Transportation and Logistics in Hungary Sectoral Analysis Autumn 2005
ICEG EC Sectoral Analyses Transportation & Logistics 2 Table of Contents Executive summary 3 1. Trends in the European Union and in the region 4 2. Evolution of the sector in Hungary 6 3. Market structure 10 4. Regulation and policy measures 11 5. Short and long term prospects 13 6. Sectoral SWOT analysis 15
ICEG EC Sectoral Analyses Transportation & Logistics 3 Executive summary In the first half of 2005 the positive trend, namely the intensification of foreign trade in the EU started in the second part of 2003, continued. It was supported by the dynamic increase of foreign trade of the NMS, which increased more than the EU average. Thus, the share of this region in foreign trade also grew. The value of the goods exported from the Central and Eastern European countries increased and in line with that tendency, the role of logistics services augmented. The transportation and logistics market has grown by double-digit figure for several years which reflects well the dynamism of this market. In line with the increasing oil prices the costs of transporters also grew. The increase of oil prices seems to be a permanent process with which the actors of the sector have to reckon. In the first half of 2005 the transportation sector in Hungary reached a significant growth mainly due to the outstanding performance of the international transportation (approximately +25%). The annual growth of the sector was more than 18% which is significantly higher than the average of the previous years (2.5-4.5%). The role of the road is growing continuously in modal split figure of transportation, in line with the decreasing role of railroads. However, the share of road transportation is still lower than that of the EUaverage. In Hungary, the share of road in transportation is 15%- points lower than the EU-average. The increasing role of road transportation is partly due to the significant investments in the road infrastructure. The length of the motorways in Hungary increased significantly in the previous years and that trend is expected to continue in 2006 too. There are four places in Hungary where significant National Logistic Centers are operated (in Budapest, Debrecen, Sopron and Székesfehérvár), while in case of the other 7 NLCs more development is needed to enhance the functioning of these places. Mainly because the demand on logistics services close to these places or far from the capital city - is expected to grow. In case of transportation sector the role of small-sized enterprises is significant, mainly in road transportation. On the other hand, the EU accession and its result, namely the larger competition is expected to decrease the role of these entrepreneurs. Besides that, the large actors of the sector plan to become regional actors, mainly because Hungary has an adequate geographical position. However, we must mention that the competition among transporters of NMS is increasing. In case of the trade between Hungary and Poland, and Hungary and Slovakia, the role of those haulers which are operated in the trading partner is dominant.
ICEG EC Sectoral Analyses Transportation & Logistics 4 1. Trends in the European Union and in the region Positive tendencies in 2004-2005 in the EU and also in the New Member States In the first half of 2005 the positive trend, namely the intensification of foreign trade in the EU started in the second part of 2003, continued. During the first eight months of the year foreign trade of EU-25 increased by 8% compared to the same period of the previous year in euro terms. It was supported by the dynamic increase of foreign trade of the NMS, which increased more than the EU average. Thus, the share of this region in foreign trade also grew. This positive tendency is expected to continue in the future, thus the trade and as a result, the transportation - between Western and Central Europe is expected to increase further. While the share of the four so-called Visegrad countries (namely the Czech Republic, Hungary, Poland and Slovakia) in the foreign trade of EU-15 was only 2.5% in 1995, this figure increased above 4% in 2003. Modal split figures in case of the transportation of goods in the Visegrad countries and the EU 100% 80% 60% 40% 20% 0% Czech Republic (2005H1) Hungary (2005H1) Poland (2004) Slovakia (2003) V4 EU15 (2002) EU25 (2002) Road Railroad Inland waterways Pipelines Source: Eurostat, national statistics offices Road: winner, railroad: loser Regarding the modal split figure in case of the transportation of goods, one can observe that the share of road transport is increasing while the share of other transports is decreasing. Accordingly, road transport has a dominant share in the EU. On the other hand, road transport has a much more dominant share in the old Member States than in the NMS. While in case of the EU-15, 75% of all transport (sea transport is excluded) is road transport, in case of the four Visegrad countries this figure is about 60%. In case of the latter countries, railroad transport still has a bigger role mainly due to the former (communist) regim. On the one hand, it is true that the role of railroad and the length of railways decreased significantly after the transition, on the other hand, the figures of the railroad transport such as the role of railroad transport or the density of
