PGZ’s Code - A Step Towards Actual Consolidation of the Polish Defence Industry [ANALYSIS]

29 listopada 2017, 12:45
Hornet fighters were originally being manufactured by McDonnell Douglas. After they have been taken over, Boeing still works on development of these fighters. The photograph features a Finnish Hornet. Image Credit: 1st Lt. Christopher Mesnard/USAF.
Land Platforms Bureau at PGZ is to be responsible for implementation of the wheeled APC programme, among other initiatives. Rosomak-M APC turret, presented in 2015. Image Credit: J. Sabak/
Within the framework of the Wisła programme, PGZ would be burdened with responsibility to receive the widely understood transfer of technology. PAC-3 MSE missile is presented on the photograph above. Image Credit: US Army.
Modernization of the Leopard 2A4 tanks (photo) up to the Leopard 2PL standard may be a good example of a programme implemented jointly by the PGZ companies.

Polish Armaments Group has introduced the so called PGZ’s Code, defining the rules for collaboration established by and between the companies belonging to the Group. According to the assumptions made by the PGZ Group’s management, thanks to introduction of the Code, the individual entities gathered within the group would be realistically acting as a part of a bigger organism. Therefore, the companies of the Group would be complementary for one another competence-wise, and it would be possible to avoid the internal competition. Not only may the Code be a step towards formal consolidation of the Polish defence industry within the PGZ Group, as the new regulations may also become a valid means to actually do so - integrate the defence sector in Poland.

The PGZ Code is a set of rules introduced within the Group. Its purpose is to regulate and systematize the collaboration between the individual companies. The introduction of the code is to make the Group act as an uniform, coherent body. The said act would also constitute the actual finalization of the process through which the Polish state-owned defence sector would undergo consolidation.

Our editors have received the information concerning the general assumptions adopted within the Code. Bringing the PGZ Group to life back in 2013 was done with an intention to consolidate all of the state defence companies within a single entity, not only to enhance and facilitate cooperation and interoperability, but also to eliminate the internal competition, quite frequent and evident an the time. Once, in two stages, the individual companies finally had become a part of the PGZ Group, a major advancement was recorded within the aforesaid scope. More and more modernization programmes pursued by the Polish Armed Forces, such as the upgrades of the Leopard 2A4 main battle tanks up to the Leopard 2PL standard, have been implemented on the basis of a wide cooperation since then.

On the other hand, one may still note certain deficiencies in the activities and collaboration established among the Group’s companies. It often happens that the individual entities avoid sharing the results of the undertaken R&D initiatives among themselves, competing against one another to win the tenders, especially the tenders organized by the Polish Ministry of Defence. As a result of the above circumstances, the potential ascribable to the individual companies is utilized in a manner which lacks focus. No synergy effect exists. Some of the undertaken actions are being duplicated, even though the parties involved could just as well get busy with work in other areas, where the expertise needs to reach deeper.

Export and Modernization: The Challenges

Throughout the upcoming period, the companies belonging to the PGZ Group are to participate in the process of replacing the Post-Soviet armament of the Polish military. Their involvement could vary. The technical modernization plans extent is to be expanded, as the defence budget grows, in line with one of the Acts recently signed by the President. The Army is to undergo reinforcement on the basis of the Strategic Defence Review.

The Polish defence industry would be working on orders at a level that has been unprecedented since 1989. And all of this should be done via international collaboration on a competitive market. PGZ would not be replicating partially obsolete technologies passed on by the “Big Brother”, as it usually was happening during the Warsaw Pact era. The Group is expected to be frequently responsible for delivering the equipment that has never been manufactured in Poland before, such as modern continuous track IFVs or SHORAD SAM systems. In other areas some of the expertise has been lost and need to be recovered. Furthermore, in many cases, e.g. when it comes to Wisła, Homar or Narew programmes, the recovery is to take place through a transfer of technology involving external partners. The above would mean that PGZ Group is going to be responsible for reception of solutions that are acquired outside. This would involve integration thereof with the domestic systems (e.g. with the C4ISR structure). Furthermore, the Group will also be dealing with operational support and further development of the said hardware. 

Image Credit: US Army.

The division of work, with the individual companies focusing on creation of competencies that are to be complementary, within a single system, is of key importance. Without this, billions of zlotys planned to be spent on modernization would not create technological advancements, also within the industry. The tight collaboration and coordination are also decisive when it comes to the position taken by the Polish entities in negotiation with the external partners. This concerns the area of transfer of technology required by the Armed Forces too. At the moment some of the programmes, including the aforesaid modernization of the Leopard main battle tanks, are pursued in collaboration with a high degree of success.

