Standing on the Verge of Momentous Change: Automotive Supplier Industry in January 2020

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Contents

Introduction 04 Global Trends in 06 Automotive Suppliers in Turkey 12

Changing Nature of the Value Chain and Capabilities 06 Understanding the Problem of Technology Adoption 14

New Partnerships and Increasing Volume of M&A’s 08 Exploring the Right Direction: Firm and Country Level 16 Strategy Requirement

Conclusion: Opportunities on the Horizon and 18 Key Lessons 4 | Standing on the Verge of Momentous Change: Automotive Supplier Industry in Turkey

Introduction

After several years of continued growth, Exhibit 1 revenues and margins for OEMs and automobile suppliers are now under ∑Sales of Top 11 OEMs1 (Billion EUR) ∑Sales of Top Suppliers2,4 (Billion EUR) pressure (Exhibit 1). Companies are +3% Top 2018 now dealing with deep-rooted shifts in -1% the value chain and are being forced +6% to play outside their traditional fields +1% Top 2017 of expertise. Facing with competitive 1,423 1,472 1,508 1,498 +7% 922 pressure from technology companies, 1,197 1,248 899 821 856 OEMs and suppliers are now looking 700 675 7,0% to reducing their cost base, making 8,0% 7,8% investments in technology and building 7,8% 7,2% 7,8% up new competencies. 6.1% 5.7% 5.0% 5.7% 6.0% 5.2% 64% 60% 64% 64% 58% 58% 6,7% 6,9% 7,0% 6,8% 7,1% 6,4%

2013 2014 2015 2016 2017 2018 2013 2014 2015 2016 2017 2018

Sales OEMs1 Sales of 40 system integrators Sales of other top supplier3 CAGR of sales CAGR of top suppliers 2017 EBIT-margin

1 Top OEMs: VW, Toyota, Daimler, GM, Ford, FCA, Honda, BMW Group, Nissan, Hyundai, SAIC Motors 2 Sales are partly based on extrapolations / estimates 3 Among others Bosch, Continental, Denso, Faurecia, Hyundai Mobis, Magna 4 Joyson Group/Tenneco with sales growth 2017-2018 (purchase of Takata and Federal Mogul respectively) CAGR: Compound Annual Growth Rate Source: Strategy& analysis 5

Major trends, signaling the future of Exhibit 2 the industry are clustered around connected, autonomous, shared and Country Comparison of OEM’s Partnerships1 Purpose of OEM’s Partnerships1,2 electric-drivetrain (CASE) technologies. These trends are inducing the value chain to alternate, and capabilities are 119 56% transforming. New competitors, mainly 8 software-oriented companies, are coming 86 91 into play and new forms of partnerships 35 13 are emerging (Exhibit 2). To address the 23 new market reality, suppliers are in need 25 12 41 20% of a solid understanding of the changing 33 26 15% landscape and conclusions on whether 2 64 14 9% and how to adjust their existing business 10 18 27 models. 15 12 2015 2016 2017 2018 Electrified Autonomous Shared Connected

America Asia Germany Electrified Autonomous Shared Connected

1 Cooperation with an OEM as initiator was considered 2 Sample from > 100 companies Source: Strategy& analysis 6 | Standing on the Verge of Momentous Change: Automotive Supplier Industry in Turkey

Global Trends in the Automotive Industry

Exhibit 3 Changing Nature of the Connected Electric Automated Shared Value Chain and Capabilities

