The Chairman's Speech at the Assembly / 22 August 2007

Mr Chairman,
Esteemed members of the Assembly,
Members of the Press:

On behalf of the Board of Directors I would like to welcome all of you to our August assembly meeting.

With us today is Mr Cevdet Akçay, Ph.D. and Dozent. We would like to thank him for so graciously accepting our invitation to join us. We are going to listen very attentively to what Mr. Akçay has to say. Welcome, Sir!

As our distinguished chairman has pointed out, our honorary assembly member and esteemed elder, Mr Jak Kamhi has been awarded athe medal for highest service to the state by the Office of the President. I would like to extend to him my heartfelt congratulations and to say especially that we regard it as a great honor that one of our members has been singled out in this way.

Esteemed members of the assembly:

Following the survey of Turkey?s top 500 industrial enterprises which we published in July, we have made public today the results of our survey of the ?second 500 industrial enterprises? at a press conference held prior to this meeting. The results of both surveys have revealed important data concerning the performance of our industry in 2006.

In my talk I would like to present for your information the results, in their main lines, of our survey of Turkey?s second 500 industrial enterprises which we announced this morning.

In the context of our presentation, I am going to remind you frequently of the results of the top 500 together with those of the second. Before proceeding to our presentation however I would like to point out that there are 216 members of the Istanbul Chamber of Industry (ICI) among the top 500 and 213 among the second 500.

Meanwhile, among these 1000 industrial enterprises, 426 are private firms and 3 state-run firms, and a total of 429 of them are ICI members.

Table - Shares of top and second 500 firms in value added

The GNP share of the second 500 firms, which was 1% in 2005, rose to 1.1% in 2006 while that of the top 500 rose from 13% to 13.1%.

In gross value added in the Turkish industrial sector, the share of the second 500, which was 4.1% in 2005, rose to 4.2% in 2006. That of the top 500 was up from 51.1% in 2005 to 51.2% in 2006.

The share of these top 1000 firms in the total value added in the Turkish industrial sector increased from 55.2% to 55.4%.

Table - Real changes in the economic indicators (private firms)

Production-based sales rose by 11.6% and total sales by 12% in fixed prices in the second 500 industrial enterprises in 2006.

Total pre-tax profit and loss in the second 500 was up by 30.4% in fixed prices for the year. Among the top 500 the increase was 37.5%.

Net value added created in the private firms among the second 500 grew by 12.1% in fixed prices in 2006, while gross value added grew by 6.2%.

Meanwhile among the top 500, net value added was up by 17.1% and gross value added up by 6.4% in 2006.

Table - Total sales turnover in the private firms among the top and second 500 in 2006 prices

In this table we examine change in the sales turnover of the private firms among the top and second 500 from 2001 to 2006. In the second 500, total sales turnover, which was YTL 24 billion in the crisis year 2001, rose to YTL 31 billion in 2006.

Among the top 500 it climbed from YTL 131 billion in 2001 to YTL 217 billion in 2006.

While the sales turnover of the top 500 was five and a half times that of the second 500 in 2001, in 2006 it was 6.9 times greater.

Table - Distribution of exports by sector

While Turkey?s exports overall were up by 16.4% in 2006, export growth in the second 500 remained at 6.5%. Turning to the distribution of exports by sector, the textiles, wearing apparel, leather and shoe sector captured first place in 2006 among the second 500 with 41.9% of total exports.

While foodstuffs, beverages and tobacco, which came in third in 2005, rose to second place in 2006, 2005?s second place metallic goods, machinery and equipment sector slipped to third place with a 12.1% share.

Firms in the textile, wearing apparel, leather and footwear sector accounted for 30% of the second 500 in 2006.

Besides their importance in exports, this sector was also responsible for 27% of total sales and 41% of jobs in the second 500 in 2006.

While there has been much criticism of the textile and wearing apparel sector, its role in exports and jobs has to be taken into account when making projections for the future.

Table - Distribution of second 500 firms by groups of fifty

When we examined firms in the first 500 in groups of fifty, we found significant differences between the first group of fifty and the following groups. In the second 500 we find a more balanced structure among the groups. The first group of fifty among the second 500 accounted for 14.7% of production-based sales, 20.5% of gross value added, 18.8% of period profit, 16.1% of exports and 15% of jobs. In the top 500 these shares were around 50% each.

Table - Distribution by groups of fifty of foreign-invested firms among the second 500

There were 17 foreign-invested firms among the second 500 in 2006. Last year there were 70. In other words, only one foreign-invested firm was added to the second 500 in a year. And among the top 500, the number of foreign-invested firms, which was 136 in 2005, rose by four to 140 in 2006. Such a picture is disturbing in a year of record-breaking inflows of direct foreign investment.

We have said frequently that the manufacturing sector is failing to garner its share of foreign direct investment inflows. The figures clearly bear this out.

