F:TUiNURN TOREPORTS DESK

WITHIN RESTRICTEDI ONE WEEK Report No. EMA-30a

This report is for official use only by the Bank Group and specifically authorized organizationsor persons It may not be pubLished, quoted or cited without Bank Group authorization. ThiBank Group does not accept responsibility for the accuracy or completeness of the report.

INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT

INTERNATIONAL DEVELOPMENT ASSOCIATION

THE DEVELOPMENT PROSPECTS

OF

TURKEY

(in nine volumes)

VOLUME VII

ANNEX V - THE ENGINEERING INDUSTRIES

December 10, 1971

Europe, Middle East andNorth Africa Department

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GURRUCY BQmAIVTS

After August 9, 1970

uS $1.00 TL 15.0

TL 1 = US $0.067

TL 1 million : US $66,667

Prior to August 9, 1970

US $1.00 TL 9.00

TI 1 ' US $D.3

TL 1 million = US $111U,11

PREFACE

This report is based on the findings of an economic mission,which visited Turkey in April/May 1970. The rmission was composed of:Gordon C. Billington (chief of mission), Gene D. Reese (agriculturaladviser), Don Mitchell (consultant, agronomist:), Jacobus van Assen(consultant, irrigation engineer), Bertil Walstedt (industrial adviser),Andrew Freyman (consultant, mining and metallurgy expert), David Beaton(consultant, metal fabricating and engineering report), Antoine Bassili(UNIDO consultant, forest industries expert), Milivoje M. Stojanovic(industrial economist), Cyril J. Martin (planning adviser - organizationand machinery of planning, N. Dean Ganjei (IMN Consultant, fiscal adviser),Francesco Gallo (general economist), Ilanjo Lell (general economist),Josefina Vial (national accounts), Rosalinda D)acumos (statistical assistant),Zoe Carson (secretary).

The industrial team was headed by Mr. Walstedt and the agricul-tural group by Hfr. Reese. The sector volumes of the report alsc draw onother special studies on Turkey, initiated or undertaken by Bank staff,in related fields, notably textiles, petro-chemicals and fertilizers.

I

INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT

WASHINGTON

THE ENGINEERING INDUSTRIES OF TURKEY

SUB-SECTOR REVIEW

TABLE OF CONTENTS

Page No.

SUMMIARY AND CONCLUSIONS .............................. i--iv

I. PRESENT STRUCTURE AND CAPABILITY ..... ................ 1

A. Historical Background ............ .. 1............. B. Present State of Development of the Industry 2C. Recent Investment in Engineering Facilities ..... 10D. Industrial Costs, Prices and Competitiveness .... 11

II. AVAILABILITY AND COST OF INPUTS ...................... 15

A. Raw Materials ................................... 15B. Manpower ......................................... 17C. Management and Entrepreneurship ........ ......... 19D. Industrial and Technical Experience ............. 19E. Finance ............................ 20

III. INSTITUTIONAL FRAMEWORK ................. 22

A. Major Institutions ................. 22B. Import Regime ................. .................. 23C. Export Encouragements ........... .. .............. 25D. The Planning and Promotion of New Projects ...... 26E. Industrial Cooperation .......................... 30

IV. SUB-SECTOR PROSPECTS AND TARGETS .......... ........... 31

A. Domestic Demand for Engineering Products ........ 31B. Potential Export Market for Engineering Products. 33C. Domestic Production of Engineering Products ..... 34D. Demand for Imports ...... ........................ 37

V. REVIEW OF SPO STRATEGY AND PROJECT INVENTORY ......... 40

A. Development of the Current Strategy and Policies. 40B. Project Inventories ............................. 41C. Appraisal of Some Current Projects .... .......... 42D. The Development of the Road Vehicle Industry .... 43

This report was prepared by Mr. David Beaton, Consultant.

Page No.

VI. DEVELOPMENT RECOMMENDATIONS FOR ENGINEERING .... ....... 45

A. Investment Strategy ........ ....................... 45

B. Restructuring of the Public Sector of theEngin.eering Study . ............................. 47

C. Overseas Financial Requirements of theEngineering Industries ...... ................... 49

D. Export Promotional Assistance ..... ............... 51

E. Industrial Co-operation in Engineering .... ....... 52

APPENDICES

I. Size and Location of Engineering Establishments

II. Evaluation of Major Engineering Projects

III. Demand Projections for Engineering Products

IV. Metal Products Sector Forecast of Total Value of Production

V. Public Sector Engineering (Brief Descriptive Account)

VI. General External Tariff - Application to Typical EngineeringProducts

VII. Description of the Engineering Sub-Sectors

SUMMARY AND CONCLUSIONS

Present Status of the Engineering Industries

i. The consumption of engineering products 1/, which was only moderateuntil 1960, has been expanding rapidly in the last ten years as Lndustrial-ization proceeded. Consumption grew by 40 percent in the first Five-YearPlan (1962-1967), and is projected to grow over 100 percent during the secondFive-Year Plan ending 1972. Estimates in this report predict a ifurther60 percent growth from 1972 until 1977.

ii. Faced with this challenge, Turkish and foreign investors haveestablished facilities for the manufacture of a wide variety of engineer-ing products, including heavy fabrication, many types of machinery, do-mestic appliances, tractors, trucks and even limited passenger car manu-facture. New factories now under construction. will produce passenger carsin volume, diesel electric locomotives and many products for the vehicleindustry.

iii. The value of engineering production grew 2-1/2 times between1962 and 1969, although only two to three percent of all investments madein the manufacturing sector were allocated to engineering production facil-ities. Production is expected to grow by a similar factor between1969 and 1977. Value added, in engineering, growing at 11 percent peryear, is then expected to be 16 percent of the total value added in manu-facturing.

iv. There are an encouraging number of new factories with modernmachine tools and products are often manufactured to a high standard oftechnology and finish. There are, however, at the same time a largenumber of old fashioned engineering works, producing parts in a somewhatprimitive manner, and where ingenuity rather than skill is the basic re-quirement.

v. Raw and semi-finished material costs are often high but estimatedprices for newly introduced forging and extrusion plants are reasonableat the new rate of 15 TL = 1 $ US. Prices and costs of various Einishedproducts are high in comparison with imported equivalents when evaluatedat the old exchange rate, but become competitive in several fields whenthe new rate of 15 TL = 1 $ US is used. On thlis basis, tools, r,efrigeratorsand small internal combustion engines would need little or no protectionat the higher exchange rate. On the other hand and on the same basis,trucks and tractors would need considerable protection for many years.

1/ For the purpose of this report the engineering industries have beendefined so as to include metal manufactures (ISIC Major Group 35) andtransport equipment (Major Group 38), except for shipbuilding (381).On the other hand, electrical equipment (Major Group 37) is not covered.A description of the subsectors included is given in Appendix VII.

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vi. Exports receive active encouragement in the form of tax rebates,loans and the availability of part of the foreign exchange earnings topurchase material and parts. Engineering exports are now expanding al-beit from a small base but are not expected to much exceed two percent ofdomestic production by 1977. Refrigerators, small tools and some machineryhave been exported to Mlddle Eastern and North African countries; occasion-al exports have been made to Europe and the United States.

Main Problems in Future Development

vii. Investment in production facilities has not been sufficientlywell controlled. In heavy engineering, low utilization exists due toconsiderable duplication of plant. The establishment of the vehicleindustry has been made regardless of the very high domestic cost of theforeign exchange saved.

viii. About 20 percent of current investment in engineering takesplace in the public sector, and contrary to declared intentions, the ten-dency has been for this sector to expand and to duplicate capacity avail-able in the private sector. Restructuring is urgently needed to controlthe growth and to produce smaller, dynamic units converting them eitherinto efficient public enterprises or in appropriate cases, into privateones, and generally also to achieve improved cooperation and specializa-tion as between the private and public sectors.

ix. In addition to the main structural problems indicated under viiand ix above, Turkish engineering industries also face a number of currentoperating difficulties. These include:-

- a shortage of steel and components, brought about by a lackof foreign currency for imports;

- high costs of imports due to a heavily protected supplierindustry;

- a shortage of trained and experienced men at all levels;

- an inflexible import regime involving the absolute controlof all imports, delays in establishing letters of credit,and the necessity to make cash deposits before licenses aregranted.

Present Development Plans

x. The State Planning Organization has approved an inventory of 36new investment projects in engineering, most of which are now in the ini-tial stages of development. Eighty-six percent of the investment plannedis for the road vehicle industry or its associated feeder industries.Many of the projects are of doubtful economic viability, and the estimateddomestic cost of foreign exchange saving is often very high.

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General Conclusions

xi. The comments and criticisms made in this report should be readagainst the background of the quite remarkable growth in the Turkish manu-facture of engineering products. The rate of growth has been such that itwas probably inevitable that management ability, technical experience, andmanual skills would not be able to keep up with the requirements of thesituation today. Moreover, governmental policy has been mainly concernedwith overall expansion. There must now be a sbift to selective support andimproved definition of priorities.

xii. The industry has functioned in an artificial situation created byimport restriction and high tariffs. Nevertheless with the new exchangerate after devaluation many Turkish establishments should be able tocompete with little or no protection.

xiii. Providing the steps below are taken there appears to be no reasonwhy growth over the next ten years should not be both efficient and vigorous.Much of the basic infrastructure is already t'here, and when suff'icientdomestic steel and components are available at reasonable cost, the industrywill be in a position to tackle the next problem - that of reducing con-version costs.

xiv. Future investment policy for engineering must take twco factorsinto account:

(a) improved utilization of existing facilities;

(b) the introduction of new facilities only when it isclearly established that the domestic cost of savingforeign currenty is acceptable.

xv. In detail, the following recommendations are made:-

- an inventory of existing capacity s'hould be drawn up;

- new investment criteria should be adopted so that theexact cost of foreign exchange saving is taken intoaccount;

- formal pre-investment studies should be undertaken onall projects where investment is not irrevocably committed;

- the public sector of the engineering industry restruct:uredto insure optimum use of facilities. Some units may besold to existing private companies; in other cases newpublic companies may be created;

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foreign financial assistance should be sought to allowimports of steel and component parts;

the government should give procedural and market guidanceto potential exporters;

an Association of Engineering Industries should be formedto coordinate and rationalize development.

I. PRESENT STRUCTURE AND CAPABILITY

A. Historical Background

1. In the early years of the twentieth century, metal working inTurkey was confined to small workshops making simple products for domesticuse. Machinery was imported, usually by the foreign-owned companj:es con-trolling the economy of Turkey at that time, and whose primary task wasto insure a ready market for European manufactured goods.

2. The establishment of the Turkish Republic in 1923 changed thissituation, and large-scale nationalization of resources followed. Locally-owned industry was in its infancy, and despite the founding of the Ii Bankin 1924 to assist private enterprise, little further development took place.Industrialization started with the establishment of the State Economic En-terprises, notably Sumerbank (for textiles) in 1933, Etibank (for mining andpower) in 1935, and the State Steelworks at Karabuk in 1937 to which,eventually, a good-sized machine shop was attached.

3. In the early fifties, the rapid expansion of basic facilities forsteel working, power generation and mining, all, in the public sector, alsoled to the establishment of a large general engineering company in the samesector. The company, now called MAKINA KIMYA ENDUSTRISI KURUMU (M.K.E.K.),was formed out of the established armament industry, which had moved to aremote area in Anatolia (Kirikkale) in the late thirties.

4. In 1950, laws were passed to promote investment in industry andequal treatment was then given to foreign and :Local capital. Encouragedby these measures, the private sector, often with foreign technical orfinancial assistance or with license agreements, started to expand. Manyof the present day private sector engineering companies originated inthis period.

5. A few vehicle assembly plants were established by European andAmerican companies in the late fifties. The plants were, of course,originally intended to insure a place in the growing market and to over-come import restrictions. Little capital was invested and local purchas-ing arrangements were made only for simply manufactured parts produced bythe small-scale local industries.

6. Since 1960 the modernization of road and rail transportation,increasing farm mechanization and the growth in construction, mining andother industries has led to an acceleration of the demand for engineer-ing products such as machinery, metal products and vehicles, etc, Dur-ing the First Five-Year Plan 1962-1967, consumption in these sectors grew by40 percent. An even greater increase of 102 percent is projected for theSecond Five-Year Plan ending in 1972.

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7. In the face of this acceleration in demand, many local enterpriseswere established, or radically expanded, with both local and foreign re-sources. Production has been growing at a higher rate than the increasein demand, so that the imports of engineering products rose by only 24and 59 percent respectively in the two periods mentioned. Nevertheless, theincreasing amounts of foreign currency required contributed to the strainon the balance of payments, and a government decree was issued whichdictated minimum proportions of local content in various engineeringitems in order to speeld up import substitution. This was done with littleor no regard for the economic viability of such production, or the com-petitiveness of the newi industries which were created to supply the essen-tial parts and materiaLs. Costs rose even above the previously high priceof imported components which had been inflated by heavy taxes and duties.

8. Recognizing the continued drain on the economy, government policyrecently changed to enicourage large-scale units with low operating costs.However, in several cases the output of such units is excessive for Turkey'srequirements in the forseeable future, and thus some adjustments of targetsis urgently needed.

B. Present State of Development of the Industry

Product Range and Volume of Output

9. Engineering in Turkey has now reached a stage where an extremelywide range of products can be manufactured. Appendix VII gives a broadoaitline of the variety of iLems produced by each of the sub-sectors in-volved. It will be seen that there are few engineering products not madein one form or another.

10. Value added in engineering is understood to have been expandingrecently at about 11 percent per year, but detailed figures were not avail-able on which to base further analysis. Output is planned to rise from1844 million TL in 1967 (9.6 percent of the manufacturing sector) to 5720million TL in 1972 (16.3 percent of the manufacturing sector).

Value Added in Engineering Sub-sectors(SPO Plan for 1972)

Value Added(million TL) Proportion of

Sub-sector (1965 prices) total engineering

Metal Products 1,850 32%Machinery 2,000 35%Agricultural Machinery 370 7%Road Vehicles 1,260 22%Railway Vehicles 240 4%

TOTAL 5 720 100%

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Within the engineering industry, the machinery sub-sector would be the mostimportant in terms of value added in 1972. The road vehicle industry, towhich so much attention is now being given in t:erms of investment, is onlyexpected to contribute 22 percent to the total. It should be rememberedthat many items from the metal products and machinery sub-sectors are sub-sequently used in the vehicle industry, so that the figure above! refers, inmany cases, to the assembly stages only.

Size and Location of Industry

11. The most recent census was made in 1963, and, at that time, therewere 361 "large" engineering establishments, defined as those enployingten or more workers. The total labor force was 42,476, an averaLge of118 to each establishment. This is larger than might have been expectedat that point in the development of engineerinag. The figure hat mostlikely been distorted by the very large railway workshops and by theshipyards included in this category. In addition to the larger shops, the1963 census showed about 40,000 small establishments employing 87,000, in-cluding working owners and unpaid family workiers. The value of productionhas grown by a factor of 2-1/2, but employment will not have increasedin proportion. As an approximation, it is thought that perhaps 200,000are now employed in the sector. The industry is primarily based in Istanbulwith over 40 percent of workers in that locatLon in 1963. Ankara andEskisehir are the next largest, and an increasing number will be employedin Izmir and Bursa as the vehicle industry expands.

12. Notwithstanding recent incentives to investment in underdevelopedregions, considerable infrastructural development will be needed in - forexample - the eastern part of Anatolia before the engineering industry couldbe usefully established there.

Growth of Self-sufficiency

13. In global value terms, three-quarters of the current domesticconsumption of engineering goods is supplied by the domestic industries.This figure, and its recorded changes over time, is distorted by the factthat it takes no account of indirectly imported materials, parts andcomponents, which form a substantial portion of currently manufactureditems.

14. With this reservation, growth of self-sufficiency has beenreasonably rapid in the machinery and agricultural machinery sectors; ithas not changed greatly in road vehicles where nominal self-sufficiencyis high but the domestic component relatively low.

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Growth of Self-sufficiencyPercentage of Consumption Value Supplied by Domestic Industry

1962 1967 1970

Metal Products 88.5 94.0 94.0Machinery 21.5 44.8 52.0Agricultural Machinery 76.0 86.5 87.0Road Vehicles 80.0 81.0 81.5Rail Vehicles 72.5 90.0 90.0

15. The degree to which directly or indirectly imported componentsand materials are used in domestic manufacture varies very widely with-in each sub-sector. Examples are quoted below for some engineering pro-ducts where the domestic component was controlled by government decree.The domestic content for automobiles was not specified on an industry-widebasis, as the only manufacturer concerned - OTOSAN - had special agreementswith the Government, and the car concerned is in any case quite untypical.

Growth of Domestic Content(Percentage)

1964 1965 1966 1967 1968 1969 1970

Tractors 25 35 40 45 50 52 55Trucks 20 30 40 45 50 52 55Coaches 30 40 55 65 70 70 75Refrigerators 60 65 70 80 85 90 90Vacuum Cleaners 25 30 50 60 65 70 75Lifts 40 50 55 65 70 70 70

16. The domestic czost of enforced import substitution has been veryhigh for tractors and trucks, though less onerous for the simpler productslike refrigerators and vacuum cleaners.

17. In the vehicle field, further increase of domestic componentnow awaits the introduction of engine and transmission plants. The pointis discussed later in the paragraphs relating specifically to the presentstate of the vehicle industry. (See, in particular, paras. 166-185)

Present Day Capability

18. The present day capability of Turkish engineering will be discussedwith reference to the three main sectors of engineering which can be called:-

- heavy fabrication engineering;- general, or batch production engineering; and- assembly flow line engineering

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Heavy Fabrication Engineering

19. This particular type of engineering has been in operation formany years in Turkey, and both individually and collectively the companiesare capable of manufacturing large and moderately complex items of plant.For example, the Sugar Industry Board Works at Ankara, probably the mostmodern plant in this category in Turkey, has a wide range of very modernequipment and machine tools, handling 10,000 tons of steel per year.

20. Other companies are less sophisticated, but nevertheless pro-duce work to a high standard. Mansur Sahin (2,000 tons) produce overheadcranes and rock crushers with relatively simple equipment, and Sungurlar(6,000 tons) manufacture boilers, including Lloyds Certification of Weld-ing, up to reasonable sizes. In total, there are probably less than10 plants of this size, each producing between 5,000 and 10,000 tonsof steel fabrications per year. These have usually been built over thelast ten years from very modest beginnings witth expansion taking placein small steps.

21. The largest new project, the Sugar Iindustry Board Works, is apublic sector enterprise, as are the fabrication works of M.K.E.K. andthe state railways. The private sector either has installed, or is inthe process of so doing, almost equivalent facilities, and thus a consider-able surplus of capacity now exists, caused partly by the present short-age of steel. Plant utilization averages 40 percent of a single shift,instead of 65 to 70 percent more commonly achieved on such plant. Lackof design and production experience would also limit utilization even ifunlimited supplies of steel became available. Further expansion of thistype of industry should be restricted until a complete inventory and ap-praisal has been made of installed capacity. Particular concern is feltat the authorization of a new project to make paper and pulp mill equip-ment, as many existing but underutilized plants could already do the work.

