TURKISH TEXTILE AND CLOTHING INDUSTRY

2007 A COMPETITIVE ANALYSIS

a report of SME Research Center

Ankara University June, 2007

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TABLE OF CONTENTS EXECUTIVE SUMMARY 3

WORLD TEXTILE AND CLOTHING TRADE_____________________________________ 8

CURRENT VIEW OF TURKISH TEXTILE AND CLOTHING MARKET_________________ 9

THE BIG PICTURE______________________________________________________ 13

THE TEXTILE INDUSTRY_________________________________________________ 14

THE CLOTHING INDUSTRY_______________________________________________ 14

CARPETING____________________________________________________________ 15

TURKISH CUSTOMS DUTIES FOR TEXTILE AND CLOTHING PRODUCTS___________ 15

OVERALL APPRAISAL OF THE TURKISH TEXTILE AND CLOTHING INDUSTRY_______ 16

PRINCIPAL ADVANTAGES OF THE INDUSTRY_______________________________ 17

MAJOR PROBLEMS OF THE INDUSTRY____________________________________ 20

SAMPLE MANUFACTURING COST ___________________________________________ 21

DIFFERENT FIRMS DIFFERENT STRATEGIES__________________________________ 13

TURQUALITY_____________________________________________________________ 25

TRANSPORTATION________________________________________________________ 25

COMPARISON OF COMPETITORS____________________________________________ 26

CONCLUSION_____________________________________________________________

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LIST OF TABLES Table I: World Textile and Clothing Trade___________________________________ 8 Table II: Major Regional Flows in World Exports of Textiles_____________________ 8 Table III: Major Regional Flows in World Exports of Clothing____________________ 9 Table IV: Major Exporters and Imparters of Textile and Clothing_________________ 9 Table V: Distribution of Textile&Clothing Exports by Chapters in 2005_____________ 10 Table VI: Exports of Textiles and Clothing: Turkey____________________________ 11 Table VII: Major Destinations in Textile and Clothing Exports: Market Improvement__ 11 Table VIII: Distribution of Textile and Clothing Exports to Major Destinations________ 12 Table IX: Regional Distribution of Exports __________________________________ 12 Table X: Exports to Selected Country Groups _______________________________ 13 Table XI: Key Figures of Turkish Textile and Clothing Market (2006)______________ 13 Table XII: Distribution of Costs in the Clothing Industry________________________ 15 Table XIII: Minimum Wage in Turkey_______________________________________ 18 Table XIV: Share of Employment Tax in an Employee’s Cost to Employer_________ 18 Table XV: Labor Costs in Selected Economies_______________________________ 18 Table XVI: Worker Motivation Ranking _____________________________________ 19 Table XVII: Working Hours ______________________________________________ 20 Table XVIII: Fixed Costs________________________________________________ 22 Table XIX: Variable Costs _______________________________________________ 23 Table XX: Exports by Transport Type______________________________________ 26 Table XXI: Imports by Transport Type______________________________________ 26 Table XXII: Total Costs of Ring-Yarn (in USD per kg yarn) _____________________ 28 Table XXIII: Costs of Textile Products by Country (in USD)_____________________ 29 Table XXIV: Labor Skill and Know-How ____________________________________ 30 Table XXV: Raw Materials and Equipment__________________________________ 30 Table XXVI: General Key Factors_________________________________________ 31 Table XXVII: Commercial Aspects_________________________________________ 231

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EXECUTIVE SUMMARY

• This report’s main aim is to provide a general picture of Turkish textile and clothing (T/C) market. The methodology of the report is based on the evaluation of secondary data (based on previously published press releases, industry reports and academic papers) and it is organised as following.

• In the first part the report provides the reader with general information on the importance of textile industry for the Turkish economy. This will be followed by the country’s commercial stance within the global T/C industry. We will then present findings as regards the issue of customs duties for the products. An overall appraisal of the Turkish T/C industry that offers a SWOT analysis will be complemented by manufacturing costs appraisals. The role of the government support will be better evaluated through the analysis of the concept of Turquality. This report’s findings will be concluded after a summary discussion on the transportation costs and competitors’ analysis.

• The findings in the report can be summarised as follows:

• In alignment with the global trend, Turkish textile and clothing market continued to grow in recent years-outperforming the global market growth rate. Exports of textiles and clothing increased by %7 and %8 in 2005 and 2006 respectively. By the end of 2006, export of textiles and clothing (T/C) has reached to $19,7 billion. Yet their share in total exports dropped to %23 in 2006, which may be a simple indication of the country’s industrial restructuring.

• The sector received a significant boost for its exports after the 1995 customs union agreement that allowed free access to EU markets.

• Turkey has been one of the major suppliers of EU and USA, two leading importers of the market. Turkey is the third biggest textile supplier of EU market with 5,3%, following EU countries (67,5%) and China (7,5%). Again Turkey is the third biggest clothing supplier of EU market with 7,9%, following EU countries (44,9%) and China (17,9%). In the second

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largest import market, the USA, Turkey is the eighth textile and twenty fourth clothing supplier with 3,2% and 1,3% market shares respectively.

• All trade between Turkey and the EU is duty free. As regards to this, according to the Agreement on the Customs Union, products of chapters 50 to 63 originating in the EU are duty free.

• Based on a recently conducted SWOT analysis of the industry we believe the following findings to be accurate: Strengths: speed, know-how, elasticity, quality cotton, educated workforce, productivity of labour, raw materials, experience, cotton production, the understanding of marketing/branding; Weakness: labour cost, input costs, energy costs, branding, no ‘made in Turkey’ image, fluctuations as regards the macro economy and polity and raw material prices, marketing and distribution channels, lack of inter-firm co-operations, over capacity, informal sector, lack of statistical data, Government’s approach towards the industry becomes more interested lately with the Turquality® project that initially aimed to help the industry to move along the value chain into the high value adding sector; Opportunities: geographical proximity to EU Middle East and ex-Soviet countries, recent moves towards high value added segments of the market; Threats: possibility of higher taxation on wages, China, other Asian competitors.

• As the Agreement on Textiles and Clothing cancelled all restrictions on trade in textile and clothing products on January 1, 2005, China strengthened its position in the market with surging sales to USA and EU, the biggest import markets. However, according to a new compromise, USA and EU set new quotas against China on t-shirts, trousers and sweaters. The new quota regime is in favour of Turkey as EU and USA are the biggest markets of its textile and clothing industry. Nevertheless, it should be noted that Turkey is losing grounds especially in US market against Asian countries. However, in the second half of 2005, the US and the EU put new restrictions on China’s exports on t-shirts, trousers and sweaters, products on which Turkey has competitive power.

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• As compared with Turkey, particularly in the apparel sector, when productivity, reliability and indirect costs are included, China offers an unbeatable quality/price ratio. Yet, price is not enough to create loyalty for consumers. Asian manufacturers have not succeeded to entrench their positions in the global market with their quality and consumer orientation. This would probably be used (and is actually being) by their Turkish counterparts.

• A close look at the transportation costs shows that the first choice of exporters is sea transportation in Turkey. 48 per cent of exports have been done via sea transportation in 2005. The share of road transportation was 43% same year. As Turkey is at the doorstep of Europe, distances are close to favour road transportation.

• As the competition in the T/C market escalates, strategies to increase market share diversify as well. In the post-2001 era that is characterised by an overvalued exchange regime and increasing competition from Asian countries with the accession of China in WTO, significant re-organisation attempts have been undertaken by the Turkish industry. Those strategies can be summarised as following: a number of firms are attempting to quit cheap production in favour of the production of fast fashion items, another set of firms are investing abroad (in countries such as Egypt or Uzbekistan) in order to benefit from low cost labour and tax breaks or are buying foreign sales outlets to strengthen/secure their marketing activities, some firms are upgrading their production by moving into brand/design/R&D activities.