Technology-driven transformation is inducing upward and downward mobility Refocus: Shift: New role: New role: across the value chain by promoting formerly Tier 2 or 3 digital companies to 1. Concentrate on product ideation 1. Reduce ICE production capacity due 1. Focus on partnerships and close 1. Shift towards selling to mobility and design, and outsource non-core to electric powertrain shift (motor/ collaboration with tech companies providers to supply vehicles for their Tier 1 and causing OEMs to lose their back-end/R&D/technology solutions battery cell production outsourced and suppliers to reduce investment -sharing service (B2C to B2B) strategic standing. Thus, suppliers are in OEM as little opportunity for differentiation, costs in, for example, R&D 2. Move into direct-to-consumer and high price pressure)1 2. Maintain customer-facing role as a a position for exploring new software and services instead of offering them 2. Maintain close interaction with shared mobility/fleet provider service opportunities as their present- through a dealer network 2. Enter partnerships for sourcing customers by being a mobility day core processes are becoming battery raw materials provider gradually irrelevant. At each point on the automotive value chain, including R&D, production, distribution, marketing & New role: New role: New role: New role: sales and aftersales/customer services, we expect to keep observing up/ 1. Fill the opportunity gap left by 1. Independently and/or in partnership 1. Enter into deeper co-operation 1. Work directly with customers in OEMs by providing independent with OEMs, enter market for R&D/ with OEM’s R&D processes, with co-operation with a mobility/fleet downstream movements and changing back-end/ technology solutions manufacturing of battery cells, stronger end-product responsibility provider to offer enabling services

business models as illustrated (Exhibit 3). Supplier leveraging scale benefits (e.g. digital packs and electric motors2 (e.g. digital services for mobility infrastructure) 2. Take on a customer-facing role by provider) 2. Enter partnerships for raw material building fully assembled automated 2. Provide customer solutions B2B2C sourcing to secure supply (e.g. shuttles and/or enabling services 2. Enter fleet operating services by (e.g. vehicle features on demand) lithium) (e.g. digital services for fleet managing all service tasks for operators) mobility providers

Automotive supply chain including: R&D, production, distribution, marketing & sales, aftersales/customer service (adjustable per case) Reduction/extension/shift of supply chain down-/upstream Core business today (still relevant tomorrow) Core business today (different strategic approach tomorrow) Core business today (irrelevant tomorrow) Potential new business tomorrow 1 Alternatively: extension into e-motor and battery cell production possible 2 Note: high necessity to refocus for traditional IC-focused suppliers Source: Strategy& analysis 7

Exhibit 4 Five New Ways to Play for Auto-Industry Suppliers

Particularly, for suppliers who are Smart Infrastructure Automated Shuttle Platform Provider Mobility Intelligence Vehicle Feature on 1 2 3 4 5 operating over traditional internal Enabler Manufacturer Provider Demand Provider combustion-focused business, we are Digitally-enabled traffic Fully assembled shuttle Platform-as-a-service Mobility software Product-as-a-service estimating an increasing number of R&D solutions for integrated for public and corporate for business partners services and centralized for end consumers mobility systems to institutions (e.g. city (e.g. OEMs, (public) data analytics for fleet through e.g. mobility activities with OEMs over battery cells, governments/ institutions councils/ shuttle service mobility providers, fleet operators and mobility providers, allowing for packs and electric motors. Additionally, (e.g. city councils) provider) operators) service providers direct monetization we present five potential new ways to x x x x x play for suppliers to shift their business in the near future, together with success Hardware Software Service Hardware Software Service Hardware Software Service Hardware Software Service Hardware Software Service factors, which are necessary but not Success factors1: Success factors1: Success factors1: Success factors1: Success factors1: sufficient (Exhibit 4). • Technology excellence • Production excellence • Agile development • Real-time data • Partnership • Integration capabilities • Cost efficiency / lean • Flexible & open domain analytics management • System adaptability SC2 • Customer centricity • Service integration • Customer centricity • Fast time-to-market • Customer centricity • User experience Example: Intelligent Example of international Example of global Example of German Example of traffic-management automotive supplier: industrial supplier: OEM’s mobility manufacturing system for a Chinese autonomous, electric, PaaS3 for the Internet of service company: fleet company/ supplier: city that integrates shared people mover Things with end-to-end management software fully automated “valet transport information for in co-operation with solutions incl. hardware, for intelligent mobility parking” (parking and all travel options mobility start-up and software and services solutions car return upon user’s system provider request via app)

