Turkey’s domestic car project right place to invest

In November 2017, Turkey launched [1] an ambitious project for creating its first domestic car brand. With the strong support of the government, five major companies will take part in the consortium to make Turkey's first domestically produced automobile. A prototype is expected to be ready by 2019 while sales will start in 2021. It is further announced [2] that the initial models will be all electric-engine, which adds even more enthusiasm to the endeavour.

Plans to produce a Turkish-designed and -built electric car is the right place to start Turkey's transition from labour-intensive, secondary manufacturing to high-value-added industries.

Contrary to the belief held by many, this is not an appeal for national prestige or a PR campaign for the governing party but is rather a serious enterprise to address Turkey's need to overcome the middle income trap. After two decades of fast growth mostly driven by services and the construction sector, it is time for Turkey to move on and invest in capital-intensive, high-tech industrial production.

Turkey has been able to pull millions of its citizens out of poverty thanks to rapid growth. However, as productivity growth has been largely depleted in inward-oriented sectors, which Turkey has long been dependent on, it not only desirable but also indispensable for Turkey to move towards more productive sectors with higher added value if the country wants to sustain its high-growth trajectory.

Middle income 'trap'

It is called a trap for a reason. After decades, newly industrialized countries -- Brazil, Thailand, and South Africa, for example -- still struggle to pass beyond the middle-income range in terms of per-capita income levels. Once the benefits of cheap labour force and large domestic markets are exhausted, most developing countries suffer from a lack of funds, human capital and know-how, which are necessary to create competitive industries that bring high surplus through exports.

Successful examples of moving beyond secondary industries -- S. Korea and Japan in this case -- were rarely seen in the 20th century because the competition in global markets easily eliminated the new producers.

With these in mind, we can list a number of reasons why the domestic car project is a good starting point for Turkey to become another success story.

First, the automobile industry has backward and forward linkages that support many other industries. Influential economist Albert Hirschman argued that developing countries should invest in sectors with the most linkages (i.e. sectors that provide other sectors with the necessary inputs or use outputs from other sectors) because these sectors have the potential to pull other industries as well.

In this respect, the automobile industry is an excellent choice. Backward linkages include aluminium, steel, and advanced plastics whereas technologies and know-how used for automobile production creates important knowledge spillovers and externalities for other sectors, such as aviation, national defence, and all sorts of electronics. One of the members of the consortium, Zorlu Holding, has already invested in a mega battery company [3] which will be producing batteries for 500,000 automobiles by 2023.

Second, Turkey already has the experience and know-how necessary for automobile production. Despite the absence of indigenous automobile brands, the automotive industry plays an important role in Turkey's manufacturing sector. Turkey is the 14th largest car producer in the world, having produced more than 1.7 million units of cars in 2017 alone [4] for some of the world's best known companies, among them Ford and Toyota. In that respect, the project will be able to draw on local manufacturing expertise.

Furthermore, the country is a major distribution hub for the Middle East and Europe. Given Turkey's considerable capacity in automotive production and geographical advantage in marketing, it is sad that the substantial profits created by the automotive industry could not be kept at home.

Third, the automobile industry, especially electric cars, has an enormous potential for innovation. Electric cars, of all new cars, are expected to have a 30-percent market share [5] by 2040 but the number of the big producers investing in the serial production of this technology is still limited. As the consortium is investing in electric cars [6], this may open Turkey a highway for innovative technologies in electric vehicles.

World-known car companies of developed countries have long built their capacity in conventional automobile technologies, which give them very competitive advantages over start-up firms. Focusing on the newly emerging electric car industry might provide the new venture with a chance to level the playing field for competition, along with a jump-start in terms of competitiveness and cost-effectiveness.

Needless to say, there are challenges ahead. Considering that electric cars qualify for substantial tax advantages in Turkey, winning the hearts of the domestic consumers might be easier. New electric cars, however, should offer something new to global consumers. Unless they are cheaper or better quality (or preferably both), consumers may simply stick with the more familiar brands.

More importantly, the venture is dependent on political support. It was the government who took the initiative to get five companies together and convince them to take over this project. The consortium should prove that they are willing and capable enough to sustain this project even without the government's encouragement. The project should be, at least in the long-run, economically viable without government support.

Overall, Turkey's initiative to produce domestic cars is the exact place where it should be investing in. The domestic car project is a good policy choice and very much likely to pay off.

Source: Anadolu Agency