The Chairman's Speech at the Assembly / 22 July 2009

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

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

We have with us today a very distinguished guest, our Minister of State, Mr. Zafer Çağlayan. We would like to welcome him and thank him for joining us. Welcome, Mr. Minister! This is your first time to be with us as Minister of State! I would therefore like to take this opportunity to thank you once again for all your efforts during your term as Minister of Trade and to express our confidence that in your new position you are going to make important contributions to solving the problems of our industry.

On his previous visit to our Chamber our Minister made frequent reference to the fact that he regards himself as a member of the Istanbul Chamber of Industry. We have always nurtured mutual feelings and I would therefore like to state that we will take special pleasure in assessing the results of our survey of Turkey's Top 500 Industrial Firms in 2008 with one of our own.

Esteemed Members of the Assembly:

In a press conference this morning we announced the results of our survey of Turkey's top 500 industrial firms, Turkey's most important and comprehensive survey of its industry which our Chamber has been conducting without interruption for exactly forty years.

Not breaking with that tradition, we are, this year as every year, taking up the results of our ISO 500 survey separately at our assembly meeting. But before turning to the results of the survey, I would like to remind you that it covers only industrial enterprises and that the ranking is based on the criterion of production-based sales.

Following this reminder, I now present to your attention the results, in tables, of our ISO 500 survey for 2008.

First of all we are going to see the firms that made it into the top ten in terms of production-based sales, exports and profit.

TABLE 1: THE TOP TEN FIRMS IN 2008

In 2008 as in previous years, Tüpraş is the top firm by production-based sales. Tüpraş has preserved its leadership since it was privatized in 2005.

In second place is electricity producer Elektrik Üretim A.Ş., the only state enterprise among Turkey's top ten industrial firms in 2008. Third in the ranking is the iron and steel manufacturer Ereğli Demir ve Çelik, up from fifth place last year.

TABLE 2: THE TOP TEN PRIVATE FIRMS IN 2008

Turning now to the top private firms, Tüpraş and Ford Automotive in first and second have preserved their places since 2006. In third is Ereğli Demir ve Çelik, again up from fifth in 2007.

TABLE 3: THE TOP TEN BY PROFIT IN 2008

This table shows the top ten firms by profit in 2008, an area in which important changes in the ranking occurred this year. In first place is Türkiye Petrolleri A.Ş., a public sector oil firm which rose from seventh place in 2007. Last year's fourth place Philip Morris is in second, followed by Ford Automotive, which preserves its third place ranking from the previous year.

TABLE 4: THE TOP TEN PRIVATE FIRMS BY PROFIT

Let us look now at the top profit-makers among the private firms in 2008. Here we find last year's fourth place Philip Morris in first place this year. Meanwhile as last year's third, Ford Automotive, rose to second, Tüpraş, in top position last year, slid this year to third.

TABLE 5: THE TOP TEN BY EXPORTS IN 2008

As in previous years, the top ten firms by exports in 2008 are all private enterprises. Tüpraş takes first place, up from second place the previous year. Second place meanwhile goes to Ford Automotive, down from first in 2007, while in third place is Oyak-Renault, up a notch from the previous year.

TABLE 6: THE SECTORAL DISTRIBUTION OF EXPORTS

The exports of the Top 500 Industrial Firms rose by 24.2% in 2008. Export growth in Turkey as a whole was 23.1% for the same year.

With shares of 26.5% each, the motor vehicle and primary metal sectors share top place in the exports of the ISO 500 in 2008. Export leader in the ISO 500 in 2006 and 2007, the motor vehicle industry shared the top position with primary metals in 2008 after its export growth remained at 6.2% for the year. Following these two sectors with a 15.6% share is the chemicals and petroleum products sector, followed by metal goods, machinery and equipment in fourth place with 14.8%.

Meanwhile the share of the textiles, wearing apparel, leather and footgear sector, Turkey's top exporter for many years, continued to contract in 2008 dipping to 5.5%. The sector's fifth place in the ranking remains unchanged however. The export shares of the other sectors vary by only small differences.

