German MP accuses Hungary of using mafia methods to squeeze out foreign competition

German MP accuses Hungary of using mafia methods to squeeze out foreign competition
The Godfather: Local companies in strategic industries or with thriving business model have been bullied by organs of Viktor Orban's state or have been approached by companies enjoying the protection of the government, but few companies dare to speak out as they fear reprisals. / bne IntelliNews
By Tamas Csonka in Budapest April 3, 2023

The Hungarian government is trying to force some German companies to leave Hungary to make room for local champions in strategic sectors, according to a long report by Der Spiegel. The article quotes a leading MP of the German conservative CDU, who accused Prime Minister Viktor Orban’s cabinet of employing mafia methods.

The report starts with the story of two German construction companies, Heidelberg Materials and Schwenk Zement, which were approached by a Hungarian sector peer a year ago with the intention of buying stakes in them.

The writer of the letter, introducing himself as the owner of a "rapidly expanding group of companies" said he was interested in "expanding its professional spectrum" and proposed to start "personal negotiations" over the takeover of two German companies.  The sender was clearly convinced that he had made an offer that the two companies couldn’t refuse, Der Spiegel notes.

Heidelberg Materials entered the Hungarian cement market in 1989 and its subsidiary Duna-Drava Cement has become a dominant player in the cement and ready-mixed concrete market.

The government has stepped up pressure on foreign firms in the construction materials industry, which is ruled by foreign players.

In July 2021, a decree forced companies that produce plaster, chalk, gravel, sand, clay, lime, gypsum and cement with annual revenue of HUF3bn (€7.8mn) to pay a 90% "mining allowance" on the difference between the revenue generated using their own prices and threshold prices set in the decree.

A regulation in mid-2021 imposed a ban on exports of certain building materials, with the aim of curbing soaring prices and alleviate product shortages driving up prices.

In February, a decree imposed a 90% mining fee on ceramic products sold above a threshold price. The decree was targeted at the top three players of Wienerberger,  Leier, and Lasselsberger (formerly Zalakeramia).

These regulations seem light-hearted protectionist measures compared to the draft legislation in the pipeline, drawn up by Hungarian Construction Minister Janos Lazar. The former cabinet chief of  Orban, a strongman of Fidesz, earlier argued that Hungary should pursue an open protectionist policy to crowd out multinational retailers to protect local players and suppliers.

After taking his post in May – a new ministry created by Orban after his fourth consecutive supermajority win – Lazar has argued for the creation of a local champion in the construction industry similar to the likes of MOL in the energy sector or OTP, which has grown to become a banking giant in the region in three decades.

The draft proposal on renewing Hungary’s building materials and construction market would give almost complete discretionary power to the government to dictate production levels and prices to foreign cement producers and represent a complete violation of all rules of the European single market, according to a Heidelberg executive speaking to Der Spiegel.

The draft, leaked to the press in March, stipulates that the use of Hungarian building materials should be prioritised over imports, and that export registrations could be imposed or even sales abroad could be banned to meet these targets. Companies selling above a fixed price level could be slapped with a punitive 90% mining fee and if the foreign owners wished to sell their companies, the state would have the right of first refusal.

There has been little news about the proposal in the local press, and presumably, the draft regulation was met with objections by the European Commission.

According to Der Spiegel, over a dozen companies have joined forces by joining the German Eastern Business Association after feeling like they are being bullied by Hungarian authorities.

In industries where the Hungarian government wants to establish national champions, "foreign companies are being disadvantaged", Philipp Haußmann, the spokesperson for the relevant working group and CEO of the Ernst Klett Verlag publishing house in Stuttgart said. They are one of the few companies to speak out against the government measures, as many fear reprisals from the government.

Local companies in strategic industries or with thriving business model have also felt the same bullying from the state or have been approached by companies enjoying the protection of the government, but hardly any of them dare to share their story in public.

Laszlo Bige, the owner of the country’s sole producer of artificial fertilisers, claims he has been threatened and harassed by state authorities to force him to sell out his company to oligarchs close to the government.

The billionaire was indicted a day after he promised financial support to the joint opposition in the 2022 election campaign. Bige is fighting in court to prove his innocence in a cartel case, after being slapped with a record HUF11bn (€29mn) fine by the competition watchdog GVH.

Former National Bank (MNB) governor Andras Simor in an interview recalled the pressure facing small, independent businesses to bow and sell their stakes under blackmail from companies with government connections.

A report that Brussels recently sent to the Hungarian government for comment notes that since 2014, Budapest has intervened in the free market more than 30 times to negate foreign investment in Hungarian state-owned companies or in private companies with close connections to the Orban administration. Doing so, the report continues, drives away "foreign capital and know-how" and endangers "productivity growth and innovation.

The European Commission has already launched proceedings against Budapest in five instances involving the Orban government’s targeting of foreign companies, and four others are being considered.

According to Der Spiegel, Gunther Krichbaum, the European policy spokesman for the conservative Christian Democrats (CDU), informed Johannes Hahn, European Commissioner for Budget and Administration about the case of Heidelberg Materials and Schwenk Zement, saying the government’s intentions were clear that their goal was to push current owners out and force them to sell their stakes.

"I never imagined that such practices would be conceivable in the European Union", the German MP was quoted as saying.

For long German companies, especially in the manufacturing sector, have enjoyed special status, with huge tax breaks and government grants. The three premium vehicle makers, Audi, Daimler and BMW, have reaped huge profits over the years from their local subsidiaries, which pay the lowest corporate tax rate in Europe (9%) as well as cheap labour.  Under Angela Merkel’s chancellorship,  Orban has vehemently defended German business interests at EU summits.

Germany is the largest employer, trading partner and investor in Hungary, although FDI trends changed and Asian firms have now became the leading investors. Germany accounts for 20-25% of foreign trade. There are 6,000 German companies in Hungary, employing 300,000 people and generating one-sixth of value added in the business sector.

The annual survey by the German-Hungarian Chamber of Industry and Commerce (DUIHK) showed that 88% of companies would invest again in Hungary. But one of five companies operating in the country see the lack of legal security as the greatest investment risk in the country, which is a higher percentage than in any other Eastern European country.