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The Analysis of Turkish Leather Industry's Competitiveness

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Abstract

Considering its export-oriented performance and the close relationship with various branches, the Turkish leather industry is one of the most important sectors of Turkey. Turkey is also a well-known leather and leather products manufacturer in the global market. Thus, Turkish leather industry is faced with a constant competition pressure. Analysing the developments and the factors that are driving the industry, and contributing are important for both the industry and the country's economy. In this study, analysis of competitiveness was discussed by using Porter's Diamond Model. For this purpose, both primary and secondary research methods have been utilized. Interviews consisting of open-ended questions prepared in the light of data surveys were made with two researchers who are experts in leather industry and three large-scale leather apparel companies in Izmir and Istanbul. As a result of the analysis, the main elements of the competition structure of the industry were described under the titles of Input conditions, Demand conditions, Relevant and Supporting authorities, Strategy and competitive structure of company, State activity and chance by analysing the results of respondents; and various suggestions have been made in order to let Turkey have a more competitive position on the world leather industry platform.
ANNALS OF THE UNIVERSITY OF ORADEA
FASCICLE OF TEXTILES, LEATHERWORK
FASCICLE OF TEXTILES, LEATHERWORK
VOLUME XIX, 2018
No. 2
ISSN 1843 813X
ANNALS
OF THE
UNIVERSITY OF ORADEA
EDITOR IN CHIEF
Indrie Liliana, University of Oradea, Romania
BOARD OF EDITORS
Sabina GHERGHE L- U niversity of Oradea, Romania
Simona TRIPA- University of Oradea, Romania
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Jocelyn BELLEMARE
Maria Angeles BONET
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Manfredo GUILIZZONI
Süleyman YALDIZ
Muge YUKSELOGLU
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Mehmet Mete MUTLU
Ioan NEAGU
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Emilia VISILEANU
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THE ANALYSIS OF TURKISH LEATHER
ATILGAN Turan1, OFLUOGLU KUCUK Pelin1
ORK Nilay2, MUTLU Mehmet Mete2
1Ege University, Engineering Faculty, Department of Textile Engineering, 35040, Izmir, Turkiye
pelin.ofluoglu@ege.edu.tr, turan.atilgan@ege.edu.tr
2Ege University, Engineering Faculty, Department of Leather Engineering, 35040, Izmir, Turkiye
nilay.ork@ege.edu.tr, mete.mutlu@ege.edu.tr
Corresponding author: Mutlu, Mehmet Mete, mete. mutlu@ege.edu.tr
Abstract: Considering its export-oriented performance and the close relationship with various branches, the
Turkish leather industry is one of the most important sectors of Turkey. Turkey is also a well-known leather
and leather products manufacturer in the global market. Thus, Turkish leather industry is faced with a
constant competition pressure. Analysing the developments and the factors that are driving the industry , and
contributing are important for both the industry and the
country's economy. In this study, analysis of competitiveness was discussed by using
Porter's Diamond Model. For this purpose, both primary and secondary research methods have been utilized.
Interviews consisting of open-ended questions prepared in the light of data surveys were made with two
researchers who are experts in leather industry and three large -scale leather apparel companies in Izmir and
Istanbul. As a result of the analysis, the main elements of the competition structure of the industry were
described under the titles of Input conditions, Demand conditions, Relevant and Supporting authorities,
Strategy and competitive structure of co mpany, State activity and chance by analysing the results of
respondents; and various suggestions have been made in order to let Turkey have a more competitive position
on the world leather industry platform.
Key words: Leather industry, Porter diamond model, competitiveness analysis
1. INTRODUCTION
Turkish leather industry has made important contributions to the development of Turkey
industry, especially a also has begun to be mentioned
in global markets by the export-based production model. However, because of the increasing market
share of the low-priced and low-quality products coming from the Far East, the leather industry has
faced with a constant competition pressure. Thus, increasing competition and sustainability of this
industry is of major importance.
