The locally produced automobile will be the culmination of a set of policies that aim to take the Turkish economy to the next level.
The Turkish economy is forging a new path. The country is investing in high-tech manufacturing industries to break away from the middle-income trap. The government is determined to support the country’s industrialists to expand towards sophisticated high-value-added sectors. In that regard, Turkey’s initiative to build a domestic car is more than a simple business venture – it symbolises a new era in Turkey’s path to becoming a developed economy. A consortium of five major companies, known as Turkey’s Automobile Joint Venture Group (TOGG), will be producing Turkey’s first-ever domestic automobiles. All the models will be electric, which makes the initiative even more exacting. The prototypes were introduced at the end of December while the first model is expected to hit the market in late 2022.
Arguably, the project is the symbol of a paradigm shift in Turkey’s economy. For decades, the country’s economic growth depended on low-value-added manufacturing. As the economy has transitioned from traditional agriculture to labour-intensive manufacturing, large segments of the rural population moved to urban areas. This trend has been largely positive as Turkey has experienced a successful growth record in the last two decades. Millions have been raised out of poverty, while the per capita income has multiplied. Again, this was accomplished mostly by transforming Turkey’s mostly agriculture-based economy to labour-intensive manufacturing sectors, such as textiles, construction, and various types of services.
However, now it seems evident that the country needs to focus its attention on transitioning to high-value-added-production if it wants to avoid falling into the middle-income trap. Last year’s economic shock was a warning. Turkey is swiftly recovering from 2018’s economic turbulence with a lesson; if it wants to maintain its high growth trajectory, it needs to cure its structural deficiencies. In other words, Turkey needs a productive and robust manufacturing sector. High-value-added, high-tech industries should be supported, R&D intensive industries should be pushed forward, and export-led sectors, such as automotive, chemicals, and shipbuilding, should replace demand-led sectors, such as construction, retail, and services.
In that regard, Turkey is already making progress. The government has shifted its attention from regulatory reforms to industrial policies. The Turkish government now intends to accomplish more than just lowering inflation and controlling public debt; it wants to change country’s sectoral composition towards more productive sectors and create and support a manufacturing industry which helps close Turkey’s consistently high account deficit, increase the employment rate, and improve productivity growth permanently. When looked at from this perspective, the significance of Turkey’s automobile initiative and the importance given by the government to the project seems obvious. Turkey first attempted to build a homegrown automobile, named ‘Devrim’ (Revolution), in the 1960s. It was designed and produced almost entirely by Turkish engineers and ready for mass production. But, the project was later abandoned due to simple operational failures, leaving a scar on the country’s self-confidence.
Sixty years later, producing a domestic car seems like the right place to start Turkey’s new great leap to becoming a fully industrialised nation and “achieve Turkey’s 60-year dream”, to put it in Turkish President Erdogan’s words. The government wants to reverse this story and prove that the Turkish economy is finally ready and capable of moving towards high-tech industries. Accordingly, it took the lead and brought together five major companies to take over the project. Furthermore, it announced a $3.7 billion subsidy package along with a purchasing guarantee of 30 thousand cars at the initial phase. Of course, the initiative is not merely a symbolic attempt. Turkey has been a centre of automobile production for decades, having produced more than 1.5 million cars in 2018 alone and ranks fifth in Europe. However, the country still does not have a domestic brand, which means the value-added created in Turkey’s automotive industry is limited.
More importantly, technology-intensive components, related to R&D and innovation, are designed and produced elsewhere. So, Turkish industries were not involved in technologically more sophisticated parts of production, which can bring about essential productivity improvements to the economy through the so-called knowledge spillovers. It should be noted that Turkey’s attempt to transform its economy towards more sophisticated sectors is not restricted to the domestic car project. Turkey has made aggressive investments in renewable energy resources in recent years, which multiplied its energy production through solar and wind energy. The government has heavily subsidised these investments, again in line with its new approach.
Furthermore, Turkey’s defence industry is already a success story. Admittedly, government efforts to enhance the national defence industries were motivated by geopolitical considerations rather than economic ones, but it has made the defence industry a stepping stone in Turkey’s leap to high-value-added production. Specifically, since the early 2000s, Turkey’s domestic production of its military requirements have increased from a mere 20 percent to 65 percent. Furthermore, it has also started to create substantial export revenues in recent years. State companies such as ASELSAN, Turkish Aerospace Industries (TAI), and ROKETSAN continue to make sizeable investments in innovative technologies.
Most recently, the government announced a comprehensive $4.9 billion subsidy program, named “IVME” (advanced, productive, indigenous industries), which will provide low-cost, long-term credit to export-led, high-tech manufacturing industries. Turkey’s domestic automobile initiative should be understood within the greater context of Turkey’s economic policy-making. It would be fair to argue that the Turkish government is changing its economic perspective from a hands-off, regulatory policy approach to a more pro-active industrial policy to accelerate the sectoral transformation of Turkey’s economy towards high-value-added, sophisticated industries. The domestic car project is the ultimate symbol of this transformation.