June7 Istanbul

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June7 Istanbul

  1. 1. Is Innovation a Turks' Game<br />to Create New Wealth?<br />A. Mete Çakmakcı<br />J.P. Morgan Asset Management Breakfast Meeting<br />June 7th, 2011 - İstanbul<br />
  2. 2. Making Sense of Turkey<br />“… 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 …<br />… Rakiled me to wonder why so much of its potential remains unrealized. Turkey is undoubtedly the country of the future, but will it always be? … <br />… 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…”<br />Reference: Stephen Kinzer, “Crescent and Star: Turkey between two Worlds", Farrar, Strauss and Girous, 2001.<br />2<br />
  3. 3. Source : Sak (2009) “KüreselleşmeninTürkKOBİ’lerineetkileri”, TEPAV<br />Innovation Mercenaries<br />3<br />
  4. 4. A future mutual partnership?<br />A place of limitless exotic fun?<br />A curious tease?<br />An economic partner from a safe distance?<br />Where is the Brand Equity?<br />4<br />
  5. 5. Catching up or Lagging Behind?<br />Turkey is labeled under “catching up with moderate growth”<br />Source : European Innovation Scoreboard 2008<br />5<br />
  6. 6. <ul><li> In 2009, 2,731,878 students were registered in undergrad university programs. 397,884 graduated from undergrad programs.
  7. 7. 28,681 master and 3,744 PhD degrees were awarded.</li></ul>Source : US Census Bureau, 2010<br /><ul><li> In 2009, 13,263 Turkish students were enrolled in the US universities, (10,2% increase from 2008 and 8th most populous group)
  8. 8. Many return with business ideas.</li></ul>The Story : Demographics<br />6<br />
  9. 9. Emerging Middle Class<br />Source: ODD, TURKBESD, DHYMI, TBB <br />7<br />
  10. 10. Innovation Dynamics<br />Knowledge is GLOBAL, value is LOCAL<br />8<br />
  11. 11. Global Innovation : MIA<br /><ul><li>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)
  12. 12. BUT, in 2010 edition of Booz Allen’s «The Global Innovation 1000» list, there are only 3! </li></ul>9<br />
  13. 13. Anatolian Tigers<br /><ul><li>Companies from fast growth regions outside İstanbul, İzmir and Ankara
  14. 14. Strong enterpreneurial family companies with very sophisticated skills set</li></ul>Source: TUIK, Ekonomist<br /><ul><li> Since 1980s, they represent the emerging conservative grass roots – TOBB
  15. 15. Culture very similar to East Asian examples.</li></ul>10<br />
  16. 16. A Map of Technological Innovation<br /><ul><li> Companies from the regions are more financially conservative, reluctant to use external finance
  17. 17. Thin capital positions to support indigenous growth</li></ul>11<br />
  18. 18. European Benchmarking<br />Source : European Innovation Scoreboard 2008<br />12<br />
  19. 19. Global Benchmarking<br />Source : www.worldbank.org/kam<br />13<br />
  20. 20. A Regional Production Specialist<br />Source : The World Bank<br />14<br />
  21. 21. Country’s share in total manufacturing exports of the region (%)<br />Share of manufacturing in Country’s total exports (%)<br />Source: TEPAV, UN Comtrade data<br />Largest Manufacturer in the Region<br />15<br />
  22. 22. Rising sectors<br />Star sectors<br />Traditional sectors<br />Failing sectors<br />Market share in 2009<br />No «Star» Export Industries<br />Source: UN COMTRADE, TEPAV calculations<br />16<br />
  23. 23. ExportMarkets<br /><ul><li>Good news is, exports are diversifying from the EU
  24. 24. Bad news is, still high exposure to troubled regions and markets, not much exposure to Far East and South America </li></ul>17<br />
  25. 25. Number of product groups with above $ 500 million exports<br />(HS4 classification, 2 digit, 2008)<br />Source: TEPAV, UN Comtrade data<br />Export Diversification<br />18<br />
  26. 26. DiversificationvsSophistication<br />Export Sophistication Index (EXPY) Turkey and selected countries (1995-2009)<br />Source: COMTRADE, TEPAV analysis<br />19<br />
