German car manufacturer Daimler announced on July 29 that it will invest an extra €1bn in Hungary, to build a second production plant next to its existing one in Kecskemet.

The Mercedes builder sparked a tussle in Central and Eastern Europe in recent months as it discussed potential plans to invest €800mn in a new engine factory in the region. Later, “leaks” suggested that several states – including Romania and Russia – could be chosen to host up to two new major plants in the region. However, the carmaker appears to have modified its plans, and will concentrate its operations in Central Europe’s car making heartland, with an increased volume of investment headed to Poland and Hungary.

The German carmaker announced in May that it will invest €500mn in a new engine plant near Wroclaw, Poland. Around the same time, the company flagged further investment in Hungary. The Mercedes builder announced expansion of the existing Hungarian plant via a €250mn investment in a 99,000 sqm car body plant and a further €344.6 for innovative machinery for existing product lines. The plan to build a second plant in Kecskemet boosts the total volume of new investment earmarked for Hungary to €1.6bn.

Daimler said construction of the new plant is expected to be finished by the end of the decade, and its capacity could reach 150,000 cars per year. The fully digital plant will be able to produce various models, the carmaker said in a statement, noting it has high hopes for the facility. The existing plant employs over 4,000 people and produced over 180,000 compact vehicles in 2015.

"All-in-all, with the existing and the new plant, the site has excellent future prospects," Rainer Ruess, head of production planning at Mercedes-Benz Cars said.

The investment will be backed by a HUF12.9bn (€41.32mn) grant from the Hungarian government and is expected to create 2,500 new jobs.

"This investment decision proves that it was worthwhile for the government to embark on an economic policy aimed at making Hungary the European centre of high value-added manufacturing activities," Hungary's Foreign Minister Peter Szijjarto stated.

Also home to car plants operated by Opel, Suzuki and Audi, Hungary saw industrial production boosted in 2015 by expansion projects in the auto sector, as well as the arrival of more suppliers. However, it is becoming clearer that the potential of carmaking to unbalance the entire industrial sector is an issue for Budapest. At the same time, with the large investment due from Daimler, and suppliers also piling in, the tightening labour market is becoming a serious challenge to further expansion.