Savunma ve Havacılık [S&H] talks to Dr. Andreas SCHWER, Chairman of the Board of Rheinmetall International Holding AG, on their aspirations towards a global industrial presence and the goals and intentions of the company focusing on Turkey.
S&H: Can we please start with Rheinmetall Defence. Where do you think Rheinmetall Defence is today in regards of capabilities and global presence?
Dr. Andreas SCHWER: Rheinmetall is quite different from most of the other global acting Original Equipment Manufacturers (OEM) as our level of internationalisation is much higher then the one of our major contenders. Rheinmetall started 127 years ago as a German company, while today the vast majority of our sales is outside Germany and more and more of our capabilities and facilities will be positioned outside of Germany and/or core Europe. Turkey is one of our key markets and we are about to build up a local engineering and manufacturing capabilities there. Rheinmetall is ready to invest into the local generation of the latest technology and – as a result of that – to achive Turkish based Intellectual Property Rights (IPR). And as a result of this localisation we can understand best the local market needs and can provide to our customers exactly what they need. That’s one key discriminator between us and other companies which are concentrating on home-based engineering and production lines within the US or Western Europe.
The other point of differentiation to most of the other OEMs is, that we are not just a systems integrator assembling the sub-systems and components which are all supplied externally. Rheinmetall has a very high level of vertical integration. Meaning that we develop and manufacture all the key components in house. We are convinced that a proper system integrator needs to be able to deeply understand the key technologies in order to have the best technical solution for the customer. That’s the reason why you will find in Rheinmetall not only the platform integration capability, but all the key elements: everything from the explosives to the fuse leading to the whole munition, the barrel that fires the round, the turret that directs and serves the barrel, the platform [tank] that powers and carries the turret, the protection system that encompasses the whole unit, the opto-electronics and sensor package as well as the fire control system the provides the final performance. All all that enables us to provide to the customer the best possible solution to fulfil his requirements.
S&H: And therefore we can say that Rheinmetall is completely vertically integrated?
Dr. A. SCHWER: Yes, today Rheinmetall is the company with the highest level of vertical integration. A system house and at the same time a broad based technology provider.
S&H: What led Rheinmetall to establish all those capabilities in-house?
Dr. A. SCHWER: Maybe it is the German culture and the approach targeting for absolute precision and perfection. And furthermore, in cases when the customer comes back with a problem, we don’t want to be left in a position where we have to ask suppliers to solve the problem, but rather being able to say, yes, we have identified and analysed the problem by ourselves and will solve it immediately, internally.
There are examples where other system integrator cannot resolve technical problems and ask Rheinmetall for support – also currently in Turkey...
S&H: I’m sure this happens a lot, all around the world?
Dr. A. SCHWER: Yes, it does. It does happen for products which are not developed by Rheinmetall but also for products having its origin in Rheinmetall. You should know that all major main battle tanks around the world are based on our technology, with the licensed 120mm smoothbore main gun. These are either copies of our system or are produced under license of Rheinmetall. And as the weapon with its barrel is the heart of any main battle tank, Rheinmetall become famous world-wide for this outstanding technology.
S&H: And the 120mm barrel production capabilities that ended up in Turkey had a funny travel route. The short version [L44] started with Rheinmetall license in the US with the M1, which then found its way to Israel and then arrived in Turkey under the M6o Modernization programme, where the Israelis had modified it to fit in the M6o Turret.
Dr. A. SCHWER: ...and there was a way for the L55 version from Korea to MKEK Turkey. I do not want to comment that any further.
S&H: At least in the end it has been acknowledged where it originates from?
Dr. A. SCHWER: Yes, and they are asking us for our help.
S&H: You were also Head of Rheinmetall Combat Systems, what can you tell us about Combat Systems Division?
Dr. A. SCHWER: I’ve been the Head of Combat Systems Division from 2o12 to end of 2o15. At the beginning of 2016 we decided to substantially re-organise our business. We decided to create under my leadership a new business division which will be fully devoted to open-up and penetrate key international markets. The drivers for that were twofold: first of all we are suffering from more and more rigid export control regimes by core European governments like the German Government. As a result of this policy we hardly can export our German based products anymore into strategic growth regions such as the Middle East. This is a strategic disadvantage which endangers our company’s growth plans.
The second driver is the increasing demand of our customers for offset and localisation of technologies. This is triggering the internationalisation and globalisation of our business and the creation of engineering and production capabilities at our customer’s premises.
For example, under our globalization goals, the acquisition of the ammunition activities of Denel of South Africa, has been a complete sucess story. Since 2oo8, we have realised a six fold increase in sales. Today, they are not only a domestic supplier for the South African national forces but also very active in exports, which makes up more than 80% of their renvenues.
S&H: Does this mean IP rights belong to Denel [SA] and not affected by German regulations?
Dr. A. SCHWER: Yes, for those products we are totally independent from the German Government and this is a kind of the role model, we certainly also want to apply into other product areas.
