After the breakdown of the international order in 1989/1990, Poland has accomplished a political and economic transformation which is perceived as a model in the world. The introduced reforms have led to fundamental changes in many economy sectors and opened the Polish market on globalization processes. With the accession to the European Union, the trend has intensified, making Poland the 20th most developed economy in the world in terms of GDP and exports of services and goods. At the beginning of the political changes, the Polish political establishment decided to protect selected economy segments from further reforms and privatization, including the defense industry.
Over 30 years since the economic transformation, the Polish defense industry has undergone minor transformations. The development of private companies and subsidiaries of foreign companies, especially American and European, is visible in defense industry. The majority of state-owned enterprises which survived the transformation period still exist today. The ambitious Polish Armed Forces modernization program and the increase in defense spending above 2% of GDP enables stable operation at the Polish defense sector. However, without conducting structural changes, technological development and increasing the arms export, Polish defense companies will be exposed to a slow loss of capabilities and the ability to sell weapons even to their own armed forces.
State defense industry – a permanent leader of transformation.
Since the beginning of the economic transformation, the Polish government has prepared and executed six restructuring programs for defense sector. Most of the restructuring programs were partially successful due to the lack of stabilization and effective operation of the industrial and technological base. Between 2013 / 2014 there was a fundamental moment for the consolidation of the Polish defense sector. A key existing defence company – Bumar Group was interested in incorporating WPRP ((Military Maintenance and Production Enterprises subordinate to Ministry of Defence) and Huta Stalowa Wola (armoured vehicles manufacturer). In the meantime, Bumar Group changed its name to Polski Holding Obronny (Polish Defense Holding) – to reflect far-reaching aspirations. However, as a result of WPRP’s and HSW objections, the Polish government decided in September 2013 to create a new entity – the Polish Armament Group (PGZ). The employees of WPRP and HSW feared the dominance of PHO companies within the holding structure and were critical of PHO’s image on export markets due to problems with contract execution (WZT-3 for India and PT-91M for Malaysia). Finally, after many negotiations between the various stakeholders, it was decided to establish the Polish Armed Forces Group at the end of 2013.
The conducted consolidation process was based on a share exchange merge and the PHO’s companies transfer to the newly established defense group. In this way, the most important process of the Polish defence sector consolidation has been completed. The shareholders of the PGZ are the Industrial Development Agency, Minister of State Assets and Polish Defense Holding. The new group includes over 50 entities employing a total of about 19 thousand employees. PGZ covers most of the potential of the industrial-military complex with capabilities in the development of the land-based system, electronics, optics, missiles and marine technologies.
Defense electronics sector
Polish companies from the defence sector can be proud of their achievements in the field of defence electronics, especially in the radar segment. Key companies include PIT Radwar and CTM, which have the longest experience in developing and implementing defense electronics and optoelectronics systems, are major players not only in Poland, but also in Central Europe.. PIT Radwar operates in the defence and security sector and offers equipment and systems for: radio-electronic reconnaissance, command support, sensors, combat management systems. The company has the greatest experience in the development of various layers of anti-aircraft and anti-missile defense systems – both VSHORAD (it has its own solutions based on Polish rocket systems – Grom/Piorun, Polish production chassis and radar systems, which is called Poprad), SHORAD and MRAD (PIT-Radwar acts as a key partner of foreign contractors. As part of providing support in the area of radiolocation PIT Radwar provides the Polish Armed Forces with Soła i Obra, Sajna or Bystra radars. Additionally, the company developed its own artillery radar Liwiec. The company is engaged in research and development in the area of passive recognition systems – P-18PL radars and PCL/PET systems. Second company that operates effectively in the electronic domain is Centrum Techniki Morskiej (CTM). The company’s competencies include providing electronic systems, command systems, weapons management systems, unmanned naval systems, communication and reconnaissance systems for the Polish Navy.
Land platforms sector
The PGZ land domain is one of the most extensive because it is a mirror image of the Polish army – the Land Forces. This group consists of production and maintenance companies responsible to a large extent for providing vehicles that respond to the needs of the Polish army. The leader of this group includes the previously mentioned HSW which develops artillery and missile systems (self-propelled howitzer – Krab, rocket launcher – Langusta, self-propelled mortar – Rak, tower systems). The company is carrying out research and development projects in the area of a new infantry combat vehicle to be equipped with an unmanned tower of the ZSSW – 30 which were designed and fully accomplished by Polish companies. On the other hand, PGZ includes a number of companies that offer modernization capabilities for tanks and combat vehicles from the Cold War period. These include Bumar Labędy (responsible for modernization of T72 and Leopard 2A4 tanks), Military Mechanical Works (modernization of T72, Leopard 2A4, artillery systems), Rosomak S.A. (manufacturer of AMV Rosomak – product based on the license of Finnish Patria). In most cases, companies in the PGZ land domain have outdated production facilities and rely on products or services of modernization of equipment and armament of the previous generation. HSW and Rosomak are currently among the key companies with modern equipment allowing the implementation of advanced projects in the land domain.
