Turkish Surprise

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Interesting examples of successful business practices in the region.

 

Turkish Surprise: A Business Blazes Path for Nation To EU's Doorstep --- Appliance Maker Koc Finds Place in Skeptical Market; A French Secret Revealed --- Europe's Most Efficient Fridge

 

By Hugh Pope

 

7 September 2004

The Wall Street Journal

A1

English

(Copyright © 2004, Dow Jones & Company, Inc.)

 

ISTANBUL, Turkey -- It's the biggest conglomerate in Turkey, with 54,000 employees and a reputation at home for quality. But when Koc Group tried to introduce a new line of its Beko brand washing machines at French furniture chain Conforama in January, the French sales staff protested.

 

"People think Turks can't make anything decent," says Valerie Lubineau, Beko's marketing chief for France. So she let the sales people in on a secret known only to Conforama's senior managers: Koc had been manufacturing Conforama's well-regarded in-house brand for years. Eight months later, the sleek blue and silver Beko machines are outselling European rivals. "We gave them arguments to break the taboo," says Ms. Lubineau.

 

Koc Group's struggle for respect in Europe reflects many of the obstacles Turkey has faced on the way to its goal of joining the European Union, now at a critical stage as the EU debates a decision due in December on whether or not to open accession negotiations with this country of 70 million people. Talks could last a decade and could still fail, but the debate over Turkish membership raises deep questions about where to draw the eastern edge of the Western world.

 

The U.S., eager to anchor Turkey in the West and buttress the country's secular democracy, strongly backs Turkish membership. For its part, Turkey has reduced the political role of the army to address concerns about a record of military coups, curbed human-rights abuses and brought triple-digit inflation down to single figures this year. Such issues had for years persuaded the EU to keep putting off negotiating membership, despite Turkey's 50 years of service as a member of the North Atlantic Treaty Organization military alliance.

 

European doubts about Turkey could still derail this mainly Muslim country in its half-century-long effort to find a place among the Christian states of Europe. Some Europeans worry about a wave of immigration at a time when the European economy is suffering sluggish growth and high unemployment. Some also fear that Turkey's population could overtake Germany's within a generation -- which could make it the most populous country in the union.

 

In France and Germany, polls typically show more than 50% oppose Turkish entry to the EU. "People are concerned which way Europe will go, and they're scared of Turkey because it has borders with Iran and Iraq," said Walter Posch of the EU's Institute for Security Studies. "They don't want to believe something good and modern can come from there," he says.

 

Still, businesses like Koc Group -- whose consolidated revenue rocketed up 61% in dollar terms in 2003 to $11.1 billion -- underscore a simple but critical part of the reason why the balance appears to be currently leaning in Turkey's favor. "As Koc Group, at least, we are already in Europe," said Bulend Ozaydinli, Koc Group's chief executive.

 

Exports from Koc Group's 96 companies quintupled to $4.1 billion in the five years through 2003, mostly to Europe. From Portugal to Russia, Koc counted a market share of 4.3% for home appliances, up from almost nothing five years before.

 

Koc's success underscores how fast Turkey is becoming a major manufacturing export center, for both international companies looking to sell into Europe and Turkish companies alike. The country now produces more than one-half of Europe's television sets, with most coming from Turkey's Vestel Electronics. Leading strong growth among several international car companies that have flocked to Turkey, French auto maker Renault is in a joint venture that exported $1 billion of cars to more than 100 countries in 2003.

 

Turkey's conflicted relationship with Europe dates back to the Middle Ages, when, bearing the standard of Islamic conquest, Turkish armies of the Ottoman Empire overran the Balkans and were stopped at the gates of Vienna in 1683. Europe's fear and occasional awe turned to scorn in the 19th century as it forced the Ottomans into retreat.

 

Soon after 1923, when the Turkish Republic was founded on the ruins of the Ottoman Empire, Vehbi Koc started what was to become the Koc Group in the new capital of Ankara. The young republic had virtually no economy. Armenian and Greek Christians had done most of the manufacturing in the empire, but most of them were expelled or killed during the preceding wars. Muslim Turks considered business "shameful," Mr. Koc later wrote in his memoirs. And yet, he recorded, "I noticed the minorities led a better life." Mr. Koc, who died in 1996, and whose family still controls 70% of the shares of Koc Group's holding company, Koc Holding AS, was determined to help Turkey catch up.

 

Progress was slow. Mr. Koc labored in a protectionist climate. The Turkish state, afraid of European and other foreign companies taking over Turkish markets as they did during the dying decades of the Ottoman Empire, maintained high tariff barriers. The companies that grew into Koc Group exported only a tiny fraction of their output.

 

Turkey's 1963 decision to move politically closer to Europe forced a gradual opening of its markets. By the 1990s, managers of some Koc units realized they had to counterattack or be crushed by bigger European competitors even in Turkey. In 1991, the main Koc company -- Arcelik, a maker of washing machines and other household appliances -- set up a research and development center to end the conglomerate's dependence on foreign patents and licenses.

 

The group was in a race against time. A 1996 deal with the EU removed the last trade barriers, like a $100-per-machine levy on imported dishwashers. But Arcelik (pronounced AR-che-lick) managed to defend its domestic market share of above 50% in most categories it competes in. By 2000, Arcelik engineers had enough technology to replace their last main licensed product, a dishwasher designed by Germany's Bosch.

 

Now more than 500 people work in Arcelik's sprawling R&D complex on the eastern edge of Istanbul, including 30 doctoral students from Turkish universities working on subjects like the movement of hot air in clothes driers. Young engineers cost a fifth of what they would in Germany. And as one of Turkey's most prestigious companies, Koc attracts the best of each class. In white lab coats and jeans, they are now experimenting with ideas like a microwave clothes drier and a refrigerator powered by magnets.