S&H: But the quality and the performance is still the same?
Dr. A. SCHWER: Yes, the excellent Rheinmetall reputation and highest quality standards are at the center of all operations – anywhere.
S&H: In the case that the production capacity in Germany is not enough, it can be sourced from Denel [SA] to meet, for example German requirements?
Dr. A. SCHWER: Yes, that is possible. We have NATO customers which are buying ammunition sourced from Rheinmetall in South Africa.
S&H: And a similiar model would also be applied in Turkey?
Dr. A. SCHWER: That’s the model.
S&H: Obviously, as a result of differing labour costs and taxes as well as infrastructure costs, the same products will have different prices?
Dr. A. SCHWER: We are certainly trying to optimize our competitivity in price by going into low-cost countries. But as I said above, that’s not our strategic driver. And in most of the cases we are producing different products there.
S&H: How will the German customer react to that? Wouldn’t they prefer to buy from SA production lines due to lower rates?
Dr. A. SCHWER: It could happen, but what the German Government usually wants is to support local production for strategic reasons. Thus, they will never allow us to shut down German facilities and Rheinmetall does definitly not have any plans to shut down German activities.
S&H: So the Denel experience was such a success, you took it up as a role-model as a strategy for all the product lines?
Dr. A. SCHWER: Yes, for all the product lines but some more so than others. We have certain product areas where we believe we can create maximum value for the customer by localization. However, there are also certain areas which are so complex that it doesn’t make sense on the short term. We start with product areas which we can manage in a reasonable time frame, and where is a substantial local demand.
S&H: In addition to Germany, Rheinmetall already has a large industrial footprint in Europe: Italy and Switzerland, as well as the US. How will those existing capabilities be integrated into Rheinmetall International or will they be remain seperate?
Dr. A. SCHWER: With the inauguration of Rheinmetall International we have introduced a matrix organisation within Rheinmetall. This allows us to operate successfuly without the need to integrate all existing international units within the new division. And nevertheless, the customer can still select among the entire Rheinmetall product range.
On the side he can buy products which we will be developed and manufacured by our new factories within key export markets. On the other hand he can procure products from the existing European production lines.
S&H: You specified three strategic markets of importance: In addition to Turkey, those were the Middle-East and the Far-East. Have you determined partner countries in those regions?
Dr. A. SCHWER: We do not restrict ourselves in those key regions and remain open for any potential partner country.
S&H: What about the Far East?
Dr. A. SCHWER: I can not disclose that yet. But we have identified our major targets and we are in negotiations with some partners.
S&H: Let’s focus on Turkey, as this is the reason we are here. You have already established your company in Turkey: Rheinmetall Defence Turkey [RDT], which in Turkish will be: ‘Rheinmetall Savunma Sanayii AŞ’. What can you tell us about your goals and expectations in Turkey.
Dr. A. SCHWER: First of all, we want to be seen as a truly Turkish company and not as a German company. Our intent is not to enter a country for a quick deal and then to say goodby. We are targeting a sustainable and fair partnership. And we will achieve that by by settling down and establishing engineering- and production capabilities. You will see us in Turkey for the long term.
S&H: How will you operate in Turkey: will you start from scratch and establish your own operations or are you looking at acquisitions and/or joint-ventures and partnerships with existing capabilities?
Dr. A. SCHWER: We are working on setting up this joint venture with MKEK which we have already announced in May, last year. The bureacracy involved is quite complex but we are very close to the final signature.
S&H: MKEK has a special status in Turkey, as it comes under the Ministry of National Defence [MoND] and thus also under the watchful eyes of the Turkish Armed Forces.
Dr. A. SCHWER: Yes, but all parties are absolutely sure that with Rheinmetall they have the right partner on board, because there is nobody who can offer this broad range of capabilities and technologies. So the idea is to come and develop your ammunition, free of German IPR. We want to make Turkey independent from foreign suppliers, we want to be a partner of the Turkish Government, in their aspirations of becoming self sufficient by 2o23. Thus we are prepared to do whatever is needed to meet those goals.
S&H: So who will own IPR rights that will be created in Turkey?
Dr. A. SCHWER: Our joint-venture with MKEK will have the rights to the IPR. Which will thus be Turkish.
S&H: And you will utilize the existing production lines?
Dr. A. SCHWER: Yes, at least in the beginning. And where modernization is needed, we will support MKEK in doing so.
S&H: Would privatization of MKEK be an interest to RDT?
Dr. A. SCHWER: Yes, it would. Wholly or in part, both options are worth looking at.
S&H: This is one part of the interests of Rheinmetall in Turkey. Rheinmetall is also interested in armoured vehicle acitivities in Turkey?
Dr. A. SCHWER: Yes, we are! We would like to become a partner in the ALTAY Main Battle Tank Program and also in other land platform programmes in the future. We are looking at both wheeled and tracked vehicles and associated integrated logistics services.
S&H: Will the vehicles area of activity be handled in the same way as the ammunition approach, creating new local designs for Turkish IPR ownership?
