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German automotive giant Volkswagen — still reeling from an emissions fraud scandal that has earned it hefty penalties and a mammoth class action lawsuit — is gearing up for a major investment in Turkey, eager to continue profiting from technology that it can no longer easily use in the West. The investment plan, which is in the final stage of talks with the Turkish government, has already sparked controversy, including political objections over Ankara’s deteriorating democratic record.
As a first step, Volkswagen established a subsidiary in the western Turkish province of Manisa. The details of the prospective plant, including its production capacity, number of employees and export plans as well as the incentives that Ankara has offered will take a bit more time to clear up, but the fact that the Justice and Development Party (AKP) government is eager to welcome a company mired in gross environmental breaches has already fueled misgivings.
The concerns are well founded. In developed countries in particular, the automotive industry is under growing pressure to transform itself in line with environmental concerns, and moving outdated technologies to emerging countries such as Turkey is attracting scrutiny.
The Paris climate accord, which entered into force in November 2016 and has been signed by 197 parties thus far, set a goal of keeping world temperatures “well below” two degrees Celsius (3.6 degrees Fahrenheit) above pre-industrial times and limiting the amount of greenhouse gases emitted by human activity to naturally absorbable levels, beginning at some point between 2050 and 2100. According to the International Energy Agency, the number of electric cars will need to reach 600 million by 2040 in order to attain the Paris goal.
European countries, which represent Turkey’s main export market, have set national targets for such transformation strategies. France and Britain plan to ban the sale of all gasoline and diesel cars by 2040, and the Netherlands even earlier. Austria, Denmark, Ireland and Portugal have set other intermediate targets related to electric cars. Germany aspires to have one million electric cars on the roads by 2022, with officials floating the idea of introducing a carbon tax.
To keep automotive emissions under control, the European Union has set the average emission target for new cars at 95 grams of carbon dioxide per kilometer from 2021, with even lower targets planned for 2025 and 2030.
Such requirements do not cover car sales in Turkey, but apply indirectly to carmakers in the country as 80% of their exports go to Europe. Manufacturers risk paying hundreds of millions of euros in fines for missing emissions standards.
Amid the tightening environmental rules, Volkswagen — the world’s seventh largest company, according to Fortune — failed its customers in a scandal that unfolded in the United States. In 2015, the US Environmental Protection Agency found that Volkswagen had used devices to cheat diesel emissions tests. Despite initial denials, the company admitted to using software to reduce apparent emissions in 11 million diesel engines worldwide. Last week, a German court began hearing a landmark case against the company, involving about 450,000 customers who are seeking refunds on the full purchase price of their vehicles.
Volkswagen said in May that the scandal has cost it 30 billion euros (nearly $33 billion) thus far. The company had agreed to a nearly $15 billion settlement with US authorities in addition to compensation of up to $10,000 each to the owners of about 475,000 polluting cars in the United States.
While grappling with the fallout, Volkswagen has been pursuing various programs in line with the transformation process in the automotive industry, including investments in the production of electric cars and related side industries. Technologies facing penalties, meanwhile, appear destined for transfer to other countries. Turkey has emerged as one of the locations to shift the production of gas and diesel cars as Volkswagen appears eager to make use of the AKP government’s desperation to attract foreign investors.
Upon invitation from President Recep Tayyip Erdogan, the German carmaker has set up a unit with a capital of 943.5 million Turkish liras ($165 million) in Manisa near Turkey’s Aegean coast, according to the Oct. 2 issue of the country’s trade registry gazette. It is reportedly planning to invest 1.4 billion euros ($1.5 billion) in a plant expected to become operational in 2022, have a production capacity of 300,000 cars per year and create 4,000 jobs.
The plant would be the first foreign direct investment in Turkey’s automotive sector in 22 years. It’s especially important for the AKP government as mounting concerns over the rule of law in Turkey, coupled with other political and economic risks, have largely discouraged foreign direct investments in recent years.
Making use of outdated technology in a country of 82 million that offers cheap labor and generous incentives could have been good enough for the company, but the AKP government has reportedly offered additional benefits, including a guarantee to buy 40,000 vehicles per year. On the day the establishment of Volkswagen’s Turkish unit became public, Erdogan issued a decree authorizing the Industry Ministry on a prospective contract with the company.
In the European Parliament, meanwhile, a group of deputies urged the European Commission to probe whether Volkswagen’s investment plan conformed with EU competition regulations, claiming that Ankara had offered the company incentives worth 400 million euros ($439.3 million) in addition to the purchase guarantee of 40,000 vehicles per year. One of the sponsors of the move, Reinhard Butikofer from the German Green Party, said Volkswagen’s decision to invest in Turkey was “causing dismay” given “the increasingly deteriorating situation of the rule of law, media freedom and democracy under President Erdogan.” The parliamentarians believe that by choosing Turkey, Volkswagen has harmed an EU member state, referring especially to Bulgaria, which was the other main contender for the plant.