turkey: a strategic trade-manufacturing-investment nexus ......sitting at the crossroads of europe,...

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Turkey: A Strategic Trade-Manufacturing-Investment Nexus Sitting at the crossroads of Europe, Asia, Middle East and Africa, Turkey has long been regarded as a highly important strategic hub for global trade, logistics and manufacturing. That status has been enhanced by its customs union with the EU and extensive array of free trade agreements (FTAs ) with nearly 30 countries, which have given it free or preferential access to a pool of some 900 million consumers. Coupled with the linking together of the country’s Middle Corridor Initiative (MCI) and China’s Belt and Road Initiative (BRI ), and a clutch of generous investment incentives, Turkey has become increasingly attractive to Hong Kong companies eager to trade and invest there. This is particularly true for those which are looking for business and relocation opportunities as a hedge against the problems caused by the lingering Sino-US trade spat. China’s recent import tariff cuts – part of its shift towards a consumption-driven economy – are also creating Turkish-related opportunities for Hong Kong firms. As Turkish traders look to take advantage of the import control relaxations and enter further into the Chinese mainland market, Hong Kong’s service providers will expect to use their extensive knowledge and experience of the market to play a pivotal role in helping them do so. Regional Connection The link-up between Turkey’s MCI and China’s BRI is already bearing fruit. An early example of this is the Trans-Caspian International Transport Route (TITR), which forms the shortest land route between China and Europe, via South-east Asia, Central Asia and the Caspian Sea. At its heart is the Baku-Tbilisi-Kars (BTK) railway route, which opened in October 2017. It starts at the Caspian Sea in Azerbaijan and runs through Georgia and eastern Turkey before merging with the Turkish and European railway systems. The TITR is not just a shorter land route for Asian products to reach European, African and Middle Eastern consumers, but also a safer and cheaper one. The corridor is 1,500km shorter than the China-Mongolia-Russia Economic Corridor and is less exposed to extreme winter weather conditions. Cargo trains from North-West China now take as little as 8 to 14 days to reach the Black Sea coast and Turkey, whereas sea voyages between the destinations can take up to 60 days. 14 Dec 2018 1

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Page 1: Turkey: A Strategic Trade-Manufacturing-Investment Nexus ......Sitting at the crossroads of Europe, Asia, Middle East and Africa, Turkey has long been regarded as a highly important

Turkey: A Strategic Trade-Manufacturing-Investment Nexus

Sitting at the crossroads of Europe, Asia, Middle East and Africa, Turkey has longbeen regarded as a highly important strategic hub for global trade, logistics andmanufacturing. That status has been enhanced by its customs union with the EUand extensive array of free trade agreements (FTAs) with nearly 30 countries, which havegiven it free or preferential access to a pool of some 900 million consumers.

Coupled with the linking together of the country’s Middle Corridor Initiative (MCI) andChina’s Belt and Road Initiative (BRI), and a clutch of generous investment incentives,Turkey has become increasingly attractive to Hong Kong companies eager to trade andinvest there. This is particularly true for those which are looking for business andrelocation opportunities as a hedge against the problems caused by the lingering Sino-UStrade spat.

China’s recent import tariff cuts – part of its shift towards a consumption-driven economy– are also creating Turkish-related opportunities for Hong Kong firms. As Turkish traderslook to take advantage of the import control relaxations and enter further into theChinese mainland market, Hong Kong’s service providers will expect to use theirextensive knowledge and experience of the market to play a pivotal role in helping themdo so.

Regional Connection

The link-up between Turkey’s MCI and China’s BRI is already bearing fruit. An earlyexample of this is the Trans-Caspian International Transport Route (TITR), which formsthe shortest land route between China and Europe, via South-east Asia, Central Asia andthe Caspian Sea.

At its heart is the Baku-Tbilisi-Kars (BTK) railway route, which opened in October 2017. Itstarts at the Caspian Sea in Azerbaijan and runs through Georgia and eastern Turkeybefore merging with the Turkish and European railway systems.

The TITR is not just a shorter land route for Asian products to reach European, Africanand Middle Eastern consumers, but also a safer and cheaper one. The corridor is 1,500kmshorter than the China-Mongolia-Russia Economic Corridor and is less exposed toextreme winter weather conditions. Cargo trains from North-West China now take as littleas 8 to 14 days to reach the Black Sea coast and Turkey, whereas sea voyages betweenthe destinations can take up to 60 days.

14 Dec 2018

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Turkey has also been upgrading and developing new maritime logistic infrastructure,most notably in İzmir. Dubbed the Pearl of the Aegean, Izmir is the nation’s third mostpopulated city and home to the North Aegean Çandarlı Port, which when completed willrank as one of the top ten seaports in the world. With an additional annual capacity of upto 12 million 20ft shipping containers or TEUs, the port is expected to increase Turkey’scargo handling capacity by 70%.

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Izmir in western Turkey is a port city on the Aegean Sea.