22. Only a small proportion of the value of this sub-sector needsto be imported - instrumentation, control gear and certain types of tubesare examples - and a domestic content of 90 percent can be achieved, pro-vided that domestic steel is used. The proportion has been at this levelfor several years and is unlikely to change as the technical complexitiesof the imported parts are considerable.

23. Tn t!e last eighteen months the shortage of steel has been themain problem facing this sub-sector. Today, eight to nine months deliverydelay is regularly experienced. The Eregli steel works are now askingfor one year forward order accompanied by a ten percent deposit, and theKarabuk steel works are adopting the same attil:ude. Some steel is beingimported, but supplies are very limited, and cash deposits have to be laiddown well in advance.

24. The shortage of some light steel sections has caused Mansur Sahinto order a new six-Metre Brake Press to make up these sections from steelplate - which is in slightly better supply -- and they Lope to offset the

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additional cost of fabricated sections by design refinement to reducescantlings to the minimum. This aptly illustrates the practical diffi-culties imposed by quantitative control systems.

25. The second main problem faced by the sub-sector is the limita-tion imposed by lack of design capability or experience, an important as-pect of this category of engineering. At present, most products are eithermade under license, or are overt copies of existing plant manufactured else-where.

26. The original design capability of each company visited was restrictedto one or tzo qualified - but inexperienced - engineers, although most hadseveral detail draughtsmen and could produce reasonably comprehensive draw-ings. The Sugar Industry Board Works produces some original designs whichare checked by Foster-Wheeler in England and a similar process is followedelsewhere.

27. Apart from radically new plant, all design work in this field,T*iether in Europe, U.S.A. or elsewhere, is usually based, to a consider-able extent, on previous experience and a certain amount of "rule of thumb"is used. While the new TUMAS Bureau will be of assistance in the basicdesign for process industries, design experience of the detail in, forextample, pressure vessels will take a considerable period to build up.

General, or Small Batch Quantity Engineering

28. This category accounts for the majority of the engineering enter-prises in Turkey, and the plants have grown up from the earlier stages ofmaking items individually to making a small quantity of identical goods atthe same time. This would typically be the situation in a general machineFhop, or in a small assembly factory with a wide range of products. A smallselection of importani: products are discussed below.

29. Machine Tools. An important step towards technical self-suffi-ciency is the manufacture of machine tools as the skills and technologyrequired are of a high order. Several companies are now engaged in thiswork under license. En the private sector, TESZAN is a typical example,and in the public sector M.K.E.K. manufactures small lathes, drills and;.ling machines. Since the private sector machines are technically as

advanced as those from M.K.E.K., the reason for the latter's interest inthis line of manufacture is not clear. Castings for machine tools areparticularly important and these can now be produced satisfactorily locally.Gears, shafts and control equipment are imported from the licensors, andabout 55 percent domestic component is achieved.

30. Small Tools. Widely needed by engineering companies, small metalcutting tools are made by several companies including Makina Takim nearIstanbul. In the public sector, the Turkish state railways also make smalltools. :n this case, the private sector is considerably more competent,having more modern plant and a small export business to Germany and theU.S.A. Once again, there seems no justification for competition between

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public and private sectors and the state railways facility seems partic-ularly inappropriate, a result of uncoordinated development of industry.

31. At present, tool steel (70 percent of the cost of a small tool)has to be imported.

32. Small Diesel Engines. Yet another developing industry is themanufacture of small internal combustion engines for irrigation pumps,generators and small agricultural equipment, all of great imporl:ance forthe development of Turkey. PANCAR MOTOR in Istanbul make 30 diesel en-gines a day of six or nine HP capacity with 65 percent domestic component.Total annual production was 5500, out of a capacity stated to be 7500.The company also manufactures centrifugal and deep well pumps and 90 per-cent of engines produced are sold as a unit, complete with pump and mo-bile carriers. It is self-contained, with its own foundry and has plansto expand production to include a 25 HP model and to raise domestic con-tent to 83 percent by purchasing crankshafts and camshafts from CELIKMONTAJ who plan to make similar parts for their own motorcycle. Thisis an interesting and encouraging venture by two companies with noother links, apart from both receiving finance from the T.S.K.B. Whenin full production, Pancar plan to make 10,000 small and 4,000 :Largeengines per year.

33. Development in the manufacture of this type of equipment hasbeen well ordered, and the two or three plants are sufficient for thepresent needs. The tendency in developing countries to have a wide va-riety of companies in the field has been avoided.

Flow Production

34. The major users of this technique are the manufacturers ofdomestic household goods (refrigerators, washing machines) and the ve-hicle industry. These are now discussed in turn.

35. Refrigerators and Washing Machines. Two of the principal compa-nies in this field are Arcelik and Profilo who both make a wide range ofproducts and employ, respectively, 2,200 and 1,700 workers. In the caseof refrigerators, 85 to 90 percent domestic content is being attained,the imported parts being those where special materials are required.Arcelik make 100,000 per year and Profilo 50,000 per year. Botlh companieshave had some success with exports of refrigerators, Arcelik selling 9,000this year to Tunisia, Iran and Pakistan, while Profilo also selL to Iraqand to Lebanon.

36. There are several other, smaller, companies in the same fieldproducing similar items on a hand-made basis. The allocation of foreignexchange for the import of parts for these urLits could be considered asan unjustified effort to keep economically non-viable plants in operation.

37. The Vehicle Industry. There are at: present some 18 companiesengaged in production of motor vehicles as shown in the table on the next

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page. One of these - Leyland - is expected to withdraw shortly and oneother company - Willys Overland - recently ceased production. It is under-stood that neither of these companies wished to invest in the plant neededto meet the increase in domestic content required by law. This number ofcompanies is excessive, and development of the industry has been poorlycontrolled.

38. Trucks are made by six of the companies. So far, only four,five and seven ton capacities have been made, but B.M.C. intend to producea 14-ton model, with forward control, shortly. Axle load limitations toeight tons restrict the development of two axle lorries further, and noplans seem to exist to introduce three or four axle models as would beneeded to go up to limits used in European standards for long distancehaulage. Domestic prices are very high by European standards, reflectingthe uneconomic scale of output and high prices of material. The highprices, and credit restIictions, have caused a severe slowing down ofsales. Most companies have surplus stocks at present and have reducedstaff. The exception is B.M.C., whose vehicle, cheapest of the local manu-facture, is selling reasonably well. It also has the highest proportionof domestic content at 65 percent, as the engine block is made in Turkey.Elsewhere, domestic content is 50 to 60 percent; engines, transmissionsand electrics are imported.

39. Passenger cars are, as yet, only made by Otosan, who produce thefibreglass-bodied ANADOL to a British design with Ford engine and powertrain. There were 3,700 cars produced last year of the basic two-doormodel and the company plans to expand production to 12,000 or 15,000 peryear, with five models - two-door, four-door, deluxe automatic, stationwagon and pick-up truck. Prototypes of these have all been completed, anda stylist is now working on a two-seater coupe version.

40. Two large new passenger car plants are being built to produce,respectively, the FIAT 124 and the new RENAULT 12L. Both expect to reachan output of 20,000 with a domestic content of 85 percent over a periodof five years.

41. Tractors are assembled by six manufacturers, the largest beingUZEL who assemble Massey Ferguson Tractors at about 7,000 per year. Amajor project is under discussion to build a new Massey Ferguson plant toproduce 20,000 tractors annually. Turk Traktor, in which FIAT holds amajor interest, also wish to expand to 10,000 tractors in the futureand SPO expect that the other manufacturers would then withdraw.

42. Domestic content for tractors averages 55 percent, except forB.M.C. who have achieved 62 percent, again by manufacturing the cylinderblock. Once again, imported parts are engines, transmissions and suchsimple electrics as are required.

THE VTEHICvLE I T'dljT'~Y

Vehicle Type and Ar'm- ait Z.ir. .ut 0ut,p,t /1

(Unit2X'/Y ar)

Co.anv and Associate Tru4ks r Bunses 4L%i s Passnger Tractors Others7 ton 3ton

Chrysler ( Chrysler, U.S.A.) 21400 100Genoto (Bedford, U.K.) 1CCOCtossn (Ford, U.K.) 2000 2000 14o0oT.O.E. (International 15C'0 300 4oo

Hai-.rester & McCormick)B.1V.C. (B.L.:i.C. u.;.) 14000 1000'. !.. (Ger2any) 400U-,~>< \i(G e rZ.' n) 300C?Ci:3. - .22;iz (?ercedes, -errnary) 300CELI1K :.owNL'AJ (Skoda, Ja.na, m/cycle

Czechoslovakie) 2500 13000

UZEL (:Kassey Ferguson U.K.) few 7000T.ark' Trlrktor (Fiat, Italy) 14000T.Z.D.i. . (Fordson, U.K.) 3000TOFAS (Fiat, Italy) start/70=E;XATULT (France) start/71AR0ELIK (LTaibretta, Italy) 3 wheelers-

.K .Ef.K. (Hanomag7, Germany) 400 1000OTYCL (Fiat, Italy) (trailers and chassis only)

Total 11300 2600 900 2000 4000 15800

/1 output is currently ext+remely variable due to the restricted supply of components.

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43. The principal operating problem faced by the assembly industriestoday is the lengthy delay experienced in establishing letters of creditfor imported parts. Periods up to nine months are now common, and para-doxically, the situation is worse on liberalized list items than on quotaitems.

44. Another problem relates to quality difficulties with local sup-pliers but these are usually overcome in time by large-scale technicalassistance from the licensor's plant until the Turkish supplier has be-come competent in the production of parts to acceptable standards.

C. Recent Investment in Engineering Facilities

45. Investment in the engineering industries was planned to grow fromTL240 million per year during the First Five-Year Plan to an average ofTL662 million during the Second Plan - an increase of 275 percent.

46. In 1968, the most recent year for which full data are available,investment in engineering was planned to be 637 million TL: 103 million TL(16 percent) in the Public Sector, and 534 million TL (84 percent) in thePrivate Sector. In fact, only 400 million TL was invested in total, 77percent of target; Public Sector engineering achieved 95 percent of target,the Private Sector only 74 percent.

47. In 1968, shortage of foreign currency and materials was nota limiting factor to growth, so the shortfall in Private Sector investmentmst have been due to other factors. A sub-sector analysis is shown below:-

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Investment Achievements - 1968

Sector Plan Actual % AchiLevement

Metal Products Public 16.5 10.8 655%Private 189.4 154.0 81%TOTAL 205.9 164.8 30%

Machinery Public 23.2 35.3 1252%Private 183.7 68.0 :37%TOTAL 206.9 103.3 '50%

Agricultural Machinery Public 7.3 2.7 .37%Private 36.4 41.0 113%TOTAL 43.7 43.7 100%

Transport Equipment Public 55.9 49.2 898%(Road, Rail and Sea) Private 124.9 129.0 103%

TOTAL 180.8 178.2 99%

Total Engineering Public 102.9 98.0 '95%Private 534.4 392.0 74%TOTAL 637.3 490.0 77%

All Manufacturing Public 1737.6 1748.2 101%Private 2822.4 2600.0 92%TOTAL 4560.0 4348.2 95%

Note:- Investments in Transport Equipment facilities include sh:ipbuild-ing not separately identified in Turkish Statistics, but whichrepresents perhaps 45% of the total.

48. It will be seen that the Private Sector fell furthest below targetin the machinery sub-sector and that in this same area, public sector in-vestment was over 50 percent higher than target.

49. The best private sector performances were in agricultural mach-inery - mostly tractors - and in the transport equipment industr:Les, whereforeign investment is often involved, and foreign organization and manage-ment more common. In the areas of metal products and machinery - both wellbelow targets in the private sector - Turkish ownership is more common,and thus capital for foreign plant is harder to obtain, and expansion ismuch reduced.

D. Industrial Costs, Prices and Competitiveness

Comparison of Domestic and Imported Prices

50. Costs and prices of some Turkish produced engineering goodswere collected during the field work, in order to evaluate the p'resent

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day competitiveness of the local industry. Domestic ex-works prices werecompared with estimated c.i.f. prices for equivalent imported goods (seetable overleaf).

51. Exact c.i.f. prices were not available as the Turkish producthad invariably been modified in some way, and the current European equiv-alent was not exported to Turkey. The comparison was made both at the oldrate of TL 9 to the US$ and the new rate of TL 15.

52. The comparison at the TL 9 rate shows the domestic industryrequiring a high degree of protection - more than 100 percent insome instances. In the calculation based upon the TL 15 rate domestic priceshave been adjusted to allow for the additional cost of imported inputs atthe new exchange rate. Time did not permit adjustment for the very widerange of existing taxes and duties. The effect could be to make the Turkishfigures even more advantageous than those shown. Even on the present basis,refrigerators, diesel engines, small tools, steelwork, aluminum extrusionsare all competitive, and protection would, in theory, no longer be needed.Pistons would be very competitive. Trucks and tractors would, on theother hand, continue to need protection at a high level. The small centrelathe used as an example for machine tools is also surprisingly expensive.These conclusions would, of course, need to be interpreted with some cautionsince they are very much dependent upon whether (a) the new exchange ratemay be regarded as a true equilibrium rate and (b) whether or not internalfinancial stability can be achieved after the devaluation. Our adjustmentsonly take into account direct effects through the higher cost of importedinputs.

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Comparison of Prices in Domestic Market(All in Turkish Lira)

Pre- PostDevaluation Situation Devaluatioin Situation

Item EstimatedDomestic Estimated Domestic Estimated

Price CIF Price Price CIF Price

Trucks -Ford D 750 82,650 43,000 107,450 71,800-B.M.C. 7 Ton 68,000 36,000 83,600 60,100-Bedford 7 Ton 115,000 42,000 149,500 70,100

Tractors -Fiat 415 41,229 19,000 53,600 31,700-M.F. 45 41,229 21,500 53,600 35,900-Hanomag 600 58,535 27,500 76,100 45,900-Nuffield 65 48,545 301,000 63,100 50,100

Refrigerators -6.5ft3 2,210 1,300 2,360 2,170-8.Oft 3 2,630 1,500 2,810 2,500-10.2ft3 3,050 2,000 3,255 3,340-12,5ft 3,420 2,500 3,650 4,170

Small DieselEngines - 6 HP 5,500 3,500 6,760 5,850

- 9 HP 6,160 4,500 7,580 7,500

Small Centre Lathe - 40 x 100cm 55,000 12,,000 71,500 20,000

Small Twist Drills - per 100 140-200 126--210 205-300 210-250

Steel Fabrications - per ton 10,000 6,000 10,700 10,000

Aluminum Extrusion - per kg. 18-22 12-15 20-24 20-25

Pistons - Willys type 32 18 35 30- Perkins type 51 30 56 50- Skoda type 31 18 34 30

53. Truck and tractor production units are small and uneconomic anddetermined efforts at cost reduction have apparently only been made insome of the plants. For example, the protection needed for the B.M.C.seven ton truck is apparently only 40 percent, probably because it has65 percent domestic component, and the chassis and cab have been rede-signed for local production. On the other hand, the Genoto Bedfcrd Truckwould require over 100 percent, and in this case, no attempt has been madeto redesign the truck to suit local manufacture.

54. Complete cost breakdowns were not available so a detailed anal-ysis could not be made of the exact items which accounted for the highlocal cost. Further investigation is needed on this aspect.

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Export Competitiveness

55. A few light engineering products are now being exported fromTurkey, but the analysis of export competitiveness is not straight-forward, as many political and other factors (such as export encourage-ments) enter the calculations, and exporters are reluctant to discloseactual prices. However, refrigerators are exported more or less success-fully and can be taken as an example. For a model of 10.3 cubic feetcapacity, the domestic market price was given as TL3100 each. The importedcomponents are of the order of TL150 C.I.F. value or TL300 landed afterpayment of duties and other charges. Export encouragements also allowthe rebate of production tax on the domestic value so a comparative costcalculation would be as follows:

10.3ft3 Refrigerator

Act. Turkish Price Est. Export Price

Domestic Components 2800 2500Imported Components 300 150

TOTAL 3100 2650

Equivalent at i:he old Exchange Rate, Say $340 $300

56. The advantage of being allowed free conversion of Turkish Liraup to 15 percent of the export earnings for the purchase of parts orwaterials has not been included. Based upon 15% free exchange and anassumed free rate of 15, this would lower the cost of exported refrigeratorsto about $265.

57. European prices for refrigerators vary widely, and prices arecontinually changing unader the influence of Italian exports and varioussales promotion schemes. An appropriate average would be $230, so theapparent competitive conversion rate would be TL11.5 = $1. Profilo'sowTn estimate was that they would be competitive without export benefitsat TL13.5 $1 US. ReErigerator export should therefore be very profit-b at a rate of TI 15 = $1 US.

58. As regards exports at the old exchange rate, Arcelik saythat their recent order for 4,000 units to Tunisia, against Italian andother refrigerators was won as much on quality as on price. Turkish re-frigerators certainly appear to be of a more robust nature than Europeanones, where price competition has reduced quality standards to a minimum.

59. While it will be many years before some sectors of Turkish engi-neering will become fully competitive, this is by no means the general

"A Thle £:ew Items examined in this section show that at a realisticexclhange rate, some products could be competitively produced today.

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II. AVAILABILITY AND COST OF INTPUTS

A. Raw MIaterials

Steel

60. At present there are only two fully integrated steel mills inTurkey, one at Karabuk, and one at Eregli. Small establishments such as

.K.E.K. at Kirikkale and some private sector companies also produce steel,generally from scrap. The combined capacity of all these plants is con-siderably less than demand, and a start has nowq been made on a third steelmill at Iskenderun. Until the latter is in operation,. and Eregli has beenfurther extended, considerable quantities of steel will have to be imported.

Iron and Steel Consumption(Million TL)

1967 1968 1969 1970

Production 3360 3570 3910 4280Imports 311 305 450 605

Consumption 3671 3825 4360 4885

61. The low level of present steel imports, resulting from the short-age of foreign. currency is severely limiting the engineering industry atpresent.

62. Tturkish domestic prices were considerably above current worldprices (at TL 9 = US$ 1), and a well established black market existed.Prices for two typical mild steel sections are compared in the table below:-

Price-Lira per KilogramLight Steel Sections Angle Section Channel Section

TURKISHI PRICE - EX MILL 2.10 2.20- STOCKIST 2.50 2.60

Stockist Margin % 1'3% 18%- BLACK MARKET 3.30 4.50

EUROPEAN PRICE -(9 TL = $1 - EX MILL 1.25 1.19

- STOCKIST 1.40 1.34Stockist Margin % 12% 12-1/2%

(15 TL = $1) - EX MILL 2.15 2.05(Neglecting any importedinput to domestic steel)

- STOCKIST 2.40 2.30

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63. Local prices, well out of line at the old exchange rates, arebetter placed at the nesw rate of 15 TL = $1. The margin between ex-milland stockist prices is higher in Turkey, reflecting the high average transportcost between the mills and the major consuming centers.

Castings

64. While steel is only cast in a few places in Turkey, iron is castin many specialist foundries, some modern and up-to-date, others smallerand old fashioned. Grey, nodular, malleable and meehanite irons are allproduced. In addition to specialist foundries, several machinery manufac-turers have their own 'Eoundries for their own products.

65. To supply parts for the growing vehicle industry, Turk DemirDokum San have a large expansion project, now suspended, for 30,000 tonsper year. The original plan was for 15,000 tons but the project was in-creased to 30,000 tons at SPO request, as part of the latter's "large in-dustry" policy. However, in this case, the policy would, if implemented,lead to excess capacity.

