The Chairman's Speech at the Assembly / 23 July 2008

Mr. Chairman,Distinguished members of the Assembly, and of the Press:

On behalf of the board of directors I would like to welcome you to our July assembly meeting. We have with us today Prof. Dr. Erol Katyrcyo?lu. We would like to thank him for so graciously accepting our invitation to join us. Welcome, Sir!

Esteemed members of the Assembly: This morning in a press conference we announced the results of our Survey of Turkey's Top 500 Industrial Firms, the most important and comprehensive study of Turkish industry, which we have been compiling now without interruption for exactly forty years. Not breaking with our tradition, we are this year, as we do every year, also taking up the results of that survey separately at our assembly meeting. As you know, our Chamber's survey of Turkey's top 500 industrial firms covers only the country's industrial enterprises and is based on the criterion of production-based sales. Following that brief reminder I now present for your information the tables showing the results of our top 500 survey for 2007.

This year as in past years, Tüpraş is Turkey's largest industrial firm by production-based sales. A private sector firm, Tüpraş has once again in 2007 preserved its leadership in the country's industry. The only public sector firm among the top 500 in 2007 is the electricity producer TEK.

This table shows the top ten private firms in the Top 50. Tüpraş and Ford, the top two in 2006, preserved their places in 2007 as well. In third place is the previous year's fourth, Oyak-Renault.

This table shows the top ten firms by profit in 2007. Tüpraş once again is the top profit-maker in 2007. Ereğli Demir Çelik, in second place in 2006, preserved its place in 2007 while Ford Otomotiv moved up from fourth to third. As in 2006, Türkiye Petrolleri Anonim Ortakly?y was again the only public sector firm among the top ten by profit in 2007.

We are looking now at the top ten private firms by profit. As usual, leadership in profit in the private sector lies again with Tüpraş. Second place Ereğli Demir Çelik and third place Ford Otomotiv preserved their places from the previous year. There is however a conspicuous jockeying for position among the top ten by profit. Shell and Turcas, for example, which was 17th in 2006, jumped to sixth place in 2007, while Aygaz rose from 18th to tenth.

The top ten firms by exports in 2007 are again private sector firms as they were in 2006. First place in 2007 goes to 2006's third place Ford Otomotiv while the previous year's first, Tüpraş, falls to second. In third place is the previous year's second place, Toyota.

The exports of Turkey's top 500 industrial firms increased by 24% in 2007. The country's total exports rose by 25.3% in the same year. As the figures indicate, export growth among the top 500 industrial enterprises was slightly below that for the country as a whole. A look at the distribution and rate of change by sub-sector in the exports of the top 500 reveals motor vehicles to be in first place with a 31% share and a growth rate of 36.9% for the year. In second place are primary metals with a 20.6% share and a 30.8% growth rate for the year, while in third, with a share of 16% and a growth rate of 13.3%, is the metal goods, machinery and equipment, and professional instruments industry. These are followed by chemicals, oil products, rubber and plastics in fourth place, and textiles, wearing apparel, leather and footwear in fifth.

Table 7: Share of top 500 in Gross Domestic Product

The top 500 industrial firms in 2007 contributed 9.3% of Turkey GDP. As you will remember, the Turkish Bureau of Statistics has updated its national income tables. The share of the top 500 in Turkey's GDP, which was around 13% in the old series, fell to 9.3% following the update.

Total sales in the top 500 in 2007 rose by 9.8% in current prices and 3.6% in fixed prices. In the private firms the increase was 10% in current prices and 3.7% in fixed prices.

Turning now to production-based sales, these rose by 10.6% in current prices and 4.4% in fixed prices in the top 500 in 2007. In the private firms, production-based sales were up by 10.8% in current prices and 4.5% in fixed prices for the year. As you will remember, the Turkish Bureau of Statistics announced an annual increase of 5.4% in industrial production in 2007 based on its monthly indexes. Therefore the results of the top 500 and those of the Bureau more or less corroborate each other.