  27. 27. Converting High-Tech to Low-Tech<br /><ul><li> 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 %. </li></ul>Source : OECD STI Scoreboard, 2008<br />Source : TUSİAD, (2008) “Türkiye Sanayiine Sektörel Bakış”<br /><ul><li> Turkey’s exports increased from 14,7 Billion USD in 1992 to 127 Billion USD in 2008. (2008 imports were 202 Billion USD )</li></ul>20<br />
  28. 28. Factor-driven economy<br />Efficiency-driven economy<br />Innovation-driven economy<br />low-cost inputs<br />productivity<br />unique-value<br />Source: WEF<br />Where does Turkey stand?<br />Turkey was a transition economy from efficiency-driven to innovation-driven in 2009.<br />In 2010, WEF downgraded Turkeyto efficiency-driven.<br />Upgrade to an innovation-driven economy? <br />Need for a large set of reforms in a wide set of areas<br />Education, judiciary, public administration, infrastructure investments <br />Risk: no-reform political climate<br />The period ahead will be even less conducive for reforms: elections in 2011, 2012, 2013, 2014, 2015 ….<br />Mid-Income Trap<br />21<br />
  29. 29. <ul><li> Cheaper borrowing is trigerring more R&D investments & spending</li></ul>1416 Million TL in Public R&D Investments<br />Investing in R&D<br />X 5 in private R&D spending <br />2002<br /> x 3,5 increase in TUBİTAK grants to private companies<br />2009<br />2010<br />286 Million TL in Public R&D Investments<br />Source : State Planning Organization, 2010<br />22<br />
  30. 30. Promoting Private Sector R&D<br /><ul><li>Law # 4691 on Technology Development Zone and Law # 5746 on R&D Promotion grants generous tax deductions/exemptions for R&D activities.
  31. 31. 28 active TDZs support 1515 firms employing 13,000 R&D staff generating 540 Million USD in exports. (mostly software companies)
  32. 32. 76 R&D centers facilitated 1,9 Billion TL in R&D spending by the private sector</li></ul>Source : OECD STI Scoreboard, 2008<br />23<br />
  33. 33. Cost of Innovation<br /><ul><li>Cost of innovation (ratherthecostof </li></ul>failedinnovations) is probablythesingle<br />mostimportantbarriertoinnovation.<br /><ul><li>Recenttaxincentives had limited</li></ul>additionalityforvariousreasons. <br /><ul><li>Inspite of “unlimited” supply of youth,</li></ul>talentandskillsarelimited.<br /><ul><li>Investment in development of skillsis extremelylimitedandconservative.</li></ul>Innovationadded-value<br />increases<br />24<br />
  34. 34. EuropeanCountriesShare of PrivateEquityInvestments in GDP (2009)<br />Source: EVCA<br />A “Virgin” Market<br />25<br />
  35. 35. Funding for Innovation : VC<br />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... <br />INVESTORS<br />Local dept is non-existant<br />No tax incentives to investors<br />Mostly international institutions<br />MANAGEMENT<br />REGULATORY<br />FRAMEWORK<br />The regulator is not willing<br />Team profiles are generic<br />Often chasing after same investors and deals<br />INVESTEES<br />Low skills to develop projects<br />Strong unregistered activities<br />Extremely sceptical of external finance<br />26<br />
  36. 36. Majority<br />Ownership<br />INTERESTING<br />Minority<br />5 M EUR<br />Mega<br />Investment Size<br />A Trivial Investment Radar<br />27<br />
  37. 37. Current opportunity profile requires more “hands on” investments<br />People with people skills and a vision for the business are required<br /> Management Skills<br />28<br />
  38. 38. <ul><li>Most investor“driven” funds have problems with management
  39. 39. No question that there is ample supply of local talent with some international experience/exposure
  40. 40. Most team profiles have strongrepresentationfromI-Bank and consultancy careers
  41. 41. Job is more than deal making – it’s about growth and exit
  42. 42. Recently deal terms are shifting to more conservative (I-Bank)
  43. 43. Profession is more art than science – should look for diverse skill implants and spin-out teams – localempathy is important (“talk to talk, drink the tea”)
  44. 44. Anotherurgencyto develop local Turkish investor base</li></ul>A FewGood Men<br />29<br />
  45. 45. Crowding Radar<br /><ul><li> Turkish PE market is attracting many new players.