Surviving of Turkish leather industry in these competitive conditions and increasing its
share in the international markets will be possible by correctly analysing and interpreting the
dynamics of the industry, and taking strategic steps towards the future. Porter's diamond model
allows systematic evaluation of the elements of competition together. For this reason, in this study,
the competitiveness of the leather industry was analysed by the Porter approach, and some
prospective deductions and suggestions were made. Furthermore, competitiveness analysis studies
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based on the diamond model are available for different industries but it is not studied for the leather
industry yet. Consequently, it is thought that this study will also contribute to literature in this issue.
1.1. Diamond Model Approach in Competitiveness Analysis
Porter has developed a model, namely diamond model, to analyse the competitive power of
an industry or a country. The model analyses the elements of global competition in a system
approach in order to systematically reveal the determinants of national competitive advantages. Four
major factors affecting the competitive advantage of an industry in the diamond-designed model
have been identified. These basic variables are the factor conditions, firm strategy and competitive
structure, demand conditions and supporting industries, which are composing the diamond corners.
In response to these four internal variables, there are two external factors in the system, namely
government and chance. In this model, the basic variables determine the competitive advantages
together, not individually.
diamond model is used to determine industries' competitiveness positions by explaining how a factor
is affected by three other factors [1]. Figure 1, shows the model and dynamics that form the model.
Fig. 1: Porter Diamond Model
2. METHOD
In this study, the competitiveness of the Turkish leather industry was analysed by Porter's
Diamond Model method. The elements that constitute the competitiveness of the industry have been
evaluated within this framework. The researchers have utilized primary and secondary data
collection techniques during the data collection step. In the secondary data collection method,
sources that related with the industry and the method (industrial reports of public institutions and
organizations, databases of these institutions, relevant internet resources, scientific articles, company
catalogues, etc.) have been examined.
In the primary data collection method, interviews consisting of open-ended questions were
made with two researchers who are experts in leather industry and three large-scale leather apparel
companies in Izmir and Istanbul. The questions in the questionnaire were prepared in the light of the
secondary data survey and these questions were used in the interviews.
3. RESULTS
Information and data obtained for the competitiveness of the leather industry are given in the
light of the findings obtained by primary and secondary data collection methods. In this context, the
sub-headings that constitute the model are summarized by numerical and interpretive data, and the
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"high-moderate-weak (low)" triple scale is used in order to base the interpretations on a common
classification [2].
3.1. Input conditions
Labour: Leather industry has a 2% share in employment in Turkey. The average daily
earnings of these people are 50.93 TL (9.93Euro) [3]. According to the enterprises, there is a
significant decrease in the number of students who go to the leather-related schools, which
negatively affects the supply of qualified labour force. Moreover, it was emphasized that many
employees changed leather industry due to the economic problems experienced. For these reasons,
the level of qualified labour force in this industry is considered as "weak". It is observed that the
average wage level of the employees is 2000 TL (389.88 Euro) and recruitments are made by
references or advertisements on the internet.
Raw material: leather industry have share in production costs of 60% of raw material, 20%
of labour, 7% of auxiliary materials, 7% of energy, 4% of financing and 2% of another components.
Therefore, raw material costs constitute an important input item [4]. As is known, production costs
are increasing in leather industry. The increase in raw material prices is one of the main reasons for
this situation. Company officials and experts have stated that they have experienced "low" in terms
of quantity in the supply of raw materials and "moderate" in terms of quality and cost. It is stated
that almost 70% of the raw materials are imported from abroad.
Capital: Firms in the leather industry indicate that new investment incentives are limited for
them and that existing clusters are not adequately supported [5]. Industry experts and businesses
classify financing sources on average at 50% bank loans and 50% equity. It is believed that cost of
capital is considered to be "high".
Energy: Industry staffers have stated that they quantity and quality
problems in supplying the energy they need, so they see problems in this area at a "low" level.
