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Car Industry in Hungary Essay

On May 1st, 2004 the European Union (EU) has undergone its largest enlargement ever to include ten new members: Cyprus, the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Malta, Poland, the Slovak Republic and Slovenia. Although the enlargement has produced arguably the largest trading bloc of the world, it has also generated debates and concerns of various natures. Perhaps the biggest debate surrounds the question whether the new lower per capita income level nations would pose as a beneficial or detrimental addition to the ‘old’ EU-15 states.

The debate touches upon the issues of social competition, mass relocation or migration of industries, and many others. The automotive industry is one of the largest of all European industries. The most recent sector features report issued by the European Monitoring Centre on Change (EMCC) addresses it as “a key indicator of economic growth and a major contributor to the gross domestic product (GDP) of several Member States and the EU” (EMCC, 2004)

Indeed, the automotive industry is a good indicator of the industrial change in the enlarged Europe and, more specifically, the Central Europe, where PSA Peugeot Citroen, Fiat, Volkswagen and others powerful car-producers have already established or plan to establish large assembly plants. Factors

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which attract companies from Western Europe to countries like Poland, Hungary, Czech Republic and Slovakia are obvious: geographic proximity and cheap labour force. Thus, hourly wage rates of well-educated personnel in central European countries range from a tenth to a quarter of the EU-15 average (The Economist Global Agenda, 2004).

As a result, investments coming from Western European automotive companies sky-rocketed development of the automotive industry in Central Europe: “In recent years, several new eastern European Member States, particularly Hungary, the Czech Republic and Poland, have emerged as important producers. They currently account for about 20% of overall EU imports in this sector” (EMCC, 2004). Furthermore, automotive industry of the new member countries is projected to grow faster over the next few decades than in the older EU-15 states.

1. 2. Statement of the Hypothesis The current situation poses several exceptionally interesting economic problems, particularly how automotive industry of the new EU nations will cope with the competitive environment provided by automotive industry of the old EU member states. Amidst all the concerns of the latest EU enlargement mentioned above, the present project is aimed to examine the challenges and opportunities for Europe’s key industry in one of the newly added member – Hungary.

The major hypothesis is that Hungary, similarly to other new EU member nations, is not only a base for low-cost export, but also a great potential market for the car manufacturers. 1. 3. Research Objectives The key objective of the present study is to reveal the degree of coincidence between the actual course of developments in the automotive industry of Hungary in view of the recent enlargement of the EU and perceived expectations of car manufacturers, dealers, and customers in this new EU member, and, taking into consideration the findings, recommend strategic management practices for car dealers in Hungary

In order to achieve the key objective the following specific objectives should be achieved: • To identify the challenges and opportunities the 10 new EU members face. • To reveal the key issues in the enlargement of the EU in relation to the automotive industry in Hungary. • To reveal the key success factors (KSFs) for Hungarian automotive industry. To find out how the stakeholders in Hungary – with a special focus on the manufacturers, distributors and potential buyers – perceive the perspectives of Hungarian automotive industry in view of the latest accession of Hungary into EU.

1. 4. Significance of the Study Premising from the assumption that Hungary and other new EU member states have great potential for development of the automotive industry, the present research will help clarify the key success factors and challenges Hungarian automotive industry faces nowadays and, depending upon the findings, determine the most effective strategic management practices for both car-dealers and car-producers.

Empirical part of the research will help to find out whether the subjective perception of the recent developments in the Hungarian automotive industry among three groups of respondents – manufacturers, distributors and potential buyers – is in line with the real state of affairs in the industry. 1. 5. Research Design and Methodology The world of business and management is far too complex to be understood with the help of some definite ‘laws’: such laws can rather be applied to physical and chemical sciences (Saunders et.

al. , 2003). Therefore, the present study tends to adopt interpretivist perspective assuming the world of business is not objective and exterior, but are socially constructed and given meaning by people (Wheeler, 2003). The business situation surrounding the automotive industry is not only complex: it is also unstable and constantly changing. The changing business environment post-EU enlargement is another concern that supports an interpretivist approach.

The same situation may, additionally, be interpreted differently by different stakeholders within the industry at different times – a phenomenon best termed as social constructionism. All these arguments and a few more not mentioned above would strongly support the philosophy chosen for the study. 1. 5. 1 Research Approach The inductive approach (also known as the qualitative approach) will be employed to support the interpretivist philosophy adopted by the author of this study. The inductive approach helps look past mere cause-effect links and understand the human interpretation of variables in question.

The result of the analysis of data obtained through this approach may be formulation of a theory of some sort, and having “…gone about the production of [the] theory in an inductive way [the] theory would follow data rather than vice versa…” (Saunders et al. , 2003). The inductive approach may also help reveal alternative explanations of established relationships (ones which might have been identified through the deductive method). The flexible structure of interpretivist research methodology permits necessary changes of research emphasis as the research progresses.

