Turkey’s industry includes a wide variety of manufacturers, primary producers and traders, responsible between them for a major share of the country’s GDP. Indeed, in 2014, exports by the entire automotive industry (including components) alone reached $22.27bn – more than the entire GDP of Iceland.
Steel, chemicals, pharmaceuticals, electrical and electronic equipment, building materials, cars, jewellery and clothing are all major export earners – and major magnets for international investors. All have benefitted from – and, indeed, driven – much of the country’s recent economic growth, with “Made in Turkey” now more prevalent than ever as a label on all manner of products sold in world markets.
Indexes & Exports
Figures from the Turkish Statistical Institute (TurkStat) show that at constant 1998 prices, the manufacturing sector contributed 24.2% of the country’s GDP in 2014. This compares to 8.8% from agriculture, hunting and forestry; 13.2% from the financial sector; and 12.6% from the wholesale and retail trade sector. The manufacturing and retail sectors are also growing – they were up 3.78% and 1.4%, respectively, in 2014, year-on-year (y-o-y) – although this has been slowing in recent years; the 2000-14 peak was in 2010, when manufacturing growth hit 13.8%, followed by 10% growth in 2011.
TurkStat also produces an industrial production index (IPI), which measures gross activity against a 2010 base line of 100 points. In 2014 the unadjusted IPI average increased by 3.6% to 120.5, while seasonally adjusted IPI rose by 3.6% to 120.8. The annual average for 2013 for industry was 116.3, up from 112.9 in 2012 and just 86.1 in 2005.
Into the first quarter of 2015, and in January 2015 seasonally and calendar adjusted IPI decreased by 1.4% compared with the previous month. Industrial production declined by 2.2% in January 2015 y-o-y, with the biggest drop recorded in the mining output, which fell by 11.5% y-o-y. This was followed by manufacturing at -2.4%. However, electricity, gas, steam and air conditioning supply rose 2.8% y-o-y. The decline in exports to Iraq and Russia, as well as the overall growth slowdown in the European continent, hampered Turkey’s industrial productivity. TurkStat figures also show that the seasonally and calendar-adjusted industrial turnover index stood at 167.3 in January 2015, down 4.9% compared to the previous month.
In 2014 the less-than-friendly environmental factors included a major rise in interest rates. In January 2014, the Central Bank hiked overnight rates from 7.75% to 12% and the weekly repo from 4.5% to 10%. However, rates were cut several times during the year starting in May, and as of March 2015 the upper overnight lending rate stood at 10.75% and the benchmark weekly repo rate at 7.5%.
The year 2014 also saw a major fall in value by the Turkish lira, which depreciated around 15% against the US dollar during the year, a slide that continued in 2015. A third factor to contend with too has been political uncertainty and domestic turbulence. Business and consumer confidence have taken something of a hit during these events.
Industry also accounts for a large share of employment. According to TurkStat’s figures, in December 2014, out of a total labour force of 28.8m (all those over 15 years of age), 25.6m were employed, of which 20.5% worked in industry. This was less than services – the largest employer, with 52.8%, and agriculture, with 19.5%. Given the 24.2% contribution to GDP of the sector, however, industry emerges as one of Turkey’s most productive activities.
Using the same 2010, 100-point base line, the number of people employed in industry has also been increasing. Calendar-adjusted industrial employment was up by 2.7% in 2014 compared with the previous year. The annual average for 2014 was 118.8, an increase from 115.6 in 2013.
The hours worked have also gone up – from 110.4 in 2012 and 112.8 in 2013 to 114.7 in 2014, and so have the wages – the gross wages and salaries index for the sector rose from 153.1 in 2013 to 176.8 in 2014. Productivity, it would seem, has been rewarded.
The Tiger's Roar
Turkey’s industrial and manufacturing heartland has long been the north-west – the region stretching from the Greek and Bulgarian borders through Istanbul and south to Izmit, Bursa, Eski hir and around the Marmara region.
This is still the area with the highest concentration of industry, although other important clusters exist around the capital, Ankara, the Aegean city of Izmir, and, increasingly, out across Anatolia, with cities such as Konya, Şanlıurfa, Adana and Kayseri also seeing industrial growth in recent times. This has led to them being dubbed the “Anatolian Tigers”.
Yet while these businesses may have started out in Anatolia, many now have a quite global reach. Indeed, research by the Turkish business magazine Ekonomist in early 2014 showed that the top 500 Anatolian Tigers now account for around 10-11% of Turkey’s total exports and around 10% of the country’s GDP.
This has led in recent times to a blurring of the distinctions between the traditional, mainly Istanbul and north-western-based industries – often members of the Turkish Industry and Business Association (TÜS AD), – and the Anatolians, often previously concentrated in organisations such as the Association of Independent Industrialists and Businessmen (MÜS İAD). In recent times, some of the most prominent Anatolian Tigers have found a place in TÜS İAD, which represents around 600 leading businesses, representing around half the country’s workforce. Indeed, several senior positions in TÜS İAD are now held by the Tigers.
