Unsure, Hummel consulted his by-now friend, local winemaker Gábor Szende.

“Gábor said he did it spontaneously, and his wines are great. So I thought, why should I buy yeast then?”

Incremental Progress

Horst Hummel with some of his Portuguiser grapes. the clinically non-observant understand all life here is focused on the grape and its alcoholic derivatives.

Batthyány utca 4, however, does not look like a winery: rather a rambling old house in need of renovation. Bar the house number, it lacks signage, but since its gates are open, your correspondent enters, tentatively - mainly in expectation of meeting a fearsome, unchained canine sentinel or two.

There is a glimpse of a round, cheery face in the corner to the left: “Come in,” says Horst Hummel, extending a friendly hand: dogs are noticeable for their absence.

Hummel is part Berlin-based lawyer, part Villány-based grape grower and vintner, who first came to these hills overlooking the Croatian border in the fall of 1997.

World-class Terroir

“I ended up here visiting Bock, Gere, Szende, Tiffán, Jekyll, all the famous winemakers, tasting wine and speaking to these guys. I was really impressed. OK, not every wine, but I saw this was a world-

Bio-dynamic Pays Dividends On the slopes of the Villány hills, Ralf Wassmann points to his vines on our right: standing in the midst of a sea of tangled, flowering flora, the scene contrasts sharply with the manicured rows to the left, where the underlying grass is mown tight to the soil.

“It’s true our vineyards are not like a golf course,” says the German, originally from Göttingen, Lower Saxony, “They called this ugly, and they called us lazy when we first arrived.”

“They”, in this instance, were some local winemakers, shocked at the incomers’ seeming indolence and disrespect for local tradition. “They” also fully expected the Wassmann grape harvest to fail, starved of water and nutrients by the myriad of thirsty, competing roots. These Germans

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would have to learn an economic viticulture lesson the hard way.

That was almost 20 years ago, but the harvests did not fail. On the contrary, Wassmann harvests have been remarkably healthy – so much so that locals have sat up and begun asking for advice. “The surrounding plants help keep the water and [maintain] the soil in good condition,” says Susann Hanauer, Wassman’s wife.

The Wassmans (pictured) have gone one “green” stage further than compatriot Horst Hummel, working to strict bio-dynamic principles in their vineyards and winery. “People ask us: ‘Why did you start organic?’ We can’t answer this; my parents weren’t organic freaks,” says Hanauer. “We were born like this.”

class terroir: this was really serious,” he tells the Budapest Business Journal in his half-renovated kitchen.

Six months later, he returned, and with the help of locals, bought seven hectares of vineyards, a small winery and the house of a former mayor: “Nobody had lived here for 15 years. It had a roof, but…. it was a ruin,” he recalls.

It seemed a solid start for his new grapegrowing-cum-winemaking career – except Hummel, then 37, had spent his life thus far fighting for patent rights in court. He had read about wine, and tasted many, but had no practical experience “on the job”.

Inspired by the teachings of Rudolf Steiner, the Austrian philosopher and advocate of “natural” food and agriculture, Hummel was determined to run his new venture on organic principles. This included, for example, absolutely no use of herbicides or artificial fertilizers, at that time novel concepts in Hungary, where the wine sector was in the first years of recovering from four decades of communism.

Such incremental progress on the natural path was boosted greatly around 20062007 as knowledge and equipment became more readily available from Western Europe, where organic wines were becoming increasingly popular. Hummel has worked his vineyards to strict organic standards since 2008, gaining certification one year later.

Meanwhile, Hummel – who at the beginning lacked the knowledge and skills to sell in Hungary – had been building a loyal customer base in Germany, including some high-quality Berlin restaurants where the sommeliers appreciate his wares.

Today, his 7.5 hectares produce between 30,000 – 40,000 bottles annually, of which 85% goes to Germany, from where roughly 20% is then re-exported to destinations including the United Kingdom, USA, France and New Zealand.

He is particularly proud that regional and indigenous varieties, such as Kékfrankos, Portuguiser and Hárslevelű are selling well Western Europe, and has high hopes that a recent first order for Taiwan will result in another growing market.