66. Non-availability of pig iron, and poor quality of coke in theolder fashioned foundries still using this material, are the main problemsfacing the private foundries. M.K.E.K. in the public sector, do not sufferthe shortage of pig iron so acutely, so some preferential treatment appearsto exist. The private sector have to import at world prices, and T.D.D.K.made a considerable loss on an export order to France for this reason.

Steel Forgings

67. Small hand forges have been in existence in Turkey for manyyears, but in the last ten years a number of more sophisticated plantshave come into operation. In 1968, there were five public sector andfour private sector companies producing between them 45,000 tons per yearof relatively simple components. The growing ve'hicle industry is demand-ing more sophisticated forgings, and two large forging plants with modernequipment are in construction:

Parsan - 9,000 Tons/yearOmtas - 5,000 Tons/year

68. The first of these two projects is examined in detail in AppendixII. As shown in that appendix, the market for vehicle forgings is expandingrapidly to an estimated 17,000 tons by 1972, so on this basis there is roomfor both, and in fact, their intended products do not overlap. A point forconcern is that neither company has any knowledge of forging, and consider--able technical assistance from West and East Germany respectively will beneeded.

69. At the new rate of 15 TL = $1 US the cost of domestically producedforgings would be roughly competitive with C.I.F. import prices, and Appendix-II also shows that the economics of the Parsan Project should be highlyfavorable.

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B. 14anpower

Availability

70. In view of the very rapid growth of the sector recently, thereis an acute shortage of skilled workers. Semi-skilled workers and laborersare generally available. The shortage of skilled labor has led to the usualconsequences - rising labor costs, assisted by union pressure, and high turn-over, particularly in Istanbul, where 25 percent to 30 percent was commonlyreported. Absenteeism is also high, particularly in the more rural areaswhere the discipline imposed by a regular work schedule is unfamiliar.

W4age Costs

71. While wage costs are still not high by European standards, a rapidincrease is taking place, and moreover, the employer has also to pay a con-siderable sum in various allowances over and above the basic wage. TheTurkish State Railway Workshop costs at Eskisehir, as an example, are:-

Lira per $ per hour $ per hourTypical Wage Costs hour 9 TL = $1 15 TL = $1

1. Wages 3.78 0.42 0.252. W4orker Costs - allowances for

children, birth, death, andseverance pay. Social In- 5.88 0.65 0.39surance, overtime and food

TOTAL 9.66 1.07 0.64

72. The cost of one hour of direct labor is thus very low by WestEuropean standards, although the cost per machine hour is less advantageousat 18.51 lire in the above example. While the analysis is for a state-ownedenterprise, the basic figures hold for the private sector as well.

Productivity

73. Detailed measurements of labor productivity were not made, butassessments were made during the visits to factories and some interestingpoints emerge. Labor effort rating was - as is common - high in the motorindustry and B.M.C. at Izmir was well up to standard. Other private sectorcompanies appeared to average between 70 percent and 80 percent of standard.

74. The picture was very different in the public sector companies.A high degree of overmanning was apparent, and numbers of workers appearedto be without immediate tasks. Those actually working were rarely seen tobe achieving 60 percent of what might be expected.

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Training

75. While most companies visited claimed to be carrying out someform of training, it appeared to be formally recognized in only a few ofthe larger ones. Among these, Arcelik have a three-year apprenticeshipfor boys and several state companies also have apprentice schools. Adulttraining is also catered for and several companies have a six-month prac-tical course, usually directed at one specific skill such as welding,paint spraying, etc. Little governmental assistance seems to be forth-coming for this activity, and a more direct form of encouragement wouldbe advantageous.

76. A widespread opinion in Turkey, even in parts of the SPO, is thatmany of the 300,000 workers now abroad are receiving training. This doesnot appear to be accurate, on the basis of the figures for those employedin Germany (94 percent of those who left in 1969 went to Germany). InJanuary 1970, only 20,800 (7-1/2 percent) were in machinery production and25,100 (9 percent) were in automobile manufacture according to statisticssupplied to mission members. Fortythree percent of Turkish workers inGermany were classified as unskilled, together with 38 percent semi-skilled.Sixteen percent only were fully skilled and thus the proportion of skilledworkers among those returning to Turkey cannot be very high.

77. Only one of the 30 companies visited employed any number ofworkers who had been in Germany. Others had offered employment but thelow wages - albeit with a lower cost of living - did not attract the work-ers to Turkish industry and it is thought that many of the workers returnto their villages to become taxi-drivers or small entrepreneurs.

78. Training, therefore, must be a long-term continuing commitmentfor the industry and many small projects are in hand with I.L.O. or otherassistance. Those involved in the projects often get severely frustrated,and it is apparent that new methods do not come very easily to Turkishworkers, although the reasons for this are unknown.

Labor Unions

79. A recent development in Turkish industry has been the growth oflabor unions since 1960. There are now a considerable number of theseunions, but as they operate on a plant rather than a trade basis, inter-union rivalry is not common. On the other hand, the union movement hasbeen increasing in militancy, and a recent round of negotiations with em-ployers for new wages and benefits was accompanied by a series of labordisputes of varying gravity. Turkish management is inexperienced and ill-equipped to deal with this activity. Many companies devote little or notime to labor relations and rarely, if ever, employ personnel or labordepartments. Some technical assistance would seem to be necessary on thisaspect.

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C. Managament and Entrepreneurship

80. Many private sector engineering companies have now reached asize and complexity where the original entrepreneur, unless exceptionallytalented, is unable to exercise minute by minute control of every aspect.This development has created the need for professional management, andwith it the need for the original owner to delegate responsibility anddecision-making to the managers. As experienced managers are scarce, theen.repreneur is reluctant to delegate authority to inexperienced staff.Production is therefore limited to one shift per day (instead of the twoor three shifts usual to keep expensive plant in full operation) so thata degree of personal supervision can be carried out.

81. Public sector companies have, in fact, developed a middle manage-ment which is given a fairly free hand as t:op management changes frequently.Management training at all levels and partiLcularly at the upper levels,is urgently needed in both public and private sectors. Various shortcourses are available to industrialists, rtn by Chambers of Industry, theTurkish Management Association, and firms of consultants. The courses,however, are restricted to a few weeks at most - many are for only a fewdays - and they can thus only touch on the fringe of modern managementmethods, and will be regarded by attendants as a pleasant diversion.

82. The I.L.O. support many of these courses through the TurkishManagement Association, and supply experts in many fields, wh,o can givemore lengthy attention to various difficulties, but again, can only dealwith a fraction of the problem. The Turkish economy should make moreuse of overseas training for its managers, and should also accept the useof foreigners in certain positions to give continuous guidance over a pe-riod of time to Turkish colleagues before handing control over to them.Turkey will have to learn to accept this form of "import" because of itscontribution to productivity and growth.

D. Industrial and Technical Experience

83. One of the principal problems facing the industry is the short-age of Turkish technical skill, experience and know-how. Thet need is feltin design, detail drawing, engineering, production and other areas. ADesign Consultancy Bureau called TUMAS has recently been creELted with theencouragement of SPO and consists of a consortia of the Danish design con-sultants, TOPSOE with the State-owned Nitrogen and Petroleum Companies andthe Sugar Board. TUMAS would now seem to be specializing in the design ofprocess plant, but can doubtless expand into other fields as experienceis gained and the staff builds up. The usual problems of such consortiaare the attraction of suitably qualified staff, and the diffiLculty of work-ing for separate industrial clients who may be in competition, or have dif-ferent license or commercial agreements.

84. Design capability will, therefore, also be needed :Ln the industryitself - particularly in the heavy machinery sector. Since l:he supply ofqualifie(I engineers will not be sufficient, Turkish industry will be de-pendent on foreign assistance, license agreements, and staff transfer for

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a considerable time.

85. A more vital need is for Turkish production engineers to devisemanufacturing methods, and to design jigs, tools and fixtures for the in-creasing productive capacity becoming available. I.L.0. and various otherorganizations are assisting where possible, but the need is for continuousattention to prevent the current habit of reversion to old methods afterimproved techniques have been introduced. A production engineering consul-tancy bureau concerned with manufacturing plant and methods in the engineer-ing industry should be set up with outside assistance. The possibilityexists (and requires careful exploration) of making the acceptance ofB3ureau methods mandatory when import licenses for sophisticated machinetools are considered.

E. Finance

36. Until recently, local sources have been able to meet financingneeds for buildings and working capital whilst foreign financial assistancehas been available for .he purchase of plant and materials overseas. How-ever, at present both these sources of finance are extremely short, andgreater recourse is now being made to local Banks for loans and other assist-ance.

The Turkish Industrial Development Bank (TSKB)

37. The Bank was formed in 1950 in Istanbful, and is one of the mainsources of finance for the Private Sector, supplying, under suitable cir-cumstances, foreign currency for capital investment, or sometimes takingan equity interest in companies. Finance for working capital is not gen-erally provided. In the engineering industries, TSKB have assisted to agreater or lesser extent, 50 companies.

TSB Project Assistance by Sector

Sector No. of Total Investment ForeignCompanies (Million TL) Currency

Million $

Metal Products 38 718.00 24.29Machinery 10 319.00 8.70Vehicles 2 62.00 2.40

TOTAL 50 1099.00 35.39

Geographically, 85 percent of these companies have been in the Istanbularea. TSKB should reexamine their policy to see if their assistance fordeveloping other areas could not be increased.

88. Projects put to the Bank for assistance are evaluated from thepoint of view of economnic viability and the degree of protection needed

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above a rate of $1 = 15 TL. From time to time, TSKB have had 1:o ask thatprojects given a Certificate of Encouragement by SPO be revised . This usuallyleads to three-cornered negotiations between the entrepreneur, TSKB and theSPO.

The State Investment Bank

89. The Bank was established in 1964 to provide financial assistanceto the State Economic Enterprises and other public sector companies. In1968, the SIB approved 92 projects involving a total investmenl: of 14,131million TL for which credits were extended for 1481 million TL. Only fivepercent of these credits appear to have been related to engineering.

SIB Projects in Engineering (1968)

Sector No. of Investment Credit % of TotalPro; ects (MTL) (MTL) Credits

Metal Products 1 70.4 12.6 0.8Machinery 1 183.4 20.7 1.5Transport Equipment 3 185.2 37.8 2.7

TOTAL 5 439.0 71.1 5.0%

90. Projects are submitted to SIB for evaluation after approval bySPO. In SIB project evaluation, economic justification appeared to playa secondary role. Investment budgets for the public sector are approvedat annual meetings at ministerial levels with SPO and SIB participation.Once approved, loans are made for 12 to 25 years, according to industry,at interest rates before devaluation between 6-1/2 percent and 8 percentdependent on ability to repay.

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111. INSTITUTIONAL FRAM1EWORK

91. Turkish industry operates today in an environment of institutionalguidance, regulation and control, and the purpose of this section is to re-view a number of these from the particular point of view of the effect thatthey have on the engineering industry in both the public and private sectors.

A. Major Institutions

The State Planning, Organization

92. The SPO was established in 1960 and is responsible for the pre-paration of five-yearly and yearly plans, and then guides and encouragesindustries in the required developments. The SPO affects the developmentof the private sector tlhrough variotus instruments of control. The effectof the SPO on engineering, is particularly felt on the establishment of newprojects, through its planning, investment criteria and investment incentives(see paras. 114-122).

The Ministry of In_ustry

93. In the context of the engineering industries, the Ministry isconcerned only with state economic enterprises and other public sectorcompanies. As previouslsy mentioned the Ministry participates in annualmeetings to agree on public sector investment targets; but apart from thisappears to exercise little influence on the day-to-day operations of - forexample - M.K.E.K. Like SPO, the degree to which ministerial guidanceis possible, or acceptable, to public sector companies depends on thepersonality of the managing director. However, political pressures can,and are, applied from time to time, and the latest managing director ofM.K.E.1K. was transferred from the Ministry itself, and such changes at toplevel are not uncommon, The practice, however, has lead in the past tolack of continuity, and insufficient guidance to managerial level employees.

Chambers of Industry

94. Each major center in Turkey has a Chamber of Industry to whichall private sector companies, by law, are affiliated. The chambers them-selves are united with the Chambers of Commerce into a central organiza-tion in Ankara called the Union of Chambers of Commerce and Industry, butthis is not a governin,g body and serves only to coordinate activities.

95. The activities of Chambers can include:-

(i) the allocation of quota list import currency amongmembers as describ'ed in the next section;

(ii) the solution of industrial problems, and representa-tion to the state on matters of immediate concern;

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(iii) the collection of statistics, although no attempt ismade to collate these nationally;

(iv) acting as a "talking shop" for mutual assistance; and

(v) organizing and encouraging training for management andworkers.

96. The effectiveness with which Chambers carry out these activitiesvaries greatly from city to city, and greater direction and guidance fromthe central body would be beneficial. It should also be noted that cham-bers are currently prohibited by law from acting in concert against laborunions and thus they cannot contribute to the stabilization of wage rates.Whilst this is a highly political problem, some' changes could, with advan-tage, be introduced. The Chambers themselves should be given a more posi-tive role in the context of industrial cooperation; this point is developedin Section 6.

B. Import Regime

97. The current import regime imposes two constraints on the engineer-ing indtustry. First, there is absolute control over the type and quantityof goods to be imported, and secondly, there is a complex tariff structurefor imports wfhen and if approved.

Import Controls

98. The importation of products or materials is generally prohibited.The government publishes detailed lists of permitted imports, thus con-trolling by exception all items. The exceptions are grouped as follows:-

(a) a liberal list of those items which may be importedsubject only to tariff and letter of credit formalities.Spare parts for machinery, some food processing equipmenat,ball bearings and motor vehicle spares are typicalengineering items on the liberalized list;

(b) a half-yearly quota list of products wqhose importationis perinitted up to a defined value for the six months.Currency available is divided between, industrialistsand importers, and Chambers of Industry allocate thecurrency to their members. Virtually all otheren}1ineering items appear on this list. Small pistonengines andI electrical motors are exceptions, theseiterms bcing ahsolutely prohibited to assist localindustry:

(c) a Bilateral Agreement Country list, referring toimports from countries with a Central Bank clearingarrangement with Turkcey. These countries are generally

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those referred to as the "Pastern Bloc", and partsfor assembly of Skoda vehicles are typical examplesof this type of goods, which are freely availableat present; and

(d) a number of categories of goods or end users whereforeign interests in onfe form or another are providingthe foreign currency. The group includes:- projectcredits, foreign direct investment, waiver imports andNATO infrastructure.

Import Tariffs

99. In the engineering sector, customs import tariffs vary widelyand can be adjusted within limits by SPO to suit particular circumstancesof projects. The general external tariff varies from five percent to 75percent in the engineering sub-sectors. The application of the varioustariff rates to a large range of typical engineering products is shownin Appendix VI. G.A.T.T. tariffs are different in amount and applicationand changes are expected from the IKennedy Round of talks.

100. In addition t:o the customs duty, various other charges are pay-able by importers:- 1/

(a) Municipality Tax, payable at 15 percent of the customsduty;

(b) Wharf Duty, at a rate of five percent of C.I.F. pluscustoms plus municipality tax;

(c) Production or Expenditure Tax, at a rate variablefrom 10 percent to 25 percent of the landed value -i.e., including the preceeding two itemis and thecustoms duty. The same tax applies to local industrybut at ex-works prices, and the effect is thereforemuch less; and

(d) Stamp Duty, payable at 25 percent of C.I.F. value.

101. The effect of these combined duties and charges frequently doubleC.I.F. values to importers as can be seen in the table below.

1/ The description refers to the situation preceding the August 1970devaluation, whicht remains substantially unchanged, apart from areduction of 10% in Stamp Duty.

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Total

Production LandedTypical Item C.I.F. Customs Municipal Ware- W4harf Tax Stamp Cost toin Category Value Duty Tax Housing Duty Rate Amount Duty Importers

AgriculturalSoil Prepara-tion Machinery 100 25.00 3.75 3.00 6.49 10 13.62 25.00 177.86

Leather Work-ing Machinery 100 30.00 4.50 3.00 6.78 10 14.23, 25.00 184.51

Stone WorkingIMachinery 100 40.00 6.00 3.00 7.35 10 15.44 25.00 197.79

Cranes 100 50.00 7.50 3.00 7.92 10 16.64 25.00 211.06Refrigerators 100 60.00 9.00 3.00 8.50 10 17.85 25.00 224.35

102. In addition to the various charges described, private industryhas to pay a deposit to the Central Bank when applying for an import license.The public sector is exempt from this procedure. The rate demanded is 20percent or 50 percent for the two quota lists and 90 or 120 percent for the lib-eralized list. The cost to the importer of this deposit is hard to calculateaccurately as it varies according to his particular circumstances at thetime, but as the deposit was retained for as much as eight or ninte monthsprior to December 1970, owing to delavs in granting letters of credit, aconsiderable financial expense was incurred.

Effect of Import Regime

103. The import regime described has a severely restrictive effecton industrial development. New plant and, more importantly, spare partsfor existing plant, is greatly delayed and industrialists cannot findfinance for sufficient work in progress as funds are tied up for lengthyperiods while the import licenses and letters of credit are being processedor are on the waiting list.

104. The high de-ree of protection - including prohibition of competi-tive imports - has perpetuated inefficient units. Domestic selling priceshave usually been set at: the equivalent duty paid landed price, and haveeven risen above that level.

C. Export Fncourag>ei;ernts

105. The encouragement and promotion of exports takes three forms;a tax refund scheme, an export credlit scheme, and an arrangement wherebypart of the foreign exchange earned can be bought by the exporter to pur-chase foreign goods or materials. The tax refunds are granted ona produc-tion taxes, customs duties and municipal taxes, up to the full amount.

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As with the investment encouragements, it is the SPO who give approval forsuch reliefs and this has caused some difficulty with the Customs Depart-ment.

106. The Export Credit scheme allows medium- and long-term creditsto be obtained at six percent and such credits are exemilpted from banlcing,insurance and stamp duties and taxes. The tax exemption also applies ifcredit is obtained from other sources.

107. The availability of part of the foreign exchange earned to theexporter is the most popular measure from the point of view of the privatesector. Up to 50 percent of export receipts can be allowed, but this isnegotiable and usual percentages range from 20 percent to 35 percent. Themeasure was originally intended to allow for the purchase of foreign mate-rial for re-export and a deposit of 10 percent of the foreign currency al-lowed had to be made in Turkish lira. This has now been modified. Up to15 percent of the foreign exchange earnings can be used to obtain maclhineryparts, etc., the balance up to the agreed proportions being for materials.

108. The effect of these incentives has been good, and many industrial-ists are now expressing interest in exports. Few, however, know how to goabout finding markets, and considerably more help is needed from the govern-ment for this purpose. Export promotion offices should be set up to examinelikely markets, find purchasers and assist exporters with formalities.Further reference is made to this aspect in Chapter VI.

D. The Planning and Promotion of New Projects

Project Identification

109. New projects can come from either of two sources:-

(a) the research group of the SPO, essentially for newventures; and

(b) public and private sector enterprises, generallyfor expansion.

