200

Machinery industry in Hungary

Sectoral Analysis

Autumn 2005

Executive summary

This analysis studies machinery industry and manufacture of motor 

vehicles,trailers and semi-trailers in Europe and Hungary. The sectors

examined include manufacture of machinery and equipment (DK),

manufacture of electrical machinery and apparatus (DL) and

manufacture of motor-vehicles, trailers and semi-trailers (DM).

The study examines the current European and Hungarian

macroeconomic environment, which is characterised by lower

economic growth than last year and the same is expected with respect

to machinery industry and manufacture of motor-vehicles, trailers and

semi-trailers. The study highlights the world leading position of

European machinery industry, however draws attention to productivity

growth lower than that of competitors and also to challenges coming

from the Far East.

The situation of the Hungarian industry is still characterised by strong

growth. In the first half of 2005 it grew by 6% on average and the

same pace of growth is forecasted on a yearly basis. Though growth

was generated mainly by export, it must be emphasized that domestic

sales also started to increase after stagnation. The main engines of

this growth were manufacture of electrical machinery and apparatus

(DL) and manufacture of motor-vehicles, trailers and semi-trailers

(DM).

The role of the sectors studied is shown by the fact that their

revenues make up 34% of the total industrial revenues, their export

revenues make up nearly 66% of total export revenues and they

employ almost 26% of industrial employees. Similar to other sectors,

concentration in size and location is considerable, its degree is

charecterised by the fact that industrial regions produce 87% of the

production value of the sector.

The study covers sectoral regulations and expected policy measures,

though long term forecast of the latter one is very difficult, due to the

coming elections.

World economic environment seems favourable, sectoral actors are

optimistic about the future of the sector.

 

1. Trends in the European Union and in the region

European machinery industry

Machinery industry producing approximately one thirds of value added

of the industry of the European Union and being world leader in

several respects is facing different future challenges. Rising energy

prices is only one of them.

In terms of production, manufacture of machinery and equipment

(29) and manufacture of electrical equipment n.e.c. (30) sectors

(in 2003 EUR 360 billion and EUR 160 million) are considered world

leaders preceding the USA and Japan. However, in terms of

productivity and developments it considerably lags behind its

competitors. While in 2003 in case of manufacture of machinery and

equipment sector, production value per employee was EUR 91 000 in

Japan, EUR 86 000 in the USA and only EUR 56 000 in the European

Union (Eurostat).

Falling behind is even more serious if we consider that improvement

prospects of long term productivity are worse than in the countries

preceding the EU. Lower productivity, relatively high labour costs,

competition coming from emerging markets and strong euro make

prospects of competitiveness much darker.

To make the situation worse, small and medium-sized enterprises

(SMEs) making up 90% of the companies in the sector have

difficulties in accessing capital for development. Compared to the

other sectors, though R+D rate is high, it is lower than that of

competitors and it is not enough to keep pace with the international

competition either.

In sectors with higher value added mainly the USA and Japan, while in

sectors with lower value added China represent considerable

challenge. 

Industrial production in the region

With respect to the industrial production growth the Czech Republic

definitely beats its neighbours in the region. Strong growth of Slovakia

in 2002 and 2003 seems to have stopped and the same is the case in

Poland with the industrial production growing rapidly in 2003. Hungary

with its balanced but slower growth had robust industrial production

growth in the first quarter of 2005, so it took the second place again

in this respect in the region.

 

Manufacture of machinery and equipment (DK), sector in the EU25

 

In manufacture of machinery and equipment sector in the 15

Member States of the European Union there were 21 315 companies

with more than 20 employees in 2003. The sector provides work

directly to 2.24 million people and manufactured machinery to the

value of EUR 360 billion. This means that the EU is definitely the

biggest manufacturer of machinery in the world outpacing the USA

(278 billion EUR) and Japan (172 billion EUR). These three

manufacturers produce three quarters of machinery and equipment of

world production.

