Turkey's ill-defined policies prevented it from setting up a sound defense industry base unlike what Israel, Spain or South Korea have done though all these countries spend an almost similar amount of resources for arms procurement at around $3 to $4 billion per year.As stated by the Turkish Undersecretariat for the Defense Industry (SSM) in 2005, Turkey ranks as the fourth-biggest country in defense imports while standing at 28th in defense industry products exports. That statistic alone is a sign of the current outlook of Turkey in the defense industry sector which continues to be a burden on the economy rather than contribute to the recovery of the country's still-fragile economy.
But policies since 2004, when Turkey announced it would minimize production under license to be replaced with a capacity to produce high technology through indigenous design and manufacture, have started to yield some results. Local ASELSAN, for example, in 2005 signed a 23 million euro deal for the sale of 18 Stinger weapon platforms (pedestal mounted air defense system, PMADS) to the Dutch Royal Army, marking the first time that ASELSAN had sold an advanced weapon system to a Western country. The system ensures important benefits for the protection of strategic facilities like dams, military bases and ports.
Turkish defense industry companies number around 70, including around 15 military-owned companies. To survive they have so far relied on offset commitments that foreign contractors have made.
During a day-long conference organized by the SSM in Ankara on new offset policies, HAVELSAN Contracts Manager Mustafa Egeli said that offsets as a facilitator introduced indigenous defense industry to exports and the new challenge should be making exports without necessarily relying purely on offsets. He, however, also clarified that offset policies would continue to be a catalyst in boosting Turkish defense industry exports and in developing a sound defense industry base.
"The SSM's mission under the industrial participation and offset directive 2007 is clear -- continued promotion and enhancement of the Turkish defense industry through quality, win-win offset programs. Prospective contractors will be required to guarantee work share, technology transfer and/or strategic partnership with eligible Turkish companies under future defense programs as part of their offset commitments," Egeli said during the conference.
Egeli also said that the importance of offsets as a key opening the doors to high technology, know-how and exports could not be ignored.Offsets are effective means in launching investments in the defense industry and in other industry branches that requires high technology while developing a technological infrastructure that contributes to an increase in local employment.
Turkey has been applying offset policies since 1984 as a means to create a local defense industry base that does not rely on sources abroad for every product. They also help to reduce the balance of payments that occur as a result of foreign currency-based defense deals.
But Turkey’s current reliance on foreign sources, around 80 percent, for main systems exports indicates its failure in creating a sound defense industry base.
New offset policies unveiled
On the sidelines of the 8th International Defense Industry fair (IDEF’07) held in Ankara last week, the SSM organized a conference titled “Offsets in Turkish Defense Procurements” during which Turkish participants, including Undersecretary for the Defense Industry Murat Bayar, outlined the new offset directive adopted on Feb. 14, 2007.
Under the offset policies, mainly foreign companies should make an offset pledge of around 50 percent of the supply contract value. The offsets, thus, should bring back work that will boost the local industry as well as exports equal to around 50 percent of the contract value.
As stated by Bayar, the category for indirect offset obligations was removed from the new offset directive. Thus foreign companies signing a defense contract with Turkey will not be able to make offset pledges of non-defense industry products in return for their offset pledges of around 50 percent of supply contract value.
The SSM has encouraged Turkish defense industry companies to market their defense industry products in world markets through the concentration of offset commitments on local defense industries by excluding the exports of civilian products and services from the new offset directive, Bayar said.
Those foreign contractors should now be offering local content, defense and aerospace exports as well as technological cooperation, investment, research and development (R&D) in defense and aerospace, and high technology in return for contracts that they will sign with the SSM, which has been overseeing around 110 defense industry projects.
Defense Minister Vecdi Gönül, taking the floor during the offset conference, stated that Turkey’s offset practices had not only offered additional business opportunities to Turkish defense companies but also were being used as an important instrument for the establishment of new investments in the defense industry field.
Gönül cited the $12 million investment to be made by Dutch Fokker Elmo in İzmir on aerospace and defense platforms as well as on electrical systems as an important example of offset policies. Almost all the production at the İzmir plant will be export-oriented, he added.
“We see the offset policies as a means for the establishment of long-term cooperation between Turkish and foreign defense industry companies. This partnership should also continue following the completion of the offset commitments,” Gönül said.
$3 billion worth of offset commitments
The SSM’s Bayar said since the establishment of the SSM 22 years ago in 1985, a total of $6.1 billion of offset pledges had been made. A $3.3 billion portion of this amount has so far been completed while the remaining $2.8 billion waits to be fulfilled.
Almost 70 percent of exports realized by the leading Turkish defense industry firms are realized through offsets, Bayar recalled. He also recalled that the new offset guidelines for 2007 had been published in an attempt to increase exports of defense products and services as well as the share of local content in defense products by over 50 percent, Bayar stated. Turkish defense industries’ share in defense products stays at around 25 percent as it has been relying on around 80 percent foreign content for main systems exports.
Take the army tactical missile system (ATACMS) project for example, said Bayar, in which US Lockheed Martin, the missile maker, exported certain missile pieces produced by local Kalekalıp which made a cost-effective offer. As a result the US company has continued placing orders with the same local company, though its offset pledge was realized.
“Offset conditions by all the leading countries in the world is an indispensable practice for our country, which has been forging big efforts to develop its defense industry. We have been trying to turn offset practices into an instrument of cost-effective cooperation between local and foreign firms,” Bayar said.
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Companies with offset obligation
GERMANY: Abeking & Rasmussen, EADS-LFK, LÜRSSEN, RENK AG, MTU, EADS-DS
ITALY: AGUSTA S.p.A., Alenia Aeronautica, Oerlikon Contraves S.p.A.
UK: EADS-ASTRIUM, Thales Underwater Systems.
SPAIN: EADS - CASA
USA: Boeing, Raytheon Company, Sikorsky, General Electric, Lockheed Martin.
ISRAEL: Elta Electronics Ind. Ltd., ELBIT Systems Ltd. /Israel, Israel Aircraft Ind. Ltd. (IAI), Israel ilitary Industries (IMI), IUP.
FRANCE: EADS-Eurocopter, Thales Airborne Systems.
HOLLAND: Thales Nederland
Successful offset applications
SIKORSKY-MILSOFT: Software development for Sea-Hawk S-92 and S-76 helicopters and related export.
SIKORSKY-ALP AVIATION: Investment and export of helicopters’ parts (drive shaft assembly, critical flight safety parts).
AGUSTA-TAI: Investment and export of AB139 fuselages.
RAYTHEON-BARIŞ ELEKTRONİK: Export of high-pressure gas coolant tubes.
LOCKHEED MARTIN-KALEKALIP: Preferred supplier for launcher parts.
FNSS SAV. SİS. A.Ş.: Export of armored combat vehicles to UAE and Malaysia.
BOEING-KALEKALIP: Manufacturing of various fuselage and wing parts for Boeing B-737-747-767-777 aircrafts.
GIAT-MKEK: Investments of eight workbenches to modernize the production line for 20 mm. cartridges.
GE-TEI: Assembly and test of T-700 and F110 motors, manufacturing related motor parts.
SIKORSKY-TAI: Export of empennage parts for UH-60M, MH-60R and MH-60S helicopters (approx 900).
Current offset status
63 offset agreements signed (1985-2007)
20 out of 60 offset programs have been successfully completed.
43 offset programs are still effective.
Total offset commitments: $6.1 billion
Total offset fulfilled: $3.3 billion
Source: SSM
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