Dr. A. SCHWER: It is our target to localise technologies and create Turkish IPR to the maximum extend possible and economically viable. In order to achive that Rheinmetall will seek for partnerships with equipment supplier based in Turkey. In any case, the decisions on the degree of localisation will be taken in close alignment with the Turkish government on a case-by-case basis. And, certainly, the exportability of the final product into other countries will play an essential role.
S&H: In the case of the ammunition approach, you had only one option to work with. In the case of vehicles there are many potential partners involved in vehicle manufacturing. There was recently a press announcement that Rheinmetall and the Turkish based BMC will join hands for this kind of business. Is it true ?
Dr. A. SCHWER: Yes, we have signed on July 27th our Join-Venture agreement and intend to inaugurate the joint company before end of this year. At this point in time there will be an offical press statement. We are very happy to have teamed-up with BMC, a profound and well established player in the Turkish automotive and defence business. A third party in our JV is the Malaysian based ETIKA Group, a strategic partner of Rheinmetall in many regions.
S&H: What sort of a timeline are you looking at regarding the ammunition joint venture with MKEK?
Dr. A. SCHWER: It depends mainly on our partner side. As soon as we have the approval from the Turkish government we can start the following day. Everything is ready to go.
S&H: Have you identified the product line that the RDT-MKEK JV will be working on?
Dr. A. SCHWER: We have a strategic road map! Obviously the 12o mm tank ammunition is important as various types of artillery ammunition, but we are also looking at several kinds of medium caliber ammunition.
S&H: On the issue of exports, obviously Turkey has very high aspirations. In this case one of the export areas of Turkey is the Middle East, where you are also looking at setting up a joint-venture. How will you manage the resulting potential competition which might arise as a result of your aspirations in Saudi Arabia?
Dr. A. SCHWER: We will differentiate our product portfolio in Turkey and the GCC countries based on the respective local market needs but also on the available assets and resources, including the supplier base. There will be no competition in between the different local companies.
S&H Does your cooperation in Turkey also cover the manufacturing of your new products such as 130mm main gun and ammunition for MBTs?
Dr. A. SCHWER: If the Turkish Government wants us to implement that in the ALTAY MBT, then yes, we will do so. That is what differentiates us from all the other players on the market. We have all those high-end technologies in house and we are not afraid of sharing it with trusted partners. That’s our strategy.
S&H: And also you will be creating the technology locally for the Turkish IPR?
Dr. A. SCHWER: Yes, exactly. If the Turkish Government decides, ‘please install this new gun into our new Altay main battle tank and please develop ammunition within Turkey’, we will develop the 130 mm gun and the related ammunition in Turkey – resulting in Turkish IPR. And by the way: this would provide to the Turkish Armed Forces the most powerful tank of the world.
S&H: Is the German government aware of your plans ?
Dr. A. SCHWER: Yes, that’s the case. It was always our policy to inform the German Government on our strategic plans. We do nothing behind their back and we act certainly in full compliance with the existing laws. For example, they knew what we were doing, when we bought Denel Ammunition of South Africa a couple of years ago. And we informed them that we will make this company fit for export from South Africa into third countries - so it was an open book.
And, please, do not underestimate the positive effect on our German based business and the German government: there is always the opportunity to back-licence the technology to our German entities and to make it available to the German customer – who does not have to finance expensive development cost.
S&H: You are focusing on the ALTAY Main Batlle Tank production with the intention of localizing all necessary IPR areas: how will it work in the case of the powerpack? Are you looking at the powerpack partnership of MTU and Renk to work towards the same localization in Turkey?
Dr. A. SCHWER: There’s opportunity for localization of powerpack technology in Turkey beyond what is currently undertaken in Turkey.
S&H: Under the above powerpack partnership or new solutions?
Dr. A. SCHWER: Both. We are currently involved in discussions with all parties and we have a good strategy in place. As strategic partner of MTU and Renk for many decades, we have a very trustful relationship and can bring assets to the table which other players can’t do.
S&H: You pointed out that you are interested in the production of the ALTAY MBT, how is that going to work?
Dr. A. SCHWER: It is the common intent of Rheinmetall, BMC and ETIKA (our other JV partner) to formally bid for the serial production phase.
How the process will look like is only depending upon SSM. If the customer will ask for a pure build-to-print solution, we will offer build-to-print, knowing that we could offer more attractive packages. We are convinced that sooner or later the Turkish Government would like to have the latest technology, which only Rheinmetal could bring to the table.
Again, we are ready to offer the full spectrum of capabilities and technologies of the Rheinmetall Group. It is only up to the customer to decide on the options.
S&H: How is RDT planning to undertake R&D in Turkey?
Dr. A. SCHWER: We are planning to localize all related R&D activities in Turkey.
We are currently evaluating various sites in Ankara and Istanbul and the decision will obviously depend on various factors.
S&H: Dr SCHWER, thank you for sparing your time for our readers and good luck.