Koç Holding A.S. Business Information, Profile, and History

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Our goal is to play a pioneering role in improving the life quality of Turkish people.

History of Koç Holding A.S.

Koç (pronounced "coach") is a name immediately recognized in Turkey, but virtually unknown elsewhere. It is the name of several of Turkey's most prominent companies, including Koç Holding A.S., the largest industrial group in Turkey. Component companies are engaged in a variety of businesses, including automotive (the Tofas unit, Turkey's largest car manufacturer), supermarkets, appliances, and energy, as well as banking, construction, food production, and hospitality. The founder of the Koç group of companies was Vehbi Koç, the first Turkish businessman to gain national prominence. Known as a generous philanthropist, he was also responsible for introducing a number of modern Western business practices to Turkey.

Early History

Vehbi Koç, was born and raised in Ankara, at that time a city of 30,000. When he was a boy he recognized that the most prosperous families in Ankara were non-Turkish minorities such as Greeks, Jews, and Armenians. They were successful traders and businessmen, occupations that were discouraged for Moslem Turks. Still, the minorities lived comfortably and many were rich, while Turks lived more modest lives as hodja (priests), civil servants, wardens, farmers, and grocers.

In 1917 Vehbi Koç convinced his father, a literary scholar, to help him establish a small grocery store in Ankara. Although he was only 16 years old, Koç recognized that commerce was the only means to wealth for a man such as himself. He pursued his trade diligently and endured the economic hardships of both World War I and the subsequent collapse of the 600-year-old Ottoman Empire.

When Turkey became a republic in 1923, President Kemal Atatürk moved the nation's capital from Istanbul to Ankara. Koç entered new lines of business in construction and building supplies, and later won a prestigious contract to replace the roof of the Turkish parliament when the old one was blown away in heavy winds. Vehbi Koç worked tirelessly, often for more than 16 hours a day. Although he became a millionaire at the age of 26, he continued to display unusual dedication. For eight months during 1930 he labored at a construction site to ensure that a hospital project was completed on schedule.

Ties with Foreign Companies: 1930s-50s

In 1928, as the company continued to diversify, Koç became a local agent for the Ford Motor Company and established several Ford dealerships throughout the country. Koç signed an exclusive agreement with the Mobil Oil Company in 1931 to search for oil in Turkey, and by 1940 had secured exclusive Turkish import and distribution rights for a variety of European and American products, including Ford cars and Socony Vacuums. During this period the company headquarters were moved to the port city of Istanbul so that trading operations could be more closely monitored.

Turkey was a neutral power during most of World War II and never became directly involved in any military action. Despite this, Koç experienced a significant disruption in its international trading business.

German forces occupied Greece and nearly succeeded in reaching the Caucasus oilfields northeast of Turkey before the war turned in favor of the Allies. After German troops were driven out of southeastern Europe and Germany had fallen, the Soviet Union attempted to gain control over the Dardanelles and Bosporus Straits, strategic Turkish sea lanes that connect the Black Sea and the Mediterranean. Between 1945 and 1947 a number of developments in Yugoslavia and Greece reduced Soviet influence in the area, and a conservative Turkish government with strong ties to the United States came into power. As the government consolidated control, it instituted a series of isolationist commercial policies that were intended to protect the domestic economy.

Foreign companies were obliged to sell their products through local agents such as Koç, who maintained import and distribution rights for foreign products in Turkey. Koç concluded agreements with several companies, including General Electric and Burroughs. Competition was greatly reduced and limited to only a few Turkish companies, operated by compradore capitalists like Vehbi Koç, Danis Koper, Uzeyir Avunduk, and Y. Selek, who held a virtual monopoly over imported products, which were greatly in demand.

The company's profits were heavily reinvested, helping to make the 1950s a period of impressive growth. Koç became affiliated with U.S. Rubber Company and Siemens, and in 1955 purchased a small steel furniture and home appliance manufacturer called Arçelik (Turkish for "pure steel").

Koç was criticized in academic and political circles for allowing Western "imperialist" corporations to drain Turkish capital and foreign exchange that could have been used to develop Turkish industries. Koç, however, did generate a small amount of foreign exchange through its export operations. While defending its role as a net importer, Koç started to expand its domestic production facilities, and eventually negotiated licensing agreements to domestically manufacture products that had previously been imported. Although this still required the importation of parts and components, Koç redirected a considerable amount of its production payments to Turkish interests.

