I. COMMERCIAL OVERVIEW OVERVIEW OF IMPORT MARKET Turkey is a growing market which continues to welcome imported goods and services despite the current unsettled economic environment. U.S. exports to Turkey totaled a record $3.4 billion in 1993, rising almost 26 percent over 1992 levels. Similar strong export growth was recorded throughout the 1980's and early 1990's, catapulting Turkey to the front line of emerging export markets and leading the Department of Commerce to tag Turkey one of only 10 'Big Emerging Markets' worldwide. Turkey is now in the midst of its most severe economic crisis since 1980, brought on primarily by large public-sector deficits and the government's slow response to negative fiscal factors. The government announced an economic austerity package April 5, 1994, and since then decisions on most new government projects have been frozen. Although the Turkish Lira has been devalued significantly vis-a-vis the U.S. dollar and German mark, and inflation has broken into triple digits, the economic crisis is more one of confidence in governmental decision- making rather than a manifestation of a fundamental economic imbalance. The longer-term picture continues to be one of substantial growth and full economic recovery. Due to the current economic crisis, exports from the U.S. and other key trading partners have fallen sharply--U.S. exports to Turkey fell 11 percent during the first three months of 1994 compared to the same period in 1993. The government has announced plans to continue projects currently underway but decisions on new projects will wait until at least the end of 1994, and probably 1995. The private sector, likewise, has adopted a wait-and-see attitude. Manufacturers are resorting to layoffs and distributors have cut orders in order to keep stocks at a bare minimum due to slack demand and the extremely high cost of financing. The Turkish economy can be compared to that of a start-up company which has a good product but has outgrown its early management organization and financial resources. If the Government can successfully manage the transition, Turkey should continue its growth trend and join the ranks of the newly industrialized states. Impressive opportunities can be found in Build-Operate-Transfer power generation projects and in revenue-sharing telecommunications projects. The need to cut government deficits will hopefully give wind to half-hearted privatization efforts. In addition to power generation and telecommunications, mid- to long-term potential for U.S. equipment and service exports looks promising in the following fields: industrial chemicals, aircraft and parts, pollution control, architectural/construction/engineering services, computers and peripherals, building products, mining and medical equipment. Although not for every neophyte exporter, Turkey offers a target of opportunity for exporters prepared for a little bit of east and west, north and south. Lack of intellectual property rights protection, a duty structure favoring EU/EFTA-origin products, and lengthy, convoluted bidding procedures for large government contracts are the principal trade barriers. SYNOPSIS OF COMMERCIAL ENVIRONMENT Turkey's commercial landscape is marked by large government infrastructure projects (and the ensuing clutter of local and foreign competitors); entrenched state economic enterprises (many of which are on the privatization block); a handful of large, family-owned holding companies (Turkey's equivalent to the Rockefellers, Harrimans and DuPonts of turn-of-the-century America); and a surfeit of small, start- up companies hungry for business. Following the founding of the modern Turkish republic, state economic enterprises (SEEs) were established as a base for Turkey's industrialization. Until the 1980s, SEEs played a dominant role in the Turkish economy. However, the opening of the Turkish market in the 1980s and the subsequent spectacular growth of the private sector have made these economic behemoths uncompetitive and obsolete. Privatization is now the hue and cry, but practical privatization steps have been slowed by their perceived political and social costs. With or without privatization, the importance of the SEEs will continue to diminish as private business accounts for an ever greater share of production. Turkey's top 10 companies account for 20 percent of the nation's GNP. Family names such as Koc, Sabanci, Yasar, and Eczacibasi are important catalysts in almost every area of industry and trade. Generally liberal trade and business policies have enabled these family holdings to flourish. By and large, the private sector sets the pace for the economy. Large holdings, small start-ups and sophisticated foreign exporters all vie for a share of contracts to meet Turkey's tremendous infrastructure needs. Although Istanbul is the undisputed seat of private business and home to the majority of Turkey's key industrialists, the central government in Ankara is an important player in the economy and provides good market opportunities for exporters. For example, the majority of medical equipment is purchased for state-owned or state- financed hospitals and clinics. Almost all education is in state-run institutions. For the time being, the state owns the largest airline, the major radio and TV network, most heavy industry including power generation, steel and petrochemicals. While many of these industries are already open or are being opened to private investment, the state will continue to be a key player and purchaser of goods and services. A local representative is essential in Turkey and should be the first agenda item for any foreign firm contemplating business here. To represent foreign firms, the private sector is characterized by a wide choice of young, well-qualified agents and distributors in addition to the trading arms of the large family holdings. Commerce's Agent/Distributor Service is an excellent way to establish contact with these representatives. HOST-COUNTRY BUSINESS ATTITUDE TOWARD THE UNITED STATES As established traders, operating in a historical cross-roads country, the Turks are open to trade with all comers. A key barrier to increased U.S.-Turkish trade, however, is the perceived physical distance between the two countries. Once they get to the United States, Turks generally find U.S. quality and pricing quite favorable when compared to their traditional European suppliers. But when U.S. products make it to Turkey, many Turks complain of 'export' pricing, excessive shipping costs and lack of in-country service and training. Not only hardworking, the Turks are also honest. The embassy receives relatively few trade complaints given the large volume of bilateral U.S.