DEFENSE DEFENSE INDUSTRY INDUSTRY

ININ TURKEY TURKEY

The Historical Developments of The Historical Developments of Turkish Defense IndustryTurkish Defense Industry

Defense industry, which had a strong position up until the Defense industry, which had a strong position up until the 17th century17th century, , could not follow the technological could not follow the technological developments of Europedevelopments of Europe in the in the 18th century18th century and totally and totally lost its impact starting from the First World War.lost its impact starting from the First World War.

NNo significant defense industry infrastructure was present o significant defense industry infrastructure was present during the during the first years of the Republicfirst years of the Republic

After the Second World WarAfter the Second World War Period, Period, foreign military foreign military aidaid received upon promotion of bilateral relations with received upon promotion of bilateral relations with the United States and Turkey’s membership of NATOthe United States and Turkey’s membership of NATO cut cut the process of development of Turkish Defense Industry. the process of development of Turkish Defense Industry.

The Historical Developments of The Historical Developments of Turkish Defense IndustryTurkish Defense Industry

IIn then the 1960 1960’s, ’s, Cyprus crisesCyprus crises in 1963 and 1967, in 1963 and 1967, Cyprus Peace OperationCyprus Peace Operation in 1974 and the arms in 1974 and the arms embargo following the Peace Operation embargo following the Peace Operation necessitated the development of a defense necessitated the development of a defense industry based on national resources. industry based on national resources.

After After 19741974 Turkish Armed Forces Turkish Armed Forces FoundationFoundation were established were established

STRUCTURE OF THE STRUCTURE OF THE TURKISH DEFENSE TURKISH DEFENSE

INDUSTRYINDUSTRY

NUMBER & SIZE DISTRIBUTON NUMBER & SIZE DISTRIBUTON OF BUYERS AND SELLERS, OF BUYERS AND SELLERS,

SELLER CONCENTRATION AND SELLER CONCENTRATION AND DOMINANCE OF FIRMSDOMINANCE OF FIRMS

AVIATION AND SPACE INDUSTRY

ProductionSales

(1999) ($) Exports(1999)($) Personnel

TAI F-16,CN-235,SF-260,AS-532 72,558,000 1,000,000 1,996

TEI Aircraft and Helicopter Engines 50,188,000 44,629,000 524

PETLAS Military Aircraft Tires 45,404,000 11,969,000 686

ROCKET AND MISSILE INDUSTRY

ProductionSales

(1999) ($) Exports(1999)($) Personnel

ROKETSAN Multiple-Launch Rocket Systems 40,309,000 12,732,000 193

MKEK Antitank Rockets 460,000,000 6,466,000 8,744

KALEKALIP Multiple-Launch Rocket Systems 15,000,000 576,834 350

ELECTRONIC INDUSTRY

ProductionSales

(1999) ($) Exports(1999)($) Personnel

ASELSANMilitary Equipment,Radar

Systems,Air Defense Systems 196,518,000 23,596,000 2,849

NETAS Communication Units 223,781,000 54,867,000 1,233

HAVELSAN Simulation and Avionic Systems 11,249,000 91,000 562

In these branches three biggest firms have chosen. http://www.msb.gov.tr/Birimler/GnPPD/GnPPDBeyazKBol1Kis1.htm

Table 1- The Comprehensive Illustration of the Firms in Defense Industry

MILITARY AUTOMOTIVE AND ARMORED VEHICLE INDUSTRY

ProductionSales

(1999) ($) Exports (1999)($) Personnel

MERCEDES-BENZ TÜRK

Heavy Duty Vehicles,Tank Carriers,Trailer Vehicles 490,697,000 163,000,000 2,868

BMC Tactical Vehicles, Military Trailers 129,974,880 16000 152

OTOKAR

Wheeled Tactical Vehicles, Development Wheeled Armored Vehicles 117,223,000 3,607,000 502

MILITARY CLOTHING INDUSTRY

ProductionSales

(1999) ($) Exports(1999)($)

POLAR A.S. Military Clothing 13,000,000 12,083,000

ERDAL KUNDURA Military Shoes

Why is the cost of production Why is the cost of production high?high? LLatest high atest high

technology technology are are used used in the process in the process of productionof production

Firms Firms cannot use cannot use mass productionmass production

the sensitiveness of the sensitiveness of products products

lack of demand to lack of demand to purchase large purchase large amounts of final amounts of final goodsgoods

