KOCAELI PROVINCE: SATURATED WITH INDUSTRY

UNCLAS SECTION 01 OF 02 ISTANBUL 000438 SIPDIS SIPDIS E.O. 12958: N/A TAGS: ECON TU SUBJECT: KOCAELI PROVINCE: SATURATED WITH INDUSTRY ISTANBUL 00000438 001.2 OF 002 ¶1. Summary: Kocaeli province is Istanbul's blue-collar neighbor. If Ankara is Turkey's Washington and Istanbul is New York, then Kocaeli is Chicago. Heavily industrial and densely populated, Kocaeli hugs the eastern tip of the Sea of Marmara. Chamber of Industry representatives and Ford Otosan executives paint a picture of a province that is significantly wealthier than Turkey's norm, but still struggling to manage rapid population growth and urbanization as well as environmental challenges with little monetary support from the central government. Kocaeli is the destination for much of Turkey's greenfield investment, so much so that one chamber official described the province as "saturated" and unable to accommodate much significant new investment. End Summary. ¶2. Kocaeli province is home to 18 of Turkey's 100 largest industrial companies including TUPRAS's recently privatized oil refinery and Ford Otosan, the market leader in the automotive sector, the country's two largest industrial companies. Despite the presence of these heavyweights as well as investments by over 100 multinational companies, 80% of the membership in the Kocaeli Chamber of Industry is comprised of small- to medium-sized family businesses. ¶3. Chamber of Industry officials ascribe much of Kocaeli's success in attracting investment to its location - directly east of Istanbul and bordering the Sea of Marmara - and excellent land/sea/air transport links. The decision decades ago to locate a major oil refinery in Izmit, Kocaeli's capital, prompted investments in the chemical and petrochemical industry and helped form the basis for what is now Turkey's industrial heartland. Kocaeli is home to 27% of Turkey's chemicals industry; however in recent years the automotive sector has eclipsed chemicals as the primary driver of Kocaeli's economy. Ford, Hyundai, Honda and Isuzu have production facilities in the province as do local and international producers of automotive parts and supplies. ¶4. The unregistered workforce is unusually small in Kocaeli due to the presence of large, industrial companies whose workers are almost entirely registered and frequently unionized, according to Onur Erguney, Deputy Secretary General of the Kocaeli Chamber of Industry. Erguney suspects well under 40% of Kocaeli's workers are unregistered. By ;contrast, most observers estimate that over half of Turkey's workforce is unregistered. Unemployment in Kocaeli is about 12%, in line with the national average, according to Erguney. Large multinational corporations report no difficulty attracting and retaining qualified staff both technical and professional. However, senior professional staff still generally live in Istanbul despite a punishing commute. Anecdotally, we asked eight senior Ford Otosan executives where they lived and all were Istanbul residents. The company provides compounded housing for 50 senior staffers who typically spend one or two nights a week in Kocaeli and the remainder in Istanbul. Yasar Onay, Ford Otosan's human resources manager, explained that virtually all technical employees lived in Kocaeli, but that more than 60% of the company's professional staff lived in Istanbul primarily because schools were significantly better than in Kocaeli. Ford has provided substantial charitable support to local public elementary and high schools as part of a good corporate citizenship program. ¶5. Kocaeli is a preferred location for foreign direct investment in Turkey's manufacturing sector, but the small size of the province and recent large-scale unplanned urbanization constrain future growth. Necmettin Bayraktar, Deputy Secretary General of the Kocaeli Chamber of Industry, notes that in many respects "Kocaeli is full." Simply finding appropriate land for new industrial development is a challenge. Bayraktar argued for carefully evaluating potential new investments with a focus on attracting projects that are higher-value-added and low environmental impact. He cited a primary complaint of the Kocaeli business community - the province is a net contributor to the government budget and pays far more in taxes than it receives in services. Increased government spending on the mitigation of existing environmental problems, through the provision of solid waste treatment facilities and greater attention to air quality, are vitally important as is investment in education, roads and health, he argued. ¶6. Kocaeli residents' political views appear to track national trends. Six of nine current MPs are from the AK Party while the remaining three represent CHP. Corporate leaders and major industrialists are strongly in favor of EU accession, while the man on the street is much less positively inclined, in a phenomenon Bayraktar described as largely emotional. Erguner noted that Kocaeli's many family-run businesses are typically part of the supply chain ISTANBUL 00000438 002.2 OF 002 of major corporations and are thus more exposed to the risks and benefits of global competition. This gives small and medium enterprises a more outward-looking focus and they are generally supportive of Turkey's EU aspirations, he claimed. ¶7. Erguney and Bayraktar agreed that the Customs Union has been a significant positive for Kocaeli, in part by forcing local companies to make changes in their management structure in order to adapt to a more competitive marketplace. EU membership remains vital, with complete economic integration with Europe the ultimate goal. Sticking with the Customs Union or a privileged partnership would not be in Turkey's long term interest, they argued. Erguney explained that Kocaeli is competing with the new Central European EU members to be the EU's production base and that competing as a member would be more effective than as an outsider. In a separate conversation that gave credence to Erguney's argument, Mike Flewitt, Ford Otosan General Manager, noted that production costs in Kocaeli were comparable to those in Slovakia, Hungary and other new EU entrants, but that Turkey's relatively larger domestic market made it a more attractive production location ¶8. Comment: Kocaeli is an exception to norm as far as greenfield direct foreign investment in Turkey is concerned. However, only a few other provinces will be likely to replicate Kocaeli's location-based success. Corlu in Tekirdag province west of Istanbul is a major manufacturing center with similarly strong transport links and proximity to Istanbul's financial and business communities. Likewise, if Ceyhan, a port city in southern Turkey, takes off as a major energy hub, significant investments in chemicals and related industries could soon follow. Kocaeli's experience with unplanned growth and insufficient government-provided educational and environmental infrastructure sound a cautionary note for those provinces wishing to mimic its success in attracting major industrial investment. End Comment. JONES