THE ANALYSIS OF INTERNATIONAL COMPETITIVENESS LEVEL OF TURKISH LEATHER INDUSTRY
Leather industry is one of the leading sector of the Turkish economy in terms of industrial production and employment. The share of the sector in the country's total industrial production is 2,2%, and has the share of 1,5 in the total manufacturing labor force and 1,6 in the Turkish total export earnings. This paper analysis the competitiveness level of Turkish leather sector by using Porter's diamond model. It is determined the current state, competitiveness level and explained main features of competitiveness structure of industry, also, a number of competitive strategies suggested. to achieve the research purpose, secondary and primary research collection methods (in depth interviews, semi-structured questionnaire, and expert opinion) were used.
The leather industry is one the oldest industries known to mankind. Particularly, leather appeared as an extremely important raw material required in every area in the civilizations of the world especially in Mesopotamia. Our earliest ancestors used skins to protect their body, hands and feet. Leather is made from the skin of any animal, cow, sheep, goat, camel, reptile, bird or fish through a process known as tanning. This process preserves the skin which would otherwise quickly putrefy or decay. Today the leather industry is scientifically based. Research is continually carried out to ensure the product is improved using the latest technology to meet modern day needs.
Developed countries started to quit the leather processing industry since 1970s because of the emerging environment pollution, excess water consumption in the industry, growing production, and growing labor cost. Due to the growing number of low cost leather imports to these countries, their growing number of environment protection regulations, and high cost, they have started to leave the sector. After the second part of 1980s with the separation of the Soviet Union and the Eastern Block, and growing importance and expansion of market economy caused balances in the leather trade and leather industry change. Consequently, leather production center started to leave Europe and enter to the East. Especially, China, due to low labor cost, and input cost advantages, is well known as the leader in the shoe sector with its export nearly 19 billion dollars. India, Brazil, Indonesia, Italy, Mexico, Thailand, Pakistan, and Turkey follow China, which is the largest producer and exporter of the sector holding the 50% share (ITKIB, 2005).
Historical Development of Turkish Leather Sector
Leather industry, which has been held by Turks dominantly since the 15th century, became one of the most important sectors of Turkey in the second half of 20th century. Although roots of the leather industry are very old and of long standing, the industry was a work branch which descended from father to son holding the guild characteristic in the very first years of the Republic. However, the leather industry has come through some changes due to varying incentive and supportive policies due to development programs. Operative effect of the State in the leather industry has started with the foundation of Smerbank, tanning operations and shoe production has become major activities of the sector for long years. The share of private enterprises has started to grown due to the application of a more liberal and private-sector focused development and trade policy in Turkey since 1950, and it has reached to its peak point, 100%, at the present day (Dellal ve zdogru, 2003).
Raw leather, which is the main entry of the leather industry, had been one of the basic elements of Turkish exports up to 1960s. Up to these years, 70% of the existing capacity has been exported as both raw leather and semi-product. Following years after 1960 raw material demand increased parallel to the development of the sector, and 100% of the existing leather production was used in the industry. Later on domestic raw leather supply fell short for the demand, therefore the import started. On the other side, since 1985 raw leather export has taken part in "products subject to permission list", and restrictions were imposed for the livestock export (Kuscu, 1996). Since 1990s, the composition of leather import has also diversified. In this period important shares in total import was taken by processed leather industry, raw leather industry, and the shoe industry took, respectively. Low shares of leather ready-wear and saddlery industry were noteworthy. Turkish leather industry import depends on the raw leather based on ready-wear entry. After 1980, raw leather demand increased due to the increase in leather ready-wear industry product export. Because of insufficient supply of domestic raw leather, export increased. Raw material cost of the sector increased especially because of the production fluctuations of different causes in exporting countries (Uysal, 2002: 676). In fact, one of Turkey's most important sectors, the leather, has been termed with Russian market concerning export and employment whereas Turkish leather industry took place not only in Russia and Commonwealth of Independent States but also in world markets through 95% export structure and 1 billion dollars of formal export revenue in 2003. In this respect, leather and leather product industry have sustained its development rapidly since the last 15 years, and have achieved to integrate into international markets through actualizing significant amount of export by using a significant amount of imported resources besides domestic raw leather resources.