Table 2 - ELECTRONIC INDUSTRY

Firms Sales

ASELSAN 196,518,000

HAVELSAN 11,249,000

MIKES 10,225,000

AYDIN ELEKTR. 17,300,000

TRANSVARO 18,000,000

STFA-SAVRONIK 9,700,000

NETAS 223,781,000

AKSA MAKINE 50,220,000

STM 4,651,160

COSKUNÖZ 22,300,000

HEMA ENDÜSTRI 45,416,000

PARSAN 18,000,923

TOTAL 627,361,083

CR 3 = 470,519,000 / 627,361,083 = 0.749997111

CR 4 = 515,935,000 / 627,361,083 =

0.822389

Herfindahl-Hirshman (HH) Index:

HH = 0.241559233

Evaluations;Evaluations; TThere are large numbers of sellershere are large numbers of sellers

66 main firms that are producing final goods 66 main firms that are producing final goods and also there are other firms which are and also there are other firms which are producing parts and components.producing parts and components.

IIn different fields of the defense industry n different fields of the defense industry there are several large firms behind the there are several large firms behind the small firms. small firms.

“ “TThe sales revenues of the firmshe sales revenues of the firms are high!” are high!”

HOWEVER COST OF PRODUCTION IS HIGH!!HOWEVER COST OF PRODUCTION IS HIGH!!

Rank Company Country

2000 Defense

Revenue*2000 Total Revenue*

Percent of Revenue From

Defense

80

Aselsan Elecktronik Sanayii A.S. Turkey 180 212 84.9

96

Hava Elektronik Sanayii Turkey 42 52 80.8

97

Tusas Aerospace Industries Inc. Turkey 32 47 68.1

*millions in dollar

Worldwide Ranking of Turkish Defense Firms

http://www.defensenews.com/channel.php?C=top100

DOMINANCE OF FIRMS

Entry and Exit ConditionEntry and Exit Conditionss Defense IndustryDefense Industry is never included any free is never included any free

trade agreementstrade agreements..

FForeign companies can produce weapons oreign companies can produce weapons except the critical equipments in Turkey if they except the critical equipments in Turkey if they become partners with any domestic firmsbecome partners with any domestic firms..

if the domestic firms want to enter this sector, if the domestic firms want to enter this sector, they may meet some national barriersthey may meet some national barriers;;

1.) T1.) This sector is his sector is capital intensivecapital intensive industry. industry. 2.) L2.) Labor forceabor force.. EEmployees must be mployees must be well well

educatededucated..

Vertical IntegrationVertical Integration

Large companies of Turkish Defense Large companies of Turkish Defense Industry have realized vertical integrationIndustry have realized vertical integration..

For example; ROKETSAN can produce For example; ROKETSAN can produce some relevant equipment for the final some relevant equipment for the final product.product. But this production is too limited But this production is too limited because of the technological impossibilitybecause of the technological impossibility

Product Product DDifferentiationifferentiation

in in DDefense efense IIndustryndustry

Product differentiation isProduct differentiation is an an important competition method in important competition method in defense industrydefense industry..

But there is not much firm which But there is not much firm which are in competition with each otherare in competition with each other..

Diversification in defense Diversification in defense industryindustry Turkey continues in its role as the “Crossroads of Turkey continues in its role as the “Crossroads of

the World,” a land bridge between Europe and the World,” a land bridge between Europe and Asia, and Turkish firms remain active in Russia, Asia, and Turkish firms remain active in Russia, the Caucasus, Central Asia and the Middle East.the Caucasus, Central Asia and the Middle East. SoSo tthe Turkish market offers strong growth he Turkish market offers strong growth prospects across the board for all the firms from prospects across the board for all the firms from different countries. To meet new opportunities, all different countries. To meet new opportunities, all companies should diversify their product bases to companies should diversify their product bases to include equipment with defense.include equipment with defense.

Aselsan produces wireless for army and at the Aselsan produces wireless for army and at the same time they can produce for the policesame time they can produce for the policess and and for special security firms by diversifying the for special security firms by diversifying the product. product.

CONDUCT OF THE CONDUCT OF THE TURKISH DEFENSE TURKISH DEFENSE

INDUSTRYINDUSTRY

BUSINESS OBJECTIVESBUSINESS OBJECTIVES

Vision of TAI;Vision of TAI;

Continuously improving to be a world Continuously improving to be a world classclass

Having high quality and being Having high quality and being competitive component producercompetitive component producer

Being sales and engineering center for Being sales and engineering center for customers around the worldcustomers around the world

Optimizing and utilizing all assets and Optimizing and utilizing all assets and resources to pursue all the market placeresources to pursue all the market place

PRICE SETTING PRICE SETTING MECHANISMMECHANISM

PRICING POLICYPRICING POLICY!! The quality of the products has

the priority the entrepreneurs may not

achieve their maximum profits because firms have to produce certain goods whose qualities, quantities and designs are determined by Turkish Armed Forces previously.

