Poland’s Balancing Act: A Briefing for the Defense Sector – Part 2
Guest Article by Christina Balis, Avascent
This is a pivotal year for the Polish defense market. Part 1 of this series offers an overview of Poland’s $44 billion military modernization program. This 2nd and final part covers key near-term purchases, as Poland becomes a key battleground for US and European industries.
Russia’s troubling regional ambitions have added urgency to Polish plans for a stronger military and more capable indigenous defense capabilities. Against that backdrop, the nationality of the winners of key missile defense and rotor-wing contracts, to be decided in the next 12 months, will set the tone for Polish defense relations over the remainder of its 10-year modernization program.
A Looming Transatlantic Battle
Up to PLN 3.5 billion ($1.2 billion) are to be spent this year on military equipment approved under the multi-year technical modernization program (TMP). According to the latest government estimates, this figure will increase to PLN 7 billion by 2016, with the remaining PLN 75.6 billion to be spent in 2017-2022. Of the PLN 91.5 billion allocated for 2014-2022, 3 procurements to be decided within the next 12 months will consume some 40% of the total.
All 3 will pit major US and European companies against each other, creating something more than a typical industry showdown. The contracts will be viewed as Poland shifting its defense posture toward European industry and its attendant alliances – or away from it.
US-European rivalry for the Polish market will be most intense within the broader air and missile domain. Poland’s military modernization also features several programs in the land and naval domains, but individual competitions tend to be smaller in value, or offer fewer inroads for American firms. Naval competitions primarily draw European bidders, while land systems programs typically involve leading roles for Polish industry.
Medium-range air and missile defense
The PLN 16 billion “Wisla” (or Vistula) program is part of a PLN 26.6 billion ($8.5 billion) multi-layered “Shield of Poland” air defense system, and stands as the single largest near-term program. The MND’s June 30/14 announcement that it had down-selected Raytheon and Eurosam (a Thales/MBDA consortium) surprised many observers. This was a near-complete reversal of fortunes from earlier this year, when Raytheon was thought to be in a losing position against the MBDA-backed MEADS and Eurosam SAMP/T teams.
In announcing its decision, the MND decided to prioritize project risk and time to deployment. It adopted 3 main criteria: the system had to be operational; it had to have been adopted by a NATO country; and it had to offer significant participation for Polish industry. Raytheon’s offering is now seen as a lower-risk, quickly deployable solution that easily meets the first 2 criteria, after their adoption effectively excluded both MEADS and David’s Sling.
Industrial participation remains an important factor, possibly the most important. Eurosam’s comprehensive offer is balanced against Raytheon’s ability to offer export opportunities within its wide customer set. Both bidders will have an opportunity to improve their offers, and up to half of the contract’s value could wind up with Polish firms.
The choice of Poland’s newly-consolidated PGZ as a partner is a given for both Wisla bidders, and PGZ is also expected to play a prominent role in the medium-range Narew air defense program. Engagement across the broader Polish defense industry, such as the recent LOI signed between Raytheon and TELDAT, should further strengthen each side’s industrial offer. Raytheon has focused its cooperation on radars and command and control systems. Eurosam’s focus remains to be seen.
Operationally, integration into NATO’s Active Layered Theatre Ballistic Missile Defense (ALTBMD) is guaranteed with both bids, but cost and access to future upgrades could prove critical in the Polish government’s decision. That decision’s scheduling ensures that it will land in conjunction with key upcoming missile defense procurements by 2 other NATO members, Germany and Turkey. Taken together, these 3 decisions have the potential to substantially reshape NATO’s missile defense architecture.
Medium-lift utility helicopters
The other major transatlantic contest, worth about $3 billion, involves 70 helicopters (48 multi-role transport, 16 Search And Rescue/Combat SAR, 6 anti-submarine) to be deployed throughout the Polish military. A winner will be selected by the end of the year, ahead of the announcement on the missile defense competition, with the first helicopters due to enter service in 2015.
Three bidders are competing: 2 European, and 1 American. Airbus Helicopters’ EC725 Caracal (Super Cougar), AgustaWestland’s AW149, and Sikorsky’s S-70i Black Hawk have until September 30th to respond to the RFP issued in early June.
The S-70i would seem to have the advantage both operationally (in meeting the anti-submarine capability requirement) and in terms of industrial footprint (leveraging its PZL Mielec subsidiary, which serves as the global final assembly center for the S-70i). AgustaWestland will match Sikorky’s in-country presence by leveraging its own PZL Swidnik subsidiary, and Airbus Helicopters plans to use a teaming arrangement with Heli Invest/WZL-1 to make up for its weaker local footprint.
Any shortcomings in current capability by either European bidder will have to be offset by a better price offer, and a more expansive industrial partnership package.
The tender for the “Kruk” (Raven) program was originally scheduled to be launched in 2018, with delivery starting in 2020. In response to recent developments in Ukraine, the Polish government has decided to accelerate the timeline. The procurement of 40 attack helicopters, up from 32 at the start of the TMP, will replace the Polish land force’s fleet of 29 Mil Mi-24D/Vs. Poland’s military views this program as particularly critical to the nation’s defense, given the country’s wide open, rolling landscape from East to West.
