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TURKEY

by EOS Intelligence EOS Intelligence No Comments

Future of Global Solar Power Industry – Tense, But There’s Still Hope.

The global solar power industry was always viewed as one based on flawed business principle of artificial sustenance. With prolonged low economic growth, the artificial support base disintegrated, resulting in shutdown of multi-million dollar business across the globe.

Several leading players, such as Siemens, Solar Millennium, First Solar Inc, and SunPower Corp and Suntech Power, have either filed for bankruptcy or pulled out of their loss-making solar power businesses. Others, such as Germany-based Bosch, have decided to wrap-up solar operations at the end of 2013 after having “tried unsuccessfully to achieve a competitive position”.

A 60% fall in solar panel prices between 2010 and early 2013, as well as the rapid expansion of natural gas production in the USA and curtailment of subsidies in the EU were some of the key reasons for growing losses. What is also worth noting is the overcapacity in the market – global production capacity for photovoltaic panels reached about 60 GW in 2012, while expected demand was only 30 GW. Driven by such unsustainable market conditions, no wonder solar power companies went out of business.

Industry experts, however, view the above factors as simply the result of China’s growing dominance in the global solar power industry. Driven by government subsidies, China became the largest solar panel supplier, accounting for 60% of global solar power production capacity. This domination of the industry has, however, come at a price. Amidst growing unhappiness with China-made products leading to local companies becoming uncompetitive, USA imposed a 40% anti-dumping duty in 2012 while in May 2013 the EU imposed provisional duties of 12% (likely to increase to 47% in August) on imports of Chinese-made solar panels. Whether this will deter China or encourage local growth is unknown; this might however have a negative effect of pushing the industry further into crisis.

Beneficiary of the present situation are likely to be manufacturers in countries like Taiwan which are not yet subject to US/EU import tariffs. About 90% of solar cells manufactured in Taiwan are exported to the USA, Europe, and China. Taiwan might also benefit from the EU’s imposition of duties on China made products, driving Chinese investment into Taiwan for setting up manufacturing plants to then directly export to the EU from Taiwan without having to pay the duties. Recent activities of some Chinese companies have indicated Turkey and South Africa being possible destinations for setting up manufacturing units.

The Chinese will find ways to get their products into the US and EU markets, even if it means moving their operations to Taiwan or other countries which are not subject to the high duties. The real issue, however, is the state of the global solar industry – with some of the major players shutting down operations and funding of solar power depleting, is the end of the road? We doubt it.

There is still hope for the solar power industry, largely driven by favorable policy measures in emerging Asian and Latin American countries. The first half of 2013 witnessed solar power investments in several countries, including Kuwait, South Africa and Chile. The industry received a major boost from Middle-East when Saudi Arabia announced a US$100 billion investment plan in 2012, to generate one-third of the country’s electricity demand through solar energy. Although current demand in these emerging markets is relatively low and may take about 10-15 years to develop into a sizeable market, the scope for growth is immense.

by EOS Intelligence EOS Intelligence No Comments

Turkey – When Being ‘The Gateway to Europe’ Wasn’t Good Enough

As with several emerging markets, Turkey’s automotive market slowed down in 2012. The ongoing crisis in Europe limited export opportunities (declined by 8% y-o-y) while domestic economic woes drove vehicles sales down (by 10% y-o-y). Although this came as a setback to the industry, which recorded strong growth during 2009-2011, the industry has bounced back as sales rebounded in the first two months of 2013.

In the last few years, Turkey, to the surprise of many industry experts, has emerged as an attractive automotive production destination. Several international OEMs, such as Ford, Hyundai, Toyota, Renault and Fiat, have set up production units in Turkey, largely to cater to growing domestic demand and as an export hub to Europe. At the same time, leading automotive OEM, Volkswagen, which has a significant presence in Turkey, remains an exception – Volkswagen does not have any plans to establish production capability in Turkey, and this has led Turkey’s Economy Minister to threaten the company with a 10% tax on the company’s imports.

The emergence of Turkey as an automotive production hub has primarily been driven by government incentives and subsidies to this sector. At the turn of 2013, the Turkish government announced incentives to encourage investment in the automotive industry as it targets USD75 billion in automotive exports over the next decade. Salient features of the incentives are as follows:

  • The investment scheme is an extension of a programme launched in 2009 and will offer tax breaks of up to 60% for new investments, up from 30% in 2012

  • Projects eligible under the latest revision include vehicle investments of more than USD170 million, engine investments of more than USD43 million and spare parts projects of more than USD11.3 million

  • Incentives in the lowest band include VAT and customs rebates, employee cost contributions and subsidies on land purchases

Turkey’s path to success as a preferred destination for manufacturing and as a growing automotive market has not been easy. There are several challenges facing the industry that have the potential to severely impact growth and expansion of the sector.

