Turkey’s Silk Road Dream

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Turkey and China are eager to form a strong bond to link one end of the Silk Road with the other.

July seems to be an excellent month for Turkish-China relations. Last July, China President Xi Jinping and Turkish President Recep Tayyip Erdoğan addressed the high profile China-Turkey Business Forum in Beijing. In front of an illustrious audience composed of leading Silk Road businessmen and politicians, Xi put the Turkish relationship with China into a clear and concise perspective. “Standing at the east and west ends of the Eurasian continent respectively,” Xi remarked, “China and Turkey were the starting and ending points of the ancient Silk Road and made important contributions to exchanges and the prosperity of human civilization.”

That day Xi Jinping honoured Erdoğan with an elaborate welcome ceremony with full colour guard outside the East Gate of the Great Hall of the People in Tiananmen Square. Xi Jinping’s wife Peng Liyuan, Vice Chairman of the Standing Committee of the National People’s Congress Chen Changzhi, State Councilor and Minister of Public Security Guo Shengkun, Vice Chairman of the Chinese People’s Political Consultative Conference Luo Fuhe were all on hand for the occasion. That afternoon, Erdoğan laid a wreath at the Monument to the People’s Heroes. The solemn ceremony and diplomatic exchange was a show of great respect for the Turkish leader and underlined the commitment to an important Silk Road partner.

In the July previous to that, Erdoğan celebrated one of China’s and Turkey’s greatest business achievements: the inauguration of the long-awaited high-speed rail link between Istanbul and Ankara. The line cut the over 500-km journey in half, from 7 to just 3.5 hours. Erdoğan was on board for the maiden voyage and hailed the link, which cost US$4.1 billion, as a victory for China’s efforts to establish itself as the world’s premier high-speed rail constructor.

The Ankara-Istanbul link was built by a Chinese-Turkish consortium which won the bid in 2005. China Railway Construction Corp., China National Machinery Import Export Corp. joined with Turkish firms Cengiz Construction and IC İçtaş Construction. China lent Turkey US$750 million to help make the project possible and the success paves the way for Chinese companies to win other big infrastructure projects in Turkey, or at least collect a share of the US$45 billion Turkish State Railways plans to allocate for rail up to 2023.

“The relationship between Turkey and China is important for both countries and the region as a whole,” remarks Kemal Simsar of SBB Capital Partners, a financial consultant engaged in bringing projects to China. “As one of the world’s fastest growing economies, Turkey faces challenges, but the country is filled with opportunity and great companies. It is an attractive destination for Chinese investment and benefits from a strategic location as well as a dynamic and skilled workforce. We have the population and manpower to make a difference and have shown we can deliver economic results. It is only a matter of time before we resume our former level.”

President Recep Tayyip Erdoğan faces challenges as he works to implement Turkey’s Silk Road vision.
President Recep Tayyip Erdoğan faces challenges as he works to implement Turkey’s Silk Road vision.

Enterprise Association

In a vote of confidence for Chinese and Turkish business cooperation, the powerful Chinese and Foreign Entrepreneur Alliance made an important statement in May 2016. This group, working with the Consul General of China in Istanbul, formed the Turkey-China Enterprise Association. Xu Ke En, Head of the Turkey Branch of the Industrial and Commercial Bank of China, the world’s largest bank, was elected the Association’s first president. This timely appointment celebrated the ICBC purchase of a 75.5% stake in Tekstilbank from Turkish GSD Holdings in April 2015 for US$316 million, making ICBC the first Chinese bank to formally operate in Turkey.

Chinese Consul General Gujing Qi attended the opening ceremony along with 24 Chinese business leaders of the highest order. Qi noted that, “In the long run, once economic growth is back on track, Turkey has huge potential and the opportunities outweigh the challenges.” Qi expressed his hope that Chinese companies play an important role in trade and economic cooperation to develop bilateral strategic and cooperative relations between China and Turkey.

The Association’s mission is to serve enterprises and develop a strong strategic platform. Its founding members are composed of businesses in the finance, energy, construction, communications, trade and transportation industries. Around the same time as the inauguration of this Association, the Bank of China was granted a license in March 2016 by Turkey’s Banking Regulation and Supervision Agency (BRSA) to formally operate in the country. As China’s most internationalized and diversified bank, Bank of China’s entry into the country is of significance.

