Turkey is an interesting and promising emerging market. The economy has recovered from a series of crises since 1994¹. The commencement of Turkey's membership negotiations with the EU at end-2005 offers renewed opportunities for many foreign investors and traders. While Hong Kong's trade with Turkey is relatively small, growth in the past two to three years has been startling. It seems inevitable that Turkey will source more consumer goods and industrial products from low-cost regions, especially China, given its expansion in consumption and industrial production.

The Turkish economy has survived previous economic crises, and has registered remarkable growth in the last few years. Its growth reached almost 9% in 2004, and about 7% in 2005. While opportunities for Hong Kong do exist, the country's market potential is nevertheless dwarfed by the picture reflected by the macroeconomic data.

For one thing, Turkey is quite a populous country, with heterogeneous development across the territory. At the country level, the purchasing power of Turkey's 73 million people is not particularly impressive, given the low per capita GDP (some US$4,900), and low average monthly wage (around US$900). However, major cities, and especially Istanbul, are much more lucrative than rural areas.

B. Istanbul as the Major Business Centre

Istanbul is the business capital of Turkey. While the city only has a population of over 10 million (around 15% of the whole country), it handles most of the country's international and wholesale trade, as well as its services business. For example, over 40% of Turkish exports and imports go through the Istanbul port, and about 42% of Turkey's tax revenues are generated by Istanbul. On the whole, Istanbul itself accounts for over one-fifth of Turkey's GDP. Such a remarkable performance is thanks partly to its strategic location, which lies at the crossroads between Europe and Asia, making it a natural trading and transportation hub across the continents.

Istanbul comprises a cluster of higher income consumers. While the city's middle-income earners may have an income of US$1,300-1,500 a month or above, monthly average consumption expenditure of households amounts to some US$1,000. These are the highest levels in the country, more than a fifth higher than those of the capital Ankara. Due also to the fact that Istanbul is Turkey's largest city, it therefore possesses the country's largest consumer market, with expenditures accounting for one-fourth of the country's total.

In view of the potential, an increasing number of Turkish and foreign retail operators are targeting Istanbul's consumer market. For instance, the largest retailing chain Migros (a Turkish hypermarket operator, which is a subsidiary of the largest Turkish company KOC Group) sells mid- to upper-range products targeting mainly higher income earners with average incomes of US$1,500 and above in Turkey, especially in Istanbul. This is because most such consumers reside in Istanbul, instead of being spread across the country.

Moreover, the targeted customers of most branded products are largely the 4-5 million medium- to high-income consumers in Istanbul, instead of the entire country. Coupled with its status as a business capital and a distribution centre in the country, Istanbul rather than Turkey as a whole seems to be the right market and possesses the appropriate purchasing power for Hong Kong products.

C. Trading Environment

1. Expanding Higher-income Class

The higher-income class has expanded along with the country's improving economy in recent years, boding well for the purchasing power of the Turkish/Istanbul market. This is exemplified by the fact that foreign chains such as Zara and Nine West (fashion items) have an increasing presence in major Turkish cities, French Carrefour and German Metro are expanding their hypermarket business, while the Britain's B&O has set up a joint venture with Koçtaş Yapı Marketleri (a member of the Turkish KOC Group) to develop DIY chain stores in the country. International brands like Unilever, reportedly, are increasingly selling their fast-moving consumer goods to the country, mainly to Istanbul. Hong Kong's A.S. Watson (a subsidiary of Hutchison Whampoa Limited), has also had a presence in Turkey since 2005, engaging in the retailing of health and beauty products in order to reap the emerging opportunities from rising incomes in the country.

2. Foreign Trade Sector

Increasing globalisation has pushed Turkish traders to look for more competitive sources around the globe. More importantly, a more stable Turkish currency since 2003, following the economic crises, coupled with the expanding economy, has enhanced Turkey's import absorption capabilities. As a result, an increasing number of Turkish companies are interested in buying from Asia.

