Turkey’s auto sector grows in the midst of political turmoil13 April 2017 | Marcus Williams
Representatives of Turkey’s automotive industry and the government’s investment support agency met in London, UK, last month to discuss the challenges the country faces in getting back on track toward production and export growth, following a politically turbulent two years. Despite the disruption, it seems the Turkish automotive sector is recovering well – both domestically and in terms of international trade…
Turkey’s location is both a blessing and a curse. It is at the crossroads of three continents and has long been a region of stability between Europe, the Middle East and Africa. The country is a logistics nexus for global automotive shipments with a well-established automotive industry of its own. However, it also borders Syria and Iraq to the south, where conflict has been raging for years.
Over the last two years there have been a succession of terrorist attacks in Turkey, as well as an attempted coup and a major crisis with Russia. Islamist militant violence has spilled over its borders, not least from the ongoing crisis in Syria, and there continue to be problems with Kurdish militants in the east of the country. This month Turkey is holding a constitutional referendum on the replacement of the existing parliamentary system that some commentators fear could spell the end of democracy in the country.
These problems have affected growth recently and led to a drop of more than 30% in foreign direct investment last year, as well as a dramatic devaluation of the Turkish lira; yet the country is recovering quickly. Performance is back at levels seen in 2014 already and it remains a growing regional base for international companies to establish their headquarters. Coca-Cola, Microsoft and Intel all have their regional headquarters in Istanbul from which they manage wide networks across multiple countries.
Istanbul is a haven for doing business in a region riven with political, humanitarian and industrial problems. The challenge the country is faced with now is convincing new foreign investors – including global automotive companies – that it continues to be a going concern.
Foreign investment in automotive
Passenger car and commercial vehicle production is growing. Last year, the country made 1.5m vehicles and it has sufficient installed production capacity to make nearly 2m. There has been almost $6 billion of investment in the automotive industry in Turkey over the last five years, according to the Turkish Automotive Manufacturers Association (OSD), and foreign direct investment in the sector is important for the country as a whole.
“There is foreign investment in many sectors and automotive is one of the most important beneficiaries, because automotive is always number one or two in our exports,” said Arda Ermut, president of the Investment Support and Promotion Agency of Turkey (Ispat) at a meeting in March at the offices of FTI Consulting involving his organisation, the OSD and Ford Otosan, the joint venture in Turkey between Ford and Koç Holding. “[Automotive] is providing an important part of the research and development (R&D) expenditure and a good case for foreign investors, and for the improvement of the economy of Turkey.”
Turkey is now ranked 17th in terms of global passenger vehicle-producing countries, but is 12th globally in terms of its commercial vehicle output.
Parallels with the UK
In terms of passenger car production, it is just two places below the UK and there are, in fact, a number of parallels between the two. Osman Sever, general secretary of the OSD, outlined some of them at the meeting in March.
For one, production levels are similar, with the UK having made 1.7m vehicles last year, against Turkey’s 1.5m. Each country exported 70% of the vehicles it made (1.15m from Turkey and 1.35m from the UK).
Turkey exports to 180 countries but 85% of its exports go to the European Union (EU). Last year, the UK exported around 60% of its assembly to the EU, though of course the future of that trade is less clear since the UK took the decision to withdraw from the EU. Nevertheless, Sever was keen to juxtapose the two countries in a positive light.
“Very much like the UK, the Turkish automotive industry has enjoyed success in recent years; car manufacturing is now at its highest point and exports are very strong,” he said.
The UK was Turkey’s top export market in 2015 (and it still is for Ford Otosan, which exports 31% of its output there) but it has slipped to number three overall with Italy now Turkey’s top export market following the success of the Tofas Fiat Tipo project. Tofas has a joint venture with Fiat Chrysler Automobiles and since 2015 has been making versions of the Tipo van, including the 4D, 5D and SW versions. The number of vehicles now exported to Italy based on that contract hit 49,000 last year. Overall, vehicle exports to Italy from Turkey are now worth more than $2.2 billion.
France is Turkey’s second biggest export market, with Germany and Spain following on after the UK.
“Very much like the UK, the Turkish automotive industry has enjoyed success in recent years; car manufacturing is now at its highest point and exports are very strong.” – Osman Sever, OSD
In terms of trade directly between Turkey and the UK, Turkey imported 40,000 vehicles from the UK last year. It also imported $1.2m worth of parts and components from the UK, according to Sever. With the Ford Transit now exclusively made at the Ford Otosan plant in Kocaeli, a good percentage of those parts imports are accounted for by Euro 6-compliant engines delivered to Turkey from Ford’s UK engine plant in Dagenham, as well as other components.
Burak Gökçelik, assistant general manager of product development, who was also at the meeting in March, said Ford Otosan imported $540m worth of material from the UK. In the other direction, Ford Otosan exports more than 30% of its output from the Kocaeli plant to the UK, equal to 90,000 vans a year.
There are concerns that the prospect of the UK leaving the single European market could hamper the level of trade the countries currently benefit from mutually.
Turkey’s trade with the UK is based on its free trade agreement with the European Union, which came into force at the end of 1995. Once the UK leaves the EU, it will no longer be able to trade on the terms it does now. Sever said that from listening to government officials in both countries, the sooner a free trade agreement (FTA) between the UK and Turkey was established, the better – and that ideally, this would be as soon as the UK officially left the EU.