110. The SPO identify gaps and needs in industrial sectors, and fromtime to time commission feasibility studies to examine possibilities ingreater detail. The policy used by SPO in the promotion and selection ofprojects is described below (paras 114-122). Once approved, projects aregiven a Certificate of Encouragement and periodic checks on progress aremade from time to time.

111. SPO has devoted considerable energy towards developing a longlist of projects in various sectors, and no less than 36 new projects arein hand in the engineering sub-sectors. Basic details of these are givenin the table below and it will be seen that heavy emphasis has been givento the road vehicle sector and supporting industries. The effect of thisis discussed in Chapter V of the report.

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On-Going Major Engineering Investment Projects(All Granted SPF Approval)

Prodluction Total ForeignStart Investment: Currency

Company Products Date 'Million TI, Million $

1. Perlins Diesel Engines 1972 166.2 14.922. Pancar Motor Small I.C. Engines 1972 12.5 0.663. Motor Sanayi Small I.C. Engines 1972 11.0 0.334. Celik >[ontaj Motorcycle Engines 1972 19.8 1.505. Demir Dolaim I Cylinder Blocks 1973 143.5 4.506. Debak Cylinder Liners 1971 21.6 1.237. Istanbul Mahle Pistons 1972 22.0 0.948. Illali Tezlilas Pistons 1971 13.1 0.589. Robert Bosch Nozzles 1973 33.3 1.451C. Dizelsan Nozzles 1972 8.9 0.3911. Segman San Piston Rings 1972 18.0 0.9512. Parsan 'No. 1 Forgings 1971 18.7 1.2313. Oimtas Forgings 1971 17.3 0.9314. Parsan No. 2 Forgings 1974 78.7 5.0315. ER-WE-PA Paper Machinery 1972 25.5 1.1316. Tezsan Mlachine Tools 1973 29.2 1.6417. Isik Koll St Plant & Fabrications 1971 10.1 0.5118. Rona Malkina Plant & Fabrications 1971 20.0 0.9419. Atlas Copco Air Compressors 1970 5.0 0.6720. Borg Warner Pumps 1971 26.0 0.8321. ilabas Pressure Vessels 1971 6.6 0.9422. Telfen Pressure Vessels 1971 8.6 0.3923. Massey-Ferguson Tractors 1972 143.6 10.6024. Tofas-Fiat Automobiles 1970 232.8 14.2025. Renault Automobiles 1972 298.0 14.5026. Maysan Shock Absorbers 1972 5.0 0.3927. Eaton,Yale,Towne Transmissions 1972 102.6 8.4028. Yilmaz Aksan Transmissions 1973 52.3 2.4429. Magneti Miarelli Auto Electrics 1971 45.0 2.4530. IMe' Makina Lifts & Pumps 1971 5.5 0.1631. Gucum Tikaret Nuts & Bolts 1971 32.0 1.5632. Kale 'Malina Dies 1970 3.6 0.1433. ECA (I) Pressure Reducers 1971 3.7 0.2334. ECA (II) Die Castings 1971 6.8 0.3535. Nlegatekniks Clocks 1972 5.4 0.2136. Demair Kokum II Radiators (CI) 1971 12.8 0.69

36 Projects TOTAIL Million TL Million $1664.7 98.01

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Investment Encouragements

112. These take two forms, an investment allowance and a customs dutyreduction or exemption on imported investnent goods.

113. The investment allowance gives exemption from tax on profitsuntil a percentage of the fixed capital has been returned. In orderto encourage the private sector to expand, it was set at quite high pro-portions under Law 933 (Execution of the Second Five-Year Plan). Unfor-tunately, the provisions authorizing these allowances were rejected by theIligh Court as unconstitutional, and expansion has been restricted as aresult.

114. For the present, the proportions have reverted to the old level:-

- generally, 30 percent of capital;

- underdeveloped areas, 50 percent of capital

When the difficulty with Law 933 has been resolved, the investment allowv-ance will attract and benefit industrialists. Howqever, even stronger in-centives would be needed to persuade the engineering industry to move intoundeveloped areas. Until considerable infrastructural development hasbeen put in hand, such moves would, in any case, have doubtful economicjustifications.

Priorities and Investment Criteria

115. SPO in their search for suitable new projects, has adopted avariety of priorities and investment criteria. Originally, their policywas for import substituation at almost any cost. In addition, progressiveincreases in the proportions of domestic content were established by lawfor certain industries. This concept has frequently resulted in an exces-sive increase in domestic costs as the small units created were not com-mercially viable without high prices; in fact, at times the domestic costswere higher than the costs of components imported from Europe on wqhichheavy duties had been paid.

116. SPO have now adopted a new policy related to "Optimum Size"which is being applied rigorously regardless of the domestic market ca-pacity for absorbing the products. Originally intended to reduce domesticcosts, thie policy is now being claimed as an attempt to force entrepren-eurs to export part of their production. For example, SPO encourages thesenew ventures which have cooperation agreements with overseas interests toinclude agreed export territories for, the Turkish licensee - particularlyfor R.C.D. and Eastern Mediterranean cotntries.

117. A development: of this procedure has been to persuade the foreigninterests to take some of the manufactured products in place of the rmTis-sion of profits. This is in line with sinilar thinking in othier developing

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countries. As an example, Massey Ferguson tractor plants in various coun-tries regularly send components to other plants, and the company may do thesame with the Turkish operation. The ER-WE-PA project for making paper,pulp and plastic machiinery, with 51 percent German interest, intends toexport 125 TL of local content for every 100 TL profit made in Turkey.

118. Some foreign participants in projects are, however, unlikelyto consider such arrangements, at least until their Turkish factory isestablished. Several large projects are held up as a result:-

Perkins - Diesel Engineslassey Ferguson - TractorsEaton-Yale-Towne - Gears

The delay in these projects severely affects a number of Turkish-.ownedfeeder industry projects, such as the Parsan and Omtas Forging Factoriesand the Turk Demir Dokum Engine Casting Project, all of which may easilyfind themselves without customers if the main projects delay further.The motor vehicle and tractor industries will be discussed further inChapter V of the report.

119. Within the broad strategy described, SPO try to apply a complexvariety of criteria such as:-

Foreign Currency SavingEmployment OfferedRelevance to the Five-Year PlanUse of new technology and processesDomestic cost of foreign exchange savingsPay Back Period

There appears to be no set of rules for guidance on priorities oni thismatter.

120. The use of such a complex set of criteria has proved to be aoreat weakness. It has create(I uncertainties within the staff and hasallowed subjective decision making - which itself has left SPO vulnerableto political pressures. The replacement of the present criteria by re-latively simple standards is recommended in Chapter VI.

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E. Industrial Cooperation

121. Cooperation between engineering enterprises in Turkey hardlyexists, and indeed the traditional approach has been somewhat in a reversesense - firms have tended to pride themselves on their independence evento the extent of unnecessarily duplicating production facilities. TheChambers of Industry, described previously, include industries other thanengineering and they are concerned more with presenting a united front tooutside governmental pressures than with acting as an organization formutual self-help.

122. A number of attempts are being made, under SPO sponsorship, atstandardization and dissemination of technology, but so far results havebeen disappointing. A few examples were noted where companies were assist-ing each other with machine shop and toolroom facilities, but no centralregister of available capacity is kept. Rationalization of facilities isnot thought of, and mergers between companies is legally difficult. Thereis, therefore, a clear need for some form of central guidance and promotionof restructuring through an Association of Engineering Industries, preferablyassociated with the Chambers of Industry.

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IV. SUB-SECTOR PROSPECTS AND TARGETS

A. Domestic Demand for Engineering Products

123. Consumption of engineering products has been severely curtailedin recent years by the low output of the domestic producers and restrictionof imports due to shortage of foreign currency., Since this has been thecase, demand is no doubt higher than indicated by the actual consumptionfigures, but the difference is very hard to evaluate. Accordingly, theword "consumption" is used throughout this section.

Current Consumption

124. The present consumption, and growth rates for the five engineeringsub-sectors, are showm in the table below:-

Consumption of Engineering Products(Mlillion TL)

Annual Consumpti.on Growth RatesPlan

Category 1968 1969 1970 1968/69 1969/70

Metal Products 2,583.7 2,927.0 3,178.0 13.3% 8.6%Machinery 3,203.8 3,424.1 3,,767.2 6.9% 10.0%Agricultural Machinery 807,6 1,212.1 1,423.9 50.1% 17.5%Road Vehicles 2,499.0 3,021.2 3,516.5 20.9% 16.4%Rail Velhicles 275.7 389.8 420.9 41.4% 8.0%

125. The more spectacular consumption increases in 1969 in the sectorsof agricultural machinery and road vehicles are expected to drop radicallyin 1970 owTing to the low allocation of foreign currency to purchase partsfor the assembly of tractors, trucks, cars and coaches.

126. The rate of growth in consumption of metal products is :Likewiseexpected to decrease due to lower growth rates in the production of engi-neering industries following the present shortage of steel and importedparts.

127. Consumption of machinery is not expected to decrease, but thisis mainly a reflection of the poor growth in 1969. Consumption of construc-tion equipment, machine tools, air compressors and textile machinery alldecreased in 1969 from the 1968 levels. Although consumption of boilers,stearm maclhinery, heating and ventilating machinery all expanded by over20 percent in the sar.e period, the net effect was a disappointing generalgrowth of the sub-sector.

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Investment in Engineering Products

128. A comparison with othler countries suggests tLhat, in Turkey, anlunusually small proportion of the Gross National P'roduct is used for in-vestment in machinery and transport equipment.

Breakdown of Fixed Capital Formation

Turkey Spain Argentina Bolivia U.K. Germany

Gross Fixed CapitalFormation (% of GNP) 21.1 24.0 18.0 13.0 19.0 24.0

Investment in Land,Dwellings, Buildings& Other constructions(% of G.F.C.F.) 68 50.4 51 56 51 45

Investment in Machineryand transport equip.(% of G.F.C.F.) 32 49.6 49 44 49 55

Source: United Nations Statistics.

129. A fuller analysis of these figures would be of great interest asan alternative approach. to the consumption growth estimates described in thenext paragraphs.

Estimated Future Consumption

130. Projections have been made for each engineering sub-sector;the full procedure and results obtained are shown in Appendix III to thisreport. Briefly, the process of estimation was as follows: current con-sumption of metal products and machinery was divided into the three cate-gories - goods for capital investment, intermediate demand by other sub-sectors, and consumption goods. Growth rates for each were then forecast,based on the growth rates expected in the relevant absorbing sector, afterdiscussion, where necessary, with relevant mission members.

13i. In the case of agricultural machinery, total investment in agri-culture was analyzed, and current proportions devoted to machinery evalu-ated. The growtlh rate of fixed capital formation as a whole was projectedand the proportions to be allocated to agriculture in total and to agri-cultural machinery, was estimated. Consumption projections for motorvehicles were based on estimates of two factors - the requirement to meetgeneral fleet growth, and the requirement to replace aged vehicles.

132. Following the policy of the SPO and the Turkish State Railways,consumption of rail vehicles is likely to be limited to domestic production,even though the vehicle replacement rate will be somewhat lower than wasrecommended by Italconsult in their report on Transport in Turkey. A summaryof the detailed figures from Appendix III is shown below:-

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Estimated Future Consumption for EnLgineering Products

AverageCategory Growth Annual Consumption

Rates 1972 1977

.MTetal Products 11% 3,918.1 6,599.6Machinery 13% 4,914.9 8,916.8Agricultural ?4achinery 8% 1,330.0 1,960.0Road Vehicles 7-1/2% 3,260.3 4,655.1Rail Vehicles As Production

133. It will be noted that the predicted growth rates in consumptionare greater than current growth for machinery aLnd metal products, thoughconsiderably less for agricultural machinery and road vehicles. Thisreflects some slowing down of the latter industries and the expectedexpansion of the machinery sector, which contains many new companiesset up as feeder units to the vehicle industry, expanding quickly indepth but only steadily in coverage.

B. Potential Export Mfarket for Engineering Products

Current Achievements

134. Exports of goods in the various engineering sectors have n ot beenparticularly successful to date although there have recently been signsof improvement in limited fields. Achievements to date are shown in thetable below, those for earlier years being, by comparison, insignificant.

Exports of Manufactured Products(Million TL)

Average AnnualSector Value of Exports Growth Rate

1967 1968 1'369 (1967-1969)

Enginecring:Metal Products 2.20 3.20 3.60 28%Machinery 1.00 1.40 2.60 62%Agricultural Machinery - - -Road Velhicles - .01 0.31Rail Vehicles - -

TOTAL 3.20 4.61 6.50 43%

All Manufactured Products 1827. 1674. 1929. 2.5%

Since 1967 engineering exports have been expanding rapidly from t:he loworiginal figures but still represent a minute fraction of total exports ofmanufactured goods.

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Future Potential

135. The export incentives described in Clhapter III are now becoming ef-fective, and the private sector is showing an increased awareness of them.There is, however, little experience of export procedures as yet, and thusexpansion is likely to be steady rather than spectacular.

136. Many products were not competitive at the old exchange rates, andeven at altered values, the range of very competitive goods is small. Therather larger number of barely competitive items will require dynamic sales-manship in order to penetrate wqorld markets.

137. The effect of entry into the European Common T!arket hias not beenstudied in detail, and it is clear that such a study should be made whenthe final agreements between Turkey and the E.E.C. are known. The R.C.D.agreement provides a framework for mutually beneficial trade, which mayat present be in Turkey's favor, as neither Iran nor Pakistan is as higlhlydeveloped industrially (although both are developing rapidly). Indeed,Turkish exports of diesel electric locomotives are now hoped for. Tractormanufacturers - where their licenses permit - are examining the R.C.D.market, and an arrangement was recently made by Turk Traktor for limitedexport to Pakistan.

138. Projections have been prepared of exports after discussion withthe SPO and these are shown in the table below. No account has been takenof the outside chance of exporting diesel locomotives, and tractor exportsin quantity have also been discounted for the present.

Exports of Manufactured ProductsProjection of Future Results

(Million TL)

Value of Average AnnualSection Exports Growth Rate

1972 1977 1969-1972 1972-1977

Metal Products 23.0 142.0 86% 94%Machinery 20.0 82.0 980% 84%Agricultural M'achinery - - -Road Vehicles 1.6 186.0 74% N.C.Rail Vehicles 30.0 42.0 N.C. 7%

TOTAL 74.6 452.0 125% 93%

C. Domestic Production of Engineering Products

Past Achievement

139. Detailed estimates of production for 1967-69 corrected to 1967values, have been made available by SPO. Those relevant to the engineer-ing sectors are shown below, and comparisons are also shown between actualannual growth rates and those forecast in the Second Five-Year Plan. It

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will be seen that wide divergencies from plans have taken pince. Exceptfor the agricultural machinery sub-sector, actual production in the baseyear 1967 was lower than forecast wihen the plan was prepared in 1965.

Annual Value of Production in Engineering Sectors(Billion TL - 1967 Prices)

ActualSecond Five- AverageYear Plan Actual Production AnrLual

Sector Annual 1967 1968 1969 1970 Growth1967 Growth (Act) (Act) (Est) (Plan) Rate

(Plan) % Rate

Metal Products 2.25 13.7%, 2.04 2.31 2.46 2.68 10%Machinery 1.43 21.7% 1.20 1.29 1.47 1.74 13%Agricultural

MIachinery 0.41 18.8% 0.45 0.62 0.92 1.10 35%Road Vehicles 2.04 11.5% 1.57 1.98 2.21 2.56 18%Rail Vehicles 0.33 7.8%7 0.20 0.24 0.32 0.36 2.2%

TOTAL 6.46 15.,0 5.46 6.44 7.38 8.44 16%

140. In terms of growth, metal products and machinery have both fallenbehind, and are now unlikely to reach 1972 targets. On the other hand,agricultural machinery, road vehicles and raiL vehicles have all grownfaster than planned since 1967. The first named is already exceedingits 1972 target, while the two others are nearly up to that level.

141. The reasons for the lagging growrth rates in the metal productsand machinery sectors lie partly in the continued shortage of steel andpartly in the large number of small production units in the sectors.Relatively little foreign technical assistance is available to thesesectors, and growth generally has been, and will be, restricted by thelacl of skills, knowledge and experience of these involved.

142. On the other hand, agricultural machinery (65 percent of whichis tractors) and road vehicles (until now, mostly trucks and coaches)have been established in more modern facilities with considerable foreignhelp. Several plants are still, in fact, run by foreign managers. Thesesectors, also, have been dependent largely on imported components ratherthan domestic steel, and the shortage of imported components has onlyrecently become serious.

Projections of Future Domestic Production

143. Forecasts have been prepared of the value of domestic productionin 1972 and 1977. Alternative methods were used according to the sub-s^ctor under consideration.

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(a) Miachinery and MKetal Products. Account was taken of two factors:improved use of existing resources and investment in additional ornew resources. The use of existing resources is presently restrictedby lack of material and parts, and by lack of technical knowledge andexperience. Even if ample material became available - by for example,the program of assistance discussed in a later section - output wouldprobably not grow at more than 10 percent per alnum (and rather lessinitially) as the influx of extra materials would lead to organiza-tional difficulties in factories and technical resources would be un-able to cope with the demand. This was the case in Pakistan in theearly sixties when U.S. Aid provided ample material, but the expectedexpansion of production was not achieved.

Resources for production are many, and a large number of expan-sionl or new projects are in hand. The SPO are dealing with 32 in themetal products and machinery sectors at present, and TSKB are assist-ing fifty or so additional companies with expansion proposals involv-ing less than $200,000 investment, thus not needing SPO authority.Outline details have been collected of all of these projects and thepotential turnover in value or quantity for each has been estimatedyear by year from the probable starting up date. Each has been allo-cated to one or the other of the two sub-sectors concerned and thusthe increased production of each of the two sub-sectors can be esti-mated.

In the latter years of the period in question - up to 1977 -additional new projects can be expected and it has been assumed thatinvestment will continue at the same rate as in 1963-72. Assumingsimilar capital/output ratios, production increases would also beproportional.

(b) Agricultural M1achinery. The sub-sector has been divided intothe manufacture of tractors, and the manufacture of other items.Tractor assembly was about 19,000 in 1969, and despite plans forexpansion to 19,800 in 1970, will in fact fall owing to the lackof imported parts. The future manufacture is likely to be dividedbetween two or three manufacturers only, instead of the existingsix. IWThile this restructuring takes place, total output is likelyto remain approximately in line with the demand levels estimatedearlier. An increasing Froportion of domestic content is likelybut the production values of, for example, gearboxes hias alreadybeen allowed for in the machinery sub-sector.

Assembly and manufacture of other types of agricultural equip-ment is widespread, but it can be assumed that production will ex-pand in line witA the demand and moreover that Turkey will becomeself-sufficient in these items by 1972, at least insofar as wholeitems are concerned.

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(c) Road Vehicles. Estimates for future production of roadvehicles can be quantified by type and subsequently valued ataverage costs. In the case of passenger cars, it has been assumedthat the Amadol plant will continue in production, although SPOconsiders that this is unlikely. Prospectiv7e output figures havebeen supplied by the manufacturing companies concerned, Otosan,Fiat-Tofas and Renault. Truck production has also been discussedwith several manufacturers and allowances have been made for out-pT]t limitations due to low demand. Several companies are expectedto cease operation over the period. Coach and other vehicle pro-duction has been estimated from SPO figures.

