US embassy cable - 05ANKARA1565

C O N F I D E N T I A L SECTION 01 OF 06 ANKARA 001565 
 
SIPDIS 
 
STATE FOR EUR/SE, PM/RSAT AND PM/DTTC. 
 
E.O. 12958: DECL: 03/08/2015 
TAGS: MARR, MASS, MCAP, PREL, TU 
SUBJECT: TURKISH/AMERICAN DEFENSE INDUSTRIAL CONFERENCE 
HIGHLIGHTS DIFFERING PRIORITIES 
 
Classified By: PolMil Counselor Timothy A. Betts; reasons 1.4 (b) and ( 
d). 
 
1. (C) SUMMARY: The first Turkish/American Defense Industrial 
Cooperation (DIC) conference to be held since 1998 provided 
an opportunity for both governments to outline national 
defense procurement priorities and discuss ways to improve 
the bilateral defense cooperation relationship.  MND Deputy 
U/S Major General Inak underscored the importance of our 
fifty-year long relationship but characterized bilateral 
defense cooperation as too little and as favoring US exports. 
 He emphasized Turkey's interest in expanding its production 
capabilities with US assistance and joint R&D efforts.  While 
expressing support for the Joint Strike Fighter (JSF) 
program, he registered disappointment at Turkey's JSF 
workshare.  The US team, led by US Director of Armaments 
Cooperation Atlantic Mr. Robert Bruce, highlighted the trade 
benefits granted to Turkey and US interest in developing 
closer missile defense and space cooperation.  US 
representatives underscored during the conference and 
subsequent office calls the need for Turkey to develop 
quality products at competitive prices that meet USG needs. 
The Turkish procurement agency, SSM urged the USG to 
encourage US firms to buy Turkish defense products, and 
emphasized the ongoing requirement for offset work, while the 
US team explained that under US law, we cannot direct or 
encourage offets and that many in Congress view them as a 
distortion of free trade.  END SUMMARY. 
 
2. (U) The 17th Annual Turkish/American DIC, held after a 
lapse of seven years, in Washington on Feb. 23, received 
strong participation from the Turkish Ministry of National 
Defense (MND) and the Turkish defense procurement agency, 
Savunma Sanayi Mustesarligi (SSM). (Full delegation list is 
at para. 19 below.)  In addition to leading the Turkish 
delegation to the DIC, MG Inak made office calls on Acting 
Undersecretary of Defense for Acquisition, Technology & 
Logistics Michael Wynne, and Defense Security Cooperation 
Agency Director Lt Gen Kohler.  To foster deeper industrial 
contacts, the American Turkish Council hosted an 
industry-to-industry day following the government meetings, 
which provided a forum for Turkish firms to tout their wares 
and a chance to deepen existing bilateral industry contacts 
through individual discussion sessions with US firms. 
 
----------------------------------- 
TURKEY LOOKING FOR MORE COOPERATION 
----------------------------------- 
 
3. (SBU) The DIC was established under the 1980 US-Turkey 
Defense Economic Cooperation Agreement (DECA) as a forum for 
discussion of bilateral cooperative efforts.  The DIC 
primarily provides a forum for both sides to discuss issues 
inhibiting current cooperation, from export controls and 
production offset requirements to limited R&D sharing.  MG 
Inak estimated bilateral trade at  /- $5 billion dollars, 
half of which is in the defense industries, most of which 
reflected US sales to Turkey.  This is in contrast, he added, 
to the $7-$8 billion in trade Turkey is developing with its 
"new neighbors." 
 
-------------------------------------- 
TURKISH DEFENSE INDUSTRY RESTRUCTURING 
-------------------------------------- 
 
4. (C) According to MG Inak and SSM Aviation head Sedat 
Guldogan, Turkey is restructuring its defense industry to 
become leaner and to advance its technological capabilities 
in order to compete for sales on the global market.  Guldogan 
outlined the government's goals as: 
 
1) Increase local industry volume by 25% in the near term, 
and by 50% eventually 
2) Create a technology-based industry 
3) Develop meaningful partnerships in international projects 
4) Effectively utilize its current capabilities now and to 
increase those capabities 
5) Increase Turkey's sales abroad 
 
To get there, MG Inak said that Turkey would prioritize its 
acquisition programs as follows: 1) Internal production, 2) 
Co-production, 3) Direct purchase.  Turkey's military is 
undergoing the same transformation process as other NATO 
members, moving from requirements-based planning to 
capabilities-based planning.  However, Turkey is still 
struggling to predict its future priorities and quantities of 
goods required to meet them.  The defense industry is being 
restructured to better respond to this. 
 