Modernization of the Company: 1960s-70s

In 1963 Vehbi Koç established a holding company for his diverse business interests. Koç Holding was founded as an anonim ;alsirket (the Turkish form of incorporation) and designated as the coordinating organ for the 28 companies that comprised the Koç group. In 1966 the company made its first public stock offering. The infusions of private capital further increased the companies' capitalization and made even greater expansion possible.

Vehbi Koç slowly relinquished control of the group to his only son Rahmi, whom he later appointed chairman of the Koç Holding executive committee, and his three daughters. Such a graceful move into retirement was uncommon in Turkey, where patriarchal autocracy is practiced in business as well as family affairs. In fact, the elder Koç did not retire. He maintained a light work schedule and continued to serve as chairman of the board, which preserved his right to veto any decision made by his son's executive committee.

In 1966 a wholly owned subsidiary of Koç called Otosan began to manufacture an automobile based on the Ford Cortina design. Sold under the name of Anadol, it was the first automobile to be completely manufactured in Turkey. Another Koç company called Tofa;als continued to assemble Fiat automobiles, sold under the brand name Murat.

Offering highly competitive salaries, the Koç group attracted the best qualified managers and businessmen in Turkey from a variety of ethnic and religious backgrounds. Many were educated at West European and American universities and business schools (Rahmi Koç graduated from Johns Hopkins University). They brought with them the latest managerial skills and strategies, and formed an innovative and dynamic group that was in large part responsible for the institutionalization of five-year plans in 1971 as part of a broader scheme of long-range planning.

When import companies purchase materials from a foreign country, they are usually required to pay for them in terms of the foreign country's currency. Companies that have not accumulated enough foreign currency for the transaction are forced to purchase it from commercial or government banks. When their foreign currency reserves are depleted, they are obligated to sell the local currency. This depresses the value of the local currency and makes it even harder to import foreign goods. Koç was a company in just this position. It never accumulated foreign currencies because it imported substantially more than it exported: in other words, Koç was a net importer.

During this period the Koç group continued to experience problems with foreign currencies. As a net importer it was unable to meet its requirements for foreign exchange. In order to meet their obligations to foreign suppliers, Koç companies were forced to drain foreign exchange from government accounts. In time, this became a considerable political liability. Once again Koç began to explore options that would allow it to substitute domestically produced products for those that were imported.

During this period, Koç helped to establish a steel alloy plant at Bursa called Asil Çelik. It was planned that Asil Çelik would produce engine blocks and component parts for other Koç group manufacturing operations. Although the plant was built to help reduce the company's dependence on foreign imports, it may also have been intended to win the sympathies of certain politicians and elements in the military who strongly believed that for strategic and economic reasons, Turkey should develop its industrial infrastructure.

Asil Çelik, the centerpiece of the company's import substitution drive, took several years to complete. Although progress was made in reducing the company's foreign exchange, the company remained a net importer. The Turkish economy, however, deteriorated so seriously that at one point even government foreign exchange reserves were depleted. Koç, which generated only 10 percent of its foreign exchange needs, was forced to suspend import payments and temporarily scale down its operations.

In response to the crisis, Rahmi Koç set up a new company agency called Ram di;als Ticaret, specifically devoted to the promotion of exports and internal generation of foreign exchange. Koç also won a year-long battle with the rival Sabanci Group for control over the country's fifth largest bank, the Türkiye Garanti Bankasi. The bank was restructured to perform more international transactions for the Koç group. The Koç companies experienced record growth during 1977 and 1978, the worst years of Turkey's economic crisis. Rahmi Koç redoubled his company's efforts to promote exports, recognizing that "the country cannot be poor while we are making money."

Koç became impatient with what was termed the "sluggish bureaucracy" of government officials in Ankara. He assembled a team of trade representatives from the Koç group to meet with officials from Soviet bloc nations, who were told to narrow their trade surpluses with Turkey by purchasing more Turkish products. Next, Middle Eastern oil-exporting nations were asked to increase their imports of Turkish products. Soon, however, Turkey's economic crisis began to affect Koç directly. The company's growth virtually halted by 1979 and 5,000 workers had been laid off.