Navy sector
The maritime domain belongs to one of the less developed in PGZ and struggling with problems. This is due to the decline of the role of the Navy in the Polish Armed Forces. The involvement of the armed forces outside the country made it a priority to develop land forces and air forces. This situation has affected the current situation that PGZ’s War Shipyard, which belonged to PGZ, for many years carried out a contract for the Ślązak patrol corvette (former cryptonym Gawron) which was contracted in 2001. The ship was not transferred to the Navy until 2015. The War Shipyard was in the process of bankruptcy, which resulted in its buyout by PGZ in 2017 in order to maintain the repair capacity of Oliver Hazard Perry class ships and the ship – 130 project. Currently, it is involved in the Kormoran II mine destroyer project. The key problem for the War Shipyard is the lack of stable orders from the Polish government and the large foreign competition in Western Europe from such major players as DCNS and Navantia. If contracts for ship renovation are not won outside the country or a serious Navy modernization program is initiated, the shipyard is expected to collapse in the next decade. In addition, it was assumed that the company, together with other maritime companies (e.g. Nauta Repair Shipyard) will enter the civil market and start producing ships for coastal structures (offshore). Furthermore, it is worth noting that the majority of PGZ’s shipbuilding assets for the civil market have been allocated in the MARS investment fund. Due to the recalculation of the value of the fund’s certificates in 2019, the value of the fund was reduced by half a billion zlotys (135 million dollars), making the companies in the maritime domain in an even more difficult situation. The situation was to be improved by the order of the ship Ratownik, worth 750 million PLN (202 million $). However, the Polish MoD broke off negotiations to restart them in 2021. Unfortunately, the company already invested 45 million zlotys ($12 million), which nobody will pay back. At the same time, the crisis situation is aggravated by the lack of decision to replace the age-old Kobben class submarines with MoD. Some of the tasks associated with maintaining, including the option of taking over used Swedish Södermanland submarines, were planned to be carried out by PGZ. The entire maritime segment of PGZ is thus entering the new decade with great uncertainty as to whether it will manage to survive this turbulent period.
Weapons and ammunition
The ammunition and weapons domain is one of the more developed in recent years. This domain includes the Nitro Chem plant, one of the world’s most important producers of high explosive materials (including TNT), whose customers are most of the countries in the world. Another key plant in this domain is the „Lucznik” Weapons Factory, which is the main supplier of small arms (pistols, Grot System – family of submachine rifles) to the Polish army. In addition, the domain includes Mesko company, which manufactures missile systems, including MANPAD systems – Grom/Grom 2 and anti-tank systems under Israeli license – SPIKE. The key players also include – PCO which is involved in the production of night vision (monoculars, goggles, target sight), thermal vision for soldiers, helicopter crews, land vehicles and battle platforms. The main recipients of the systems are the Polish Army and uniformed formations – the Border Guard and the Police. In addition, the company is involved in providing an observation and targeting unit for AMV Rosomak and BWP Borsuk. The main technological customers for those companies are the Polish recipients, and the companies has not had any significant successes on the foreign market in recent years. Only the PCO has exported a limited amount of night vision systems to Ukraine in the face of the conflict in the Donbas.
Companies belonging to PGZ have products and services that fully meet the basic needs of the Polish Armed Forces to the extent necessary for its functioning. On the other hand, the Polish state defense industry tries to develop new products which will be the answer to threats in the XXI century. However, in this case, the achievements of various companies have so far failed due to, for instance, failure to meet the requirements of the army, development of solutions which were not fully adequate to the needs of the army or a prolonged research and development process. On the other hand, PGZ has limited financial resources of its own, allowing for the development of modern armaments, which could be of interest to other countries. Currently, PGZ relies exclusively on the development of individual innovative products for the needs of the Polish Army and tries to obtain modern solutions as a result of offset or cooperation with foreign companies. However, in the second case, it does not achieve satisfactory results due to the strong position of Western companies.
UAV, command systems, rotary aviation – the Polish sector on the path of development.
Poland’s accession to NATO and increased involvement in missions abroad can be said to have led to the development of private defence companies. New operational needs of the Polish armed forces allowed for the development of unique and necessary solutions.
