The Automotive Industry in Turkey

2008 And Beyond?

Prof.Dr.Ercan TEZER / OSD General Secretary Presented in “TURKINVEST Meeting"

Founded in 1974

Main Objectives Are:

To Represent MV Sector In Public Authorities, Local and International Organisations

To Gather and Publish Various Information on MVI of Turkey

To Organize & Conduct Joint Actions in Different Fields

Is an Active Member of:

OICA ACEA Liaison Committee

ODETTE GAID Group

TAAM

OSD is a Partner of

ACEA / EUCAR, EU ERTRAC and EU Motor Vehicle Technical Committee

UN / WP 29

All Relevant Information is Found in OSD Web-Site:

www.osd.org.tr/

Otomotiv Sanayii Derneği / OSDAutomotive Manufacturers Association

Milestones of Turkish Economy

CLOSEDECONOMY

FREEMARKET

ECONOMY

1980

EU/TR CUSTOMSUNION

1996 *

WTOMEMBERSHIP

1995 *

FREE CIRCULATION

OF CAPITAL

1989

EU FULL MEMBERSHIPPERSPECTIVE

2002

EU ACCESSIONNEGOTIATIONS

DECISION

2005 ANDBEYOND

Changing Political and Business Habits

Towards a New Turkey

Political Uncertainty Resulting In Business Indecision

Striving Private Sector

Global

(70 Mio Production / 62 Countries)

Intensive

(10 Companies / % 90 Production)

Multiple Effect-Creates

(Value Added / Revenue / Jobs)

High Competition / Costumer Expectation

(Better Safety/Higher Comfort/Rock Bottom Price)

Product Differentiation

(P.Cars-Status / CV-Investment)

Globally Under Heavy Legislation

(Emission/Safety/Climate Change)

Innovation Oriented

Automotive Industry

Global Delocalization“To be Manufacturer in Potential Markets and Enjoy With Low Operational Cost”

USA

S.AmericaAnd

Others

Europe

Japan

Korea

1950

1970

1980

1990

1970

1960

PRC

1980

11.596

10.7818.882

6.213

4.0863.0192.971

2.8902.578

2.3502.095

1.750

1.6601.2841.238

1.099997939

844785

1) JAPAN

2) USA

3) CHINA

4) GERMANY

5) S.KORE

6) FRANCE

8) BRAZIL

7) SPAIN

9) CANADA

10) INDIA

11) MEXICO

12) ENGLAND

13) RUSSIA

14) ITALY

15) TAILAND

16) TURKEY

17) İRAN

18) CZECH REPUBLIC

19) BELGIUM

20) POLAND

Ranking in EU (27)

Total 6

Buses 1LCV 2H.Trucks 6P.Cars 9

Production 1.300.000Capacity 1.500.000Exports 950.000Market 675.000

20081.1 Million Units in 2007

MVI in World – 2007 (x 1.000 Units)

2 Million Units in 2015

World Total Production – 2005/2020 (1

.000

Un

its)

0

20.000

40.000

60.000

80.000

100.000

120.000

2005 2020

P.Cars LCV HCV

66.700

103.900

Change% 46

Increase in Total Production By Regions 2005/2020

4,253,28

2,31

2,211,78

1,561,16

1,11

1,111,03

1,56

0 1 2 3 4 5

PRC

India

Asia/Pasific

E.Europe

Others

Mercosur

Korea

EU

N.America

Japan

World Total

2020 / 2005

Production Moves From West To East & North To South

Production BRIC Countries 2005 / 2020

0

5.000

10.000

15.000

20.000

25.000

30.000

35.000

40.000

2005 2020

Russia Brazil PRC India1.

