CHINESE COMPANIES SEEK MARKETS IN HUNGARY AND

C O N F I D E N T I A L SECTION 01 OF 04 BUDAPEST 000380

SIPDIS

STATE FOR EUR/CE JLAMORE, INR FOR JWIECKING; NSC FOR
JHOUVENIR

E.O. 12958: DECL: 05/20/2019
TAGS: PREL EINV ETRD ECON CHN HU
SUBJECT: CHINESE COMPANIES SEEK MARKETS IN HUNGARY AND
CENTRAL EUROPE

REF: 07 BUDAPEST 01593

BUDAPEST 00000380 001.2 OF 004


Classified By: ACTING POL/ECON COUNSELOR STEVEN WESTON FOR REASONS 1.4(
b) AND (d)


1. (SBU) Summary. Despite the sharp economic downturn in
Hungary this year, Chinese trade missions, economic
development conferences, and other trade and
investment-focused exchanges between China and Hungary are
continuing at a brisk pace. As the bilateral economic
relationship between the countries matures, Chinese companies
are increasingly looking at Hungary as a place to invest,
instead of merely as an export market. Hungarian officials
believe this is a result of the Chinese Government's "go
global" campaign of economic expansion, and are trying to
capitalize on it by promoting Hungary as China's "gateway to
Europe." This approach not only encourages the exports of
finished Chinese products, but also promotes Chinese
investment in Hungary, particularly in distribution and
logistics projects, as well as in light manufacturing to
enable products to qualify for "made in the EU" designation.


2. (SBU) A number of current and planned investment projects
appear to have been developed with this goal in mind,
including a rail transfer station and planned industrial park
near the border with Ukraine, and a cargo airport linked to a
planned industrial park near the Austrian border. The global
economic crisis appears to be slowing the pace of Chinese
investment, however, while at the same time, shrinking export
markets for Chinese products globally is causing many Chinese
firms to re-focus on developing export markets in Hungary and
Central Europe. End summary.

FROM EXPORTS TO INVESTMENT


3. (SBU) Until the past few years, Chinese interest in
Hungary was primarily as a market for exports. In 2008,
Chinese imports into Hungary totaled Euro 4.2 billion,
accounting for approximately 5.7 percent of all Hungarian
imports, and making China one of Hungary's largest importers
outside of the EU. According to Geza Vass, Director General
of the Ministry of Economy and Development, as the bilateral
economic relationship matures, however, China is increasingly
looking at Hungary as a potential destination for direct
investment. Tibor Dessewffy of the Demos Hungary Foundation
points to the visit of former Hungarian Prime Minister
Medgyessy to China in 2002 as beginning the period of
ccelerated economic cooperation between the two countries.
In recent years, Chinese investors have established a number
of manufacturing facilities in Hungary, primarily in the
areas of consumer electronics and telecommunications. The
Ministry of Economy estimates that the total stock of Chinese
direct investment in Hungary is approximately USD 1 billion
(although other reports suggest the amount is considerably
lower, around USD 600-800 million). By comparison, estimated
U.S. direct investment in Hungary since 1989 is estimated at
USD 9 billion.


4. (C) Agnes Henter, Director for Investment Projects for the
Investment and Trade Development Agency of Hungary (ITDH)
notes, however, that the modest investment figure does not
accurately reflect the level of interest of Chinese investors
in Hungary. She describes Chinese companies as
"aggressively" looking at Hungary, and notes that there have
been a large number of Chinese business groups visiting
Hungary recently, most notably a delegation of 42 Chinese
companies involved in the alternative energy, components, and
ICT sectors visiting Hungary in March. Henter also noted
that the Chinese government is fully sponsoring a visit to
China this month of Hungarian companies and government
officials.


5. (C) Erika Pinter, Director of the Ministry of Economy's
Asia and Africa Division, believes that the high level of
interest from Chinese companies is linked to Beijing's "Go
Global" foreign trade and investment campaign, but points out
that most trade missions and company visits tend to be from
specific provinces or regions in China. Director General
Vass believes that economic forces are more of a driver of
Chinese company actions than overarching coordination from
the central government in Beijing.

