Apart from Russia, Turkey offers the biggest growth potential in CEE.
For decades, Turkey has been a production base for buses and trucks.
MAN as well as Mercedes-Benz entered the country in the 1960s to begin bus production. Then Mercedes-Benz added truck manufacturing in 1986. Nevertheless, Turkey also has a history in car manufacturing through entering alliances with Western producers at an early stage.
Two of the three biggest joint ventures, Fiat Tofaş and Ford Otosan, are partly in the hands of the Turkish conglomerate Koc Holding, which therewith controls nearly 50% of car production countrywide. The biggest single producer, however, is Renault Oyak. After reforms in 2001, Turkey was able to attract further foreign automotive players, especially thanks to the country's free trade access to the EU.
This factor contributed significantly to the development of Turkey as an export hub. Moreover, Turkey earned the image of a low-cost, high-quality location, bridging Europe and Asia.
The component sector did not take long to prosper after the arrival of global vehicle manufacturers. In addition to domestic suppliers, several domestic-foreign partnerships have been established. Moreover, Turkey also plays a major role in producing components, the majority of which are for export.
In 2007, for the first time, the Turkish automotive industry even overtook the domestic textile industry as biggest exporter.
Figure 43: Projected sales and production (in units) compared between 2008 and 2012
Figure 44: Projected sales and production (in units) compared between 2008 and 2012
Apart from Russia, Turkey offers the biggest growth potential in CEE, with a population greater than 76 million, the lowest car density in Europe and an average car age of 16 years. However, the market potential has not had the chance to unfold in its entirety, due to the ups and downs of Turkey's volatile economy.
New passenger car sales peaked with 678,000 vehicles in the period between 2003 and 2004, due to a scrappage program. In 2008, the domestic car sales fell 17% to 494,569 units, but rose nearly 13% to over 557,000 vehicles in 2009.
Nearly 1.1 million,198 light vehicles were produced in Turkey in 2008, but domestic production dropped by more than 20% in 2009. Oyak Renault, a joint venture since 1969 between Renault and the Turkish Army Pension Fund, manufactures the Renault Megane, Clio, Fluence and from 2011 E-Fluence passenger cars as well as powertrain components in Bursa, about 90 kilometers south of Istanbul.
In the 1960s, Otosan (Otomobil Sanayi) began car manufacturing in alliance with Ford in the province Kocaeli. Today, the joint venture produces the Ford Transit Connect van and plays a significant role in Ford's supply chain.
The domestic automaker, Tofas, began producing and promoting re-branded Fiat cars under license in 1971. Since 2001, however, the factory has produced only Fiat-branded cars such as the Doblo, the Linea and the Palio.
In 2005, PSA and Fiat agreed to jointly develop a common platform for vans to be sold throughout Europe under the Fiat, Peugeot and Citroen brands. Asian manufacturers established plants in Turkey as well. The İzmit factory, founded in 1997, was Hyundai's first overseas production plant.
Toyota and Honda entered the market in the 1990s. From China: Chery Automobile will start operations in Turkey in the second half of 2011. As noted earlier, Turkey is also home to bus and truck manufacturers such as Mercedes- Benz, MAN, Isuzu and Iveco.
Figure 45: Light vehicle sales by brand (in units), 2007 and 2009
Figure 46: Light vehicle production by brand (in units), 2007 and 2009
In the downturn
The Turkish automotive industry has expanded rapidly over the past couple of years as it has become more integrated into the European automotive value chain. Eighty percent of the country's automotive production is for export, and the industry accounted for 30% of overall Turkish export sales in 2008.
Accordingly, the global downturn had a significant impact as it reversed the economic improvement brought on by a disciplined monetary policy for the purpose of securing stabilization.
An agreement with the IMF might be an option in order to secure financial resources and attract further investment. The downturn also revealed other issues, such as a weak currency and high debt.
To boost domestic demand for passenger cars, the Government initiated a consumption tax break in Spring 2009 for three months, which resulted in a 10% increase in passenger car sales for the year. In terms of light vehicle and car production, Turkey also has benefited from the European scrappage programs.
However, some Turkish exporters are approaching the Middle East as an alternative automotive market to the slowing European market. Turkey's solid industrial base and its efforts to converge with EU standards have made it an attractive place to invest for automobile manufacturers:
- Hyundai decided to relocate parts of its i20 production to Turkey from India due to local labor conflicts in India and in order to produce closer to the European market.
- The Chinese automotive manufacturer Chery announced plans in 2009 to establish a factory in Turkey for the purpose of supplying Turkey and Eastern Europe, and Chinese player Dongfeng Motor intends to invest into its new passenger car manufacturing unit.
- Hella, supplier of head lamps and automotive electronics, acquired 49% of a Turkish vehicle parts trading company in January 2009 in Istanbul with the intention of participating in the significant aftermarket business.
- In 2008, Lamborghini opened its first showroom in Istanbul. The brand considers Turkey an important part of its development strategy, due to the country's strategic location between Europe and Asia. In contrast to the investment plans of others, Honda intends to delay the expansion of its Turkish facility, which was supposed to supply the now crisis-affected Russian market.
Risks and opportunities
Challenging macroeconomic expectations
- From a macroeconomic standpoint, Turkey faces serious challenges ahead and could have difficulty meeting targets from the IMF.
- While long-term interest rates &$40;over 60% in 2001) still exceed 20%, the current account balance remains negative, which should be an additional obstacle to reducing foreign debts.
- Despite continuous growth figures combined with an inflation rate, Turkey needs to manage its vulnerability to economic shocks by implementing structural changes. Turkey's economy is very much dependent on large capital inflows.
- Although the inflation rate has been reduced significantly, inflation is an ongoing issue and requires tight monetary policy.
The country's geographical position might put exports to some countries at risk
- Higher energy prices have led to increasing transport prices around the globe. This has had a direct influence on vehicle transportation costs.
- 90% of exports go to WE; direct neighbors import little of Turkey's vehicle output.
- As other CEE countries closer to WE markets increase their production, Turkey could face fierce competition due to its greater distance from these markets. On the other hand, Turkey offers unparalleled proximity to the Middle East and northern Africa.
- In recent years, growth in domestic sales has been slow, despite credit offers that have made it easier for Turkish customers to buy a car.
Low car density combined with strong population growth
- Turkey’s comparatively small car fleet (7.1 million passenger cars) and large population present a strong combination for prospective growth.
- A well-established foreign automotive industry and structural reforms make it easier for foreign OEMs to enter the market and expand production.
- With about 15 foreign OEM projects and more than 700 foreign suppliers involved, it can be considered a mature industry sector that affords easy access for establishing new facilities.
- Turkey has a low labor costs compared to many European countries, a skilled workforce and a highly developed technological infrastructure.
- After the tax reform that began in 2005, the current corporate tax code (with a flat tax rate of 20%) enables taxpayers to have more clarity in respect of their tax applications, which will promote the investment environment (e.g., thin capitalization, transfer pricing, foreign tax credit, participation exemption).