• Following these findings we made the following conclusions and suggestions to the investors interested in T/C sector of Turkey: First of all, Turkey possesses an army of skilled/experienced workforce that can adapt to fast changing quality and product requirements of the industry.

• The country’ unique geo-political position is a rare asset. The geographical proximity to EU markets has been complemented in 1995 with the Customs Union agreement. Furthermore, the country also has significant cultural and economic ties with the ex-Soviet countries in the Caucasus. Since 1990, with the collapse of the Berlin wall, Turkish entrepreneurs discovered the potential of the East-European markets as they exploited first-mover advantages to accumulate knowledge about the specifics of these markets. Therefore, while

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Turkey’s textile trade with the EU is slowing down, its exports are growing fast in these emerging markets. Turkish firms are quite well placed partner candidates for foreign firms willing to operate in these markets for the first time.

• There is a significant know-how and market power in denim.

• Turkey is increasingly becoming an interesting market to operate in, this observation is not solely based on cost-economic considerations but also takes into account the knowledge opportunities enabled by its increasingly sophisticated nature of its T/C (textile and clothing) markets. Istanbul might become a gravity centre for T/C sector, an important location to learn and monitor about the latest technology, market and fashion trends. This is because of two reasons: there are important foreign brands that are already actively present in the city and these companies bring an important stock of know-how with them; and many Turkish firms are aiming, with the recently emerging government support, to try to build their international reputation as brand names.

• Turkish firms’ know-how and capabilities in high-value added activities are being significantly upgraded as they feel the pressure of global competition. A closer look at the industry shows the emergence of a number of different strategies that are mainly based on: the accumulation of marketing capabilities (the establishment of foreign sales outlets, branding activities and the use of first-mover advantages in ex-Soviet markets), foreign investments targeting neighbouring low-cost production advantages offered by countries such as Uzbekistan and Egypt and also some efforts in technological research and development.

• Another important asset of Turkish firms is the fact that during the macro-economic turbulences of 1990 they gained the ability to produce and operate in unstable environments. This is, we believe, a crucial core competence to be considered if one wants to be active in similarly unstable markets of East Europe, Balkans and the Caucasus.

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• Despite the existence of the cost-related disadvantages encountered in the face of the Asian competition, it is important to realise that there is a significant room for cost improvements in Turkish T/C sector. Foreign firms that can overcome the limitations associated with the semi-informal structure of Turkish firms can obtain significant cost improvements. First of all, the low density of co-operation culture among the Turkish firms signals, we believe, to the underutilised potential for scale economies (in fact clustering projects that are co-financed by the European Union funds are trying to address this issue recently). Secondly, most Turkish firms do not possess modern financial management techniques to organise their cash flows; once again the assistance by foreign firms might produce significant productivity gains in the optimal use of finance. There is also significant room for improvement in building alliances (clustering projects) and finance. One might argue that similar potential for improvements can be existent in similar developing countries, but we believe these advantages should be considered together with other strengths of the industry presented above. Such a unique combination of different competitive advantages that are present both in low and high value added activities of the global value chain together with the marketing opportunities enabled by the country’s geo-political situation and the dynamic entrepreneurial spirit of its industrialists and workers alike, we believe, is difficult to find.

• It is also useful to note at this critical juncture that, Turkish Lira is overvalued as a result of a five year IMF programme. It is not clear whether this exchange rate regime will continue in the future. As elections are getting closer a number of political parties in Turkey are campaigning to more competitive levels of exchange rates.

• Last but not least, Turkey’s institutional ties with the EU and its recently gained abilities to influence WTO decisions should not be under estimated. As a result of China’s WTO accession, Turkish firms, business associations and governmental bodies are increasingly learning to work together to make their voice heard and actively take part in the shaping global rules of the game in T/C industry.

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1-WORLD TEXTILE AND CLOTHING TRADE Being one of the oldest industries and a leg of ‘old economy’, the textile and clothing industry is referred to as a ‘traditional industry’. However, it has undergone remarkable restructuring through decades and is still the backbone of many developing economies in terms of exports and employment. Being far from its splendid boost in late 1980’s, textile and clothing (T/C) trade continues to expand in recent years. Global textile trade grew 4% and reached to 203 billion USD and clothing trade grew 6% and reached to 276 billion USD in 2005 according to WTO data. Despite the market growth, textile and clothing trade fail to preserve their shares in global merchandise trade. The share of textiles and clothing in world trade fell down to 2% and 2.71% in 2005 respectively (see table 1 below). Although exports of textiles and clothing increase, their shares in world trade decrease. Table I: World Textile and Clothing Trade

2004 Share 2005 Share Textile 195,4 2,18 203 1,99 Clothing 259,2 2,89 275,6 2,71 Total Exports 8958 100 10.159 100

Source: World Trade Organisation According to The Agreement on Textiles and Clothing, all restrictions on trade in textile and clothing products terminated on January 1, 2005 and these products are no longer subject to quotas under a special regime outside normal WTO/GATT rules. Dominating over the half of exports, EU-25 countries and China are the biggest markets in textile and clothing trade. Nevertheless, the trade liberalisation trend, boosted by its competitive power, donated China with overwhelming trade advantage which shifted the origin of textile and clothing manufacturing to Asia. Defeating other regions, textile trade from Asia to Europe surged 19%, to North America 20%, to Africa 14% in 2005. Asian countries may become the manufacturing base in a foreseeable future Table II: Major Regional Flows in World Exports of Textiles (2005-Billion US Dollar)

Value Annual Percentage Change 2005 2000-2005 2004 2005 Intra-Europe 59,2 4 11 -5 Intra-Asia 45,6 3 11 5 Asia to Europe 16,4 11 14 19 Asia to North America 15,5 11 13 20 Intra North-America 10,6 -1 6 4 Asia to Middle East 6,5 8 10 5 Asia to Africa 5,3 14 18 14

Source: World Trade Organisation

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A similar view in clothing trade may clarify the Picture. Clothing trade from Asia to Europe surged by 17%, to North America by 15% and to Commonwealth of Independent States by 27%. Table III: Major Regional Flows in World Exports of Clothing (2005-Billion US Dollar)

Value Annual Percentage Change 2005 2000-2005 2004 2005

Intra-Europe 83,7 9 13 2 Asia to North America 47,6 6 8 15 Asia to Europe 34,8 10 13 17 Intra-Asia 32,4 4 12 -6 South and Central America to North America

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Intra-North America 11 -4 -1 -2 Asia to CIS 7,3 34 55 27 Source: World Trade Organisation EU, China, USA, Hong Kong, India and Turkey are major exporters of textiles and clothing. Major importers are again EU, USA, China, Hong Kong, Turkey and Mexico, Russia, Canada, Japan Table IV: Major Exporters and Imparters of Textile and Clothing

Textile Clothing Major Exporters Major Importers Major Exporters Major Importers

EU EU EU EU China USA China USA USA China Hong Kong Japan

Hong Kong Hong Kong Turkey Hong Kong South Korea Mexico India Russia

Taiwan Japan Mexico Canada India Turkey Bangladesh Switzerland

Pakistan Canada Indonesia Australia Turkey South Korea USA South Korea

Source: World Trade Organisation According to 2005 data, Turkey captures 3,5 per cent of the world’s textile exports and 4,3 percent of clothing exports. Turkey is the ninth biggest exporter of textiles and fourth biggest exporter of clothing. 2-CURRENT VIEW OF TURKISH TEXTILE AND CLOTHING MARKET

In alignment with the global trend, Turkish textile and clothing market continued to grow in recent years-outperforming the global market growth rate. Exports of textiles and clothing increased by %7 and %8 in 2005 and 2006 respectively. By the end of 2006, export of textiles and clothing (T/C) has reached to $19,7 billion. Yet their share in total exports dropped to

%23 in 2006, which may be a simple indication of the country’s industrial restructuring.