WB Group, which is a large Polish leader on the defense market, has become a part of this niche. The company implements projects related to C2 systems (especially for artillery units), reconnaissance systems (development of unmanned aerial systems), strike systems (lottering ammunition), training systems and weapon control systems. It is worth noting that the company successfully cooperates not only with the Polish Army (especially in the field of artillery systems) but also with clients from outside Poland. Products developed by WB Group are used in the U.S. Army on a daily basis (Fonet communication system) but have been practically tested during ongoing conflicts (e.g. on the Turkish-Syrian border and Ukraine).
Another private company is Teldat, which specializes in the development of communication and command systems. The company develops its own equipment and systems for data processing and command. In the context of Polish private companies from the defence sector, Lubawa should also be mentioned, which specializes in the production of masking systems and pneumatic tents used by Polish and foreign armed forces.
Apart from Polish companies from the defence sector, there are plants of foreign concerns in Poland. The key plants include PZL Swidnik belonging to the European concern Leonardo and PZL Mielec belonging to Lockheed Martin. Both plants specialize in the production and maintenance of helicopters and form the core of the so-called Aviation Valley – a special economic zone in south-eastern Poland associating companies from the aviation sector. The list of these companies also includes the French company Safran and the American Pratt & Whitney operating in the area of propulsion systems. In Poland there is also a branch of Airbus, which carries out construction projects for the parent company.
Is the Polish defence industry strong?
The Polish defence industry is no longer as powerful as in the eighties in XX century. As a result of economic transformation and the loss of a large number of markets, the Polish defense industry has shrunk significantly. However, despite losing its unique position, the Polish defense industry still has a unique position in the world. It certainly has a relatively stronger position compared to the countries of Central and Eastern Europe and is on a par with the Belarusian, Serbian or Ukrainian industries. In some technological domains, especially in the area of defense electronics, it has advanced solutions. However, in contrast to these countries, it is not forced to export its products abroad. It should be remembered that Poland spends 2% of its GDP (this figure is expected to rise to 2.5% of GDP in the following years). This makes that local companies do not feel the need to export because they know that the Polish modernization program largely covers their assortment (command systems, reconnaissance systems, individual soldier equipment). However, in the case of other armament programs where advanced technology is required, Polish companies are becoming the main partners of foreign companies, ensuring their commitment to projects for the next decades.
Arms export? Yes, but private companies.
For over a decade, state companies from the defence sector have had significant problems with exporting their products. This is partly due to the lack of support from the state administration, a considerable high defense budget of the Polish Army, which allows the existence of the companies and the production capacity of the companies themselves, which potentially will not be able to fulfill orders for foreign customers at once. Besides, it should be emphasized that there is no single integrated system of armament sales support both on the level of PGZ and state administration. Individual PGZ companies conduct their own commercial activities, which quite often fail. Over the years there has been no effective sales policy implemented that would allow for stable and effective acquisition and implementation of foreign contracts. Frequent changes in the management board cause a correction of the sales policy, which exists only for the period of the management by the given board.
Therefore, it is not surprising that it is private Polish and foreign defence companies located in Poland leading in the arms export. These companies from the Aviation Valley – PZL Mielec and PZL Swidnik, which are subsidiaries of Lockheed Martin and Leonardo, are responsible for 86% of arms, equipment and components exports. This is due to the fact that these companies are integrated into their corporate structure and the entire supply chain. In addition, within the Aviation Valley, partnering companies evolved not only as a Tier II and Tier III suppliers to LMCO and Leonardo, but also to other companies in the aviation sector. While the WB Group is the main exporter of armaments for Polish companies, its revenues amount to PLN 300-400 million. The 35% of sales revenue comes from exports to Asian, Middle Eastern and U.S. markets. It should be noted that in 2019 PGZ exported goods for 949 thousand zlotys (around three hundred thousand dollars). WB Group’s stable position on foreign markets results from its unique offer in the field of communication and command systems, which, combined with niche competences and technologies, allows for the execution of orders.
