Annual Report EXPERIENCED - SOLID - INNOVATIVE CONTENTS 01 INTRODUCTION 02 INDEPENDENT AUDITOR’S REPORT ON THE ANNUAL REPORT OF THE BOARD OF DIRECTORS 04 CHAIRMAN’S STATEMENT 06 ABOUT OTOKAR 08 OVERVIEW 10 SUMMARY FINANCIAL INFORMATION 12 COMPETITIVE ADVANTAGES 14 AREAS OF OPERATION 16 MILESTONES 19 HIGHLIGHTS OF 2016 22 BOARD OF DIRECTORS 24 SENIOR MANAGEMENT 25 OTOKAR IN 2016 26 COMMERCIAL VEHICLES: PASSENGER TRANSPORTATION VEHICLES 28 COMMERCIAL VEHICLES: CARGO TRANSPORTATION VEHICLES 30 DEFENCE INDUSTRY 34 R&D 36 CREATING VALUE FOR STAKEHOLDERS 38 SUSTAINABILITY 40 HUMAN RESOURCES 41 FUTURE 42 CORPORATE GOVERNANCE AND FINANCIALS 43 CORPORATE GOVERNANCE 78 REPORTS AND FINANCIAL STATEMENTS 142 INFORMATION DOCUMENT CONCERNING THE GENERAL ASSEMBLY GLOSSARY INTRODUCTION EXPERIENCED, SOLID, INNOVATIVE Having reached these days by garnering over half a century of experience, Otokar is one of the leading companies in Turkey’s automotive and defence industry. A source of pride for Turkey, Otokar products emerge in over 60 countries on five continents. It continues to grow in the world and Turkey. It pioneers technological innovations and shapes the future. This power stems from; its experience, firm partnership & capital structure, and its uninterrupted innovative perspectives and business conduct over the years. CONVENIENCE TRANSLATION INTO ENGLISH OF INDEPENDENT AUDITOR’S REPORT ON THE BOARD OF DIRECTORS’ ANNUAL REPORT ORIGINALLY ISSUED IN TURKISH To the Board of Directors of Otokar Otomotiv ve Savunma Sanayi A.Ş. Auditor’s Report on the Board of Directors’ Annual Report 1. 1. We have audited the annual report of Otokar Otomotiv ve Savunma Sanayi A.Ş. (the “Company”) for the year ended 31 December 2016. Board of Directors’ responsibility for the Annual Report 2. The Company’s management is responsible for the fair preparation of the annual report and its consistency with the consolidated financial statements in accordance with Article 514 of Turkish Commercial Code (“TCC”) No. 6102 and Capital Markets Board’s (“CMB”) Communiqué Serial II, No:14.1, “Principles of Financial Reporting in Capital Markets” (the “Communiqué”) and for such internal control as management determines is necessary to enable the preparation of the annual report. Independent Auditor’s Responsibility 3. Our responsibility is to express an opinion on the Company’s annual report based on the independent audit conducted pursuant to Article 397 of TCC and the Communiqué, whether or not the financial information included in this annual report is consistent with the Company’s consolidated financial statements that are subject to independent auditor’s report dated 9 February 2017 and presented fairly. Our independent audit was conducted in accordance with Independent Auditing Standards that are part of the Turkish Standards on Auditing issued by the Public Oversight Accounting and Auditing Standards Authority. Those standards require that ethical requirements are complied with and that the independent audit is planned and performed to obtain reasonable assurance whether the financial information in the annual report is fairly presented and consistent with the consolidated financial statements. An independent audit requires applying audit procedures to obtain audit evidence on the historical financial information. The procedures selected depend on the professional judgement of the independent auditor. We believe that the independent audit evidences we have obtained during our independent audit, are sufficient and appropriate to provide a basis for our opinion. 2 OTOKAR 2016 ANNUAL REPORT Opinion 4. Based on our opinion, the financial information in the annual report of Board of Directors of Otokar Otomotiv ve Savunma Sanayi A.Ş. is consistent with the audited consolidated financial statements and presented fairly, in all material respects. Other Responsibilities Arising From Regulatory Requirements 5. Pursuant to subparagraph 3 of Article 402 of the TCC No. 6102, within the context of ISA 570 “Going Concern”, we have not encountered any significant issue which we are required to be reported with regard to the inability of Otokar Otomotiv ve Savunma Sanayi A.Ş. to continue its operations for the foreseeable future. PwC Bağımsız Denetim ve Serbest Muhasebeci Mali Müşavirlik A.Ş. Beste Gücümen, SMMM Partner İstanbul, 1 March 2017 INDEPENDENT AUDITOR’S REPORT | INTRODUCTION 3 CHAIRMAN’S STATEMENT Esteemed shareholders, business partners, and employees, We have left behind a year of challenges as both our shrank by 27%, the light truck segment, another field of country and the world at large saw developments that Otokar’s, tightened further by more than 45%. Meanwhile had significant impact on the economy, politics and the recovery observed in the European bus market led to a foreign affairs. Despite the many risks that the current 14% increase in the exports of the Turkish bus industry. conjunctures impose, we maintain a positive outlook about our expectations from 2017. Despite the tightening of the market, Otokar maintained its leading