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Table V: Distribution of Textile&Clothing Exports by Chapters in 2005

Source: Undersecreteriat of Foreign Trade

2005 2005 2005 2005 2005

ANNUAL

CHAPTER QUANTITY(KG) VALUE($)

Share in Textile

Share in Clothing

Share in T/C

Share in Total Exports

50 Silk, including yarns and woven fabric thereof 127.819 4.557.186 0,08 0,02 0,006

51 Wool&animal hair, including yarn & woven fabric 24.779.032 180.145.382 3,30 0,95 0,25

52 Cotton, including yarn and woven fabric thereof 295.348.484 1.177.527.060 21,54 6,24 1,61

53 Vegetable textile fibre nesoi 7.444.254 25.077.651 0,46 0,13 0,03

54 Manmade filaments 195.537.813 893.552.557 16,34 4,73 1,22

55 Manmade staple fibers 162.031.461 958.380.731 17,53 5,08 1,31

56 Wadding, felt etc; sp yarn; twine, ropes etc. 54.545.798 178.633.384 3,27 0,95 0,24

57 Carpets and other textile floor coverings 204.821.611 669.388.099 12,24 3,55 0,92

58 Special woven fabrics; tapestries etc 58.889.793 549.487.290 10,05 2,91 0,75

59 Impregnated etc text fabrics; textile art for industry 53.195.265 260.652.604 4,77 1,38 0,36

60 Knitted or crocheted fabrics 97.013.010 569.597.221 10,42 3,02 0,78 TOTAL TEXTILES EXPORTS 1.153.734.340 5.466.999.165 100,00 28,95 7,48 61 Apparel articles and accessories, knit or crochet 20.916.611 6.588.131.714 49,11 34,89 9,01

62 Apparel articles and accessories, not knit etc. 41.027.661 4.858.636.031 36,22 25,73 6,64

63 Textile art nesoi; needlecraft sets; worn text art 342.321.841 1.968.178.016 14,67 10,42 2,69 TOTAL CLOTHING EXPORTS 404.266.113 13.414.945.761 100,00 71,05 18,35

TOTAL TEXTILES&CLOTHING EXPORTS 1.558.000.453 18.881.944.926 100,00 25,82

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The sector received a significant boost for its exports after the 1995 customs union agreement that allowed free access to EU markets. The ensuing investment boom in textile machinery, that was significant especially between 1995-2000 era, made the country the second exporter to EU after China. It is interesting to note that, despite the importance of the sector for the Turkish economy, there has not been a coherent set of policies that have been established by the state as regards to promote the competitiveness of the industry in an ever globalising economy. Table VI: Exports of Textiles and Clothing: Turkey

2004 2005 Change % 2006 Change % Exports of Textiles and Clothing

17,6 18,9 %7 19,7 %8

Total Exports 63,17 73,48 %16 85,28 %4 Share %28 %26 %23

Source: Undersecreteriat of Foreign Trade Turkey has been one of the major suppliers of EU and USA, two leading importers of the market. Turkey is the third biggest textile supplier of EU market with 5,3%, following EU countries (67,5%) and China (7,5%). Again Turkey is the third biggest clothing supplier of EU market with 7,9%, following EU countries (44,9%) and China (17,9%). In the second largest import market, the USA, Turkey is the eighth textile and twenty fourth clothing supplier with 3,2% and 1,3% market shares respectively. Turkey is the third biggest textile and clothing supplier of EU market. Table VII: Major Destinations in Textile and Clothing Exports: Market Improvement

Source: Undersecreteriat of Foreign Trade Despite the decline in exports to Germany, USA and France, substantial growth in exports to new destinations (East Europe, Spain and Russia) has been caught. During the recent years, especially since 2000, entering new markets has been the principal aim of the national export strategy. In this context, Central and East Europe, Russian Federation, Middle East have been in the scope of exporters.

Destination

2005 (million $)

2006 (million $) Change

Germany 3.900 3.751 -4% UK 2.410 2.517 4% USA 1.533 1.275 -17% Italy 1.053 1.212 15% France 1.128 1.090 -3% Netherlands 956 960 0% Spain 709 902 27% Russian Federation 575 717 25% Denmark 401 457 14% Romania 364 439 21%

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Source: Undersecreteriat of Foreign Trade Europe is still the biggest market, with 56,1% of sales in 2006, for Turkish textile and clothing industry. Share of Asian countries, including neighboring countries in Middle East, rose to17,8% in 2006 as compared with 14,6% in 2001. Americas are declining markets since their shares have fallen to 7,4% in 2006 as regards to 11,7% in 2001. Table IX: Regional Distribution of Exports (Million $)

2001 2002 2003 2004 2005 2006 %

2006 EU-25 16.854 19.468 25.899 34.451 38.400 47.919 %56,1 Free Zones (Turkey) 934 1.438 1.928 2.564 2.973 2.967 %3,5 Other Regions 13.546 15.152 19.426 26.152 32.102 34.593 %40,5 Other Europe 2.787 3.554 4.857 6.637 8.820 7.927 %9,3

Africa 1.521 1.697 2.131 2.968 3.631 4.565 %5,3

Americas 3.685 3.914 4.269 5.733 5.960 6.328 %7,4

Asia 4.592 5.230 7.813 10.465 13.213 15.254 %17,8 Australia and New Zealand 98 122 158 264 271 327 %0,4

Others 864 637 197 84 208 192 %0,2

Total Exports 31.334 36.059 47.253 63.167 73.476 85.479 %100 Source: Undersecreteriat of Foreign Trade Having many members from EU, OECD is the major target market of Turkey with 63,7% share in exports.

Table VIII: Distribution of Textile and Clothing Exports to Major Destinations

Textile (2006) Exports Clothing (2006) Exports Destination Million $ Share Destination Million $ Share Germany 814 10,1% Germany 2.936 25,2% Italy 661 8,2% UK 2.095 18% USA 595 7,4% Netherlands 786 6,8% Russia 569 7,1% France 767 6,6% UK 422 5,2% USA 679 5,8% Romania 364 4,5% Spain 635 5,5% France 324 4% Italy 551 4,7% Spain 267 3,3% Denmark 407 3,5% Poland 262 3,2% Trakya Free Zone 230 2% Bulgaria 261 3,2% Sweden 203 1,7%

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Table X: Exports to Selected Country Groups (Million $)

2001 2002 2003 2004 2005 2006 %

2006 OECD 20.616 23.551 30.425 40.518 44.355 54.464 %63,7 EFTA 316 409 538 667 821 1.189 %1,4 BSEC 2.932 3.599 5.044 6.779 8.619 11.656 %13,6 ECO 972 1.042 1.569 2.206 2.670 3.340 %3,9 CIS 1.978 2.279 2.963 3.962 5.057 6.989 %8,2 Turkic States 557 619 899 1.194 1.409 1.981 %2,3 OIC 4.197 4.725 7.205 10.214 13.061 15.003 %17,6 Source: Undersecreteriat of Foreign Trade Textile and clothing sectors are key elements of Turkish economy with their employment capacity, production volume and export share. 2.1-THE BIG PICTURE Table XI: Key Figures of Turkish Textile and Clothing Market (2006) Contribution to GDP 35 billion USD Share in GDP 8,7% Share in Industrial Output 16,3% Share in Manufacturing 18,7% Share in registered employment 4% Share in registered industrial employment 21% Registered Employment 800.000 Estimated Informal Employment 1.300.000 Exports/Production 57% Share in Total Exports 23% Number of Firms 43.000 Number of Exporters 11.000 Source: Undersecreteriat of Foreign Trade There are 43.000 firms in the market, quarter of which are active exporters. 74 of these companies have been listed among the Top 500 Industrial Enterprises in İstanbul Chamber of Industry’s 2006 ranking. Taking into consideration that informal economy is more common in the sector, textile and clothing possibly have larger share in national economy. Capacity utilisation rate of the industry was 80% in 2006 above that (76%) of the whole manufacturing industry. With its promising potential, Turkish textile and clothing market winks eyes to foreign investors as well. According to Treasury data, there are 298 foreign companies (74 textile-224 clothing) operating in Turkey. On the other hand many local companies operate as contract manufacturers for famous brands.