However, considering the vast scope of future orders it would be required to uniformly and unambiguously define and follow certain rules for modernization. This is one of the objectives associated with the introduction of the PGZ Code. Moreover, PGZ Group is also facing an opportunity of greatly expanding the export sales, thanks to development of products that would ensure that “generational leap” is taken by the Polish military. Heightened export sales values have been already recorded, however the growth still is too low, especially when compared with other significant defence entities operating in our region.

Read More: Wisła Programme: Transfer of Technology - Three Domains of Key Importance [ANALYSIS]

Meanwhile, the ever-changing geopolitical landscape leads to growth of defence spending around the world. This creates numerous opportunities to conquer the export markets. According to the recommendations issued during the NATO Summits organized in Warsaw and Newport, the European nations are increasing their defence budgets. Asian, Middle East or African markets also retain a high degree of attractiveness. The global defence investment in 2022 may exceed USD 500 billion, according to the estimates. Once the embargo-covered states are taken out of the equation, along with the highly developed states basing their military potential on proprietary solutions (the United States, the United Kingdom, Germany), still orders having a value of USD 180 billion would remain available. PGZ Group estimates that it could be involved in procurement procedures valued at USD 17 billion per annum. Hence, there is something to fight for. However, PGZ would need to present an attractive offer and consolidate promotional activities related to its products on the external markets.

Contents of the Document

The PGZ’s Code assumes that a number of actions are undertaken, to enhance collaboration within the Group. Seven domain offices [bureaus] are to be created within the PGZ’s structure. Their task would be to coordinate the implementation of the major programmes in the areas assigned. This also applies to the most important modernization programmes pursued by the Polish Armed Forces. Land Platforms Bureau is listed as an example. According to the assumptions made by the Group’s management, the said unit is to coordinate the MBT, IFV and APC programmes, as well as the programmes concerning the vehicles for the special operations component.

Wieża KTO Rosomak-M prezentowanego w 2015 roku. Fot. J. Sabak/

The individual departments will also be dealing with division and distribution of competencies among the companies, along with planning of further development of capabilities offered within the given domain. Thanks to the above, the development of the individual companies gathered within the Group would be focused, and driven to increase the holistic potential within the PGZ.

The PGZ’s Code is to create conditions within which communications would be brought into order (here we are referring to the subordinated companies). Moreover, unified, homogeneous tools shall be introduced, allowing the owner to properly assess the effectiveness of work undertaken by the companies. This would be done on the basis of comparative data sets.  The Code would also become a foundation for introduction of a coherent communications strategy. The strategy as such could make it possible to effectively promote the Group on the export markets. PGZ is willing to present its offer as a single element, within a single, coordinated and realistically implemented strategy. Finally, one should note that the Agreements concluded between the PGZ Group and the individual companies are to make it possible to define the rules for collaboration, despite the lack of the holding law emerging on the grounds of the Polish legal background.

In total, the Code covers 18 areas with defined rules of cooperation. The said areas include, inter alia, research and development, international cooperation, foreign trade or investment policy. The Code shall also include rules of business ethics, corporate supervision or rules of accounting. The latter may make it easier to supervise the operation of the individual companies.

PGZ is also going to remain in possession of common corporate organs shared between the individual companies. These organs of the group would be dealing with audits, issuing opinions on investments and international agreements, and finally, with pointing to the possible PGZ Group’s paths of development. PGZ Code is to become a base for establishing a tighter cooperation between the individual companies of the Group, so that it remains capable of undertaking activities as a “single body”.

According to the management board of the PGZ Group, implementation of the Code would make it possible to ensure better coordination of marketing activities on the foreign markets, as well as preparation of a coherent and cohesive offer, also created for specific customers or customer groups. The most important export efforts will be undertaken by the International Trade Office of the PGZ. This unit would supervise and coordinate the trade activities within the individual companies.

Obviously, the actual consolidation of the PGZ Group shall reinforce its position in negotiations with the external partners. Not only are we referring to companies working together with the Polish entities within the scope of the transfer of technology, but also to the Polish state entities other than the Polish Ministry of Defence, such as the National Centre For Research and Development or the Ministry of Development. 