5. (C) The genesis of the industry restructuring is Turkey's 
evaluation of the US and others' defense sectors where 
industries consolidated to maximize efficiencies.  In 
addition, Guldogan noted that militaries increasingly rely on 
high-tech products such as Unmanned Aerial Vehicles (UAV)s 
and advanced fighter systems like the Joint Strike Fighter 
(JSF).  Turkey is in the process of reorganizing its 
State-owned companies, which comprise 75% of the $1.3 billion 
defense industry, under a single umbrella company that will 
be managed jointly by the Turkish Armed Forces Foundation and 
SSM.  The process should be completed by May 2005.  Following 
consolidation of the large State-owned companies, the small 
companies and the maintenance and repair centers will be 
consolidated.  At the end of the 4-phase project, the private 
sector will be invited to participate as a minority partner. 
Foreign involvement with the re-structured firms will be 
conducted through the umbrella corporation or with the 
individual sub-companies depending on the size of the 
project.  In response to MG Inak's request for a USG analysis 
of the Turkish defense industry, Mr. Bruce stated the USG 
does not conduct assessments of foreign defense industries, 
but recommended the MND contact the OUSD (AT&L)/Industrial 
Policy for information on the methodology of their review of 
the US industrial base.  This could serve as a model for 
Turkey to conduct its own assessment of its defense industry. 
 
--------------------------------------------- ----------- 
OFFSETS A TURKISH REQUIREMENT FOR THE FORESEEABLE FUTURE 
--------------------------------------------- ----------- 
 
6. (C)  During both the government and industry portions of 
the DIC, SSM Offset Department head Aysun Kucuk underscored 
Turkey's continued reliance on offset work.  Kucuk was 
undeterred by a DOD AT&L presentation on the US policy 
against offsets and current Congressional efforts to end 
them, saying she viewed offsets as a "win-win" situation for 
both US and Turkish firms, and an "opportunity" for US 
companies to make a sale.  Guldogan noted that Turkey views 
foreign corporate offset requirements as a way to elevate 
Turkey's technological standards and will require them for 
the foreseeable future.  According to a Nov. 26, 2004 MND 
directive, participants in foreign tenders valued over $5M 
are required to meet at least 50% of their import value in 
offset commitments through production, technology transfer or 
training.  Participants in the attack helicopter tender 
issued February 10 are required to meet a 60% offset 
requirement. 
 
7. (C) Aysun Kucuk said that US industry has only realized 
$789M of its total $1.6B offset requirement to-date.  She 
suggested purchases of MKEK's 5.56 machine gun or the fast 
patrol boats produced by Yonca Teknik A.S., R&D support or 
technology transfer as ways that US industry could meet its 
outstanding offset requirements.  Kucuk noted that 
Northrop-Grumman is evaluating the possible purchase of 
Turkey's fast patrol boats and urged the USG to encourage 
this purchase.  She suggested that purchases in Turkey for 
the US military could be credited against US corporate offset 
requirements and that the USG could choose to give the credit 
to the US firm of its choice.  (In fact, Northrop-Grumman and 
other contractors have this "offset requirement" by virtue of 
their commercial contracts, not the US Government.  The US 
Government makes no offset commitments.)  While appearing to 
accept Mr. Bruce's clear explanation that the USG does not 
play a role in direct commercial sales or purchases, MG Inak 
and SSM representatives insisted that the USG should 
positively influence Northrop-Grumman's decision.  Mr. Bruce 
questioned whether Turkey has taken advantage of the $1B USG 
Foreign Comparative Testing program to evaluate foreign 
product ability to meet a USG need, which would save the USG 
from investing needlessly in development of an item that is 
available elsewhere.  MG Inak said he was unaware of this 
program and expressed an interest in participating. 
 