(d) 1.ailway Vehicles. The sole manufacturers of railway vehiclesare the State Railway TWorkshops and both current production andfuture plans have been discussed with them. It has been assumedfor the forecast that diesel-electric locomotive manufacture willbe limited to 30 per year - that is to say that exports will notbe made. Exports of coaches and wagons are expected, however, butin limited quantity.

(e) Summary of Pesults. The results of the calculations describedare shown in summary form in the table following and full detailsare given in Appendix IV to the report.

Revised Forecast of Production Valuein Engineering Sectors

(Billion TL - 1970 Prices)

Current Forecast ForecastProduction Production Annual Growth

Sector 1970 Plan 1971 1977 1970-1972 1973-1977

Metal Products 3.00 3.50 5.91 9.5%O 10%Machinery 1.95 2.85 7.51 21.5% 22%Agricultural Machinery 1.23 1.33 1.80 4.0% 6%,Road Velhicles 2.87 3.01 4.20 3.0% 7'Rail Vehicles 3.39 0.47 0.61 7.0% 5%,

D. Demand for Imports

144. The previous sections of the report have discussed the mirketrequirements, domestic and export, and the potential production of do-mestic industry. Since the latter cannot, in most cases, satisfy the de-mand, there will be a continuing need for the import of engineering goods.This section discusses each sub-sector in turn.

Types of Goods to be Imported

145. ,œetal Products. Generally speaking, the need for imports ofmetal products will consist of items like special purpose fittings,alloy steel products and other items which cannot be made economicallyin Turkey. The range of goods is likely to be wide.

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146. Machinery. Wqhile Turkey is likely to become increasingly self-sufficient in heavy fabricated machinery, and will probably establish in-ternal combustion engine and transmission factories before 1977, the fullrange of machinery products cannot be met, and such items as ball androller races - except possibly for standard sizes - certain types of earth-moving equipment, special purpose plant, etc., will require to be imported.

147. Agricultural Machinery and Tractors. The intention of SPO isto make the sector self-sufficient in terms of whole items of plant. Itwould also seem to be SPO policy to limit consumption to availability andso the requirements for imports should be negligible.

148. Road Vehicles. Turkey's needs for small and medium-sized pas-senger cars are to be catered for by three manufacturers, and again, con-sumption is likely to be limited to their actual production. Trucks upto 12 to 14 tons will be made before 1977. Coaches will all be domes-tically produced. However, large passenger cars - unless made from CKDcomponents - and large trucks will have to be imported, as will a varietyof special purpose vehicles. Turkey is currently without any smallfour-wheel drive vehicle, and these may also need to be imported for mili-tary or agricultural purposes.

149. Railway Vehicles. It is the policy of the Turkish State Rail-ways to manufacture and supply all their oxm equipment (including loco-nmotives within the next two years) and to limit consumption of vehiclesfor replacement of obsolete stock to the production capability of theirown workshops. Accordingly, no import requirements of whole items shouldarise in this sector, although some doubts have been expressed aboutdomestic production of all-electric locomotives within the next five yearsshould the planned extension of electrification take place.

Volume of Imports

150. Imports have been estimated as the global difference betweentotal demand (that is domestic consunmption and exports) and total produc-tior, neglecting any change in stocks over such a long period. The tablebelow shows the results for each sub-sector, witil a comparison withi theimports for 1969, the latest available figure.

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Summary of Estimated Import Requirements(MIillion TL cDmpared with 1969)

Sector 1969 1972 1977

'fetal Products 227.0 439.1 826.6!Maclinery 1,787.0 2,079.9 1,488.8Agricultural MNachinery 183.3 nil* nil*Uiotor Vehicles 474.0 252.4 639.6R-ail Vehicles 35.0 nil* nil*

Total 2,706.3 2,771.4 2 ,55.0

T The theoretical zero figure for imports in these twosectors is the result of a policy decision, but smallimports of special purpose equipment may be needed.

1351. It should be noted that thiese import estimates include importedinputs only insofar as tihey appear as intermediate products in othersub-sectors. For example, engines for motor vehicles are imported underthe macilinery sub-sector, and refrigerator condensers under the metal pro-ducts sub-sector. It will be appreciated that i.mports of basic raw mate-rials or semi-finished products in sub-sectors cother than the above fiveare necessarily excluded.

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V. RENVIW OF SPO STRATEGY AND PROJECT INVENTOPY

152. Brief reference was made earlier in this report to the effectthat past policies and strategies of the SPO have had on tile expansionof engineering in Turkey. Thiis part of the report reviexws in more detailthe development of SPO's current policy witlh special reference to the pre-sent project inventory and the expanding vehicle industry on which it islheavily based.

A. Development of the Current Strategy and Policies

153. The engineering industry in Turkey has grown very rapidly overthe last ten years, as a direct consequence of two main factors, onecommercial and one strategic.

- Local and foreign investors response to the rapid rise inthe denand for engineering products.

- The urgent necessity to save the foreign exchange forindustrialization which led to governmental decreesencouraging domestic manufacture and domestic contentin an attempt to check rapidly rising imports.

154. Concentrating on import substitution, the resultant investmentin domestic production was frequently made without due regard for thelonger term economic consequences for Turkey. Local and foreign inves-tors were motivated by medium term commercial prospects, and the SPO'sstrateay took little account of the actual cost to the economy of theforeign exchange saved. As previously noted, the effect of the policy hasbeen the establishment of a number of economically dubious enterprises,particularly in the road vehicle sector.

155. The extent, however, is not as wide as it might have been hadrhe e-xpansion not 'been limited greatly by the economic environment in the;en years referred to. laterials - particularly steel - and imported com-ponents have been in short supply due to the foreign exchange limitations.'.itrepreneurial and mrnagerial skills have been directed to seeking and.':;iting m-Itei,alsl, anid to circumventing the various limitations imposed';y regulation or circumstance, and they have tlherefore often been unable

Lo expand as quickly as they intended or to build up and train sufficientlyexperieniced staff.

156. The desire to take domestic integration still further was mod-erated by a realization that the cost of domestically produced items -necessarily on a relatively small scale - was rising rapidly. it has;Already been remar'ed tl,hat costs were often, in fact, higher than tlheprice of equivalent imported goods even when the latter included the heavyuplift imposed by the import regime.

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157. Official SPO policy nas now changed - without altogether aban-doning thie concept of import substitution. Current strategy is aimzed atliconsing only so-called economic size units, using the latest tecinologyavailalle. Thle high output arising from such units - the basic reasonfor the low unit costs - is often in excess of Turkey's immediate, or fore-seeable future, requirerments. Thlus, considerable development in exportmarkiets will be a condition for commercial and economic viability. Thesuccess of such a policy will depend upon market acceptance in major con-suming countries.

158. TwSo recent modifications to SPO policy are worthy of particularnote, demonstrating a flexibility of approach towards strategic problems.One already described, has been to persuade foreign interests to take partof the output of joint projects in lieu of profit transfer. Widespreaduse of this technique presupposes that the foreign partner has world-,Tide interests, and the research group of SPO irt particular are makingdetermined efforts to interest leading international companies in settingup operations in Turkey.

159. The second modification is whiere SPO encourage projects whoseproduct has a hiah labor content to exploit the advantages of Turkey'spresent low7 labor costs. Several projects invo:Lving temporary import formachining an(1 assembly, followed by re-export, have been discussed. Oneproposal is the export of MANi bus bodies to Europe, with a labor contentof 1,3003 mkan-hours each. A fabricating company visited makes the steelframework for small conveyors in sub-assembled form for export to Germanyand final assembly with other components.

160. These more encouraging developments for new projects are, how-ever, a fairly recent change in policy. The present inventory of approvedprojects, discussed in the next two sections of this part of the report,reflect tle result of previous, less well-considered, policies.

161. The dilemma facing the SPO of attempting to keep domestic costsof small volume production dowm while maintaining imports at a lolw levelis, in the present state of the underdeveloped home and export markets,virtually unsolvable if industrial expansion is to continue. A hlgh levelof engineering industry imports, possibly with the foreign currency assis-tance discussed in Chapter VI(C) of this report, will be required for manyyears to come.

B. Project Inventories

162. There are at present 36 engineering investment projects approvedby the SPO in various stages of implementation; a full list was given inPart D, Section V. These projects generally refer to investments in whichover $200,000 foreign currency, or 5,000,000 TI. turnover is involved, somany smaller projects are not included. At least 15 others were discussedduring the field worlk and T.S.K.B. supplied a list of 64 companies whichthey are, or have been assisting from time to time.

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163. Hlowever, the major investments - particularly new investnients -are known to the SPO. The list referred to above contains projects total-ing 1,664.7 million TL, of which approximately half (882.09 million TL or$98.01 million) is foreign currency. The investments will be spread overa period of three years, giving an approximate arnual investment of 555million TL. This :List does not include the on-going railway diesel loco-motive project, in itself 240 million TL when fully expanded.

164. It will be seen that the great majority of current projects in-volve the vehicle and tractor industry, and the ancillary industries beingcreated to supply t:hem with parts and materials. Eighty-six percent ofthe investraent fal:Ls into this category, although some feeder industries,such as the forges and transmission unit plants, will also supply otherindustries.

C. Appraisal of Some Current Projects

165. Six of the above mentioned projects have been analyzed indetail in order to evaluate the exact domestic cost of the foreign cur-rency saved in each case. None of the projects selected is yet in pro-duction, so the evaluation was based on cost estimates suppliecl by tlieSPO project section, amplified by direct discussion with the entrepreneursor foreign interests involved.

166. The projects selected, and results ohtalned, were as follows:

TDomestic CostCompany Prodluct Investment Foreign Plant of Foreign

(lillion TL) (MIillion TL) Lxchange SaveclTI. per $US

T.C.D.D. )Diesel Locormiotive 244.9 6.7 10.99

Fiat Pasisenger Cars 332.9 13.9 33.30

Perkius Diesel Engines 201.2 14.9 16.25

r aton-Yale-Towne Iransmissions 134.6 3.4 13.13

i.assey Fer-guson Tractors 183.6 10.6 20.22

Parsan Forgings 97.0 3.2 13.7

167. The analysis and evaluation, together with all the figures con-cerned, are given in detail in Appendix II to th1is report. It should benoted that virtually all the projects are now being reappraised by thesponsors, who feel that the cost estimates need now to be revised upwards.

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168. The assumptions behind many of these projects are probably far toooptimistic (i.e. the market for diesel engines may only justify an annualoutput of 20,000, instead of 50,000 assumed in the original project).

169. Based on the cost of foreign currency saving alone, most of theprojects seem ill advised. It is very doubtful if any new project in thevehiicle industry could be so justified. The main problem is one of insuf-ficiont volume discussed further in the next section.

171. There are, of course, other benefits to be obtained from thesenew investments. Turkish engineering as a whole will benefit, particularlythie other recipients of goods made in the feeder plants created for theVehicle Industry - and new skills and employment will be created.

D. The Development of the Road Vehicle Industry

171. It has been noted that the great majority of the current ProjectInventory concerns the Road Vehicle Industry or its supplier industries.The industry, as described in Chapter I, has grown in poorly coordinated mannerto the situtation today where almost 20 companies are involved in the finalassembly of cars, trucks, buses and tractors. Each therefore has a verysmall part in what is, in any case, a restricted market.

172. In truck and tractor manufacture, for example, six or seven plantsare supplying a requirement which could rationally be supplied by two of each.As has been shown by B.M4.C. in Izmir, both trucks and tractors can readilybe made in the same plant, leading to the supposition that two large plantscould cater for both truck and tractor manufac:ture.

173. Without necessarily going to this extreme position, some ration-alization is undoubtedly called for, and two truck and two tractor plantsshiould be aimed at. Selection will be a problem, but the principle ofencouraging those with large capital already iLnvested should be adopted.

174. Passenger car manufacture is now beiing established and this wouldat first sight appear to be a misuse of funds as the domestic cost of sav-ing imports is very high - as much as 33 TL per US dollar in the case of theFIAT plant discussed previously. This is baset upon an output of 20,000 carswithi 85 percent domestic component in five years which is probably economi-cally unrealistic. The project must be re-examined for viability at diffe-rent levels of output and domestic component.

175. It is understood that 200,000 vehicles per year is considered tobe the minimum size of automobile plant in Spain, but there are certainlymany plants of lesser size in Europe today. They tend, however, to be morefor specialized cars, and the economic level for volume car production islikely to be well above the 20,000 cars per year which is the target ofboth the FIAT and Renault companies in Turkey,,

176. The Anadol glass-fibre car is in a different category and relativelylow volurme output may be more economic with this type of material. Ilowever,

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the complexity of increising the range to five or six body types may, in fact,count against the manufacture. The number of firms making ordinary and mini-buses is also expected to decrease as the volumes now made are well belowoptimum levels.

177. In general, the vehicle assembly industry has developed to anextent greater than thait warranted by the economic situation. Some improve-ment could be expected when there are only two manufacturers in each sub-sec-tor, but there is no doubt that, in this instance at least, Turkey is payinga heavy price for imporl: substitutes.

l'8. As regards cotnponent manufacture the enforced raising of domesticcontent presented local vehicle assemblers with two alternatives,

(a) to install plant and produce parts themselves (verticalintegration);

(b) to use parts produced by a developed domestic industry.

179. In most cases, the latter alternative was chosen, and in thesense that this action hbas stimulated local industries to expand consider-ably, has had a good effect. Costs, however, are excessive owing to thesmall volumes involved and many difficulties have arisen with quality anddelivery problems.

181. It is noticeable that the newer plants -- FIAT and Renault - areteniding to a more vertically integrated structure, although the final formof the two companies has yet to be determined. B.M.C. has been instrumentalin the rapid expansion of supplier industry units in the Izmir area. Body-work, castings and chassis are all now produced for them by outside suppliers,although many parts are also made in their own plant.

I 82. The Project laventory referred to includes suppliers of many othervehicle industry parts and possibly same of these could be operated economi-cally provided that onily a limited range of products were made. This wouldbe cond-itional on a greatly reduced number of vehicle assemblies.

182. However, the volume is unlikely to support the economic productionof gears and gearboxes, or engines in the variety of types needed to coverthe range of sizes from the smallest car to the largest truck - even if thenumber of different makes were considerably reduced.

134. The policy of Lncreasing domestic content progressively thereforerequires to be changed, and it must be accepted by SPO that an entirely selfsupporting vehicle indust:ry cannot be established at the present, or likelyfuture, volumes of output.

184. A more gradual build up rare should be adopted, and small scaleunits encouraged. For example, engine and gearbox manufacture could bestarted with a high proportion of imported parts, and only gradually changeover to domestically produced parts as the local industry learns to competeon price, quality and delivery. A moderate level of protection could beused to assist this operation.

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VI. DEVELOPMENT RECOMMENDATIONS FOR ENGINEERING

185. This final Part of the Report describes the considerat:ions whichare likely to have an important impact on for the future development ofEngineering in Turkey. These can be examined under the following headings:-

(a) Strategy for Investment, including the drawing up of aninventory of existing capacity, the establishment of newInvestment Criteria and the need for Pre-Investment Studies.

(b) Restructuring of the Public Sector of Engineering.

(c) Requirements for Financial Assistance.

(d) The establishment of improved procedure and market guidancefor exporters.

(e) The creation of an Association of Engineering Industr:Les.

A. Investment Strategy

Strategic Principles

186. Future investment in Engineering Facilities in Turkey should begoverned by two fundamental concepts:

(a) Firstly, ensuring that existing capacity is utilized to theabsolute maximum to satisfy the growing demand for products.

(b) Secondly, embarking on new investment ventures only when thereare clearly documented benefits to the economy.

187. In order to implement these principles, a number of ismmediatesteps need to be undertaken.

(a) The existing capacity and utilization should be measuredaccurately, and a system of regular re-measurement shouldbe introduced.

(b) Evaluation criteria for new ventures should be criticallyreexamined.

(c) All projects not irrevocably committed should be re-evaluatedagainst the new criteria with formal Pre-Investment sl:udies.

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188. The probable effect of these studies would be to limit the estab-lishment of vehicle industry supply units for the present and also to cur-tail further expansion of heavy fabricating plants.

Inventory of Existing Capacity

189. All project proposals should consider fEully the existing capacity,the extent to which it is already utilized and the extent to which it canwork efficiently due to shortages of materials and skilled workers. Todo this properly, a catalogue of metal-working plant and facilities shouldbe prepared and kept upi to date. Certain Chambers of Industry alreadyhave this in mind and a central registry for the Private Sector couldreadily be prepared. Ihe Public Sector should also prepare and publishcatalogues. The SPO should then co-ordinate the two catalogues and ensurethat they are kept up to date with current utilization and capabilities.It is suggested in Section 6 below that an Association of EngineeringCompanies could take over the work when it is formed.

Investment Criteria

190. Once the need for additional capacity has been proved, evaluationof new projects or restructuring plans can be undertaken. The main criteriashould be the domestic cost of foreign exchange savings, every effort beingmade to calculate this figilre as correctly as possible. Supplementarycriteria, such as the employment offered, learning of new skills and theestablishment of new technologies should be considered as secondary.

191. The general policy should be to encourage those industries whichcan become competitive quickly, and in this context the export of materialsor parts to other plants should be more fully explored. Internationallybased companies like Massey Ferguson frequently ship parts from one countryto another, but it must be recognized that this is a two way situation andthat import of parts will also be required and indeed beneficial.

192. The Turkish Engineering Industry can never become completely self-sufficient, and this must be accepted by SPO. The additional cost of eachpercentage increase of domestic component rises quickly, and this shouldbe fully evaluated for each type of product. For example, the optimum forpassenger vehicles might be 60 percent, a certain type of machinery 85 per-cent and so on. It is not possible to lay down hard and fast rules - eachpioduct is different.

Pre-Investment and Sector Studies

193. Formal Pre-Investment studies, taking account of the recommendedpolicies, are needed for all projects not irrevocably committed. Some ofthose discussed in Turkey were:

- Perkins Diesel Engine Plant (engines up, to 130 HP)

- Second Diesel Engine Plant (engines over 130 HP)

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Aluminium Extrusion Facilities

- The Second Stage of the Diesel Locomotive Project

- Metal Fabricating Projects, such as ER-WE-PA

- All Vehicle Industry feeder unit projects(Eaton-Yale-Towne, M.K.E.K., etc.)

194. The objectives of such pre-investment studies should be clearlyto establish whether or not the domestic cost of foreign exchange savingwas acceptable so that a sound basis can be prepared for the allocationof funds and dealing with any application for foreign assistance. In orderto do this properly, potential domestic and export markets should be examined,and domestic production costs carefully analyzed, not only at full. outputrates, but also during the initial years of the project. Critical. points willinclude the extent to which existing facilities could accommodate the work,the availability of materials at reasonable cost, and the amount of foreignassistance and training which can be given.

195. At the same time a careful evaluation is needed of the sector as awhole and uirtually every product group (and sometimes individual products)to determine development opportunities and needs for protection and/or incen-tives. It is strongly urged that this study be initiated at once so thatdevaluation can be followed up by protettion through customs duties and spec-ial incentives rather than through quantitative restrictions.

B. Restructuring of the Public Sector of the Engineering Industry

196. In engineering, the principal public sector corporations areM.K.E.K., the State Railway Workshops and the Sugar Board Industry Work-shops. The Karabuk steel works, and the State ilydraulic Works Companyalso have extensive engineering facilities.