Low to high focus areas 1 Outlined success factors are most relevant ones but not limited to these 2 Supply chain 3 Platform-as-a-service Note: x = key success factor Source: Strategy& analysis, Siemens.com, Alphabet.com, Boschservicesolutions.com, Microsoft.com, Continential.com, Zf.com, Mahle.com 8 | Standing on the Verge of Momentous Change: Automotive Supplier Industry in Turkey

New Partnerships and Increasing Volume of M&A’s

In order to gear up for the new era, acquisition of software competencies or partnership agreements are becoming more and more widespread among the industry players, namely OEMs, system integrators and auto suppliers. Yet, the underlying reason is now different than aggressive sales growth or geographical expansion. Henceforth, M&A activities are targeting portfolio extensions towards software and electrics / electronics intensive areas, ultimately leveraging the acquired know-how to make existing products fit for the future. The intertwined figure (Exhibit 5) illustrates how leading system integrators are opening up new business areas through strategic acquisitions. In Turkey we can also observe similar partnerships (e.g., around the national car project). 9

Exhibit 5 Continental has Became part of Continental announced the completed the the Continental acquisition of Quantum Inventions Cooperation Autonomous Driving & Future Mobility acquisition of Elektrobit Elektrobit Software Automotive Group, a subsidiary specialist for innovative software solutions. Sensor heating Protect your customers and Expanding mobility services and Automotive for autonomous drivers from higher susceptibility strengthening position in the USA Identification and diagnosis diagnostic on ice and associated with connected and Continental acquired the LIDAR of safety risks of electronic technology snow autonomous vehicles Development of advanced camera Research on business of Advanced Scientific Enhancement of map and components in the vehicle detection technology required for autonomous vehicles Concepts (ASC) to complete its location data with sensor Significant contribution to safe self-propelled systems range of environmental sensors data from vehicles Development of an image the company’s latest Series Hyundai Mobis and KT started for driver assistance systems Development of state-of- recognition technology B financing round. Valeo acquired the German company developing 5G-based Smart and automated driving. the-art technologies for that uses image peiker, a major provider of onboard Connected Car technology driverless vehicles and processing technology Development telematics and mobile communications development of new fields and is dedicated to deep of integrated solutions. The acquisition will allow Valeo acquired the German of competence learning. control software Valeo to expand its range of connectivity start-up company gestigon, which used for related products specializes in the development of Focused on the enhancement of motion automated 3D image processing software for Development of ultrathin Development of software augmented reality head-up control systems and drive components driving, Improvement and the cabin of the vehicle. for control units in displays for automated driving automotive engines vehicle motion personalization of control and vehicle comfort and Comprehensive strategic cooperation Introducing a new feature called “Turo Go” other related safety for drivers and in the areas of automated driving, that allows users to book, locate and unlock Internet of Things (IoT)-based functions. their passengers Development and supply manufacturing, advanced driver of next generation networked vehicles and intelligent vehicles using the Turo smartphone app Continental assistance, automated driving and more. networked cars and mobility services Automated announced mobility services driving and cooperation with electromobility NTT DOCOMO Providing world- Development and promotion of a new safety Advanced in-vehicle systems to develop 5G class Intelligent used for automated driving standard for autonomous vehicles (AV) based Transport Drive the localization, perception, technology for and other control actions on Responsibility-Sensitive Safety (RSS), Systems (ITS) and route planning functions for a networked cars Mobileye’s mathematical safety concept. solutions to meet completeautonomous driving system the growing Valeo joined Apollo, the market demands Strengthening Accelerating innovation Bosch has partnered with Canadian startup Provision of connectivity Bosch and TomTom autonomous ecosystem of Baidu Valeo announced a partnership in China of position as a for mobility services Mojio to wirelessly connect more vehicles to solutions for its electric cooperate on innovative agreement with start-up company major supplier of a variety of digital services, from insurance mapping technology for Ellcie Healthy to accelerate the cockpit systems car Sion Production of modern assistance companies to emergency responders automated driving development of intelligent networked eyewear for motoring. systems and autonomous driving functions for cars, commercial vehicles Ensuring a seamless Robert Bosch GmbH and e.GO Mobile AG and off-highway applications connection between vehicle and have announced a cooperation in the areas of everything(vehicle-to-everything -V2X) connectivity and after-sales services. ZF has partnered with Mobileye to offer next-generation Development of interior and camera systems to major automotive manufacturers safety technologies for self- Bosch and Baidu sign framework driving cars, known as the agreement on strategic cooperation to “cockpit of the future” jointly develop intelligent mobility in China Development of the first blockchain-based Development of AI self-driving systems for mass automotive transaction market vehicles platform for mobility services Using information collected by Bosch Accelerating the Digital mapping radar and video sensors in vehicles development of company jointly to create and update maps Challenges to the vehicle seat shown electronic solutions for Offer car controlled by the car by designs for the future car and the the networked vehicle. Secure hypervisor pools to your manufacturers BMW, inclusion of autonomous driving base for the ETAS employees Daimler and Audi. ZF has signed a (AI) -based RTA-VRTE software New joint mobility solution by cooperation agreement vehicle control solution that includes integrating the autonomously powered with the long-distance unit (ZF ProAI) the AUTOSAR Adaptive e.GO Mover Shuttle with Transdev’s mobility provider for automated Platform Standard operating system. FlixMobility to develop driving new target groups. applications Source: Strategy& analysis (Strategic) partnership Strategic investment (e.g. M&A) Investment Others 10 | Standing on the Verge of Momentous Change: Automotive Supplier Industry in Turkey