In 2003 the strongly export-oriented sector exported outside the EU

to the value of EU 131 billion (36% of production value). The export

potential of the sector is characterised by having the biggest foreign

trade surplus and that accounts for 43% of trade in machinery and

equipment. (Eurostat)

 Challenges coming from emerging markets are demonstrated by the fact 

that considerable growth was reached only by subsectors requiring high

technological knowledge which are the following: manufacture of

machinery for the production and use of mechanical power,

except aircraft, vehicle and cycle engines (29.1) and

manufacture of other general purpose machinery(29.2).

 

Manufacture ofelectrical machinery and apparatus sector in EU-25

 

Manufacture of electrical machinery and apparatus sector in 2002

provided work to 3.23 billion people in total, employing approximately

11% of industrial employees. The sector is sensitive to trends of the

market more than average, so recession and slowdown have

remarkable effects on the performance of the sector.

Manufacture of radio, television and communication equipment

and apparatus (32), and manufacture of office, accounting and

computing machinery (30) sectors were hardly hit by the recession

in 2001. The latter one has not recovered since then, as it is a fact

that the EU has difficulties in keeping pace with the USA and Japan, as

well as China. The former ones outpace the EU in the field of

development, the latter one has advantage concerning cheaper assembly

capacity.

Manufacture of apparatus (33) which has always had growth

potential, ows its performance to its high-tech character. In this field

labour intensive production of emerging countries is not competitive

yet. These facts support those widespread arguments which claim that

the future of the machinery industry lies in sectors with high value

added, requiring large investments.

 

Car manufacturing sector in the EU25

 

Car manufacturing makes up 3-4 % of the total GDP of the EU, it

employs approximately 1.9 million people, which accounts for 7% of

industrial employees and 1.2% of total employees in the EU.

Companies of ACEA in 2003 produced 16.9 million automobiles on the

line in total. In Europe 20.2 million cars were produced, which makes

up 34% of world production. This performance makes Europe the

biggest car manufacturer in the world, as the USA has only 27%

share, while countries in the Asian region account for 29% of world

production.

With respect to manufacturing of automobiles the dominant position

of Europe is even more powerful; Europe makes up 40% of world

production, followed by Asia (32%) and America (20%).

The situation is different concerning growth prospects, as traditional

car manufacturing countries had moderate growth (see chart 4.) – 2-

2% in the EU and Japan – however it was especially strong in Turkey

(24%), South America (26%) and Asia (18%).

It must be noted that in the Central European region (Poland, the

Czech Republic, Slovakia, Hungary and Slovenia) by the opening of

the new car manufacturing plants and developing the old ones the

most intensive car manufacturing potential was created in Europe and

also in the world with more than 2 million cars/year capacity – certain

estimates forecast 4 million in the near future. Besides the new

factories (PSA, Renault, Toyota, Hyundai) VW group and Suzuki will

increase manufacturing and Renault launched its cheap world

automobile Dacia Logan in Romania. Due to emerging manufacturing

centres the car manufacturing of the world in 2004 increased further –

by nearly 6% - and exceeded 64 million items.

 

2. Evolution of the sector in Hungary

Hungarian industry in the first half of 2005

 

The second quarter of 2005 brought spectacular change in industrial

production. 2% growth in the first quarter of the year was followed by

nearly 10 % increase in the April – June period, thus industrial

production in the first half of the year exceeded the volume of the

same period of the previous year by 6%. Though the July figure

shows some moderation of the growth pace (5%), growth rate in

August was outstanding (12.1%), thus the third quarter will slightly

lag behind the growth of the fourth quarter of the year.

From the data currently available (especially seasonally and working day

adjusted indices on the fixed basis) it seems – though the July

figure shows a slight standstill – that the industrial output recovering

in the second quarter of the year could represent the beginning of a

dynamic upward trend similar to the one in the second quarter of

2003.

Partly due to statistical methodology changes, partly due to the

recovery of the export, the situation became as it was before: export

remained the main source of industrial growth (9.6% growth in the

first quarter). It must be highlighted that in spite of the downward

trend of the domestic sales data, domestic trade was set in motion

and after four years of stagnation it produced 3.2% growth on

average and in August it approached 10% growth pace (compared to

the same period of the previous year).

