Japanese investment on the rise in Turkey

Manisa, a vibrant industrial town in Turkey’s Western Anatolia region, has had a lot of visitors from Japan recently. On February 8, the Japanese multinational electronics and electrical-equipment manufacturer Mitsubishi inaugurated a new air-conditioner factory on the outskirts of the city, which came with an investment of US$100 million.

Only a few kilometers from this factory site continues the construction of another production plant, undertaken by the Japanese firm GS Yuasa, which has invested $65 million to produce automotive batteries.

In the meantime, another Japanese company that calls Manisa home, Toyo Ink, recently announced that it would expand its Turkish venture with a new investment of $30 million.

These are only a few examples of the recent Japanese investment wave in Turkey, which is not geographically limited to the province of Manisa. Daikin has initiated a heating-system factory in Sakarya in Turkey’s northwest. Sojitz is planning a major investment in Turkey’s health sector, while at the same time Honda has decided to celebrate its 20th anniversary in the Turkish market with a new investment of $50 million at its Gebze plant, again in Turkey’s industrial northwest. These are all developments seen in the past couple of months.

This remarkable interest by the Japanese in the Turkish market has surged over the past five years, as 28 Japanese companies entered the country through mergers and acquisitions.

According to Turkish Central Bank data, as of the end of 2016, Japanese investment in the country totaled $1.98 billion, a figure that reflects only the capital officially exported from Japan into Turkey, and does not include the reinvested earnings of Japanese ventures.

According to Turkish industry experts, over the next 10 years Turkey could receive an inflow of up to $10 billion in Japanese capital, particularly in such sectors as automotive, consumer electronics, energy and food.

Japanese companies are risk-tolerant when it comes to investing in Turkey. An interesting piece of information revealed by the Central Bank data is that in 2016, Turkey’s annus horribilis with a failed coup attempt, several terrorist attacks and ongoing violence across the country’s borders, most of the foreign direct investors withdrew their money from Turkey because of increasing risks, but the Japanese did not.

There are 104 countries listed in the Central Bank statistics that have directly invested in Turkey. For 99 of them, the total amount of their investment in Turkey went down in 2016. Only five countries increased their investment in Turkey, and Japan was one of them (the others were Qatar, Russia, Italy and Chile).

Despite ongoing risks and concerns, Turkey remains attractive for Japanese companies for two reasons. First of all, Turkey’s large population with increasing disposable incomes makes it a lucrative market for Japanese products that are produced in Turkey, such as automobiles, air-conditioners, consumer electronics and so on.

Turkey’s economy continues to grow – in the third quarter of 2017 it grew faster than any of the world’s 20 other major economies – and so does household spending.

At the same time, in order to provide another boost to bilateral commercial relations and also to support Japanese direct investments by facilitating their imports of components and intermediate products into Turkey, the two countries are planning to sign a free-trade agreement. The eighth round of the FTA negotiations was concluded last week in Ankara, and the agreement is expected to be finalized soon.

The second reason Japanese companies increasingly invest in Turkey is its central position at the crossroads of several subregions, which makes in an attractive as a production hub.

Reflections from Japanese company representatives clearly reveal how they consider Turkey in this respect. For instance, Toyo Ink has planned to invest in Turkey “as a production hub for Eastern Europe, Russia and the Turkic republics, Middle East, the entire African continent and Western Asia.”

Honda, similarly, exports the automobiles it produces in Turkey to 33 countries in Eastern Europe, the Middle East and North Africa.

For those Japanese ventures that export their products to Europe, Turkey offers the additional advantage of having a customs union with the European Union, which makes it possible for these companies to export their products on a tariff-free basis.

Japanese investment in Turkey is increasing, and the next interesting story to watch will be how the competition between Chinese and Japanese investments on Turkish territory will unfold. Chinese companies also have a growing interest in Turkey, especially within the framework of the Belt and Road Initiative. In the meantime, the Turks are also making efforts to make use of the BRI and attract more Chinese investment.

So far the Chinese and the Japanese have been competing in different tracks; Chinese companies are interested in Turkey’s infrastructure and energy projects, while the Japanese companies are more focused on consumer products. However, with interest from both sides growing fast, the future could bring more competition between the two Asian economic powerhouses.

Turkey hopes to stand to benefit from increasing investment from both sides.

Dr Altay Atl? is an Istanbul-based academic and writer specializing in international political economy and international relations. He is a research associate at Istanbul Policy Center and teaches courses on international political economy, international economics and comparative Asian political economy at various universities.