His investment so far? The winemaker is stumped. A quick calculation in his head, and he reckons “something between EUR 0.5-1 million”. Along with two fulltime employees, seasonal work lifts his job-creation efforts to “perhaps five or six” when averaged over the year. Tiny, certainly, compared to Germany’s bigger investors, but a definite help in any small, rural community.

Hummel spends perhaps 20% of his time in Berlin on legal work, the remainder on his love – wine.

“I like being a lawyer, but you are always following up the interest of your client. In wine, you do the opposite. I produce something that I think is good,” he says. “I follow my own interests, and this is the connection to what I like. This is the big difference.”

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DUIHK: 25 Years of Helping German Companies Invest and Reinvest

BBJ: You mentioned expansion: do companies here simply expand their existing industries or they are entering new fields as well?

DW: Besides expanding their existing capacities, companies are bringing in new functions to Hungary. The Hungarian government is much interested in promoting higher-value aditions to operations – e.g. research and development – and not only assembly lines.

We already see German companies bringing some strategic parts of the supply chain here. If you look at the automotive industry, some of the outlets are quite important elements of the group-level supply chain.

This gives the country a certain level of safety as German carmakers probably won’t simply take subsidiaries from here to somewhere else.

Dirk Wölfer, head of communications at the GermanHungarian Chamber of Commerce and Industry (DUIHK), talks with the Budapest Business Journal about the nature of German Investments in Hungary, the challenges faced and the level of government support.

ZSÓFIA VÉGH

Dirk Wölfer BBJ: Is this a unique phenomenon compared to other countries in the region?

DW: The biggest economies, including Poland, Czech Republic, Slovakia, and Romania, they are also under strong influence from German capital. As in Hungary, in the majority of them Photo: DUIHK/Pelsőczy

BBJ: How has the flow of German investment into Hungary changed in the past years?

Dirk Wölfer: During the past few years there has been a constant flow of German investment into Hungary. It is noteworthy to mention that the majority of this stems from reinvested earnings (i.e. companies that are already here are expanding their existing capacities), while a less significant part comes from completely new investors. Many companies are inquiring with our chamber about investment opportunities but they are, of course, also looking at other countries.

the region as well. If you look at e-mobility, the recent diesel scandals or autonomous driving, German carmakers face several issues that pose certain risks to the industry in Germany, and this potentially could negatively impact the region, and thus Hungary as well.

Dirk Wölfer speaking at the “Central and Eastern Europe: a strong partner of Germany” conference.

reinvested earnings account for the bulk of German FDI. It is a general trend in the region and it also proves that the companies operating here are quite happy with the overall conditions.

Our annual surveys on the business outlook and the overall investment climate also reflect that confidence has improved in the last few years. The general feeling is that this is a good place to invest. However, there is difference between the manufacturing industry, mainly producing here for exports on the one hand, and services, retail, trade, etc. on the other. More than half of total German investments in Hungary went into the manufacturing sector – this ratio is higher compared to other countries in Hungary, where the share of the manufacturing sector is just about one third, while two thirds are directed into services. Within the German FDI, the dominating industry is the automotive sector.

BBJ: Do you think this is going to change? Will we see more growth, say, in the automotive sector?

DW: In general the conditions for automakers are very favorable here, and also in the region. But the automotive industry, especially the German, is facing huge challenges, which could be a risk for

Since we are a member of the global network of German chambers in more than 90 countries, we constantly cooperate with them, but would like to intensify cooperation with regional German chambers even more. We will obviously have a celebratory gala in the autumn, but beyond that we are already preparing for the next year, which most likely will address infrastructure issues as a competitiveness factor for Hungary and the region.

Also, many of the factories here are state of the art, even within the group, and therefore, the CEE-region could weather potential reshuffles in the industry probably better than other locations.

BBJ: They may be bringing more functions here, yet at the same time, isn’t it true that German companies have been dissatisfied with the shortage of proper workforce in Hungary?

RW: The shortage of skilled labor is indeed a problem. It [the problem] has been increasing dramatically in the last two-to-three years. But this is not unique: in Czech Republic or Slovakia the situation is similar or even worse, as our surveys show. The problem is partly a quantitative (i.e. demographic) one, as people leave for the West and less children are born. It is also a question of quality (i.e. of the educational system).