197. M.K.E.K. and the State Railway Workshops manufacture a widevariety of products in a large number of units of varying efficiency anddegree of modernity. The facilities and products are described in AppendixV to this report.

198. Both M.K.E.K. and the State Railway Workshops gave the imnpressionof lack of control of the workshops which are often far removed fromcentral offices. The latter appeared to be staffed by career civiL servants -movement between Ministries and State Economic Enterprises is frequent.M.K.E.K., in particular, is now so diverse, and is trying to pursue so manydifferent lines at once, that the lack of direction and purpose is clearlyapparent.

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199. Restructuring of Public Sector resources should be carried out,with the objective of establishing smaller, more closely knit units towhich a more dynamic management policy can be applied.

Strategy for Restructuring

200. State Economic Enterprises were originally established to pioneergrowth in new industries where the Private Sector was not capable of under-taking the task. Provision was made in a Law passed in 1938 for the returnof S.E.E.'s to the Private Sector when the latter had become competent.

201. A suitable strategy for restructuring the Public Sector,particu-larly MKEK., would be to separate activities not limited by an overridingtechnical or commercial rationale and convert them into independent publiccompanies, or in appropriate cases into private ones. The State enterprisesshould be operated mu,zh more strictly, according to criteria of efficie2cyand profitability.

202. The more ineffective parts of M.K.E.K. - for example the factoriesin the center of Ankaca - should be closed down. M.K.E.K. could then con-centrate increasingly on the Armament and Explosive Industries for whichit is well equipped. The possible role of M.K.E.K. as a holding companyis discussed below.

203. Other Public Sector engineering facil:Lties should also be restruc-tured. For example, I:he machine tool interests of M.K.E.K. and the smalltool manufacture of the State Railways could be combined into a new PrivateSector (or Mixed Enterprise) machine tool unit.

204. Likewise, the Sugar Industry Board's new fabricating facilitiescould produce the heavry machinery now made by M.K.E.K. in Ankara and bythe State Railways in Eskisehir, thus improving utilization of new plantsand permitting the closure of old, ineffective units. The State Railwayswould then concentrate on the manufacture of Diesel Electric Locomotivesand Railway equipment.

205. This restructuring across company boundaries would have to becarried out by, or through, SPO and the Ministry of Industry, and shouldform part of a thorough re-examination of the purposes and needs of thePublic Sector in Turkish engineering, particularly directed at intra PublicSector co-operation and at ensuring that the Private Sector has reasonablefreedom of action.

The Place of Mixed Enterprises in Engineering

206. In recent years there has been an interesting development ofmixed interest enterprises - that is, companies where the Public Sectorholds a minority interest.

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207. MI.K.E.K. participations include Tur]k Traktor (with FIAT), Fiat-Tofas, Perkins and a number of others, M.K.E.K. has a representative inthe Management Group of Tofas, and the project has proceeded well. Sucha representative was refused by Perkins, and ZM.K.E.K./Perkins re!lationshipshave been poor.

208. Success of mixed enterprises is thus very varied, and the contrib-ution that M.K.E.K. can make is limited. M.K.E.K. has good knowledge ofEngineering in Turkey, and can offer limited technical assistance. Inthe financial field it apparently has access to considerable furLds. Withits steel and non-ferrous metal capacity, it can also offer materials whichmay not be available elsewhere.

209. Management expertise is not a likely contribution, as M.K.E.K.has a "civil-service" type of structure not suited to modern industry, andits employees have priorities other than those which should inspire andguide new developments.

C. Overseas Financial Requirements of the Engineering Industri.es

Finance for Capital Investment

210. Virtually all new engineering projects require foreigrn currencyto purchase machine tools and equipment, as the range of locally madeproducts is severely limited in number and variety.

211. A common method in the past has been for a foreign company totake a financial interest in the new concern, usually to manufacture itsown products under license. Plant and machinery was then supplied by theforeign company as its contribution to the investment, while local share-holders financed the purchase of land and the erection of buildi.ngs.

212. In recent years, however, the larger size of production unitencouraged by SPO has necessitated extensive plant and foreign companieshave sometimes been unable, or unwilling, to invest the full amount needed.In such cases, Turkish and overseas Investment Banks have started to takea financial interest in the new concern, and this has often proved crucial.

213. There were, in May 1970, eight engineering projects out of the 36approved by SPO without finance for foreign plant. A total of 30.5 million$ US is involved. The Projects are:

Pancar Motor Small Engines for Pumps $ 660,000T.D.D).K. Castings for Vehicle Industry 4,500,000Parsan Stage II Forgings for Various Industries 5,030,000Segman San Piston Rings 90i,000Mahle Pistons 940,000Rona Makina Fabrications 940,000Yilmaz Akcan Transmission Parts 2,440,000M.K.E.K. Transmission Parts 15,000,000

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214. Several othier unfinalized projects were discussed during thefield-work. Particularly important were the Massey Ferguson Tractor, andPerkins Diesel Engine projects where the companies wished to reduce thescale of the operation, and to obtain assistance in meeting the capitalneeds wlhich they were, previously, agreeable to financing themselves. Thecombined total requirement for foreign currency is $25.5 million for thesetwo projects.

215. Many of these projects seeking finance involve products for themotor vehicle and tractor industries but the projects for vehicle industrycastings, pistons and plston rings will only proceed if the Perkins EngineProject is not cancelLea.

216. The Steel Fabrication project is in a sector where cautionis needed before further investment. Excess capacity already exists forthis type of manufacture, and the project should, therefore, not proceeduntil the capacity evaluati on referred to previously has been carried out.

217. Apart from the small Pancar Motor project for irrigation pumpengines, and part of the Parsan Forging project, which both appear to havereasonable potential, ttie projects not yet financed may form a usefulstarting point for the new policy of appraisal suggested above.

Foreign Exchange for Inidustrial Imports

213. The present s:iortage of foreign currency is having a severe effecton the industry due ta lack. of funds for the purchase of materials or partsfor assembly. The short-ge of steel is restricting output in all the generalengineering sectors, and is beinig used as a frequent excuse for failureto achieve targets. It is, as is stated earlier, not the only restrictingfactor (lack of experience and skill are others), but some easement ofsupplies would be beneficial. lMany assembly plants visited - except thosewLch Eastern Bloc associatiois - were at a standstill for want of importedparts. Foreign exchange for quota list items takes six to seven months,and for Liberalized List items even longer (9 to 10 months is reported).Overseas financial assistance for industrial imports would help to keepindustry moving, to provide employment and allow experience to be gainedunder fully operative conditions.

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219. Total import requirements for parits for assembly in 1971 and1972 have been provisionally estimated as follows:

Direct Import of Parts for Domestic Production(Provisional Estimate - M.T.L.)

1971 1972

Metal Products 330 350Machinery 550 516Road Vehicles 1,116 1,193Rail Vehicles 45 63Agricultural Machinery 450 415

TOTAL 2,491 M.T.L. 2,537 M.T.L.

Equivalent to (at oldexchange rate) 276.7 M$ 281.8 M$

220. These estimates include direct imports for all producers in thesectors named, but it is not recommended that all producers should benefitfrom such assistance. A prior survey would be needed to define exactlywhich companies were of suitable importance to the industry; this wouldtend to be the larger concerns with considerable investment in, currentlyunder-utilized facilities. Ideally parts or materials made available asthe result of such assistance should not be allowed to support inefficientfirms. The present system of import allocaitions is a major reason forinefficiencies, because in the present acute shortage situation, virtuallyany product, in any quality and of any price can be sold. Should foreigncurrency be made available for "maintenance imports" parts and components,the Government must ensure that recipient industries, as a condition oftheir allocation, should provide reasonable guarantees with respect toquality, price and other aspects of performance.

D. Export Promotional Assistance

221. The Export Encouragements and Incentives have been described inChapter III of this report. They have been well designed, and the engineeringindustry is now showing an increased awareness of the benefits to beobtained from the incentives.

222. There is, however, a grave lack of knowledge of export marketneeds and opportunities, and of the necessary procedural matters associatedwith exporting. It is recommended that a dymamic Export Guidance Officeslhould be created, taking over part of the duties of the export encouragementsection of the SPO.

223. The responsibilities of the new of.fice should include:

(a) Market Surveys in potential exporl: territories.

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(b) Establishment of Export Promotion Offices in suitable countries,probably working through Embassies and Consuls to start with.The officers should be able to advise potential exporters about:

i. Types of Goods neededii. Price and Quality levelsiii. Delivery requirementsiv. Unexpected opportunities for supplying sudden needs.

(c) The design and agreement of a simplified procedure for exportsincluding documentation, refund of taxes, and claiming incentives.

(d) Advice on shipping and carriage problems.

E. Industrial Co-Operation in Engineering

224. The Chambers of Industry do not set out to assist industrialco-operation between memlubers and in addition are not solely concerned withEngineering. There is a need for an Association of Engineering Companies whereproblems related only to that sector could be discussed and resolved. Inparticular, the Association should co-ordinate member firms activities by:

(a) Maintaining a register of the metal working capacity of members,particularly of special purpose or ultra-large capacity machinetools.

(b) Encouraging increased use of the sub-contracting of specialistoperations among members, such as submerged-arc welding, gearproduction, heat treatment, etc. to avoid duplication of under-utilized plant.

(c) Giving advice on new technology and production methods, includingjig and tool design, advice on machine tool selection, and makingproduction engineering expertise available at factory level.

(d) Suggesting mergers or co-operative agreements between smallconcerns to encourage the creation of economically viableunits.

225. Such an Association would need to be established in such a wayas to ensure that both Public and Private Sectors would be represented.

APPENDIX I

SIZE AND LOCATION OF ENGINEERING ESTABLISHMENTS

Basic Figures

1. The last full scale census of industry was made in 1963 in pre-paration for the Second Five-Year Plan. Since that time, no further censushas been made, and although SIS, SPO and various Chambers of Commerce andIndustry, collect data - usually on a sampling basis - no comprehensiveevaluation has been carried out in spite of the fact that the 1963 Censusfigures are obviously very out of date in a rapidly developing situation.

The Engineering Industry

2. The Census of Industry divided manufacturing establishments intothe two categories of "large" and "small" according to the number of workersemployed - any establishment with over ten emp:Loyees being categorized as"large".

3. Engineering establishments accounted for no less than 25 percentof the 161,000 establishments recorded, and for 17 percent (73,000) of the431,000 employees in manufacturing generally, resulting in an average of1.8 employees per establishment, compared to a figure of 2.68 for allmanufacturing industries.

4. The table shows the analysis of the Engineering Sectors; at thattime, and concentrates on the large (i.e. over ten employees) industries,as the very large number of very small scale industries are not of directinterest.

Average Number of Workers By Sectors

(Large Industry Only)

Averaire No. ofNo. of Large No. of Workers Per

Sector Establishment Workers Establishment

Metal Products 223 20,034 90

Machinery 83 5,186 52

Transport Equipment 55 17,256 117

TOTALS 361 42,476 118

APPENDIX IPage 2

5. Thus, even at this period some reasonable scale industry appearsto have been in existence. The Transport Equipment sector average has beendistorted by the very large railway workshops and shipyards.

The Situation Today

6. It is unfortunate that more up-to-date figures were not availableduring the survey. The consensus of opinion - bourne out by the visits made- was that the proportion of workers in engineering has increased more thanthat in other sectors, and that a large number of the very small establish-ments were no longer in existence. The output of the engineering sectorshas increased from T.L. 3,000 million in 1963 to T.L. 8,000 million in 1969an apparent, uncorrected increase of 270 percent. Employment, however, willnot have increased in direct proportion, as individual output will have beenincreased by higher productivity, increased mechanization, etc. As a roughapproximation it is suggested that the figure of 73,400 workers in 1963 mayhave increased to about 200,000 by 1970.

Location of Industry

7. The 1963 Census also showed that the workers employed weredistributed as follows:

Province Main Town Percentage Notes

Istanbul Istanbul 43 Private sector

Ankara Ankara 22 Public Sector (M.K.E.K.)

Izmir Izmir 2 Vehicles

Eskisehir Eskisehir 12 Railway Workshops

Sakaraya Adapazari 4 Railway Workshops

Sivas Sivas 8 Railway Workshops

Bolu Bolu 1 Vehicle Industry

Kocalei Izmit 1

Others 7 Widely separated

8. Since 1963, the situation is likely to be similar but the numbersemployed in Izmir and Bursa will now be increasing due to the growingvehicle industry, and the provinces between Izmit and Istanbul will alsobe increasing in the engineering sectors as new industries are created alongthe Izmit Highway at Gebze and Kartal.

APPENDIX II

EVALUATION OF MAJOR ENGINEERING PROJECTS

Introduction

1. An economic evaluation has been made of six important engineeringinvestment projects.

Ilnvestment Foreign PlantCompany Product (Million TL) (Million $US)

A. T.C.D.D. Diesel Locomotive 244.9 6.7

B. Fiat Passengers Cars 332.9 13.9

C. Perkins Diesel Engines 201.2 14.9

D. Eaton-Yale-Towne Transmissions 134.6 8.4

E. MasseyFerguson Tractors 186.6 10.6

F. Parsan Forgings 97.0 3.2

The projects are described and evaluated in turn.

Method of Evaluation

2. The basic method of evaluation has been to calculate the netdomestic cost, in Turkish lira, of the foreign exchange savings, expressedin US$. Net domestic costs have been estimated by subtracting from theex works prices, all taxes, profits, direct and indirect imports and thenadding two standard allowances.

- 10% of Domestic Costs, to allow for indirect taxes

- 12% of Total Assets, to allow for interest andprofits before corporate tax.

3. Foreign Exchange Savings are based on C.I.F. value of equivalentimports, less the cost of direct and indirect imports to domestic production.These also include 10 percent of Foreign Plant value as depreciat:ion, andthe cost of licence fees and royalties.

4. The calculations refer to the cost estimates obtaining when theprojects have reached full capacity operation. Time obviously dLd notpermit detailed analysis of the build-up years, which in several cases had

APPENDIX IIPage 2

not been fully planned at the time of the survey. The results obtained arethus possibly too f'avorable to the projects because account has not beentaken of:-

- Any losses carried forward from earlier years, whichmay have been justified as a necessary cost of developingnew industries.

- Any changes in world market prices as all evaluationshave been, done in terms of current C.I.F. values, andthe Turkish product is assumed to be comparable to theimported equivalent.

A. Turkish State Railways Diesel-Electric Locomotive Project

Background

5. According to an SPO Report, the Turkish Main Line Locomotive fleetpresently consists of 785 steam and 53 diesel-electric locomotives, some ofthe latter being 15 years old, others more recent. All diesel poweredlocomotives have been imported, from General Electric, Krauss-Maffei, andMAK. The progressive replacement of the existing steam locomotives by 1987with Diesel-Electric types at the rate of 30 per year is envisaged, andthis has been calculated on the basis of 0.583 diesel-electric to 1 steamlocomotive.

6. A licence agreement for the domestic manufacture of theselocomotives has been signed with Traction-Export (France) and for themanufacture of engines with Chantiers Atlantique, also of France.

7. Exports of R.C.D. countries are also hoped for. The followingquantities have been estimated by SP0 and TCCD after a survey of thesecountries, and are for replacement of old steam engines and for expansionof traffic:

- West Pakistan 30 per year

- Iran 10 per year

- East Pakistan 10 per year

Of these, the Iranian market is least likely, as the country has standardizedon General Motors Locomotives and has few foreign currency problems.

8. The total market for Turkey and R.C.D. countries, has thus beenestimated by SPO as 70/80 per year till 1985.

Present Situation

9. TCDD plan to carry out the manufacturing project in two stages,both aiming at 85 percent Domestic Content of the locomotives:

APPENDIX IIPage 3

- 30 Locomotives and 50 Engines per year,Investment TL 184.9 million

- 60 Locomotives and 100 Engines per year,Further Investment TL 60.0 million.

The first stage is now under construction, 20 machine tools being installedwith 60 still to come. A new extension has been added to the existinglocomotive overhaul building at Eskisehir and, in all, TL 108 m:Lllion hasbeen spent or committed (including TL 31 million in foreign currency) outof the 184.9 million planned for Phase I. Marking out is now under way onthe first locomotive, which is to be 70 percent imported and is scheduledfor completion in 1970. The first full year of operation - tilL mid 1971- is expected to produce 10 locomotives, the second 20 and the third 30 witha local content of 45 percent at that stage. Progressive improvremenst to85 percent would follow, unless the second stage was embarked upon in whichcase the build up would be different. The second stage envisages furtherinvestment, raising the whole investment to TL 244.9 million.

Evaluation

10. The calculations for the economic evaluation are shown in thetable at the end of the appendix. The domestic cost of foreign exchangesavings is shown to be TL 10.99 = US$1.

11. This is unexpectedly low, and raises questions as to the accuracyof the figures in the SPO Project Report on which the evaluation was based.It was remarked that costs were to be re-evaluated after the first fewlocomotives had been produced and that no attempt had been made to evaluatecosts at lower output levels.

12. The ultimate production figure of 60 is, of course, quite high,though not nearly as high as the successful I]ndian plant at Varanasi wherethe output is 150. The Diesel-Electric locomotive in these quantities hasstill tan assembly time where low labor rates would be an advantage, andbatch machining would also take place. In view of these factors, theproject should be fully re-appraised after two years.

B. The Fiat-Tofas Pro'ject

Background

13. A not uncommon nationalistic which has led the SPO to encouragethe establishment of the first major motor car factory in Turkey. Otosanalready produce a small number of glass-fibre bodied cars using a BritishFord engine and transmission, but the producl: is more of a handmade carthan is usual in its category. The Fiat pro-ject is intended to produce20,000 cars per year of the FIAT 124 type, building up to this quantity

APPENDIX IIPage 4

over 4 or 5 years. Domestic proportion is planned to rise from 35 percentinitially, to 85 percent ultimately.

14. Total investment is TL 332,875,000 including $13,489,000 foreignexchange for plant and equipment. Like production, investment is plannedto build up over 5 years.

15. The plant is ultimately intended to employ 1,300 workers on twoshifts, and considerable numbers of Italian Supervisors and technicianswill be needed in the initial years. Bursa has been selected as a siteas the town has a history of automobile repair and bus production. Thesecond motor car plant (Renault) will also be established in Bursa, formuch the same reasons. It is understood that ample labour is available forboth.

16. The company has been formed with 41.5 percent FIAT interest, thebalance being held between the KOC Holding Company and M.K.E.K. The projectis currently being managed by a committee made up of one director from eachcompany which meets weekly.

17. The factory is now virtually complete, and plant installationshould start shortly. Production is due to start on November 13th, 1970having been put back from the beginning of September. As already noted,there will initially be a considerable imported component. In the futureFIAT intend to follow the practice in their other overseas operations,ending up by making within their own factory 80 percent by value of theautomobile, and thus there will be relatively little scope for independentsuppliers.

Evaluation

18. The evaluation showgn in the table was based on SPO figures, andthe sponsors were recalculatinDg costs during the voisit made by the mission.Domestic cost of Foreign Exchange savings is very high - TL 33.3 = US$1.00 -

as might be expected in such fa situation. The unit, with protection, willundoubtedly be commercially viable - FIAT have considerable experience insetting up plant overseas - but it may well be that their new calculationswill show benefit from adopting a slower build up of domestic content, aswould appear on the face of it, to be the correct course of action.

