It is not enough to simply keep pace with change; one needs to not only anticipate but also lead and shape that change. And this is what we have perfected at Koç Group.

A Year of Change
2007 was an eventful year internationally and nationally. Internationally, the main events were the collapse of the US sub-prime loan market, which undermined the confidence and capacity of financial markets, particularly in developed countries, and the inexorable rise of oil and other commodity prices. Nationally, back-to-back governmental and presidential elections caused political uncertainty and slowed down, but did not halt, economic growth.

By judiciously taking advantage of the positive developments in Turkey and the world and minimizing the impact of negative ones, we as Koç Group ended 2007 quite successfully.

In the immediate future, Turkey will increasingly feel the effects of global competition. The country's future largely rests on whether or not the government can revitalize its former determination and enthusiasm for economic reform and for furthering Turkey's relations with the European Union.

The global economic center of gravity is shifting away from recession-prone developed countries and towards developing countries. Developing countries can capitalize on their future role as economic locomotives and destinations of foreign direct investment.
 
Managing Change
Maximizing the benefits of global and national transformation requires effective change management within one’s circle of influence. It is not enough to simply keep pace with change; one needs to not only anticipate but also lead and shape that change. And this is what we have perfected at Koç Group.

Koç Group's philosophy of change maintains the Group's momentum for growth while balancing the influence of external events against the Group's internal dynamics.

In a rapidly changing world where consumer expectations are continually in flux, we regularly review our companies, their products and services, technology, work procedures and their sales methods, and rigorously implement improvements and innovations.

Instead of getting caught off guard, or being overwhelmed by the dizzying pace of change, we have shaped our strategy to strengthen the structure of our Group by taking advantage of change. The focused growth strategy that we have been following in the recent years is a part of this vision.

R&D and Technological Innovation
Technology is a key ingredient for us: the most effective way of maintaining competitive superiority is to take full advantage of technology.

As Koç Group, we continue to make a difference in all our business lines by creating new technologies and applying the latest developments to our processes. Indicative of our determination and success, Koç Group ranks among the top 1000 firms in the world in R&D investment and Arçelik ranks 101th in terms of the number of patent applications.
 
Focus Ensures Value and Resilience
Koç Holding today has a much more focused business portfolio compared to a few years ago. We concentrate on sectors where we hold a leadership position-energy, automotive, consumer durables and finance. We obtain 88% of our consolidated revenues and 93% of our operating profits from these sectors. We are strengthening our position in our core business lines through both organic and inorganic growth in order to ensure sustainable leadership, profitability and growth.

We also have companies operating outside these core sectors, which will maintain their growth and profitability through their own resources.
Obtaining this focus has required significant restructuring. Since 2005, our Group has sold companies yielding USD2.3 billion in total proceeds, while the value of our acquisitions have totaled USD6.6 billion. In line with our target to maximize shareholder value creation, we have reached a portfolio structure which has a higher potential for growth and profitability while at the same time is more resilient against potential risks. We are continuing in our path to become world class players in the sectors in which we operate.

Global Presence
Our continued investments, which are a sign of our confidence in Turkey, formed the basis for our international success. Koç Group ranks among the top 200 companies in the world and the top 50 companies in Europe, confirming our global standing.

The combined revenues of the Group are equal to 9% of Turkey's GDP, while the Group's exports represent 11% of Turkey's exports and our tax payments make up 15% of the national tax revenue. The Koç Group companies account for 21% of the revenues of Turkey's top 500 companies, as ranked by the Istanbul Chamber of Industry. 

Outstanding Performance
The main indicators of our Group continue to improve year by year. In 2007, our consolidated revenues increased by 5%, reaching YTL51.4 billion. In terms of US dollar, our revenues grew by 15% to USD39.5 billion.

These results include the impact of divestitures. When like-for-like numbers are taken into consideration, the growth rates are actually two points higher. Meanwhile, our operating profits grew by 20% to YTL3.6 billion, and net profits increased four-fold to YTL2.3 billion. This figure includes approximately YTL650 million profit from divestitures. However, even when we exclude this figure, there was still a 275% increase in net profits in 2007.

Koç Group will continue to deliver the quality its name has come to promise in order to maintain growth and profitability, supported by our deep-rooted corporate culture, vision, operations, strong human resources and pursuit of excellence.

Our Sectors
In consumer durables and automotive, we are increasing our production and sales through new projects and investments. We are expanding to new markets like China and the US, while continuing to grow in the domestic market. Turkey’s energy sector is going through a major transformation and we are on the lookout for opportunities that this change might bring. Meanwhile, we are continuing our aggressive growth plan in banking.
 
Energy
Through our continued investments in recent years, and with our operations ranging from LPG distribution to petroleum distribution and refining, we have become the indisputable leader of Turkey's energy sector.

Tüpraş is Europe's 8th largest oil refinery. Tüpraş became part of the Koç Group at the beginning of 2006. In 2007, the company generated record sales and profits. The company's capital expenditures in 2006 and 2007 reached USD630 million, while a further investment of over USD2 billion is planned in the next five years, expanding capacity and productivity and further adding significant value to Turkey's economy.

