IAI seeks 'comeback' in Turkish market

Once a big player in Turkey's lucrative defense market, Israel Aerospace Industries (IAI, formerly Israel Aviation Industries) has had to go through difficult times both at home and in Turkey, now, under new management for over a year, the company is hoping to make a spectacular comeback to the Turkish market, aiming at two critical military programs.

�We want to benefit from Turkey's defense industry infrastructure,� Yair Ramati, IAI's corporate vice president for marketing told the Turkish Daily News here. �Technology transfer [to Turkey] is essential. We wish to create a win-win situation. Our strategy is to try to work with the local industry as much as possible.�

Unlike Turkish, U.S. or European defense industries, IAI is an export-dependent business and exports 85 percent of its production. Turkey's domestic defense industry meets only about 15 percent of Turkey's weapons systems requirements. IAI's sales in the first nine months of 2006 totaled $2 billion, up 14 percent from $1.75 billion in the same period of 2005. IAI's backlog of orders in January-September 2006 reached $6.9 billion.

Major IAI business in Turkey's defense market includes attack drones, low-altitude targeting pods, electronic support measures as part of Boeing's AWACS program and the upgrade of F-4 fighter aircraft,. Industry sources estimate IAI business in Turkey in the range of $1.5 billion to $2 billion over the past decade.

IAI's space division, MBT, is preparing to compete for a long-delayed Turkish contract for the construction and launching of Turkey's first military satellite, Gokturk. The program is estimated at over $200 million including insurance and launching.

�Our proposal will be most appropriate [for Turkey] because Israel and Turkey have similar requirements in space programs,� Jacop Hardy, director of international marketing at IAI's missile systems, space and IT division. �The nature and conduct of our [space] activities are similar. Europeans spend billions of dollars on space programs. Turkey and Israel must be much more modest in the way they spend money. Our scope of activity is not in billions [of dollars], but in small fractions of money but good quality.�

MBT has successfully launched nine satellites since 1988, when it started space programs with the OFEQ family of satellites. Six of them are still in orbit. Ironically, Israel is the only country in the world that launches satellites �westward� in order not to �trigger tensions with its eastward neighbors,� according to MBT officials. An advanced version of the OFEQ satellite will be offered for the Turkish program, a high-resolution, lightweight satellite with high levels of agility. �Turkey will move to more advanced synthetic aperture system after a first experience with electro-optical satellite technology,� said Hardy.

Both commercial and military buyers are catered to by MBT. It will most likely compete with European, former Soviet bloc and far-eastern rivals for the Turkish satellite programs. Two U.S. bidders, Lockheed Martin and Ball Aerospace, have indicated that they would not bid.

The missile division of MBT produces smart bombs, laser-guided bombs, command and control systems, missile seekers, anti-missile missile systems, naval command and weapon control systems, and the unique Harpy -- the land-launched, vertical attack anti-radar system.

IAI's missile division will also bid for a Turkish program for the procurement of air defense systems, or theater missile defense systems. IAI's Arrow system, originally developed on U.S. technology, will compete with Lockheed Martin's PAC3 and Russian-made S-300 systems. Industry sources estimate the contract value at around $1 billion.

IAI has received one good and one bad piece of news from Turkey this year. IAI's Malat division, maker of unmanned aerial vehicles (UAVs), the biggest in the world after the United States, won a Turkish contract and is now working with the program's prime local contractor, Aselsan. Malat, a division with an annual turnover of $300 million, won the Turkish contract against U.S. General Atomics, offering a medium-altitude, long-endurance (MALE) solution: a Heron-type UAV.

Aselsan is tasked with developing the critical payload system for the proposed UAV. A prototype payload has been sent to the Malat division but has been found to be a bit �too big� in size. �We respect Turkey's intention for independence,� said David Schwartz, deputy general manager of Malat. �If Turkey is to go deeper into UAV technology, it will have to spend a lot of effort to minimize the size of the payload.�

The program is now at a critical design stage. There may be minor delays in deliveries of around 2-3 months, according to Schwartz, but deliveries will begin in the last quarter of 2007.

At the beginning of 2006 IAI thought it had another Turkish contract in its portfolio, an approximately $500 million deal for the upgrade of a batch of 48 Turkish F-4 fighter jets, a follow-on order after an initial batch of 54 aircraft. But Turkish military and procurement authorities decided at the last minute that it would be wiser to spend the money for new fighters instead of upgrading a fleet that was already approaching its expiry date. The deal has been minimized to just a few million dollars worth of mostly local work, and to reinforce its fighter fleet Ankara has signed up to buy 30 new F-16 aircraft. The F-16 deal will cost Turkey $2.9 billion �if all options are exercised,� but it will probably stand at around $1.5-1.7 billion because �all options will not be exercised.�

IAI has been trying to recover from an internal shock. In September 2005, detectives from the Israel Police National Fraud Investigation Unit raided the IAI's headquarters, confiscating files and other documents relevant to a then ongoing probe into suspected kickbacks between corporate managers and IAI's agents overseas.

Two agents were interrogated about their involvement in several big-ticket arms deals, including the purchase of Russian-made Ilyushin aircraft for the IAI-designed Phalcon aerial early warning system (also known as the Phalcon spy plane) that was supposed to be sold to China but instead shipped to India. The agents were Aharon Frankel and Adiv Avraham (who did not have any known Turkish portfolio).

Frankel and Avraham were accused of having drained IAI's coffers in overpriced commissions which they allegedly shared with top IAI management. At stake were tens of millions of dollars, involving not only the Phalcon deal but also many others in Romania, Azerbaijan and Kazakhstan. At the center of suspicion was IAI's legendary General Manager Moshe Keret, who ran the company for the 20 years leading up to the investigation.

Today, one IAI official says, �You can see Mr. Keret jogging along the beautiful beach in Tel Aviv.� The investigation? No one knows where it will end.

TEL AVIV - Turkish Daily News, LINK