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Is Innovation a Turks' Game to Create New Wealth?
A. Mete ÇakmakcıJ.P. Morgan Asset Management Breakfast Meeting
June 7th, 2011 - İstanbul
2
Making Sense of Turkey
… Raki led me to wonder why so much of its potential remains unrealized. Turkey is undoubtedly the country of the future, but will it always be? … … By the time they drain their final glasses and step out into the darkness, they have often concluded that their country is either the “golden nation” destined to shape world history or a hopeless mess certain to remain mired in wretched mediocrity…”
Reference: Stephen Kinzer, “Crescent and Star: Turkey between two Worlds", Farrar, Strauss and Girous, 2001.
“… After a glass or two, what at first seemed clear becomes obscure. By the time the bottle is empty, everything appears murky and confused. Yet through this evocative haze, truths about Turkey may be most profoundly understood …
3
Source : Sak (2009) “Küreselleşmenin Türk KOBİ’lerine etkileri”, TEPAV
Innovation Mercenaries
4
A place of limitless exotic fun?A future mutual partnership?
An economic partner from a safe distance? A curious tease?
Where is the Brand Equity?
5
Catching up or Lagging Behind?
Source : European Innovation Scoreboard 2008
Turkey is labeled under “catching up with moderate growth”
6
In 2009, 2,731,878 students were registered in undergrad university programs. 397,884 graduated from undergrad programs.
28,681 master and 3,744 PhD degrees were awarded.
Source : US Census Bureau, 2010
In 2009, 13,263 Turkish students were enrolled in the US universities, (10,2% increase from 2008 and 8th most populous group)
Many return with business ideas.
The Story : Demographics
7
Emerging Middle Class
2003 2006 2008
Automobile Sales (in thousands) 359 622 494
White Good Sales (in millions) 3 5.5 5.2
Airline Passengers (in millions) 34 59 75
Mobile Phone Network Subscribers (in millions) 26.6 51.4 64
# of People Getting House Loans (thousands) 43 268 237
Consumer Credit + Credit Cards (billion TL) 12.8 67.7 114
Source: ODD, TURKBESD, DHYMI, TBB
8
Innovation Dynamics
Knowledge is GLOBAL, value is LOCALKnowledge is GLOBAL, value is LOCAL
9
Global Innovation : MIA 12 Turkish companies in 2010 edition of the «Forbes Global 2000» list (5 in Banking, 3 in Conglomerate, 2 in Telecommunications, 1 in Construction, 1 in Transportation)
BUT, in 2010 edition of Booz Allen’s «The Global Innovation 1000» list, there are only 3!
Global Ranking
Category Ranking
R&D investment(m EUR)
R&D / Net Sales Ratio (%)
R&D Investment per Employee (k EUR)
General Industries (272 companies in the category)
Koç 355 15 118,38 5,7 1,7
Category Ave. 773,13 3,2 3,4
Leisure Goods (25 companies in the category)
Vestel 786 24 42,92 2,0 3,5
Category Ave. 1783,98 2,4 2,7
Automobiles and parts (62 companies in the category)
Tofaş 370 35 111,22 4,4 15,9
Category Ave. 816,66 4,7 3,2
10
Anatolian Tigers
2002 2003 2004 2005 2006 2007 2008 2009 2010 -
20,000,000
40,000,000
60,000,000
80,000,000
100,000,000
120,000,000
140,000,000
10%
15%
20%
25%
30%
35%
40%
Share in Exports by Anatolian Tigers
"Tigers"ShareTurkey
Expo
rts B
illio
n $
2004 2005 2006 2007 2008 -
50,000,000
100,000,000
150,000,000
200,000,000
250,000,000
55.0%
55.5%
56.0%
56.5%
57.0%
57.5%
58.0%
58.5%
59.0%
Anatolian Tigers' Share in Manufacturing GDP
"Tigers"TurkeyShare
Bill
ion
$
Source : TUIK, Ekonomist
Since 1980s, they represent the emerging conservative grass roots – TOBB
Culture very similar to East Asian examples.
