Footwear, Leather & Components Industry in Turkey

Footwear, Leather & Components Industry in Turkey A Market Study for Italian Investors Final Report Prepared for Italian Trade Agency, Istanbul Istanbul December 7, 2018

Copyright & legal status 1. The Purpose of This Report This Report has been prepared by IBS Beynelmilel İş Hizmetleri AŞ, trading as IBS Research & Consultancy ( IBS ) for the Italian Trade Agency in Istanbul ( ITA- Istanbul ) as a general outline of certain aspects of the business environment in Turkey as of the date of this Report. Notwithstanding anything contained herein, this Report is not intended to provide the basis of any investment, credit, legal, regulatory, accounting, taxation or other evaluation or decision and should not be considered as (i) a recommendation by IBS that any person enter into any relationship or transaction with IBS or any other person or (ii) advice by IBS with respect to any matter whatsoever. 2. Status of Information Nothing outlined in this Report is, or should be relied upon as, a promise or forecast of the future. 3. Disclaimer Notwithstanding anything contained in this Report, IBS is not nor holds itself out to be, an advisor as to legal, taxation, accounting, regulatory, investment or credit matters. IBS further recommend that each recipient of this Report takes its own independent advice with respect to all of the matters referred to in this Report. Accordingly, neither IBS nor any of its directors, officers, employees or representatives shall incur any responsibility or liability with respect to any action, omission, statement, recommendation or comment made in this Report or made by any of them in connection with any matter referred to in this Report. 4. Other Relationships IBS may have business relationships with one or more persons or companies referred to in this Report and it may that by reason IBS may have information bearing on this Report and the facts and transaction(s) described herein which IBS is unable to disclose. 5. Reproduction and Reprinting Any reproduction and printing rights of this report is owned by the Italian Trade Agency in Istanbul, Turkey and Italian Trade Agency in Rome, Italy. Any other use or disclosure in whole or in part of this information without the express written permission of the owner is prohibited. IBS i

Table of Contents Copyright & legal status... i Executive summary... 7 1 Leather & leather products manufacturing industry... 17 1.1 Market landscape...17 1.1.1 Introduction... 17 1.1.2 General and leather sector trade between Italy & Turkey... 18 1.2 Market size and growth...19 1.2.1 Market balance in leather sector... 19 1.2.2 Local production... 20 1.2.3 Raw hides and skins... 21 1.2.4 Tanning and dressing... 24 1.2.5 Leather accessories: saddlery, bags and luggage and leather goods... 25 1.2.6 Leather garments... 27 1.2.7 Footwear... 28 1.3 Industry structure and infrastructure...29 1.4 Foreign trade in leather sector...32 1.4.1 Foreign trade in leather sector... 32 1.4.2 Foreign trade in leather sector by countries... 34 1.4.3 Foreign trade in leather sector by segments... 39 1.4.4 Italy -Turkey foreign trade in leather sector... 42 1.5 Leather industry distribution system and trade practices...45 1.6 Competition in leather sector...46 1.6.1 Key Companies in processed leather... 46 1.6.2 Key Companies in bags, luggage, leather goods and saddlery... 48 1.6.3 Key Companies in leather garments... 51 1.7 Major M&A activities and investments...55 1.7.1 M&A... 55 1.7.2 Incentives... 55 2 Footwear... 56 2.1 Market size in Footwear...56 2.2 Footwear industry structure...58 2.3 Foreign trade in footwear industry sector...59 2.4 Footwear retail: distribution structure & trade practices...66 2.5 Key manufacturing companies in footwear...69 3 Components & accessories for footwear industry... 77 3.1 Components & accessories production...77 3.2 Industry structure & infrastructure...79 3.2.1 Footwear material distributors... 79 3.2.2 Sole/insole manufacturers and distributors... 80 3.3 Components & accessories industry distribution system...82 3.4 Foreign trade in components & accessories...85 3.5 Competition in components & accessories...89 IBS ii

4 Opportunities & challenges... 91 5 Future projections & evaluation... 94 5.1 Growth drivers...94 5.2 Market forecasts and projections 2017-2023...97 5.3 Challenges...98 6 Regulatory environment... 102 6.1 Customs duties, tariffs and taxes... 102 6.1.1 HS 41 Raw, semi-processed and finished leather products... 102 6.1.2 HS 42 Saddlery, bags and luggage, and leather garments... 103 6.1.3 HS 43 Raw and processed fur and fur garments and goods... 105 6.1.4 HS 64 Footwear... 106 ANNEXES 108 Annex I Top 100 tanneries in Turkey... 109 Annex II Top 100 footwear manufacturers... 117 Annex III Top Turkish footwear distributors... 125 Annex IV Top Turkish footwear components/materials producers & distributors.. 130 Annex V Top 10 company profiles... 131 Company profile 1: ISKEFE TANNERY... 132 Company profile 2: SEPİCİ TANNERY... 134 Company profile 3: CEVAHİR TANNERY... 136 Company profile 4: DERİ 2000 TANNERY... 137 Company profile 5: TAMER TANCA... 138 Company profile 6: BOYNER GROUP... 139 Company profile 7: MARKAPARK (DERİDEN)... 144 Company profile 8: DUYAR SHOE MATERIALS... 145 Company profile 9: ERDOGDU GROUP... 147 Company profile 10: PALAMUT GROUP... 149 Annex VI Country Groups in import regime tables... 151 Annex VII Trade fairs and events (11/2018-2019)... 152 Annex VIII List of investment incentives granted to the leather industry companies 154 Annex IX Stakeholders in the leather industry... 159 IBS iii

List of charts Chart 1: Trade volume (total) between Italy and Turkey, $ Billion, 2007-2017... 18 Chart 2: Turkey's footwear, leather and components imports by countries 2017, $ Million... 18 Chart 3: Leather sector production by segments, value share, 2017... 20 Chart 4: Breakdown of leather sector companies by size, 2017... 31 Chart 5: Leather sector foreign trade, 2007-2018e, $ Million... 32 Chart 6: Average unit price in leather sector foreign trade in Turkey, 2007-2018e, $/kg... 34 Chart 7: Average unit import price of leather sector products Turkey from Italy, 2007-2018e... 38 Chart 8: Import of leather sector by segments, 2017, $ Million... 40 Chart 9: Export of leather sector by segments, 2017, $ Million... 40 Chart 10: Exports of leather garments including direct sales to tourists, 2012-2017, $ Million... 41 Chart 11: Italy s leather sector export to Turkey by segments, 2017, $ Million... 43 Chart 12: Turkey s leather sector exports to Italy by segments, 2017, $ Million... 44 Chart 13: Footwear industry market balance in Turkey, 2007-2017, Million pairs... 56 Chart 14: Footwear foreign trade in Turkey, 2007-2018e, Million US$... 60 Chart 15: Genuine leather footwear imports of Turkey, 2007-2017, Mn US$ & Thousand pairs, $/pair.. 64 Chart 16: Genuine leather footwear export of Italy to Turkey, 2007-2017, Mn US$ & 000 pairs, $/pair. 65 Chart 17: Turkey footwear components import, by sub-segments, 2012/2017, $ million... 86 List of figures Figure 1: Geographic concentration of leather sector in Turkey, 2017... 29 Figure 2: Map of specialized leather industry zones, 2017... 31 Figure 3: Leather sector market structure, 2017... 45 Figure 4: Footwear sector value-chain, 2018... 58 Figure 5: Components & accessories industry distribution system... 82 Figure 6: Supply chain from components/materials (chemicals) to footwear... 83 Figure 7: Supply chain from components/materials (artificial leather) to footwear and leather... 84 Figure 8: Growth drivers of and challenges for leather industry development... 94 List of tables Table 1: Leather industry market balance in Turkey, 2007-2017, $ Million... 19 Table 2: Leather sector market size in Turkey, 2007-2017, $ Mn... 20 Table 3: Number of enterprises in leather sector, 2007-2017... 21 Table 4: Number of animals by kinds, 2007-2017, Million heads... 22 Table 5: Number of slaughtered animals by kinds, 2007-2017, Million units... 22 Table 6: Raw hides and skins market balance in Turkey, 2007-2017, Million units... 23 Table 7: Processed leather market balance, 2007-2017, Million m 2... 24 Table 8: Saddlery, bags & luggage, leather goods market balance, 2007-2017, Tonnes... 25 Table 9: Saddlery, bags & luggage, leather goods market balance, 2007-2017, $ Million... 26 Table 10: Leather garments market balance, 2007-2017, Tons... 27 Table 11: Leather garments market balance in value, 2007-2017, $ Million... 28 Table 12: Specialized leather industry zones in Turkey, end 2017... 30 Table 13: Leather sector foreign trade, 2007-2018 3 rd Quarter, Mn $... 32 Table 14: Leather sector foreign trade, 2007-2018 3 rd Quarter, '000 Tonnes... 33 Table 15: Leather sector import by countries, 2007-2018 3 rd Quarter, $ Million... 34 Table 16: Leather sector exports by countries, 2007-2018 3 rd Quarter, $ Million... 36 Table 17: Leather sector imports by countries, 2007-2018 3 rd Quarter, '000 Tonnes... 38 Table 18: Foreign trade of leather sector by segments, 2007-2018 3 rd Quarter, $ Million... 39 IBS iv

Table 19: Leading leather sector exporters in Turkey, 2017, $ Million... 41 Table 20: Imports from Italy in the leather sector by segments, 2007-2018 Q3, $ Million... 42 Table 21: Exports of Turkey to Italy in the leather sector by segments, 2007-18 Q3, $ Million... 44 Table 22: Leading companies in processed leather and fur, 2018... 46 Table 23: Breakdown of bags, luggage, leather goods and saddlery producers by size, 2018... 48 Table 24: Leading companies in bags, luggage, leather goods and saddlery, 2018... 49 Table 25: Breakdown of bags, luggage, leather goods and saddlery producers by size, 2018... 51 Table 26: Leading companies in leather and fur garments, 2018... 52 Table 27: Investment incentives certificates granted to the leather industry, Units and TL Mn, 2015-18 55 Table 28: Footwear industry market balance in Turkey, 2007-2017, Million pairs... 56 Table 29: Footwear industry (excl. footwear component) market balance in Turkey, 2007-17,$ Mn... 57 Table 30: Footwear imports of Turkey by countries, 2007-2018 3 rd Quarter, $ Million... 60 Table 31: Footwear exports of Turkey by countries, 2007--2018 3 rd Quarter, $ Million... 62 Table 32: Footwear imports of Turkey by sub-segments, 2007--2018 3 rd Quarter, $ Million... 63 Table 33: Footwear export of Turkey by sub-segments, 2007--2018 3 rd Quarter, $ Million... 64 Table 34: Footwear retail market and key footwear retailers* in Turkey, 2016-2017, Mn$... 66 Table 35: Breakdown of footwear producers by size, 2018... 69 Table 36: Leading companies in footwear, 2018... 70 Table 37: Footwear parts & components market balance in Turkey, 2007-2017, $ Million... 78 Table 38: Top 10 sole/insole manufacturers in Turkey, Mn pairs & tons, 2017,... 80 Table 39: Turkey import of footwear components (HS 6406), by countries, 2007-18 3 rd Quarter, $ Mn.. 85 Table 40: Turkey import of uppers and parts (HS 640610), by countries, 2007-2018 3 rd Quarter, $ Mn.. 87 Table 41: Turkey import of outer soles and heels (HS 640620), by countries, 2007-18 3 rd Quarter, $ Mn 87 Table 42: Turkey import of removable in-soles, heel cushions, by countries, 2007-18-... 88 Table 43: Turkey export of footwear components (HS 6406), by countries, 2007-18 3 rd Quarter, $ Mn.. 89 Table 44: Breakdown of footwear components & accessories producers by size, 2018... 89 Table 45: Leading companies in footwear components & accessories, 2018... 90 Table 46: Number of incoming tourists by nationalities, 2007-2018 October (top 20 countries)... 95 Table 47: Leather sector production forecast, 2017-2023, $ Million... 97 Table 48: Customs duty for HS 41 group by country groups, 2018... 103 Table 49: Customs duty for HS 42 tariff heading by country groups, 2018... 104 Table 50: Additional customs duty for HS 42 tariff heading by country groups, 2018... 104 Table 51: Total customs duty for HS 42 with additional tax by country groups, 2018... 104 Table 52: Customs duty for HS 43 tariff heading by country groups, 2018... 105 Table 53: Additional customs duty for HS 43 tariff heading by country groups, 2018... 105 Table 54: Total customs duty for HS 43 with additional tax by country groups, 2018... 105 Table 55: Customs duty for HS 64 tariff heading by country groups, 2018... 106 Table 56: Additional customs duty for HS 64 tariff heading by country groups, 2018... 106 Table 57: Total import charges for HS 64 with additional customs duty, 2018... 107 Table 58: Beymen turnover by sales channels, 2015-2017... 140 Table 59: Beymen share of product groups sales per sales channels, 2017, %... 142 IBS v

Abbreviations $ All dollar terms are US dollars ASD Footwear Industrialists Association of Turkey Bn Billion CAGR Compound annual growth rate CIS Commonwealth of Independent States DETEK Leather Technologists and Chemists Association EDMIB Aegean Leather and Leather Products Exporters' Association EFTA European Free Trade Area EU European Union GDP Gross Domestic Product GDP Gross Domestic Product IDMIB Istanbul Leather and Leather Products Exporters' Association ITC International Trade Centre ITKIB Istanbul Textile and Apparel Exporters Associations LASIAD Laleli Manufacturers and Businessmen Association Mn Million OIZ Organised Industry Zones SGK Social Security Institution SSD Turkish Leather Goods Association TDKD Turkish Leather Garment Manufacturers' Association TL Turkish Lira TOBB Union of Chambers and Commodity Exchanges of Turkey TSDS Turkish Leather Industrialists Association TUDIS Turkish Leather Industry Employer s Association TUIK Turkish Statistical Institute TÜRDEV Turkish Leather Foundation VAT Value added tax WTO World Trade Organisation IBS vi

