US embassy cable - 03ISTANBUL1687

UNCLAS SECTION 01 OF 02 ISTANBUL 001687 
 
SIPDIS 
 
 
SENSITIVE BUT UNCLASSIFIED 
 
 
STATE FOR E, EB/IFD AND EUR/SE 
TREASURY FOR OASIA - MILLS AND LEICHTER 
USDOC FOR 4212/ITA/MAC/OEURA/DDEFALCO 
 
 
E.O. 12958: N/A 
TAGS: ECON, EINV, EFIN, PGOV, TU, Istanbul 
SUBJECT: GEBZE INDUSTRY SEES AWAKENING ECONOMY 
 
 1.  Sensitive but Unclassified.  Not for internet 
distribution. 
 
 
2. (SBU) Summary: Industrialists in the Marmara region 
industrial town of Gebze told visiting P/E Section Chief and 
Poloff that recent positive economic developments are finally 
beginning to be felt at their level, and that they are fairly 
bullish on the region's economic prospects.  While exports 
remain the primary engine of economic growth (though they 
have been hurt by low profit margins as a result of the 
strong Turkish lira), our interlocutors reported that they 
are beginning to see a pickup in domestic demand as well.  As 
a result, all firms reported a significant increase in 
employment over the last eight months, with most increasing 
their long-frozen workforces by 20-30 percent.  A number of 
problems continue to cloud the business horizon, however, 
with high energy prices, high taxes, and unfair competition 
from the informal sector topping the list.  Gebze businessmen 
give the AK government high marks for its initial year, 
commenting that it is among the most "business friendly" 
governments they have seen.  End summary. 
 
 
3. (SBU) An Industrial Center: An important center in the 
industrial heartland of Turkey's Marmara region, Gebze is a 
short 40 kilometers outside of the Istanbul city center, with 
convenient highway, rail and sea connections to Central Asia, 
the Middle East and Europe.  Local business officials proudly 
point to the area's dynamic industrial sector, which now 
accounts for 13 percent of Turkey's industrial production. 
During an October 30 day trip to the region organized in 
conjunction with the Gebze Industrialists and Businessmens' 
Association (GESIAD), P/E Chief and Poloff toured a number of 
industrial facilities, ranging from low-tech flooring and 
wood products production, to more high-tech production of 
automobile radiators, automotive glass, and copper tubing. 
 
 
4. (SBU) Exports and domestic demand: All the firms we 
visited reported a sharp uptick in demand, which had prompted 
them to expand employment over the last 9 months.  Kale Oto 
Radyator, for instance, noted that its work force had grown 
by 50 percent to approximately 200 people, while Sarkuysan, a 
manufacturer of copper wire and tubing and one of Turkey's 
leading industrial success stories, noted that employment has 
increased 30 percent to 450 employees.  Turkey's recent 
export boom explains the companies' success, both directly 
and indirectly.  Kale, for instance, supplies 95 percent of 
the radiators used in the Turkish automotive industry, so 
that while its sales are largely domestic, they form part of 
a sector that has played a key role in leading Turkish 
exports to record levels this year.  Olimpia Oto Camlari 
Sanayi and Ticaret, a leading auto glass manufacturer, has 
benefited similarly, though it does not dominate its market 
to the same extent.  Sarkuysan, meanwhile, enjoys a dominant 
local market share while also exporting half of its output. 
Domestic producers are also seeing an uptick in demand, 
though Yongapan Wooden Products General Manager Azem Gungor 
noted that his Turkish market is largely saturated, so the 
firm is currently focusing more on overseas opportunities and 
expanding its factories in Bulgaria and Romania and looking 
to open a new operation in Bosnia. 
 