TABLE 7: THE SHARE IN GDP OF THE TOP 500 INDUSTRIAL FIRMS

Source:Turkish Bureau of Statistics
N.B: The Top 500's share in GDP is figured from gross value added created in producer prices.

As one of the most important indicators in our survey, the gross value added of the ISO 500 firms represents their share in Turkey's GDP. At 8% in 2001, this share rose in 2002 to 10.8% and was 10.4% in 2004, 9.9% in 2006 and 9.3% in 2007. Contracting to 8% in 2008, it was very near its level back in 2001. We might therefore take this table as showing that the top industrial firms were quickly impacted by the downturn in the economy but that they equally quickly benefited from the rebound.

TABLE 8: CHANGES IN THE ECONOMIC AGGREGATES OF THE TOP 500 INDUSTRIAL FIRMS

A look at the economic aggregates of the ISO 500 reveals some interesting developments in 2008. In the ISO 500 as a whole for the year, production-based sales rose by 19% on 2007 in current prices, a rate which is considerably above the 10.6% rise in 2007. An increase of this magnitude in production-based sales would at first glance appear surprising in a year like 2008, which went especially badly in the second half. A major factor in the increase is that the price rise in the industrial sector at 13% was higher than the overall 8.1% rise in the PPI. Indeed, when purged of the effects of inflation, this 19% increase actually represents a fixed increase of 5.3% in production-based sales.

But the most dismal results of the ISO 500 industrial firms in 2008 emerge in the parameters of our survey measuring profitability. There has been enormous erosion in before-tax period profit in particular. While before-tax period profit in current prices was up by 22.7% in 2007 in the ISO 500 as a whole, a year later it had contracted to 13.3%. Meanwhile in the private industrial firms, the contraction in before-tax period profit was 21.3% in current prices and 30.4% in fixed prices.

As pre-tax period profit was contracting significantly, losses in turn spiraled out of control. While losses in the ISO 500 overall in 2008 were up by 450% in current prices on 2007, the increase was extremely high, at 339.6% in the private firms and 7,336.2% in the state enterprises.

There was a big drop as well in total period profit and loss in 2008, which contracted on 2007 by 36.4% in current prices and 43.7% in fixed prices in the ISO 500 as a whole. In the private firms meanwhile the situation was even gloomier with contractions on 2007 of 40.1% in current prices and 47% in fixed prices in total period profit and loss. Falling profitability in turn caused a fall in value added. Net value added in the ISO 500 in general contracted by 3.7% in current prices and 11.7% in fixed prices in 2008. While gross value added showed an increase of 0.8% in current prices, in real terms it contracted at the rate of 7.6%.

TABLE 9: TOTAL PERIOD PROFIT AND LOSS (PRE-TAX) BY SECTOR AND RATES OF CHANGE

The unfortunate situation that emerges in our survey's profitability indicators is of even more striking proportions in the sub-sectors. As the table shows, among the ISO 500 firms the electricity sector suffered the biggest fall in total period profit and loss at 347.7%. This sector is followed by manufacturing with a loss 272.7% and textiles, wearing apparel, leather and footgear with 137.2%. Mining is the only sector that managed to increase its total profit and loss in 2008.

TABLE 10: AVERAGE NUMBER OF WAGE WORKERS

The number of wage workers fell by 1.6% in the ISO 500 as a whole in 2008. When we look at the figures for the public and private firms, we see that worker numbers in the private firms actually rose by 0.4% in 2008 while in the state-run firms they fell at the rate of 12.5%. The privatization of public enterprises like state monopoly TEKEL and petrochemical giant PETKYM account for these changes in the figures.