C. The Perkins Diesel Engine Project

Background

19. The Perkins Diesel Engine Project is closely associated with theproject from the Massey Ferguson Group (of which Perkins is part) to buildtractors, and was originally intended to provide 20,000 engines of threesizes up to 130 HP ior use in Tractors and Trucks. On insistence from theSPO the capacity was increased to 50,000 engines. The proportion ofclomestic content was to rise to 70 perecent in 5 yIears, and a profitlimitation of 16.5 percent net of tax was imposed as the plant was to havea monopoly of the market.

APPENDIX IIPage 5

20. Perkins had considerable problems finding local partners for aninvestment with a return as low as 16.5 per cent, but finally establishedan enterprise with the following ownership:

- Massey Ferguson 51%- M.K.E.K. 20%- Chrysler (Turkey) 10%- Genoto (General

Motors) 10%- T.S.K.B. 9%

21. The company received its approval in August 1968, the decreestipulating a start on site in 6 months and a build up period to fullproduction of 6 years.

Present Situation

22. The project had problems to begin with. Relations between Perkinsand the principal local shareholder, M.K.E.K. were very poor; Perkins com-plained of interference, M.K.E.K. of lack of information and cooperationM.K.E.K. wished to take a leading part in the enterprise - even 1:o theextent of appointing staff - but Perkins preferred that control shouldremain entirely theirs, and the difficulty culminated in considerable delayin land purchase as M.K.E.K. refused to meet their share of the :Local currencyrequired fsor the land and buildings.

23. Perkins then made formal application to have the decree alteredso that:

- M.K.E.K. were removed as shareholder- The Profit Limitations were removed- The annual quantity was reduced to

20,000 as before- The domestic content was reduced.

24. The first request was withdrawn after negotiations, and SPOfinally accepted the second, refusing the third as being contrary to theirpolicy of "large units". Perkins has since withdrawn the project.

Evaluation

25. An economic evaluation based on an output of 50,000 engines is shownin the table at the end of this appendix. The domestic cost of foreign ex-change savings is TL 16.25 - US$1.00, and it is considered that the achieve-ment of such a competitive rate is a function of the large size of unit.

26. One outstanding problem is therefore the question as to whether amarket for 50,000 engines exists. Estimates of Tractor, Truck and Coachproduction made in the report indicate a total production for all makes of

APPENDIX IIPage 6

44,800 engines in 1977. While it may be possible to adopt all the modelsto take the Perkins engine, many manufacturers will object, and some atleast of the trucks and coaches will need larger engines. A short termmarket of 50,000 engines does not exist as uses other than trucks - such assmall boats, combine harvesters, etc., would be quite insufficient.

27. The production of a lesser quantity, such as 20,000, radicallyaffects the economics, but meaningful calculations cannot be made untilPerkins have issued the revised cost figures.

D. The Eaton-Yale-Towne Project

Background

28. The Eaton-Yale-Towne project is intended to supply gears andtransmission units to the truck industry. It would produce a total of24,000 gearboxes and 24,000 sets of differential gears of various types peryear, and has been set up with the participation of several Turkish truckmanufacturers.

29. Total fixed capital has been estimated at TL 102,611,000 andtotal assets after a three year build up period at TL 134,592,000. Of this$8,400,000 will be required for foreign plant. The company was approvedin 1969, and production was expected to start in 1972.

Present Situation

30. The factory site has been levelled, but no further work has beendone. The project is now being completely reappraised as costs were risingrapidly, and 24,000 sets of transmission for trucks was thought to beexcessive for the market.

Evaluation

31. The table at the ernd of the section shows the evaLuation and indi-cates a domestic cost of TL 15.13 = US$1.00 calculated on overall operatingfigures, as the full range of gearbox and axle types have not been separatelycosted. Whilst this is a fairly competitive figure the note has alreadybeen made about rising costs.

32. ThIe total market for truck transmission sets is likely to be notmore than 15,000 in 1977. The sponsors would therefore be correct inevaluating the manufacture of a lesser quantity, but it is uncertain whethersuch a project could be commercially or economically viable.

33. By including tractor gears a market of perhaps 35,000 sets wouldbe reached in 1977, at the expense of the complexity of even more types ofgears in small batches.

APPENDIXC IIPage 7

34. Gear cutting plant is usually universal once the full range ofmodule cutters is available and therefore extra tooling should be confinedto mandrels but the re-setting of plant between batches would increase costs.

35. Two other gear cutting projects exist - one from M.K.E.K., andone from Akcan. Details are not yet finalized. The large quantity users- the FIAT and Renault plants - are likely to make their own. There istherefore a case for one large plant to handle all trucks, tractors andcoach gears. The answer would seem to be a major reappraisal of all threegear projects, with the possible objective of a merger into one largeeconomic unit.

E. The Massey-Ferguson Proi_ct

Background and Present Situation

36. The project is closely linked with the Perkins engine project, andis in the same state of development which need not be repeated here. Inthis case a total Investment of TL 183.6 million is envisaged; including$10.6 million foreign plant. A build up period of 5 years is plannedstarting with two models and increasing to 3 in ithe third year. MasseyFerguson tractors are now assembled by a Turkish firm, and 8,000 were madein 1969.

Evaluation

37. The evaluation made in the table shows that the domestic cost ofthe foreign exchange savings is TL 20.22 = US$1.030 which (while high incomparison with some of the other products evaluated in this appendix) isnot excessively so, and the result is undoubtedly due to the relativelylarge volume of throughput. Costs were not available for lesser outputvolumes.

38. A market for 25,000 tractors in total will ultimately exist, butthe range of sizes required will probably be wider than the 3 sizes oftractors proposed. Turk Traktor Company also intends to expand productionand thus the market may have to be shared by two production units of lessthan economic size.

39. Exports of tractors would be the answer to this problem if morecompetitive prices could be obtained, and the present reappraisal by MasseyFerguson would take this into account. Turk Traktor are already exploringthe possibility of export to Pakistan.

APPENDIX IIPage 8

F. The Parsan Forging Project

Background

40. The company was founded in 1968 by 7 Private Industrialistsconsisting of 5 contractors, an economist and a mechanical engineer nowappointed General Manager. This group of individuals approached SPO foradvice on suitable subjects for new investment. At the time, SPO wereconcentrating on the establishment of Vehicle Industry feeder units and thusthe new forging project was started.

41. The Pre-Investment Study was completed by Parsan in 1969, andwas based on a study made by American Consultants for the SPO. Two stageswere forecast:

Stage I - 6,000 tons per year forgings, plus 200,000rear axle shafts giving approximately 9,000tons in total.

Stage II - An additional 14,000 tons per year offorgings and 48,000 caterpillar track links,giving approximately 25,000 tons in all atthis stage.

Investment needs were estimated to be:

Fixed Capital Working Capital

Stage Total Foreign Exchange Total(Million TL) (Million US $) (Million TL)

Stage I 40.9 1.23 6.3

Stage II 56.1 2.00 22.8

TOTAL 97.0 3.23 29.1

Present Situation

42. Work is now proceeding on the buildings for Stage I and plant hasstarted to arrive. Production is scheduled to commence later in 1970 anda five year build up to 9,000 tons per year is planned. Subject to finance -the reasons for the 1969 pre-investment study - Stage II is hoped to startup in 1972. Application has been made to IFC, but is held awaiting theoutcome of Stage I.

Economic Evaluation

43. Lack of detail product cost data precludes an independant analysisand the figures used are therefore on the results of the Project Report.

APPENDIX IIPage 9

44. The total demand for relevant forgings for the vehicle industry hasbeen estimated as:

Year 1972 1977 1982

Demand

(Tons per year) 17,000 29,500 47,500

This is based on an estimated vehicle requirement: allowing for fleet growthand replacement of old vehicles. The Parsan Pro'lect will supply only partof this market, which was calculated at an average of 180 kg. of forgingsper vehicle which is approximately correct. (The same figure is used inthe United Kingdom calculations). Another part of the market will be suppliedby the Omtas Project, although the actual items for manufacture do not overlap.

45. Detailed cost estimates have been made for Stage I in terms offixed and variable costs at various per cent utiLizations.

% UtilizationCosts (Million TL) 60% 100%

Fixed Costs (Wages, Depreciation, MaintenanceDebt servicing, license fees, expenses, etc.) 11.19 11.67

Variable Costs (Material, auxiliary materials,fuel, overtime, etc.) 31.4 49.,9

TOTAL 42.59 61.57

46. In terms of actual costs, about one-third will be attributable toRear Axle Shafts, which at 60 per cent utilization would be TL 14.20 million.At this rate 120,000 shafts of various sizes would be produced, at an averagecost of approximately TL 118 per piece, high by European Standards.

47. The Parsan company has carried out more detailed cost evaluationsand comparisons with imported components, showing a profit of 24 per cent atsuggested Sales Prices. Adjusting the profit for the purposes of calculationrate to the minimum acceptable level of 12% only, estimations have been madeof the dollar cost of the import savings.

APPENDIX IIPage 10

Rear Axle ShaftsTrucks Coaches Cars Tractors Unit

1. Europe 9-10 10--15 6-8 12-17 $/piece

2. Landed in Turkey 140-160 160-240 100-120 200-280 TL/piecr

3. Present Sales Price 280-300 350-450 224-300 500-650 TL/piece(Turkey)

4. Parsan Price 144 200 112 256 TL/piece(Est)

5. Parsan Cost 120 162 95 205 TL/piece(Adjusted)

6. Est.C.I.F. if imported 10 13 7 15 $/piece(Tstanbul)

7. Dollar Costs(5 - 6) 12.0 12.4 13.6 13.7 TL per $

Considering that the price is on high cost l'urkish Material, these costsare quite encouraging as the effect of imported inputs (such as alloyingelements and hardening salts) would be either included in the basic steelprice, or be of small effect. The project therefore appears to be viable.

APPENDIX III

DEMAND PROJECTIONS FOR ENGINEERING }RODUCTS

Demand for Metal Products

1. Current Turkish Statistical figures div:Lde the Metal ProductsSub-sector into the three categories of Capital, Intermediate, and Consump-tion Goods. Direct enquiry resolved the actual products involved to be asfollows:

Capital Goods - Construction Steelwork- Radiators and Low Pressure Broilers- Wire Products- Hand Tools

Intermediate Goods - Nuts, Bolts, etc.

Consumption Goods - Household Hardware (pots and pans)- Other consumables

2. There was also a miscellaneous category, divided between inter-mediate and capital goods, understood to include castings, forgings, andother similar items either produced for direct sale (Capital Goods) orincorporation in machinery (Intermediate Goods).

3. The Capital Goods defined above are used by:

(a) the Construction industry, currently expanding at8/9 per cent in terms of investment, but considerablyless in terms of area.

(b) the General Engineering Industry, currently expandingat 11 per cent.

It is suggested therefore that a growth in demand of 10 per cent per annummight be projected for this category of Metal Products.

4. Intermediate Goods - mainly nuts and bolts - are used by t:heMachinery, Road and Rail vehicle industries and also, to a lesser extentby construction, repair facilities and domestic consumers. The greatestproportion will be used by the first two mentioned; and these two sectorsare forecast to expand at the following rates:

Machinery - 20 per centRoad Vehicles - 8 per cent

As they are of almost equal volume, a growth rate of 14 per cent may beexpected in the Metal Products Intermediate Goods, increasing to 15 per centas the Machinery Sector growth continues.

APPENDIX IIIPage 2

5. Consumption Goods are somewhat ill defined, but on the assumptionthat such items are generally related to household goods, an elasticity of1.5 per cent relative to the rise in Gross National Income has been forecastby the Mission, that is to say, 9.25 per cent until 1974, and 10.5 per centthereafter.

6. The table below shows the demand projections for the MetalProduct sectors prepared on these bases. For comparison purposes, theplanned figures for 1970 are included.

Estimated Demand for Metal Products(Million TL)

Plan ProjectionsCategory 1970 1972 1977

Capital Goods 1,366.6 1,653.6 2,663.1Intermediate Goods 703.1 941.7 1,877.7Consumption Goods 1,108.3 1,322.8 2,058.8

Total Demand 3,178.0 3,918.1 6,599.6

The Demand for Machinery

7. The end uses of the products of the Machinery Sector are extremelydiverse, but can, like those of Metal Products, be divided somewhat arbit-rarily into the three categories of Capital, Intermediate and ConsumptionGoods. In this sector, the divisions would be:

(a) Machinery for Fixed Investment(Boilers, Machine Tools, Textile Plant, etc.)

(b) Machinery for incorporation in other products(Gearboxes, engines, etc.)

(c) Machinery for consumer use(Household. appliances, etc.)

8. In considetring future projections, the growth of investment inCapital Plant is rel.ated to the growth of investment generally, but theproportion is complex and likely to change year by year. In the case ofTurkey, the demand for machinery as a proportion of total investment inmanufacturing (the largest user of investment machinery) has been decreasingrecently according t:o SPO figures:

APPENDIX IIIPage 3

Plan196-7 1968 1969 1970

Investment in the 3,449 4,348 5,278 6,312Manufacturing Sector

Demand for Machinery 1,302 1,457 1,466 1,609for Investment

Proportion 38% 34% 28% 25%

9. At first sight this decrease is curious, as the proportion ofmachinery equipment to total investment in the various manufacturing sectorsis often high, and investment in manufacturing as a proportion of GrossDomestic Fixed Capital Formation has increased from 20.5 per cent in 1967to 24.4 per cent in 1970. The decrease may partly be due to certain currentinvestments where all buildings and groundwork have been completed, butpart only of the machinery has been installed leaving further plani: invest-ment - often requiring foreign currency - until output demand warrants it.Many refineries, processing plants, etc., are in this state.

10. Growth in demand for machinery for investment is thus likely tobe erratic, but as a first approximation it is suggested that a figure of12 per cent be taken to allow for recent shortfalls.

11. Intermediate Machinery, such as gearboxes, internal combustionengines and like equipment is most closely related to the road vehicleproduction industry, forecast to expand from TL 2,480 million in 1972 toTL 4,201 million in 1977, an increase of 150 per cent. Total Domesticcontent of road vehicles will rise from 60 percent (TL 1,700 million) in1972 to 80 percent (TL 3,360 million) in 1977, tn increase of almost 200per cent over the five years, or 15 per cent per year. A similar growthrate can be expected for Intermediate Machinery.

12. In the case of Machinery for consumption uses, growth can beexpected to be closely related to the increase of GNP, with a high elasticitysimilar to that predicted for consumption metal products, that is, 9.25 percent until 1974 and 10.5 per cent thereafter.

13. Demand projections for the Machinery Sector, based on the estimatedgrowth rates described above, are shown below compared with the plan for 1970.

Estimated Demand for Machinery(Million TL)

Plan Estimated DemandAssumed Category 1970 1972 1977

Fixed Capital Investment 1,609.2 2,165.3 3,816.0Intermediate 641.8 848.8 1,707.2Consumption 483.0 581.1 945.4Others 1,033.0 1,319.0 2,430.2

Total 3,767.0 4,914.9 8,916.8

APPENDIX IIIPage 4

Demand for Agricultural Machinery and Equipment

14. Total investment in the Agricultural Sector was TL 3,196 millionin 1968, representing about 15.2 per cent of the total gross fixed capitalformation that year. The proportion has remained constant in recent years,but is planned to reduce to 14.2 per cent in 1970. This is in line withthe continued transfer of emphasis from the agricultural to the manufacturingsectors. The proportion has been assumed to reduce to 12 per cent in 1977.

15. Currently, the largest proportion of the investment (42.6 percent in 1968) is involved in the Irrigation and Drainage schemes. Thenext largest sector i.s Machinery and Equipment at 26.5 per cent in 1968.However, 1968 was a peak year for irrigation projects, and it is understoodfrom Agricultural mission members that the proportion of investment allocatedto this aspect may now be expected to decrease.

16. On the other hand, mission members thought that more equipmentwas needed, particularly in tractor drawn apparatus (as opposed to tractorsthemselves) and the emphasis is likely to be more on machinery in thefuture. It has, therefore, been assumed that :35 per cent in 1972, and 40per cent in 1977, of agricultural investment will be allocated to Machineryand Equipment.

17. Tractors wi'll still account for the majority of the investment.At present, it has been estimated that about 99,000 exist, an increase ofover 80 per cent from the 55,000 existing in 1965. Many of the existingmachines are of consi.derable age, and of a wide diversity of types and sizes.The tractor population, in terms of tractors per 1,000 ha of cultivated land,is now 4.15 - a figure comparable with that of Spain 5 years ago and consi-derably behind that of Greece. It would be of interest to obtain currentfigures for Spain ancd Greece if these are available to the Bank.

18. In common with most developing countries, tractors are also usedas general transportation in country districts, and there is a limited demandfor industrial tractors in large plants. The major demand however, will befor conventional agricultural uses.

19. Accordingly, further increases in tractor population can beexpected. The proportion of total investment divided to tractors, however,is unlikely to change significantly, and may diminish somewhat as moreemphasis is given to supply of agricultural equipment to make up the defi-ciencies presently commented on by mission members. For the purposes ofthe projection, a figure of 60 per cent has been taken (for comparison the1969 proportion was 64.5 per cent). At average prices, the demand for trac-tors can therefore be estimated as:

1.972 - 18,500

1.977 - 25,000

20. Without alt:ering these global figures, some slight change from cur-rent tractor sizes is likely. At present, the emphasis is on the 30 to 40

APPENDIX IIIPage 5

horsepower range. In the future, the Anatolian Wheat Programme is liLkely toneed deep ploughing with more powerful (60/70 horsepower) tractors, while atthe other end of the scale an increasing need is being felt for smalL tractorssuitable for market garden size of operation. The change can be sutmarizedas follows:

Tractor Size Proportions

Horse Power Period 1968/72 Period 1973/77

14 15% 25%25 20% 20%35 40% 30%50 25% 25%

21. The balance of the investment in Agricultural Machinery andEquipment will be divided between a wide variety of products such as combineharvesters, cultivators, ploughs, seed drills, harrows, mowers, traiLers,balers, etc. The demand for these in total can be assumed to grow al: thesame rate as the general investment, and demand projections in terms of valuecan be made accordingly.

22. The table shown below indicates the demand projection calculationfor this sector in detail.

Estimated Demand for Agricultural Machinery

ACTUAL PROJECTION1967 1968 1969 1972 1977

GNP - Increase % 6.5% 6.5% 6.5% 7% after 1976(Billion TL) - Amount 110.7 118.1 142.7 197.3

G.F.C.F. - Proportion 18.4% 19.4% 19% 19%(Billion TL) - Amount 16.8 20.3 23.0 27.1 37.5

Agricultural - Proportion 15.4% 15.2% 15.2% 14% 13%Investment - Amount 2,589 3,074 3,500 3,800 4,900

(Million TL)

Total Demand forAgriculturalMachinery andEquipment - Proportion 29% 26.5% 34.5% 35% 40%

- Amount 749.3 807.6 1,212.1 1,330.0 1,960.0

Divided into:a) Tractors - Proportion - 60.4% 64.5% 60% 60%

- Value - 487.8 782.5 800.0 1,180.0- Quantity - 17,000 19,200 18,500 27,000

b) Other Equipment- Value - 319.8 429.6 530.0 780.0

APPENDIX -IIPage 6

Demand for Road Vehicles

23. Two studies have already been made cf Road Vehicle demand in Turkey,The first was commissioned by SPO (from a Turkish Consultant company AyyildizMuhendislik Musavirlik Burosu) and the second was carried out by the SPOPlanning Section themselves.

