GLOBAL CRISIS CAUSES FURTHER DAMAGE TO TURKEY'S TEXTILE SECTOR

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E.O. 12958:N/A

TAGS: ECON, ETRD, EFIN, TU

SUBJ: GLOBAL CRISIS CAUSES FURTHER DAMAGE TO TURKEY'S TEXTILE SECTOR



1. (SBU) Summary. Turkey's textile sector - which had already been

experiencing serious difficulties even before the economic crisis -

is now faced with a sharp contraction in European demand. Although

the yearly decline in textile and apparel sector exports in 2008 was

just 0.2%, exports fell 27% in the last two months of the year.

Exports dropped even more dramatically in the first two months of

2009, 32% in January, and 39% in February. GOT economic stimulus

measures have largely ignored the sector except for certain

incentives for producers that move their facilities to Eastern

Turkey. As the sector has already suffered from competition with

Chinese textiles and the over-valued TL in recent years, sector

representatives warn that these new difficulties will likely lead to

factory closures in 2009. Given the large numbers of people that

the sector employs and its contribution to Turkish GDP, the sector

feels "rejected," asking if this lack of support by the GOT is a

part of a "survival of the fittest" policy. End summary.



Turkey's Textile Sector

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2. (U) Turkey's textile sector has historically been a key engine

for exports and job creation. Investments in the sector grew

substantially in the 1990s, and Turkey's 1996 Customs Union with the

EU provided new export opportunities for the sector. The textile

and apparel sectors in Turkey comprise close to 8.0% of Turkey's GDP

and the 40,000 textile-related firms are estimated to employ 2

million people (just under 10% of the entire labor force). In 2008,

textiles made up 17% of Turkey's total exports. Europe is the main

market for Turkish products, receiving 46.7% of textile exports and

79% of apparel exports. Turkey is the second biggest textile

supplier for the EU, after China, and is the eighth largest textile

exporter in the world and the fourth largest apparel exporter.



3. (U) Turkish textile and apparel exports amounted to $21.88

billion in 2008, down 0.2% from $21.9 billion in 2007. The downward

trend in exports started in October 2008, with an 8.7% fall,

continuing in November (25%) and December (27%). The drop was even

sharper in the first two months of 2009, with a 32% fall in January

and 39% in February. The Istanbul Ready-Wear and Apparel Exporters'

Union (IHKIB) announced on April 13 that they expected a 30% fall in

Turkey's apparel exports in 2009. IHKIB also noted the sharp fall

in textile and apparel production in the first two months of 2009,

with textile manufacturing down 10.6% and apparels manufacturing

12.1% during this period, compared to a 1.8% fall in overall

manufacturing. Following a meeting among sector representatives in

early April, Aegean Ready-Wear and Apparel Exporters' Union

President Jak Eskinazi announced that 180,000 people in the industry

had lost their jobs since the beginning of 2009.



Textile Exporters: Our Crisis Started Earlier

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



4. (SBU) Commenting on the impact of the global crisis on the

Turkish textile sector, Istanbul Textile Exporters' Association

(ITKIB) Agreements Department Head Zuhal Bilek said the crisis in

the textile sector started much earlier. Bilek noted the significant

challenges the sector had faced in recent years, due to increased

production costs and an overvalued lira, both of which dramatically

reduced Turkish producers' competitiveness at the same time that new

rivals such as China were entering into Turkey's traditional

markets. As a result, Turkey had been gradually losing market share

for several years and its textile production had begun to decline

sharply as early as February 2008, well before the onset of the

global crisis.



5. (SBU) Bilek commented that the sector went through a necessary

but painful restructuring over the past 15 years, bringing its

production standards in line with EU preferences. The sector's

geographic proximity to the European market and its flexible

structure (able to respond rapidly to smaller orders) have helped

Turkey keep its position as the second biggest supplier to Europe,

according to Bilek, despite the negative domestic market conditions

and increasing competition from East Asia. With the shrinkage in

European demand, however, the sector is hurting, Bilek observed, and

there is not much room left for the sector to adjust itself to the

new market conditions.



6. (SBU) Bilek acknowledged that the TL's decline against the dollar

and euro in late 2008 will eventually help increase exports, but due

to the long order timeframes typical in the sector the positive

effects have not yet been fully realized. As with most other

products, the collapse of demand has also offset the gains that

would normally be expected from the currency's depreciation.



