VZCZCXRO1857
RR RUEHAG RUEHDF RUEHIK RUEHLZ RUEHROV
DE RUEHUP #0630 1761107
ZNR UUUUU ZZH
R 241107Z JUN 08
FM AMEMBASSY BUDAPEST
TO RUEHC/SECSTATE WASHDC 3102
RUEATRS/DEPT OF TREASURY WASHDC
INFO RUCNMEM/EU MEMBER STATES COLLECTIVE

UNCLAS BUDAPEST 000630 
 
SENSITIVE 
SIPDIS 
 
STATE FOR EUR/NCE AND EB/IFD, AND INR/EC 
TREASURY FOR JEFF BAKER AND LARRY NORTON 
 
E.O. 12958: N/A 
TAGS: PREL EIND EINV HU
SUBJECT: HUNGARY WINS MERCEDES-BENZ AND EU INNOVATION CENTER 
 
SUMMARY 
 
¶1. (U) Hungary is celebrating its recent selection over other 
countries in the region for both a new Daimler car plant and 
the European Institute for Innovation and Technology.  The 
Daimler plant alone is expected to add another 1 to 1.5 
percent to Hungary's GDP.  In total, some USD 1.7 billion 
will be invested in Hungary for both projects in the next few 
years, creating some 2,500 new jobs directly and at least 
10,000 jobs indirectly.  Both are unexpected ) and perhaps 
undeserved ) votes of confidence given the government's 
record on competitiveness.  End Summary. 
 
LUXURY COMES TO HUNGARY 
 
¶2. (U) On June 18, German car company Daimler AG announced 
that it would invest USD 1.24 billion to build a new plant in 
the southern Hungarian city of Kecskemet to manufacture its 
Mercedes-Benz A and B-class vehicles.  With expectations that 
the plant will directly create 2,500 new jobs and a total of 
10,000 to 14,000 jobs through local suppliers, media reports 
predict a 1.0 to 1.5 percent boost to Hungary's GDP.  While 
plant construction is expected to begin next year with an 
estimated first roll-out in 2011 of 100,000 cars annually, a 
memorandum of understanding and details to the agreement have 
yet to be made.  EU approval is also needed and expected to 
take three months.  According to media reports and 
Parliamentary staff, state subsidies amounting to USD 255 
million, (the highest allowed by the EU and offered by all 
other competing countries) will be part of the package. 
Media reports indicate that USD 191 million of the subsidies 
will be in cash. 
 
¶3. (U) Former Minister of Economy Janos Koka believes the 
city's easy access to motorway roads in the region is why it 
was chosen over the three other competing bids from Romania, 
Poland, and Serbia.  The media also cited labor availability, 
successful assembly operations by Audi and Suzuki, and the 
city's long tradition in vocational training as other reasons 
for its competitive advantage. 
 
HUNGARY SCORES OVER POLAND AGAIN 
 
¶4. (U) On the same day, the EU also announced the selection 
of Budapest as the location for the European Institute of 
Innovation and Technology.  As the EU's main center for 
integrating research and development ideas with the business 
community, it will employ a staff of 50 to 60 people and have 
a budget of USD 465 million for 2008-2013.  The institute, 
nick-named "Europe's Brain" by one MFA official, will focus 
first on energy and climate change.  According to press 
reports, Budapest was selected over Wroclaw because Poland 
already has the EU border agency Frontex while Hungary has 
yet to be the home of an EU center. 
 
COMMENT: VICTORY OR DISTRACTION? 
 
¶5. (SBU) While the EU's decision to select Budapest for its 
innovation center was expected, Hungary's late entry to the 
competition as well as its high labor costs and unfavorable 
tax structures make Daimler's choice of Kecskemet a surprise. 
 Although Kecskemet may have indeed been a strategically good 
choice for Daimler given its location, it has already led 
several high-ranking officials to rationalize a questionable 
record on competitiveness.  We are concerned that this recent 
spate of good news may compound the sense of complacency that 
is leading the GoH to delay much needed structural reforms. 
Foley