VZCZCXRO2296
PP RUEHDA
DE RUEHAK #0297/01 0561535
ZNR UUUUU ZZH
P 251535Z FEB 09
FM AMEMBASSY ANKARA
TO RUEHC/SECSTATE WASHDC PRIORITY 8896
INFO RUCPDOC/DEPT OF COMMERCE WASHDC PRIORITY
RUEATRS/TREASURY DEPT WASHDC PRIORITY
RUEHIT/AMCONSUL ISTANBUL 5427
RUEHDA/AMCONSUL ADANA 3633

UNCLAS SECTION 01 OF 04 ANKARA 000297 
 
SIPDIS 
SENSITIVE 
 
DEPT FOR EUR/SE, EEB/BTA/TPP 
DEPT PLEASE PASS USTR MMOWREY 
COMMERCE FOR CRUSNAK AND KNAJDI 
TREASURY FOR FPARODI 
 
E.O. 12958:N/A 
TAGS: ECON ETRD EFIN TU
SUBJ: TURKEY'S AUTOMOTIVE SECTOR RUNNING ON EMPTY 
 
Ref: ANKARA 118 
 
¶1. (U) This is a joint Embassy Ankara/Consulate 
General Istanbul cable.  This cable is sensitive but 
unclassified. 
 
¶2.  (SBU) Summary.  Turkey's automotive sector is in 
desperate straits due to the collapse in European 
demand for automotive goods.   For years, the sector 
has been a model of Turkey's export-oriented growth 
philosophy and, in 2008, it became Turkey's largest 
export sector (surpassing steel and textiles), with 
total exports of USD 18.3 billion (80% of Turkish 
automotive production).  However, auto exports fell 
dramatically in late 2008, dropping -35.4% in the 
fourth quarter.  This has continued into 2009, with 
January numbers showing a 64% YOY decrease.  The 
sector's problems are having (and will continue to 
have) serious effects on the wider economy.  Some 
1.3 million people depend directly or indirectly on 
the sector for employment, and the GOT is 
understandably eager to avoid factory closures and 
layoffs (although these have already started, with 
over a thousand announced layoffs and more to come). 
Despite this desire, the GOT's policy response has 
so far been rather tepid, with a great deal of talk 
but little in the way of concrete assistance for the 
sector.  The stimulus package passed on February 18 
contains some limited measures to help the sector, 
and a new package focused on the automotive industry 
is expected "soon," but industry has been 
disappointed in the GOT response to date. 
Regardless of what the GOT does or fails to do, 
however, the sector will face troubled times until 
demand picks up again.  End summary. 
 
Turkey's Automotive Sector 
-------------------------- 
 
¶3. (U) The automotive industry in Turkey began its 
rise immediately after the economic crisis in 2001, 
benefiting from Turkey's increased emphasis on 
export-oriented production.  The industry saw rapid 
growth, jumping from 346,000 automobiles in 2002 to 
1.1 million in 2007.  Exports also grew rapidly, 
from 258,000 automobiles in 2002 to 820,000 in 2007, 
with a value of USD 12.2 billion.  The sector's 
direct employment rose from 26,000 in 2002 to 47,500 
in 2007.  Support industries also grew rapidly, with 
the auto parts industry providing 200,000 jobs as of 
2007, generating USD 30 billion in revenue, and 
exporting USD 2.8 billion worth of goods (again, 
with 65% destined for European markets).  In all, 
the Foreign Trade Undersecretariat estimates that 
the employment of 1.3 million people depends upon 
automotive production or related service industries. 
There are currently 15 manufacturing companies in 
the automotive sector, most with foreign capital. 
There are 4,000 auto parts producers, 185 of them 
with foreign capital.  Turkey is the largest 
producer of buses in Europe, and the third largest 
producer of light commercial vehicles. 
2008: A Bright Beginning Foiled by the Crisis 
--------------------------------------------- 
 
¶4. (SBU) During the first half of 2008, the 
automotive sector was on track for a record year. 
Both domestic and foreign sales were up 25-30% on 
the year and production was going to come in well 
above the targeted 1.3 million units.  According to 
Dr. Ercan Tezer, Secretary General of the Automotive 
Industry Association (OSD), this began to change 
toward the end of the second quarter.  At that time, 
the number of new vehicle orders began falling fast, 
led by falling demand in Europe (Note: Approximately 
80% of Turkey's automotive production is exported, 
of which 70% is destined for Europe.  As a result, 
Turkey's auto sector is extremely sensitive to 
demand trends in Europe.  End note.)  The OSD began 
advising its members to consider cutting back on 
production to avoid an inventory overhang, but their 
warning was largely ignored both by industry and the 
GOT, which was eager to see continued growth (and 
increasing tax revenues) in this profitable sector. 
 