ICEG EC Sectoral Analyses Transportation & Logistics 5 Goods with higher values Emphasis on transpors that has less impact on the environment Increasing oil prices Infocom technologies in the sector railways - are generally higher in the NMS than in the EU-15. Anyway, the role of road transport is expected to increase in the future in case of the NMS too, which will result in the further decline of the railroad and other transports. Probably, the biggest adventage of the road transport is that goods can be transported from house to house. Thus, despite the fact that the figures of railroad transport improved in many NMS in the first half of 2005 (such as in the Czech Republic or Hungary), the role of road transport increased further. The value of goods transported from Central and Eastern Europe increased continouosly in the last years. In 1999 the average value of a ton of goods was EUR 1000, while this figure increased to EUR 1400 in 2003. This means that these countries export goods with higher and higher values. Among the countries in the region, Hungary exported goods with the highest value (a ton of good was valued at 2700), mainly because of the fact that the share of electronic products is quite high in the export. It is interesting that the figures of the Czech Republic and Slovakia in 2003 were EUR 1600 and EUR 1800, respectively. Among the important tendencies we have to mention that the EU tries to put more emphasis on the dispersion of those modes of transports that have less negative effect on the environment, such as the intermodal transportation methods (Ro-LA, Ro-Ro, etc.). In line with the increasing oil prices the costs of transporters also increased. The increase of oil prices seems to be a permanent tendency with which the actors of the sector have to reckon. In the global logistics sector one can observe that information and communication technologies has larger and larger role in logistics services, which make transportation easier and more efficient.
ICEG EC Sectoral Analyses Transportation & Logistics 6 2. Evolution of the sector in Hungary 2004: a good year in Hungary H1 2005: the good tendency continued International transport is the main engine of growth Increasing role of road transport Significant develpment of infrastructure in 2004 and 2005 which is expected to continue in the future In 2004 Hungary joined the EU and this factor influenced the figures of transporation too. In 2004 the value of international transports increased significantly. Compared to 2003 that figure increased by almost 17% in terms of tonne-kilometre. Thus, total transport figure which includes national transport - increased by more than 10%, while that figure averaged around 2.5-4.5% in previous years. In the first half of 2005, the good tendency continued. The performance of transportation increased by 18.1% compared to the same period of 2004. Basically the road transportation reached an outstanding growth (+28.3%), while inland water transport also increased significantly (+23.1%). On the other hand, the performance of railroad and pipeline transport played a less important role in overall growth of the sector. In the first half of 2005 international transport remained the main engine of the growth. During the first two quarters of the year international transport increased by almost 25% in terms of tonne-kilometre mainly due to the outstanding performance of road transport. International road transport incrased by approximately 50%. Basically due to the aforementioned factor, the share of each mode of transport changed. In the first half of 2005 the share of road transport increased to 58%, which represents a 5%-points jump compared to the same period of the previous year. The share of inland water transport also increased by 0.2%-point (to 4.3%) in the examined period. The share of the other modes of transport decreased. The role of railroad transport decreased despite the fact that its performance increased. The share of pipeline transport also decreased. The development of the road infrastructure, namely the increase of the length of the motorway network had a positive impact on road transport. In 2004 the M30 motorway (which connects Miskolc to M3) was opened and the M3 motorway was also lengthened by a 12 km section (between Polgár and Görbeháza). Besides that, in the Western part of the country two small section of M7-M70 motorways were opened (M7 Becsehely-Letenye 8,7 km, M70 Letenye- Tornyiszentmiklós 18,6 km). In 2004 57 km of motorways was opened which was almost the double of the 2003 figure (29 km). In the summer of 2005 another almost 20 km long section was opened, namely the section of M7 between Balatonszárszó and Ordacsehi. Accordingly, the length of motorways in Hungary reached 668 km. According to the plans the length of new motorways will reach 95 km in 2005. In 2006 the planned length of new motorways is 219 km (including the lengthening of M3 to Nyíregyháza, the opening of M35 that connects Debrecen to M3, and the M6 motorway will be built to Dunaújváros). In 2005 the longest section that is expected to be opened is the remaining section of M5 that will reach Szeged. At the end of 2006 we expect that the length of motorways in Hungary will reach 963 km in accordance with the plans. This means that the density of motorways, namely the total length of motorways per