Companies from fast growth regions outside İstanbul, İzmir and Ankara
Strong enterpreneurial family companies with very sophisticated skills set
11
A Map of Technological Innovation
Companies from the regions are more financially conservative, reluctant to use external finance
Thin capital positions to support indigenous growth
12
European Benchmarking EU-27 Turkey Spain Poland
Life-long Learning 9,7 1,5 10,4 5,1
Pubic R&D Expenditures 0,65 0,37 0,55 0,38
Private Credit 1,31 0,29 1,83 0,4
Non-R&D Innovation Expenses 1,03 0,16 0,49 1,03
Public-private Co-Publications 31,4 0,3 10,6 1,3
EPO Patents 105,7 1 29,3 3
Technology Balance of Payments Flows 1,07 0,12 0,28 0,4
SMEs introducing product or process innovations 33,7 29,5 29,5 20,4
SMESs introducing marketing or organizational innovations 40 50,3 29,5 29,1
Employment in Medium-high & High-tech Manufacturing 6,69 3,6 4,47 5,5
Employment in knowledge-intensive services 14,51 5,53 14,22 10,33
Medium-tech and high-tech manufacturing exports 48,1 38 52,3 48,9
Knowledge-intensive Services Exports 48,7 12,9 27,9
New-to-market sales 8,6 4,65 7,37 4,56
New-to-firm sales 6,28 11,17 8,48 5,55
Source : European Innovation Scoreboard 2008
13
Global Benchmarking
Source : www.worldbank.org/kam
14
A Regional Production Specialist
Source : The World Bank
15
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%0%
5%
10%
15%
20%
25%
30%
35%
ArmeniaAzerbaycan
BulgariaEgypt
Georgia
Greece
Israel
Jordan
Kazakhstan
MaltaQatar Moldova
Romania
Russia
Sırbistan
Tunisia
Turkey
UAE
Country’s share in total manufacturing exports of the region (%)
Share of manufacturing in Country’s total exports (%)
Source: TEPAV, UN Comtrade data
Largest Manufacturer in the Region
16
0.0% 1.0% 2.0% 3.0% 4.0% 5.0% 6.0%
-15%
-10%
-5%
0%
5%
10%
15%
20%
Automotive Clothing and Accessories
Iron-steel
Textiles
Electrical machinery
Fruit-Vegetables
Metal ProductsPetroleum Products
Non-metal mineral products
General Industrial Machinery
Other transport
Telecom and Sound Equipment
Note that bubble volumes indicate exports in 2009.
Ave
rage
ann
ual g
row
th ra
te (2
005-
2009
)
Star sectors
Traditional sectors
Rising sectors
Failing sectors
Market share in 2009
No «Star» Export Industries
Source: UN COMTRADE, TEPAV calculations
17
Export Markets
1996 2000 2007 2008 2009 20100%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
otherEU-27Non-EU EuropeNear and Middle EastNorth AfricaNorth AmericaSh
are
in E
xpor
ts
Good news is, exports are diversifying from the EU
Bad news is, still high exposure to troubled regions and markets, not much exposure to Far East and South America
18
Number of product groups with above $ 500 million exports(HS4 classification, 2 digit, 2008)
Turkey
Russia
Ukraine
RomaniaUAE
Greece
Israel
Saudi A
rabia
Kazakh
stan
Egypt
Tunisia
Moro
cco
Bulgaria Iran
Croatia
Jordan
Serb
iaQatar
Kuwait
Algeria Iraq
Syria
Azerb
aijan
Turkmenist
an
Armenia
Bosnia-H
.
Georgia
0
5
10
15
20
25
30
35
40
45
39
28
21 2017 16 15
1311 11
9 8 8 86 5 4 3 3
1 1 1 1 1 0 0 0
Source: TEPAV, UN Comtrade data
Export Diversification
19
Diversification vs Sophistication
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 20099000
10000
11000
12000
13000
14000
15000
16000
Brazil
China
India
Russia
Turkey
Export Sophistication Index (EXPY) Turkey and selected countries (1995-2009)
Source: COMTRADE, TEPAV analysis
20
Converting High-Tech to Low-Tech
Source : TUSİAD, (2008) “Türkiye Sanayiine Sektörel Bakış”
Source : OECD STI Scoreboard, 2008
Share of high-tech in manufacturing exports from 1992 to 2008 only increased from 1,2 % to 1,7 %. Poland’s increased from 3,7 % to 5,2 %; Brazil’s increased from 5,4 % to 12 %.
Turkey’s exports increased from 14,7 Billion USD in 1992 to 127 Billion USD in 2008. (2008 imports were 202 Billion USD )
21
• Where does Turkey stand?– Turkey was a transition economy from efficiency-driven to innovation-
driven in 2009.– In 2010, WEF downgraded Turkey to efficiency-driven.
• Upgrade to an innovation-driven economy? – Need for a large set of reforms in a wide set of areas– Education, judiciary, public administration, infrastructure investments
• Risk: no-reform political climate– The period ahead will be even less conducive for reforms: elections in
2011, 2012, 2013, 2014, 2015 ….
Factor-driven economy
Efficiency-driven
economy
Innovation-driven
economy
low-cost inputs productivity unique-valueSource: WEF
Mid-Income Trap
22
x 3,5 increase in TUBİTAK grants to private companies
1416 Million TL in Public R&D Investments
286 Million TL in Public R&D Investments
Investing in R&D
2002
2009
Source : State Planning Organization, 2010
Cheaper borrowing is trigerring more R&D investments & spending
2010
X 5
in p
rivat
e R&
D
spen
ding
23
Promoting Private Sector R&D Law # 4691 on Technology Development Zone and Law # 5746 on R&D Promotion grants generous tax deductions/exemptions for R&D activities.
28 active TDZs support 1515 firms employing 13,000 R&D staff generating 540 Million USD in exports. (mostly software companies)
76 R&D centers facilitated 1,9 Billion TL in R&D spending by the private sector
Source : OECD STI Scoreboard, 2008
24
Cost of Innovation
8-10 yrs Experience6,000 – 7,000 TL
3-4 yrs Experience3,000 – 4,000 TL
O-1 yrs Experience1,600 – 2,000 TLIn
nova
tion
adde
d-va
lue
incr
ease
s
Cost of innovation (rather the cost of
failed innovations) is probably the single
most important barrier to innovation.
