Improving Factor Conditions

The Case of Manisa Electrical and Electronic Appliances Cluster

Important Notice

Launched in March 2007, “Development of a National Clustering Policy” is an EU-funded technical assistance project (the Project, hereinafter) that seeks to contribute to elaboration of a national clustering policy, through development of a “whitepaper” on clustering. The Project is being implemented by the Undersecretariat for Foreign Trade (UFT) with the technical assistance of an international consortium, contracted by Central Finance and Contracts (CFCU).

The methodology, deployed for the development of this and other Roadmaps reflects the key priorities of the DCP Project. Therefore, it, on the one hand aims at developing a roadmap that demonstrates how the cluster can be more competitive, and on the other, serves the key purpose of informing the process of cluster policy-making and development of policy-level and institutional recommendations. The Roadmap for Manisa Electrical and Electronic Appliances Cluster has been developed with direct involvement of a broad range of stakeholders: enterprises, governmental and non-governmental organisations, academic and research organisations, and other relevant cluster actors. Cluster analysis began with secondary research, which was followed by primary research activities like interviews, focus group meetings and small workshops with businesses, NGOs, local stakeholders. The Project benefited, to a large extent, from Prof. Michael Porter’s Diamond of Competitiveness during the assessment of competitiveness of clusters.

Cluster Analysis

The assessment of the cluster competitiveness is based on the framework of “Porter’s Diamond[1]F” (diagram below), structuring its analysis along the following dimensions: factor conditions, firms strategy and rivalry, demand conditions and related and supporting industries, enhanced by the overview of related government policies and activities of institutions for collaboration.

1. Factor Conditions

Within the cluster competitiveness assessment framework, “factor conditions” refer to the presence or absence of inputs such as a workforce with [specialized] skills, the availability of particular raw materials, resources, physical infrastructure, financing etc. Here, the main objective of the analysis is to identify presence or absence of the factor conditions that have an impact on the competitiveness of the Manisa Electrical and Electronic Appliances Cluster. The cluster theory suggests that “to increase productivity, factor inputs must improve in efficiency, quality, and (ultimately) specialization to particular cluster areas" (Porter, 2000).

The studies conducted to assess the factor conditions concentrated on the following parameters:

• Location,
• Physical resources,
• Infrastructure,
• Human resources,
• Knowledge resources, and
• Capital resources.

1.1. Location

A company’s location has a considerable impact on its competitiveness. The cluster approach suggests "that a good deal of competitive advantage lies outside companies and even outside their industries, residing instead in the locations at which their business units are based." (Porter, 2000, p.16) Location of a cluster can contribute to a cluster’s competitiveness, if it provides a cluster with unique advantages in terms of access to markets and/or resources.

Manisa is only 36 kilometres away from Izmir, Turkey’s 3^rd largest city, which is home to an international airport and one of the largest ports (Alsancak) in Turkey. Proximity to Izmir brings forth many advantages, in terms of logistics, access to human resources and knowledge base, all of which have been raised by the Cluster actors as competitive advantages of their location. In fact, when defining the geographical boundaries of the Cluster, local stakeholders indicated that economic agents (such as companies, universities, NGOs) in Izmir should be considered a part of the Cluster.

1.2. Quality and Presence of Physical Resources and Infrastructure

Manisa is at the centre of an expanding transport infrastructure. The road that connects Manisa to Izmir has been improved considerably over the last year. The railway that connects Manisa to Izmir which has been closed for sometime for reconstruction and improvement purposes, and is expected to be operational by mid-2009.

Manisa is home to one of Turkey’s largest and oldest organised industrial zones, which is presently home to most of the Cluster companies. The OIZ provides superior infrastructural facilities, which natural gas co-generation power plant (85MW); wastewater treatment plant (21,500 cubic metres a day capacity); natural gas distribution; hot water and steam system; drinking water supply; wastewater and rainwater collection and disposal; electricity distribution; lighting; social facilities and services; and infrastructure facilities. Since its establishment in 1970, Manisa OIZ has expanded considerably (now covering an area of over 7 million square meters). The expropriation and infrastructure development activities of the 4^th expansion zone (3.76 million square meters) have been completed.

