Getting Organized for Customs Union :

Lale DURUIZ

Transformation Efforts of Turkish Autobobile Industry for the Global Markets

This paper discusses Turkish automobile sector on the way to integration with EU. The sector's developments indicate very significant signs about how the globalization and the industrial policies effect the firms' approaches to product development, technology strategy, organization of work, managerial techniques, profit strategies and investments. After a general look to the industrial development of the sector, the market structure, production, trade, investments and profitability trends are evaluated. The analysis of the two main car producers shows the efforts given with the threat of the customs union.

Industrial Development of Turkish Automobile Sector

1960-1978

Import substitution development model was adopted in 1960 and the automotive industry was identified as the driving force for industrialization in Turkey. Government tried to create an attractive climate for domestic and foreign investments in assembly sector. High profitability was almost guaranteed since entrepreneurs were protected against foreign competition by high tariff barriers and encouraged by tax exemptions and preferential exchange rates for the imported technology.

Passenger car production started in 1966 with Otosan's fiber glass bodied Anadol model through a unique dealer -assembler agreement with Reliant Motor Company of Britain. The government gave the priority to local production of automobiles under licensed technologies towards the end of the 1960s. Thus, Oyak-Renault was established via licensing agreement with Renault in France in 1969 and Tofa_ was formed in cooperation with Fiat SpA in 1968. Investment permits to both companies were issued with the conditions of achieving 85% local content rate in the fifth year of production. The deficiencies of the regulations were no measures for the development of components sector, no concern about development of technological capabilities and about economies of scale. The vehicle importers and multinationals were anxious not to lose their existing markets and wanting also to exploit this attractive climate, became interested in assembly plants. The nominal rate of protection by tariffs was one of the highest within the Turkish manufacturing industry (280.2%) high costs could easily be reflected in prices under the prevailing oligopolistic market conditions. Rate of return were very high, although in varying degrees depending on the overhead costs of the firms. Although local content levels achieved in the period were around 60 %, increasing production levels created a high demand for foreign exchange to import the remaining 40 %. Because of balance -of-payment difficulties, manufacturers' foreign exchange allocations were limited, which restricted the companies' production programs. In spite of the high demand for transport vehicles in the period, capacity utilization only reached 68% for the automotive sector.

1978-1980

Political instability and weakening in economy started in 1978 resulting in the huge external debt and an accelerating inflation rate. A major shortage of foreign trade due to the dramatic increase in oil prices and decrease in Turkish worker's remittances further restricted imports of necessary parts and components in the automotive sector. All these difficulties, including daily electricity cuts up to three hours, resulted in a dramatic fall in total production levels.

1980-1990

In 1980 export-oriented industrialization strategy was adapted and gradual liberalization of the importation of cars and gradual reduction of tariffs were the measures. Internal demand was contracted as a result of the high interest rates and restrictive monetary policies during the first years, after 1984 economic vitality and political stability and urbanization effected the market positively and cars were seen as an investment inflation hedge.

1990-1993

Turkish government issued various decrees in 1990 aimed at transforming the industry from a foreign currency loser to winner sector. Financial investments were given to the suppliers investment and to form an internationally updated car. Import duties are lowered from 72-150 % in 1989 to 39 % in 1993.

Global integration were considered in the development plans and incentives for the foreign producers were taken to the agenda. The number of the foreign investments in the automotive sector rose to 99 in 1995 from 13 in 1980.

1994

Economic crisis has caused the production to decrease around 39 % in 1994. Workers were retired and fired, capacity utilization have dropped.

Towards Integration

A new period of restructuring started in the Turkish automobile industry following the Customs Unionization agreement signed with the European Union on March 6, 1995. This agreement necessitates the harmonization of administrative and regulatory structure of the industry with EU in 5 years. Quality certification is one of the main concerned points. The industry faces major difficulties in adjusting to the demands of global market since there were no explicit technology policy during the protection period to promote the development of the industry to internationally competitive levels. The industry describes itself as being too vulnerable for immediate liberalization. During the 5 year period, used cars are not allowed to enter the country, high taxes to Japanese cars will continue. The customs duties are abolished however another tax entitled Private Consumption Tax will start to take place. As a result 5% reduction in domestic and 10-15 % in foreign car sale prices are expected. According to the customs union agreement the Japanese cars produced in Turkey will be categorized as produced outside the European Union.