While the inductive approach is the most suitable for the present study, it will be prudent to adopt some of the rigidity of the deductive approach, especially whilst dealing with data collection from some the stakeholders of the industry, namely the customers. Due to the sear size of the ‘population’, it would be ideal to adopt some of the data collection method, such as sampling, typically advocated by the deductive end of the continuum. Hence, whilst designing the research strategy, this study will make use of the advantage of both inductive and deductive approach in order to achieve more reliable outcomes.

1. 5. 2. Research Strategies and Methods to be adopted The Research Methods guide developed by George Wheeler lists the following strategies within the framework of the interpretivist methodology: • Action Research – ideal for a constantly changing social world, and where the researcher and the research itself are part of the change. • Case Studies – ideal for extensive examination of a single instance, and to understand the dynamics present within a single setting. • Ethnography – ideal for understanding observed patterns of human activity; originated from anthropology.

• Grounded Theory – ideally used to describe the world and the perception of the individual(s) under study • Hermeneutics – originally used for interpreting ancient scripture, has been later been formalised and broadened in scope. • Participative Enquiry – ideally used for ‘research with people’ rather than ‘research on people’. (Wheeler, 2003). Since the study basically revolves around a strategic management perspective, the ideal strategy for the research maybe the action research strategy, the purpose of which is “…not just to describe, understand and explain the world but also to change it” (Coghlan and Brannick 2001).

However, upon a thorough examination the case study strategy seems more suitable for the purposes of present study because “…when ‘how’ and ‘why’ questions are asked, a case study method as a research strategy is favoured. [The case study method] useful when the phenomenon under investigation is difficult to study outside its natural setting and also when the concepts and variables under study are difficult to quantify” (Ghauri and Gronhaug, 2002).

Therefore, the case study strategy a natural choice – there will be several instances where ‘how’ and ‘why’ questions need to be answered within the selected 8-step strategic decision-making process model. Credibility of research – especially reliability and validity – is a key issue that needs to be addressed in adopting the research strategies. Reliability can be assessed by answering the following three questions (Easterby-Smith et al. , 2002): Validity, on the other hand, would ensure that the findings are really what they appear to be, such that the relationship between two variables is a causal relationship.

1. 5. 3. Time Horizon and Data Collection Methods Having decided upon the research strategies, the next step is to collect the data. However, due to time constraints, typical of any research project aimed to fulfil an academic course requirement, the time horizon for the present research is cross-sectional. Consequently, majority of data pull used in the research will be retrieved from secondary sources of the following types: • Documentary – written materials or non-written (media-based) materials • Multiple Source – area based (e. g. journal, country) or time series based

• Survey – censuses, continuous & regular survey, or ad-hoc surveys Information regarding EU laws, regulations, technology past/present/future strategies of various companies, production data, consumer demand data, and other vital information (required for furthering & supporting the analysis of findings from primary data) are the typical kinds of secondary data that would be used in the study. These types of secondary information is normally available from books, journal articles, newspapers & magazines, conference papers, reports, archives, films, television, electronic database, internet, etc.

Primary data collection is the key concern for any research project. Typically, for a research project designed to fulfil the requirements of an academic course, primary data collection becomes a key time management concern. But, this should not bog down or discredit the requirements of the data for the research. The necessity of primary data often arises due to ‘missing’ data/information within the secondary data source. Typical primary data collection methods are: observation, conversations, interviews (structured, semi-structure, unstructured, focus group, telephone, or online), and questionnaires.

Due to the nature of the research, primary data collection would be limited to data obtained from questionnaires: • Key personnel in manufacturing companies – data will be obtained through self-distributed questionnaires. • Key personnel in dealerships – data collection method will be similar to that of above. • Current and Potential Customers – data collection method will be similar to that of above. The expected outcome of the primary research is that there is a significant discord between the expectations of manufacturers, dealers, and customers and actual developments and trends in Hungarian automotive industry.

1. 5. 4. Analysis of Data and Interpretation of Findings The primary data obtained through the questionnaires will be interpreted both qualitatively and quantitatively. Quantitative analysis is descriptive in nature, summarising data in the form of charts, tables, percentages and averages. In the event that a survey is carried out, the data obtained would mostly be categorical, hence is likely to be ranked across a scale. This data might be represented in terms of frequency, central tendency or dispersion.

By contrast, qualitative analysis of data provides more eloquent source for interpretation. This will involve categorisation, ‘unitising’ data, recognising relationships and developing categories to facilitate it, and testing the hypotheses to reach conclusion. 1. 6. Literature Review The literature review section aims to provide an overview of the most useful theoretical works on the problems of automotive industry in Europe in general and new EU members and Hungary in particular. Any complicated problem in general is rather difficult to explain in thorough detail.

