THE DEFENSE INDUSTRY IN TURKEY 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 Saudi Arabia 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 Turkish armed forces. 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.