China has become the third largest source Turkish imports, accounting for 6% of the total in 2005, after Germany's 12% (42% for the EU as a whole) and Russia's 11%. Imports from China more than doubled from US$2.6 billion in 2003 to US$6.8 billion in 2005. Higher labour costs in Turkey, which are more than 3-4 times that on the Chinese mainland for skilled labour, not even taking unskilled labour into consideration, are among the major reasons why companies are looking at China. Compared with their counterparts on the mainland, Turkish manufacturers also lack economies of scale, which makes their products more expensive. In fact, competition from Chinese imports by some early movers has started to put pressure on Turkish companies, prompting them to consider sourcing from the mainland.

As a result, more and more Turkish companies are now inclined to buy directly from China, especially those from coastal regions and the southern part of the mainland, although product quality is still a concern. As regards smaller companies, many are currently sourcing Asian products via West European distributors, due mainly to their small order quantity and desire for better logistics arrangements rendered by distributors in Europe. But business expansion in Turkey and more sophisticated sourcing requirements are prompting them to consider buying directly from Asia, mainly China, at lower costs.

D. Growing Appetite for Competitive Products

1. Goods not massively produced locally

Toys, gifts and premiums, watches and stationery may offer certain niches for Hong Kong exporters, given the lack of production at competitive prices in Turkey. In many cases, Turkish importers have been buying such consumer goods and small items via their agents in Western Europe, as they are not familiar with sourcing in Asia, and are constrained by small order quantities. But spurred by the revival of the Turkish economy and the expansion of their business, an increasing number are exploring direct sourcing opportunities from Asia.

Thanks also to increasing construction activities in the country, including those relating to residential buildings, demand for certain household goods, e.g. kitchenware, appliances and lighting items, is also on the rise, creating considerable opportunities for relevant Hong Kong suppliers. This is despite the fact that many companies call themselves "manufacturers", even though they are actually importers sourcing mainly from abroad.

2. Demand stemming from robust tourism

There is a demand from the Turkish tourism sector, one of the pillars of the Turkish economy, for a variety of travel and souvenir items. About 21 million visitors visit the country mainly for holidays each year, with the majority coming from advanced countries, especially Western Europe. These well-off travellers help elicit a keen demand for a wide range of travel products, at which Hong Kong companies excel.

3. Niches in electronics market

The electrical and electronics market may offer certain niches for Hong Kong, particularly in the area of audio equipment and IT items, especially accessories. Indeed, Turkey has a certain amount of production of household electrical appliances and electronic products. But the Turkish industry focuses largely on visual products and big-ticket items, such as refrigerators, washing machines and television sets.

Due to the existing production of certain electrical and electronic items in Turkey, there is a demand for certain electronic parts and components in the country. These include a variety of semiconductors, acoustic parts and passive components, as well as certain precision plastic and metal parts.

4. But a bit difficult for clothing

In relative terms, Turkey is quite a difficult market for Hong Kong's clothing companies in view of the fierce competition from local suppliers. Notably, Sahinler Holding, a company which holds some 17 enterprises in Turkey and a number of subsidiaries in nine other countries, is regarded as the largest player in the sector. The company makes both textiles and clothing in Turkey, and claims to sell over 50 million pieces of apparel a year to Europe and the US. Apart from Sahinler, there are a number of small and medium-sized clothing manufacturers, as well as large vertically integrated textile and apparel companies in the country. It is estimated that Turkey has about 45,000 firms which are involved in clothing manufacturing, employing some 1.5 million workers.

Turkish safeguard measures imposed on Chinese textile products are an added constraint to Hong Kong's clothing exports to the market. This is despite the fact that the Turkish industry may now be in the process of repositioning itself. While some Turkish brands may seek alternative sources from Asia, their market is largely confined to Turkey itself instead of Western Europe. As a result, unlike famous West European brands that Hong Kong companies can ride on to access the European market and beyond, orders from Turkish buyers are largely meant for the domestic market, where competition from other local suppliers is intense.

¹ Including the economic crises in 1994, 2000 and 2001