TÜS İAD and MÜSİAD are thus the two largest and most influential professional organisations in Turkey’s industrial world. The private sector is also represented by the Union of Chambers and Commodity Exchanges of Turkey (TOBB), whose 365 members are all representatives of local chambers of commerce, industry and commodity exchanges.
On the governmental side, the Ministry of Science, Industry and Technology has been the lead body since 2011, when the previous, Ministry of Industry and Trade was reorganised and renamed.
In addition, there are several other ministries that are also crucial for the sector, including the Ministry of Economy, the Ministry for EU Affairs, the Ministry of Environment and Urbanisation, and the Ministry of Energy and Natural Resources.
Importance Of SME's
While Turkey has many large enterprises of domestic origin in its industrial sector, small and medium-sized enterprises (SMEs) still constitute a key part of the sector.
Indeed, according to Turkish Treasury figures, SMEs account for 99% of all enterprises in the country, at 1.9m, along with around 78% of all employment, 62% of exports and 57% of total value-added.
The sector receives support too from both the government and from international organisations such as the European Investment Bank, which gives assistance via Akbank, bolstering its financing of SMEs. The SME Development Organisation is also there to assist in training, technology development and innovation, export orientation and quality improvement.
The Turkish Credit Guarantee Fund (KGF) also works as an intermediary to help SMEs gain bank credit, with an emphasis on helping new SMEs in the high-tech field and those located in the regions. Post 2007/08 crisis, the KGF provided counter guarantees of around TL1bn (€352.1m), enabling SMEs to access some TL10bn (€3.5bn) in credit and helping fuel the rapid economic turnaround of the 2010-11 period.
Several other bodies are important players in the SME world, including the SME Venture Capital Investment Trust and the Istanbul Venture Capital Initiative. The former is a risk capital intermediary in the financial markets, the latter Turkey’s first fund of funds and co-investment programme.
A third important force now is the Anatolian Venture Capital Fund, which is being supported by EU pre-accession funding and will see some €16m of investments in SMEs in targeted Anatolian regions. The fund is investing in companies in the 43 most disadvantaged regions of Turkey, where there is considerable growth potential. A minimum of 50% of the fund will be invested in provinces in the south-eastern Anatolia region, for example.
Government legislation was also enacted in early 2014 allowing for licensed angel investors to deduct from their annual tax base 75% of the capital they invest in certain, targeted SMEs, with this rising to 100% if the investment is in research and development (R&D). The legislation introduces for the first time a formal licensing procedure for angel investors and an accreditation process for angel investor networks.
When looking at Turkey’s exports, several sub-sectors stand out as major performers. In 2014 according to statistics from the Turkish Exporters Assembly, of a total $157.7bn in exports, industrial products accounted for 78.8%. Within this, the automotive sector was the most valuable (see analysis) at $22.27bn, followed by the textiles sector at $18.7bn. The chemicals sector came in third at $17.8bn.
The Turkish Chemical Industry Assembly, which is under the umbrella of the TOBB, contains all the leading sector bodies, including professional organisations such as the Turkish Chemical Manufacturers’ Association (TKSD) and the Istanbul Chemical Exporters’ Union, and representatives of the major companies and government agencies.
Turkey’s chemical companies have been losing out in the Arab Spring, as previously attractive North African markets have become volatile. Nonetheless, expectations are for continued growth in exports, although at a lower level than in previous years.
As with automotives, the chemicals sector had been heavily dependent on European trade, but since the 2007/08 crisis, manufacturers have been looking increasingly to new markets in Latin America, Africa, the Middle East and Asia. Exports to the EU, which had averaged around 60% before the crisis, were at around 39% in 2013. Consumer goods such as cosmetics, soaps, glues and adhesives are one area where Turkish companies have done well in the new markets of Latin America and Africa, though sector insiders expect tough competition, going forwards, in these areas. This is because South-east Asian countries – particularly Malaysia and Indonesia – have direct access to raw materials such as palm oil. One consequence of this has been that some Turkish companies, such as Evyap, have purchased plantations in Indonesia in order to secure their supply chains.
One recurrent challenge for the subsector is its heavy dependence on imported intermediary goods. These account for approximately 40% of all imports for the sector, according to the TKSD, which with a depreciating Turkish lira in 2014 and 2015 has further squeezed company bottom lines. The TKSD is therefore pushing government to back plans to build more integrated chemical ports in Turkey, along the lines of the Port of Tarragona in Spain.
The idea is to import raw materials and then manufacture more of the intermediary products on Turkish soil, before re-exporting the higher value-added finished products. In 2014 the TKSD was carrying out pre-feasibility studies on approximately 10 potential sites for such ports.
