Ikili Rapor DEIK (Matbaa) Son.Pdf 1 10/4/11 6:25 PM

Ikili Rapor DEIK (Matbaa) Son.pdf 1 10/4/11 6:25 PM

October 2011

CMY

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CMY

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October 2011

MY DEİK Foreign Economic Relations Board & BCG Boston Consulting Group

CMY No part of this book may be used or reproduced, copied, distributed in any manner

K without written permission of DEİK & BCG.

Foreign Economic Relations Board (DEİK) TOBB Plaza, Harman Sokak No: 10 Kat: 5 Esentepe - Şişli 34394 İstanbul - Turkey Phone: +90 (212) 339 50 00 (pbx), +90 (212) 270 41 90 (pbx), Fax: +90 (212) 270 30 92 www.deik.org.tr - www.turkey-now.org www.dtik.org.tr - www.healthinturkey.com

The Boston Consulting Group Kanyon Ofis, Büyükdere Cad. No: 185 K: 13 Levent 34394 İstanbul - Turkey Phone: +90 (212) 317 80 08 Fax: +90 (212) 317 82 10 www.bcg.com.tr

ISBN NO: 978-605-5979-06-5

DEİK Yayınları: 771-2011/9-b1

Küresel Ekonomide Türkiye Serisi Turkey in Global Economy Series Ikili Rapor DEIK (Matbaa) Son.pdf 4 10/4/11 6:25 PM

CMY

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DEİK President’s Message

Dear Readers,

Turkey has achieved remarkable economic and political development in the new millennium. A sound macroeconomic strategy combined with prudent scal policies and major structural reforms have, over a period of 10 years, facilitated Turkey’s successful integration into the global economic system. Turkey’s GDP levels increased more than triple since 2002 while its GDP per capita increased from US$ 3,500 in 2002 to $10,079 in 2010. Its exports increased from US$ 36 billion in 2002 to US$ 114 billion by the end of 2010. Although the global economic crisis adversely affected the Turkish economy in 2009, Turkey proved to be one of the fastest recovering economies in the world by registering an impressive 5.9 percent economic growth rate in the last quarter of 2009 reaching a record level of 8.9% in 2010. Most importantly, Turkey did not achieve this impressive economic performance at the expense of price stability. It drastically decreased ination from 30 percent in 2002 to 6.4 percent in 2010, an unprecedented outcome of rapid economic growth. These achievements enabled Turkey to assume a hard-won place as the 17th largest economy in the world, and 6th largest economy compared to the EU members in 2010 in terms of its GDP. Recent studies also predict that Turkey will continue to be the “BRIC of Europe” with its democratic credentials, economic model and strong private sector in the upcoming years, and rank by the year 2050 the 5th largest economy in Europe after the UK.

C One of the primary factors behind Turkey’s impressive development record was Foreign Direct Investments M (FDI). Since the start of the new millennium, the Turkish economy attracted US$94 billion of FDI, and Y ranked the 15th most attractive FDI destination in the world for the period between 2008 and 2010. The EU CM accession process, which gathered momentum during this period, further strengthened Turkey’s macroeco- MY nomic fundamentals and regulatory infrastructure rendering the Turkish economy more attractive to CY foreign investors. Currently, around 26,000 foreign enterprises representing a variety of sectors, including CMY but not limited to nancial services, infrastructure, retailing, research and development operate in Turkey. K However, we believe that Turkey offers more business opportunities with its young and productive population, rising income levels, growing global inuence, consolidated democratic regime, liberal market economy, business-oriented legal and nancial infrastructure, and strong growth potential. As a result, we initiated a series of studies aimed to explore and devise the ways in which the Turkish enterprises and their global business partners can exploit new investment opportunities. The current issue is the rst report of such studies prepared in partner- ship with Boston Consulting Group (BCG), a leading global management consulting rm who shares our vision in making Turkey one of the global investment centers. It identi es speci c sectors for mutual cooperation, and offers investors a roadmap to ensure tangible results. At a more general level, it also aims to stimulate debate about policy both by exposing potential challenges and by identifying where to look for lessons and good practices.

As Turkey’s leading business association representing the Turkish private sector, the Foreign Economic Relations Board of Turkey (DEİK), is dedicated to promoting and improving foreign economic relations between Turkey and its global partners through its national and global networks. I believe that the current report is a substantial step in the right direction, and will lead to new business opportunities for both Turkey and its global business partners.

M. Rifat Hisarcıklıoğlu President TOBB-DEİK Ikili Rapor DEIK (Matbaa) Son.pdf 6 10/4/11 6:25 PM

Message from the Chairman of the Executive Board

Dear Investors,

Foreign Economic Relations Board of Turkey (DEİK) was founded in 1988 to promote the economic and commercial relations of Turkish businessmen abroad along with the broader goal of ensuring the overall integration of the Turkish economy into the global economy.

As a consequence of the economic liberalization policies of the 1980s, Turkey became a prominent actor in international trade as well as an attractive hub for foreign direct investments. In fact, DEİK has earned considerable credit for achievement as an institution that makes every effort to open the Turkish economy up to the world economy.

When we look at Turkey’s most powerful sectors, we see that Turkey is the 2nd largest manufacturer of at glass in the world, the number one textile and TV manufacturer in Europe, and the number one exporter of

C cement in Europe. Turkey has the world's 8th largest ship construction industry and Turkey is within the

M rst 10 most popular tourist destinations in the world.

Y Due to the enactment of the new Law for Foreign Direct Investment in 2003, foreign investors have gained CM

MY equal rights with Turkish investors. Accordingly, the value of foreign direct investments after 2003 is more

CY than 70 billion U.S. Dollars.

CMY In this new era, the priorities of DEİK include fostering production of goods and services which have high K added value and competitive power, providing market diversity and depth, contributing in attracting the investments involving high technology to Turkey, and supporting the trademark of Turkish brands and providing them the opportunity to have activities in the global arena.

