Tuesday, 22 September 2009

Macro Level Trends – Turkish Autos A.S. – Creating a Counter-Cyclical Industry

Whilst advanced regions continue to address these stalling economic times, combining talk of stimulus package effect and the timing of exit strategies, other less developed countries are congratulating themselves for being on the flip-side of events.

Turkey, amongst other EM regions has had a history of economic roller-coaster rides, especially so during the precarious 1990s with quick succession boom & bust cycles that saw real interest rates run into double and even treble figures. But since the local 2001 crisis it has managed to contain fiscal and monetary policy so as to create a far more stable and sustainable platform, with the reported assistance of the IMF and World Bank.

[NB. These 2 august bodies were previously criticised as being over-zealous in recommending corrective action during the 97/98 Asian Tiger Crash and elsewhere, but it seems the level of inter-action with Turkey has set an appropriate model].

Thus it was with subtle glee that last week Deputy Prime Minister Ali Abacan (pronounced Abajan) took to the respective stages of Oxford University and the London School of Economics to espouse the restraint shown by the Turkish banking system which has bolstered economic stability. That restraint in place since 2001 resultant from regulatory reform. This engendered a reticence toward any type of overly exotic transaction and so gave very minimal exposure to the CDO and toxic asset debacle that has unfortunately infected advanced economies and provided sizable capital ratio cushions in domestic banks that have helped off-set the contraction of foreign sourced funds regards state and commercial investment.

Placed as a geographic, political and industrial 'intermediate' between the West and East, Turkey has enjoyed a level of sustained growth since the turn of the century not seen for decades, indeed some say not since its creation as a republic in 1923. The country enjoyed increasing export trade to Europe (its main trading partner), improved relations with neighbouring countries and a previously buoyant global economy. Growing FDI monies came from inward investment both commercially in factory, retail and offices and privately with foreigners choosing to buy comparatively inexpensive real estate in holiday areas. Add to this the boom-time of Istanbul, drawing-in provincial migrants, and Turkey effectively re-played the Spanish experience of the 1980s/90s with upward spiraling investment flows resulting from an entwined combination of FDI and encouraged domestic demand which led to construction demand and so fueled the demand spiral.

At an industrial level the likes of the historically influential families such as the Koc's and Sabanci's undertook sole projects and joint ventures projects with foreign firms spanning financial, automotive, consumer durables, food, retailing, IT, construction, chemicals, textiles, cement/aggregates, energy, tourism, defence and education.

In the automotive realm, a far from comprehensive list companies includes:

Koc -
(2007 income of US$39.5bn) -
Otokoc AS, TOFAS (Turk Otomobil Fabrikasi AS)(Koc-FIAT), Ford Otosan Otomotiv San AS (Ford Transit & Transit Connect) (Koc-Ford), KARSAN – POPAS (licensed PSA & Hyundai LCVs & contract manufacture to others), Kiraca (investment & trade group), Karland (parts distribution), Kirpart (parts manufacturing), (Koc-FIAT Kredi AS (captive finance credit), New Holland Trakmak Traktor, Otokar Otobus Karoseri San AS, Otomotiv Lastikleri Tevzi AS, Set Auto (covering Azerbaijan & Kazakhstan), Set Oto Tourism-AVIS, Sherbrook International Ltd (parts), Doktas Documculuk Tic Ve San (castings), and others.

Sabanci -
(2007 income of US$16bn) -
TEMSA (truck & bus), Bridgestone Rubber & Tyres, Toyota Motor, Mitsubishi Motor, Desas (commercial vehicles rental),

Other : Kibar Holding -
Hyundai vehicle assembly & metals processing.

Other : Anadolu Group -
Isuzu vehicle assembly. Lada & Kia importer & exporter

Other: Cukurova Group -
BMC Turkey LCV, HGV & Bus

Other: Ulusoy Conglomerate -
Volvo Turkey, HGV & Bus distribution & parts

Over the last decade, there has been recognition of and action toward an improved structural re-alignment of Turkey's auto-sector, given that increased industrial competition within a limited span of industrial capability had eroded profitability and so the value-adding nature of the sector. Importantly, the industry had to be better integrated into a more robust national industrial route-map, which itself derived from local and global conditions.

To answer the challenge the Koc Group prompted Inan Kirac - a local industry luminary – to create the Kiraca Auto. Ind. & Trade Inv. Group. Its remit was to: invest in unmet demand capacity, target the LCV segment(s) and “bring order to the chaos” of independent parts manufacturers by introducing new marketing & distribution models both domestically and for export. Acquisition of KARSAN to rationalise its operations and expand via additional licensed manufacturing aswell as acquisition of renowned parts manufacturing, parts distribution and marketing companies created a powerful holding company of 9 companies with sector influence.

