TASAM Strategy Report: The Future of the Turkish Defense Industry

Issue 65 - February 2016

The Strategic Report for Sustainable and Strong Export - 1 titled “The Future of Turkish Defense Industry” prepared by the National Defense and Security Institute was announced to the public at a workshop in which Former Minister of National Defense Mr. Vecdi Gönül,  Former Minister of Foreign Affairs Mr. Yaşar Yakış, Undersecretariat for Defense Industries Prof. İsmail Demir, TASAM President Mr. Süleyman Şensoy, representatives of Security and Defense Industry, foreign diplomatic mission representatives and media members participated. 

TASAM President Mr. Süleyman Şensoy made the workshop’s opening remarks. Mr. Şensoy mentioned that they focused more on their studies and activities regarding the Security and Defense Industry within the scope of “Turkey’s Strategic Vision 2023” since 2006 and informed the audience on the current status they reached since then. Mr. Şensoy said, “The activities regarding the sector we initiated in 2006 have institutionalized and formed the basis for new studies and new foundations. The Strategic Report titled ‘The Future of Turkish Defense Industry’ that we will discuss here today is one of them. The “Istanbul Security Conference” that will be taking place on 03-05 December 2015 in Istanbul will be a first in Turkey. The National Defense and Security Institute passed a certain stage considering the institutionalization process. We believe that this institutionalization will be falling into its place as a ‘learning process’ in the upcoming period”.

 Mr. Şensoy underlined that the Defense Industry was amongst the leading sectors of Turkey and added, “Turkey has made an important headway in the last era. Turkey is currently capable of covering sixty percent of its requirements through local resources. Then again, regarding the remaining forty percent, there are still more complicated areas containing high technology that we are dependent on from foreign countries. We need to cover more distance from what we have achieved so far. There is a crucial point that needs to be stressed here. In my opinion a scale change is required in our sector. A reform whether in the form of a “sector reform”, “security reform” or a “defense reform” is essential. Without doubt, the management method for this reform is also quite important. I believe that building a process that operates from the bottom to the top within the structure to be formed here would be healthier”. 

Mr. Şensoy stated that this sector reform was of vital essence for the sector receiving the 1.2 % of the gross national product within the scope of the current budget appropriations and continued, “In my opinion, a country struggling to become a regional and balancing power in its region needs to develop a greater scale in this area. In the current period, security needs have to be put in the center of all aspects of our lives. For instance the NATO updated its new security concept as a ‘strategic communication’. Surely, the members of the Armed Forces are closely following these developments. I think we need a modular hard power concept allowing integration, containing rapid and high technology and that is compatible with the soft power rather than mere hard power”.

In his remark during the opening ceremony, Undersecretariat for Defense Industries Prof. İsmail Demir initially expressed that the countries should avoid foreign dependency especially considering the critical technologies during fulfillment of their defense and security requirements and continued, “For reaching a more dynamic, productive and competitive sector, firstly we need to increase the efficiency and extend the capabilities. In the light of this principle, as the Undersecretariat for Defense Industries, we initiated the incentive mechanism. We provide soft loans to the domestic companies assigned as sub-contractors at the Defense Industry projects, for the investment finance for the machinery and equipment they require within the scope of the project throughout the duration of the project through the Defense Industry Support Fund. Meanwhile, our Undersecretariat is assuming important roles in the defense industry cluster activities as well. In addition to our activities in Istanbul Technopark, the Kazan Specialized Organized Industry Region that we established can be put forth as one of such activities”. Prof. Demir stated that they were conducting all the aforementioned activities for reaching a more effective and competitive industry capable of producing solutions for all the requirements of the Turkish Armed Forces and added that in order to reach the identified goals, the overall industry policy, world conjuncture, education system, human resources structure and human resources training projects need to be considered as a whole.

Ret. Brigadier General Dr. Oktay Bingöl: “Turkey have to reveal New Doctrines”

In the panel related with the report that consisted of five chapters, namely, “Identifying the Proper Strategy for the Future to be shaped in Increasing the Export Potential and Sustainability of the Turkish Defense Industry”, “Points Identified during the Studies Conducted Regarding the Status of the Turkish Defense Industry and the Report Preparation Process”, “General Outlook on the Plans and Strategies of the Defense and Security Industry Sector of the Western Countries” and “Suggested Measures”; one of the creators of the Report, Ret. Brigadier General Dr. Oktay Bingöl informed the participants on the report’s overall framework and the adopted methodology. 