Infrastructure Boom

In line with its ambitious vision to develop Turkey into a US$2 trillion economy by 2023,the Turkish government has been overseeing a spending spree on the country’sinfrastructure. The aim is to lay a sound foundation for more dynamic economicdevelopment. Among the long list of projects is Istanbul’s new airport, which will replacethe 93-year-old Ataturk Airport when it opens on 31 December 2018. It is projected tobecome the busiest air hub in the world with a planned yearly capacity of 200 millionpassengers – nearly double that of the current world leader, Hartsfield-Jackson AtlantaInternational Airport.

The Turkish government also aims to complete 11,700 km of high-speed railway lineslinking 41 domestic cities by 2023, which would put Turkey behind only China in terms ofthe amount of railway construction. Other key projects among the 3,500 reportedly underdevelopment or in the planning stage include the Kanal Istanbul (an alternative waterwayto the Bosphorus River, linking the Black Sea with the Marmara Sea), the Yavuz SultanSelim Bridge (the world’s longest, highest and widest suspension bridge with a two-lanerailway and eight-lane highway on the same deck), the Eurasia Tunnel, the IstanbulFinance Centre, and the Gebze-Izmir Motorway Project linking Istanbul with Izmir. All thisis taking place alongside more than US$200 billion worth of building work and urbanrenewal across many Turkish cities.

To help finance this, the Turkish government hopes to secure US$350 billion foreigninvestment on a Public-Private Partnership (PPP) basis. So far, the country has completeda total of 225 PPP projects worth some US$135 billion. These include the İstanbul NewAirport, built by the Limak-Kolin-Cengiz-MaPa-Kalyon Consortium, the Yavuz Sultan SelimBridge and Northern Marmara Highway by the IC İÇTAŞ – Astaldi Consortium ICA and theEurasia Tunnel by the Turkish-Korean joint venture registered as Eurasian TunnelOperation Construction and Investment, or ATAŞ.

Manufacturing Powerhouse

Turkey’s growing economy and its rapidly improving transport connections have made

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the country attractive to international manufacturers looking to relocate. In order to ridethis wave, the Turkish government has been trying to entice foreign export-orientedcompanies to move their production to the nation’s 19 Free Zones, 322 OrganisedIndustrial Zones and 56 Technology Development Zones (TDZs).

The Aegean Free Zone (ESBAŞ) in İzmir, with its advantageous location and tax, legaland customs incentives, is becoming increasingly popular as a destination forinternational manufacturers looking to do business in Turkey and the surrounding region.ESBAŞ is home to nearly 180 investors and tenants, mainly in industries such as foodprocessing and packaging, automotive, machinery, IT, medical devices, textiles,electronics and electrical, aviation, avionics and aerospace. These include world-classmanufacturers such as US-based Delphi Diesel, which makes injector nozzles, valves andpump parts for diesel motors, France’s FTB Lisi Aerospace, luxury German fashion houseHugo Boss, Eldor Electronics from Italy, Ukrainian manufacturer DEZEGA, whichspecialises in respiratory protective equipment, and Lasinoch, a subsidiary of Japan’sPigeon Corporation which produces breast milk feeding pumps, feeding bottles andpacifiers.

ESBAŞ, operating since 1990, was the first modernproduction and export-based manufacturing zone inTurkey.

ESBAŞ, with its concentration of high-valuemanufacturing operations, is considered one of themost successful free zones in Europe.

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Sino-Turkish Co-operation

As a key part of the ancient Silk Road, Turkey is naturally an important partner in today’sSilk Road Economic Belt and Maritime Silk Road, or the BRI. Even before thedevelopment of the BRI, there had been a growing collaboration between Turkey andChina. In 2010, China was a strategic partner in the financing and construction ofTurkey’s national high-speed railway between the cities of Edirne and Kars, providingloans of US$28 billion, while the China Railway Construction Corporation and ChinaNational Machinery Import and Export Corporation are members of a Turkish-Chineseconsortium (along with Turkey’s Cengiz Construction and Ibrahim Cecen IctasConstruction) which was behind the construction of the İstanbul-Ankara high-speedRailway.

The İstanbul-Ankara High-speed Railway

Source: Türkiye Cumhuriyeti Devlet Demiryolları (TCDD)

In 2015, the Chinese joint venture Euro-Asia Oceangate, controlled by Cosco Pacific, China Merchants Holdings (International) (CMHI) and CIC Capital, acquired the majorityshare of Kumport, the third-largest container terminal in Turkey. The port is close toİstanbul, Turkey’s biggest city and its key trading hub which accounts for over half of thenation’s total trade and serves as a transhipment hub for goods being transported via theBlack and Mediterranean Seas. This investment also creates a natural synergy with theChinese shipper’s investment and expansion plans in Piraeus – Greece's largest port.

This growing Sino-Turkish collaboration should ensure better co-ordination among theconnecting nodes of the TITR and the Maritime Silk Road, while further strengthening theposition of Turkey and its surrounding region as Asia’s maritime gateway to Central andEastern Europe (CEE).