GRAPHICS 1: WORKER DENSITY IN THE PRIVATE FIRMS AMONG THE ISO 500 (Employnment per one million TL in sales volume)

For the purposes of our survey, worker density is defined as the number of workers employed per each TL 1 million in sales volume. A look at the graph reveals that worker density has been characterized by a falling trend since 2003. Together with developments in technology, the number of persons employed in production has been falling around the world. The decrease apparent in the graph however leads us to think that in Turkey at least the increased use of imported inputs was instrumental in the trend, which began in 2004 when the low dollar/TL exchange rate became permanent and continued in 2008 when the exchange rate was TL 1.28 on average for the year.

TABLE 11: DISTRIBUTION OF THE TOP 500 INDUSTRIAL FIRMS IN GROUPS OF FIFTY (%)

When the ISO 500 firms are ranked in groups of fifty by their production-based sales, it becomes evident that capturing economies of scale has a positive impact on performance. For in 2008 as in previous years all the indicators save jobs are significantly higher in the top fifty firms. Some 49.8% of production-based sales in 2007 were due to these top fifty firms, a percentage that rose by 2.8 points to 52.6% in 2008. We believe that the hefty price increases observed particularly in the products of the petroleum and primary metals industries are responsible for this rise.

Meanwhile the share of the top fifty firms in the ISO 500's value added in 2008 is 53.7%, down from 58.1% in 2007. The same firms' share in total period profit and loss (pre-tax) was 58.5%, up from 43.9% in 2007. They were also responsible for 56.5% of the ISO 500's exports and 29% of Turkey's exports in 2008.

While the top fifty firms' share of total workers was 33.5% in 2006 and 2007, in 2008 it fell to 31% in the most discouraging development of all among the first fifty firms in the top 500.

Meanwhile these firms' share in Turkey's GDP is 4.5%. If we remember that the share in GDP of the Top 500 is 8.4%, then it is immediately evident that the first fifty firms singlehandedly account for almost half that figure.

TABLE 12: DISTRIBUTION OF FOREIGN-INVESTED FIRMS BY GROUPS OF FIFTY (%)

Foreign-invested firms among the ISO 500 numbered 148 in 2008, up from 136 in 2005, 140 in 2006 and 143 in 2007. When ranked in groups of fifty, foreign-invested firms among the top fifty number 18 this year, down slightly from 19 in 2007. These eighteen firms account for a 15.6% share of production-based sales in the group, down from 17.9% in 2007.

The eighteen foreign-invested firms among the first fifty are also responsible for 17.3% of the group's gross value added, 23.6% of its period profit and 27.7% of its exports. While the share of gross value added contributed by the 18 foreign-invested firms among the first fifty was unchanged from 2007 to 2008, their share in total period profit and loss increased significantly while their share in exports contracted, a development in which a decline in exports of transport vehicles especially played a role.

TABLE 13: CAPITAL STRUCTURE (%)

* Calculated using figures corrected by inflation accounting.

The downturn in the economy in 2008, the fall in profitability and, towards the end of the year in particular, the rise in the exchange rate led to a significant deterioration in the capital structure of the ISO 500 industrial firms. There was, for example, a very sharp increase in borrowing during the year. While the overall borrowing rate of the private firms in the ISO 500 rose from 47.9% in 2007 to 54.4% in 2008, the share of equity capital declined from 52.1% to 45.6%. This represents the first deterioration of this magnitude in capital structure since 2001. A rise in the TL equivalent in foreign currency of the borrowed funds together with the rise in the exchange rates towards the end of the year was responsible for the deterioration.

TABLE 14: RATES OF CHANGE IN TOTAL DEBT AND EQUITY CAPITAL (%)

Let us now examine change in the rates of borrowing and equity capital. While debt in the ISO 500 overall was up by 38.3% in 2008, equity capital rose by a scant 2.7%. If we remember that growth in borrowing was 9.4% and growth in equity capital 17.2% in 2007, the deterioration in the industrial firms' capital structure in 2008 becomes even clearer.

