WASHINGTON U.S. arms makers Raytheon Co and Lockheed Martin Corp are considering ways to sweeten their offer to build a Patriot missile defense system for Turkey after Ankara said it could still back away from a provisional $3.4 billion deal with China, sources familiar with the issue said on Tuesday.
"There are internal discussions going on about improving the Patriot offer," said one source, who is familiar with the talks but not authorized to speak publicly.
A second source confirmed that preliminary discussions were under way within industry and the U.S. government about how the offer could be adjusted to be more competitive with bids submitted by the Chinese firm, and a European group.
Both sources said no decisions had been made and it was important to allow Turkey - a member of NATO - time to make up its mind.
Turkey announced in September it had chosen China's FD-2000 long-range air and missile defense system against rival offers from Franco/Italian Eurosam SAMP/T and Raytheon.
It said China offered the most competitive terms and would allow co-production in Turkey, but the decision caused alarm in NATO countries worried about China's growing clout.
Secretary of State John Kerry and other U.S. government officials raised concerns after Ankara's choice of the missile defense system built by China Precision Machinery Import and Export Corp, a firm that is under U.S. sanctions for violating the Iran, North Korea and Syria Nonproliferation Act.
"We continue to convey our serious concerns about the Turkish government's contract discussions with a Chinese company - which is currently sanctioned by the United States - for an air and missile defense system that will not be inter-operable with NATO systems or collective defense capabilities," said one State Department official.
State Department officials said Kerry had expressed his concerns to Turkish Foreign Minister Ahmet Davutoglu in New York, and Assistant Secretary of State Victoria Nuland, who oversees European and Eurasian affairs, has discussed the issue with senior Turkish officials.
Washington sees Turkey as a key partner in the Middle East, with common interests from energy security to counter-terrorism, but Ankara is not the deferential ally it once was as it seeks an increasingly independent role on the world stage.
One of the sources said the U.S. companies were examining whether they could scale back their bid to bring it more in line with what was offered by the Chinese firm, which did not include the capability to target medium-range missiles.
That may involve changes in the missiles that would be provided with the Patriot system.
The companies are also reviewing the offset agreements and co-production deals involved in the U.S. bid, the sources said.
Turkey was seeking some space launch capabilities, but it was unclear if U.S. officials would approve the export of such sensitive technologies as part of an offset package accompanying the missile defense deal, said one of the sources.
The sources said the U.S. proposal was more comprehensive and offered Turkey greater capabilities than the Chinese system, as well as ongoing maintenance and technical support for the Patriot missile defense system. They said the offer also included substantial co-production arrangements.
"It's really not certain how it will work out," said one of the sources. "But there is a lot of interest in at least examining what could possibly be done."
Sources familiar with the discussions have said the deal could affect Turkey's plans to buy radar-evading F-35 fighter jets built by Lockheed.
Turkey helped fund development of the F-35 and hopes its participation results in component orders for Turkish firms.
Pentagon officials have confirmed that the Defense Department's policy chief, James Miller, visited Turkey this month, but declined to give any details about his discussions with Turkish officials about the missile defense deal.
Turkish Defense Minister Ismet Yilmaz last week said Turkey has asked bidders for the missile defense system to extend the their bids and offer improved terms - in case talks with the Chinese firm failed.
Executives at Raytheon and Lockheed say they remain prepared to work with Turkey on the issue, but have declined comments on any specific efforts to revise their offer.
"We welcome the opportunity to continue discussions with the Turkish government for their critical missile defense needs," Lockheed spokesman Gordon Johndroe told Reuters in an email.
(Reporting by Andrea Shalal-Esa; Editing by Tim Dobbyn)