Is There Life After the Automotive Industry?

Much has been said about the fact that Hungary’s industrial policy pursued since the 1990s has, on the whole, weakened the country’s long-term prospects. While this argument can certainly be accepted, it is equally true that there were very few realistic alternatives for achieving rapid industrial development at the time.

What now seems increasingly clear, however, is that the industrial structure built over the past decades is unlikely to serve Hungary well for many decades to come.

Our demographic trends are unlikely to improve, meaning that no significant additional workforce will become available. At the same time, the employment of foreign guest workers faces both legal and social constraints.

Looking ahead, it will matter not only how Hungary’s GDP per capita evolves, but even more importantly how its Gross National Income (GNI) develops.

We must acknowledge these realities and avoid pursuing labour-intensive development strategies in the future.

The automotive industry has been the single most important pillar of Hungary’s industrial structure, providing stable performance for decades.

However, the European—and particularly the German—automotive industry is facing serious challenges, and these inevitably affect domestic manufacturers and their supplier networks. The automotive industry has been the only multinational-driven development model whose value chain Hungarian small and medium-sized enterprises (SMEs) have been able to join successfully. A decline in the automotive sector will inevitably have a negative impact on these businesses.

It appears that, over many years, European car manufacturers postponed important forward-looking investments, relying instead on the comfort of their established growth potential.

They have not only become complacent technologically but have also fallen behind in terms of business innovation. Faced with the surge of Chinese electric vehicle manufacturers, even industry giants such as Volkswagen are responding primarily through layoffs and the sale of production facilities.

The automotive industry should have recognised much earlier that the rise of electric vehicles was inevitable. Because of their architecture, software will become more valuable than the vehicle’s mechanical platform itself. This is demonstrated by the emergence of companies with no traditional automotive background that have rapidly become mass producers of vehicles.

In this new environment, even the oldest and most prestigious car manufacturers risk being transformed from innovators into assemblers—a fundamentally different and far less profitable position in the value chain.

When discussing innovation, we must also address investors’ short-term financial expectations alongside the uncertain and long-term returns of development investments.

Many readers may be familiar with the classic experiment: if participants are offered one apple today or two apples next week, most choose the certain reward available immediately. We naturally dislike waiting, even when patience promises a higher return.

The same tendency can often be observed in investment decisions, where short-term financial expectations dominate.

The management of publicly listed companies focuses heavily on quarterly earnings reports, often losing sight of longer-term strategic opportunities.

Executive compensation frequently depends on short-term share price performance and quarterly profits, making these metrics more important than preparing for future technological change.

Of course, investors are diverse and have different objectives. Nevertheless, I believe publicly listed companies should communicate their long-term strategic goals more clearly, providing investors with a clearer understanding of where the company intends to be in the future.

Naturally, the apple experiment has one important limitation: the future reward is guaranteed, whereas the return on a major investment project is never certain. Large institutional investors managing the savings of millions of people cannot simply alter their risk exposure or expected returns according to their own preferences.

The real question, therefore, is whether today’s financial system is capable of supporting long-term innovation despite uncertain returns, recognising that investors may ultimately risk not only the expected profit but even part of their original capital.

Whatever area of the economy we analyse, we eventually arrive at the same conclusion: Hungary faces significant challenges if it wishes to improve its long-term economic performance.

We cannot reverse demographic decline, but we can expand education and retraining opportunities, allowing the available workforce to move into the rapidly growing service economy.

Large language models and other AI technologies should also become part of education, making career changes possible with lower barriers to entry and shorter learning curves.

Small and medium-sized enterprises are also key drivers of economic development. We discussed their role in greater detail in a previous article.

Improving the sector requires professional mentoring, high-quality continuing education, and the creation of genuinely effective support channels. Wherever possible, SMEs should also be helped to expand into export markets, while even greater profitability may come from enabling their faster integration into high-value service industries.

Hungary’s industrial structure cannot be fundamentally transformed in the short term, nor do we currently possess the financial resources required to do so.

We should accept this reality while encouraging foreign companies operating in Hungary to undertake more research and development activities and to contribute more actively to vocational education and workforce development.

The conditions attached to the substantial investment incentives and subsidies already granted should also be reviewed carefully.

At the same time, foreign companies should be expected to comply fully with Hungarian laws and regulations.

Hungary needs a more flexible, learning-oriented and adaptive economic policy.

Our economy does not primarily need more factories. Instead, it needs to support industries and businesses capable of significantly increasing Hungary’s Gross National Income (GNI), because only a stronger national income base can sustainably finance the true engines of a successful society: education, healthcare, transport infrastructure, and their long-term high-quality operation.

By: Viktor Szentkiralyi