The Turkish software sector at a turning point
As the Turkish economy continues to grow, after a major turnaround in the last decade, the Turkish software sector is finally becoming more visible domestically and internationally.
The latest global economic crisis continues to affect the world economy, with a special impact on developed countries. The economies of developing countries continue their growth, though at a slower rate than in the last three years, and they keep closing the gap with the economies of their developed counterparts. Developing countries are expected to grow considerably faster than developed economies for the foreseeable future. In the changing balance of power, China, Brazil, India, Indonesia, Mexico, Russia, South Korea and Turkey are expected to lead the growth of the world economy. Most of these countries are estimated to accelerate their growth rates in 2013 and 2014.
In this context, the Turkish economy grew at a rate of around 2.7% in 2012. While the current account deficit, one of the structural problems and risks of the economy, as a percentage of the gross domestic product (GDP) shrank from 10% to 6% levels, the export markets continued to widen. In fact, the dependency on Europe in exports has declined from 60% levels to less than 40% in the last few years. Fitch, one of the major credit rating agencies, improved the credit rating of the country to ‘investment grade’ for the first time in decades. New credit rating upgrades are possible in 2013. The first signs of the impact of the measures taken in 2012 toward a higher value-added economy may also be seen in 2013. There are signs and expectations that the growth rate should be above 4% in 2013, and even higher in 2014.
The decrease in debt, inflation and budget deficit levels, factors such as investments in infrastructure, education, and health, and measures taken toward the solution of some of the structural problems, are among the recent positive developments which are estimated to have a visible impact in the Turkish economy in the coming years. As a result, productivity, capital accumulation, and competitiveness levels are expected to improve.
Some of the threats and risks to the current stability and the positive outlook in the short to medium term, which may cause sharper downturns and fluctuations than expected, are as follows: delay in the structural transformation of the economy, as the current account deficit and the deficiency in value creation and addition continue; prolongation of social and political problems and discussions; election period in the next three years (local, presidential and general elections, and a possible referendum for a new constitution); economic and political problems in neighboring countries; environmental uncertainties, natural disasters (earthquakes being a special threat to Turkey), and contagious diseases; lack of permanent solutions to economic problems in the United States (US) and the European Union (EU); uncertainties in emerging stars such as China.
In the long term, it is important to mention some of the 2023 objectives of the government which shape the current actions, activities and investments of both the public and the private sector: become one of the 10 largest economies in the world (up from #16), have a GDP per capita of USD 25,000 (up from the current USD 10,000 levels), USD 500 billion worth of exports (up from the current USD 150 billion levels), and USD 10 billion worth of software exports (up from the current USD 400 million levels).
One of the basic elements of these objectives is to shift toward higher value-added areas and to increase research and development, which means a stronger emphasis on the information technology (IT) sector. In the longer term, in many predictions for the next 40 to 60 years, most Turkish and foreign analysts, experts, companies and organizations agree on the high potential of Turkey to become one of the top 6-7 economies of the world.
According to the Organization for Economic Cooperation and Development (OECD), Turkey may have the seventh highest growth rate among 42 countries (34 OECD members and 8 non-members) between 2011 and 2060 with an average rate of 2.9%. The rate should be 4.5% between 2011 and 2030, which is slightly higher than the ratio of 4.2% for the period of 1995-2011. After the economy matures, it is expected to grow at around 1.9% between 2031 and 2060.
After summarizing the current state and the outlook of the Turkish economy, it may be useful to describe the last two decades in order to understand the situation of the software sector of the country. Turkey hopped from crisis to crisis in the 1990s as it was led by unsuccessful coalition governments, a situation which was exacerbated by political uncertainties, social unrest in certain parts of the country, a major earthquake and external factors. The last economic crisis in 2001, one of the worst in the century-long history of the country, convinced both the people and the politicians that it was time for serious reforms. A single-party government ever since, aided by a positive global conjuncture, has had a positive performance, and carried out social, political and economic reforms. As a result, budget deficit, inflation, and debt levels declined to reasonable levels, the banking sector was reformed, and the country was declared an official candidate to become a full-member of the EU. Significant amounts of foreign direct investment poured in. Going forward, while the economy continues to grow, many analysts agree on the need for structural change in order for this growth to be sustainable and for the government to reach its ambitious long-term goals.
The difficult economic environment of the 1990s affected the software sector negatively in Turkey, where there were no success factors present during that period, when many developing countries were taking steps to contribute with the growth of their IT and software sectors in coordinated efforts among actors such as the government, the private sector, and universities. The end result was a very small software sector with some relatively insignificant and coincidental success stories on a global scale. Enterprises of all sectors were reluctant to invest in IT in an uncertain economic and political environment, and preferred to benefit from high interest rates instead of the more cumbersome path of earning from efficient operations.
As the economic situation of the country improved significantly in the last decade, both the government and the private sector were motivated to invest in IT as capital started to accumulate. Enterprises started to feel the pressure to go after operating profits and efficiency as interest rates declined. The relevant actors started coordinated efforts to help the IT sector grow. The government initiated the Information Society Strategy, established technological parks throughout the country, introduced incentives such as tax advantages, started to support small and medium-sized enterprises’ (SMEs) IT purchases and to give grants for IT projects of universities and software companies. As a result, the software sector has experienced a double-digit growth rate in the recent past. Nonetheless, despite all the efforts, the sector remains relatively small. On the other hand, this also points to its growth potential.
As the information and communication technology (ICT) sector continues to grow in the world and in Turkey, software is one of the fastest growing segments. In recent surveys, both large corporations and SMEs express their intention to increase short-term spending on IT. While the enterprise resource planning (ERP) segment continues to lead the enterprise application software (EAS) market, there is a growing interest for customer relationship management, human resource management, business intelligence, business-to-business, business-to-consumer, and software as a service. Business intelligence, cloud and mobile segments are expected to constitute a more important market for software companies by 2015. Software firms that are able to present integrated solutions for their customers, contribute to their institutional transformation, and integrate their products and services with the main business of the customers, are expected to dissociate themselves from the rest of the competition during this period.
Despite the difficulties of finding accurate data, the Turkish software and services segments are estimated to have a size of approximately USD 2 billion, according to the Software Industrialists Association (YASAD). Considering that the IT and ICT sectors of the country have surpassed the thresholds of USD 10 billion and USD 30 billion, respectively, the Turkish software segment continues to remain relatively small despite the recent growth trend. Ratios such as software/hardware, software exports/total exports, and software/GDP are relatively small compared to those of developed and some of the developing countries. The Turkish software and services sector’s volume is slightly above 0.3% of GDP, which is dwarfed by the 2-3% levels observed in many developed and developing countries.
The Turkish EAS market has a size of over USD 100 million. ERP constitutes over 40% of EAS, and is expected to maintain its leadership in the coming years, with a double-digit growth rate. According to IDC, the EAS market grew 16.6% year-on-year in USD terms to reach USD 139 million in 2011. IDC expects the Turkish EAS market to expand at a compound annual growth rate of 12.2% to reach USD 247 million at the end of 2016.
There is an urgent need for the Turkish software sector to grow, which would contribute to the solution of the structural problems of the economy, add value, and increase productivity. This situation demonstrates the potential of the sector at the same time. There is still a significant software need in many fast-growing sectors. SMEs by themselves constitute a large market. Market penetration rates in some of the surrounding countries, which are in the radar of exports of Turkish software companies, are even lower than those of Turkey.
A more visible software sector is expected to be one of the key drivers of growth in the Turkish economy in the coming years.