Dr Ramazan Kayikci
Free lancer, Free lancer
Expert Commentary Part 2 Corona Crisis an Opportunity for Turkish Industry?
It is too early to assess the actual effect of the coronavirus in short and long terms on the Turkish foundry industry. By looking at the current course of the pandemic however, it is still possible to make some predictions about what impact this epidemic might have on the industry.
Turkish foundries mainly manufacture semi-finished parts and they annually export around 1.6 Million-ton castings, which is approximately 65 % of their total tonnage to mainly European automotive and machinery producers.
According to the Association of Turkish Foundrymen, there are around 1,000 registered foundries in Turkey. Nearly 800 of these are medium or micro-sized enterprises and therefore, the corona pandemic will inevitably affect the Turkish foundries.
The quick spread of the coronavirus has rapidly brought about radical precautions and with that a dramatic recession in European automotive and other machinery production. In the short term (0-6 months), this may cause a sharp drop in demand of cast components from Turkey also. Small and medium-sized foundries were already having a hard time due to intense competition and low-profit margins, especially in automotive-based production. For this reason, the enterprises that the corona crisis will affect the most intensely in the short term will probably be small and medium casting companies which produce for the automotive industry.
At this stage for many foundries, besides the financial risks, there may inevitably be potential serious personal risks. Therefore, companies should focus primarily on efforts to reduce risks to personal health and ensure that their personnel are safe and protected from viruses in the workplace. As there will be no chance of distance working for the foundry industry, they must keep open and operating daily in order to survive.
Measures to Strengthen the Turkish Economy
Many experts say that Turkey doesn’t have large enough reserves to rescue the economy when things go wrong. For this reason, Turkish officials have taken several measures to control the pandemic from spreading as was the case in neighbor country Iran or Italy. Nevertheless, officials have confirmed around 1,500 infected and more than 30 death in the country. Turkish officials have unveiled several measures to strengthen the nation’s economy one week after the first domestic Covid-19 case was confirmed. Introducing an economic stimulus package worth 100 billion liras (approx. 13.6 billion Euro), President Erdogan and the government, said national insurance payments in 11 sectors would be suspended for six months, while credit payments for impacted companies would be frozen for three months. Other measures lowered the VAT on domestic air travel from 18 % to 1 %, suspended hotel accommodation tax until November and increased minimum pension payments.
Turkish Foundries at Risk of Insolvency
Compared to those of the western European governments, the check written by the Turkish government is no doubt skimpy. There seem also some problems in its scope. For example, VAT reduction on domestic air travel and hotel accommodation taxes is meaningless, while almost all the nation must stay home. So far, neither guarantee to the industry for being protect from bankruptcy has been given nor the support measures mentioned above apparently adequate to save local foundries from bankruptcy.
High Risk of Supply Chain Disruption
By looking at the current situation and the future projections, it can be said that there will be short-term, medium-and long-term consequences of this crisis on the entire value chain in Turkey. However, everything depends on how things go in the country in the next few weeks. No one wishes that the pandemic gets out of control and therefore every possible measure should be taken by the government and the citizen to prevent this. In short-term, however there are high potential risks of supply chain disruption for all over Turkish industries as well as foundries. If the scale of the pandemics comes to the situation where it no longer allows for a solid supply chain and/or people feel their workplace is no longer safe for them to work or people are not allowed to go for their work, then the inevitable consequence of this scenario would be a great industrial shut down. Thus, the government should take an immediate action to guarantee a flowing supply chain and assure the public this will not allowed to be disrupted.
Contrary to the short-term risks, in the medium and long-term there will be many new opportunities for the Turkish economy and Turkish foundries as well. It may be too early to forecast the exact scenario, however, in the long run, this virus crisis offers Turkey a huge opportunity to reposition itself in the global supply chain. After the recent Chinese shut down many European producers could consider Turkey as an alternative supplier for semi-finished products.
President Erdogan has also stated in his latest address that “If we can manage these few weeks well and inform the nation well and keep the virus under control, we anticipate a good outlook, better than we had hoped.” According to him, the pandemic could become an opportunity for Turkish manufacturers as global companies seek to shift production away from China.
Hard Times for all Industries
If the pandemic cannot not be overcome in a few weeks, the most prone industries which will be affected hardest by this crisis are tourism and automotive. Tourism has already been hit by the collapse of human travel since February. It is not known when international and domestic mobility will re-start.
One of the biggest car manufacturers (Ford-Otosan) has already halted its production lines for 2 weeks in Turkey. It is likely that in a few weeks, other manufacturers might come to similar decisions. Here everything depends on how this crisis progresses and how long it will take to end. This is an open question as the coronavirus disrupts daily life and economic activity in new and unpredictable ways. We don’t know yet the scale of decline in production Turkish manufacturers will face. However, there will most likely be a hard period for all the industries regardless of their size. If for any reason the car manufacturers or part suppliers decline their production the other will have to decline accordingly. It is the balance between supply and demand.
Automotive production has stopped almost entirely in Europe. Turkey slowed down its production and has gradually brought it to a halt. Many foundries are facing job cancellations due to this sluggishness. Again, the longevity of the situation is unknown. It is also not clear when European car manufacturers will re-start their production. Knowing that 65 % of foundry production is exported out of Turkey, the survival chance of Turkish foundrymen depends immensely on the recovery of production in Europe. Obviously, all other sectors are affected by this crisis and will be more intensely affected in the next few weeks.
Turkey in Place of China?
The worst case for Turkey would be a major economic crisis as the country experienced in 1994, 2001 and 2008. If it happens this would be the worst than all the previous cases. Turkey’s medium- and long-term foreign currency debts exceeded $ 328 billion as of the end of 2018, according to official data, with private companies responsible for about two-thirds. Private companies confronted a further $ 138 billion in foreign exchange debt due in the next year. Given that Turkey’s overall economic production was about $ 766 billion last year, these numbers were disturbing. In a best case scenario, the corona pandemic ends soon without disruption on the economy. Then, as it is mentioned above, Turkey can take the place of China for much more investment and jobs than as did before the corona pandemic.
It is well known that after each crisis Turkish economy recovers quickly. Turkish manufacturing industries such as the foundry sector is well interconnected to European manufacturers and adopts itself by means of cost and quality according to the European standards. This is the only way to sell products to the European manufacturers. For this reason, many people believe that Turkey will be doing better after this crisis.
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