From Ottoman textiles to high-tech weapons systems, Turkey has a long history of industrial activity. The challenge now is reducing the trade imbalance while maintaining impressive growth. Booming domestic demand and record exports increased industrial production in Turkey by almost 9% in 2011, powering economic growth that was second only to China among G20 nations. Productivity gains, proximity to affluent export markets and government incentives to lure investment are all lifting manufacturing to new levels.
Growth could be hindered by stalling economies in Europe, Turkey’s main export destination. Another risk is the massive current-account deficit, which ballooned to about 10% of GDP in 2011, second only to the US deficit in dollar terms. Such rapid industrial growth means Turkey must import more raw materials and intermediate goods to feed production. This has forced the central bank to take monetary measures to cool the economy, which is likely to rein in growth for 2012.
DRIVING GROWTH: Exports jumped 18% to $135bn in 2011, with the highest percentage of goods – worth $11.6bn – headed for Germany. Italy was Turkey’s next biggest market, taking $6.8bn. Iraq came third, buying $6.6bn of Turkish goods, followed by the UK, France and Russia. This growth trend continued in 2012, with exports climbing 8% to $12.6bn in March 2012 alone, according to the Turkish Exporters Assembly (T M). “If Turkey is to reach its export target of $500bn per year by 2023, there needs to be 10% growth in exports year-on-year,” said Hüseyin Durmaz, chairman of machinery maker Durmazlar Makina. “Turkish products are more affordable right now, due to the current devaluation of the Turkish lira. However, in order for Turkey to have strong and healthy exports, it needs to focus on creating a sustainable edge that is based on the competitiveness of its products,” Hakan Bayman, the general manager of tyre manufacturer BriSA, told OBG.
The biggest export sector was the automotive industry, at $1.91bn. Turkish carmakers have more than quadrupled output since 2000 and have surpassed Poland and the Czech Republic in manufacturing global brands. Now Prime Minister Recep Tayyip Erdoğan is calling for a Turkish brand, saying the country has the ability and technology to do so (see analysis).
Production of cars and other vehicles rose 10% in 2011 to 1.2m units, said the Automotive Manufacturers’ Association (OSD). Oyak Renault, a venture between the French carmaker and the Turkish military pension fund (OYAK), accounted for more than a quarter of that production. Tofaş, which is a joint venture between Turkey’s Koç Holding and Italy’s Fiat, and Ford Otosan, a venture of US-based Ford and Koç, were the second- and third-biggest manufacturers.
PREPARING FOR GROWTH: Vehicle sales rose almost 14% in 2011, reaching a record 910,867 units, including cars, light commercial vehicles and trucks, a rise of 15% over 2010. But the bumper year of 2011 has been followed by a rapid slowdown in production and sales in the first quarter of 2012 as demand at home and abroad has slipped. Car manufacturing fell 8%, while exports were down 6% and domestic sales shrunk 26%, according to the OSD. “The central bank’s decisions that are restricting the volume of credit in order to cool the economy are negatively affecting the rate of growth in automobile sales,” the association said in a bulletin in April 2012. The OSD now “aims for 2012 to be a year in preparation of rapid growth.”
NEW INVESTMENTS: To that aim, planned investments include Ford Otosan’s €205m expenditure on a new plant in Gölcük, adjacent to its existing factory in Kocaeli, according to the government’s Investment Support and Promotion Agency (ISPAT) in January 2012. Further investments in other new products worth an additional $1bn are also due to be made by 2014. The expanded capacity will raise Ford Otosan’s production to 400,000 units from the current 320,000. Its cars are exported to more than 75 countries.
The Gölcük plant is scheduled to make a new light commercial vehicle (LCV) that is still on the drawing board, but should enter production in early 2014. The plant will also create 1500 new positions. Based on 2011 statistics, Ford controls 15.6% of the market share in Turkey, its fourth-largest retail market in Europe. “The overall economy in Turkey is not deteriorating, but we are not anticipating much growth in the automotive sector because of increased costs to domestic buyers, in the form of new taxes, and limited growth in terms of export opportunities,” Ford Otosan’s general manager, Haydar Yenigün, told OBG.
Oyak Renault, Turkey’s largest carmaker by sales, will invest $254m in 2012, Reuters reported its general manager, Tarık Tunalıoğlu, as saying in February 2012. Honda shares Ford and Renault’s confidence. Japan’s third-largest carmaker recently spent $40m renovating its Turkish plant as it gears up for increased exports to North Africa. Honda has a 2012 production schedule of 25,000 of its popular Civic model, which it already ships to Egypt, Israel, Jordan, Poland and Russia, according to local media reports. German carmaker Volkswagen is considering starting up production of up to 250,000 vehicles of one or more of its models, according to Hürriyet newspaper in February 2012.