Executive summary Leather & leather products manufacturing industry The trade volume between Italy and Turkey amounted to $19.8 Bn in 2017 Italy has an average trade surplus of $4.0 Bn with Turkey during the last decade. In 2017, total export of Italy to Turkey amounted at $11.3 Bn which made it 5 th largest exporter to Turkey after China, Germany, Russia and USA. As of 2017, Turkey s total leather products including footwear import was $1.2 Bn and Italy was the second largest exporter to Turkey with an overall share of 17% and $204 Mn amount. Production value of the leather sector was around $4.2 Bn (TL15.5 Bn) as of 2017. The CAGR of the leather sector was 1.9% in between 2007 and 2017, and it was slightly less than the GDP growth of 2.4% in $ terms in the same period. During the last decade, imports in leather sector decreased from $1.6 billion to $1.2 billion level. In the past decade, the growth of leather sector exports from $0.8 billion in 2007 to $1.3 billion in 2017 with a CAGR of 4.2% in the period became the key drive for the increase in domestic production. The largest segment in leather sector was footwear industry which accounted for 62.9% of the production value in 2017. Turkey is a net importer for raw hides and skins. During the last decade, between 50-80% of total raw hides and skin was imported. Italy was the 8 th largest exporter of raw hides and skins to Turkey with a share of 4% in 2017. Production volume of tanned and dressed leather decreased from 57.9 million m 2 in 2007 to 33.1 million m 2 in 2017, with a CAGR of -5.4% per annum. Imports of processed leather was also decreased almost 50% in the last decade from 17.1 million m 2 in 2007 to 9.2 million m 2 in 2017. Italy was the second largest exporter of processed leather to Turkey after Azerbaijan in 2017. The production in leather accessories (saddlery, bags & luggage and leather goods) increased highly. The 2017 production volume was 3.1 times over the 2007 level. The key factor for the production growth in the leather accessories segment was protective measures of the Turkish government especially for bags and luggage imports from China and other Far East countries. Turkey s exports in the leather accessories also increased highly during the 2007 and 2017 period. IBS 7

As of 2017, the leather garments industry is the smallest segment in the leather sector. In 2017, there are around 700 enterprises active in the industry according to official statistics of TUIK published in November 2018. There was a decline in leather garments manufacturing at a CAGR of -4.4% in volume terms in the last decade. The imports of leather garments also decreased at a CAGR of -5% during 2007 and 2017; in the same period exports of Turkey decreased more with a CAGR of -7%. Footwear The share of Italy was 10% both in value and volume terms in Turkey s leather garment import. Most of the leather garments imported from Italy are branded high-end products. Turkish companies that make contract manufacturing for luxury international brands mostly use Italian leather, which were already defined in the specs of the manufacturing contract. Turkish footwear industry is the largest segment in the leather industry and the production growth was the most prominent one during last decade. The footwear industry production in value terms was around $2.5 billion as of 2017. Thanks to additional taxes applied by Turkey in footwear import especially from Far East countries since August 2014, the total import of footwear decreased by 15% in value terms and 22% in volume terms between 2015 and 2017. The production volume of the footwear industry increased with a CAGR of 6.1% per between 2007 and 2017. The most remarkable success of the Turkish footwear industrialist was in export. Most of the production was not genuine leather products; 90% of the production was made of artificial leather, textile, and non-woven materials. There are around 6,000 companies active in the footwear industry as of 2017, around 100 of which are large size companies. There are only 20-30 companies having over 250 employees according to TOBB industry database. Majority of the local footwear retailers worked with contracted footwear manufacturers who are producing under retailer s brand name such as Bambi, Beta, Desa, Elle, Hotic, Flower, Kemal Tanca etc. Few of the retailers such as Bambi, Beta, Desa, Flo (Ziylan), Gezer, Kavsan (Greyder) have also their own production facilities; however, they produce only a limited share of the products they sold. IBS 8

Total foreign trade volume of Turkey in footwear industry was $1.3 billion as of 2017 and expected to be $1.5 billion in 2018 and it reached the peak in 2014 with $1.6 billion. The footwear export of Turkey exceeded import for the first time in the near history in 2017 and the trade surplus of Turkey in footwear is expected to be larger in 2018 with around $250 million. Italy was the third largest country in Turkey s footwear import during the last decade and will protect its position in 2018 with increasing export to Turkey. Due to the protective measures of the Turkish government by taking serious antidumping measures in against cheap imports from China and other Far East countries especially after 2014, footwear imports from China decreased 59% between 2013 (the peak year of the imports from China with $499 million) and 2017. Most of the Italy s footwear export to Turkey is leather shoes and bags as well as accessories. Italy was the leading exporter to Turkey in genuine leather footwear product group. In 2017, the share of Italy in genuine leather exports of Turkey in value terms was 86% and in volume terms 69%. During the last decade various high-end Italian brands in footwear entered in the Turkish market through their own stores and/or making trade agreements by leading luxury retailers. o Alberto Guardiani (Barners Group) opened its first store in Ankara Next Level shopping mall in 2013 and the second one in Akasya shopping mall in Istanbul in 2017. o Hogan (Tod s Spa) entered Turkish footwear market in August 2014 through its store in Akasya shopping mall. Afterwards Hogan opened new stores in Nisantasi and and Istinye Park shopping mall. o In September 2013, Beymen opened mono brand store of Valentino in Istinye Park shopping mall. o Demsa Group, Dogus group and Dillasima opened various new stores of high-end Italian brands like Armani, Gucci etc. o Various footwear retailers like Beta, Cabani, Henry, Moccassini (Bülent Tanca), Tamer Tanca Inc (with Kemal Tanca branded stores), Vespa etc. started to sell Italian shoe brands in their selected stores and Internet stores. All these developments led a significant increase in footwear imports of Turkey from Italy and it was reached its peak in 2014 with $104 million; which represented almost 50% increase compared to its 2007 level. IBS expects Italy s export in footwear to Turkey will again reach $100 million level in 2018, due to continuing growth in luxury ready-wear retail in the country. IBS 9

Turkey s export in footwear increased significantly during the last decade. The footwear retail market size was around $4.7 billion in 2017. With the changing retail market structure of Turkey, the share and penetration of the branded retail chains in footwear has been increasing through their stores in shopping malls. There are 15-20 key local footwear retailers in Turkey. In addition, footwear retailers, ready wear retailers are also a key retail channel for the footwear sales. In the low and medium price range LC Waikiki, Koton, Defacto, Ozdilek and in the high-end range Beymen, Boyner, Demsa Group, Hugo Boss, Vakko are key readywear retailers in Turkey. The footwear sales turnover of Boyner Group (which includes Altinyildiz, Aymarka, Beymen Magazacilik and Boyner Buyuk Magazicilik) which was around $183 million in 2017, and LC Waikiki s footwear sales turnover which was around $132 million make these companies one of the top ten footwear retailers in Turkey. Italian footwear brands are present in the Turkish market in three key channels: o Through multi-brand stores of luxury multi-channel stores of Turkish ready-wear retailers such as Ay- Marka, Beymen, Boyner, Demsa Group, Dillasima Group, Vakko etc. o Secondly but rarely through mono brand stores of high-end luxury ready wear retailers like Barners Group, Beymen, Dillasima Group, Demsa Group (Roberto Cavalli, Gucci-Nisantasi, Salvatore Ferragamo Nisantasi) Dogus Group etc such as Alberto Guardiani (by Barners Group), Gucci (by Dogus Group), Tod's S.p.A / Hogan (by Derique owned by Erdal Ayaydin), etc o Thirdly and widely through high-end stores of top local footwear retailers like Tamer Tanca, Deriden (and Markapark), Kifidis, Yargici etc and very limited through selected stores of low and medium segment retailers like Ayakkabi Dunyasi, Flo, Deichman etc. Components & accessories in footwear industry Footwear parts & components market accounted at $125 million production in 2017. Overall consumption was $146 million which grew at a CAGR of 9.1% between 2007 and 2017. Around 40% of the local consumption is met by import in 2017. Components industry local production growth in the last 10 years was slightly higher compared to the growth in footwear industry which was 6.1% CAGR. Relatively higher consumption growth is linked to export-oriented growth of footwear industry. IBS 10

While China is by far the dominant supplier of footwear components which constituted 80% in 2017 in value terms, Italy is the second largest supplier to Turkey, having a share of 10%, with a value of $5.6 million. In the first nine months of 2018, there was -20% decrease in the imports of footwear components due to decreasing domestic production. Imports from China, the leading exporter of Turkey in this category decreased 24% in the first nine months. Although there was an increase in imports from Italy in the first nine months of 2018, IBS identified that majority of the imports was in the first two quarters of the year which was declined radically in the third quarter. IBS estimate there will be very limited amount of imports from Italy also in the fourth quarter of 2018 and finally there will be decline in the year total of 2018. Turkey s main export destination for footwear components has traditionally been Russia, CIS countries and Eastern Europe. Italian companies have a very good image and are key suppliers in various raw materials and components such as chemicals, leather (both genuine and artificial), footwear textile, soles and heels as well as various finishing materials (lasts). In components area Erdogdu Group and Duyar as well as Palamut Group are key distributors of Italian companies active in raw materials and components supply. COIM Turkey, a subsidiary of COIM SpA (Chimica Organica Industriale Milanese) is also representing a number of foreign brands in Turkey. Growth drivers Increasing exports especially in footwear, bags and luggage as well as leather and fur garments due to diversification of export markets Increasing number of tourists visiting Turkey Protective measures of government by additional customs duty especially in against to competitive and cheap imports from Far East countries. Due to ongoing downturn in Turkish economy and high devaluation of Turkish Lira most of the footwear producers will shift their focus from domestic market to foreign markets and they will target to increase their exports. The key growth driver for the leather sector in 2017 was the high increase in export of footwear, bags, and luggage as well as leather and fur garments. In the next five years, the number of incoming tourists is expected to reach 53 million with a CAGR of 6.2% between 2018 and 2023. With the increasing tourist volumes, the domestic sales will increase at least $100 million in bags and luggage and $150 to 200 million leather and garments in the forecast period of 2018-2023. IBS 11

The protective measures applied by the Turkish government through imposing additional customs duty to far East countries including China, India, Vietnam was another key driver for the increasing investments in especially footwear, bags and luggage segments and the increasing local production in leather sector. Market forecasts Regulations Competition In the forecast period, between 2017 and 2023, the leather sector (in broad definition) is projected to grow at a CAGR of 3.6% in US dollars terms, compared to the CAGR of 1.9% between 2007 and 2017. Leather industry production is projected to reach $5.1 billion value in 2023 while footwear will account for slightly 64% of this value. Since August 2014, Turkish government has started to take protective measures to support the local industry in the leather sector. First in August 2014, Turkish government started to apply additional customs duty for the import of footwear products for the far eastern country groups. With the decree of the Council of Ministers of 2014/29076, Turkey started to impose additional 50% customs duty for genuine leather footwear products or minimum $5 per pairs and 30% additional customs duty for artificial leather or textile footwear products or minimum $3 per pairs. In addition, Turkey started to impose 20% additional customs duty for semi-finished parts of footwear. In each sub-product groups there is no duty for EU and EFTA countries. As of 2018, there are around 280 companies and 290 enterprises listed by union of Chambers (TOBB) industry database having capacity certificate in leather and fur processing in Turkey. Within listed leather and fur processing companies, only 3% of the companies have over 100 employees, 10% having 50-99 employees and 25% has 25-49 employees, rest of them are less than 24 employees. The largest companies in the Turkish leather processing segment are Iskefe Deri, Sepicileri Caybasi Deri, Sen Deri, Uyguner Deri, Rodeo Deri and Cevahir Deri companies. As of 2018, there are around 205 companies and 212 enterprises listed by Union of Chambers (TOBB) industry database having capacity certificate related with leather accessories (bags, luggage, leather goods and saddlery) manufacturing. Within listed leather accessories companies, around 14% of the companies have over 100 employees, 11% having 50-99 employees and 22% has 25-49 employees, rest of them are less than 24 employees. IBS 12

Desa, Matras, Kandermir Leather, Uyar Saraciye, Sen Leather, MCS Group, Petek Saddlery, Tergan, SF Leather and Hilal Canta are the key local producers in the leather accessories manufacturing. As of 2018, there are around 230 companies and 238 enterprises listed by Union of Chambers (TOBB) industry database having capacity certificate related with leather garments manufacturing. Within listed leather garment manufacturers, 12% have over 100 employees, 10% have 50-99 employees and 20% has 25-49 employees, remaining 58% of the companies have less than 24 employees. Desa, Orjin Group & Aydinli Leather, Agamer, Sen Leather, Sued Mod Leather, Doruk Leader and Lider Leather are key companies in the leather garments manufacturing. As of 2018, there are around 678 companies and over 680 enterprises listed by Union of Chambers (TOBB) industry database having capacity certificate related with footwear manufacturing. Within listed footwear manufacturers, 2% have over 250 employees, 6% have 100 to 249 employees, 11% have 50-99 employees and 26% has 25-49 employees, remaining 55% of the companies have less than 24 employees. Gezer, Flo (Ziylan), YDS, Kavsan (Greyder), Ciftciler Footwear, Muya, Ozdallar, Akinal, Mekap, Ceyo, Tripstep are key producers in footwear sector with over 200 employees and $20 million/year turnover. TOBB industry database listed 117 companies that have capacity reports relevant to leather and footwear components industry defined under the 15.20.40 NACE code. There are only nine companies having more than 100 employees and 11 companies with 50-99 employees in the footwear components segment. Sole production capacity in Turkey is estimated at 500 million pairs (circa 100,000 tons) as of 2017. The key producers are Ziylan Taban, Elit Taban, Ozsahin Taban, Global EVA, Opar Ayakkabi, Lamci, Fatih Okce, Alkan, Sonar, As Fuspet in the sole/in-sole manufacturing within footwear components segment. Major players Product group Processed leather and fur Key companies Iskefe Leather Istanbul Tuzla, Bursa, Bolu Gerede, and Nigde Sepiciler Caybasi Leather Izmir Sen Leather Tekirdag / Corlu Uyguner Leather Istanbul Tuzla and Bursa Rodeo Leather Izmir Cevahir Leather Istanbul Tuzla IBS 13

