When asked about attractive new regions for either outsourcing or future growth, automotive executives would probably top their lists with Brazil, Russia, India, and China (“BRIC” countries). However, Turkey should not be overlooked, both as an attractive market as well as a low-cost, high-quality manufacturing hub. In 2006, more than 900,000 light vehicles were manufactured in Turkey, up 14% from 2005. With light vehicle production capacity of about 1 million units, Turkey enjoyed 90% capacity utilization in 2006. Indeed, Turkey produced more vehicles than any of the new EU member states, including Poland and Slovakia. Total vehicle sales reached nearly 670,000 units in 2006. Turkey represents a larger production base and a larger market than any country in Central and Eastern Europe (CEE) besides Russia.
Most of Turkey’s production is light commercial vehicles (i.e., pickup trucks) and goes to export (69% in 2006). At the same time however, imports made up 57% of domestic sales. Furthermore, Turkey’s domestic light vehicle market is projected to grow by 9% annually through 2013 to 1.1m vehicles. OEMs can take advantage of the relatively low manufacturing costs in exporting to neighboring countries, and the relatively large domestic market.
Aside from the dynamism of Turkey’s market, low costs, logistics and high-quality are other reasons the automotive industry should pay attention to Turkey. Manufacturing costs are comparable to CEE, but these costs will stay lower, as new EU members lead the world in pay increases above inflation. Turkey is not expected to join the EU for at least a decade, so real wage increases will not have the same drivers as in CEE.
While Turkey is at a cost disadvantage compared to China or India, it enjoys a more strategic location, especially with respect to Europe. Another Turkish advantage over competing low cost regions is the regulatory environment, including intellectual property protections matching EU standards as well as more flexibility in terms of investments (JVs, etc.). Additionally, Turkish automotive quality is greater than other low cost regions and is competitive to high wage areas. For instance, Ford’s profitable Turkish JV has been its highest quality operation in Europe for four straight years. Currently, nearly 150 suppliers have manufacturing operations at international quality standards in Turkey.
Turkey’s cost advantages extend beyond manufacturing, as the country has a large, well-educated population. Automotive companies have already begun to take advantage of this. Since 1995, Turkey has been Fiat’s third global R&D center, after Italy and Brazil. Furthermore, Ford has built up design and R&D capabilities to the extent that it can fully develop a vehicle in Turkey.
Automotive investors still face various challenges in Turkey. The inflation rate, foreign exchange rates, and domestic demand all fluctuate greatly. However, these can be overcome by flexibility, hedging, and the correct mix of domestic and export business. Also, while Turkey is most suited to supply parts and cars to Europe and the Middle East, rather than NAFTA or Asia, even this could change as OEMs increasingly utilize global models, platforms, and components. Already, Ford will reportedly bring the Turkish-made Transit Connect to NAFTA in 2008.
Turkey is not the largest emerging market, and it is not growing the fastest. It is not the lowest cost country, nor is it completely stable. However, its ideal mix of proximity, costs, size, growth, and quality make it a country that all global automotive companies should explore as a manufacturing hub and as an end market.