THE DEFENSE INDUSTRY IN

MARKET OVERVIEW

The defense industry in Turkey has undergone a major transformation over the past decade. Initially an importer, the country, whose international recognition of its systems is increasing every year, is now a manufacturer of defense equipment and materials. Today, 3 Turkish groups rank among the 100 largest defense companies in the world.

Defense is an extremely dynamic sector and a highly strategic market for Turkey, which aims to provide its armed forces with state-of-the-art war materials and equipment.

Despite the industry's gain in autonomy in recent years, technological independence has not yet been fully achieved (68.5% of equipment manufactured locally) and Turkey, ranked 17th in the world in terms of military spending in 2016, remains dependent on foreign expertise and know-how. Turkish industry is nowadays forced to call on the skills of international companies for technologies whose design it does not fully master.

Indeed, Turkey has a strong interest in the development of its military industry: Ankara allocates a budget of about USD 18 billion each year and aims to reduce its dependence on the outside world completely by 2023, the centenary year of the Republic of Turkey. To this end, the government is pursuing a policy of incentives that considerably favors local production and encourages technological partnerships with international players with a view to increasing the skills of Turkish manufacturers. THE DEFENSE INDUSTRY IN TURKEY

THE DEFENSE INDUSTRY HAS TRANSFORMED ITS MILITARY PROCUREMENT STRATEGY...

Evolution of the sector to the present day Percentage of materials manufactured locally and used in defense 1990-2000 2010-2020 68,5%

Local design Direct Co- Partial design Technology and purchase production development production 24%

Avant 1990 2000-2010 2020-2030 2002 2016

Source : SSM Key Figures $16.9 $6 $1.74 $1.25 billion billion billion billion Total expenses (2017) Turnover including aeronautics Exports including aeronautics R&D expenditure (2017) (2016) (2017)

... BY INVESTING MASSIVELY

Top 20 countries that spent the most Average expenditure over a 5-year period Breakdown of expenses by category (USD billion, 2016) (Billions of USD) (2016)

1 USA 611.2 3% 2% 16% 2 China 215.2 20 12-1 6 17 3 Russia 69.2 35% 4 63.7 22% 5 India 55.9 20 07-1 1 16,8 6 France 55.7 23% 7 United Kingdom 48.3 8 Japan 46.1 20 02-0 6 11,1 59% 9 Germany 41.1 40% 10 South Korea 36.8 19 97-0 1 8,7 11 Italy 27.9 12 Australia 24.6 Turkey NATO 13 Brazil 23.7 19 92-9 6 6,5 14 Israel 18.0 Per so nal Eq ui pment Other Infrastructure

15 Canada 15.2 Expenditure on equipment includes R&D. 16 Spain 14.9 19 87-9 1 4 Personal expenses include military, civilian and pension expenses. 17 Turkey 14.8 Infrastructure spending includes NATO's common 18 Iran 12.7 infrastructure and national military constructions. 19 Algeria 10.2 19 82-8 6 Other expenses include operating and maintenance expenses, 2,5 other R&D expenses and expenses not allocated to the above 20 Pakistan 10.1 categories.

Source : SIPRI, OTAN ... AND HAS THUS BECOME A KEY SECTOR OF THE ECONOMY

Repartition of turnover in % Turkish companies are now ranked AAGR ERO - (2016) among the world's largest defense 10% Maintenance, Other players repair, operation 15% (military) 6 3% AAGR th 13% Logistical Terrestrial 57 support platforms 3,1 6% 28% $6 61st 1,74 Billion in sales in 0,8 Naval platforms 9% 2016 20 09 20 17 Aerial platforms th 15% 98 Turnover in Defense (USD billion) Products for civil Weapon- Exports in Defense (USD billion) aviation munitions & 10% missiles Source : SASAD 14% THE DEFENSE INDUSTRY IN TURKEY

THE INDUSTRY BENEFITS FROM AN ATTRACTIVE FRAMEWORK WITH GOVERNMENT INCENTIVES AND A SKILLED WORKFORCE...