The plan does face some opposition, however, with the “chemports” having to be located on the coast with good access to existing industrial areas. Largely, this means the Aegean coast and other coastal areas – all places where there is strong competition for land with tourism and real estate. The TKSD sees this as a bottleneck for foreign investment, however, which in recent years has concentrated on consumer products such as paints, soaps, detergents and cosmetics for the fast-growing Turkish market. In terms of base chemical investments, there have been only three major ones in the past five years – an acrylic fibre joint venture between Dow Chemicals and AKSA, and a polypropylene plant launched by Bayagen Group and Saudi Arabia’s Advanced Petrochemical Company – plus the largest petrochemical investment in recent years, the Azeri state energy company Socar’s Star refinery investment (see Energy chapter). In the meantime, Turkey continues to manufacture low or middle-priced products, with the TKSD estimating an average cost per tonne of sector products at just $1.70. Raising this requires major investment in value-adding technologies and R&D, to secure intellectual property rights on future products. The sector will likely be pushing for the government to take a more active stance on this too in the years to come.
“In general, the Turkish chemical sector is dominated by small companies, many of which are family-owned. Future development should move the sector further up the value chain, and it would also require consolidation and the formation of partnership in the sector,” Volker Hammes, CEO of BASF Turkey, told OBG.
Knitting It Together
Turkey has long been famous for its textiles – images of Turkish carpets reach back to early medieval times – while in recent years, its ready-to-wear industry has also been making great strides internationally. According to the Ministry of Economy, taken together, in 2013 – the latest year for which figures were available – textiles and clothing accounted for around 7% of Turkey’s GDP, plus an 18.3% share of Turkey’s total exports.
Around 1m people work in the textile, ready-to-wear and leather industries too, in some 58,000 companies, according to the Social Security Institution. Further 2013 data shows that the Turkish clothing industry is the world’s seventh-largest supplier in the world, and the second-largest supplier in the EU. It regularly ranks in the global top 10 of textile exporters.
Traditionally, while raw materials were produced in Anatolia – Turkey ranked eighth in the world in terms of cotton production in 2013– they were then processed in Istanbul and other major north-western urban centres, such as Bursa.
The industry was based in distinct quarters of the cities, where factories would produce usually low-priced, low value-added products for domestic sales and exports. Turkey was thus seen largely by international companies as an outsourcing destination.
This model has changed drastically in the last decade, as cheaper commodities and labour, mainly in Asia, have undercut Turkey. The response of local companies has been to shift up-market, with Turkish textile and clothing companies now producing much higher-quality products, often now the result of world-class design.
In recent years too, the factories have shifted out of Istanbul into Anatolia, with Adana and Kahramanmara ş currently major production centres.
Meanwhile, some of the more successful companies, such as Koton and İpekyol, have become boutique houses, opening their own stores in Europe and the Middle East, as well as supplying goods to existing international chains. Now too, Turkish companies are doing the outsourcing, having basic materials manufactured in Asia and elsewhere.
The Ministry of Economy figures also show that the sector exports around 65% of its production, with some 80% of this cotton clothing. Knitted clothing and accessories accounted for 61.8% of the total, woven clothing the rest, with T-shirts and pullovers the most popular among the former group. Turkey is also the world’s second-largest manufacturer of hosiery, with this alone responsible for some $1.2bn in exports in 2013. Overall, 2013 saw sector expansion, too. In terms of knitted or crocheted exports, these were up 9.9% on 2012, while woven exports went up 5.2%. Both outperformed overall GDP growth of 4% and the overall export figures, which largely flat-lined.
What obstacles there are to further growth in 2015 are those that apply to the economy as a whole: a slowdown in domestic growth, political uncertainty and the slow pace of recovery in key markets such as Europe. At the same time too, the government has been trying to control credit growth. The lira depreciation has also hit those reliant on imported materials, with costs rising due to foreign exchange issues. This has undoubtedly put considerable pressure on some bottom lines, as Turkish consumers remain highly cost-conscious, with companies thus reluctant to pass on costs to customers. Even so, expectations are high that exports will remain on a solid growth path. Cheaper Turkish products have also made major inroads into markets such as Russia, Ukraine, and the other former Soviet countries, as well as the Middle East.
Although industrial growth has slowed, strong fundamentals, such as a growing population and geographical location, as well as good trade relations with key markets now in recovery, such as the EU, will stand the country in good stead.
Challenges do remain. Global concerns form part of these, while perceptions of political uncertainty domestically may also put new investments on hold. The high targets set by the government for 2023 (see Economy chapter) may also be difficult to achieve without a major surge in the European economy, in particular.
For all these challenges, however, Turkey remains a strong economy, with its industries at the forefront of growth. With experience of and connections with both the Western world and the Middle East and Asia, the country’s industrialists and business leaders remain in an advantageous position to leverage Turkey’s unique status into future profits and investor rewards.
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