Working capital efficiency and cash flow availability are particularly critical for the capital intensive automotive sector.

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1 i Supply Chain Finance an Engine of Growth for the Turkish Automotive Industry Introduction Working capital efficiency and cash flow availability are particularly critical for the capital intensive automotive sector. The automotive industry has been struggling to regain its normalcy ever since the financial crisis of Worldwide car production dropped by 0.9% in 2008 to a critical 10.4% in 2009 making it the first reduction in production volumes since The price increase in raw materials, coupled with global stiff competition and keeping pace with more demand resulted in an everincremental thirst for cash flow in the industry. To operate more efficiently, be able to compete, and in some cases survive, companies are currently compelled to focus more than ever before on working capital management. Supply Chain Finance (SCF) offers the automotive industry the opportunity to optimize working capital and ensure adequate cash flow availability to fund growth. By the same token it distinctly improves supplier relationships and reduces risk in their financial supply chain. What is Supply Chain Finance? (SCF) Supply Chain Finance is a solution that helps meet corporate objectives. This includes: working capital, EBITA, supply chain risks. It allows companies to increase their payment terms while availing supplier get early payment.

2 Overview The automotive industry in Turkey is a main and critical driver of the manufacturing sector. It is one of the largest employers in the country, creating job opportunities for more than 400,000 people. With three out of the five top exporters hailing from the automotive industry, it is also an export champion with its 16 percent share in total exports, ranking it in the top 20 automotive exporter countries in the world and ranked as the 6 th largest automotive manufacturer in Europe. Turkey also offers a supportive environment on the supply chain side. There are around 1,100 first-tier companies working directly with OEMs. With the parts going directly to the production lines of vehicle manufacturers, the localization rate of OEMs varies between 50 and 70 percent. Turkey is also home to many global suppliers. There are more than 250 global suppliers that use Turkey as a production base, with 28 of them ranking among the 50 largest global suppliers. European OEMs are expected to increase production of buses and trucks in Turkey destined for the Eastern & Western European markets, and to reduce manufacturing costs by 10-20% by switching several platforms in Western Europe to Turkey. Industry Challenges The supply chain in the automotive industry is very complex. On average over 20,000 different parts go into the production of a vehicle, any delay or disruption in part supply will delay production. Supply chain is a complicated process that requires excellent coordination between external and internal business functions Several regulatory and taxation obstacles plague the Turkish OEM automotive industry causing lack of growth and delays in production and delivery. Turkish OEMs have to achieve excellence in Supply Chain Management to enter new global markets, which requires significant restructuring and investments in every process. Illustrative example of a common automotive supply chain: At the top of the chain diagram are Tier 1 suppliers that furnish major components, such as engines, that go into a vehicle platform. The Tier 2 suppliers furnish the parts that the Tier 1 suppliers require, such as the piston rod assembly that is part of the engine. As shown in the schematic below, there are typically 3-5 levels in the automotive supply

3 Supply Chain Process Supplier Tiers chain, which comprises thousands of suppliers. process as a whole. Supply Chain Finance (SCF) has currently proven to be the best system to adopt. A highly customizable Supply Chain Finance system has the necessary requirements to contribute positively in the flow of cash and materials, in both the Financial and Physical Supply Chain. SCF can be adopted as a standardized platform for Supplier financing as well as payable terms extensions, and result in a real working capital optimization. Overcoming Obstacles A Supply Chain is not just about how materials flow, cash has a flow of its own across the chain, which is the Financial Supply Chain. A depressed working capital caused by inefficient payable management and a lack liquidity on the supplier side, will negatively affect the financial flow, and subsequently the material flow. Such instances have unfortunately become quite common in the automotive industry, hence the need for an effective solution. It is of utmost importance that finance and supply chain departments coordinate in various aspects to planify current as well as upcoming production cycles. Equally as important is the choice of financial tools to adopt in order to alleviate the strain on the For years, the automotive supply industry has been in a challenging position, resulting from continuing pricing pressures from OEMs, intense competition, evolving products due to increased complexity and advances in technology, volatile raw materials prices, as well as industry globalization. To counter production and market, Working Capital management became necessarily the focus for the industry. For many, a focus on cash and Working Capital was key for survival. Yet industry analysis reveals a contrasting picture in the industry s Working Capital performance.

4 When it comes to optimizing working capital, the industry faces a wide range of strategic challenges. For example, supply chains are becoming increasingly global, creating longer lead times and adding vulnerability to business disruptions. Product complexity is also on the rise, adding both risk and R&D cost to the mix. This is to say nothing of the rush to build capacity and distribution in emerging markets. While there is evidence of progress in some areas of Working Capital, there are still significant opportunity for improvement across the entire Working Capital value chain for the industry and for most of its constituents. It is worth noting that a highlevel exercise (Ernst & Young analysis) indicates that a total of up to US$35 billion is still unnecessarily tied up in the WC of 40 of the largest automotive suppliers (by sales) in North America, Europe and Japan. This amount is equivalent to 7% of sales of the companies analyzed. Automotive treasuries have traditionally played an important role in providing finance to the dealership network with a view to expand availability of credit and push sales. While funding dealership networks may have had the desired result on top-line, the ability to reduce working capital cost across the supply chain is equally important to manage the bottom-line. Provisioning of finance across the business value chain by leveraging either the balance sheet or the brand of the OEM can help keep financing cost low. This scenario, however, requires the OEM balance sheet to be sufficiently solvable against potential default. Importance of R&D According to Mr. Kudret Önen the Chairman of the OSD (Automotive Manufacturers Association) in Turkey, the main strategy of the automotive industry is to carry out new projects in addition to current manufacturing projects in order to increase manufacturing volume of innovative products with high added value as well as efficiency. On the other hand, the development of the design operations is a priority for the industry in cooperation with the firms in the supply chain in order to become Global Automotive Excellence Center. Particularly global impacts of the developments in BRIC countries are closely monitored. Within this framework, Research and Development activities are of strategic importance to develop automotive industry and new technologies, to increase efficiency and competitive capacity as well as to sustain new export projects. New investment incentives granted to the automotive industry in addition to a flourishing business environment will undoubtedly boost Turkey as an emerging global player in automotive production. Dr. Mehmet Dudaroğlu, Chairman of TAYSAD (Association of Automotive Parts & Components Manufacturers) in Turkey adds