Continuing now with the same table, total period profit and loss (pre-tax) in the top 500 rose by 35.1% in current prices and 27.5% in fixed prices in 2007. In the private firms, the increase was 34% in current prices and 26.4% in fixed prices. Net value added in the top 500 was up by 14.4% in current prices and 7.9% in fixed prices for the year.

Turning now to gross value added, I would first like to make a brief explanation before looking at this parameter. In earlier years, gross value added was calculated in our survey only in producer prices, which include VAT and Special Consumption Tax (SCT). However, since the Bureau of Statistics began leaving VAT and SCT out of its gross value added figures and announcing them in basic prices, we have followed suit and now give figures for value added created in the top 500 in basic prices as well. By this method, in basic prices the increase in gross value added in the top 500 in 2007 is 14.6% in current prices and 8.1% in fixed prices. In producer prices, which include VAT and SCT, the rise was 9.8% in current prices and 3.6% in fixed prices.

Let us look now at the development in jobs. But before turning to our survey's findings regarding employment, I would like to share with you a few observations about employment in general. Although the economy has grown on average by 6.8% annually since 2001, growth in jobs has been only about 1% a year. Looking at developments in jobs by primary sector in the last six years, we see that job growth in industry was an annual 2.1% and in services 3.7%. In agriculture on the other hand job growth averaged 3.3% annually in the last six years.

Turning now to employment in the top 500, the number of workers overall rose by 3.6% in 2007, while workers in the private firms were up by 2.5% and in the public sector firms by 10%.

Employment density is defined as the number of workers per YTL 1 million in sales revenues. Employment density is observed to have embarked on a falling trend since 2003 with advances in technology. However, the fact that the fall in our graph began in 2004 when the low exchange rate became chronic leads us to believe that in Turkey this fall was caused by an increase in the use of imported inputs. As the graph shows, employment density, which peaked at 2.8 in the private firms in 2003, fell to its lowest ever in 2007 at 2. This further reinforces our view that increased use of imported inputs has had an adverse effect on employment density.

When we rank the top 500 industrial firms in groups of fifty by their production-based sales, it emerges that the share of the top fifty firms in such sales in 2007 was 49.8%, in other words close to half. The top fifty industrial firms account for 40-60% of production-based sales, gross value added, period profit and loss and exports in the top 500. These firms also claim 33.5% of total workers. These ratios were practically the same in 2006. Turkey's top 500 industrial firms also created close to 5.4% of the country's GDP in 2007, and a 27.9% portion of Turkey's total exports was also realized by these top fifty firms.

There were 143 companies with foreign capital shares among the top 500 in 2007. This was up from 136 in 2005 and 140 in 2006. These 143 foreign capital companies realized 33.3%, or about one-third, of the top 500's total production-based sales. Their share in gross value added was 37.5%, in total period profit and loss 38.1%, in exports 47.6% and in number of workers 29.3%. There are also 19 foreign capital companies among the top fifty firms, which therefore gives them enormous weight within this group.

We would now like to examine change in asset financing in the private firms among the top 500. If we start by taking a look at change in foreign funds, in other words, debt, in asset financing by year, we see that these reached their highest level in 2001 at 66.5%. Following the favorable effect of inflation accounting, this fell to 45.7% in 2004. But another deterioration, albeit slight, occurred again in 2005 when the share of foreign funds in asset financing rose to 47.1%. This deterioration continued in 2006 and, under the impact of the market fluctuation in May of that year, the share of foreign funds rose to 47.7%. Turning now to 2007, an improvement, albeit slight, is in evidence. The share of foreign funds in asset financing, which was 47.7% in 2006, declined in 2007 to 46%. The share of equity capital meanwhile, which was 42.8% in 2006, rose in 2007 to 43.4%. Finally, the share of short-term debt among foreign funds declined from 32.6% to 32% and that of long-term debt from 15.1% to 14%.