 

The 14.2% increase in export in the second quarter considering the

export share as well, was driven by machinery industries, however

among the bigger subsectors food industry and oil processing industry

had increased foreign sales. The three machinery sectors making up

almost 70% of the total share of the industrial export increased their

export volume by 12.7% in the January- June period, while in other

segments of processing industry exports grew by 5.8% on average.

After the stagnation of the previous years, recovery of domestic sales

of industry is completely due to the increased domestic trade of

manufacture of electrical machinery and electric power industry,

though in the second quarter among the domestic sales of the most

significant subsectors like food industry, oil processing and metal and

steal industry there was a certain revival compared to the previous

months.

Parallel to the dynamism of the gross output, value added of the

sector considerably increased in the second quarter. The 1.4% rise in

the January – March period was followed by 6.3% increase in the

second quarter, so on the average of the second half of the year,

value added of industry increased by 3.9 % which exceeded the

average of the Hungarian economy. (MET)

 

Labour force and related costs

 

Contrary to the neighbouring countries in Hungary the fall in the

number of industrial employees since 2001 continued in 2005 (2.8%

in the first half of the year). Due to the decreasing number of

employees and the recovering industrial production in the second

quarter, productivity growth based on gross output of the January –

June period reached 9.1%. In accordance with production indices the

most significant progress (productivity growth of 20.1%, 18.8% and

16%) was made in the field of building material industry, manufacture

of electrical machinery and oil processing. (MET).

As the increase in gross value added of the industry slightly fell behind

the output growth, the pace of productivity increase based on value

added (6.9%) slightly fell behind the 7.5% rise in industrial wages in

the first half of the year. Thus in the first half of the year industrial

unit labour costs increased to a limited extent. Considering the fact

that the first six months show strengthening of the forint (compared

to the same period of the previous year), unit labour costs rose by 4%

in euro terms. Since in the Visegrad countries the pace of increasing

unit wage costs exceeded 10% mainly due to the slower industrial

growth, thus relative – cost-based - competitiveness of the Hungarian

industry improved against our competitors. (MET).

 

Export sales of machinery industry and manufacture

of motor-vehicles,trailers and semitrailers

 

Similar to the previous years it was the manufacture of electrical

machinery which made the greatest contribution to the export

growth. The subsector made up 40% of industrial export increased its

export by 16.3% in the first two quarters, due to the fact that the export

of computers as well as radio, television and communication

equipment, which represented the two main product groups, rose by

more than 20%. Manufacture of vehicles export increased by only 7%

in the first half of the year, however it is especially remarkable

considering the fact that registration of new cars in the Europen Union

fell by 2.3% in the first 5 months.(MET)

 

Domestic sales of machinery industry and manufacture

 

Almost only the indices of manufacture of electrical machinery of 

motor-vehicles, trailers and semitrailers decreased. In spite of this fact growth 

of the domestic sales was mainly supported by the trade of this field. The 

subsector’s 32.5% increase in trade in Hungary is definitely due to the 

tripling of sales of electronical parts (MET).

It should be highlighted that the more than 22% growth in car

manufacturing in the first half of the year is due to the increased sales

of suppliers connected to the upswing in the production.

 

Development of order stock in the industry

 

End of June order stock of prominent manufacturing sectors

accounting for more than two thirds of total industrial production and

nearly 90% of exports fell back by 4.3% compared to the 2004 June

level. Contrary to tendencies in the previous years (when growth pace

of export orders usually exceeded that of domestic ones), this year

domestic orders seem to increase (7%) while export orders are less

than last year (-6.5%)

The April-June period changed the trend of export sales and production

of the industry, although statistics of orders can still be considered

moderate, industrial production growth could reach 5-7% on a

yearly basis, according to expectations. If favourable developments

affecting the reviving domestic sales will remain, growth could reach

the maximum of the forecast.

 

With respect to the total order stock among the three machinery

industry sectors, growth was produced in manufacture of machinery

and equipment sector and also in car manufacturing sector, though

the decline of the latter one at the beginning of the year could be

considered as a warning sign. Manufacture of electrical machinery in

May and August compared to the outstanding figures of last year is

understandable as a matter of fact.

