Esteemed shareholders,

2019 was a year in which the impact of political developments on macroeconomic balances was felt more strongly than ever. After having made such rapid progress for such a long time, the process of globalization appeared to be giving way to one of increasingly more protectionist trade policy. With the addition of uncertainties created by Brexit not just for EU economies but for the global economy as a whole as well as of political tensions in different parts of the world to the impact of US-China trade wars, worries about global growth increased last year.

In such a context, developed countries’ central banks found it necessary to amend their tight-money policy stances and to reverse their decisions to start raising interest rates in favor of more expansionist monetary policies. Having recourse to interest rate cuts on three separate occasions, the US Federal Reserve Bank lowered its policy rate to the 1.50-1.75% range. Concluding that Europe’s economic recovery was not proceeding as desired, the European Central Bank also cut its rates while concurrently launching a comprehensive support package. With developed countries’ interest rates running so low, there was a relative quickening of capital inflows into developing countries, where the growing global interest in their assets was observed to invigorate their equity markets.

Lower-than-expected growth performances among Asia’s economies also impacted adversely on global trade and growth. Having grown by an average annual rate of nearly 10% for four decades, China now singlehandedly accounts for some 16% of the world economy and is one of its biggest players today. That said, Chinese economic growth has also been losing steam steadily since 2010 and, weighing in at only 6% (admittedly in part due to the effects of its trade spat with the US), its 2019 growth performance was the lowest in thirty years.

In early 2020, US-China trade talks made progress and a first-stage deal was reached while, even if only for the immediate future, the uncertainties of the Brexit process appear to have gone away. We regard both developments as beneficial for the global economy. However owing to their potential global-scale political and economic ramifications, the US elections that will be taking place this November will be the most important item on the agenda that we shall have to keep our eyes on between now and then.

TURKEY’S ECONOMY RESUMED GROWING THE THIRD QUARTER.

Unfolding concurrently with a process of rebalancing the national economy, perceptions of the risks posed by internal and international external developments made 2019 a tough year for markets to deal with.

In the immediate wake of the 2018 surge in exchange rate volatilities, the Turkish economy contracted for three consecutive quarters in a process that ended only when a 0.9% rate of growth was registered in Q3 2019. Even though inflation failed to return to the single-digit range, it was constrained by low global-market interest rates and by weak domestic demand and, at 11.84%, it was at its lowest level in three years.

In a series of steps during the first half of the year that was supported by the optics of inflation in decline, Turkey’s central bank cut back its policy rate, reducing it from 24% to 12%. Not only did this give markets something of a boost, it also impacted favorably on companies’ cashflows by lowering their borrowing costs.

Turkey’s export performance was favorable and strong in 2019 while the improvement in the country’s current account deficit gradually continued. However the curtailing effects of a faltering global economy on our exports became unmistakable by the last quarter of the year. Half of all of Turkey’s exports are destined for the European Union, where political contingencies are such as to make it important to eliminate such structural imbalances.

Combined with a relative improvement in perceptions of Turkey as a source of country risk, global markets’ low interest rates, substantial liquidity, and appetite for risk impacted favorably on the country’s markets and nourished expectations of satisfactory economic performance.

ALTHOUGH THE TURKISH AUTOMOTIVES INDUSTRY’S MARKET CONTRACTED, ITS EXPORT PERFORMANCE REMAINED ON COURSE.

Beset as it was by unsteady macroeconomic conditions and domestic consumption in decline, the Turkish automotives industry’s total output contracted by 6% and weighed in at 1,461 thousand units in 2019. Although the overall market for automobiles and light commercial vehicles shrank by 23% with 479,060 units being sold, the year-on decline in automobile sales (which account for 81% of the total market) was 20% while that in the case of light commercial vehicles was 32%.

The Turkish automotives industry’s total exports were worth USD 31 billion in value in 2019. That figure corresponds to 17% of the country’s total export trade and is second historically only to the record-breaking performance which the sector achieved in 2018.

IN A CHALLENGING YEAR, TOFAŞ ACHIEVED SUCCESSFUL RESULTS.

In a year fraught with challenges on the economic front, Tofaş performed successfully. The 264 thousand vehicles which the company produced in 2019 made up 18% of the country’s total automotives industry output and 15% of its automotives industry exports. The Fiat brand once again completed the year as the overall market leader. The Fiat Egea, which Tofaş itself developed and continues to produce, was the country’s most popular car for the fourth year in a row and further strengthened its position among consumers.

Last year the Tofaş Board of Directors approved a USD 225 million investment to give the company’s Egea model family a new facelift. This investment calls for the extension of the Egea project, for which Tofaş is undertaking major product development responsibilities, until 2024.

Striving constantly to expand its manufacturing competencies, Tofaş raised its World Class Manufacturing score to 81/100, thereby surpassing all Fiat Chrysler and other automotives plants where WCM methodology is being employed.

Another important development for Tofaş that took place last year was a decision, announced in December, of a merger between Fiat Chrysler Automobiles and French automotives manufacturer Groupe PSA. The synergies that this merger will give rise to will not only increase productivity but will also create significant advantages in technology and product development.

WE LOOK TO THE FUTURE WITH HOPE.

Notwithstanding the realities of the tough conditions that still prevail, in 2020 we will strive to repeat the success that we achieved in 2019’s shrinking market, to keep our financial structure on an even keel by focusing on balance-sheet strength and cash-management opportunities, and to maintain our solid performance through our production and sales competencies.

Inherent in the visionary attitude of the Koç Group is an ability to manage today’s risks while also spotting opportunities that lie within the changing dynamics of the present in order to be ready for the future. Short-term volatilities never prevent us from focusing on long-term objectives. Despite the economic and political uncertainties evolving both at home and abroad, we have faith in the future of our country and our industry and with that confidence, we are determined to continue with our automotives industry investments and to defend our leading position in our sector.

As the only automotives company in Turkey that makes both automobiles and light commercial vehicles, Tofaş will continue to marshal its experience, its production might, and its technology- and R&D-focused vision in order to create even more added value and to make itself even more competitive.

In closing I take this opportunity to thank all of my colleagues for the dedication, confidence, and superior efforts that underlie our success while also extending my sincere thanks to all of our other stakeholders for their trust and support.

Very truly yours,

Ömer M. Koç
Chairman of the Board of Directors