Turkey's chances of auto expansion

July 15th 2014| Turkey |

Turkey's auto industry veers from domestic to export demand. Neither is likely to support the kind of rapid expansion the government wants.

With Turkey's presidential election looming on August 10th, the country's business sector (including its auto industry) is in need of some attention. For over a decade, Turkey has been a manufacturing base for global automakers, especially for European companies serving the Middle East and Africa. After the 2008 financial crisis, its domestic car market began to come into its own, too. But now the economic situation has changed once more, and dependence on export markets is likely to increase.

The recovery of Turkey's automotive industry after the global collapse in 2008-09 was as spectacular as it was unexpected. Both car and commercial vehicle sales rose by nearly 40% in 2010, followed by another 16% increase in 2011. By then vehicle sales had topped 900,000 units, making this one of the largest markets in Europe. With half of those sales coming from imports, the boom was a particular godsend for European vehicle-makers, who enjoy preferential treatment in Turkey, as well as lower shipping rates. Renault, for example, saw Turkey become its seventh largest market in terms of profits.

Local production recovered rapidly too, and by 2011 had made up all the ground lost in 2009. Turkey became the largest automotive producer in Eastern Europe, overtaking the Czech Republic and Slovakia, as well as being the largest light commercial vehicle producer in Europe. By 2013, the country's annual automotive output had neared 1.2m units (see chart), with marques such as Fiat, Renault, Hyundai and Ford among the local leaders.

Links to GDP growth

One reason is that the bright picture for Turkey's domestic market began to dim after 2011 with the continued worsening of the euro-zone crisis and economic turmoil caused by the spreading Arab Spring political movement. Domestic car sales fell by 6% in 2012, and although they recovered last year, the anti-government protests that broke out in Istanbul and other major cities in May 2013 impacted consumer and investor confidence. The lira plunged, weakening to nearly TL2.4 to the dollar in mid-2013 (compared with TL1.6 in 2010-11) before it firmed up more recently. It also lost a quarter of its value against the euro compared to the average in the first six months of 2013.

All this prompted the Central Bank of the Republic of Turkey (CBRT; the central bank) to jack up its interest rates in early 2014 and although they have eased since, the benchmark one-week repo rate remains at 8.75% compared to 5.5% at the start of the year. In June, inflation came in above expectations, suggesting that further cuts will be far slower than the government was hoping for.

The effect on car sales was exacerbated by an increase in the private consumption tax and restrictions on bank loans introduced last year. In the first half, light vehicle sales were down 26%, totalling just 287,000 vehicles. Imports bore the brunt of the decline, but domestic sales also contracted by over 10%. Even though the pace of contraction moderated in June, The Economist Intelligence Unit is still expecting a full-year decline of nearly 20%.

Uncertainty ahead

On the other hand, the weakness of the lira has been a boon for exports, which were also bolstered by a bounce in the European automotive market. In the January-May period, Turkey's vehicles exports were up 24%, to 242,000 vehicles. Overall auto output rose by 17%, therefore, despite the domestic malaise.

With exports on a roll, the auto industry is expected to play a key role in Turkey's future growth. Prime minister Recep Tayyip Erdoğan, who is expected to become Turkey's first popularly elected president, has based his political programme on a strong economy. The government already has an ambitious target to expand GDP to US$2trn by 2023, more than double its current size, and to treble exports to US$500bn a year. This could entail pushing up vehicle production to 4m, more than three times its current level.

On the positive side, Turkey would be a prime beneficiary if economic sanctions on Iran eased in coming months. But offsetting this is the spreading civil war in Iraq, a key trading partner. The conflict worsened in recent weeks and Iraq is on the verge of breaking up along sectarian and ethnic lines. Based on first-half results, Iraq fell from second place to third among Turkey's largest export markets, behind Germany and the UK. North African countries, while less turbulent than Iraq and Syria, have seen their economic growth stall.

The European recovery, meanwhile, is unlikely to sustain the kind of growth that Turkey wants. While automotive sales across the continent have lifted off the bottom, the overall economic situation in Europe remains negative. Labour markets remain weak and youth unemployment is a particularly worrisome problem. The political environment is also a concern for Turkey, whose never-bright hopes of EU accession have dimmed in recent years, discouraging many investors.

Yet new investment may not actually be what Turkey's auto industry needs right now. After all, despite the rise in output, capacity utilisation is still unsatisfactory: the Automotive Manufacturers' Association (OSD) estimated it at just 73% in 2013. It is only in the past couple of years that the numbers have begun to stabilise. There are signs of expansion starting again – Ford Otosan recently inaugurated a new plant, for example – but capacity utilisation is likely to improve. That will bolster company profitability, although it will not help Turkey's long-term chances of building up a large auto industry.

Source: Industry Briefing