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Turkey: Manufacturing
[June 30, 2006]

Turkey: Manufacturing


(EIU Viewswire Via Thomson Dialog NewsEdge) COUNTRY BACKGROUND

FROM THE ECONOMIST INTELLIGENCE UNIT

Manufacturing accounts for 90% of total exports of goods

Manufacturing output has been a major driver of economic growth since the 1960s. Including basic processing industries like iron and steel and oil refining, it accounts for well over 90% of merchandise exports and 17-18% of employment. Most kinds of consumer goods are domestically manufactured in significant quantity and variety. However, in some areas, a modern domestic industry never developed (mobile telephones, cameras, timepieces) or imports have come to dominate the market (small household appliances and utensils). Industrial machinery and a wide variety of industrial materials, such as chemicals, plastics and building materials, are also produced within the country, although not always in sufficient quantity or variety to meet domestic demand. Production of electronic components and some other industrial parts is limited. The majority of exports are made up of consumer goods. The television industry and a large section of the clothing and textiles industry are primarily geared to exporting, and numerous other manufacturing industries export a significant share of their output.



Aside from primary processing sectors, cigarette plants and a few other miscellaneous plants not yet privatised, ownership of the manufacturing industry rests almost entirely with the private sector. Tens of thousands of small firms coexist with a dozen large conglomerates. The extent and nature of integration with the international economy varies greatly. All major automotive plants, including many parts producers, are partly ownedand increasingly majority-ownedby multinational partners, which regard Turkey as one of their strategic bases. However, independent Turkish companies are in the majority in the household appliances and consumer electronics sectors. The television sets exported by these companies are generally made to order for multinational electronic goods producers or Western retail chains. This is also the typical pattern in the clothing sector, with most export goods made to order for international fashion houses and only a minority exported under Turkish trademarks. In food-processing and other perishable consumer goods sectors, multinational companies have a significant presence either directly or through long-standing partnerships or licensing arrangements with local firms. However, innumerable independent local firms of varying sizes also compete for these markets.

Large parts of manufacturing output rise and fall primarily with domestic consumer demand. However, exports have increased in importance, enabling manufacturers to tap into a wider market and serving as a lifeline in years of low domestic demand.


EU rules and fiscal constraints limit state support to industry

Various forms of state support have been used to favour the growth of manufacturing. In the post-war period, the state supported the efforts of nascent private capital through specific tariff protection, capital injections and a range of incentives, including tax breaks and the duty-free import of investment goods. Industrialists made use of foreign technology and formed joint ventures with foreign capital. Some became virtual monopolies in the domestic market. These "import substitution" policies reached their peak in the 1960s and 1970s. In the 1980s and 1990s trade barriers came down, but investment incentives continued. The state turned a blind eye to tax evasion and informal employment, increased its own payroll and financed its deficits with the help of capital inflows. A new generation of small industrial enterprises grew up, particularly in relatively low-technology areas such as food-processing and textiles and clothing. These smaller enterprises were also the main beneficiaries of various schemes to support exports.

Specific incentives have at times been made available to certain sectors, often resulting in excess capacity, but also contributing to critical mass and accumulation of expertise. The large number of steel furnaces and car plants is partly attributable to such incentives. In the early 1990s, in the run-up to the establishment of the customs union with the EU and the abolition of EU textile quotas, specific incentives were made available for the textile industry. Today, investment incentives put special emphasis on the development of backward regions, small and medium-sized enterprises and high-technology industries. Exporters benefit from credits and guarantees from the state foreign trade bank, Eximbank, a value-added tax (VAT) rebate system, and an internal processing customs regime. However, important sections of Turkish manufacturing industry have been complaining of difficulties in competing in domestic and foreign marketslet alone attracting new foreign investmentowing to relatively high energy, tax and social security costs, as well as the strength of the lira in 2004-05. With the declared goal of attracting foreign investment, the government cut the corporation tax rate from 30% to 20% in 2006, but scrapped the "investment allowance" tax break. In breach of its promise to the IMF not to introduce sector-specific incentives, the government cut the VAT rate on textiles, clothing and some leather products in March 2006 to help domestic producers.

Industries as diverse as chemicals and electronics, shipbuilding and jewellery are mostly located close to the major markets and ports. The most industrialised regions are the Istanbul conurbation, stretching from Tekirdag in the west to Izmit in the east, Bursa and other northwestern provinces, the region around Izmir and the Mersin-Adana-Iskenderun area. Availability of local raw materials or primary commodities has sometimes prompted industries to locate in various other parts of the country. Production of foodstuffs, cement and other building materials, textiles and clothing is quite widespread. As the capital, Ankara has seen some industrial development, including defence equipment industries. Konya and Gaziantep are known for their agro-industry. Kayseri has recently become known as a furniture centre. A few other central Anatolian provincial centres are also witnessing a measure of industrialisation, which is attributable to their lower costs.