Manisa Organised Industrial Zone

The 5^th expansion zone (743K square meters) will host the logistics centre (aka logistics village). Manisa OIZ has recently been identified by the People’s Republic of China as one of the top ten industrial zones in the world.

The rapid expansion of the OIZ owes much to Vestel’s decision to make the Manisa OIZ its manufacturing base for electrical and electronic household appliances (i.e. washing machines, refrigerators, dishwashers, TVs, VCDs, laptops etc.).

During the last years, a number of suppliers have moved their production facilities from Izmir to Manisa. Reportedly, the cost of doing business (i.e. rent) in Manisa is lower than Izmir, and this difference is at the extent of justifying high moving costs.

In addition to the Manisa OIZ, some Cluster companies (such as Franke) are operating Muradiye and the industrial zones, adjacent to the Manisa OIZ. 

1.3. Human Resources

Parallel to the rapid growth of the Cluster, the need for qualified labour force has increased rapidly as well. The core activity of most of the Cluster companies is manufacturing, accordingly blue-collar workforce graduated from vocational and/or technical schools is in high demand. According to the records of the Office of the Governor there are 59 vocational and technical schools in Manisa (educating some 900 students). In addition to the state-owned vocational and technical schools, the vocational and educational training centre of Elginkan Foundation has been cited by the Cluster actors as an important facility.

Vocational and technical education is provided through secondary and tertiary (pre-bachelor’s degree) schools and colleges.

Vocational Education in Manisa

In terms of access to white-collar workforce (including administrative and management staff and engineers), the situation is more complicated. Here, the presence of Celal Bayar University is seemingly an advantage; however most of Cluster companies are of the opinion that the linkages between the Cluster and the University are rather weak (or nonexistent). Although it is difficult to argue that presence of Celal Bayar University has provided the Cluster with a unique advantage, it should also be noted that there are strong universities in Izmir, on which the Cluster also leverages. 

As noted above, being close to Izmir has many advantages, and one of most pronounced advantages of this geographical proximity is Izmir’s quality of life, which most of the managers and high-level engineers in Manisa enjoys. Had Manisa had not been so close to Izmir, it would have been particularly hard for the Cluster to attract high calibre managers to Manisa, quality of life of which is, to say the least, not on par with Izmir.

1.4. Knowledge Resources

Celal Bayar University is far from acting as a knowledge base for the industry. The Celal Bayar University has an Electrical and Electronics Engineering Department, which unfortunately do not provide education (i.e. the department does not accept students)[3]. The Cluster companies feel themselves more proximate to the universities and facilities, operating in Izmir.

Establishment of a techno-park is one of the projects that is currently in the agenda of the Manisa OIZ Management. 

1.5. Capital Resources

It is difficult to argue that the Cluster enjoys a competitive advantage in terms of accessing to financial resources. Reportedly, the suppliers work with very slim profit margins, which prevent them from making further investments that would improve their manufacturing practices, and/or investing in R&D. Although there are a number of national (i.e. TUBITAK, UFT, KOSGEB, TTGV etc.) and international (i.e. FP7 etc.) programmes, from which the Cluster companies (especially SMEs) can benefit, the field studies revealed that with the exception of large companies of the Cluster (i.e. Vestel and Indesit), the level of knowledge of the Cluster companies of these programmes are at very low levels.  

2. Firms’ Strategy and Rivalry

This aspect of the diamond framework refers to the conditions governing corporate organization and aspects of rivalry among firms in a cluster. The benefits of promoting rivalry among the companies in a cluster is counter-intuitive, however are proved and well-documented. Porter himself has long said that rivalry is an essential part of cluster dynamics. The cluster theory suggests that one of the most important dimensions of localisation is that it acts to boost domestic rivalry. With a few exceptions, recent empirical research confirms that knowledge in clusters is created through increased competition and intensified rivalry.

Another dimension that this particular parameter takes into account can be summarised as “company formation”. This is important to analyse as it provides hints of level of conduciveness of the business environment for establishing new businesses. A disturbingly low level of new entrants to the cluster might indicate, inter alia, that cluster’s business environment is not favourable for fostering entrepreneurship.

