Electronics, Machinery-Equipment and Software Should Receive Incentives

Alarko CEO Ayhan Yavrucu, a veteran businessman with an excellent grasp of the structure of Turkish industry and the current status of the Turkish business world, proposes a clear formula for transformation and development: “Investments that would improve technology and increase capacities in the software, electronics and machinery-equipment industries should be granted incentives, and the results should be closely monitored.”

We Need a Fourth Industrial Revolution for Survival
Geopolitical risks are extremely high in our region. A country located in such a region must keep constant watch on risks, while simultaneously focusing on transformative steps that would allow it to cope with the circumstances that surround it. Economic transformation is key to our ability to cope with the circumstances. You can only cope if you have a strong economy. Overcoming the survival issue calls for the fourth industrial revolution.

Stop Discussing Concepts and Let’s Get to Work
We talk a lot about innovation and Industry 4.0... We do not have any problems at the conceptual level. But at some point we have to get to work, and clean the blocked channels. The concepts are already well-known; we shouldn’t waste any more time on them. Now it’s time to roll up our sleeves and get to work. We are very good at talking about things, but we are not as good at rolling up those sleeves. Saying that this channel needs to be cleaned is not enough; someone has to pick up the axe and start digging.

No One Asks Where All These Incentives Are Going...
“I have never seen so many incentives”, says Alarko CEO Ayhan Yavrucu. He states that the range of existing incentives is immense, but they do not offer any strategic unity. He adds the following: “Secondly, the effectiveness of these incentives is not being analyzed. No one asks where all these incentives are going, and what outcomes have been achieved”. Emphasizing that he fully supports the incentive system in general, Alarko CEO Yavrucu adds that the state should be selective in granting incentives, and should definitely measure the effectiveness of the outcomes. Arguing that “an incentive that is not measured can never be deemed to have succeeded”, Yavrucu proposes a roadmap for Industry 4.0: “Machinery-equipment investments have been falling in the first two quarters. A decrease of 8.6%. We have to reverse this trend. Incentives would offer crucial leverage at this point. If you try to incentivize everything, you would end up spending a lot of money and not incentivizing anything. Investments that would really improve technology and increase efficiencies and capacities in the machinery-equipment, software and electronics industries should be granted incentives, and the results should be closely monitored. This would greatly support the development and transformation of Turkish industry.

Introduce Programming Courses, Grow with the Resulting Ecosystems
You stated that incentives must be measured. But some people say that, had there been enough market demand, they would have invested even without the incentive. Plus, investments are currently stagnant. How do you think the investment level can be increased given these circumstances?
There are too many small-scale SMEs in Turkey. Such a small-scale structure is not, and cannot be, economically feasible. How far could an SME with an annual revenue of TL 8-10 million go even if you offer incentives? An SME with such a revenue cannot be feasible. We should lead SMEs towards economies of scale. We always talk about efficiency, and efficiency is directly linked to economies of scale. Scale is crucial if you want to produce competitive goods. In other words, you will have a difficult time if you are producing 30,000 pumps while someone else is producing four million. It is not realistic to offer incentives to a company producing 3,000 pumps, instead of targeting 500,000 pumps. This would not generate competitiveness. We should provide incentives to investments that focus on economies of scale and devise our strategies accordingly, regardless of which industry we are talking about. This would actually also serve as an incentive to SMEs.

How is this going to happen?
Imagine the production of a tank. It has thousands of components. It is impossible for a single enterprise to produce all of them. The value chain involved in that production process is going to spread to the lower levels, thus generating very healthy SMEs who can also export to international markets. Turkey cannot achieve international standards with small, introverted SMEs. The defense industry is the best candidate for implementing this policy. In fact, many countries have achieved development through the defense industry. But we should bear in mind that using the right business models is of crucial importance here. Tasks should be assigned to those who can really perform them. Trying to artificially create business for certain people will not work. It should be assigned to those who can obtain and transform the necessary technology, and who possess the necessary skills and capital. Good planning is essential here. This is how the automotive industry flourished in Turkey.