 

3. Market structure

Car manufacturing

 Our region, just like China or the Far East is becoming the new

centers of car manufacturing. However, prosperity of manufacturing

did not coincide with market changes. In Europe, which is the main

destination of cars made in Hungary, sales of automobiles increased

moderately. According to ACEA data in the EU-15 sales of new cars

rose by only 2%, in the EU-25 it was 1.6%, while in the New Member

States registration of new cars decreased by 5.3%. Manufacture of

road vehicles shows a brighter picture, where these figures in the

same order are +2.9%, +2.6% and -2%. In the first half of 2005

sales of automobiles decreased by 1%, while in the New Member

States it was lower by 15% compared to the same period of 2004.

(ACEA data)

It is a good news that domestic production was able to grow even

under these circumstances, exceeding 122 thousand items, 82

thousand of which were exported, still mainly to Europe. Supply

industry also made dynamic progress in manufacture of automobiles

and commercial vehicles. Hungarian subsidiaries of worldwide

companies – eg. Bosch, ZF, Sapu, BPW, Knorr-Bremse – include more

and more Hungarian medium-sized companies in the supplier chain.

(Figyelõ)

In the past ten years production volume of the sector grew tenfold,

the export of the sector grew twelvefold and instead of the labour

intensive production, which characterised the beginning of the

nineties, high-tech and technology demanding production became

significant.

Machinery industry 

While there are still reports on establishing new electronical and spare

parts manufacturing plants in Hungary, European players of the

sector have been producing in Asia for years.

Certain sectors of machinery industry based on mass production in

our region could fall on hard times similar to the European textile

industry. A good example could be consumer electronics moved from

Western Europe to the East years ago. Without protective tariffs there

will be no point in manufacturing consumer electronics within half a

decade in the EU. One of its indications could be the fact that Videoton

Holding Inc. closed down its plant producing printed circuits in

August 2005. Relocation of manufacturers considerably worsens the

position of the background industry supplying the base parts. 20%-

30% of base material surplus could be saved by the transport costs,

but high labour costs and the very costly environmental protection

investments compulsory in the EU make several machinery

manufacturer non-competitive. The solution might be taking

advantage of market niche opportunities, eg. household electronics or

automobile parts. (Figyelõ)

EU accession had positive effects as well, as several Western

European medium-sized companies appeared in the domestic

machinery industry, which mainly prefer Western Hungary and due to

their size can be integrated into the economy better than the giants

settled down in the second half of the nineties, primary motivation of

whose was to take advantage of the cheap labour force and tax

concessions. Machinery industry is dominated by the subsidiaries of

the worldwide companies, among the top twenty we can find only Videoton.

Manufacturers of mass products can get real chance only by industrial

protection measures of the EU (consumer protection, IPR), greater

degree of specialisation as well as research and development. In this

respect the situation can be considered favourable, as General

Electric, Electrolux, Sony-Ericsson, Nokia, Flextronics, Elcoteq and

Philips all invest in research significantly.

In case of increasing the severity of the currently premature system

of machinery industry protective tariffs, Hungary would be in a much

favourable position in terms of production as well.

The biggest Asian and especially Chinese manufacturers would spend

a fortune at ’the gates of Europe’ to establish assembly plants which

enabled them to make their machines and appliances legally

European to be able to enter the protected European market. (Figyelõ)

 

The role of the TOP 200 in machinery and manufacture

of motor-vehicles, trailers and semitrailers

 

 The 18 machinery and the 16 car manufacturing companies included in the 

TOP 200 accounted for 77.3 % of the 7.2 thousand billion HUF revenues of 

the sector. The same companies produce 88% of sectoral export and

nearly 86% of the profit before taxes.