Historically, companies investing in cost Exhibit 6 leadership have always gone for M&A to achieve economies of scale through High-Level Overview of the Consolidation Trend industry consolidation. In conjunction Amount of Mega Deals and Deal Value with the rising new trends explained 2009 – 2019 YTD 18 18 Fiat Chrysler and above, our observations suggest that the 17 Peugeot owner PSA 1 1 amount of mega deals are increasing in 16 Group have announced 1 1 the industry (Exhibit 6). It is also worth 2 the merger of two 1 14 mentioning that supplier sales growth is companies on October 31, 2019. often accelerated by M&A in all markets The deal would create across the globe including countries that 9 7 8 the world’s third-largest have historic organic industry growth. 9 7 However, targeted expansion of the automaker and help spread the huge cost of product portfolio, concentrating on the developing electric and positioning in the future, has already 6 autonomous vehicles started to be considered as strategically 5 much more important than revenue 4 2 9 3 3 1 growth through M&A. 7 7 7 6 1 3 1 4 1 4 1 1 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 YTD Closed Ongoing USD 10+bn USD 5bn - USD 9.99bn USD 1bn - USD 4.99bn USD 0.5bn - USD 0.99bn

Source: Strategy& supplier database (data status 2010 – 2018), Thompson Reuters, Cap IQ, Mergermarket.com 11 12 | Standing on the Verge of Momentous Change: Automotive Supplier Industry in Turkey

Automotive Suppliers in Turkey

The Turkish automotive industry faces 1. Firstly, suppliers in Turkey are facing Exhibit 7 similar challenges as is the case globally: several challenges in the adoption declining volumes and margins. The of new technologies, resulting in low Top 10 OEM Sales1 – Turkey (Billion USD) downward trend at the center of the value value-added products and drop in chain is spreading out to lower levels in profits given increasing demand for -0.7% CAGR recent years. technology-based products globally. 2014-18 CAGR 25.9 25.7 In 2018, sales from production went 2. Secondly, there is a lack of strategy +11.1% 7% Other OEMs2 down by 0.7% and 2%, compared to on a firm and country level. The lack 9% 24% 22.4 7% 2017 for OEMs and auto suppliers, of strategy results in trying to get 7% -3% 6% 9% respectively. For the period between through the day, but not considering 18.9 19.1 7% 9% 2% 2014 and 2018, Top 10 auto supplier’s on which market positioning (way 5% 5% 10% 17% 14% 7% sales having even dropped by 1.6% to play), capabilities and products 12% 10% annually on average (Exhibits 7&8). are required in the future to remain 11% 12% 19% 17% 16% 1% competitive. Investments are either 15% 16% Export volumes experienced negative not made at all or are still not made 17% growth in the first half of 2019, compared in the right areas. 21% 19% 20% 20% 26% to the same period in 2018. In this period, 17% exports of auto suppliers dropped by 3%. 11% 9% 24% 25% 7% According to our discussions with 26% 28% 24% industry leaders, there are two underlying reasons that hinder the future growth and 2014 2015 2016 2017 2018 pave the downward trend for automotive suppliers in Turkey: 1 Sales from production 2 , BMC, Honda, Man - They make less than 10% of Top 10 OEMs Sales Source: Istanbul Chamber of Industry, Desktop Research, Strategy& Analysis 13