SBB’s Kemal Simsar is in favour of Chinese investment flows.
SBB’s Kemal Simsar is in favour of Chinese investment flows.

Strategic Investment

Prior to the events in March, Turkey’s new Minister of Energy and Natural Resources Berat Albayrak, paid his first visit to China seeking investment in renewables, nuclear energy and coal industry. Albayrak met the China giants of the wind power and coal mining sectors in Beijing and solar power representatives in Shanghai. During his four-day visit to China, Albayrak shared Turkey’s goals and projects with Chinese counterparts and discussed opportunities for collaboration and investment in these most strategic of sectors.

Despite the geographic distance, the economic and cultural relationship between China and Turkey has a long history. At the start of the millennium, Turkish trade with China was a mere US$1 billion. Last year, the amount reached US$27 billion, with a stated goal of reaching US$100 billion by 2020.   

The volume of trade has increased remarkably along with the rapidly rising interest displayed by Chinese and Turkish companies to invest in one another’s countries. Current trade flows between these two prominent Silk Road countries is mostly based on the importation of goods from China to Turkey.

There are many reasons for the growing trade numbers and increased presence of Chinese enterprises in Turkey. With its unique geopolitical status connecting the East and the West and its preferred status on the edge of the EU, not to mention the ever-pending subject of EU membership, Turkey offers attractive investment opportunities to Chinese investors trading with Europe. In addition, Turkey has become an important source for providing Chinese industry with goods, such as raw materials, chemicals, industrial and healthcare equipment.

The Chinese and Turkish leaders enjoy a moment with the next generation.
The Chinese and Turkish leaders enjoy a moment with the next generation.

Presidential Diplomacy

Xi Jinping visited Turkey as the Vice President of China in February 2012. On that occasion, the two nations signed 28 agreements comprising mostly joint investment projects amounting to US$4.3 billion. The investment fields were first outlined in the October 2010 framework agreement on The Improvement of Mutual Commercial and Economic Cooperation. Under this framework Turkey hopes Chinese companies create employment and provide technology transfer by adding value to the manufacturing process.

Following President Erdoğan’s 2015 visit to China, investment activity began to accelerate. Hattat Holding and China Avic International signed an agreement worth US$1.5 billion for the construction of a thermic power station in the Amasra region. Turkey’s well-known construction group Ağaoğlu also reached an agreement with China’s Sinovel for the construction of electric power stations with an investment of some US$1 billion. Meanwhile, Turkish Akfel Group and Sun Energy of China will produce solar panels with a total investment of US$350 million.

With the support of a positive financial atmosphere the investment interest of the Chinese companies in Turkey is accelerating. Currently, China General Technology Holding Ltd. (Genertec), which is amongst the top ten companies in China, is planning to invest US$1 billion in Turkey in the fields of energy, health and spare parts for trucks, buses and commercial vehicles. Likewise, Dongfeng Motor has decided to invest US$250 million in Turkey and Chinese energy companies are interested in establishing mining and renewable energy in Anatolia.

With its population exceeding 1 billion, China is an attractive market for both large Turkish companies and SMEs. Today, Turkish companies are more conscious of the importance of this market than ever before, and with confidence comes a willingness to invest. The success of business groups such as Zorlu, Arçelik, Garanti Bankası, Şişe Cam and Demirdöküm of Koç Holding encourages other companies to enter China.

Turkish Forays

The Turkish banking sector has led the way into China. Garanti Bankası, one of the largest banks, was the first to open a Representative Office in 1999. Türkiye İş Bankası, another well known bank, set up a Shanghai Representative Office to provide consulting services to Chinese companies willing to invest in Turkey and vice versa in 2009. Akbank of Sabancı Group, a leading holding company, and state bank Ziraat Bankası, are opening offices very soon. The objective of these banks is to improve relations with China to better understand the market opportunities and support trade.

Leading Turkish groups are active through their own companies or Chinese joint ventures. Koç and Sabancı Group, the kings of the Turkish business world, have invested in China since the start of the millennium and look to invest further. Sabanci’s Kordsa acquired 99.5% of IQNE Qingdao Nylon Enterprise from US-based Invista Group as far back as 2006. The following year, Koç’s Arçelik BEKO, the leading household appliance maker, bought washing machine maker Changzhou Casa-Shinco.