- Turkish trade. For their part, the Turks expect to be treated as European trade partners, enjoying the pricing and credit terms offered to sophisticated, reliable partners. MAJOR BUSINESS OPPORTUNITIES Turkey's current economic climate has spurred action on two relatively new opportunities: privatization and Build-Operate-Transfer projects (BOT's). Privatization. The Turkish Government's plan to "privatize" its many state-owned enterprises has been stalled due to the lack of political will needed to deal with the large layoffs associated with a crash privatization program and judicial decisions which have dealt setbacks to the wide-ranging temporary powers given the Privatization Administration. However, Turkey's economic crisis, and the need to reduce public-sector deficits, may have provided the impetus to move forward. Everything from paper plants to the national airline are slated to be sold, but many analysts do not expect business opportunities to come wholesale. Privatization will likely continue to occur selectively, as small parts of the state empire are laboriously put on the block. BOTs. A more immediate opportunity will be for Build-Operate-Transfer and revenue-sharing projects. With the government strapped for cash, these methods are being used to finance new power plant construction, airports, bridges, telecommunications services and other projects where revenues can be used to repay investment and operating costs. A new BOT law recently passed by Parliament will hopefully end legal challenges to this financing method. Up to now, the Government has provided a key market for U.S. exporters. Transportation infrastructure, power projects, telecommunications, defense, mining, medical, computers, you name it, the government has been a major purchaser. Although the Government is not always the easiest customer to deal with, especially for politically sensitive major projects, U.S. firms have been active and successful in landing Government contracts. A notable feature of the Turkish economy is its broad foundation. Turkey's exports, however, have not encompassed the same diversity. In order to continue with export growth, Turkey will need to expand its product range and improve quality to meet Western standards. Imported machinery will be required in a variety of industries to meet these goals. Turkey is in the center of many developments, especially those concerning Central Asia and the Caucasus. It is a gateway to the new republics of the former Soviet Union, with Istanbul becoming somewhat of an airline transportation hub for this region. Turkish businessmen, supported by their government, have actively been making inroads into these new markets. However, U.S. exporters should first look at Turkey's domestic market. Comprising 61 million people, Turkey already offers a good market for raw materials and industrial machinery and, as per capita income increases, promises to offer an excellent new market for consumer products. In Turkey's major cities today, there is a small, very wealthy, Western-oriented upper class. There is also a sizeable and growing middle class of salaried workers and small business owners who are becoming major consumers of imported goods and services. Business prospects for U.S. firms selling to Turkey remain very promising. It is clear from market research that U.S.-manufactured products such as electrical power systems, aircraft, telecommunications equipment, building products, computers and peripherals, mining equipment, medical equipment, electronics test equipment, scientific and analytical equipment, and pollution control equipment are very competitive in the Turkish market. Some of these products, however, are credited on the export tallies of European countries from which they are ultimately shipped to Turkey by subsidiaries of U.S. firms. MAJOR ROADBLOCKS TO DOING BUSINESS Financing. Whether for a private company or a government project, creative financing sells. Most private firms are willing to use letters of credit but will increase purchases with more liberal credit terms. For the Government, major sales are often not realized unless there is an attractive finance package attached. Government Indecision. The Government has many priorities, many of which are not realized. Picking the winners is the key here. The right partners, consultants, financing, and approval of the mid-level bureaucracy are all factors in moving projects forward. Contract Irregularities and Payment Delays. Large contracts with the Government are sometimes a one-way street. The Government expects firms to be flexible when it changes contract terms or delays the implementation schedule (without price adjustments), but firms are strictly held to their commitments. Program changes are sometimes used to delay payments. IPR Violations. Turkey lacks adequate protection for intellectual- property rights. Modern IPR laws need to be enacted first, then the challenge will be for the Government to enforce them. Respect for the Turkish Market. In order to succeed in business here, U.S. firms need to provide service centers and training for their products, to visit regularly, and to give pricing and terms on par with other sophisticated markets. NATURE OF LOCAL AND THIRD-COUNTRY COMPETITION Turkish firms are active across the range of commercial and industrial enterprise. Turks are willing to form joint ventures or licensing agreements with foreign firms in order to acquire needed technology. The top level of Turkish management is world class. Turkey is an associate member of the European Union and is planning a Customs Union with the EU by the end of 1995. Adoption of the EU's Common External Tariff will cause some dislocations and favor goods and services sourced from the EU. Germany is Turkey's largest trade partner in part due to the approximately two million Turks who are resident there. German competition is especially strong for consumer goods and industrial products. The United States is squarely in second place in terms of exports to Turkey. U.S. firms are competitive for many high-technology and industrial products, and due to FMS financing have until now largely cornered the defense equipment market. Other European countries including Italy and France are major players. Japan is expected to become a larger trading partner. Many foreign firms establish local subsidiaries which can be formidable competitors since the Turkish Government treats them as local firms in terms of large government tenders.