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Lesson on How to Overcome Difficulties

Dariusz Majchrzak, Piotr Wilczyński and Jacek Żołnierkiewicz in the debate on serious crises in defense industry and tendencies in the arms trade market.

Defense industry already felt the effects of coronavirus pandemic, particularly in the countries where lockdown had caused multi-week pause in production. How many similar situations occurred in this sector since the Cold War ended, when large armament investments were no longer needed?

Piotr Wilczyński: The end of the Cold War did not mean any decrease in the demand for new weapon, as the number of armed conflicted increased. Western states could sell their old weapon systems to those countries where domestic industry had been restructured and many plants had gone bankrupt. The manufacturers received orders for new armament to replace the one that had been sold out. The first serious crisis took place after the 9/11 attacks, when the United States declared the so called war on terror, and the related threats led to restrictions stemming from higher security norms in armament plants.

REKLAMA

Jacek Żołnierkiewicz: I can’t agree with the opinion that the end of the Cold War never ignited any crisis in defense industry. It did – in the former Warsaw Pact states, and Poland is an example. As early as in 1980s, a technological gap between Polish and Western defense companies was getting larger. Since the end of the decade, no serious, technologically advanced product had been developed. The last product was the PT-91 tank, which was a Polish modernization of T-72. Better yet, the scale of crisis in our defense industry was reflected in the fall of employment rate. Before the end of the Cold War, the armament factories employed about 250,000 people, and only several years later – 50,000. Even if we take into account that a part of the production – such as uniforms – did not accounted for defense products, it was still a gigantic regress. Worse, none of the restructuring programs for this sector in 1990s was successful, the negative results of which we can still experience to this day.

Dariusz Majchrzak: The end of the Cold War, disbanding the Warsaw Pact and the collapse of the Soviet Union meant enormous geopolitical changes. Poland with its reduced army had to adjust to this new situation, and this reduction seriously affected defense industry. At the same time, a new factor appeared – activity of foreign defense companies which had seen their chance while observing political processes in Poland for entering a new market. The idea of a potential future Polish membership in NATO meant that the army would need equipment that domestic defense industry did not produce at the time.

Jacek Żołnierkiewicz: The second crisis in defense industry was a result of the 2007–2008 financial crisis. At the time, I worked in the General Staff of the Armed Forces, and I witnessed the situation where budgeting for many technical modernization programs was suddenly reduced, which meant less orders for armament and military equipment. The programs which survived were related to integration with NATO and foreign missions. Smaller businesses had the hardest time, as they couldn’t wait several years for new orders.

Piotr Wilczyński: That’s true, the greatest crisis in defense industry after the Cold War – on the global scale – was the result of the collapse of multi-currency monetary system in 2007-2008. There were budget cuts in many countries at the time, and the consequence was lack of new contracts and cancelling the ones concluded before.

In the past, one of the crisis signs was no contracts for new weapon. In the first phase of today’s turmoil, the defense sector does have orders, but there occur problems with their execution due to temporary business lockdown.

Jacek Żołnierkiewicz: We still don’t know any long-term effects of the pandemic, as we still don’t know how long it takes. The longer, the worse for our economy. In the meantime, expenditures for technical modernization program are closely related to the GDP. This year, the GDP rate will fall, so the cuts in defense procurements seem inevitable. Just like in the past, available financial resources will go to priority programs, which are – as the defense minister has indicated – the F-35 multi-task fighter, the Patriot air defense system, and the high-mobility artillery rocket system (HIMARS). The remaining programs will rather stay in the budget, but with changed deadlines. However, if the crisis will deepen, priorities will change. At this point, the defense companies will need help from the state, although my concern is that some of them, despite all the support, may not survive the crisis.

Dariusz Majchrzak: Each crisis situation is different. In current pandemic crisis can already be observed how important is the role of the media, as they have an impact on public audience through information they give, particularly if we deal with such a rare situation of threat – a pandemic. Even if statistics comparing the number of deaths year by year deny the level of threat, we should not belittle the situation. It’s well-grounded to apply some prevention measures wherever possible. I don’t think, though, that the pandemic will have a long-term impact on economy, particularly on defense industry, but only time can reveal the consequences.