TABLE 15: RETURN ON SALES IN THE TOP 500 INDUSTRIAL FIRMS (%)
(Total Period Profit and Loss / Sales Volume)

* Calculated using figures corrected by inflation accounting.

Before turning to sales profitability, I would like to draw your attention to the number of firms making a profit and the number making a loss. In 2008, 352 of the top 500 firms posted profits. If we remember that this number was 450 in 2007, it is immediately apparent that many more firms posted losses in 2008. The number of firms posting losses, which came to 50 in 2007, rose in 2008 to 148. In other words, in terms of sales profitability 2008 was the worst year of the post-2001 period for Turkey's industrial firms.

In line with the favorable economic developments that have been experienced in the economy since 2001, sales profitability rose to its highest level yet in 2004 at 6.7%, and then showed a relative decline again in 2005 and 2006, only to rise again to one of its highest levels in recent years in 2007 at 7.2%, due in particular to a sharp rise in the exchange rates.

Then in 2008 just the opposite occurred. When non-operating profit fell by 38.1% and total profit by 40.1%, sales profitability dropped to 3.9% in the ISO 500 as a whole and to 3.6% in the private firms. As I said a little while ago, these figures represent the lowest levels of sales profitability in the entire post-2001 period.

TABLE 16: RETURN ON ASSETS
(Total Period Profit and Loss / Total Assets) (%)

* Calculated using figures corrected by inflation accounting.

Profitability is examined by different indicators in our survey, and one of them is return on assets. Return on assets is a ratio measuring how much profit is derived in return for the resources that are utilized. Return on assets, which topped out at 10.1% in 2007 under the impact of exchange rate profits, declined a year later to 5%.

GRAPHICS 2: ECONOMIC RETURN IN THE PRIVATE FIRMS (%)
(Net Value Added / Total Assets)

* Calculated using figures corrected by inflation accounting.

We turn now to another criterion of profitability, economic return. Before that, however, let me say that the 36.4% fall in total period profit and loss (pre-tax) in 2008 led conspicuously to a fall in all the profitability ratios. Economic profitability shows the amount of net value added created in return for assets, which represent the total of foreign funds and equity capital channeled into the business. Over 30% at the start of the 1990's, economic profitability fell in 2001 to 10.7%. At 17.3% in the private firms in 2007, it fell in 2008 to 13.9%. As the table shows, economic profitability ratios in 2008 are the lowest of the post-2001 period. This contraction in economic profitability ratios indicates a decline in value-added productivity. Nevertheless, boosting value-added productivity is essential for achieving stable and sustainable growth in the economy.

TABLE 17: ECONOMIC PROFITABILITY BY SECTOR IN THE PRIVATE MANUFACTURING FIRMS (%) IN 2008

A look at economic profitability by sector in the private firms in 2008 reveals rubber products, wearing apparel and furniture to be the sectors with the highest ratios at 30.8%, 28.9% and 28.1% respectively. The lowest ratios meanwhile are found in the wood and cork industry with 3.6%, the printing industry with 5.7% and the pottery and porcelain industry with 6.1%.

TABLE 18: THE ASSET TURNOVER RATE
(Volume of Sales / Total Assets)

Notes: Sales are taken as net, after 1998.
* Calculated using figures corrected by inflation accounting.

An indicator of financial productivity, the asset turnover rate is the ratio of sales turnover to total assets and expresses the rate at which the money allocated to an enterprise turns over.

The asset turnover rate fell to its lowest level in 2001 at 1.24. At 1.42 in 2006, it fell in 2007 to 1.40 and to 1.37 in 2008. Financing scarce and costly in Turkey. Not only that but when the money enterprises have tied up in their business fails to turn over sufficiently rapidly, financing becomes even more difficult.

TABLE 19: ASSET TURNOVER BY SECTOR IN THE PRIVATE MANUFACTURING FIRMS (2008)

Petroleum products were the sector with the highest rate of asset turnover in 2008 at 3.99. The sectors with the lowest asset turnover rates were the beverages industry with 0.55, the tobacco processing industry with 0.56 and basic metals with 0.62.

