The Unknown TV Giant
PCs, digital cameras, and MP3 players may be the glamour products these days in consumer electronics, but TVs are still a very big business for leading makers such as Sony (SNE), Philips, and LG Electronics. In Europe, though, the hot name to watch is a company few have ever heard of: Turkey's Vestel Electronics, located in Manisa. In less than a decade, it has parlayed solid technology and cheap manufacturing into its role as the leading supplier of TVs in Europe, with a quarter of the market.
One reason Vestel is so little known is that most of its TVs are sold under other brand names, including SEG in Germany and Teletech in Britain. Vestel also supplies TVs to dozens of other companies, such as Sanyo (SANYY) and Hitachi (HIT), who relabel them under their own names. All told, the Turkish manufacturer sold more than 8 million conventional and flat-panel TVs last year in Europe. That was more than Philips Electronics (PHG), though the Dutch giant booked higher revenues thanks to a richer mix of high-priced flat-panel models.
Now Vestel is ramping up its flat-panel TV capacity to meet growing demand. By next year, it expects to produce nearly 3.4 million export units, on top of 6.9 million traditional cathode-ray tube TVs. It's investing $144 million in capital spending this year to expand its Vestel City manufacturing complex in Manisa, near Izmir on Turkey's Aegean coast.
Western Europe is a rich target, but Vestel is also hoping to capitalize on growing demand in Russia and former Soviet states as well as the domestic Turkish market, where it commands a 40% share. Thanks to its success outside its home market, Vestel is Turkey's leading exporter, selling more than $2.5 billion worth of goods in 103 countries around the world. "We represent 55% of all Turkish TV exports, and we feel we're doing it right," says Turan Erdogan, head of Vestel's foreign trade division.
So, who is Vestel? Founded in 1984, it was acquired in 1994 by the Zorlu Group, a family-owned textile giant controlled by Turkish billionaire Ahmet Zorlu. In addition to TVs and other electronics, Vestel is also a top maker of white goods -- washing machines, dishwashers, refrigerators, and air conditioners -- sold in Turkey, Europe, and the Mideast.
Overall sales topped $3.3 billion last year, up 25% from two years earlier, and the company earned $63 million in net profits, some $40 million of that from electronics, estimates Cenk Orcan, co-head of research for HSBC in Istanbul. Vestel employs more than 14,000 people in Turkey.
For all the company's success, it has had a rocky ride on the Istanbul Stock Exchange. After rising smartly at the start of this year, to a high of 5.75 new Turkish lira ($4.34), shares in its publicly traded electronics unit are now trading at 3.58 lira ($2.32), some 24% below their level a year ago.
This is due, in part, to a 15% devaluation of the Turkish lira vs. major currencies, as well as the recent selldown in emerging market indexes (see BW Online, 5/23/06, "Emerging Markets Beat a Quick Retreat"). Vestel's white goods unit went public in April, raising $150 million, but the shares have trailed the broader Turkish bourse by 16% since then, says HSBC's Orcan.
"Vestel has been growing its top line well, but it works on extremely low margins, as is true with all consumer electronics producers," Orcan says. What's more, he notes, an oversupply of flat-panel TVs this year and brutal competition in conventional TVs is forcing down prices and exerting additional pressure on margins (see BW Online, 6/8/06, "LCDs Display Their Flaws").
One advantage Vestel enjoys is its proximity to European markets. Compared with Far Eastern producers, who must ship their goods halfway around the world, Vestel has lower freight costs. It also benefits from Turkey's customs union with the EU, whereas Chinese and other Asian manufacturers face higher duties and anti-dumping tariffs. Being on the edge of Europe, the company says, also lets it respond more quickly to rapid changes in demand in the highly segmented European market.
The company also has a strong position in its domestic market, where it's the No. 2 seller behind archrival Beko. A unit of Turkey's largest conglomerate, Koç Holding, Beko sells fewer TVs overseas but still ranks as the No. 3 supplier in Europe. And like Vestel, Koç is also in the white goods business, where its Arcelik brand dominates the Turkish market with 56% share.
To escape the commodity trap and raise profitability, Vestel is trying to move up the value chain. It has 500 research and development engineers -- half working on software -- employed in labs scattered from San Diego to Britain to Taiwan.
"You have to have your own software capabilities, because that's becoming more important all the time," says foreign trade division head Erdogan. Engineers are working on everything from on-screen menus to electronic programming guides -- capabilities Vestel hopes will give it an edge with consumers.
The company is also starting to sell more products under its own brand name, which can give it a price premium and better margins. When Vestel first pushed into Europe, it opted for a low-cost relabeling strategy.
"You either push heavily and market your own name or get efficiency from economies of scale and production cost savings," says Erdogan. But since then, it has acquired the SEG and Teletech marques, as well as Nokia's (NOK) old Luxor and Finlux brands. And now, when it enters new markets, it sells TVs under its own name.
The Vestel brand is already used in Iraq, Iran, the Balkans, and Central Asia. But perhaps the most successful foreign foray has been in Russia, where Vestel opened a TV plant in Alexandrov in 2004. In its first year of operation, the company sold 700,000 Vestel-branded CRTs and grabbed 12% of the Russian market. Back home in Turkey, of course, Vestel is a household name. The company even sponsors a football club, called Vestel Manisaspor.
In the long run, Vestel's most important challenge is to navigate the rapid market transition from traditional to flat-panel TVs. The company's own projections show demand for CRTs declining, but the market is still strong enough that it continues to open new production lines in Turkey and abroad. Erdogan says switching those lines to flat-panel production later won't be difficult. (The company doesn't make its own liquid-crystal or plasma panels, but acquires them from outside suppliers.) Plus, newer lines help the company's bottom line because they make more use of automation.
Will its greater engineering input, strengthening brand name, and wider distribution be enough to kick up Vestel's profits and share price? It won't happen overnight, but analysts are hopeful about the company's prospects. "The bright side is that Vestel Electronics is gradually moving into higher-tech production of higher-margin products," says HSBC's Orcan. At the same time, the company's foreign success is highlighting Turkey's underappreciated tech prowess. Looks as if Vestel won't remain unknown much longer.
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