Driving Toward Europe

Turkey

Economic News

22 Jul 2010
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Turkey is set to become a launch pad for China's rapidly growing car industry as it attempts to establish a presence in European markets, signalling growing confidence in the country's already strong automotive sector.



On April 22 Chery Group, China's largest carmaker, announced that it planned to begin production of its Kimo, Tiggo and Alia models in Turkey, in partnership with local carmaker Mermerler Group. Zhou Biren, Chery's vice president, told media the company was currently looking for land for a new plant, which would take two years to come online and would have an initial capacity of 100,000 vehicles. The exact level of investment will be finalised following a feasibility study of Mermerler's production facilities.



"Being successful in Turkey will be a benchmark for our success in Europe," said Biren. "This is because Turkish customers have similar tastes to customers in the EU. For this reason, Turkey is the first step toward entering the European markets... which is our primary goal."



As part of the EU Customs Union, Turkey has an ease of access to EU markets that Chinese producers lack. However, the strict safety regulations imposed on imports also mean that many cheaper Chinese models would not be permitted entry. This factor, combined with persistent doubts among buyers over the quality of low price Chinese goods, goes some way to explaining why Chery and Mermerler have decided to focus on more expensive models.



With vehicle prices on average 30% below foreign brand equivalents, Chinese carmakers have traditionally targeted rapidly growing markets in the developing world. The company's QQ Hatchback model - whose price of $4800 makes it the second-cheapest car in the world, after Indian firm Tata's $2500 Nano model - will not be made in Turkey. The Alia and Tiggo models it will produce instead cost between $15,000 and $26,000.



The company will join other foreign firms Renault, Fiat, Toyota, Hyundai and Honda in producing passenger cars in Turkey. Vehicles account for approximately 20% of all Turkish exports, and in the first three months of 2008, Turkey exported 151,940 automobiles, a rise of 34.9% on the corresponding period in 2007, according to the Automotive Manufacturers Association. In 2007 total vehicle production, including commercial vehicles and buses, hit just over 1m and many analysts predict this figure could hit 2m in the next ten years.



Turkey faces stiff competition from countries such as Romania and Hungary, however, which are also looking to use cheap production costs to become centres of vehicle production in the EU. By the end of 2009, Renault's Romanian subsidiary, Dacia, aims to nearly double production of its budget Logan line to 400,000 units, with the majority intended for export.



In addition to bringing foreign investment and knowledge to the Turkish market, the entry of automobile firms provides additional opportunities for the country's growing subcomponents and spare parts manufacturing segment. In recent years the strength of the lira has encouraged firms to buy cheap intermediate goods and establish assembly plants in Turkey, and a number of firms from the US, Germany and Japan have opened plants or expanded the production of components ranging from steering wheels and seat belts to air conditioning units.



The automobile sector is now seeing a greater push from local businesses and the government to move into more high tech areas as well as research and development. Speaking at a conference on April 29, Mehmet Simsek, the minister of economy, said that rather than simply being an outsourcing centre for the automotive industry, Turkey should look to design cars. The new tax law introduced this year offers a 90% tax break to firms engaged in research and development, indicative of the government's commitment to boosting innovation in Turkish industry.



While the opportunities for expansion into European markets are clear, the potential of the domestic market should not be overlooked. Chery is targeting 50,000 domestic sales for its first years of production, but Turkey's young demographic and rising income levels suggest that long term potential is strong. With half of the country's population under the age of 25 and with the government targeting a doubling of average personal income to $10,000 by 2013, there is likely to be a strong increase in car purchases in the coming years.

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