The Political Context Changes: 1980s-90s

On September 11, 1980, as the Turkish economy approached a state of virtual chaos, elements of the Turkish armed forces under General Kenan Evren seized control of the government and imposed martial law. As part of the military government's stabilization policy, severe restrictions were placed on foreign exchange payments. As a result, Koç was forced to alter its business strategies significantly. Operations in the group's divisions (many of which were operating at 30 percent of capacity) were further scaled down, and some were closed completely. The Asil Çelik steel plant was the most seriously affected Koç interest. The plant was closed and later nationalized by the military government.

The Koç financial division, consisting of a bank and an insurance company, were expanded to provide the group with greater foreign exchange services. When the financial division was established in the mid-1970s, it ended a 50-year policy of Vehbi Koç that the company remain out of this line of business.

With control restored to the Turkish economy, the military government authorized a general election for the return of civilian government. The Motherland Party led by Turgut Özal came to power in 1983 and began a campaign to "Westernize" the economy by lifting protectionist trade restrictions. Beginning in 1985 foreign companies were permitted to export products directly to Turkey.

Imported Japanese and Soviet automobiles began to compete directly with automobiles manufactured by Koç's Tofa;als and Otosan divisions. Koç also faced competition from imports in such areas as refrigerators, office supplies, canned goods, and textiles. The company protested strongly, arguing that the sudden implementation of a liberal trade policy would upset the economy and eliminate domestic investment incentives. Prime Minister Özal responded that the people of Turkey were suffering under a trade policy that forced them to purchase inferior goods and that provided Turkish companies with no incentive to improve their products to make them internationally competitive. While presenting Koç with a serious challenge to its livelihood, the trade policy was not considered to be a ruinous development.

Koç maintained its association with a variety of Western corporations, and in 1985 concluded an agreement with American Express to establish a joint venture bank called the Koç-Amerikan Bank. Koç was also a partner in the Istanbul Fruehauf corporation, which began to produce full and semi-trailers in 1985.

Vehbi Koç took another step into retirement during 1984 when he passed the board chairmanship to his son Rahmi. He continued to advise the executive committee of his opinions and concerns through daily memos. Koç, a strong proponent of free trade and Turkish membership in the European Community, was regarded as a distinguished elder statesman.

Succeeding years brought continued expansion and further acquisitions. Koç Holding participated in 1993 in the acquisition by Aygaz of Turkey, in which Koç was a shareholder, of a 56 percent interest in two liquefied petroleum gas marketing companies from Mobil Oil Turk A.S.

The decline of Turkish government protectionist policies, part of an ongoing general campaign to modernize the country's economy, did not at first cause much trouble for Koç. The official imprimatur on direct exports from foreign companies left untouched the very high customs duties, which kept locally produced products artificially competitive. Even the European Union's 1995 customs agreement, which aimed to prevent such punitively high customs duties among member nations, provided a measure of protection for the company. The agreement included designated "sensitive sectors" that received exemptions; as a result of intensive lobbying by Koç, one of those exempt sectors was used automobiles--a product that could have caused trouble for the company's Tofas brand.

In the latter part of the 1990s, however, Turkey's protectionist policies were increasingly eroded, putting pressure on the country's automakers. One example of this occurred in 1996, when a Turkish parliament measure allowed Turks working abroad to purchase imported cars free of duties. The market was further squeezed when Sabanci Group, the second largest Turkish conglomerate, initiated a joint venture with Toyota. By that time, Koç-Fiat's share of the automobile market had already been reduced to 52 percent--and predictions of an enormous influx of foreign product resulted in a hiatus in new investment by both Koç-Fiat and its principal competitors.

Committing to a Varied Portfolio: Early 21st Century

Koç Holding announced in 2000 that its strategy would embrace investment in retail, construction, health, and finance. The first major development of 2001 was a reversion to one of the company's historical sectors, however; the company partnered with Norway's Statoil to launch a joint venture in gas marketing. The Norwegian state oil and gas company, as part owner of gas reserves in Azerbaijan, had advocated an Azerbaijan-to-Turkey gas pipeline to more effectively tap into the Turkish market.

The year 2002 brought varied developments. Tofas responded to the heightened need to compete effectively by introducing four new models, based on the Fiat's Palio and Albea. The four models represented the fruits of a $100 million investment in new product development. Koç also sold 15.2 percent of its stake in Goodyear Lastikleri, a Turkish subsidiary of the giant U.S. tiremaker, back to the parent company for $15.9 million.

