THE EVOLUTION AND DETERMINANTS OF PROFITABILITY IN TURKISH MANUFACTURING INDUSTRY 1997-2006

ABSTRACT

The objective of this study is to analyse the response capacity of Turkish manufacturing industry to
growing international competition from low-wage countries and to real exchange rate fluctuations. To
analyse these competitive pressures and the responses of enterprises, developments in profit margins on
exports and domestic sales and their main determinants have been estimated in a range of manufacturing
sectors. This analysis reveals the emergence of three clusters in Turkish manufacturing industry: highly
competitive, intermediary and declining sectors. The respective profitability performances of these clusters
reflect on their growth dynamics: more profitable activities produce, export and create employment more
than the others.


The car industry: The contribution of productivity growth has been decisive but also somewhat
volatile. It was outstanding from 2002Q1 to 2004Q3 and then declined. The recent deceleration in
export prices affected profits negatively (since 2005Q1).

• Electronics: The contribution of price developments since 2002Q1 has been consistently negative(reflecting probably mounting competition from Asia). Electronics firms reacted with important
productivity gains and, more recently, with wage moderation. However, all three factors contributed negatively in 2006Q1.

• The food industry: Strong wage growth affected profits negatively since 2003Q4. Since 2005Q2,
strong productivity gains made a major contribution.

• Plastics: Since 1999Q4 productivity growth made a consistently positive contribution (except in
three quarters). In 2006Q1, contributions from all three factors were negative.

• Textiles: The three main profitability factors affected profits negatively since 2004Q4. Prices
contributed negatively since 2002Q1. The major productivity gains obtained between 1999Q2-2000Q3 could not be maintained.

• Clothing: Strong wage growth since 2002Q3 affected profits negatively. Prices contributed
negatively since 2002Q1 (except in three quarters).

. Profitability level analysis according to sectors
5.1 The profitability performances of different sectors were estimated and analysed, with a
particular focus on the post crisis structural adjustment period.
5.2 The analysis makes clear that individual sectors’ profitability has increasingly diverged, and
that this divergence is deeper in export markets than in the domestic market. The divergence of sectoral
profitabilities reflects mainly weakening sectors’ loosing their margins more severely in export markets
than at home, while sectors which succeeded to preserve their profitability achieved a comparable
performance in foreign and domestic markets.
5.3 The analysis indicates that the profit squeeze was strongest in the industries which suffered from
a fall in output prices, as these firms were not able to raise productivity or cut wages sufficiently to protect
their profit margins. By contrast, the more successful industries faced less pressure on prices (due to
product specialisation, high demand, and/or less competition from low wage countries) and also achieved
more wage restraint, as their more skilled labour force was less affected by the sharp increase in minimum
wages, so that their profit margins remained larger

Sectors Performance Highly competitive sectors
Car manufacturers Firms have succeeded to achieve remarkable wage restraint over the past two years despite
a successful pickup in their prices and profits.
Electronic goods Manufacturers have achieved significant wage moderation under strong downward
pressures on prices and profits. The pressures on prices have been increasing recently.
Basic Metals The sector benefited from exceptional price and profitability increases (due to excess demand in international markets) but avoided wage drifts.
Intermediary sectors
Electrical machines In response to growing import competition (basically from China) producers have shifted
to higher value-added products.
Metal products Firms have not stopped developing their international activity in spite of narrowing export profit margins.
Furniture Manufacturers responded to a sharp loss of profitability by accelerating productivity gains
and by shifting to higher value-added products.
Plastics Manufacturers reacted to a sharp fall in international prices with very strong productivity
gains. And it has a tendency to become one of the highly competitive sectors.
Declining sectors
Textiles In spite of steep price declines and mediocre productivity gains, firms were effectively
forced to grant above-average wage increases, due to large increases in the minimum
wage.
Clothing Protection measures against Chinese exports in OECD markets in 2005 permitted some
restoration in margins, without however slowing down sharp employment adjustments.
Leather manufacturing Producers recently improved their product differentiation and pricing power. A pickup of
exports ensued but employment adjustments continue.

6. Conclusion

6.1 The analysis reveals the emergence of three clusters in Turkish manufacturing industry: highly
competitive, intermediary and declining sectors. The respective profitability performances of these clusters
reflect on their growth dynamics: more profitable activities produce, export and create employment more
than the others

http://www.tcmb.gov.tr/

The Evolution and Determinants of Profitability in Turkish Manufacturing Industry, 1997-2006
(Rauf Gönenç, Gökhan Yılmaz Working Paper No. 07/01, January, 2007)