ICEG EC Sectoral Analyses Transportation & Logistics 7 Increasing tolls Decrease of standard VAT rate 100 km 2 figure will reach 1 km of motorway. At the beginning of 2005 motorway toll fees increased by 15% in average. The increase was explained by the rate of inflation and the increasing costs of the infrastructural development. Considering the high oil prices the government decreased the VAT rate on petrol products to 20% from 25%. Due to the decrease of VAT rate, prices of petrol decreased by around HUF 10-11. However, that decrease has no significant impact on the transport sector mainly owing to the fact that transporters reclaim VAT on gasoline. It means the competitiveness of the Hungarian transporters has not increased by that measure. On the other hand, that measure may have a positive impact on the budget due to the fact that the demand of petrol can increase in the border region and in case of transit traffic. Pan-European corridors The aforementioned development of infrastructure network is in line with the Pan-European infrastructural development. Pan-European Transport Corridors Source: EIU Due to the good geographical position of Hungary 4 out of the 10 socalled Helsinki corridors crosses the country. These are the following:
ICEG EC Sectoral Analyses Transportation & Logistics 8 Corridor IV. Dresden/Nuremberg Prague Wien/Bratislava Győr Budapest Bukarest Craiova/Constanta Sofia Thessaloniki/Plovdiv - Istanbul Corrigdor V. Venice Triest/Koper Ljubjana Maribor Budapest Uzhorod Lvov V/A: Bratislava Zilina Budapest V/B: Rijeka Zagreb - Budapest V/C: Ploce Sarajevo Osijek - Budapest Corridor VII. Danube Corridor X. Salzburg Villach Zagreb Belgrade Nis Skopje Thessaloniki X/B: Belgrade Novi Sad Budapest Logistics service centres Obviously, the Corridors influence the development of the Hungarian infrastructure network, basically the motorway network. Besides that, the development of the inland water transport route, namely the Danube, is also needed. Regarding the intersections, there was no significant advance since our latest report. Acording to the conception, there are 11 logistics regions in which there are 13 national logistic centres (NLC). However, most NLCs are under planning or development. Among the NLCs the most important centres are in Budapest, Debrecen, Székesfehérvár and Sopron. These NLCs increased continuously their capacity. Trans-European Transport Network and National Logistic Centres in Hungary Source: KTI
ICEG EC Sectoral Analyses Transportation & Logistics 9 There are other smaller logistics centres in the country but those are mainly situated near Budapest and obviously close to motorways.
ICEG EC Sectoral Analyses Transportation & Logistics 10 3. Market structure Outsourcing Logistics services About the enterprises Outsourcing is relevant in the logistics and transportation sector. Two thirds of the largest enterprises in Hungary outsource its storage activity but the same amount of outsorcing is observable in case of the transportation and customs management services. In Hungary the value of logistics services increases by 20% in average according to estimations. If Hungary was able to be a regional logistics centre this figure could be even higher. The majority of logistics enterprises are private entrepreneurs. Their share in total number of enterprises reached 60% in the middle of 2005. One can find most private entrepreneurs among road transporters where the number of private entrepreneurs is twice as much as the number of companies. Number of logistics enterprises, by activity and form of enterprise (30 June 2005) Private entrepreneurs Companies Total Share of private entrepreneurs in total (%) Railroad transport 0 16 16 0.0 Other (scheduled) road passenger transport 0 141 141 0.0 Road transport 16 565 8 481 25 046 66.1 Inland water transport 23 113 136 16.9 Air transport 22 109 131 16.8 Storage services 311 692 1 003 31.0 Transport agent activities 754 2 238 2 992 25.2 TOTAL 17 675 11 790 29 465 60.0 Source: KSH Decreasing number of private entrepreneurs The biggest players Foreign actors In the last few years the number of private entrepreneurs decreased gradually. This trend is partly due to the accession to the EU which resulted in growing competition in the sector. Thus, those private entrepreneurs, which were not able to keep the pace with the competitors, ceased to operate. According to their revenues the biggest actors of the sector are the MÁV group, the Magyar Posta (Hungarian Post), the Waberers Group, the MASPED and the Raaberfreight Group. The revenue of these five companies reached about HUF 250-300 billion in 2004. Among foreign actors the dutch investors (such as Rynart, Vos, Versteijnen) have the largest share in the sector. They are followed by the Austrians (e.g. Hödlmayer, Delacher) and the Germans (such as Schenker, DHL-Danzas and Dachser). Besides these investors, Italian and American investors also play a significant role in the sector.