In summary, leather and leather product industry have sustained its development rapidly for the last 15 years, and have achieved to integrate into international markets through actualizing significant amount of export by using a production capacity increased in significant rate. Technological advancement, which is a must for a competitive industry, is growing rapidly and the Turkish leather sector has reached the point that it now exports its own technology. Turkey can now produce all the machinery and the most of the chemicals which it needs for leather making and export them as well. Leather manufacturers are mainly located in Istanbul (Tuzla), Izmir (Menemen), orlu, Usak, Denizli, Gerede, Bursa, Gnen, Manisa, Bor and Kula. Zeytinburnu (Istanbul) is considered the most important production and trade centre for the Turkish leather garment industry (Bektas, 2006).
Diamond Model Approach for International Competitiveness Analysis
In 1990, Porter developed Diamond Model while explaining why some countries are more competitive than others are. The model analyzes components of the global competition in a systematical framework in order to introduce the indicators of national competitive advantage (Bulu, Eraslan and Kaya, 2006). Diamond Model also embodies a sector's total competitiveness position. Classical economics theories identify the factor pools such as national territory, natural resources, and population that can be delivered to prosperity, as the indicators of comparative advantage. It is also not sufficient to merely undertake macroeconomics variables, low-cost or intensive labor force, state policies, or management techniques as the indicator of competitive advantage in order to attain the accurate result. Porter has focused on specific industries to attain a more valid paradigm, and conveyed that, competitiveness is affected by the factors mentioned above. However, he also underlined that in some situations those factors might inhibit sustainable growth if they are abundant. Porter asserted that nations could form their own advanced factor pools such as well-qualified labor force, powerful technology, knowledge, and culture, and he added that this is the case for specialized conditions (Porter, 1990; Neven and Drge, 2001:4-5; Bulu et al., 2004: 4). Those factors, which play primary role in the formulation of comparative advantage, can be developed or can be changed parallel to policies applied, technological developments, or cultural developments. On the other side, Porter argues that factors that are open to general usage such as any firm can gain unskilled labor, raw material, and that those firms were not able to have competitive advantage concerning these features.
The model designed like a diamond defined four factors affecting the competitive advantage. These basic variables are factor conditions, firm strategy, and rivalry structure, demand conditions, and related and supporting industries, each placed in a corner of the diamond. State takes place in the model as another variable affecting other four variables pro-actively. Diamond Model identifying the competitive advantage introduces a system; therefore, basic variables not one by one but collectively identify the competitive advantage. In other words, factors placed on each corner of the diamond, affect each other. Therefore system acts like a dynamic structure (Bulu, Eraslan and Kay., 2006). State impacts four factors externally; therefore there exists internal interaction connection in twelve directions, and four external interaction connections effect degree between these interaction connections, and effect degree between interaction connections and the model as a whole vary from region to region or from firm to firm. Diamond model is applied for the purpose of identifying the competitive positions of sectors and countries by representing the effect of one factor on the other three factors (Bulu, Eraslan and Kaya, 2006).
Demand conditions affect the competitiveness of firms by requesting new innovations. Besides high demand level brings economies of scale advantage to firms. A powerful demand structure, which is not contented with the exiting conditions and which is diversified enforce firms to produce new products and to pursue changes. By the way, the highness of quantity and the quality of domestic demand bring in regional firms competitive advantage in global markets. According to Porter, if domestic demand signals firms correctly about the structure of the future demand, nations or national firms can gain competitive advantage by sensing the said signals before foreign companies.
Sufficiency and the competitiveness level of related and supporting industries affect directly the competitive advantage of firms. A globally successful sector may carry another related sector to global success. For instance, Italy not only possesses a good leather and shoe industry but also possesses a good leather processing machines sector. A competitive supply chain may form competitive advantage by supplying low cost and innovative inputs. In sectors within horizontal and vertical connections, exchange of information brings in innovation and exchange of ideas.
With the firm strategy and the structure of rivalry, Porter treats establishment formats of firms, organization structure, polities, and national competitiveness. While polities of firms affect the firm strategy directly, it has positive or negative effects upon the polities of cultures, organization structure, firm relations, etc. The structure of national competition is closely related to global competitiveness. According to Porter, even though firms perceive low competition as an advantage, a qualified regional competition prepares firms for the global competition by enforcing them to innovative and go beyond economical facilities.
