Poland - Defense Industry
From the early days of Poland's new existence the leading circles have realized that the creation of an industry, which would supply the Polish army with explosives, was imperative, for it is an indispensable means for defense, and one of the main necessities for the maintenance of Polish independence. The first step taken in this direction was the creating in 1921 of the munitions plant "Pocisk," the second was taken in the reorganization of the chemical works "Nitrat," which manufactured explosives covering the requirements for the army as well as the mining industry. This enterprise at the same time further advanced the chemical industry in the country. The plant "Nitrat" found an outlet for its products both in the military and industrial needs of the country. By-products were manufactured into super-phosphates for agricultural fertilizers and will also supply the dye industry with various products.
The technical staff of this plant cooperated with the technicians of the artificial silk factory in Tomaszow. The entire equipment of the nine factories, composing the Italian concern "Societa Italiana Prodotti Esplodenti" in Milan was acquired. This company supplied explosives, not only to the Italian army, but also to the other Allied armies during the World War. The Italian concern undertook to put the whole plant into operation by the middle of 1922.
After World War II, Poland found itself in the Soviet sphere of influence and was organized in accordance with Soviet notions. In the 1950's, also at the urging of the Soviet Union, Poland undertook tremendous efforts to establish its own defense industry practically from the ground up. Utilizing Soviet deliveries of equipment and licenses, production capacities were created that corresponded with the tasks emanating from the military doctrine of that time. The industrialization of Poland guaranteed a relatively stable basis for the defense industry.
The Polish defense industry continued to employ substantial resources for the development of its capacities until the beginning of the 1980's with a view to needs in the event of a crisis and the Warsaw Pact provisions for arms production. A decision was made, for example, on the production of the T-72 tank and its capacity at the cost of huge investments in coordination with the Soviet Union at the level of the old top political command. The almost total fixation of important arms enterprises on the production of arms was a primary cause of the problems in a conversion of production. The large capacities of the Polish defense industry could never be totally utilized from an economic point of view and in the case of export receipts one must always see Poland's subsantial outlays for the defense industry.
By the end of the Cold War the Polish defense industry had 82 producing enterprises with the legal status of an enterprise of the defense industry along with the associated preferences and restrictions. In the 1980's, the 82 status enterprises together with more than 250 cooperating enterprises of various branches produced more than 90 percent of the products for national defense (armament, military technical equipment, and material for the rear). In the individual enterprises, the share of military production the overall value of production ranged from 1 to 86 percent. The rest was made up of products for the civilian sector that were technically similar to the produced special output (construction equipment and machinery, trucks and special vehicles, radio and television sets, farm machinery, locomotives, light aircraft, helicopters, and so forth).
Parts of the Polish defense industry have traditionally had a large share of civilian output. In 1989, the output of the enterprises that produce for the armed forces made up about 8 percent of all Polish industrial products. Only 3 percent of that went for defense products. Overall about 60 percent of the capacity was used for civilian production.
The Polish defense industry was never set up to cover all the demands of the armed forces with all kinds of arms and equipment. And the range of produced products thereby declined. Poland did not cope with the pace of the arms race, especially in regard to the research and development of military equipment. They had to stop independent production of combat aircraft and missiles. Heretofore about 25 percent of the equipment and armament of the Polish Armed Forces was imported.
In the view of Polish insiders, nevertheless, the defense industry was still a flourishing branch of industry in 1989. The Warsaw Pact ordered tanks, armored personnel carriers, radio stations, and other military equipment. There were dependable "rules of the game" and a precisely determined production potential had to kept ready at all times for a possible war. The state bore the costs for this "readiness for war."
Prior to 1989 (since the collapse of communism), the Polish defense industry benefited from many advantages. Companies manufacturing for the defense sector were given absolute priority in the acquisition of raw materials, technology and preferential credits. Also, they were exempt from paying taxes. Now faced with sharply reduced government subsidies, outdated technology and an over employed work force, defense firms in Poland struggle to survive. After 1989, three main factors negatively affected the long-term prospects for weapons production. The first was the collapse of the Warsaw Pact market, which accounted for 80-90 percent of defense sector output. The second was the advent of the new market economy. The third was the shrinking world arms markets, particularly for the generally low-technology weapons that were produced in Poland. In addition, the number of special orders written by the Ministry of Defense has been seriously reduced. The Polish defense industry, however, still looked to the government for massive assistance. The defense industry believes that, if their products are made to be compatible with NATO standards, they could again become competitive, particularly if quality remains high and the price of the finished product remains low.
After the fall of communism, the changes in political and economic systems also began affecting defense industry factories. The process, started in 1989, is still occurring today as the defense industry seeks new paths of development. The financial state of many Polish factories producing for the country's defense is far from adequate. This situation is, first and foremost, a result of the protracted process of restructuring this sector of the economy. Poland has lost its former markets, to which it successfully exported arms in the past. Poland's armed forces have thus been faced to adjust to the new situation, and, following accession to NATO, bring military equipment up to NATO standards. In practice, that meant doing away with outdated weapons and acquiring modern ones. At this point, however, the weakness inherent in Poland's defense industry was revealed: Polish factories were unable to bridge the technological gap dividing them from the world's leading arms producers, and therefore could not purchase such things as multi-purpose aircraft, modern tanks and armored personnel carriers.
An important factor in Poland joining the research and production programs implemented within the European defense industry's framework is Poland's participation in the Western European Armaments Group (WEAG). Poland also wishes to take part in the OCCAR. Since Poland's entry into NATO, considerable interest to cooperate with Poland has been shown by both member states of NATO and the EU. The interests find expression in the form of fact-finding and promotional missions.