ICEG EC Sectoral Analyses Transportation & Logistics 11 4. Regulation and policy measures Transportation and logistics policy in the EU Road transport Railroad transport Intermodal transport Air transport No customs borders Derogations In the European Union there is no detached common transportation and logistics policy. However the EU has a common transport policy, which includes transportation and logistics. The main features of this transport policy related to transportation and logistics are the following. The regulation of road transport in the EU defines the conditions of participating in international transportation, while the regulation of national transportation remained in the hand of the governments. In general the transportation in the EU is bounded to three conditions; these are the personal reliabilty, the professional competency and the adequate financial safety. The main directives of the regulation of international road transportation are the following: access to the market of the international road transport; free provision of services; no discrimination; equal conditions in the provision of services. The international road transportation is based on the EU s quota-free permission system. This activity can be operated in possession of the permission of the Community. Regarding the national transportation, the permission is given to all enterprises that fulfill the aforementioned conditions. The market liberalisation of the railroad transportation is dual. On the one hand, the liberalisation of trans-european transportation of goods on railroad has been completed in the old Member States until 2003. On the other hand, the entire liberalisation of international transportation is planned to be completed until 2008. Then the real single market of railroad transportation will be achieved. Regarding the intermodal transportation, the Commission tries to put more emphasis on the dispersion of these modes of transportation by allowances and by the possibility to give subsidy. The Hungarian regulation is harmonised with this regulation. In Hungary those (road) transport vehicles, which are used in intermodal transport, are granted rebates of vehicle taxes and these vehicles has an exemption from the weekend restrictions on heavy goods vehicles. The directive of the EU s air transport policy is liberalisation which can enhance further the increase of the air traffic. Regarding the stock of airplanes, those planes which make heavy noise must be taken out of operation. The EU is a customs union in which the customs duties were abolished. Accordingly, the products can be transported tax-free within the European Union. In the destination country (where the product is transported) VAT must be paid on the imported goods. Obviously if the product is imported from a third country (outside the EU) then not only VAT but also customs must be paid on the product. As a result of the accession negotiations, Hungary received temoprary derogations in the following cases related to transportation and logistics, which are still in effect: For a maximum of 5 year after accession, Hungary does not need to open its cabotage market, however, according to the agree-
ICEG EC Sectoral Analyses Transportation & Logistics 12 ment, the Hungarian transporters also cannot access to the cabotage market of the other Member States. Until 31 December 2006 Hungary needs to open its Trans- European Rail Freight Network only partly. Hungary has also been granted transitional arrangement on the maximum authorised weights and dimensions of road vehicles (until 31 December 2008).
ICEG EC Sectoral Analyses Transportation & Logistics 13 5. Short and long term prospects The effect of the relocation on the sector Concentration is expected The role of centres in the country is expected to increase Support of intermodal transportation Strong competition Single market Threats from Visegrad countries It is an interesting process that the increasing wages have a positive impact on the transportation and logistics sector. Since the relocation means the companies move their production to another country, mainly situated in the neighbourhood of Hungary, it increases the demand of transportation. On the one hand, Hungary is a significant market for the neighbouring countries, on the other hand, the good geographical position of Hungary makes the country a good logistics centre towards Southeast and East European region. Thus, the multinational companies transport back and storage their products in Hungary and they can also export it from here. It means the role of Hungarian transport and storage companies will grow. Most directors of the largest logistics companies believe that concentration is expected in the logistics sector in the next 1-3 years. In line with the aforementioned factor, namely the process that the assembly-based manufacturing is leaving the country, the role of services will increase in the future and in parallel the role of storage and logistics services are also expected to grow. Traditionally, Budapest and its region have the leading role in logistics activites. In the future we expect that the position of Eastern Hungary will increase, storage companies will grow their capacity in this region which can result in the increasing prices of building sites. Regarding the EU tenders, mainly those actors can apply for these calls which operate intermodal transport services. In the Community s policy mainly these enterprises can get support. On the other hand, those companies that cannot provide complex and comprehensive services will have to face with severe defficulties in the future. Their hope can be the specialisation rather than a wide service portfolio. EU Enlargement certainly has an impact on the previous relationships, the conditions of the competition and the business climate. The challenges to keep competitiveness and to stay in the market are vital for the actors in the logistics and