Plan of attack

Kamil Jach
Warsaw Business Journal

 

Poland's arms manufacturers stood on the verge of crisis not so long ago, until the government introduced consolidation measures that put the market on stable footing. Now, though Bumar Group has emerged a victor on the industry battlefield, Poland's smaller weapon makers are being outgunned, and experts say that only further consolidation and a focus on niche markets will whip the industry into shape.

With few customers and crippling financial losses, Poland's arms producers looked to be running out of ammunition just a few years ago. Then, government moves to consolidate the industry allowed weapons makers to escape intact, but not unscathed. While Poland's big gun, Bumar, is now successfully leading the charge into foreign markets, embattled smaller producers will have to rethink their strategies.

The late 1990s and first years of this decade saw a Polish arms industry that was struggling to survive. More than 95 percent of the sector's products were sold solely to the Polish Ministry of Defense and Ministry of the Interior. On top of that, many companies were suffering huge financial losses. For example, in 2001, the total operational costs of the 38 biggest arms suppliers surpassed their combined sales by zl.183 million.

Brothers in arms

In 2002, the National Program for Restructuring of the Arms Industry was created and implemented by the Polish government. As a result of the program, several major Polish arms companies were consolidated into two capital groups. The first group was centered around Polish arms giant Bumar Group, while the second was headed by the Industrial Development Agency (ARP). The industry slowly started to recover, but while Bumar Group has since become something of a locomotive for the whole branch, the group led by the ARP continues to lag behind.

"There are a few significant problems the ARP group has been having. First of all it's considerably smaller, there are only six companies there," Slawomir Kulakowski, CEO of the Polish Chamber of National Defense Manufacturers (PIPnROK) explains. "The second problem is that while some companies, such as the facility in Swidnik, are doing quite well, others, such as Mielec, are still unable to pay off their debts, which sometimes reach up to zl.20 million. The third thing is that Bumar Group has several hundred products, while the ARP can offer much fewer. Last but not least, the market in Europe has not been very good for aircraft-related equipment lately - and this is the focus of the ARP group - in contrast to the goods for ground forces in which Bumar specializes," he says.

Enemy within

There are other obstacles which the industry as a whole faces. Experts underline that Polish producers have to deal with a 22-percent VAT tax, while many European companies pay lower rates. Moreover, firms from Poland are in danger of losing the race in technological advancement, because there is no central facility responsible for innovation in Poland.

"We are working on the issue of the Development and Research Institute with the Economy Minister," says Roman Baczynski, president of Bumar Group. "The technique in the field of arms production is moving forward so swiftly that we really need the newest available solutions, otherwise we will be left behind over the next three years. If we do not make use of this very moment, now that we have managed to achieve a certain stability, we may go back to the state [of the industry] from the 1990s, and that would be a disaster," he warns.

Plane speaking

Other hindrances facing the industry stem from the sluggishness in completing the offset deal with US companies after the Polish government signed a deal to buy American F-16 fighter planes in early 2003.

"The offset deal promised back at the end of 2002 has hardly been executed since then." Grzegorz Holdanowicz, a former fighter pilot and editor-in-chief of defense magazine Raport, says. "There is not much for the industry, several deals for electronics producers, several others for some companies, but all of these are minor in comparison to what has been signed and promised."

Mission aborted

Experts say that Poland's previous government tried to find ways to prop up the ailing industry, but argue that the plans envisioned could have done more harm than good. One such idea included creating a third capital group.

"This idea was ... very difficult," the CEO of WB Electronics, Adam Bartosiewicz, is careful with his words. "The government wanted to pull out the best companies from their groups and to merge them with weak companies. This was against the whole idea of these groups," he explains.

Fortunately, industry experts say, the former government did not have a chance to execute the idea, while the new government has held to the prevailing wisdom and withdrawn from the plan. However, industry experts complain that current government officials have not yet proposed any alternative, and have begun mulling possible solutions only recently.

Reinforcements needed

"I can see little help from the Ministry," Holdanowicz says. "They want to open the Polish market to the European Union but it seems as if they do not care about the recent problems, in contrast to the former government."

Kulakowski of PIPnROK is more understanding: "The new government has had little time to do something spectacular," he says. "On the other hand however, new people in the Ministry were not prepared properly for their jobs. Some of them lacked the required knowledge or qualifications, so they are learning now and thus, the impression of them doing little may be exaggerated, but is not totally untrue."

For its part, the Ministry vows it is doing its best.

"For us, the fate of the Polish arms industry is of utmost importance," Defense Minister Radoslaw Sikorski avers. "I am aware that our companies are not able to produce fighter planes, but still there are niches we should enter. We will also be careful, following the industry's advice, with our participation in the European Defense Agency."

On the march

Bumar Group has not waited for help from the Ministry and over the past few years has won several significant deals. In Iraq the company has signed at least three large contracts worth a total of $560 (zl.1,838) million. The value of its contract portfolio reached $1.2 (zl.3.9) billion in 2005, while just three years earlier it was just $80 (zl.263) million.

As for the ARP-led group , Kulakowski says all is not lost: "The coming years will bring a good situation for aviation equipment producers. If ARP is able to make use of it, they will be out of the woods."

The smaller arms companies will also have their chance to go on the offensive, but experts emphasize their window of opportunity is closing. "Bumar Group has been somewhat pulling the industry up, and thanks to that it has not sunk," Bartosiewicz says. "However, this is the last call, a few more years and the West will be too far ahead for us to catch up."

Joining forces

There are several markets where Polish arms producers could look to pull themselves out of the doldrums, such as those in South America or Oceania. Opportunities also exist in several African countries such as Mali, whose President was educated in Poland. Experts also point to markets in India, China or Chile, Peru and Columbia as accessible to Polish arms manufacturers. So far however, it seems that only Bumar has been able to tap these markets effectively.

"In the tough global market of the arms trade, it is hard for small companies to compete," says Bumar's Baczynski, who believes that consolidation is the answer to the smaller producers' woes. "Small companies should either merge with each other or with one of the existing groups. We are open to doing business with anyone who comes and presents something interesting. Let them come," he says.