Investments in the defense and aeronautics industry are eligible for a wide range of government incentives Expenditures on product and that significantly stimulate the development of the sector technology development (Million USD)

INCENTIVES FOR INVESTMENT IN LOCAL SUPPORT PROGRAMS FOR RESEARCH, MANUFACTURING DEVELOPMENT AND DESIGN ACTIVITIES

741

ü Deduction of corporate taxes (up to 100%) ü 100% deductible R&D expenses ü Tax credits (up to 90%) ü Exemption from corporate taxes ü Land allocation ü Income tax exemption for R&D employees ü Project financing ü Areas dedicated to technology development ü Exemptions from social security premiums ü Special financing for start-ups ü Exemptions from VAT and customs duties ü Export subsidies ü Training aids 247 513

120 Ø Reduce start-up costs Grants, incentives and supports are available Ø Improve cash flow at all stages of a new product development 20 07 20 16 Ø Accelerate the return on investment life cycle. Finan ced by In vestment Fun d Fu nded by incentives

Source : SASAD Turkey has a skilled, young and competitive workforce

Turkey has recorded Distribution of employees by department Distribution of engineers by type of diploma 80.8 M of inhabitants 3% Directions; 4% 33% 1137 37% PhD; 422 50,2% 49,8% Other (administration, 2nd university cycle; support); 11856 3895 35.502 41% 10.529 Number of Number of employees Production; engineers (2016) 14356 (2016)

Average age Average age 31.1 32.4 23% 59% Product and technology development; 1st university cycle; 6212 8153 Source : SASAD ... LEADING TO THE MULTIPLICATION OF ALLIANCES BETWEEN TURKISH AND FOREIGN COMPANIES

1988 1985 2010 + + + + +

FNSS, a joint venture 51% owned by Nurol Holding and TEI, a joint venture between TAI (Turkish Aerospace Kale Pratt & Whitney, a joint venture owned 51% by 49% by BAE Systems, is a leading manufacturer and Industry), GE (General Electric), TAFF (Turkish Armed Kale Group and 49% by Pratt & Whitney, uses supplier of tracked and wheeled armored vehicles and Forces Foundation) and TAA (Turkish Aeronautical advanced technologies essential to the production of weapons systems for the . Association), is a key player in the manufacture and the F135 engine powering the F-35 Lightning II. assembly of aircraft engine parts and modules.

2014 2017 2017 +

BMC, a Turkish-Qatari partnership, manufactures BAE Systems and TAI have signed an agreement worth Rolls-Royce and Kale Group have established a joint armored vehicles for the defense industry, as well as £100 million to work together to develop the TF-X, a venture 51% owned by Kale and 49% by Rolls-Royce to buses for public transport, heavy and light trucks for fifth generation fighter aircraft for the Turkish Air develop aircraft engines for the TF-X fighter aircraft. transport and logistics. Force. THE DEFENSE INDUSTRY IN TURKEY

HOWEVER, TURKEY STILL REMAINS A MAJOR IMPORTER, PARTICULARLY OF EUROPEAN KNOW- HOW...

Imports from Turkey by category Geographical origins of imports from Turkey (Million USD - 2016) (2016) 220 210 153 millions $ USA 12%

Europe 138 134 128 112 Re st of the w orld 517 millions $ 103 101 40% * Logistics, space and security 48 $1.289 32 million in imports 15 12 14 10 3 4 3 2 in 2016

Civil Aviation Terrestrial systemsNaval systemsAir systems (military)MRO (Maintenance, repair, operation)Other* 619 millions $ 48% Source : SASAD, Turkish Statistics Institute ... WITH A NEED FOR ADVANCED TECHNOLOGY IN MANY FIELDS

TACTICAL VEHICLES CYBER-SECURITY FORMATION AND SIMULATION SYSTEMS Ø Electric vehicle technologies Ø Information Management Technology Ø Algorithmic modeling technologies Ø Intelligent driving / communication technologies Ø Cloud computing systems Ø Simulation applications / live simulation, virtual between vehicle-vehicle and vehicle-center Ø Geographic information systems Ø Modernization of training structures Ø Survivability of armored vehicles Ø Use of new defense technologies in training CONTROL COMMAND NAVAL PLATFORMS Ø Command, control, intelligence, decision ELECTRONIC EQUIPMENT Ø Underwater acoustic modem support systems Ø Micro-nano technologies Ø Positioning systems Ø Combat management systems and integration Ø GaN technology Ø Complex naval platform projects Ø Augmented reality, military applications Ø Cooling technologies Ø Multimode acoustic transducer (situation recognition) Ø Advanced microwave production technologies Ø Underwater acoustic communication network Ø Augmented reality applications for operational Ø Photonic technologies use Ø Advanced optical materials technologies AIR PLATFORMS Ø Structural monitoring applications COMMUNICATION SAFETY, ENERGY Ø Automatic flight control technologies Ø Broadband wireless communication technology Ø Smart grids and energy management Ø Method for automatic target search/recognition Ø Tactical field communication systems technologies Ø Energy harvesting / more electric overhead Ø Public safety systems Ø Renewable energy technologies platforms Ø Sensor technologies for security applications Ø Platform tracking and management technologies MONITORING AND SENSORS Ø Ultrasonic imaging Ø Innovative accident prevention technologies Ø Surveillance systems Ø Avionics computing technologies Ø Radars Ø Airborne acoustic sensor networks WEAPONS, ROCKETS, FUSES Ø Barrel coating technologies Ø Software for the design of ballistic calculations Ø Medium and long-range propulsion systems

