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SNAPSHOT FROM THE FIELD
A Site Selection Web Exclusive, May 2011
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Come Together

A city in coastal Turkey cashes back-to-back winning tickets on major industrial projects.

by ADAM BRUNS

SNAPSHOT FROM THE FIELD
A member of a dance troupe performs at the elaborate groundbreaking ceremonies for the new Kale Pratt & Whitney joint venture plant in Izmir’s Aegean Free Zone.
A

s dawn was just beginning to break in the United States on Kentucky Derby day, two major corporations placed their own wagers on a high-stakes joint aerospace project nearly half a world away.

Just like at Churchill Downs (and with nearly as much pomp), large white tents were erected 5,642 miles (9,078 km.) to the east in the Aegean Free Zone, or ESBAŞ, in Gaziemir, Turkey, part of the Izmir metro area of some 3 million residents, on a day most of the nation counts as a work day. Tables were set and security lines established to accommodate Turkish President Abdullah Gul and 400 or so attendees celebrating the groundbreaking for the $200-million Kale Pratt & Whitney joint venture plant that will make components for the F-35 Joint Strike Fighter as well as for the F135 engine that powers it.

The big party came one day after diesel engine and filtration giant Cummins held its own celebration for a $70-million filtration and components plant, also in the ESBAŞ zone. The back-to-back ceremonies reinforced U.S.-Turkish business and military connections in the same week that the killing of Osama bin Laden sent conflicting waves of resentment and reassurance throughout this predominantly Islamic part of the world. Imminent national elections on June 12 are further ratcheting up the political and emotional pitch in Turkey, with polling showing 59-percent support of the current administration.

But none of that background noise could deter the enthusiasm of company and Turkish organization leaders, as the two projects embody an entire nation's economic momentum, and express in concrete form why this secular republic, even under conservative ex-Islamist leadership, stands apart from its Middle Eastern neighbors.

KaleCementPour2
Abdullah Gul, president of Turkey, prepares to throw the switch May 7 to pour the first cement for the Kale Pratt & Whitney plant. In remarks, he said the project was about more than defense alliances … it was about commerce and trade.

"The Turkish government for the past eight years has been decidedly pro-business and interested in attracting foreign investment, and they have consciously chosen world standards," said U.S. Ambassador to Turkey Francis Ricciardone in an interview just before the festivities unfolded. Ricciardone's diplomatic career has included stints across the Middle East. "Look carefully at the environment," he counseled. "Many advantages are obscured by headlines, especially for less sophisticated companies. They think Turkey and think of the Middle East, instability and violence, and they are frightened off. The Obama administration would advise companies to take a closer look."

President Obama himself took that look two years ago when he visited Turkey, and immediately set in motion programs to further stimulate business and trade ties between the two nations. But the momentum has been building since well before he took office. Ricciardone noted Turkey's steadily rising standards since joining the EU customs union in 1996. Simultaneously, various business sectors such as telecom have gradually embarked on the privatization path, motivating companies from abroad to beat a path to Turkey. Today, Turkey stands in a tie with fellow Mediterranean nation Italy as the world's 16th largest economy, which grew by 8.9 percent in 2010.

Plenty of Space, Plenty of Students

The new 215,285-sq.-ft. (20,000-sq.-m.) facility, targeted to be open by the second quarter of 2012, is located on approximately 25 acres (10 hectares), and will be aiming for LEED-Gold certification, a high goal in the manufacturing realm. But high goals are typical of the vision of the two companies, of ESBAŞ, and Turkey as a nation.

The new project, officially established by Kale Pratt & Whitney Uçak Motorları Sanayi A.Ş., is the inaugural outgrowth of the JV first announced at the Farnborough Air Show last July.

"We will make an investment of [US]$60 million in five years and employ 700 for the company," said Kale Group Technical and Chemistry Head Osman Okyay then, in a translated press release from Kale (pronounced "kah-lay"). "We forecast a very fast growth. We may reach an investment of $100 million, maybe $200 million in the following years. We perform the manufacture of 300 parts among the 4,000 parts of F135 engine. We may manufacture up to 1,000 parts when the investments increase."

At that time, a final site had not been selected.

"When we create business opportunities in any country in a joint venture relationship, we generally rely heavily on our partners," said Dave Galuska, senior vice president of module centers and operations for Pratt & Whitney, in a post-lunch interview at the groundbreaking. "They understand the country far better then we do. Together we defined what the facility requirements would look like. As you get that list of requirements you can map it to where there are site alternatives that can meet those requirements. We got it down to two sites, this being one. And we just turned it over to our partners and said, 'Either is fine for us. You know it best. You get to make the final decision.' "

The other finalist site was a free trade zone in Kocaeli. But ESBAŞ is known for its aerospace cluster, which includes such companies as Fokker Elmo, German firm PFW and Turkish firm Lisi Aerospace. ESBAŞ in May 2012 will host a Global Industrial Cooperation Conference organized by a consortium of organizations in the aerospace, defense and security sectors.

