APRIL 2007

Competitiveness Report

Turkey

ANALYSIS BY THE UNICREDIT GROUP NEW RESEARCH NETWORK For authors see last page

The report is based on data and information available from local and international sources, and on a number of interviews with foreign entrepreneurs operating in Turkey.

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Published by UniCredit Group/Bank Austria Creditanstalt Aktiengesellschaft http://www.unicreditgroup.eu http://www.ba-ca.com

Edited by CEE Research Department E-mail: [email protected] Bernhard Sinhuber, Tel. +43 (0)50505-41964

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2 Competitiveness Report Turkey, April 2007 Turkey

The challenges of the biggest converging market

• The impressive progress made by Turkey greater than EUR 4,200) is 80 % higher sector with important chains of suppliers in the last 5 years in terms of economic than five years ago. and strong local brands. Pressures on stability has dramatically increased the • The size and the potential of the local costs (of labour, land, inputs) in recent attractiveness of the country for foreign market (Turkey is the second biggest years are evident, and they are pushing investors. Strong growth and a signifi- country in Europe in terms of population towards higher value-added activities cant disinflation process have character- after ) are among the main and a restructuring of labour-intensive ized the country after 2001. In the last drivers for enticing foreign companies to sectors. two years (2005 – ‘06) Turkey has the country. • The EU convergence process, indepen- attracted twice the amount of foreign • But Turkey is not simply a large and fast dently from the final outcome, will be direct investment received in the whole growing outlet market: it is also a com- a big opportunity to contribute to the of the previous decade. The local market petitive production location as it has stability of the country and improve the is growing fast: GDP per capita (now strong traditions in the manufacturing business environment.

MOODY’S LT FC RATING S&P’S LT FC RATING FITCH’S LT FC RATING Ba3/Stable BB–/Stable BB–/Positive

Macroeconomic scenario 2005 2006 2007f 2008f 2009f Nominal GDP (EUR bn) 290.6 309.7 335.8 368.8 405.2 GDP per capita (EUR) 4,032 4,244 4,546 4,932 5,357 Real GDP, yoy (%) 7.4 5.2 5.4 6.4 6.2 Inflation (CPI) yoy, avg (%) 8.2 9.6 8.1 5.9 4.9 Unemployment rate (%) 10.3 9.9 9.3 9.0 8.5 Exchange rate/€, eop 1.595 1.860 1.970 1.978 2.009 Interbank O/N, simple, eop 13.50 17.50 16.50 14.00 12.50 Current Account/GDP (%) –6.3 – 8.0 – 7.2 – 7.9 – 7.8 FDI/GDP (%) 2.7 5.1 3.4 3.1 2.7 Budget balance/GDP (%)* – 2.0 – 0.7 – 2.6 – 2.0 – 1.5 Public debt/GDP (%) 71.6 65.0 63.0 61.0 59.0 *) Until 2005, the budget and primary balance figures are based on the consolidated budget, whereas after 2006 these data are based on the central administration budget. Source: The Central Bank, Turkish Statistical Institution, Yapi Kredi Strategic Planing and Research, UniCredit Group New Europe Research Network

• The Turkish economy has developed • Despite some slowdown in growth dur- • The political scene is crowded. The very favourably in the last five years, ing the second half of 2006, following upcoming presidential elections in with solid growth and declining in - the financial turmoil which weakened May and general elections in November flation. Growth has been higher than the currency and brought higher interest are already at the centre of attention. 7 %, on average, in the last five years; rates, the growth picture remains very EU accession negotiations, after playing inflation declined under the 10 % benign for the coming years, and the a very positive role in recent years, are threshold (it was around 70 % five Turkish economy will continue to attract now partially frozen, and the long jour- years ago). Public deficit, the Achilles’ significant foreign investment. Declining ney towards the EU seems increasingly heels of the Turkish economy in the oil and commodity prices can contribute difficult. Still, the EU convergence past, was almost balanced in 2006. to the disinflation process in the coming process, independently from the final months, as well as helping the current outcome, will continue to represent a account deficit (at 8 % in 2006) to big opportunity to contribute to the decline. stability of the country.

Competitiveness Report Turkey, April 2007 3 Turkey

Trade Flows and Foreign Direct Investments in the country

Turkish Trade Flows Foreign Direct Investment USD mn % of GDP and USD mn

120 5% 50,000 –40 100 4% 40,000

80 3% 30,000

–20 60 2% 20,000

40 1% 10,000

20 0 0% 0 19981999 2000 2001 2002 2003 20042005 2006 199819992000 2001 2002 2003 2004 2005 2006

Export (FOB) Import (CIF) Trade balance (right scale) FDI Inflows/GDP (%) Cumulated FDI (right scale)

Source: Central Bank of Turkey, Turkish Statistical Office, New Europe Network Research Source: Central Bank of Turkey, Turkish Statistical Office, New Europe Network Research