position in the Turkish market in the overall bus Despite the tightening observed in the markets where segments in which it operates. With buses sold to more we operate, we at Otokar have delivered a successful than 40 countries, and exports growing 18%, Otokar further performance, increasing our turnover 14% year on year to strengthened its presence in overseas markets in 2016. TL 1.6 billion. With a total exports figure of $ 145 million accounting for 27% of the total turnover, we ended the year with TL 410 million in gross profit, and TL 69.7 We Started Exporting Technology As the stagnation in the domestic market highlights the million in net profit. Our products, which we produce to importance of exports, we see that exporting products meet the needs and expectations of our clients at the alone is not enough. With our developing innovation and core of our focus, our R&D and engineering capabilities, technology capabilities as a country, we need to reinforce our experienced and skilled human resource, and our our standing in global markets. Acting on these facts, 4% strong sales network became the factors that brought us Otokar has been allocating 4% of its revenues to research successful financial results in 2016. INCREASE and development for the last decade, and has started to IN TURNOVER stand out in global scale not just for its export products The commercial vehicles industry as one of Otokar’s key with fully-owned intellectual property rights, but also with fields of operation was among the sectors that were its know-how, engineering, R&D and technology transfer most affected by the developments in the world and capabilities. The products that Otokar engineers design 69.7 in our country in 2016. According to the Automotive and develop, and our capabilities continue to bring in Manufacturers Association data, the bus market that MILLION TL new international successes by the day. The agreement Otokar serves experienced a tightening of up to 33% in NET PROFIT we have signed with OGHAB, a company with 55 years of 2016. In the same period, while the Turkish trailer market 4 OTOKAR 2016 ANNUAL REPORT experience in bus production of Iran, in 2016 to build the Navigo buses I believe that if we are tasked with the serial production of abroad through technology transfer has confirmed our claim in this area. Altay, we will go beyond satisfying the needs of our country As we begin to see the positive results of this initiative in 2017, we will in the best possible way, and take an important step forward also aim to sustain our expansion in the European bus market. In terms in exports as well. The interest of friendly and allied nations of the domestic market, 2017 will be a year when our goal will be to in the prototype of the national main battle tank Altay maintain our leadership in Turkish bus industry, and increase our market indicates that this project will also contribute positively to share in the other commercial vehicle segments. Turkey’s defence industry exports in the long run. I am proud to inform that we have continued to take important steps Esteemed shareholders, in technology exports in the defence industry in early 2017. Al Jasoor, the joint venture with a local partner, has signed a contract for $661 As it continues to grow steadily, Otokar manages all million with the United Arab Emirates Armed Forces for the 8x8 its processes with the concepts of accountability, armoured vehicles. The deal, which includes product, technology transfer, transparency and responsibility, and strives to leave consultancy and production in the United Arab Emirates, also became a better world for future generations. Having been the biggest contract signed by the Turkish defence industry for a single included in the BIST Sustainability Index in 2015, Otokar, item. In 2017, we aim to complete the necessary preparations in the as a key stakeholder of the sustainability program, United Arab Emirates for the contract through Al Jasoor. We will meet the has engaged in a number of activities to develop demand of the United Arab Emirates for 8x8 armoured vehicles, which environmentally friendly products and manufacturing will reach 700 units when completed. processes. Within the scope of the Koç Group’s “I Support Gender Equality for my Country” project, In the coming periods, we are aiming at opening to new markets, especially Otokar carried out awareness raising activities to in the Gulf Region, one of the key markets for the defence industry, and promote gender equality in the public transportation strengthening our existing markets. We anticipate that “Otokar Land sector, and particularly toward increasing female Systems Limited”, a company we established in Abu Dhabi in 2016 to serve employment in the industry, with the support of these purposes, will have a positive impact on our exports to the region. leading organizations, federations and associations. We at Otokar also rewarded institutions that Turkish Defence Industry Will Gain Momentum increased their female employment and worked for social equality.