PRICE ELASTICITY OF DEMANDPRICE ELASTICITY OF DEMAND

There is only one buyer (TAF) and large There is only one buyer (TAF) and large numbers of sellers, which is called numbers of sellers, which is called monopsony marketmonopsony market

TAF always prefers to buy the defense TAF always prefers to buy the defense products in internal market, if current products in internal market, if current technology in the country is available and technology in the country is available and also the costs of production are not so high. also the costs of production are not so high. As a result, the elasticity of demand (EOD) As a result, the elasticity of demand (EOD) becomes approximately inelastic in becomes approximately inelastic in domestic markets.domestic markets.

PRODUCT DESIGN IN DEFENSE PRODUCT DESIGN IN DEFENSE INDUSTRYINDUSTRY

Product design is very Product design is very long process in defense long process in defense industry because the industry because the products are very products are very important, specific and important, specific and expensive expensive

CustomerCustomerss and Producer and Producerss are in contact and are in contact and coordination coordination in all the in all the parts of the production.parts of the production.

RESEARCH & RESEARCH & DEVELOPMENT (R&D) IN DEVELOPMENT (R&D) IN

DEFENSE INDUSTRYDEFENSE INDUSTRY

RESEARCH & RESEARCH & DEVELOPMENT (R&D) IN DEVELOPMENT (R&D) IN

DEFENSE INDUSTRYDEFENSE INDUSTRY

Research and development is the Research and development is the cornerstone of this industry cornerstone of this industry

5-5-10 % of the defense budget is being 10 % of the defense budget is being arranging for R&D in some developed arranging for R&D in some developed countries but in Turkey this amount is countries but in Turkey this amount is only only 11 % of the defense budget. % of the defense budget.

ADVERTISING AND MARKETING ADVERTISING AND MARKETING IN DEFENSE INDUSTRYIN DEFENSE INDUSTRY

Advertisement and marketing is not Advertisement and marketing is not widespread and possible for defense industry widespread and possible for defense industry by the well known methodsby the well known methods because products because products are being produced for governments.are being produced for governments.

But:But: Defense fairs can be organized Defense fairs can be organized Turkey foreign commerce diplomats and Turkey foreign commerce diplomats and

military diplomats can present and introduce military diplomats can present and introduce the Turkish defense industry products to the the Turkish defense industry products to the foreignerforeigner

MergerMerger

AdvantageAdvantage; ; Companies’ competition power will Companies’ competition power will

increase.increase.

Huge mergered companies couldn’t reach in Huge mergered companies couldn’t reach in Turkish Defense Industry.Turkish Defense Industry.

We We mention that Aselsan is a big company mention that Aselsan is a big company but itsbut its annual revenue is only 200-250 annual revenue is only 200-250 million dollars. On the other hand, Lockheed million dollars. On the other hand, Lockheed Martin’s annual revenue is approximately Martin’s annual revenue is approximately 22 billon dollars22 billon dollars..

In april, 2005 In april, 2005 TAITAI and and TUSASTUSAS agreed to merge agreed to merge under a single corporate identity.under a single corporate identity.

PerformancePerformance Of The Of The

Defense Industry Defense Industry

Price-Cost MarginPrice-Cost Margin

WWhen we look at the theory; in hen we look at the theory; in perfectly competitive equilibrium perfectly competitive equilibrium “PCM=0” but if the firm exercises some “PCM=0” but if the firm exercises some market power and can elevate price market power and can elevate price above average cost so PCM is greater above average cost so PCM is greater then zero. We know that defense then zero. We know that defense industry does not industry does not actact as a perfectly as a perfectly competitive market so we can say that competitive market so we can say that PCM is above the zero PCM is above the zero

GROWTH IN DEFENSE GROWTH IN DEFENSE INDUSTRYINDUSTRY

Turkey has a great potential to growth Turkey has a great potential to growth because of the geographic location. All the because of the geographic location. All the neighbors have bigger amount of budget neighbors have bigger amount of budget for defense than Turkey has so this is a for defense than Turkey has so this is a treat for Turkey. To eliminate this treat treat for Turkey. To eliminate this treat Turkey should increase its defense Turkey should increase its defense industry budget so this situation creates a industry budget so this situation creates a growth potential forgrowth potential for Turkey Turkey..

Quality of Products and Quality of Products and ServicesServices

Technical specification requires Technical specification requires AQAPAQAP or or ISOISO certificates certificates..