 

Manufacture of machinery and manufacture of motor-vehicles, trailers

and semi-trailers sectors together account for nearly 34% of the total

industrial revenues, while export revenues make up 65% of the

industry. The importance of the sector is even greater, as the HUF

5606 billion revenues of companies included make up 46% of the HUF

12000 billion revenues of the TOP 200. Concerning export revenues

the role of the sector is even more important, as the aforementioned

32 companies account for 73.5% the industrial export of the total

TOP200.

 

Geographical concentration is clearly shown by the chart, illustrating

the prevalence of the machinery and manufacture of motor-vehicles,

trailers and semi-trailers sector in Western Hungary. Central Hungary

and the Transdanubia region produce 87% of the total machinery

production of the country.

(DL

Investments and FDI

As there is no more recent and reliable sectoral report on the

development of FDI, we are making calculations and estimates about

its main pillars, which are equity, reinvested earnings and other

capital.

 

 Equity, reinvested earnings and other capital (highlighted sectors) —

2004, 2005 I.quarter estimates

Source: Hungarian National Bank

The development of this capital stock shows a very heterogenous

picure with respect to time. In 2001 manufacture of machinery and

equipment sector (DK) received equity, reinvested earnings and other

capital to the value of EUR 72 million, which reached EUR 140 million

in 2002 and has been decreasing since then.

On the other hand, in manufacture of electrical machinery and

apparatus (DL) sector these types of investments were rising until

2003 reaching EUR 550 million EUR in that year. After a considerable

fall in 2004, in 2005 following the trend in the first part of the year it

can approach the level of 2003. Investments in manufacture of

machinery and equipment (DK) sector came to a standstill in 2002,

but equity, reinvested earnings and other capital have been increasing

since then and may even reach the nearly EUR 1.2 billion level of

2001.

 

4. Regulations and policy measures

Regulations to be taken into consideration

After the EU accession future development of the sector is mainly

determined by the EU directives and recommendations. Environmental

protection directives and the introduction and acceptance of IPR

(intellectual property rights) have already been mentioned. The latter

is primarily to filter counterfeits and imitations coming from rapidly

developing countries.

Most of the measures are taken in the framework of the Lisbon

Strategy for growth and jobs to accelerate reaching the Lisbon goals.

The goals of the program endorsed in July 2005 are making

Europe more attractive in terms of capital and employment, making

knowledge and innovation the engines of growth and take political

measures which enable enterprises to create more and better jobs. So

in outline its targets coincide with the goals of Hungarian

competitiveness policy.

The goal of the program is a horizontal view which recommends

the most favourable policy for each sector by examining them instead

of directing top down and using intervention methods.

The aim includes the introduction of a more relevant, more integrated

and more consensual economic policy by co-ordinating the different

separated policies. To achieve this there are seven cross-sectoral

initiatives:

1. Protection of intellectual property rights (IPR), to simplify patent

process and preventing counterfeits from entering the

market

2. Establishing a working group on the analysis of

competitiveness, energy and environment, aiming at coordinating

these three areas

3. Studying competitiveness and market entry to apply protection

tariff policies more effectively

4. Program on simplifying legal regulations to repeal multiple

and redundant regulations concerning the sectors (European

machinery industry is subject to several similar regulations)

5. improvement of sectoral capacities to decrease the lack of

professionals in certain sectors

6. Managing industrial restructuring to promote structural

adjustment of branches of industry

7. Integrated industrial R&D program, which include promoting

governmental developments which are aimed at terminating

market deficiencies arising from the lack of funds and a unified

innovation monitoring system.

These developments will be started at the end of 2005 and in 2006,

which will significantly affect machinery industry. So will some of the

sector-specific measures of this program which will mainly include

the activity of the ICT workgroup and manufacture of machinery

industry policy dialogue.