Bags, luggage, leather goods and saddlery Footwear Footwear retailers Footwear component producers Footwear component distributors Yilbay Leather Tekirdag Prima Leather Teknofin Artifical Leather, Istanbul Desa Matras Kandemir Leather & Textile (CantaTurk) Uyar Saddlery Gezer FLO (Ziylan Footwear) Muya YDS Textile & Leather Ankara Kavsan (Greyder) Ciftciler Footwear (Conever) FLO (Ziylan) Adidas Group LC Waikiki Deichmann Nike Inc. Akinal Footwear Fatih Okce Gezer Footwear Ramiz Tarhan Samsun Akin Rejenere Coim Turkey Erdogdu Group Palamut Group Sen Leather Tekirdag / Corlu MCS Group Petek 1855 Tergan SF Leather Akinal Footwear Urgan Footwear (Dunlop/Fila) Ozdallar (Macromen) Tristep Mekap Yesil Footwear Tamer Tanca Beymen Inci Boyner Ayakkabi Dunyasi Dusal EVA ABC Medical Ziylan Taban and FLO (Ziylan) On-Ar Group Duyar Shoe Materials Birtug Foreign Trade IBS 14

Opportunities & Challenges Leather Footwear Components Turkish leather industry imports 58% of the raw leather consumed in the domestic market, South America and South Asia countries being the most prominent supply sources. Italian leather (and components as well) would be used by Turkish contractors when international retailers impose such intermediate goods/materials as per their contracts. Current exchange rates with the depreciated Lira make Italian import too expensive for the industry. Companies/traders tend to make import largely for stocking keeping in mind that current exchange volatility would hit again. Depreciation of Turkish Lira against Euro poses financial advantage in contract manufacturing opportunities with Turkish footwear companies. Current economic turmoil in Turkey brings merger and acquisition opportunities in Turkey as many footwear companies. Increasing tourist numbers particularly from Middle East and Russia (expected to be more than 6 million in 2019) brings dynamism to mid and high segment footwear and leather products. Market will be stabilized in 1-2 year with more financially strong and well managed companies will be present in the market. High segment Italian footwear still has ground in the market as the high income consumers continue to pay for luxury brands. Any investment to increase brand awareness of Turkish consumers will eventually pay off. While luxury Italian footwear will continue to be on the shelves, the range of collection would be rather limited in the short term with regard to strong Euro against Lira While Turkish companies are well placed in producing soles, hills, the raw materials are largely imported from Italy. Italian positioning is very strong in adhesives, sealants and other chemicals Prominent distributor companies are well experienced in working with Italian manufacturers. IBS 15

Footwear, leather and components industry in Turkey IBS 16

1 Leather & leather products manufacturing industry 1.1 Market landscape 1.1.1 Introduction Leather and leather products manufacturing industries is one of the oldest industries in Turkey. The leather business is a traditional craft business in Turkey dating back to the 12 th century. Until the start of the economic liberalisation years with early 1980 s, sector s activities remained within the country. As of mid 80 s with developed foreign trade, the sector opened itself to the world and expanded dramatically. Initial efforts to modernise the leather industry began in the 1970s but significant progress on a real industrial scale only began in the mid 1980s. At present, there are nine operating organised industry zones (OIZ) in Turkey specialised in leather. The wastewater treatment plants for majority of these zones have been completed. In addition, the construction of one organised leather industry zones is continuing. Sector production is made according to international standards and is becoming more sensitive to health and the environment issues; 90% of the production is reportedly conformed with international health and environmental standards. Turkey can now produce all the machinery and 90% of the chemicals which it needs for leather making and export them as well. Leather manufacturers are mainly located in Balikesir (Gönen), Bolu (Gerede), Bursa, Denizli (Honaz), Gaziantep, Isparta, Istanbul (Tuzla), Izmir (Menemen), Manisa (Kula), Nide (Bor), Tekirdag (Corlu) and Usak. Since leather processing business requires special expertise and investment, the way to compete in the sector necessitates an institutional structure and organization. While the number of manufacturers of leather tanning and processing has experienced a significant decline since 2006, major companies have survived. While Turkish leather industry grows as export-oriented (1% of manufacturing industries output, 0.5% of total labour force and 0.9% of total Turkish exports earnings in 2017), the industry provides opportunities as the import of leather and footwear declines in the recent years. It is notable that more than half of Turkey's officially recorded leather export originates from direct sales to tourists. The product categories to be covered in this research are as follows: HS '41 - Raw hides and skins (other than fur skins) and leather HS '42 - Articles of leather; saddlery and harness; travel goods, handbags, etc. HS '64 - Footwear, gaiters and the like; parts of such articles (footwear components) IBS 17

1.1.2 General and leather sector trade between Italy & Turkey Chart 1: Trade volume (total) between Italy and Turkey, $ Billion, 2007-2017 $ Billion 25.0 20.0 17.4 18.5 16.6 21.3 19.7 19.6 19.2 17.5 17.8 19.8 15.0 10.0 5.0 10.0 10.7 7.5 7.8 13.5 7.6 5.9 10.1 6.5 13.5 13.3 12.9 12.1 10.6 10.2 7.9 6.4 6.7 7.1 6.9 7.6 11.3 8.5 0.0 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Italy's exports to Turkey Turkey's exports to Italy Trade volume Italy-Turkey Source: TUIK and ITC-Trade Map, 2018; IBS analysis Trade volume between Italy and Turkey amounted to $19.8 Bn (billion) in 2017 after a peak of $21.3 Bn in 2011. In this trade, Italy has an average surplus of $4 Bn with Turkey during the last decade, the highest years of Italy s surplus was in 2012 with $7 Bn and decreased to $2.8 Bn in 2017. In 2017, total export of Italy to Turkey amounted at $11.3 Bn which made it 5 th largest exporter to Turkey after China, Germany, Russia and USA. Turkey s exports to Italy reached its peak during the last decade with $8.5 Bn in 2017. Turkey was the 13 th largest exporter to Italy. Chart 2: Turkey's footwear, leather and components imports by countries 2017, $ Million 12% 17% 30% 6% 4% 3% 2% 2% 2% 1% 22% Source: TUIK and ITC-Trade Map, 2018; IBS analysis As of 2017, Turkey s total leather products including footwear import was $1.2 Bn and Italy was the second largest exporter to Turkey with an overall share of 17% and $204 million. In 2017, Italy s total leather products export was $24.9 Bn, and export to Turkey accounted only 0.8% of the Italy s export in the sector. IBS 18

1.2 Market size and growth 1.2.1 Market balance in leather sector The historic market trends in Turkish leather sector to be analysed covering the following sub-sectors: Raw hides and skins Tanning and dressing of leather Leather garments industry Leather accessories covering saddlery, bags and luggage and leather goods (including belts, gloves, hats, wallets etc.) Footwear and footwear components Production value of the leather sector was around $4.2 Bn (TL15.5 Bn) as of 2017, according to latest industry and service statistics of TUIK published in November 2018. The sector production in value terms (US dollar) increased at a CAGR of 1.9% between 2007 and 2017, from $3.5 billion in 2007 to $4.2 billion in 2017. The sector reached its highest production value in 2012 with $4.6 Billion. Table 1: Leather industry market balance in Turkey, 2007-2017, $ Million CAGR 2007 2012 2015 2016 2017 2007-17 Production 3,518 4,628 4,167 4,247 4,237 1.9% Imports 1,650 2,033 1,568 1,312 1,237-2.8% Exports 846 1,118 1,175 1,183 1,280 4.2% Consumption * 4,322 5,543 4,560 4,376 4,194-0.3% * Consumption figure includes the local sales to the foreign tourists in Turkey which is accepted as exports by the leather industry associations. e: estimate; only production figure is estimated by IBS for 2017. Source: TUIK foreign trade statistics, TUIK, Annual Industry and Service Statistics, period 2017 (published 02.11.2018) During the last decade, imports in leather sector decreased with a higher compound average rate of -2.8% from $1.6 billion to $1.2 billion level. In the past decade there was a growth trend only in exports of leather and leather products. Turkey s leather industry exports increased from $0.8 billion in 2007 to $1.3 billion in 2017 and exceed imports first time in the near past. Local consumption figures which includes the local sales to tourists (tourist sales accounted significant share in leather industry) was in decreasing trend due to negative effects of the political tension with Russian Federation and the terrorist attacks in metropolitan cities of Turkey related with the war in Iraq and Syria. After 2017 summer and in 2018 majority of these problems started to be resolved, and the incoming tourist volume and the tourism revenues of Turkey has returned to its old days. IBS 19

1.2.2 Local production Production value of the leather sector was around $4.2 Bn (TL 15.5 Bn) as of 2017, according to the latest industry and service statistics of TUIK. Sector production in value terms (US dollar) increased at a CAGR of 1.9% between 2007 and 2017, from $3.5 billion in 2007 to $4.2 billion in 2017. The share of leather sector in Turkey s GDP has been steady, average %0.5, during the period and is estimated to be same in 2018. The share of leather sector in overall manufacturing output value was around 1.0% in 2017. Table 2: Leather sector market size in Turkey, 2007-2017, $ Mn NACE code Activity Description 2007 2012 2015 2016 2017 14 Leather garments 964 553 378 258 334 14.11 Leather garments & articles 964 553 378 258 334 15 Leather and related products 2,554 4,076 3,789 3,988 3,903 15.11 Processed leather 796 1,027 885 903 810 15.12 Saddlery, bags & luggage etc. 286 585 450 421 430 15.20 Footwear 1,472 2,464 2,454 2,664 2,663 14+15 Leather industry, total 3,518 4,628 4,167 4,247 4,237 Manufacturing industry, total 316,590 428,752 410,606 402,804 431,461 Share in manufacturing industry 1.1% 1.1% 1.0% 1.1% 1.0% Share of leather sector in GDP 0.5% 0.5% 0.5% 0.5% 0.5% GDP, current prices, Mn $ 672,108 872,040 859,797 860,900 851,106 Source: TUIK, Annual Industry and Service Statistics, period 2017 (published 02.11.2018) The largest segment in leather sector was footwear industry which accounted for 62.9% of the production value in 2017, followed by tanning and dressing industry with a share of 19.1%. The smallest segments are the saddlery, bags, luggage and leather goods industry and leather garments industry and with a respective share of 10.2% and 7.9% in 2017. Chart 3: Leather sector production by segments, value share, 2017 10.2% 7.9% 19.1% Footwear Tanning & dressing Sadlery, bags & luggage Leather garments 62.9% Source: TUIK, Annual Industry and Service Statistics, 2018; IBS analysis IBS 20

As of 2017, there were around 691 enterprises active in leather garments industry and 8,931 enterprises were active in manufacture of leather and related products, of which 856 in tanning and dressing, 1,929 of them in saddlery, bags and luggage and leather accessories production. The largest amount enterprises were active in footwear industry with around 6,146 companies. Table 3: Number of enterprises in leather sector, 2007-2017 Nace Rev 2 Activity Description 2007 2010 2015 2016 2017 14 Leather garments 999 807 829 714 691 14.11 Leather garments & articles 999 807 829 714 691 15 Leather and related products 8,444 8,707 8,845 8,826 8,931 15.11 Processed leather 1,137 941 891 864 856 15.12 Saddlery, bags & luggage etc 1,868 2,125 1,913 1,908 1,929 15.20 Footwear 5,439 5,641 6,041 6,054 6,146 14+15 Leather industry, total 9,443 9,514 9,674 9,540 9,622 Manufacturing industry, total 309,841 299,928 335,311 433,636 437,364 Share of leather sector in manufacturing industry 3.0% 3.2% 2.9% 2.2% 2.2% Source: TUIK, Annual Industry and Service Statistics, period 2017 (published 02.11.2018) Share of leather sector within manufacturing industry enterprises decreased from 3.0% to 2.2% between 2007 and 2017. During the last decade approximately 180 enterprises have shut down in which the largest decrease was in leather garments industry with around 310 enterprises. The key reasons of the decrease were: decreasing trade volume with key export markets of Turkey mainly with Russia due to political problems between Russia and Turkey, decreasing volume of incoming tourists from Russia and other EU countries due to political problems between Russia and Turkey as well as political uncertainties and unsecure environment due to terrorist attacks and coup attempt during 2015 and 2016. the consolidation of the sector during these years, increasing competition of Far East countries in the sector. 1.2.3 Raw hides and skins Livestock Although the livestock population of Turkey is high among agricultural countries in the world, due to significantly low productivity levels; the leather sector in Turkey is dependent to import to meet its raw hides and skins demand. Where the share of stock-breeding was around 60-70% of total agricultural output of developed countries, it is between 20-25% in Turkey. This main reason behind this is the poor organized sector structure and uneducated animal breeders. The livestock population increased at a CAGR of 3.4% between 2007 and 2017. The overall population was 43.4 million in 2007 and reached to 60.7 million in 2017. IBS 21

Table 4: Number of animals by kinds, 2007-2017, Million heads Share CAGR 2007 2012 2015 2017 2017 2007-17 Bovine animals 11.1 14.0 14.1 16.1 26.5% 3.8% Ovine animals 31.7 35.8 41.9 44.3 73.0% 3.4% Other animals 0.6 0.4 0.3 0.3 0.5% -6.2% Turkey total 43.4 50.2 56.4 60.7 100.0% 3.4% Turkey ovine & bovine, total 42.9 49.8 56.1 60.4 99.5% 3.5 Italy ovine & bovine, total 15.5 15.0 13.8 14.6 62.9% -0.6 World ovine & bovine, total 3,640.5 3,772.9 3,836.7 n.a. Turkey share in World 1.2% 1.3% 1.5% n.a. Italy share in World 0.4% 0.4% 0.4% n.a. * Other animals include horses, asses, mules, camels and pigs Source: TUIK and FAO, IBS analysis, September 2018 Turkey has 1.5% of the world bovine and ovine livestock population where Italy has only 0.4% share as of 2015. In total, 5.4 million bovine and ovine animals imported by Turkey during the period which accounted 31% of the increase in the bovine and ovine population between 2007 and 2017. Between 2007 and 2017, Turkey imported 2.9 million bovine animals (mainly from Uruguay, Brazil, Hungary, France, Australia and USA) and 2.5 million ovine animals (mainly from Australia and Bulgaria). Import of live animals from Italy was negligible between 2007 and 2017. Turkey imported a total of 12,700 bovine animals between 2007 and 2017 and only 2,556 live bovine animals from Italy in 2017. The official number of slaughtered ovine and bovine animals in Turkey was around 11 million heads as of 2017. This excludes around 820,000 bovine and 2.7 million ovine animals to be slaughtered during the Feast of Sacrifice in 2017. Summing approximately 14.3 million animals was slaughtered as of 2017. Table 5: Number of slaughtered animals by kinds, 2007-2017, Million units 2007 2012 2017 CAGR 2007-17 Sheep and goat 7.7 5.5 7.2-0.6% Bovine animals 2.0 2.8 3.6 6.0% Total 9.7 8.3 10.8 1.1% Note: Data on hide production covers slaughtering in slaughterhouses and outside slaughterhouses starting from 2010 and excludes the slaughtered animals during the Feast of Sacrifice. Source: TUIK, IBS analysis, September 2018 Sector experts commented that ca 20% of the bovine and ovine leather skins collected during the Feast of Sacrifice in Turkey were not usable due to wrong processing and preservation methods, however, which was 50% in ten years ago. IBS 22

