Turkish Manufacturers Adapt Amid Relentless Inflation
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Spiraling inflation in Turkey has proven tough to tamp down.
Last week, the Central Bank of the nation raised its year-end inflation forecast to 65 percent—with the caveat that it could be even higher given geopolitical risks.
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Local economist estimates peg it closer to the 70 to 75 percent mark.
As petrol prices soared by 90 percent from May to September, business owners and manufacturers are taking a long, hard look at their budgets—and at finding ways to keep business afloat.
The last six months have been a long series of critical adjustments.
In July, the minimum wage went up by 34.6 percent. This was in addition to an approximately 100 percent wage increase since January 2022. Although workers say they are hard-pressed to meet the cost of living in spite of these increases, manufacturers said that with the state of a global cut down of orders, the effects of the Russia-Ukraine war, and the runaway inflation, their livelihood is being existentially challenged.
Sourcing Journal visited manufacturers and exporters in Istanbul and the neighboring manufacturing zones where the pain points have been shifting over the last year. Many factories have continued to work at lower capacities—estimated at 60 to 70 percent.
Turkey exported $19.47 billion in apparel in 2022, ranking as the world’s fourth largest after China, Bangladesh and Vietnam.
Meanwhile, imports for the sector, including cotton, cotton yarn and cotton textiles, were up by 30.3 percent over the previous year to $4.84 billion.
The Turkish lira has seen a dramatic decline in value, down by approximately 53 percent from 13.06 versus the dollar in January to 28.70 on Nov. 17, impacting imports and raw materials for the industry. It also makes the dollar value of the minimum wage vary greatly, from the earlier $450 equivalent of 11,402 Turkish lira to just under $400 now.
Turkey’s apparel exports stood at $16.3 billion for the 10-month period from January to October 2023. Textile exports were $7.9 billion for the same time period. Turkey is the fifth largest textile exporter in the world.
“As in many other sectors, the policy framework implemented by the government was not sustainable, it had to change,” said Erhan Aslanoglu, an economics professor at Istanbul’s Piri Reis University.
“The sector tried to do their best, many companies escaped from shut down, they expected that they needed to be patient up to elections and then the policy was expected to change—and it did change,” he said. “The textile and apparel sector is one of the most competitive sectors in Turkey and provides many major producers and brands in the world. The value added and competitiveness is very high in the sector.”
Now, with President Recep Tayyip Erdogan almost six months into his new term in the office that he has commanded for more than two decades, a U-turn has been enacted to more traditional economics with finance minister Mehmet Simsek, formerly a Merill Lynch banker. The appointment of Hafize Gaye Erkan as central bank governor also added more credibility—and hope.
There have been five straight interest hikes from the central bank from June to October, and businesses are finding that the finance minister’s warnings that “it wasn’t going to be an easy road ahead” are proving true.
Inflation has been rising—and the hope that the year-end numbers would be under 40 percent has been dashed. Perilous food security and hard living conditions are becoming a reality.
“The direction of the policy is correct now in my opinion, turned towards tighter monetary policy but Turkey needs a more proactive monetary policy,” said Aslanoglu. “I perceive this is a reactive policy. The higher minimum wages from Turkey are somehow restricting the competitiveness of the entrepreneurs but it is necessary. We are living in high inflation and wage earners need this desperately. Even the businessmen are not complaining about this. They accept that this is essential.”
Mustafa Gültepe, president, Turkish Exporters’ Assembly (TIM), told Sourcing Journal, “When we make a quote, we are not quite sure what the costs will be for some months ahead. The cost of raw materials has been shifting, and the overall production costs are hard to predict.”
However, there is no sense of defeat in his attitude, but rather the earnestness of a challenge that he believes is possible to solve. “The Turkish are a hardworking people, with the ability to take risks,” he said. “We are constantly searching for a better way ahead.”
Haldun Boz, İstanbul Apparel Exporters’ Association (İHKİB), board member, and chairman Yanetim Kurulu Baskani, which owns Texim, a large manufacturing company that supplies to Ralph Lauren, Hugo Boss, PVH and Gant among others, reiterated the point. “The Turkish have the soul of an entrepreneur. Post-Covid, with the effect of nearshoring, a lot of the supply chain was reorganized, and we all benefited. Many of us increased our capacity and invested significantly at the time. But with the slowdown in orders worldwide, this has been a major problem for us,” he said.
He said that geography is key to sourcing at the moment.
“Turkey is considered to be in the European zone by our customers, many of whom divide their production sourcing capacities about 50/50 between Asia and Europe,” he said.
Umut Boz, managing director, Texim, has been looking at ways to change to future-proof the company. “We made almost a 100 percent increase in our knitting capacity, also in stitching, infrastructure, warehousing, new factory building—we kept our silent time to grow. We also invested a lot in technology, in terms of infrastructure systems, many tools, and upcoming digitization,” he said.
Added to the pressures were the severe earthquakes in February, and their impact on 11 provinces, where 1,616 garment and 1,290 textile companies operated before the disaster, with more than 350,000 employees. The industry has been working together to find the way forward.
As Mustafa Gültepe pointed out, there has been a huge effort to find solutions, support workers and to rebuild factories, many of which were back to work within months. The greater issue has been rebuilding the houses and other facilities for workers. The priority has been clear, as the textile, apparel and footwear sector accounts for approximately 7 percent of Turkey’s GDP, employing more than 2.5 million people according to estimates from the United Nations Development Programme.
Different business models are emerging as well. Safak Kipik, CEO of Spring Near East Manufacturing Company Limited, an Istanbul-based company which works with PDS Limited as a sourcing partner from Turkey talked about the way the way business is shifting. “There’s a lot of consolidation going on,” he observed. “The brands are consolidating, the retailers, the market, they all are. Big retailers are decreasing their market share, and many mid-market players are struggling, they are either merging or going into administration; and there are new players. The big players and retailers are also looking for strategic partnerships with suppliers—they are willing to commit to more business, but their expectation from the suppliers is growing too, and in return for more commitment want them to make investments— as in sustainability, etc.”
Even though the manufacturing costs in Turkey are higher, Kipik is aware that buyers consider it “too risky to have too much sourcing from one country, like Bangladesh or Cambodia, in case there is a disaster there.”
“We are changing the industry from fast to slow,” said, Ramazan Kaya, co-chair, The Turkish Clothing Manufacturers’ Association (TSGD), talking about how the industry itself is changing.
“Rather than price-focused products, we have switched to value-based products. Using sustainable raw materials, using 3D systems, using production preferring new items rather than commercial. We are working with the brands and distribution partners to not only supply, but plan our road for a longer distance, and this is a transformation not only for us, but for them as well.
“This transformation is not easy, sometimes it can be a pain—all transformation is a big challenge. The reason is, we don’t have direct support from our buyers, we don’t have direct support from the government, so that’s why we need to change ourselves. In order to sustain. We have to apply ourselves and make an evolution.
“There’s a saying from Rumi: ‘Yesterday I was clever, so I wanted to change the world. Today I am wise, so I am changing myself.’ That is what we are doing,” he said.