Turkey’s foreign trade volume has reached unprecedented Over time, Turkey’s exports have continued to shift from agri- levels in the last few years. Trade volumes, which averaged cultural goods to manufacturing industry products that now only USD 68 billion in the second half of the 1990s, reached account for 94 % of total exports. Considering that in the sec- USD 222 billion in 2006. The reasons behind the boost in ex- ond half of the 1980s the share of manufacturing goods and ports from USD 25 billion on average in the same period to agricultural goods in total exports were approximately 75 % USD 85 billion were the robust and sustained demand from and 20 % respectively, the tremendous change in the structure Turkey’s major trading partners, namely Europe, as well as of Turkey’s exports and the increasing competitiveness in increased labour productivity and reduced labour costs in manufacturing industry products is more comprehensible. the aftermath of the 2001 economic crisis. Imports, on the other hand, jumped from an average of USD 43 billion in the Further details reveal that the structure of exports has been late 1990s to USD 137 billion at the end of 2006. Imports changing within the manufacturing industry in recent years were driven by robust GDP growth as well as the increased as well. Historically the most important export sectors in international commodity prices, especially in 2006. Turkey, textiles and clothing, lost share dramatically due to difficulties encountered in competing with low-cost East Turkey’s major trading partner is the EU. The EU-25 Asian products. From 2002 to 2006, the share of textiles and constitutes 52 % of Turkey’s total exports and 39 % of total clothing within total exports dropped from 36 % and 23 %. By imports as of the end of 2006. More specifically, in terms of contrast, the automotive and basic metal industries became exports, Germany with a share of 11% is followed by the the new driving sectors, with the share of the automotive in- United Kingdom and Italy (each accounting for 8 %). For dustry increasing rapidly from 6 % in 2000 to 15 % in 2006 imports the major trading partners in 2006 were the Russ- and the share of basic metals increasing from 8 % to 11%. ian Federation (13 %, mainly oil-related products) followed Apart from these two sectors, Turkey’s other major exporting by Germany (11%) and China (7 %). Italy and France rank sectors (such as machinery and equipment, chemicals and fourth and fifth respectively. Turkey registers deficits in plastics, and communication equipment) rely on substantial bilateral trade with her major trading partners: imports use of imported intermediate inputs, which raises concerns from the Russian Federation were five times as high as about the low value added in production, increasing imports exports to that country in 2006, leading to a bilateral deficit and the trade deficit. of USD 14.3 billion. More striking is the fact that imports from China outweigh exports heading in the other direction In fact, Turkey’s imports consist mainly of intermediate goods fourteen times, accounting for a deficit of USD 8.9 billion. (72 % of total imports in 2006). Imports of investment goods The trade deficit with Italy is comparably lower, namely and consumption goods, on the other hand, constitute 16 % USD 1.8 billion, indicating a relatively more balanced trade and 12 % of total imports respectively. The four items which volume. together make up 66 % of total imports are oil-related prod-

4 Competitiveness Report Turkey, April 2007 ucts, chemicals, basic metal goods, machinery and automo- Until recently, the privatisation agenda for 2007 included biles. The rise in international oil prices led to USD 26.6 bil- important assets such as TEDAS (electricity distribution lion worth of oil-related product imports in 2006, correspond- company), electricity production plants, TEKEL (tobacco ing to 19 % of the total import bill. The expected decline in unit), Milli Piyango (national lottery), Halkbank and some commodity prices in 2007 is anticipated to alleviate the bur- major ports. However, a series of postponements in these den of metal goods and oil imports to some extent. Neverthe- planned auctions have created concern on the part of in- less, given the high import content of production in Turkey, vestors. The sale of three electricity grids has been deferred, import growth is not expected to slow down considerably in the privatisation of the tobacco firm TEKEL has also been the coming years as long as economic growth is sustained. delayed, and lastly, the government decided to change the planned block sale of Halkbank into a 25 % IPO. Hence, it In terms of foreign direct investment, Turkey is a remarkably seems that the 2007 privatisation programme has lost some different case with respect to the other CEE countries: the lat- momentum ahead of the general elections in 2007. ter opened their economies to foreign investment only in the 1990s, during the transition, while major FDI flows in Turkey Examining foreign investments in Turkey during 2005 and have been present since the post-war period. The similarity to 2006, it is clear that investments in industrial sectors CEE countries is related more to the acceleration of FDI flows remained limited, while the bulk of investments were con- in recent years, together with the convergence process to- centrated in services sectors, oriented towards the domestic wards the European Union and a deep process of reform. FDI market. Investments in services sectors accounted for around inflows, which hardly averaged USD 0.8 billion in the 90 % of total investments in both years. More specifically, two 1990 – 2000 period, reached USD 9.8 billion in 2005 and sectors, namely financial intermediation and transport, stor- peaked in 2006 at USD 20 billion, corresponding to 5.1% of age and communication, received most of the FDI (their projected GDP. Political stability, the reform process in the share in total FDI being 40 % and 36 % in 2006 respectively). banking and public sectors, robust economic growth, EU can- Inflows to the banking sector amounting to USD 12.8 billion didacy and IMF programs as anchors: all of these elements were quite impressive in the two years. The inflows to com- have put Turkey in the spotlight for foreign investment. Direct munication sectors, on the other hand, stemmed mainly from investments in emerging Europe in 2006 are estimated to be the sale of Turk Telekom to Oger Telecom and Telsim to close to USD 70 billion and, hence, Turkey has become the Vodafone. In 2007, FDI inflows are expected to continue, but recipient of almost 30 % of the total FDI inflows. they may fall just short of the peak levels in 2006. Our expec- tation is that FDI/GDP will total 3.4 % in 2007. The surge in FDI inflows also coincided with the acceleration in the privatisation programme of the government: realised Looking at the countries of origin of FDI in the 2002 – 2006 privatisations reached record levels in 2005 and 2006. Privati- period, Europe emerges as the main region where 82 % of sation projects worth USD 8.2 billion were carried out in 2005, total FDI inflows originates. The Netherlands tops the list which is almost 50 % of all the privatisations conducted since accounting for 22 % of total FDI in this period, Belgium 1986. In 2006, realised privatisations amounted to USD 8.1 bil- comes second (16 %), followed by and France lion and, consequently, total privatisations since 1986 amount (10 %). Italy’s share in FDI inflows in this period is not neg- to USD 25.8 billion. In the last two years, the telecom operator ligible either, at 4 %. Together, the share of the Arabian Turk Telecom, oil refinery Tupras, steelmaker Erdemir and Gulf countries has increased in the last three years, Mersin Port were among the major assets privatised. amounting to 12 % on average between 2002 and 2006.

Drivers of competitiveness (2006) Turkey Czech Rep. CEE-81 EU-15 Population (mn) 73.0 38.1 10.1 10.3 72.9 21.5 7.7 389.4 Average age, years2 29 37 39 39 38 38 41 39 Youth education attainment level3, %2 44 91 83 91 89 76 77 75 Science and technology graduates4 5.6 9.4 5.1 7.4 8.9 9.8 8.5 13.6 GDP per capita € 4,244 7,077 8,925 11,010 8,221 4,510 3,172 27,660 Monthly labour costs, € 2 677 818 944 954 841 358 229 3,438 Labour productivity per person (EU25=100) 41 59 73 69 63 41 35 106 R&D expenditure, % of GDP2 0.66 0.57 0.94 1.42 0.83 0.39 0.5 1.91 Corporate tax (%) 2019162420161029 FDI (in % of GDP, avg 2004 – ’06) 2.9 4.2 4.6 6.1 4.9 8.3 13.8 n.a. 1) CEE-8 are the CEE countries that entered EU in 2004. 2) Data as of 2005; 3) Percentage of the population aged 20 to 24 having completed at least upper secondary education; 4)Tertiary graduates in science and technology per 1.000 of population aged 20 –29 years. Data as of 2004 Source: Eurostat, EBRD, UniCredit Group New Europe Research Network