From the perspective of Sabanci Holding Group - the 2nd largest conglomerate in Turkey with a seemingly lesser level of auto-activity - there appears less transformative industrial interventionism as a result of historic involvement and general holding compant strategy. Instead a continued focus upon expanded retailing opportunities, the OEM tyre margins as 'first-fit' and in the aftermarket, and the development of its bus & coach activities relative to the large European sector & market.

To set a broader context, Turkey's own auto-sector, with historic links to the US, UK, Italy, France and Germany, saw sustained growth from the 1960s onwards. Initially through initiatives such as the failed 1960s 'Devrim' (“Revolutionary Dream”) and 60s/70s/80s national Anadol Car initiative using Ford & Rootes Group mechanicals with Turkish manufactured fibre-glass multi-variant bodies. That national car solution - driven by the central agenda of affordability - grew vehicle demand which was latterly filled by JV deals with foreign OEM's; BMC, FIAT & Ford foremost as disposable income grew along with consumer expectations with Oyek-Renault soon following in 1969.

These sector agreements also effectively set the pattern for the industry at large for many years:
a) 'Commodity Car' for PV domestic demand – exemplified by Anadol followed by TOFAS 124 (Murat) & 131 (Sahin/Dogan/Kartal)
b) 'Flexible Platform' for LCV domestic demand – exemplified by Ford Otosan Transit (minibus, van, chassis-cab), but also Peugeot & BMC...providing the body construction and interior 'fit-out' capabilities that have allowed the coach & bus sector to flourish.

In comparison to the initial homogenous vehicles, early attempts were made at producing niche vehicles but were either still-born or short-lived These included a 'Turkish Sportscar' coupe called the STC-16 (based on the Anadol) which flailed due to the effects of the 1973 oil crisis (primarily input costs of oil based GRP body & 'knocked' consumer demand of small target market) and the small production run of the 'Bocek' (Bug) akin to a VW Dune-Buggy for the emerging coastal tourism regions. These limited (and perhaps too early) efforts for diversification were superceded by the effective re-entry of foreign vehicle assemblers for domestic and export markets including: Daimler. Opel, MAN AG, Toyota, Honda & Hyundai. Their presence assisting the broad intellectual improvement particularly in production engineering, manufacturing set-up (new and model swap-over) and operational production efficiency.

Interestingly, as with the historical likes of TATA in India, Turkish truck-bus companies were better positioned in terms of localised business models requiring previoulsy minimal R&D due to a strangle-hold markets and so have been comparatively protected. Thus BMC, Otokar and TEMSA have historically enjoyed more notional stability thus far. But as with TATA India, this is pseudo-protectionism has theoretically come to end with EU accession demands and of course WTO free-trade regulations. So though the local market will take time to see the fruits of enhanced competition as fleet buyers continue their typical default purchasing decisions to the likes of KARSAN, BMC & TEMSA times are changing, and companies have reacted accordingly.

The latter two companies are today heavily export orientated, and as such are having to invest in R&D to match the grade of the renowned European benchmark manufacturers that lead the world. With this as the benchmark, Turkey is having to integrate, develop, test and launch the highest levels of today's sophisticated technology solutions - from Euro VI regulations of engine emissions to intelligent 'self-aware' electronics systems that span much from GPS location 'e-tagging' to monitoring drive-cycles for in-service fleet costing.

As we see, it has essentially been the arrival of foreign VMs and OEMs that has enabled engineering and design technology transfer, and so gradual intellectual transfer. However, this process is arguably incumbered by a fragmented Turkish education system. Whilst the efforts of Koc Group in establishing the Koc University in 1993 (and other similar efforts such as Galatasaray University in 1992)are laudible, they are relatively recent and small-scale compared to the state-established efforts of Asian and S. American nations. More must be done to proactively support an extension of the Koc & Galatasaray schemes and the introduction of others, perhaps achieved as a public-private initiated exercise as an adjunct of military service. This would also enable the development of domestic defence engineering know-how which itself could be sold internationally.

Thus, as of today, whilst current arrangements have provided a useful synergy for foreign companies, the Turkish government and Turkish consumers, the question of Turkey's real industrial USP - its real differentiator - and the role of education in creating that, remains a high regard matter. A topic well-noted by Babacan's audience at the LSE.

Japan, S.Korea and now China created their own progression path through automotive, consumer durables and critically electronics - initially through JVs but moving onto self-sufficiency. Turkey in contrast has not to date been seen to similarly follow.