Cluster theory further suggests that “knowledge in clusters is created through spill-over following from the local mobility and sociability of individuals”. Here the strategy of the firms in a cluster and their attitudes towards collaboration (while competing at the same) are critical elements to consider.

If companies compete with others in the same cluster, they will be motivated to constantly innovate in order to differentiate themselves from their rivals. Both firm strategy and rivalry contribute to regional competitiveness drawing on regional innovation dynamics.

The studies conducted to assess the firms’ strategy and rivalry concentrated on the following parameters: (1) The nature of competition, (2) New business formation, (3) Firm strategy, and (4) Firm structure.

2.1. Competition

As mentioned earlier, the Manisa EEA Cluster hosts a number of Original Equipment Manufacturers (OEMs) and Original Design Manufacturers (ODMs), and smaller scale companies that supply to the OEMs/ODMs.

Vestel produces a wide variety of household appliances, which include TVs, laptops, washing machines, dishwashers, refrigerators etc. Vestel’s corporate objective is to be a global leader in 3C convergence (communications, consumer electronics and computing). Indesit, on the other hand, manufactures refrigerators and deep freezers in Manisa[4]. These two companies are among the 5 largest household appliances producers in Turkey, with Arcelik and BSH and Kumtel. Both Vestel and Indesit also sell to domestic market, however their main focus is on export markets. Although Vestel and Indesit produce similar products, their focus areas are somewhat different, with Vestel specialising on production of TVs and laptops, and Indesit on fridges. Although there is some level of competition between these two companies, it is still difficult to argue that Vestel and Indesit are competing head on. Bosch, the third OEM of the OIZ, produces water gas heaters, gas flash heaters, gas control components, heat exchangers and copper pipes, and thus is operating in quite a different segment. Established in Muradiye (i.e. in Manisa but not in the OIZ), Franke produces “kitchen systems” (built-in household appliances).

In addition to the abovementioned OEMs/ODMs, the Manisa EEA Cluster is home to their suppliers. The competition within the suppliers segment is based on price, which is almost always dictated by the OEMs. Accordingly, the suppliers have to work with very slim profit margins, which allow them to “survive” but not to invest in R&D, innovation etc. Secondly, as with the other OEM-driven industries, most of the suppliers work exclusively for one of the OEMs. In due course, the suppliers are susceptible to risks that are embedded in being almost entirely tied-up to a single buyer. In the know of these risks some of the suppliers have made the effort to diversify their product portfolios and clienteles. This trend has lead emergence of a local capacity in manufacturing automotive parts and components[5].

To sum up, the nature of competition in the Manisa EEA Cluster is one that reflects the global dynamics of household appliances industry and typical elements of an OEM-driven industry. 

2.2. Firm Strategy

As far as the assessment of firm strategies is concerned, there is, again, the need to differentiate between the OEMs and their suppliers. The most notable element of corporate strategies of Indesit, BSH and Franke is their quite visible devotion to generating environment-friendly technologies for household appliances industry. All three invest heavily in R&D, innovation, process improvement etc. Vestel’s corporate strategy, on the other hand, is based on being a global leader in 3C convergence. It should be noted that among these companies, Vestel is the only one that produces TVs and laptops[6].

According to a report issued by Deloitte, Vestel is ranked second (following Arcelik), among the Turkish companies, in terms of corporate resources devoted R&D. Vestel’s annual report indicates that the company invested USD55 million in R&D in 2007[7]. Vestel’s R&D activities are being carried out in Manisa, Izmir (Cabot), Vestek (Istanbul) and Bristol-England (Vestel Annual Report). The field analysis further revealed that most of the R&D activities are carried out in Manisa, and some in Urla (Izmir) Technology Development Zone. Although Franke and Indesit are engaged in R&D activities locally, R&D activities of these countries are being directed by headquarters in Italy (for Indesit) and Switzerland (for Franke), and being carried our globally.

The strategies of the suppliers do not vary significantly, as most of them thrive for achieving higher levels of cost efficiency. Most of the suppliers in the Cluster possess the accredited quality certifications, which have become an industry standard. As noted earlier, some suppliers have started to seek opportunities in other sectors (i.e. Automotive) and markets (i.e. Bursa etc.).