Raw hides and skins Turkey is a net importer for raw hides and skins. During the last decade, between 50-80% of total raw hides and skin was imported. Total market size of the raw hides and skin sector is estimated around $200 million in 2017, well below the 2007 value of $400 million, according to official statistics. In unit terms, total consumption of hides and skins decreased significantly with a CAGR of -5.4% from 55.5 million units to 30.9 million units in 2017. Local production volume was stable during the last decade while export and import decreased dramatically. The import volume decreased by 26.6 million units between 2007 and 2017, and the export volume was one-fourth of the 2007 quantity in 2017. In 2018, IBS estimates around 30% increase in volume terms for the import of raw hide and skins and 25% increase in value terms. Italy was the 8 th largest exporter of raw hides and skins to Turkey with a share of 4% in 2017. Iraq, Turkmenistan, Libya, UK and Afghanistan were top five countries in Turkey s raw hides and skins import in 2017 and accounted almost 50% of imports. Table 6: Raw hides and skins market balance in Turkey, 2007-2017, Million units CAGR 2007 2012 2015 2016 2017 2007-17 Production 13.3 11.2 13.7 12.6 13.6 0.3% Imports 44.5 33.2 14.1 12.2 17.9-8.7% Exports 2.3 0.5 0.6 0.5 0.6-12.6% Consumption 55.5 43.9 27.2 24.3 30.9-5.7% Share of imports 80% 76% 52% 50% 58% Source: TUIK, production, foreign trade statistics and IBS estimates, 2018 Turkey s raw hides and skins production does not meet the local demand in both qualitative and quantitative terms. For instance, the leather garments industry mainly imports its hides and skins primarily because of the quality problem in the locally produced raw leather. In this case leather and leather goods production is directly affected by world stock and prices, so tanners plan to make bulk purchases for their raw material need at convenient times in order cope with the high prices. In 2017, 75% of the hides and skins consumption of Turkey was from ovine animals and the rest was from bovine animals. The share of hides and skins from ovine animals was 64% in production, and 86% in imports. IBS 23

1.2.4 Tanning and dressing Turkey s leather industry dates back to second half of 15 th century primarily concentrated in Kazlicesme, Istanbul s historical tanning centre. Currently there are around 850 tanneries in Turkey employing roughly 9,200 people. Production volume of tanned and dressed leather decreased from 57.9 million m 2 in 2007 to 33.1 million m 2 in 2017, with a CAGR of -5.4% per annum. Turkey s processed leather import was 9.2 million m 2 in 2017 while the export was around 8 million m 2. Table 7: Processed leather market balance, 2007-2017, Million m 2 CAGR 2007 2012 2015 2016 2017 2007-17 Production 57.9 45.8 28.3 26.1 33.1-5.4% Imports 17.1 13.5 8.2 8.2 9.2-6.0% Exports 6.6 7.4 7.2 7.5 8.0 1.9% Consumption 68.3 51.8 29.3 26.7 34.3-6.7% Source: TUIK foreign trade statistics and IBS estimates, 2018 Local consumption of processed leather decreased almost half of its size in 2017 compared to 2007 level. As of 2017, 75% of the tanned and dressed leather was ovine leathers and the remaining 25% was bovine leathers. This breakdown was almost same for the last decade. Considering the 80 million m 2 tanning and dressing capacity, the capacity utilization rate of the sector was decreased from 85% in 2007 to 43% in 2017 Imports of processed leather was also decreased almost 50% in the last decade from 17.1 million m 2 in 2007 to 9.2 million m 2 in 2017. Italy was the second largest exporter of processed leather to Turkey after Azerbaijan in 2017. Tanned leather exports of Italy decreased 60% between 2007 and 2017 from 3.4 million m 2 in 2007 to 1.4 million m 2 in 2017. Imports from Italy accounted for 8% of the total processed leather imports of Turkey in 2017. Around 62% of Italy s exports are in HS 4107 category -Leather further prepared after tanning or crusting "incl. parchment-dressed leather", of bovine "incl. buffalo" or equine animals, without hair on, whether or not split-. Being one of the oldest industries in Turkey, the technology level used in the industry did not show a major improvement but there are a few number of medium and large size companies with high technology processing infrastructure. The sector is still very labour intensive and mechanisation level remains low. One factor affecting this is the relatively cheap labour cost in Turkey. According to the SGK (Social Security Institution) statistics the average daily salary level of employees in the sector was around $18 per day, considering 10 hours of working per day, the hourly average wage in the sector was around $1.8 in 2016. After high devaluation of Lira in 2017 and 2018, the hourly net minimum wage in Turkey decreased $1.3 and it was one of the lowest in EU together with Albania, Serbia and Montenegro. IBS 24

1.2.5 Leather accessories: saddlery, bags and luggage and leather goods The leather accessories industry is fragmented and there are only a handful of companies that have an established corporate brand. In the saddlery, bags and luggage and leather accessories industry there are around 1,900 registered producers according to the official statistics. Majority of them are micro enterprises with less than five employees. Total official employment in the industry was around 9,800 people as of 2017. The general business profile of these companies shows that they mostly concentrate in production, while marketing, advertisement and promotion efforts are largely avoided. Usage of financial loans is very limited; education level and number of the skilled staff is very low as well. The majority are family companies run by traditional business practices. Most of the companies are in the form of workshops (small ateliers) that have one shaving, one cutting and one or two sewing machines. Producers use their machinery for the longest possible time (30-40 years). Second hand machinery usage is very common. In contrast to the leather garments, in the leather accessories industry, the production volume was increased highly. 2017 production volume was almost 3.1 times over the 2007 level. The key factor for the production growth in this segment was protective measures of the Turkish government especially for bags and luggage imports from China and other Far East countries. During the last decade, import of saddlery, bags & luggage, leather goods decreased at a CAGR of -10.0% in volume terms, from 25,490 tonnes in 2007 to 8,895 tonnes in 2017 Table 8: Saddlery, bags & luggage, leather goods market balance, 2007-2017, Tonnes CAGR 2007 2012 2015 2016 2017** 2007-17 Production 8,820 16,100 27,470 25,300 27,350 12.0% Imports 25,490 15,735 15,975 10,219 8,895-10.0% Exports 4,610 6,902 8,817 9,810 11,107 9.2% Consumption * 29,700 24,933 34,628 25,709 25,138-1.7% * Consumption figure includes the local sales to the foreign tourists in Turkey which is accepted as exports by the leather industry associations. ** Production figures is estimated by IBS for 2017 Source: TUIK foreign trade statistics, TUIK manufacturing industry production statistics and IBS estimates, 2018 In against decreasing import, local production increased almost 3.1 times as the export also increased 2.4 times during the same period. Turkey s leather accessories export doubled between 2007 and 2017 in volume terms. Export in this segment was only 4,610 tonnes in 2007 and reached to 11,107 tonnes in 2017. In 2017, the export volume exceeded import first time during the last decade. IBS 25

Main reason of the decreasing domestic consumption was decreasing sales to the tourists due to sharp decline in number of tourists from Russia and European countries especially in 2016 and 2017. The consumption is expected to increase again with the expected increase in incoming tourists in the next years. Around 30% of the local production in this category is sole leather products and the share of leather products within exports was 24% in 2017. The share of sole leather products was only 11% in import. Most of the production and foreign trade in handbags and luggage are artificial leather and textile products. The production value of the leather accessories industry increased from $286 million to $459 million with a CAGR of 4.8% between 2007 and 2017. Table 9: Saddlery, bags & luggage, leather goods market balance, 2007-2017, $ Million CAGR 2007 2012 2015 2016 2017 2007-17 Production 286 585 450 421 459 4.8% Imports 424 374 394 287 272-4.3% Exports 180 248 199 176 188 0.4% Consumption * 531 711 645 533 543 0.2% * Consumption figure includes the local sales to the foreign tourists in Turkey which is accepted as exports by the leather industry associations. Source: TUIK foreign trade statistics; TUIK, Annual Industry and Service Statistics-2017 The leather accessories industry production in value terms was lower compared to increase in volume terms between 2007 and 2017. This is mainly because the shift of industry from genuine leather products to artificial leather and textile products in surface materials of especially bags and luggage. As a result, both average unit production price and average unit export price of the industry outputs has decreased significantly during the last decade. In 2007, the average unit production price of one kg of the industry output was $32, where it was only $17 in 2017. The average unit export price of Turkey in this segment was also decreased from $39 to $17 per kg due to shift from manufacturing genuine leather articles in the past to manufacturing artificial leather and textile articles in 2017. IBS 26

1.2.6 Leather garments As of 2017, the leather garments industry is the smallest segment in the leather sector. In 2017, there are around 700 enterprises active in the industry according to official statistics of TUIK published in November 2018. On the other hand, as of end 2017, there were around 390 companies having manufacturing capacity certificates (excluding small workshops less than 5 employees) in the TOBB industry database. Total employment in leather garments manufacturing industry (including small workshops) was estimated around 5,700 paid employees as of 2017. As with other areas of leather sector, leather garment companies are mostly small-scale family firms having adequate capital to produce their own products and have their own customers. The leather garments sector has two distinct periods pinned at 1990s. Before 1990s, all companies worked for a few corporate companies and small-scale family establishments were producing sub-contracted garments since they did not have adequate capital. After 1990s, with new markets such as Russia, CIS and the Balkan countries became available and prospective; these companies acquired capital considerably through shuttle trade and became financially stronger and more independent. There was a decline in leather garments manufacturing at a CAGR of -4.4% in volume terms in the last decade. The production volume decreased from 9,611 tonnes to around 6,107 tonnes in 2017. Table 10: Leather garments market balance, 2007-2017, Tons CAGR 2007 2012 2015 2016 2017** 2007-17 Production 9,611 9,660 6,407 5,552 6,107-4.4% Imports 595 315 190 118 63-20.1% Exports 3,099 1,051 731 767 830-12.3% Consumption * 7,107 8,924 5,866 4,903 5,340-2.8% * Consumption figure includes the local sales to the foreign tourists in Turkey which is accepted as exports by the leather industry associations. ** Production figure is estimated by IBS for 2017 Source: TUIK foreign trade statistics, TUIK manufacturing industry production statistics and IBS estimates, 2018 There was a significant decrease in the leather garments foreign trade between 2007 and 2017. Russia is Turkey s key export market in leather garments. The main reason of the decrease in export volume was the economic crisis in Russia as well as political tensions between Russia and Turkey during the period. The industry export decreased with a negative CAGR of -12.3% between 2007 and 2017. The import volume decreased with a higher rate compared to export and production; with a CAGR of -20.1% between 2007 and 2017. Decrease in domestic demand was almost parallel to the decrease in production at a CAGR of -2.8% during the same period. Main reason of this high decrease in domestic consumption was the decreasing tourist volume from Russia as well as EU countries IBS 27

because most of the domestic sales were duty free sales to tourists visiting Aegean and Mediterranean coastal cities of Turkey. The leather and fur garment industry production in value terms decreased from $964 million to $334 million between 2007 and 2017. Table 11: Leather garments market balance in value, 2007-2017, $ Million CAGR 2007 2012 2015 2016 2017 2007-17 Production 964 553 378 258 334-10.0% Imports 47 110 92 62 29-4.8% Exports 230 163 124 119 116-6.6% Consumption * 782 895 431 281 224-11.7% * Consumption figure includes the local sales to the foreign tourists in Turkey which is accepted as exports by the leather industry associations. Source: TUIK foreign trade statistics, TUIK, Annual Industry and Service Statistics-2017 In value terms, the decrease in production and local consumption was higher compared to the decrease in volume terms. This proves the negative trend in unit prices of leather and fur garments in dollar terms in the local market. In dollar terms the average unit prices of leather garments decreased around 62% of the 2007 price level. In contrast, the average unit export prices of leather garments in 2017 increased around 88% compare to 2007 export price levels. This indicates that Turkish producers exported value-added products but sold relatively cheaper priced mass products in the local market. The average unit price of Turkey s export in leather garments was $139 per kg in 2017 and it was $74 per kg in 2007. On the other hand, in leather garments import, average unit price of imported products increased almost five times in 2017 compared to 2007 level. Average unit price of the imported products was $454 per kg while it was $79 in 2007. This is mainly as a result of an increase in the share of value-added high segment products in leather garments imports due to the new trade barriers by Turkish government in against to the cheap and especially Far East origin product imports in the segment. Leather for the leather garments industry is mainly imported as local leather manufacturers do not maintain production quality. Main foreign suppliers of processed leather for leather garments are Azerbaijan, Italy, India, Kenya, Tajikistan and Brazil. 1.2.7 Footwear The footwear and footwear components sectors were elaborated in detail in Section 2 and Section 3 of the report. IBS 28

1.3 Industry structure and infrastructure Turkish leather and leather products sector grew rapidly in the 1980s and 1990s, and with the competition conditions emerging in the 2000s, the sector has entered a transformation process. Then it focused on protecting its manufacturing infrastructure and competitive power in export. The majority of Turkey's leather and leather products manufacturing industry is located in the organized industrial zones; especially in specialized industry zones established exclusively for the leathers sector. Due to environmental reasons, the tanning and dressing enterprises are located mainly in these regions. While there has been a significant decline since 2005 in the number of manufacturers of leather tanning and dressing, large and corporate companies have been able to survive. One of the most important characteristics of the sector, which mainly operates in the Leather Organized Industrial Zones, is environmentally sensitive, modern and highquality production in parallel to the European standards. Leather manufacturers are mainly located in Balikesir (Gonen), Bolu (Gerede), Bursa, Denizli (Honaz), Gaziantep, Isparta, Istanbul (Tuzla), Izmir (Menemen), Manisa (Kula), Nigde (Bor), Tekirdag (Corlu) and Usak provinces. Istanbul (Zeytinburnu) is considered as the most important trade centre for the Turkish leather wear industry. Figure 1: Geographic concentration of leather sector in Turkey, 2017 Source: IBS In the leather sector: Tanning and processing Leather apparel Footwear Tanning and dressing industry is mainly located at following provinces: o Istanbul-Tuzla, Tekirdag-Çorlu, Bursa, Balıkesir-Gonen, Bolu-Gerede, Izmir-Menemen, Usak, Isparta, Manisa-Kula and Hatay, Leather garments industry companies are in Istanbul and Izmir. Almost 50% of the footwear industry companies are in Istanbul and remaining in Gaziantep, Izmir, Konya and Bursa etc. IBS 29