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HUNGARY AS CHINA'S GATEWAY TO EUROPE


6. (SBU) Hungary is actively marketing itself to potential
Chinese investors as a "gateway" to Central and Eastern
Europe, making the case that through Hungary, Chinese
investors and exporters can serve the Central European
market, including non-EU members like Ukraine and the
Balkans, as well as Hungary's developed neighbors like
Austria. Increasing economic ties with China was a priority
of former Prime Minister Gyurscany. In addition to a number
of senior level visits, Gyurscany created a position within
his office to manage Hungarian-Chinese economic relations,
filled by Andras Huszty, who continues in this role in the
current government. In addition, former Finance Minister
Janos Veres has just been appointed to a relatively undefined
position responsible for "Eastern relations," which will
include relations with Ukraine, Russia and China.


7. (U) In marketing Hungary to the Chinese, GOH officials
point to the fact that Hungary's Chinese population is the
largest in the region - large enough to support eight Chinese
language newspapers and other publications, as well as a
bilingual Hungarian-Chinese school. (Note: There are no
reliable statistics available on the number of Chinese
citizens living in Hungary, although the Chinese Embassy
Political Counselor told an Embassy Officer they estimate the
number to be around 20,000. Newspapers also report the
number to be in the "tens of thousands." End note.)
Hungarian investment promotion officials also market Hungary
as China's largest trading partner in Central and Eastern
Europe, making the country well-positioned to help Chinese
companies enter and expand elsewhere into the European
market.


8. (SBU) ITDH's Henter noted the distance from China often
causes Chinese companies to look for local partners or joint
venture opportunities as opposed to pursuing greenfield
investments (although Director General Vass from the Economy
Ministry notes that Chinese involvement in greenfield
investments is also growing). Recently released M&A
statistics show that Chinese companies ranked second in terms
of the number of M&A deals in 2008, with 1,209, although many
of these likely involved very small Chinese companies (see
below). (Note: The U.S. ranked fifth with 526 M&A
transactions. End note).


9. (SBU) Ministry of Economy State Secretary Laszlo Varju
notes that Hungary is also seeking to become a tourist
destination for Chinese vacationers, a goal facilitated by
Hainan Airline's direct flights between Beijing and Budapest.
Hungary's tourism association estimates that in 2008, 32,000
Chinese tourists spent 63,000 nights at commercial lodgings
in Hungary, an increase of 13 percent over the previous year.



10. (SBU) Varju also spoke of growing technological and
scientific cooperation between Hungary and China, citing as
examples relationships between the Budapest and Miskolc
Universities of Technical Sciences with Shenzhen University,
as well as a joint Hungarian-Chinese research lab at
Hungary's Eotvos Lorand University. USFCS also reports
ongoing Hungarian-Chinese research cooperation at the Miskolc
nanotechnology research center, as well as ongoing biotech
research cooperation in Szeged.

IMPACT OF THE GLOBAL ECONOMIC CRISIS


11. (SBU) Despite the global economic crisis, delegations of
Chinese companies continue to visit Hungary "on a monthly
basis." In the last six weeks alone, Hungary hosted a "China
High Tech Fair" (featuring 60 companies from Shenzhen),a
"China Brands Business Forum," and a trade mission comprised
of 42 Chinese companies focusing on the alternative energy,
components and ICT industries. This month, the Chinese
government is also sponsoring a visit to China of Hungarian
companies and trade and investment promotion officials.
Despite this high level of activity, however, Vass notes that
the global economic crisis is having an impact on potential
Chinese investors in two ways. First, planned investment
projects have been postponed as companies adopt a "wait and

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see" approach, waiting for the economic situation to improve
before proceeding with significant investments. Second, Vass
notes shrinking global export markets has caused many Chinese
companies to once again view Hungary primarily as a
destination for finished Chinese exports.


12. (U) In addition, like other firms in Hungary, Chinese
manufacturers in Hungary are coping with falling demand
resulting from the global downturn. Chinese company Hisense
announced in January it is shutting down its LCD assembly
unit in Hungary, while maintaining its sales, financial and
repair center.