Analysis of the Turkish Automobile Sector

Production and Foreign Trade

Turkish car industry was relatively small scale during the import substitution period but after 1984, import liberalization policy began to influence the capacity and production. Rapid rise in the production and capacity seen after 1987 was not aiming at foreign markets but the domestic market. Exports have been very limited in both periods only the threat of the customs union during the last two years have made the producers think about the foreign markets. The exports are destinated to neighborhood countries and China. The import of cars rose strikingly after 1990 and expected to rise more in 1996.The capacity utilization have dropped a lot in 1994 due to the macroeconomics conditions.

Table 1 : Turkish Automobile Production and Foreign Trade

Year	1975	1980	1985	1989	1990	1991	1992	1993	1994	1995
Car Production	67,293	31,529	60,353	118,314	118,314	167,556	195,574	265,245	212,651	223,414
Car Import				7,094	65,390	33,651	52,173	101,610	24,921	21,651
Car Export				8,220	5,533	5,790	8,996	6,846	12,802	33,163
Cap. Utilisation %	82	36	64	83	76	79	n.a.	n.a	54	47

Structure of the Market

The development of the domestic car industry has been supported by the protective shield of customs duties, fund levies, and additional taxes on import cars, which although lower than in the past was still very high in 1993. For a midsize car, for example, the after tax retail price for an imported model was 43 percent higher than a domestic model with the same pretax retail price. With the customs union, the Private Consumer Tax will replace the duties with nearly the same amounts. The current product line of Turkish car manufacturers is not viable in liberalized environment. Traditionally, Turkish manufacturers have operated in two car segments, lower medium and medium models that have already been phased out in the country of origin. These two segments account for 97 percent of the Turkish market, while these segments represent only 40-60 percent of the market in developed European economies.

With 60 million inhabitants, the market seems unsatisfied with one car per 26.7 people (5.7 in Greece, 1.9 in Italy). The two dominant firms (TOFA_ and OYAK-RENAULT) shared 90 percent of the market until 1990 and with the entrance of some other producers(See Table 2) decreased to 81 % in 1995. Honda, Hyundai and Mazda with 100.000 capacity have got permissions to start production in Turkey soon. The main importers today are Toyota, Mazda, Honda, Nissan, Hyundai, Kia, BMW, Lada, Skoda, Tavria. Among those only Eastern European imports were cheaper as a result of the customs duties. However, in 1995 EU and EFTA ¹ imports rose significantly.

The resulting competition has increased the concern of the sector with productivity increase (which is very low, 125 cars per worker at the assembly line compared to 250 in EC), quality improvement and product diversity which have been in turn, important motives for new technologies, investment and increase of capacity.

Investments

The investments of the sector were tripled with the threat of growth of imports and new entrances to the industry. Until 1992, only 5 models were making up 80 % of the unit sales. New model and capacity development were the main investment in 1994. The government supported the investments in 1995, but the contracted market lead the firms to prefer playing with financial tools.

Profitability

The automotive industry has been enjoying high profitability. Net income after tax was 19 % in 1991, but it has come down to 0.4 in 1994. The increase in material and parts costs are the main cause for this decrease since labor costs and taxes did not change significantly (see the below table). The foreign exchange rates has caused the sectors with imported parts to decrease the material cost of parts but not in automotive. Profitabity seems to be transferred to the foreign partner and to the suppliers.

TABLE 2 : Turkish Car Market Structure

Firms	Starting Year of production	Licence	Foreign Cap. %	Production 1995 Capacity (Cars/Year)	(Nov. 95) Cars sold	Market Share (Nov. 95) %
Opel	1990	Gen. Motor	100	15,000	855	3
Otosan	1959	Ford	30	30,000	1,096	4
O. Renault	1971	Renault	57	150,000	7,995	32
Toyotasa	1994	Toyota	50	100,000	2,310	9
Tofas	1971	Fiat	41.5	200,000	12,668	51

TABLE 3 : Investments (US)

Year	1992 Realized	1983 Realized	1994 Realized
Capacity Development	80,862,880	166,122,160	290,400,000
Modernization	25,991,640	89,138,720	109,400,000
New Model Development	51,983,280	97,242,240	225,700,000
Quality Development	5,775,920	16,207,040	43,400,000
Localization	112,630,440	12,155,280	25,300,000
Others	11,551,840	24,310,560	11,900,000
Total	288,796,000	405,176,000	706,100,000

TABLE 4 : Profitability Current Price, billion TL.)