Before 1990s, most of the leather industry companies were located within urban centres of the cities. During this period, concerns about industrial pollution and environmental problems urged especially tanneries as well as companies from other segments of the sector to move out of city centres. In 1986, first steps towards moving companies which were located in Kazlicesme district (the traditional and historic centre of the industry since Ottoman times) of Istanbul to the newly established Istanbul Leather Organized Industry Zone in Tuzla (which is outskirts of the city) were taken, and the zone was fully operational as of 1992. Afterwards the leather industry companies which were located within Izmir city centre Yesildere moved to Izmir Menemen Leather Industry Zone. In 1997, the status of leather zone in Izmir changed to a Free Trade Zone. Today there are 40 leather companies, five leather chemicals companies and one leather machinery company are active in the Free Trade Zone out of 76 companies. As of end 2017, there are 11 specialized industrial zones established for leather sector in Turkey, one of which is under construction and remaining is operative. The largest of the specialized leather OIZs was Istanbul Leather OIZ (Tuzla). There are around 194 active companies in the region. Other important and well established OIZs are Izmir (Menemen), Tekirdag - Corlu and Usak Leather OIZs. Table 12: Specialized leather industry zones in Turkey, end 2017 Number Number of Current Area of industrial operating employment Occupancy Name of the OIZ (hectare) parcels companies (people) rate, % Balikesir-Gonen 109 86 32 427 39 Bolu Gerede 1 196 110 28 810 40 Bursa Leather 190 121 24 610 35 Denizli Leather Specialized 63 75 13 200 35 Isparta Mix Leather 85 66 7 210 24 Istanbul Leather (Tuzla) 741 360 194 9350 86 Izmir Free Trade Zone (Menemen) 162 189 80 ( 40*) 1,600 70 Manisa-Kula Leather under construction Nigde Bor Mix Leather 292 170 49 1275 53 Tekirdag-Corlu Mix Leather 130 80 54 1201 58 Usak Leather 264 120 83 1817 79 Total 2,232 1,549 670 17,500 58 * In Izmir Free Trade Zone 40 companies of operating 80 companies are in leather sector. Source: IBS desk research and interviews, IBS analysis, 2018 In total there are 670 operating companies in the OIZs which accounted around 8% of the total sector enterprises. The companies located in OIZs are mostly medium and large size companies and accounted approximately 25% of the sector employment. Today almost all these leather organized industry zones are equipped with water treatment plants and provides modern industrial infrastructure for the companies. IBS 30

Figure 2: Map of specialized leather industry zones, 2017 Istanbul Leather (Tuzla) OIZ (194 companies) Tekirdag Corlu Leather OIZ (54 companies) Bolu Gerede OIZ (28 companies) Balikesir-Gonen OIZ (32 companies) Bursa Leather OIZ (24 companies) Izmir Menemen FTZ (40 companies) Manisa Leather OIZ (under construction) Usak Leather OIZ (83.) Denizli Leather OIZ (13 companies) Isparta Mix Leather OIZ (7 companies) Nigde Bor Mix OIZ (49 companies) Source: IBS There is discounted land allocation incentive in specialized leather industry zones with low occupancy rates. There is 90% discounted land allocation in Manisa Kula Leather and Nigde Bor Mix, 70% discount in Usak Leather OIZ, %60 discount in Balikesir Gonen and Denizli Leather, 50% discount in Bolu Gerede, Isparta Leather OIZs. There is no discounted land allocation in Bursa Leather OIZ, Istanbul Tuzla Leather OIZ, Izmir FTZ, and Tekirdag Corlu Leather OIZ because these OIZs are almost fully occupied. Around 75% of the companies active in the leather sector were micro enterprises employing 1-9 workers, the share of small companies was 17%, medium size companies were 2.6% and finally large size companies accounted less than 1% share in 2016. Chart 4: Breakdown of leather sector companies by size, 2017 2.6% 0.3% 17.4% Micro companies (1-9 employees) Small size companies (10-49 employees) Medium size companies (50-249 employees) Large size companies (over 250 employees) 79.7% Source: TUIK, Annual Industry and Service Statistics, IBS analysis, 2018 IBS 31

1.4 Foreign trade in leather sector 1.4.1 Foreign trade in leather sector Turkey has long been a net importer in leather sector, though the growth trends in the last decade show export rising faster than import, and finally in 2017 Turkey became a net exporter in the leather sector. Export in value terms grew at average compound rate of 4.2% during the 2007 and 2017 period where import declined at average compound rate of -2.8%. Chart 5: Leather sector foreign trade, 2007-2018e, $ Million $ Million Exports Imports 2,033 e: IBS estimate 1,650 846 1,568 1,118 1,175 1,312 1,237 1,183 1,280 1,450 1,213 2007 2012 2015 2016 2017 2018e Source: TUIK and ITC Trademap, IBS analysis and estimate for 2018 Total trade volume of Turkey in the leather sector reached its peak in 2012 amounted at $3.2 Bn and decreased to $2.5 Bn in 2017. In 2017, value of Turkey s leather export was 3% over that of the import which stood at $1.3 billion. Trade deficit of Turkey in the leather sector decreased from its peak $915 million in 2012 to a trade surplus of $43 million in 2017. The main reason of decline in trade deficit was the protective measures of the Turkish government by taking serious anti-dumping measures in against cheap imports from China and other Far East countries especially after 2014. Table 13: Leather sector foreign trade, 2007-2018 3 rd Quarter, Mn $ Growth 2017 2018 CAGR 2017-18 2007 2012 2015 2016 2017 9M* 9M 2007-17 9M Exports 846 1,118 1,175 1,183 1,280 975 1,104 4.2% 13.2% Imports 1,650 2,033 1,568 1,312 1,237 927 909-2.8% -1.9% Trade volume 2,497 3,150 2,743 2,495 2,516 1,903 2,014 0.1% 5.8% Trade balance -804-915 -393-129 43 48 195 Share in Turkey's exports 0.8% 0.7% 0.8% 0.8% 0.8% 0.8% 0.9% Share in Turkey's imports 1.0% 0.9% 0.8% 0.7% 0.5% 0.5% 0.5% *9M= Nine months (three quarters) total Source: TUIK and ITC Trademap, IBS analysis, 2018 IBS 32

The export in leather sector was $1.1 billion in the first nine months, where the import was around $0.9 billion, and the trade surplus of Turkey increased to $0.2 billion in the same period. In the first nine months of 2018, the leather sector exports increased 13.2% mainly because of high devaluation in Turkish Lira. The sector companies underlined that export to Russia, Italy and most of the EU countries as well as selected Middle East and African countries increased significantly during the first nine months of 2018. In contrast there was a continuing decrease in import excluding raw hides and skins and processed leather products. IBS estimates that the leather sector export will reach $1.4 billion and the import will stay at the level of $1.2 billion for the year total of 2018. The share of leather sector export in Turkey s total export remained same with 0.8% during the last decade. On the other hand, the share of leather sector import decreased from 1.0% in 2007 to 0.5% in 2017. In volume terms Turkey was a net importer during the period. The CAGR of the leather sector export in volume term was higher between 2007 and 2017 with 6.5% and the decline in import was higher compare to value terms with a negative CAGR of -4.1%. Table 14: Leather sector foreign trade, 2007-2018 3 rd Quarter, '000 Tonnes Growth 2017 2018 CAGR 2017-18 2007 2012 2015 2016 2017 9M* 9M 2007-17 9M Exports 71 95 111 123 133 106 111 6.5% 5.0% Imports 239 208 138 137 157 113 136-4.1% 20.7% Trade volume 310 303 248 260 290 219 247-0.7% 13.1% Trade balance -168-114 -27-13 -24-7 -25 *9M= Nine months (three quarters) total Source: TUIK and ITC Trademap, IBS analysis, 2018 In the first nine months of 2018, the key change in the volume of import was the increasing trend; the import volume reached 136 thousand tonnes with 20.7% growth compared to first nine months of 2017. The key sources of this increase were increasing volume of import in the raw as well as processed and finished leather. This growth trend shows that during the last decade, the average unit export price of Turkish leather sector products has declined from $12/kg in 2007 to $10/kg in 2018 (estimated), and average unit import price has increased from $7/kg in 2007 to $11/kg in 2015 but then again decreased to $6/kg in 2018. This main reasons behind this trend were: Decreasing volume of imported finished products in against to raw materials, Increasing volume of cheaper leather product import against high segment finished leather products. IBS 33

Chart 6: Average unit price in leather sector foreign trade in Turkey, 2007-2018e, $/kg Average unit price, $/kg Exports Imports e: IBS estimate 12 12 10 11 11 10 10 10 7 8 6 2007 2012 2015 2016 2017 2018e Source: TUIK and ITC Trademap, IBS analysis and estimate for 2018 1.4.2 Foreign trade in leather sector by countries The following table gives the trend in Turkey s leather sector import by top 15 trade partners. Table 15: Leather sector import by countries, 2007-2018 3 rd Quarter, $ Million Growth 2017 2018 Share CAGR 2017-18 2007 2012 2015 2016 2017 9M* 9M 2017 2007-17 9M China 627 737 613 444 370 290 249 30% -5.1% -14.3% Italy 232 254 228 201 204 152 163 17% -1.3% 7.2% Vietnam 74 127 173 179 154 117 120 12% 7.6% 2.8% Indonesia 54 85 70 79 70 51 48 6% 2.7% -6.8% India 44 100 82 60 50 36 27 4% 1.2% -25.8% Spain 83 107 41 28 31 25 29 3% -9.2% 15.3% France 35 47 28 27 28 20 24 2% -2.3% 22.4% Germany 31 27 20 18 23 18 19 2% -3.0% 7.6% Free Zones 82 48 32 22 19 14 13 2% -13.4% -1.4% Romania 15 15 16 16 18 10 9 1% 1.3% -12.3% Portugal 7 9 15 13 17 13 8 1% 8.7% -39.7% Hungary 2 3 13 13 16 12 7 1% 22.9% -43.5% Cambodia 1 9 9 11 13 10 14 1% 36.9% 35.1% Iraq 0 4 5 7 12 9 8 1% 77.9% -11.2% Bangladesh 0 5 7 7 11 5 6 1% 49.4% 8.4% Others 363 456 217 187 201 146 167 16% -5.7% 14.5% Total 1,650 2,033 1,568 1,312 1,237 927 909 100% -2.8% -1.9% Note: listed by 2017 data *9M= Nine months (three quarters) total Source: TUIK and ITC Trademap, IBS analysis, 2018 Italy consistently was the second largest country in Turkey s leather sector import after China between 2007 and 2018. Top 15 countries accounted for an average 82% of Turkey s import in leather sector in the last decade. Share of top 15 countries was 84% in 2017 and 82% in the first nine months of 2018. IBS 34

Turkey s leather sector import from China started to decline significantly after 2016 and the CAGR of imports of Turkey from China was -5.1% between 2007 and 2017. In addition to China, countries like Italy, Spain, France, Germany, Free zones having a declining trend in its leather sale to Turkey between 2007 and 2017. In the first nine months of 2018, the declining trend in import from China has been continuing by getting stronger; the decrease in import from China was -14.1% compared to the first nine months of 2017. On the other hand, unexpectedly there was an increase in import from Italy as well as other EU countries like France and Spain in the first nine months of 2018; there was 7.2% growth in import from Italy in value terms, 15.3% growth in import from Spain, 22.4% growth in import from France and %7.6 growth in import from Germany. The main reason of this increase was largely due to, as IBS identified, the traders made their purchases in the first half of the year as they foresaw the currency fluctuation in Turkey at the second half of the year. IBS interviews with key distributors proves this suggestion. These companies declared that they made very limited import in the second half of the year. In addition, foreign trade statistics showed that there was a significant decline in the third quarter compared to first two quarters of 2018. In 2017, China maintained its ranking as the top country in Turkey s leather sector import. The leather products import from China amounted at $370 million representing 30% of total import of Turkey. Import from China is expected to decrease around $317 million in 2018 with a decline of -%14 due to shrinking demand in low- and mediumpriced leather products market in Turkey. The majority of the leather sector import of Turkey from China was footwear segment products and accounted approximately 65% of total leather sector import. It is followed by handbags with a share of 11% and travel bags with a share of 9% and trunks, suitcases etc with a share of 6%. These four top categories accounted 90% of the China s leather sector exports to Turkey in 2017. The second largest trade partner of Turkey in leather import was Italy. Import from Italy amounted to $204 million in 2017 and is expected to reach around $220 million with a growth of 7% in 2018. The main sources of growth in Italy s export to Turkey was in footwear and leather accessories segments where there was a decrease in raw and processed leather. In the first nine months of 2018, the import of Turkey from Italy in leather sector was $11 million over the same period in 2017 as discussed in above paragraph. The 46% of the Italy s leather export to Turkey was footwear products and the second largest category was handbags with 18% share in 2017. These top two categories accounted 64% of the Italy s leather sector export to Turkey in 2017. Most of the leather sector imports from Italy are branded luxury products of ready-wear and sportswear which were marketed through high end retail chains active in Turkey. (See details in Section 2.3 and 2.4) Vietnam was the third largest country in leather sector export to Turkey with 12% share in Turkey s leather import in 2017. Vietnam will be again the third largest supplier of Turkey in leather sector in 2018. The imports of Turkey from Vietnam in leather sector reached approximately $120 million in the first nine months of 2018 and is expected to IBS 35

