US embassy cable - 04ADANA112

UNCLAS SECTION 01 OF 03 ADANA 000112 
 
SIPDIS 
 
SENSITIVE 
 
USDA FOR FAS/COTS AND G&F, STATE FOR EB 
 
E.O. 12958: N/A 
TAGS: ECON, ETRD, EIND, EAGR, TX, TU, ADANA 
SUBJECT: STRUGGLING SE TURKEY TEXTILE AND AGRICULTURAL SECTORS 
 
 
1.(SBU-BUS SENS)   Summary:  In meetings with PO in the last 
month, local businessman have been cautiously noting signs of a 
bottom in the regional economy and expressing guarded positive 
macro outlooks about a gradual return to growth in the region 
over the next 3-4 years.  They also spoke of the need for 
consolidation in the textile sector, but noted the weakness of 
such a tradition in Turkey's business culture.  Large food 
producers and commodities business people noted a "down year" in 
the making and commented on international contributors to their 
business models.  End Summary. 
 
Cotton brokers in Adana are "miserable" 
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2. (SBU BUS)  Recently a prominent Turkish cotton broker, 
headquartered in Adana, spoke to PO about the "woes" in the 
cotton brokering business this season.  "There are just a few of 
us in Turkey," he said," but we are miserable."  He attributed 
current challenges to a "slowdown in China in the last three 
months and a bumper crop in cotton coming in this year."  He 
said that the "Chinese demand (for imported cotton) has really 
dropped.  They obviously decided to cool things down and their 
demand for (imported) cotton this quarter is really low now 
compared to (this time) last year."  He said that Turkish cotton 
producers have expanded their cultivation areas this year and 
more farmers opted to expand their cotton planting after last 
year's elevated prices.  All told, he summarized that reduced 
Chinese demand for cotton and an increased anticipated worldwide 
cotton supply this year was squeezing cotton brokers' margins 
and knocking 20-30 percent off last year's gross revenues. 
 
3.(SBU)  The broker, who sells about 200,000 bales of U.S. 
(Texas, Carolinas and Memphis) cotton annually to open-ended 
spinning Turkish mill clients to account for almost half his 
annual sales, made an appeal for the U.S. to continue GSM 
financing.  He claimed that many of his larger deals are 
dependent on GSM financing and that it is not a "distorting 
effect on commodity trade, like quotas."  He said that, other 
than U.S. cotton for which he foresaw continued strong Turkish 
demand, his other cotton sources are Israel, Turkmenistan, 
Uzbekistan and west Africa. 
 
Consolidation, but survival in Turkish textiles predicted 
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4. (SBU SUS SENS) Several textile business people and observers 
asked about regional prospects with the multi-fiber agreement's 
(MFA) expiration approaching were not optimistic in the 
short-term, but offered guardedly positive long-term views. 
Most saw that the MFA's expiration would mean more competition 
than many older, traditional and poorly-managed mills could 
handle.  They were particularly worried about short-run effects 
in the Cukurova area, near Adana, where they predicted many 
failures and much unemployment on the horizon. While they noted 
some short-term respite from a recent drop in cotton prices, 
they observed that very strong Chinese competition had reduced 
margins tremendously and that their targeted foreign sales 
denominated in dollars had declining value.  They also pointed 
out slowly growing Turkish labor costs relative to South, 
Southeast and Central Asian textile producers as well as rising 
energy costs.  One contact, who manages and partly owns a 
synthetic fiber's textile plant in Tarsus, said that "a few of 
the healthier Cukurova companies want to compete fairly like the 
big players, but are being undercut by failing mills who are 
null-invoicing, paying only day rates for labor and otherwise 
dumping products on the market." They said that the financially 
strong textile industries in Gaziantep (SANKO) , Kahraman Maras 
(KIPAS) , Istanbul and Bursa, who have invested - or publicly 
committed to - almost 900 million dollars in new plant this 
year, would weather the new competitive trends, albeit with 
lesser margins and lower returns on equity.  Nevertheless, since 
most are almost entirely privately held, this factor would not 
be that significant.  "Textiles are a way of life for the big 
players," one observer noted. 
 
5. (SBU BUS SENS)  "Logically, there would be consolidation in 
textiles," one businessman said," but that is harder in this 
'patron' business culture, where companies are privately-held 
and your factory is the core of your social identity.  Our 
lawyers are also just getting to understand this business tool," 
one American-educated businessman said.  Still some small mills 
in Kahraman Maras and one or two near Adana have closed or been 
sold out, if they were new enough, by the big players in 
Kahraman Maras.  "Others will try to move offshore, such as a 
few have done in Turkmenistan and Bulgaria," another businessman 
added,  "Still this is risky since doing business in 
Turkmenistan is unpredictable and Bulgaria's low wage rates 
could rise with EU accession." 
 