We Need to Inspire Young People

Growth through ecosystems…
Absolutely. This is why the machinery-equipment, software and electronics industries must be incentivized. In software, we have to introduce programming classes at secondary schools. This is an area with 100% value added. Had we been able to teach programming in Turkey, we would now have been talking about billions of dollars in software exports instead of unemployment among young people. Education, education, education… It’s crucial. Even if we have a single dollar, we should use it for education. Besides incentives, the problem we are faced with today has to do with high-quality human resources. Most major investors are importing personnel from abroad. They apply to the Ministry of Labor for permission to bring technicians and engineers from foreign countries. This shouldn’t happen in a country of 80 million people. We need an education system that is compatible with our needs. As a businessperson, I can clearly observe that our education system does not train people that meet our needs. Turkey can realize its potential only if we manage to solve this problem. Unfortunately, Turkey is currently unable to utilize its potential. The brain drain is going on. We need to reverse the brain drain. We treat investment purely as a physical thing, but investing in people is the best type of investment.
Young people actually are quite innovative and create successful start-ups. Where do you think the system fails? I firmly believe in Turkey’s potential. The key is to create an ecosystem that would transform that potential energy into kinetic energy, and to support it in a coherent way. Per capita income is around 10,000 dollars now. We have the potential to go well beyond that. In the last forty years, only two countries have managed to overcome the middle income trap. It’s not easy. But Turkey could very well be the third country. The key is well-educated people. Both for intermediate positions and the upper levels. Turkey has huge potential but we must inspire young people, and offer them the right environment. Turkey does not have a capital issue. Turkey can find the necessary funds. Turkey’s problem is related to human resources. That is the secret ingredient that will allow us to turn what we already have into a delicious cake.

How are things going for Alarko this year?
Thank God, it’s going well. In tourism, we are above the national average. In contracting, we have been awarded new projects, and additional projects are on the way. Our main markets in contracting are Central Asia, Russia, and Turkey. We are also making efforts to enter new markets. I believe Africa has a huge potential. We are already focusing on Africa. Some of our colleagues work there. We have been awarded a new project in Kazakhstan, it’s a large-scale project. We are also actively pursuing new projects, including those in energy. In the contracting business, you now have to first develop the project, explain why that project is needed, convince the relevant parties to engage in PPP, translate the legislation, etc... The earlier “give-me-money-and-I’ll-do-it” attitude does not work anymore…

What are your future plans at Alarko?
Everything is changing at full speed… In air-conditioning, we used to have either centralized or individual systems. Intermediate systems have arrived in the last eight to ten years, and changed the entire industry. Prices are lower, quality is higher, sizes are smaller. This is the kind of change we are experiencing. And all of it is coming from design and the underlying software. Honestly, I have no idea what we are going to have tomorrow. There are no limits here. You have to constantly increase your speed, just as in cycling. All commodities are undergoing similar rapid changes. A product you have this year is no more available the next year. In the past, you had an obligation to make available spare parts for ten years. This is changing as well. The change in product technology is extremely fast. You cannot use the same technology for two consecutive years, because a new technology arrives immediately.

What are your expectations regarding our relations with Europe in the coming days?
After the elections in Germany, I believe that our problems with Europe will begin to be solved. Many things have been said, we cannot expect problems to be solved in an instant, but I think rationality will come to prevail after a while. Turkey’s main direction and destination is the West. Adopting Western values has always been beneficial for Turkey. This year, 80% of foreign investment came from Western countries… West is our true direction. We should closely embrace its values.

“FOREIGN CURRENCY WAS BEHIND ALL CRISES IN TURKEY”
I’ve been working for 45 years. When I look back at my professional life, I experienced eight or ten crises. Except for one or two, all them were foreign-currency crises. This is important. I believe also the government is very well aware of this fact. The current level of interest rates shows that they are aware. Having access to foreign currency is extremely important for us. Funds should be able to flow into Turkey. This requires strong confidence that Turkey will be able to pay back its debts. Keeping the budget deficit under control is important in this regard. The ability to pay back debts is the number-one criterion in terms of Turkey’s ability to access international funds. I think the recent tax increases are aimed at controlling the deterioration in budget performance. Regardless of what people say, the FED is going to remove liquidity from the markets, even if at a slow pace. As the pool gets smaller, funds will begin to flow to countries with a stronger financial structure… This is why Turkey needs to improve its budget performance. And that certainly necessitates additional funds.

“IF YOU ARE NOT READY FOR THE DESIGN ERA, ALL YOU CAN DO IS SCRAPE MEAT OFF THE BONE”
The design era is coming. And design requires software. This is the essence of the thing. Countries with the necessary knowledge and experience in these fields will take the lead. Those without it will turn into parts manufacturers, or maybe not even that, because the 3D technology will take that away too. This is why I think the design era is coming. There is nothing to fear if you have managed to establish an infrastructure and atmosphere that would broaden people’s horizons. Hardware is not a problem anymore. You can domestically produce the most complex things, but if you don’t have the technology, you are just someone waiting for others. Forgive the expression but they will also not let you eat the cream of the value chain, and all you can do will be to scrape the meat off the bone. Those who have the brain will have the money.

“THIRD QUARTER WILL SEE DOUBLE-DIGIT GROWTH”
Stating that growth rate in the third quarter will be above 10% thanks to the base effect, Ayhan Yavrucu says: “Growing 6.5% annually is impressive. You are almost growing as fast as China…”.