Our other companies in the sector, Aygaz and Opet, are maintaining their successful performances with their customer centered and innovative approach.

With Tüpraş and Aygaz positioned to act as our two main investment vehicles in the energy sector, Koç Holding is ready to benefit from any potential opportunities that might arise.

Automotive
Koç Group companies account for 46% of Turkey's total automotive production and 45% of its exports. Despite the contraction in domestic demand in 2007, total production of the Group's automotive companies have grown by 13%, with over 520,000 manufactured units.

Today Koç Group is in a position to export vehicles to the US market, “homeland of the automotive industry”. This is a significant indicator of our success in the automotive sector, which we entered when our founder, Vehbi Koç, established a Ford dealership in 1928.

Ford Otosan sold 102,000 vehicles in Turkey in 2007 and with a 16.8% market share, has continued its market leadership for the sixth consecutive year.

After having successfully launched Linea and MiniCargo production, Tofaş is now implementing the new Doblo project. Fiat Linea, which Tofaş manufactures in Bursa and exports to three continents, was nominated the “Best Automobile of 2008” by the “Autobest 2008” jury, consisting of Europe's leading automotive editors.

As in 2006, exports were the main driver of growth in automotive in 2007. We will ensure future growth and continued investment in our companies with new projects.

Consumer Durables
Koç Group is amongst Europe's top three consumer durables manufacturers and among the top six in the world with Arçelik. In television manufacturing, it ranked second in Europe with Beko Elektronik. As part of our international growth strategy in the sector, we took the highly significant step of starting production in China.

In line with the developments in global markets, domestic demand for household appliances shrank by 5.5% in 2007. LCD television sales, on the other hand, continued to grow in both domestic and international markets.

Koç Group's consumer durables companies continued their market leadership in Turkey in 2007 with a 57% share in appliances and 42% in TVs. Having the most extensive sales and after-sales service network in Turkey reinforces our leading position in the local market.

Due to the emphasis we place on R&D in consumer durables and electronics, we continue to break new ground with innovative products, not only in Turkey but also in the world.

To further strengthen our position in the consumer electronics sector, in 2007 Beko Elektronik took sole ownership of Grundig, in which we have held a 50% ownership since 2004. With 63 years of experience, Grundig is a highly respected brand and is a valuable addition to our portfolio.

Finance
Against a background of continued growth, Koç Group has also rapidly expanded its operations in the finance sector with Yapı Kredi Bank.

After joining the Group, Yapı Kredi underwent an intense phase of restructuring and integration, and as a result, significant improvements have been recorded in the bank's productivity, profitability and capital structure.

Yapı Kredi's return on equity increased from 18.5% in 2006 to 22.7% in 2007; while the capital adequacy ratio increased from 7.2% at the end of 2005 to 13.7% at the end of 2007.

With its profitable and strong capital structure, Yapı Kredi embarked on an aggressive branch expansion plan from mid-2007, increasing branches to 676 at the end of the year.

Our target is to increase our network to 1000 branches within two years. Yapı Kredi is now Turkey's fourth largest private bank and, with superior products and high quality service in every area of banking, it is well positioned for future growth.

Retailing
As part of our focused growth strategy, we have taken the decision to exit the FMCG retailing in 2007. Initially Migros sold 50% of Ramenka, its Russian operations, to Enka for USD542.5 million. In February 2008, we signed an agreement to sell our 51% share in Migros, which has been operating under the Koç Group since 1959, for YTL1.98 billion.

For half a century, Migros has been creating value for the Turkish economy and today, with 22% share of the organized retail market, it is the leader in its sector, a “success story” for the Koç Group and for Turkey.

The proceeds from the Migros sale will further strengthen our financial position and provide a significant source to the Koç Group for new investments.
 
Social Responsibility
We know that commercial success not complemented with social responsibility is deficient. As the Koç Group, through our foundations, we are dedicated to the wellbeing of our society. The sense of responsibility and the foresight of our founder, Vehbi Koç, have been our most important guides in this respect. We know that we can only develop commensurate to the development of our society. Therefore, social responsibility is a vital component of our activities.

The corporate social responsibility projects we launched and implemented last year were exemplary. In an ambitious project, which started nationwide in 2006 to support vocational high schools, we aim to draw attention to the problems of unemployment and the shortage of qualified industrial workers, and take an initiative toward solving them. As of 2007, with the contribution of our companies, we have provided scholarships to 4,000 students in 250 high schools.

Turkey's most widely dispersed grassroots project for local development initiatives, “For My Country” draws on Koç Group employees, distributors, and subsidiaries to undertake locally identified projects that meet local needs, thereby demonstrating Koç Group's commitment to local issues and solutions nationwide.

The Future
The leadership we have assumed in all our areas of operation has become a driving force in Turkey’s economy. The successful development of our Group in local and global markets is directly reflected in the economy and progress of the country.
 
Koç Group will continue to deliver the quality its name has come to promise in order to maintain growth and profitability, supported by our deep-rooted corporate culture, vision, operations, strong human resources and pursuit of excellence. Consequently we will continue to create shareholder value and contribute to the economic and social development of our country.

Dr. Bülent Bulgurlu
CEO, Board Member

Quoted from 2007 Annual Report.