Since little can be done about the

Special Report | 21

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Photo: DUIHK/Pelsőczy

Budapest Business Journal | July 27 – September 6, 2018

From left to right: Prof. Klaus Mangold, Minister of State Levente Magyar and DUIHK president Dale A. Martin, speaking at the the “Central and Eastern Europe: a strong partner of Germany” conference. demographic reasons in the short-term, the state and companies are focusing on education. In the medium- and long-term, automation and robotization could reduce the labor demand, which could in return also help raise the competitiveness of these companies.

BBJ: What is the Chamber doing to try and help improve the situation?

DW: We dedicated the entirety of last year to this problem. We always try and help companies with practical solutions, rather than writing academic studies. We have an educational center that is heavily involved in improving education/training system in Hungary, and also provides special training for member companies based on German standards. This is important for German companies if they want to keep up German standards of their products.

Besides this, we also cooperate with the

Hungarian authorities and chambers regarding legislation of education.

For example, we are organizing tailormade multiannual training courses for automotive companies, or courses for the middle management of retail companies. This training and even the exams are based on German curricula, which is a key benefit for the students as well as for the companies.

We also launched a campaign called “Tech Girls”, supported by our members, aimed at young girls to make technical studies and careers more attractive for them. This year, we have already made the second road show across the country, with great success. Furthermore, we provide platforms for the companies to exchange best practices in the field of HR, and we launched a “Reliable Employer” quality label, which helps companies’ recruiting efforts.

BBJ: You also have discussions with the government. What is your impression: are German companies satisfied? Does the government address their issues suitable?

DW: We have a joint committee with the (former) Ministry of National Economy.

Our experience is that many authorities really try to address the specific problems of the corporate sector, starting from permits to subsidies to education and labor market matters. We see a quite constructive approach from our partners.

We are not dealing with politics, and focus on the day-to-day operation of the companies instead. Not surprisingly, they are happy as long as the numbers and the economic environment is fine.

BBJ: The organization turned 25-years-old this year. How do you celebrate the anniversary?

DW: When we started to prepare for this anniversary, our board suggested that we shouldn’t just party and look back, but also should look forward. Therefore we organized various professional events related to this anniversary including a CEEconference in May (see photos) and other, smaller events focusing on members’ future needs.

Since we are a member of the global network of German chambers in more than 90 countries, we constantly cooperate with them, but

“We always try and help companies with practical solutions, rather than writing academic studies.

We have an educational center that is heavily involved in improving education/training system in Hungary, and also provides special training for member companies based on German standards.

This is important for German companies if they want to keep up German standards of their products.” would like to intensify cooperation with regional German chambers even more. We will obviously have a celebratory gala in the autumn, but beyond that we are already preparing for the next year, which most likely will address infrastructure issues as a competitiveness factor for Hungary and the region.

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Socialite Spending Time on the Island of Freedom I was first told about the Sziget Fesztivál three years ago by a guy who’d escaped from Hungary in 1982, long before the collapse of the communist government.

DAVID HOLZER

The Love Revolution page on the Sziget website is a manifesto for creating a “temporary dream nation, celebrating and sharing the best from cultures and people around the globe. We believe that everyone’s individual freedoms should be respected.”

These are, of course, noble words in these interesting times of ours. On the face of it, it’s inspiring to read them. But click on “Become a Szitizen” and all that happens is you’re sent to a page when you can buy tickets for the festival. (Incidentally, there were still plenty of tickets left when writing this.)

I would have loved to have been able to ask a representative of the festival exactly what the Love Revolution and becoming a Szitizen add up to. Because it looks like the festival’s organizers are simply offering what they think liberal young Europeans expect to see.

But, then again, there is also place called NGO Island where organizations as diverse as Amnesty International, the Hungarian LGBT Alliance, the Migrants’ Help Association of Hungary and Association of All Cameroonians in Hungary are represented. I must admit, I’m curious as to how many Cameroonians there are in this country.

The Music

He’d only been allowed back into the country in recent years. My new friend described Sziget in a way that made it seem to be as much about freedom as music. At that time, I couldn’t imagine how Hungary could have given birth to something like Sziget.

I went to Sziget

in

2015,

when Robbie Williams played. He was on his “Let Me Entertain You” tour and entertain us he did. At times it felt like Sziget was Robbie’s giant living room.

