Analysis: Turkey seeks to up its game - DRAFT

Article published in the September/October edition of European Rubber Journal magazine

Turkey is an investment hub for many suppliers of tires and rubber products into Europe – a position that looks set to continue despite the recent political turmoil in the country:

Strategically located between Europe, the Middle East and Asia, Turkey has for decades offered a low-cost base, for major manufacturers - not least in the automotive sector.

Turkey is Europe’s seventh largest automotive producer and 16th largest worldwide. In 2014, its automotive industry reached €30 billion in foreign trade volume, accounting for around 11.5 percent of the country’s total exports.

The burgeoning automotive sector is supported by a growing number of major tire and rubber companies with manufacturing bases in Turkey, including Pirelli, Sumitomo, Bridgestone, Freudenberg and Trelleborg.

This presence looks set to grow, according to London-based market research group Technavio, which published a report in July projecting a CAGR growth of over 5 percent in the Turkish rubber and plastics sector to 2021.

According to Technavio analyst Chandrakumar Badala Jaganathan, over 60 percent of the demand for the sector’s output is coming from countries in western Europe, particularly Germany, Italy, France, the UK and Spain.

Recent turmoil

And, despite the recent political turmoil, a clear indication of market confidence in Turkey was a mid-August $150-million long-term loan by the European Bank of Reconstruction of Development (EBRD) to Brisa, a joint venture between Bridgestone and Sabanci, for a project to build its second tire plant, in Aksaray.

Rated at 4.2 million units/year, the new plant is due on stream in early 2018 and is expected to employ 550 people. It is to become Brisa’s strategic hub, supplying Bridgestone and Lassa brands to markets in Turkey and neighbouring countries.

“As a leading international financial institutions the EBRD’s decision to trust in Turkey and Brisa despite the current conditions and provide a US$ 150 million loan with convenient terms is truly encouraging and promising,” said Brisa CEO Yigit Gürçay.

Among other recent investments, Sumitomo Rubber Industries has signed a major distribution deal with Turkish tire maker and distributor Petlas while Korean rival Hankook is understood to have expanded its supply network within the country.

German automotive rubber parts supplier Freudenberg, which completed its E10-milion expansion in Bursa, Turkey in June, also remains confident about its prospects in the country.

“When we invest, we do it for the long-term – this principle applies to all our investments including the recent one in Bursa,” said company spokeswoman Charlotte Baumann in a written statement to ERJ.

The investment, she added, “allows us to engage in even closer partnership with a large number of automakers with production plants in the area.”

Local players

One of the many successful local players is Uzer Makina, which manufactures tire machinery for not only Turkey but also other destinations in Europe, Asia and North America. And the company’s managing director Seyfullah Bozkurt is confident that the country is keeping its competitive edge.

While Turkey tries to become a part of the Western world, Bozkurt said, it still offers low-cost labour and good geographical access.

And quality is another selling point.

“Made in Turkey” has a good image, according to Bozkurt, who supported his claim by saying that Pirelli rolls out Formula 1 tires from its plant in Izmit.

“I believe that this shows the quality level,” Bozkurt commented.

Indeed, this June saw Pirelli move the EMEA headquarters of its Industrial Tire Division from Milan to Istanbul, from where it will now run the operation which covers 128 countries.

Regional incentives provided by the government, noted Bozkurt, are prompting industry players to invest in places other than Izmit – Turkey’s so-called tire industry capital, where Goodyear, Pirelli and Brisa have production plants.

Local tire-maker Petlas and Sumitomo Rubber Industries (SRI) opened a €460-million joint-venture tire factory in Cankiri last year. As with Brisa’s project in Aksaray (see above), this investment is worth roughly €450 million and will significantly increase Turkey’s tire production and export capabilities.

As for Uzer Makina itself, the company aims to expand out of its current manufacturing facilities in Izmit and set up smaller workshops across the country as the industry grows elsewhere.

Raw materials concern

With few natural resources, one of the key problems for Turkey is the supply of raw materials, such as synthetic rubber, natural rubber and carbon black.