transportation sector, which is obvious regarding the market structure of the sector. Several hundreds of thousands enterprises compete in this sector. As a Member State of the Union, Hungary has become a part of a transport market where Hungarian transporters could have appeared only by special permissions before the accession. Besides that the Hungarian enterprises had to cope with transport enterprises which knew the market better and had international experiences. Although the regulation of freight and passenger transport services is harmonised to EU legislation, there are significant differences between the transporters of Hungary and that of the EU-15. Basically, most Hungarian transporters are capital-scarce and less modern compared to those operated in the EU-15 both in terms of transport safety and environmental aspects. According to the view of the Association of Hungarian Forwarding and Logistic Service Providers (AHFLSP), the majority of the international transportation became services in the single European market. In that
ICEG EC Sectoral Analyses Transportation & Logistics 14 Elimination of border barriers About MÁV Air transport can be a winner environment the Hungarian haulers can find good market opportunities if they specialize and focus on a few activities. The large national holdings are expected to cooperate with each other which is more likely than mergers and acquisitions in the market. Those larger Hungarian haulers, which can provide adequate, specialised and high quality services, will be able to cope with the competition even in the single market. However, it also means that those large enterprises have the best chance to survive and grow which have good stock of vehicles and are present in the market for a while. Unlike the international transport, national transport remains protected from foreign competition for some years. Until 2007 EU protects its market from the Hungarian haulers, while Hungary has worry about the haulers of the other New Member States and it seems it is not an unrealistic fear. In case of the transportation between Hungary and Poland, the Polish transporters share reaches 70%, while the figure in case of Slovakia is close to 100%. The elimination of border barriers is a positive factor for the road haulers, while that is not so positive for those enterprises which provided customs management services. The Hungarian haulers share in the transport from and to the European Union is around 54%. Altough that figure decreased by 2%-points in the last 1-2 years, in medium term the Hungarian haulers can increase their share. The status of the Hungarian Railroads (MÁV) can be protected only in short or medium term. The company s future depends on the factor whether the MÁV can get in the dynamically expanding intermodal transport. EU enlargement has a positive impact on the railroad transportation too, the time of transport can be decreased and that increases the competitiveness of this mode of transport. We expect that the liberalisation of railroad transport will also generate further increase of trasnportation. The biggest competition is expected in case of international haulage and intermodal tansport according to international experiences. These are the most profitable services and liberalisation influences mainly these activities. Air transport can be one of the biggest winners of the EU enlargement. The performance of Budapest Airport can be doubled in the next 10 years. It is also a good factor that almost half of the trasnport is transported by Hungarian enterprises. Regarding the potential increase of air transport, it is worth mentioning that the share of this mode of transport is significantly higher in the EU15 than in Hungary.
ICEG EC Sectoral Analyses Transportation & Logistics 15 6. Sectoral SWOT analysis Strengths Good geographical position of Hungary; 4 out of 10 Pan-European corridors run across the country As a Member State, Hungary is the Southeastern border of the EU. Thus, Hungary is the link between Southeast Europe and the EU and also between the CIS countries and the EU Rapid growth of foreign trade and transportation in the last years There are several high-quality logistics services centers in Hungary. Opportunities As an EU Member State, Hungary s connection with the Union s logistics sector is strengthening, thus, Hungary is attractive for investors. The increase of foreign direct investments is expected, which can spur the growth of competitiveness of the enterprises in Hungary. Hungary s share in international (European) transportation can grow further due to the developing infrastructure. Hungary has its strategy to become a regional logistics center which can also spur the multinational logistics enterprises to invest in the country. Weaknesses The status of road infrastructure is still lagged behind the EU average The national railroad infrastructure is weak The cooperation between firms is smaller in Hungary than in the Western-European countries There is a duality in the sector: oversupply of capacity, while shortage of complex, good quality logistics services The interconnection of SME s into transportation chains is underdeveloped Threats The underdeveloped transport infrastructure (underdeveloped compared to the EU average) may hinder the further development of the role of the logistics sector. The provision of high quality logistics services demands a small number of highly qualified workers, which is against the interest of the workers Increasing competition in national and international transportation due to EU membership. This threat mainly concerns to those small and medium sized enterprises which are not present in a transportation chain. The not adequate level of development of the infrastructure may have a negative impact on transition routes crosses the country Without high quality services the country will become only a transit country which has no significant value added but costs.