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Carmaker Daimler Sets Up Mercedes Plant in Low-Cost Hungary

Daimler is investing 800 million euros ($1.24 billion) in a plant in Hungary, making it the last major carmaker to set up shop in low-cost eastern Europe and the move the single biggest foreign investment in Hungary.

A Daimler factory in Rastatt in southwestern Germany

Daimler hopes to produce its compact car models more cheaply in future

The Stuttgart-based carmaker said in a statement its Mercedes-Benz car unit would invest 800 million euros ($1.23 billion) to build the Kecskemet plant near Budapest, and would sign a memorandum of understanding with government officials there in the coming weeks.

The new factory will "boost competitiveness, and access new markets," as well as create up to 2,500 new jobs, Daimler said.

Carmaker hopes to export to US

Hoping the cheap production in Hungary will help it to compete with fuel-efficient car rivals from Germany, Korea and Japan, Daimler plans to add two models to its compact car line-up, bringing the number of compact vehicles to four.

The company said it would also invest 600 million euros in its Rastatt car plant in southwest Germany to improve production there for the long-term.

Dieter Zetsche, CEO of Daimler

Zetsche hopes to gain a competitive edge with Daimler's Hungary investment

"Mercedes-Benz is going to offer an even wider range of exciting premium cars with the high levels of comfort, safety and overall quality that are characteristic of the brand in the particularly fuel-efficient compact-car segment," said Dieter Zetsche, the company's chief executive.

"Moreover, our expanded product range will allow us to tap into new customer groups and open up new market regions," Zetsche said.

But it's not just the eastern European market that Daimler hopes to tap with its new Hungarian plant. A spokesman for the company told news agency Reuters that the company was also eyeing exports to North America given that fuel-efficient cars with smaller engines were becoming increasingly popular in the US in light of spiraling oil prices.

So far, exporting compact cars to the US was hampered by high manufacturing costs and a strong euro, the company spokesman said. Since the beginning of the year, Daimler has begun selling its new model of the Smart car in some US cities.

Single-biggest investment

Daimler's investment has been welcomed by the Hungarian government. Prime Minister Ferenc Gyurcsany said Wednesday the plant broke all investment records in the country.

"Daimler's decision represents the biggest single investment in Hungary's history," Gyurcsany told a special news conference held in parliament. The previous record had been set by South Korean tire manufacturer Hanook with a 500-million-euro plant in 2005.

"The factory will provide employment for 2,500 people and will indirectly create 10,000 more jobs as suppliers," Gyurcsany said, adding the investment would provide a valuable boost to the country's economy.

Hungary produced 289,000 cars and 2.4 million engines in 2007. This year it expects to manufacture 366,000 cars and 2.5 million engines. Among the brands currently being built in Hungary are Audi, Opel, Fiat, and Suzuki.

Daimler can hope to capitalize on hourly wages of five euros in Hungary and solid infrastructure which links its Kecskement plant to its Rastatt factory in Germany via a highway. The carmaker, which hopes to manufacture 100,000 vehicles a year in Hungary, said the eastern European country had edged out Poland and Romania to bag the Daimler contract because of its cheap labor costs and skilled manpower.

Daimler last to enter eastern Europe

Daimler is the only major carmaker in the world without a production base in eastern Europe, where demand for cars is growing as the region's economies surge and where labor costs are significantly lower than in western Europe.

Daimler's rivals have long been splashing out in the region.

The Hungarian town of Györ

Volkswagen has a plant in the Hungarian town of Györ

Volkswagen opened its first plant at the end of 2007 near Moscow to serve the fast-growing Russian market, Audi employs some 6,000 employees in the Hungarian town of Györ and Volkswagen's Czech subsidiary, Skoda has a strong presence across eastern Europe.

In addition, German luxury carmaker BMW has long been assembling cars in Kaliningrad in Russia. And, Renault, PSA Peugeot Citroen, General Motors and Toyota have all long secured a foothold in the region.

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