Another significant event of 2002 was Koç Holding's effort, in partnership with Turk Telekom, to acquire a controlling interest in the Bulgarian state monopoly telecom company, BTC. The sale, part of a privatization effort by the Bulgarian government, would also include the country's third GSM license. As of this writing, the outcome of Koç's bid was undetermined. The most vigorous challenge was expected to come from Britain's private equity house, Advent.

Regardless of the ultimate result, Koç's involvement in the venture seemed to underscore its ongoing commitment to a varied portfolio and its desire for an expanded connection with technology-based businesses as it embraced the new millennium.

Principal Subsidiaries: Tofas Group (Automotive): Bursa Oto; Egemak; Gün Oto; Istanbul Fruehauf; Istanbul Oto; Karsan; Karsan Pazarlama; Opar; Ormak; Otobüs Karoseri; Otokar Pazarlama; Otoyol; Otoyol Pazarlama; Ottar; Setur Oto; Türk Traktör; Tofa;als; Tofa;als Oto; Tormak; Trakmak. Otosan Group (Automotive): Dökta;als; Ege Oto; Kuzey Motolari; Motör Ticaret; Otokoç; Otosan; Standard Belde; Nasoto; Otomotor. Automotive Supplies Group: Bebimot; Beldesan; Endiksan; Mako; Royal Tevzi; Takosan; Tekersan; Uniroyal Endüstri. Durable Goods Group: Alpa; Arçelik; Ardem; Atilim; Beko; Bekoteknik; Destek; Egemen; Geli;alsim; Hamle; Türk Elektrik Endüstrisi. Consumer Products Group: Aymar; Besan; Beyta;als; Bozkurt; Bürosan; Düzey; Kav; Kurt Mensucat; Maret; Migros; Tat; Türkay. Construction and Mining Group: Demir Export; Garanti In;alsaat; Izocam; Kimkat; Koçta;als; Koza; Mavi Çelik; Merkez Ticaret; Türk Demir Döküm; Tarko; Tek-Iz. Energy and Trade Group: Ak-Yak; Akpa; Ankara Gaz; Aygaz; Bilar; Bürokur; Bursa Gaz; Gazal; Haliç Antrepoculuk; Koç Burroughs; Lipet; Mobil Gaz; Porsuk Ticaret; Setur; Setur Diners; Setur Avis; Tata;als; Turistik I;alsletmeler. Financial, Foreign Trade, and Siemens Companies: Koç Yatirim; ;alSark Sigorta; Etma;als; Hata;als; Simko; Günsu; Kofisa Di;als Ticaret; Ram.

Principal Competitors: Electrolux AB; Haci Ömer Sabanci Holding A.S.; Renault S.A.

Chronology

• Key Dates:
• 1917: Vehbi Koç opens a small grocery store in Ankara.
• 1923: Koç enters the construction and building supply industry.
• 1928: Koç becomes a local agent for the Ford Motor Company, establishing several Ford dealerships throughout the country.
• 1931: Koç signs an exclusive agreement with Mobil Oil to search for oil in Turkey.
• 1940: Koç secures exclusive Turkish import and distribution rights for a number of European and American products.
• 1955: The company purchases a small Turkish manufacturer of steel furniture and home appliances.
• 1963: Koç establishes Koç Holding to serve as parent to its diverse companies.
• 1966: The company makes its first public stock offering; wholly owned subsidiary Otosan begins manufacturing the first automobile to be made entirely in Turkey.
• 1977-78:Koç experiences record growth, despite Turkey's economic crisis.
• 1979: Turkey's economic crisis catches up with Koç, which must lay off 5,000 employees.
• 1980: The Turkish military imposes martial law, places restrictions on foreign exchange payments; as a result, Koç scales back its operations dramatically.
• 1985: Turkey allows foreign companies to export their products directly to Turkey, creating a highly competitive environment for Koç; Koç forms a joint venture bank with American Express.
• 1984: Vehbi Koç resigns as chairman of the board; his son Rahmi becomes chairman.
• 2001: The company partners with Norway's Statoil to launch a joint venture in gas marketing.
• 2002: Koç makes a bid for control of Bulgarian state monopoly telecom company, BTC.