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2.2-THE TEXTILE INDUSTRY Textile industry is composed of large and integrated enterprises (famous fabric brands are Aksu, Güney Sanayi, Altınyıldız, Yünsa, İpeker, Deba and İpekiş). Textile firms are spread within the country, clustering in Southeastern Anatolia, Aegean and Mediterranean regions where cotton is cultivated. Leading manufacturers are located in Istanbul, İzmir, Bursa, Kahramanmaraş and Gaziantep. 7500 firms are estimated to make exports. Bursa is concentrated (if we measure the ratio of clustering n the basis of employment) on textile production. There is an accumulated knowledge in the traditional production culture that supports the form of flexible integration of small and large firms. 80% of employment in Gaziantep is in textiles, the region has a potential to become globally oriented and independently integrated region. Denizli district is famously focusing on home textiles (such as towel bathrobe) based on traditional family based SMEs that are heavily dependent on international linkages as they prefer to be sub-contractors. Çukurova district, where the majority of cotton is cultivated, is also highly specialised in textile industries. According to a survey of Turkish Textile Employers Association, held in its member in November 2005, major cost items in the textile industry are raw materials (33%) and human resources (25%) Raw materials: 33% Human Resources: 25% Intermediate goods:: 7% Dyestuff:4% Clean and waste water: 1% Energy: 9% Maintenance: 2% Transportation: 2% Depreciation: 7% Cost of financing: 3% Other: 7% 2.3-THE CLOTHING INDUSTRY The clothing industry –built up on contract manufacturing- depicts a more fragmented view, 80 per cent of which is consisting of SMEs. Firms are import-dependent on machinery and equipment. A big majority of clothing firms are located in Marmara region, close to Istanbul. According to the Textile and Clothing Ad-hoc Committee Report for the 9th Development Plan that outlines the general cost items for the clothing industry. Here, raw material costs have the lion’s share (47%) in average clothing costs. Clothing industry is composed of two sub-sectors: weaving and knitting. Exports on the weaving based clothing industry focus on t-shirts (40%), sweaters and jerseys (20%), socks (10.5%). The rising star in the weaving sector is socks. The share of socks in weaving sector is surging recently by 20% per year.

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Exports of the knitting sector focus on Women's suits, jackets, dresses skirts etc (45%), men’s suits, jackets, etc (24%). Denim trousers are the fastest growing group of products in the knitting sector. Their share in knitting sector exports rose to 25% in 2004 from 9% in 1999. Table XII: Distribution of Costs in the Clothing Industry

COST ITEMS WEAVING KNITTING SOCKS AVERAGE Raw materials % 43 44 55 47 Intermediate goods % 12 11 5 10 Direct labor costs % 29 30 22 27 Cost of financing &depreciation % 3 6 8 6 Other % 12 9 11 10 Total (%) 100 100 100 100

Source: Textile and Clothing Ad-hoc Committee Report for the 9th Development Plan, State Planning Organisation, p.45, 2006. 2.4-CARPETING Carpet industry is different by nature from other textile products. Its manufacturing is highly capital-intensive, it requires a specific set of machinery and technologies. Geographic locations are not really influenced by the incidence of labor costs1. Carpeting is a growing sector in the T/C industry with 11.2 billion USD trade in 2005. Major importers are the USA, the UK, Germany, Canada and Japan with 62% share in overall imports, while major exporters are Belgium, India, Turkey, Netherlands, China, USA and Iran. Carpet exports of Turkey was 745 million USD in 2005 with 6.6% of world share. Leading markets for Turkish carpets are Saudi Arabia (12%), the USA (9%), Kazakhstan (5%), Iraq (5%), Ukraine (5%), Russia (5%) and Germany (4%)2. Although having a historical and traditional expertise in hand-made rugs, Turkish carpet industry is turning towards machine-made carpets. Exports of machine-made carpets is rising with an average speed of 30% per year, and they create 85% of total carpet exports. 3-TURKISH CUSTOMS DUTIES FOR TEXTILE AND CLOTHING PRODUCTS Imports from EU All trade between Turkey and the EU is duty free. As regards to this, according to the Agreement on the Customs Union, products of chapters 50 to 63 originating in the EU are duty free. Imports from Non-EU Countries

1 Institut Français de la Mode, Study on the Implications of the 2005 Trade Liberalisation in the Textile and Clothing Sector-Consolidated Report, 2004, Paris, p.23. 2 Detailed Information can be found … Undersecreteriat of Foreign Trade - http://www.dtm.gov.tr/dtmweb/index.cfm?action=indexen&dil=en

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Free trade agreements with EFTA, Israel, Macedonia, Croatia, Bosnia-Herzegovina, Morocco, Palestine, Tunisia, Syria, Egypt and Albania may facilitate imports. In line with the Generalised System of Preferences, Turkey does not impose customs duties to the EU countries, EFTA countries, Israel, Macedonia, Croatia, Bosnia-Herzegovina, Morocco, Palestine, Tunisia, Syria, the least developed countries for textile and clothing products. All T/C products except some, those listed under Chapter 51, are duty free for GSP+ countries3. For developing and other countries, applied customs duties for products of chapters 50 to 63 are as follows: Raw materials: from 0 to 7,5% Yarns: from 0 to 4% Fabrics: from 0 to 4% Carpets: from 0 to 8% Apparel: from 0 to 12% Made-ups: from 0 to 12% Detailed information can be found on the web page of the Undersecreteriat of Foreign Trade4. Value Added Tax 18% VAT on duty paid value. 4-OVERALL APPRAISAL OF THE TURKISH TEXTILE AND CLOTHING INDUSTRY A recent SWOT analysis indicates the following for the T/C industry5 Strengths: speed, know-how, elasticity, quality cotton, educated workforce, productivity of labour, raw materials, experience, cotton production, the understanding of marketing/branding

Opportunities: geographical proximity to EU Middle East and ex-Soviet countries, recent moves towards high value added segments of the market

Weakness: labour cost, input costs, energy costs, branding, no ‘made in Turkey’ image, fluctuations as regards the macro economy and polity and raw material prices, marketing and distribution channels, lack of inter-firm co-operations, over capacity, informal sector, lack of statistical data.

Threats: possibility of higher taxation on wages, China, other Asian competitors.

3 Bolivia, Ecuador, El Salvador, Guatemala, Georgia, Honduras, Colombia, Costa-Rica, Mongolia, Moldova, Nicaragua, Panama, Peru, Sri Lanka, Venezuela 4 http://www.dtm.gov.tr/dtmadmin/upload/ITH/TarimDb/mevzuat/ithmevzu/ithrejkarari/ek%20listeler%202007/50-81.%20Fasıllar.xls 5 Ulaş, D.; Özer A.; Koçak A., Hazır Giyim Sektörü İçin Yön Haritası: Örnek Olay İncelemeleri,