Investment Incentives

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On the way to the 100th Anniversary of the Republic[1], Turkey is expected to continueits plans to develop and upgrade its infrastructure and – to make good use of theimproved logistics and strengthen its role as a regional manufacturing powerhouse –expand its network of industrial parks in an attempt to grow local production capacityalongside rising domestic and external demand. This is good news for Hong Kongmanufacturers who are considering relocation amid the fallout from the Sino-US tradedispute.

Turkey’s keenness to attract foreign investment means that it now boasts one of themost competitive investment incentive packages of any emerging economy. This includesa Project-Based Incentive Scheme, under which projects involving at least US$100million worth of investment that ensure sufficient supply levels of strategic goods andservices, and boost technological capacity, research and development (R&D) efforts,competitiveness and added value in production, qualify for a pool of support measuresthat the investor can use to create whatever incentive package to make the investmentmost feasible and profitable.

A host of different schemes offering various support measures are available to suitinvestment size, region, sector and product. Measures include value-added tax (VAT)exemption, customs duty exemption, tax deductions, social security premium support forthe employer’s share, interest rate support, land allocation and VAT refunds. Forinvestments in the least developed regions of Turkey, income tax withholding supportand social security premium support for the employee’s share are also available.

Hong Kong businesses looking to take advantages of these opportunities should also behelped by the presence in Turkey of major Chinese banks such as Industrial andCommercial Bank of China (ICBC), which has been operating there since May 2015, andBank of China (BOC), which received its banking licence on 1 December 2017.

Turkey Trade

Hong Kong’s trade with Turkey is rising rapidly. In the first nine months of 2018, HongKong’s sales to Turkey grew by 15% year-on-year to US$775 million, which comparesfavourably with the 9% growth in Hong Kong’s total exports over the same period.Electronics and electrical goods such as telecommunication equipment and parts,computers, electrical apparatus for electrical circuits and semi-conductors, electronicvalves and tubes, watches and clocks, toys, games and sporting goods, jewellery andpearls, precious and semi-precious stones are selling well in Turkey.

When it comes to Turkey’s exports, the country is becoming a leading global supplier inthe field of agribusiness and is now the world’s seventh-largest agricultural producer. In2017, Turkey sold more than 75% of the world’s total market of hazelnuts and exportednuts, figs and olive oil to as many as 140 countries. Other popular food and beverageproducts include high-quality tea, wine, honey, dairy products and seafood.

Turkey is also the world’s fourth largest home textile supplier, famous for its towels,furnishing and curtain fabrics bed linens, and Europe’s leading TV and white goodproducer, selling, for example, refrigerators to some 160 countries.

Online Potential

Online sales in Turkey make up a relatively low share of total retail sales at just 3.5%.

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This means that the potential in the online market is there to be tapped by global e-commerce players. Alibaba has already made a move, recently announcing its acquisitionof Trendyol (Turkey’s largest online fashion retailer, with 90 million monthly visits and 16million registered users) from the European Bank for Reconstruction and Development(EBRD) and several US investment funds. It hopes to expand and optimise its reachamong the country’s growing pool of young, high-income, tech-savvy consumers.

There are also plenty of potential opportunities in Turkey for the provision of the sort ofprofessional services and innovative business models at which Hong Kong excels. GivenTurkey’s ambitious list of massive infrastructure projects, high demand is expected notonly for project funding and financing, but other professional services such as projectevaluation and consultancy, engineering, architecture, logistics, information andcommunication technology (ICT) and marketing.

However, these opportunities are not limited to those available in Turkey. Turkishbusinesses are especially keen to make inroads into the Chinese mainland market amidChina’s recent import tariff cuts, as evidenced by their presence at the inaugural ChinaInternational Import Expo (CIIE). This was the world's first import-only-themed national-level expo, which kicked off on 5 November 2018 at the National Exhibition andConvention Centre in Shanghai, bringing together more than 3,600 exhibitors and over400,000 buyers.

Turkey's Showcases at CIIE

Displays of Turkish exports spanning agricultural and food and beverage products tomachinery and services received a very warm welcome from Chinese buyers at the expo.However, while Turkish exporters and service providers seemed convinced that the

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Chinese market was ready for their products, most admitted that they were unfamiliarwith mainland China’s laws and regulations, not to mention the market dynamics in termsof consumer preferences and distribution channels.

Given their language advantages, their extensive knowledge of the Chinese market andregulatory environment and their proximity to the mainland market, Hong Kongcompanies can play a pivotal role in helping prospective Turkish companies bring theirproducts to the Chinese mainland market.

Hong Kong can also serve as a tailor-made business hub for Turkish enterprises lookingto establish headquarters in Asia, offering them an extensive web of the value-addedservices from finance to branding and research and development (R&D) they will need.

[1] Turkey will celebrate the 100th anniversary of the foundation of the Republic in 2023.

Copyright©2018 Hong Kong Trade Development Council. Reproduction in whole or in part without priorpermission is prohibited. While every effort has been made to ensure accuracy, the Hong Kong TradeDevelopment Council is not responsible for any errors. Views expressed in this report are not necessarilythose of the Hong Kong Trade Development Council.

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