For instance, despite being a roughly 180-kilotonne carbon black market – which can potentially call for two production plants – Turkey does not have local manufacturing capacity and still depends on imported supply of rubber component materials.

Indeed, according to an ERJ source, a leading carbon black manufacturer recently decided against building a plant in Turkey as it could not secure long-term feedstock supply into the country.

The Turkish government and national bodies, such as the Rubber Association and OSTIM rubber cluster, are currently working on strategies to address the problem, according to Turkey’s Rubber Association chairman Nurhan Kaya.

The ‘input supply strategy’ (GITES), coordinated by the Turkish ministry of economy, as well a ‘strategy of chemical sector’ scheme, sponsored by the ministry of science, industry and technology, both target increased productivity, reduced of dependence on imports of raw & intermediate materials and increased export potential.

The programmes also support investors, both local and foreign, by providing tax-reliefs incentives, ranging from 15-65 percent.

“These schemes offer exemptions in VAT and customs duty, tax deductions, land allocations, support for interest on loans, VAT refunds, and support for employer’s social security premiums,” explained Technavio analyst Jaganathan.

Insufficient R&D and product development support are other significant obstacles for Turkish-based manufacturers, according to Rubber Association chief Kaya.

To address the issue, Turkey’s scientific and technological research council (TUBITAK) introduced a grant scheme in 2015 named “Frontier R&D Laboratory Support Programme” to encourage further R&D in the country.

One of the companies that has benefited from such initiatives is tire-cord manufacturer Kordsa, whose research centre won Turkey’s “best R&D centre of the year award” in 2015.

The company opened a €30-million technology centre in cooperation with Sabanci University in Istanbul’s Teknopark innovation hub, in August, with 40-percent funding-support from government.

The centre, which will study high-technology composite materials for industries such as aviation and automotive, signals Turkey’s ambitions in R&D and self-sufficiency in intermediate materials.

In addition to that project, Kordsa is adding two extra production lines for “new generation” products in response to increasing demand.

“We will add a new polyester HMLS yarn line of 6 kilotonne to our existing capacity in Izmit and a 6.5 kilotonne to our existing capacity at Indonesia,” said Kordsa’s global accounts and marketing director Vahe Hanamirian.

The company expects the added capacity to cover increased demand for polyester reinforcement materials in both Asian and European markets.

Business as usual

While the failed coup attempt in mid-July and increasing spill-over from the war in neighbouring Syria might have dented investor confidence in some quarters, the fundamentals of doing business in Turkey seem robust for manufacturers.

According to Fazilet Cinaralp, the secretary-general of the European Tyre & Rubber Manufacturers’ Association (ETRMA), the political events in Turkey over the summer are unlikely to have any significant impact on the country’s tire and rubber industries.

“I personally believe that the investments will continue without interruption,” Cinaralp, who is originally from Turkey, told ERJ. “Normally a developing country would face strong [after] shocks in terms of currency exchange rate and interest rate fluctuations. Neither of them happened.”

This view, she noted, was echoed by analysts at Merrill Lynch, which recently confirmed that Turkish stocks and bonds were the best-performing investments in the global economy in July, despite the upsets.

“This mini-rally in Turkey, brief as it may be, highlights just how much risk yield-starved investors are willing to take on when $11 trillion worth of bonds of governments around the world are offering up negative returns.”

The message of “business as usual” can also be detected among domestic players.

“Business operations are proceeding uninterrupted and will continue to do so,” insisted Nurhan Kaya chairman the Turkish Rubber Association, which will host the RubberCon 2018 in Istanbul, organised by International Rubber Conference Organisation (IRCO).

According to Kaya, customs procedures together with all other government and private sector services have been operating “normally without any delays despite the political unrest”.

Organisers of Rubber 2016 expo in Istanbul also insisted that the tire and rubber sector had not been impacted.

Everything is going well,” assured Cansu Gördü, project marketing specialist at Tüyap Fairs and Exhibitions Organization Inc., which is staging the Istanbul 9th Rubber Industry Fair on 24-27 Nov.

Life has been continuing in Turkey,” said Gördü. “There hasn’t been impact on the tire and rubber industry in Turkey so the date is still the same.”