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4.1-PRINCIPAL ADVANTAGES Affluent raw materials Self sufficiency in raw material production (especially in cotton but also in wool and synthetics) together with the control of the entire production chain (integrated) from raw materials to clothing is another advantage of the Turkish market. Turkey is the 6th cotton cultivator and one of the major synthetic fibre manufacturers in the world. Geographical proximity to major markets Europe is the biggest textile and clothing importer in the world. On the other hand Russia, Eastern Europe and Middle East are growing markets. Partly thanks to its proximity, Turkey also benefited from the hollowing out of jeans manufacturing in Europe and emerged as a major denim and jeans exporter. In 2004 Turkey exported 2.2 billion worth of denim fabrics, jeans and other denim products. This eventually turned the country into an important jeans manufacturing site with a 6.5 per cent share of the world market. Entrepreneurship Strong entrepreneurial spirit with experience in providing good customer service and ability to fulfil both small and large orders provide Turkish companies with strong competitive advantage against Asian competitors. Customs Union with the EU According to the Customs Union Agreement between Turkey and the EU, products are no longer subject to quotas and duties are abolished since 1996. This allowed Turkish exporters grow their market share in the EU especially in textile and clothing. Trade agreements In addition to the Customs Union, Turkey has free trade agreements with EFTA, Israel, Macedonia, Croatia, Bosnia-Herzegovina, Morocco, Tunisia, and Syria. Qualified, motivated workforce Last but not the least, qualified and motivated workforce is a major advantage of Turkey. Under this framework, a glance at workforce would be helpful to understand Turkish market. Gross minimum wage is set 562, 5 TL in 2007. With social security insurance (19,5%), and unemployment insurance fund (2%) premiums, total cost of a worker with minimum wage is 683,44 TL (370 €, 487 $). Company paid lunch and transportation are general practices in Turkey. Adding these in, total cost of an employee for employer would reach 400 € or 530 USD per month. This is relatively high in comparison to Chinese market. The table below shows the composition of an employee’s average cost to the employer. Some fringe benefits (i.e. transportation, lunch, etc) should be added on it.

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Table XIII: Minimum Wage in Turkey (Turkish Lira) Item 2006 2007 Gross minimum wage 531 562,5 Insurance premium 19,5% (Employer’s stake) 103,545 109,69 Unemployment Insurance Fund Premium %2 (Employer’s stake)

10,62 11,25

Total Cost to Employer 645,165 683,44 Total Cost to Employer (Euro) 343 370 Total Cost to Employer (USD) 445 487 Comparing to its competitors, tax on employment is quite high in Turkey. This is one of the reasons why Turkey is losing market share in some regions against Asian manufacturers. Table XIV: Share of Employment Tax in an Employee’s Cost to Employer Country Average Tax (1996-2002) Turkey 41 % Brazil 33,1% Italy 32,6% France 30,6% South Korea 25,2% USA 21,2% OECD 18,1% Mexico 11,1% Source: US Department of Labour, Bureau of Labour Statistics, May 2004. Table XV: Labour Costs in Selected Economies Country $ Cost per hour Bangladesh 0,28 Vietnam 0,28 Pakistan 0,37 Sri Lanka 0,46 China 0,48 Indonesia 0,55 India 0,67 Egypt 0,88 Thailand 1,29 Tunisia 2,05 Mexico 2,19 Morocco 2,56 Turkey 2,88 Poland 3,8 Malta 9,53 Source: Werner International (www.wernertex.com)

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However, Turkey has two basic advantages among many, which would satisfy all stakeholders. These are motivation of employees and total working hours per year. According to World Competitiveness Yearbook of Institute for Management Development (IMD), outpacing many countries such as UK, India, China, Italy, Spain and South Africa, Turkey held the 27th rank in worker motivation with 6,04 pts, where Hong Kong was the first with 8,04. Table XVI: Worker Motivation Ranking (Scale 0-10)

Ranking Country 2005

1 Hong Kong 8,04 2 Switzerland 7,81 3 Denmark 7,81 4 Austria 7,32 5 Iceland 7,20 9 USA 7,07 12 Singapore 7,00 13 Japan 6,89 16 Brazil 6,66 17 New Zealand 6,64 26 Malaysia 6,08 27 Turkey 6,04 28 United Kingdom 5,95 31 India 5,80 35 Slovak Republic 5,74 36 Hungary 5,64 42 China Mainland 5,23 46 Italy 4,71 47 Spain 4,58 48 South Africa 4,54 51 Indonesia 4,39 52 Mexico 4,34 53 Greece 4,27 56 Russia 3,85 58 Argentina 3,24

Source: IMD World Competitiveness Online, May 2006. Ahead weekends and New Year day, four days for national holidays and seven days for religious holidays are common days of rest, during which many firms cease working, in Turkey. An average employee works 2154 hours per year which places Turkey in 12th rank in the world, outpacing, Malaysia, New Zealand, China, Brazil, South Africa, Russia, etc.

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Despite the upper limit of 45 hours per week working, average working reach 52 hours in the manufacturing industry, according to the World Bank report6. Table XVII: Working Hours (Av. number of working hours per year)

Ranking Country Hours

1 Hong Kong 2,398 2 India 2,347 3 Maharashtra 2,347 4 Korea 2,341 5 Taiwan 2,327 6 Philippines 2,301 7 Mexico 2,281 8 Chile 2,205 9 Thailand 2,184 10 Jordan 2,178 11 Indonesia 2,175 12 Turkey 2,154 13 Malaysia 2,152 17 New Zealand 2,022 18 Hungary 2,012 19 China Mainland 2,000 25 Czech Republic 1,946 26 Brazil 1,931 28 South Africa 1,910 36 Slovenia 1,850 37 Bulgaria 1,824 38 Estonia 1,820 42 Russia 1,775 43 Sweden 1,775 49 Greece 1,744 59 France 1,561

Source: IMD World Competitiveness Online, May 2006. 4.2-MAJOR PROBLEMS Turkish T/C industry now faces a strong challenge to move from being a standard quality subcontractor in the low value added segments of the global value chain to becoming an original design/brand manufacturer and/or R&D intensive textile producer (that uses nano-technologies or organic materials etc…). Firms such as Sarar (http://www.sarar.com.tr/indexeng.htm) for example

6 Turkey Economic Country Memorandum Vol.II Expanded Report, Worldbank, 2006, s.145.

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decided to abolish their sub-contracting relationship with the German firm Hugo Boss and moved into higher added value segment of the clothing industry. Despite it reduces costs, informal employment-especially in clothing industry- is one of the major problems. Since contract manufacturing is widespread in clothing industry, informal employment is very common. Very small workshops even in basements can be designated to manufacturing in the clothing industry. This fragmentation easily gives rise to informal employment which reduces manpower costs up to 50 per cent. It also renders manufacturers dependent to relatively larger firms. As manufacturers are dependent to larger firms in style and brand, they barely survive or go bankrupt. Finally, the fragmentation impedes manufacturers to grow and create their own brands. The IFM report7 utters the same view by:

“While Turkey has all necessary elements to succeed, such as a complete textile chain, easy access to raw materials in order to move to a “Made in Turkey” own-brand and own-design producer country, it will have to urgently increase productivity and quality of its products. However investing in brands and image to compete with companies from Italy , the US etc. is costly and will be feasible for a limited number of larger firms, only.”

Appreciation of Turkish Lira is a key issue for exporters in Turkey. Strong Lira is undermining competitive power of exporters especially to US market. Statistics reveal this tendency as declining shares in total exports. China, India and Pakistan are gaining relative advantage in western markets. Soaring raw material prices is another impediment for local manufacturers. Being a cultivator of cotton, Turkey commenced to import cotton from Egypt, India and China. Energy, another input, is quite expensive in comparison to competitors. Other issues and possible suggestions can be listed as follows: -Turkey should diversify export markets in order to reduce reliance on the EU market. -Product range should be enriched as well, in order to enter into new markets and protect market shares. - New investment should be made particularly in spinning and weaving where machinery is relatively old. While considering the problems associated with the Eastern competition, it is useful to notice that Turkish textile’s initiative made the industry an important global actor in WTO negotiations. Istanbul declaration that was made in February 2004 brought together 96 textile companies and institutions from 54 countries to form Global Alliance for Fair Trade Textile platform, led by the Turkish and US manufacturers. Furthermore this situation had a positive impact, we believe on the industry, as it forced industry partners and government finally to coordinate their activities and work together. Turkish Chambers Association, Turkish Export Association and Turkish Export office are now meeting regularly with sectoral –based organisations such as İTKİB (http://www.itkib.org.tr/en_new/), TGSD, TSİS and PMSB. 5-SAMPLE MANUFACTURING COST

7 Institut Français de la Mode, Study on the Implications of the 2005 Trade Liberalisation in the Textile and Clothing Sector-Consolidated Report, 2004, Paris, p.226.

