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Ankara Plans Single Defense Industry Group

Procurement officials aim to soon merge Turkey’s biggest defense companies under a single corporate entity, but industry remains skeptical of the plan. Consolidation may give an upper hand to the military in most procurement decisions and create a state monopoly in contracts.

ANKARA, Turkey --- An ambitious plan by Turkey's government and military authorities for the consolidation of the country's biggest defense companies has unnerved the local industry, with some analysts and procurement officials objecting to the proposal.

Analysts and industry sources said the plan would kill off competition in the defense procurement business and give too much power to the military, which, through a foundation, controls most of the big players in the local market.

“No doubt, the military will win an upper hand in most procurement decisions if the plan goes ahead,” said one senior industry source who represents several Western weapons suppliers.

A London-based Turkey specialist said the plan to merge Turkey's big defense companies would create a state monopoly and undermine the procurement office, the Undersecretariat for the Defense Industry or SSM. “The SSM will come under pressure to award most of its contracts on a sole-source basis – to the new defense giant,” he said. “That will kill off competition and cause a waste of public resources because the monopoly will charge monopolistic [more expensive] prices on each program. Local competition may die off.”

Last month Turkey's defense officials pushed the button for a huge consolidation plan when Turkish Aerospace Industries Inc. (TAI), the country's second largest defense company, and Turkish Aircraft Industries (TUSAS), TAI's parent company, agreed to merge under a single corporate identity. TAI and TUSAS, both based here, formalized the merger plan at their extraordinary general meeting Feb. 18.

In January TUSAS acquired the 42 percent stake that Lockheed Martin Aeronautics held in TAI together with a 7 percent stake that General Electric held in the same company. After the acquisition, TUSAS's shares in TAI rose to 98 percent. The remaining 2 percent of shares in TAI are owned by small Turkish companies.

A TAI official said the merger plan aims to prevent an overlap of activity. “It would not be productive if TAI and TUSAS operated as separate units,” the official said.

TAI assembled F-16 fighter jets at its plant in the 1980s and 1990s. Lockheed Martin Aeronautics, which developed and manufactures the F-16 and other military aircraft, is a division of Lockheed Martin, the world's largest defense company. General Electric is a large U.S. company with a division that builds aircraft engines.

TAI presently manufactures parts for Boeing Co. of Chicago and U.S. helicopter maker Sikorsky. The company also is a participant in the multinational Joint Strike Fighter and Future Large Aircraft programs.

Also in January Alenia Aeronautica SpA officially made a proposal to the SSM for the purchase of TAI's 49 percent shares. The procurement office has yet to decide on this proposal.

Now there are broader objectives to the consolidation plan. The plan aims to create a Turkish Defense Industry Holding Inc., or Turk Savunma Sanayi Holding A.S. in Turkish, a parent entity for the country's top defense companies presently owned by the government and/or the military.

Under the plan, Turk Savunma Sanayi Holding will hold majority stakes in most of Turkey's key weapons/systems manufacturers. These will include TAI; software company Havelsan; military electronics manufacturer Aselsan, the country's largest defense concern; missile manufacturer Roketsan; and ammunition supplier MKEK, all based here.

A senior government official said that Murad Bayar, Turkey's chief procurement official, made a presentation on the consolidation plan at a meeting of the National Security Council (MGK) on Feb. 25.

“Government and military leaders have given their go-ahead for the plan,” the official said. “We are targeting the next few months to formalize the plan. Ideally, by the end of April, the merger will be a reality.”

One procurement official familiar with the consolidation plan said there was already a “silent war” for top management at the proposed parent company. “Several military figures and industry executives are lobbying for top posts,” the procurement official said. “The military leaders insist a retired general/service commander should chair the proposed holding company.”

Industry sources said although the consolidation plan had initially been devised by the SSM, it has significantly deviated from its original purpose.

“The idea was to create a national aviation company bringing together the capabilities of several smaller companies,” said one aviation industry source. “The plan has now turned into a battle for power between military and industry figures. This may be a big strategic mistake on the part of Turkish industry.”

Some analysts said Turkey was moving in the wrong direction with the plan. “This is centralizing, instead of de-centralizing,” said Reha Tartici, director of the Istanbul-based research house Consensus. “Such big plans either bring about big gains or big losses.”

An Ankara-based defense analyst said the consolidation plan would give too much power to the military, which owns majority stakes in the companies to merge, and undermine smaller, privately owned companies.

“The plan took off on good faith, no doubt. But it is now going in the wrong direction,” the analyst said. “It will probably create a military-controlled giant run by bureaucracy and red tape, and a kind of monopolistic market where smaller, privately owned companies will not be able to breathe.”

Turkey's government and military officials first debated reshuffling the local industry at a May 2004 meeting and agreed on a white paper that made a gloomy diagnosis of the market situation at the time.

According to the white paper, Turkey's local industry met only a fraction of national requirements. In 2003 it met a mere 20 percent of the country's procurement needs. That compares with 79 percent in Israel, 48 percent in South Korea and 66 percent in Italy.

Presently, Ankara hopes the consolidation plan will boost the local content/requirement ratio to 50 percent in the next five years.

The defense industry restructuring white paper outlined the necessary strategy as follows: (a) to create a competitive industry; (b) to materialize original (national) design models in programs; (c) to restructure the defense industry so as to make it efficient and productive; and (d) to achieve, by the year 2010, systems integration and software; network, information and satellite systems; electronic warfare and missile, guidance and control capabilities.

Turkish Defense Industry Skeptical of Government Plan