Turkey: Gearing up to face challenges

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Despite an improved performance so far in 2013, Turkey’s automotive sector is expected to continue to face hurdles over the coming years. The economies in some of its main export markets are underperforming and new challenges are arising from other producers looking to launch a drive into Europe, potentially raising the level of competition at home and abroad.

Last year, Turkey’s automotive sector produced around 1m units, just over half of them passenger vehicles. Some 730,000 units were shipped overseas in 2012, with sales amounting to nearly $20bn, according to Turkish Automotive Manufacturers Association data. While the automotive sector continues to be one of the main export earners, total production was down by 9.8% in 2012, the result of weak demand both locally and abroad, particularly in Europe.

Domestic sales have rebounded this year, with 381,000 units rolling off the lots in the first six months of 2013, a 12% increase over the same period last year. However, some of the bounce may be fading. According to data released in early July by the Automotive Distributors’ Association, June sales were up by 4.2% year-on-year, compared to 15% in May, possibly due to anti-government protests throughout the month, which gave rise to concerns over medium-term economic stability.

Local sales have been supported by historically low interest rates, part of the central bank’s policy aimed at promoting growth. The reserve lowered its key lending rate to 4.5% in mid-May, helping to spur more domestic demand. How long the low interest regime can be maintained is subject to some debate, with inflation rising steadily this year to hit 8.3% in June, a nine-month high and well above the central bank’s 5% year-end target. Consumer inflation could be pushed up further, with the fall in the value of the lira to a record low in early July of TL1.96 to the US dollar set to make imports even more expensive.

The combination of weaker currency, low interest rates and high consumer demand could prompt the central bank to raise its key rates in the second half of the year in an attempt to curb inflation. By making personal loans more expensive, any such move would have an impact on sales of domestically manufactured cars. However, should the lira remain weak, local producers stand to benefit.

Though automotive exports accelerated in the first half of 2013, totalling $10.5bn to the end of June, there are concerns that overseas sales could slow in the latter part of the year, especially if the US Federal Reserve scales back its bond purchases, which are key to its stimulus programme. If carried out, there could be a cooling effect in other economies, the Turkish Exporters’ Assembly has warned, which might hit auto exporters.

Further down the road, the industry could face longer-term challenges. A report on the Turkish automotive sector prepared by consultancy firm KPMG warned that the industry’s traditional markets could be threatened by the increasing penetration into Europe by BRIC producers – Brazil, Russia, India and China.

According to the study, released in April and based on a survey of Turkish auto executives, 61% of respondents believe manufacturers from BRIC countries will penetrate the European market over the coming six years, with China being the main entrant. While some executives thought it possible BRIC manufacturers could establish plants in Turkey as part of their drive into Europe, most felt Eastern European counties would be favoured as production bases. These factories would not only form a challenge to Turkey’s export sales, but could also be used as the foundation for a push into the Turkish domestic market, offering inexpensive alternatives to locally produced vehicles.

Though 75% of respondents said they expected new foreign direct investments to be made in the sector over the next five years, this is likely to come from Europe, rather than from any of the BRIC countries, meaning that Turkey’s vehicle makers will face increasing competition both in the marketplace and for investments through to 2017 and beyond.

While Turkey’s Minister of Science, Industry and Technology, Nihat Ergün, said in early July the government hopes that the automotive industry will achieve a production rate of 4m vehicles a year by 2023, this will depend on its capacity to adapt to regional challenges and changing domestic requirements. These will include state plans to require new vehicles to have reduced emissions and be more fuel-efficient, as well as a push for the manufacture of hybrid and electric vehicles, which could boost export potential.

Turkey’s automotive manufacturers and their foreign partners are looking to adapt their production to meet changing demands locally and in their traditional export markets, with leading brands having announced more than $2.5bn of new investments in their plants for this year alone. By trying to keep ahead of the competition, the sector should be able to maintain its place as one of Turkey’s leading industrial driving forces.

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