The government's adoption of the "Program of Restructuring the Industrial Defense Capacity and Supporting the Technological Modernization of Poland's Armed Forces" in 1999 was an important factor fostering the development of Poland's defense industry. The program's authors-in view of limited budgetary resources-believe that new technology and capital funds can be acquired using offset contracts. Thanks to the introduction of this program, the supplier of new multi-function aircraft will also have to invest a certain amount of money in Poland's defense industry. This is all the more important as Poland's armed forces were required to make major purchases of modern equipment after joining NATO. Money from offset contracts will accelerate the privatization of the sector and the importation of state-of-the-art technology to Poland. Certainly, this program is not a Polish invention. Most developed countries use offset contracts when purchasing arms. U.S. Department of Trade data shows that out of 25 major trade contracts with Europe concluded in 1995, twenty-one involved an offset contract.
Initially, the Ministry of Treasury, which is responsible for privatization in Poland, tried to bail out the defense industry by locating strategic partners and signing cooperation agreements with international companies. Successive government cabinets focused on defense industry restructuring as a key element of both industrial and national security policy. The Ministry of Economy initiated a program to restructure and consolidate the defense industry. Under this program, two holding companies were established by the end of 2003. One was PHZ Bumar and the other was the Industrial Development Agency (ARP - Agencja Rozwoju Przemysku). Both holdings play a major role in consolidating entities for each group. These companies combined their production capacity and credit resources. At the end of August, 2007 the Council of Ministers accepted new program to further restructure and consolidate the defense industry in year 2007-2012. Under this program, Bumar Group was enlarged. The program is strictly tied up with modernization and restructurization of the Polish armed forces.
- The ammunition/rocket/tank group (under PHZ Bumar) includes: ZM Mesko S.A., ZM Dezamet S.A., TM Pressta S.A., Przemyslowe Centrum Optyki S.A., CNPEP Radwar S.A., ZM Tarnow S.A., ZM PZL-Wola S.A., WSK PZL-Warszawa II S.A., ZPS Pionki, ZM Krasnik, ZM Bumar-Labedy S.A., Fabryka Broni Lucznik-Radom, PSO Maskpol S.A., and ZCh Nitro-Chem S.A. PHU Cenrex trading company handles marketing and export for this holding.
- The aircraft/electronics group (under the Industrial Development Agency (ARP - Agencja Rozwoju Przemysku)) included: Polskie Zaklady Lotnicze Mielec, WSK PZL-Swidnik S.A., ZR Radmor S.A., and PZL Hydral S.A. PHZ Cenzin trading company handles marketing and export for ARP Group. Also, there were three repair shipyards, thirteen military repair facilities, and eight research and development institutions for the defense/military function. In addition to the above listed companies, there are several small private firms, which are very successful on the Polish market including WB Electronics, Transbit, Wamtechnika, DGT, and Airpol.
By 2010 the Polish defense industry comprised 38 manufacturing companies, 12 renovation and manufacturing military enterprises, 10 research-and-development establishments, and three companies specializing in trading arms. Revenue from this sector of the economy amounted to zl.3.7 billion in 1999, while the sector's corporate assets are estimated at over zl.5 billion. Up to now, out of the 38 companies recognized as strategically important for the country, only a few have been successfully privatized.
The first of them is PZL Okecie, acquired by the EADS corporation, which consists of German, French and Spanish companies and is one of the largest aircraft fleet producers in Europe. The other one, also active in the aircraft industry, is the WSK Rzeszˇw engine maker, which was bought by United Technology of the United States. The remaining plants awaited their turn. Unfortunately, there were not many prospective buyers.
The Strategy of Consolidation and Supporting the Development of Polish Defense Industry in 2007-2012 was adopted by the government on 31st August 2007. The government's strategy for the defense sector provides for consolidation within the Bumar Group, and launching privatisation processes to make defense industry competitive in the struggle for international contracts. Under the strategy, the purpose of consolidation is to ensure easier access to investors on third party markets. Several countries of Southeast Asia are seriously interested in Polish products, and in cooperating to develop technology. The strategy also provides for partial consolidation of the research and development sector. The ministries of economy and national defense pronounced themselves in favor of consolidating around Bumar only those R&D units, that are associated with the defense industry.
Participation in trade fairs, conferences and seminars is a very effective avenue for promotion in the defense/military sector in Poland. The MSPO International Defense Industry Exhibition is the largest annual event for the defense and security industries in Central and Eastern Europe attracting buyers from throughout the region and represents an excellent venue for U.S. companies in these sectors. It is held each year in Kielce (south east Poland) at the beginning of September. Participation in the MSPO trade show and accompanying conferences and seminars is a very effective avenue for promotion in Poland and its neighbors.
Opportunities for American firms exist mainly in investment, technology transfer, and coproduction work. Polish defense companies seek cooperation agreements or joint venture opportunities with foreign defense companies that, combined with the relatively lower cost of production in Poland (particularly tanks, armored vehicles, artillery, ships, aircraft, and helicopters), will be attractive to potential customers. Receptivity to American products is high due to an affinity toward the United States. American suppliers have an excellent reputation for high quality products, reliability, and technical assistance. However, technological advantage is not the only factor determining success in the market. American companies should focus on educating end-users and other players in the defense sector. A successful exporter should support its agent/representative at trade shows, seminars, and conferences.
The Polish government is required by law to hold tenders for major procurements. All tenders for amounts above 10,000 ECU must be officially announced. Tenders for lower amounts can be announced locally, in the local press or through local media. The law provides that tenders of very high value should be published in the Journal of European Economic Community. However, until Poland becomes a full member of European Union, this is not a requirement. The Bulletin of Public Procurement (Biuletyn Zomowien Publicznych) lists public procurement opportunities throughout Poland.
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