US embassy cable - 04ADANA56

UNCLAS SECTION 01 OF 02 ADANA 000056 
 
SIPDIS 
 
 
BUSINESS SENSITIVE 
 
 
E.O. 12958: N/A 
TAGS: ECON, EINV, EFIN, TU, ETRA, ADANA 
SUBJECT: SE TURKEY ECONOMY LINKED TO TEXTILE CHANGES, IRAQ 
 
1.(SBU-BUS SENS)   Summary:  Southeast Turkey's economy 
continues to be slow and characterized by underemployment.  A 
few stronger regional companies, such as SANKO GROUP and several 
Adana/Mersin construction companies, have repositioned 
themselves to do business in Iraq or make new investment to 
adapt to international competition. The container/bulk port in 
Mersin and fuels terminal in Iskenderun are healthy, in part 
because of Iraq-related business, as is the parastatal steel 
smelting plant, Is-Demir, in Iskendrun., which is processing 
large amounts of scrap steel from Iraq.  They are, however, 
exceptions to the rule in an economy still largely linked to 
textiles and agriculture. End Summary. 
 
 
Where SANKO GROUP is headed on Textiles 
 
 
2. (SBU BUS) The SANKO GROUP announced on March 20 that it will 
invest USD 75 million in Adiyaman province under the new 
incentive law to build three new factories to expand its yarn 
and ready-wear capacity in textiles.  According to Abdulkadir 
Konukoglu, the first factory will be ready next year and will 
employ 1,500 people, with two more factories coming by 2007. 
The last two factories' employment potential is unknown. 
 
 
SANKO Getting Leaner in Process 
 
 
3. (SBU SUS SENS)  Konukoglu in another discussion told PO that 
Sanko had reached full capacity at its existing Gaziantep site 
and needed to expand elsewhere to maintain its competitive 
position.  He saw the Adiyaman investment as important to 
raising SANKO's manufacturig productivity as the expiration of 
the Multi-Fiber Agreement approaches in 2005.  While the 
Adiyaman investment will introduce 150,000 yarn spindles to 
SANKO's industrial base, SANKO will gradually retire a similar 
number of older spindles from its older plant in Gaziantep, 
shedding approximately 800 jobs by 2007 in the process.  By 
2007, SANKO will therefore have retained its existing 500,000 
spindle manufacturing base, but created growth room (in 
Adiyaman) and increased labor productivity. 
 
 
SANKO Sees Textile Future For Itself 
 
 
4.(SBU BUS SENS)  Konukoglu said competition with Chinese 
textiles after 2005 will be challenging, but he thought that 
SANKO still had lower shipping cost, indigenous cotton supply 
and superior European client relationship advantages to balance 
out lower Chinese cost bases.  He said that SANKO also has 
agents in China looking for clients and joint venture 
opportunities there.  SANKO intended to keep moving up the 
product value chain to retain its competitiveness, he said, 
mentioning how Chinese products would not be in direct 
competition with SANKO products for at least several years. By 
then, he anticipated that Chinese WTO compliance especially 
unfair labor practices; economic shocks; textile market shifts; 
and greater Chinese financing costs once state banks became 
insolvent would create a more transparent and more level playing 
field for Turkish-Chinese textile competition, especially in 
Europe, but even so for some North American markets.  He 
anticipated that SANKO, with its large established European and 
North American customer base (LEVI's, e.g.), flexible product 
lines attuned to client needs and deep pockets could make it 
through the difficult transition years of 2005-2008, but he 
doubted many other Turkish companies would be able to do 
likewise. 
 
 
Meanwhile SANKO joining up with China on other businesses 
 
 
5.(SBU SUS SENS)  He added that SANKO, already a distributor of 
Chinese brand HAIER appliances and electronics, was expanding 
its distribution channels for the brand.  He said that he had 
been impressed with the brand's product quality for several 
years, but now saw that they were bringing "new technology, 
really good stuff" to the market that would challenge Turkish 
local appliance producers, Japanese brand license products and 
European perennials.  "They have turned a corner at HAIER and we 
want to expand our business with them," Konukoglu said. 
 
 
Turkish Construction doing business in Iraq~ 
 
 
6.(SBU BUS SENS) On the margins of a recent Iraq reconstruction 
conference, we discussed ongoing business with several 
Adana-based construction firms.  They noted that the 
construction business was still in a downturn in southeast 
Turkey, but that they had tried to make up for te slow economy 
here with construction jobs for the U.S. in Iraq.  One 
construction company, Kulak construction, has completed about 
USD 15 million in projects in Iraq and projects that it could 
deliver almost USD 40 million in construction contracts by the 
end of 2004.  Its work is primarily centered at the Balad CAMP 
ANACONDA area near Baghdad.  Another company, ER-KA Limited, 
said that it had done several million dollars of construction 
for the U.S. in Kirkuk and now was regularly supplying several 
hundred thousand dollar apiece supply contracts to U.S. military 
consumers in Iraq for telecommunications, vehicle fleet 
maintenance and logistics. 
 
 
But still wary about diving in with two feet 
 
 
7.(SBU BUS SENS)  Most southeast Turkish business contacts said 
that they were interested in pursuing further subcontract work 
in Iraq, but were still very concerned about security and asset 
protection. They said that the security instability made 
projects risky for their employees, hard to deliver according to 
contract timelines and quality levels and posed sometimes 
unacceptable risks to their assets, for which insurance was 
largely unavailable.  They also said that the widespread 
requirements for bid bonds at project levels of USD 5 million 
and above was discouraging, since Turkish banks were hesitant to 
participate in that market and they rarely held sufficient 
capital to finance such requirements internally. 
 
 
Iskenderun Busy with Fuel and Steel 
 
 
8.(SBU BUS SENS) The Iskenderun area in Hatay province is also 
faring well because of investment by Tosyal steel to expand its 
roll steel capacity and the increase in scrap steel processing 
largely from Iraq at nearby parastatal steel smelting plant, 
Is-Demir.  The fuels terminal in Iskenderun is also handling 
much of the transloading for humanitarian and increasingly some 
key U.S. force operational fuels bound for Iraq.  Some local 
contacts note that employment is increasing by at least several 
hundred jobs in Iskenderun because of the steel sector 
expansion, but note that most money from fuel purchases "only 
goes to Istanbul where the companies operating the Iskenderun 
terminals have their headquarters." The fuel terminal operation 
at Iskenderun does seem to be enjoying higher productivity 
because of Iraq-related business. 
 
 
 
 
 
 
 
 
 
 
REID