8. (C) During a separate office call with MG Inak, DSCA Chief 
Lt Gen Kohler raised the USG's concern with the production 
offset requirement, saying that the issue came to the fore 
during the November presidential election, where it was tied 
up in the controversy over exporting US jobs offshore.  US 
industry has tried to explain the value of offsets, to 
include their role in doing business, but the perception on 
the Hill remains that offsets equate to US job losses.  For 
that reason, Lt Gen Kohler said, he is concerned about some 
of the Terms and Conditions (T&Cs) in the attack helicopter 
tender.  Lt Gen Kohler also emphasized the potential adverse 
impact that the EU's lifting of its arms embargo on China 
would have on how the US does business with all countries, 
including Turkey. 
 
--------------------------- 
NEW STANDARD CONTRACT TERMS 
--------------------------- 
 
9. (C) SSM's Guldogan briefly described the new standard 
defense contract terms, which are being applied to all 
contacts initiated after Nov. 26, 2004, except those for R&D, 
where some T&Cs might not apply.  The goal is to receive 
compatible bids calculated under similar terms.  Bidders are 
required to initial every page of the T&Cs.  Any bid that 
does not comply will not be considered.  The first tender 
issued under these requirements was the attack helicopter 
tender issued on Feb. 10.  SSM hopes that US companies will 
choose to participate in the tender, which has a June bid 
submission deadline.  To get initial feedback from potential 
bidders, SSM would host a  Bidders' Conference on March 10. 
While SSM welcomed input, according to Guldogan, it did not 
intend to change any of the T&Cs.  Guldogan expressed his 
belief that the current T&Cs are "less strenuous" than some 
applied in the past.  He dismissed complaints by firms that 
received the attack helicopter bid package that some of the 
T&Cs are too difficult for any firm to meet.  Through this 
change, SSM is attempting to standardize certain elements, 
such as the grace period.  He added that SSM recognizes that 
bidders may experience an added cost associated with these 
terms, and that this should be reflected in their bids. 
 
10. (U) Guldogan listed current and upcoming tenders as 
follows: 6 Mine Hunting Vessels: partnering with Germany; 91 
attack helicopters: RFP issued in February, bids due in June, 
decision expected in December; trainer aircraft: 4 potential 
bidders, including Raytheon; utility helicopters: Sikorsky 
and Eurocopter, mid-year RFP; light utility helicopter for 
Jandarma and police: RFP to be issued mid-year; 
reconnaissance and surveillance satellite: RFP before end of 
year; and an F-16 upgrade: LOA under discussion with Boeing. 
 
 
11. (C) Lt Gen Kohler, during his office call with MG Inak, 
raised concerns presented by US firms about the difficult 
terms of the attack helicopter tender that may prevent them 
from competing and suggested the need for give and take on 
both sides. 
 
------------------------ 
RESEARCH AND DEVELOPMENT 
------------------------ 
 
12. (C) MG Inak noted that he specifically brought BG Akay, 
MND's R&D and Technology Department head, because he views 
R&D cooperation as a major area of opportunity.  Asserting 
that under the DECA the US committed to support the 
development of Turkey's technological advancement, MG Inak 
called on the US to assist Turkey to increase its testing, 
evaluation and certification capability.  According to Akay, 
as part of the defense industry restructuring, R&D spending 
would more than double to $300M or 2% of the budget in 2005, 
and was projected to grow to 6%.  MND R&D priorities include 
UAVs, satellite-based technology, cruise missiles, air 
defense systems, mine detection and disposition, smart 
weapons, robotics, stealth technology, network centric 
warfare and nano technology, among others.  Turkish R&D is 
conducted through universities, defense companies and the 
TUBITAK government research facility which has departments 
devoted to information technology (BILTEN), energy systems 
(MRC), materiel and chemical weapons (SAGE), information 
security and micro-electronics (NRIEC).  TGS R&D Command's 
CDR Balci noted that Turkey had more cooperative R&D projects 
with other countries than with the US.  Mr. Bruce welcomed 
this information and underscored that Turkey's R&D priorities 
had never before been clearly outlined to him.  He asked for 
specific contact information for each R&D area. 
 