reach $159 million in 2018. 92% of the leather import of Turkey from Vietnam was footwear products and mostly sportswear in 2017. Turkey s import from Vietnam was tripled between 2007 and 2017. This increase in the import from Vietnam is mostly due to early purchases of big international sports shoe brands, again, that foresaw the depreciation of Turkish Lira against Dollar and Euro. Indonesia was the fourth largest country in Turkey s leather sector import with a share of 6%, and again a high share (93%) of leather imports from Indonesia was footwear products like Vietnam. Indonesia will remain as fourth largest exporter to Turkey in leather sector considering its $48 million export to Turkey in the first nine months of 2018. Top 15 countries accounted for an average 62% of Turkey s leather sector export in the last decade. As of 2017, the share of top ten countries was 62%. Italy was the fourth largest export market of Turkey in leather sector in the last decade. Table 16: Leather sector exports by countries, 2007-2018 3 rd Quarter, $ Million Growth 2017 2018 CAGR 2017-18 2007 2012 2015 2016 2017 9M* 9M Share 2007-17 9M Germany 105 81 93 100 110 83 87 9% 0.4% 5.3% Iraq 15 86 130 91 107 85 75 8% 21.6% -12.0% Russia 90 177 94 39 91 69 127 7% 0.1% 84.2% Italy 59 99 88 59 71 53 73 6% 1.9% 38.7% Bulgaria 29 20 20 48 60 50 29 5% 7.7% -42.5% UK 55 57 59 51 51 38 35 4% -0.7% -8.9% France 50 41 44 50 46 35 34 4% -0.7% -1.7% Spain 30 18 30 39 43 31 36 3% 3.6% 17.0% Saudi Arabia 19 43 35 40 39 32 27 3% 7.4% -15.8% Romania 40 13 22 31 37 28 34 3% -0.8% 21.1% USA 29 24 25 32 33 24 25 3% 1.3% 2.8% Netherlands 33 17 26 27 26 22 23 2% -2.2% 4.8% India 1 1 10 13 25 17 23 2% 42.3% 34.9% Israel 12 8 17 21 24 19 20 2% 7.2% 7.4% Serbia 17 10 14 18 23 17 17 2% 3.2% 2.0% Others 264 423 467 524 492 373 439 38% 6.4% 17.7% Total 846 1,118 1,175 1,183 1,280 975 1,104 100% 4.2% 13.2% Note: listed by 2017 data *9M= Nine months (three quarters) total Source: TUIK and ITC Trademap, IBS analysis, 2018 Although Turkey s largest export market was Germany in 2017, due to high increase in export to Russia in the first nine months of 2018, Russia has become again the top export destination for Turkey. During the last decade, between 2008 and 2015 Russia was the largest export destination for Turkey, due the political problems described below Germany has become again the top export destination for Turkish leather sector products since 2016. Turkey s export to Germany increased from $105 million in 2012 to $110 million in 2017 with a CAGR of 0.4% during the period. In 2017, Iraq maintained its second place in Turkey s leather sector export but there was a significant decrease in export to Iraq in the first three quarter of 2018 with a decline IBS 36

of -12% due to political imbalance in northern part of Iraq. The leather sector export of Turkey amounted at $107 million and represented 8% of total sector exports of Turkey in 2017. It is expected to decrease $94 million in the year total of 2018. The majority of the leather sector export of Turkey to Iraq was footwear segment products and accounted 87% of total sector exports of Turkey. Majority of the footwear products exported to Iraq were made of artificial leather and textile materials. Turkey s leather sectors exports to Iraq increased seven-fold between 2007 and 2017, compensating the decrease in other key markets. Russia has been traditionally a key export destination for Turkish leather industrialist and traders. There was a noticeable decrease in export to Russia due to political tensions between two countries in 2016; after Turkey s downing a Russian jet in Syria. In addition to political tensions, economic problems in Russia also resulted in a negative trend in leather exports. In 2017, the political tension between two countries diminished which gave the pave for a significant increase in Turkey s leather sector exports to Russia from $39 million in 2016 to $91 million in 2017, with a growth rate of 133%. In the first nine months of 2018, there was an enormous growth of 84% in the Turkey s export to Russia in leather sector and it is expected to reach $168 million in 2018. Italy was the fourth largest export destination of Turkey. Having 6% share in Turkey s leather sector export Italy was a key market for Turkish leather sector companies. Turkey s export to Italy in the sector was increased with a CAGR of 1.9% between 2007 and 2017, increased from $59 million to $71 million. Turkey s leather export reached its peak value in 2014 with $119 million during the last decade. Between 2010 and 2015, export of Turkey fluctuated between $88-119 million and in 2016 there was a significant drop up to $59 million. In the first nine months of 2018, export of Turkey to Italy was increased with a growth rate of 39% and reached $73 million and is expected to reach over $100 million in 2018-year total. In volume terms top fifteen countries in Turkey s leather sector import were different from the order in value terms. China was again the top source country in Turkey s leather import in volume terms with a share of 15% and followed by Iraq and Turkmenistan (due to import of heavier goods such as raw hide and skins). In the first nine months of 2018, there was 21% increase in import of Turkey due to high increase in raw and processed leather import. In raw and processed leather especially import from UK, Afghanistan, Mongolia, USA and Dominic Republic increased highly in 2018. IBS 37

Table 17: Leather sector imports by countries, 2007-2018 3 rd Quarter, '000 Tonnes Growth 2017 2018 Share CAGR 2017-18 2007 2012 2015 2016 2017 9M* 9M 2017 2007-17 9M China 41 40 35 26 23 18 16 15% -5.6% -10% Iraq 0 4 5 11 23 16 15 14% 154.2% -5% Turkmenistan 7 7 5 7 8 6 7 5% 2.6% 10% Italy 10 13 8 7 7 6 6 5% -3.5% 3% Azerbaijan 7 9 3 9 6 5 3 4% -1.3% -36% Vietnam 3 5 7 7 6 4 5 4% 8.0% 6% Libya 1 3 4 3 5 4 3 3% 16.5% -29% UK 26 8 1 4 4 2 8 3% -16.1% 264% Afghanistan 0 9 10 9 4 2 8 3% 48.6% 349% Australia 6 10 3 2 4 3 3 3% -3.9% -6% Georgia 7 1 0 1 3 2 3 2% -7.2% 10% Indonesia 2 3 3 3 3 2 2 2% 4.0% 1% Qatar 0 1 3 3 3 3 2 2% 44.1% -12% France 9 6 2 1 3 2 2 2% -11.2% 2% India 2 4 3 3 3 2 2 2% 5.3% -10% Others 119 89 45 42 51 36 51 33% -8.1% 43% Total 239 208 138 137 157 113 136 100% -4.1% 21% Note: listed by 2017 data *9M= Nine months (three quarters) total Source: TUIK and ITC Trademap, IBS analysis, 2018 Although Italy was the 2 nd country in Turkey s leather sector imports in value terms, it was the 4 th country in volume terms with a share of 5% in 2017. Chart 7: Average unit import price of leather sector products Turkey from Italy, 2007-2018e $/kg 29 30 28 30 23 20 7 10 11 10 8 6 2007 2012 2015 2016 2017 2018e Average price of imports, total Average price of imports from Italy The average unit price of leather products imported from Italy was significantly higher compared to the general average. In 2017, the average unit price of leather sector import of Turkey from Italy was $28/kg where it was $8/kg for the average. IBS estimates that the average unit price of leather sector import of Turkey from Italy increased to $30/kg in 2018 where there was a decline in general average to $6 per kg. IBS 38

1.4.3 Foreign trade in leather sector by segments Footwear was the largest segment in the leather sector foreign trade, accounted 55% in value terms for imports and 60% for exports in 2017. Table 18: Foreign trade of leather sector by segments, 2007-2018 3 rd Quarter, $ Million Growth 2017 2018 Share CAGR 2017-18 2007 2012 2015 2016 2017 9M* 9M 2017 2007-17 9M Raw leather Imports 327 402 98 78 105 77 96 9% -11% 24% Exports 16 3 2 1 3 2 1 0% -17% -43% Trade balance -312-400 -97-76 -103-75 -94 Semi-processed and finished leather Imports 282 282 189 151 154 112 119 12% -6% 7% Exports 105 158 179 183 208 153 162 16% 7% 6% Trade balance -178-124 -9 32 53 41 42 Leather garments Imports 47 110 92 62 29 21 8 2% -5% -64% Exports 230 163 124 119 116 84 82 9% -7% -2% Trade balance 183 53 32 57 87 63 74 Bags & Luggage, leather goods, saddlery and harness Imports 424 374 394 287 272 205 187 22% -4% -9% Exports 180 248 199 176 188 137 157 15% 0% 15% Trade balance -244-127 -195-111 -84-68 -30 Footwear Imports 570 864 795 734 676 512 499 55% 2% -3% Exports 317 546 670 704 766 600 702 60% 9% 17% Trade balance -253-318 -124-30 90 87 203 Leather sector, total Imports 1,650 2,033 1,568 1,312 1,237 927 909 100% -3% -2% Exports 846 1,118 1,175 1,183 1,280 975 1,104 100% 4% 13% Trade balance -804-915 -393-129 43 48 195 *9M= Nine months (three quarters) total Source: TUIK and ITC Trademap, IBS analysis, 2018 In Turkey s leather sector import the second largest category was bags & luggage, leather goods, saddlery and harness industry which amounted at $272 million and accounted 22% of the Turkey s leather sector imports in 2017. The third largest category in import was semi-processed and finished leather amounted at $154 million and 12% of the leather sector imports in 2017. This segment was followed by raw leather imports with $105 million and 9% of the sector imports in 2017. The smallest segment in import of the sector was leather garments amounted at $29 million and 2% of the sector imports in 2017. In the first nine month of 2018, there was a significant increase in import of Turkey in raw skins and leather and processed and finished leather categories, where there was reliable decrease in footwear and leather accessories (saddlery) and a high decrease in leather garments import. On the other hand, Turkey s export in footwear and leather accessories increased by two digits in the first three quarters of 2018. IBS 39

Chart 8: Import of leather sector by segments, 2017, $ Million Chart 9: Export of leather sector by segments, 2017, $ Million 9% 0% 15% Footwear 16% Semi-proccessed & finished leather Bags& Luggage, leather goods, saddlery & harness Leather garments Raw leather 53% Source: TUIK, ITC Trademap, IBS analysis, 2018 After footwear, the second largest export segment was semi processed & finished leather accounted for 16% share in overall leather sector export in 2017. It increased at a CAGR of 7% during the period, particularly due to decreasing export volume of finished products in the leather sector. The sector companies lobbying with the government authorities to ban the export of semi processed and finished leather as other Far East countries and evaluated this as against to the national economy. The third largest segment in export was bags & luggage, leather goods, saddlery and harness industry amounted at $188 million and accounted 15% of the Turkey s leather sector import in 2017. There was almost no growth in the segment s export between 2007 and 2017. The peak in export of the segment during the period was at 2012 amounted at $248 million. The fourth largest segment was leather garments amounted at $116 million and 15% in sector export in 2017. There was a significant decrease in leather garment export from $230 million to $116 million between 2007 and 2012. Considering the local sales of leather garments by Turkish leather companies to the tourists visiting Turkey in the local market, the decrease was more dramatic. According to the records of different exporter s union, export including direct sales to tourists was $239 million in 2012 and decreased to $160 million in 2017. Total decrease in export was $80 million between 2012 and 2017. It means that there were $77 million direct sales of leather garments to tourists in 2012 and it decreased to $44 million in 2017 and the decrease in direct sales to tourist was around $32 million between 2012 and 2017 with a CAGR of -10% during the period. IBS 40

Chart 10: Exports of leather garments including direct sales to tourists, 2012-2017, $ Million $ Million Official exports Direct sales (exports) to tourists 300 250 200 150 239 77 160 44 CAGR 2012-2017 -8% -10% 100 50 163 116-7% 0 2012 2017 There were only five companies in the top 1,000 exporters list of Turkey in 2017. These five companies accounted 13% share in Turkey s leather sector export in 2017 and two of them are foreign trade companies and the other two are footwear companies. There was only one tannery in the list: Sepici Leather. Table 19: Leading leather sector exporters in Turkey, 2017, $ Million 2017, Exports $ Mn Share TGS Foreign Trade Inc (Ready-wear manufacturers) 50 4% Flo (Ziylan Footwear) 35 3% DSD Foreign Trade Inc (Leather manufacturers) 35 3% Gezer footwear 28 2% Sepici Leather 23 2% Total (Top five exporters) 171 13% Total Turkey leather exports 1,280 100% * TGS s total exports was $958 million, $50 million part is only leather and leather products exports of the TGS. Source: TIM 2017 Top 1000 Exporters of Turkey, published in 2018 IBS 41

