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Turkey is no turkey when it comes to expansion

Unstable markets can be a problem, but this little-known market has big potential

The Turkish Government has launched a major investment worth $12 billion in the telecommunications sector

As the rest of the world begins thinking about catching up with the “automated countries,” formerly obscure markets are likely to hold big potential for U.S. companies. Among these markets is Turkey, which had been relatively closed to U.S. trade and tourism until recent years. Despite some setbacks, Turkey holds promise for U.S. companies, according to a recent report by the U.S. Department of Commerce.

The report, which focused primarily on the telecommunications industry, noted that after a boom in the Turkish automatic data processing (ADP) market in 1993, the market shrank approximately 25 percent in 1994 due to a severe economic crisis which led the Turkish Government to cut spending drastically. In terms of figures, the total ADP market reached a peak of $788 million in 1993 and decreased to $600 million in 1994. The market for local area network (LAN) equipment followed a similar trend and decreased to $35.7 million in 1994 from $45.1 million in 1993. 1995 is expected to be a year of modest recovery, due to private sector and to a lesser extent, government investments.

Major end-users in this field are banks, stock exchange brokers, large corporate holdings, transportation companies, and media firms. The financial sector especially, promises a lucrative market potential. Market share of different end-users for overall ADP hardware can be taken as a basis in evaluating end-user profile for LAN equipment: Financial institutions (60 percent), government agencies (15 percent), manufacturing (10 percent), trading (9 percent), education/R & D; (3 percent), and transportation and communications (2 percent.)

Turkey’s advanced and fast growing telecommunications infrastructure constitutes a sound base for local and wide area networking operations. The Turkish Government has launched a major investment worth $12 billion in the telecommunications sector covering the years 1993-2002 under the Telecommunications Master Plan.

Imports dominate the market since local production and market size are very limited. Modems are the only locally produced LAN equipment. Total amount of imports was $45 million in 1993. Because of the economic crisis, imports decreased considerably, shrinking to $35.5 million in 1994. This figure corresponds to a 22 percent decrease over 1993. Despite the forecasts that the economic crisis may continue, some increase (10 percent) on the demand side is expected due to modernization investments by financial corporations, opening of huge retail outlets, and foreign-financed projects.

Share of U.S. products in the overall LAN equipment market is approximately 25 percent. Leading competitors are Taiwan, France, and the United Kingdom. The relative customs tax advantage of European Union (EU) countries that will come with the EU-Turkey Customs Union in 1996 may be offset by technically superior U.S. products and the Turkish customers’ trust in their superiority.

U.S. products are generally preferred by Turkish customers because of their quality and technical superiority. However, price also determines receptivity. Suppliers from the Far East countries provide very competitive prices. European suppliers will also enjoy favorable customs duty rates for their products as a consequence of Turkey’s accession to the European Union (EU)-Turkey customs area in 1996.

Market assessment

* Market Demand: The overall market for data processing equipment declined 25 percent to $600 million in 1994 over 1993, the boom year with a total sales volume of $778 million. In the absence of detailed statistical information on items constituting LAN equipment, a means of differentiating it from the total figures may be to use the percentage given for overall data communications equipment in the “Share of World Information Technologies Market Categories Table” prepared by the International Data Corp. in 1992. This table puts the share of data communications equipment at 3.5 percent out of total sales of all hardware, software, and data processing services in the world in 1992. Taking a 3.5 percent share as the basis for data communications equipment and total market sizes in Turkey in 1993 and 1994 for overall data processing equipment, we reach the following total market sizes for the LAN equipment category: $27.5 million in 1993 and $21 million in 1994.

The main reason for the market shrinkage in 1994 was the economic and financial crisis which hit Turkey hard. The Turkish Government’s countermeasures were a major cut in budget spending. As government agencies make up 15 percent of the total data processing market, LAN equipment sales also were hit by budget cuts. However, those agencies which implement data processing investments through foreign financing continue to push up demand.

The major share of demand is driven by banks, stockbrokers, large corporate holdings, transportation companies, newspapers, and radio and TV broadcasting companies. Companies in the financial sector, which is led by banks, are at the top of the customer base. Currently, there are 45 banks which have more than 6,000 branches. The banking system’s need for fast and secure communications creates lucrative market potential. Information on Turkish banks can be obtained from the Union of Turkish Banks whose address is provided in the contact list at the end of this report.