State, acting as an external dimension affecting those four factors, plays a major role in formation of comparative advantage. State affects these four factors through applications such as varying standards development, and preventing monopolies (Porter, 1990; z and Pamuksuz, 2003: 3). In the Diamond Model of Porter, the whole system is defined as a quite dynamic process in which positive and negative interactions occur. In this process, competitive advantages are related to renewals and the speed of innovations. The case of being beneficial for an effect emanating from a determiner is related to the condition of that determiner. Every factor is affected positive in case that factor assesses the effect reflecting to its own. Emergence of a large and common interaction is related to qualification and density of interactions in the whole system. While only one factor is generally insufficient, presence of a dynamic and competitive media with new information, capabilities, and players, brings in global competitive advantage (Erkan and Erkan, 1994: 360). In summary, model is a convenient and an important tool to analyze competitiveness in sector level. In this respect, by the Diamond Model, it is possible to ascertain how leather industry is convenient to gain national competitive advantage depending on these four factors. When the Diamond Model is analyzed in detail, the model enables us to determine which of these basic factors and their sub variables are weak, and which are strong. This process leads the researcher to determine to develop further which of these basic factors and/or these variables. In other words, by the Diamond Model, the competitive position of the sector is identified therefore it will be possible to suggest strategies upon the export ability and the capacity of the sector.
Methodology of Research
The aim of the study is to identify the competitive position of Turkish leather industry by using the Diamond Model of Porter. In other words, the competitive position of Turkish leather industry is analyzed with Diamond Model. To attain the results of the study, primary and secondary research methods are used.
* Data Collection Method
In this study, primary data collection method is used together with secondary data collection method. In-depth interview and survey are two techniques used as primary data collection methods. Besides sectoral data were collected from various sources such as sectoral reports, etc. as secondary source.
In-depth interview method was applied to sector managers and members of related non-governmental organizations, and to decision makers in the light of findings in the literature review. In order to prevent directing the applicant, and to attain the information completely and correctly, interviews were held in a chatty environment.
Another data collection method used in the study is survey. Survey is an important tool to gather fast, reliable and a systematic data. Questions asked in the survey was designed as structured questions, semi-structured questions, and unstructured questions. Structured questions were prepared in light of basic factors and sub variables of the Diamond Model. With the unstructured questions of survey, ideas and views of the person related to the sector were asked. Survey questions were applied to main players of the sector (related NGO leaders and members, officials of related public bodies, decision makers, entrepreneurs, and experts). Applicants were determined by using secondary data and advices of other applicants. While some surveys were applied face to face, some were applied through the e-mail. As the secondary data collection method, written and visual resources (sectoral reports, records of organizations, related internet resources, scientific articles, firm catalogs of related non-governmental organizations and of public bodies) were investigated.
* Data Analysis Method
The Diamond Model, developed by Michael Porter, was used to identify the regional competitiveness of Turkish leather industry. In the application, factors related to sector were analyzed in the light of factors of the Diamond Model.
All basic factors (factor conditions, demand condition, related and supporting industries, and firm strategy and rivalry structure) were divided into sub factors, and data gathered from the study were compared with international competitiveness benchmark. In this respect, each factor was rated: low (-), medium (-/+), and high (+).
After determining levels of all factors, the same methodology was applied to reveal the competitiveness position of the sector. Operative effects for the competitiveness levels of factors affect the result.
Competitiveness Analysis of Turkish Leather Sector by Diamond Model
* Factor Conditions
Raw Material: For the domestic production of raw leather, which is the basic input of the leather sector, is not sufficient, raw and semi-processed leather demand is supplied through import. In Turkey, leather gathered from cutting animals constitutes 40% of processed leather. Residual 60% is supplied through import. 46% of great cattle leather and 75% of small cattle leather is presumably supplied through import. The reason why the sector depends on import so much is the insufficient domestic supply concerning both amount and quality. A significant amount of raw leather and semi-processed leather is imported from EU countries.
Labor: Turkey is an advantageous country in terms of skilled and unskilled labor (Engineer, adept, foreman, intermediate labor, etc.)
Technology: Sector is sufficiently advanced in terms of technology. Especially advancement on leather processing technique enables the sector to export the technology; however, Turkish leather processing technology is still follower.
Geographical Position: Sector possesses the advantage of geographical position in terms of input and output (marketing). Notably, while geographically closeness to harbors eases raw material supply, geographically closeness to Europe, Russia, and other countries eases marketing procedures.