In addition to its routine meetings, DEİK coordinated very signi cant meetings where many of the most distinguished persons in the world could meet with Turkish and foreign business people.

I hope that Turkey will be promoted because of this publication, and new projects, enterprises, and cooperation will be established which will render Turkey one of the biggest economies in the world.

I sincerely believe that with the guidance of DEİK as a pioneering business organization serving Turkey's integration into global market place, Turkey will become further involved with the world.

Rona Yırcalı Chairman of the Executive Board DEİK Ikili Rapor DEIK (Matbaa) Son.pdf 7 10/4/11 6:25 PM

Foreword

Dear Readers,

As the world is going through one of the most distressed economic periods in history, businesses and investors alike are having to look for returns in markets that did not take center stage previously. With long-term growth prospects looking weaker in most of the developed economies, more attention is already directed to developing countries that have attained a level of economic robustness even in such times of global volatility. An excellent such example is Turkey, which managed to recover swiftly from its own crisis of 2001 and the 2008-09 global crisis with a positive growth performance in every quarter since the rst half of 2009.

Foreign Direct Investment (FDI) has been one of the key pillars of Turkish economic agenda since the early 2000s and the country has shown a remarkable boost in its FDI attraction performance. Today, Turkey is one of the key rapidly developing economies that hosts many multinational incumbents as well as strong local players. C

M Despite its recent successes in FDI attraction, Turkey still has room for further groth in terms of FDI from Y many developed geographies when compared to other rapidly developing economies such as India, Mexico CM and China. Moving on from this picture, together with the Foreign Economic Relations Board of Turkey MY (DEİK), we have worked on the "Global Advantage of Turkey" report.

CMY Turkey with its structural competitive advantages is one of the key destinations in today's market context.

K We believe, going forward, Turkey, with its rapid growth, young population, liberal market regime, geo- political status and expanding middle class, will offer even more promising opportunities.

The following report was created with the aim of sharing lesser known key facts and gures on Turkey to highlight the commercial opportunities as well as raising discussions on Turkey's role in Global Transfor- mation, achieving breakthrough growth for "incumbents" and "challengers”.

Dorukhan Acar Burak Tansan Principal Partner and Managing Director The Boston Consulting Group The Boston Consulting Group Ikili Rapor DEIK (Matbaa) Son.pdf 8 10/4/11 6:25 PM

CMY

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CMY

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Turkey's global advantage can be highlighted across 6 different dimensions

Size of the economy 6 2 Historic Macro returns of indicators

foreign investors

5 3 Trade, FDI track record Labor and Population 4 Dynamics Strategic importance(s)

CY Turkey is one of the largest economies in the world, and is CMY expected to grow even further K

Key highlights

1 1. Turkey's GDP expected to exceed $1 trillion Size of the by 2015 economy 6 2 Historic 2. Turkey ranks 15th by GDP and 14th by

Macro returns of GDP-per-capita, among largest countries – indicators foreign has scale advantage investors 3. Turkey will grow with BRICs, in the wake of a 5 3 multi-polar world, maintaining its scale All rights reserved. Trade, advantage FDI track record Labor and and DEIK. 4 Population Dynamics Strategic importance(s) The Boston Consulting Group 1 by Copyright © 20 1

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Turkey's GDP to exceed $1 trillion by 2015

Annual GDP1

GDP1 , in USD Bn GDP3 Growth % 9.4% 1200 8.9% 10 8.4% 1033 6.9% 966 GDP 6.2% 5.5%4 GDP Growth % 900 5.3% 5.0%4 4.7% 4.5%4 4.0% 4.0% 5 730 729 614 600 0.7%

0 300

-4.7% 0 -5 2002 2003 2004 2005 2006 2007 2008 2009 20102 20112 20122 20132 20142 20152

Sustained GDP growth over the next 3 - 5 years

M 1. Gross domestic product, current prices , in U.S. dollars 2. Data for 2010-2015 is IMF's prediction 3. Gross domestic product, constant prices , in U.S. dollars 4. Based on Medium Term Plan for 2011-2013 by State Planning Organization of Turkey

Y Source: IMF World Economic Outlook, Oct 2010

MY CY Turkey has the scale advantage CMY Ranks 15th by GDP and 14th by GDP-per-capita, among largest countries1 K

1 Top-20 in GDP GDP-per-capita1

USA $14,658 USA 47.3 China $5,878 Canada 46.2 Japan 42.8 Japan $5,459 France 41.0 Germany $3,316 Germany 40.6 France $2,582 UK 36.1 UK $2,247 Italy 34.0 Spain 30.6 Brazil $2,090 Korea 20.6 Italy $2,055

Saudi Arabia 17.0 Canada $1,574 Poland 12.3 India $1,538 Brazil 10.8 Russia $1,465 Russia 10.4 Turkey 10.4 14 Spain $1,410

Turkey $742 South Africa 7.1 and DEIK. 15 Colombia 6.2 Indonesia $707 Thailand 4.9 Poland $469 Iran 4.7 Saudi Arabia $444 China 4.4 Argentina $370 Indonesia 3.0 India 1.2 South Africa $357 0 10 20 30 40 50 0 2,000 4,000 6,000 8,000 10,000 12,000 14,000 16,000 The Boston Consulting Group

USD thousand 1 by USD Bn Turkey follows BRIC closely !

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Key macroeconomic indicators yield a positive picture of Turkey, with major stabilization over the last decade

Key highlights

1 1. Interest rates have been decreasing over the Size of the past decades from ~60% levels to ~15% economy levels 6 2 Historic Macro returns of 2. Inflation rates have been stabilizing in the indicators US range of 5-10% after the 2004 crisis period investors 3. In line with inflation, the Turkish Lira FX 5 3 rates have also stabilized over the past 5-6 Trade, years FDI track record Labor and 4 Population Dynamics 4. Turkey has a relatively low debt-to-GDP Strategic ratio among Eastern European countries yet importance under-rated

5. Turkish CDS premiums have been far less volatile in comparison to other European

C nations over the last crisis period

CY CMY Dropping interest rates catalyze economic dynamism K

Annual Interest Rate1

80%

62% 60%

49%

40%

15% and DEIK.

