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Viewing cable 04ISTANBUL1807, TURKISH TEXTILE FIRMS SEE A GRIM FUTURE

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Reference ID Created Released Classification Origin
04ISTANBUL1807 2004-12-06 11:31 2011-08-24 01:00 UNCLASSIFIED//FOR OFFICIAL USE ONLY Consulate Istanbul
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