Competitiveness Report Turkey, April 2007 5 Turkey

Foreign Investment in Turkey – Main Lessons

The impressive progress made by Turkey in the last there is still a significant polarisation in the distribution of 5 years in terms of economic stability and convergence incomes, with a vast and rich upper class having tastes and towards European standards has dramatically increased habits comparable mainly with European standards. All the attractiveness of the country for foreign investors, es- these characteristics make Turkey a destination market with pecially for European investors (in parallel with the Turkish huge potential that has few peers among emerging markets convergence process to the European Union). The booming and certainly cannot be compared with any other Central FDI inflows are the most noticeable indicator in this sense: and Eastern European country. in the last two years (2005 – 06) Turkey attracted twice the amount of FDI received in the whole of the previous decade. But Turkey is not simply a large market: it is also an impor- Resistance to foreign investment (with obstacles in terms of tant productive base with strong traditions in the manu- bureaucracy, customs and local competition) is a thing of facturing sector. the past: local authorities are now encouraging foreign in- vestors to enter the Turkish market. And the Turkish econo- In particular, Turkish producers are major players in some my is much more open and more competitive than a few specific sectors: textiles, non-metallic mineral products years ago. The economic crisis of 2001 must be considered (cement, ceramic, glass, etc.), basic metals, white goods the main turning point, as revealed by a few macroeconom- and automobiles. Turkish exports in textiles, for example, ic indicators: in 2001 real GDP declined by 7.5 %, inflation account for almost 4 % of the entire world textile trade (and reached its peak at around 70 %, the budget deficit was 7 % of EU-15 imports), despite the difficulties due to in- higher than 16 %, and public debt totalled 108 % of GDP. It creasing competition from emerging markets. The sector is is striking how much the Turkish economy has changed characterised by having many small enterprises and a very since then and how foreign entrepreneurs perceive it. The interesting chain of suppliers. Turkey is also a world leader stabilisation process induced a strong and sound growth in non-metallic mineral products (with an export share of pattern (7 %, on average, between 2002 and 2006), signifi- 2.5 % in the world) as a significant producer of cement, cant disinflation (with a decisive re-orientation of inflation glass, and other goods and materials. The production of expectations that finally brought increases in prices down white goods, in which local manufacturers are particularly below 10 %) and inconceivable improvements in public strong, is also attracting foreign investors. Looking at the finances. The EU anchor offered strong support, culminating automotive sector, Fiat, Ford, Toyota and Renault are all in with the start of accession negotiations with the EU in Turkey, manufacturing light vehicles in particular and October 20056. All of these factors were key aspects in the mostly through joint ventures with local groups. The pres- perception of the entrepreneurs we interviewed: even if ence of many local and foreign car producers attracts past experience of instability during the 1980s or 1990s is numerous international suppliers and producers in related still a fresh memory, the image of the country among for- sectors. Pirelli, the fifth largest tyre producer in the world eign investors is far better now than it was a few years ago. and a long-standing international company, is one of them. The Italian company8 was founded in 1872 and expanded The main driver of foreign investments in Turkey is still abroad (to Spain) in 1902; it has been producing in Turkey related to the vast potential of the local market: a popula- since the 1960s: its first Turkish plant was established in tion of 73 million whose income levels are increasing fast. 1962. Now the Izmit plant is Pirelli’s biggest around the Turkey is the second biggest country in Europe in terms of world (Pirelli also manufactures in Italy, Germany, Great population after Germany (excluding Russia). GDP per capi- Britain, China, Romania, Brazil, Argentina, and Venezuela). ta (now greater than EUR 4,200) is 80 % higher than five Pirelli produces a large amount of tyres in Turkey because years ago. Turkish GDP represents almost 30 % of the total of the presence of many vehicle manufacturers, the proxim- GDP of Central and Eastern Europe (considering the ten ity to European demand (80 % of the tyre production is ex- new EU members and the Western Balkans7): hence it is a ported), and also because of local demand: Turkey actually potential target for all the companies developing networks in represents the main European market for truck tyres due to Central and Eastern Europe. There are also specific demo- the strength of the local manufacturing system associated graphic features worthy of note. First, Turkish citizens are with an underdeveloped railroad system. very young on average, especially if compared with Europe (both Western and Eastern). The average age of the Turkish Many foreign companies targeted the Turkish local mar- population is around 29 years, ten years less than the aver- ket because of its potential in terms of consumers, but later age European age. Second, Istanbul with its population of understood the advantages that could be exploited pro- 12 million and an important industrial base nearby is a very ducing locally. Zegna, a famous Italian brand for wearing special and important gateway to enter the country. Finally, apparel, has been targeting the Turkish market since 1989 to

6 Competitiveness Report Turkey, April 2007 exploit the commercial opportunities in the country. This local companies and maintaining the brands. The Italian strategy was coherent with the traditions of the company, Barilla, one of most famous pasta makers worldwide, en- which at that time also entered the Chinese market, almost tered Turkey by acquiring Filiz Gida, and maintained the twenty years ago, as a destination market rather than a mere Turkish brand without imposing the Italian brand that is production base. Zegna wanted to open a shop in Istanbul, rather popular at international level (see box 1). Along the and the company started to produce locally as well: the Turk- same lines, Menarini, an Italian pharmaceutical company, ish plant of the company in the special zone of Tuzla is now bought Ulagay, a Turkish company, which is still distribut- the main global plant for Zegna shirts, despite the company ing medicines with its local and well established brand. also having plants in Mexico, China, Italy, Spain and Switzer- Menarini is commercially present in many European coun- land. Around 99 % of the Zegna shirt production in Turkey is tries with production sites in Turkey, Italy, Germany and exported and sold abroad. The company has a shop in Istan- Spain. Ulugay was acquired in 2001 with the aim of further bul and it is also working as wholesale trader, taking advan- developing business activities in Turkey; export activities tage of some local producers (especially for belts, jackets and from Turkey are minimal, while production mainly serves coats). The main driver of Zegna’s presence in Turkey is re- the local market. Turkey in this case has been seen as a lated to the strong role of the textile and apparel sector in the natural expansion of the European market but with the ad- country, in all the production segments, from fabrics to gar- vantage of buoyant expansion on the local market. The ments. This is not common for other low-cost locations that pharmaceutical sector is expanding fast thanks to rapid mainly cover only a few phases of the production process. improvements in the health care system.