The 71 foreign-invested firms in the second 500 accounted for 14.5% of production-based sales, 20.1% of gross value added, 17.2% of pre-tax period profit, 13% of exports and 13.2% of jobs in this group.

Table - Average number of wage workers

The total number of wage workers in the second 500 industrial firms rose by 1.3% in 2006. The increase in the top 500 for the same year was 3.6%.

Table - Job density in the private firms among the first and second 500

Job density refers to the number of persons employed for every YTL 1 million?s worth of sales. Viewed from this angle the second 500 appears to be ahead of the first.

Job density in the 2001-2006 period was two or three times higher among the private firms in the second 500 than among the private firms in the top 500.

Job density in 2006 was 5.5 in private firms of the second 500, and 2.1 in the private firms of the top 500.

When we look at the graph, we see that in both the top and the second 500 job density peaked in 2003 only to fall steadily in subsequent years. Indeed, the fall in the first 500 was somewhat more conspicuous than that in the second.

This drop in job density is significant and has to be looked into. For if job density could have been preserved, more people could have had jobs. One reason for a decline in job density could be an increase in worker productivity. The fact, however, that this decline began in 2004 when the low exchange rate became a virtually permanent raises the possibility that an increase in the use of imported inputs also played a role.

Table - Payments to workers as a percentage of sales revenues in the private firms among the top and second 500

The second 500 is once again ahead of the top 500 when it comes to payments to workers as a ratio to sales revenues in the private firms.

While 8.8% of total sales revenues were paid to workers in the private firms among the second 500 in 2006, in the top 500 this ratio was 6%. Taking this in conjunction with job density, one might say that the private firms among the second 500 offer a higher potential for employment. This potential should be taken into account when developing policies for solving the unemployment problem.

Table - Asset financing in the private firms

Now we shall look at financial structure. The favorable development that began in the economy in 2002 was reflected in the financial structure of the firms, and the ratio of total debt to equity capital began to fall. This improvement continued up to 2004 when a glitch, albeit small, occurred. This backsliding continued, even worsened, in the top 500 in 2006. A similar trend is observed in the second 500. The share of total borrrowing in asset financing in the private firms among the second 500 was 50.2% in 2005, rising to 53.9% in 2006.

Looking at other aspects of asset financing, we see that the share of equity capital declined from 44.9% to 40.3%, and that of pre-tax period profit from 4.9% to 5.8%. In the second 500 as in the first, the share of equity capital has contracted due to an increase in borrowing despite growth in period profit.

Table - Return on sales in the private firms

While 491 of the private firms among the second 500 posted profits in 2006, 80 posted losses. Return on sales, which was 2.9% in the second 500 firms in 2005, rose to 3.4% in 2006.

Return on sales in the private firms among the top 500 was 4.7% in 2005, rising to 5.9% in 2006. Return on sales in the top 500 in 2006 was 75% higher than that in the second 500. The situation was the same in previous years.

Table - Return on sales by sector in the private manufacturing firms

Just as we calculated return on sales in the top 500 based on crisis year 1994 = 100, we made a similar calculation for the second 500 based on starting year 1997 = 100.

We found that return on sales in all sub-sectors with the exception of the electrical appliances and electronics and the pharmaceuticals and dye sectors declined by very serious proportions.

The sharpest declines were in the forest products and furniture industry and in the automotive industry. Return on sales, which we based on 1997 = 100, fell in 2006 to 2.1 in forest products and furniture and to 9.5 in automotive. A sizeable portion of the other sectors also showed profitability ratios significantly lower than in 1997.

Table - Asset turnover rates (sales turnover / total assets) in the private firms

The asset turnover rate shows how many times the money invested in a firm?s assets turns over during the year, and return on sales how much profit is gained at every turnover. The rate of asset turnover in the second 500, which was 1.22 in 1997, fell to 1.11 in 2006.

Increasingly difficult terms of global competition are forcing firms to lower their profit margins.

In order to preserve competitiveness when profit margins are being lowered, it is essential that the asset turnover rate rise. Unfortunately in Turkey not only have profitability ratios contracted, asset turnover rates have also gone down.

Table - Distribution of net value added as factor incomes in the private firms

In this table we see the distribution of net value added in terms of factor incomes. We are making use here of the method used in figuring GNP by the revenues method.

In this method, net value added consists of wages and salaries, interest paid, rent paid, and profit as national income, in other words, the profit derived from a firm?s primary production activity. Profit as national income in the private firms among the second 500 slipped into negative territory from 1997 onwards, falling to its lowest in 2001 at minus 67.7. The share of interest paid in the same year was 78.2%.

In the post-2001 period, the share of profit as national income returned to positive territory for the first time in 2004, rising to 9.3%. Falling slightly to 8.1% in 2005, it bounced back in 2006 to 16%. The share of wages and salaries, which was 78.4% in 2005, declined in 2006 to 67.5%. As the figures show, growth in profit as national income in 2006 was the result of a decline in the share of wages and salaries. The same is true of the top 500.