Exhibit 8 Exhibit 9 Top 10 Automotive Supplier Sales1 – Turkey (Billion USD) Export Volumes of OEMs and Suppliers (Billion USD)

CAGR 31.4 CAGR CAGR CAGR -1.6% 2012-18 2014-18 8.4% 28.4 4.7 4.6 4.4 4.5 10% 4.4 6% 5% -18% 24.2 34% 5% 7% 8% 6% 6% 7% 3% 22.8 CAGR 6% 6% 6% 21.6 21.6 34% 9% 7% 5% -5.8% 6% 9% 9% 19.3 8% 8% 5% 8% 6% 8% 37% 16.3 7% 8% 9% 1% 42% 42% 15.3 9% 7% 40% 9% 9% 8% 9% 0% 43% 9% Suppliers 34% 35% 10% 9% 10% 1% 8% 9% 11% 8% 8% 9% 10% 5% 66% 15% 66% 14% 12% 12% 63% 13% -4% 58% 58% 60% OEMs 57% 66% 65% 25% 25% 24% 23% 22% -5%

2014 2015 2016 2017 2018 2012 2013 2014 2015 2016 2017 2018 2018 H1 2019 H1 Exports / Vehicle production 67% 72% 74% 71% 75% 85% 76% 76% 86% (Volume) Source: Turkish Exporters Assembly, Turkstat, Automotive Manufacturers Association, President of the Republic of Turkey Investment Office, Strategy& Analysis 14 | Standing on the Verge of Momentous Change: Automotive Supplier Industry in Turkey

Understanding the Problem of Technology Adoption

The transition from traditional systems The problem involves multiple actors Thirdly, government-backed funds As these incentives and funds provided to high-tech systems is the primary and their interaction with each other. and incentives have not been utilized to companies have not created the challenge for the Turkish automotive Firstly, OEMs in Turkey are either direct by companies in a way that enhances expected impact from innovation suppliers, mainly producing mechanical investments of global OEMs or joint innovation level in the industries. Mainly, perspective, governmental funding systems. Our discussion with industry ventures. This leads the decisions on the government is providing funds mechanisms has recently been shifting players reveals that suppliers in Turkey technology and innovation to be led by and incentives in two forms: 1) tax to be provided for mid-high and are notoriously timid in engaging global organizations rather than the local incentives and supports, which enable high technology level products and R&D activities. In particular, they entity. Furthermore, local production is companies to pay lower tax, social technological development itself. In order are concerned to face potential mainly based on combustion engines and security premiums and 2) cash grants, to create an innovative environment, technical challenges and to spend not EV/Hybrid technology. which are direct and non-refunding cash it is also critical to increase the level time and resources to overcome them. injections for approved project(s) of the of education, adopt supportive Additionally, as the process of adopting Secondly, it is the input / factor market companies. Generally, the most common organizational / management structure, new technologies takes time to adjust that speeds up or hinders the technology form of government-backed funds and and facilitate access to relevant funding and monetary returns are only realized in adoption of Turkish automobile suppliers. incentives is tax incentives, and this has – particularly the access of small-scale subsequent years, the shift to innovation On the labor side, auto suppliers are not provided the desired level of impact companies and start-ups. tends to be put on hold, causing a low now competing for talent with digital for fostering innovation. In terms of cash technological progress observed among companies and the market is running grants, support is provided either for the Turkish supplier companies. short of skilled-labor. Furthermore, the the improvement of a (current) product current level of collaboration between or production process improvement suppliers, universities and start-ups is purposes. not sufficient to create an efficient and sustainable innovation environment. 15