Kale was founded in 1957 in the ceramics industry. Today it employs 5,000 people in 22 different businesses.

Ilhan Ozaydin, general manager for Kale Aero, said Kale initially looked at whether an existing site could accommodate the new JV. But the business plan requirements needed more space. So Ozaydin visited four or five different free trade zones, including Tuzla in Istanbul and Bursa, to get proposals, and sent them to Kale's board of directors.

"The best site for our needs was ESBAŞ, not only in terms of land quality, but the mentality as well," he said. "There is total cooperation."

Zeynep Bodur Okyay, president of the Kale Group of Companies, reaffirmed the sentiment: "What sets apart ESBAŞ is the mentality of its leadership," she said, noting that the zone is not only the eldest of Turkey's zones (celebrating its 20th anniversary in 2010), it's also among the best, because of that collective attitude.

ESBAŞ founder Kaya Tuncer said his zone is looked to for leadership among the 19 zones currently active in Turkey, as well as for planning now under way by the Turkish government for a new generation of zones. He says the most important elements are, in order, infrastructure, social structure for the work force, logistics facilities, and finally, tax incentives, which most financial officers expect today as a ground-floor condition.

Zeynep Okyay said Kale's site selection team comprised four individuals, including Kale's CEO, GM and president of the technical division, as well as Pratt & Whitney. Ozaydin said the lease was signed once a soil investigation showed positive results. Okyay said another crucial aspect was the ability to have space to expand into in the future on the site, which was formerly an olive tree farm. But a new aerospace technical school being formed by the Aegean University in Izmir with the support of the Turkish Air Force and the Turkish Undersecretariat of Defense (SSM) may have helped Izmir carry the day.

"Human resources qualifications were most important," said Okyay. "Izmir is very well known for its education quality, but the city has lost some of its industry, so the younger generation tends to leave. But it's getting better."

"Labor is a big advantage, with a skilled and educated work force, and a much lower cost than in Italy," said U.S. Ambassador Ricciardone. "And it's a young country, with a median age of 28. There are eight universities here in Izmir, for example, with two more opening this year. And they are educated with white-collar and technical skills. We're not talking about people making t-shirts."

Turkish Commerce Minister Nihat Ergun said as much from the podium, noting that advanced technology goods had gone from around 5 percent of total manufacturing exports nearly a decade ago to between 20 and 25 percent today.

Led in part by ESBAŞ, the Aegean region was second only to Istanbul's Marmara region in exports in the first quarter of 2011, according to statistics from Turkey's Undersecretariat of Foreign Trade, with more than 4,000 firms sending off goods worth approximately US$3.2 billion, a 30-percent increase over the first quarter of 2010.

Kaya Tuncer said 5 percent of the zone's original 550-acre (223-hectare) footprint is left undeveloped. But negotiations are under way with the government for another parcel of about 170 acres (69 hectares). Meanwhile, expansions have recently come from Fokker Elmo, Akzo Nobel, Endor and Hugo Boss, among others, and two companies just this month sought 25 acres (10 hectares) each for possible projects. Some 16,000 people now work in the zone.

Human Connections Strong

Both Dave Galuska and his colleague Ed O'Donnell, vice president of F135-F119 business development within the military engines division of Pratt & Whitney, say the infrastructure of relationships in Turkey reinforces business aims just as strongly as good soil does. The genuine warmth of those relationships was on display as Galuska joined a large group at the groundbreaking ceremonies paying their respects to Kale Group founder Dr. Ibrahim Bodur, part of a legendary generation of Turkish industrialists.

O'Donnell first met Osman Okyay in 2003, when Pratt was just beginning to do some Joint Strike Fighter (JSF) program work in Turkey. Galuska, meanwhile, had previously worked with fellow United Technologies companies Hamilton Sundstrand and Sikorsky, both of which have made significant investments in Turkish business development. Pratt also has a growing relationship with fast-growing Turkish Airlines, with which it opened an engine center in 2010.

Galuska said the new project in Izmir stands out because it is unconnected to the traditional "offset" approach, whereby a government buys a U.S. defense technology platform and wants some in-kind trade associated with that procurement.