* Firm Strategy and Rivalry Structure
SME Type of Structuring: Notably, leather ready-wear sector is structured as SMEs. A major part of the sector is located in Istanbul, and there are 1.700 enrolled members in Istanbul Chamber of Industry, 3180 enrolled members in Umum Saraclar Odasi, and there are 90 enrolled firms in Saraciye Sanayicileri Dernegi. Nonetheless, there are more than 500 firms throughout Turkey which is not enrolled to any organization or chamber (Dnya, 2004). Management structure of SMEs brings in dynamism to firms, and sectors (indirectly) in terms of decision-making and innovativeness. Most of the firms in the sector are SMEs, provided that firms competing in the sector experience difficulty in providing the necessary funding for R&D which is an important element for competition power.
Family Businesses and Professionalism: In consequence of high number of family businesses in the sector, the sector cannot professionalize. These kinds of firms are not institutionalized; so they are not able to employ professionals; therefore, they get weak at strategic points such as profitability, financial structure, output development and innovation &differentiation while the family connections bring flexibility.
Fashion, Design, and Branding: Turkish leather ready-wear producers find acceptance all over the world through the quality they possess, provided that it is not the case for branding. Both high cost of branding investment, and usage of foreign brands for exports to Europe are the main obstacles for the case of branding.
* Demand Conditions
Domestic Demand: Because national population is about 70 million, and nearly half of the population consists of young people, Turkey stands as a significant market. Annual increase of GNP increases the expenditure per person. Nevertheless, the climate, and geographical structure of our country prevents end users using leather (as a ready-wear) during all four seasons.
Foreign Demand: 95% of the sector production is exported indicating that the sector is focused on foreign demand. Since the decomposition of the Soviet Union in 1990s, leather ready-wear sector has advanced in the region. Sector is the biggest supplier of Russia; therefore, sector is dependent on Russia largely. Even a little crisis in Russia or political decisions made by Russian government affects the sector. The reason why Russian market is attractive for the leather sector is Russian buyers shopping with cash money. Moreover, the appropriate climate of Russia makes the increase in demand feasible.
* Related and Supporting Industries
Industrial Zones: Because of custom operations, the raw leather requires and negative relation between environment and processes, firms competing in the sector are obliged to operate in industrial zones. Istanbul Tuzla Industrial Zone and Istanbul orlu Industrial Zone are perceived as two important centers. Formal data indicate that there are 13 leather industrial zones in Turkey, however, in consequence of insufficient supply in all over the world to run all of these industrial zones, a portion of them are known to work with idle capacity. On the other hand, because of environment pressure in Europe, countries such as France, Italy, and Spain drawback from tannery business, and Turkey has tried to fill the gap. Therefore, leather industrial zones with role model treatment facilities were built, and demands were supplied through replacing the newest technology.
Logistics: Logistics, which plays a vital role in the transportation of product to market, is at an acceptable level in the most important capital of the sector, in Istanbul. Especially, land transport is the most important supporter for European market. Besides, export to countries along the Black Sea is done easily through seaway.
Slaughterhouses: Sector industrialists underline the fact that high quality raw material is required to produce high quality products, and they highlight the low quality of raw leather supplied from domestic market. Industrialists express that big farm lands should be established with the supervision of a veterinarian in order to provide high quality leather. It is also indicated that there must be slaughtering standards, and those farm lands must be kept under inspection. Moreover, problems in the storage of leather occur, and this process has not been standardized, yet.
Activities of Non-Governmental Organizations: The number of NGOs related to leather and leather ready wear sector is sufficient. The movement of Turkish Leather Council of IDMIB in 2005 brought in activity to the sector, even, famous people (famous people from media, field of art, business world, and a minister) out of sector has supported the creation of synergy in the sector by joining the movement voluntarily.
Collaboration with Universities: As is the case in many other sectors in our country, there is no significant collaboration between leather industry and universities/other academic organizations. Especially universities with customized departments supplying the qualified labor force of sector do not exist. There are not also sector-focused departments that may conduct R&D activities.
Social Security Payments: In Turkey, the share of employment tax rate in cost of an employer is approximately 41%. This rate is 21,2% in USA, and 16,2% in Japan. The situation causes firms lose competition power, and pushes firms to be unregistered. When social security payments are taken into account as well, an employee working in Istanbul with minimum wage, cost employer approximately 829, 49 YTL.
Tax Rates: The regulation concerning reduction in extremely high corporation tax (from 30% to 20%) is perceived as an important progress for the sector.