Dr. Bingöl mentioned that many reports covering all areas have been prepared in the sector so far and said, “We examined approximately 200 publications, accessed international databases and gathered documents. In all the reports published until today, almost everything regarding the sustainability and future of the sector has been said. So, we tried to establish a different point of view in our study and attempted to identify the grey areas through a critical reading. We accomplished top-down, horizontal negotiations with the Turkish General Staff, Ministry of National Defense, Undersecretariat for Defense Industries, Defense Industry companies, SMEs and Sub-Industry companies and most of these efforts were reflected to our report”.

Mentioning that they included several new concepts in the report Dr. Bingöl continued, “We seem to require defense and security industry conceptualizations. We need to make more comprehensive and in-depth assessments in theoretical and academic levels that would cover all sectors and the relevant sector. This fact has been examined in the report. Moreover, we underlined the model to which we refer as the eco-system and developed a ‘military’ecole model as well. Unless there is a doctrinal dependency between the producing countries and the purchasing countries, it is not easy to market a product merely on the basis of technological competence. The doctrines determine the way a product is sold, too. As Turkey, we are unable to develop doctrines regarding this issue. We have the products, yet we lack any global or regional doctrines in military and defense aspects. Especially our major companies should form doctrines in parallel with their product development activities. The relation between the concept and the doctrine should be well established for achieving the technological alignment and association”. Dr. Bingöl mentioned that they attached special importance to the security industry diplomacy concept in the report and added, “All the actors taking part in the defense industry have certain demands. We identified a communication gap between the actors here. The communication and trust issues have to be established again in a further strengthened manner. All actors are going through many problems during many stages such as the supply and procurement processes, bureaucratic processes and information sharing”. Dr. Bingöl also stressed the unique structure of the defense industry regarding the transparency and confidentiality aspects and emphasized the importance of establishing a balance in these issues for the companies. Dr. Bingöl said, “All our companies need transparency from top to bottom. Being informed about the steps to be taken by the governmental institutions and authorities are of vital importance for the investments. Therefore, we believe that this balance should immediately be established and required mechanisms should be launched”. 

Dr. Bingöl mentioned in summary that considering the overall report, their joint assessment as the science and consultancy board was that the Turkish Defense Industry has already reached a saturation point with the help of the major moves and added, “If the saturation point is reached before achieving the identified goals then a strategic problem must arise. Certain severe limitations may arise during progress towards the future with proper steps, and for the protection of a sustainable industry and acquired capabilities and for gaining new capacities”. 

Dr. Ali Bilgin Varlık, one of the authors of the report with Ret. Brigadier General Dr. Oktay Bingöl, stated that the aim of the report was to pave the way for designing and planning the human resources, structures and strategies for increasing the sustainability and export potential of the Turkish Defense Industry for the future and to identify the measures to be adopted to this end and said, “This report consists of five main chapters. In the first four chapters, we tried to put forth the factors identifying the issues and in the last one we suggested the measures to be adopted to overcome the assessed issues”. 

Defense Expenditures Declined by 9.5 % between 2009-2013 in European and American Continents 

Dr. Varlık underlined that the worldwide defense expenses reached to the level of $ 1.7 trillion as of 2013 and continued, “Compared with the figures of the last era, we come across a change rate of 25.2 %. During this ten-year-period, there was 17 % increase in defense expenses in every five-year long period. Evaluating the last three-year-period we see a decrease of 2%. Except for the People’s Republic of China, where the defense industry budget of 2013 was around $ 625-656 billion, the sales turnover of the top 100 companies operating in defense industry was $ 455 billion and this amount equals to 70 percent of the global turnover. Taking a look at the period between 2009 – 2013, the resources allocated to defense in the African continent back then reached to $ 10.9 billion with a 34 percent increase, whereas in the American continent it recessed to $ 76 billion, a decrease of 9.5%. The decrease in the defense expenses of the European and American continents has been without doubt one of the most notable developments. Considering the data of 2013, the greatest suppliers are the countries suffering from security issues and the developing countries. Saudi Arabia, India and United Arab Emirates remain on top of the list while America, Russia and France are the greatest weapon manufacturers and suppliers”.  

Dr. Varlık added that the technological superiority and their role as a ecole model country are the factors thar are allowing these countries to become the greatest suppliers and said, “As they create doctrinal dependency, these countries are able to create the imperfect competition conditions in the market. This strategy is formed around the ‘win and win little principle’. What we refer here is that the information transfer in the relations between the strong and weak countries could not be fully realized most of the time, therefore we cannot speak of a full competency transfer. On the other hand, the rising economies are obliged to accept less profit. The major consortiums control the market through both legal and illegal methods. Due to the huge investment expenses, the rising economies (the developing countries) do not have the capability of competing neither in quality nor in prices with the major consortiums. The developing countries will have to either accept less than what they have expected or have to skip the technology where there are only a few best practices”. 

