VZCZCXRO2780
RR RUEHDBU RUEHFL RUEHKW RUEHLA RUEHNP RUEHROV RUEHSR
DE RUEHUP #0380/01 1461432
ZNY CCCCC ZZH
R 261432Z MAY 09
FM AMEMBASSY BUDAPEST
TO RHEHAAA/NATIONAL SECURITY COUNCIL WASHINGTON DC
RUEHC/SECSTATE WASHDC 4191
INFO RUEHZL/EUROPEAN POLITICAL COLLECTIVE
RUEHBJ/AMEMBASSY BEIJING 0107
RUEHCN/AMCONSUL CHENGDU 0001
RUEHGZ/AMCONSUL GUANGZHOU 0017
RUEHGH/AMCONSUL SHANGHAI 0003
RUEHSH/AMCONSUL SHENYANG 0012
RUCPDOC/DEPT OF COMMERCE WASHDC

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. 
 
BUDAPEST 00000380  002.2 OF 004 
 
 
 
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 
 
BUDAPEST 00000380  003.2 OF 004 
 
 
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 
 
BUDAPEST 00000380  004.2 OF 004 
 
 
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