Majority of our dominant firms have Majority of our dominant firms have these certifications. For example; these certifications. For example; TAI‘s quality certifications are shown TAI‘s quality certifications are shown at the belowat the below;;

ISO 9002 : January 13, 1995ISO 9002 : January 13, 1995 AQAP-120 : February 28, 1998AQAP-120 : February 28, 1998 ISO 9001 ISO 9001 : :May 22, 1998May 22, 1998 AQAP-110 : July 24, 2000 AQAP-110 : July 24, 2000

This is a quality

certificatio

n ofAlp

Aviation.

Different Types Of Quality

certifications

Technological ProgressTechnological Progress

Technological progress may be considered Technological progress may be considered a relevant performance indicator and it a relevant performance indicator and it produces perhaps the most fundamental produces perhaps the most fundamental type of feedback for the basic conditions type of feedback for the basic conditions of demand and supply.of demand and supply.

In Turkish Defense Industry has developed In Turkish Defense Industry has developed about this topic since Americaabout this topic since Americann weapon weapon embargo on Turkey (1974)embargo on Turkey (1974)..

Government Government InterferenceInterference

Competition PolicyCompetition Policy

TThere is free competition for all domestic or here is free competition for all domestic or foreign private corporationsforeign private corporations..

TThe domestic he domestic iindustrndustriesies (i.e. Aselsan, (i.e. Aselsan, Havelsan, FHavelsan, FNNSS…etc) and related SS…etc) and related organizations engage in technological organizations engage in technological cooperation among themselves in a race for cooperation among themselves in a race for service, but without entering into service, but without entering into destructive destructive competitioncompetition and by observing the integrity and by observing the integrity and interests of the state and nation.and interests of the state and nation.

TaxTaxesesSome taxes will be mentioned at the below Some taxes will be mentioned at the below

that are paid by the domestic companies;that are paid by the domestic companies;Decision stampDecision stamp : %0, 45 of agreement value.: %0, 45 of agreement value.Agreement revenue stamp: %0, 75 of Agreement revenue stamp: %0, 75 of

agreement value.agreement value.Advance revenue stamp: %0, 75 advance Advance revenue stamp: %0, 75 advance

payment.payment.Value added tax: %18 of bill value.Value added tax: %18 of bill value.Total direct and indirect taxes are Total direct and indirect taxes are

approximately approximately %30%30 of companies’ net income. of companies’ net income.

IIn December, 2002 Aselsann December, 2002 Aselsan’s ’s income before income before tax was equal to tax was equal to 81,566,907 81,566,907 millionmillion T TLL and it and it paid paid 32,223,560 32,223,560 millionmillion TL TL to the government to the government..

SubsidiesSubsidies

DDirect subsides can not irect subsides can not be reachedbe reached in Turkish in Turkish defense industry.defense industry.

The Undersecretary of The Undersecretary of Defense Industries Defense Industries uses the special uses the special “Defense Industries “Defense Industries Support Fund” for Support Fund” for material and service material and service purchases. purchases.

REGULATIONREGULATION & & DEREGULATIONDEREGULATION IN DEFENSE IN DEFENSE

INDUSTRYINDUSTRY In Turkish Constitution we can find In Turkish Constitution we can find

some regulations about the defense some regulations about the defense industry but these are about arranging industry but these are about arranging the budget of the defense the budget of the defense expenditureexpenditure or functions of the staffs. For example or functions of the staffs. For example 1324, 1325 and 3238 numbered laws 1324, 1325 and 3238 numbered laws are about the defense industry and are about the defense industry and arranging the procurement mechanism arranging the procurement mechanism of defense industry of defense industry

TRADE POLICY IN DEFENSE TRADE POLICY IN DEFENSE INDUSTRYINDUSTRY

Since 2004 Turkey has been trying to Since 2004 Turkey has been trying to establish itsestablish its’’ own defense industry own defense industry by dealing with R&D, creating new by dealing with R&D, creating new trade policy and new procurement trade policy and new procurement strategies. Because Turkey is strategies. Because Turkey is currently highly dependent on currently highly dependent on imports and should establish its own imports and should establish its own defense industry defense industry

MACROECONOMMACROECONOMIIC POLICY OF C POLICY OF GOVERNMENT IN TURKISH GOVERNMENT IN TURKISH

DEFENSE INDUSTRYDEFENSE INDUSTRY

BUDGET PROPORTIONSBUDGET PROPORTIONS&&

THE INCREASING DEFENSE THE INCREASING DEFENSE SPENDING AND GOVERNMENT SPENDING AND GOVERNMENT

GROWTHGROWTH

The most important portion of the resources The most important portion of the resources allocated to defense is constituted by the budget of allocated to defense is constituted by the budget of the Ministry ofthe Ministry of National Defense. National Defense.