000

Un

its

2005 2020 2020/2005

Russia 1.407 3.347 2,38Brazil 2.350 3.588 1,53PRC 5.696 24.204 4,25India 1.679 5.500 3,28Total / BRIC 11.132 36.639 3,29Total / World 66.740 103.932 1,56

ChangeX 3.29

All Factor Indexes Are Picking up in Q4 2008 Bad News Flow

Raw Material and Oil&Energy Prices

Credit Crunch Libor +

Policy Interest Rate

Inflation

Unemployment

Drop in Global GDP Growth Results Slumps in LV Sales

2008 1.8 m

2009 3.5 m

2010 2.9 m

Global Recovery is Expected After 2011

New Trends Under Global Crisis

28.46928.24630.12626.10225.530

28.724

0

10.000

20.000

30.000

40.000

50.000

June July August

2007 2008

- 4,6% - 9,6% - 8,3%

1.550

1.358

955805

1.259

1.427

0

500

1.000

1.500

2.000

June July August

2007 2008

- 7,9% - 7.3% - 15.7%

185187

253

146170

231

0

100

200

300

400

500

June July August

2007 2008

- 8,6% - 9,0% - 21%

25.702

21.87121.53520.47919.15120.669

0

10.000

20.000

30.000

40.000

June July August

2007 2008

- 4,0% - 12,4% - 20,3%

Market Change In 2008 EU/Turkey

Commercial Vehicle

P.Cars

EU+EFTA

EU+EFTA

TR

TR

P.Car Market Change % 2008 and 2009

Country 2008 2009SPAIN -23 -12ITALY -14 -6UNITED KINGDOM -8 -12GERMANY 1 -4FRANCE 2 -6Total Western Europe

-7 -7

Turkey Keeps up With Recent Global Economic Trends in the Region

Longest Practice of Global Market Economy Emerging Economy Applying the International Rules of Free

Trade Such as Competition Law, Property Rights And Etc. International Capital Movements are Liberalized Up to Date Infrastructure for Commercial and Financial

Activities, Telecommunication and Transportation Competitive Industrial Products for the World Market

Long Term Relation With EU Within The Association Agreement Dated 1963

Candidate Country in Negotiation Process For EU Membership

Customs Union Was Realized Between Turkey andEU For The Free Circulation of Industrial Goods

New and More Competitive Conditions in the Market

Better Incentives for the Industry Towards More Competitiveness to be a Global Player

Closer Integration of MVI’s Between Turkey and EU

More Share in the MVI Market for EU

Customs Union/1996 and MVI

For the Free Movement of Industrial Goods

Tariffs and Non-Tariff Measures Were Wholly Abolished

for Non-EU Countries CCT and CTP Were Implemented

Series of Technical and Commercial Legislation Were Adopted

Competition Rules / Block Exemption Legislation in MVI Import And Export Regimes and Common Rules State Aids Customs Code Common Commercial Policy Preferential Agreements Abolition of Technical Barriers Protection of Intellectual, Industrial and Commercial Properties Direct and Indirect Taxation Protection of Consumers Environmental Measures All Relevant MVI Technical Directives

Basic Steps Taken for the Approximation of the EU Legislation

ASSEMBLY

DEVELOPMENT OFCOMPONENT IND.

INCREASE INCAPACITY

UP-TO-DATE MODELEXPORT

FULL INTEGRATIONMANUFACTURING BASE

Research & Development, Design & Technology Management,Intellectual & Industrial Property

1960-1970

1970-1980

1980-1990

1990-1995

1995-2000

2000-2012

TARGET FOR 2012 : CENTER of EXCELLENCE

License

Localization

Modernization

Up-to-date Model

Transition Period

Free Market

Global

Competition

Protected Market

Development of MVI in Turkey: 1960/2010

Entrence ofToyota

and Honda

Strengths

International Production And Design Technologies With Component Industry

Technological Infrastructure And Quality To Global Standards

Partnership And High Level Of Integration With International Manufacturers

Export Experience

Strategically Close Location To The Emerging Markets

Well Educated, Entrepreneur, Competitive Human Resources

Lower Man Hour Costs Compared To The EU

Weaknesses

Fluctuating Demand

Lack of Long Term Policies

Low Capacity Usage Rate Causing

High Production Cost

Imports Are Not Regulated

Efficiently And Thus Over-imports

High Energy Costs

Lack Of Effective Coordination

Between Vehicle Manufacturers

and Component Industry

SWOT Analysis / I

Opportunities

High Co-operation In R&D Efforts With Leading World Technologies

Low Car Density Rates Signal For Potential High Demand In The Future

Exporting Potential To Surrounding Markets

The Only Global Production Center In The Region

Increasing Integration With EU

Close Bilateral Relations With G8, CIS, ECO And Black Sea Economic Co-operation

Threats

New Production Facilities İn Other Emerging Markets

Foreign Direct Investment İs Favoring Other Emerging Markets

High Tax Rates

Fluctuating Local Demand

Unstable Economy

Excess Of Production Capacity In Global Arena

SWOT Analysis / II

85 % of Components

Manufacturers

MV Manufacturers in Turkey

İzmir

Adapazarı

Ankara

İSTANBUL

Gölcük

Aksaray

İzmit

Bursa

Eskişehir

Adana

Motor Vehicle Manufacturers (2008)