Table - Distribution of gross value added on a factor income basis in the private firms

Gross value added consists of the sum of net value added, appreciation and net indirect taxes. While the share of net indirect tax in gross value added in the private firms among the second 500 was 6.8% in 1997, in 2006 it rose to 10.5%. As you will remember, the rise was even more conspicuous in the top 500.

While not of the dimensions in the top 500, the share of net indirect taxes in gross value added in the second 500 as well nearly doubled within ten years.

Table - Ratio of selected indicators to total sales in the private firms

Turning now to non-operating revenues, these continued their decline as a ratio to sales in the second 500 as in the first in 2006, falling from 2.2% in 2005 to 1.3%.

Table - Share of non-operating revenues in total period profit and loss in the private firms

In the private firms among the second 500, the share of non-operating revenues in total period profit and loss fell to its lowest level in the last 10 years in 2006 at 46.8%.

Mr. Chairman,

If we wanted to summarize the results of our surveys of the top and second 500 industrial enterprises in Turkey, we might say that 2006 was a more favorable year for both groups. We should nevertheless remember that the results for 2006 were obtained by comparison with 2005, and 2005, with the exception of the crisis years 1999 and 2001, was the worst year for the 500 surveys.

Therefore, the improvement that is apparent in 2006 in comparison with 2005 should not deceive us.

As in the top 500, when we assess the results of the second 500 from a broader time perspective, for example, from the starting year 1997, it emerges that the indicators for financial efficiency and profitability are lower now than they were in that year. This should be carefully noted.

At the same time, despite what could be regarded as a significant improvement in the basic indicators, in the second 500 as in the first, the deterioration in financial structure that began in 2005 is observed to have worsened further in 2006.

What this tells us is that in the second 500 as well, firms achieved a relative success in 2006 by incurring serious risks, mainly exchange rate risk.

The recent fluctuations in the global markets have reminded us once again of how careful we need to be when it comes to such risks.

We often hear it said nowadays that difficult times lie ahead and that the period of abundant international liquidity could soon be over.

And if it were, then our economy and our firms could be in trouble.

We cannot however regard such developments with surprise. Views have been advanced for a long time that the flow of international liquidity will dry up at some point, that the chain of happiness could be broken.

We, too, when things appeared to be going well, have been at pains to draw attention to the need to take timely measures so as to soften the blow if the global winds happen to shift.

We stressed the same point during fluctuation back in May of 2006. We said then that we could put our economy on a more sound footing by turning the fluctuation into an opportunity to ?quickly complete what hadn?t been done yet?. Instead short-term measures at that time. No distance was covered in the direction of medium and long-term structural reforms. We could say that despite everything the Turkish economy made a relatively good showing in the face of the most recent fluctuation.

We don?t know however what developments are going to be like in the days ahead. As I see it, all attention should be focused on the economy without delay in order to minimize possible costs.

Turkey has unfortunately not yet reached the point at which it can finance its own growth. Our growth exhibits a structure that is dependent on foreign funds.

To grow our own economy we are of course going to take advantage of global funds and the opportunities offered by the global economy. But we cannot, we must not, neglect to create for ourselves havens of refuge in global storms. The profitability of our firms, and their value added and capacity for generating funds need to be improved so as to increase the share of our own funds in financing our growth.

We take every opportunity to point out that important obligations fall upon the private sector in this regard. We underscore our own responsibility for developing our productivity, R and D and capacity for innovation, and for making the transition to economies of scale.

However, we also point out at every opportunity that important obligations fall upon our government and the managers of our economy as well, and that we are going to continue to demand from our government everything that is incumbent on it to do. Structural reforms should finally be completed so as to be able to strengthen the resistance of our economy and of our firms to global fluctuations. And micro reforms that will boost their competitiveness should be implemented without delay.

As Turkey?s industrial sector, this is our most fundamental expectation for the future. As our esteemed chairman pointed out a little earlier, coordination among the ministries is of the utmost importance for identifying the problems of our industry and solving them. In the context of our attempts in the past, we have the impression that there is some disorganization in our government and in the structure of our bureaucracy regarding our industry. We cannot see any office or address that is responsive to our problems.

The problems of our industry, which affect several different sectors, are multi-dimensional in nature and concern many different units of the government. For solving those problems, it is extremely important that coordination be established among all those units.

Another of our expectations is that our ministry of industry, as the name implies, be given a structure that will enable it to be more active and effective in solving the problems of our industry.

I believe, I want to believe, that our government is going to place more importance on industry, production and competitiveness and that the new term will be a period in which the micro economic change we desire will take place in the economy. In closing I salute all of you once again on behalf of the Board of Directors.

C. TANIL KüÇüK, CHAIRMAN
BOARD OF DIRECTORS
THE ISTANBUL CHAMBER OF INDUSTRY (ISO)