German car giants and Asian battery kings: a match made in Hungary | Daily News Byte

BERLIN/BUDAPEST, Dec 13 (Reuters) – German carmakers and Asian battery suppliers are coming together in Hungary in a multibillion-dollar marriage to launch their electric ambitions.

Companies are flocking to central Europe, where Viktor Orbán’s government is defying Western wariness of China and offering generous benefits for hosting foreign operations and investing in Hungary’s presumption as a global electric vehicle (EV) hub.

Investments in the Hungarian automotive industry are dominated by three countries – Germany, the champion car manufacturer, plus China and South Korea, the leaders in batteries for electric vehicles, far ahead of their European rivals.

Companies from those three countries provided 29 of the 31 cash subsidies Hungary awarded for major investments in its auto and battery sectors over the past decade, according to a Reuters analysis of government data showing the extent of German, Chinese and Korean convergence there.

“Cathodes, anodes, separators, assembly lines, the entire battery supply chain is here,” said Dirk Wolfer of the German-Hungarian Chamber of Commerce in Budapest. “This is a foot in the door of Europe.”

Recipients of such subsidies included German carmakers BMW ( BMVG.DE ) and Mercedes-Benz ( MBGn.DE ), as well as battery makers such as China’s BID and Korean rival Samsung SDI ( 006400.KS ). The average subsidy level was 15% of the investment.

According to government data, Hungary has received over 14 billion euros ($15 billion) in foreign direct investment in its battery sector alone over the past six years.

Major investments are generally classified as those worth over 5-10 million euros, which vary depending on factors such as job vacancies.

Government incentives and the ability for automakers and battery suppliers to work side-by-side show strong appeal, according to interviews with about 20 industry players and consultants in Germany, Hungary, China and South Korea.

China’s CATL ( 300750.SZ ), the world’s largest maker of EV batteries, and Korean battery giants SK Innovation ( 096770.KS ) and Samsung SDI told Reuters the planned proximity to German carmakers was a key factor in their decisions to invest in Hungary, as and the possibility of getting separators and other components there.

CATL is investing 7.6 billion dollars in the construction of the largest battery factory in Europe in Hungary. This plant and the $2.1 billion BMW plant will be located in the city of Debrecen, which attracts an ecosystem of suppliers, from brake and battery cathode manufacturers to industrial machinery.

Mercedes-Benz is converting its plant in Kecskemet to produce electric cars, while Volkswagen’s ( VOVG_p.DE ) Audi builds cars and electric motors in Djerba.

Such a big business could be a boon for Prime Minister Orban’s government, as the country faces the most difficult economic environment in more than a decade, with inflation above 20%, a slowing economy and EU funds in limbo.

However, Hungary’s electric vehicle project also faces difficult obstacles, according to many industry insiders.

One key concern is the huge demands large battery factories will place on the power grid, which needs to shift from fossil fuels to renewables to meet zero-emissions goals for much of the auto industry, the people said.

A lack of specialized workers in Hungary to work in battery cell production could also slow capacity, they added.

HIPA, the Hungarian foreign ministry agency responsible for attracting investment in areas from batteries and cars to logistics, did not respond to Reuters’ inquiries about the electric vehicle industry.

‘CHINA HAS MADE GOOD STEPS’

Hungary’s welcome to Asian battery makers could raise concerns expressed by Brussels and Berlin about the danger of Europe becoming too dependent on China and other foreign powers, especially in technologies central to the green transition.

For now, though, the need to ramp up production of electric vehicles leaves the European auto industry little choice but to source from Asian players, said Csaba Kilian of the Hungarian Automobile Association.

“I absolutely agree that European manufacturers should have their own sources… but it’s competition, and China has made good strides,” he added. “There is a learning curve.”

Europe should have an EV battery production capacity of 1,200 gigawatt hours (GWh) by 2031 if current plans come to fruition, exceeding expected demand of 875 GWh, Benchmark Mineral Intelligence (BMI) estimates. But of that 1,200 GWh, 44% will be provided by Asian companies with factories in Europe, ahead of domestic firms at 43% and U.S. pioneer Tesla ( TSLA.O ) at 13%, according to a Reuters calculation based on BMI data.

The outlook for Germany’s battery sector has been dampened by record energy there as a result of the loss of Russian gas, according to automotive consultants Boston Consulting Group and Berills Strategi Advisors.

Hungary offers a relatively stable energy system supported by nuclear power, as well as high subsidies and the lowest corporate tax rate in Europe at 9%.

The entire battery supply chain has come into the country, said Ilka von Dahlvig, policy manager at the European Battery Alliance, which was launched by the European Union in 2017 to boost the domestic industry.

“Everything is there. When we look at the forecast for 2025 and 2030, it looks like it will have one of the largest production capacities in Europe,” she added.

“It could be that Hungary is in fact the next big battery manufacturing cluster in Europe.”

Asked about concerns about relying on Asia for technology, an EU official said the bloc – which must approve member state subsidies to investors – has a system in place to cooperate and share information about investments from non-EU countries that could affect security.

The European Commission is currently negotiating with Hungary on the size of the subsidy that the country will offer to CATL for the construction of the factory in Debrecen, the official added.

‘SENDING THE WRONG SIGNAL’

For some Western companies, setting up shop in Hungary is a difficult decision.

German auto supplier Schaeffler said it was on the verge of opening its primary electric motor plant in Hungary in August, rather than Germany, because of the appeal of Hungary’s incentives, but opted for Germany for fear of sending the “wrong signal” to Germans who fear losing jobs abroad.

Other industry players have raised a number of concerns about potential pitfalls for Hungary’s growing auto industry as factories ramp up, including the power grid problem.

Batteries are particularly energy-intensive parts of electric vehicles for production, which require large amounts of energy to dry the material and operate the machine.

Hungary’s energy sources in 2021 consisted of 80% fossil fuels, 14.5% nuclear and 3.6% solar, according to Reuters calculations of data from the BP Statistical Review of World Energy.

The mix presents problems for carmakers who will soon have to demonstrate carbon-free credentials in their supply chains under new German and European legislation.

Hungarian Foreign Minister Peter Szijjarto met in Munich last month with senior executives from BMW and car suppliers including Schaeffler and Knorr-Bremse, before the German carmaker announced it was stepping up its investment in the country.

Topics discussed included plans to improve logistics infrastructure in Hungary and increase the amount of renewable energy used for the electricity grid, according to one of the companies in attendance.

When BMW first announced its plan to build its factory in Debrecen in 2018, the government pledged to spend around 135 billion forints on improving local infrastructure, according to calculations by the German-Hungarian Chamber of Commerce.

As for the battery, CATL told Reuters it was considering developing solar power with local partners in Hungary.

Despite the risks, Alexander Timmer, a partner at Beryls Strategi Advisors in Munich who has worked on several automotive and battery projects in Hungary, said the country presented an attractive package.

“The combination of cost advantages, government subsidies and proximity to car manufacturers’ factories makes Hungary increasingly attractive for battery manufacturers,” he added.

($1 = 397.54 forints; $1 = 0.9483 euros)

Reporting by Viktoria Valderza from Berlin, Gergelj Sakac from Budapest; Additional reporting by Heekiong Yang, Zhang Yang; Editing by Pravin Char

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