Local tank production contract litmus test for Koç’s defense business

Burak Bekdil

Prime Minister Recep Tayyip Erdoğan (L) and Koç Holding Chairman Mustafa Koç are seen at the inauguration ceremony of local tank Altay, developed by Koç’s defense firm Otokar. DAILY NEWS photo

A multibillion-dollar government contract to select the maker of Turkey’s first indigenous main battle tank will be a litmus test for the defense arm of the country’s biggest industrial conglomerate, Koç Holding.

Koç’s armored vehicles manufacturer, Otokar, designed, developed and produced four prototypes, under a $500 million contract, of the Altay, the new-generation Turkish tank, but a much bigger contract for its serial production will likely see a three-way competition. 

A few months after a political row between Koç and the government, the group’s shipyards lost a nearly $2 billion deal which it had won on an interim basis. That row has already subsided but there is a challenging newcomer in the armor market: Ethem Sancak, one of Prime Minister Recep Tayyip Erdoğan’s favorite businessmen and a close friend. 

It was not a secret that Koç was never Erdoğan’s favorite business group. Its owners are not conservative enough and are often portrayed as the “Istanbul elite,” as opposed to Erdoğan’s preferred conservative businesses from the Anatolian heartland.

The first major public tension between Koç and Erdoğan’s government emerged last summer. In one incident during the month-long Gezi demonstrations in June, protesters tried to escape police tear gas and pepper spray by taking refuge in a posh Istanbul hotel, the Divan, owned by Koç. Hotel management admitted the protesters into its lobby, which quickly turned into a makeshift first aid room.
 
The police fired more tear gas and pepper spray into the hotel lobby although it is illegal to fire these chemicals into indoor spaces. It was reported that Ali Koç, a board member and third-generation family member, had ordered the hotel to help the protesters.

A few days later, an angry Erdoğan said in a public rally: “We know which hotel owners helped terrorists [protesters]. It is a crime to abet terrorists. And those crimes will not remain unpunished.”

Shortly after that brawl, tax police raided Koç’s refinery subsidiary, Tüpraş. Officials said it was a regular inspection. But in September the government’s executive committee that oversees defense procurement scrapped a $2 billion deal with Koç’s shipyards, RMK Marine, pledging a new competition.

Back in January 2013, RMK had signed the contract to build six vessels under the program dubbed MİLGEM. 

Koç’s other defense heavyweight, Otokar, was widely viewed as the “logical” producer of the Altay which it designed and developed. But things may not be so bright for Otokar as defense procurement officials are preparing to officially launch a competition for the serial production of the first indigenous Turkish battle tank. 

The race for the serial production will involve an initial batch of 250 tanks to be followed by three follow-on orders each comprising 250 more tanks. 

Defense officials say the contract will be put out for tender after the presidential elections.  
According to one official, the competition will most likely begin between the formation of the new government and the end of the year. 

Otokar is expected to compete with two other local rivals, BMC and FNSS.  

PM’s close friend

Defense industry sources say that although Otokar is the logical frontrunner in the contract because it was the developer of the Altay, it may face particular challenge from BMC.

Only earlier this year BMC, a previously failed company, emerged as a serious rival in Turkey’s armored vehicles market. 

Sancak’s investment fund ES Mali Yatırım ve Danışmanlık A.Ş. on May 1 bid 751 million Turkish Liras (US $359 million) for BMC. The government approved the sale May 8. Sancak was the only bidder for the company.

Sancak, who used to mostly operate in the pharmaceutical and health sectors, has recently switched the focus of his business toward “building up a strong presence in the media and defense sectors.” His media outlets are widely known to be pro-Erdoğan publications.

Earlier in 2014, a fund administered by the government put BMC up for sale. BMC was seized in May 2013 due to financial obligations its parent company, Cukurova Holding, failed to fulfill. The group’s debts amounted to $455 million.

BMC manufactures the Kirpi, a mine-resistant, ambush-protected (MRAP) vehicle. The Kirpi is the country’s first locally designed and developed MRAP.

Sancak said he was in negotiations “with the relevant agency” of the Qatari government for a potential partnership in BMC. The Qatari government is Erdoğan’s staunchest regional ally.