13. (C) During MG Inak's office call, Lt Gen Kohler noted his 
concern with the low level of Turkish R&D investment.  He 
emphasized that Turkish firms must be at a competitive level 
to work with US firms.  In response to MG Inak's suggestion 
that US firms could cooperate with Turkish firms on R&D, Lt 
Gen Kohler emphasized that US firms identify their own R&D 
partners, with the USG playing no role.  Lt Gen Kohler 
continued by saying that US firms do conduct joint R&D in 
countries where the other company brings something to the 
table, using the example of long-life batteries developed by 
a foreign partner. 
 
-------------------- 
JOINT STRIKE FIGHTER 
-------------------- 
 
14. (C) SSM's Guldogan called JSF one of Turkey's biggest 
defense programs.  He added that Turkey is very impressed by 
the project and does not question its success, but is deeply 
disappointed in the amount of workshare it has received. 
After the UK, Turkey will be the third largest purchaser of 
planes at 100 units.  If the UK drops its projected purchase 
to below 100 as suspected, Turkey would become the second 
largest purchaser after the USG.  Given Turkey's projected 
$10B purchase, which would prohibit Turkey from investing in 
other projects, Guldogan expressed Turkey's surprise that its 
workshare paled in comparison to "other countries" (read: 
Italy) that planned to purchase far fewer planes but 
complained loudly and were rewarded with over $2B in 
workshare.  Guldogan raised the specter of Turkish withdrawal 
from the program by noting that SSM would brief its 
government soon on the project and that upper management 
would decide whether or not to continue with JSF in June 
based on Turkey's workshare.  In Guldogan's words, he was 
"not complaining, just telling you.  The US can take an 
action or not." 
 
15. (C) In a separate office call with Acting Undersecretary 
Wynne, MG Inak characterized Lockheed-Martin, the JSF Prime 
Contractor, as very inflexible.  He noted that Turkey is 
seeking more cooperation on the JSF program and reviewing 
closely its participation in the program.  Inak said he had 
told his government that Turkey joined JSF to get the 
technology.  He does not want to have to tell his government 
that Turkey will get nothing.  In his view, Lockheed and 
other US firms are looking for USG support and encouragement 
to give Turkey business. Acting U/S Wynne responded that all 
of the US JSF participants are being pushed to maximize 
foreign participation but also to standardize the design as 
much as possible.  Finding a balance between those two 
requirements is a challenge.  During MG Inak's office call 
with the Director, DSCA, Lt Gen Kohler said that 
Lockheed-Martin is looking for the best quality, price and 
overall value for inputs.  He underscored that the USG could 
not direct Lockheed Martin on what to do.  He dismissed 
Guldogan's complaint that Lockheed Martin did not publicize 
its definition of "best value," saying that the definition is 
widely understood. 
 
--------------------------------- 
US DEFENSE PROCUREMENT PRIORITIES 
--------------------------------- 
 
16. (U) In response to MG Inak's call for the US to address 
the defense trade imbalance by pressing US firms to utilize 
Turkish products, both Acting U/S Wynne during his meeting 
with MG Inak, and Mr. Bruce during the DIC, outlined current 
US defense procurement priorities and noted that these 
included areas where Turkey could participate.  They 
emphasized more durable "soft goods" and efficient, creative 
solutions to logistics problems.  Mr. Bruce suggested trucks 
that don't rust; efficient power generators;  forklifts and 
other equipment to move supplies into trucks faster; 
longer-life batteries; better fuel efficient vehicles; 
armored trucks; durable clothing for troops; ammunition and 
food items.  Acting U/S Wynne projected that the Iraqis would 
look for strong policing vehicles and armored fuel trucks. 
He also suggested the Marine Fighting Vehicle as an 
opportunity.  MG Inak gave no indication of Turkey's interest 
in any of these areas, but, rather, again noted his 
government's desire to see Northrop-Grumman purchase the 
Yonca fast patrol boats. 
 