3.2. Demand conditions
Domestic demand: It is thought that domestic demand is insufficient and "weak" compared
to external demand, and the demand variability in this market is considered to be "weak". It is
argued that insufficient purchasing power and the changing weather conditions due to global
warming cause low demand of leather; and leather products in the domestic market are mostly
export leftover and second quality products.
Foreign demand: According to experts, foreign demand for Turkish leather products is
increasing. Among the main reasons for this are the geopolitical position and its high quality and
experienced production infrastructure. The foreign demanding level is stated "moderate" and this
demanding variance is at "high" level. Parameters affecting external demands are economy, politics,
fashion, climate change and instability in the country.
The status of the related industries: Leather industry performs activities in close relationship
with many different sectors such as, animal husbandry, textile, chemistry [4]. According to experts,
changes in demand in the related industries are not widely reflected in the leather sector and are
"moderate" level of influence. It is thought that other concepts such as economy and fashion direct
demand more.
3.3. Relevant and Supporting authorities
Industry is in contact with the Ministries of Economy, Customs and Trade, Development
and many others. In addition, occupational and non-governmental organizations like Turkish
Association of Leather Industrialists, Turkish Leather Foundation, Footwear Industrialists
Association of Turkey, Turkish Leather Garments Manufacturers' Association, and Turkish
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Exporters Assembly can provide many possibilities and advantages such as education, labour force,
and cooperation. In addition, Turkish Leather Brands carries out activities aimed at increasing
exports of Turkish leather, leather goods and footwear industry, developing its image and branding it
abroad. Ege University Leather Engineering Department trains engineers for leather industry and
carries out projects and R&D studies jointly with companies in the industry. However, according to
the interviews, the experts find the university-industry cooperation as "moderate". Looking at
international cooperations, companies participating in international fairs and leather companies can
strengthen their cooperation and market share. Cooperation capability in the logistic infrastructure is
considered adequate at the "moderate" level in terms of technology, cost and time opportunities.
3.4. Strategy and competitive structure of company
The situation of the SMEs: The leather processing industry is concentrated in Istanbul-
-Menemen, Tekirdag-Corlu, Usak, Bursa, Balikesir-Gonen, Bolu-Gerede, Isparta, Hatay
and Manisa-Kula. The distribution of shoe supplier firms is 50% in Istanbul and the other firms are
located in cities like Izmir, Konya, Gaziantep, and Bursa. Leather apparel firms are mostly located in
Istanbul and Izmir [6]. According to experts, firms are mainly small and medium sized enterprises,
and the proportion of these firms is 90%. According to industry workers and experts, leather firms'
strategies are more cost-oriented.
The situation of R&D, design and branding activities: There is one R&D center in the
leather industry. There is no leather factory with a design center [7, 8]. The companies in the
industry are also signing various R&D projects with universities. According to managers and
experts, R&D, design infrastructure and branding in leather industry are seen at "low" level.
Concentrated areas of R&D projects are indicated as new technologies in production, technologies
for the environment and productivity increasing methods. Especially design becomes recently an
important fact at firms. It is emphasized that this situation is reflected in the branding and that the
branding is inadequate especially in the foreign market.
Capacity utilization (ratios): According to the data of Central Bank, the production capacity
utilization ratio of leather and related products is 57.4% by 2016 [9]. This ratio proves that the
capacity cannot be used efficiently.
Production range: By means of know-how, craftsmanship, high collection and design
capacity of double-face production, the leather garment area is known internationally. In the
footwear industry, production and product quality are rapidly improved, and design and R&D
capacity develops to produce higher added value products [5]. It is thought that the Turkish leather is
among main players in footwear and garment area, while main competitors are Italy in leather
garments and China in footwear. According to experts, Turkish leather is seen as high quality but
also high cost according to Far East market and low cost and moderate quality according to
European market.
3.5. State activity
Social security payments: Taxes on labour costs and employment in Turkey are an important
part of production costs [4]. The minimum wage in Turkey was 277.18 Euro, the total cost to the
employer together with other expenses 412.31 Euro stands out [10]. This situation can cause
informal employment in the sector.