TABLE 20: NON-OPERATING INCOMES IN THE PRIVATE MANUFACTURING FIRMS (TL)

In this table we examine non-operating incomes. The share of non-operating incomes in total period profit and loss (pre-tax) has contracted sharply since 2001, falling to its lowest level in recent years in 2006 at 26.3%. In 2007 on the other hand this rate rose again to 35.6% with a small rise to 36.8% in 2008, which was a rather unusual year in that both operating and non-operating incomes fell at almost the same rate. The fall in non-operating incomes stems largely from a decline in exchange rate profits due to rising exchange rates.

TABLE 21: THE DISTRIBUTION AS FACTOR INCOMES OF THE GROSS VALUE ADDED OF THE TOP 500 INDUSTRIAL FIRMS (PRIVATE FIRMS)

*After eliminating the effect of Tüpraş, this was 50.0% in 2005 and 48.3% in 2006.
**After eliminating the effect of Tüpraş, this was 31.3% in 2005 and 41.3% in 2006.

The share of net value added in gross value added in the ISO 500 private industrial firms was 74.3% in 1992. After that its share contracted steadily, falling to 40.3% in 2001. In 2006 it was 39.7%, rising by a small percentage in 2007 to 41.6%, only to drop back to 38.3% in 2008. The fundamental reason for the fall is a sharp rise in the share in gross value added of net indirect taxes. At 10.5% in the private firms in 1992, the share of net indirect taxes in gross value added in the private firms rose to 50.8% in 2008. What this means is that while 10.5% of the gross value added created in the private firms was paid to the state in the form of net indirect taxes in 1992, in seventeen years this amount has very nearly quintupled to over 50% today.

TABLE 22: THE DISTRIBUTION OF EMPLOYNMENT AND GROSS VALUE ADDED IN THE MANUFACTURING INDUSTRY (%)

We obtain important data on structural change in Turkey's manufacturing industry by comparing the current results of our survey of the ISO 500 top industrial firms with results for the years from 1982 to 2008. Major changes in the sectoral distribution of jobs in the manufacturing industry have occurred in those years. In 1982, for example, textiles, wearing apparel, leather and footgear was the sector with the highest share of jobs in the ISO 500 manufacturing industry at 26.3%. In 2008 on the other hand this sector is in third place with a 14.9% share in employment. The foodstuffs, beverages and tobacco sector has the biggest share of jobs in the ISO 500 in 2008 with 18.7%. With an even bigger share of 19.7% in 1982, this sector ranked second behind textiles, wearing apparel, leather and footgear.

With the second biggest share of jobs after foodstuffs in 2008 is the motor vehicle sector with 17.7%. In 1982 this sector was in seventh place with a share of only 4.3%.

Another noteworthy change in the distribution of jobs in the ISO 500 manufacturing industry in the last 26 years is the rise in the motor vehicle sector from seventh to second place with an increase of 321.4%. The textiles, wearing apparel, leather and footgear sector in contrast has slipped from first to third place with a 43.5% loss of jobs.

Let us turn now to the change in the sectoral distribution of value added in the ISO 500 manufacturing industry in the last 26 years. The chemicals, petroleum production, rubber and plastics sector ranks highest by this parameter in 2008 with a share of 40.5%. It was in first place in 1982 as well with a share of 26%, increasing its share by 55.8% in the intervening 26 years. In second place by value added in 2008 is the foodstuffs sector with a 24.8% share. This sector was in fourth place in 1982 with a share of 14%. In 26 years the foodstuffs sector has increased its share in value added by 77.9%. Motor vehicles with 8.8% ranks fourth by value added in 2008, up from seventh place in 1982 when it had a 6.3% share.