Recent tax incentives had limited
additionality for various reasons.
In spite of “unlimited” supply of youth,
talent and skills are limited.
Investment in development of skills is extremely limited and conservative.
25
Source: EVCA
UK
Sweden
Belgium
Norway
Finland
Denmark
Switz
erland
Hungary
Luxe
mburg
European U
nion
Portugal
France
Poland
Netherlands
Germany
Spain
Greece
RomaniaIta
ly
Turkey
Austria
Czech
Rep.
Ireland
Bulgaria
Ukraine
0
0.1
0.2
0.3
0.4
0.5
0.6
European Countries Share of Private Equity Investments in GDP (2009)
A “Virgin” Market
26
Funding for Innovation : VC
MANAGEMENT
INVESTORS
REGULATORYFRAMEWORK
INVESTEES
Turkey has an open capital regime, for most sophisticated institutional investors local context is irrelevant. But, with no historic data it is impossible to wager for risk of
investing in Turkey...
The regulator is not willing
Low skills to develop projectsStrong unregistered activities
Extremely sceptical of external finance
Local dept is non-existantNo tax incentives to investors
Mostly international institutions
Team profiles are genericOften chasing after same
investors and deals
27
Majority
Minority
Ow
ners
hip
Investment Size
Mega5 M EUR
INTERESTING
A Trivial Investment Radar
28
Current opportunity profile requires more “hands on” investments
People with people skills and a vision for the business are required
Management Skills
29
Most investor “driven” funds have problems with management
No question that there is ample supply of local talent with some international experience/exposure
Most team profiles have strong representation from I-Bank and consultancy careers
Job is more than deal making – it’s about growth and exit
Recently deal terms are shifting to more conservative (I-Bank)
Profession is more art than science – should look for diverse skill implants and spin-out teams – local empathy is important (“talk to talk, drink the tea”)
Another urgency to develop local Turkish investor base
A Few Good Men
30
Crowding Radar
Turkish PE market is attracting many new players.
Deep talent pool is a strong enabler
Where is the deal flow?
1995 - 2002
2002 - 2010
Source : EIF
31
Where is the Beef?
Source : Deloitte, Ernst&Young, İş Girişim A.Ş.; Press
<2001 2002 2003 2004 2005 2006 2007 2008 2009 20100
5
10
15
20
25
30
0
500
1000
1500
2000
2500
3000
3500
4000
1
68
14
2
9
24
24
2
1
4
6
4
9
3
2
3
3
3
4
3
24
3
2
11 > 200 M USD
50-200 M USD
25-50 M USD
0-25 M USD
unspecifiedNum
ber
of D
eals
Am
ount
Inve
sted
(M U
SD)
As of April 2011, total number of transactions is 131 and number of total exits is 22.
71% of all transactions took place after 2006
Of 86 public transactions, 65% were within 0-25 M USD
32
Turkey has an expanding war chest of international investors
So far the largest private investor in PE/VC is the İş Group in İş Girişim
Garanti is an investor in İstanbul Venture Capital Initiative
Many Turkish Blue Chips (including big manufacturing and services conglomorates) expressed interest in setting up their own funds. (some are already recruiting management)
“Minority psyche” is big barrier for most to commit to a fund
Unrealistic expactations on representation in investment decisions
Concerns on branding
Too early to speak about “retirement funds” in Turkey
Investor Profile
33
Outlook New generation of young enterpreneurs (especially of top universities) have the proper skills and high capacity to learn fast. They ask and learn.
Second/third generation is taking over in the family owned SMEs. They mean business and are open to the world
Investors and Banks are quickly adopting to finance innovation. They need to ‘innovate’ to stay relevant
Big companies are still a big «?»
Capacity on the demand side is developing faster than the suppy side of policy and programs. Civil initiatives are mobilizing. Legacies are slug.
Innovation and related buzzwords are still crowding out the agenda.
Challenge : Can Turkey be the ‘California’ of Europe?
34
A public private partnership built upon the market credibility of the investors
Fund size is 160 M EUR. As of June 2011, 41 M EUR have been committed; 71,5 M EUR are under negotiation (24 M EUR is anyday for signature)
Full commitment is expected before the end of investment period at the end of 2012 – «iVCi 2» is under discussion
iVCi helped create strong awareness in the market, providing a mentoring facility for new/emerging teams
Istanbul Venture Capital Initiative Turkey’s first and only fund of funds as a
Luxembourg SIF vehicle under EIF management (www.ivci.com.tr)
iVCi Strategic Network is currently chaired by Mr. Ali Sabancı, a highly visible enterpreneur and investor.
35
Sector needs a professional association
TurkVCA is MIA since 2004
Concerns over high visibility
Reliable data and strong representation is needed to develop a good conduct sector and market
Turkey has extensive experience on localization of special purpose administrative structures
It might be time to consider setting up a proper “free financial zone” with its own regulator in line with
other government priorities inside Istanbul
Future of PE in Turkey Recently, pe/VC has become a top policy priority. It is a learning process!