0% 1/1/02 1/1/03 1/1/04 1/1/05 1/1/06 1/1/07 1/1/08 1/1/09 1/1/10 1/8/11 The Boston Consulting Group 1 by Interest rates are down to 12% and keep falling!

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Inflation rates have been stabilizing in the range of 5-10% after the 2004 crisis period

Inflation (Average consumer prices 2001-2010) Expected inflation for the coming years

Annual % change Annual % change 100 % 40 % Limited rise in inflation at 2012, then decrease there off. 80 % 30 %

60 % 54.2% 45.1% 20 % 40 %

25.3% 10 % 20 % 5.7% 6.0% 4.8% 10.4% 4.3% 8.6% 8.2% 9.6% 8.8% 6.2% 6.4%

0 % 0 % 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011e 2012f 2013f 2014f

Inflation rates are expected to continue the downward C trend in the mid-term

Source: IMF Y

CY Turkey still seems to remain under-rated in its debt servicing CMY – has a healthier risk position vs countries with better ratings K

Moody's Ratings S&P Ratings1 Gross Debt-to-GDP % in 2010

Japan 226% Greece 130% Israel A1 Israel A Italy 118% Belgium 100% Estonia A1 Czech A United States 93% France 84% Czech A1 Cyprus A- Canada 82% Hungary 78% Poland A2 Poland A- United Kingdom 77% Israel 76% Russia Baa1 Thailand BBB+ Inv. Germany 75% India 72% Lithuania Baa1 Morocco BBB- Grade Austria 70% Brazil 67% Hungary Baa3 Brazil BBB- Netherlands 66% All rights reserved. Spain 63% Cyprus 61%

Romania Baa3 Hungary BBB- and DEIK. Poland 55% Latvia Baa3 India BBB- Norway 54% Argentina 52% Bulgaria Baa3 Morocco 50% Thailand 46% Turkey Ba2 Romania BB+ Mexico 45% Speculative Denmark 44% Ukraine B2 Turkey BB Grade Turkey 43% Sweden 42% The Boston Consulting Group

Czech Republic 40% 1 by Switzerland 39%

0 50 100 150 200 250

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Stability of Turkish economy reflects to its CDS premiums During the global crisis major FDI attractors in Europe exhibits higher volatility

Credit Default Swap Premiums Key Facts

2044,7 1200.0 • CDS premiums are priced "freely" in the market, in 1000.0 proportion to the risk perception for a country.

800.0 • FDI attractors with better Turkey S&P rank, actually show 600.0 Russia wider volatility and higher Hungary steady-state prices. Greece 400.0 • Thus, Turkey exhibits higher stability and perceived as a lower risk country in the 200.0 market.

0.0 04/09/2007 04/09/2008 04/09/2009 04/09/2010 04.07.2011 Turkish CDS premium is less volatile and its current C steady-state is lower than competitors with better rating !

Source: Bloomberg Y

CY Turkey's growing and young population fuels the growth of CMY its trade volume and the rise of the middle class K

Key highlights

1 1. Turkey's trade volume has grown to $300 bn Size of the while running a trade deficit economy 6 2 Historic 2. Turkey has a dynamic population that

Macro returns of constitutes an extensive labor pool indicators US investors 3. Moreover, Turkey's extensive labor pool is also well-educated 5 3 All rights reserved. Trade, 4. In comparison to competitors, Turkey offers a FDI track record Labor and and DEIK. cheaper, yet more productive labor force 4 Population Dynamics Strategic 5. Turkey is already urbanized and the growing importance significance of its middle class is illustrated via numerous economic & social indicators The Boston Consulting Group 1 by Copyright © 20 1

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Turkey's trade volume has grown to $300 bn Experienced trade deficit every year in the past 9 years,

Export Volume Import Volume

USD Bn USD Bn 150 250 132 CAGR: +15% 4 202 114 CAGR: +17% 200 12 185 107 102 4 4 170 12 100 3 8 86 150 140 141 5 6 9 73 117 63 5 5 128 98 5 100 47 110 5 190 50 103 99 69 162 173 36 4 80 52 3 133 132 3 69 111 58 50 3 93 44 USA 66 33 48 Rest of World 0 0 2002 2003 2004 2005 2006 2007 2008 2009 2010 2002 2003 2004 2005 2006 2007 2008 2009 2010

US Rest of World

Y Source: TUIK

CY Turkey recorded 113 US$ B of exports in 2010 focused CMY on 6 key industries K

Automotive, textiles, chemicals, steel Europe, Middle East, Russia & US are and food are the export champions the most important export markets

US$ B 20 % These six industries 50 2.7% 49% 17.3 account for ~70% of 2.9% overall 2010 exports 3.1% 3.3% 14.6 40 15 4.1%

12.7 12.2 5.3% 11.1 30 5.3% 10 9.6

account for ~50% of and DEIK. 5 10.1% 2010 exports 10

0 0 Automotive Textiles Chemicals Steel Agriculture Electrical Germany UK Italy France Iraq Russia US Spain UAE Iran Total (ready- (food) appliance &

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In addition, Turkey is a major global contractor and a preferred tourism destination

Turkey generates substantial revenues Tourism sector is a significant from construction projects abroad contributor to the economic activity

US$ B # of countries US$ B # of visitors - mn 35 48 50 35 29 30 27 44 43 26 30 30 39 23 25 37 40 36 36 24.6 25 34 23.8 25 32 20 22.3 21.9 20 20.9 21.2 20.8 20.3 30 20 20 18.5 16.9 15 15 15 20 11.3 11.6 10 10 10

10 5 5 4.2 5 2.4

0 0 0 0 2002 2003 2004 2005 2006 2007 2008 2009 2010 2006 2007 2008 2009 2010 Revenues from projects abroad # of countries Tourism revenueses # of visitors

