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Cablegate: Se Turkey Economy Linked to Textile Changes, Iraq

This record is a partial extract of the original cable. The full text of the original cable is not available.

UNCLAS SECTION 01 OF 02 ADANA 000056

SIPDIS


BUSINESS SENSITIVE


E.O. 12958: N/A
TAGS: ECON EINV EFIN TU ETRA ADANA
SUBJECT: SE TURKEY ECONOMY LINKED TO TEXTILE CHANGES, IRAQ

1.(SBU-BUS SENS) Summary: Southeast Turkey's economy
continues to be slow and characterized by underemployment. A
few stronger regional companies, such as SANKO GROUP and several
Adana/Mersin construction companies, have repositioned
themselves to do business in Iraq or make new investment to
adapt to international competition. The container/bulk port in
Mersin and fuels terminal in Iskenderun are healthy, in part
because of Iraq-related business, as is the parastatal steel
smelting plant, Is-Demir, in Iskendrun., which is processing
large amounts of scrap steel from Iraq. They are, however,
exceptions to the rule in an economy still largely linked to
textiles and agriculture. End Summary.


Where SANKO GROUP is headed on Textiles


2. (SBU BUS) The SANKO GROUP announced on March 20 that it will
invest USD 75 million in Adiyaman province under the new
incentive law to build three new factories to expand its yarn
and ready-wear capacity in textiles. According to Abdulkadir
Konukoglu, the first factory will be ready next year and will
employ 1,500 people, with two more factories coming by 2007.
The last two factories' employment potential is unknown.


SANKO Getting Leaner in Process


3. (SBU SUS SENS) Konukoglu in another discussion told PO that
Sanko had reached full capacity at its existing Gaziantep site
and needed to expand elsewhere to maintain its competitive
position. He saw the Adiyaman investment as important to
raising SANKO's manufacturig productivity as the expiration of
the Multi-Fiber Agreement approaches in 2005. While the
Adiyaman investment will introduce 150,000 yarn spindles to
SANKO's industrial base, SANKO will gradually retire a similar
number of older spindles from its older plant in Gaziantep,
shedding approximately 800 jobs by 2007 in the process. By
2007, SANKO will therefore have retained its existing 500,000
spindle manufacturing base, but created growth room (in
Adiyaman) and increased labor productivity.


SANKO Sees Textile Future For Itself


4.(SBU BUS SENS) Konukoglu said competition with Chinese
textiles after 2005 will be challenging, but he thought that
SANKO still had lower shipping cost, indigenous cotton supply
and superior European client relationship advantages to balance
out lower Chinese cost bases. He said that SANKO also has
agents in China looking for clients and joint venture
opportunities there. SANKO intended to keep moving up the
product value chain to retain its competitiveness, he said,
mentioning how Chinese products would not be in direct
competition with SANKO products for at least several years. By
then, he anticipated that Chinese WTO compliance especially
unfair labor practices; economic shocks; textile market shifts;
and greater Chinese financing costs once state banks became
insolvent would create a more transparent and more level playing
field for Turkish-Chinese textile competition, especially in
Europe, but even so for some North American markets. He
anticipated that SANKO, with its large established European and
North American customer base (LEVI's, e.g.), flexible product
lines attuned to client needs and deep pockets could make it
through the difficult transition years of 2005-2008, but he
doubted many other Turkish companies would be able to do
likewise.


Meanwhile SANKO joining up with China on other businesses


5.(SBU SUS SENS) He added that SANKO, already a distributor of
Chinese brand HAIER appliances and electronics, was expanding
its distribution channels for the brand. He said that he had
been impressed with the brand's product quality for several
years, but now saw that they were bringing "new technology,
really good stuff" to the market that would challenge Turkish
local appliance producers, Japanese brand license products and
European perennials. "They have turned a corner at HAIER and we
want to expand our business with them," Konukoglu said.


Turkish Construction doing business in Iraq~


6.(SBU BUS SENS) On the margins of a recent Iraq reconstruction
conference, we discussed ongoing business with several
Adana-based construction firms. They noted that the
construction business was still in a downturn in southeast
Turkey, but that they had tried to make up for te slow economy
here with construction jobs for the U.S. in Iraq. One
construction company, Kulak construction, has completed about
USD 15 million in projects in Iraq and projects that it could
deliver almost USD 40 million in construction contracts by the
end of 2004. Its work is primarily centered at the Balad CAMP
ANACONDA area near Baghdad. Another company, ER-KA Limited,
said that it had done several million dollars of construction
for the U.S. in Kirkuk and now was regularly supplying several
hundred thousand dollar apiece supply contracts to U.S. military
consumers in Iraq for telecommunications, vehicle fleet
maintenance and logistics.


But still wary about diving in with two feet


7.(SBU BUS SENS) Most southeast Turkish business contacts said
that they were interested in pursuing further subcontract work
in Iraq, but were still very concerned about security and asset
protection. They said that the security instability made
projects risky for their employees, hard to deliver according to
contract timelines and quality levels and posed sometimes
unacceptable risks to their assets, for which insurance was
largely unavailable. They also said that the widespread
requirements for bid bonds at project levels of USD 5 million
and above was discouraging, since Turkish banks were hesitant to
participate in that market and they rarely held sufficient
capital to finance such requirements internally.


Iskenderun Busy with Fuel and Steel


8.(SBU BUS SENS) The Iskenderun area in Hatay province is also
faring well because of investment by Tosyal steel to expand its
roll steel capacity and the increase in scrap steel processing
largely from Iraq at nearby parastatal steel smelting plant,
Is-Demir. The fuels terminal in Iskenderun is also handling
much of the transloading for humanitarian and increasingly some
key U.S. force operational fuels bound for Iraq. Some local
contacts note that employment is increasing by at least several
hundred jobs in Iskenderun because of the steel sector
expansion, but note that most money from fuel purchases "only
goes to Istanbul where the companies operating the Iskenderun
terminals have their headquarters." The fuel terminal operation
at Iskenderun does seem to be enjoying higher productivity
because of Iraq-related business.


REID

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