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DEFENSE INDUSTRY IN TURKEY DEFENSE INDUSTRY IN TURKEY

The Historical Developments of Turkish Defense Industry n n n Defense industry, which had The Historical Developments of Turkish Defense Industry n n n Defense industry, which had a strong position up until the 17 th century, could not follow the technological developments of Europe in the 18 th century and totally lost its impact starting from the First World War. No significant defense industry infrastructure was present during the first years of the Republic After the Second World War Period, foreign military aid received upon promotion of bilateral relations with the United States and Turkey’s membership of NATO cut the process of development of Turkish Defense Industry.

The Historical Developments of Turkish Defense Industry n n In the 1960’s, Cyprus crises The Historical Developments of Turkish Defense Industry n n In the 1960’s, Cyprus crises in 1963 and 1967, Cyprus Peace Operation in 1974 and the arms embargo following the Peace Operation necessitated the development of a defense industry based on national resources. After 1974 Turkish Armed Forces Foundation were established

STRUCTURE OF THE TURKISH DEFENSE INDUSTRY NUMBER & SIZE DISTRIBUTON OF BUYERS AND SELLERS, STRUCTURE OF THE TURKISH DEFENSE INDUSTRY NUMBER & SIZE DISTRIBUTON OF BUYERS AND SELLERS, SELLER CONCENTRATION AND DOMINANCE OF FIRMS

Table 1 - The Comprehensive Illustration of the Firms in Defense Industry AVIATION AND Table 1 - The Comprehensive Illustration of the Firms in Defense Industry AVIATION AND SPACE INDUSTRY Production Sales (1999) ($) Exports(1999)($) Personnel TAI F-16, CN-235, SF-260, AS-532 72, 558, 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 Production Sales (1999) ($) Exports(1999)($) Personnel ROKETSAN Multiple-Launch Rocket Systems 40, 309, 000 12, 732, 000 193 MKEK Antitank Rockets 460, 000 6, 466, 000 8, 744 KALEKALIP Multiple-Launch Rocket Systems 15, 000 576, 834 350 Production Sales (1999) ($) Exports(1999)($) Personnel ASELSAN Military 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 ROCKET AND MISSILE INDUSTRY ELECTRONIC INDUSTRY In these branches three biggest firms have chosen. http: //www. msb. gov. tr/Birimler/Gn. PPDBeyaz. KBol 1 Kis 1. htm

MILITARY AUTOMOTIVE AND ARMORED VEHICLE INDUSTRY Production Sales (1999) ($) Exports (1999)($) Personnel MERCEDES-BENZ MILITARY AUTOMOTIVE AND ARMORED VEHICLE INDUSTRY Production Sales (1999) ($) Exports (1999)($) Personnel MERCEDES-BENZ TÜRK Heavy Duty Vehicles, Tank Carriers, Trailer Vehicles 490, 697, 000 163, 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 Production POLAR A. S. Military Clothing ERDAL KUNDURA Military Shoes Sales (1999) ($) 13, 000 Exports(1999)($) 12, 083, 000

Why is the cost of production high? n n Latest high technology are used Why is the cost of production high? n n Latest high technology are used in the process of production Firms cannot use mass production n n the sensitiveness of products lack of demand to purchase large amounts of final goods

Table 2 - ELECTRONIC INDUSTRY Firms Sales ASELSAN 196, 518, 000 HAVELSAN 11, 249, 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 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; There are large numbers of sellers 66 main firms that are producing final Evaluations; There are large numbers of sellers 66 main firms that are producing final goods and also there are other firms which are producing parts and components. n In different fields of the defense industry there are several large firms behind the small firms. “The sales revenues of the firms are high!” HOWEVER COST OF PRODUCTION IS HIGH!! n

DOMINANCE OF FIRMS Worldwide Ranking of Turkish Defense Firms Rank Company Country 2000 Defense DOMINANCE OF FIRMS Worldwide Ranking of Turkish Defense Firms 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 47 68. 1 Tusas Aerospace Industries Inc. Turkey 97 32 http: //www. defensenews. com/channel. php? C=top 100 *millions in dollar

Entry and Exit Conditions ü ü Defense Industry is never included any free trade Entry and Exit Conditions ü ü Defense Industry is never included any free trade agreements. Foreign companies can produce weapons except the critical equipments in Turkey if they become partners with any domestic firms. if the domestic firms want to enter this sector, they may meet some national barriers; 1. ) This sector is capital intensive industry. 2. ) Labor force. Employees must be well educated. ü

Vertical Integration Large companies of Turkish Defense Industry have realized vertical integration. For example; Vertical Integration Large companies of Turkish Defense Industry have realized vertical integration. For example; ROKETSAN can produce some relevant equipment for the final product. But this production is too limited because of the technological impossibility

Product Differentiation in Defense Industry ØProduct differentiation is an important competition method in defense Product Differentiation in Defense Industry ØProduct differentiation is an important competition method in defense industry. ØBut there is not much firm which are in competition with each other.