“[The] two countries have important trades with each other and that is not something to be taken lightly,” said Sever, adding that the feedback he had received suggested the proposed FTA would at least maintain the current trade volumes and preferential treatment. “There is a lot in common,” said Sever. “The UK is a very important export market for us and we are also an important export market for the UK.”
Gökçelik admitted that with Brexit, Ford would be recalculating the trade balance and looking at it from a Customs Union perspective.
While it exports vehicles and components to 180 markets abroad, Turkey also has a growing domestic market. For the first time in its history it sold more than a million vehicles on the home market in 2015 (1.1m, in fact).
Of the vehicles sold in Turkey, 65% (around 658,000) are imported and Sever was keen to stress that Turkey did not have a protectionist policy.
“We feel competition is good for everybody,” said Sever. “It develops the market so you can become more competitive. It helps the customer to choose what product they want. We are a country with a serious trade balance issue but our market is open.”
That said, according to Arda Ermut, while the country is not forcing manufacturers to make parts where vehicles are assembled, the government is trying to attract foreign companies to make parts locally.
Those vehicles are being sold to a population that has seen improvements in the standards of education and healthcare. This bodes well both from a consumer point of view in terms of a rising middle class and in terms of a growing base of skilled labour for the sector.
“In Turkey, the average age is 30 and it has a population of 78m,” said Ermut. “Those tech-savvy people know the trends of IT penetration. They are also open to new trends to make business with different cultures. These companies are using the human capital potential and the strategic location to address this region.”
The automotive sector in Turkey also has a mainly adequate pool of labour to meet the demands of finished vehicle delivery as output increases – something more developed markets such as the UK and US are struggling with, as the driver pool continues to age and the recruitment drive continues to run flat.
“From time to time, the transport companies face driver shortages but these are not substantial,” said Sever.
Engineering skills issue
However, there are issues with the recruitment of engineers into the manufacturing part of the business.
Sever said Turkey had seen a decline in the number of students going into engineering but the industry was focusing on mechanical engineering and, what was more important for the future of automotive manufacturing and the increase in electronic modules, mechatronic engineering.
“There is a push situation but we are managing what there is,” said Sever. “Skill is an issue we have to manage.”
Gökçelik noted the efforts being made at Ford Otosan. “As you know, by 2030 more than 50% of the vehicle could consist of electronic components, so you need more electronic and software engineers. That is why we have started trialling mechatronic engineers,” he said. “I have a lot of them. We are leading heavy-duty diesel engineering in Turkey for commercial vehicles and also supporting Ford on light-duty diesel engines.”
Focus on rail
Another issue pertinent to the maintenance and growth of both Turkey’s domestic business and its imports and exports is the development of its supporting infrastructure.
Automotive production in the country is currently focused in the Marmara region in the north-west. The region has the strongest logistics connections, both in terms of the road and port network, while also having an adequate labour pool of workers for both modes. Put simply, logistics is not a problem for the general automotive sector, according to Ermut. In fact, it is “a lucrative market” if you are an ocean services provider, added Osman Sever.
“Say there are over a million [vehicle units] going out on ships and 650,000 coming back in. A 70% fill rate when you are doing the return journey is not something you find easily,” he noted.
However, the growth in Turkey’s automotive sector has left a gap when it comes to land-based infrastructure, especially rail, and this is something the government is addressing with a push toward more privatisation.
Automotive transport providers will no doubt hope to avoid a situation like the one that affected trade when the port of Derince was privatised, however. Usage fees for ro-ro operators at the port increased by 450% in one month after private operator Safi Katı Yakıt Sanayi, Ticaret took over operations from the government in 2015.
Nevertheless, in Turkey there is currently an over-reliance on the road network.
The OSD has a logistics committee that is made up of the logistics managers from its 14 OEM and numerous tier supplier members. Sever explained that during the committee’s monthly meeting in February, one of the logistics subjects under discussion was the strategy to privatise the railways.
“[There are] substantial infrastructure developments but the speed at which we are growing means that unfortunately, there is a gap,” he said. “We need to be able to do something more to complete our operations with less cost and less risk involved.”
Sever said that at the moment, there was a heavier reliance on road transport to move cars to the ports than was necessary, though the opening of the Osman Gazi suspension bridge in the Gulf of Izmit last year had helped to halve road transport times. He went on to say that one idea OSD’s logistics committee put forward to the minister of transport in Turkey was that of direct rail connections to the car plants. By way of example, he cited rail connections to logistics hubs such as DB Schenker’s at Barking in the UK, as well as a number on the continent.
“I used to work for Renault in France and saw the same as in Germany, where the factory connects with the major hubs,” he explained. “We have requested that and the reply [from the minister] was, ‘yes we will work on it’.”
Better rail connections would also address the issue of quality in outbound delivery, according to Sever.
“Every handover of the vehicle between modes is a risk to quality,” commented Sever. “Given the competitiveness and the eagerness of the other players in the industry to grasp part of your business, quality is of the utmost importance. Therefore we do not take any risks and so the fewer transfers we do with the vehicle in transport, the better we feel and the more cost competitive we are. It is something we are following very closely and are talking to the government about.”
Global trade, with product quality at its centre, will be a major contributor to the strength and speed of Turkey’s recovery after recent turmoil in the region. And Turkey’s already global automotive sector will be a major contributor to that – assuming the country’s position as a gateway between continents continues to attract investment from established carmakers and suppliers, as well as newer players wanting to trade with the country.