Tax rates: The rate of VAT on leather and shoe upper leather made by a subcontractor has
been reduced from 18% to 8% starting 25 November 2016 by Decree No 2016/9542 [11]. Industry
executives and academics agree that tax rates for Turkey's manufacturing industry are "high".
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Incentives: There are many incentive schemes closely followed by the leather industry [12].
According to experts and academicians, the effect of incentives and tax policies provided by the
government on competitiveness level is "moderate".
Audit: The leather industry, which moved from an environmental point of view, signed an
"Environmental Protocol" with the Ministry of Environment in 1994. Protocol is required that the
enterprises either take part in any organize industrial zone with a treatment system or establish their
own treatment systems. As a result of the efforts of industry to adapt to the environment, 70% of the
goods produced are produced by environmentally sensitive methods today [13]. It is argued that the
practices in the regulation of intellectual property rights in the fight against counterfeiting should be
activated [5]. Representatives of industry have stated that the efficiency of the state control systems
is "moderate".
Informality: Informal employment has become widespread, wage levels have fallen, and
long working hours have been used as the most known way to lower the labour [14]. One of the
important means of reducing costs is to employ uninsured workers, so industrial representatives
particularly point out that informal employment is at a "high" level.
3.6. Chance
It is also a factor that affects the competitiveness of the leather industry, like every industry
both nationally and internationally. The Turkish leather industry has a structure that is influenced by
economic and political developments due to its commercial relations especially with other foreign
markets in other fields. Managers and academicians interviewed within the scope of the study see
the leather industry as "moderately bright" for the future of Turkey.
4. CONCLUSIONS AND SUGGESTIONS
Turkish leather and
international markets in terms of competitiveness. The leather industry has been on a rising trend for
the last two years, although it has followed a long period of ups and downs. The export target of the
industry is 5.2 billion dollars in 2023. When the leather industry is examined, it is seen that it is
composed of shoes, leather and fur garments, finished leather and furs and saddlery product groups.
Leather shoes has 51% share of the leather industry in export; leather apparel, finished leather and
furs saddlery product groups have 19%, 17%, 13% respectively. According to Porter's Diamond
Model, the competitive power of the industry appears to be "moderate". While the industry is weak
in terms of input conditions, it has moderate competition power in terms of demand conditions.
When we look at the strategies and structure of the companies in the industry, it is seen that there is
a low competitive power except from the product variety. The reason for this is that firm strategies
are largely based on cost strategies due to the fact that 90% of the company structures are composed
of SMEs, low capacity utilization rates (57.4%), low level of R&D, design and branding. Product
range is seen as the most important success of leather industry and it is at a high level.
When we look at the efficiency of the government, it is seen that it is a moderate effect of
competition power. The most significant weaknesses in terms of industry are shown as high tax and
social security payments that state implements. It is also seen that government incentives and
supervision are moderate.
It can be said that the competitiveness of the Turkish leather industry is at a moderate level.
In order to increase the competitive power, it is necessary to improve the weak and moderate
competition elements. According to this;
should give more support to the vocational schools and University that provide intermediary and
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expert personnel for leatherworking in order to solve the problem of qualified personnel. Also;
government incentives need to be developed to lower energy costs. Likewise, remedial measures
should be considered for high capital costs and public measures should be taken to reduce credit
interest.
markets such as the USA, Africa and Iran should be evaluated.
ore on marketing, innovation, design and branding-
oriented strategies than on cost and production-oriented strategies.
rates and social security payments. These costs need to be removed from the factors that have an
adverse effect on competition power of Turkish firms. Likewise, the emphasis should be given on
incentive system to industry-oriented by reviewing.
s informality, which has also a great
effect to unfair competition. In this regard, necessary regulations and inspections must be done
urgently.
The improvements to be done on these terms will provide significant contributions to leather
to increase its competitive power and achieve its goals for the year 2023.
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