WEAPONS EXPORTS

Turkish Military Power, Made by Germany?

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Rheinmetall, through a Turkish-Qatari joint venture, hopes to build Turkey's next tank. Picture source: Reuters

The Turkish economy has struggled in the face of political instability at home and war in the neighboring Middle East, but there’s one sector that is still primed for growth – the national defense industry.

The order comes straight from the top. President Recep Tayyip Erdogan intends to transform Turkey into a regional military heavyweight, and he has made clear that money is no object. The Turkish government has increased its defense budget by 11.4 percent over 2016 for a total of $19.9 billion (€17 billion).

Germany, Turkey’s most important trade partner, has traditionally played an important role in the building Ankara’s military power. In 2015, Berlin approved €39 million ($45 million) in defense exports to its NATO ally.

“Turkey is in one of the most volatile regions of the world, which is why we will have a large need for defense and security measures in the future,” said Engin Aykol, head of the Turkish weapons manufacturer Nurol Makina, which specializes in armored vehicles and is based in Ankara.

Rheinmetall has a stake in the Turkish-Qatari joint venture BMC, which has placed a bid to develop the next Turkish main-battle tank.

But relations with Turkey have soured as President Erdogan has launched a wide-ranging political crackdown in the wake of a failed military coup. Indeed, Berlin announced a full review of relations with Ankara after Turkish authorities detained a German human rights activist, arrested two journalists and reportedly sought to blacklist German companies.

In March alone, the German government rejected 12 applications for weapons exports to Turkey. Berlin is now reviewing all arms deals with greater scrutiny.

The politics might be bad, but the business is good and companies such as Rheinmetall are  still looking to expand operations in Turkey. The Düsseldorf-based arms company installed former defense minister and sitting parliamentarian Franz-Josef Jung on its supervisory board for the express purpose of expanding business ties with Ankara.

Rheinmetall and other German companies, which are still looking at Turkey with euro signs in their eyes, have a loophole around Berlin – they can set up subsidiaries and joint ventures to keep doing business in the country. Indeed, Rheinmetall has been active in this way for years in the Turkish market. For example, Rheinmetall has a stake in the Turkish-Qatari joint venture BMC, which has placed a bid to develop the next Turkish main-battle tank.

ThyssenKrupp is also no stranger to doing business this way. The conglomerate already exports submarines to Turkey, and in its next phase plans to work with local Turkish partners to export these weapons system to Indonesia. It would be virtually impossible to conclude these deals with Jakarta from Germany due to corruption concerns and the unstable political situation in southeast Asian nation.

If President Erdogan has his way the country will one day manufacture its own aircraft carrier.

It’s a win-win situation for both sides, the German defense industry and the Turkish government. Mr. Erdogan wants Turkey to become independent of arms imports by 2023, and by working with local partners German companies do not lose out on business opportunities.

“The Turkish government believes that a fully integrated defense industry will stimulate economic growth in many other sectors and push the transformation forward,” said Alper Ücok, head of the Turkish industry association Tüsiad.

Indeed, the Turkish defense industry is growing rapidly. Three Turkish companies are now among the top 100 arms manufacturers worldwide, according to the magazine Defence News.

Aselsan, ranked number 57, is the only weapons producer listed on the Istanbul stock exchange. It produces radar equipment and small anti-aircraft systems. In 2016, Aselsan generated revenues of nearly €1 billion and its operating profit quadrupled to €200 million.

The aerospace and defense firm TAI, ranked number 72, is developing Turkey’s first drone, known as the “Anka,” and says it participates in the production of the Airbus A400M military cargo plane. Rokestan, ranked number 98, manufacturers a broad range of rockets and anti-submarine missiles. Aselsan has a 15-percent stake in Rokestan.

Earlier this month, Mr. Erdogan personally dedicated Turkey’s first domestically produced frigate and if he has his way the country will one day manufacture its own aircraft carrier. But Engin Aykol, head of the Turkish weapons manufacturer Nurol Makina, said Ankara still has a long way to go before the national defense industry can go toe-to-toe with the big European players in France and Germany.

 

Ozan Demircan and Martin Murphy reported this story for Handelsblatt. Spencer Kimball adapted this story to English for Handelsblatt Global. To contact the authors: demircan@handelsblatt.com, murphy@handelsblatt.com, s.kimball@extern.handelsblatt.com 

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