Key targets: The national development strategy has set high GDP and export aims

Accounting for between a quarter and a third of the country’s entire GDP, Turkey’s industrial sector is a world player in areas as diverse as automotives, ready-to-wear, chemicals and retail. A major source of Europe’s industrial imports – as well as a destination for the continent’s exports – Turkey is also a major industrial trader with the Middle East, Central Asia and beyond. Indeed, wherever Turkish Airlines (THY) opens a new route, be it to Ouagadougou, Burkina Faso or Ashgabat, Turkmenistan, Turkish industrialists are some of the first to travel there, contracts in hand. Yet these are by no means easy times for the sector, as European economies either shrink or remain steady, while competition for new markets in Asia and Africa is tough. The sector also faces ambitious targets set by the government, which wishes to mark the first centenary of the Turkish republic with a spot among the world’s top 10 economies. That will require industrial outfits to redouble their efforts at a time of global uncertainty.

Made in Turkey

Turkey's rising profile internationally and the increasing awareness of Turkish products, from textiles and automobiles to airlines and television shows, should help in this regard. "Brand Turkey” is slowly but surely becoming known around the world; according to a recent ranking by Brand Finance, a company specialising in brand valuation, Turkey had the 19th-most-valuable nation brand worldwide in 2011 with a value of $373bn, up 19.8% year-on-year. Futurebrand's “Country Brand Index 2012-13”report put Turkey 45th worldwide, but 10th among the "Future 15” brands, noting that the country is “a new favourite in political, economic and cultural circles".

E Ali Bilaloğlu, CEO of Doğuş Otomotiv, pointed to the automotive sector as one area where Turkey has achieved high-quality design standards, and said the country is becoming known for its excellent automotive craftsmanship. “ Made in Turkey” is not yet synonymous with high quality across the board, however, according to Elif Çapçı, the CEO of retailer Beymen. “If you look at other countries – Europe, for example – you see that designers and labels had to work and invest over several decades before they achieved global prominence,” Çapçı told OBG.

One scheme that should assist with this is Turquality, a state-backed initiative to help boost exports by developing strong global Turkish brands and strengthening the image and perception of Turkish-made products as well as Turkey more generally. The programme has expanded since its launch in 2005 and as of December 2012 covered 97 brands from 85 firms across a wide range of sectors, from machinery to jewellery. Its stated aim is to create 10 global brands within 10 years.

In general, Turkey needs to move up the value chain, going from a low-cost-production centre to a value-added one. İsmail K›sac›k, CEO of global apparel manufacturer Taha Group, told OBG, “ We need to shift from high-volume manufacturing to making high-end, high-margin items." TOFAŞ CEO Kamil Başaran echoed this sentiment at an April 2012 seminar organised by the Turkish Authorised Automotive Dealers’ Association, saying the local automotive industry needed to transition from “made in Turkey” to “designed in Turkey”.

Sector Bodies

During the first decades of the republic, Turkish industry often took second place to agriculture, as the country that emerged from the ashes of conflict in 1923 was still largely rural. This balance changed over the years, however, as a command economy, generally run by the one-party state, began an industrialisation programme that operated by political diktat rather than market forces.

Liberalisation began in the 1980s, and the end of the Cold War and the reopening of trade with the countries of the Black Sea and Central Asia helped to electrify the Turkish economy. Then, in 1996 Turkey signed a Customs union with the EU, while peace agreements in the Middle East and a surge in growth in the Gulf also encouraged the expansion of trade to the south. Thus, within two decades, Turkey went from being a largely closed-off, frontline Cold War state back to its historical place as a crossroads between continents.

Effects

The results of this rebirth have been dramatic. A look at the figures from the Turkish Statistics Department (TurkStat) shows the progress of industry. GNP at current prices derived from industry stood at TL19.28m (€8.3m) in 1987, TL100.32m (€43.3m) in 1990, TL2.04bn (€882m) in 1995, TL29.03bn (€12.53bn) in 2000 and TL123.67bn (€53.4bn) in 2005. From 1990 onwards, World Bank figures have shown value added for the industrial sector outstripping that of the euro area (EA); in 1990, as a percentage of GDP, industry’s value added in the EA was 32.6% and Turkey’s 32.16%. By 2000, the respective figures were 27.88% and 31.48%, and by 2005, 26.42% and 28.51%. The global downturn then hit both the EA and Turkey – with 2009 being the year Turkey was hit the worst by the crash. Still, in 2010, while industry’s value added in the EA was 26.23% of GDP, in Turkey it was 26.65%.