French car group PSA, which owns Citroen and Peugeot, is considering opening a plant in Turkey, ISPAT said. PSA already uses Turkish suppliers for LCV production, including Tofaş and automaker Karsan, which produce three models of LCV, and buys parts worth €90m a year. A new package of government incentives make Turkey as attractive as Brazil, China and India, Marc Bergeretti, Peugeot’s chief in Turkey, told local newspaper Hürriyet.
The government’s incentive package includes land allocation, measures to increase production capacity, enhance investment attractiveness, reduce labour costs and provide employee benefits assistance, according to the economy minister, Zafer Çağlayan.
Companies in the large auxiliary automotive industry are upbeat, even in the face of a slowdown. “Turkey is building a proper middle class and this leads to higher consumption, as well as higher-value consumption. People are buying lots of cars,” said Hakan Tiftik, president and CEO of Istanbul-based Kordsa Global, the world’s top producer of the yarns used in tyre production. “Some 80% of the tyre market is replacements, so even if the economy slows, we expect to see business as people maintain their vehicles and buy new tyres.”
REAL CHEMISTRY: Chemicals were the second-biggest exporting segment at $1.65bn in 2011, according to T M. It is a diverse sector, active in 14 distinct product categories. Petrochemicals, thermoplastics, fertiliser, organic and inorganic chemicals, pharmaceuticals, synthetic fibres, paints, soaps and detergents are the main areas of production, according to the Turkish Chemical Manufacturers Association.
Most firms are located in and around Istanbul, Izmir, Adana, Gaziantep and Ankara. The Turkish Union of Chambers of Industry and Exchanges (TOBB) said 83% of the 13,118 registered chemical companies are small and medium-sized enterprises.
Combined capacity is 180m tonnes for the production of about 2600 chemicals, though actual output in 2010 was 126m tonnes. The industry has developed significantly in terms of quality, productivity and the environment and is in the process of adopting the EU’s technical standards, increasing the sector’s export potential across the continent.
Turkey’s biggest petrochemicals maker Petkim alone had 2011 exports of $834m, a rise of 57%, CEO Hayati Öztürk said in March 2012. Azerbaijan’s State Oil Company, or SOCAR, controls 61% of it after buying out its Turkish partner in late 2011 and the government’s 10% stake in March. SOCAR will invest $177m in 2012 to boost capacity and productivity at Petkim, which aims to meet 40% of Turkey’s petrochemical needs from a current 25%, according to Dünyanewspaper. Turkey now imports about 75% of the petrochemicals it uses.
SOCAR is set to become Turkey’s biggest foreign investor as it spends $17bn over the next five years on the construction of a gas pipeline and its upgrades at Petkim, SOCAR’s president, Rövnag Abdullayev, said in April 2012. The investments include the construction of a refinery at the Aliağa plant on the Aegean. Oil refiner Tüpraş, Turkey’s biggest industrial company, operates some 85% of the country’s refining capacity.
DRUGS: Pharmaceuticals account for about a tenth of chemical production. Turkey meets 90% of its pharmaceutical needs domestically and exports a significant amount of products as well. The Afyon Alcaloids factory, for example, produces 20% of the morphine used by the pharmaceuticals industry worldwide. Certain medicines, including cancer drugs, vaccines and hormones, are generally imported.
The government buys 90% of drugs sold in Turkey through its national health service and uses the lowest prices in EU states to set a ceiling. This is part of an attempt to close a budget deficit by reining in health care costs; state spending on drugs is about $10bn a year. The government has slashed prices 250 times since 2004, according to the Chamber of Pharmacists. “Price pressure in the market is irrational, because of the limitations imposed by the government. Prices have been discounted 11%, on top of previous discounts in 2010 of 32.5% on originals and 20.5% on originals with generics. This will have to change in 2012,” said Ş ebnem Girgin, director of public affairs at Pfizer Turkey.
Other key segments in the domestic chemicals industry are fertilisers, with about 5.8m tonnes of annual capacity; synthetic fibre production at 850,000 tonnes per year; detergent and soap capacity of 1.3m tonnes and 550,000 tonnes per year, respectively; and production of paints and coatings at 800,000 tonnes a year. Turkey has the largest soda factory in the Middle East with a total capacity of 750,000 tonnes per year.
GOING UP: The construction industry grew by 10.6% in the third quarter of 2011, earning TL16bn (€6.8bn), according to a report by the Turkish Contractors Association. A thriving building industry requires large quantities of steel and copper. Steel production reached 34.1m tonnes in 2011, a 17% increase on 2010 output, according to industry data. Turkey has known reserves of 4m tonnes of copper, but that could more than triple with Asya Mining’s discovery of a deposit with as much as 10m tonnes, the state-run Anatolian News Agency reported in March 2012.