C Turkey already has regional players in both industries with

M potential to transform into global challengers

CY CMY A dynamic population forms an extensive labor pool K

Large and growing population ...... With favorable demographics

Population (Mn) 100 60+ yrs 14-60 yrs 0-14 yrs

+1.1% Romania 19 65 16 80 80 76 72 68 Bulgaria 23 63 14 64

40 Poland 17 67 16 and DEIK.

Turkey 8 64 28 20

Europe 22 63 15 0

2000 2005 2010 2015f 2020f 0 20 40 60 80 100 The Boston Consulting Group % 1 by Notes: Population of 73 million is growing steadily, European countries have reducing populations. Urbanization is taking place rapidly, making especially Turkish cities a clear economic growth area: 65% of population lives in urban areas; Growth of urban areas is 2.6% p.a. (vs 1.1% p.a. for total Turkish population); TR cities are populated by 47 million inhabitants; Large cities of Turkey are Istanbul (12m), Ankara (4m), Izmir (3m), Konya (1m), Bursa (1m) , Adana (1m) and Gaziantep (1m). Turkey s population will remain young for the coming decades. Total number of households is around 17 million up from around 15 million in 2000

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HR pool is not only large but also well educated

Comparative Pool of University Graduates Some Key Facts

• Turkey has the largest working age population in EU Mn and CEE with 49,5 million people (i.e. age 15-64) 8 • Turkey has the one of the largest labor forces of EU 6.8 and CEE with 22 million people

• Unemployment level is ~11,9% thus available labor 6 pool to employ 4.7 • Labor pool is mostly educated, at least a middle school level 4 3.9 • White collar labor pool costs much less than EU

• Labor pool committed and motivated; also to work in the surrounding regions of Turkey 2

0.9 • There are good executive and middle management 0.5 officers in Turkey- many top level Turkish executives in global Coca-Cola, Microsoft, Intel, Pepsi, Gillette, 0 Pfizer, P&G, NBG, GE, Unilever, etc. Ireland Portugal Poland Turkey Spain

M 1. Selected countries due to historic ties, current relations or neighoring borders; excl huge markets that all globals cover seperately such as India and Russia

Y Source: TUIK, IMF WEO, BCG

CY CMY Turkey has a diversity of highly qualified human capital K

Orhan Pamuk, Nobel Prize Winner CEO, Coca Cola Company Doctor Oz

nd Directors @ Cannes, Berlin, Rome K. Dervis, Former Head of United World Basketball, 2 , Men & Women Nations Development Program All rights reserved. and DEIK. The Boston Consulting Group 1 by Copyright © 20 1

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Labor force is cheaper within CEE / EU and more productive (1)

Labor Productivity Growth Labor Cost Per Hour (2009) (Annual average 2002-09)

Turkey 3.0 Turkey 4.4% Russia 3.3 Bulgaria 4.1 Romania 4.4% Romania 5.9 Hungary 9.3 Russia 3.8% Slovakia 9.6 Czech Rep. 3.1% Poland 9.7 Czech Rep. 13.2 Poland 2.6% Japan 23.5 Slovakia 2.2% UK 24.2 US 26.3 Hungary 2.0% Italy 30.2 Slovenia 1.5% France 30.6 Germany 40.3 Bulgaria 1.3%

0 10 20 30 40 50 0 1 2 3 4 5 USD %

CY Labor force is cheaper within CEE / EU and CMY more productive (2) K

Annual Average Number of Sick Days Hours Worked per Week of Full-Time per Employee in Europe (2008) Employment Annual Average (2008)

Turkey 4.6 Turkey 53.7 UK 5.5 UK 43.0 Spain 5.7 Czech Rep. 42.7 Germany 6.6 Poland 42.7

Italy 6.7 Bulgaria 42.0 Romania 7.8 Spain 41.9 France 8.3 Germany 41.7

Poland 9.7 Romania 41.1 and DEIK. Czech Rep. 10.8 France 41.0 Portgal 11.9 Belgium 40.9 Bulgaria 22.0 Hungary 40.8

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Turkey is already an urbanized country

Urban accounts for 70% of total Big urbanization wave occurred in population the past

Population in M (%) 100 First wave driven by 8 push factors: political Total annual growth rate 0.97 CAGR tension in the East ('05-'15) 80 76.7 Urban 73.3 growth rate 69.7 6 21.5 Rural -0.57 22.3 (28%) 60 22.8 (30%) Current wave caused by (33%) pull factors: job, income, 4 and quality life in the cities 40

55.2 51.0 Urban 1.65 46.9 (72%) 2 20 (67%) (70%)

0 0 2005 2010 E 2015 E 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 1965– 1970– 1975– 1980– 1985– 1990– 1995– 2000– 2005– 2010–

Y Source: Turkey Statistics Institute, desk research, BCG analysis

CY Urbanization raises number of mid-classes and lifts CMY people out of poverty K

Household income distribution in Household income distribution in 2005 2015

Number of households in K Number of households in K $ p.a $ p.a

> 50 k 435 > 50 k 1,523

5 - 10 k 4,844 5 - 10 k 3,851

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Emergence of the Turkish middle-class observed in many key dimensions : "Consumption"

Airline Passengers Automotive Sales TV Sales

Mn Thousands Stock per 1k people 150 1,500 600 +200% +16% +121% 102 100 1,000 400 350 793 723 301 56 50 500 200 34 359

0 0 0 2002 2005 2010 2003 2005 2010 2005 2010 Shopping Malls Electrical Appliances Demand PC Demand

Numbers USD Mn thousand +66% 400 +191% 15,000 30,000 +315% 12,004 300 268 20,745 217 10,000 20,000 200 7,242

92 5,000 10,000 100 5,000

C 0 0 0 M 2002 2008 2010 2005 2010 2005 2010

Y Source: TUIK, DHMI, ODD, Economist Intelligence Unit, AYD,

CY Emergence of the Turkish middle-class observed in CMY many key dimensions : "Financial" K