TABLE 23: A COMPARISON OF TURKEY'S TOP 500 INDUSTRIAL FIRMS WITH THE U.S.A.'s FORTUNE 500

When the ISO 500 is compared with the Fortune 500, it appears that seven Turkish firms could make it into the U.S. ranking. In first place by total sales in the ISO 500 for 2008, Tüpraş could rank 115th in the Fortune 500, while second place Petrol Ofisi could stand at 206th. Fourth place Ford Automotive meanwhile would qualify for 438th place, sixth place electricity producer EÜA? for 479th and seventh place white goods manufacturer Arçelik for 493rd.

Esteemed Members of the Assembly:

The results of the ISO 500 survey of Turkey's top 500 industrial firms shows that 2008 was the worst year of the post-2001 period for these enterprises. Their profits fell sharply on the previous year, the contribution they make to the economy in the form of value added was reduced, and their financial structures suffered serious deterioration. Total period profit and loss in the private firms among the ISO 500 in 2008 dropped by 40.1% in current prices and 47% in fixed prices. Sales profitability too is down from 7.2% to 3.6%, with the upshot that 2008 was a year of losses for Turkey's industry. The downturn that began in 2008 has unfortunately continued in 2009 as well, and the fall in industrial production that has been under way since August 2008 has now entered its tenth consecutive month. Parallel with the fall in production, industry especially has suffered huge job losses as well. Under the impact of the sharp fall in industrial production in the first quarter of 2009, the Turkish economy has contracted at the whopping rate of 13.8%. One bright spot in this dismal picture is that the downturn seems to have decelerated and bottomed out in the second quarter of the year and a rebound to have gotten under way.

But whatever consolation we may take in that rebound, we must not forget that we are still looking at double digit minuses in the basic economic indicators such as production and jobs.

Yes, this crisis is a crisis of the whole world. The last quarter of 2008 and all of 2009 have been and are going to be difficult for the entire global economy. But how correct is it to attribute all the problems in Turkey's economy and industry to the global crisis? Why has Turkey - Turkish industry, the real sector in particular - been one of the countries hardest hit by the crisis? Why has industry become the weakest link in the chain of the Turkish economy? Is this due entirely to the country's industrialists? Why has Turkey been one of the countries whose economies contracted the most? Why has Turkey become one of the countries with the highest rates of unemployment? Correct answers need to be given to these questions.

TABLE 24 - THE DISTRIBUTION OF GDP BY PRIMARY SECTOR (%)

When announcing the results of our ISO 500 survey last year, it was pointed out that the manufacturing industry's share in GDP, which in 1998 was 23.9% in current prices, declined in 2007 to 16.8%. Unfortunately the figures have confirmed that this dismal picture is continuing. Not only that but manufacturing's 16.8% share in GDP in 2007 fell to 16.1% in 2008 and to 15.6% in the first quarter of 2009. Turkey is a country that needs rapid growth in order to solve her economic and social problems. And for rapid growth she needs industry. Unfortunately however our industry is hemorrhaging more with every passing year. Here at the Istanbul Chamber of Industry, which represents some 40% of Turkey's industry, we regard it as our duty and responsibility to draw attention to this dangerous trend. We would therefore like to reiterate that measures need to be taken starting now so that these problems will not get worse and our capacity for production and employment will not be further weakened in the years to come. Yes, various economic packages have been put in place. But solution of the problems we face and may face in the future demand far more comprehensive policies and implementations than those we have seen so far.

Mr. Minister,

In previous crises, exports always used to be the way out when the domestic market was sluggish. But in this crisis we are also facing serious difficulties in exports. On the one hand we must definitely revive the potential in our domestic market. On the other it is extremely important that we diversify our export markets. We are expecting our industrialists to be supported in this endeavor.

With a population of over seventy million, Turkey has to be able to create jobs for its youth, and to solve its economic and social problems. We have no choice but to continue producing and to boost our production. As industrialists, and as the private sector, we are determined to pursue our struggle to sustain and boost production and to compete and, despite the crisis, to continue doing so in spite of all the obstacles in front of us.

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