Turkey’s Decision a Wake-Up Call for U.S. Missile Defense Suppliers

By Sandra I. Erwin

U.S. antimissile systems have been the gold standard for decades, and American firms have sought to capitalize on that prestige as they court customers in the Pacific Rim and the Middle East.
So it came as a shock that Turkey, which hosts a U.S.-made radar as part of a larger NATO missile shield — selected a Chinese company to build a national defense system.

The decision, two years in the making, appears to have been based not on technical merits, but on fire sale prices and economic benefits that the Chinese were able to offer to the Turks, said Mike Trotsky, vice president of air and missile defense at Lockheed Martin Corp.

Lockheed, teamed with U.S. rival Raytheon Co., was among the contenders for the Turkish contract.

There are still “many questions” about this deal, Trotsky said at a news conference last week during the Association of the U.S. Army annual convention in Washington, D.C.

The selected bid was from China Precision Machinery Export-Import Corporation, a state-controlled firm that makes the HQ9 long-range surface-to-air missile. Its offering, worth about $4 billion, was $1 billion cheaper than those submitted by other competitors from the United States, Russia, and a French-Italian consortium. The United States proposed a system of Patriot air defense batteries — made by the Raytheon Co. — that would fire Patriot PAC-3 interceptor missiles supplied by Lockheed.

Because the Chinese offering came with generous government subsidies, it put American firms at a considerable disadvantage, said Trotsky. “The industries that comprise the HQ9 production are state owned,” he said. “In the U.S. we typically are not going to compete with a subsidized bid. They are always going to be able to offer a lower price.”

U.S. suppliers have dominated the missile defense market to a great extent because the Pentagon backs these sales and commits to providing tech support and maintenance services for as long as the buyer owns the system. Only U.S. firms have a history of supporting systems for 20 to 30 years, even if they are no longer in the U.S. inventory, Trotsky said. The Chinese have never sold an air and missile defense system to protect an entire country. “There isn't a lot of test data about the Chinese system,” he said. “There isn't a lot of history about China's ability to support a system for 30 to 40 years in another country.”

The reaction within U.S. industry circles has been a realization that technical excellence offers no guarantees in cutthroat international arms competitions. “More attention [should be paid] to how the U.S. can offer better deals to overcome some of this subsidized benefit,” Trotsky said. Turkey was not looking to just buy a system. It also wanted a co-production arrangement and financing. “The Chinese were a billion dollars less than the next bidder, [and] offered full financing and full coproduction,” he said. “The United States didn't release us in industry and the Army to do those kinds of things. The business deal the Chinese offered looked attractive. Only time will tell if promises were met.”

Some countries increasingly prefer to buy arms through commercial agreements, as opposed to Pentagon-managed foreign military sales, or FMS. Although the U.S. government stamp of approval is desired, those transactions come with strict limits on technology sharing and reselling, which deters some potential buyers.

U.S. sales of missile defense systems are done both commercially and through FMS. Industry likes to have flexibility to construct deals, “but we also like to see the security aspects that the U.S. government brings when we do business together,” said Trotsky.

Whether a system can be offered as a commercial sale or as FMS is decided by an executive committee at the Defense Department. “To the U.S. government, the distinction is that it can enforce security obligations from one country to another. For sensitive technologies they prefer that.”

The United States and NATO allies voiced strong objections to the Turkish decision after it was announced. They contend that by going with a Chinese system, Turkey undermines the interoperability of NATO’s missile shield. The HQ9 would not be able to operate with Patriot and with Raytheon’s AN/TPY-2 radar, which currently is based in Turkey. The mobile X-band radar detects ballistic missiles immediately after launch.

“There is going to be continued discussion about how you bring a Chinese system into a country that already has an established NATO missile defense network,” Trotsky said. “NATO countries are going to want assurances about security so their information is kept separate. That will be a difficult thing to execute. I don't know that the Turks have a plan to do that.”