The presence of Ferroli in Turkey, a company specialised in The strong industrial base of the country makes it possible air conditioning systems, boilers and radiators, dates back to for the foreign company to find high-level local suppliers. 1989 as a distributor. The company imported and sold goods This has been very important for Benetton, which does not to the local market that were mainly produced in Italy. More produce directly in Turkey but sells many goods “made in recently, the company decided to start producing locally. The Turkey” taking advantage of the quality of its local supplier. local market is booming (natural gas distribution started re- This explains why foreign companies that produce or sell in cently), logistically it is a good location, as raw materials are Turkey (directly or through affiliates) do not represent a ma- available, and there are still cost advantages. Around 75 % of jor driver for the internationalisation choice of other foreign the production is going to be exported. companies, especially suppliers. This is mainly related to the fact that contrary to the experience of other CEE countries As Turkey has been both an important destination market foreign companies already find good services provided by and an industrial base since the post war period (in contrast local firms. This also has some implications for the patterns to other CEE countries), local companies are quite devel- of internationalisation of foreign companies, which are less oped and modern. For this reason many foreign investors systemic if compared with other experience in CEE: “follow- enter Turkey by acquiring local firms and local brands the-client” strategies are less common than in other Cen- (thus gaining access to clients, knowledge of the local tral Eastern European markets. This has implications for market, etc.), especially in the manufacturing sector. This the dimensions of the foreign firms involved in Turkey as is not common for other CEE markets, where foreign in- well: the size of the local market represents a major barrier vestors often prefer green-field investments because exist- for SMEs and the strength of the local production system pro- ing plants are sometimes obsolete and local partners do not vides less scope for small “followers”. On the other hand, all have strong brands and know-how. Entering Turkey with the medium-sized and large companies target the potential of local partners, especially during the initial stages of interna- the Turkish market. Metro, for instance, the big German re- tionalisation, is considered a plus. Some of the manufacturing tailer, has been in Turkey since 1990. It is present in more companies interviewed adopted this strategy, acquiring than 31 countries and around 45 % of its turnover comes

6) Political stability at domestic level has also helped. Since 2002 the AKP (Justice and Development Party) government has been able to rely on a strong majority and pass many reforms. In March 2003 Recep Tayyip Erdogan (AKP) became Prime Minister. AKP received around one third of the total votes of the Turkish electorate and actually controls around two thirds of all the seats (due to the 10% threshold that excludes small parties). This is the fifth year of the current parliament, for the first time in recent Turkish political history, a clear sign of the political stability achieved. The next parliamentary elections in November 2007 will probably deliver a strong majority in the Parliament again.

7) The ten new EU members considered are Bulgaria, the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Romania, Slovakia and Slovenia; the Western Balkan countries are the countries of ex-Yugoslavia (Bosnia-Herzegovina, Croatia, Montenegro, Serbia) and . The weight of Turkish GDP in the above mentioned CEE area (including Turkey) is 29 %, or as large as 40 % of GDP of these 15 countries if we exclude Turkey.

8) The role of Italy, as Turkey’s second trading partner, is quite important. Italian foreign policy (through its warm support for the Turkish candidacy to the EU) and Italian entrepre- neurs have demonstrated strong interest in the country. While the main trading partner for Turkey is Germany, Italy that focuses more on South Eastern Europe and the Mediterranean considers Turkey as one of its priorities for developing business links. For instance, the increasing role of Turkey as an energy hub is particularly relevant for Italy, as ENI, the biggest Italian company and active in the oil refinery business, is involved in different projects around the country. Industrial links are very strong, with all the major Italian companies already present in Turkey, such as ENI (oil), Pirelli (tyres), Fiat (automotive), UniCredit and Generali (banking and finance), Finmeccanica (Machinery, Defence) and Indesit (white goods).

Competitiveness Report Turkey, April 2007 7 Turkey

from abroad. The company mainly sells Turkish goods in its Cimsa (cement), Akcansa (cement) and Akbank (finance). supermarkets and “cash and carry” stores, and it also exports The third group in terms of size is Dogus¸, with interests in many Turkish goods to Germany (since the 1970s before es- finance, construction, media and the automotive sector tablishing its presence in the local market). trade through companies such as Garanti Bank (finance) and through large chains and shopping malls is not as new a con- Dogus¸ Otomotiv (automotive, joint venture with Volkswagen). cept in Turkey as in other emerging markets: Migros and It is still difficult to understand whether in the future those some municipality retail chains started to position themselves conglomerates will concentrate their attention more on some in the local market in the 1960s. Some foreign chains are specific sector, or whether they will maintain a major active in Turkey (apart from Metro also Tesco, Carrefour and involvement in very different activities as they currently do. Lidl), but the local competition is very strong. The services sector is very strong and competitive in The Turkish production structure is characterised by having Turkey too, especially in the field of banking and a network of small local enterprises and by the major role finance, telecommunications and transport. First, the ser- played by a few big family-owned conglomerates. They vices sector is mainly aimed at serving the vast, local mar- represent challenging competitors for foreign investors, and ket, and it can take advantage of the enormous possibilities often many important partners. Koç Group is the largest of in terms of economies of scale; second, many activities these groups, and it is active in the automotive sector (joint require a skilled labour force (mainly “white collar”), and ventures with Fiat and Ford), white goods, retail, food, this can be considered one of the main sources of strength finance with companies such as Yapi Kredi Bank (finance, in on the Turkish labour market in the main cities. Local con- partnership with UniCredit Group), Arcelik (white goods), glomerates are very active in the above mentioned sectors, Migros (retail), Tofas¸ and Ford Otomotiv (automotive) and but many foreign companies are gradually entering the Tupras¸ (energy). The Group comprises more than 120 com- market, starting from 2004 – 05. The main FDI inflows in panies, 21 of whom are listed on the Istanbul Stock Ex- Turkey over recent years have been related to telecommu- change, and has 93,000 employees. It is the only Turkish nications (Turkcell, Telsim, and Avea) and finance (all but company in the top 500 companies at global level (Fortune one of the major private banks have experienced some kind 500). Five of the top-10 Turkish companies belong to Koç of foreign involvement in the last three years). TIM, the Group. The second group in terms of size is Sabanci, active in mobile arm of Telecom Italia and the main mobile operator the field of services such as finance, tyres, food, retail, in Italy, acquired Avea in 2000. Avea is the third mobile op- cement, chemicals, with companies such as Brisa (tires), erator in Turkey, with around 8 mn subscribers. Turkey