Sub-Sectors

Breaking the industry figures down by segment, the TurkStat numbers include mining and quarrying, electricity, gas, water and manufacturing under industry. Of these, manufacturing takes by far the lion’s share. In 1990, this sub-sector contributed TL86.3m (€37.3m) to GNP, at current prices, or 21.7% of the total, according to TurkStat. By 1995, the figure was TL1.75bn (€756m), or 22.3%, while by 2000, the figure was TL23.9bn (€10.32bn), or 19%. In 2005, the respective figures were TL101.25bn, or 20.8%. By 2010, TurkStat figures for manufacturing as a percentage of GDP show the sector contributing 15.7%, while in September 2012, the figure rose to 16%. Given that the total GDP as of September 2012 was TL1.06trn (€457.7bn), that would give manufacturing around TL169.17bn (€73.05bn) for the period.

Overseeing this expansion has been a succession of governments, each of which have had different national development strategies. Currently, the Ministry of Industry and Trade (MoIT) has a central role, with much of its strategy aimed at the goal of EU membership for Turkey. The country is in the process of working through the EU accession document’s acquis (French for “that which is agreed upon”) that refer to the total body of EU law and have been organised into 35 chapters. Progress on these chapters has been slow of late, although this has largely been due to political disputes, rather than economic ones.

An industrial strategy for Turkey through to 2014 is currently in place. This was drawn up by the MoIT in cooperation with the State Planning Organisation, the Secretariat General for EU Affairs (now the Ministry for EU Affairs), the Investment Support and Promotion Agency, the prime ministry, various other relevant ministries, and a range of professional bodies. These include the Union of Chambers and Commodity Exchanges of Turkey, the Foreign Economic Relations Board, as well as chambers of commerce and industry across the nation. There is also the Turkish Industrialists and Businessmen’s Association and the Independent Industrialists and Businessmen’s Association (MÜSİAD). The former, which represents a more secularist political view, was previously more influential than it is today, while MÜSİAD, a more Islamist-oriented organisation, now holds more sway with the current Justice and Development Party (AKP) government.

Centennial Celebration

The AKP administration has also launched Vision 2023, its national development plan timed for the centenary of the Turkish republic that same year. This includes some major new targets that should have implications for the industrial sector.

By the 100th anniversary, the plan aims for a GDP of $2trn, annual exports of $500bn, a foreign trade volume of $1trn, per capita income of $25,000, an unemployment rate of 5% and an overall ranking for Turkey as one of the world’s top 10 economies by size. Most of these targets imply a doubling, if not tripling, of the current levels within 10 years. While these targets may seem ambitious, they were made following spectacular growth over the past decade. When the AKP took power in 2002, per capita GDP was just $3500, with the $10,000 mark breached by 2010. Exports at that time stood at around $36bn, but have now reached about $151.8bn. Notably, this was achieved despite the global economic downturn in 2008/09 and Turkey’s own financial meltdown in 2000/01.

Still, many leading industrialists are concerned that with the continued downturn in European markets – Turkish industry’s main export destination – the next decade will see the sector struggling to maintain growth, let alone hit the targets envisaged. “We will have to triple our current production capacity,” said Ercan Tezer, the secretary-general of the Turkish Automotive Manufacturers’ Association (OSD).

“This means we will need around 13% average annual growth, which is a remarkable figure, but it is a very promising target. There are global realities, too – such as the excess capacity of many production areas, especially in Europe.” In many ways, the 2023 goals must be achieved in spite of European trade, rather than due to it, with the search for other markets thus a priority for industry as a whole.

Exports & Imports

Manufacturing will likely bear the brunt of Turkey’s effort to hit its $500bn export target, with the top four sectors for exports in 2012 all from this area. The top sector was automotives (see analysis), with $19.06bn in exports that year, down 5.3% from $20.12bn in 2011, according to Turkish Exporters Assembly (TIM) data. Second were chemicals and chemical products (see analysis), with $17.54bn, up 11.3% from $15.76bn in 2011, followed by ready wear and clothing (see analysis), with $16.09bn, down 0.4% from $16.15bn in 2011. Textiles (see analysis) have retained an important, if declining share, exporting $7.85bn of goods in 2012, down 1.2% from $7.94bn in 2011. In fourth place were metals and metal products (see analysis), with $15.56bn, up 1.7% from $15.3bn in 2011.

