KPMG's Industrial Manufacturing Sector Outlook 2019 Report

KPMG's Industrial Production Sector Overview 2019 Report Examines State of Manufacturing

KPMG released its Industrial Production Sector Overview 2019 report. The report highlights three main factors pressuring industrial production in Turkey: financial contraction, protectionism and Brexit. However, despite mixed global data, expectations for export orders remain strong in Turkey, and foreign investor interest in the sector continues. Alongside tightening domestic financing conditions and weak demand, protectionist approaches in global trade and uncertainties arising from Brexit are among the factors negatively affecting the sector's outlook. Hakan Ölekli from KPMG Turkey, emphasizing the critical importance of global trade and geopolitical tensions for Turkey's industrial sector, said: "If there is no further deterioration from these two issues affecting the world in general and Turkey in particular, recovery in industrial production could be seen in the second half of 2019. Otherwise, deepening trade wars globally would be the primary factor limiting industrial production in Turkey."

GLOBAL SITUATION

• Global industrial sector has entered a slowdown process that became evident in the second half of 2018.
• Global trade volume showed 0.5% growth as of March 2019, with industrial production at 0.8% level.
• Japan and the Euro Area showed the weakest performance among developed economies in 2018, while the US achieved high growth thanks to its strong domestic market.
• Latin American economies were among the weakest performers among emerging economies.

Slowdown to continue

• Leading data suggest the slowdown in global industrial production will continue for some time. Purchasing managers' indices (PMI) in global surveys remain above the 50 level, indicating activity continues to grow, but they confirm the slowdown is persisting.
• Industrial sector confidence indices calculated by the OECD also confirm continued loss of confidence in the industrial sector among developed economies (G-7). However, these figures show stabilization efforts in all OECD economies toward the end of 2018.

SITUATION IN TURKEY

• Industrial production in Turkey showed 2.1% increase in March 2019 compared to the same month of the previous year, while annual contraction of 2.2% was recorded.
• Looking at the overall picture of industrial production in Turkey in the first quarter of 2019, it declined 4.8% compared to the first quarter of the previous year. Compared to the previous quarter, seasonally and calendar-adjusted industrial production recorded 1.7% growth.
• Advances in information technology are causing transformations in the sector's production structure. However, this process is progressing relatively slowly in Turkey.
• Despite incentives given in recent years for R&D spending to increase technology levels, no significant increases have been recorded.
• If a free trade agreement is not pursued between the two countries, the UK's Brexit process and the possibility of the UK leaving the EU without an agreement could hinder Turkey's export growth and renewed acceleration of industrial production.

Technology's Share Growing

• In the second half of 2018, high-technology production, which has a limited share of total production, increased 5%. Sharp declines were seen in mid-low and mid-high technology-intensive production based on external demand.
• According to March 2019 data, high-technology production increased 13.5% compared to the same month of the previous year, while mid-high and mid-low technology-intensive production contracted 2.5% and 9.0% respectively. Low technology-intensive production showed 0.6% growth.

No Cause for Concern on Employment

• Although notable momentum loss was seen in the second half of 2018, no decline has yet been observed in industrial production employment. Looking at the year overall, total employment in industrial production maintained its year-on-year growth trend.
• Male employment in the industrial sector, which was 4 million 115 thousand in 2017, rose to 4 million 306 thousand in 2018, while female employment increased from 1 million 275 thousand to 1 million 362 thousand.
• Female employment share in the sector, which was 23.2% in 2014, reached 24.0% by the end of 2018. As of February 2019, industrial sector employment rate was 19.7%, while female labor force participation rate reached 34% level.

Minimum Wage Impact

• Minimum wage increases and rising inflation trend are also affecting employment in the sector. With the minimum wage increase determined for 2019 at a high rate of 29%, it is projected that industrial labor costs will continue to increase rapidly in the coming period.

Costs Increased

• Production costs, which had been at low levels in previous years, increased 27% as of mid-2018 compared to the previous year. The sharpest increase of 40.3% occurred in the energy group.
• Due to rapid increases in exchange rates, producer costs in industrial production increased at a rate of 35.7% in 2018. Average increase in the overseas energy group reached 58%.
• In 2018, labor costs increased an average of 19.9%, becoming a factor straining the sector. As of March 2019, labor payments showed 20.9% increase compared to the same quarter of the previous year.

Revenue Growth Recorded

• As of March 2019, the calendar-adjusted industrial revenue index showed 25.8% increase compared to the same month of the previous year. Compared to February, the increase was 5.3%.

Foreign investor interest continues

• Between 2004-2018, foreign direct investment in the sector exceeded 58 billion dollars. However, of the 29.7 billion dollar total equity investment by overseas residents, 8.7 billion dollars is in companies in the sector.

Recovery signals observed

• Although the global trade atmosphere is not supportive, expectations for export orders remain strong in Turkey recently. Despite rising cost factors reducing profit margins, the low level of the Turkish Lira is considered the primary factor behind this.
• With the support of limited decline in real sector confidence index and limited weakening in exports, capacity utilization rate also entered a stabilization process in the near term.

'Technology is an opportunity, not a threat'

Hakan Ölekli from KPMG Turkey noted that developments in information technology over the past 5 years have brought important changes to business models and organizational structures in manufacturing. Ölekli said: "New technologies enable rapid increases in productivity in industrial production and also result in rapid decreases in production costs in the medium term. Technological transformation was seen as a major opportunity rather than a threat during periods when growth outlook was positive."