Turkey's Wild Ride

Turks shop at a open air market in Istanbul. Tough times could be ahead.

Serkan Senturk / AP

• Share

(2 of 2)

Hitting Speed Bumps
For all its worries, there's still a tremendous vibrancy in Turkey. You can see it in Istanbul, a city of 15 million, with its growing roster of expensive hotels, new upscale shopping malls — and perpetual traffic jams. But you can also find it in other parts of Turkey, in places like the Mediterranean port of Iskenderun.

Just outside the town is a state-of-the-art coal-fired power plant built by the German utility Steag, which alone provides about 5% of Turkey's electricity. When it started operations in 2003, the $1.5 billion plant was the biggest single foreign investment in the country. In nearby Isdemir, a giant steel mill built in the 1970s by Russian engineers using Soviet technology is undergoing massive renovation. Some 18,000 workers used to produce just over 2 million tons of steel here; now about 6,000 people produce almost three times as much — and the plant consumes less energy per ton of steel than many of its rivals around Europe. In August, a new hot strip mill started up, the first fruits of a $3 billion investment program aimed at upgrading Turkish steel production.

One of the biggest changes is to be found in Bursa, a 90-minute boat ride from Istanbul across the Marmara Sea. Just outside the old town is a sprawling Renault plant that dates back almost four decades. During the first years of its operation, the factory produced small cars for the Turkish domestic market — models that were already at the end of their life in Western Europe. But since 2000, Renault has used the Turkish plant as a significant export hub. It makes Renault's Mégane and Clio cars there for the rest of Europe, and has been upgrading the factory to produce diesel engines. "The quality is really good," says Alain Gabillet, the French general manager.

Indeed, automobiles have become Turkey's single most important industry, overtaking the traditional No. 1, textiles. Along with Renault, three other foreign giants — Fiat, Honda and Toyota — all have significant production facilities in the country. About 80% of output is exported, mainly to Europe, which until recently meant booming business. But as the specter of recession comes to haunt Germany, France and the rest of the Continent, automotive sales have been badly hit. In Turkey, that has resulted in a drop in production since June, after five years of continuous growth. "Foreign orders are drying up and there's nothing we can do about that," says Ercan Tezer, head of Turkey's Automotive Manufacturers Association, who nonetheless is lobbying the government to do more to promote domestic sales; cars are heavily taxed in Turkey, and the industry argues that this needlessly hurts its prospects. "Everybody has some soul-searching to do regarding this crisis," Tezer says.

It's one of Turkey's oddities that the Steag plant, the Isdemir steel factory and the Renault plant are either joint ventures with or wholly owned by an organization called OYAK, which is the military's professionally managed pension fund. Unusually for a pension fund, OYAK directly owns and operates major sectors of the Turkish economy, and it has boomed along with Turkey these past six years. Indeed, OYAK is now the third largest business in the nation, behind the conglomerates owned by the Sabanci and Koc families. Its rapidly growing profits this decade have ensured that military officers now get substantial lump sums when they retire. Coskun Ulusoy, a military-history buff with an economics doctorate from Pittsburgh University who heads the organization, knows that OYAK won't be able to continue increasing the payout at the same rate as it has been. (Last year it was up more than 50%.) And he's sober about the nation's prospects overall. "The truth is that there's danger lurking out there," he says. "We will be affected one way or another — it's a matter of degree."

The End of the Boom
When outside experts look at Turkey's vulnerabilities, they see other weaknesses apart from its dependence on exports to Europe. One of the drivers of growth this decade has been foreign direct investment, but that has dropped by about 40% so far this year. Sabanci Dinçer is right to praise the robustness of the banking sector, but there are some vulnerabilities here, too: several of Turkey's banks have been acquired by foreign companies, including two European banks that have run into financial trouble elsewhere, Fortis and Dexia. Turkey also has a current account deficit that amounts to about 6% of its economy, and a recent Goldman Sachs study of emerging markets most at risk highlights that deficit as a potential trouble spot. Still, overall, Turkey came in 12th out of the 18 countries that Goldman examined, just behind Brazil, but in substantially better shape than the Czech Republic, Poland, Ukraine, Romania and the worst-placed country, Hungary.

That's little consolation to Ümit Boyner. The Boyner family's retailing business includes many of the world's top brands, from high-end names such as Prada and Bottega Veneta to more affordable ones like Benetton. Along with their competitors, the Boyners have been on a roll. New shopping malls have sprung up across the country, especially in Istanbul, where some of the most recent examples were deliberately aimed at upscale, upwardly mobile clients. The Boyners have fully participated in this boom; for luxury goods alone, they doubled their retail space over the past two years. But now luxury is taking a fall, and sales of all types of merchandise are soft. "There's no need for panic," Boyner says, "but this is the point where you need to be very conservative." In her family's case, that means a freeze on all new investments, and a search for ways to cut operating costs. In one of the Boyners' biggest stores in Istanbul, which stretches over six floors, the manager has even shut off the escalators to save money.

On a sunny October afternoon, the normally teeming streets of the fashionable district of Nisantasi are oddly quiet. The occasional tourist couple wanders by. Behind elegant windows advertising new autumn collections, plush stores like Hugo Boss, Louis Vuitton and Armani are empty. Groups of sales attendants hover nervously by the entrance. "Business is terrible," says the director of one popular U.S. luxury label. "We hoped it would pick up after Ramadan, but it hasn't. Nobody wants to lose face by officially going on sale in October because it's unheard of, but in-store most labels are offering 30% to 50% off. That's a first for us. We would normally never go on sale before January." Smaller local boutiques, tucked away between the giant stores, are already openly discounting designer jeans, imported footwear and fine cashmere by as much as 70%.

At the Beymen Brasserie nearby, Tolga Yildirim, a consultant, is sitting at an outdoor table drinking beer. "This is all we're going to be spending on for a while — food and drink," he says. "That's about it for the near future. Everybody's going to have to be careful." For Turks used to living in a boom, it's quite a change. But they've been through hard times before — much harder times, and not all that long ago. As Ümit Boyner says, "We have a saying here: "If you go into the hammam, you have to sweat." If a downturn at home is the price of greater integration into the world economy, so be it — as long as it doesn't last too long.
— with reporting by Pelin Turgut / Istanbul