1.4.4 Italy -Turkey foreign trade in leather sector The leather sector import value of Turkey from Italy was $204 million in 2017 and expected to be around $220 million in 2018 considering the nine month import of Turkey from Italy which was 7% over the import in the first nine month of 2017. The main sources of growth in Italy s export to Turkey was in footwear and leather accessories segments where there was a decrease in raw and processed leather. The main reason of this increase was largely due to, as discussed above, the traders made their purchases in the first half of the year as they foresaw the currency fluctuation in Turkey at the second half of the year. The CAGR of the import of Turkey from Italy was -1.3% between 2007 and 2017. Italy s export to Turkey reached its peak in 2012 with a value of $254 million. There was a $50 million decrease in import from Italy between 2012 and 2017 and it is expected to be around $35 million between 2012 and 2018. Main reason in decreasing import from Italy was mainly decreasing export of Turkey in raw, semi- processed and finished leather. Table 20: Imports from Italy in the leather sector by segments, 2007-2018 Q3, $ Million Growth 2017 2018 Share CAGR 2017-18 2007 2012 2015 2016 2017 9M 9M 2017 2007-17 9M Raw leather 20 46 11 6 9 6.9 5.2 4% -8.0% -25% Processed leather 93 71 44 38 38 27.1 25.6 19% -8.6% -6% Leather garments 4 5 6 4 3 2.6 2.6 2% -1.5% -1% Leather accessories* 37 49 61 56 56 41.4 48.6 27% 4.3% 17% Footwear 78 83 107 97 98 74.5 81.5 48% 2.3% 9% Total 232 254 228 201 204 152 163 100% -1.3% 7% * Saddlery, bags and luggage and leather accessories Source: TUIK and ITC Trademap, IBS analysis, 2018 October During the period there was only increase in bags, luggage and accessories and footwear categories export of Italy to Turkey. The total increase in these categories was $22 million between 2012 and 2017 where there was $72 million decrease in raw, semi- processed and finished leather as well as leather garments exports of Italy to Turkey during the same period. The largest segment in Italy s leather sector export to Turkey was footwear segment with a share of 48% in 2017 and followed by the bags, luggage and accessories category with a share of 27%. Semi-processes and finished leather products were the third largest segment having a share of 19% in 2017. Turkish companies imported mostly finished bovine leather from Italy. The import of semi-processed and finished leather reached its peak in 2007 with a value of $93 million and decreased to $38 million in 2017. The share of Italian companies in Turkey s semi-processed and finished leather was 25%. Turkish companies that make contract manufacturing for luxury international brands mostly use Italian leather, which were already defined in the specs of the manufacturing IBS 42

contract. Companies like Acar Leather & Creative, Desa, Derimod, Matras, SF Leather, Orjin Deri, Lodarno Belts are example of such firms working with international retailers and fashion brands. Chart 11: Italy s leather sector export to Turkey by segments, 2017, $ Million 48% 27% 19% 4% 2% Source: TUIK and ITC Trademap, IBS analysis, 2018 October The footwear imports of Turkish companies from Italy accounted almost 14% of the Turkey s total footwear import in 2017. In 2017, 75% of the footwear import of Turkey from Italy was shoes with leather upper. In this sub-segment imports from Italy accounted 32% of the category imports of Turkey. Thanks to its key international brands in luxury ready-wear and leather goods, Italy was clearly the leading supplier in the highend branded footwear market in Turkey. The high-end leather footwear and leather accessories (bags, luggage and leather goods) companies and retailers whom the key ones listed below imports majority of the highend Italian shoes, bags and leather accessories to Turkey. Beymen (with a rich collection of Italian brands like Alberto Fasciani, Bottega Veneta, Buttero, Dolce&Gabbana, Etro, Fabi, Fendi, Magnanni, Mazzoleni, Miu Miu, Prada, Valentino Garavani, Versace etc), Demsa Group (Salvatore Ferragamo), Deriden & Markapark (Alberto Guardiani, Armani, Chiara Bellini, Due Italiani, Geox, Guiseppe Mengoni, NeroGiardini, Roberto Botticelli, Roberto Cavalli, Tosca Blu etc.) Dogus Group (Gucci, Porche Design), Tamer Tanca (Alberto Guardiani, Dolce & Gabbana, Fabi, Franceschetti, Gutteri, Macossini, Moleschi, Prada, Rucoline, Valentino) Prada Spa (through own stores and other retailers like Beymen etc.: Prada and Miu Miu brands), Vakko (Armani, Fratelli Roseeti, Moreschi, Rene Caovilla, Santoni, Versace) IBS 43

Turkey s export to Italy was fluctuating between $60-100 million range between 2007 and 2017, amounted at $59 million in 2007 and with a CAGR of 1.9% between 2007 and 2017 increased to $77 million in 2017. It is expected to reach over $100 million in 2018. The main reason behind the increasing exports was the devaluation TL in 2018. As a result, Turkish leather sector products became more attractive for Italian footwear and leather goods traders. IBS identified several Italian traders in both AYMOD and AYSAF fairs and exhibitions who were making business agreements with Turkish companies. Table 21: Exports of Turkey to Italy in the leather sector by segments, 2007-18 Q3, $ Million Growth 2017 2018 Share CAGR 2017-18 2007 2012 2015 2016 2017 9M 9M 2017 2007-17 9M Raw leather 5.4 4.9 4.6 4.3 4.4 0.5 0.1 6% -2.0% -77% Processed leather 1.0 5.5 19.1 13.9 16.5 13.0 15.0 23% 31.9% 16% Leather garments 19 15 11 14 12 8 6 17% -4.6% -22% Leather accessories* 27 62 35 10 20 7 22 28% -3.0% 198% Footwear 6 12 18 17 18 13 18 25% 12.5% 41% Total 59 99 88 59 71 42 61 100% 1.9% 47% * Saddlery, bags and luggage and leather accessories Source: TUIK and ITC Trademap, IBS analysis, 2018 October In the first nine month of 2018, the export of Turkey to Italy increased 47% compared to the first nine month of 2017. This is mainly due to increasing export of Turkey in bags, luggage and leather accessories segment. 56% of Turkey s export to Italy was under bags, luggage and leather accessories and processed leather segments in 2017 with equal shares of 28% each. The footwear sector was the third largest segment in Turkey s export to Italy with 25% and followed by leather garments with a share of 17%. The export of raw leather was negligible. Chart 12: Turkey s leather sector exports to Italy by segments, 2017, $ Million 28% $ Mn 28% $ Mn 25% $ Mn 17% $ Mn 2% $ Mn Source: TUIK and ITC Trademap, IBS analysis, 2018 October The share of bags, luggage and leather accessories segment is expected to increase 46% in 2018 and will follow by the footwear sector with 24% and processed leather 20% share. IBS 44

1.5 Leather industry distribution system and trade practices As mentioned above, Turkey is dependent to import of hides and skins, around 50-60% of the raw hide and skin demand meet through imports. Mostly tanneries import directly depending on their raw hides and skins demand. Tanneries can do some of their import through inward processing regime and imports raw hides and skins without customs duty for exporting the processed leather produced by these hides and skins. There are also various small and medium size traders of hides and skins such as Alderi, Arter Foreign Trade, Halley Fur, Ozgunesciler, Toktas Deri etc. Figure 3: Leather sector market structure, 2017 In processed leather, Turkish tanneries meet around 80% of the local demand and exports approximately 20% of the finished leather. There are around 850 tanneries in Turkey as of 2017 but only 50% of them are working regularly. Most of the sector companies are located in Organized Industrial Zones specific to leather industry. There are only ten companies having more than 100 employees in the industry. Some of these companies are also active in leather trading (imports and exports) together with independent traders like Aslan Deri, A1 (Alma Group), Isra Group, etc. And as declared to IBS most of the footwear, leather garments and bags and leather goods manufacturers meet their finished leather demand directly from local tanneries and/or their wholesalers and retailers, and they mostly imported directly from foreign manufacturers or traders. Most of the imported processed leather are direct imports of local producers who are producing shoes and bags for their contracted orders by international footwear and ready-wear retailers. In leather processing (tanning) sector, the key strategic tendency of sector companies are as follows: IBS 45

To improve production capacities of the sector companies to meet large size orders especially from international retailers, To increase the production quality of sector companies to meet international health, safety and environmental standards, To improve sector clustering policies, and To develop new marketing strategies both for domestic and export markets. IBS understands that Turkish tanneries will focus more on export markets in the near future due to constriction in the local market. The leading companies like Iskefe, Sepiciler, Sen deri, Uyguner Deri are active in the market through their wholesalers as well as their own branches in key cities. Most of the local leather producers declared IBS that they do not sell imported processed leather but due to limited availability of raw leather through domestic production they import raw leather from different sources. This will change depending on commercial conditions and the quality of the raw leather. 1.6 Competition in leather sector 1.6.1 Key Companies in processed leather As of 2018, there are around 280 companies and 290 enterprises listed by union of Chambers (TOBB) industry database having capacity certificate in leather and fur processing in Turkey. The complete list of the companies by their employee size and provinces as well as NACE Rev.2 production codes were listed in Annex I of the report. Within listed leather processing companies, only 3% of the companies (ten companies) have over 100 employees, 10% having 50-99 employees and 25% has 25-49 employees, rest of them are less than 24 employees. IBS presents the profiles of top three companies with over 100 employees below. Table 22: Leading companies in processed leather and fur, 2018 Company name Nace Rev.2 Location # of employees Iskefe Deri 15.11.32 Bolu, Bursa, Istanbul 350 Sepiciler Çaybaşi Deri 15.11.31 Izmir 320 Şen Deri -Corlu 15.11.41 Tekirdag 205 Uyguner Deri 15.11.32 Istanbul 155 Rodeo Deri Sanayi 15.11.31 Izmir 151 Cevahir Deri 15.11.32 Istanbul 136 Yilbay Deri 15.11.41 Tekirdag 120 Prima Deri 15.11.32 Istanbul 107 Teknofin Deri Suni Deri 15.11.52 Istanbul 102 Deri 2000 15.11.41 Izmir 99 Source: TOBB Industry database, IBS analysis 2018 Iskefe Leather Istanbul (Tuzla), Bursa, Bolu Gerede, and Nigde IBS 46

www.iskefe.com.tr info@iskefe.com.tr T: +90 216 394 02 72 F: +90 216 394 02 70 Bulut Kargın, Import Specialist, bulutkargin@iskefe.com.tr Iskefe Leather is the leading company in leather manufacturing in Turkey and it especially manufactures industrial leathers for the shoe sector. Its product range includes wet blue, crust, finished leather for safety shoes and army boots. Iskefe Leather processes 200 tonnes cattle hide daily with its five plants at Istanbul, Bursa, Gerede and Nigde. Besides own production; it gives contract manufacturing services to the sector through its developed technological infrastructure and machine park for wet processing and drying areas. Apart from the domestic shoe manufacturers Iskefe Leather is also producing leather for the international shoe and handbag manufacturers. Please see Annex V for a more detailed coverage for İskefe Deri. Sepiciler Caybasi Leather Izmir www.sepiciholding.com info@sepiciholding.com T: +90 232 850 50 00 F: +90 232 850 50 92 Metin Bengisu, Foreign Trade Manager, metin.bengisu@sepici.com.tr Established in 1927, one of the oldest tanneries in Turkey. The company is located in Izmir Caybasi. The company is the largest integrated tannery in Turkey. The production capacity of the company is around 1 million square meters per year. Sepiciler has three different facilities in its Caybasi premises to produce chrome leather, sole leather, and vegetable leather. The company is working with leading companies in the world and exports 75% of its production. The company has very modern production infrastructure giving importance to environment and also energy efficient sustainable production methods. Sepiciler Caybasi Leather was awarded two times as the best tannery of the Europe. The company has employed over 300 workers. Please see Annex V for a more detailed coverage for Sepiciler Deri. Sen Leather Tekirdag / Corlu www.senderi.com.tr senderi@senderi.com.tr T: +90 212 639 78 50 F: +90 212 639 78 59 Reyhan Sever, Foreign Trade Manager, reyhan.sever@senderi.com.tr Established in 1991, Sen Leather is an integrated company active in tanning and garment manufacturing in Turkey. The company is known as the largest tanner of Spanish entrefino, Merino lamb skin double-face (shearling) in the World. The company has 600,000 square meter annual production capacity of double-face lambskin. In addition to processed leather, the company has also around 60,000 pieces leather garments IBS 47

production capacity. It has 14,000 m2 closed production area and over 200 employees. The company has an R&D team directed by international designers and a R&D laboratory in Corlu. The company gives high importance in environmentally friendly production and has its own water treatment facilities. 1.6.2 Key Companies in bags, luggage, leather goods and saddlery As of 2018, there are around 205 companies and 212 enterprises listed by Union of Chambers (TOBB) industry database having capacity certificate related with bags, luggage, leather goods and saddlery manufacturing. Table 23: Breakdown of bags, luggage, leather goods and saddlery producers by size, 2018 Company size Number Share Over 100 29 14% 50-99 24 11% 25-49 47 22% 10-24 arası 48 23% less than 10 64 30% Total 212 100% Source: TOBB Industry database, IBS analysis, 2018 Within listed segment companies, around 14% of the companies have over 100 employees, 11% having 50-99 employees and 22% has 25-49 employees, rest of them are less than 24 employees. There are a significant number of textile companies having capacity declarations for the NACE codes related with this segment production. These companies are producing handbags and accessories from textile, artificial leather and leather materials along with textile and ready-wear production. In addition to these companies there are also some automotive components and packing manufacturers producing bags in addition to their main production line. To identify the top segment companies who are their core business are production of bags, handbags, leather goods and saddlery products, IBS excluded the above-mentioned textile, automotive components, packaging and stationery companies from the leading companies list presented below. IBS 48

Leading companies with over 100 employees in the bags, luggage, leather goods and saddlery products segment are as follows: Table 24: Leading companies in bags, luggage, leather goods and saddlery, 2018 Companies Location Employee size* YDS Textile & Leather Ankara 1,200 Desa Istanbul, Bolu (Duzce) 816 Matras Istanbul, Usak 494 Kandemir Leather &Textile Istanbul 180 Uyar Saddlery Istanbul 156 Sen Leather & Ready-wear Istanbul 152 MCS Group (Mekin Saddlery) Istanbul 131 Petek Saddlery Istanbul 128 Tergan Leather Istanbul 125 SF Leather Izmir 121 Hilal Canta Promotion Ordu 105 * related with production facilities. Source: TOBB Industry database, IBS analysis 2018 IBS presented the profile of YDS in footwear section because the core business of the company is footwear production. Desa Istanbul www.desa.com.tr T: +90 212 473 18 00 Meltem Tokel, Purchasing Manager, meltem.tokel@desa.com.tr Completed its vertical integration from tanning and dressing to leather ready-wear retail, Desa is the leading leather sector company in Turkey. Desa has three factories. Tekirdag Corlu tanning and dressing factory, the factory has 2.7-million-year ovine skin, and around 100,000 bovine skin processing capacity. Desa produced leather for its own use as well as international brands like Prada, Pollini, Giorgio Armani ve Chanel etc. Istanbul, Halkali leather garments and leather goods factory, Desa has a production capacity around 100,000 leather garments, over 300,000 leather bags and around 100,000 textile accessories (handbags etc) per year in this premise. Bolu, Duzce - leather garments and leather goods factory, Desa has a production capacity over 700,000 leather bags per year. In 2017, Desa produced around 100,000 leather bags, 120,000 leather accessories (wallets, belts, gloves etc), and around 40,000 units of leather garments. As mentioned above Desa is also a major leather ready-wear and leather goods retailer having 116 stores in Turkey. Desa is also main distributor of Samsonite in Turkey for 27 years. As of 2017, there were around 45 Samsonite stores operated by Desa in Turkey. The retail turnover of Desa was around TL 151 million in 2016 and expected to be around TL 170 million in 2017. IBS 49