E&E: Also important in recent years has been electrical and electronic goods (E&E) and machinery, which was valued at $11.18bn in 2012, around the same as in 2011. The E&E sector has recently been dominated by white goods, which employs around 2m people and has a capacity of around 25m units a year, according to a 2010 Deloitte report on the sector. Several companies are now household names beyond Turkey – even if their Turkish origins are not so well known. Indeed, Beko, which is the UK arm of Arçelik and accounts for around a fifth of the parent company’s exports, is now the UK market leader in white goods, expanding its market share there from 8-9% on a unit basis in 2008 to 17% by the end of 2012, according to the Financial Times. The financial crisis helped lower-priced Turkish white goods in countries such as the UK, as consumers turned to good quality, but lower-end models as they tightened belts.

Arçelik is 57%-owned by Koç Holding and posted a 31% increase in total sales in 2012, to TL7.9bn (€3.4bn). Other important companies include Vestel Group, part of Zorlu Holding, which has subsidiaries in the UK, Germany, Russia and Scandinavia. Vestel claims a 21% share of the European market when it comes to TVs, largely sold under local brand names. Foreign players are also present in Turkey, including Bosch, Italy’s Indesit, and Siemens Household Appliances (BSH) – whose Turkish operation is now the headquarters for its MENA, Central Asian and nearby Eastern markets. It is likely to be at home, though, that the white goods and household electronics sectors will see future growth. As per capita income rises, demand for more appliances follows, with the Economist Intelligence Unit predicting a compound annual growth rate (CAGR) of 10% for these sectors between 2009 and 2013, rising to 12% for household audio and video equipment.

Social Transformation

Helping with this are some sociological and financial changes. “Consumer behaviour is changing,” Norbert Klein, the CEO of BSH Turkey, Central Asia, Middle East and North Africa, told OBG. “For example, children are leaving their homes to live in apartments much earlier than in the past, when they would wait until marriage. This has boosted the sales of white goods and appliances. The number of active credit cards in the market has also more than doubled over the past four to five years.” To move this sector forward, industry players note the importance of developing local research and development (R&D), with this sure to be vital to future value added in a highly competitive global marketplace. This is evident in the automotive sector.

“Given Turkey’s severe dependency on fuel imports, the auto industry should try to specialise in the design and production of energy-efficient vehicles,” said Hakan Bayman, the CEO of Brisa, a major tyre producer in Turkey. “However, success in this area, and in other value-added industries such as agribusiness, will require heavy investment from the government and the private sector in research and development.” One of the government’s targets for 2023 is to see 3% of GDP going to R&D, up from 1% in 2012. Though this will be a major challenge for the sector.

Further Influence

The importance of R&D expansion is also crucial to other industry sub-sectors. Turkey has long been a purchaser of defence equipment from the US and Europe, especially Germany. Yet for some time now, the main military procurement agency, the Undersecretariat for Defence Industries (SSM), has been trying to encourage more domestic weapons production.

Turkey has the second-largest army in NATO and also confronts some turbulent borders, namely with Iran, Iraq and Syria. Its defence spending, however, is only the sixth-largest in Europe and 15th in the world, signifying a low level of technology in the armed forces, which the SSM also wishes to address. Turkey has thus participated in the F-35 joint strike fighter, the Type 214 submarine and the A400M transport plane programmes, with this also feeding experience into domestic industries, such as aerospace and defence outfits.

Aerospace not only benefits from the defence contracts evident here, but has developed significant civilian expertise. TAI has been a supplier for Airbus since 1998, producing body panels and ailerons. Some 2500 jobs revolve around Airbus in Turkey, which also receives parts from Istanbul-based Kale Aero.

The republic has 18 domestic defence companies, with the state Turkish Armed Forces Foundation as a major shareholder in all of these. The sector earned $18.76bn in 2012, as per Ford & Sullivan data, who estimate a $20.7bn industry by 2021 and a CAGR of 3.29% between 2009 and 2020.

Also in transport, GE Transportation recently established a locomotives plant in Eskişehir, in partnership with the Locomotive and Engine Industry Corporation. The plant will turn out around 50 locomotives in its first two years, most of which will go to Turkish State Railways; in the long term, 50-100 locomotives a year will be built, generating around $1.5bn in export revenues.

Outlook

The next decade will likely see a continuation in the current shift in export markets away from Europe and toward Asia and Africa for Turkish industry. At the same time, increased spending on R&D and meeting the goals set for 2023 will be vital if the country is to produce higher-value-added goods, and thus keep ahead of its lower-cost Asian and African rivals.

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The Report: Turkey 2013

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