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Below, a sample manufacturing cost is given for a shirt in the first year of manufacturing including the factory installation costs. Manufacturing volume: 1500 shirts per day Working days: 300 per year Annual manufacturing volume: 450.000 shirts Manufacturing time per shirt: 27,42 minutes Number of sewing machines:: 70 Number of button and buttonhole machines:7 Number of Irons: 10 Number of workers: 100

cutting: 5 workers ironing (pocket-cuff): 12 workers sewing: 35 workers button holing: 11 İŞÇİ press (arm-collar-cuff) and assembling: 15 workers final ironing: 2 workers control and packaging: 9 workers purchase supervisor: 1 worker sales supervisor: 1 worker band and cutting supervisors: 2 workers total: 92 workers other: 8 workers TOTAL: 100 workers:

Major fixed cost items are sewing machines, CAD system and spread tables. Table XVIII: Fixed Costs COST ITEMS COST (in Euros) Sewing machines 190.756 CAD system 30.000 Interface cutter 2704 Irons 2035 Knives 554 Quality control machine 6900 Spread tables 22.000 Press machines 6300 Compressors 3000 Total 264.249 Major variable cost items are purchase of raw materials and intermediate products, wages, rental payments, etc.

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Table XIX: Variable Costs (per month ) COST ITEMS COST ( in Euros) Raw materials-intermediate products 162.596 Labour* 36000 Building rentals 4250 Electricity-Heating-Communication 2617 Alimentation and cleaning 1500 Other overhead 1050 Total 203.990 *If all workers are paid minimum wage Annual Variable Costs: 203.990*12=2.447.880 €. Total Annual Costs in the first year= 2.712.129 €. Unit cost for the first year: 2.712.129/450.000=6,0269 € Total annual costs in the first year (with leasing)= 2.595.353 € Unit cost for the first year (with leasing): 2.595.353/450.000=5,767€ As the firm will no longer spend for equipment and machinery, costs will diminish in coming years about 10 percent. Hence, with an overall estimate, total annual costs would float around 2.500.000 € per year and unit cost per shirt would be 5,55 €. 6-DIFFERENT FIRMS DIFFERENT STRATEGIES Foreign Outlet Owners Turkish firms opened nearly 1350 sales outlets in foreign countries. The number for the carpet and home textiles reached 350 and is expected to reach 700 in 2010. The first foreign market for outlets is Russia followed by other ex-Soviet countries such as Ukraine, Romania, Kazakhstan, Georgia etc… The leading foreign outlet owners and their strategic plans are as following8: Kiğili: has 2 outlets in Azerbaijan and plans to open 25 new ones until 2010 in Romania, Poland, Hungary, Ukraine, Kazakhstan, Turkmenistan, Egypt, Jordan and North African countries. (http://www.kigili.com.tr/) Sarar: 43 stores in Turkey, 46 stores abroad including US (New York) and Germany (Dusseldorf) Sabra: It has 10 outlets in Poland, plans to open an extra 20 until 2010. (http://www.sabratekstil.com/default.html) Sabri Özel: Plans to open 10 outlets until 2010 in Italy, Rome and Russia. Crispino: aims for 50 outlets by 2010. Zen: 6 outlets in Russia, wants to open 100 outlets by 2010. Cross Jeans: 14 outlets in Germany, 5 in Poland, one in Czech Republic and Slovakia.

8 http://.rotahaber.com/haber/20070520/Turk-markalarinin-dunya-cikarmasi.php

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Derri: 6 in Poland, 2 in Ukraine, one in Honk Kong and Tokyo, plans to open 20 outlets by 2010. BGN: 15 outlets in France 118 in total and plans to open 150 until 2010. T-Box: present in many outlets in Russia, Australia, New Zealand, Indonesia, Switzerland, Germany, Ireland, Costa Rica and Greece… (http://shop.t-box.com.tr/general/start.aspx) Kyo my Friend: 3 outlet stores in Germany, plans to open an extra 50 by 2010. Branding The following companies are heavily investing in branding: Vakko: has signed in American designer Zac Posen Damat: wants to be active in the luxury items Balizza: prepares a new collection with ex- Valentio designer Stefano Guerrriero Koton: significant re-organisation Hey Grup: bought Buckler’s trademark to be active in US. Beymen: branding for internal markets Hatemoğlu: prepared a luxury collection entitled Hatem Saykı İpekyol: aiming upper income classes with its Machka trademark. Important brand exporters of Turkey have exports averaging around 100 million dollars, which is still small as compared with global industry leaders that have turnovers over 2 billion dollars: In 15 December 2006 big Turkish brands’ exports were as following (million dollars) Cross (107), Desa (13,6), Colin’s (66), Koton (13,8), Ramsey(2), Damat (4,6), Sarar (31,5), Little Big (73,9) (http://www.littlebig.com.tr/en/). Foreign investment The following firms have either invested or entered into sub-contracting arrangements in foreign countries: Korhan Tekstil China and Russia, Baha tekstil: Uzbekistan Ultaş Entegre tekstil: Uzbekistan Atateks Dış Ticaret: Jordan Bursel Tekstil: Uzbekistan ALKIM Teksil: Uzbekistan Şahinler Holding: Jordan, Bulgaria, Egypt, China Bigser Tekstil: Bulgaria, Russia Serko Tekstil: Bulgaria Other important players in the industry Yeşim Tekstil is a subsidiary of the Nergis Holding. Its exports reached 260 million dollars in 2006, has 5000 workers and produces home textile and clothing items. Subcontractor for Nike, Banana Republic, Old Navy, Lands End, Shclafgut and Zara. Leading Denim producers: Orta Anadolu group in Kayseri (with a 200 million $ turnover and 100 million $ yearly exports) that moved into denim production with subcontracting arrangement in 1985 with Levi Strauss and its US-based WEST Point Pepperell developed its own brands named Ordenim and continued to produce for British Marks and Spencer and Levi Strauss. Other important

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denim producers are ISKO, BOSSA DENIM AND GAP GÜNEYDOĞU. These are large an integrated factories each with yearly capacities of 20-40 million meters. Jeans manufacturing: Turkish producers enjoy their preferential access to the EU markets thanks to Customs Union. Here the ex-soviet markets have also proved important for Turkish exporters. In the 1990s the “suitcase trade” in which jeans and other clothing items are estimated to be important gained significant momentum. A group of traders called “Laleli” traders exported T/C by stuffing them in suitcases. This was possible until 2004 as Russia did not tax imports up to 200 kilograms per passenger. The Turkish brand Bilkont and Mavi jeans (http://www.mavijeans.com/ss07/main.asp) are so successful with their export performance that they ranked 75 and 154 respectively among Turkey’s top 500 industrial firms. Rodi jeans is popular in Germany, Cross jeans in the Polish market and Colins jeans in the Russian market. 7-TURQUALITY Government’s approach towards the industry becomes more interested lately with the Turquality® project that initially aimed to help the industry to move along the value chain into the high value adding sectors… Here the aim is to provide financial and infrastructural help to the industry such as providing them with consultancy services, assisting fashion shows abroad and design activities, bringing fashion shows to Turkey, assisting Turkish firms in their effort to open new stores in important centres of fashion around the world such as Paris, New York, Madrid, etc. Initiated for the textile and clothing industry, today the Turquality® project covers a range of different industries as textile, clothing, automotive, durable goods, jewellery, industrial goods and fast moving consumer goods. Seven of them in textile and clothing, 22 brands are included in the scope of Turquality®. Supported Brands in Textile and Clothing Home textile: Hamam, Taç Textile: Bossa Clothing: BGN, Colin’s, Cross Jeans, Damat-Tween Two major purposes of the project are • to promote products manufactured in different industries, which have potential for brand

establishment in international target markets together with the studies to create positive image for Turkish products

• to create an accreditation system (covering all the processes from manufacturing to marketing) for the products which Turkey has competitive advantage

8-TRANSPORTATION Turkey has the largest road transport fleet, with over 40.000 vehicles, in Europe and Middle East. Being at the crossroads of immense trade traffic, the transportation industry operates in a 600 billion USD market.