TOFAŞ/FIAT JV FIAT 400.000O.RENAULT JV RENAULT 360.000TOYOTA FDI TOYOTA 150.000HYUNDAI ASSAN JV HYUNDAI 100.000HONDA FDI HONDA 50.000

1.060.000FORD OTOSAN JV FORD 350.000HYUNDAI ASSAN JV HYUNDAI 25.000KARSAN Local PEUGEOT 25.000B.M.C. Local Local 20.000M.BENZ TÜRK JV M.BENZ 20.000ANADOLU ISUZU JV ISUZU 13.000TEMSA Local Local 14.000OTOKAR Local LAND ROVER 8.000M.A.N. FDI MAN 5.000

480.000

1.540.000

Capacity Vehicle/Year

CV

Ownership

TotalCV Total

P.Cars

Companies Partner

P.Cars Total

Product ● Japanese Interest Was First Shown In Car Industry In 1994 With Toyota And Then Honda

● Toyota Brought New Concepts And A Remarkable Motivation To The Industry

● Toyota-Turkey Became One Of The Important Manufacturing Centers Of Toyota In Europe

● Isuzu, Hino And Mitsubishi Are In Commercial Vehicle Sector

MVI Integration

Link With EU Manufacturers FIAT GROUP JV FORD JV MAN FDI M.BENZ JV RENAULT JV ROVER GROUP

L PEUGEOT L

Link With Non-EU Manufacturers

ISUZU JV TOYOTA

FDI MITSUBISHI L HONDA FDI HYUNDAI JV

Number of Manufacturers 14 Link With Non-EU 5 (% 26 of 2007 production) * JV/FDI 4 * License 1

Link With EU 7 (% 72 of 2007 production) * JV/FDI 5 * License 1

Local 2 (% 2 of 2007 production)

Automotive Component Industry In Turkey:“An Advanced Supplier Base”

Around 1.000 Component Suppliers: 350 Of Them Are Global Suppliers

International Accreditation: Quality – ISO 16949, Environment - ISO 14001

Well Trained Work Force: Around 250.000

Cost Advantage: High Productivity and Relatively Less Labor Wage

Significant Experience In Their Field

Able To Meet Global Standards

Able To Compete In Global Markets

Experience In Export Activities

0

200

400

600

800

1.000

1.200

1963

1964

1965

1966

1967

1968

1969

1970

1971

1972

1973

1974

1975

1976

1977

1978

1979

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

Passenger Cars

Total

11047

421348

431297

1.100635

3 243213

271175

Total Production: 3,000 in 1963

1,100,000 in 2007

History of the Production (x1.000)

High Fluctuations In the Past Have Had A Particularly Negative Effect On The

Development And Competitiveness Of The Industry

347

534

823 879988

1.100

0

200

400

600

800

1.000

1.200

1.400

2002 2003 2004 2005 2006 2007

262

359

519561

706

830

0

200

400

600

800

1.000

2002 2003 2004 2005 2006 2007

175

401

746 763670 640

0

200

400

600

800

1.000

2002 2003 2004 2005 2006 2007

4.3446.518

10.02011.540

14.560

20.500

0

5.000

10.000

15.000

20.000

25.000

2002 2003 2004 2005 2006 2007

Production

Total Market Exports / Million $

Exports

Changes in Last 6 Years (x1.000)

X 3.17X 3.17 X 3.17X 3.17

X 4.72X 4.72X 3.65X 3.65

Exports Share in Total Production is Over 75 %

(X 1000)