 

In 2002, the Japan Institute of Product Maintenance chose Arcelik's vast washing-machine factory for the first award for excellence given to any washing machine plant outside Japan. In February 2004, the European Commission honored an Arcelik-made refrigerator with a special award for using as little electricity as a 16-watt light bulb, significantly better than the European competition. "Technology [relating to appliances] used to be generated mainly in Germany. Not any more," said Semsettin Eksert, Arcelik's head of research, himself the winner of a patent for a variable-height shelf on the upper rack of dishwashers.

 

Still, continued slow growth in Europe forced Koc to directly confront its branding problems. The Arcelik name, for example, was deemed unpronounceable in Europe. Its products were initially shipped to Europe under the company's Beko brand name. But even that offered no quick way to crack the more profitable upper reaches of the European market.

 

The outlook shifted on Sept. 11, 2001. Brandt, the French home-appliance conglomerate, happened to file for bankruptcy that day. Even as turmoil spread across the globe after the terrorist attacks on America, the Koc board voted to dispatch executive Nedim Esgin, then president of the Arcelik unit, to France the next morning to try to buy the company. "Everyone was frightened of everything that day. It took real courage to go ahead," says Mr. Esgin.

 

Koc lost out to an Israeli investor for control of Brandt's French operations. But within a year, Mr. Esgin obtained prestigious former Brandt brands in Germany and Austria.

 

An athletic former member of the Turkish national basketball team, the 47-year-old shared the company founder's determination to match the prosperity of the West. Like many Turks, he had experienced prejudices personally. While studying management at San Francisco's Golden Gate University in the late 1970s, Mr. Esgin navigated a world that lumped secular Turkey in with neighboring Iran after the Islamic revolution there, and associated Turkey with the prison abuse depicted in the hit movie "Midnight Express." "I started telling everyone I was Yugoslav," says Mr. Esgin, who left Koc last year after 21 years and now hopes to start up a business representing foreign investors here.

 

Other Koc companies have been following suit, expanding market share in Europe by snapping up well-known brand names. Koc bought the Blomberg brand in Germany and Elektra Bregenz in Austria, both makers of refrigerators, dishwashers and washing machines, as well as Arctic, the leading brand of refrigerators in Romania.

 

In their most remarkable coup, Koc television and electronics manufacturing unit Beko Elektronik teamed up with a British partner this year to buy Grundig, one of the proudest names in German television and radio. Marketing director Erem Demircan, who helped shepherd the deal, had cut his teeth in the early 1990s selling Koc electric motors in Europe. He too felt prejudice against Turks was behind many a question about his company's ability to produce to high standards. In a German fair in 1992, just after Europe lifted border controls, he was humbled to see that none of the maps of the new Europe included Turkey.

 

"I reckoned the only way to put us on the map of Europe was through trade," says Mr. Demircan, who lobbied one partner, a unit of South Korea's LG Corp., to move Turkey from LG's Middle East division to its European division. LG says the change was for "geographical reasons" and didn't apply to the whole company. Mr. Demircan's success mirrored other Turks who lobbied international television channels to move Turkey from the Middle East to Europe on weather forecasts.

 

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"The way people approach us in the 1990s and now is totally different. Then it was being discussed whether Turks can even be Europeans. Now it is whether Turks can be members of the EU," said Mr. Demircan, 37, touring a plant where workers were busy erecting new buildings to help the company ramp up production from 4.2 million televisions in 2002 to a planned 9 million to 10 million in 2005. "Now, our customers just ask for prices. If you're in the TV business, you accept that it is Turkey's job to make TVs, just like carpets or Turkish delight," the candy.

 

Still, Mr. Demircan proceeds carefully, drawing on lessons Koc has learned. He was thrilled to be part of the Koc team that took possession of the Blomberg household appliance factories in Germany in 2002. At the headquarters, German management greeted their new owners with a Turkish flag and emotional Turkish immigrant workers, who said they never believed they'd see the day that their company would become Turkish.

 

But when Koc took over Grundig this year, Mr. Demircan sent an advance message asking that no Turkish flags be displayed. Koc also hired a German design house to help get the right plain, square German look for new product lines. And visitors to the Grundig and Blomberg Web sites have to dig deep beneath prose about their status as historic icons of German engineering to find out that Turks actually own the companies, design the insides and make the products.

 

"We want to create a Grundig that is a purely German company, that Germans can be proud of," said Mr. Demircan. "We're not disappointed as Turks. We know it'll take us another 10 or 20 years to establish our brands. That will certainly happen, as Turkey becomes more European."

 

Koc's Beko Elektronik expansion dates back to 2001, when it became Grundig's sole external TV supplier. Grundig's new chief, Hubert Roth, says that Beko's low-price and attractive models helped lift Grundig's sales even as it was in bankruptcy proceedings last year. By June Grundig's market share in Germany had doubled to 6% to 8% from its low point of 3% to 4% a year ago. "It's unbelievable," Mr. Roth said, comparing Turkey's achievement in Europe with the paths followed by Japan, Korea or China. "Nobody here . . . thinks about these developments in Turkey. They don't think about the enemy until he's at the door."

[Nakharar]

That's a little bit sad considering the dire situation here in Germany. Once prestigious household names like Grundig, AEG, Blaupunkt, Braun and Telefunken are going down the drain. I don't know if Schrörder will realize what a heavy price they will pay for outsourcing their manufacturing sector.