	Sales	Material	Wage	Tax	Mark-up
	Q	C	W	T	M	M/Q	C/Q	W/Q	T/Q
1990	7,916	4,518	373	1,553	1,472	0,19	0,57	0,05	0,20
1991	12,271	7,661	764	2,386	1,460	0,12	0,62	0,06	0,19
1992	20,875	14,006	1,035	3,831	2,003	0,10	0,67	0,05	0,18
1993	59,351	38,684	2,850	13,197	4,620	0,08	0,65	0,05	0,22
1994	64,750	45,023	3,814	13,470	2,443	0,04	0,70	0,06	0,21

3. Analysis of Two Main Car Producers, TOFAS and OYAK-RENAULT on the Way to Customs Union

This section will evaluate the automation level, product development, productivity, employment structure, training activities, unionism, task rotation, suggestion systems, TQM/TPM applications, environment projects of the two foreign licenced (Fiat and Renault) firms which has been holding 80-90 percent of the market since 1970's.

Automation Level

TOFAS
Started with engine section then welding unit is established
1984 First investment in microelectronics
1991 140 CNC's
     100 PLC's

CAD in design of some parts
Press shop-Conventional die changing-15 minutes
Welding-conventional Painting - PLC controlled automated system machining
1) Taylorist line (Bird series) mechanical machinery and CNC's labor intensive
2) Fordist line
  Tempra model
  Automated
Machine tools-computerized
Assembly labor intensive all the processes are expected to be auto controlled robot in placement of glass
The final tests are done by the drivers
Integration of factory with the management and sales department in Istanbul and with the suppliers via IT networks is achieved to a certain extent

RENAULT
Started as an assembly plant, weilding department is established first then engine section.
1994 30 CNC out of 750 machines
     Press shop
     3 conventional 1 automated line die changing- 12 minutes
Welding- automated system has been launched recently
Engine : engines lower than 1400 cc are produced only
CNC's are used intensively.
Assembly labor intensive
Workers place the glass by hand
The final tests take place in simulators

Product Development

TOFAS
1971 bird series, similar models with same engine
1990 Tempra (Planned to be produced only in Turkey)
1993 Tipo
1994 Uno
Totally 45 different versions
Search for new models started after 1990.
Outdated models (phased out in the country of origin) are still the most sold ones even though customer perception of their quality is negative.

RENAULT
1971 R.12 TX
1985 R.9. Fairway
1987 R.11 Flash
1990 R.21.GTL
1994 R.19 Europa
Totally 50 different versions of Renault in the Product Development Part
Search for new models started after 1987.
Outdated models (phased out in the country of origin) are still the most sold ones even though customer perception of their quality is negative.

Productivity (car/worker)

TOFAS
1990 15.9
1991 17.8
1992 19.4
1993 25
1994 25
* 1993 42.5 hrs./car

Eventhough, there seems an effort in increasing the productivitiy, a major productivity gaps exist in more sophisticate operations, e.g. body shop, engine shop, complicated assembly sections.

RENAULT
1990 18.5
1991 18.9
1992 26.4
1993 29.7
1994 26.2
* Capacity max, 650 car/day  350 car/day in 1996

The productivity has increased significantly after 1990's however still lower than European and Japanese competitors.

Employment

TOFAS

Structure

Firms 1989 1990 1991 1992 1993 1994

TOFA_

Worker 4.514 5,595 6,149 7,425 8,104 4,924

Employee 368 402 480 530 569 518

Administrator 22 53 16 16 15 16

Engineer 83 113 138 169 193 238

Ad.Eng. 6 5 5 5 9 8

Total 4,993 6,168 6,788 8,145 8,890 5,704

The table shows that the increase in the number of workers is cut down by the 94 crisis. Other employees are not affected by the crisis, such as the steady increase in engineers.
Training
Training seminars are given by the capital goods suppliers ; some technicians are sent abroad ; most of the training is on technology and maintenance, then comes quality.
Orientation training is said to be given to a new worker.
'Service after sale' personnel and represantatives are also trained (1829 man-course in 1994)
Average traning period is
20 hrs./employee in 1994,
17.2 hrs./employee in 1995.
A training center for 903 employee is established in 1995, the old one was for 144 in 1992.
4,102 employee were trained in 1992 which has increased to 14,510 in 1995.

RENAULT

Structure

Firms 1989 1990 1991 1992 1993 1994

O.RENAULT

Worker 3,446 3,781 4,190 4,190 4,484 2,974

Employee 465 418 496 535 555 487

Administrator 2224 14 20 35 32 42

Engineer 8375 62 117 137 160 158

Ad.Eng. 620 18 24 35 50 63

Total 4,030 4,293 4,847 4,932 5,281 3,724

The steady state in the number of workers has changed in 94 crisis. Other employees are not affected by the crisis.