The Challenges

  • Overdependence on Europe for Exports – In 2012, Europe accounted for 70% of Turkey’s automotive exports and the country suffered in 2012 due to weak demand from the continent. As an immediate step to curb the impact of the ongoing Euro crisis, automotive OEMs are expected to shift focus towards the Middle East and North Africa to reduce its dependence on the unstable European markets.

  • High TaxationSpecial consumption tax and VAT raise the domestic purchase price of a vehicle in Turkey to 60-100% of the pre-tax price. For instance, the price of a Ford Focus 1.6 Trend without tax is EUR15,259 in Germany whereas the same vehicle costs EUR11,000 in Turkey. While the German government imposes a 16% tax, making the final price of the car EUR17,700, the Turkish government imposes a tax of 64.6% making the price EUR18,132. In this context, if Turkey becomes a full member of the EU, it will acquire a larger share of the European market because of lower price before taxation. Turkey also has a higher tax on luxury cars compared with the EU while tax on gas is also one of the highest in the world.

  • Resistance from Labour Unions in the EU – Labour unions in EU are against the transfer of automotive production to Turkey while some car producers prefer to move to other emerging economies such as China and India which have experienced rapid growth in productivity.


While automotive OEMs face several constraints in the Turkish market, the opportunities seem to outweigh the challenges. Using Turkey as a production hub to cater to regions beyond Europe, such as Middle-East and North Africa is a potentially significant opportunity for automotive OEMs. At the same time, booming domestic demand should continue driving growth of players such as Volkswagen, General Motors, Ford, Hyundai, Renault and Fiat.

Even though 2012 temporarily put the brakes on rapid expansion, the Turkish automotive industry is expected to remain an attractive destination for manufacturing and a promising market for sales.
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Part I of the series – Mexico – The Next Automotive Production Powerhouse?
Part II of the series – Indonesia – Is The Consecutive Years Of Record Sales For Real Or Is It The Storm Before The Lull?
Part III of the series – South Korea – At the Crossroads!

by EOS Intelligence EOS Intelligence No Comments

South Korea – At the Crossroads!

South Korea is the world’s fifth largest automobile manufacturer, behind China, Japan, the US and Germany. Automobile sales in South Korea breached the 8 million units mark for the first time in its history in 2012. The surge was mainly on account of strong overseas demand for locally-made models – exports accounted for 82% of these sales while domestic sales (accounting for the remaining 18%) actually contracted 4.2% to 1.4 million units in 2012.

Contracting domestic demand for local companies is mainly due to lack of real income growth, increased debt repayment burden and slump in the housing market in Seoul Special City (houses are often bought in South Korea for investment purposes). Meanwhile, overseas sales, cars exported from South Korea and vehicles assembled in overseas plants, expanded 7.9% to 6.8 million units in the same year.

The South Korean market is dominated by Hyundai Kia Automotive Group which accounted for 82% of domestic sales and 81% of exports in 2012. GM Korea, Renault Samsung and Ssangyong (acquired by Indian company Mahindra and Mahindra in 2011) account for 10% of the domestic sales while rest of the market is catered to by imports. BMW, Daimler (Mercedez-Benz), VW, Audi, Toyota, Chrsyler and Ford are the leading importers.

Free Trade Agreements

South Korea has aggressively pursued FTAs, with the provisional enforcement of an FTA with the EU from July 2011 and the full enforcement of an FTA with the US from March 2012. In the automotive industry, tariffs on parts and components were abolished as soon as the agreements came into force, whereas tariffs on vehicles will be abolished between South Korea and the EU over a three-to-five-year period and those with the US in the fifth year after enforcement of the agreement.

As a result of the FTA, exports to the EU sky-rocketed and the double-digit growth trend continued until March 2012. However, as the EU economy weakened, exports declined and returned to pre-FTA levels. In case of the US, exports surged around the time of the enforcement of the FTA in March, even though the tariffs on vehicles are yet to be scaled down. This phenomenon was labelled as ‘announcement effect’.

An interesting trend that has emerged is that whereas the domestic sales of South Korean cars declined by about 6.3% in 2012, domestic sales of imported cars increased by 24.6% in the same year. Moreover, for the first time, imports accounted for 10% of domestic sales, which is in sharp contrast to the 2% share about a decade back. European automotive OEMs have benefitted the most from this surge in demand for vehicles. This increased market share for European vehicles is mainly due to the fall in prices; as part of FTA between South Korea and the EU, the tariffs on large vehicles reduced from 8% to 5.6%.

Thus it can be said that while the enforcement of FTAs has been effective in boosting exports, it has brought about structural changes in South Korea’s domestic market.