Instead, whilst Koc and Sabanci groups – the 'industrial arbiters' – indeed operate across many industrial sectors there has been mention that that the country hung too long onto the eroded competitiveness of its previously large textiles base and so lost industrial development traction. Recognising this in the 1990s it put overt belief, and disproportionate focus, into tourism and real-estate. But of course the manufacturing sector was quietly growing, having created its own domestically branded and contract manufacture base(s) for a broad range of white and brown goods (washing machines, TVs et al). However, it does seems that the domestic brands like BEKO (part of Koc-Arcelik) have not broken through into western consumer consciousness; even though BEKO is infact capacity-wise #3 in Europe.

Though of course westerners must remember that Turkey's historical and typical commercial trade ties lay with the CIS states, Russia and Middle East, and so for the most part Turkey has served essentially as a technology assimilator and product distributor for these regions.

The question is, "Does this relatively hidden industrial reality (from western gaze) provide the template for “Turkish Auto AS” today and into the future?". The answer must surely be "yes" but with a caveat.

Given the major impact felt by Turkey from heavily contracted western markets over the last 18 months or so (@approx 25%), and given the expected surge in economic development of the CIS over the next decade thanks to its hydro-carbons asset-base, massive agricultural potential and eager populace, it is expected that the newly announced Turkish economic roadmap will encompass the potential for the on-going positive 'CIS export effect' – either explicitly, or given the nature of Turkey's geo-political sensitivity, implicitly.

That continued CIS draw for what is essentially the replaying of 2nd hand technology transfer relative to its previous 'home game' achievement will be undoubtedly successful and so must be followed and exploited to good effect.

However, Turkey must also seek to find its own unique place through technological and manufacturing abilities and differentiation, so providing another road for economic growth by becoming ever more relevant to parallel (high-EM)and advanced B2B and B2C markets.

In the automotive arena, as the western world sits at this historic juncture created by constrained investment and the demands of eco-responsibility, Turkey may well be positioned to turn such challenges into opportunities. Seizing its abilities in low-cost volume manufacture through alternative materials and a low-cost labour-force to thereby potentially creating a new, 21st century automotive industry formula.

A formula that avoids the traditional demands of massive capital expenditure created by the 'Budd' manufacturing system requiring expensive stamping equipment and associated tooling. An alternative which instead combines modular, adaptable and so customisable lightweight component-systems and sets from which to create multi-various LCVs and PVs.

After the increasingly successful previous national efforts of 'Devrim' and 'Anadol', investment-auto-motives believes Mr Babacan, Mr Kirac and the Turkish government should seek to plot additional alternative paths for its highly important automotive industry. Potentially a case of “3rd time domestic success” (after Devrim & Anadol)perhaps using portions of the earned funds from the CIS region sales of conventional vehicles and re-cycling such monies towards eco-orientated vehicles and mobility solutions.

Turkey, given its position on the auto-sector value-curve has deployed its abilities well, but as time progresses so do the achievements of foreign entities, and so there is the danger of Turkey maintaining a sub-optimal competitive postion. It obviously recognises this, having both improved its ability during the process of industrial absorption, and now thanks to efforts of Inan Kirac et al, appreciates the need for industrial re-organisation of the status quo.

The question is "what next?" - how must that re-organisation be directed?

As perhaps a case-study for parallel learning or indeed inspiration, TATA decided to go 'bottom-up' in creating the Nano and along with it 'visioneering' the requisite engineering and infrastructure. Turkey should perhaps look 'top-down' to see how it can deploy its knowledge in creating not a car, but a new-era auto-sector using the best of its own self-directed, indigenous and affiliate resources.

Given the frustration of many CEE countries at present - holding their own auto-assets - its central role could grow even as far as orchestrating the knowledge and asset-base of CEE neighbours to one side (West) and western Middle Eastern neighbours to the other (East). This would create a geographical 'industrial S-shaped chicane' with Turkey at the central apex.

[NB, this recommendation sits in the middle of a broader geo-industrial context forwarded by investment-auto-motives. One that promotes the emergence of an Eco-Tech European Rainbow across the UK-Sweden-Norway-Germany (to the west) and a Premium Arabic sector emerge based on cultural association across Saudi Arabia, Kuwait & Qatar (to the east).

Hence a '3-pillar' plan spanning Northern Europe, the EurAsian region and Middle East].

Thus, just as Istanbul and Turkey itself spans 2 continents and 2 cultures, so the officials in Ankara should create the same dualistic outlook for the auto-sector; perhaps its most prominent industrial economic powerhouse. A dualistic outlook that builds-in the foundations of counter-cyclicity from 'old' and 'new' industrial models; themselves related to 20th century "conventional" and 21st century "advanced" whole vehicle & systems solutions.

For Turkey must continue to promote itself as a progressive independent thinker with pan EurAsian reach, tied not the past, or even the current but a global future.