Turning now to change in sales profitability in the top 500 firms, let us begin by looking at this change by year. Sales profitability in the top 500 dropped to minus 0.5% in the crisis year 2001. In 2004, the brightest year of the period, it rose again to 6.7%, only to fall relatively slightly to 4.6% in 2005 and then rise again in 2006 to 5.9%. In 2007 we see a relative improvement in sales profitability, which climbed to 7.2% for the year.

In this table too we examine change in sales profitability, this time in the private manufacturing firms among the top 500. Taking sales profitability as 1994=100, we find that it rose in only four sectors from 1994 to 2007, namely in foodstuffs, forestry products, primary metals, and paper and paper goods.

This table shows economic profitability. Economic profitability shows how much value added is created in return for the money allocated to the enterprise. At 16.9% in 2006, economic profitability in 2007 rose to 17.3%. Despite this relative improvement in 2007, the average 20% levels of economic profitability of the 1990's have still not been recovered. It is imperative that economic profitability ratios be raised to render investment and production attractive.

Among the private firms, the highest rate of economic profitability in 2007 is observed in the tobacco processing industry at 32% and the lowest in the textile sector at 9.8%.

Let us now examine the asset turnover rate, which shows how fast the money allocated to an enterprise turns over. At 1.42 in the top private firms in 2006, the asset turnover rate fell slightly in 2007 to 1.40. As our table shows, in 1992 the asset turnover rate was 1.67 and thus has deteriorated significantly over the last fifteen years.

If we look at the asset turnover rate by sector, we see that it is highest in the oil derivatives industry at 3.28 and lowest in the alcoholic and non-alcoholic beverages sector.

Taking the asset turnover rate as 1994=100, vehicles and chemicals are the only sectors that appear to have raised their asset turnover rates in 2007.

In this table we see net value added at factor cost in the private firms among the top 500. The share of wages and salaries in net value added in these firms is 49.8% in 2007. The share of interest paid is 9.1%, and that of profit as national income, in other words, profit derived from production activity, 41.1%.

The share of wages and salaries in net value added among the public enterprises in 2007 is 91.6%. While the share of interest paid rose to 8.1%, that of profit as national income fell to 0.3%. These ratios indicate that the structure of the public sector firms remains inefficient.

With approximately YTL 545,000, the chemicals, oil refining, rubber and plastics industry takes first place in gross value added created per worker in the private sector firms.

In this table we examine non-operating income. While such income was at levels of around 30% of total period profit and loss in the top 500 firms in the 1980's, it rose sharply in successive years to 219% in 1999 and 547% in 2001. Parallel with the favorable developments in the economy since 2001, non-operating income as a share of total period profit and loss began to decline rapidly, falling to its lowest level in 2006 at 26.3%. Then in 2007, it again rose as a share of total period profit and loss, coming to 35.6%. With an increase of 34% in total period profit and loss in 2007, non-operating income, which is one of the sub-items in this total, rose by 81.2%. This is the highest rise of the post-2001 period and therefore noteworthy.

As you know, enterprises in recent years have turned to sources of funding outside the country in order to reduce financing costs,. The total foreign debt of the non-financial institutions, in other words, the real sector, which was 70.9 billion dollars at the end of 2006, had risen to 105.5 billion by the end of 2007. This increase in foreign debt has also affected the nature of non-operating incomes. While these consisted essentially of interest incomes prior to 2007, the results for 2007 make clear that non-operating incomes were not mainly interest incomes as in previous years but rather exchange rate gain. For unrealized foreign currency translation differences may lead to exchange rate gains or losses on valuation day. Valuation was processed in such a way as to enhance exchange rate gains in 2007. And the ensuing foreign exchange gain swelled the dimensions of non-operating incomes in total period profit and loss.

As you will remember, we pointed out a little while ago that sales profitability, which was 5.9% in 2006, rose to 7.2% in 2007. Sales profitability is found by taking the ratio of period profit and loss to total sales. The growth in exchange rate incomes augmented total period profit and loss and therefore pulled sales profitability up.