24. Broadly in agreement on growth rates in passenger cars, the twostudies differed in truck and coach growth rates, adopted slightly differentgrouping of vehicles and started from different levels of demand in 1967.Neither study was entirely satisfactory in detail, and meaningful comparisoncannot be made owing to the different bases used. The SPO's own study was,however, more practical and benefited from some of the more obvious shortfa-lein the original study.

25. A new demand forecast has been prepared for this report, based onthe 1967 vehicle fleet sizes, composition and ages given in the ItalconsultTransportation Report, and making allowances for more recent developments inthe industry.

26. Demand for new vehicles will result from general growth in fleetsizes, and from replacements for life expired vehicles, of which Turkey, incommon with many developing countries, has a considerable number. In 1967,for example, the average age of cars was 9 years, trucks 8 years and coaches7 years. These averages are unlikely to have altered significantly, althoughsome small improvement may have been recorded in the average age of long-distance coaches, as many have been imported.

27. The total number of vehicles in 1967 was estimated as follows forthe major categories:

Passenger Cars 106,000Trucks and Pick-ups 91,470Coaches and Mini-buses 27,780

At that time the Passenger car fleet was increasing by 12.8 percent perannum, trucks by 10.4 per cent, and coaches by 12.5 per cent. It can beassumed that the exisling growth rate for passenger cars will continue to belocally produced - and considerably cheaper - cars become more freelyavailable in 1971. The growth rate is then likely to increase to 15 percent, and to be restricted by production rather than financial limitations.

28. On the other hand, truck demand has dropped considerably and appearsto be about 5 per cent: at present, and the market for coaches is alsoexpanding at a similar rate.

29. On this basis, the following fleet size is forecast for 1972, and1977. The annual requirements for new vehicles to satisfy this growth canalso be calculated.

APPENDIX IIIPage 7

Total Estimated Fleet of Vehicles

1972 1977

Passenger Cars 201,735 405,760Trucks 116,740 148,995Coaches 35,455 45,250

It is, unfortunately, not possible to compare these figures with currentfleet sizes as the SPO grouping of vehicle is dissimilar, and contains alarge miscellaneous category.

30. Requirements for replacement of time-expired vehicles are subjectto many variable factors such as the supply of spare parts, the supply offinance for repair or replacement, and in the case of Turkey, the presentgradual change from the present use of large imported cars for the dolmusshared taxi system to the use of mini-buses. Thus far, the change appearsto be confined to rural areas, but is likely to extend to urban areas asproduction of mini-buses increases.

31. The reduction in average vehicle age will therefore only be gradualand it is suggested that an average age for all categories of 6 years in 1972,and 5 years in 1977 might be achievable. On this basis, and assum:ing aneven distribution of age in the vehicle population, (as the last census wasmade many years ago) replacements in 1972 and 1977 have been estimated.

32. Thus, the total demand for each category, composed of the demandto meet fleet growth, and the demand for replacements, has been determined,and is shown below. Numbers have then been converted to equivalent valuesin Turkish lira by extending with average current unit values. Demand formiscellaneous vehicles (large cars, jeeps, three wheelers, motorcycles, etc.)and for repairs have been based on the SPO studv in terms of value as abroadly similar growth rate had been used, and the content of the categorywas extremely varied.

APPELNDIX IIIPage 8

Estimated Demand for Road Vehicles

1972 1977Value Value

Category Quantity (Million TL) Quantity (Million TL)

Passenger Cars:Growth 26,315 52,925Replacement 5,860 10,350

TOTAL 32,175 804.4 63,275 1,581.9

Trucks:Growth 5,560 7,095Replacement 7,245 8,740

TOTAL 12,805 836.2 15,838 1,063.0

Coaches:Growth 1,690 2,155Replacement 2,080 2,790

TOTAL 3,770 414.7 4,945 455.2

Others:(Miscellaneousand Repairs) - 1,205.0 - 1,555.0

TOTAL DEMAND 3,260.3 4,655.1

Demand for Railway Vehicles

33. The Turkish State Railways is engaged in an extensive, and longoverdue, replacement of equipment including the replacement of steam locomo-tives with diesel-electric main line, diesel shunting and electrical mainline locomotives. The latter are confined to the short length of track nowelectrified. Passenger coaches and other rolling stock is also being over-hauled and replaced by newly manufactured steel and light alloy vehicles.

34. A recently written report 1/ recommended the following replacementsover the next ten years:

Main Line Locomotives - 479Shunting Locomotives - 129Passenger Coaches -1,261Goods Wagons -7,115

However, Turkish policy has been to manufacture all rolling stock, and re-cently also all locomotives, (even electrically powered) domestically and soreplacements at the desired rates will solely be dependent on the State Rail-way Workshops output, and thus demand, or more accurately consumption, willbe a function of production and is not therefore discussed further.

1/ Prepared by Italconsult.

APPENDIX IVPage 1

METAL PRODUCTS SECTOR

FORECAST OF TOTAL VALUE OF PRODUCTION

(Million TL)

ESTIMATED PROGRARME jPOJECTTONSOURCE OF PRODUCTION PRODUCTS 1969 1970 1972 1977

1. Existing Capacity All 2,751 3,000 3,305 5,080

2. Current New Investments

SPO List:Demir Dokum I Castings 20 70

Debak Liners 30 40

Mahle Pistons 10 25

Ilhami Pistons 10 20

Bosch Nozzles 5 20

Dizelson Nozzles 2 10

Segman Rings 10 20

Parsan Forgings 20 30

Omtas Forgings 15 30

Gucum Ticaret Nuts,Bolts 25 50

Kale Dies 5 10

Demir Dokum II HeatingRadiators 20 40

Other small investments 25 50

3. New Investments,at current rates 420

TOTAL Value of Production 2,751 3,000 3,502 5,915

AVERAGE Annual Growth Rates _ 9% 11%

APPENDIX IVPage 2

MACHINERY SECT'OiR

FORECAST OF TOTAL VNLUFE OF PRODUCTIO.'

| ,XLUE OF I1TIQI il i)lL 1 -_ 7 . I ,

SOURCE OF PRODUCTION PRODUCTS ESTIMATED PKOCRXAJ;;v P-,J r:_1 969

1. Existing Capacity - 1,640 1 ,95C 2,050

2. Current New Investments

SPO List:Perkins Engines 1 t )100 Z 420Pancar Motor Engines 50Motor San EnginesCelik Montaj Engines 20ER-WE-PA Machinery - 20-C'Tezsan M/C Tools 40 1 40Isik Fabricating S0C 40Rona Fabricating 50| 75,Atlas - Copco Compressors 10 10Borg Warner Pumps 20 20Habas P.Vessels 35 50Tekfen P.Vessels 35 5C,Mysan S.Absorbers 10 201E.Y.rowne Gearboxes 50 230Y.Aklcan Gearboxes 10 801M.K.E.K. Gearboxes 50 200Meck.Makina Lifts 201 55E.C.A. Valves 20Megateknik Clocks 10 20M.K.E.K. Textile /C j 10 25

Others: Sungirlar Boilers 1 10 h|13Mansur Sahin Fabricating Ii 1 10Sugar Board. Fabricating -I0Bimac M/C Tools 40 4.0Metal Ticaret MIC Tools 20? 40Makina Takim Tools 5 10Byroni Jackson Pumps . 10Profilo Appliancee 30 100Arcelik Appliances I 5C 50%

Other small investments 70 10C

3, New Investments, atpresent rate and out-put ratios _ 11,400

TOTAL Value of Production 1,640 1,950 2,855 7,510

AVERAGE AriuLal Growth Rate | 1 9/ 21/0 21.5%_ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ - _ _ _ _ _ _ _ _ i. . _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _

APPENDIX IVPage 3

RHAD VEHICLE, RAIL VEHICLE AMD AGRI(ULTT AL, MACHINERY SECTORS

FORECASTS OF FUTURE P;QRODUCTION

NUiBER ANlT VALUE 0O1 OUTPUT (MI.LLION T.L.)

CATEGORY ESTIMATED PROGRAMME PROTECTI01N1969 1970 119'72 1977

__ ~ ~~ I.__________

(Current) (Current)| (1967) (1967)

fiCND VLHICLES

Passenger Cars - Qty. 4,200 6,500 23,000 65,000- Value 112.6 174.2 575.0 1,625.0

Trucks - Qty. 12,700 14,400 13,70( 14,850- Value 1,118.0 1,223.3 895.0 997.0

Coaches - Qty. 2,125 2,500 3,960 4,850- Value 342.9 404.7 439.5 446.5

Miscellaneous including repairs- Value 888.1 1,064-.3 1,100.0 1,133.0

TOTAL VALUE 2,461.6 2,866.5 3,009.5 4,201.5

|RAIL VEHTCI;iS

Locomotives:

Mainline - Qty. 10 3D 3- Value 25.0 75.0

Shunlting - Qty. 10 12 10 1 10- Value 13.5 14.9 12.5 12.5

Electric - Qty. - - _ 5- Value 15 15

u!olling Stock

P Passenger - Qty. 100 103 100 100- Value I 63.4 51.0 55.0 55.0

Goods - Qty. 941 928 1,200 1,500- Value 130.9 102.8 138.0 171.5

Miscellaneous including repairs- Value 122.0 145.0 175.0 285.0

TOTAL VALUE 329.8 338.7 470.5 614.0

AiPI CJLTUhAL, MACHINERY

7 Tr, oors - Qty. 19,000 19,800 18,500 25,000- Value 779.0 861.3 800.0 1,080.0

*:ther iy.mn - Value 249.8 371.7 530.0 880.0

TOTAL VALUE 1,028.8 1,233.0 1,330.0 1,960.0

-- 3-

I I~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

APPE:N )1. VPage 1

PUBLIC SECTOR ENGINEERING

(Brief Descriptive Account)

General Comment

1. Public sector corporations with considerable interests in engineer-ing are:

- The Mechanical and Chemical Industries Corporation;

- The Sugar Industry Board;

- The Turkish State Railways Corporation.

Other public sector enterprises also have limited engineering facilities,such as:

- The Iron and Steel Corporation at Karabuk;

- The State Hydraulic Services.

The facilities and products of the first three are now described.

The Mechanical and Chemical Industries Corporalion (M.K.E.K.)

2. The corporation was formed out of the old established Armamentfactory and now has 30 production units in Ankara, Kirikkale and Istanbul,employing 16,000 in total, and turning out milLtary products, chemicals,explosives and wood products in addition to the engineering industry prod-ucts which are listed overleaf.

3. The list of engineering products is not exhaustive and many otheritems have been made from time to time, often of an experimental or proto-type nature. For example, one unit recently made an exact copy of a smallimported earth road grader as an exercise, but are now seriously thinking ofit as a future production possibility.

APPENDIX VPaze 2

Mechanical and Chemical Industries CorporationTypical Civilian Engineering Elroducts

Category Product Approximate__utitt(1969)

Steel Various Alloy Steels 34,000 tonsSeamless Tube (Project)

Non-Ferrous Metals Copper and Brass 6,500 tons

Electrical Machinery Electric Motors 400,000 number

Foundry Grey & Malleable 1,500 tons- Cylinder Blocks (5,000 tons capacity'- M/C Tool Beds

Machine & Forge Shops Gears and Parts 200,000 Gears

Machinery Tea Processing Plant UnknownCement Processing Plant Unknown

Machine Tools Lathes, Milling M/Cs 550 UnitsShapers, Drills 1,600 unit target

Mobile Machinery Tractors (Hanomag) 300 (PKD)Air Compressors 80 (PKD)Road Grader PrototypeRoad Roller Prototype

Metal Products Galvanized Wire )400Barbed Wire ) t

Textile Machinery Dornier Loams 400Massoli Spindles 100

Buildings Steel Franed & Cladfactory units, etc. Unknown

4. Apart from the general machine shop, gear cutting plant andfoundry at Kirikkale, facilities are generally old fashioned and cramped.The Ankara plants, particularly, are badly laid out in a large number ofsmall buildings.

5. In addition to the above variety of activities, M.K.E.K. haslately taken financial interests in newly developing Private Sector compa-nies. Examples of this form of Mixed Enterprise include Turk Tractor,Tofas-Fiat and Perkinis. M.K.E.K. are now looking for private partners touncertake a T.L. 300 million project to manufacture automobile gears withtheir assistance.

The Sugar Industry Board Workshops

6. Originally established to repair and manufacture plant and equip-ment for the Sugar Producing Factories, the original factory at Eskisehir hasbeen joined by a newly constructed heavy fabrication factory near Ankara.This new factory also produces plant and machinery for the cement and petro-

APPENDIX VPage 3

chemical industries. The Ankara factory has a capacity of 6,000 tons ofsteelwork per annum, in addition to about 3,000 tons produced by Eskisehir.

7. The new factory, about 6,000 m in area is well laid out andequipped with large modern machine tools and plant. Work to Lloyds and otherInternational standards is regularly produced, including large pressurevessels with submerged arc welding. Long term plans exist for add:Lng capa-city to -this factory:

Phase I 1973 - Additional 4,500 mPhase II 1978/80 - 4,000 m2

Phase III 1990 - 9,000 m2

8. The effect of this 20 year plan will be to quadruple output, toapproximately 25,000 tons per annum. This is probably the maximum practicalsize for a fabrication factory, and this view is also held by Management.

9. Present costs average about T.L. 10,000 per ton, very high byEuropean standards taken at the old exchange rattes. This is, however,mainly due to the excessively high steel costs referred to elsewhere, asmaterial can be expected to represent about 70 per cent of the end. productin this category of work. Low utilization of plant can also be a contrib-uting factor.

10. An approximate evaluation at the new exchange rate of 15 T.L. =shows a considerably better comparison with European rates. Allowing for theprice rise of imported inputs, the domestic costs could be only 8%, over theC.I.F. value of imported items.

Turkish State Railway Workshops

11. All the rolling stock and locomotives made in Turkey are built inthe State Railway workshLops. In addition, many other products, not immed-iately associated with the railway business, are manufactured from time totime. The position today is as follows:

APPENDIX VPage 4

Turkish State Railway WorkshopsPrincipal Works

Location Employees Product Oujpg

Eskisehir 4,000 Diesel-Electric Locos (M1ain Line) Prototype 1970Diesel-Electric Locos (Shunting) 12 (1969)Bogie Goods Wagons 300 (1969)lleavy Fabrications-bridges, cranes 3,000 tonsBus-Bodywork -Small tools (Twist drills, etc.) -Locomotive Repairs (steam) -Railway Track points -

Sivas 4,000 Locomotive Repairs (steam) -Two-Axle Goods Wagons 4 per day

Adapazari 2,000 Piassenger Coaches 90 (1970)Ambulance Bodywork -

12. In addition, many other repair facilities exist in old stearnengine depots, and the Ankara Depot is understood to make small industrialdiesel shunting locomotives on a very different scale of operation.

13. From time to time other products are made. The Eskisehir factoryhand-made four saloon automobiles some years ago and is currently repairingsmall harbor launches. The cars were made at a cost understood to be in ex-cess of $100,000. The exercise has not been claimed as economically moti-vated.

14. The only plants visited, those at Eskisehir, included a large,modern and well equipped machine shop/assembly area, although other build-ings and machinery at the same site were less satisfactory.

APPENDIX VIPage 1

GENERAL EXTERNAL TARIFF

APPLICATION TO TYPICAL ENGINEERING PRODUCTS

(million TL)

TARIFF RATE TYPICAL PRODUCTS

1% - Dairy Machinery, Parts for Locomotives, Inval:id Carriages

15% - Machinery for Earth Moving, Metal Moulding and Casting,

Nuclear Reactors, Ball Bearings, Fighting Vehicles

20% - Punch Card Machinery, Locomotives

25% - Hydraulic Machinery, Furnaces, Agricultural Machinery,

Railway Track Fittings

j0% | - Centrifuges, Bottling Plant, Machinery for Paper, Pulp

and Book Making, Printing Presses, Spinning Machinery,

Sewing Machines, Typewritiers, Calculating Machines,

Transmission parts, Gaskets, Railway Wagons, Tractors

and Harbour Craft

35% - I.C. Piston Engines, Weaving Machinery, Texile Printing

Plant

40% - Steam Boilers and Engines, Parts for Piston Engines, Gas

iTurbines, Air Pumps, Heat Treatment Plant, Textile

Washing Plant, Rolling Mills, Office Duplicators, and

parts for Paper, Printing and Textile Machinery

j 50P%o 5 - Gas Generato'rs, Compressors, Road Rollers, Liquid Pumps,

Weighing Machinery, Cranes, Machine Tools, Cvncrete

Mixers, Vending Machines, Vehicle Bodies and Chassis,

Fork Trucks, Bicycles, Ships and Boats

60% - Fans and Blowers, Air Conditioning Plant, Refrigerators,

Water Heaters, Motor Cycles and Lorries

79% - Vehicle Parts

l 7'0, - Motor Cars arid Buses, Clocks and Watches, etc.

- 1-

APPENDIX VI(continued)Page 2

NOTES: 1. The list of articles given is rnot exhaustive, and

many sub categories exist, whereby (for example)

different sizes of the samne type of plant have

different t;ariffs.

2. The Tariff shown is that for Common External use.

Turkey is a signatory to the C-.A.T.T. Agreemenl, and

under this an entirely different (and generally

lower) set of tariffs and applications exist.

3. rlariffo are also subject to modifications in the

Kennedy Round.

APPENDIX VII

DESCRIPTION OF THE ENGINEERING, SUB-SECrORS

1. It is necessary to define in some detail. the terminology used inthis report so that the statistics quoted can be related to the officialplans and analyses prepared by the SIS and SPO. T'his appendix also servesas a brief outline of the very wide range of products manufactured in Turkeytoday.

2. Engineering has been taken to involve the following sub-sectors* of the Manufacturing Industry:-

(a) Metal Products Sub-sector

- Construction materials

- Radiators and water heaters

- Household items

- Wire products

- Hand tools

- Bolts, nuts, screws, etc.

- Casting and forgings

- Domestic consumables

- Miscellaneous items

(b) Machinery Sub-sector

- Steam and gas generating and driven equipment

- Construction, mining and road-making plant

- Internal combustion engines and gas generators

* - Heavy industrial equipment

Machine and power-tools

- Air compressors and pumps

- Food processing machinery

- Heating and ventilating plant:

- Textile machinery

APPENDIX VIIPage 2

- Transmission units, bearings, etc.

- Durable consumer items (refrigerators, etc.)

(c) Agricultural Machinery Sub-sector

- Tractors

- Combine harvesters

- Ploughs (tractor or horse clrawn)

- Harrows and mowing machines (tractor and horse drawn)

- Tractor trailers

(d) Road Vehicle Sub-sector

- Passenger cars

- Lorries and pick-up trucks

- Buses and mini-buses

- Others, including motor cycles, scooters,three-wheelers, etc.

(e) Railway Vehicle Sub-sector

- Locomotives - steam

- electric

- diesel

- Passenger carriages (various types)

- Goods wagons (various types)