Exhibit 10 Turkish Auto Suppliers’ Product Portfolio Focus Bolded part types are Turkish Auto Suppliers’ Focus Portfolio Competitive future market Stars

Driver Information & Assistance framework) 1 4 Cockpit Infotainment Chassis Electronics Battery and Energy Storage Body Electronics Electrical Distribution Systems Way to Play: Technology leader Body Structures 3 Price premium through R&D E-Motors & Generators incl. ISG Power Converters and Controls for Hybrid Cabin Safety Systems Suspension Links & Knuckle Assy’s Lighting / Exterior Trim 2 Transmission Poor dogs Door Systems Brakes Climate Systems Cash today question mark tomorrow Way to Play: Last Man Standing Price- and quality leader in not Wheels, Tyres, 1 technology-intense market segments Jacks & Equipment Steering Springs, Dampers, Frames & Powertrain Mounting Anti-Roll & Levelling Air Intake Powertrain Controls Driveline Switches & Climate Controls Engine Fuel Systems Systems Glasshouse & Lids Seating Exhaust Cooling Technological progress (in points along CASE progress Technological 0 Power Supply 19 18 17 16 15 14 13 12 11 10 9 8 7 6 5 4 3 2 1 Intensity of Competition • How can Turkish auto suppliers change their focus from «poor dog» and «cash today» parts to «star» parts? • Should Turkish auto suppliers continue to focus on part groups that generate high cash to stay competitive? (in number of competitors per product group) Body Interior Body Exterior Chassis Electrical Powertrain Hybrid and BEV tech. 1 Along the dimensions: Connected, Autonomous, Shared, Electric (CASE) Source: Strategy& Analysis 16 | Standing on the Verge of Momentous Change: Automotive Supplier Industry in Turkey

Exploring the Right Direction: Firm and Country Level Strategy Requirement

As competitive pressures mount and new Exhibit 11 players show up with new competencies, auto suppliers are left with hard choices Focusing on Selected Capabilities – about what products and services to keep or cut, what customers to serve “Industry workforce will be Need for omni-channel excellence: e.g. more than 70% of train tickets are already bought and what capabilities to invest in. Our cut by at least 50% by 2030 and Ambi-dextrous 4 discussion with industry players indicates employees who remain will need very organization Immersive online (via app, computer) that the future way-to-play will be either different skills”1 channels technology leadership or cost leadership. Yet, auto suppliers are not focusing Need for collaboration to stem high Suppliers show strong growth on their differentiating capabilities and costs: tech companies have on Performing of +450% in M&A activity for determining strategic options. average a 10% higher partnerships software related competencies5 The Turkey’s Automobile Joint Venture R&D spend than auto Smart Group unveiled its first domestically- suppliers2 technology produced “TOGG” in December 2019, stating that it aimed to One German OEM aims to have Need for optimized global produce up to 175.000 electric vehicles half of its revenue coming from Mixed Hyperlocal per year in a project experted to cost sourcing as labor costs make up 3 portfolio footprint USD 3.7 billion over 13 years. This project digital offerings by 2020 ~30% of total interior parts costs when shows Turkey’s direction for electric manufactured in Western Europe6 vehicle production and therefore, in order to keep up with this strategic direction, 1 PwC Strategy& report “Transforming vehicle production: How shared mobility and automation will revolutionize the auto industry by 2030” suppliers should adapt innovation-based 2 Strategy& analysis based on annual reports of several technology companies and suppliers; average R&D spent as percentage of revenue in 2018: 16% tech. vs. 6% supplier strategies going forward. 3 Strategy& analysis based on OEM press releases 4 Tagesspiegel press release on Deutsche Bahn tickets 5 Strategy& analysis 6 PwC Strategy& report “Capabilities-driven restructuring – A manufacturing footprint strategy for a commodity automotive supplier industry” 17