Consumer Loans Insurance Premiums Mortgage Loans

+345% Bn TL Mn TL Bn TL +89% 150 20000 +81% 80 129 61 15000 14129 60 100

10000 40 7810 32 50 29 5000 20

2 0 0 0 2002 2005 2010 2005 2010 2007 2010

Bn TL Bn TL +732% Thousand and DEIK. +347% 800 10 9.2 150 129 617 600 107 100 400 252 5 The Boston Consulting Group 200 138 50 43 1 by

0 1.1 2002 2005 2010 0 0

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Emergence of the Turkish middle-class observed in many key dimensions : "Telecom, Media, Technology"

Mobile Subscribers Broadband1 Subscribers Computers in household

Mn Mn +431% % +42% 80 10 60 8.5 51% 62 60 40 44 40 5

20 13% 20 1.6

0 0 0 2005 2010 2005 2010 2005 2010 3G Users Facebook Users Movie tickets sold

Mn Mn Thousand 40 +8385% +82% 30 40 +173% 30 28.0 31 19 30 20 20 20 17 18

10 7 10 10 0.3 C 0 0 0 M 2007 2010 1. Fixed and mobile 2009 2010 2002 2005 2009 Y Source: BTK, TUIK, InsideFacebook, socailbakers.com

CY Emergence of the Turkish middle-class observed in CMY many key dimensions : "Value added output" K

Patents & Registrations R&D Technoparks

Mn TL Numbers +913% Numbers 8000 10000 60 +385% +144% 8087 6000 5510 39 40

TWh Numbers +288% Numbers and DEIK. 30000 80000 73521 300 24916 60000 203 20000 49252 200 16718 161 40000 128 27003

10000 100 The Boston Consulting Group 6426 20000 1 by

0 0 0 2000 2005 2009 2000 2005 2009 2000 2005 2010

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Emergence of the Turkish middle-class observed in many key dimensions : "Education, Tourism, Press"

Citizens Going Abroad Universities Foreign Journalists

Mn Numbers Numbers +636% 15 +108% 200 +108% 300 265 11 154 150 10 200 8 100 5 74 77 5 100 50 36

0 0 0 2000 2005 2010 2000 2005 2010 2002 2010 Tourists Arrivals Turkish Students Abroad Foreign-owned Companies

Mn Numbers Numbers +291% 40 +175% 200000 +577% 30000 25490 30 29 150000 139000 20000 21 20 100000 9675 10 10000 10 50000 6511 20531

C 0 0 0

M 2000 2005 2010 2005 2010 2003 2005 2010

Y Source: BDK, TURSAB, MEB, YURTKUR, Undersecretariat of Treasury

CY Emergence of the Turkish middle-class observed in CMY many key dimensions : "Increasing globality" K

Visa-free Countries International Flight Network Bileteral Investment Treaties

Number of Countries Number of Countries Numbers +162% +27% 80 +9% 200 100 157 81 58 74 60 150 53 64

40 100 50 60 20 50

No of Countries +240% Mn USD Number of Countries and DEIK. 20 1000 100 +80% 17 +762%

15 707 74 601 55 10 500 50 7 41 5 The Boston Consulting Group 5 1 by 82 0 0 0 2002 2005 2010 2000 2005 2009 2002 2005 2010 Copyright © 20 1 Source: Ministry of Foreign Affairs, CIHAN H.A., TIKA, Undersecretariat of Treasury, Undersecretariat of The Prime Ministry for Foreign Trade(DTM) , SHGM 22

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Turkey has strategic advantages in its geo-political positioning; plus improving technological and social standing

Key highlights

1 1. Turkey is strategically important acting as a Size of the natural link and bridge to markets in economy Caucasia, Central Asia, Balkan states and 6 2 Historic the Gulf Macro returns of indicators foreign 2. Turkey s new mid-term economic plan investors seems feasible and ensured fast(er) recovery in the global crisis times 5 3 Trade, 3. Turkey is a key participant of the global FDI track record Labor and economical and political scene 4 Population Dynamics Strategic 4. Turkey is becoming technologically importance(s) important globally

5. Turkey is becoming socially important globally

MY CY Turkey is strategically important CMY A natural link to markets in Caucasia, Central Asia, Balkan states and the Gulf K Proximity and Corridors Strategic Importance

TURKEY IS STRATEGICALLY LOCATED IN BETWEEN EU AND ASIA WHILE ENJOYING PROXIMITY TO NEWLY EMERGING MARKETS • Extremely close to CIS, ME and Africa – newly emerging markets: 3000 KM • Access of the West to Central Asian countries • Offers easy access (proximity) to all such 2000 KM nations without the risk

1000 KM • Ensures flexibility in all fronts • Strong cultural ties especially with the CIS

region 1000 KM 2000 KM 3000 KM Note: All distances from Istanbul

!"#$%&' -+..%$ /$0$"1.2$& Nabucco Gas • Turkey is a gateway to energy resources such as 6+.2#%$

Blue Stream-I Trans-Caspian gas and oil pipelines in the region TT Jadi Kazakh Gas

( #'')' *+#"', Nabucco • Turkey, with Russia, is the leader in Black Sea Trans-Caspian Turkmen Gas

Iraqi Gas and DEIK. Arab Gas P/L (ITGEP) Iranian Economic Corporation Phase-III TerGas Gas

Egyptian Gas Arab Gas P/L 34,52 Map: Google Map • Proximity to EU now better with the customs Fibre silk road union: Oil • Trade-wise Turkey is integrated into the EU • Full EU-integration potential is a reality for