CHINESE COMPANIES IN HUNGARY


13. (U) There are an estimated 5,000 Chinese-owned businesses
operating in Hungary, although all but a few are small
businesses - mainly restaurants, clothing stores, and small
grocery stores. In addition to Hisense, major Chinese
manufacturers present here include telecom companies Huawei
and ZTE; and electronics companies Lenovo, Panda Electronics
Group, TCL, Skyworth, and Xoceco (Xiamen Overseas Chinese
Electronic Co). Bank of China maintains its only branch in
Central Europe in Hungary, helping to finance Chinese
companies in the region.


14. (U) The "China Brand Trade Center" (CBTC) project in
Budapest (reftel),announced during former Prime Minister
Gyurcsany's 2007 visit to China, continues to develop slowly.
The project is located within and adjacent to the existing
"Asia Center" retail and wholesale trade outlet. Although
advertised to provide office and showroom space for up to 600
Chinese firms looking to market their brands to the European
market, CBTC Sales Director Klara Zombory notes that the
center has initial capacity for about 350 companies. Zombory
told us that a "roadshow" is underway in China to recruit
companies to join the CBTC, and tha recruitment efforts are
headed by a former official from the Chinese Embassy to
Budapest. The CBTC plans to open once it has 100 companies
in place, which Zombory expects will occur within 6-12
months.


15. (SBU) Vass admitted that interest on the part of Chinese
companies to establish a presence in the CBTC is below
expectations. He suspects that many companies may not feel
it is desirable to have offices and showrooms co-located with
direct competitors. CBTC's Zombory also notes that there is
a challenge overcoming Hungarian perceptions that Chinese
products are of poor quality, a perception she believes is
perpetuated by the large number of inexpensive Chinese
clothing shops here.

MAJOR PROJECTS CURRENTLY IN DEVELOPMENT


16. (SBU) A large project currently under development that
has attracted Chinese investment interest is the "Zahony
Development Project," which involves an intermodal logistics
center, an industrial park network, and a "standard to
wide-guage railway interchange" at Hungary's Schengen border
with Ukraine. Hungarian government officials indicate that
Chinese investors are interested in setting up an industrial
park for Chinese companies at this site. The major advantage
of this project is the link to the so-called "Europe-Far East
Land Bridge," which seeks to offer a cheaper alternative to
ocean transport for cargo shipments from China to Central
Europe, by utilizing the China railway, the Transsiberian
Railway, and the European rail network. Project developers
boast that the network can cut transit times in half as
compared to ocean routes from China to Europe, at
significantly reduced costs. The project requires the
transferring of containers from a standard gauge to a wide
gauge railway car at the Chinese/Russian broker, and back
again at the border between Ukraine and Hungary. The project
developers note they have secured special customs and tariff
arrangements to allow "block trains" to move in both
directions non-stop. The project is supported by the GOH as
part of its national development plan, and receives EU
funding for infrastructure development.


17. (SBU) Another major project is the development of a cargo
airport and industrial park near the Western Hungarian town

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of Szombathely, approximately 8 miles from the Austrian
border. Runways totaling 3.5 kilometers are planned for the
airport, which would have direct access to Austrian and
Hungarian rail lines. Raytheon is currently exploring
possible involvement in the project, known as "SIA-Port."
The project is expected to be completed within the next five
years, and is likely to include an industrial park dedicated
for Chinese companies. ITDH's Henter noted that unlike
exporters, Chinese manufacturing companies tend to prefer to
be co-located with other Chinese companies, allowing for the
sharing of services and the development of sub-supplier
relationships.

COMMENT


18. (C) For years, the Chinese commercial presence in Hungary
was equated with Chinese fast food outlets,
individually-owned shops selling inexpensive Chinese
clothing, and stands in crowded flea markets. Although all
are still present here, Hungary's commercial relationship
with China has evolved considerably, and China is now both a
major trading partner and a highly-sought foreign investor.
Economy Ministry Director General Vass pointed out that
Chinese companies are "good investment partners," and that
there have been "no labor problems" associated with Chinese
owned factories in Hungary. As long as the global downturn
continues to shrink traditional Chinese export markets, we
expect that Chinese companies will continue to aggressively
seek new export opportunities in Hungary. If this strategy
involves direct investment and some local job creation, the
Hungarians will likely be eager supporters.
Levine