Piotr Wilczyński: I also think that data on overall number of deaths in most countries do not confirm the fact we’re dealing with a pandemic. Still, present crisis shows features of bioinformational warfare, which makes it a some kind of hybrid activity. One of the effects of this situation is lower competitiveness of western economies, which is advantageous for China. As regards the effect of this crisis on defense market, I agree with the thesis that without any support from the state – meaning us, the taxpayers – it can be hard to maintain the companies with key significance for national security. The entire world must cope with that problem. At the same time large, powerful defense businesses – mainly American and West European – will try to abuse this crisis situation to take over smaller enterprises at the lowest possible cost.

Is the impact of the pandemic on economy not overestimated?

Jacek Żołnierkiewicz: Various factors have impact on defense business, such as for example international situation. Did coronavirus make any falls in the number of armed conflicts or their tension levels? It did not. What’s more, new trouble spots appeared, which shows continuity in the demand for weapon. Obviously, some procurements may be revised or businesses reorganized. I don’t think, though, that in the long-term perspective today’s crisis will significantly affect the arms industry.

Piotr Wilczyński: Defense companies must now cope with three problems. The first one is to reduce production or even slow it down, which stems from the fact some of their suppliers had to close their businesses. Which leads to the second problem, such as delays in deliveries. The third one is the increase in the product cost. The decrease in demand for components make them more expensive. Production cost is also increased by growing inflation, because in such situations governments usually simply print more money.

Should state support be limited only to state businesses?

Jacek Żołnierkiewicz: All Polish companies important to state defense system should receive state support – regardless of ownership. The fact most of them is state-owned stems from the necessity to meet many requirements, such as maintaining production capability and its increase in case of war. For that reason it is the state-owned companies that mostly receive key orders. However, there are private-sector companies participating in the military programs.

Dariusz Majchrzak: Defense companies should be the apple in the government’s eye, which on one hand should support them, and on the other – benefit from them. It seems to me that regardless of their ownership (private or state-owned), they should be somehow controlled by the state to be the part of security policy.

How do the NATO and EU states support their defense sector? Doesn’t the last months’ experience point to the need to introduce additional solutions?

Jacek Żołnierkiewicz: In some countries, including Germany, a mechanism was launched allowing for placing more orders with domestic manufacturers. We should also go this way. In the Polish Armaments Group (PGZ) we see the need for legal changes and we already sent some suggestions to the Ministry of State Assets. One of them is the possibility to waive from penalties fixed by the contract, which is now impossible. A good mechanism could also be higher advance payments for ordered equipment. Such a solution would be advantageous for both parties, as the producer doesn’t have to obtain any large credits, which also translates into the product price.

Piotr Wilczyński: The form of support to a great extent depends on whether or not in a certain country there are more state-owned businesses or private companies. The government of the United States strongly supports their private sector, but this stems from their specific situation. The US defense companies are closely related to politicians, as they bestow large funds upon their election campaigns, and thus expect favors in response. In exchange for these favors, a congressman or a president may count on the funds from defense companies in the next elections. In Europe, state-owned entrepreneurs must believe that a government will decide to support them via, e.g. orders or donations, or reducing taxes. Private companies must more than usual rely on their own resources. In Poland, companies being on a special list of businesses of economic-defense nature, can receive some support from the state. In my opinion, such solution is harmful for private suppliers of subassemblies who are not on the list.

Jacek Żołnierkiewicz: Each company ready to meet the requirements can however be placed on the list.

Dariusz Majchrzak: The scale and form of the defense industry support from the state all depend on whether it considers the support useful. The key here is a political will. Apart from it, economic potential of independent states is also important, as not all of them can afford to pump into the defense industry business hundreds of millions or billions dollars or euro. However, the benefits for the state, particularly related to technologically advanced businesses, can be significant.

Do defense industry companies keep some financial reserves for a rainy day?

Dariusz Majchrzak: There is some regularity which doesn’t limit to defense industry. Big companies practically always have some of their own financial resources, allowing them to function in crisis for at least several months without any external support. Smaller businesses often quickly lose their financial stability, and have troubles several weeks after they stop working. That’s why the issue of financial reserves of economic entities within defense industry seems crucial.
Jacek Żołnierkiewicz: In our state defense companies, there is no such reserves, which is a consequence of the above-mentioned restructuring attempts in this sector. The military overhaul and production plants were transformed into companies and thrown into deep waters of free market, in most cases with no proper support in the form of orders.

