ICT Hungary: Eastern Europe’s emerging electronics hub

Hong Kong’s exports to Europe continue to show welcome signs of revival, although it may still be too early to tell if a truly broad-based economic recovery is actually taking place across the whole continent. There are, however, particular reasons to be optimistic with regards to Central and Eastern Europe (CEE). With growth of 11%, CEE was the fastest-growing region for Hong Kong’s exports in the first nine months of 2013, considerably outpacing a number of other burgeoning emerging regional markets, notably Latin America and Africa.

While different product sectors may experience different routes to recovery, electronics – Hong Kong’s largest merchandise export earner – has been faring particularly well in CEE. This is especially true in those countries where electronics manufacturing outsourcing clusters are becoming increasingly prominent in light of rising production costs in other more distant production bases, driving a greater need for market proximity and improved inventory management. Capitalising on these demands, Hungary has successfully leveraged its strategic location within the CEE.

Electronics leads Hong Kong’s exports to Hungary

Thanks to Hungary’s thriving high-tech sector, especially in the fields of Information and Communications Technology (ICT), electronics always ranks as number one among Hong Kong’s exports to the country. In the first nine months of 2013, the city’s electronics exports to Hungary grew by 10% to US$898 million.

Hong Kong's exports to major CEE markets in Jan-Sep 2013

Hungary imports a far higher concentration of electronics items from Hong Kong than its neighbours. Source: Census and Statistics Bureau, HKSAR Government

In terms of the Hungarian market, there is a definite contrast between the comparatively small size of the country’s domestic market and its disproportionately large import of Hong Kong electronic parts and components. Not only does the country rank second overall in terms of Hong Kong’s exports to CEE, it also imports a far higher concentration of electronics items than any of its neighbours.

Share of electronics output in CEE

Hungary is the largest electronics producer in the CEE. Source: REED Electronics Research – August 2013

The reason behind this unusually high proportion of electronics imports can easily be discerned by a quick review of the country’s economic history. Since Soviet times, Hungary has specialised in vehicle manufacture, giving it an extensive pedigree in the auto parts and associated electronic components sectors. Currently, electronics manufacturing accounts for more than 20% of Hungary’s total production output, while also providing about 112,000 jobs. Hungary is, undeniably, the largest electronics producer in the CEE, accounting for more than one-quarter of the region’s total electronics output.

A regional electronics hub

Given the country’s industrial heritage and a growing penchant for near shore outsourcing among manufacturers targetting the European market, Hungary has proved itself a magnet for local and foreign investors in the electronics manufacturing sector, in terms of both mass and specialised electronics production. Many world-class electronics companies have now established their regional headquarters, manufacturing facilities and R&D activities in Hungary. This includes a number of global electronics manufacturers, such as Bosch, Electrolux, GE, Philips and Samsung, as well as a number of the world’s leading electronic manufacturing service (EMS) providers, notably Flextronics and Foxconn.

Major electronics companies in Hungary

Hungary is a magnet for local and foreign investors in the electronics manufacturing sector. Source: Hungarian Investment and Trade Agency (HITA)

In addition to its existing manufacturing facilities in the country, Samsung recently invested in a new TV manufacturing plant in Hungary. This has raised the company’s total investment in the country to around 160 billion Hungarian forints (US$730 million). This latest investment is not only a major testimony to the success of the Hungarian electronics industry, it also confirms the production facility as one of Europe’s (and the world’s) largest and most modern sites.

Hong Kong’s electronics exports to Hungary

Hungary’s import of Hong Kong components and parts closely follows the ups and downs of the global electronics industry. Source: Census and Statistics Department, HKSAR Government

Owing to the broad range of its manufacturing base, Hungary’s import of Hong Kong components and parts closely follows the ups and downs of the global electronics industry. Following a big jump in demand in 2004, when the country joined the European Union, Hong Kong’s electronics exports to Hungary benefitted from the significant subsequent upward trend. Although there was a definite drop in 2009, when the global recession set in, Hungary’s orders for Hong Kong’s electronics still recorded a compound annual growth (CAGR) of 16% over the past decade as a whole.