"None of what we're doing is offset-based," said Galuska. "The selection of the property, the investment, the cost structure … it is a competitive, compelling story all by itself. We're doing all of this, and there's no commitment to buy the airplane, or to buy Pratt & Whitney engines. It's just good business."

The F135 engine is certainly good business for Pratt at present, as its the only engine platform being used for the JSF program. The U.S. Dept. of Defense cancelled a contract for a competing engine from GE and Rolls Royce, though the companies have pledged to continue developing their engine entirely through self funding. The JSF project has eight partner countries and two security cooperative participants (SCPs). The partners include the United Kingdom, Italy, Netherlands, Turkey, Canada, Australia, Denmark, and Norway. The two SCPs are Israel and Singapore.

"Generally speaking, the JSF program has broken the model of offset," said O'Donnell of the eight-country aircraft development program, with affordability and partnership initiatives leading to a more sustainable business model than discrete trade-offs. He and Galuska both observe that the JSF program office truly leads the way within the military in understanding how worldwide sourcing not only brings a value proposition to the program, but offers strong growth opportunities for the industrial base within partner countries.

"This partnership is a one based on trust," said Kale founder Bodur last summer. "They will assign six to seven experts, who are in key positions, to us for this manufacturing plant. This is very important because they will give us the technology."

One significant human resource for Pratt and many other companies is Murad Bayar, undersecretary of the defense, who since coming into office in 2004 has encouraged what O'Donnell calls "a great explosion of cooperation with industry," resulting in growth in defense industry exports.

O'Donnell said partner countries are bringing about 700 to 800 aircraft to the JSF program. Pratt works with some 50 suppliers throughout the partner countries, as well as close to 450 in the U.S. O'Donnell says the partners bring a lot of affordability, ingenuity and insights to the program, often via specialized skills. Denmark, for instance, doesn't have a propulsion industry to speak of, but can offer IT and other softer skills. Netherlands has more work going on in composites: "They all bring a different character, and they've all benefited," he said.

"We keep a good eye on emerging markets," added Galuska, watching such factors as labor costs as well as the logistics costs of moving hardware. In Turkey, said O'Donnell, "you get tremendous value in skilled labor, engineering excellence, and the ability to machine tough materials."

While the commercial side of the propulsion market is generally sourcing in places such as China and India, Turkey is very competitive for the more complex items, said Galuska, because the work force has "that nice mix of process technology to make more complex items in an engine, which don't have huge direct labor content. They have the engineering expertise to do the process development to get the maximum out of advanced machining centers. For high-touch labor content, wage differential is key. But move up to the high-tech stuff, and resource talent is key."

The Best Path to Knowledge

Ricciardone said there is an increased interest from the governments and from the companies themselves in fomenting export and trade activity among small and medium enterprises based in both countries.

"We have trade missions in both directions, including an oil and gas sector group coming in June," he said. "And there is a group of seven Turkish delegations going to the U.S. or Europe. Of course the U.S. interest is in American jobs, but invariably, when companies establish relationships, we see two-way investment."

Such activity could help correct the trade imbalance that has lagged the strategic defense relationship that the two countries first established through NATO 50 years ago. Turks often point out that their country only accounts for two out of every 1,000 imports coming to the U.S. In 2010, the U.S. exported $15 billion worth of goods to Turkey, but only $5 billion in goods made their way to the U.S. from Turkey.

The current Turkish leadership continues to push the virtues of privatization. Improvements in intellectual property protection, and in food and pharmaceutical inspection regimes, may help improve that trade imbalance even more, said Ricciardone.

Meanwhile, as economic developers the world over repeat to whomever will listen, the best way to see a place's advantages is to a) go there, and b) talk to people.

"I think a lot of Americans are somewhat naïve on Turkey," said O'Donnell. "I think a lot of people come with a little suspicion, and quickly learn that shouldn't be the case. Once you come to Turkey and meet people over here, you quickly establish how genuine they are in their desire for friendship. And you also find out that once you establish a friend, it's not superficial. You have a friend for life."

Galuska attested to that: Just the week before the groundbreaking, he hosted friends from Turkish precision machining firm Alp Aerospace at his family home in Connecticut. As for the business side of things, he summed up the challenge and the opportunity in succinct terms that could apply to any business looking to branch out:

"There is a lot of good capability in the world that is not well understood."

Ed O’Donnell (left), vice president of F135-F119 business development within the military engines division of Pratt & Whitney; and Dave Galuska, senior vice president of module centers and operations for Pratt & Whitney.

Story in Pictures

Kale Group founder and honorary chairman Ibrahim Bodur accepts the good wishes of Dave Galuska, Pratt & Whitney’s senior vice president, module centers and operations.
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