Such complicated problem as automotive industry in general and its perspectives in Hungary after states’ accession to the EU requires detail evaluation of the related literature in a number of paradigms, i. e. : economy, economic geography, political science, social science etc. Moreover, until now there is no general source providing a detailed prognosis of Hungarian automotive industry profile within future five0ten years. As a result, this problem could only be evaluated through detailed analyses of related data in many aspects.

However, there are plenty of sources that allow a researcher to build a general framework of the study through evaluation of past experience of domestic car industry in Hungary (1), general tendencies in European and global automotive industries during recent decade (2), major competitors of Hungary for foreign investments of car manufacturers (3), etc. Books There is a number of books that implicitly relate to the research problem. Most of them provide a general theory of economy and economic geography, the theoretical fundament for analysis of roots and causes of plants transferring etc.

Recent work “Location of manufacturing FDI in Hungary: How important are business-to-business relationships” by Hungarian economist G. Bekes (2004) is dedicated to the general analysis of Hungarian economic potential and its attractiveness to investors in a global environment. The author also evaluates the idea of plants relocation in Hungary and calculates more probable future transfers in an early data. Another book “Location determinants of multinational firms within Poland” by A. Cieslik (2003) develops the problem of economic investments in polish economy.

Nevertheless, as Polish and Hungarian economies exist now in relatively comparable conditions the work is important to develop the general principles of financial investments and major tendencies in this process for the CEE countries. A comprehensive guide “How different is eastern Europe” (2003), serves an ultimate research for general economic, political, social etc. profiles of the post-communist states of the region. The authors provide all necessary comparisons between the states; examine their financial attractiveness, safety of investments etc.

While previous research is dedicated to theoretical economic analysis of CEE states attractiveness, another research “Overseas investments and firms exports” by K. Head, and J. Ries (2003) is targeted to evaluate the general global tendencies in industry’s relocation, particularly, for the Eastern Europe. The authors also examine Hungarian economic profile and its attractiveness for Western and Eastern investors dealing in different sectors, also including automotive industry. Journals and Articles

A number of recent articles reflect different aspects of the examining problem and provide a thorough analysis of its past, present and future states. D. Brownstone, and K. Train in their article “Forecasting new product penetration with flexible substitution patterns” (1999) develop a strategy for analysis and forecasting of new products penetration on the new markets. The authors built a comprehensive model for prognosis and analyze its validity for different economic systems. C. Coughlin, and E.

Segev in their paper “Locational determinants of new foreign owned manufacturing plants” (2000) analyze Eastern Europe from the point of view of potential investors as well as provide necessary forecasting for plants relocation in Europe in an early date. They observe general trends in domestic economies of the CEE countries, their attractiveness for investors, advantages and disadvantages of relocation of the plants to these states. Another approach to evaluate the general principles and applied tactics of plants’ locations and relocations in provided in the article “A tractable approach to the firm location decision problem” by O.

Figueiredo and associates (2004). The researches have out their aim to develop the most reliable and universal formula for prognosis of industry’s locations. As some articles develop the general formula applicable to the analysis of probability of plants location in a certain country, the other researches focus on the countries’ economic and geographical profiles as crucial criteria for investors in car industry. The article “Increasing returns and economic geography” by P.

Krugman (1991) analyze the CEE region’s attractiveness for investors according to following criteria: their geographic location, economic ties, specificity of economic development, etc. The article also provides comparative analyses of the domestic economies in the region. Web References Internet references were also critical for the present research as they always provide the most recent data concerning the problem. Besides, access to the databases of the European and international car manufacturers provides first-hand information concerning their present and future strategies and plans, analyses of major failures and mistakes, etc.

L. Pries (2003) observed Volkswagen as a most serious “player” on European field of car industry. The author develops company’s main strategies for investments in the other states, the reasons for plants’ relocations etc. The article is also valuable in understanding of German specific interest in Hungarian car industry and its disposal as a foothold for expansion on Eastern and Western markets. The recent article “The new dynamic of central and east Europe opportunities and challenges” (2004) is dedicated to the evaluation of the major trends in the development of the new EU-10 members.

The authors provide detailed analyses of the probable problems facing the states after their EU accession, as well as evaluate the opportunities for the new members. Amidst the list of opportunities the authors also give an overlook of automotive industries that will have a tendency for development in an early date. M. Bursa (2004) analyzes Central Europe from economic and business perspectives. He works out thorough economic profiles of the states, analyzes their attractiveness for foreign investments pre- and after their EU accession on May 1, 2004.