Textiles and clothing lead the way, but face problems

Textiles and clothing account for one-quarter of exports and employ some 1.5mpeople. The spinning and weaving industry, originally based on local cotton, is still internationally significant, but has been overtaken by the clothing and home textiles industries. These industries meet the great majority of domestic demand, as well as generating 20% of Turkey's exports. Germany and other west European countries are by far the largest export markets. Exports are mostly made to order for Western fashion houses, but a few manufacturers also market abroad, as well as at home, under their own trademarks. Firms face the challenge of moving up the value-added ladder to cope with intense international competition, which increased further with the elimination of quotas for WTO members (including China) at the end of 2004. Textiles and clothing output have lagged the general level of industrial production in recent years. In 2005 they contracted by 11.8% and 12.5% respectively. Reports of textiles and clothing businesses closing down, moving production offshore or moving into other sectors have increased.

The traditional textiles industry is centred in Istanbul, Bursa and the cotton-growing Izmir and Adana regions. In recent years investments, especially in finished products, have also spread to Denizli and other more remote centres, where labour is cheaper. The industry is made up of a large number of tiny, small and medium-sized firms displaying various degrees of specialisation and achieving various levels of quality. Foreign investment in the sector is rare. A significant proportion of all production is believed to go unrecorded.

The automotive sector is increasingly export-oriented

Domestic tractor production began in 1955 and car production in 1963. Today, Turkey has about 20 manufacturers of cars, commercial vehicles and tractors, almost all of which have multinational owners or partners. The long-established OYAK-Renault and Tofas (Koc-Fiat) plants are both located in Bursa. Toyota, Honda and Hyundai started to produce cars in Turkey in the mid-1990s. Meanwhile, Otosan (Koc-Ford) decided to concentrate on light commercial vehicles. Otosan's new, export-oriented Izmit plant began in 2001. There is also a substantial parts industry.

Vehicle output reached 450,000 units in 1993. The 1994 financial crisis and import liberalisation prevented further growth until the low-interest credit boom of 2000, when 468,000 vehicles were produced. By this time, over half of all cars and one-third of all commercial vehicles sold in the domestic market were being imported, mainly from western Europe. However, Turkish plants were also starting to produce new models and to increase their exports through the international distribution networks of the foreign partners. Another domestic market crisis hit output in 2001-02, but it bounced back in 2003-05.

In 2005 a total of 879,000 vehicles (excluding tractors) were produced in Turkey. The number of cars produced was 454,000. The top manufacturers were Ford Otosan, Renault, Tofas and Toyota, in that order. The majority of the output (553,000 vehicles, including 320,000 cars) was exported. This compares to exports of just 40,000 vehicles as recently as 1998. The leading exporters were Ford Otosan, Toyota, Renault and Tofas.

Domestic production accounted for 43% of total local sales and 31% of local car sales. All the companies that have production plants in Turkey also import models manufactured elsewhere. The leading importers are Ford, Opel, Volkswagen, Peugeot and Renault. Turkey has not yet permitted imports of second-hand cars from the EU. In US dollar terms, the exports and imports of the automotive industry, including parts, amounted to US$9.6bn and US$10.5bn respectively in 2005, according to the official statistics agency, the Turkish Statistical Institute (Turkstat).

Manufacturing production(1997=100; % change year on year unless otherwise
indicated)Annual average2005 2001-05 Food & beverages6.12.8Textiles-11.9-0.7Clothes-12.5-1.4Refinery products-0.12.7Chemicals5.66.4Non-metallic goods10.05.1Metals3.46.4Non-electrical machinery & equipment1.111.1Motor vehicles9.618.5Total manufacturing4.85.2Sources: Turkish Statistical Institute.Household durables and consumer electronics

Turkey is a major manufacturer and exporter of household durables, such as refrigerators and washing machines, and of consumer electronics (primarily television sets). These sectors are dominated by a small number of large firms. The largest, Arcelik, which spans both sectors, is also Turkey's best-known trademark and largest private-sector industrial company, with a turnover of some 3.1bn (about US$3.7bn) in 2005. It is a member of the Koc group and is a classic product of the import-substitution era. The firm has several brands in Europe and a manufacturing plant in Romania. It also uses the trademark of its sister company, Beko. Arcelik's domestic rivals include Profilo Telra in electronics, the German-controlled BSH-Profilo in white goods and the Vestel Group in both sectors. Turkish firms depend on imported components, but at the same time, they are investing in research and development and adopting innovations like flatscreens and digital technology. Vestel claims to be one of the world's three largest television manufacturers, with a capacity to produce about 12m televisions a year, mostly at its "Vestel City" facilities in Manisa.

Exports of television setsmostly to Europesurged from under 2m until 1995 to 7.2m in 2000-01, benefiting from cheap labour and better customs access than East Asian competitors. The industry was cleared by an EU anti-dumping inquiry in 2001. In 2004-05 exports reached about 18m, while some 2.5m sets were also produced for the domestic market. Since the 2001 recession, the white-goods sector has also been exporting most ofits output, particularly refrigerators and ovens. At the same time, the domestic market has recovered, especially in 2003 and 2004, as a result of returning consumer confidence, delayed consumption, rapid credit expansion and price wars. According to Turkstat, 5.1m refrigerators, 4.4m washing machines, 5.9m ovens and 780,000dishwashers were produced in 2005. Imports account for 10-15% of domestic sales of major household durables and consumer electronics. Imports of low-cost products from China have increased visibly.

SOURCE: Country Profile

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