Breakdown between finished electronics and electronics parts and components

Electronic parts and components have always been the most sought-after products among Hong Kong’s exports to Hungary. Source: Census and Statistics Department, HKSAR Government

Electronic parts and components have always been the most sought-after products among Hong Kong’s exports to Hungary, accounting for 71% of Hong Kong’s total exports and 78% of its total electronics exports to the country in January-September 2013. Electronic parts and components also enjoyed 32% year-on-year growth over the same period, compared to the 9% and 10% gains for overall exports and all electronics exports, respectively.

Hong Kong’s electronics exports to Hungary (parts and components)

Transmission/reception apparatus, computers and telephone sets are also among Hong Kong’s leading finished electronics exports to Hungary. Source: Census and Statistics Department, HKSAR Government

Aside from electronic parts and components, transmission/reception apparatus, computers and telephone sets are also among Hong Kong’s leading electronics exports to Hungary, together accounting for nearly 90% of finished electronics exports.

Apart from meeting domestic demand, Hungary also serves as a regional electronics distributor, extending a reliable supply of quality electronics inputs to manufacturers, traders and distributors in a number of neighbouring countries, including Romania and the Ukraine. Its success here rests on a combination of its robust electronics cluster, advanced transport network and its strategic location along the eastern border of the Schengen area (the 26 European countries that have abolished passport and immigration controls at their common borders). As a result, a number of international electronics brands are increasingly distributing products directly from their Hungarian factories to the various nearby regional markets.

ICT continues to shine

Thanks to the continuing growth of the ICT sector, telecommunications equipment and parts have continued to lead Hong Kong’s exports to Hungary. According to the Hungarian Association of Information Technology Companies (IVSZ), the country’s ICT industry – comprising some 20,000 companies – contributes 12% of the country’s GDP, making it the fifth largest such sector in the EU. Demonstrating unrivalled resilience, ICT has been the only industry in Hungary to maintain constant growth in the face of the recent economic turmoil.

In fact, Hungary has now nurtured a number of ICT firms that are well-known and well- regarded beyond its national boundaries. A number of these businesses have now been acquired by multinationals, while many have established close collaborations with local and global brands. This has seen them undertake a number of joint venture projects with their global counterparts in the device manufacturing, carmaking, network operating and several other high-tech sectors.

Well-known Hungarian ICT companies

Hungary has nurtured a number of ICT firms that are well-known and well- regarded beyond its national boundaries. Source: HITA, IVSZ

Hungary’s record-high FDI inflows in 2012 signified the nascent return of foreign investment. With funds destined both for the expansion of existing operations and for new investments, this can be seen as a clear sign of the increasing international faith in Hungary’s electronics sector. Several foreign investors, including Audi, have even adopted the dual training system model, commonly used in Germany, to provide theoretical and practical training for up-and-coming Hungarian workers. These apprenticeship programmes are designed not only to enhance the skills of workers, but also to boost their entrepreneurial capabilities.

These impressive commercial developments, together with a 23 billion Hungarian forints (US$103 million) injection of EU structural funding agreed for the period 2014 and 2020, will provide a huge additional boost to the country’s already burgeoning electronics industry. Of this EU funding, some 60% has been allocated for economic development, an area where ICT and digital inclusion will play crucial roles. Additional government incentives are also to be introduced to nurture a new generation of start-ups, support innovation and foster the export and re-export capacity of Hungarian electronics companies.

Growing with Hungary’s electronics sector

In light of the growing maturity of the Hungarian electronics sector, there may be greater opportunities for Hong Kong companies beyond simply supplying electronic parts and components to Hungarian importers under OEM arrangements. Companies in the city should consider possible future partnerships with Hungarian electronics businesses which are keen to introduce their innovative, practical and reasonably-priced ICT solutions to Asia.

Over recent years, a number of Hungarian ICT companies have begun to actively target the Asian markets, a move principally driven by the slowdown in the European market. A prime example is NNG, a Hungarian company that has taken a global lead in the provision of electronic navigation and GPS systems. In 2009, the company expanded its operations into India and China, later opening a dedicated office on the mainland in order to better serve China’s burgeoning automotive industry.

Related information: Hungary infographics