What makes Turkey's domestically produced auto venture viable

METIN BAŞBAY
Published 14.01.2020 00:29
Updated 14.01.2020 13:11
A prototype of the domestic electric car project in Gebze, Dec. 27, 2019. AA Photo
A prototype of the domestic electric car project in Gebze, Dec. 27, 2019. (AA Photo)

Turkey's Automobile Joint Venture Group (TOGG), a consortium of Turkey’s five major companies, has unveiled the prototypes of Turkey’s first ever homebred cars. As part of an exciting launch ceremony, President Recep Tayyip Erdogan revealed the first two models from the range, an SUV and sedan, both of which are electric vehicles (EV).

The same day, the Turkish government promised the project with a $3.7 billion subsidy package as well as the production site in Bursa. Mass production of the SUV model is expected to start in 2022, and the new venture involves a plan to produce five EV models in total within the next 15 years. If successful, the initiative will achieve, in President Erdoğan’s words, "Turkey's 60-year dream."

A bold business endeavor and a great leap forward in Turkey’s attempts to become an industrialized nation – there are nonetheless many risks and obstacles ahead. However, arguably Turkey is taking the right step at the right time, as many factors point to the project most likely paying off.

THE EXPANDING MARKET

The electric vehicle industry is only just beginning to blossom, which makes now a great time for startups like TOGG. The fact that there are no key players or market dominators in the EV industry, at least for the time being, gives the venture a chance to level the playing field with century-old car companies still developing their own capacities.

New players in any sector need to build up their competitive clout as quickly as possible so as not to get crushed under the weight of global competition. This is highly difficult given that in such sophisticated sectors, companies need years, even decades before they can acquire the necessary experience, know-how and organizational skills to achieve high efficiency. It is no secret that many other high-tech industries well-established companies leave little space for newcomers.

This is exactly why EV is the right investment for companies in developing countries like Turkey. The EV market is still tiny and a long way away from market saturation. Specifically, EVs are expected to aggressively penetrate the car market, taking a share of as much as 32% of new car sales by 2030 and 57% by 2040, compared to their current share of 2.1%. However, there are only a few companies truly up to competing in this quickly developing market.

Needless to say, there will still be fierce competition. A great advantage Turkey has in terms of standing on its own two legs in the face of this coming competition is that, despite its lack of domestic car company names, Turkey has been a manufacturing powerhouse in auto manufacturing for decades. Some of the biggest global automotive companies, including Toyota, Fiat Chrysler and Ford, have been manufacturing vehicles and auto parts in Turkey for decades.

Consequently, Turkey already has the engineering know-how, a highly skilled labor force and managerial experience in the market. In 2018, having produced more than 1.5 million vehicles that year, Turkey became the 15th largest automotive manufacturer in the world and fifth-largest in Europe. Most recently, Volkswagen has also announced it would be setting up its latest factory in Turkey.

Of course, there is a reason why all these companies choose Turkey for production. Along with its sector-specific human capital, Turkey is at a great location in terms of marketing. Eight-five percent of vehicles produced in Turkey go on to the export market. Turkey’s geographical proximity to main markets in the Middle-East and Europe gives the country a significant standing in terms of transportation and logistics.

It should be noted that TOGG promises more than a national brand to Turkey. Unlike the conventional auto industry, EVs are in their infancy in terms of technological improvements. In other words, the EV sector is a fertile land for promising research and development efforts, and innovations in autonomous driving, charging speed, charging infrastructure and battery range may lead to promising results. So, investments in EVs are also investments in all these potentially innovative technologies with great market value.

EFFECT ON OTHER INDUSTRIES

Moreover, it will likely contribute to other strategic industries through what economists term "knowledge spillovers," i.e. acquired know-how and expertise that can be transferred to other high-tech industries, such as aviation, defense, renewable energy production and electronics and increase the productivity levels of the entire economy. Moreover, investment has the potential to influence other industries such as steel, advanced plastics and software that provide necessary components to the auto industry.

One last factor in the projects' favor is that they will become immediately competitive in the domestic market due to Turkey's high taxes regarding transportation. Foremost, taxes on gasoline are very high in Turkey, meaning EVs will present a way of avoiding high fuel costs. Second, VAT and excise taxes on automobiles are also very high. In this respect too, the project will surely be supported by the government via tax breaks and subsidies.

WAYS TO GO

Needless to say, despite all its advantages, Turkey’s domestic automobile project needs to pass many tests before it can secure success. First, mass production should be designed and realized in a cost-effective way, which is quite different and in some ways more difficult than creating the prototype. Questions arise, for instance, in relation to battery production, which is an essential component of EVs.

The project’s CEO, Gürcan Karakaş, said the battery would be domestically designed, yet it is still unknown where it will be produced. In early 2018, Zorlu Holding, a member of the TOGG consortium, announced that it would be investing $4.5 billion in a mega battery plant set to produce batteries for 500,000 automobiles by 2023, but so far we have not heard much of any developments on that front.

Second, as the venture promises more than success in the domestic market, it needs a solid marketing strategy focused on the export market. The government announced that it would buy 30,000 cars within a short time frame, so it is safe to say that sales will boom quickly. The project needs to offer something different to global customers if it is to be sustained in the long run, even without government support.

All in all, TOGG is an ambitious endeavor that has united the Turkish government, Turkey’s major private companies and a group of Turkey’s brightest engineers and managers in an attempt to produce Turkey’s first homegrown automobile brand. But, it is more than a prestigious project and seems to make a lot of sense from an economic point of view, too. The country seems to be closer than ever to fulfilling a long-held national dream.

* Researcher at TRT World, currently a Ph.D. candidate in Development Studies at the University of Cambridge where he also completed his MPhil in Economics

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