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7. (SBU) Sabri Unluturk, Aegean Textile Exporters' Union Chairman,

echoed Bilek's complaints. Elaborating on the increased production

costs, Unluturk said the TL-based costs, like energy and labor,

doubled over the past five years, whereas the FX rate remained

unchanged. "We have been going through a serious restructuring and

transformation since 2002 and as a result have increased our

productivity by 40%," said Unluturk. Only companies able to

complete this restructuring were able to survive and remain

competitive, according to Unluturk, and a number of firms closed as

a result. Unluturk noted that all companies had to settle for lower

profit margins in this new, more competitive environment and that

the sector has invested heavily (and continues to invest) in

technology and human capital. Unluturk said these factors made it

more difficult for Turkish textile producers to deal with the global

crisis. "We were already operating on such tight profit margins and

having difficulty finding financing when the global crisis broke,"

complained Unluturk. (Note: Most textile firms in Turkey are SMEs,

increasing the difficulty of finding credit and trade financing when

banks are loaning only to the safest of borrowers. End Note.)





The GOT Response: "Leave Textiles Production to China"

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8. (SBU) Since the beginning of this year, the GOT has announced a

number of economic stimulus packages to minimize the impact of the

global economic crisis. In its first package in February 2009, the

GOT announced the extension of tax discounts for textile and apparel

producers employing more than 50 people, as long as they move

facilities to certain specified provinces, mostly in underdeveloped

Eastern Turkey. In subsequent packages, the GOT announced VAT

reductions for the automotive, electronics, household goods and

furniture sectors, but there was no additional support for the

textile and apparel sector.



9. (SBU) Bilek said the textile producers were frustrated with the

GOT package, because they do not think the tax advantages justify

the cost of moving their facilities and workers to less developed

areas, especially as these regions may not possess the necessary

support infrastructure. Bilek noted Treasury Minister Mehmet

Simsek's comments from July 2007, where he said Turkey should leave

low value-added textile production to the Chinese. "At that time,

we decided that the GOT had let go of our sector," said Bilek.

Bilek argued that sector representatives had made numerous

suggestions to the GOT on helpful measures to mitigate the global

crisis - such as reductions in social security premiums, lowered

energy prices, eased payments for delayed taxes and the use of

unemployment fund proceeds in employment creation - but none of

these measures were included in the packages.



10. (SBU) Unluturk suggested that the GOT's abandonment of the

textile sector was the reflection of an unspoken policy, based on

"the survival of the fittest." According to Unluturk, that the GOT

announced specific measures even for a relatively unimportant sector

such as furniture and did nothing for textiles is meaningful, and is

hard to understand given the large numbers of people that work in

textiles. He dismissed a proposed GOT plan to expand exports to new

markets during the crisis, since those markets - many of them

"closed" economies like Syria and Iraq - are Turkey's competitors in

textiles and the high-end Turkish products destined for the European

market would not sell as well in low income countries. Unluturk

stressed the importance of the market share Turkey had achieved in

Europe and Russia after years of hard work, and said the sector

would fight to survive 2009 despite the GOT's lack of support. "We

already lost several facilities to the crisis, and we know there

will be more losses this year," said Unluturk.



11. (SBU) In a public statement on April 13, IHKIB President

Tanriverdi criticized the GOT for not announcing any specific

measures for the textile and apparel sectors during the crisis.

Tanriverdi reiterated the sector's demands for tax and social

security premium relief, and suggested that the GOT meet 50% of

export insurance premiums for textile exporters. Tanriverdi also

noted the impact of the overvalued lira on exports and said: "Our

survival limits in exchange rates are 1.60 in USD/TL and 2.15 in

EUR/TL. The Central Bank should intervene if these levels change to

disadvantage Turkish exporters."



Comment

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



12. (SBU) The textile sector does have some legitimate complaints



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about GOT policies that unnecessarily increase production costs

(such as high taxation of inputs and relatively high social security

contribution requirements) and it may eventually succeed in

convincing the GOT to reduce those costs. At the same time, the

sector's problems are not temporary blips - the decline in

competitiveness predates the crisis and will not instantly disappear

when the crisis is over. Given that textiles employ over 2 million

people, it is unlikely that the GOT will allow the sector to

collapse completely, especially in light of the January 2009

increase in unemployment to 15.5%. The GOT's focus on other sectors

may indicate a realization, however, that the golden age of Turkey's

textile sector has probably ended, and that a painful but necessary

adjustment to a smaller sector is inevitable. End comment.



JEFFREY