Turkey as a country is not alone with Exhibit 12 a requirement for a clear vision and strategy. Even those countries that are Turkey’s Research & Development Landscape leaders in automotive industry have the Turkey R&D Personnel and R&D Spending Development - Automotive same problem: the future is not clear. (Headcount, Million USD) Nevertheless, they take initiatives to assume leadership in some areas. Turkey is already positioned as an important 9,321 7,696 7,594 hub for global players that invest in 6,874 7,101 engineering and R&D; such as AVL, FEV, Idiada and Ricardo. Additionally, there are multiple R&D incentives in actions and companies are increasing the number of R&D personnel. Yet, the problem 143 automotive R&D lies in that there is no unifying force, centers (in 2018) partially backed by the government, to induce roles and responsibilities on the value chain. Without such 27 automotive design structures or forces, the production centers (in 2018) market ends up in “everyone-fighting- 27 with-everyone” industry model and 2013 2014 2015 2016 2017 companies are operating with a low level of specialization. R&D Spending Number of R&D Personnel

Source: Turkstat, President of the Republic of Turkey Investment Office, Strategy& Analysis 18 | Standing on the Verge of Momentous Change: Automotive Supplier Industry in Turkey

Conclusion: Opportunities on the Horizon and Key Lessons

Opportunities

OEMs: Existing close relations with local Location advantage: Turkey is well- Building on existing capabilities: In Strong Labor market: To attract global and global OEMs and understanding known with its strategic location. There the last decade, Turkish auto suppliers auto suppliers looking for cost reduction, their future needs plays a crucial role are two important takeaways for Turkish gained an important experience on the Turkish labor market has a lot to offer. for Turkish automotive suppliers. Our auto suppliers. Firstly, companies how to develop products and vehicles. On average, a Turkish engineer with the discussion with industry players reveals from South Korea, Japan and China Furthermore, the industry already similar skill set costs up to %66 less that the subsystems of motor, electronics which are targeting EU market can be achieved standardized quality levels. compared to its peers in EU. Additionally, and software are becoming new focus addressed to create joint ventures. They By choosing the right partner for joint Turkish workers are not reluctant to work areas. Particularly, OEMs are demanding are looking for regions of production ventures, Turkish auto suppliers can aim overtime and have better absenteeism autopilot, battery cooling systems, having close distance to assembly for extending their product portfolio to rate compared to Europe that makes electronic and body control unit, camera plants in EU region. Thus, Turkey offers a technology-intensive products. hourly labor cost very competitive. sensors and electric motors to be great place to produce and Turkish auto produced locally. suppliers have a remarkable chance to increase their know-how through having partnership with companies from East Asia. Secondly, Turkish auto industry has a huge potential to serve EMEA region and to penetrate the market with urgent delivery features, especially given also the customs union with the EU. 19

Key Lessons

Strategy on Firm Level: Auto suppliers Strategy on Country Level: Government Roadmap Design: Firms should engage Partnerships: Firms should be open to should decide on their strategy over cost and companies should work together in roadmap planning, setting target levels new partnerships with digital / technology leadership or technology leadership. to set up the value chain positioning and implement commitment to these companies, learn from them and update Changing product portfolio and opening and organize division of tasks in order levels. The measure of success should be their cultural mindset accordingly. up new product lines require reallocation to prevent «everyone-fighting-with- clear. (E.g. investing significant part of the of resources and solid evaluation of everyone» industry model. Tax incentives sales revenue in R&D, while maintaining future financing plan together with or subsidy policies should be set out the level of the international competitors timeline assessment for required to increase firm-level granularity on the in terms of EBIT margins). competencies. value chain. 20 | Standing on the Verge of Momentous Change: Automotive Supplier Industry in Turkey