Producing pasta with a Turkish brand (Box 1)

Barilla is one of the most famous There are two main drivers behind the Turkey (where pasta is a side dish and Italian pasta brands, selling pasta internationalisation of Barilla: the a substantial amount is still home worldwide. The company also has availability of a large market in terms made) and more than 25 kilos in Italy other business units producing of population and opportunities, and (where pasta is a main course). Some snacks and biscuits. Barilla pro- the existence of a local company with products are considered specifically duces in Italy but also in Greece good standards and strong traditions attractive for Turkish costumers, like and Mexico. (hence also a well-known brand). The softer pasta and smaller cuts. chain of suppliers in Turkey is equally Barilla entered the Turkish market in very strong: suppliers of wheat and The Turkish company is strongly 1993 (another case of a long-stand- packaging for Barilla and agents are independent from the Italian Barilla: ing presence, especially if compared Turkish for instance. Services such as the links with the parent company are with the relatively recent appear- insurance, marketing and auditing are strong, but no Italians are employed in ance of foreign investors in other mainly multinational corporations Turkey; R&D activities are located both emerging markets), in partnership already working in Italy with Barilla. in Italy and in Turkey. The company with Filiz Gida, a company previous- Competitors are mainly local exports the pasta produced in Turkey ly owned by Doguş Group, one of producers. to North Africa, the Middle East, the the main local conglomerates. From United Arab Emirates (UAE) and 2003 Filiz became wholly owned by Far less pasta is consumed in Turkey Somalia, even if we consider that 90 % Barilla and is now the second than in Italy, as the yearly consump- of sales are directed towards the biggest pasta maker in Turkey. tion is around 6 kilos per person in Turkish market.

8 Competitiveness Report Turkey, April 2007 was considered a very interesting target for the expansion Turkey became very competitive in costs. In the most recent of the business: a huge potential market in terms of popula- years the currency has been strong, driven by FDI and re- tion, with a relatively low penetration of mobile phones (the newed confidence in the Turkish economy, appreciating by penetration of mobile phones relative to the population is more than 28 % in 2004 – 2005 in real terms versus the euro. around 60 % in Turkey against 100 % in Europe, and 120 % Today, even after the financial turmoil that weakened the in Italy), made Turkey one of the preferred choices of the currency in spring 2006, the country is considered less com- company. Turkey was considered “a growth story” at that petitive in costs (because of increases in salaries but espe- time (the beginning of the decade), when financial markets cially because of the level of the exchange rate), and not were concentrating their attention on the expansion of very convenient to outsource to from European labour-in- telecommunication companies. Italian Telecom was ex- tensive production sites. The Turkish production system is panding in Europe (Spain, Greece, France and Germany), gradually adapting to this new environment, but small and Latin America (Bolivia, Peru and Venezuela) and even medium-sized enterprises working in more price-sensitive North Africa. Although the experience of the company in segments of the textile sector still regard the weaker cur- Turkey is considered very positive, TIM is now leaving rency as essential. On the other hand, a weak – and unsta- Turkey as the result of a more general strategy to reduce its ble – currency is considered grim for many other producers, foreign commitments and concentrate more on the Italian especially those involved in sectors characterised by high business, thereby cutting its debt exposure. The Italian import intensity and where the stability of domestic demand telecommunications company still maintains an indirect plays a central role. These main trends are well illustrated stake in the fixed lines operator Turk Telecom. by the strategies of some companies active in textiles and wearing apparel, such as Zegna (producing and selling in The strength of the services sector represents not only a Turkey), Linea Sprint (producing textile swimsuits in good source of foreign investments but also an important Turkey and exporting abroad), and Benetton (for whom pillar of support for manufacturing activity in Turkey. In- Turkey is an outlet market and a supplier of goods): Linea dustrial companies can easily find the high level of service Sprint is the most affected by the strength of the currency, needed in terms of consultancy, legal services, marketing, while Benetton and Zegna are enjoying the booming local banks and insurance. It must be stressed that this particular market (see box 2). advantage is not so common in other emerging markets. The quality of the labour force is considered by foreign The competitiveness of the country on the cost side, entrepreneurs to be one of the main strengths of the which was not a topic of discussion some years ago, is Turkish economy, especially concerning “white collars”. now threatened by the strength of the currency, especially The upper-middle class is very well educated, universities are in the most traditional price-sensitive sectors. Labour costs very selective, and the services sector, which employs many in Turkey are lower than in Europe, but some countries (in highly skilled workers, is strong, especially in the main cities. the Far East but also in Central and Eastern Europe) can be On the other hand, salaries for these categories are very often considered more attractive from this point of view. Lower aligned with Western standards and there are no strong labour costs can nowadays be found in Asia, North Africa, and advantages in this respect for foreign companies in Turkey. even in some EU countries such as Bulgaria and Romania9. This is why, according to the foreign investors we inter- In some cases Turkey is considered by foreign investors to be viewed, the labour intensive sectors (textiles in particular) a base for accessing other countries, especially in regions will be among those most affected in the future by the relo- where the links with Europe are weaker. This role could be- cation of production towards other emerging countries. On come more significant in the future, but it is not fully exploited the one side this is a painful process, especially for some yet. First, Turkey is developing a very important network as small enterprises; on the other hand, it is pushing Turkish an energy supplier, and serves as a bridge between produc- companies towards higher quality and higher value-added ers (Russia and Middle East) and consumers (Europe). Apart activities. The cost competitiveness of Turkey is very sensi- from this, foreign companies are looking at Turkey as a pos- tive to exchange-rate developments. While the currency sible base for future expansion, and two directions seem to was linked to the dollar and the currency was strong, the be particularly appealing: one is the Caucasus (Georgia and Turkish production system regularly experienced tensions Azerbaijan10) and Central Asia and the other is the Middle and finally a crisis. Immediately after the 2001 devaluation East and North African Muslim countries. In both cases the (the domestic currency depreciated by more than 130 %) geographical, historical, and even religious links are interre-

9) Bulgaria and Romania joined the EU in 2007. Their monthly labour costs, according to Eurostat, were around EUR 229 and EUR 358 respectively in 2005. Turkish labour costs were between EUR 650 and 700, while China has monthly salaries of between EUR 170 and 200.

