TBY talks to Sedat Güldoğan, Deputy Undersecretary at the Undersecretariat for Defence Industries (SSM), on the significance of offset agreements, the establishment of Technopark Istanbul, and the integration of SMEs in the defense industry.
TBY How has the use of offset agreements helped to encourage growth in the defense industry?
SEDAT GÜLDOĞAN Offsets have been used as tools to create volume for the industry, as it helps to balance trade within the country. The SSM was founded in 1985, and we have been given two important tasks by law: to develop the Turkish defense industry and to make acquisitions for the armed forces. These two should be balanced, but of course there are some tradeoffs. Offset agreements have been a starting point to establish the industry—using offset agreements alone for the industry does not make any sense. After making offset agreements, it is necessary to continue with other investments as a means to develop the industry.
In the 1990s, Turkish defense companies focused mainly on coproduction programs for land and air systems. One such company is FNSS, a joint venture between US and Turkish companies that produces armed vehicles. Even the F-16 assembler, TAI, started up in 1984 through joint ventures with General Dynamics. Now they have spent 15 to 20 years as co-production companies. In that phase we used offset agreements to keep those companies alive. What we realized by the early 2000s is that we cannot just keep using offset agreements to do so. They create a certain volume of business, but if you want to dive deep into the defense industry, you need to use cutting-edge technology. Without technology, you cannot obtain sustained growth. That’s why we have developed and adopted a new strategy. While using the offset model, we need to focus and make more of an investment in technology and dedicate resources to certain areas, rather than making investments in all sectors. We need to screen which areas to make investments in and energize all the country’s capacities. We still use the offset model today, since it is a tool of defense buying. In 2004 the local industry volume met 25% of the Turkish armed forces’ needs. In 2012, it’s around 52%, and this is because we have developed better technology and more volume.
How has the SSM moved to enhance agreements since then with regards to technology?
Technology is something that cannot be transferred. Offset agreements were used for production technology, but for real technology we have not used the offset model. Companies are not willing to give you technology through the offset mechanism. We have sought to encourage investment in R&D by using domestic tools. Technology development depends on different elements. Human capital is significant, and universities are vital to the technological manufacturing process. SMEs are also important, as are R&D centers. All of these elements need to be energized to create technology.
The SSM is directly contributing to R&D centers through the development of Technopark Istanbul. What will be its impact on the defense industry?
The Technopark is directly linked to the SSM. The company was established in partnership with the Istanbul Chamber of Commerce (İTO), and hopefully we will see the first phase of it open by the end of 2012. Murad Bayar, the Undersecretary for Defence Industries, and I are deeply involved in the process. Technopark Istanbul is being promoted through a roadshow, and we are seeing huge interest from defense industry companies to firms from other sectors. We want to apply a different model there, since the boards of İTO and the SSM are not keen on using Technopark Istanbul as a mere money-making scheme. We want to see real technology-intense companies working there, and we want to link them to industry.
The integration of SMEs into the defense industry is an integral part of the SSM’s 2012-2016 strategy. How will this be executed?
It’s not easy. We focus on SMEs because they represent a large portion of all business in Europe and everywhere else. Over the last 10 years, the defense industry has exhausted much of its energy on creating technology-intense main contractors. Now we realize that to develop a stronger defense industry we need layers. The US is a good example of a layered defense industry, which makes the industry more robust and sustainable. This is why, for a couple of years, we have been paying special attention to SMEs, not just as a strategy, but by contract we now require companies to give 30% of the work that is taken by the main contractor through the contract from the SSM to SMEs. This is why in the last couple of years the clustering of SMEs is growing, both in Ankara and Istanbul. SMEs are now the main focus of the SSM, both in manufacturing and technology capacities.
The top five countries for defense manufacturing have stayed the same for years: the US, China, France, the UK, and Russia. How can Turkey take a share of the race for the $60-billion market?
It is important to brand the country’s products. “Made in Turkey” should be recognizable as a hallmark of quality, especially in the defense industry. Turkey’s influence in the region and, in some cases, other parts of the world is growing. Influence creates opportunities to sell more. The defense sector is dominated by a few countries, so it’s not easy. Two years ago, Turkey’s exports totaled only a couple of million dollars, whereas today it is close to $1 billion. Our target for 2016 is $2 billion. Exporting is one of the most important tools for us to maintain sustained growth in the industry.
How integral is Turkey’s relationship with NATO to the SSM’s growth strategy for the defense industry?
Turkey has always been a good partner in NATO through its military forces; however, NATO has a commercial side as well. NATO’s programs offer good opportunities for growth and exports. This is why, for the past couple of years, we have been paying special attention to NATO’s programs, and we just opened a new office in Brussels. To promote exports we now have three offices, and the SSM has representatives there to ease communications. We have offices in Washington, D.C., Saudi Arabia, and now Brussels, to ease communications with NATO. We are also getting some results though NATO’s programs. Turkey’s share in defense has started to grow, but there’s still more to be done.
Are South America, Brazil, the US, and the Middle East your key markets for exports?
These offices are not there to just promote exports, but to develop relations in the defense industry in order to better understand each other. Sometimes we get lost in the bureaucracy of the defense system in Western countries, so our aim is to better understand their systems. It’s a government policy and we are trying to play our role within it, to support it in whatever way we can.
What are the most important objectives of the SSM’s 2012-2016 strategic plan?
The idea of the new plan is to develop better technology and a better industry, as well as to layer the industry, develop better structures, and promote SMEs. It’s a combined strategy to dive deep into the industry and grow technology. These are the two main pillars of our new strategy. We know that defense budgets all over the world are shrinking, but the only thing kept intact is the R&D budget. You can cut anything, but can’t touch the R&D budget. If you touch the R&D budget, you can’t sustain the same capacity. In the defense industry Turkey is making an investment, both through human resources and also companies as well. This is why R&D is critical. And our strategy is key for us.
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