Moving East - How Poland and Ukraine Provide Significant Opportunities for the Defence Industry


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Moving East - How Poland and Ukraine Provide Significant Opportunities for the Defence Industry - Market Insight by Frost & Sullivan

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Moving East - How Poland and Ukraine Provide Significant Opportunities for the Defence Industry

  1. 1. - September 2011 Moving East - How Poland and Ukraine Provide Significant Opportunities for the Defence Industry Dominik Kimla, Industry Analyst - Aerospace, Defence & Security “50 Years of Growth, Innovation & Leadership”
  2. 2. Moving East - How Poland and Ukraine Provide Significant Opportunities for the Defence Industry Market InsightOverviewDuring the Cold War era, Central and Eastern European (CEE) countries-Czechoslovakia, Hungary,Poland, and Ukraine were among the major defence industry producers of the world. However, theend of the Cold War and the breakdown of the Warsaw Treaty Organisation (WTO) caused the endof industrial partnership agreements and created significant challenges for the functioning of thecountries’ defence manufacturing bases. Production capacities of defence companies were too largefor the diminished needs of foreign customers and their own armed forces. As a consequence, CEEgovernments introduced several measures, including industrial conversion and re-orientation tocivilian production, privatisations and severe downsizing. These measures caused the size of thearms industry to be drastically reduced in a very short time period.As a result of this drastic downsizing, CEE countries’ defence industries experienced a period ofstagnation in the post-Cold War era. However, the industry has undergone something of a revival,partially stimulated by political shifts within these countries towards the West. After the historiclows of the 1990’s defence expenditure in the CEE region is expected to remain fairly stable atnow-heightened levels, with a slight growth in expected expenditure from 17.5 billion dollars in2011 to 17.9 billion dollars in 2020. Polish defence expenditure is responsible for over half of thisfigure, with growth of approximately 800 million dollars over the forecast period.Financial Crisis Limits Defence Spending in CEE CountriesThe Visegrad Group of countries (the Czech Republic, Hungary, Poland, and Slovakia) haveconcentrated their efforts on modernisation and replacing Soviet-era weapons and defenceequipment according to NATO interoperability criteria. However, the global economic downturnhas seriously limited defence expenditure in the CEE region. Most Ministries of Defence (MoDs)are underfinanced and the majority of the CEE armed forces suffer from consistent budgetshortfalls and lack foresight in procurement planning. Large proportions of equipment stocks arereaching the end of their operational life spans, and MoDs will be unable to finance all plannedmodernisation programmes.© 2011Frost & Sullivan Page 2
  3. 3. Moving East - How Poland and Ukraine Provide Significant Opportunities for the Defence Industry Market Insight CEE Defence Spending Forecast, 2011-2020 20000 18000 Expenditure ($ Million) 16000Expenditure ($Million) 14000 12000 10000 8000 6000 4000 2000 0 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Ukraine 3587.3 3463.6 3339.9 3349.2 3358.5 3367.7 3377.0 3438.9 3500.7 3562.6 Slovakia 955.8 939.6 923.4 925.8 928.3 930.7 933.1 936.4 939.6 942.8 Poland 9100.3 9249.5 9398.7 9510.6 9622.5 9734.3 9846.2 9876.1 9905.9 9935.7 Hungary 1305.0 1260.0 1215.0 1198.1 1181.3 1164.4 1147.5 1152.0 1156.5 1161.0 Czech Republic 2515.4 2472.7 2430.1 2398.1 2366.2 2334.2 2302.2 2310.7 2319.3 2327.8 All figures are rounded. The base year is 2010. One such example is that of the Ukrainian Armed Forces, which are in a critical state. The main priority of Ukrainian authorities is to prevent serious reductions to the combat readiness level of the Armed Forces; in 2010 only seven percent of the Ukrainian MoD equipment budget was spent on new arms and equipment, while almost 88 percent was spent on maintenance. As a result of budget constraints, most modernisation and arms replacement plans have been postponed until 2016 or beyond. Despite the current difficult financial situation, Ukraine has ambitious future plans which will drive the defence industry in this region. For example, the Ukrainian Navy plans to introduce four new corvettes by 2021. The cost of the project is estimated to exceed two billion dollars and most of the corvettes’ equipment and armaments will come from mainly Western European foreign suppliers. Percent of CEE Defence Spending Percent of CEE Defence Spending per Country, 2011 per Country, 2020 14.4% 13.0% 20.5% 19.9% 6.5% 7.5% 5.5% 5.3% 52.1% 55.4% Czech Republic Hungary Poland Slovakia Ukraine Czech Republic Hungary Poland Slovakia Ukraine © 2011 Frost & Sullivan Page 3
  4. 4. Moving East - How Poland and Ukraine Provide Significant Opportunities for the Defence Industry Market Insight In contrast to most CEE countries, the situation in Poland looks promising; Frost & Sullivan predicts that Poland will continue as the regional leader in terms of defence spending. It is expected that the Polish share of CEE defence expenditure will increase from 52.1 per cent in 2011 to 55.4 per cent in 2020. One of the key drivers is the government’s legal commitment to allocate 1.95 percent of the previous year’s gross domestic product to defence spending. Under procurement plans announced in 2009, the Polish MoD envisages spending of almost 11 billion dollars by 2018 on defence equipment, in the form of fourteen ongoing programmes. The main priorities are: air defence (including missile defence), new utility helicopters, unmanned aerial vehicles (UAVs), command and control systems, training and simulation systems, and the purchase