Strategy& PwC TAYSAD

Strategy& is a global strategy consulting At PwC, our purpose is to build trust in Established in 1978, TAYSAD is the sole business uniquely positioned to help society and solve important problems. and most competent representative of deliver your best future: one that is built We’re a network of firms in 158 countries the Turkish automotive supplier industry. on differentiation from the inside out and with more than 236.000 people who With more than 450 members, the tailored exactly to you. As a part of the are committed to delivering quality in association represents 65% of the output PwC network, every day we’re building assurance, advisory and tax services. of the automotive supplier industry and the winning systems that are at the heart Find out more and tell us what matters to 70% of the industry’s exports. 80% of of growth. We combine our powerful you by visiting us at www.pwc.com.tr members operate in the Marmara region; foresight with this tangible know-how, 12% in the Aegean region and 8% in PwC has been providing services to technology, and scale to help you create a other regions of Turkey. 450 TAYSAD the Turkish business world since 1981, better, more transformative strategy from members employ more than 200,000 with five offices located in four cities; day one. people. Istanbul, Ankara, and Izmir. With As the only at-scale strategy business a professional staff of 1.700, we provide 25% of members have foreign partners that’s part of a global professional services to create the value that our who hold varying levels of shares. services network, we embed our strategy clients look for. TAYSAD is a member of CLEPA, the capabilities with frontline teams across European Association of Automotive PwC to show you where you need to go, Suppliers (www.clepa.be). In addition, the choices you’ll need to make to get the association has a reference there, and how to get it right. position within Turkey for domestic and international OEM’s, Tier 1 Suppliers The result is an authentic strategy process and institutions being the representative powerful enough to capture possibility, of Turkish Automotive Parts and while pragmatic enough to ensure Components Suppliers. effective delivery. It’s the strategy that gets an organization through the changes TAYSAD holds ESCA Silver Label and of today and drives results that redefine ISO 9001 Certificates. tomorrow. It’s the strategy that turns vision into reality. It’s strategy, made real. 21

Automotive practice service offerings

• Distribution and retail strategy (offline and online) • Mobility-as-a-service strategy and ways-to-play • Dealer business model and direct sales • Capability requirement definition, development & Marketing, sourcing (incl. supplier selection) • Market entry strategies for new players Sales Future of • Go-to-market, pilot set-up, launch support and scaling • Ownership vs. usership models & Aftersales Mobility

• Development and realization of value creating • Digitization strategy and target picture Digital inorganic strategies Enterprise & • Digitization of core processes (e.g. predictive • Enterprise portfolio review maintenance, digital supply chain, RPA1) Transfor-mation Enterprise Value Architecture • Improvement of strategic positioning and business • Digital transformation acceleration (e.g. org set-up, performance governance, KPI’s, tracking) (EVA) • Optimization of balance sheet and tax structure

• Product and service strategy, opportunity sizing & • Organization, product & process maturity assessment Extended proposition design • Enablement through preventive, reactive and Integrated Enterprise • (Digital) unit set-up, capability building and talent sustained solutions Product Enablement (EEE) & Service • Roadmap, risk assessment and (digital) portfolio • From supplier nomination to End of Production management/ divestiture Strategy

• Risk analysis along product lifecycle Product • Transparency over cost and customer value (Technical) • Prioritization of risk mitigating measures Value • Technical and commercial opportunities for cost Compliance Management • Implementation of best practice technical compliance reduction and value creation (PVM) management system to ensure conformity with • Creation of holistic PVM organizations (i.e. strategy, technical compliance standards operating model, methods & tools, resources) 22 | Standing on the Verge of Momentous Change: Automotive Supplier Industry in Turkey Your Contacts

Tolga Baloğlu Kağan Karamanoğlu Henning Rennert Partner, PwC Turkey Partner, PwC Strategy& Turkey Partner, PwC Strategy& Germany +90 212 326 53 34 +90 212 326 63 09 +49 160 95553583 [email protected] [email protected] [email protected]

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