Labour Strife

After an almost 4-year gap, strikes by the labor union returned to plague automotive manufacturing in South Korea in the summer of 2012. The industrial action, which also hit car parts manufacturers and some other industries, revived memories of the days when strikes were chronic in South Korea. Workers went on strike in 21 of the first 22 years since the unions’ formation in 1987; however, unions’ political influence has dimmed in recent years with declining memberships.

Hyundai, Kia and GM Korea were affected by the strikes and suffered record losses – Hyundai alone is estimated to have lost more than USD 1 billion. The main points of contention were the abolition of graveyard shift, wage increase and to confirming of permanent positions to the high proportion of contract workers. Although the companies agreed to most of the demands of regular workers, discussions with contract workers are still ongoing.

To offset the loss suffered from such strikes, OEMs are diversifying their production bases. Hyundai for one has moved to reduce the dependence on domestic manufacturing plants by expanding production in the US, China, India, Brazil and Turkey during the last decade. South Korean plants accounted for 46% of Hyundai’s capacity in 2011, down from 60% in 2008, when the last strike took place and 93% in 2000. Although another objective for establishing a global production network is to make inroads into the global markets.

Another consequence of strikes is that production costs are expected to shoot up, mainly on account of increased wages and also due to the additional investments that the OEMs will now have to undertake to make up for the reduced working hours per day; along with the abolition of the graveyard shift, another demand of the workers was to reduce the number of hours being worked in the two shifts from 20 to 17 hours.

Currency Uncertainties

The Won has been strengthening against the Yen and the US dollar since mid-2012, increasing production costs while adding to currency conversion losses, as sales in foreign markets translate into fewer Won. This has significantly eroded South Korean automotive OEMs competitiveness; companies such as Hyundai and Kia have consequently ceded market share to Japanese OEMs which are enjoying resurgence on the back of a brightening export outlook.

The Yen is also on a two-year low against the US dollar while the Won was at the highest level against the dollar since August 2011 in January 2013. Toyota can now in principle offer a discount of more than 10% to its US customers whereas South Korea’s Hyundai Motor has to raise the dollar price by over 5% to keep up with the Won.

A December report by the Korean Automotive Research Institute (KARI) states that South Korean export would shrink by 1.2% annually for every 1% drop in the Yen against the Won.

Over the years, the strategy of the South Korean Automotive OEMs has revolved around exports and the companies have established global production network to cater to geographies around the world. However, the recent upheaval in the foreign exchange markets have raised serious doubts about the company’s short-medium term prospects.


With increasing competition from global OEMs both in the domestic and global markets (resulting from FTAs) and currency uncertainties nullifying cost advantages that the Korean car makers have traditionally relied on, it is perhaps time for country’s OEMs to shift focus from quantity to quality – stressing superior design and engineering over sales growth.

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In our fourth discussion in this series, we understand the automotive market dynamics of Turkey. Its proximity to Europe and cultural affinity to Asia has seen a growing presence of both European and Asian OEMs. Is Turkey a long-term growth market for automotive OEMs, or is the market as developed as most western countries?

Part I of the series – Mexico – The Next Automotive Production Powerhouse?
Part II of the series – Indonesia – Is The Consecutive Years Of Record Sales For Real Or Is It The Storm Before The Lull?

by EOS Intelligence EOS Intelligence No Comments

Mexico – The Next Automotive Production Powerhouse?

As the first of our five part automotive market assessment of the MIST countries – Mexico, Indonesia, South Korea and Turkey, we discuss the strengths and weaknesses of Mexico as an emerging automotive hub, and the underlying potential in this strategically located gateway to both North and South America.

Emergence of Mexico as a major automotive production hub is the result of a series of events and transformations over the past decade. The most important of which is the growing trend among automotive OEMs and auto part producers to have production bases in emerging economies. And the earthquake in Japan in 2011 tilted the tide in favour of Mexico just as ‘near-shoring’ was already becoming a key automotive strategy in 2011.

Automotive production in Mexico increased by 80% from 1.5 million in 1999 to 2.7 million units per year in 2011, largely thanks to a significant boost in investment in the sector.

Between 2005 and 2011, cumulative foreign direct investment (FDI) in the automotive sector amounted to USD10.3 billion. In the last year, several automotive OEMs have initiated large scale projects in Mexico; some of these projects include

  • Nissan – building a USD2 billion plant in Aguascalientes; this was the single largest investment in the country in 2012 and should help secure the country’s position as the eighth largest car manufacturer and sixth largest car exporter in the world

  • Ford – investing USD1.3 billion in a new stamping and assembly plant in Hermosillo, New Mexico

  • Honda – investing USD800 million in a new production plant in Celaya, Guanajuato

  • GM – investing USD420 million at plants in Guanajuato and San Luis Potosi

  • Daimler Trucks – investing USD300 million in a new plant to manufacture new heavy trucks’ transmissions

  • Audi – has decided to set-up its first production facility across the Atlantic in Mexico; with planned investment outlay of about USD2 billion, this move by Audi represents a significant show of trust by one of the world’s leading premium car brands

  • Mazda – building a USD500 million plant in Guanajuato; it has reached an agreement to build a Toyota-branded sub-compact car at this facility and will supply Toyota with 50,000 units of the vehicle annually once production begins in mid-2015

Bolstered by this new wave of investment, Mexico’s vehicle production capacity is expected to rise to 3.83 million units by 2017, at an impressive CAGR of 6% during 2011-2017.

