Defense Industry on a path towards recovery

The Polish defense sector is in fairly poor condition: marred by nearly non-existent exports, mostly uncompetitive products and dearth of innovation. That situation is a consequence of historical factors still haunting the industry, thus, in order to get the full picture, one has to look back to the past – to the Warsaw Pact period

By Wojciech Rylukowski

Soon after WWII, the reconstruction of the defense sector required previously unheard of amounts of money. The country saw the second wave of increased spending on armaments in the 1970s, and one decade later, the sector reached the peak of its capabilities. In the heyday of the industry there were 82 strategic defense companies, more than 600 cooperators and 10 research and development centers, according to Jakub Jaworski from the Polish Chamber of Defense Manufacturers. Poland’s capabilities were impressive: the sector could produce 300 class T tanks, 160 jet fighters and transport aircraft, 350 helicopters, or 700 anti-aircraft missiles a year. It shouldn’t come as a surprise, therefore, that in 1985 Poland was the fifth biggest weapons exporter in the world. Most of the production, however, was sold to the Warsaw Pact countries, as the Soviet Union, a mighty patron, required each member to work out a specialization within the alliance – one country could only make a final product with components supplied by other states. For example, parts to assemble a tank in Poland were imported from East Germany, Romania, Bulgaria, Hungary and the USSR. The defense industries in the Soviet bloc states and its satellites were coordinated by the USSR, whose aim was to prevent them from fully developing their defensive potential and becoming independent. That is also why weaponry across the bloc was usually made on Soviet licenses.

Hard Landing

The reality of the cold war forced Poland into excessive spending on armaments, which was said to stand at 12-15 percent of the annual budget. Overgrown and overstaffed (with around 250,000 people working in the industry at its peak), the defense sector found itself in trouble after communism collapsed. Since bonds with former allies became more lax, and demand for weapons fell, it was evident that the sector needed to undergo significant restructuring to become competitive. Although efforts have been made throughout the 1990s and 2000s to upgrade the industry, results have not, so far, been satisfactory. According to analysts, the reasons behind the flop were manifold, including a lack of coordination between ministries, insufficient financing of restructuring programs, insufficient control over money transferred to the troubled companies, or inadequate spending on R&D. A report by the National Center for Strategic Studies (NCSS) enumerates further problems. The way the industry is managed is determined by its ownership, thus it falls victim to the interplay of interests and lack of coordination between ministries responsible for defense, the treasury and the economy. Changing political powers have different plans for the state and the economy, which undermines the continuity of development. Additional weakness stems from management structures oriented at keeping control over companies and not their real transformation towards increased competitiveness. One of the few positive outcomes of restructuring over the past years has been scaling down employment, but it wasn’t enough to turn around the fate of the business.

The transformation undermined Poland’s weapons exports. According to an annual report by the Ministry of Foreign Affairs, Poland sold armaments abroad worth €395 million in 2014. The bulk of that sum (€294 million) accounted for exports of aircraft, unmanned aircraft, and airplane engines and components. In fact, this positive result was achieved by cooperators or subsidiaries of foreign producers operating in Poland, such as PZL Świdnik owned by AgustaWesland, or PZL Mielec, a unit of Sikorsky. Considering that the remaining €100 million included the sale of old, decommissioned weapons, “the real” value of Polish defense companies’ exports is estimated at around €30-

€40 million, a figure as low as at the beginning of the 1990s. It wouldn’t be an exaggeration to say that weapons exports are close to extinction.

Ambitious aims

The government is making efforts to turn the fate of the industry around and to help it bounce back. One of its latest policies is the renewed attempt to consolidate state-owned companies into one entity, something that has previously failed twice. This time, with the newly created Polska Grupa Zbrojeniowa, the situation is expected to be different. In September 2015, the head of PGZ, Wojciech Dąbrowski, announced at a defense fair in Kielce that the company “wants to act as an innovative supplier of specialized systems” and said that it will have revenues of PLN 12 billion in 2030, with the majority of the sum expected to come from exports. The company wants to introduce 100 new products in the next 15 years and become the 10th biggest weapons producer in the world. Whether these big words become reality is still an open question.

The potential success will likely boost production volumes and capabilities of private companies, who may become associates of the state-owned giant. And the private companies are already faring relatively well. In 2014, 13 of them generated revenues of PLN 870 million, and employed 5,000 people. The leading manufacturer, WB Group, is successfully licensing the technology it had designed itself to international markets. The company’s biggest success is the sale of a license for Fonet, a digital internal communication system, to the US Army and several dozen other countries. Apart from that, the firm is already cooperating with state-owned companies. In tandem with Huta Stalowa Wola, it is developing an unmanned gun turret, and recently it has become part of a consortium with PGZ to run in a tender for the Battlefield Management System for the Polish Army.

Positive signals

Despite the grim overall situation, positive signals are even coming from stated-owned companies. For example, Huta Stalowa Wola has developed RAK self-propelled mortars, the first weapon of its kind completely designed and produced in Poland since WWII. Recently launched, the “Regional Security Assistance Program 2022,” aimed at supporting exports, stipulates providing loans to the Visegrad Group members (the Czech Republic, Slovakia and Hungary), the Baltic States, as well as Romania and Bulgaria so that they will be able to purchase Polish arms. The program’s goal is also to bind and coordinate the defense potential of all the countries in the region. There are initial indications that such a program could work. In July 2015, Poland and Slovakia signed a letter of intent regarding cooperation in the defense industry, and as a result, the southern neighbor will buy 30 Rosomak Scipio vehicles for PLN 120 million. Meanwhile, Bulgaria, which is striving to cut dependence on Russia, has signed a €6 million deal with Poland to service its MiG 29 fighter jets. Further successes should come as the PLN 130 billion modernization program announced by the government kicks in. Of course, one swallow doesn’t make a summer, but combined policies may bring tangible results, and Poland may be able to rebuild its defense sector so that, once again, it can become one of the driving forces of the economy.