 
5. (SBU) Familiar Concerns: Gebze businessmen echoed 
traditional complaints about Turkey's relatively unfriendly 
business environment, pointing especially to concerns about 
high Turkish energy prices.  Two of the firms we visited, 
Sarkuysan and Yongapan, produce much of their own energy, but 
high natural gas prices and the high cost of electricity for 
the 20 percent of their energy needs they buy on the open 
market crimp profits.  Sarkuysan VP Sevgur Arslanpay listed 
high energy prices as a major obstacle to his firm's 
international competitiveness and their single biggest 
complaint about the local business environment.  Gungor 
pointed to sector specific problems: the high cost of forest 
products, which he said were three times the level of 
neighboring countries, largely because of government control 
of forests.  While logistics and the weight of many of its 
products shield Yongapan from international competition, the 
difficulties have led the company to focus its expansion more 
on its foreign than its domestic operations. 
 
 
6. (SBU) Informal Economy: Among other complaints were high 
tax rates, including the lack of inflation accounting (which 
the government has promised to implement next year), which 
can lead to diminution of a company's capital, and the 
difficulty in raising financing (most of our Gebze 
interlocutors pointed to self-financing as the major source 
of their funds-- only Kale noted that it has historically 
been able to secure bank financing at very low rates, perhaps 
stemming from its market dominance in an export-oriented 
industry).  Lower tech companies also complained about unfair 
competition from companies that operate in the shadows, 
avoiding payment of labor and other taxes.  For companies 
like Sarkuysan, which require extensive investment and high 
tech processes, however, this is not an issue. 
 
 
7. (SBU) Plaudits: Gebze businessmen were largely 
complimentary about the new Turkish government, crediting it 
with a more business-friendly attitude than its predecessors, 
and arguing that the results of the past year show its 
competence in addressing economic issues.  As one would 
expect from members of an industrialists' organization close 
to Islamic spiritual leader Fethullah Gulen, the businessmen 
we spoke to appeared pious.  Likewise, as one would expect 
from businessmen representing not only Gulenist but, more 
broadly, Anatolian values, several criticized President 
Sezer's decision not to invite the head-scarved wives of AK 
parliamentarians to his independence day reception.  Kale 
President Celal Kaya even expressed support for the 
government's plans to dispatch Turkish soldiers to Iraq 
("necessary," he said, "to protect the Turkmen" and to 
dissuade the Kurds from forming their own state).  There was 
some concern that AK's handling of the imam-hatip (preacher) 
schools and higher education council reform was clumsy and 
untimely, but overall our interlocutors judged AK's moderate 
face to be sincere, and expressed hope that it would continue 
to focus on the economy rather than other issues. 
 
 
8. (SBU) Comment: If these companies are an indicative 
sample, exports may turn out to be the engine that pulls 
Turkey out of the lingering effects of the 2001 economic 
crisis.  Each of the companies we visited has been making 
serious investments in production capacity, often by 
purchasing foreign equipment, as well as by hiring more 
workers, holding out the prospect of a pick-up in local 
demand.  The view of politics from this industrial heartland 
is that this government has scored big points by taking steps 
to stabilize the economy and improve the business 
environment.  AK will continue to enjoy widespread support 
here as long as fixing the economy remains their top priority. 
 
 
9. (SBU) Behind the scenes wrangling that preceded the trip 
also set in bold relief the odd mixture of xenophobia and 
openness to world markets that can characterize Turkish 
business.  We learned from Mustafa Gunay, whose Business Life 
Association (ISHAD) worked with its affiliate GESIAD to 
organize the program, that one company was hostile to the 
planned visit, fearing that we represented American companies 
that wanted to either steal his "cutting-edge" technology or 
buy it out from under him cheaply.  Gunay responded by asking 
what century he was living in, and stressing the need for 
mid-sized Turkish companies to reach out to and cooperate 
with foreign partners.  The exchange highlights the public 
relations benefit of showing the flag in outlying industrial 
districts, and we plan to follow-up by organizing a "Doing 
Business with the U.S." program early next year in 
cooperation with GESIAD. 
ARNETT