Diversification in defense industry Ø Ø Turkey continues in its role as the “Crossroads Diversification in defense industry Ø Ø Turkey continues in its role as the “Crossroads of the World, ” a land bridge between Europe and Asia, and Turkish firms remain active in Russia, the Caucasus, Central Asia and the Middle East. So the Turkish market offers strong growth prospects across the board for all the firms from different countries. To meet new opportunities, all companies should diversify their product bases to include equipment with defense. Aselsan produces wireless for army and at the same time they can produce for the polices and for special security firms by diversifying the product.

CONDUCT OF THE TURKISH DEFENSE INDUSTRY BUSINESS OBJECTIVES CONDUCT OF THE TURKISH DEFENSE INDUSTRY BUSINESS OBJECTIVES

Vision of TAI; n n Continuously improving to be a world class Having high Vision of TAI; n n Continuously improving to be a world class Having high quality and being competitive component producer Being sales and engineering center for customers around the world Optimizing and utilizing all assets and resources to pursue all the market place

PRICE SETTING MECHANISM PRICING POLICY !! The quality of the products has the priority PRICE SETTING MECHANISM PRICING 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 DEMAND n n There is only one buyer (TAF) and large PRICE ELASTICITY OF DEMAND n n There is only one buyer (TAF) and large numbers of sellers, which is called monopsony market TAF always prefers to buy the defense products in internal market, if current technology in the country is available and also the costs of production are not so high. As a result, the elasticity of demand (EOD) becomes approximately inelastic in domestic markets.

PRODUCT DESIGN IN DEFENSE INDUSTRY Ø Ø Product design is very long process in PRODUCT DESIGN IN DEFENSE INDUSTRY Ø Ø Product design is very long process in defense industry because the products are very important, specific and expensive Customers and Producers are in contact and coordination in all the parts of the production.

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

RESEARCH & DEVELOPMENT (R&D) IN DEFENSE INDUSTRY Ø Ø Research and development is the RESEARCH & DEVELOPMENT (R&D) IN DEFENSE INDUSTRY Ø Ø Research and development is the cornerstone of this industry 5 -10 % of the defense budget is being arranging for R&D in some developed countries but in Turkey this amount is only 1 % of the defense budget.

ADVERTISING AND MARKETING IN DEFENSE INDUSTRY Advertisement and marketing is not widespread and possible ADVERTISING AND MARKETING IN DEFENSE INDUSTRY Advertisement and marketing is not widespread and possible for defense industry by the well known methods because products are being produced for governments. But: Ø Defense fairs can be organized Ø Turkey foreign commerce diplomats and military diplomats can present and introduce the Turkish defense industry products to the foreigner Ø

 Merger Advantage; Companies’ competition power will increase. è î Huge mergered companies couldn’t Merger Advantage; Companies’ competition power will increase. è î Huge mergered companies couldn’t reach in Turkish Defense Industry. § We mention that Aselsan is a big company but its annual revenue is only 200 -250 million dollars. On the other hand, Lockheed Martin’s annual revenue is approximately 22 billon dollars. In april, 2005 TAI and TUSAS agreed to merge under a single corporate identity.

Performance Of The Defense Industry Performance Of The Defense Industry

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

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

Quality of Products and Services Technical specification requires AQAP or ISO certificates. Majority of Quality of Products and Services Technical specification requires AQAP or ISO certificates. Majority of our dominant firms have these certifications. For example; TAI‘s quality certifications are shown at the below; v ISO 9002 : January 13, 1995 v AQAP-120 : February 28, 1998 v ISO 9001 : May 22, 1998 v AQAP-110 : July 24, 2000

This is a quality certification of Alp Aviation. This is a quality certification of Alp Aviation.

Different Types Of Quality certifications Different Types Of Quality certifications

Technological Progress v v Technological progress may be considered a relevant performance indicator and Technological Progress v v Technological progress may be considered a relevant performance indicator and it produces perhaps the most fundamental type of feedback for the basic conditions of demand supply. In Turkish Defense Industry has developed about this topic since American weapon embargo on Turkey (1974).

Government Interference Government Interference

Competition Policy v v There is free competition for all domestic or foreign private Competition Policy v v There is free competition for all domestic or foreign private corporations. The domestic industries (i. e. Aselsan, Havelsan, FNSS…etc) and related organizations engage in technological cooperation among themselves in a race for service, but without entering into destructive competition and by observing the integrity and interests of the state and nation.