In 2014, FIBA Group, which owns franchise rights for Marks & Spencer in Turkey, Ukraine and Russia as well as Gap and Banana Republic brands in Turkey and Russia, opened Star Mall, a US$300 million shopping center in northeastern China. Starmall Shenyang Plaza has become a major attraction for entertainment and shopping in Shenyang and remains the biggest Turkish investment in China to date.

With the positive effects of these investments, companies are encouraged to invest and cooperate with Chinese companies. The Turkish priority sector of defense and security is another area of cooperation and transfer of know-how. “We can create mutual value given China is our biggest Asian commercial partner and second biggest in the world,” says Bora Doğualp, General Manager of Tepe Defence and Security Systems. “Cooperation can be established in specialized areas, such as security consulting, electronic and physical security services or training and plant management.”

Based on the long common history between the two important Silk Road markets, Turkish and Chinese executives can cooperate and create long-term partnerships. “China has been an important foreign trade and investment market for a long time,” says Dr. Zehra Güngör of Stage Communications Consultancy and World President of International Public Relations Association (IPRA)  for 2014. “In the last few years, the communication network has naturally enlarged as the cooperation between China and Turkey has. The interest of Chinese investors in Turkey has increased substantially as well.”

Güngör emphasizes that communications supported by investment and trade has enlarged the mutual cooperation. “It does not seem difficult to strengthen communication between the two ends of the Silk Road,” she says. “We share a kind of togetherness based on past trading relations and cooperation in terms of language, culture and arts. From this perspective communication management is most necessary.”

Turkey has a huge interest in information and communication technologies, especially high-tech telecom services, due to the needs of a large population. The government allocated a considerable part of its budget to IT infrastructure to support ongoing and future projects to improve the quality and efficiency of IT-based public services.

Turkey is eager to make a leap forward in technological innovations and as such adopted the R&D and Innovation Support Law in 2008. The R&D Law supports the development of technological innovations, improvement of product quality and standards, and eases access of foreign direct investments focused on R&D and innovation. For this purpose, the Law provides technology centers, R&D projects supported by public enterprises or foundations, cooperation projects and techno-enterprises with a tax discount of 100% for expenditures incurred until 2024.

In addition, the R&D Law provides tax incentives for withheld income tax, stamp tax exemption and social security premium support for R&D-related activities. Investments concerning the transfer of industrial know-how and new technologies are particularly supported with special tax advantages and incentives in the Technology Development Zones, Industrial Zones and Free Zones.

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Times have changed since the Ottoman Empire ruled the region with an iron hand.

Sectors of Interest

In terms of renewable resources, such as geothermal, solar, wind and biomass energy, Turkey has a huge potential for foreign investment. The rapid industrialization and urbanization of Turkey makes environmental technology investments more interesting, especially in the areas of waste management, water supply and management and air pollution control. All environmental projects, particularly investments in technologies, are supported by special incentives. For that reason, the Turkish energy sector offers good investment opportunities through the means of future privatization of state-owned electricity and distribution companies.

Turkey has an advantageous position in the field of maritime and land transportation. Logistics is one of the fastest developing sectors over the last few years. Foreign investor interest in the sector is visible, as clearly indicated by recent acquisitions. The geographic proximity to emerging markets enables Turkey to offer combined transportation opportunities to these markets. Turkey is expected to become an important logistics center in the coming years through infrastructure investment, incentives, privatization opportunities and its easy access to trade routes.

“Turkey is a crossroad in the logistics field as the country is on the Western end of the Silk Road and links Europe to the Middle East,” says Neşe Güneş, General Manager of Exova BM Trada. “In this context, important investments concerning transportation lines have been done in the last ten years. Investments concerning transportation infrastructure will remain on Turkey’s agenda. The new Turkish government has incorporated many plans related to transportation in its economic program.”

In terms of the Silk Road dream, it is essential that Turkey remain at the forefront of the initiative. SBB’s Simsar goes on to explain that Turkish companies want to become more international and are eager to expand their businesses abroad. “These companies watch all possible investment and partnership opportunities outside Turkey very closely,” adds Simsar. “The desire to grow and become an important part of the Silk Road economic community is something no one can ignore.”

Shanghai Business Review is the leading English language website and print magazine for business leaders conducting business in China.

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