 

Environmental regulations

 

Among EU regulations – regarding that machinery industry is

interrelated to other sectors in many respects – several of them

applies to this sector, the most important of these are the following:

93/42/EEC directive concerning safety and quality of

therapeutical equipments

WEEE provision of law concerning the waste of electrical and

electronical appliences

EUP directive, concerning products consuming energy and

gives directives towards their economical development and

environmental effects

RoHS (2002/95/EC) directive prohibiting use of dangerous

materials in manufacturing electrical or electronical appliances

There are almost 90 directives regulating manufacturing of

cars concerning production and operation of cars (e.g. Euro IV)

A set of directives regulates production of ICT equipment starting

from electromagnetic radiation through defining voltage

limits to comformity of equipment

Manufacturing of machinery directive: providing independent

standards

Packaging directive

2000/14/EC directive regulating noise emission of 75 machines

and outdoor equipment,

2002/88/EC,  and the  2004/26/EC directive, regulating exhaust

emission standards of non-road internal combustion engines.

In line with the competitiveness policy, Hungarian economic policy

also aims at introducing horizontal methods similar to the EU.

Elaboration of the overall policy is in process, the strategy to be

prepared will take NDP opportunities into account and also regulations

concerning risk capital. According to the plans establishment of

industrial clusters will be fostered, incubational and business advocacy

will be extended, access to information will be improved as well as

programmes aiming at developing enterpreneurial, language and IT

skills.

5%-points decrease of VAT coming into force in January 2006 is

expected to result in increasing domestic sales, which can have

spillover cyclical effects.

Economic policy will probably be affected by political considerations as

well until the elections, the direction it will take in the second quarter

of the year will depend on the results of the elections.

 

5. Short and long term prospects

Factors affecting the development of the sector

 

Recent bustling growth of the Hungarian industry can be connected to

the short-term unsteadiness of industrial results of the Member

States, Germany first of all. That is why after the revival of the

Hungarian industry in August there might be a likely fall in October.

The expected growth of the industry in 2005 will exceed the 5-

6% forecasted, in a favourable case it could approach 7%. In

2006 growth pace will be relatively unbalanced during the

year, it is expected to be between 7-8 %. In the third quarter

of 2005 Ecostat prosperity index is 48.0%, increased by 2.5

percentage points compared to the previous quarter of the year.

Indicators measuring short-term business expectations of TOP 100 big

companies, domestic SMEs and the population were fluctuating within

a 45-50% band in the past one and a half years. Trend lines of indices

in the first quarters were close to the positive range was rather flat,

then after the loss of confidence in spring it started to rise. All subindices

contributed to the increase of complex confidential index in

a positive way. The greatest increase in confidence was among the

SMEs, though the improvement of confidential indices of the

population and big companies is also remarkable (Ecostat, 2005)

Expectations of market players

Source: Ecostat

 

Expectations of big companies

 

Undiminished optimism of big companies mainly with foreign financial

interests is based on world economic growth and lively foreign

demand. The export-oriented sector which is sensitive to cyclical

changes in the short-term hopes that the global economic

developments will remain and result in improvement of its operating

conditions. After years of stagnation domestic sales of the industry

started to increase, volume of sales permanently rises, especially

domestic sales of big companies are extending. World economic

conditions are favourable all in all, international organisations and

institutions do not expect substantial changes in the following one and

a half years.

 

Expectations of SMEs

According to the aforementioned analysis it seems that the

expectations of the SME sector in October do not reflect the

reviving effect of international prosperity and the dynamic

performance of the domestic economy. Mainly big companies took

advantage of the increase in domestic sales, SMEs rather succeeded in

the services sectors. It is disadvantageous that large number of

enterprises do not work in the field of financial services.

The size structure, the relations and the managing structure of the

SMEs need modernization. To strengthen them one of the most

important steps is ensuring the improvement of finances and

facilitating better access to development and finance funds.

 

6. Sectoral SWOT analysis

Strengths Weaknesses

High technology machinery

industry

Trained workforce

Geographical concentration

(increasing synergies)

Favourable economical

prospects

Concentrated market

structure

Limited access to funds of

small and medium sized

enterprises

Opportunities Threats

Good geographical location

Investments in sectors with

high value added

The sector plays an

important role in the

economic policy of the

European Union

Competition coming from

the emerging markets

Macroeconomic

developments

Standstill of the market of

the European Union

 

Appendix. Statistical data

Top 20 companies in the machinery sector by return from sales , 2004 (Millions of forints)

 

 

 

 


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