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In this picture, the first choice of exporters is sea transportation in Turkey. 48 per cent of exports have been done via sea transportation in 2005. The share of road transportation was 43% same year. As Turkey is at the doorstep of Europe, distances are close to favour road transportation. Istanbul-Berlin: 1735 km. Istanbul-Brussels: 2178 km. Istanbul-Moscow: 1753 km. Istanbul-Hamburg: 1983 km. Istanbul-London: 2496 km. Istanbul-Madrid: 2734 km. Table XX: Exports by Transport Type 2003 2004 2005 Road transport 42.9% 42.9% 43% Sea transport 49% 49% 48% Railway transport 0.8% 0.9% 1% Air transport 6.8% 6% 5.4% Other 0.2% 0.5% 2.3% Source: TUIK On the other hand, majority of imports have been done via sea transportation (57%). As seen, there is a huge gap between exports and imports in terms of road transportation. Again, air transportation’s share in imports was 11 per cent, well above that of exports. Table XXI: Imports by Transport Type 2003 2004 2005 Road transport 25.7% 24.5% 24.5% Sea transport 57.2% 58.2% 57% Railway transport 0.9% 1.2% 1.5% Air transport 12% 12.6% 11% Other 3.8% 3.3% 5.5% Source: TUIK Turkish transportation industry is in a restructuring process, which aims to diversify channels and increase the shares of sea and railway transportation. İzmir, Marmaris, Çeşme, Kuşadası, Trabzon, Dikili Harbours have been privatised in the last four years. New investments have been made to railway modernisation. Moreover, Turkey has promoted to grey list, in early June, from black list in sea transportation, which will support the industry in coming years. 9-COMPARISON OF COMPETITORS As the competition in the T/C market escalates, strategies to increase market share diversify as well. In the post-2001 era that is characterised by an overvalued exchange regime and increasing competition from Asian countries with the accession of China in WTO, significant re-organisation

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attempts have been undertaken by the Turkish industry. Those strategies can be summarised as following: a number of firms are attempting to quit cheap production in favour of the production of fast fashion items, another set of firms are investing abroad (in countries such as Egypt or Uzbekistan) in order to benefit from low cost labour and tax breaks or are buying foreign sales outlets to strengthen/secure their marketing activities, some firms are upgrading their production by moving into brand/design/R&D activities. The IFM report named Turkey, China and Hong Kong as the most competitive T/C manufacturing countries. In comparison to China, Turkey has lower costs in ring-yarn, O-E yarn, woven ring-yarn fabric, woven O-E yarn fabric, ring yarn knitting, knitted ring-yarn fabric, O-E yarn knitting, knitted O-E yarn fabric and textured yarn knitting. Nevertheless, China maintains its dominant position in the global market. The share of textile and clothing in China’s exports was 15,1% in 2005. Exports of textiles and clothing grew 23%, 20% respectively in 2005. China’s share in world textile and clothing exports was 24% in the same year. Having a great supply of low-cost workforce (T/C industry employs 15 million people), China will probably sustain its competitive power in the foreseeable future thanks to cheap capital, rising foreign investments and supporting government policies. As the Agreement on Textiles and Clothing cancelled all restrictions on trade in textile and clothing products on January 1, 2005, China strengthened its position in the market with surging sales to USA and EU, the biggest import markets. However, according to a new compromise, USA and EU set new quotas against China on t-shirts, trousers and sweaters. The new quota regime is in favour of Turkey as EU and USA are the biggest markets of its textile and clothing industry. Nevertheless, it should be noted that Turkey is losing grounds especially in US market against Asian countries. However, in the second half of 2005, the US and the EU put new restrictions on China’s exports on t-shirts, trousers and sweaters, products on which Turkey has competitive power.

Even it has an affluent workforce, average labor cost of China is 20% expensive than India and Sri Lanka, 40% than Indonesia, 100% than Pakistan, 180% than Bangladesh. However particularly in the apparel sector, when productivity, reliability and indirect costs are included, China offers an unbeatable quality/price ratio: same as India, Indonesia and Vietnam, 25% less

than Pakistan9. Even this would not be sufficient to create a sustainable market share. Chinese products owe their market share primarily to their prices. Yet, price is not enough to create loyalty for consumers. Asian manufacturers have not succeeded to entrench their positions in the global market with their quality and consumer orientation. This would probably be used (and is actually being) by their Turkish counterparts. Halit Narin, chairman of Turkish Textile Employers Association, voices in an interview that many US and European firms turn back to Turkish manufacturers after the disappointment they had with Chinese goods.

9 Institut Français de la Mode, Study on the Implications of the 2005 Trade Liberalisation in the Textile and Clothing Sector, Paris, 2004, p.177.

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Comparing to other T/C exporting countries, Turkey has an apparent cost advantage in many products. International Textile Manufacturers Federation’s 2006 cost comparison results are shown below to highlight relative cost sub-items. Table XXII: Total Costs of Ring-Yarn (in USD per kg yarn) Element Brazil China India Italy Korea Turkey USA

Waste 0,20 7%

0,26 9%

0,15 7%

0,19 6%

0,20 8%

0,21 8%

0,18 6%

Labour 0,08 3%

0,03 1%

0,04 2%

0,77 24%

0,23 9%

0,19 7%

0,50 18%

Power 0,17 6%

0,27 9%

0,32 15%

0,35 11%

0,20 8%

0,28 11%

0,15 5%

Auxiliary Material 0,10 4%

0,10 4%

0,10 5%

0,12 4%

0,11 4%

0,10 4%

0,11 4%

Capital (depreciation&interest)

0,75 28%

0,43 15%

0,44 21%

0,46 14%

0,45 18%

0,41 16%

0,65 23%

Manufacturing Cost (A) 1,29 49%

1,09 38%

1,05 49%

1,89 58%

1,18 46%

1,19 46%

1,56 57%

Raw Material 1,36 51%

1,80 62%

1,08 51%

1,31 41%

1,36 54%

1,42 54%

1,22 43%

Total Yarn Cost (per kg yarn) 2,65 2,89 2,13 3,20 2,54 2,61 2,81

Source: International Production Cost Comparison 2006, International Textile Manufacturers Federation

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Table XXIII: Costs of Textile Products by Country (in USD)

Brazil China India Italy Korea Turkey USA

Ring-Yarn (per kg) 2,65 2,89 2,13 3,20 2,54 2,61 2,81

O-E Yarn (per kg) 1,85 2,28 1,52 1,96 1,80 1,89 1,75

Textured Yarn (per kg) 2,24 1,74 1,77 2,30 1,96 2,19 2,29

O-E Yarn Weaving (per meter) 0,20 0,18 1,22 1,43 0,26 0,24 0,31

Ring Yarn Weaving (per meter) 0,21 0,19 0,22 0,40 0,25 0,23 0,30 Woven Ring-Yarn Fabric (per meter) 0,715 0,74 0,627 1,004 0,733 0,728 0,837

Woven O-E Yarn Fabric (per meter) 0,662 0,748 0,595 0,911 0,704 0,707 0,741

Ring Yarn Knitting (per meter) 0,033 0,027 0,020 0,070 0,029 0,024 0,045 Knitted Ring-Yarn Fabric (per meter) 0,643 0,692 0,511 0,805 0,612 0,624 0,691

O-E Yarn Knitting (per meter) 0,041 0,031 0,025 0,090 0,035 0,029 0,058 Knitted O-E Yarn Fabric (per meter) 0,704 0,846 0,568 0,791 0,679 0,705 0,685

Textured Yarn Weaving (per meter) 0,34 0,29 0,31 0,65 0,35 0,30 0,49

Woven Textured Yarn Fabric (per meter) 0,577 0,471 0,496 0,895 0,560 0,530 0,737

Textured Yarn Knitting (per meter) 0,084 0,064 0,051 0,146 0,068 0,054 0,094

Knitted Textured Yarn Fabric (per meter) 0,552 0,428 0,421 0,627 0,478 0,512 0,573

Source: International Production Cost Comparison 2006, International Textile Manufacturers Federation.

