TURKEY'S AUTOMOTIVE SECTOR RUNNING ON EMPTY

UNCLAS SECTION 01 OF 04 ANKARA 000297



SIPDIS

SENSITIVE



DEPT FOR EUR/SE, EEB/BTA/TPP

DEPT PLEASE PASS USTR MMOWREY

COMMERCE FOR CRUSNAK AND KNAJDI

TREASURY FOR FPARODI



E.O. 12958:N/A

TAGS: ECON, ETRD, EFIN, TU

SUBJ: TURKEY'S AUTOMOTIVE SECTOR RUNNING ON EMPTY



Ref: ANKARA 118



1. (U) This is a joint Embassy Ankara/Consulate

General Istanbul cable. This cable is sensitive but

unclassified.



2. (SBU) Summary. Turkey's automotive sector is in

desperate straits due to the collapse in European

demand for automotive goods. For years, the sector

has been a model of Turkey's export-oriented growth

philosophy and, in 2008, it became Turkey's largest

export sector (surpassing steel and textiles),with

total exports of USD 18.3 billion (80% of Turkish

automotive production). However, auto exports fell

dramatically in late 2008, dropping -35.4% in the

fourth quarter. This has continued into 2009, with

January numbers showing a 64% YOY decrease. The

sector's problems are having (and will continue to

have) serious effects on the wider economy. Some

1.3 million people depend directly or indirectly on

the sector for employment, and the GOT is

understandably eager to avoid factory closures and

layoffs (although these have already started, with

over a thousand announced layoffs and more to come).

Despite this desire, the GOT's policy response has

so far been rather tepid, with a great deal of talk

but little in the way of concrete assistance for the

sector. The stimulus package passed on February 18

contains some limited measures to help the sector,

and a new package focused on the automotive industry

is expected "soon," but industry has been

disappointed in the GOT response to date.

Regardless of what the GOT does or fails to do,

however, the sector will face troubled times until

demand picks up again. End summary.



Turkey's Automotive Sector

--------------



3. (U) The automotive industry in Turkey began its

rise immediately after the economic crisis in 2001,

benefiting from Turkey's increased emphasis on

export-oriented production. The industry saw rapid

growth, jumping from 346,000 automobiles in 2002 to

1.1 million in 2007. Exports also grew rapidly,

from 258,000 automobiles in 2002 to 820,000 in 2007,

with a value of USD 12.2 billion. The sector's

direct employment rose from 26,000 in 2002 to 47,500

in 2007. Support industries also grew rapidly, with

the auto parts industry providing 200,000 jobs as of

2007, generating USD 30 billion in revenue, and

exporting USD 2.8 billion worth of goods (again,

with 65% destined for European markets). In all,

the Foreign Trade Undersecretariat estimates that

the employment of 1.3 million people depends upon

automotive production or related service industries.

There are currently 15 manufacturing companies in

the automotive sector, most with foreign capital.

There are 4,000 auto parts producers, 185 of them

with foreign capital. Turkey is the largest

producer of buses in Europe, and the third largest

producer of light commercial vehicles.

2008: A Bright Beginning Foiled by the Crisis

--------------



4. (SBU) During the first half of 2008, the

automotive sector was on track for a record year.

Both domestic and foreign sales were up 25-30% on

the year and production was going to come in well

above the targeted 1.3 million units. According to

Dr. Ercan Tezer, Secretary General of the Automotive

Industry Association (OSD),this began to change

toward the end of the second quarter. At that time,

the number of new vehicle orders began falling fast,

led by falling demand in Europe (Note: Approximately

80% of Turkey's automotive production is exported,

of which 70% is destined for Europe. As a result,

Turkey's auto sector is extremely sensitive to

demand trends in Europe. End note.) The OSD began

advising its members to consider cutting back on

production to avoid an inventory overhang, but their

warning was largely ignored both by industry and the

GOT, which was eager to see continued growth (and

increasing tax revenues) in this profitable sector.



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Industry's reluctance to cut back meant that

production soon began to outpace demand, and

industry is now sitting on 150-160,000 unsold

vehicles (12% of annual production).



5. (SBU) Vural Kural, Head of the Turkish Sector

Assemblies and Economic Research Department at the

Union of Chambers and Commodities Exchanges of

Turkey (TOBB),painted a similar gloomy picture. Up

until April 2008, the automotive sector was

operating at full capacity, but it began to slow in

May and June before plummeting 14.3% YOY and 32.1%

YOY in July and August, respectively. By January

2009, automotive capacity utilization was 53.2%

lower than the previous January. The falloff in

units produced was even more dramatic, with a 63.4%

YOY decline in December 2008, bringing the sector

back to its 2004 level (Note: The discrepancy

between production and capacity utilization is due

to a decrease in overall capacity as factories began

to shutter in late 2008. End note.) Exports also

fell sharply, ending December down 49.4% from the

previous year (although overall value increased for

the year, due to the strong first quarter).



6. (U) Faced with low demand and overproduction, the

industry has reacted by temporarily shutting down

production lines. Ford Otosan, one of Turkey's

largest producers, announced in November that it

would be shutting down production at two factories

on five separate dates spread out over the following

four months. Other producers immediately followed

suit. On February 16, Ford announced that it would

be stopping production entirely February 26-March 15

and again March 27-31, citing deteriorating market

conditions. Following layoffs of 300 people in

December, Ford now employs 6200 people but noted

that it will have to reexamine its employment plan

in light of expected reductions in production. In

January, Turkey's largest automobile producer Tofas

(a partner of Italian Fiat) laid off 800 workers and

Componenta, a Finnish automotive casting firm, let

425 workers go. Kural stated that until the pending

inventory of 160,000 vehicles is sold off,

production will be more or less halted indefinitely.



