Turkey Missile Defense Deal Underscores Export Challenges
By Dietrich Knauth, Law360
November 20, 2013
Although Turkey may be having doubts now about awarding a $3.44 billion missile defense contract to a Chinese company, its willingness to seriously engage with China casts doubt on American companies' plans to use military exports to soften the blow of defense cuts at home.
Turkey raised eyebrows when it chose a bid by China Precision Machinery Import-Export Corporation over other bidders, including a team of Raytheon Co. and Lockheed Martin Corp. While NATO allies expressed concern about Chinese access to NATO's integrated missile defense program and about the reliability of the Chinese system, Turkey has pointed to the bid's lower price — $3.44 billion compared to a reported $4 billion by other bidders — as well as its offer of technology transfer agreements and a guarantee that more of the contract's money would flow to Turkish component suppliers and assembly teams.
These types of provisions, known as offset agreements, are becoming more prevalent in international procurements, and U.S. companies looking to compete on a global scale would be wise to take note, according to Jennifer Huber, a partner at Fluet Huber & Hoang PLLC. Offsets, which are intended to ensure local economies benefit from defense spending, can include trade agreements, technology transfer agreements, or guarantees of subcontracts or supply purchases.
“The reason why China has an advantage here is because they're willing to understand and navigate the joint production and offset requirements that Turkey has set out,” Huber said. “U.S. contractors have been reluctant to understand and participate in those kinds of obligations, and that obligation is only going to become more important. There is going to be one way forward, and we're going to have to learn how to navigate it.”
Governments are keen to show they are paying attention to local jobs and economic concerns when giving vast sums to foreign companies, according to Brandt Pasco, an attorney with Kaye Scholer LLP. And arms sales in particular often involve considerations other than price and performance, he says.
Turkey's initial selection of China, which is notable for the interoperability and diplomatic concerns raised by NATO, could simply be a negotiating tactic, he added.
“Sometimes countries make a nod towards a low-cost provider to put some price pressure on the bidder that is ultimately going to win,” Pasco said.
Lockheed, for its part, declined to discuss the details of the Turkey competition, but said it was open to working toward a better deal.
"We welcome the opportunity to continue discussions with the Turkish government for their critical missile defense needs,” the company said.
Turkey's decision underscores the difficulty of relying on foreign military sales to make up for a decline in domestic defense spending. Many companies have suggested they would ramp up military exports to deal with the U.S. drawdown, including Raytheon and Lockheed Martin, which created a new international business unit this summer. But that road may be more difficult than some companies are prepared for, attorneys say.
Many U.S. allies face similarly squeezed budgets, and the regions most poised to make significant defense investments, like the Middle East and Africa, are indifferent about the choice between the U.S. and China, Huber said. If allies like Turkey can't be counted on, then the U.S. budget cuts will hit many defense companies harder than they've been letting on.
U.S. and NATO officials, which are still trying to persuade Turkey to reconsider its choice, say the Chinese system could disrupt NATO's vision for a fully interoperable system, known as Active Layered Theatre Ballistic Missile Defence, that would protect all NATO members.
Turkey's NATO allies will likely be reluctant to pursue full integration because of the risk that China could take sensitive data from the NATO defense system, according to the Center for Strategic and International Studies.
Top U.S. officials have renewed diplomatic efforts this week, following news that Turkey had requested a longer deployment for a U.S.-made Patriot missile defense system that now protects Turkey from missiles fired from war-torn Syria. Defense Secretary Chuck Hagel said Monday that the U.S. would keep two NATO-commanded Patriot batteries in Turkey for one more year, “as a concrete demonstration of alliance solidarity and resolve.”
Secretary of State John Kerry also put the missile defense procurement on his agenda during a meeting with Turkish Foreign Minister Ahmet Davutoglu, according to State Department spokeswoman Jennifer Psaki.
“Secretary Kerry reiterated our concerns and the importance of procuring a NATO interoperable system, which has long been a concern we’ve expressed to Turkey. And that was how he conveyed it during the meeting yesterday,” Psaki said.
Still, at the end of the day, China isn't necessarily poised to become a direct competitor to the U.S., which typically serves different markets. Generally, wealthier or more responsible nations buy from the U.S., while poorer nations or those looking to cut corners buy from Russia or China, and Europe sells to itself, according to attorneys.
“Even though they're definitely moving up the food chain in terms of their capabilities, we typically don't see the same level of sophistication or perfection of design that U.S. companies have shown,” Pasco said.
Article can be found on Law360 here: http://www.law360.com/articles/488744/turkey-missile-defense-deal-underscores-export-challenges.