AEROSPACE & DEFENCE MARKET OF TURKEY A QUICK LOOK TO TODAY AND NEAR FUTURE
JULY 30, 2004
By Melih BİLGİN In Past: Turkey has had several attempts to establish world class aerospace & defense industry since the beginning. I do not want to go too much details of it but those efforts can be classified into three periods.

In Ataturk period, which can be considered as first one, parallel to economical mainstreams, private sector investments could be seen in Aerospace & Defense sector. The issue of why those attempts had not succeeded is a long subject and needs to be investigated carefully but the main reasons behind that unsuccessful attempts poor coordination of local needs, ineffective use of government procurement tool can be mentioned.

After Ataturk’s era, which can be classified as second period, being a NATO alliance was the major streamline in Turkeys defense industry. There had been a quick adaptation based on NATO operational requirements. In that period, some military facilities has been established to support Turkish Military operational needs concerning to NATO standards such as Air Force Maintenance Centers, Main Repair Facilities for Armored Vehicles and some existing facilities such as Shipyards has been reorganized based on military operational needs.

The common points of all, those facilities are sub-organizations under military units and they have no mission to find any other commercial customers than Turkish military in that period of time.

Ozal’s year can be considered as third period of Turkish Industry. Pro-Ozal years has had impacts from embargo which was caused by military intervention in Cyprus. That embargo has underlined the importance of self sufficient defense industry. In that years, special funds has been established, under the name of Silahlı Kuvvetleri Güçlendirme Vakfı, to capitalize Turkish Defense Industry investments. After those efforts, the period of Joint Ventures has arised in Turkey. The main characteristics of this period are; first is Turkish Government are the key customer for each of those investments, second is, due to several reasons such as lack of sufficient funds, bargaining power and knowledge etc., the JV structures were limited to what the foreign investors have offered to bring to Turkish Industry.

In other words, the foreign companies have looked to a period which is limited by government procurement program to maximize their benefit in a limited period of time.
Turkish parties is the one who suppose to create long term interest for foreign investors which would fit into Cost Minimization Strategies of foreign investors. Post Ozal years brought a distinct rise of private sector in any business sectors but, in aerospace and defense sector, we can only mention emergence of private structure due to strong conservative nature of the defense & aerospace world.

Trends in World Market

Competition is the key word for today’s business environment. Incompetitiveness is a burden even for strong economies. This is one of secrets behind the collapse of Eastern Block. In today’s political business atmosphere, there is no political, military boundary to block utilization of the resources for being more competitive. Today’s superpower, USA, even it has superior military technology and economical power, has been keep investing on researches of competitiveness. Cost minimization has always been the main streamline in business environment, besides, different than past, political boundaries do not have priorities in business life, as it had in the past. For western Aerospace & Defense Companies, former eastern block countries and China have become an attractive platforms with their labor cost structure and industrial experience to gain additional competitive margin by transferring them relatively low value added –labor intensive businesses. Today, many of the big US and European Aerospace & Defense companies have Joint Ventures in Eastern Block countries and China. In other words, there is though competition in low cost world which Turkish industry has to be aware of and take necessary actions.

One of main disadvantage of military investments, they are long pay back period investments. This can partially be eliminated by dual use military investments to create much quicker returns to fund continuous improvement. This is one of main military technology policy of USA today. “Chubby” military technologies are too expensive to handle even for developed countries such as US. It is easy to see how source consuming that “chubby” technology/military investments can be. Such resource consuming effort would have marketing problem, even if it has successful results from manufacturing point of view. The nature of the market is dominated by giant companies and, as Murhy says, whoever has the gold, makes the regulation.

Dilemmas for Turkish Industry

There are two way out for Turkish Industry. One is using low labor availabilities to offer long term labor cost savings for foreign investors but the question how low is “low”. Turkey’s labor structure is not “competitive” enough to beat other competitor in world market such as China and Former Eastern Block Countries but Turkey can have a chance by leveraging the quality of existing infrastructure, effective delivery performance etc. In other words Turkey can compete with business environment profile, skilled labor and delivery performance. In parallel to those, qualified human resources availability has to be kept up. The dilemma with this situation, labor intensive jobs are good for widespread employment program but they do not generate enough sources to jump towards high added value world.

Second way is selecting right pattern to gain steps towards high value added-low investment business world. I know, the formula- low investment and high value added- sounds the software world. That’s right. Instead of big and risky hardware investment, software sounds right pattern to follow.

Technology can be classified into four disciplines; organizational, material, manufacturing and design. When we look at the position of Turkey from those four different perspectives, we get different evaluations for each. From organizational technology perspective; Turkish industry has been learning a lot but still there is long to go. From material technology perspective, definitely it is weakest point of Turkish Aerospace & Defense industry. From manufacturing technology point of view, Turkey has best position comparing to other technology chapters. From design technology point of view, some embryonic evolvements can be mentioned. The harmony between those disciplines is not optimum in Turkey yet. So, the efficiency of coordination effort can not be high enough to satisfy expectations. As an example, you can not generate satisfactory local value adding by parts machining, if you do not produce the raw material locally.

Private sector is not strong enough in Turkish Aerospace & Defense Market which is jeopardizing the chance of competition regarding to low cost availabilities. On the other hand, with composition of dominancy of non private organizations, very high indirect costs in the “companies” are vital to survive. As a one of the main strategy streamlines, fully commercial and professional management should strictly be recommended for no private organizations in Aerospace & Defense market.

Opportunities and Strategy Recommendations

Turkeys buying position in world market brings up strong bargaining power. In other words, offsets from government procurement programs brings great opportunities for Turkish industries but the magnitude of existing infrastructure is not big and competitive enough to utilize offset programs as leverage to penetrate world market. Offset should be well addressed, well defined projects for Turkish Industry companies, needs to be evenly distributed to the industry companies to minimize the risk.

Local procurement program has to be a strong element of Turkish Aerospace & Defense Strategy. Major players of Turkish market have to have effective, well working subcontracting policies and the results of those policies has to be closely watched.

Even there have been some disadvantages, Turkey is still a low cost country and provide low cost advantages who wants to invest or buy. Turkey has been strong ally to western industrialized world which makes the communication easier. It is an important element to develop new business with the industry. Turkey has to use low labor availabilities to gain position in world market. On the other hand, high value added – low investment (software) business has to be initiated as small portion of the resources to learn the nature of the business environment.

Turkey has take part in world wide aerospace & defense projects as reliable, competitive partner. Existing FLA and JSF projects are perfect examples for Turkish Industry.

As everybody knows, international politics plays very important role to gain business in Aerospace & Defense market. So, the government to government t relations are as critical as competitive offers in world market.

The companies have to have specialties and to be competitive on their specialty and those company specialties in other words their competitive advantages has to be complimentary with other Turkish industry companies. This means the defense & aerospace policy needs to have strategy and that strategy should take into account the harmony between technology disciplines. In other words, weakest part of the chain needs to be strengthened.

Author: Melih Bilgin is marketing director of Eskişehir based Alp Havacılık company.

Melih BİLGİN

Translation : Sinem SONUVAR