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Table XXIV: Labor Skill and Know-How (Advantage Ranging, 0=uncompetitive, 5 highly competitive) Labour

Costs Cost per std. min.

Labour Availability

Operating Skills

Management Skills

Spinning/Weaving Know-How

Dyeing/Finishing Know-How

Apparel Making/Knitting

Know-How

Consolidated Evaluation

China 4 5 5 5 4 4 3 5 4 India 4 4 5 2 3 4-3 2 4 3 Pakistan 5 3 5 3-4 3 3 1 2 2 Bangladesh 5 3 5 4 3 2 1 4 2 South Korea 0 1 1 5 5 5 5 5 2 Turkey 2 3 4 4 4 5 4 5 3 Source: Institut Français de la Mode, Study on the Implications of the 2005 Trade Liberalisation in the Textile and Clothing Sector, Paris, 2004, p.158. Table XXV: Raw Materials and Equipment (Advantage Ranging, 0=uncompetitive, 5 highly competitive) Cotton

Supply Wool

Supply MMF

Supply Spinning

Equipment Weaving

Equipment Knitting

Equipment Dyeing/Finishing

Equipment Apparel making

Equipment

Consolidated Evaluation

China 5 2 4 5 5 5 3 3 4 India 5 1 3 4 3 2 2 3 3 Pakistan 4 1 3 3 3 2 1 2 2 Bangladesh 2 1 1 2 1 2 1 2 1 South Korea 1 1 4 4 5 4 5 5 4 Turkey 5 1 3 4 5 5 4 4 4 Source: Institut Français de la Mode, Study on the Implications of the 2005 Trade Liberalisation in the Textile and Clothing Sector, Paris, 2004, p.159.

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Table XXVI: General Key Factors (Advantage Ranging, 0=uncompetitive, 5 highly competitive) Access to

Capital Energy Costs

Transaction Costs

Transport Infrastructure Consolidated Evaluation

China 5 4 3 4 3 4 India 3 2 1 3 2 2 Pakistan 3 2-3 1 2 1 1 Bangladesh 2 2 1 2 1 1 South Korea 4 3 4 4 5 4 Turkey 2 3 5 5 5 4 Source: Institut Français de la Mode, Study on the Implications of the 2005 Trade Liberalisation in the Textile and Clothing Sector, Paris, 2004, p.160. Table XXVII: Commercial Aspects (Advantage Ranging, 0=uncompetitive, 5 highly competitive) Reliable

Delivery Quality Level Conformity Flexibility Design/Fashion

Capacity Geographical Proximity

to the EU Language

and Culture Consolidated

Evaluation China 4 4 4 2 2 0 2 2 India 2 3 3 4 2 1 2 2 Pakistan 2 2 2 1 1 1 1 1 Bangladesh 2 3 3 1 1 1 1 1 South Korea 4 5 4 4 4 0 3 3 Turkey 4 4 4 5 3-4 5 4 4 Source: Institut Français de la Mode, Study on the Implications of the 2005 Trade Liberalisation in the Textile and Clothing Sector, Paris, 2004, p.161.

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CONCLUSION In summary, companies who are wishing to invest in Turkey should be aware of the fact that the country offers a number of significant advantages.

• First of all, Turkey possesses an army of skilled/experienced workforce that can adapt to fast changing quality and product requirements of the industry.

• The country’ unique geo-political position is a rare asset. The geographical proximity to EU markets has been complemented in 1995 with the Customs Union agreement. Furthermore, the country also has significant cultural and economic ties with the ex-Soviet countries in the Caucasus. Since 1990, with the collapse of the Berlin wall, Turkish entrepreneurs discovered the potential of the East-European markets as they exploited first-mover advantages to accumulate knowledge about the specifics of these markets. Therefore, while Turkey’s textile trade with the EU is slowing down, its exports are growing fast in these emerging markets. Turkish firms are quite well placed partner candidates for foreign firms willing to operate in these markets for the first time.

• There is a significant know-how and market power in denim. • Turkey is increasingly becoming an interesting market to operate in, this observation is not

solely based on cost-economic considerations but also takes into account the knowledge opportunities enabled by its increasingly sophisticated nature of its T/C (textile and clothing) markets. Istanbul might become a gravity centre for T/C sector, an important location to learn and monitor about the latest technology, market and fashion trends. This is because of two reasons: there are important foreign brands that are already actively present in the city and these companies bring an important stock of know-how with them; and many Turkish firms are aiming, with the recently emerging government support, to try to build their international reputation as brand names.

• Turkish firms’ know-how and capabilities in high-value added activities are being significantly upgraded as they feel the pressure of global competition. A closer look at the industry shows the emergence of a number of different strategies that are mainly based on: the accumulation of marketing capabilities (the establishment of foreign sales outlets, branding activities and the use of first-mover advantages in ex-Soviet markets), foreign investments targeting neighbouring low-cost production advantages offered by countries such as Uzbekistan and Egypt and also some efforts in technological research and development.

• Another important asset of Turkish firms is the fact that during the macro-economic turbulences of 1990 they gained the ability to produce and operate in unstable environments. This is, we believe, a crucial core competence to be considered if one wants to be active in similarly unstable markets of East Europe, Balkans and the Caucasus.

• Despite the existence of the cost-related disadvantages encountered in the face of the Asian competition, it is important to realise that there is a significant room for cost improvements in Turkish T/C sector. Foreign firms that can overcome the limitations associated with the semi-informal structure of Turkish firms can obtain significant cost improvements. First of all, the low density of co-operation culture among the Turkish firms signals, we believe, to the underutilised potential for scale economies (in fact clustering projects that are co-financed by the European Union funds are trying to address this issue recently). Secondly, most Turkish firms do not possess modern financial management techniques to organise their cash flows; once again the assistance by foreign firms might produce significant productivity gains in the

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optimal use of finance. There is also significant room for improvement in building alliances (clustering projects) and finance. One might argue that similar potential for improvements can be existent in similar developing countries, but we believe these advantages should be considered together with other strengths of the industry presented above. Such a unique combination of different competitive advantages that are present both in low and high value added activities of the global value chain together with the marketing opportunities enabled by the country’s geo-political situation and the dynamic entrepreneurial spirit of its industrialists and workers alike, we believe, is difficult to find.

• It is also useful to note at this critical juncture that, Turkish Lira is overvalued as a result of a five year IMF programme. It is not clear whether this exchange rate regime will continue in the future. As elections are getting closer a number of political parties in Turkey are campaigning to more competitive levels of exchange rates.

• Last but not least, Turkey’s institutional ties with the EU and its recently gained abilities to influence WTO decisions should not be under estimated. As a result of China’s WTO accession, Turkish firms, business associations and governmental bodies are increasingly learning to work together to make their voice heard and actively take part in the shaping global rules of the game in T/C industry.

FOR FURTHER DETAILS PLEASE CONTACT

• Assistant Prof. Dr. H. Bader ARSLAN ANKARA UNIVERSITY Faculty of Political Sciences Cebeci 06590 Ankara tel: +90 312 595 12 04 fax:+90 312 319 77 36

• Dr. Ali FIKIRKOCA ANKARA UNIVERSITY Faculty of Political Sciences Cebeci 06590 Ankara tel: 312 595 14 28 fax:+90 312 319 77 36 All rights reserved. Ankara University SME Research Center June, 2007