EXAMPLE OF COOPERATION ON A EUROPEAN SCALE

European supply chain BELGIUM

FRANCE

GERMANY

SPAIN

TURKISH AEROSPACE INDUSTRIES TURKEY

AIRBUS A 400M The A400M is the first program that has enabled TAI to gain capacity UNITED-KINGDOM over the entire life cycle of aerospace products. TAI's work share in the A 400M program includes the design and manufacture of structural components for the front part with emergency exit door, the upper section with rear door, parachuting doors, billiard cue, ailerons and spoilers. TAI was also in charge of all fuselage harnesses. The company

was responsible for the design and supply of the lighting system 1-Ratier-Figeac, 2-AM Seville, 3-AF Saint Eloi, 4-AUK Filton, 5-DENEL, 6-AF Nantes, 7-AD Stade, 8-AM Seville, (except for the cockpit) and the water and waste system. 9-AD Stade, 10-TAI, 11-SOCATA, 12-TAI, 13-AD Bremen, 14-AD Bremen, 15-TAI, 16-AF Saint Nazaire, 17- Messier-Dowty, 18-PAG,19-SOGERMA, 20-SOCATA, 21-Messier-Dowty, 22-SONACA, 23-AD Stade, 24-AUK Filton, 25-SONACA, 26-Aerolia, 27-TAI Source : Airbus Defense THE DEFENSE INDUSTRY IN TURKEY

TECHNOLOGY TRANSFER HAS ENABLED TURKEY TO DEVELOP MAJOR LOCAL DEFENCE PROJECTS...

DRONE ANKA DRONE BAYRAKTAR DRONE KARAYEL

TAI Anka is a medium-cruise, long-range, high altitude UAV that The Bayraktar tactical UAV is a medium cruising altitude and The Karayel UAV is the first and only tactical unmanned aerial entered service in June 2012. It performs reconnaissance and long range UAV developed for tactical reconnaissance and vehicle designed in accordance with NATO STANAG-4671 identification missions day and night with an autonomous flight surveillance missions. The prototype development phase began standard and for reconnaissance and surveillance purposes. capability including automatic take-off and landing. Anka in 2007. The 2nd phase of development and serial production of Karayel has a triple redundancy avionics architecture that integrates a heavy fuel engine and an electro-explosive ice the Bayraktar Block B (TB2) began in January 2012. Bayraktar provides protection against all types of accidents, the first time protection system with an advanced ground control station and TB2 has a monocoque design with an inverted V-shaped in the world that a company has this specificity, until now only a dual data link for operational safety and ease of use. The structure. The fuselage is made of carbon fiber, Kevlar and used in civil aviation. Remote sensing systems on board the system is expandable with a transportable image processing hybrid composites, while the joint segments are made of Karayel are capable of detecting a target and marking it for station, a radio relay, a remote video terminal and SATCOM. aluminum parts machined by precision computer numerical laser-guided munitions. All phases of the flight, from take-off to control. The drone has a length of 6.5m, a wingspan of 12m and landing and the flight profile, are autonomous. a maximum take-off weight of 630kg.