Turkey The Boston Consulting Group 1 by

Note: JADI name derives from the initials of the following cities; Jeddah (Saudi Arabia), Amman (Jordan), Damascus (Syria) and Istanbul (Turkey); it is an integrated multi-pass fiber optic network. The silk road is also similar covering Fujairah (United Arab Emirates) going over Riyadh (Saudi Arabia), Amman (Jordan) and Tarsus (Syria) to reach stanbul. For the first time in Middle East, covering the

entire Gulf area and having a total distance of 7750 km with its spare structure, the RCN Project will be the longest terrestrial fiber optic infrastructure in the region between Fujairah and the West Copyright © 20 1 Source: BCG-Analysis, ICT news Eurasia, TT 23

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Turkey s new mid-term economic plan is feasible, and ensured fast(er) recovery from the global crisis

Mid Term Economic Plan Summary

Main objective is to reach a rapid and sustainable growth period • Expected 2011 GDP growth is 4-5% (vs. -6% in 2009)

Realignment in public sector investments • Priority to infrastructure investments in education, health, technological research, transportation and communication • Bringing down inter-regional development disparities via social infrastructure projects

Reduction in public sector deficit and increase in debt management transparency • 2010 budget deficit decreased to 3.6% of GDP vs. 5.1% in 2009 • 2011 Jan- Mar budget deficit decreased to 4.1% of GDP vs. 11.3% in Jan-Mar 2010

Strengthened public revenue channels • Encouragement of individual and institutional savings • Stability in audit and implementation of tax administration; renewal of the income tax law in 2010 • Reduction in informal economy

Re-Organization in and Privatization of State Economic Enterprises (SEEs) • Complete public withdrawal from electricity distribution and sugar production • Decrease in public share in telecommunication and port operation

C • Introduction of new corporate governance for SEEs • Initial studies for partial public offerings for Ziraat Bank M

Source: BCG-Analysis; State Planning Organization; Morgan Stanley Economic Outlook Report;Economist Intelligence Unit, May 2011; Deloitte Economic Outlook Report (3Q 2009) Y

CY Turkey is a key participant of the global economical and CMY political scene K

Turkey is a key member of leading international Organizations

Turkey was a founding member of the United Nations in 1945 • Nine UN agencies are officially represented in Turkey: FAO, ILO, UNDP, UNFPA, UNHCR, UNIC, UNICEF, UNIDO and WFP. The IOM has an office in Ankara and UNODC and WHO also have liaison offices in Turkey • Turkey has a permanent mission at the UN • Turkish nationals played key roles at the UN – e.g. Kemal Dervis was the 3rd highest ranking official at the UN as the administrator of UNDP • Member of UN Security Council during 2009-2010

NATO member since 1952 • Ex- Turkish Minister Hikmet Çetin was the NATO Senior Civilian Representative in Afghanistan during 2003-2006

One of the Founding Members of OEEC1 in 1948, which became OECD2 in 1961

and DEIK. Member of EU custom-union, since 1996

Founding member of BSEC3 , since 1992 The initiative seeks to galvanize international action against extremism Member of World Trade Organization through the forging of international, intercultural and interreligious dialogue

and cooperation since 2006. Its co- The Boston Consulting Group

Active in key organizations like Worldbank, IFC, Islamic Development Bank,... sponsored by Turkey and Spain. 1 by • Worlbank and IFC utilize Turkey as a hub to serve broader regions

1. Organisation for European Economic Co-operation 2. Organisation for Economic Co-operation and Development 3. Blacksea Economic Cooperation Council Copyright © 20 1 Source: BCG-Analysis; NATO,OICiOECD,G20, BSEC, WTO, UN websites 24

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Turkey is strategically technologically important

Volitan, Int’l Desgin Award 2007 NYC Taxi*, by KARSAN** JSF Member & Parts Producer by TAI* and Kale*

* Finalist ** a DEIK member. * DEIK members.

Subway by DURMAZLAR Pars by FNSS* Altay... National Tank by Otokar*

2015

* a DEIK member. * a DEIK member. M

CY CMY Turkey is strategically socially important K

Unesco World Cultural Heritage (9) Sports Events 320+ museums and 131 historic sites

City museums • e.g. Edirne Museum, Kars Museum, Ni de Museum

Ethnography museums • e.g. Balıkesir Sıdıka Erke Ethnography Museum, Konya Ethnography Museum Islamic art museums • e.g. Erzincan-Yakutiye Turkish & Islamic Art Museum, Istanbul Turkish & Islamic Art Museum Science museums European Capital of Culture 2010 • e.g. Islamic Science & Technology All rights reserved. History Museum, METU Museum

Monothematic industry museums and DEIK. • e.g. Düzce Sarsılmaz Museum, stanbul PTT Museum Pluri-thematic industry museums • e.g. Rahmi Koç Museum, Istanbul Marine Museum (History & Art center)

Monothematic art museums The Boston Consulting Group • e.g. Pera Museum 1 by

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Turkey is strategically unique given Istanbul

A cross-road : Only city linking Worlds Largest Stadium World Capital continents by car (Hippodrome of Constantinople) Capital to 3 giant empires – Roman, Byzantine, Ottoman

129 emperors in 1600 years

Worlds Largest Church Cultural Accumulation Küresel kültürel ve etnik Worlds Oldest Shopping Mall metropol btw 537 and 1629 (Old and New)

MY CY Turkey is strategically construction wise important CMY Turkey ranks 2nd after China with 33 companies according to “ENR Int’l 225 list” K

Museum of Islamic Arts*, Qatar Tyngah Power Plant, Ireland Dubai Metro, UAE

* Constructed by BAYTUR - a DEIK member. * Constructed by GAMA - a DEIK member. * Constructed by YAPI MERKEZI- a DEIK member.