Taxes Some taxes will be mentioned at the below that are paid by the Taxes Some taxes will be mentioned at the below that are paid by the domestic companies; v Decision stamp : %0, 45 of agreement value. v Agreement revenue stamp: %0, 75 of agreement value. v Advance revenue stamp: %0, 75 advance payment. v Value added tax: %18 of bill value. Total direct and indirect taxes are approximately %30 of companies’ net income. In December, 2002 Aselsan’s income before tax was equal to 81, 566, 907 million TL and it paid 32, 223, 560 million TL to the government.

Subsidies @ @ Direct subsides can not be reached in Turkish defense industry. The Subsidies @ @ Direct subsides can not be reached in Turkish defense industry. The Undersecretary of Defense Industries uses the special “Defense Industries Support Fund” for material and service purchases.

REGULATION & DEREGULATION IN DEFENSE INDUSTRY Ø In Turkish Constitution we can find some REGULATION & DEREGULATION IN DEFENSE INDUSTRY Ø In Turkish Constitution we can find some regulations about the defense industry but these are about arranging the budget of the defense expenditure or functions of the staffs. For example 1324, 1325 and 3238 numbered laws are about the defense industry and arranging the procurement mechanism of defense industry

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

MACROECONOMIC POLICY OF GOVERNMENT IN TURKISH DEFENSE INDUSTRY BUDGET PROPORTIONS & THE INCREASING DEFENSE MACROECONOMIC POLICY OF GOVERNMENT IN TURKISH DEFENSE INDUSTRY BUDGET PROPORTIONS & THE INCREASING DEFENSE SPENDING AND GOVERNMENT GROWTH

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

THEORY; Henry Carter Adams, Francasco Nitti, Richard Musgrave, Rostow and Peacock- Wiseman n The THEORY; Henry Carter Adams, Francasco Nitti, Richard Musgrave, Rostow and Peacock- Wiseman n The growth of government is a continuous process because of the increasing defense spending. n Our findings are proving theory. The defense expenditures are increasing from 1994 and also simultaneously GNP increases too.

DEFENSE EXPEDITURE IN TURKEY COMPARING WITH OTHER NATIONS’ RELATED STATISTICS % % (2001) Defense DEFENSE EXPEDITURE IN TURKEY COMPARING WITH OTHER NATIONS’ RELATED STATISTICS % % (2001) Defense Expenditure Proportion in GNP Defense Expenditure Per Capita www. ssm. gov. tr

Turkish Defense Expenditure Comparing with Other Nations ** USA, France, Russia, China, Germany and Turkish Defense Expenditure Comparing with Other Nations ** 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. TURK EY 2002 Defense Expenditure Per Capita (Billion Dollar) Defense Expenditure (Billion Dollar) 0 9 EU EDC DATA 2003 13 USA : 1419 ENGLAND : 627 FRANCH: 583 GERMANY 329 ENGLAND : 37 FRANCH: 35 GERMANY: 27 Defense 5 2 -3 Expenditure Proportion in **Taner, M. “Dokuzuncu Kalkınma Planı Savunma Sanayii Ozel Ihtisas GNP (%) Komisyonu 1. Taslak Raporu”, Ankara, Kasım 2005

Strengths & Weaknesses Strengths v v Human Resources Defense Budget Scientific Infrastructure Experiences Weaknesses Strengths & Weaknesses Strengths v v Human Resources Defense Budget Scientific Infrastructure Experiences Weaknesses v Lack of institutional infrastructure v Number of the Procurement Office v Interest to Imported Products v Brain Drain

OPPORTUNITIES AND THREATS OPPORTUNITIES THREATS v TUBITAK R&D FOUNDS v TECHNOLOGICAL INNOVATIONS v EU OPPORTUNITIES AND THREATS OPPORTUNITIES THREATS v TUBITAK R&D FOUNDS v TECHNOLOGICAL INNOVATIONS v EU ACCESSION NEGOTIATIONS v TENDENCY OF ARMAMENT IN THE v THE WORLDWIDE WORLD COMPETITION IN THE DEFENSE INDUSTRY v EU ACCESSION NEGOTIATIONS v NEW AND DEVELOPING POWERS IN THE WORLD

Suggestions for the Turkish Defense Industry We can mention to fulfill the requirements for Suggestions for the Turkish Defense Industry We can mention to fulfill the requirements for improving and ensuring the continuity for the Turkish Defense Industry in two main categories; 1. ) Political side 2. ) Application side

1. ) Political side: * If Turkey wants to attain its main target , 1. ) Political side: * If Turkey wants to attain its main target , it should consider that SSM as only authority for all decisions. 2. ) Application side: * To increase the production capacity of firms * Domestic companies should be supported for improving new projects * To organize a subsidiary mechanism for our companies and tax rate ought to be decrease. * To organize a loan mechanism for export aims. * Defense industry should be propped up by the Offset mechanism. * High qualify labor force have to be supported by the government. Otherwise, they might go abroad for working.