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Cablegate: Turkish Textile Firms See a Grim Future

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

UNCLAS SECTION 01 OF 03 ISTANBUL 001807

SIPDIS

SENSITIVE

STATE FOR EUR/SE AND EB
TREASURY FOR INTERNATIONAL AFFAIRS - RADKINS AND MMILLS
NSC FOR BRYZA AND MCKIBBEN
USDOC FOR ITA/MAC - DDEFALCO
DEPT PASS USTR FOR LISA ERRION

E.O. 12958: N/A
TAGS: EFIN EINV ECON TU
SUBJECT: TURKISH TEXTILE FIRMS SEE A GRIM FUTURE

REF: A. ADANA 112

B. ANKARA 5661

Sensitive but Unclassified. Please Handle Accordingly.

This message has been coordinated with Embassy Ankara.

1. (SBU) Summary: Leading Turkish textile exporters tell us
they are deeply pessimistic about prospects for the sector,
warning that the end of the global quota system next month
will lead to mass layoffs in Turkey unless "an exit" is
found. In a recent meeting organized by the Istanbul Textile
and Apparel Exporters' Union (IKTIB), representatives of more
than 30 companies that currently account for close to 1
billion USD in exports to the U.S. cited not just "unfair"
competition from China and India, but Qualified Industrial
Zones (QIZ's) in Jordan and particularly the prospect of
QIZ's in Egypt as serious threats to their future. With
textiles accounting for up to a third of industrial
employment in Turkey, they predicted that a "social crisis"
will emerge in coming years, since there are no other sectors
that can absorb the work force that will be made redundant.
They pressed for reconsideration of a Turkish QIZ including
textiles as their only chance for the future.
Representatives of leading U.S. textile importers concurred
with this gloomy prognosis, noting that change will not come
immediately, but predicting that over the next few years
textile exports to the U.S. will decline 20-25 percent, while
(Turkey's more significant) exports to the European Union
could decline by as much as half. End Summary.

2. (U) Represented at our recent meeting with IKTIB were such
leading firms as Altinyildiz, Sahin Holding, Erteks, Tureks,
Istanbul Konfeksiyon, and Mithat Giyim. While companies
noted that they expect the impact of quota removal on overall
Turkish export volumes to be felt over the next several
years, they said that they are already feeling the squeeze on
their profit margins. Many have already taken steps to
reduce their work force, laying off 5 to 10 percent of their
employees. Others have frozen investment plans, as they wait
to see what will happen. Most predicted a further 20 percent
decline in employment as the impact of the lifting of quotas
is fully absorbed. Already, they said, the impact of China
and India is being felt on the pricing side. They
characterized the pricing pressures they face as
"unbearable," and said most plants are not making any profit,
but are simply operating to maintain market share. Most of
the orders they receive now from the U.S. are repetition
orders, which are the secondary low volume orders that
supplement primary bulk orders, many of which are now sourced
to China.

3. (SBU) Participants unanimously characterized the Far
Eastern competition they face, primarily from China and
India, as unfair. Chinese producers, they argued, receive
formal and informal subsidies ranging from free energy, cheap
bank loans -- which are essentially grants since they are
rarely repaid -- and government subsidies for exports. They
noted that these advantages are on top of a labor cost
advantage whereby Chinese costs, at 45 USD per worker per
month, are only a tenth of Turkey's 450 USD per month. In
addition, companies complained that while they are frequently
inspected and forced to abide by strict codes of conduct,
such codes are observed more in the breach in China and
India, further enhancing those countries' competitive edge.
Producers noted ironically that Turkey's status as a
mid-range producer has led it to be selected as a pilot
country both by Western companies and countries for various
pilot programs that add to their costs. They also observed
that they understand that Turkey will become a test country
for a new U.S. port security program, while China and India
have been exempted, because the program is not "feasible"
given the volumes passing through their ports. Comment:
Industry representatives apparently do not realize that the
Container Security Initiative, if implemented in Turkey,
would actually provide them with a competitive advantage
relative to producers in countries without access to a CSI
port. End Comment.

