Following the automotive industry’s “build where you sell” adage, BMW is building its first new factory in Europe since 2005.
The German carmaker’s planned €1 billion ($1.17 billion) investment in a new factory in Hungary is symptomatic of the widening protectionism driving manufacturers to rethink their supply chains. The trade dispute between China and the U.S. is already impacting exports between those two countries. BMW has stopped exporting its X3 off-roader to Asia from a plant in the U.S., as it can avoid tariffs by making the vehicle in China. The company stopped short of confirming whether its decision to build a Hungarian plant was a reaction to increasing trade tensions.
As part of its “build where you sell” strategy, BMW has already scaled up its production capacity elsewhere in continental Europe, expanding its business with contract manufacturers VDL Nedcar in the Netherlands and Magna in Austria. Outside Europe, the Munich-based carmaker plans to open a new factory in Mexico next year in addition to expanding production in China.
BMW said the Hungarian factory will help it expand manufacturing in Europe, where it sells 45% of its cars. Both Daimler and Audi already have car factories in Hungary. As Reuters reports, Audi recently announced investments in serial production of electric engines there. Oliver Zipse, BMW AG Board Member for Production also touched on this, stating, “Our new plant in Hungary will also be able to manufacture both combustion and electrified BMW models”.
The automotive industry is becoming an increasingly important segment of the Hungarian economy. Car manufacturing currently accounts for about a third of its exports. With BMW’s presence in the country, that proportion could rise to 40% or more, according to Peter Virovacz, an analyst at ING in Budapest. Noting that the project will bring foreign investment to a less developed part of Hungary, as well as growth to the Hungarian economy, Virovacz cautioned that Hungary’s increased dependence on the car industry will heighten its exposure to a slump in car sales in the event of an economic downturn.
However, in Virovacz’s estimate, “The biggest question mark regarding this investment will be the Hungarian labour market ... it is already very hard to find 1,000 employees, let alone in 2 years from now.” Like other countries in Central and Eastern Europe, Hungary has been struggling with a shortage in human capital, partly due to emigration to the west, which offers higher wages.
The new BMW plant in Hungary will be near the city of Debrecen, about 230 kilometres east of Budapest. It will have a production capacity of 150,000 cars.