CHAR ALTAY HELICOPTERE ATAK AVION DE COMBAT TF-X

The 3rd generation Altay battle tank is the first battle tank The Atak T-129 helicopter is a version derived from the Italian The TF-X Fighter Aircraft is a 5th generation fighter aircraft entirely developed and produced in Turkey. The development model A.129 International, developed under technology transfer that will replace the Turkish F-16 and operate alongside the F- and testing phase of the four prototypes has been awarded to by TAI. Longer than A.129, the T-129 uses mainly a new Rolls- 35A, about 100 units of which have been ordered from the local vehicle Otokar for an amount of €480 million. Otokar is Royce/Honeywell LHTEC T800 turbine initially developed for Lockheed-Martin. With the TF-X, Turkey will become one of the now waiting for the green light from the Under secretariat of the late RAH-66 Comanche armed reconnaissance helicopter few countries to have the necessary technologies, engineering State for the Defense Industry to launch mass production of the program. The first of the 5 prototypes of this version made its infrastructure and production capabilities, which a 5th tank, valued at €13.75 million each. Altay has a 120mm smooth first flight in September 2009. TAI announced on 31 October last generation (or beyond) jet fighter needs. The TFX is scheduled to barrel and is able to protect itself against chemical, biological the start of the national development of the Atak 2 attack make its maiden flight in 2023 and enter service in Turkish and radioactive weapons attacks. The maximum speed is set at helicopter without foreign assistance on the basis of the aviation from 2030. 70 km/h, the engine has a power of 1,500 hp and the vehicle is technical knowledge acquired with the T.129 attack helicopter able to operate underwater at a depth of 4.1m. currently produced under Leonardo's license.

... SHARPENING HIS APPETITE ON THE INTERNATIONAL SCENE...

Sectoral origins of orders in 2016 90% of orders in the defense industry come from the local market (Million USD) Geographical origins of orders in 2016 (Million USD) Terrestrial platforms 5.920 Aerial platforms 3.391 Weapsons & missiles 1.080 TURKEY 10.611 EUROPE USA Naval systems 640 258 386 REST OF THE Civil aviation 293 WORLD 658 Security systems 254 Military ERO 210 Other 125 TOTAL 11.913

Source : SASAD

... WHILE CONTINUING TO BUILD IMPORTANT PARTNERSHIPS

MAY 2017 MAY 2017 JANUARY 2018

STM (JV between Aselsan and Havelsan) and JV between Kale and Rolls-Royce to jointly Formalization of a military cooperation with ThyssenKrupp signed an agreement to build develop and produce aircraft engines that will Eurosam (JV between MBDA and Thales) the Indonesian maritime fleet at the Turkish be used, among other things, in the concerning a contract to study the definition of shipyard in Gölcük. construction project for the local fighter TF-X. a future missile system. THE DEFENSE INDUSTRY IN TURKEY

IN PARALLEL WITH THE DEVELOPMENT OF THE INDUSTRY, MANY CLUSTERS IN THE DEFENCE AND AERONAUTICS SECTORS HAVE EMERGED, AND TURKEY NOW HOSTS MAJOR DEFENCE EVENTS

First event dedicated to the Turkish aeronautics sector 220 companies 22-26 april 2020 Antalya

ANKARA BURSA 173 companies 400 companies 125 companies 75 companies ESKIŞEHIR Event on aviation and aerospace

29 companies 24-37 september 2020 IZMIR Istanbul

45 companies

International Defence Industry Exhibition 30 april – 3 may 2020 Istanbul

DEFENCE IS A HIGHLY REGULATED INDUSTRY THAT REQUIRES THE SUPPORT OF A LOCAL EXPERT WELL INTRODUCED INTO THE ECOSYSTEM

The defense, security and nuclear sectors in Turkey are managed in pairs by Patrice MOYEUVRE, Director of Defense and Security and Ilker ONUR, Executive Director, Expert Consultant Turkey.

Patrice MOYEUVRE Ilker ONUR

Director of the Defense, Security and Nuclear Executive Director Project, Advantis Consulting Advantis Consulting

With a long military career in the French Air Force, which he left as a Franco Turkish, founder of Advantis Consulting in 2003, Ilker ONUR has general officer, Patrice MOYEUVRE held senior operational and supported more than 170 companies in their strategic and operational decision-making positions in joint and multinational environments. development in Turkey, from international groups to family-owned SMEs, in various and varied fields of expertise. A specialist in Turkey, he has been posted twice to diplomatic posts as a defense attaché at the French Embassy in Ankara where he was in Ilker ONUR began his career at PPR and later held the positions of charge of security and defense issues and Franco-Turkish bilateral Purchasing Director and Marketing and Sales Director at major groups relations. such as Carrefour and TeknoSA.

Patrice MOYEUVRE is a graduate of the French National Institute of With more than 20 years of operational experience in Turkey, Ilker Higher Studies of Security and Justice, the NATO Defense College and ONUR is accredited as a "Turkey Expert Consultant" by Stratexio and the War School. He is a graduate of the National Institute of Oriental has expertise in strategic analysis and advice, negotiation and lobbying, Languages and Civilizations of Paris and the University of Ankara and M&A operations and industrial establishment management as well as speaks Turkish fluently. business development.

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