----------------------- 
DEPOT-LEVEL MAINTENANCE 
----------------------- 
 
17. (U) During MG Inak's office call, Lt Gen Kohler noted 
Turkey's interest in providing depot-level maintenance and 
repair services for vehicles deployed to Iraq.  He 
acknowledged some USG interest in this prospect since US 
forces were likely to be in Iraq for some time.  However, he 
stressed that the US Army has the lead on this issue.  A DIC 
conference presentation on depot-level maintenance explained 
the Congressional requirement that not more than 50% of 
appropriated funds for such maintenance can be used to 
contract services outside of DOD facilities and that 
compliance was closely scrutinized by the GAO.  However, both 
at the conference and in the office call with Lt Gen Kohler, 
Turkey's existing NAMSA (NATO) contract to conduct repair 
work was raised as a possible umbrella under which work on 
vehicles coming from Iraq could be conducted. 
 
------------------------------ 
US VIEW OF DEFENSE COOPERATION 
------------------------------ 
 
18. (U) In sharp contrast to the Turkish portrayal of our 
bilateral defense cooperation, US presentations highlighted 
the positive and looked forward to additional areas of 
opportunity, including space cooperation under a framework 
MOU that was being finalized.  The US also hoped to sign a 
Tactical Missile MoA with Turkey to provide a framework to 
explore project ideas and information exchange towards the 
achievement of tactical missile standardization, 
interoperability, risk-sharing and tactical support.  From an 
export control standpoint, the State Department viewed the 
partnership as strong.  As a NATO member, Turkey enjoys 
special US export privileges under the Defense Trade Security 
Initiative (DTSI), as well as expedited congressional 
notification privileges.  According to State PM 
representatives, of the 80 licenses being processed for the 
JSF GPA, 11 are from Turkey.  State PM reps also praised 
Turkey for being a DTSI blanket end use and retransfer 
signatory which authorizes Turkey advanced retransfer consent 
to ship certain FMS equipment to other DTSI blanket end use 
signatories, a process that greatly facilitates the U.S. 
retansfer requirements process.  Additionally, certain Buy 
America Act requirements and the Balance of Payments 
requirements are waived for Turkey.  It is also granted 
WTO/GPA privileges even though it is not a member.  The one 
criticism leveled at Turkey throughout the conference and 
during office calls, was the need for Turkish firms to more 
aggressively work to identify market needs, develop a product 
to meet them, and actively market that product to potential 
buyers.  It was repeatedly underscored that the 
responsibility for the development of Turkey's defense 
industry lies with Turkey, and Turkey alone. 
 
 
 
19. (U) Participants: MND Deputy Undersecretary for 
Technology & Coordation MG Omer Inak was accompanied by:  BG 
Akay, MND Chair of the R&D and Technology Department, Col. 
Alsancak, Defense Industrial Foreign Relations (DIFR) Dept. 
head, Col. Karadag, Bilateral Foreign Relations Branch DIFR 
Department head, CDR Balci from the Turkish General Staff R&D 
Command, Aysun Kucuk, SSM Offset Department Director, Sedat 
Guldogan, SSM Aviation Department Director, Asuman Vangolu, 
SSM Director of Foreign Relations and Promotion, and Necati 
Subasi from the SSM Foreign Relations Department.  The US 
delegation, led by the DOD Director of Armaments Cooperation 
Atlantic Mr. Robert Bruce, included representatives from the 
Office of the Undersecretary of Defense for Acquisition, 
Technology & Logistics (OUSD AT&L), Undersecretary of the Air 
Force, Navy International Programs Office, International 
Security and Space Policy Office, Joint Strike Fighter 
Program office, the Defense Security Cooperation Agency, 
other Office of the Secretary of Defense staffs, the Joint 
Staff, the State Department Political-Military Office, Ankara 
Office of Defense Cooperation Chief MG Sutton and Embassy 
Ankara Deputy PolMilCouns. 
 
20. (U) This cable was cleared by OUSD (AT&L). 
EDELMAN