Turkey's car industry remains stalled

By bne IntelliNews August 18, 2009

David O'Byrne in Istanbul -

After the collapse of its main European export markets, Turkey's hard-pressed automotive sector had been hoping that a temporary reduction in taxes levied on new automotive sales in Turkey might spark a recovery in domestic sales to tide it over. New figures suggest that hasn't been the case.

That tax holiday, which lasted from March through June, did provide a temporary fillip to sales as Turkish consumers rushed to take advantage of lower prices. Passenger car sales for May reached 44,000, while light commercial vehicle sales peaked at 20,000 in June - both figures representing the highest monthly sales figures since December 2007.

Yet despite this initial optimism, figures just released to bne for the month of July show sales plummeting to just 16,600 for passenger cars - the lowest recorded since January 2007 - and 12,000 for commercial vehicles - the lowest since November last year. "The drop in sales after the ending of the tax breaks is a normal reaction, and we'll get a truer picture of whether underlying demand is increasing in the last quarter," says Cengiz Kabatepe, assistant general manager of Ford Otosan, Ford's Turkish joint venture, which manufactures light commercial vehicles at two plants in northwest Turkey.

But with exports to key European markets still showing little sign of recovery, Kabatepe, like many in Turkey's automotive sector, would like to see the tax breaks made permanent. "Ideally, the tax on new vehicle sales should be balanced to encourage customers to buy, but at the same time maximizing revenue for the government," he says.

His sentiments are echoed by Dr Ercan Tezer, head of Turkey's automotive manufacturers association, who points out that the 18% VAT plus 37% special consumption tax levied on new car sales in Turkey is way above European norms. "Ideally, we'd like to be in line with the EU where taxes average 20-25%," he says.

And with as many as 2.5m of Turkey's 14m vehicles over 20 years old, many would like to see the introduction of incentives to scrap older vehicles. "An incentive scheme would help boost both sales and tax revenues, and would help remove more polluting vehicles from the roads," says Ibrahim Aybar, chairman of Turkey's Automotive Distributors' Association, pointing out that the lower emissions from new, more efficient vehicles would help offset any growth in vehicle ownership in Turkey, which at only 92 vehicles per 1,000 people is only a fifth of the European average of 470.

Taste for luxury

Both, however, readily admit that domestic sales alone won't be sufficient to sustain a revival of the sector, which at its peak in 2007 was exporting 80% of the 1.2m vehicles manufactured. Thus, any recovery in Turkey's automotive sector relies heavily on the recovery of its key European export markets, to which sales in the first six months of this year had dropped to 277,000 vehicles, down 35% the same period in 2008, when the 557,000 vehicles exported was the highest half-year figures the sector has ever recorded.

Ford's Kabatepe explains that, in fact, exports from the automotive sector as a whole are increasing again, pointing out that exports of vehicles and parts for the month of July totaled $1.7bn for the month of July, more than double the $700m-800m recorded in the early months of the year, although it is still far from the $2bn-2.5bn the sector recorded at its height in 2008.

However, he concedes that the figures reflect a greater recovery in the sale of automotive parts, which account for between 30-40% of revenue, as opposed to vehicle sales which account for 60%-70%. "There's no escaping the fact that to get back to the point we were at before the crisis with exports totaling $2.5bn a month, depends entirely on how quickly the European economy recovers, which obviously depends on many factors and is hard to predict," he explains, suggesting that such a recovery could begin next year.

Dr Tezer says that in the automotive sector a slump-recovery cycle typically lasts around three years, meaning he's expecting the industry to return to the point it was in 2008 by end of 2011.

However, while a recovery in exports can only be good news, a full recovery in Turkey's car-buying market also carries with it the risk of soaring imports. One of the more unusual statistics to emerge this year has been the revelation that imports continue to account for 56% of vehicle sales in Turkey - down only 2% from the peak of 58% recorded in 2008 and previously in 2004. As Dr Tezer points out, imports of commercial vehicles at only 38% of sale are acceptable, but imports of passenger cars that reached 66% of sales over the first six months of this year are not. "Our industry only produces certain types of passenger car, so we will always have imports, but ultimately the level of imports reflects on the competitiveness of our manufacturers," he explains.

Ford's Kabatepe says it's an unfortunate facet of Turkish culture that consumers still believe that imported products are better quality than locally produced, even though local plants have long been able to meet exacting global quality standards. "If they weren't up to scratch, we wouldn't have been able to export so many vehicles," he laughs. "We just need to convince our own consumers that this is the case."

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