Friday, 09 November 2018 15:03

ChicGeek Comment The Turkish Lira Crisis Boon

Turkish lira crisis for fashion manufacturingOver the past few decades Turkey has become a powerhouse in fashion manufacturing. Thanks to cheap and plentiful labour, quality producers and its geographical location, at the heart of the world, Turkey is, now, the 6th largest fashion supplier in the world and the 3rd largest supplier to the EU, according to World Trade Organization (WTO) data 2016.

The Turkish lira has been failing this year due, in part, to its high levels of government debt and, in August, thanks to Donald Trump’s clumsy rhetoric over the detention of US pastor Andrew Brunson - he has since been released - and his disagreements over defence policy, the Turkish lira plunged even further.

Trump announced his plans to hike tariffs on Turkish steel and aluminum to 50 percent and 20 percent, respectively. 

The Turkish president, Erdogan, at the time, repeated calls for Turks to sell their dollars and euros to shore up the national currency. “Together with our people, we will stand decisively against the dollar, forex prices, inflation and interest rates. We will protect our economic independence by being tight-knit together,” he said.

“We will impose a boycott on U.S. electronic products. If they have iPhones, there is Samsung on the other side, and we have our own Vestel here,” he naively said.

After vehicles, clothing is Turkeys’ most successful export product, earning 9.4% of the country’s total exports. Of them, knitwear amounted to US$ 8.8bn (5.6% of total export), while exports of woven clothing reached US$6.0bn (3.8% of the total) in 2017. The Turkish lira (TL) is the world’s worst-performing major currency, losing more than 40 percent for the year to date. Five years ago a dollar bought TL2. It is now around TL7.

This clearly makes manufacturing much cheaper for foreign companies if paying in the local currency and an opportunity for Turkey to boost exports. Dollars, euros and pounds are all going further. A source, who didn’t want to be named, said, “I just returned from a trip to Turkey. It's been sad for the Turkish economy, but great for UK companies.

“I've seen the devastating results for some of our own teams working in Turkey, but purchasing and manufacturing becomes even more cost effective and we have seen factories willing to reduce their minimums,” they said.

Data from September 2018 showed inflation surged to 17.9 percent year-on-year in August, its highest level since late 2003. The central bank reacted by sharply increasing its benchmark lending rate from 17.75 percent to 24 percent last month. Turkish companies buying and selling in foreign currencies are less affected. The boon is when they pay their workers in the local currency.

Mukesh Desai, works with companies such as Hackett and French Connection, connecting foreign brands with fabric and manufacturing in Turkey, says, “Local factories buy in pounds and euros so there’s not much difference. It just matters when paying wages in lira and is better by around 5-10%”.

Imports become more expensive, but with Turkey being such a huge domestic fabric producer this will limit its impact on buying the raw material and fabrics.

“Some manufacturers are passing it on, some are not.” says Desai. “Everybody from the British high-street is increasing production and the fabric side is all increasing in Turkey.” he says.

One thing to note, though. “Brands are buying less quantities and are not carrying too much inventory, but they are not going to the Far East as much with Turkey being quicker to market.”

Oguz Yucel of MPY Textile Manufacturing, who produce thousands of woven and knitted pieces daily, says, “We are a Turkish company and produce in Turkey, Bulgaria and China.

“Our customers, from Europe, Benelux, Russia, USA, Canada regions, work in euros and dollars, therefore, we do not produce in Turkish, but purchase in euros and dollars and sell in euros and dollars, therefore we have no problem with production,” he says.

“2019, we are going to be 6% bigger”. says Yucel enthusiastically.

With cheaper labour costs, Turkish apparel manufacturers operating in USD will be the main beneficiaries of the change in the exchange rate, but they will be able to become more competitive and reduce their prices to their wholesale customers. Foreign brands and operators will also be able to negotiate harder and drive better deals.

The one place the Turkish currency crisis is affecting negatively is the domestic economy and local fashion industry. Another source, who didn’t want to be named, works for an pastedGraphic.pngIstanbul based, international retailer specialising in men’s and women’s contemporary casual wear. They make everything in Turkey, except the outerwear and produce all sorts of jersey tops, knits, light weight woven tops and dresses, shirts, jeans and non denim bottoms.

“On the retail side, all international brands in Turkey raised their sale prices as a quick response,” he says. “Local brands (like us) kept prices to an affordable point. It helps to keep the customer loyalty and bring new customers in. On the other hand it sums up to a profit loss”.

“On the manufacturers' side all exporting factories had the advantage,” he says. “But, there are difficulties with their local customers pricing the new collections and receiving payments".

"All products' costs were dramatically raised up due to fabrics, yarns and accessories prices all being in USD. The payment terms between local brands and suppliers are another case that sourcing and finance teams have to deal with,” he says.

The local Turkish consumers will feel the squeeze and any ambitions that foreign brands or retailers had for growth in Turkey will have to be rejigged to recognise this.

“It will definitely make customers to buy less fashion products in the short term.” he says. “They (consumers) will target more affordable products and retailers. The volumes will slide from better brands to budget retailers. So, the better brands will grow their entry price point product groups to keep their customers.” he says.

While Turkey has become a more attractive place to manufacture and buy fabric from for international brands, in the short term, those retailers or brands may be restricted in their fabric and hardware choices if their suppliers work in Turkish lira and imports become much more expensive.

While the currency has bounced back slightly, it’s still volatile and this makes investors uneasy. While this lira boon may increase demand and production, lower investment, due to the high interest rates and overall caution within the Turkish manufacturing business and economy, may stall growth in production capacity and restrict businesses from reaping the full benefits. 

The domestic market will move further towards lower end, homemade product and will definitely dent the luxury international brands unless they can be replaced by tourists with more liras in their pockets. While you’ll probably be seeing an increase in ‘Made in Turkey’ labels in your clothes soon, it will be to the detriment of the local economy.

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