Exit Strategy

This might be my last post.  Hungry was a failure.  We hired a professional accounting firm, but still got the VAT so messed up that we are abandoning the operation.     It was all very disappointing,  I had high hopes to run the business and employ some excellent folks at competitive wages. 

If you want to open a manufacturing business in Hungry and you have a small company like mine, hire a small accounting firm with practical experience and good English language skills.  Start small.

We've now moved the operation to a different EU country and doing it in partnership with an established company.

New 9% Corporate Tax Rate

Hooray for Hungary!  They are trying to be competitive and attract businesses  When countries start to compete for our business like corporation do, the citizens will be the winners.

But I wish they would address their burdensome VAT.  Ireland will soon have the higher corporate tax rate of 12.5%, but because they allow exporting companies to be exempt from VAT, it is very attractive and I'm tempted to move there for that reason.

VAT

The VAT is a terribly burdensome administrative 'activity.'  When I buy things, I pay VAT and then I request a refund.  I get back 100% of the tax after 2-3 month.  So, the government gets free use of my money and it cost me lots of time and energy to pay and recover, not to mention the extra cash flow burden (27%).   It is a significant cost to a small business.  Ireland is better and allows companies to be exempt from the VAT if they export 75% of their goods. (which I do).  So, any politician that starts talking about a VAT in the US should be lynched.

The other strange issue with VAT is that if I buy material from companies inside Hungary and take delivery inside Hungary, I pay this burdensome tax and take a cashflow hit, but if I were to move my business to a location outside Hungary, and continue to buy material from Hungarian suppliers, I don't have to pay the tax, even to the other country.  I must report it to the other country, but there is nothing to pay.

So, the VAT is creating the incentive for me to relocate my operation outside Hungary, but to buy from suppliers in Hungary.  I guess most EU countries are the same.  There is an incentive to buy materials from a different country than were the materials are delivered.  Weird.

Choosing Suppliers

Finding suppliers and getting quotes has been difficult.  We manufacture products and need suppliers of mechanical, electrical and plastic components from a dozen or more suppliers.  For selecting our key suppliers I made 2 new rules:

1) The president must speak English well, and
2) The company must not be so large that I do not deal directly with the President.

If the company is too large, we are not an important customer.  So I'm looking for suppliers with 10-100 employees.  I think my chances of finding the supplier I need will improve if they are in or near Budapest, since there is a better chance of finding strong English speakers.

Barriers to Entry

The concept of 'Barriers to Entry' was interesting to learn about as I read Michael Porter's book 'Competitive Advantage' many years ago.  Starting a business in Hungary, as an English only American has presented some large challenges, from laundry & haircuts to hiring & taxation. Hungary, especially rural Hungary, has a low cost and well skilled labor force as demonstrated by the presence of large factories set-up by international companies, such as Electrolux, Bosch, Samsung, and many others that overcame barriers to entry to get access to this desirable labor force.

I know first hand the frustration of the language barrier while trying to learn the rules of the game and set-up a business,  But the main question I have to answer is:  Are these difficulties short-term and once overcome, will result in a competitive business, or are they a long-term cost of doing business which will take away much or all of the advantages of the low cost labor?  In other words, are these challenges a case of a Michael Porter 'Barrier to Entry' with a profitable business opportunity waiting on the other side of the barriers or is this just an impractical venue for a small America business? This is what I need to figure out.

Greetings

In May 2016 I moved from Tucson Arizona to Jaszbereny Hungary to start our company's European operation.  SunDanzer manufacturers solar powered refrigerators and freezers for domestic, commercial and medical use.  The plan has 2 phases.  Phase I is to set-up distribution and Phase II is to move some of our manufacturing from the US to Europe, probably Hungary. We have key suppliers and customers in Europe so this move reduces our logistics cost and time, and makes us more competitive.

The initial distribution phase is much easier and lets me learn the rules of the game here in Hungary before committing to manufacturing. The purpose of this blog is to communicate to other entrepreneurs issues I faced and to communicate to Hungarians what rules and regulations help, and more importantly, inhibit small business development.

I picked Hungary because I have a major supplier here and some Hungarian friends who graciously give me advice and help me overcome hurdles such as 'where to get a haircut' or help in locating key plastics and metal suppliers.  But the concern with Hungary, other than the language barrier, is the relatively low rating on the World Freedom Index.  Labor rates are low, but taxes and regulations are high.

Anyway, over the coming months I plan to chronicle the issues I face in the hope it is helpful to other entrepreneurs from aboard or within Hungary that aspire to do business in Hungary.