Matras Istanbul www.matras.com e-ticaret@matras.com T: +90 212 474 96 98 F: +90 212 630 37 23 Deniz Ergin, Purchasing Manager, deniz@matras.com.tr Established in 1970, Matras is another vertically integrated well-known leather sector company. Matras has its own tannery located in Tuzla, Istanbul, and the company has leather garment, bags, luggage and leather goods production facilities in Istanbul and Usak. Matras has increased its production capacity 30% in 2014 with its new Usak factory. The annual production capacity of the company was around 250,000 units leather bags and garments as of 2018. In addition to its own production, Matras produce leather bags and garments for international brands like Prada, Mui Mui, MullBerry, Burberry. Matras is also active in retailing and have 15 stores in Turkey. Kandemir Leather & Textile (CantaTurk) Istanbul www.cantaturk.com info@cantaturk.com T: +90 212 687 32 35 F: +90 212 687 32 22 Kandemir Leather and Textile was established in 1996 by Ali Kandemir. The company used CantaTurk brand name. Kandemir has a production capacity of 60,000 units per year leather accessories (bags, belts and accessories) and 2.4 million units per year fabric bags. According to the capacity reports, the company has around 180 employees in its production facilities. Kandemir is mainly active in promotion business. The company is working with over 100 promotion agencies and companies. Uyar Saddlery Istanbul www.uyarsaraciye.com info@uyarsaraciye.com T: +90 212 424 01 50 Ceren Boru, Purchasing Executive, satinalma@uyarsaraciye.com Established in 1957, it is one of the largest producers and distributor of bags and luggage in Turkey. The company has a factory in Silivri/Istanbul and produce over 100,000 units of luggage and travel bags in a year and over 250,000 school bags. Uyar Saddlery is also active in woman handbags market and leather accessories, the company produce around 75,000 units of woman handbags and 200,000 units of leather accessories in a year. The luggage brands of the company are Ground, Karts, Jamos and they have production licence for Pierre Cardin luggage. IBS 50

The company is the distributor of Nike, Benetton, Fornarina, Sisley, Camel, Quicksilver, Calvin Klein and Guess bags and luggage brands in Turkey. The company exports minimum 25% of its annual production. Sen Leather Tekirdag / Corlu www.senderi.com.tr sender@senderi.com.tr T: +90 212 639 78 50 F: +90 212 639 78 59 Reyhan Sever, Foreign Trade Manager, reyhan.sever@senderi.com.tr As a vertically integrated company Sen Leather s profile is presented in the tanning and garment manufacturing segment. The company is also active in leather garments as well as leather bags and luggage segments. In addition to its leather garment manufacture, the company has over 100,000 units per year leather bags and accessories production. 1.6.3 Key Companies in leather garments As of 2018, there are around 230 companies and 238 enterprises listed by Union of Chambers (TOBB) industry database having capacity certificate related with leather garments manufacturing. Table 25: Breakdown of bags, luggage, leather goods and saddlery producers by size, 2018 Company size Number Share Over 100 29 12% 50-99 24 10% 25-49 47 20% 10-24 arası 48 20% less than 10 90 38% Total 238 100% Source: TOBB Industry database, 2018 Within listed leather garment manufacturers, 12% have over 100 employees, 10% have 50-99 employees and 20% has 25-49 employees, remaining 58% of the companies have less than 24 employees. As in other segments, there is also significant number of textile companies having capacity declarations for the NACE codes related with leather and fur garments manufacturing. To identify the leading companies in this segment we eliminated the companies whom core business are not manufacturing of leather and fur garments. IBS 51

Leading manufacturing companies in the bags, luggage, leather goods and saddlery products are as follows: Table 26: Leading companies in leather and fur garments, 2018 Companies Location Employee size* YDS Textile & Leather Ankara 1,200 Desa** Istanbul, Bolu (Duzce) 685 Orjin Group & Aydinli Leather Istanbul 400 Agamer Leather Izmir 161 Sen Leather Istanbul 152 Sued Mod Leather Istanbul 149 Doruk Leather Istanbul 102 Lider Leather Izmir 102 * related with production facilities. **employees related with leather garments manufacturing. Source: TOBB Industry database, IBS analysis, 2018 The profile of YDS is presented in footwear section, Desa and Sen Leather is presented in Section 1.6.2. Here we present the remaining companies within leading companies. Orjin Group/Aydinli Leather Istanbul www.orjin.com info@orjin.com T: +90 212 550 40 50 F: +90 212 550 20 50 Yılmaz Özcan, Foreign Trade Manager, yilmaz.ozcan@orjin.com Two companies operate under the Orjin Group: Orjin Leather and Aydinli Leather which specializes in manufacturing ready-made leather & fur articles. Orjin Leather was established in 1980 and Aydinli Leather in 1987. Orjin Group has more than 30 years experience in leather garment business. The company is active vertically in production, exports and retail of leather and leather/fur garments. Orjin Group produce both its own creation as well as carries out contract manufacturing for the well-known international fashion and luxury brands. The group s turnover from leather business was over $100 million as of 2016. The production capacity is around 200,000 pieces of leather garments per year. The company has a logistics centre in Germany. Orjin group is also active in retail, real estate, and tourism businesses. Orjin Group has 50% share in Istanbul s prestigious shopping mall Istinye Park and as well it s the distributor of Hugo Boss in Turkey. Orgin Group has around ten stores named as Elements to sell leather garments and ready wear products. The Group has also stores in USA and EU countries. IBS 52

Agamer Leather Izmir www.agartioglu.com.tr info@agamoda.com.tr T: +90 232 328 19 66 F: +90 232 328 19 65 Bekir Agartıoglu, Purchasing Manager, bekiragartioglu@hotmail.com Established in 2012, Agamer is a successful leather and fur garments producer located in Izmir. The company has also its own tanning and dressing facilities to produce leather for its leather/fur garments manufacturing. The factory located in Izmir Ataturk Organized Industry Zone. The company has around 160 employees related with leather garments production. In its tannery Agamer produced shearling and lamb Nappa. Agamer also uses high quality leathers from Italy, Spain and Far East countries including India. The production capacity of the company was around 180,000 pieces of leather and fur garments per year. Agamer exports majority of its production and main export destinations are Russia, EU countries and USA. Sued Mod Leather Istanbul www.suedmod.com info@www.suedmod.com T: +90 212 410 28 28 F: +90 212 410 28 88 Narin Çakır, Foreign Trade Manager, narincakir@suedmod.com Established by Huseyin Gecgoren in 1965, today the company owned by Mr. Tamer Gecgoren. Sued Mod Leather has its production facilities in Bagcilar Istanbul. The company has 6,000 square meters closed area and an annual capacity of 100,000 pieces of leather and fur garments. The company exported 95% of its production and has limited presence in the local market. Around 45-50% of exports were to EU countries, 30% to Russia, 10% to USA and 10% to Far East countries. The company has around 150 employees related with production with sales, marketing and trading personnel, the total employment of the company reached around 300 people. Sued Mod uses domestic leather as well as high quality leather from Italy, India, New Zeeland, Spain, UK, and other Far East countries. IBS 53

Doruk Leather Istanbul www.dorukderi.com info@dorukderi.com T: +90 212 294 90 00 F: +90 212 294 90 02 Müge Gürün, Foreign Trade Manager, mugegurun@dorukderi.com Established by Sedat Kursun in 1989, Doruk Leather is a leading manufacturer in leather and fur garments. The company has two facilities in Kagithane, Istanbul with a closed area of 10,000 square meters. The annual production capacity of the company is around 100,000 pieces. The company has a department store for tourists in Antalya named as Ottimo Leather Centre having 20,000 m2 closed areas and operates a hotel in the region. Lider Leather Izmir www.liderderi.com.tr T: +90 232 376 81 97 F: +90 232 376 80 73 Ebru Dengiz, Finance Manager, ebrud@liderderi.com Lider Leather, was originally established in 1980 to produce leather garments to Alfa Inc.; a leather trading group. In 1994 Marc Galiko separated company from Alfa and started production independently. In addition to leather garment factory, tannery unit was incorporated into the system in Salihli in 1990. Afterwards the tannery of the company moved to Izmir Free Zone in 1998, Lider Leather started to operate in an integrated plant including both tannery and leather and fur garments manufacturing facility. The company is involved with foreign trade since its foundation and has established good relationships with serious companies in Europe. The company positioned itself as an exporter company and has limited presence in the local market. IBS 54

1.7 Major M&A activities and investments 1.7.1 M&A Excluding the acquisition of Reno retail store chain by FLO, there is not any M&A deal in leather and footwear sector for the last 4-5 years. This acquisition of FLO can be evaluated under retail sector value chain. 1.7.2 Incentives Share of leather industry in the investment incentive certificates has also been negligible. In the first two months of 2018, only three, out of 532, certificates were granted to the companies in the leather industry all of which were domestic companies. In 2017, four foreign-origin companies received incentive certificates totalling at TL 34 million. Number of certificates Table 27: Investment incentives certificates granted to the leather industry, Units and TL million, 2015-2018* 2015 2016 2017 2018 Leather All Leather All Leather All Leather All Domestic 20 4,260 17 4,887 27 7,138 3 508 Foreign 0 234 1 223 4 338 0 24 TOTAL 20 4,494 18 5,110 31 7,476 3 532 Amount of total incentives, Mn TL Leather All Leather All Leather All Leather All Domestic 127 65,085 101 66,891 161 84,658 8 6,333 Foreign 0 34,943 1 31,169 34 93,599 0 1,823 TOTAL 127 100,027 102 98,060 195 178,257 8 8,156 Source: Ministry of Economy, 2018 Industry experts commented that most of the leather industry investments were made in Istanbul, Bursa and Tekirdag, the least advantageous regions covered in the investment support scheme of the Turkish government. Export oriented industry is historically concentrated in western provinces of Turkey as covered in the above sections. Please see Annex VIII for a full and detailed list of investment incentive certificates granted in the last three years. IBS 55

2 Footwear 2.1 Market size in Footwear Turkish footwear industry is the largest segment in the leather sector and both the production and exports growth of the industry were the most prominent ones during last decade. Table 28: Footwear industry market balance in Turkey, 2007-2017, Million pairs CAGR 2007 2012 2015 2016 2017 2007-17 Production* 194 383 428 446 476 9.4% Imports 32 50 43 35 34 0.4% Exports 56 126 180 214 222 14.7% Consumption 160 288 278 255 278 5.7% * Production data is estimated by IBS from TUIK production statistics Source: TUIK foreign trade statistics, TUIK manufacturing industry production statistics and IBS estimates, 2018 The production volume of the footwear industry increased with a CAGR of 9.4% between 2007 and 2017. The most remarkable success of the Turkish footwear industrialist was in export. The export volume of the industry was quadrupled in the last decade, which was 56 million pairs in 2007, reached 222 million pairs in 2017. Thanks to additional taxes applied by Turkey in footwear imports especially from Far East countries since August 2014, the import of footwear decreased almost by 40% between 2014 and 2017. The government applied 30% additional customs duty for artificial leather footwear products and 50% additional customs duty for genuine leather products. (See details Section 5) Chart 13: Footwear industry market balance in Turkey, 2007-2017, Million pairs Mn pairs 600 500 400 476 446 428 383 CAGR: between 2007-2017 300 200 100 0 288278 278 255 214222 194 180 160 126 50 56 32 43 35 34 Production* Imports Exports Consumption 2007 2012 2015 2016 2017 Source: TUIK foreign trade statistics, TUIK manufacturing industry production statistics and IBS estimates, 2018 IBS 56

This protection measures also affected the international retailers like Adidas, Cacharel, H&M, Hummel, Zara, and many global brands that manufactured their footwear products mostly in Far East countries. After the increase of customs duty rates some of these international brands decided to manufacture selected range of their footwear products in Turkey instead of importing. As a result, local production volume started to increase in footwear and most of the domestic companies invested for new production facilities and lines. Between August 2014 to March 2018 Adidas, Beta, Clarks, LC Waikiki, Lacoste, Camper and Zara are some of the companies that have invested in or have investment plans in local production, to decrease negative effects of the additional customs duties. Asa result, one of the leading producers and retailers in the footwear sector, Flo (Ziylan Ayakkabi) established a large size green-field production facility in Sanliurfa and increased its local production rate within overall production from 60% to 80% in 2017. In parallel to the World footwear market trends, most of the production was not genuine leather products; 90% of the production was made of artificial leather, textile, and nonwoven materials. Out of 476 million pairs of footwear production around 10% (approximately 45-50 million pairs) were made from genuine leather materials in 2017). The footwear industry (excluding footwear components and parts to be analysed separately in the following section) production in value terms was around $2.5 billion as of 2017. The CAGR of the industry production in value terms was 6.1% between 2007 and 2017. Table 29: Footwear industry (excluding footwear component & parts) market balance in Turkey, 2007-2017, $ Million CAGR 2007 2012 2015 2016 2017 2007-17 Production* 1,407 2,319 2,313 2,540 2,538 6.1% Imports 540 806 729 668 617 1.3% Exports 283 509 627 663 729 9.9% Consumption 1,664 2,616 2,416 2,545 2,427 3.8% * Production figures are estimated by IBS for 2016 and 2017. Source: TUIK foreign trade statistics, TUIK manufacturing industry production statistics and IBS estimates, 2018 In value terms, the CAGR of the footwear export was 9.9% where the CAGR of import was only 1.3% between 2007 and 2017. Making its peak in 2012, the domestic consumption was almost stable between 2015 and 2017 at around $2.4-2.5 billion. IBS 57

2.2 Footwear industry structure The key elements in the footwear value chain are raw material suppliers, components suppliers, footwear manufacturers, footwear retailers and finally end-users. This section presents the general structure of the sector and in Section 2.4 the footwear retail structure and trade practices in Turkey will be analysed in detail. The footwear sector value chain in Turkey as follows: Figure 4: Footwear sector value-chain, 2018 In terms of raw material and components local production has significant share in footwear production but in some areas the imports have significant stake such as artificial leather, footwear chemicals (polyester and polyurethane systems, EVA, artificial rubber for sole, insole as well as artificial leather production, adhesives etc), machinery etc. In all the above areas where import have high shares, Italy is one of the top four supplier of Turkey. Especially in chemicals the share of Italy is considerable with the presence of Coim, Elachem, Epaflex, Sipol and Technogi. In addition, Italian machinery companies are far away dominant in the Turkish market with various brands. There are around 6,000 companies active in the footwear industry, around 100 of which are large size companies. There are only 20-30 companies having over 250 employees according to TOBB industry database. The majority of the companies in the sector are small and medium size enterprises. Most producers at the higher end of the market are members of the Association of Shoe Manufacturers, but the level of technology and mechanisation in the sector as a whole is low. With the exception of some 100 larger plants and another 300 medium sized plants the production process is very labour intensive. Machinery usage is limited or non-existent, and shoe production is completely labour intensive for the rest. Majority IBS 58