Due to the problems with the continuity of delivering components produced abroad, there are voices that broad international cooperation in armament production is not a good solution, and should be based on domestic potential. Is it threatening to the collapse of multinational projects in western states and turning towards autarchy, i.e. self-reliance in defense industry?

Jacek Żołnierkiewicz: Every risk must be estimated. Before current crisis, the most important was the production’s low cost, not only in defense industry. Negative consequences of such attitude appeared after the pandemic outbreak when it turned out that China had the monopoly for part of the products needed for the fight with the virus. For that reason, now such a risk will be taken into account when, for example, producing weapon.

Dariusz Majchrzak: Current crisis is a serious lesson for companies, not only in defense industry. What’s more, there are signals that there are new pandemics ahead. Nevertheless, I don’t think that a full autarchy is possible in arms production, although surely many governments will tend to be self-reliant in that field.

Jacek Żołnierkiewicz: I think that the European Union and NATO will develop procedures in case any potential situation, the sort of we are now dealing with, takes place in defense industry. Perhaps some mechanisms will be introduced to counteract any unexpected problems with delivery continuity, such as producing the same components in various places and storing the reserves which will make it possible to manufacture the final product even after the chain of delivery is broken.

In a crisis situation, do you think politicians will decide to cut on the armament procurement, or rather will try to save jobs in defense industry?

Piotr Wilczyński: In western world, the approach to this issue will derive from a political environment of the rulers in a given country. One of the first moves of politicians, who support pacifism, will be cutting down on defense expenses. Other decisions will be taken where the rulers are in close relationship with great business, represented by defense industry concerns.

Dariusz Majchrzak: One of the most important rules in economy is the rule of supply and demand. Although the pandemic crisis is still on, the intensity and number of armed conflicts in the whole world are not reducing. The scale and kind of military threat does not change either in respect to our country. We should therefore conclude that the demand for any kind of armament will not be decreasing. The key effect on the purchase of weapon in the time of crisis will have the attitude of a given country towards the issue of security. If any country notices the threat, it is more prone to cut its defense expenditures. The examples of such attitude is Estonia and Latvia.

Jacek Żołnierkiewicz: These countries declare that they are not limiting they defense budgets, but they can be forced to do it. Such decisions can be imposed on politicians due to economic situation. Although the governments would like to place their orders in defense sector, they simply may not have the money. If the GDP falls, these states’ budgets, including defense budgets, will get lower.

Piotr Wilczyński: Also, even if the spending for defense won’t change in numbers, still due to inflation the purchasing power of this money will be lower.

Jacek Żołnierkiewicz: What should also be considered is the relations of the public opinion to the defense spending, which the politicians usually take into account in a situation where there is not enough money and budget cuts are needed.

What is the future of the world arms trade?

Piotr Wilczyński: After the pandemic started, the governments in many states – even democratic ones – have been in favor of authoritarian ruling, and this increases the risk that new armed conflicts and local riots and political crises break out.

Dariusz Majchrzak: As a rule, in time of crisis the number of armed conflicts increases, and these increase the demand for weapons. The response to it is usually higher supply level in this field. I don’t think that coronavirus will cause any regress in arms trade.

Piotr Wilczyński: I see the chance for the armament producers in the fact that smaller businesses can go broke in some countries, and then we will need appropriate production capability and competition as regards prices and delivery deadlines. The Arabian and Balkan countries can be potential markets for Polish weapons, and arms export can become the source for funding new R&D work.

Jacek Żołnierkiewicz: That’s not going to be that easy, because more and more countries, including Poland, expects the transfers of military technologies and producing their own weapons. Close relationship between defense industry and ministry in the question of exporting armament and military equipment is important, because the intellectual rights for many projects are owned by the State Treasury. When the systems are classified, and an interested customer wants to have access to source codes, it’s hard to count on the consent of the military. Then, the alternative can be a deep modification of the project, which requires time and money.

It did happen before that we lost potential foreign orders because of the inability of defense industry to meet requirements regarding the production size and delivery deadlines.

Jacek Żołnierkiewicz: Unfortunately, it’s hard for us to compete with large businesses the production scale of which is incomparable with the potential of our plants. Similar limitations exist in the aspect of creating a new product according to the requirements of a specific customer. Small production scale sometimes has negative effects on our armed forces. Sometime overhauling certain systems produced many years ago is more expensive than buying new ones.

