Volkswagen factory deal could kill off Turkish national car project

The wave of nationalism that swept Turkey after a failed coup attempt in 2016 has led to a surge of national projects, ranging from the production of a national tank to a national employment drive. Among the most hotly anticipated is the project to design and mass produce Turkey’s first domestic automobile.

But just as that flagship project is getting off the ground, a new deal with German car manufacturing giant Volkswagen appears set to give it unexpected competition.

In 2017, President Recep Tayyip Erdoğan announced he was looking for five high-calibre companies to take charge of the domestic car project, and in November that year the five were introduced to the public.

The companies include vehicle manufacturer BMC, Anatolia Endüstri Holdings, Kıraça Holding, Türkcell, and Zorlu Holding, all companies with well-established owners who enjoy the favour of the ruling Justice and Development Party (AKP).

The group of five make up Turkey’s Automobile Joint Venture Group (TOGG), the company formed to develop the national car.

The project is being coordinated by Rifat Hisarcıklıoğlu, the head of the Union of Chambers and Commodity Exchanges of Turkey, which is taking a 5 percent share in the national care company.

The other five 19 percent portions of shares in TOGG have been distributed among the five participating companies.

In May, Industry and Technology Minister Mustafa Varank announced the specifications of the car, which he said would be electric with a range of 500 km. The prototype would be created in 2019, and the car would begin production in the second half of 2021 and become available for commercial sales in 2022, Varank said.

Three different models are set to be released, and so far, 30,000 units of the car have been ordered, TOGG’s chief executive officer, Gürcan Karakaş, said. Exports of the vehicle are planned to commence in 2024.

TOGG has approached 62 parts manufacturers to ensure that all components are produced in Turkey, and Karakaş said several had already signed up to the project.

The project, which is thought to require investment worth $4 billion to reach completion, has reportedly hit rough ground under Turkey’s current economic squeeze, which is believed to have raised expenses due to the weakened lira.

Some sources believe the government is likely to step in to offer it super incentives – the huge tax breaks and subsidies granted to projects deemed to be of strategic importance.

On the other hand, last week’s news that Volkswagen AG has chosen Turkey over Bulgaria for the construction of a new factory means the indigenous car is already set to face stiff competition from a German automotive giant.

The German public-service broadcaster ARD reported that Erdoğan’s government had offered Volkswagen lucrative super incentives of its own, including subsidies and tax breaks, to secure the company’s investment, going so far as to personally put his name down as guarantor.

Sources in Berlin and Ankara say the factory will produce Volkswagen Passat cars, as well as some models from its Czech subsidiary Skoda and Spanish subsidiary Seat.

The reports stated that a large number of the luxury Passat models set to be produced will go to Turkish public institutions, which often use Volkswagen and Audi cars.

While Ankara circles have been discussing Erdoğan’s rumoured personal intervention in the deal, and the long list of concessions he is said to have handed the German company for the factory, the episode illustrates the close but complicated relationship Turkey has with Europe.

Germany and other European Union countries have been scathing in their criticism of Turkey’s rule of law, judicial independence, and basic rights and freedoms in recent years, and these have been compounded by the imprisonment on terror-related charges of German citizens, including journalists Deniz Yücel and Meşale Tolu, and human rights activist Peter Steudtner.

Those developments led German Chancellor Angela Merkel’s government to suspend arms sales to Turkey, freeze government-backed Hermes export credit guarantees, and issue a warning to German citizens that they could be arbitrarily arrested in Turkey.

German President Frank-Walter Steinmeier did not hold back his criticism of the Turkish president’s anti-democratic actions when he paid a state visit to Erdoğan last September. That visit upped the tension to even higher levels.

This is why the ability to draw a 3.5 billion-euro investment from a European giant like Volkswagen was seen as a critical matter of prestige that would help conceal the negative perception of Erdoğan and Turkey on the international stage.

The incentives offered to Volkswagen to make what Turkey defines as a “strategic investment” are said to include interest subsidies through customs and VAT exemptions on all components as well as other tax exemptions, and the provision of public land for the factory, free of charge.

Moreover, some of the incentives could be coming even before the deal is officially signed in September or October: Volkswagen is rumoured to have requested a discount on the huge tax paid in Turkey on vehicles, which amounts to around half of the full price.

Europe is the largest market for Turkey’s automotive industry, which with international yearly sales worth $35 billion is the driver of Turkey’s export economy.

Turkey’s automotive sales contracted by 43.31 percent over the first six months of 2019 to 156,378, compared to 275,870 during the same period the previous year.

Of those 156,378 cars, 68,193 were built in Turkey, while 88,185 were imports, a decrease in the number of imported cars from 66 percent to 56 percent of the total. Just over 15,000 of these were built by Volkswagen – the largest share of imported vehicles sold in the country.

Thus, Volkswagen’s market share can be expected to multiply with the establishment of the factory. If the government does give the guarantee that it will purchase state cars from Volkswagen, the German giant could easily become the market leader in Turkey.

Given all the advantages, incentives and benefits promised to Volkswagen, by the time Turkey’s national automobile becomes available in 2022, customers for the national flagship project could be few and far between.

 

 

The opinions expressed in this column are those of the author and do not necessarily reflect those of Ahval.