  46. 46. Deep talent pool is a strong enabler
  47. 47. Where is the deal flow?</li></ul>Source: EIF<br />1995 - 2002<br />2002 - 2010<br />30<br />
  48. 48. Where is the Beef?<br />Source: Deloitte, Ernst&Young, İşGirişimA.Ş.; Press<br /><ul><li>As of April 2011, total number of transactions is 131 and number of total exits is 22.
  49. 49. 71% of all transactions took place after 2006
  50. 50. Of 86 public transactions, 65% were within 0-25 M USD</li></ul>31<br />
  51. 51. <ul><li>Turkey has an expanding war chest of international investors
  52. 52. So far the largest private investor in PE/VC is the İş Group in İş Girişim
  53. 53. Garanti is an investor in İstanbul Venture Capital Initiative
  54. 54. Many Turkish Blue Chips (including big manufacturing and services conglomorates) expressed interest in setting up their own funds. (some are already recruiting management)
  55. 55. “Minority psyche” is big barrier for most to commit to a fund
  56. 56. Unrealistic expactations on representation in investment decisions
  57. 57. Concerns on branding
  58. 58. Too early to speak about “retirement funds” in Turkey</li></ul>Investor Profile<br />32<br />
  59. 59. Outlook<br /><ul><li> New generation of young enterpreneurs (especiallyof top universities) have the proper skills and high capacity to learn fast. They ask and learn.
  60. 60. Second/third generation is taking over in the family owned SMEs. Theymeanbusinessandareopentotheworld
  61. 61. Investors and Banks are quickly adopting to finance innovation. Theyneedto ‘innovate’ tostayrelevant
  62. 62. Big companies are still a big «?»
  63. 63. Capacity on the demand side is developing faster than the suppy side of policy and programs. Civil initiatives are mobilizing. Legaciesareslug.
  64. 64. Innovationand related buzzwords are still crowding out the agenda.
  65. 65. Challenge : Can Turkey be the ‘California’ of Europe?</li></ul>33<br />
  66. 66. Istanbul Venture Capital Initiative<br /><ul><li>Turkey’s first and only fund of funds as a Luxembourg SIF vehicle under EIF management (www.ivci.com.tr)
  67. 67. A public private partnership built upon the market credibility of the investors
  68. 68. 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)
  69. 69. Full commitment is expected before the end of investment period at the end of 2012 – «iVCi 2» is under discussion
  70. 70. iVCi helped create strong awareness in the market, providing a mentoring facility for new/emerging teams
  71. 71. iVCi Strategic Network is currently chaired byMr. Ali Sabancı, a highly visible enterpreneur and investor.</li></ul>34<br />
  72. 72. <ul><li>Recently, pe/VC has become a top policy priority. It is a learning process!
  73. 73. Turkey has extensive experience on localization of special purpose administrative structures
  74. 74. 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
  75. 75. Sectorneeds a professionalassociation
  76. 76. TurkVCA is MIA since 2004
  77. 77. Concernsoverhighvisibility
  78. 78. Reliable data andstrongrepresentation is neededtodevelop a goodconductsectorand market</li></ul>Future of PE in Turkey<br />35<br />

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