Will there be any changes in arms trade at the regional level?

Piotr Wilczyński: The Persian Gulf monarchies import the greatest number of weapons, as they profit from their oil and gas export. They are in the phase of building their defense industries, so import is the necessity there. However, if because of the crisis in western states the Arab states are selling less oil, they will have less money for weapons.

Jacek Żołnierkiewicz: Also, there can also occur certain regional changes in Asia. In Europe, the NATO members for several years have been increasing their expenses for defense, because their armies must recreate many combat capabilities lost after the Cold War. The coronavirus crisis should not change this tendency. Of course, provided that it doesn’t take too long.

What can be the results of present crisis for Polish defense industry, including its plans for international cooperation?

Jacek Żołnierkiewicz: Much will depend on the government’s policy related to large procurement of armament abroad, particularly in the United States. It’s also about technology transfers and cooperation between Polish and American companies. The key question is also whether we want to introduce to the imported systems our own solutions or devices, or rather adopt them in a configuration offered by a supplier. In the latter case, the price may be lower and deliveries faster, but at the cost of our local producers.

Dariusz Majchrzak: In my opinion, it’s crucial to estimate the potential of individual companies and entities and whether the production of specific kind of armament locally is payable. If it is, than some budget should be allocated for the R&D, so all interested entities have the possibility to create modern solutions, such as a new product, which can then be sold outside Poland. However, we should realize that this process takes time and changes in the way a state and the armed forces supervise the research.

Jacek Żołnierkiewicz: Unfortunately, the incapable field of R&D work does not guarantee it. The Ministry of National Defense sees the problem and work on healing this area, but that’s a subject for a different debate.

Piotr Wilczyński: Current crisis, or actually the future after crisis, which is about economic changes on the global scale, is both a chance for the growth, and a threat. That’s why our defense industry must be under the care of specialists, the work of which will bring long-term development plans, and prevent our plants from economic breakdown. It’s a perfect time to establish good relationships and agreements, take over smaller businesses and benefit from the fall in their share prices or the withdrawal from several markets of some of the bigger players. For this, we need some analytical minds and talented political leadership.

Can the participation in international programs be for our defense industry a chance for further growth?

Jacek Żołnierkiewicz: In this case, the moment of joining a specific multinational program is very important. We’re joining the F-35 project at the point when the cards have already been dealt, so we can’t count on too much. Our consistency in the approach to the participation in such projects is also crucial.

Piotr Wilczyński: A good idea is to start closer cooperation with the V4 states, i.e. the Czech Republic, Slovenia or Hungary. First, they are located in our close neighborhood, which means lower risk of disrupting delivery chain. Second, we’re in a similar geopolitical situation. Third, these countries have highly developed defense industry, and establishing cooperation with them would mean joint R&D effort, which would compare to the potential of France, Germany or Great Britain. Fourth, Poland would be the biggest player in this pact. The weak side of such program would be the narrowing down to land systems only. Ship building could be however developed based on agreements with the Baltic Sea states. I particularly mean Finland, which is significantly experienced in designing small ships, proper for defense of the Polish coast, Sweden with the plants producing submarines, and Denmark, which develops modern vessels with higher displacement weight. Also in the field of aircraft and helicopter production we should decide on cooperation with foreign partners, as Poland lacks capabilities to manufacture combat aircraft of the latest generations, though we can produce helicopters and aircraft for training purposes.

Jacek Żołnierkiewicz
He has been in PGZ for five years. For 29 years, he served as the Air Force officer and the officer of the General Staff of the Polish Armed Forces, and specialized in automated systems for command support and warfare control and tactical systems for data transmission.

Piotr L. Wilczyński, PhD
He is the Chairman of the Polish Geopolitical Society, Assistant Professor at Pedagogical University in Kraków. He specializes in geopolitics and geostrategy, defense industry and armed conflicts in the world. He’s an officer in reserve experienced in missions abroad.

Col Dariusz Majchrzak, PhD
He works at the University of War Studies (ASzWoj). Among his scientific interests are the issues of national and international security, and the analysis of the processes and phenomena in the security environment.

Krzysztof Wilewski, Tadeusz Wróbel

autor zdjęć: Tomasz Paczos / FOTONOVA / EAST NEWS, Artur Orzechowski

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