10) Both countries are involved in the transit of the Baku-Tibilisi-Ceyhan (BTC) pipeline that serves Turkey and Europe. Azerbaijan has a Turkic and majority-Muslim population.

Competitiveness Report Turkey, April 2007 9 Turkey

lated and play a role. The example of the Benetton Group is Turkey and also serves North Africa, the UAE and Somalia indicative in this respect. Benetton entered the Turkish mar- from Turkey. Ferroli supplies other CEE markets from ket in 1986, in partnership with a local company; at that time Turkey such as , Bosnia, Romania and the Czech Re- it was the first foreign retail brand in Turkey (it entered public, while Turkey is considered to be a very good place before McDonald’s). In 1998 Benetton started to explore even for future expansion. Menarini, the Italian pharmaceuti- possible expansion in former Soviet countries and entered cal company who bought the Turkish firm Ulugay, exports Kazakhstan, Uzbekistan, Turkmenistan and lately Georgia, Turkish products to many Mediterranean countries (while Kyrgyzstan and Tajikistan. Benetton represented the first for- ex-Soviet countries are managed from Germany). eign investment in some of these countries. The “first comer” advantage is seen as very significant, especially in terms of In the near future, the Turkish economy is going to remain finding locations and reaching agreements with local part- outward oriented in terms of exports and imports and ners. Benetton now has more than 100 stores all over Turkey, attract more FDI, derived from privatisations and green- where it controls its activities in the Caucasus and Central field/brownfield investments: 2005 has already been a turn- Asia. The company sees the former Soviet countries as being ing point in this respect. The long and bumpy journey crucial for future expansion. Barilla produces pasta in towards the EU, even if not successfully completed11, will

11) Currently, 8 out of 35 accession chapters are frozen and the future of negotiations appears uncertain.

Italian companies in the Textile sector: a challenging future (Box 2)

The textile and wearing apparel sector tors, especially in Asia and in North tial. Hence the appreciation of currency in Turkey is one of the most important Africa. Asia has a leading role in terms of and the increase in salaries are mainly for the country: it represents around costs, while North Africa also exploits its hurting those who produce in the local one quarter of total exports (down from proximity to European markets. market and sell abroad. Companies 39 % in 1998), and plays a major role in that can impose their brand (Zegna for the European markets (it represents We interviewed three Italian companies instance, which targets the market of 7.4 % of total European imports of tex- active in the sector; two of them produce relatively wealthy consumers) are not tiles and wearing apparel). The textile in Turkey, while the other is in Turkey so affected: high quality goods associ- sector is also very important for Italy mainly to sell its goods: we met the top ated with a strong brand are less sensi- (constituting around 12 % of Italian ex- management of Ermenegildo Zegna, tive to costs. On the other hand, the ports and 8.5 % of European import de- which produces shirts and targets wealthy Turkish plant of Linea Sprint is suffering mand). In both countries the sector is clients with very high quality standards from competition from the other plants undergoing a significant process of re- and a well known brand; Linea Sprint, a belonging to the same company that structuring following the increasing producer of high quality swimsuits, whose are located in areas more competitive competition coming from low-cost brand was popular in the past but is not in costs, like North Africa for instance. countries, especially from Asia. Many so strong on an international level; and Linea Sprint is thus gradually reducing Italian companies have adopted the Benetton, which has more than 100 stores its production capacity in Turkey, even strategy of outsourcing their production in the country and can be considered a if the plant is going to be maintained, abroad, mainly to Eastern Europe, sort of pioneer having been present in especially for the sake of diversifica- where they found lower costs and a Turkey since 1986. Benetton makes use of tion. The strong appreciation of the very favourable business environment. Turkey’s strong industrial background in currency in the period 2004 – 06 is also the textile sector to produce goods in out- causing a gradual loss in competitive- Our interviews have highlighted differ- sourcing and sell them through its stores. ness for many local companies, which ent patterns of future developments for are experiencing a painful restructuring the sector. Turkey cannot be considered The companies that produce directly in process. competitive in this sector as it was in the country (including Zegna and Linea the past, when the country could take Sprint) are more sensitive to costs and on For these reasons the EU convergence advantage of strong traditions and low- the level of exchange rate. For Benetton process is seen in a different light by er costs (of labour, inputs, land) at the that mainly targets the local market, the local and foreign producers. It can have same time. Cost competitiveness has level of exchange rate is not so important positive effects on the stability of the been eroded in recent years by the (even if many suppliers are Turkish), country, but can also contribute to the strength of the currency and by the while improvements in the purchasing increase in land and labour costs (via emergence of other low-cost competi- power of Turkish consumers are essen- higher wages and a stronger currency).

10 Competitiveness Report Turkey, April 2007 open up a huge market even more and attract foreign process as a huge opportunity to contribute to the stabil- capital. However, the EU convergence process, if associated ity of the country and improve the business environ- with a strong currency (driven by FDI flows) and rising ment. Moreover, a huge outlet market will be available salaries, could create some competitive tensions for some for the Turkish production system. Since in many CEE Turkish SMEs involved in the labour-intensive sectors. For countries the opening of their economy has meant major these companies a gradual shift towards higher production opportunities for foreign investors even with a very weak ranges (in terms of quality and technology) must be expected local production system (that actually benefited later on if they want to survive the entrance of many emerging com- from the rapid inflow from abroad of knowledge, skills and petitors in the international arena. technology), many Turkish companies can leverage their strengths even in foreign markets, especially in some spe- The business community, both local and foreign entrepre- cific sector. And the EU convergence process will trigger neurs, see EU entry or at least the long EU convergence more competition in the Turkish local market.