A number of other web articles and companies’ sites provide auxiliary information of their plans, major tendencies in their expansion policies, as well as other trends in their cooperation with the countries of CEE region in general and Hungary in particular. 1. 7. Organization of the Study The study will consist of three major parts – theoretical chapters, empirical part, and concluding summary of findings and results – divided into several chapters introduced to better organize the research and fully reflect the purpose of study. CHAPTER 2

CHALLENGES AND OPPORTUNITIES FOR THE TEN NEW EU MEMBERS: HUNGARIAN PROFILE IN THE EXPANDING EUROPEAN MARKET 2. 1. Economic Effects of the Communist Era on in Hungarian industry and society: the past heritage of Hungarian industry As Hungary has been a part of Soviet camp for almost half a century, both the work and management habits established over decades of Communist domination still remain significant obstacles to the development of a strong, market-oriented economy in Hungary that, besides, will be able to compete with western companies.

A number of stereotypes (workers drinking on the job, damaged goods shipped to customers; disregard to consumers and their demands poor technologies that leg behind western standards, etc. ) still serve an obstacle for foreign companies who decide whether to invest in Hungarian industry or prefer the other states. The overall quality of Hungarian goods was significantly worse than of their western equivalents. Nevertheless, the customers were forced to buy goods from state-owned plants though their qualities were very poor.

As a result, the stereotypes of Hungarian economy of 1980s still dominate on western CEOs mentalities in many aspects. Nevertheless, in the early ninetieth the situation was slowly going to better: in 1991-1992 Hungary received more direct foreign investment than any of the other five eastern European members of COMECON. At the same time, Hungarian market was entered by a number of multinational corporations. However, Hungary soon began to lose its foreign investment advantage as wages in Hungary increased, compared with its neighboring countries.

At the same time, rapid political and economic reforms made neighboring Poland and Czech Republic more attractive for the investors. In 1990s Hungary’s wages were higher than in Asia and are rapidly approaching western European wage levels. Meanwhile, Hungarian major competitors were gaining more attractive economic and business environment. Poland with its 34 million population has a large domestic market that made it attractive for foreign investment.

The Czech Republic, another rival of Hungary for investments, has exhibited signs of strong economic activity: exports from the Czech Republic to Western Europe increased by 39 percent in 1989. Dislike Hungary both Poland and Czech Republic possessed their own passenger car brands, FSO in Poland and Skoda and Tatra in Czech. That made these countries more attractive for potential investors as they possessed more skilled personnel and technologies and had enough capacities for further car production. 2. 2. The “velvet revolutions” in Europe and COMECON’s fall.

The new politico-economic map of Central and Eastern Europe Since 1989 European continent has witnessed profound social, economic and political changes. The fall of the Berlin Wall in 1989 changed the politics of Europe and opened space for a Europe of the future as a continent where no boarders and taxes serves the obstacles for the principles of free markets. However, since reunification of East and West Germany in 1989, and adhesion of Austria, Finland and Sweden in 1995, the next legal enlargement of European family took place only a decade after, on May 1, 2004.

Enlargement of European Union will extend the benefits of the single market to all of the new Member States; at the same time, each of them will also face serious challenges, and first of all in economic development. It still remains unclear if the fluctuating economies of East European post-socialistic countries that now have joined European Union will appear ready to withstand the pressures that competition in the single European market will bring.

But once that is done, there is no doubt that bringing in such dynamic economies, with so many resources and so much enthusiasm to offer, will benefit both old and new Member States (Busek, 2000). On May 1, 2004 ten new countries (EU-10) entered European Union – the biggest economic market in the world with population almost half a billion (450 million) people. EU has obtained a new formula when old Member States (EU-15) were joined by new accession states (EU-10). Among ten new members, eight represent former socialistic states, namely, Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Slovakia, and Slovenia.

Moreover, three of them, i. e. : Estonia, Latvia, and Lithuania were former republics of the USSR which economies were dependent from external providers and mainly orientated on the demands of the former Soviet Union (the map of new EU-10 members and adjoining countries is placed in Appendixes). It makes the 2004 enlargement of EU unique in ethnical, psychological, political and economic aspects. Though the new Member States had fifteen years to accommodate their economies up to the average European level, the differences in their development still remain apparent.

It gives a ground for serious debates concerning the challenges and achievements that the new market will bring each of new Members Countries. Though the Countries of Socialistic Europe faced better conditions for their economic development, the tendencies, dynamics and perspectives of their transition from socialism to capitalism also left much to be desired. In fact, all ten new economies of the European Union are underdeveloped even comparing with the poorest members of the EU, i. e. : Portugal and Greece.

Only Slovenia, the most developed republic of former Yugoslavia that always had tight relationships with Italy, is outlined against the other nine countries: per capita incomes and gross national product of the country is on the average European level. The economies of Cyprus and Malta, orientated mainly on tourism are comparatively too small to lose from joining the EU. As a result, the most serious problems will face the economies of three major East European countries that have entered EU in 2004, i. e. ; Poland, Czech Republic and Hungary.

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