The only problem was that, big as it was, the living room contained 80,000 people and, as my partner is tiny, it was hard to be entertained for too long. So, I put Sziget down on my “things I’ve done in Hungary but don’t want ever to do again” list.

But, as is the way, I’m going again this year. I share a sneaky love of hip-hop with my partner’s daughter and have heard good things about the Kendrick Lamar show, so we’re going for the opening night.

I’m hoping the security people will let me in carrying a stepladder for my partner to scamper up.

A Brief History of Sziget

I found out from my partner’s brother-inlaw that Sziget started out as a festival for Hungarian students and music fans in 1993.

Back then, it was even possible for locals to sneak in through a back fence without paying.

Apparently, Sziget originally helped fill the vacuum left by the end of communist government funding for the formerly vibrant summer festival scene. I still can’t quite get my head round the fact that it was a communist government that created such a flourishing summer festival scene in the first place. Was it strictly folk music, schlager and rousing party anthems all the way?

The sestival was originally called Diáksziget (Student Island). It was popular but made a massive loss. From 1996 to 2001, it was sponsored by Pepsi, and known as Pepsisziget.

It’s been called simply the Sziget Fesztivál, or just Sziget, since 2002 and has a raft of sponsors.

Today, Sziget is a major European festival. Around

50% of visitors

come from outside Hungary. I know people who make the trip from London. There’s

even a Sziget Express party train, complete with DJs, that brings festival obsessives from Amsterdam all the way to Budapest.

Sziget’s popularity with Europeans and the fact that tickets are expensive for many Hungarians – even if they strike me as really good deal – has led to it being criticized here. It has also meant that hip young Hungarians, not that I know too many of these, prefer to go elsewhere.

They’re more likely to go somewhere like a drum and bass festival. I was surprised to discover how popular drum and bass and grime are with Hungarian young folks.

Attempting to woo them might possibly explain the inclusion of UK grime star Stormzy on the Sziget opening night bill.

Sziget Love Revolution

Like most festivals nowadays, Sziget isn’t just about the music.

Comedians and theater groups perform.

There’s a cinema salon. You can stroll past installations and sculptures as well as places to dance. But what’s most intriguing to me is the idea of a Love Revolution and becoming a Szitizen.

Whoever does the booking for Sziget clearly knows their stuff. As I said, Kendrick Lamar and Stormzy are only the best-known names from the world of black music.

On the rock and roll side of things, you’ve got Arctic Monkeys, Liam Gallagher and The Kooks, among others. Poppier acts include Lana Del Rey and Dua Lipa.

And that’s not to mention the host of other people I’ve never heard of, as is only proper for a gentleman of my age.

Even if I only really want to see a couple of the performers, I’m determined to enjoy just being at Sziget.

Remember the guy who first told me about the festival in the first place? When he escaped Hungary, he ended up in Australia. Heavy metal band AC/DC truly represent freedom for him. So, perhaps the best way to understand Sziget is through the music and celebrate the fact that we’re able to enjoy a night or so on the Island of Freedom, even if it may only be temporary.

Tickets for Sziget are still available at www.sziget.com. This year’s festival runs from August 8-15.

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Hárslevelű Pushing Furmint Hard As the frenzy around the Furmint grape goes on unabated, wines from the less-fancied Hárslevelű grape continue to quietly show they are every bit as exciting when it comes to making dry wine. While Furmint is being planted in many parts of the country, or re-planted as it was once widespread before the phylloxera louse wiped it out, Hárslevelű has long had a solid footprint around the land.

ROBERT SMYTH

From the coolish climes of the Eger wine region, Debrői Hárslevelű 2017, from the barely known Tóth és Tóth Szőlőbirtok és Borpince, is a nice combination of the fresh, floral and fruity, while also having some depth, length and complexity with notes of lime peel and sage.

This is remarkable value at just HUF 1,000 a bottle, but the bad news is that it’s not in the shops yet. You can either pick it up for that price at the cellar in Aldebrő (110 km northeast of Budapest), or get them to send it by courier (the delivery fee for up to 30 bottles is HUF 2,800).

