Arms Deal

Turkish-German Consortium Eyes Jakarta Submarine Deal

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Thyssen-Krupp submarines are in demand. Turkey wants a piece of the action. Source: Christian Charisius/dpa

Turkey has been a loyal customer of ThyssenKrupp. For almost 50 years, the country’s navy has ordered submarines from the Ruhr Group’s shipyards, which today operate under the name Thyssen-Krupp Marine Systems (TKMS). Even competitors like the French DCNS couldn’t break this long-standing business relationship, though not for lack of trying.

Recently, however, the relationship between Turkey and its favorite supplier has suffered. In addition to souring political relations between Germany and Turkey, TKMS has had problems with its production process and six Type 214 submarines ordered by Turkey are now delayed, leading to significant consternation in Ankara.

Displeasure over the German supplier, however, has not deterred Ankara from expanding its cooperation into new territory: Turkey now wants to enter the export business with Thyssen-Krupp. Together they want to sell submarines to Southeast Asia. Company representatives have already presented a joint bid for a contract in Indonesia, Handelsblatt has learned from sources in the industry.

While Turkey’s motives are understandable, the advantages for Thyssen-Krupp are less clear. The company could take hits to its reputations for multiple reasons.

The government in Jakarta wants to modernize its underwater fleet and has asked manufacturers for bids. The country plans to buy three new submarines. Turkey and Thyssen-Krupp are offering up the same Model 214 that Ankara has ordered, one of the best submarines currently available.

The price is expected to be over €1 billion ($1.09 billion). There is strong competition: in addition to the Turkish-German consortium, DCNS and suppliers from China and South Korea are also hoping to secure the deal with Indonesia.

Southeast Asia is regarded as a growth market for shipyards worldwide. Several countries from the region are equipping their fleets to curb any encroachment from China. In addition to Indonesia, Thailand, Singapore and Malaysia are all also buying new submarines.

While Turkey is entering new territory with this venture, the name Thyssen-Krupp is well-known in Southeast Asia. Several naval forces in the region already have submarines from Kiel in their fleet.

Thyssen-Krupp is apparently happy with its role as a junior partner in the new consortium. But even this could give the company plenty of trouble. Arms deals with Ankara have become controversial, and only more so since the recent referendum with which President Recep Tayyip Erdogan expanded his power. German defense contractor Rheinmetall was harshly criticized for plans to build a tank factory in Turkey.

The Turkish government’s goal with these partnerships is clear. It wants to upgrade its own industry technologically and thus become more independent of arms imports – and ultimately even export military equipment on their own. From the Turkish perspective, German companies are natural partners, as they are the traditional manufacturers of tanks and submarines. As both countries are members of NATO, there are also no restrictions on the deal, even if there are more and more skeptical voices in Berlin.

Turkey last ordered new submarines at Thyssen-Krupp eight years ago, when there were fewer objections. These are partly being produced in the military Gölcük shipyard. If the German-Turkish partnership were to win the bid, at least one of the submarines to be built at the site would go to Indonesia instead. That’s clear from the documents of arms company STM Defense Technologies, which acts as a partner for Thyssen-Krupp on the Turkish side.

While Turkey’s  motives are understandable, the advantages for Thyssen-Krupp are less clear. The company could take hits to its reputation for multiple reasons. On the one hand, there’s the increasingly controversial cooperation with the Turkish arms industry. On the other hand, the company’s leadership must be worried about the corruption that is rampant in Indonesia.

With previous military orders, Indonesian government officials demanded a markup of 10 percent, which was supposed to go to the pension funds of the armed forces. According to internal documents, Thyssen-Krupp dropped out of a previous bidding process because this markup had been viewed as corruption by internal controllers. The group has since tightened its guidelines.

The company’s board members are likely to be highly conscious of the potential for brand damage. It is possible, however, that the managers have no alternative. According to STM’s documents, Turkey had already planned a joint export of submarines to Indonesia early on.

It’s even possible this had already been part of the deal for the sale of submarines to the Turkish navy, though Thyssen-Krupp would not comment on this possibility. Due to the massive delays in the construction of the Turkish submarines, Thyssen-Krupp could face high contract penalties in the three-digit million range. It is conceivable that Ankara would at least partially waive these if the deal with Indonesia is successful.

 

 

Martin Murphy covers the steel, car and defense industries for Handelsblatt. To contact the author: murphy@handelsblatt.com

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