ANKARA 00000297  002 OF 004 
 
 
Industry's reluctance to cut back meant that 
production soon began to outpace demand, and 
industry is now sitting on 150-160,000 unsold 
vehicles (12% of annual production). 
 
¶5. (SBU) Vural Kural, Head of the Turkish Sector 
Assemblies and Economic Research Department at the 
Union of Chambers and Commodities Exchanges of 
Turkey (TOBB), painted a similar gloomy picture.  Up 
until April 2008, the automotive sector was 
operating at full capacity, but it began to slow in 
May and June before plummeting 14.3% YOY and 32.1% 
YOY in July and August, respectively.  By January 
2009, automotive capacity utilization was 53.2% 
lower than the previous January.  The falloff in 
units produced was even more dramatic, with a 63.4% 
YOY decline in December 2008, bringing the sector 
back to its 2004 level (Note: The discrepancy 
between production and capacity utilization is due 
to a decrease in overall capacity as factories began 
to shutter in late 2008. End note.)  Exports also 
fell sharply, ending December down 49.4% from the 
previous year (although overall value increased for 
the year, due to the strong first quarter). 
 
¶6. (U) Faced with low demand and overproduction, the 
industry has reacted by temporarily shutting down 
production lines.  Ford Otosan, one of Turkey's 
largest producers, announced in November that it 
would be shutting down production at two factories 
on five separate dates spread out over the following 
four months.  Other producers immediately followed 
suit.  On February 16, Ford announced that it would 
be stopping production entirely February 26-March 15 
and again March 27-31, citing deteriorating market 
conditions.  Following layoffs of 300 people in 
December, Ford now employs 6200 people but noted 
that it will have to reexamine its employment plan 
in light of expected reductions in production.  In 
January, Turkey's largest automobile producer Tofas 
(a partner of Italian Fiat) laid off 800 workers and 
Componenta, a Finnish automotive casting firm, let 
425 workers go.  Kural stated that until the pending 
inventory of 160,000 vehicles is sold off, 
production will be more or less halted indefinitely. 
 
The GOT Response (Or Lack Thereof) 
--------------------------------- 
 
¶7. (SBU) Tezer noted that by late September 2008, it 
had become obvious that the crisis, now in full 
swing, was having a deeply negative effect and the 
industry asked the GOT to implement a set of 
measures to help the sector.  Industry 
representatives met with Deputy PM Nazim Ekren, 
Finance Minister Kemal Unakitan, Trasury Minister 
Mehmet Simsek, Foreign Trade Minister Kursad Tuzmen, 
and one other minister that Tezer declined to name 
(later confirmed to be Industry Minister Zafer 
Caglayan).  For two months, Tezer said, these 
negotiations went nowhere.  Then the GOT regained 
interest, and a series of proposals were considered, 
including: 
 
-- Credit incentives for domestic consumers, 
including a reduction in the 15% tax on automotive 
loans (60% of domestic auto purchases are financed 
through credit); 
 
-- Incentives for continued R&D investment; 
 
-- Funds and/or tax incentives to keep the workforce 
in place and prevent layoffs; and 
 
-- An incentive plan for investment, with the 
possibility of substantial corporate tax reductions 
depending on the size and location of the 
investment. 
 
In addition to the above proposals, ideas began to 
circulate in the press for other incentives, such 
as: reduced electricity costs, tax breaks for 
purchasing environmentally-friendly vehicles, and 
the reinstitution of a tax break for new car 
 
ANKARA 00000297  003 OF 004 
 
 
purchasers who trade in older vehicles (see reftel). 
 