6.(SBU BUS SENS)  Most experienced textile business people cited 
Turkish textile producers' domestic sources of cotton, proximity 
to EU and European markets, earlier entry into "branded 
products," gradually increasing targeting of higher value-added 
products, well-establish client ties, textile innovation and 
proven quality, and deeper sources of non-public financing as 
the keys to the industry's predicted survival in the next 3-5 
years.  "It does not mean that we  will avoid turmoil, just that 
we will survive," one cotton broker concluded. 
 
Which way will Sabanci Group textiles go? 
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7.(SBU BUS SENS)  In the Cukurova textile community, many eyes 
are on the Sabanci Group's  BOSSA mills, which local contacts 
say is really the only financially strong player left in and 
around Adana.  BOSSA representatives and other Sabanci Group 
representatives have said that the company is less and less 
enchanted with the low-margin textile industry from which the 
company first grew, but it is unclear whether the company is 
prepared to sever its ties to the industry altogether.  It has 
been consolidating its large BOSSA plant area into a condensed 
footprint, selling off excess real estate in the process, and 
retiring some older workers early, in both blue and white collar 
positions.  Some observers wonder whether the company, under new 
strategic leadership and seeing impending strong competition in 
the sector may be tempted to sell its holdings to a strong 
textile-focused group, such as SANKO or KIPAS. 
 
Regional businessman sees slow recovery nationwide, SE trailing 
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8.(SBU BUS SENS)  Polled about future economic prospects, area 
business people cautiously are noting signs of a bottom in the 
regional economy and expressing guarded optimism about a gradual 
return to growth over the next 3-4 years.  "Right now no one is 
building plant, except the few in the textile business building 
in Adiyaman (province) because of the new regional incentives. 
There is too much excess capacity already, but they are laying 
off fewer workers month-on-month," one business contact who 
travels nationwide regularly said.  "Southeast Turkey still has 
the furthest to go in the recovery, but area productivity is 
starting to rise in some sectors.  Without more worker skills 
entering the labor force, however, the area's low-skill 
industries are seeing less of this productivity gain just as 
they face rising competition," one contact said, pointing toward 
textile, forestry and furniture sectors, strong in southeast 
Turkey, as economic "soft spots." 
 
Farmers, Food producers see mixed results, want end to subsidies 
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9.(SBU SUS SENS)  Several Cukurova region big agricultural 
producers complained of "excess competition from foreign 
vegetables and wheat with which we cannot compete, especially 
with rising fuel prices."  They lamented the influx of 
"artificially cheap" southeast EU vegetables and some 
international grains and strongly criticized international food 
subsidy programs.  The EU and (the U.S.)  have to stop this. 
You are flooding the markets with subsidized food products and 
drowning us out in Turkey, Pakistan and Africa," one 
U.S.-educated Turkish farmer said. These contacts cited the 
biggest foreign competition in grains, especially corn and 
wheat; onions and potatoes; and some green vegetables, such as 
broccoli, singling out Greece, Italy and Spain as their market 
interlopers. (Note: Turkey places an 80 percent import duty on 
corn and does not meet its domestic demand for corn.  End Note.) 
 
10.(SBU BUS SENS)  Nevertheless, some niche food product players 
saw the market somewhat differently.  The representative of an 
Adana-based aquaculture farm selling assorted seafood into the 
EU markets was optimistic about future growth and noted 
expanding demand for her company's products, such as crayfish, 
frog legs, shrimp, crab and snails.  Another fruit producer said 
that his products, greenhouse grown from California strawberry 
stock imported annually, was doing well provided he could 
protect its brand name from "falsely advertising competitors in 
more profitable 'truck markets,' like Istanbul, Izmir and 
Ankara."  He also noted that, because he did not trust the GOT 
to enforce food patents and trademarks, he had hedged his 
business by investing in ice cream production as well, because 
with a growing population, a significant portion of which was 
young, there was always dependable growth in the sweets food 
sector. 
 
11.(SBU)  In yet another perspective on the food products market 
in southeast Turkey, Turkish truck drivers frequently delivering 
goods to/from Iraq freely talk of loading their truck cabs and 
luggage in Iraq with tea, coffee, sugar, cocoa, flour, rice and 
candy to re-sell in Turkey where it brings two to three times 
its Iraqi cost. 
 
 
 
REID