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Production in the New World... Starting from Scratch!

The previous month, I was a panelist in the panel discussion on "Global Production Trends" at the Uludağ Economy Summit. Participation in this meeting, which was organized for the first time, and aims to be the "Davos of Turkey", was quite high thanks to the initial enthusiasm and proper marketing.

While I was preparing for the panel discussion, I observed that the following were the common denominators of both my discussions with expert friends in production, and articles by opinion leaders on this topic.

Let me elaborate on these itemsi;

Production in Asia "for Asia"

Production in Asia has been growing rapidly since the 1990s. While it continues to grow under the leadership of China, which surpassed the U.S. in 2007 in terms of production value, and has positioned itself as "the factory of the world", the focus in growth is now shifting quickly to the rapidly growing domestic demand in Asia instead of exports to developed economies.

A sharp change in the cost structure of production

In the last five to six years, significant changes have been seen in the breakdown of items that make up the production cost particularly due to dramatic increases in raw material/energy costs, the relative increase in the cheap labor costs in Asia, and the increase and volatility in freight costs. As a result, all organizations have to review what they will produce where and with which added value, in other words, they have to "design their production model over again".

Supply chain management – starting from scratch!

The supply chain of many industries had been designed according to the balanced world trade conditions of 20 years ago in a way that benefited from cheap labor and freight costs. When end consumer needs that displayed a rapidly changing trend in the aftermath of the 2008 crisis, and supply chain interruptions caused by an increasing number of natural disasters (like the earthquake of 2011 in Japan impacting the whole automotive and electronic industries) were coupled with all the changes I mentioned above, it became essential for organizations to both design supply chain management from scratch, and to consider it as a growing priority in risk management.

New incentives… New opportunities… And risks

After the 2008 crisis, many countries including Turkey announced and are still announcing significant investment incentives to strengthen their economies though for different reasons. Therefore, all organizations that are planning to expand in global markets, increase added value in production, and boost competitiveness have to fully understand the rapidly changing investment dynamics of the country/region.

What, then, is the “reality under the iceberg”? Which theme emerges from all these arguments? In order to be close to the consumer, and manage cost/supply volatility, the “regional production” model has become more valid than the “low cost production” model in global production.

What does that indicate? Rather than “producing in the country that offers the lowest cost in the world” as we used to do, “we need to concentrate our production in such a country/region that is in or close to the largest/fastest-growing location, and where there is the biggest need for local solutions to consumer needs”.

“Of course, we still need to be where we find the inputs with the lowest cost, however, our goal should be to focus on realizing the part of our production that is customized for a specific customer somewhere close to the customer, as well as on a production model that is flexible enough to receive goods from multiple suppliers so as to manage supply chain risks.”

It is easier said than done, and requires significant investment and effort. However, the production dynamics of the new world render such a complete re-design, and an agile as well as flexible model almost a sine qua non.

What kind of opportunities, then, will all of the above, and particularly regional production, bring about for Turkish companies? The biggest opportunity lies in front of us, the Turkish companies.

These opportunities exist in both Europe, still our largest export market, and in MENA, a rapid-growing region, where we enjoy a geographical advantage.

Although we now think of economic challenges and stagnation first when Europe is mentioned, it actually created a competitive advantage for Turkish companies, like for instance in textiles, as opposed to their Asian competitors especially because of rapidly changing consumer needs and supply risks.

MENA, on the other hand, is at the beginning of a brand new rapid growth period accompanied by an increasing potential for consumption, and demand for products that have a higher added value. Turkish companies are in a very advantageous position to become “first movers” and lead in these markets particularly in this period thanks to their familiarity with these markets.

In short, we are in a precious period of change where the “regional production” model reigns in global production, and Turkish companies are face to face with significant growth opportunities both in Europe and the MENA region.

Speed and agility will win. Because we have plenty of both running in our blood/nature, the time is rife for Turkish companies to seize the opportunity, and climb one level up in the league of global production. Let’s not miss it.

Kind regards,

Mehmet N. Pekarun