THEORY; THEORY; Henry Carter Adams, Francasco Nitti, Henry Carter Adams, Francasco Nitti,

Richard Musgrave, Rostow and Peacock- Richard Musgrave, Rostow and Peacock- WisemanWiseman

TThe growth of he growth of government is a government is a continuous process continuous process because of the because of the increasing defense increasing defense spending.spending.

Our findings are Our findings are proving the proving the theorytheory..The defense The defense expenditures are expenditures are increasing from increasing from 1994 and also 1994 and also simultaneously simultaneously GNP increases tooGNP increases too. .

DEFENSE EXPEDITURE IN TURKEY COMPARING WITH OTHER NATIONS’ RELATED STATISTICS

Defense Expenditure Proportion in GNP Defense Expenditure Per Capita

%

%

(2001)

www.ssm.gov.tr

TURKEY2002

EU EDC DATA2003

Defense Expenditure Per Capita (Billion

Dollar)

130 USA : 1419ENGLAND : 627FRANCH: 583GERMANY 329

Defense Expenditure (Billion Dollar)

9 ENGLAND : 37FRANCH: 35GERMANY: 27

Defense Expenditure Proportion in GNP (%)

5 2-3

USA, France, Russia, China, Germany and Israel are the dominant countries in the world market of the defense industry. Other countries, including Turkey, share the proportion of %10 in the market and Turkey’s proportion is about 2% in the whole defense industry.

Turkish Defense Expenditure Comparing with Other Nations **

**Taner, M. “Dokuzuncu Kalkınma Planı Savunma Sanayii Ozel Ihtisas Komisyonu 1. Taslak Raporu”, Ankara, Kasım 2005 

Strengths & WeaknessesStrengths & Weaknesses

StrengthsStrengths Human Human

ResourcesResources Defense BudgetDefense Budget Scientific Scientific

InfrastructureInfrastructure ExperienceExperiencess

WeaknessesWeaknesses Lack of Lack of

institutional institutional infrastructureinfrastructure

Number of the Number of the Procurement OfficeProcurement Office

Interest to Interest to Imported ProductsImported Products

Brain DrainBrain Drain

OPPORTUNITIES AND OPPORTUNITIES AND THREATSTHREATS

OPPORTUNITIESOPPORTUNITIES TUBITAK R&D TUBITAK R&D

FOUNDSFOUNDS TECHNOLOGICAL TECHNOLOGICAL

INNOVATIONSINNOVATIONS TENDENCY OF TENDENCY OF

ARMAMENT IN THE ARMAMENT IN THE WORLDWORLD

EU ACCESSION EU ACCESSION NEGOTIATIONSNEGOTIATIONS

THREATSTHREATS TECHNOLOGICAL TECHNOLOGICAL

INNOVATIONSINNOVATIONS EU ACCESSION EU ACCESSION

NEGOTIATIONSNEGOTIATIONS THE WORLDWIDE THE WORLDWIDE

COMPETITION IN THE COMPETITION IN THE DEFENSE INDUSTRYDEFENSE INDUSTRY

NEW AND NEW AND DEVELOPING DEVELOPING POWERS IN THE POWERS IN THE WORLDWORLD

Suggestions for the Turkish Suggestions for the Turkish Defense IndustryDefense Industry

We can mention to fulfill theWe can mention to fulfill the requirements for improving and requirements for improving and ensuring the continuity for the ensuring the continuity for the Turkish Defense Industry in two main Turkish Defense Industry in two main categories;categories;

1.) 1.) Political sidePolitical side

2.) 2.) Application sideApplication side

1.) 1.) Political sidePolitical side:: ** If Turkey wants to attain its main target , If Turkey wants to attain its main target , it should consider that SSM as only authority it should consider that SSM as only authority for all decisions. for all decisions.

2.) A2.) Applicationpplication side: side:

** To increase the production capacity of firmsTo increase the production capacity of firms** Domestic companies should be supported for Domestic companies should be supported for improving new projectsimproving new projects** To organize a subsidiary mechanism for our To organize a subsidiary mechanism for our companiescompanies and t and tax rate ought to be decrease.ax rate ought to be decrease.* * To organize a loan mechanism for export aims. To organize a loan mechanism for export aims. ** Defense industry should be propped up by the Offset Defense industry should be propped up by the Offset mechanism.mechanism.** High qualify labor force have to be supported by the High qualify labor force have to be supported by the government. Otherwise, they might go abroad for government. Otherwise, they might go abroad for working. working.