Perspectives

Corporate View: Erhan Karakas, Mercedes-Benz Türk

Published: May 2010

Mercedes-Benz Türk AS produces a wide range of vehicles, including buses and trucks, and imports passenger cars and light commercial vehicles. In 2009, the company realised €1.2 billion in sales. The company employs in the region of 4,000 staff, with a further 2,500 employed in its dealer and customer service network.

Erhan Karakas

Finance Manager

As the Finance/Treasury Manager at Mercedes-Benz Türk, Erhan Karakas is responsible for the company’s liquidity planning, cash management, bank relations and financial risks. He joined Mercedes in mid 1997 and spent three years in domestic sales financing, followed by three years in cash management.

Prior to working at Mercedes, Erhan spent seven years in sales and project financing for medical equipment. He holds a Bachelor of Science degree from the Economics School of Istanbul University.

Please describe the structure of the company’s treasury department/finance function and your role within the organisation.

The company’s finance/treasury department has 14 employees. Our department is responsible for liquidity planning, cash management, managing receivables risks and all bank relations. I head up the treasury department and report to the CFO. The controllership function, accounting, taxes and customs operations are all managed by the CFO as well. We carry out treasury operations mainly as three groups: dealing, cash management and planning/reporting. The dealing desk is in contact with our banks for pricing and quotations. The cash management group is responsible for payments, collections and management of all bank accounts and bank based dealer financing systems.

The planning/reporting group forecasts liquidity up to a 12 month horizon, plans our interest result and manages compliance issues, supplier financial risk assessments and the treasury operations of our affiliated used vehicle company. Of course we are part of a large group based in Germany and here in Turkey we work within the guidelines and principles handed down from our central treasury in Stuttgart.

What are the most challenging aspects of your job today and why?

Most of the time, we have to find or invent solutions to long-term business needs by utilising cash management facilities offered by banks. For instance, last year we looked into financing our dealers, that was the solution that won us a Treasury Today Adam Smith Award, and this year we will be looking into supplier financing. Meeting the needs of our buyers and suppliers is a big challenge for us and we really aim to initiate finance facilities for companies doing business with us, by using the cash management solutions provided by banks.

As such, we are looking to extend our dealer financing solution further, speeding up the invoicing times and shortening the time taken to deliver vehicles. This project is underway now and hopefully will be completed by the end of 2010. Mercedes-Benz Türk has always targeted sustainable and reasonable financing facilities both for our dealers and suppliers, who can concentrate themselves on their core businesses rather than looking for money to finance their operations.

Whilst protecting the financial and compliance interests of the finance area are extremely important, meeting the working capital needs in a production company really has been one of the first priorities and the major challenge. Liquidity management in particular is a challenge, since all the operations and investments have to be made using our own sources and without utilising any credit facility.

Managing costs has been another challenging target for the finance function of late. Managing cash by paying it out has always been against our understanding in a production and marketing company. Managing cash efficiently and effectively is a must – this is particularly true in times when cash is king, and a risk free and sustainable liquidity management strategy is necessary. One of the most significant tools here though is having a detailed and accurate cash flow forecast in place to enable us to have sufficient visibility to make informed decisions.

Have the challenges changed since you started your treasury career?

My treasury career began in 1997 and since then the challenges have developed in parallel with the level of my role, but then so have the technologies available to overcome these. For instance when there was virtually no internet and no electronic banking it was very tough to put excess cash to use quickly enough to gain a decent level of interest on it. Early on in my career interest rates were also a huge challenge as in Turkey they were in the region of 80-100% at one point, so we needed to protect the company from inflation risks. Fortunately, Turkey is no longer an inflationary country and our rates are around 6-8% per annum.

Managing receivables risks, is a continuous challenge in the finance department, and this has certainly developed over the last 13 years. Early on we made efforts to control receivables risks with in-house solutions, but today banks are ready to takeover those risks, while we concentrate on alternative business models and finding solutions to finance our business partners.

How are banks meeting your needs post-crisis?

Over the years we have built up some very strong relationships with the biggest banks in Turkey. By this I am not simply referring to banks which are owned by Turkish shareholders, but also to global banks who have a wide range of branch offices with good local capabilities in Turkey. In the main our domestic business runs solely through banks located in Turkey. We also work with foreign banks. Since we sell our exports to our parent company only, our work with foreign banks is on collection of our exports.