While the sub-Mediterranean Villány wine region, deep in the country’s southwest, is synonymous with red wine, Hárslevelű and other white grapes do well in the cooler sub-region of Siklós. It is from here that Berlin lawyer turned Villány

Socialite | 23

Frivolo 2017 (HUF 5,500) was fermented in tanks and the wine was aged in a ceramic egg. Like oak, these vessels enable small amounts of oxygen to be absorbed into the wine during the ageing process, enabling complex aromas and flavors to develop, but without any oaky notes to mask the given wine’s natural attributes. Furmint is so often aged in oak but it doesn’t always have the aromatic attack to stand up to a barrage of wood.

Solely made in the tank, Furmint can ooze zesty freshness but slightly lack structure, though this is not the case with the powerful 1945 2017.

Best Blends

Kreinbacher Birtok, Somló. winemaker, Horst Hummel, has conjured up what is one of the finest examples of so-called “orange wine” – white wine made in the same way as red wine with the grapes kept on the skins during fermentation –in the country.

While orange wines are very much the flavor of the month on the international stage, Hummel is staggered at how few Hungarian white grapes are vinified via skin contact.

‘A Red Among Whites’

“I tried to make a fresh, reductive wine from it, but then I realized that Hárslevelű was made for skin contact. It is a red wine among the whites,” he says.

His Hummel Góré Hárslevelű 2015 (HUF 6,580 from Radovin) from Siklós Városhegy was kept on the skins for a whopping three weeks and was aged for seven months in used Burgundy barrique barrels, then bottled unfined, unfiltered and without added sulfur with the complete yeast. It has intense aromas of crème brûlée, dried apricot, orange peel, coffee, honey and ginger. The concentration continues on the palate without the slightest trace of bitterness from the prolonged skin contact, although the tannins from the maceration bring delicious mouthfeel. It is full-bodied with incredible length and complexity. (For more on Hummel’s story, see Page 19.)

Creative winemaking is also in the air at the bijou Szóló winery from the Tokaj hotspot of Tállya. Tango 2014 (HUF 7,500) is proof

that you can make a huge wine in a weaker vintage. Wines are available in Budapest by contacting the winery (www.szolo.com).

Following fermentation in tanks, this Hárslevelű was aged first in a new barrel and then in a used aszú barrel under what is known as a flor yeast cap for three years. Dry Szamorodni is also aged under flor (Spanish and Portuguese for flower) but the difference here is that the sealed barrel was filled to the top to ward off oxidation. While this wine has some of a dry Szamorodoni’s intense nuttiness, it also has a fresh streak running through it. It was bottled in the winter of 2017 without fining, filtration or any added sulfur. It is a deep yellow in color, nutty and spicy with marmalade notes and an extremely rich texture and supreme length.

While Szóló winemaker Tímea Éless loves Hárslevelű and believes that it has got great potential, Furmint is still “at the heart of it”. She has eschewed the use of oak with several new Furmint releases, and instead gone for steel container (1945, from 2017, no price available yet), porcelain egg (Puro 2016, HUF 14,200) and ceramic egg (Parlando 2017, HUF 8,800) for fermenting and ageing respectively.

It is no coincidence that some of the best dry wines in Tokaj are blends of Furmint and Hárslevelű as these grapes work so well together in Tokaji Aszú, one of the world’s great sweet wines.

Gisella’s Szil-völgy Furmint-Hárslevelű 2016 (HUF 6,650 from Bortársaság) is a case in point. Another example is Holdvölgy’s Vision 2016: 40% Furmint, 40% Hárslevelű, and 20% Kabar, a crossing of Hárslevelű and Bouvier (and one of the permitted Tokaj grapes). Scoring 95 points in this year’s Decanter World Wine Awards (DWWA), it provides further proof that white blends work wonders in the dry category, striking just the right balance between freshness and complexity. No pricing details yet, but it should be out on the market soon.

Going one point higher and thus scooping a Platinum medal at DWWA, Kreinbacher’s Prestige NV (HUF 5,500 from Bortársaság), shows that Furmint, in this case with a little help from that sparkling wine supergrape Chardonnay – the blend being 85% and 15% respectively – has the goods to make it as sparkling wine.

Kreinbacher’s remarkable attention to detail in the making of traditional method sparkling wines in Somló reaped further rewards at the recent Champagne and Sparkling Wine World Championships – with two vintage magnums (the not yet released Classic Brut Magnum 2015 and the Prestige Magnum 2013 – HUF 17,000 from Bortársaság) claiming gold medals and two non-vintage releases obtaining silvers.

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