Cement is also key to industry, and Turkish producers are running at almost full capacity. The country produced 66m tonnes in 2011, of which some 15m tonnes were exported. Cement accounts for some 2% of total exports, making Turkey the world’s fourth-largest exporter, according to the Turkish Cement Association.
It predicts growth of 60% over the next 10 years.
However, cement exports dropped by 35% in 2011, Zeki Gürses, general manager of the Antalya Free Trade Zone, told Hürriyet. Gürses attributed the decline to civil unrest in the Middle East, a region that buys almost half of Turkish cement. Some firms are looking to South America and Russia to make up for the drop in exports to those countries affected by the Arab Spring. About a quarter of Sabancı Holding’s subsidiaries’ cement exports went to Brazil, helping lift revenue by 22% in 2011. Sabancı Holding sees 4.5% growth in cement on the back of a 5-6% increase in the construction sector in 2012. This follows an 11% expansion to 56m tonnes, or 763 kg per capita, in 2011.
EXPANDING: Akçansa and Çimsa, cement manufacturers owned by Sabancı Holding, which together control about 20% of the local market, are looking to expand overseas by acquiring a company, probably in southern Europe or the Middle East, Mehmet Göçmen, head of Sabancı’s cement group, said in February. The companies could also acquire Turkish firms, he said.
APPLIANCES: White goods also saw success in 2011, largely due to a housing boom, according to the Turkish White Goods Manufacturers’ Association (TÜRKBESD). Sales jumped 19.3% to a record 6.47m units in 2011. Other factors were easy credit and increased consumer confidence. Growth will likely slow to about 7% in 2012 due to economic uncertainty in Europe and its effect on consumer confidence, as well as slowing home sales, TÜRKBESD said. Koç-owned Arçelik, Europe’s largest appliance maker, still expects its sales to increase by 20% in 2012 on higher exports. According to Norbert Klein, CEO of Bosch Siemens Home Appliances, real estate projects are a key demand driver. “The Turkish market is transitioning away from solo appliances, and the uptake of built-in white goods is being driven by new real estate developments,” he told OBG.
ON THE DEFENSIVE: Defence exports have more than doubled in the last five years, from $486.9m in 2006 to more than $1bn in 2011, figures from the Undersecretariat for Defence Industries showed. The government has been actively promoting the sector through a number of diplomatic efforts, as showcased by President Abdullah Gül’s trip to Indonesia in April 2011 to sign $400m defence agreement.
But domestic military equipment manufacturers have been quite successful on their own too. Despite frosty diplomatic relations with Israel, it remains a strong military trading partner. For example, boot maker Yakupoğlu is still outfitting the Israeli Defence Force. Sales to the Turkish armed forces and foreign militaries rose by 18% in 2010 to $2.7bn. The growth was mainly in electronics, the aerospace sector and weapons, according to the Defence Industrial Manufacturers’ Association. Turkey is still a net importer of arms, but the government wants to devise its own defence systems to even out the balance. One such project is the development of a drone aircraft – the military deploys 200 unmanned vehicles; another is an indigenous fighter jet.
FABRIC OF TURKEY: The third-largest source of export revenue in Turkey is the clothing trade, shipping $1.49bn worth of goods overseas. Textile production has a 500-year history in Turkey and was a staple of the Ottoman economy up until the empire’s end. Modernisation and capacity upgrades in the industry spanned the Turkish Republic’s first 40 years. With expanded cotton planting in the 1960s, the industry came into its own, and in the 1980s, it boomed with the opening of foreign trade. The peak was in the 1990s, when Turkey entered the Customs Union agreement with the EU.
Today, ready-to-wear clothing accounts for 11% of all exports, about half of its share in the 1990s, according to the Ministry of Economy. Half of all exports go to the EU. Germany is the top importer of Turkish garments, buying $3.8bn worth, followed by the UK at $2bn and Spain at $1.3bn, data from 2011 showed. As for textiles and related raw materials, Turkey ships $7.7bn worth of goods overseas; Russia is its biggest market, buying more than $1bn worth.
Proximity to European markets, a qualified workforce, liberal trade policies and the Customs Union have helped make Turkey the world’s eighth-biggest textile manufacturer, according to a report by the General Secretariat of Istanbul Textile and Apparel Exporter Associations. Most of Turkey’s 7500 textile manufacturers are medium-scale, the trade group said. As for ready-to-wear, there are more than 11,000 manufacturers producing for export. This helped make Turkey the world’s fourth-biggest clothing exporter in 2008, according to World Trade Organisation statistics.