In Turkey, banks used to be able to make 90% of their profits from treasury services due to the exceptionally high interest rates. The business was simply trading government papers. As I said, the rates have come down in the last ten years, and at even faster rate since the financial crisis in 2008 (before the crisis rates were at 16-17%), which led banks to start focusing on new products. I believe that the banks also started to focus their attention on small to medium enterprises and their financial supply chains.

We are one of the biggest companies in Turkey, but we have hundreds of small suppliers and 40 dealers and authorised service providers across Turkey. Not only after crisis, but long before, banks started developing new credit facilities and providing affordable working capital to these smaller companies. For example: during and after the crisis we could continue our dealer financing system for domestic vehicle sales with our partner bank and a similar system was introduced for domestic spare parts sales right after the crisis.

The banks are also innovating to differentiate themselves and here in Turkey we have seen quite a lot of movement in the credit card business. We have looked into these card solutions and plan to introduce Mercedes co-branded cards to our customers to facilitate their purchases in our service stations.

How have the company’s supply chain operations developed since the crisis?

As I mentioned before, we are beginning to look into supplier financing with our banks. Working with a bank on such a solution is much simpler as the banks have really invested in this space and the systems are easy to use, rather than factoring operations. The system is initiated with the delivery of goods and the related invoice, which is uploaded to the bank’s system by the buyer. From that point on, the supplier is able to collect his invoice by discounting it in the bank’s system at any time.

We are seeing more and more treasury centres being based in Turkey. What are the benefits of being based here?

While each country has faced its own particular difficulties throughout the crisis, I strongly believe that, especially during crisis and post-crisis period, Turkey’s banking system was given a chance to prove itself. There were no defaults of Turkish banks, when there were problems with banks in EU countries (that were previously considered much ‘stronger’ than Turkey) and in the US. The country is also well placed for conducting international business – particularly with the Middle East.

Of course there are things that may be considered downsides, such as the fact that the Turkish lira is not convertible, but then again we do not expect it to become the next big global currency. In Turkey, however, there is free circulation of foreign currency, such as the dollar and euro. This can be useful in terms of trade as these currencies tend to be accepted nationally as a form of payment, in fact we sell many of our vehicles in euro. In terms of treasury, some of the regulations are not as clear as in other countries, particularly where cash pooling is concerned since a sub bank account system is not allowed.

How has the company dealt with the financial crisis? Were there any major challenges?

In October 2008 our sales dropped dramatically and consequently our stock started to increase. The major challenge was to adjust the capacity in our truck factory, which we achieved in only two months. On a company basis, every unit performed a disciplined cost management exercise, regardless of their size and impact. In the treasury department our challenge was working capital management, which we tackled with effective and dynamic daily liquidity control.

We focused on our key strengths and core competencies in the market and for our customers. At the beginning of 2009 Mercedes-Benz was carrying a record level of stock. However, we turned this situation to an advantage starting from the second quarter by breaking another record in increasing our market shares in many vehicle segments. Continuation of our dealer stock financing system with our partner bank, Garanti Bankasi, was another double sided challenge during crisis – for us and for the bank – but we managed to keep the programme going.

What treasury projects or achievements are you most proud of?

Of course I have to start with the dealer stock financing system that brought us a Treasury Today Adam Smith Award for Working Capital Management/Financial Supply Chain. Aside from that, in 2009 we launched an electronic petty cash system that has brought comfort to all employees and minimised the cash volume in our teller desk. Starting from 2004 our continuous developments in electronic banking systems have also made us proud. Since then, we have been working with electronic bank statements which have simplified our cash management operations.

Moreover in 2007 we needed an electronic approval system (electronic signature) for our domestic and foreign payments, that should comply with our treasury guidelines and compliance rules. Our banks developed the system successfully and we have been using it effectively since then. I believe that Mercedes-Benz Türk has been the initiator of many new projects developed by banks.

What are the company’s treasury priorities for the next 12 months?

We definitely have a significant challenge in front of us to improve our dealer stock financing system with faster invoicing. The new set-up will enable to us deliver the vehicles to our dealers faster. Overall, the response time of the Mercedes brand to the end customer should shorten, which will mean greater customer satisfaction. Other benefits that we will expect to see are automated processes able to respond to different business cases without changing accounts receivable risk that is zero in the current situation.

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