of a new submarine. In addition, the Polish defence market also represents the greatest potential opportunities in terms of support-in-service (SIS) outsourcing among CEE countries. It is estimated that outsourced SIS expenditure will reach 4.09 billion dollars during the forecast period. Defence Support in Service Market: Total Support In-service Spend versus Out-source Spend (Poland), 2011-2020 2500 2000 Expenditure ($Million)Expenditure ($ Million) 1500 1000 500 0 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Year Out-sourced SIS spend Total SIS spend All figures are rounded. The base year is 2010. The Upcoming Privatisation of the Polish and Ukrainian Defence Industries is Expected to Bolster Growth The state-owned Bumar Group, founded in 2002, is Poland’s biggest defence industry representative. Consisting of twenty three manufacturers of a wide range of defence products, the association is undergoing a significant restructuring and consolidation process. Manufacturers are going to be grouped into four divisions including soldier equipment, ammunition, land vehicles, and electronics to promote integration between companies within the group. Frost & Sullivan expects the government will sell a minority stake in the Bumar Group by mid-2013. © 2011 Frost & Sullivan Page 4
  5. 5. Moving East - How Poland and Ukraine Provide Significant Opportunities for the Defence Industry Market InsightAs well as Bumar companies, there are also foreign players-such as Avio, MTU Aero Engines, Pratt& Whitney and United Technologies who are investing in Polish aviation industries. Sikorsky tookover the Polish aircraft manufacturer PZL Mielec in January 2007 to provide a European base forthe International Black Hawk Helicopter Programme. Similarly, helicopter manufacturer PZLSwidnik was acquired by AgustaWestland in 2009. Both Sikorsky and AgustaWestland aimed tomaximise their industrial base before the announcement of the utility helicopter tender, as it isexpected that government will require domestic production. The helicopter contract is estimatedto amount to at least 2 billion dollars, and a decision is expected to be made by the nextgovernment (after the October 2011 election).The Ukrainian defence industry inherited a better developed manufacturing base than other CEEcountries as a legacy of the Soviet Union. The Ukrainian defence industry, which is approximately90 percent state-owned, demonstrates higher technological development than other sectors.Ukraine’s defence manufacturers produce satellites and space systems, heavy-lift transport aircraft,tanks and armoured vehicles, among other materials. The Antonov AN-70, a state-of-the-artmedium-range transport aircraft, is an example of the Ukraine’s defence industry potential. Theaircraft may be an alternative to the Airbus A400M for customers from Asia and the Middle East, atalmost half the price and with a heavier load capacity. Ukraine may also privatise some of itsdefence enterprises, although the government states that ‘strategic defence companies’ (as yetundefined) are likely to remain state-owned in the short-to-medium term.Export Sales as the Main Driver of the Ukrainian Defence IndustryThe defence sectors in the Visegrad countries are dependent on their national markets. WhilePoland has noted some export successes particularly in India, Malaysia and Indonesia in the past tenyears it has struggled to find new foreign customers. However, the Ukrainian defence sector hasbeen quite successful in attracting new foreign customers. Ukraine has signed large defencecontracts to provide arms and defence equipment to India, Iraq, Pakistan and Thailand. The countryhas also signed smaller contracts with customers all over the world. Ukraine is still among the topten arms exporters in the world and the Ukrainian defence industry is almost entirely dependenton exports, due to the Ukrainian Armed Forces’ severe budget limitations.© 2011 Frost & Sullivan Page 5
  6. 6. Moving East - How Poland and Ukraine Provide Significant Opportunities for the Defence Industry Market InsightConclusionPoland, with an ongoing 11 billion dollar procurement programme, appears to be the most lucrativemarket among CEE countries for defence suppliers during the forecast period. Polish utilityhelicopter and air defence system projects will be the biggest defence tenders in the CEE region.Defence companies interested in the Polish market should consider the possibility of participationin an expected upcoming initial public offering (IPO) of the Bumar Group to establish a domesticmanufacturing base.In Ukraine, although approximately 20 percent of its defence sector exports are to Russia,companies have been looking to collaborate with Western European suppliers. The most promisingproject in terms of Ukrainian-Western European defence industry co-operation is the UkrainianNavy’s corvette programme, with an expected value of two billion dollars. Ukraine’s lack ofadvanced naval technology creates an opportunity for Western suppliers to provide up to 80percent of the corvettes’ components. Co-operation in this upcoming programme can create thefoundations for future defence projects after 2016 when Ukraine’s financial situation improves. About Frost & Sullivan Frost & Sullivan, the Growth Partnership Company, enables clients to accelerate growth and achieve best-in-class positions in growth, innovation and leadership. The companys Growth Partnership Service provides the CEO and the CEOs Growth Team with disciplined research and best-practice models to drive the generation, evaluation and implementation of powerful growth strategies. Frost & Sullivan leverages 50 years of experience in partnering with Global 1000 companies, emerging businesses and the investment community from more than 40 offices on six continents. To join our Growth Partnership, please visit contact us Tel: 44 (0) 20 7730 3438 | |