The Polish Armaments Group Ahead of Major Changes
PGZ needs a bold, long-term vision and determined leadership to conduct industrial and organisational changes to transform the company into a modern defence player
The new Polish coalition government, led by the Civic Coalition was sworn in on 13 December 2023. The change of government has triggered a change of power in state-owned companies. The Ministry of State Assets has started the process of management board changes in the largest enterprises. It is expected that the new management board of the Polish Armaments Group (PGZ) will be appointed after the general meeting of PGZ shareholders in mid-February of this year. The new leadership of PGZ will have to address many internal and external challenges.
The strategic context is well known. The Russian invasion of Ukraine has caused the greatest challenge to national security since the end of the Cold War. Furthermore, the war in Ukraine is nearing its second anniversary and has transformed into a trench warfare conflict with no clear outcome or end in sight. With a big question mark over the result of the November US Presidential election, Poland, the biggest country on the eastern flank of NATO, needs to be ready for all possible scenarios.
A vital part of contingency planning should be the restructuring of the local defence industry base, specifically because the rest of Europe is only selectively increasing its defence industry capabilities and there is a lack of pan-European coordination in this regard. The initiative towards reform and the strengthening of the defence sector should cover both private and state-owned entities, PGZ however due to its size and scale will be a front-runner.
The Polish Armaments Group, which was set up in 2013, is the biggest entity in the Polish arms industry bringing together about 50 companies. It is also the largest defence firm among NATO’s eastern flank countries. The company registered nearly $1.9 billion in total sales in 2022. According to the company board’s initial estimates, PGZ’s revenue in 2023 should exceed $2.6 billion, a 37% growth compared to 2022. Furthermore, according to PGZ’s latest strategy, the company wants to reach at least $6 billion in sales revenue by 2033.[1] Although the company is heavily engaged in the modernisation agenda of the Polish Armed Forces, its presence in international markets is relatively modest. Only about 15% of total sales revenue is generated by exports. Last year the company was listed among the top 100 defence companies, ranked 62nd and 71st place respectively by the Defence News and the Stockholm International Peace Research Institute rankings. The relatively distant place of PGZ in the international rankings cannot be satisfactory for a country listed among the top 25 economies worldwide with growing international aspirations and in which the arms industry has a long tradition. The history of key PGZ subsidiaries dates back to the interwar period.
Table 1. Brief SWOT analysis of the PGZ
Although some positive changes have started to be implemented, e.g. new infrastructural investments in Mesko or HSW companies to increase production capacities to satisfy the growing number of contracts, the PGZ is still struggling with some structural issues. The consolidation process of the group is still an unfinished chapter. This needs to be done to simplify and streamline the decision-making and management processes and increase efficiency within the group. The company has a limited number of competitive products that can be offered to potential customers. This is the consequence of the low level of R&D spending and the technological gap compared to Western competitors, which translates into a relatively low export income.
Another crucial aspect, which is beyond the PGZ level, is the lack of long-term government strategy toward the defence industry development and ad-hoc procurement decisions of the Ministry of National Defence (MND). So far, most of the government measures addressed towards the defence sector were reactive instead of proactive. The group's success can only be achieved with coordinated support from government institutions. A long-term, comprehensive, and consistently implemented defence industry policy is crucial to restructure the local defence sector. The strategy needs to be accompanied by a stable and predictable purchasing policy of the MND, together with increased spending on military research and development programmes.
The swift implementation of the above-mentioned measures is necessary to transform the PGZ into a modern defence prime benefiting from the growing domestic market and expanding abroad. The company will also need to be a much more active player in Europe as a member of large European armaments programmes and swiftly implement lessons learned from the war in Ukraine to successfully compete with other defence primes on the global market. If the new leadership succeeds, the result will be a technologically innovative and internationally competitive entity, integrated with the European defence sector, with global interlinks and a substantial share in the global arms market. The transformation of PGZ will benefit the whole eastern flank of NATO.
[1] Selected Key Issues of the PGZ Strategy for 2024-2033, PGZ’s web page, https://grupapgz.pl/wp-content/uploads/2023/12/strategia-grupy-pgz-2024-2033.pdf