4. (SBU) Beyond the Far Eastern threat confronting them,
producers expressed concern about competitors closer to home.
They noted that QIZ's in Jordan and potentially in Egypt
will take sales away from Turkey. More generally, they
complained that implementation of these and other
preferential arrangements, in the Americas and sub-Saharan
Africa, undercut them, and they asked rhetorically why such a
benefit could not be provided to Turkey, given its
longstanding strategic alliance with the U.S. Already,
several companies noted that they are considering moving
production to Jordan to benefit from the QIZ (ironically the
Istanbul-based Turkish American Business Association recently
organized a briefing highlighting the advantages of such a
move). They argued that only a QIZ agreement between the
United States and Turkey would permit companies to maintain
their existing market share in the United States.

5. (SBU) Producers noted that their overall woes are
compounded by the strengthening Turkish lira and depreciating
dollar. Companies specializing in shipping to the U.S. are
especially impacted, but they conceded that the overall
sector is somewhat cushioned from by the fact that the lira's
appreciation against the Euro has been less marked, but even
there the Chinese renminbi's link to the dollar enhances
China's competitiveness there.

6. (SBU) Representatives of U.S. textile importers largely
echoed these predictions about the impact of the elimination
of quotas on Turkey. Gap's Middle Eastern Representative
Gulsun Cetin (whose husband Rusen is a senior IKTIB board
member), told us her company sources nearly 10 percent of its
annual 6.3 billion USD in procurement from the region (and
290 million USD of that total from Turkey alone). She sees
Turkish textile exports to the United States declining by
20-25 percent over the next three years. She predicts that
Turkey's exports to Europe will drop even more sharply,
however-- by up to 50 percent over the same period, in part
because she expects the U.S. to be more aggressive than
Europe in adopting safeguard measures and in part because the
value of Turkey's customs union position will diminish in the
post-quota environment. Cetin agreed that Turkey's
disadvantage vis-a-vis the Far East stems not just from
higher costs, but the difficulty purchasers have in
implementing codes of conduct there. But she also criticized
Turkish companies for their failure to use the last few years
to upgrade their manufacturing to the next level and move to
higher value added production. As a result, she said, Turkey
has "no competitive edge," and optimistic predictions about
Turkey's ability to compete by both politicians and industry
are divorced from reality.

7. (SBU) As for the Gap itself, Cetin noted that she is
shifting her firm's more mass market products (largely those
targeted at Old Navy and Gap stores) to Egypt from Turkey.
Some higher-end production, such as men's blazers, however,
is moving here from Italy, given lower labor costs (18 USD
per piece versus 48 in Italy). Cetin noted that Turkey can
move towards these higher end items, so that overall textile
export values will not decline as substantially as will
volumes. But she still predicted wrenching economic
dislocations, and agreed with Turkish manufacturers that it
is not clear where in the economy those laid off from textile
production will be able to go. Other leading export sectors,
such as automotive production, are less labor intensive, and
also require more skilled labor. The transition will require
careful government management, our IKTIB interlocutors told
us, something that has not occurred up to now.

8. (SBU) Comment: In contrast to their optimistic public face
(a recent editorial in the Exporters' Union magazine
recounting a visit to China pointed out that country's
shortcomings and opined that Turks should not be overly
fearful of the threat it poses), in private industry leaders
are much less sanguine. We reiterated that discussion of
QIZs with Turkey has always excluded the textile sector, and
that even if Turkish QIZ's were to reemerge as a realistic
possibility (something that does not now appear likely), this
would remain the case. IKTIB members, however, stressed that
without some such "privilege" from the United States, Turkey
is likely to lose significant market share, resulting in
severe economic hardship and a potential "social crisis."

9. (SBU) Turkish industry is painting a decidedly more
gloomy picture than external observers, like the WTO, IMF and
investment bankers, all of whom have predicted a more limited
impact. It is also difficult to disentangle the impact of
the end of quotas from exchange rate changes and more local
factors (such as a 34 percent increase in the minimum wage
earlier this year) that may be playing a part in the textile
sector's loss of competitiveness. Nonetheless, the Turkish
textile industry, which thrived behind the barriers of the
quota system, is clearly in transition. The sector, while
still large, is increasingly becoming less important to the
Turkish economy: the share of textiles in total Turkish
exports of goods has fallen from 39% in 1998 to 29%
currently, while total exports grew by 125% (nominally) since
1998. We suspect that the industry is overplaying the
downside of the end of the Agreement on Textiles and Clothing
to bolster their case for trade preferences. Embassy Ankara
plans to report views of GOT officials and Ankara-based
business organizations on these issues septel. End Comment.
ARNETT
ARNETT

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