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Conference Provides Much-needed Insight into Central & Eastern European Defence Markets |
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(Source: Frost & Sullivan; issued March 11, 2005)
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Integrating Poland, the Czech Republic and Hungary into NATO has proven a greater challenge to Ministries of Defence than originally expected, concluded delegates at SMi's inaugural Warsaw conference on NATO enlargement.
With high-value procurements in 1999-2001 sapping much-needed force transform resources to meet post-9/11 operational requirements, restructuring and modernisation will require a great deal of patience and savvy financial management.
Laying out NATO's concerns for the region, Frank Boland, Director of Force Planning for the Alliance, emphasised language training, military education, command & control (C2) and infrastructure as key concerns going forward. While defence spending priorities currently focus on the formation of light aeromobile infantry forces, the glaring need for BMP and BRDM replacements barely eclipsed the lack of serviceable rotorcraft at any significant force level.
It is tempting to add defence sector privatisation and the elimination of exorbitant offset requirements to the list of obstacles to effective transformation. Although this is widely considered a black hole in government spending, patient foreign investors will find the silver lining in a highly-skilled workforce with lower wage-demands than other European countries and a strategic position within the EU Common Market.
Although the enlargement experience and lessons learned differ across national lines, defence budgetary and procurement priorities remain largely the same. Strategically, the Czech Republic and Hungary are looking to develop niche capability (the Czech Republic in CBRN Defence and Hungary in combat engineering and bridge-laying), while Poland is looking to develop a more autonomous posture to enable it to effectively staff, command and soldier a German-Polish EU Battle Group.
At the force level, however, modernising rotorcraft, armoured infantry fighting vehicles and upgrading existing ISTAR capability are pressing capability requirements. This is only complicated more by the fact that East European militaries are bound hand and foot to a rusting defence industry.
There is hope, however, maintains Alon Redlich, president of International Technology Sourcing While Eastern Europe's defence industries show many structural weaknesses, US and international arms manufacturers would be wise to exploit these opportunities to bridge cost-sensitive North American boards and the EU market. Using the privatisation of WSK-Rzeszow as an example of successful industrial partnering in Poland, Mr. Redlich pointed out the wisdom of investing in the Rzeszow plant: the EU now has a ‘domestic' source for F-16 F-100 engines.
Such foresight is also shown by Patria Oy's partnership with the Polish Army for its KTO Rosomak armoured vehicle programme. By investing in the WZM-Siemanowice Slaskie plant, Patria Polska has partnered with the Government of Poland to create a long-term revenue stream that capitalises on the low-cost, high-quality work force at WZM-Siemanowice Slaskie and fulfils the government's offset requirements by investing much needed euros in an otherwise failing business.
Nevertheless, the region's growth potential over the next five years is significantly limited. Painful financial strictures associated with post-Soviet reforms and EU entry are aggravated by the dollar through-life cost of expensive NATO entry prestige projects.
Both the Czech Republic and Hungary bought numbers of Saab Gripens, only to experience a dramatic shift in force planning and operational strategy in the wake of 9/11. Poland's KTO programme represents a $5B investment in armoured warfare at a time when it's Mil-24 fleet is being divested to the Iraqi Armed Forces and uptake of F-16 Block 52 C/D's is choking the Air Force's budget. Although these markets represent strong growth and co-evolution prospects in the 2009-2014 timeframe, neither uptake of new equipment nor systems are likely until more funds are available to procurement officials. Furthermore, as Rheinmetall Landsysteme's Dieter Hanel pointed out, industrial offset requirements surpassing 100% close competition to all but the strongest offers.
Industry would, however, be advised to continue their inroads into the Polish, Czech and Hungarian markets, as the combination of a highly-qualified workforce, low labour costs and EU membership make this a highly desirable region in which to invest for growth. Although the Czech Republic's VOP 025 and 026 maintain a strong presence in the T-72 MRO market, BUMAR-Labedy has scored successes with its PT-91 MBT, and PZL-Swidnik W-3 helicopters are being sold to the Iraq Armed Forces, this overlooks longer-term weak points like PZL-Mielec, Aero Vodohody and PZL-Lucznik.
What firms really want is industrial partnership and technology transfer, taking as one successful example, Patria's Rosomak. With defence consolidation continuing across in Eastern Europe, strong potential exists for foreign (especially non-EU) investors in the component manufacture, military MRO and land-based communications markets as the region offers cheaper, equally proficient workforces and a unique strategic position within the EU Common Market.
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