ABUNDANCE OF SUPPLIES: Domestic suppliers cover most of the industry’s raw materials needs. Turkey is the world’s seventh-biggest cotton producer as well as a major manufacturer of synthetic fibres. Textiles and clothing account for one-third of Turkey’s industrial employment, according to the OECD.
Competition from ultra-low-cost producers in Cambodia, Laos and Vietnam has forced Turkey and other wealthier textile-making countries to concede global market share over the past decade or more. To remain relevant, the industry should bolster high-end fashion design, Murat Yalçıntaş, head of the Istanbul Chamber of Commerce, told an industry conference in 2010, “Turkey should become a trendsetter with its fashion designs and designers. We should have done this earlier, so as not to lose market share in the world.” Already, world-famous brands like Levi’s and Gap are made in Turkish factories under patent. Now Turkey’s own brands are being distributed overseas, among them Mavi Jeans, Network and Vakko.
VALUE-ADDED: This is part of a wider shift away from low-cost production to create value in industrial output and widen profit margins. “Our goal is to use technology to develop a more efficient infrastructure in order to bring Turkey to the top levels of the value-added chain in industry,” the finance minister, Mehmet Şimşek, said at a conference in 2011. Expanding the benefits of setting up shop in special investment zones is a part of the government’s incentives scheme announced in April 2012. Turkey has three types of zones, the incentives of which include exemptions from taxes and labour charges (see analysis). Turkey has 260 organised industrial zones, which provide infrastructure, including water, electricity and communications, to investors.
STRATEGY: The government’s Industrial Strategy Document through 2014 pledges a policy framework for a long-term vision of Turkey as the regional production base for medium- and high-tech products, such as motor, air and space vehicles, medical tools, electronics and pharmaceuticals. It aims to do so by increasing companies’ competitiveness and efficiency, boosting exports, shifting towards high-tech products, training labour and maintaining respect for the environment and society, the document said. “In order to achieve these objectives, industrial strategy will have a critical function,” the document said. “The manufacturing industry is meant to be the main sector leading the economic growth in an outward-looking structure.”
Among the threats to this strategy that the document outlines is the country’s dependence on foreign fuel. The International Energy Agency estimates Turkey’s energy imports may jump 25% to $68bn in 2012. The country must also import far too many intermediate products to power its industry, which has inflated the current-account deficit to its current record levels, the taming of which Şimşek has said is the government’s top priority. Turkish businesses tend to stay small to avoid stifling regulations, which prevents them from becoming adequate suppliers of components that larger companies find cheaper to import. Çağlayan said industry’s dependence on imports stood at 43% at the end of 2011. R&D: A lack of research and development (R&D) and innovation could be another threat, the Industrial Strategy Document said. “While Turkey’s science and innovation indicators lag those of most OECD countries, there has been some strong performance in recent years,” the OECD said in a report published in 2010. Gross expenditure on R&D in 2008 was 0.73% of GDP, doubling since 1998, the OECD said. Industry paid for almost half of R&D in 2008, and the government financed 32%, the OECD report said. The R&D Law, introduced in 2008, has helped, introducing incentives and support for investors involved in R&D activities, including land allocations and tax incentives. The Scientific and Technological Research Council of Turkey and the Turkish Technology Develop- ment Foundation both offer incentives for R&D projects as well. “The R&D Law was a good first step, but it is important for the government to expand the incentives to companies that cannot reach the minimum level of 50 R&D employees. Small firms have a great deal of innovation to offer, if supported correctly,” Steven Young, head of Bosch Turkey. While a young population – half of the country is under the age of 29 – provides ample labour, the government’s document says workers lack the skills required for a higher-tech transition. But productivity has been rising since 2000, according to a paper by Harvard Pro- fessor Dani Rodrik. The rate of growth is between 3% and 3.5% of GDP per worker. “The post-2000 period looks uniformly good, irrespective of which measure of productivity growth we focus on,” Rodrik wrote. Yet productivity gains have come at a price. It is one factor behind Turkey’s unsatisfactory work safety record, according to experts cited by Hürriyet in April 2012. In 2010, 1454 people died on the job, up 67% from 2002, the International Labour Organisation said. Every day, 176 work accidents occur, three people die and five are crippled. Among other causes are increasing industrial output and high demand for workers, the transition from labour-intensive to technology-intensive production, the widespread treatment of workers as just another bit of machinery and a lack of education about safety techniques, according to Hürriyet. The fast-grow- ing construction and steel industries, big contributors to Turkey’s industrial output, are especially dangerous. OUTLOOK: For industry to power growth, the government will have to rein in inflation, restrict lending and reduce the trade imbalance – and attempt to keep industrial expansion consistent at the same time. The outlook for growth will likely improve once the economic situation in Europe stabilises. Until then, the sector will be dependent on the emerging local middle class.
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