3 2 512 13

8 9

7164 62 62

7175

30

22

73

0

200

400

600

800

1.000

1.200

1.400

1.600

0

10

20

30

40

50

60

70

80

90

100

Exports 10 8 15 37 42 31 37 91 104 202 262 359 508 552 697 820

Production 345 453 269 326 329 400 405 326 468 286 357 562 823 879 988 1.100

Exports (% ) 3 2 5 12 13 8 9 30 22 71 73 64 62 62 71 75

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

Rate of Exports in

Production

Total Production % 75

P. Cars % 80

%

The Automotive Market is An Unsaturated One

Approximately 15 Million Vehicles Are To Be Sold In Turkey

To Reach To The Level Of Bulgaria In 10 Years

(Whose GDP Per Capita Are Rather Similar)

604510 493

391 343 361

144 138

0

200

400

600

800

Ge

rma

ny

Gre

ec

e

Sp

ain

Po

lan

d

Hu

ng

ary

Bu

lga

ria

WO

RL

D

Tu

rke

y

SMMT / Vehicle/1.000 Inhabitants in 2006

Automotive Culture 50 years of production tradition High Sense of Quality TQM, Lean Production, 6 Sigma Labor Peace unionized work force / collective bargaining since

1963 Qualified, Well-Trained, Motivated Labor Force at Competitive Cost Flexible Working Hours 7.5 hours / shift - 3 shifts / day - 6 days / week;

Rate of Absenteeism < 1.5 % Entrepreneurship $ 10 billion worth of Investment Partnership With World-Leading Manufacturers Experienced Local Component Industry / Supplier Base Unsaturated Domestic Market With High Potential of Demand More Incentives on R & D and New Investments Developed Infrastructure & Services in the Region

Logistics, Energy, Transport, Banking, Communication

Manufacturing Facilities With State-of-the-Art Technology

The Assets & Potential of MVI of Turkey

● A New Investor Will Search For The Opportunity To Develop New Products At

Moderately Lower Cost.

● All Automotive Products Become Obsolete In The Long Term, Therefore

Current Models Need To Be Renewed Within 2-3 Years.

● So The Continuity Of The Business Would Heavily Depend On The Ability To

Design And Launch New Products.

● In Order To Realize New Projects At Competitive Cost These Are Needed:

R&D Capabilities (Vehicle And Component Manufacturers)

o More Effective R&D Incentives

Advantages In Investment Cost

o Project-Based Investment Incentives For Both Vehicle And Component Industry In Major Exports Projects

What Will Lead to New Investment

1. CHINA

-Tax Vacation Of Two Years

-Tax Discount At 50% For Subsequent Three Years

-Production Activities In Certain Areas Or In Tech Development Enjoy Low

Tax Ratio ( 10%, 15%, 24%)

2. KOREA

-Tax Vacation Of Seven Years For High Tech Investments

-Tax Discount At 50% For Subsequent Three Years

-Royalties Paid For High Tech Areas Are Not Subject To Withholding Tax For 5 Years

Benchmarking With Other Countries / II

Benchmarking with other countries / I

2. HUNGARY

-10 years tax vacation as of the year of the investments completion for the investments more 33.3 Mil. USD

4. SLOVAKIA

-5 years tax vacation

-50% tax discount for the investors increasing their paid in capital at 4.5 million EUR at the end of tax vacation period

1. IRELAND

- Active income is subject to 12,5 % corp.tax as for Passive income 25%

3. CZECH REPUBLIC

-Tax vacation of from 5 to 10 years

5. CROTIA

Investment (Million $)

EmployeeAmount

Tax Ratio(%)

1.1-2.3 30-50 7

2.3-7 50-75 3

7+ 75+ 0

Incentives For Export Oriented Investments That Are Aimed At The Development And Production Of Competitive Products

Were Abolished

The Tax Incentive That Was Previously 26,4 % Decreased To 13,2 %

According To Act 4842, New Economic Investments That Will Deliver Internationally Competitive Vehicle Models With High Added Value Requiring The Deployment Of High Manufacturing Technology, Fall Within The Scope Of “General Incentive Regulations”

Communiqué2002/ 1

Act4842

Investment Sum 100 100

Investment Allowance (%) 200 40

Corporate Tax Exemption (%) 200 40

Provided Tax Incentive(33% - 19.8%) x 200%

= 26.4 %(33% - 0%) x 40%

= 13.2 %

Net Allowance Rate (%)(33 % - 19.8 %)