5 to that by underlying that the most important issue taking precedence for the industry has been the New Incentive System. Supply manufacturers interpret the engine and driveline investments as the most strategic investment. Mergers & Acquisitions KPMG s latest survey on the automotive sector in Turkey highlights an increase in M&A activity in the Turkish automotive sector, with 2012 accounting for eight out of more than 15 acquisitions realized in the last five years in the sector. We have seen three main trends in the historical transactions: The first is the acquisition by manufacturers coming from developed markets such as Mahle, Titan Italia and Bridgestone looking to purchase manufacturing capacity, benefit from cost advantages or increase their product range. As long as price pressures from end-users in Europe persist, and Turkish manufacturers are at par with their European competitors on quality, KPMG believes that such acquisitions will continue. The second is that global automotive companies have looked to increase their share in the value chain in the growing Turkish market by acquiring distribution channels. Johnson Controls acquisition of its distributor, Karat Güç Sistemleri and ALJ s increasing its shareholding in Toyota Marketing are examples of such transactions. As the number of motor vehicles per capita in Turkey continues to increase to the levels experienced in developed countries, KPMG expects further interest in the distributors of motor vehicles and spare parts in the domestic market. The third is the financial investment in automotive component companies which are growing rapidly and are in need of capital. The developing domestic market and increasing capabilities of the Turkish automotive parts manufacturers present a high growth potential for domestic parts manufacturers. KPMG s survey also indicates that the parts manufacturing industry presents opportunities for external investment. Therefore, parts manufacturers in need of capital represent an opportunity for international private equity funds. Bancroft s acquisition of Standard Profile and UniCredit Merchant Bank s investment in Martur are examples of such opportunities realized by financial investors. KPMG believes that Turkish automotive parts manufacturers have the capability to make acquisitions in Eastern Europe and neighboring countries, mainly Russia, in the next two to four years. It is seen as the next logical step for Turkish parts manufacturers looking to capture the business of their international clients in other markets, having already proven their ability to deliver on quality in the domestic market.

6 How SCF Can Help? Supply Chain Finance (SCF) can assist the automotive sector in Turkey in a number of ways: Working Capital optimization for large OEMs that will free trapped working capital. Increase Days Payable Outstanding (DPO); A company releases cash that was untapped in its balance sheet, and as a rule of thumb a 15 days extension on payables of USD 1bn will free up USD 40 million while it takes an average of 3 months to unlock such working capital. Strengthen the balance sheet, hence making the company more attractive for foreign investors. Another important attribute that SCF has to offer is that while large OEM buyers will be able to extend their DPOs, they are not leaving their suppliers out to dry. SCF maintains a Win-Win scenario for both the Buyer and the Supplier whereby the supplier will be getting early payment option at lower rates. OEM s suppliers will be greatly benefiting from an increase in cash flow and as SCF stands for the True Sale of the suppliers receivables, it is then an Off- Balance sheet transaction. This will heavily influence the relationship between OEMs and their suppliers and greatly reduce any supply chain disruptions. SCF will also greatly support the current focus on R&D in the Turkish Automotive industry in order to come up with the most feasible solutions for restricting gas emissions for vehicles intended for export to Western Europe as well as solutions for gas efficiency/mileage greatly appreciated by the local Turkish consumers. With SCF, suppliers are now able to effectively manage their R&D costs while maintaining a healthy supply chain with their respective buyers. This is not to say that SCF will solve all of the Turkish Automotive industry challenges, but it will certainly have a positive impact as part of the effective solutions to be adapted to wane those challenges and assist in the growth of the sector for the medium to long term.

7 About UbiQ About PrimeRevenue UbiQ Innovations is a technology-led service provider of supply chain finance and payment solutions for businesses in the MENA region. The company is backed a number of highly experienced shareholders in the fields of financial services (including supply chain finance) and consulting. UbiQ s expertise in facilitating short-term trade finance, reverse factoring and working capital solutions enables clients to optimize their working capital via supply chain finance solutions that are based on cloudbased processing. UbiQ delivers its supply chain finance services as an independent Multi-funder platform with global transactions processed on the PrimeRevenue platform. UbiQ s reverse factoring or invoice discounting solution offers clients a flexible method of providing asset-backed and receivables financing by offering a real-time, detailed view of their invoice portfolio. UbiQ was named Best Supply Chain Finance Service Provider in Turkey 2015 by Global Banking & Finance Review PrimeRevenue is the acknowledged leader in working capital finance, managing and optimizing cash flow for more than 20,000 customers in over 70 countries. The comprehensive solutions offered by its OpenSCi product suite allow its clients to involve their strategic trading partners to create tangible value for the entire value chain. As of now for the year 2015, more than $120 billion in supply chain finance transactions has been processed through its platform. PrimeRevenue has developed a deep understanding of financial supply chains and has quickly become the leading solution provider in working capital optimization for businesses through close collaboration with their treasury and procurement teams. Headquartered in Atlanta with offices in multiple continents, PR provides a global reach to best serve their customers with local market knowledge and expertise. PrimeRevenue was recently named 2015 Best Supply Chain Finance Provider & Best Web-Based Supply Chain Finance Solution by Global Finance Magazine.