According to news reports, Turkish leaders, in response to the blowback, said they would consider new bids if the deal with the Chinese did not work out. “If U.S. and European companies make us better offers, we will continue to talk with them,” Foreign Minister Ahmet Davutoglu told local journalists, reported the AFP news agency.

Despite the high-profile loss, U.S. firms remain bullish on the international missile defense market.

“There is a high demand for missile defense in general, and there will continue to be for three to five years,” Trotsky said. As long as Iran and North Korea continue to develop long-range ballistic missiles, U.S. allies in the Pacific Rim and the Middle East will seek to build up their defenses, he said. “Most countries we talk to are concerned about short and medium range ballistic missiles.”

Among the newest buyers of U.S. systems are the United Arab Emirates. It signed a $1.1 billion deal last year to buy 48 missile defense batteries from Lockheed Martin. The system, known as Terminal High Altitude Area Defense, or THAAD, uses Raytheon’s AN/TPY-2 radar. With no new U.S. purchases of the radar on the horizon, Raytheon is banking on FMS deal to keep the AN/TPY-2 production line alive, said James L. Bedingfield, program manager at Raytheon.

The company has delivered 11 radars and is expecting a U.S. Army contract to build the 12th. “In fiscal year 2014, there are some spares and pieces of a radar to be bought. Beyond that, it's anyone's guess. But I don't see the program ending.”

With Pentagon funding drying up, companies are looking to their FMS customers to invest in upgrades. Raytheon signed a deal recently with the UAE to upgrade the AN/TPY-2 ballistic missile defense radar’s signal and data processing equipment. This would enable the “brains” of the radar to more quickly and accurately discriminate threats from decoys, Raytheon officials said.

“We both benefit from the upgrade and share the cost,” Bedingfield said in an interview. “The U.S. Missile Defense Agency has been very good about understanding where the FMS opportunities are.”

The U.S. Army, which manages ground-based tactical ballistic missile defense programs, is facing draconian budget cuts and is not expected to make major purchases in the foreseeable future, officials said.

The plan is to “integrate” existing air and missile defense systems, rather than have them operate in isolation, said Gen. Vincent K. Brooks, commander of U.S. Army Pacific. “We have a need to protect ourselves, our installations and our friends” that must be defended under existing treaties, Brooks told reporters at AUSA. “We have adversaries who are increasing their missile stocks on hand, their surface to surface fire, causing danger to the region,” he said. “There is increasing demand for integrated air and missile defense.”

The Army was expected to invest about $7 billion in IAMD programs. But decisions are on hold pending the completion of a Defense Department inspector general audit. As originally conceived, the IAMD would be a network of several missile defense systems such as Patriot, the Navy’s DDG-1000 land-attack destroyer, the Joint Land Attack Cruise Missile Defense Elevated Netted Sensor (JLENS) aerostat and others.

The thinking is that, if an enemy tried to jam a Patriot signal, the United States could switch to another system that operates on a different radio frequency and still be able to launch an interceptor.
JLENS manufacturer Raytheon hopes that tight Pentagon budgets will spur interest in aerostats as low-cost alternatives to satellites or aircraft. Douglas W. Burgess, Raytheon’s program manager, said the Army plans to continue testing two JLENS helium-filled aerostats — equipped with radar that can track low flying aircraft or missiles — for the next three years at the Aberdeen Proving Ground, Md.

The Missile Defense Agency’s interest in high-altitude sensors is not limited to aerostats. The agency awarded The Boeing Co. a research contract to equip the company’s Phantom Eye unmanned aerial vehicles with sensor packages. A prototype is being tested at Edwards Air Force Base, Calif., said Michael L. Rinn, Boeing vice president for directed energy systems. The company, too, is hoping that the Phantom Eye will be seen as a cheaper alternative to missile-tracking satellites.

Topics: C4ISR, Sensors, International, Missile Defense, Procurement

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