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Cablegate: Kocaeli Province: Saturated with Industry

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RUEHLN RUEHLZ RUEHPOD RUEHROV RUEHSR RUEHVK RUEHYG
DE RUEHIT #0438/01 1441226
ZNR UUUUU ZZH
P 241226Z MAY 07
FM AMCONSUL ISTANBUL
TO RUEHC/SECSTATE WASHDC PRIORITY 7061
INFO RUEHZL/EUROPEAN POLITICAL COLLECTIVE PRIORITY
RUEHDA/AMCONSUL ADANA PRIORITY 2313
RUCPDOC/DEPT OF COMMERCE WASHDC PRIORITY

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

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