The locomotive of this trend has been Turkey’s rapidly growing telecommunication infrastructure which is among the most modern in Europe. Under the Telecommunications Master Plan which covers years 1993-2002, the Turkish Government aims to invest an additional $12 billion to increase telephone line density to 25 per 100 persons from the current level of 21, and boost the digitalization ratio to 80 percent. In addition, the government is considering a large informatics project which will probably end up as an “Information Superhighway.” The total cost estimate of this project is $200-300 million. Currently, the World Bank is considering whether or not to provide a credit for this project which consists of several sub-projects. The core of the national Informatics project is State Institute of Statistics’ (SIS) National Information System and Statistical Infrastructure Development Project (NISSIDP).

In accordance with the government’s above-mentioned plans the following public sector projects are expected to start over the next three years:

— State Institute of Statistics (SIS) National Information System and Statistical Infrastructure Development Project: This project is intended to establish on-line statistical databases, which would integrate the core data holdings of several government agencies and provide parallel access to international statistics. In order to implement the project, SIS is seeking a World Bank loan of $40 million. Total project cost is approximately $50 million.

— TURPAK: This is a revenue-sharing, package-switching data network between the Turkish PTT and Northern Telecom, and currently has a capacity of 6000 ports. The number of subscribers is approximately 2,500. This network is expected to expand and new modems will be purchased by the PTT. The PTT is also providing data communications through leased-lines and dial- up slow speed lines with appropriate modems.

Despite the cuts in government spending, the 1995 Investment Plan for public organizations envisages over $70 million spending for office automation/data processing purposes.Private and public financial institutions, big corporations, and large retail stores constitute the leading customer base for networking equipment. The increase in financial transactions and large retail outlets require fast, accurate, and safe data communications. Financial institutions make up approximately 60 percent of the total customer base for computer hardware, followed by government sector (15 percent), manufacturing (10 percent), trading (9 percent), education/R & D; (3 percent), and transportation/communications (2 percent).

U.S. products in this industry category are typically selected for their high quality and especially, for their technological superiority. However, these advantages are somewhat offset by lower prices of imports from Asia/Pacific countries and by the lower duty rates imposed on imports from the European Union by the EU-Turkey Association Agreement. The coming of Turkey’s accession to the EU Customs Area in 1996 will augment this advantage. U.S. suppliers must counter these advantages with sustained technological development in order to retain or expand market share.

Currently, U.S. products enjoy approximately 25 percent share of the market. Main competition comes from Taiwanese companies,followed by French and British suppliers. Market domination of U.S. firms may increase as long as they keep investing in R & D; and introduce innovations to the markets to offset the price and tariff advantages of the competition.

Turkey’s imports are regulated by an Import Regime published annually by the Undersecretariat for Treasury and Foreign Trade (UTFT). This regime sets forth applicable rules and regulations regarding imports to Turkey and the applicable customs duties and surcharges on imported products. Most items may be imported into Turkey without government permission. However, an import certificate issued annually by the UTFT to the importer is essential in any import action. Every import action must be processed by a commercial bank which issues a specific import permit and effects payment.

Turkey is preparing for customs union with the EU at the end of 1995, and this process will lead to lower customs duties for goods of EU/EFTA origin. Therefore, U.S. firms should take into account favorable import duty rates applied to European suppliers when competing in a particular project.

Distribution/marketing practices:

Appointing agents/distributors or establishing joint ventures with local firms is essential for success in the Turkish market. A reputable agent, through contacts and knowledge of the local market, can provide important first hand information. A list of potential agents/distributors for LAN equipment is included as an attachment to this report.

In Turkey, agency representation agreements are private contracts between agents and their foreign suppliers. There are no regulations governing commission rates.

An alternative to using an agent/distributor is to establish one’s own office in Turkey and many U.S. firms in the computer sector such as IBM, AT & T;, Digital, Hewlett-Packard, Compaq, Microsoft, and Oracle have done so. Most other American and third country computer equipment suppliers have penetrated this market through agents or distributors.

Government agencies carry out procurement through local or international tenders. Firms which provide financial packages along with their bids have a better chance to secure business. When funding from international financial institutions such as the World Bank is involved, foreign firms are eligible to bid directly. In local tenders, only Turkish companies or Turkish subsidiaries of foreign companies can bid. Price is generally the most important factor in purchasing decisions of public sector agencies, but credit terms and length of repayment period are also considered.

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