Kutlu Karavelioğlu
Türkiye’s Machinery Exporters’ Association (MAİB) President

Despite an increase in machinery exports, high interest rates are negatively impacting the sector’s profitability and production capacity. The decline in exports of tractors, agricultural, and forestry machinery stands out as a significant indicator of the overall contraction in the industry.

According to consolidated data from the machinery manufacturing industry, total machinery exports including free zones rose by 0.3% in the January-June period, reaching 13.7 billion dollars and entering positive territory for the first time this year. Although exports decreased by 5.7% in volume terms, machinery exporters raised their average kilogram price by 6.3% to 7.8 dollars. On an annualized basis, exports increased by 0.5% to 28.3 billion dollars. During this period, exports to Germany—the sector’s largest market—managed a limited positive growth of 0.8%, amounting to 1.5 billion dollars in machinery exports. The United States ranked second with a 3% increase and 871 million dollars in exports, followed by Italy with an 11.8% rise and 593 million dollars. Among the top 10 countries, exports to Russia—whose ranking is rapidly declining—fell by 36.4%, while France and Romania recorded increases of 27% and 24.6%, respectively. Among subsectors, exports of internal combustion engines and components, ranking first, rose 5% to reach 1.2 billion dollars. Losses in construction and mining machinery, one of the most shrinking sectors, reached 167 million dollars. In the first six months, exports of tractors, agricultural, and forestry machinery brought 85 million dollars less, while washing and drying machine exports decreased by 65 million dollars. In June, when a calendar effect led to a 10% export increase, the unit kilogram price rose for the first time to 8.3 dollars.

TRUMP TAKES MEASURES AGAINST TRADE DIVERSION

Second-quarter global trade data indicate that the tariff confusion, which keeps key production centers worldwide on edge, has caused orders to be brought forward. The WTO’s announcement that no real growth is expected in goods trade this year suggests that the rise observed in global production and order PMIs since February may not be sustainable. Although negotiations between the EU and the US continue tensely despite their trade deficits in goods and services balancing each other, after Japan and South Korea, BRICS countries have also come under Trump’s radar. Although not yet openly stated, there is a possibility that the US’s major trading partners may develop a collective counter stance. Countries like the United Kingdom and Vietnam, which have received tariff cuts, are enjoying early completion of their negotiations. The tax applied to Vietnam has been reduced from 46% to 20%, while an additional 40% tax has been imposed on foreign goods shipped via this country. In other words, the Trump administration has effectively designated Vietnam as an investment country by taking precautions against possible trade route deviations. To enable those considering selling goods to the US and EU through Türkiye at low or zero tariffs to quickly become investors, we need to develop strategies that prioritize specialized customs and market supervision.

SELECTIVE DEFENSE STRATEGIES EMERGE AGAINST THE CHINA SHOCK

The EU, aiming to reduce dependency on third countries, especially China, in critical technologies, is creating a new investment regime to promote domestic production under the definition of ‘Net Zero Strategic Projects.’ For example, when the dependency rate on foreign components in energy machinery or systems exceeds 50%, accelerated permit processes and financing facilities are activated for production and investment projects in that field. The European Commission’s response to the China Shock and its development of protective measures against Chinese firms in public procurement indicate that the Union is adopting selective defense strategies alongside its open trade policy. The call for joint action against China’s monopolistic approach in critical products at the G7 meeting also signals that this direction will deepen through global cooperation. In this context, Türkiye should position itself both as an alternative in the strategy to reduce dependency on China and as a partner that upholds fair trade principles. Developments in the EU, which established an ‘Import Surveillance Unit’ to protect its industry and began publishing heat maps by tracking unusual increases instantly, should prompt us to set up early warning systems against goods that could quietly infiltrate our market. While strengthening our import regime, inspiration should be taken from every measure the EU develops to cope with foreign goods amid its weakened competitiveness. In the first five months of the year, machinery imports from China alone increased by 16.6%, reaching 5.3 billion dollars. The share of Chinese imports in our total machinery imports, which was 24.6% in the same period last year, rose to 28.8% this year, clearly showing the exponentially growing impact of China’s state-backed aggressive pricing and market entry strategies on Türkiye and its shifting of domestic market balances in its favor.

VERY STRONG SIGNS OF CONTRACTION IN PRODUCTION

We regard the 9% increase in orders in May in Germany’s machinery and plant engineering sector—a key commercial and technical catalyst for us—as a recovery signal despite the base effect. The 12% increase in foreign orders is evaluated as a result of the EU’s determination to consolidate the single market. In the US, manufacturing PMI data exceeding expectations is a positive development for global demand and indicates a mid-term expansion trend in machinery and equipment investments. While hopes for the investment environment begin to grow, officials from the European Central Bank complain that the rapid appreciation of the euro will fuel imports and disrupt efforts to keep inflation at 2%. Despite the risk of shifting from production to imports, it is hoped that the appreciation of the Turkish lira will contribute to the disinflation process, yet Türkiye’s PMI index falling to 46.7 in June sends a very strong signal about the stagnation in industrial production. Domestic producer price index (PPI) in manufacturing is 23.8%, reaching 30.9% in machinery; our products continue to become more expensive in foreign currency terms. The 9.3% production decline in machinery in May and the capacity utilization rate falling to 68.6% in June show the sector is facing losses difficult to compensate.

NO REAL GROWTH, PROFITS ERODE

The 41% increase observed in production-based sales for 2024 does not represent real growth, as it remains below the increase in the domestic producer price index in the same period. The dramatic decline in profitability ratios, continuing into this year, confirms this. In a period when the real return on interest against inflation is at historic highs and production risks have grown extensively and diversified, it has become unsustainable to operate with negligible operating profits, as reflected in employment data released by TÜİK, Türkiye’s official statistical body. While industry contracts, construction and services sectors grow, consumption continues through imports. In short, high interest rates diminish the prosperity of the industry.