PGZ also wants to participate in the EU-supported programmes. The above also concerns the work undertaken via EDA. After 2020 the European Defence Fund financing may be as high as EUR 1.5 billion per year. The Fund itself is bound to become a platform for tighter EU cooperation, also within the framework of the most significant development programmes. PGZ shall be and can be seen as a potential leader among the Polish defence industry entities, with regards to the most important programmes. To effectively fight for subsidies the Group would need to offer a comprehensive proposal, making the best use of all of the advantages of the individual companies.

Consolidation Around the World

The tendencies to expand the scope of consolidation in the defence sector are evident all around the world. Fusion of the German KMW and French Nexter companies who now form the KNDS Brand is one of the best examples for the above. Despite the relatively expansive potential and product offer, despite the well established presence of both entities on the external markets, a decision was made that fusion is required to pursue large scale R&D projects, e.g. seen in development of a new generation main battle tank that would replace Leopard 2 or Leclerc platforms. 

It shall also be added that the newly developed future generations of the military equipment are usually far more complex and costly than their predecessors. This means that quantitatively the production is smaller, in comparison with the previously manufactured products. For instance, one should note that Bundeswehr has ordered only 350 Puma IFVs. Meanwhile more than 2 thousand Marder platforms had been acquired in the past. Even if the quantity of the Puma vehicles goes up in the Bundeswehr following a decision on increased defence spending, one may be almost certain that the vehicle would not be introduced into service in numbers applicable to its predecessors.

A similar situation may be witnessed in case of the Leopard 2 tanks. More than 2 thousand vehicles as such were originally introduced into service in Germany. Now, after quantitative increase has been introduced, 320 main battle tanks would remain in the Bundeswehr’s inventory. This probably also takes into account the tanks of the “shared pool”, transferred by the Netherlands.

Obviously, the consolidation efforts in the defence sector date far back. The European MBDA company, a European supplier working in the missile technology domain, was established through a staged fusion of companies hailing from the UK, France, Italy, Germany and Spain. Thanks to the undertaken effort, Europe remains capable to still develop complicated guided missiles that remain highly competitive on the global market.

Defence sector companies in the United States have also been taking steps towards consolidation back in the 1990s, following the Cold War. The steps as such were a must, as defence budget underwent major cuts. Within that period, after a fusion between Marietta Corp. and Lockheed, Lockheed Martin company was founded. The said entity is said to be the most significant player in the defence sector, e.g. according to the SIPRI ranking. Before the above happened, Lockheed had taken over the aviation portion of the General Dynamics company that developed the F-16. The development programme concerning the F-16’s successor is based on a wide international cooperation.

Hornet fighters were originally being manufactured by McDonnell Douglas. After they have been taken over, Boeing still works on development of these fighters. The photograph features a Finnish Hornet. Image Credit: 1st Lt. Christopher Mesnard/USAF.

At the same time, other US-based companies were carrying out fusions and takeovers, some of which were quite widely defined. For example, Boeing became an owner of the McDonnell Douglas company, where F-4, F-15 and F/A-18 fighter aircraft and DC-10 airliners have been manufactured. Raytheon has taken over some departments of the Texas Instruments and Hughes Electronics companies. Northrop has taken over the Grumman company. Northrop Grumman company was established as a result of the latter process.

All of the cases above show that armament companies that had been fierce competitors previously, can cooperate within a single capital group after they fuse. Furthermore, the more and more demanding market makes consolidation a condition of success. Noteworthy, practically in all of the cases above we were dealing with companies with high potential, delivering proprietary systems in hundreds of examples, up to the level of advancement applicable to multi-role jet aircraft. This is yet another argument supporting tightening of cooperation. Especially by and between the smaller entities. Not only do companies as such, to get an impulse for development, need funds, but they also need technologies to conduct further activities.

What's next?

Image Credit: J.Sabak

The Polish defence sector, even though formally it has already been consolidated, requires further tightening of collaboration. Tools would be needed to allow the PGZ Group to operate as a uniform body. The gradual introduction of the PGZ’s Code may be an opportunity to put solutions as such to work. At the same time, if the efforts made to increase the defence spending are successful, then the Polish defence industry may face a need to work on the domestic orders, with the level of involvement that has not been recorded since decades. However, to make use of this opportunity, consolidation of the Polish defence industry needs to be finalized, with PGZ becoming a modern umbrella company working in the area of defence.

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