Why is Mexico attracting such large levels of investment from global automotive OEMs? Which factors have positively influenced these decisions and what concerns other OEMs have in investing in this North American country?

So, What Makes Mexico A Favourable Destination?

  1. Trade Agreements – Mexico has Free Trade Agreements (FTAs) with about 44 countries that provide preferential access to markets across three continents, covering North America and parts of South America and Europe. Mexico has more FTAs than the US. The FTA with the EU, for instance, saves Mexico a 10% tariff that’s applied to US-built vehicles, thereby providing OEMs with an incentive to shift production from the US to Mexico.

  2. Geographic Access – Mexico provides easy geographical access to the US and Latin American markets, thereby providing savings through reduced inventory as well as lower transportation and logistics costs. This is evident from the fact that auto exports grew by 12% in the first ten months of 2012 to a record 1.98 million units; the US accounted for 63% of these exports, while Latin America and Europe accounted for 16% and 9%, respectively (Source – Mexican Automobile Industry Association).

  3. Established Manufacturing Hub – 19 of the world’s major manufacturing companies, such as Siemens, GE, Samsung, LG and Whirlpool, have assembly plants in Mexico; additionally, over 300 major Tier-1 global suppliers have presence in the country, with a well-structured value chain organized in dynamic and competitive clusters.

The Challenges

  1. Heavy Dependence on USA – While it is good that Mexico has established strong relations with American OEMs, it cannot ignore the fact that with more than 60% share of its exports, the country is heavily dependent on the US. The country needs to grow its export markets to other countries and geographies to hedge against a downturn in the American economy. For instance, during the downturn in the US economy in 2008 and 2009, due to decline in sales in the US, automotive production in Mexico declined by 20% from 2.17 million in 2008 to 1.56 million in 2009. Mexico has trade agreements with 44 countries (more than the USA and double that of China) and it needs to leverage these better to promote itself as an attractive export platform for automotives.

  2. Regional Politics – Mexico is walking a tight rope when it comes to protecting the interests of OEMs producing vehicles in the country. In 2011, Mexican automotive exports caused widespread damage to the automotive industries in Brazil and Argentina and in a bid to save their domestic markets, both the countries briefly banned Mexican auto imports altogether in 2012. Although, later in the year, Mexico thrashed out a deal that restricts automotive imports (without tariffs) to its two South American neighbours rather than completely banning them, it does not augur well for the future prospects of automotive production in Mexico. One of the reasons automotive OEMs were expanding their capacity in the country was to be able to cater to the important markets in Latin America, particularly Brazil and Argentina. Now the Mexican government has the challenge of trying to keep everyone happy – its neighbours, the automotive OEMs and most importantly its own people for whom it might mean loss of jobs and income.

  3. Stringent Regulatory Environment – The Mexican government, the Mexican Auto Industry Association and International Automotive OEMs are locked in a tussle over the government’s attempts to implement fuel efficiency rules to curb carbon emissions. Mexico has an ambitious target of cutting greenhouse gas emissions by 30% by 2020, and 50% by 2050. The regulations are similar to the ones being implemented in the USA and Canada, however, the association has complained that the proposal is stricter than the US version. Toyota went as far as filing a legal appeal against the government protesting the proposed fuel economy standard. Although the government eased the regulations to appease the automotive OEMs in January 2013, the controversy highlights resistance by the country’s manufacturing sector to the low-carbon regulations the government has been trying to introduce over the past few years. Such issues send out wrong signals to potential investors.

So, does Mexico provide an attractive platform for automotive OEMs? From the spate of investments in the country so far, it seems so – over the past few years, the country has finally begun to fulfil that potential and is now a key driver in the ‘spreading production across emerging economies’ strategy of companies looking to make it big in the global automotive market. However, there are still a few concerns that need to be addressed in order for Mexico to become ‘the’ automotive manufacturing hub in the Americas.

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In our next discussion, we will assess the opportunities and challenges faced by both established and emerging automotive OEMs in Indonesia. Does Indonesia continue to be one of the key emerging markets of interest for automotive OEMs or do the challenges outweigh the opportunities?

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