¶8. (SBU) On February 18, Parliament approved a broad 
package of measures to stimulate the economy, some 
of which will benefit the automotive sector. 
Specifically for the auto sector, the GOT announced 
an amnesty for fines and unpaid taxes on vehicles 
older than 30 years.  This is intended to encourage 
the owners of old vehicles to sell their cars and 
buy new ones.  The anticipated tax discount on new 
cars was not a part of the package, however. 
(Comment: It seems unlikely someone so poor that 
they are driving a 30-year-old car is going to be 
enticed into buying a new vehicle simply because 
they receive an amnesty from taxes and fines they 
probably had no intention of paying anyway.  End 
comment.)  The package also contained broader 
measures not limited to the automotive sector - 
these will be reported on septel. 
 
¶9. (SBU) While Tezer welcomed the limited measures 
in the new package, he was disappointed that it 
included neither retail credit incentives nor large- 
scale corporate tax incentives sought by industry. 
Industry Minister Zafer Caglayan, in what has become 
a weekly ritual, has repeatedly told the press that 
targeted sectoral relief packages will be coming 
"soon," and Tezer expressed his hope that later GOT 
efforts will incorporate more of the industry's 
ideas in this sectoral package.  Deputy PM Ekren 
announced on February 20 that the sectoral packages 
will cover the textile, iron and steel, contracting, 
automotive, tourism and maritime sectors, including 
financing assistance and tax remedies.  He also 
added that Turkey's Eximbank would increase its loan 
capabilities from USD 500 million to USD 1 billion 
as part of the same package. 
 
¶10. (SBU) Kural observed that the GOT is "showing 
different faces to different people" in an attempt 
to assure the G20, IMF, and local actors that their 
sometimes conflicting concerns will all be 
addressed.  As a result, its policy response has 
been chaotic.  He also noted that he would like to 
see more in the way of broad tax relief as a way to 
immediately address the pressures on corporations 
and to prevent further layoffs within the automotive 
sector, but lamented that most of what he had seen 
in the rumored sectoral packages involved 
encouraging new investment spending.  He criticized 
the GOT for failing to assess the problem correctly, 
saying that their policies rest on the assumption 
that demand will return to "normal" (i.e. pre-crisis 
levels) in the relatively short term and that 
investment spending will therefore pay immediate 
dividends.  The idea that the crisis has introduced 
a fundamental shift in the world economy - with an 
end to soaring demand fueled by easy credit and a 
shift to higher savings rates - is not one that 
appeals to the GOT, Kural contended, because it 
would require accepting that they need to adjust 
policies for a longer-term approach. 
 
Protectionism Redux 
------------------- 
 
¶11. (SBU) Trade protectionism has a long history in 
Turkey, but it has been held in abeyance since 2001 
as exports led the economy's impressive growth.  Now 
that growth has slowed, however, protectionist 
tendencies are again beginning to surface.  Tezer 
complained that 70% of domestic auto purchases are 
imported, and bemoaned the lack of import 
protections to help local producers, as he alleged 
exist in South Korea and Japan.  He also observed 
that the 80% of production that is exported is "too 
high" and expressed hope for a 60/40 export/local 
consumption mix in the future, observing that local 
profit margins are higher and that stronger domestic 
demand for domestically-produced autos would help 
cushion the sector against future shocks.  He 
expressed his hope that Ankara would use policy 
measures to encourage local sales of domestically- 
produced vehicles, such as through the retail credit 
 
ANKARA 00000297  004 OF 004 
 
 
incentives. 
 
Comment 
------- 
 
¶12. (SBU) Given the importance of the automotive and 
automotive parts industries to Turkey's economy and 
the relatively high wages in the sector, any 
slowdown will have serious knock-on effects in the 
larger economy as well as on government finances. 
The GOT likely will pass a sectoral package to help 
the sector, but the breadth of tax cuts that the 
industry seems to expect will be difficult for a 
government that is already struggling to match 
declining tax revenues with its spending plans.  The 
automotive sector stimulus plan may help marginally 
to ease the pain but, until demand recovers, more 
production halts and layoffs are likely to come. 
End comment.