The GOT Response (Or Lack Thereof)

--------------



7. (SBU) Tezer noted that by late September 2008, it

had become obvious that the crisis, now in full

swing, was having a deeply negative effect and the

industry asked the GOT to implement a set of

measures to help the sector. Industry

representatives met with Deputy PM Nazim Ekren,

Finance Minister Kemal Unakitan, Trasury Minister

Mehmet Simsek, Foreign Trade Minister Kursad Tuzmen,

and one other minister that Tezer declined to name

(later confirmed to be Industry Minister Zafer

Caglayan). For two months, Tezer said, these

negotiations went nowhere. Then the GOT regained

interest, and a series of proposals were considered,

including:



-- Credit incentives for domestic consumers,

including a reduction in the 15% tax on automotive

loans (60% of domestic auto purchases are financed

through credit);



-- Incentives for continued R&D investment;



-- Funds and/or tax incentives to keep the workforce

in place and prevent layoffs; and



-- An incentive plan for investment, with the

possibility of substantial corporate tax reductions

depending on the size and location of the

investment.



In addition to the above proposals, ideas began to

circulate in the press for other incentives, such

as: reduced electricity costs, tax breaks for

purchasing environmentally-friendly vehicles, and

the reinstitution of a tax break for new car



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purchasers who trade in older vehicles (see reftel).



8. (SBU) On February 18, Parliament approved a broad

package of measures to stimulate the economy, some

of which will benefit the automotive sector.

Specifically for the auto sector, the GOT announced

an amnesty for fines and unpaid taxes on vehicles

older than 30 years. This is intended to encourage

the owners of old vehicles to sell their cars and

buy new ones. The anticipated tax discount on new

cars was not a part of the package, however.

(Comment: It seems unlikely someone so poor that

they are driving a 30-year-old car is going to be

enticed into buying a new vehicle simply because

they receive an amnesty from taxes and fines they

probably had no intention of paying anyway. End

comment.) The package also contained broader

measures not limited to the automotive sector -

these will be reported on septel.



9. (SBU) While Tezer welcomed the limited measures

in the new package, he was disappointed that it

included neither retail credit incentives nor large-

scale corporate tax incentives sought by industry.

Industry Minister Zafer Caglayan, in what has become

a weekly ritual, has repeatedly told the press that

targeted sectoral relief packages will be coming

"soon," and Tezer expressed his hope that later GOT

efforts will incorporate more of the industry's

ideas in this sectoral package. Deputy PM Ekren

announced on February 20 that the sectoral packages

will cover the textile, iron and steel, contracting,

automotive, tourism and maritime sectors, including

financing assistance and tax remedies. He also

added that Turkey's Eximbank would increase its loan

capabilities from USD 500 million to USD 1 billion

as part of the same package.



10. (SBU) Kural observed that the GOT is "showing

different faces to different people" in an attempt

to assure the G20, IMF, and local actors that their

sometimes conflicting concerns will all be

addressed. As a result, its policy response has

been chaotic. He also noted that he would like to

see more in the way of broad tax relief as a way to

immediately address the pressures on corporations

and to prevent further layoffs within the automotive

sector, but lamented that most of what he had seen

in the rumored sectoral packages involved

encouraging new investment spending. He criticized

the GOT for failing to assess the problem correctly,

saying that their policies rest on the assumption

that demand will return to "normal" (i.e. pre-crisis

levels) in the relatively short term and that

investment spending will therefore pay immediate

dividends. The idea that the crisis has introduced

a fundamental shift in the world economy - with an

end to soaring demand fueled by easy credit and a

shift to higher savings rates - is not one that

appeals to the GOT, Kural contended, because it

would require accepting that they need to adjust

policies for a longer-term approach.



Protectionism Redux

--------------



11. (SBU) Trade protectionism has a long history in

Turkey, but it has been held in abeyance since 2001

as exports led the economy's impressive growth. Now

that growth has slowed, however, protectionist

tendencies are again beginning to surface. Tezer

complained that 70% of domestic auto purchases are

imported, and bemoaned the lack of import

protections to help local producers, as he alleged

exist in South Korea and Japan. He also observed

that the 80% of production that is exported is "too

high" and expressed hope for a 60/40 export/local

consumption mix in the future, observing that local

profit margins are higher and that stronger domestic

demand for domestically-produced autos would help

cushion the sector against future shocks. He

expressed his hope that Ankara would use policy

measures to encourage local sales of domestically-

produced vehicles, such as through the retail credit



ANKARA 00000297 004 OF 004





incentives.



Comment

--------------



12. (SBU) Given the importance of the automotive and

automotive parts industries to Turkey's economy and

the relatively high wages in the sector, any

slowdown will have serious knock-on effects in the

larger economy as well as on government finances.

The GOT likely will pass a sectoral package to help

the sector, but the breadth of tax cuts that the

industry seems to expect will be difficult for a

government that is already struggling to match

declining tax revenues with its spending plans. The

automotive sector stimulus plan may help marginally

to ease the pain but, until demand recovers, more

production halts and layoffs are likely to come.

End comment.