= 13.2 % (33 % - 0 %)

= 33 %

* Corporate Tax (%) 30 33

* Fund Contribution (%) 10 0

* Withholding Tax (%) - 19,8 0,0

Recent Incentives Proposal On Investment

Decrease Corporate Tax Rate was Reduced From 30 % To 20 % And Cancelled Investments Allowance 40 %

Together With Tax Council, OSD Proposes The Following Scheme:

Min. Investment

(million YTL)

Min. Employment

Min Exports (million YTL)

Corporate Tax Rate (%)

25 100 5 10100 200 10 8200 400 50 6400 800 100 4

|> 600 > 1200 > 150 2

Recent Developments on R&D Activities

A New Incentive Scheme is Now Covering R&D Activities in Companies to be Effective This Year Such As:

100 % Deduction of R&D Expenses From Corporate Tax Came into Operation in 2008

Tax and Social Security Funds Payment Exemption for Those Working in R&D Activities

Government Assigned Yearly $ 300 Million to TUBİTAK in Order to Support R&D Activities and Targeted to Increase R&D Expenses up to 2 % of GNDP in 5 Years

Automotive Technology and R&D Center – OTAM(*) was Established in Istanbul Technical University-ITU with $ 12 Million to Start off

TUBİTAK-MAM is Providing Large Scale of Basic Services for R&D

(*) OSD, ITU (Istanbul Technical University) , TAYSAD (Assoc. of Component Manufacturers), UIB (Union of Vehicle & Component Exporters) are the Partners of OTAM

Offices

(1445 m2)Vehicle

Laboratory (1640 m2)

IC Engines Laboratory (1640 m2)

OTAM was Established by (OSD), The Scientific and Technical Research Council of Turkey (TÜBİTAK) and Istanbul Technical University (İTÜ) in 2004

OTAM is Formed as an R&D Company in 2007 (OSD, TAYSAD, İTÜ, UİB) to carry out of R&D and Type Approval Tests in Cooperation with ITU

OTAM is Mainly Specialized in the Areas of Engine, Emission, Vibration, Noise and Chassis / Body Analysis

Automotive Technology / R&D Center OTAM

Prospects of the Turkish Automotive Industry

o In The Short Term Production: Over 1,0 Million

Exports: Over 0,8 Million Already Realized

o In The Medium Term Production: 2,0 Million

Exports: 1,5 Million Can be Achieved

Direct Employment Of 600,000

Total Exports Of $ 50 Billion

By Means of Additional Investment At Least $ 5 Billion

● Optimizing Capacity Utilization Full Use of Domestic Market Potential More Activities in Exports Markets

● Increasing Competitiveness Cost Reduction By Means Of Productivity Improvements Encouraging More Innovation in The Industry Better Management in Supply Chain

● Strengthening Assembler/Supplier Strategic Partnerships

Establishing Long-term Partnerships Effective Cooperation On Supply Chain

The Strategy and Action Plan

Current International Trophies

● Ford OTOSAN, Among European Ford Factories, Has Been Selected As The Best Motor Vehicle Manufacturer In The Last Five Years.

● Toyota Factory In Adapazarı Was Selected The Best Worldwide Toyota Manufacturing Plant In 2006.

Ford Connect “VAN of the year” in 2003 Production: İzmit

FIAT Doblo“VAN of the year” in 2006 Production: Bursa

Renault Clio III“Car of the year” in 2006 Production: Bursa

Ford Transit“ VAN of the year” in 2007Production: Kocaeli

FIAT LINEA “Autobest 2008”Production: Bursa

TEMSA DIAMOND“Busbuilder of the year 2007”Production: Adana

FIAT FIORINO“Van of the year” in 2009 Production: Bursa

TEMSA TEMSA IS A BUS PRODUCERIS A BUS PRODUCER

TURKEY IS A CENTER OF TURKEY IS A CENTER OF

GLOBAL AUTOMOTIVE PRODUCTIONGLOBAL AUTOMOTIVE PRODUCTION

AndAnd

IS TO BE A “CENTER of EXCELLENCE”IS TO BE A “CENTER of EXCELLENCE”

INTERNEThttp://www.osd.org.tr

e-MAILosd@osd.org.tr

Thank You For Your Interest