Special thanks is due to all the interviewed companies and institutions, which shared with us their experience and knowledge of the country: Company name Sector/Activity AVEA Telecommunications Benetton Wearing apparel Ferroli Air conditioning, radiators, boilers Filiz Gida (Barilla) Food Metro Retail trade Pirelli Tyres Riva Linea Sprint Wearing apparel Ulugay (Gruppo Menarini) Pharmaceutical Ermenegildo Zegna Textile and Wearing apparel A special thanks to Roberto Lorenzon, head of New Europe Desk in Yapi Kredi, and Gamze Çakarcan of the New Europe Desk in Yapi Kredi for their support in organising and managing the interviews.

Competitiveness Report Turkey, April 2007 11 Turkey

Annex

Main trading partners and investors Exports USD Imports USD Trade Balance USD FDI stock USD (2006) mn (2006) mn (2006) mn (2002 – 2006) mn Germany 9,673 Russia 17,494 Germany – 4,881 Netherlands 6,251 United Kingdom 6,812 Germany 14,554 Russia – 14,267 Belgium 4,628 Italy 6,749 China 9,553 Italy – 1,820 Arabian Gulf Countries 3,514 USA 4,996 Italy 8,569 United Kingdom 1,730 Greece 2,860 France 4,602 France 6,601 France – 1,999 France 2,726 Total 85,142 Total 137,032 Total – 51,891 Total 28,650 Source: Turkish Statistical Institution, Central Bank of Turkey, UniCredit Group New Europe Network Research

Turkish exports to Trade flows and FDI by sector (2006, % on total) Exports Imports FDI* stocks Food beverages 5.6 2.3 2.3 Germany 11% Textiles 24.3 4.8 0.8 UK 8% Leather 0.5 1.0 0.0 Wood 0.4 0.6 0.0 Italy 8% Others 61% Paper and publishing 0.9 2.5 0.3 Refined petroleum products 4.3 6.8 0.1 USA 6% Chemicals 4.4 17.9 2.9 France 5% Rubber and plastic 3.8 2.4 0.3 Oth. Non-metallic mineral pr. 3.5 1.3 0.6 Source: Turkish Statistical Institution, Central Bank of Turkey, Metal products 15.8 17.8 0.8 UniCredit Group New Europe Network Research Machinery and equipment 7.5 13.1 0.4 Electrical equipment 7.8 14.3 0.3 Turkish imports from Transport equipment 18.3 13.6 1.5 Furniture, manufacturing n.e.c. 2.9 1.7 0.0 Total manufacturing 100 100 10.3 Russia 13% Electricity, gas, water supply – – 1.2 Construction – – 2.3 Germany 11% Wholesale, retail trade – – 6.5 Transportation & Communications – – 35.7 Others 59% China 7% Finance, Insurance, – – 39.8 Real Estate & Business Services Italy 6% Others (Agriculture, Mining, – – 4.3 France 5% Social & Business Services) Source: Central Bank of Turkey, UniCredit Group New Europe Network Research Source: Turkish Statistical Institution, Central Bank of Turkey, *) 2002 – 2006 UniCredit Group New Europe Network Research

FDI in Turkey from

Netherlands 22% Others 30%

Belgium 16% France 10% Arabian Gulf Greece 10% Countries 12%

Source: Turkish Statistical Institution, Central Bank of Turkey, UniCredit Group New Europe Network Research

12 Competitiveness Report Turkey, April 2007 Trade flows and FDI with Germany Turkish-German trade flows (% of total) German FDI in Turkey

• German FDI in Turkey amounts to 3.7 % of total cumulated FDI received in the 2002 – 2006 period. 20% • Germany is the ninth largest investor in the country, active mainly in sectors such as transport, energy and communication.

15% Key German investments in Turkey: • Siemens 10% • Mercedes Benz • Man 5% • Bosch • Steag • 0% Praktiker . . . . ip ip r r. ic ls r. re g r s s • uip u u p p t a p u in d e e e Bayer q q q al l as ic it h oo th til g e e e t ra l um rn is a x ra t l d e e p em e u l W Le Te e or ca n m in d h ol F ub ev p ri a d m an C tr b s ct ry n c r e p , an le e a i e p & d r E ls all b d er o T hin a t b e p Fo c et e Ru in a a -m f P M m n re sic o e, a . n k B h Co Ot

Trade flows and FDI with Italy Turkish-Italian trade flows (% of total) Italian FDI in Turkey

• Italian FDI in Turkey amounts to 4 % of total cumulated FDI received in the 2002 – 2006 period. • Italy is the sixth largest investor in the country, focusing mainly on 15% the banking sector and SMEs

Key Italian investments in Turkey: 10% • UniCredit (Yapi Kredi) • Fiat (Tofas) • Pirelli 5% • Barilla (Ulugay) • Magneti Marelli • 0% Finmeccanica . . . . ip ip r r. ic ls r. re g r s s • uip u u p p t a p u in d e e e ENI q q q al l as ic it h oo th til g e e e t ra l um rn is a x ra t l d e e p em e u l W Le Te e • or ca n m in d h ol F ub ev Indesit p ri a d m an C tr b s ct ry n c r e p , an le e a i e p & d r E ls all b d er o T hin a t b e p Fo c et e Ru in a a -m f P M m n re sic o e, a . n k B h Co Ot

Trade flows and FDI with Austria Turkish-Austrian trade flows (% of total) Austrian FDI in Turkey

• Austrian FDI in Turkey amounts to 3.9 % of total cumulated FDI received in the 2002 – 2006 period. 20% • Austria is the seventh largest investor in the country, focusing mainly on the banking sector, but is also active in the areas of paper 15% and construction

10% Key Austrian investments in Turkey: • OMV • Red Bull GmbH 5% • Austria Tabak • Austria Haustechnik AG • 0% Hobas Engineering GmbH . . . . ip ip r r. ic ls r. re g r s s • uip u u p p t a p u in d e e e Capsnap Europe Packaging GmbH q q q al l as ic it h oo th til g e e e t ra l um rn is a x ra t l d e e p em e u l W Le Te e • or ca n m in d h ol F ub ev Austria Card GmbH p ri a d m an C tr b s ct ry n c r e p , an le e a i e p & d r E ls all b d er o T hin a t b e p Fo c et e Ru in a a -m f P M m n re sic o e, a . n k B h Co Ot