The Cluster companies (suppliers) interviewed during the field analysis indicated that they are aware off the need for investing in R&D; however report that they do not have sufficient resources to do so.

OEMs have indicated that “supplier development” is an important part of their corporate strategies. This strategy has a very straight forward rationale: “the more competitive suppliers you have the more competitive you become”. However, cluster companies gave mixed signals regarding the OEM – supplier relations in the Cluster. Some suppliers claim that OEMs do not undertake any initiative, unless there is an absolute need to do so (such as training programmes for ensuring conformity with international standards). Representatives of the OEMs, on the other hand, are of the opinion that the suppliers are not committed to R&D and innovation, as best demonstrated by suppliers’ reluctance for engaging in collaborative R&D efforts, which would require putting matching funds against the public funds.

In order to complete the assessment of the firm strategies in the Cluster it might be useful to elaborate on the failed attempt of the industry to establish an LCD Panel manufacturing facility in Turkey. Although the said attempt goes beyond the boundaries of the Manisa EEH Cluster, it is still important at least for three reasons: first, the tale of LCD Panel Plant might cast further light on the macro-level discussions on geographical boundaries of a cluster; second, it is an indication of level of collaboration in the industry and third; the said initiative provides hints on the role of government in stimulating cluster initiatives.

In 2004, a group of TV manufacturers in Turkey (including Vestel, Beko and Profilo) have tried to make a joint investment to establish a plant that would manufacture LCD panels. The fixed investment (set up) cost of such a plant $3.5 billion with a similar amount of investment to be made every three years.

Cost of LCD Panel Investment

For some reason, this initiative did not go through. Some industry experts and analysts blame the government for not supporting this initiative financially; whereas some other report that as the initiative progressed, the partner conflicts among the partner companies emerged. Whatever the reason this initiative did not go through and Turkey had to leave a considerable share of the rapidly expanding LCD TV market to producers in other countries such as Poland. Since there is no complete LCD manufacturing capacity in Turkey, Turkish producers are mere modular assemblers of LCD TVs.

2.3. New Business Formation

Porter suggests that “The advantages of a cluster new business formation can play a major role in speeding up the process of cluster innovation. Large companies often face constraints and impediments of various sorts to innovating. Spin-off companies often pick up the slack, sometimes with the blessing of the large company ... Because of new business formation; clusters often grow in depth and breadth over time, further enhancing cluster advantages.[8]”

New businesses in the Cluster are formed by foreign direct investment (especially at the OEM level) and by entrepreneurs (especially at the supplier level). There are also supplier companies, owners of which were at some point in time working at the OEMs, but later left the OEM to set up their own ventures either individually or by partnering with others.

The rate of new business formation has been increasing in Manisa and is expected to increase further over the next years.[9] However at this point it is not possible to provide figure on the share that the EEH cluster will get from these new businesses. Some industry analysts are quite pessimistic about the future of the EEH industry in Turkey, to the extent of claiming that the manufacturing capacity of the industry will contract significantly over the next 5 years and finally seize to exist.

2.4. Firm Structure

As the discussion in the preceding sections has already demonstrated the OEMs in the Cluster are institutionalised companies, with their shares trading on stock exchanges. Interestingly, however, holding families still play an important role in the management structures of both Indesit (Merloni) and Vestel (Zorlu). However both companies are managed professionally and there are non-family members holding key positions in the management structures. BSH (Bosch – Siemens Hausgeräte) was established in 1967 as a joint venture of Bosch and Siemens.

 Table 7: OEMs in Manisa

Most of the suppliers are family-owned businesses; with a small share of companies (such as Teleset) having more institutionalised corporate structures. 

3. Demand Conditions

Within the Diamond framework, demand conditions refer to the nature of the home market. According to the cluster theory there are three broad attributes of home demand that has an impact on the competitiveness of clusters: (1) Composition of home demand[10], (2) The size and pattern of growth of home demand, and (3) The mechanisms by which a nation’s domestic preferences are transmitted to foreign markets.

