Arms Manufacturers Are Coming Back into Fashion

ERA Company, the manufacturer of the renowned passive surveillance radars that can track even the so-called stealth planes, has in the last year turned in the best financial performance of the last twenty years. And there has been no let-up in demand. ERA is not an exception to the rule. The Czech Association of Defense Industry estimates that exports were worth a record 11.8 billion CZK last year. The growth in the defense sector has been steady over the last three years and its today’s volume is four times what it was ten years ago; over the last four years there has been increase of more than 100%.

The Czech arms manufacturers have proved to be increasingly competitive and, at the same time, the world affairs have been getting more and more complex. Nevertheless, the majority of countries where the Czech exporters have success with upgraded weaponry are peaceful. At least according to the interview given for the online server iHNed.cz. The common complaint appears to be the lack of interest from the Czech Army and the corresponding lack of references.

On the other hand, Polish manufacturers can only dream about the export success of their Czech colleagues. The majority of their production is procured by the state and Poland is also trying to attract modern technologies by declaring a ten-year program of massive upgrades and rearmament of the Polish Army. Foreign investors are not always happy with the way they are treated though. Two major helicopter manufacturers, Sikorski and AgustaWestland, have invested huge sums into purchases of two traditional Polish manufacturers only to lose in the tender for the supply of multipurpose machines. The third participant, Airbus, won notwithstanding the fact that it had barely started building its assembly line in Łódź.

The flagship company of the Polish arms industry, the newly created PGZ holding, which brings together the most important state-controlled companies in the defense sector, is paralyzed by waiting for the results of the autumn parliamentary elections. They can bring about sweeping changes in the management of the state-run companies, and not only in the defense industry.

Defense industry is, on the principle, a business connected with the state. Different approaches chosen in the Czech Republic and Poland manifest well what the risks are in the sector that has entered a growth period, given current geopolitical tensions.

The issue is not only whether the firms are state-owned or private, export or domestically oriented.

The Czech companies, privatized or built up from scratch after the collapse of the socialist arms manufacturing at the beginning of the 1990’s, have learnt how to rely on themselves and their own capabilities.

The Polish approach relies more on “polonization” i.e. an effort to master or participate in development of new technologies. The proposal to participate in development of the new generation of the Raytheon’s Patriot missiles is most likely only wishful thinking. The U.S. officials have indicated something of the sort but the deal announced in spring mentions only the import of the U.S. made missiles. Polonization also appears to be complicated in the case of Leopard 2A4 tanks, since managers of the newly formed PGZ have to negotiate with a number of German companies that participate in its production. Also, the armored carrier Rosomak built on licensed platform of the Finnish company Patria is yet to succeed on export markets.

The most interesting tender is the competition for a supply of drones in which the established players from the U.S. and Israel face a stiff challenge from a private Polish firm WB Electronics, one of the few examples of success of the Polish private manufacturing.

Defense contractors—not unlike farmers—do tend to complain a lot about the way the state treats them: misunderstandings, favoritism, or unfair (understand better funded) Western competition feature high on the list. This industry is highly regulated; good relations with politicians are necessary for business at home, for export the red tape is overwhelming. Take the tender for pistols worth 34 million EUR in Slovakia. In May 2015, the biggest domestic private manufacturer Grand Power accused the Ministry of Interior of tailoring the deal for Česká Zbrojovka (CZ) along with Austrian Glock, when Robert Kaliňák, Slovak Minister of Interior, declared the two companies as the likely winners even before the tender was officially announced.

Here it is important to distinguish between two things: domestic state contracts and the quality of machinery production, and of its specific segment—arms manufacturing. As with its experience in car manufacturing, the Central Europe has a tradition in arms production as well. This tradition is the strongest in the Czech Republic, but Slovakia does not lag behind too much. Take the case of Grand Power, the company of Jaroslav Kuracina, who is successful with his own original pistol design abroad, but not at home. It bears the evidence of the potential in arms manufacturing. The Czech way of privatization then appears to be as the better way forward; as the old socialist weapon manufacturing sector was “destroyed,” it forced the producers to face the world competition and to get rid of the dependency on the decision- making of domestic politicians.

The Polish colleagues have not severed their umbilical cord with the state and its politicians. Not only do they depend on the contracts with the Polish army, but on the preferences of the current government as well. It took six long years to consolidate domestic industry and to carry out the idea of the PGZ foundation. What is more, it is not even certain that this colossus with workforce numbering in tens of thousands survives the next government.

Different history and approach of the Czech and Polish defense contractors is also the reason why it is difficult to bring to life any common defense projects of the Visegrad quartet. Another cause, described by the 2012 expert commission DAV4 report, is the fact that Slovakia and Hungary tended to use the joint tenders to strengthen their own domestic defense industrial base, which is less competitive than Czech and Polish. But as the last DAV4 April report suggests, the cooperation across the defense industries would only be possible if it were seen through by politicians. Tomasz Siemoniak, Polish Deputy Prime Minister and Minister of Defense, is of the same opinion. The companies themselves, due to the different strategies illustrated by the Czech- Polish dichotomy, will not rush into any deep cooperation and will join forces ad hoc when the individual projects suit them.

In other words, arms industry in the Central Europe has a decent perspective, but only separately in each country and not as a deeply integrated sector. And because only Poland has a large and long-term program of military upgrade, it is bound to become a magnet for defense contractors. The close relationship between the state and its domestic weapon makers will make the entry for foreign competitors difficult, unless they have the sophisticated technologies that Warsaw covets.