VW ‘one tax pledge away from choosing Turkey over Bulgaria for €1bn plant’

VW ‘one tax pledge away from choosing Turkey over Bulgaria for €1bn plant’
Traffic in Istanbul. Turks face paying a steep tax if they opt for a car with a large engine.
By bne IntelliNews August 30, 2019

A pledge from Turkey for a change in the special consumer tax system at a specific date in the future would reportedly be enough to convince Volkswagen to choose the country over Bulgaria as the location for a €1bn multi-brand auto production plant.

“The only standing request VW has [in its talks with Turkish officials] is on taxation on the vehicle market,” Reuters late on August 29 reported a source as saying. Turkey was trying to come up with a formula that would meet Volkswagen’s concerns while not putting existing car producers at a disadvantage, they added.

Turkey’s tax regime charges from 45% to 60% for engines up to 1.6 litres and from 100% to 110% for engines up to 2 litres. Vehicles with engines of less than 1.6 litres constituted 96% of all car sales last year, with the steep Turkish taxes on larger cars limiting most buyers and local producers to smaller engine sizes, the news agency added.

It also quoted one source as saying VW executives were planning to convey the request for the tax system change to Turkish President Recep Tayyip Erdogan, with a final decision on the investment location to “materialise shortly”.

Auto industry representatives in Turkey, meanwhile, continue to demand tax measures that would help all carmakers in the country. Recession-hit Turkey saw its auto sales plunge 66% y/y in July after following a 16% decline in June. The market contracted 55% y/y in May and 57% y/y in April. In the first seven months of the year, auto sales declined by 48% y/y to 213,000 units.

Major producers including Fiat, Renault, Ford, Hyundai and Toyota produced more than 1.3mn motor vehicles in Turkey last year.

In late July, German state media outlet ARD reported that VW was intending to build the plant in the western Turkish province of Manisa.

Size of market persuasive
According to ARD, VW finally decided to build the factory in Turkey rather than Bulgaria because of the size of the local auto market, even though labour costs are much lower in Bulgaria. Turkey’s population stands at around 82mn people.

VW has reportedly calculated that it could sell as many as 40,000 Passat model units annually in Turkey. The carmaker also took into account the fact that the Passat limousine version is highly popular among Turkish officials and the government might buy this model in considerable quantities for official use, the news outlet said.

The Manisa plant would also produce Skoda and Seat models of VW group subsidiaries.

If VW officially announces the Turkey investment, the Ankara government will boast that the decision represents foreign investors’ maintaining confidence in the Turkish economy, despite its present travails.