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Turkey is strategically regional business wise important

BCG Global Challenger List Turkish Airlines Acquisitions of Turkish Co.'s Entrants

M Note: RPC by Gubretas; BH Airlines by Turkish Airlines, BeST by Turkcell, Godiva by Ulker, CMA CGM by Yildirim Holding, Invitel Intl by Turk Telekom, Cacharel by Aydinli Group, Finlux by Vestel,

Y Grundig by Koc Group, Villeroy & Boch by Vitra Source: Bloomberg, Reuters, Financial Times, Haberturk, Businessweek,

CY Privatizations and private company sales expected to fuel CMY the FDI inflow into Turkey in the short and medium terms K

Key highlights

1 1. FDI stock in Turkey started to grow Size of the significantly, largely due to increased political economy stability 6 2 Historic

Macro returns of 2. Pace of privatizations increased since 2005, indicators foreign bringing the historic total to $42B investors 3. Important privatizations expected to generate 5 3 around $50B are anticipated in 2011 and All rights reserved. Trade, beyond FDI track record Labor and and DEIK. 4 Population Dynamics 4. Other private company block sales, IPOs Strategic and SPOs are also expected in the near importance(s) future

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FDI stock in Turkey started to grow significantly lately Despite global crisis, thanks to political stability

FDI Inflows1 to Turkey

USD Bn 25 22.0 20.2 Due to global financial 20 19.5 crisis decrease in line CAGR: +81% with global trends that is ~50% decrease 15 07-09

10.0 10 8.4 8.9

5.1 5 3.4 2.9 1.8 1.1 0 1995-2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 1990-2000: 2001: 2003- present: Political instability with 9 Reform Program based on Single Party (AKP) elected coalition governments in 10 review by World Bank Financial Law 4875 enacted: Eliminates limits in capital years. $772 M/yr FDI attracted Adv. Service requirements for new FDI projects, grants full but full potential not realized C convertibility in transferring capital and earnings M 1. Including real estate and loans FDI inflow

Y Source: Republic of Turkey Undersecretary of Treasury

CY CMY Privatization totaled to $42B K

Privatization evolution over years (US$ M) Type of sales

42,039 3,085 279 2,275 Other 3% 6,297 Public Offering 17%

4,259

8,096 Asset Sale 32%

9,523 and DEIK. Block Sale 48%

1985-2004 2005 2006 2007 2008 2009 2010 2011 Total 1985-2011 The Boston Consulting Group

50% of privatization done via block sales, creating 1 by opportunity for institutional & strategic investors

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Top 10 privatization transactions generated US$30 B

Top 10 privatization by size Block sale Total share Sale Target Sector Privatization type acquirer privatized1 (Mn $)

Turk Telekom Telecom Block sale + Public offering OGER Telecom 60% 8,461

Tupra Petroleum Refinery Block sale + Public offering Koc Holding 83% 5,251

Teda Electricity Distribution Asset sale Various investors 4,198

Erdemir Iron & steel Block sale + Public offering OYAK 49% 2,823

Tekel Alcohol & Tobacco Asset sale Various investors 2,478

Petkim Petrochemicals Block sale + Public offering Sorcas&Turcas 94% 2,464

Petrol Ofisi Petroleum Marketing Block sale + Public offering bank – Do an 68% 1,443

Halkbank Banking Public Offering 25% 1,839

Isbank Banking Public Offering 12% 633

Sumer Holding Textile Asset sales Various investors 456

TOTAL 30,046 C

M 1. Total shares privatized by block sale and public offering

Y Source: Turkey Privatization Administration

CY Significant privatization opportunities marked in CMY Turkey's agenda for 2011 and beyond K

Sales Responsible Target assets/companies Description Timeplan proceeds authority

• EUAS, 16 GW installed power US$15 B • 4 priority thermal PPs & 9 TBD PA Energy generation capacity portfolios of hydro & thermal PPs • IGDAS, Istanbul Gas Dist. US$4 B • 4.2mn customers 2011 Istanbul Muni

• Halkbank US$7.5 B • 25% via SPO, 50% via block sale 2011&TBD PA Banking

• Ziraat Bankasi US$5 B • 25% via IPO TBD PA

• Sea ferry (IDO) US$0.8 B • Istanbul ferry line 2011 Istanbul Muni . and DEIK. • Airline (Turkish Airlines) US$1.6 B • 49% via SPO and/or block sale 2011 PA • Parking (ISPARK) US$4 B • Istanbul parking rights 2011 Istanbul Muni.

Telecom • Turk Telekom US$2.4 B • 15% to be sold via SPO 2011 PA The Boston Consulting Group

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Proceeds of ~US$50 B expected from these privatizations in 2011-2013 period

US$ B 0,5 49,8 50 1,6 0,8 2,4 4,0

4,0 40 4,0

5,0

30 12,5

15,0

0 Energy1 Banking2 Seaports3 Toll roads Gas dist.5 Parking6 Telecom7 Airline8 Ferry-line9 Lottery10 TOTAL Assets to be & bridges4 privatized

M 1. Government expects US$15 B 2. Estimate based on current market capitalization 3.Price tag from cancelled past tenders 4.Government expects US$4 B 5.Investment bank estimates 6. Press 7. Estimate based on market capitalisation 8. Estimate based on market capitalization 9. Investment bank estimates 10. Investment bank estimates Source: BCG analysis, press, investment bank esitmates Y

MY Backup CY Sale of toll roads & bridges to generate large proceeds CMY 2,000 km of toll roads with high traffic bridges for 25 years K

Key highlights

• Two bridges in Bosporus with around half million passenger daily

• Scope including ~2,000 km of highways

– Edirne-Ankara 836km – Izmir-Cesme 89km – Izmir-Aydin 173km

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In addition many other private company block sales, IPOs and SPOs are on the way...

Large private company sales (e.g.)

Upcoming IPOs and SPOs (e.g.)