American defense articles procurement and their impact on the Polish defense industry
When we look at the Polish defence industry from a different perspective as a mature player with products that are successfully exported, entities that are profitable and benefit the Polish economy – it should be noted that The main reason behind the problems of the Polish defence industry is the lack of possibility of stable operation based on defence orders from the Ministry of Defence. Only selected products, such as radar systems, low-level anti-aircraft defense systems, communication systems, command systems, artillery equipment – self-propelled howitzers and mortars, ammunition, and individual equipment of soldiers are supplied by Polish entities. More advanced technologies are purchased outside the country. After Law and Justice seized power, this course of action was strengthened by the purchase of armaments from the United States, including F-35 multi-purpose aircraft, HIMARS missile artillery systems and Patriot missile defense systems. Poland is on the second place of the American defence cooperation agency – DSCA, in the ranking of countries that bought armaments in the USA. From 2016 to 2020, the Polish government spends between 9.4 and 12 billion dollars on armaments from the United States. Thus, the Polish government spent almost one whole year’s budget on purchasing arms in the U.S. The state defense industry was forced to negotiate the terms of offset agreements with the Americans, who are tough negotiators. This makes it unclear whether Polish defence companies will eventually receive the defence technologies that were supposed to allow them to develop new production capacities and products in the future. It is also difficult to determine whether the Polish defense industry will gain the ability to provide support and maintain the armaments acquired by the Polish Army. Thus, Polish companies may lose the chance to develop new products and services that will not only meet the expectations of the Polish soldier but also those of other nationalities facing similar challenges.
State defense industry – a recipe for healing
The end of 2020 brought another blow to PGZ, which showed a loss of 1.2 billion PLN in revenues, which in 2019 reached 6 billion PLN. The loss concerned only the leading company, while the entire capital group has a loss of 611 million PLN. The bad financial situation resulted, among others, from the aforementioned valuation of the investment fund MARS. The current situation is a result of a founding error consisting of locating both military and civil production and real estate companies in PGZ. PGZ also includes companies which have been balancing on the edge of profitability for over a decade. However, the Polish government is not interested in making the restrictive steps leading to the closure of unprofitable companies or consolidation along with reducing employment. The companies participating in the Technical Modernization Program, especially HSW, PIT-Radwar, PCO, Nitrochem, partly Mesko and Fabryka Broni „Łucznik” are profitable companies. These companies form the main core of PGZ should focus their efforts on building competitive advantage both on the local and international market. Efforts should be related to greater integration and building synergies.
It should be stressed that PGZ’s subsidiaries are not fully interested in full integration and they do not see any added value in cooperation with the parent company. For the subsidiaries, PGZ supports them only in the area of bank guarantees and loans, imposing a 5% burden for the parent company and collecting dividends. So the biggest problem of the PGZ Group is to build a coherent vision of development, acceptable to both the companies and the parent company. Similar discussions were held in 2014 during the establishment of PGZ, stimulating optimism among the employees of the companies. As the current example shows, this was premature optimism. In the Polish defense industry there is a lack of synergy effect. Many projects, both in production and organizational terms, are implemented in a bad way, causing duplication of equipment among individual plants. There is no integrated system of purchasing, human resources management and IT, which are modern determinants of quality in every developed industry. This is a common feature for many defence industries in the CEE region. Under the rule of Law and Justice government, further attempts were made to improve the situation within the Polish defense sector. Primarily attempts are based on directing defense orders to Polish defense sector entities and providing financial assistance to selected companies at risk of bankruptcy. Further attempts to consolidate the defense sector from the level of PGZ are based on operational consolidation. Within the PGZ additional merger of selected defense companies, which have concurrent competencies and machinery parks, is planned. In order to ensure more efficient use of available resources, investments in the machine park and IT systems are continuously implemented.
In conclusion, the current shape of the defense industry in Poland suffers from the absence of a clear vision of the industry development on the part of politicians themselves. Since the establishment of the PGZ, the industry has been dependent on several ministers and the Ministries themselves (between the Ministry of Defense and the Ministry of the State Treasury), which has resulted in frequent changes in the development paths and the personnel within the structure itself. Additionally, more attention is paid to the political results of companies’ activities in the domestic context than to the economic one. However, in recent months, it has been observed that there is a desire to reverse this trend and focus on increasing operational efficiency.
A key role has been played also by the Ministry of National Defence itself, which faces the challenge of improving the system of acquiring weapons and military equipment and stimulating the development of innovative solutions. Without system-based solutions, the defense industry will continue to face barriers in winning new contracts from the Polish army, developing R&D projects and exporting arms. The defense industry needs to increase the involvement of the Ministry of Foreign Affairs and the Ministry of National Defence in order to promote its solutions abroad and win lucrative contracts or be a participant in international programs. The Polish defense industry certainly has interesting solutions, but without increasing the operability of the state defense industry and cooperation both inside and outside the triangle industry – public administration – science, there will be a decline in the sector’s production capacity rather than progress.
Note: A Russian-language version appeared on 1/2021 Eksport Vooruzheniy (Arms Exports) – Russian research journal focusing on the defense industry and arms trade issues. Source: http://cast.ru/news/vyshel-1-2021-yanvar-fevral-zhurnala-eksport-vooruzheniy.html