The share of “furniture, household appliances and home care services” in total consumption in Turkey has decreased from 7.3% in 2002 to 6.0% in 2007 (TURK STAT, household surveys). However in the meantime the total consumption has increased considerably, allowing an expansion of the household appliances consumption as well.

Domestic Market for Electronic Devices

As the preceding table demonstrates the total consumption of consumer electronics have increased from USD936 million in 1999 to USD2.15 billion in 2005. The following table presents the projections, which predates the break of global financial crisis, of the industry regarding the domestic demand.

Projected domestic demand for EEH Appliances

As per Arcelik, the total size of the domestic household appliances (white goods) was USD2.2 billion in 2007, with sales of 5.2 million appliances. The statistics provided by Turkish White Good Industrialists Association are presented below:

Table 10: Domestic Sales of White Goods

Turkey has a young and growing population, which offers significant opportunities of household appliances producers. In addition to having a growing population, the changes in social life also has an impact on the bright prospects of the household industry in Turkey. As far as sophistication of home demand is concerned, Turkish consumers, especially those with the purchasing power, have an appetite for the electronic devices, as best demonstrated by the rapid take up of mobile phones in Turkey. More relevant to the cluster is the fast take up of digital broadcasting services, which have recently been upgraded to cover high definition broadcasting as well.  

4. Related and Supporting Industries

The Manisa EEA Cluster host a critical mass of OEMs, suppliers and other related and supporting industries as well.

Logistics is gaining more importance and fast becoming a key factor of competitiveness. As mentioned earlier the Manisa EEH Cluster enjoys certain competitive advantages as a result of its geographical proximity to Izmir, and the logistical facilities therein. Thus far the railway that connects Manisa OIZ to Izmir port has not been used efficiently, due to a number of reasons stemming mainly from nonexistence of intermodal transportation facilities. Accordingly most companies of the Cluster have preferred road transport over railway. MOSBAR, a joint initiative of Manisa OIZ and BARSAN Logistics, will provide integrated logistics services to Cluster companies within the logistics village to be established in the 5^th expansion zone of the OIZ. Additionally, within the BALO initiative block trains are planned to be operated between Manisa and certain European countries (i.e. Germany, France, Italy, Austria etc.).

Another recent development, which would further improve the quality of logistical services, is the privatisation of the port of Izmir. The port has been acquired by an international consortium, composed of Hutchinson and Aegean Exporters’ Association.

According to the records of the Provincial Directorate of Industry and Trade in Manisa, there are 837 companies operating in the Cluster.

Related and supporting industries include machinery producers, packaging and labelling, wooden palette manufacturers, casting, foundry and moulding, ignition electrodes, paints and dyes, glass, heating parts and components etc.

5. Institutions for Collaboration and the Government

Government policies and actions have an impact on the competitiveness of clusters. Cluster theory suggests that governments should provide the clusters with a favourable operating environment that would boost their competitiveness.

The field analyses and the working group meetings that have been held in Manisa did not reveal any competitive advantage that the Manisa EEA Cluster enjoys as a result of government actions and/or policies.

The Manisa OIZ is home to the regional offices KOSGEB (Manisa Enterprise Development Directorate) and Turkish Standards Institute.

Institutions for collaboration (IFC) are the organisations, with which clusters cooperate to become more competitive. Such organisations, in Turkey, include universities, chambers, exporters’ unions, sectoral associations, foundations, organised industrial zones, research institutions etc.

The controversies regarding the management of the Manisa OIZ have created a serious tension between the Manisa Chamber of Commerce and Industry and the present management of the OIZ, which overtook the management functions upon “court order”. This tension (and conflict) has literally ceased the relations between the two organisations. In fact, Manisa was the only province where a roundtable meeting, convening all local stakeholders, could not be held. Manisa was also the only province where the information day was not attended by the local chamber. This said Manisa OIZ, both under its present and old management, is one of the most active and “wealthy” OIZs in Turkey.

There are three associations lobbying for the interest of the electronic and electrical devices in Turkey: BEYSAD (Association of White Goods Suppliers), TESID (Turkish Electronic Industry Association) and TURKBESD (Turkish White Goods Manufacturers). Although the key players of the Manisa EEA Cluster are members of these associations, none of the three associations are composed entirely of the companies established in Manisa.