Training
Training institution is established last year, electronics and electrial systems are taught to the workers in groups of 14.

One worker gets training of 45 hr/year in average.

Some techicians are trained abroad in Siemens or Renault.

Capital goods suppliers train their experts to the factory for the adaptation of new technology.

Unionism

TOFA_
Turkish-Metal-Work union, which does not have much strength, appriciates the works of management.
In the 94 economic crisis many workers were fired and retired and the union could not act against it.

RENAULT
Turkish Metal-Work union "applause"s the TQM applications. Not very strong.
In the 94 economic crisis many workers were fired and retired and the union could not act against it.

Task rotation

TOFA_
Task rotation seems to take place more on Taylorist line than the Fordist Line, in engine department.
In assembly not much task rotation is applied. Each worker does a specific job.

RENAULT
Not many tasks are rotated, in contrast, skilled substitute working take the place of the absent worker.
In assembly not much task rotation is applied.
Each worker does a specific job.

Suggestions

TOFAS
0.34 suggestion per worker per year which seems close to Europe avarage of 0.4 is declared by the firm.
RENAULT
There has been few suggestions which has been realized, for example, holes on the table for the pistons, some hooks for the tables.
Technicans were working to change the electrical system to electronic systems. Suggestion system at this level works more efficiently.

TQM/TPM-Applications

TOFA_
In 1993 the firm started TOFA_ 2000 project which aims at Total Excellence.
Customer focus have started with service after sale (24 hrs working, emergency units)
Statistical process control have started in the factory.
Training and application of TPM have started, 25 % of the white collar workers have been trained in PDCA.
The firm started working for ISO 9000
RENAULT
It is declared that TQM, TPM are applied since 1989, However, the marketing firm of OYAK-RENAULT (MAIS) declared that they do not believe in TQM, the foreign partner urges them for the applications.
The assembly line does not have quality sections separetely, so in that sense all the workers are producers and controller at the same time. Statistically process charts and TQM reward system seems working, however all these applications are coming from the top management and hanging in the air for the time being. The firm is working for ISO 9000.
They have started training for TPM. But there is a maintenance department working.

Projects on Environment

TOFA_
Started a new project ;
- 2000 cc Tempra (green cars) production
- Precautions for water and air pollution in the factory.

RENAULT
Ergonomic precautions have taken place inside the plant.
Not very sensitive about the green cars. The firm's gray cars, when polution filters are placed on exaust pipe, do not work properly. As a result, the cars with filters gets the licence and then takes the filters out.

Conclusions

The protection years were not exploited by the Turkish automobile sector in establishing the technological infrastructure for the global competition. On the contrary, it has enjoyed the high profitability and remained in the production of outdated models for the domestic market by the old production and managerial techniques. Globalization, coming with the customs union with EU, threatened the firms and efforts toward new products, microelectronics technologies, new organization methods, quality and ecological movements started. The main two firms have a very solid place in Turkish political and bureaucratic hiearchy which has lead EU to give 5 more years to the industry for getting ready for the global markets. The efforts are admirable however the rules for the competition in the international market does not work with admiration. The coming five years will be determining of the future of the industry.

Bibliography

ANSAL, H., Technical Change and Industrial Policy : The Case of Truck Manufacturing in Turkey, World Development, Vol. 18, No 11,1990.

Association of Automotive Parts Manufacturers, Turkish Automotive Parts and Components Industry, unpublished report, July 1995.

DURUIZ, L. and YENTÜRK, N., Facing the Challenge, Turkish Automobile, Steel and Clothing Industries' Responses to the Post-Fordist Restructuring, Ford Foundation,1992.

NEDIMOGLU, F., Evaluation of Suppliers of Automotive sector on the way to Customs Union, paper presented to the Automotive and Suppliers Symposium, 3-4 November 1995.

OSD, Automotive Manufacturers Association General and Statistical Information Bulletin, Turkish Automotive Manufacturers, Part I, 1995.

TEZER. E., Automotive Industry and Customs Union, paper presented to the Automotive and Suppliers Symposium, 3-4 November 1995

TMMOB, IV Automotive and Suppliers Symposium, 3-4 November 1995.

TMMOB, Turkish Automobile Industry Productivity Analysis, 1993 Congress of Industry, Nov 1993, Bursa.

YENTÜRK, N., Automotive Sector and Changing Profit Margins 1988-1994, unpublished report, 1996.

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