In his presentation, Dr. Varlık underlined that as a result of the global economic crisis and the U.S. Budget Control Act accepted during Obama’s Presidency, approximately $ 600-700 billion will be cut from the U.S. Budget by 2020 and added that with the limitations in defense expenses set by the UK and Western European countries, a severe market shrinkage and fierce competition conditions would be arising. Dr. Varlık expressed that Turkey would also be affected from this fluctuation and continued, “Surely, these conditions will cause certain threats and risks. Then again, we believe some opportunities will be emerging in this period as well”. Dr. Varlık stated that all products with demand have a place in the market and determined important points regarding the supply and demand market. “We observe that the supply and demand market is formed in a structure with two qualities. In the normal operations, the demand based structure is affected by a tough competition in the global market despite the profits gained in the investment expenses and the first sale. Meanwhile, we see that the supply based structure which utilizes high technology becomes more successful in the global market” said Dr. Varlık. 

Dr. Varlık stated that within a fifteen-year-period since the 2000s, the Turkish Defense Industry has reached the capacity to operate in the international arena and added that despite these positive developments, the resources allocated to the defense budget from gross national product started decreasing since 2010. Dr. Varlık mentioned that the defense industry turnover of 2006-2012 increased two and a half times and reached to $ 4.75 billion in 2013. He also underlined that in 2008-2013 a distinct increase of 56 percent was observed in the export performance and added that especially taking the supply method of the projects into consideration, increase in the joint production and indigenous production models were noted in certain groups.  

Turkey allocated $ 17 Billion to defense in 2004-2013 

In the report, it was stated that a total of $ 17 billion was allocated to Turkey’s defense expenses according to 2004-2013 data. It was mentioned that 58 percent of this budget was allocated to staff expenditure while the remaining 42 percent was assigned to current expenditure and half of this current expenditure was allocated to MRO activities. According to the report, in the ten-year-period, Turkey allocated merely 19 percent of this $ 17 billion  budget to armament. The report underlined that the Turkish Defense Industry was still not at the desired level in indigenous and domestic design aspects and touched upon the importance of decreasing foreign dependency especially in raw materials and high cost energy inputs. 

Important points were stated within the conclusion of the report. The great number of company profiles that the Turkish Defense Industry had and therefore it also had many weak actors that cannot cope with the international competition circumstances were underlined in the report in addition to the fact that many companies relied on their strategy to fulfil Turkish Armed Forces needs in order to maintain their sustainability and that this caused many problems. 

The lack of interest in other sectors considering the civil products in particular both in domestic and foreign markets, the failure in diversifying the market and product options were among other titles existing in the aforementioned report. The most striking point identified in the conclusion of the report was that the contracts of most of the comprehensive projects were completed and that the sector will go into a major recession in the domestic market opportunities. The report suggested that Turkey would escape from this recession merely by putting forth high technology and high quality products. Additionally, the strategic approaches developed by Turkey in the current status were mentioned in the report. Turkey’s implementation of a strategy with the international consortiums and as their sub-contractor was assessed as a success in the report. Operating as a main contractor to the countries with less fierce competition conditions was suggested as another strategy for Turkey by the report. Countries such as Pakistan, Iraq, Georgia, Azerbaijan, Malaysia, Turkmenistan, Bahrain, United Arab Emirates, Egypt, Qatar, Nigeria, Afghanistan, Bangladesh, Rwanda, Colombia, Kazakhstan,  Philippines and Slovenia were suggested as the ones where these strategies can be launched. In this part of the report, it was stated that as a result of the strong relations established with such countries, the Turkish Defense Industry would be heading towards the first row of the third league. Moreover, as stated in the concluding comments, Turkey’s failure to create a global brand in the international arena besides the success of a few companies, due to its failure in forming an ‘ecole’ (school-model) was mentioned in addition to the limitations in sector’s market activities due to the international regimes, the embargoes and sanctions implemented to third parties by the governments with whom Turkey allies with. 

Following these points, the things to do in order to resolving the problem was mentioned in the report. According to this, it was stated that civil-military relations had impact on the overall functioning of the defense industry sector. Therefore, the report underlined the importance of the establishment of a strong architecture that would allow the structuring of the sector while decreasing the need for coordination. The need for restructuring the Turkish Armed Forces Foundation to be in line with the necessities of the time, was underlined in this chapter as well. 

Providing contributions to other ministries’ defense budgets during budget preparation activities, increasing financial and administrative support, increasing the representation and efficiency in Europe and in international organizations as part of the European Union, developing new security and defense policies, gaining the concept approach to the defense industry, restructuring education institutions in accordance with the requirements of the defense industry were mentioned in the suggestions portion of the report.