Source: Global Insight, YASED, UniCredit Group New Europe Research Network

Competitiveness Report Turkey, April 2007 13 Turkey

UniCredit Group CEE banking network

The Baltics Czech Republic Russia HVB Bank Tallinn Živnostenská Banka International Moscow Bank Liivalaia Street 13/15, EST-10118 Tallinn Na Prikope 858/20, CZ-113 80 Prague 1, Prechistenskaya emb. 9, Phone: +372 668 8300 Phone: +420 2 2412 1111 RF-19034 Moscow www.hvb.ee E-Mail: [email protected] Phone: +7 095 258 7200 www1.zivnobanka.cz E-Mail: [email protected] HVB Bank Vilnius www.imb.ru Vilniaus Gatve 35/3, LT-01119 Vilnius Phone: +370 5 2745 300 HVB Bank Czech Republic www.hvb.lt Nám. Republiky 3a, CZ-110 00 Prague 1, Yapi Kredi Moscow Phone: +420 221 112 111 Goncharnaya emb. 2, UniCredit Bank (Latvia) www.hvb.cz RF-115172 Moscow Elizabetes Iela 63, LV-1050 Riga Phone: +7 495 234 9889 Phone: +371 708 5500 Hungary E-Mail: [email protected] www.unicreditbank.lv UniCredit Bank Hungary www.ykb.ru Szabadság place 5 – 6, Bosnia and Herzegovina H-1054 Budapest, Serbia UniCredit Zagrebacka banka Phone: +36 1 269 0812 UniCredit Bank Serbia Kardinala Stepinca b.b., Fax: +36 1 353 4959 Rajiceva 27 – 29, 11000 Belgrade BH-88000 Mostar Phone: +381 11 3204 500 Phone: +387 36 312112 www.unicreditbank.hu E-Mail: [email protected] E-Mail: [email protected] www.unicreditbank.co.yu www.zaba.ba Macedonia BA-CA Representative Office HVB Central Profit Banka Dimitrie Cupovski 4 – 2/6, Slovakia UniCredit Bank Slovakia Zelenih Beretki 24, BH-71000 Sarajevo MK-1000 Skopje Šancova 1/A, SK-813 33 Bratislava, Phone: +387 33 533 688 Phone: +389 2 3215 130 E-Mail: [email protected] Phone: +421 44 547 6870 www.hvb-cpb.ba Poland E-Mail: [email protected] www.unicreditbank.sk Nova Banjalucka Banka Bank Pekao Marije Bursac 7, BH-78000 Banja Luka ul. Grzybowska 53/57, Slovenia PL-00-950 Warsaw Phone: +387 51 243344 Bank Austria Creditanstalt Ljubljana Phone: +48 42 6838 232 E-Mail: [email protected] Šmartinska 140, SI-1000 Ljubljana, www.novablbanka.com www.pekao.com.pl Phone: +386 1 5876 600 Bulgaria E-Mail: [email protected] Bank BPH www.ba-ca.si Bulbank Al. Pokoju 1, PL-31-548 Cracow, Sveta Nedelya Sq. 7, BG-1000 Sofia Phone: +48 12 618 68 88 Phone: +359 2 923 2111 Turkey E-Mail: [email protected] www.bulbank.bg Yapi Kredi www.bph.pl Yapi Kredi Plaza D Blok, Levent, HVB Bank Biochim TR-34354 Istanbul, Ivan Vazov Street 1, BG-1026 Sofia Romania Phone: +90 212 339 70 00 Phone: +359 2 926 9210 UniCredit Romania www.yapikredi.com.tr E-Mail: [email protected] Ghetarilor Street 23 – 25, www.biochim.com RO-014106 1, Ukraine Phone: +40 21 200 2000 HVB Bank Ukraine Hebros Bank E-Mail: [email protected] Yaroslaviv Val 14A, UA-01034 Tzar Boris III Obedinitel www.unicredit.ro Phone: +380 44 230 3300 Blvd. 37, BG-4018 Plovdiv Phone: +359 32 90 57 73 E-Mail: [email protected] HVB Tiriac Bank www.hvb.com.ua Croatia Charles de Gaulle Sq. 15, Zagrebacka banka RO-011857 Bucharest 1, UniCredit Bank Ukraine Paromlinska 2, HR-10000 Zagreb Phone: +40 21 203 2222 14, D. Galitskogo St., UA-43016 Lutsk, Phone: +385 1 6305 250 E-Mail: [email protected] Phone: +380 332 776210 www.zaba.hr www.hvb.ro www.unicredit.com.ua

14 Competitiveness Report Turkey, April 2007 This is a product of the New Europe Research Network. The New Europe Research Network involves all the research offices of the Group dealing with the CEE region, with the aim of providing a shared view in terms of economic developments at the single country and at the regional level

Debora Revoltella UniCredit Group, CEE Chief Economist Network Coordinator [email protected]

UniCredit Group, CEE Economic Research UniCredit Romania – Economic Research Carmelina Carluzzo – Matteo Ferrazzi – Sandor Gardo – Rozalia Pal, Senior Economist Hans Holzhacker – Fabio Mucci – Lisa Perrin – Bernhard Sinhuber – Gerd Stiglitz UniCredit Bank Slovakia – Macroeconomics & Market Analyses Bulbank Planning and Control Division, Viliam Patoprsty, Chief Analyst Economic Research Section Lubomir Korsnak Kristofor Pavlov, Chief Economist Elena Georgieva Yapi Kredi Bankası Cevdet Akcay, Chief Economist Zagrebacka Banka – Macroeconomic Research Ahmet Cimenoglu, Head, Strategic Planning and Research Zarko Miljenovic, Chief Economist Suzi Apalaci – Yelda Yucel – Veyis Fertekligil Nenad Golac International Moscow Bank Treasury Zivnostenska Banka – Financial Markets Division Alexander Morozov, General Manager Patrik Rozumbersky, Chief Economist Sergei Kondrashov – Valery Inyushin – Sergei Alenkin

HVB Bank Czech Republic – Economic Research UniCredit Bank Hungary Pavel Sobisek, Chief Economist Márta Szegő Biróné, Chief Economist Vaclac Verner Tibor Nagy

Pekao SA – Macroeconomic Research Office Andrzej Bratkowski, Chief Economist

The authors of this issue Matteo Ferrazzi – Yelda Yucel

Competitiveness Report Turkey, April 2007 15 Your Leading Banking Partn er in Central and Eastern Europe