Conclusion and Suggestions
Processed leather, leather products, and shoe sector is an important sector in which Turkey is one of the leading countries in terms of production, and technology, and in which Turkey is an exporter of technology and know-how in some sub-product groups; however, the export of the sector and the share it has in world markets are not satisfactory. Therefore, the sector cannot realize the value of the potential it possesses. Statistical analysis made with registered data about developments related to sector in world markets, positions of these players in these markets, and the presence of Turkey in markets, indicates that sector is in need of a market strategy that will be rapidly applied.
When the position of Turkish leather, leather products, and shoe sector in world markets is considered closely, it is seen that the sector is not an important player in leading markets. Current export is mainly to Russia; however, it can be seen that the most vital market, which is European Union, does not come up with a significant share in total market.
In general, negative competition, lack of management and capital due to family company structure, lack of new product development and modern marketing activities due to company scale are factors weakening the competitive power of sector.
The position of Turkish leather industry takes in world market is in the area of qualified, non-expensive leather, and leather products. It is nearly impossible for the sector to compete with products produced in mass and cheaply in Far East. Further development in areas where the sector can compete depends on product quality, and product variety. The experience, knowledge, and mature labor force possessed may enable the sector to go further in this area. The sector must be aware that allocation of resources for this area will be a paying investment for long term. There are many possibilities of product development in the sector ranging from raw leather processing methods to valuing of processed leather in terms of utilization area and purpose. It is also possible to raise the value of defective product and defective semi product not only through developments in production but also in finishing stage. However, developments in leather processing and painting require resource and skilled labor allocation in R&D activities. Therefore the appropriate strategy for the incoming days should be focusing on R&D activities.
Sector faces difficulties in respect of fashion and branding. In this area, imitating is in more forefront than originality and creativity. Works done with designers and resource allocation level for these works is insufficient. It is quite important to be aware that marketing is the art of creating demand for new products, and innovativeness and creativity must be in the forefront. In this respect, Turkey should be the leader in fashion, and branding as the new center of leather. Fashion and design contests organized thus far indicate that Turkey possesses knowledge, and creative young designers that cannot be undervalued. A special attention should be paid to sector. A quantum leap should be actualized for not only leather product such as apparel or shoe, but also for processed semi-product leather produced by Turkish leather sector. But in order to have sustainable and permanent export, tanneries must specialize on leather they process one by one or in groups.
There are inequalities and "unfair competition" in regions where industrial leather production of Turkey is done. Avoidance of such kind of conditions is a requirement for our common benefit. Recently experiences indicate that closure of tanneries or deterioration in a specific region does not bring in an advantageous position for the other regions. The core resolution is to use multi-regional structure of the industry, which possesses different experience and hardware as a positive factor for foreign competition. Italy is a good example for the sector. Italian leather industry has developed specialization of different regions on different products, so that they have achieved to position themselves as a responsive sector to different demands through a diversified product range, and they have bewared of destructive competition in between. Together with division of labor, and specialization mentioned above, restructuring in production requires new purpose built arrangements and organizations. All above are objectives that can absolutely be actualized gradually. The important point here is stability for doing the right and having an open understanding.
Investment and scale growth has been financed through the benefit gained from recent market growth, and as a consequence through equity capital. Funding of modern technology investment is quite expensive. For instance, establishment of a modern tannery producing 2000 unit of leather for fur per day costs 5 million dollars. Production cost is quite high as well. Firstly, the amount of leather, which is the basic raw material, and input of the leather industry is limited to the number of animal on earth, so that leather is an expensive raw material. Moreover, fluctuations in supply-demand relations make the leather a material, which is open to speculations in world stock markets. On the other hand, leather processing cost and working capital need is quiet high. In brief, fixed capital investments are financed through sector's own equity capital, however, due to idle capacity amortization of this financing has come to a halt, and to pay for the excess raw material and operating cost has been a matter of concern.
In conclusion, the sector must be directed to new markets through combining cost, quality, and variety within the optimum way while keeping its market share in Russian market. The sector must have the courage to be creative, and innovative, and courage to change habits. The main purpose should be decreasing the market portfolio risk by focusing on both risky and high-margin markets such as Russia, and stable, secure, and low-margin markets such as USA. Notably, markets of developed countries are markets with high barriers, high demand and high quality standards, however, once entered, these markets provide stability and institutionalism. Efficient huge markets perceived as emerging economy in industry and trade throughout the world such as China must be taken into consideration.
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