At this juncture I should point out that any reverse development in the exchange rates is going to impact negatively on exchange rate gains and therefore on sales profitability, nor may its effect necessarily be limited merely to that.

We are now going to examine gross value added at factor cost in the private firms among the top 500. Gross value added is the sum of net value added, amortizations, and net indirect taxes. The share of net value added in gross value added, which was 39.7% in the private firms in 2006, rose by a small amount to 41.6% in 2007. The share of net indirect taxes in gross value added, which was 49.8% in 2006, fell slightly in 2007 to 48.2%.

Let us look now at interest paid and interest income in the private firms among the top 500. The ratio of interest paid to sales, which was 1.2% in 2006, came to 1.1% in 2007. As for non-operating income, its ratio to sales was 1.6% in 2006, rising significantly in 2007 to 2.6%. If we look at interest income, which is a sub-category of non-operating income, this were 0.6% of sales in 2006, rising to 0.7% in 2007. Not a significant increase. On the other hand, the ratio other non-operating incomes to sales, which was 1% in 2006, rose to 1.9% in 2007, an increase in which the increase in exchange rate gain was determinative.

Table 28: A comparison of Turkey's top 500 industrial firms with the Fortune 500

In a comparison of the Istanbul Chamber of Industry (ISO) 500 in 2007 with the U.S. Fortune 500, ISO's top firm in total sales, Tüpraş, is at 160th place in the Fortune 500 and second place Petrol Ofisi in 262nd. Third place Shell and Turcas ranks 377th, and fourth place Ford Otomotiv 433rd in the Fortune 500.

Esteemed members of the assembly.

Parallel with the low growth in the Turkish economy in 2007, sales revenues and rates of growth in value added remained relatively low in the ISO 500. On the other hand, there was a relative improvement in profitability and financial structure among the ISO 500 during the year. However, as we said a little while ago, this improvement was brought about by utilizing foreign financing sources and by the exchange rate gains derived as a result. The improvement in profit in 2007 is not the result of an increase in production! It is a virtual improvement, an illusion! How long can such profitability continue? Profitability that arises as a side effect of foreign borrowing and an unrealistic exchange rate policy? How permanent can that be?

It should not be forgotten that this virtual improvement was gained at the cost of inflation and exchange rate risk. It is clear that our industrial firms are gong to face serious challenges if such risks materialize. Beyond the short-term risks, an unrealistic exchange rate policy also means the potential for paving the way to serious losses in our medium and long term production and employment structure.

Industry has been the primary sector of the Turkish economy since 1982 and its engine of growth. The figures indicate however that the engine is gradually running out of steam. While industry's share in GDP was 26.8% in current prices in 1998, ten years later in 2007 it has declined to 19.5%. Similarly the share of manufacturing in GDP shrank from 23.9% to 16.5%. A decline of this magnitude in the weight of industry and manufacturing in the nation's economy in the short space of ten years is a development that needs to be taken seriously from the standpoint of the country's future. Not only that, but as I pointed out a little while ago, an unrealistic exchange rate policy could further accelerate this unfavorable trend.

Such a situation exists in no other country in the same category as Turkey. The share of industry in GDP is decreasing rather than increasing. In China, for example, industry's share in GDP, which was 39% in 2002, rose to 41% in 2006, while in India the increase was from 15% to 16% and in Russia from 17% to 19%. Does Turkey have less need for industrialization than these countries? Why do we remain a spectator to our industry's declining share in GDP? Where is Turkish industry going? Do we have a policy regarding industry? The answer to this question is that our country and our economy are of vital concern for our future generations. Leaving aside for a moment the smoke and dust of Turkish politics, we need to focus on these basic problems.

In closing I thank you for your patience and salute you all once again on behalf of the board of directors.

C. Tanıl KÜÇÜK
Istanbul Chamber of Industry
Chairman of the Board of Directors