C ...drawing remarkable local and international attention

Y Source: BCG; Company Websites; Press

CY Several large-cap foreign companies have enjoyed strong CMY performances in Turkey K

Key highlights

1 1. Two main types of foreign investors are Size of the present in Turkey: Private Equities and economy Strategic Investors 6 2 Historic

Macro returns of 2. Various successful examples include the indicators foreign Turkey operations of: investors – General Electric – TPG 5 3 – Citi All rights reserved. Trade, – Ford FDI track record Labor and and DEIK. – Coca-Cola 4 Population Dynamics – Procter & Gamble Strategic importance(s) The Boston Consulting Group 1 by Copyright © 20 1

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Seductiveness of these opportunities only double when combined with high-profits captured by former investors

Private Equity Examples Strategic Investors Examples

CY GE's Investment in Garanti grew at CAGR of 29% for CMY 5 years excluding dividend gains K

2005 2007 2008 2010

BBVA buys 24.9% GE buys 25.5% stake Garanti buys back Garanti buys back stake Transaction from Dogus 4.65% stake from GE 370 founder shares (18.6 p.p. from GE)

Implied and DEIK. $6.6 Bn $14.5 Bn $23.5 Bn Equity Value

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TPG bought Mey for $810Mn and sold for $2.1Bn after 5 years

% Market Share in Volume Key Facts

% • Mey has ~80% share in domestic raki market 80 +7% with access to 50k retail outlets 70,5 70 • In 2004, Mey Icki JV1 bought Tekel's alcoholic 65,9 beverages division for $292Mn in 2004

60 • In 2006, TPG bought %90 of Mey for $810 Mn 2008 20 17,4 2009 • In 2008, Mey sold Tekel Birası brand to Efes for 11,8 $3.8Mn. 10 7,9 6,8 • In 2011, Diageo agreed to buy Mey cki for $2.1 2,9 3,1 2,4 3,7 3,3 2,3 0,9 0,9 Bn at x9.9 of Mey's 2010 EBITDA 0 Mey Icki Burgaz Efe Pernod Diageo Brown- Other Ricard Forman

2 C Mey's value grew at 21% CAGR under TPG control

M 1. JV consortium was composed of Nurol-Limak-Özaltın-Tutsab 2. Based on buy and sale prices of TPG.

Y Source: Euromonitor, Company websites, Bloomberg, Financial Times, Wall Street Journal, Bloomberg HT, Hurriyet Economy, BCG Analysis

MY CY Citi's 20% stake in Akbank grew from $3.1Bn to $4.6Bn CMY Dividends received were ~USD 1.1Bn K

2007 2008 2009 2010 2011

Citi 20% stake from Still holds the shares Transaction Akbank1

Market USD 15.5 Bn22 USD 22.9 Bn3 Capitalization The Boston Consulting Group and DEIK.

Citi's investment in Akbank grew at CAGR 15.4%, while its 1 by Return on Equity in US was -0.7% on average

1. Transaction was completed on January 9th 2007 2. Implied value 3. Market capitalization as of April, 2011

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Ford-Otosan JV uses scale advantage of TR to lessen costs Ford increases ownership to 41% progressively, making TR an export center

Company Performance Key Facts

USD Mn % • Since 1959, Ford increases ownership 1 10 15 progressively to 41% 14% 13%

12% 12% • Kocaeli Plant, with 320,000 units of annual 8 11% production capacity, is the Best Ford Brand 10% 10% 2 6.2 10 Assembly Plant in Europe since 2002 . 6 4.9 4.6 4.8 • Inonu Plant is the Best Powertrain Plant in the 4.5 38% 2 4.1 31% World since 2005 . 4 3.7 53% 45% 46% 5 53% 43% • Large-scale exports diversify domestic risks, 2 while lowered costs give competitive 62% 69% 55% advantage. 47% 47% 57% 54% 0 0 • $1.82 Bn in dividend payment during last 6 2004 2005 2006 2007 2008 2009 2010 years3 Domestic Revenue Export Revenue • 6 consecutive years of leadership btw EBITDA Margin C 2003-2008 in sales from production

M 1. While Koç owns 41% , 18% is publicly owned . 2. According to Ford Production system ratings 3. From 2005 to 2010. 4. Renault breaks leadership streak in 2010.

Y Source: Ford Investor presentation, Thomas Reuters, Financial Times, Automotive Manufacturer's Association BCG Analysis

CY The Coca-Cola Company has been enjoying market CMY leadership in fast growing market K

Median Age vs. Consumption/Capita1 Key Facts

Age • Long Presence: since 1988. Currently, 20% 50 stake belongs to TCCC, %50 Anadolu Efes.

• Scale: 6th largest bottler in TCCC2 system Germany Italy among . Greece Canada 40 • Growth: Sales volume grew at CAGR 16% United Kingdom USA btw 2004-2006.

• Leadership: Market leader with 69% share.

Kazakhstan Argentina All rights reserved. 30 Azerbaijan Turkey United Arab Emirates • Exports: Share of international operations in Tajikistan Turkmenistan Mexico total sales increased to 26% in 2010 from Kyrgyzstan 17% in 2005. Jordan Pakistan Syria Iraq • Management: CCI also controls part of 20 Middle-East*, Central Asia* and Pakistan 0 50 100 150 operations. Per Capita Consumption in Liters The Boston Consulting Group and DEIK. • CEO: Muhtar Kent, a Turkish, became the 1 by

1. Carbonated drink consumption per capita 2. The Coca-Cola Company 3. Coca-Cola Icecek CEO of TCCC.

* Azerbaijan, Kazakhstan, Krygyzstan, Turkmenistan, Tajikistan, Syria, Jordan and Iraq.

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For further questions

TOBB Plaza Talatpa a Cd. No: 3 Kat:6 Gültepe-Levent stanbul – 34394 Turkey Tel: +90 212 339 50 00 Fax: +90 212 292 30 72 [email protected] www.deik.org.tr www.turkey-now.org

MY Kanyon Ofis CY Buyukdere Cad. No:185 K:13 Istanbul, Levent 34394 Turkey CMY Phone: +90 212 317 8008 Fax: +90 212 317 8210 K www.bcg.com [email protected]

35 Ikili Rapor DEIK (Matbaa) Son.pdf 36 10/4/11 6:25 PM

www.deik.org.tr

CM For further information on investment opportunities in

MY Turkey, please refer to ISPAT, Europe’s 2nd most effective Investment Promotion Agency CY dedicated to promoting your global business: CMY