Friday, 20 January 2012

The Turkish Defense Industry Market Opportunities and Entry Strategies, Analyses and Forecasts to 2016

Turkey is one of the largest defense spending countries in the world and ranks among the world’s top fifteen defense spending countries. The size of the Turkish defense budget has attracted numerous foreign OEMs to establish joint ventures in the country. From 2011 to 2016 (the forecast period), Turkey is expected to register similar growth to countries such as Israel and Japan (reference see figure 13 below).

London, January 2012 –Turkey is one of Asia’s most attractive defense markets. Over the forecast period, defense expenditure is expected to grow steadily, primarily due to the threat posed by the political unrest in neighboring countries, terrorism, and peacekeeping missions. The capital expenditure allocation of the defense budget is expected to increase from the current level of 18%, to 21% by 2016, as the country enters the next cycle of its military modernization program. As a percentage of GDP, the country’s defense budget in 2010 was 1.92%. The Turkish homeland security market is driven by factors such as terror threats and maritime security needs. The country meets the majority of its defense requirements through imports, and was ranked twelfth in the list of countries with the largest defense imports during 2005–2010 (the review period).

Despite the global economic downturn in 2009, the country’s arms imports registered an increase of 17% over the previous year. Throughout the review period, Germany emerged as the largest supplier of arms to Turkey, with a market share of 48.1%. However, in 2010, the US accounted for the majority of the country’s arms imports. During the forecast period, Turkish defense imports will be dominated by Western European suppliers such as Germany and Italy, as a result of the deterioration of Turkish-Israeli relations due to the Israeli government’s refusal to issue an apology for the attack of a humanitarian aid flotilla in international waters, an incident which resulted in the deaths of nine Turkish nationals.

Foreign OEMs enter the Turkish defense market through the formation of joint ventures or strategic alliances with domestic defense firms. During the last 20 years, firms such as Tusas Engine Industries, Inc (TEI) and FNSS have been formed by foreign investors through joint ventures with domestic firms in order to fulfill offset obligations. However, following this, foreign defense firms have partnered with domestic companies in order to develop and supply products. In 2010, Raytheon adopted this strategy by collaborating with Turkish military electronics manufacturer Aselsan. In addition, foreign investors also collaborate with domestic research organizations such as the Middle East Technical University (METU), Istanbul Technical University (ITU), Bogazici University, Bilkent University, Anadolu University, Gazi University and Yeditepe University to develop and produce new defense equipment.

The Turkish defense industry faces considerable challenges due to high levels of corruption. A number of personnel within the defense industry share close relations with procurement officials and exercise monetary influence over such officials in order to win defense contracts. In order to win contracts, foreign investors are therefore compelled to pay substantial sums of money, a factor which discourages the entry of new companies into the market. Furthermore, Turkey is approaching the completion of its military equipment acquisition cycle, and the ongoing impact of the global financial crisis has resulted in the delay, postponement or cancellation of several of its procurement programs. The country also faces indefinite delays in the completion of projects, which has led to cost overruns.

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