Ten bidders have reportedly responded to the August 1 RFI deadline, and once again US and European suppliers appear to be the strongest contenders for this $1.5 billion buy. Boeing (AH-64E Apache) and Bell/Textron (AH-1Z Viper) represent the US side, while AgustaWestland/Turkish Aerospace Industries (T129 ATAK) and Airbus Helicopters (EC665 Tiger HAD) are leading on the European front. It isn’t clear whether Sikorsky offered a S-70i with their Level 2 or 3 Battlehawk kits, but the number of respondents and Sikorsky’s bids elsewhere indicate that this is possible. The bidders’ Polonization approaches are also unclear, with key industrial partnerships likely to become known in coming months.
An award decision is expected sometime in 2015, most likely after the Wisla program’s winner is announced, making this the last pick of the 3 tenders. That could make Poland’s Raven a more politically charged competition than might normally be the case.
What Now, What Next?
Poland faces a significant challenge as it moves ahead with its next 3 big-ticket purchases. All 3 programs are critical to the country’s national security, but Polish doctrine and threat assessment should dictate different strategic weightings.
The need to stay within the TMP’s fixed budget may also shape the government’s options. An earlier competition this year for advanced jet trainer (AJT) aircraft was awarded to Alenia Aermacchi (like AgustaWestland, a subsidiary of Italy’s Finmeccanica), who offered 8 of its M346 jets and support at the bargain price of PLN 1.186B ($390M). The bids for BAE’s Hawk and LM/KAI’s T-50 were 46% higher and 50% higher than the MND’s PLN 1.2 billion cap, respectively. Many outside observers saw this cap as a highly unrealistic target, given the inclusion of 30-year sustainment support in the bid request. A repeat of this scenario for a strategically important buy would have much more serious consequences.
We believe that the most likely outcome of the 3 upcoming competitions will be a 2:1 split in favor of one side, rather than a sweep. One plausible scenario would see Poland buy a mix of US and European helicopters, and a US air and missile defense system.
Within Europe, a parallel game of musical chairs is underway across the TMP, although even here the spoils (spread across air, land, and naval requirements) should be shared, however unevenly, among Europe’s 4 largest national industrial bases, plus the Scandinavian countries.
While in theory these upcoming Polish military acquisitions are not linked, their combined outcome will send a political signal to both sides of the Atlantic. The decisions will also determine the degree of the country’s integration into, and acceptance by, the rest of Europe’s defense industry. Under these circumstances, we believe that integrated management would offer Poland clear benefits. The Polish government could afford to make trade-offs among programs to facilitate planning across the entire TMD, while remaining within the total allocated budget. In addition to stretching the delivery period for certain systems, for example, the MND can opt to invest less in one area to pay for additional capability in a more strategic area.
All this should set the stage for other medium-term procurements that will further test Poland’s relative penchant for weighing US and European systems against each other, including medium-heavy lift aerial transports, various C4ISR programs; and, even further down the road beyond the TMP, next-generation fighters.
Avascent is the leading strategy and management consulting firm advising clients in defense, security and government-driven industries. With a team of 100 full-time professionals located at its offices in Washington, DC, and Paris, France, and a worldwide network of regional and subject matter experts, Avascent has nearly 30 years of experience of assisting clients in the areas of strategic growth, value capture, and mergers and acquisitions. To speak to Business Development, contract Jay Korman. For further information about Avascent’s European operations, contact Christina Balis.
- DID – Poland’s Balancing Act: A Briefing for the Defense Sector – Part 1. Lays the foundations for this article.
- DID – Alone, If Necessary: The Shield of Poland. Poland’s future 3-tiered air and missile defense system.
- DID – Quote the Raven: Poland’s Attack Helicopter Competition.
- DID – Turkey’s TUHP: $3.5b for 109 T-70 Helicopters – and More. Actually, the S-70i. Turkey has positioned themselves to be able to step into Poland’s prime industrial role for the type, if circumstances allow.
- DID – Poland’s New Advanced Jet Trainer: M-346 Wins. The win ended up being budget-driven, not capability-driven. Will that history repeat?
- DID – Poland to Extend, Improve Its FFG-7 Frigates. Well, one of them, anyway. And the improvements are limited.
- DID – Buy from the Pros: Poland Adds More German Tanks.
- DID (Sept 9/14) – Polish Defence Modernization: Between strategic intent and spending reality. Looks at a different aspect: asks if the TMP’s full $44 billion in funding will really be there. Near-term programs are safe, but what could a funding shortfall mean?
- Flight Global (Sept 4/14) – Contenders make final pitches for Polish helicopter deal. Utility helicopters.
- Foreign Policy Association (Sept 18/13) – Beyond Air and Missile Defense: Modernization of the Polish Armed Forces.
- Polish MON (Sept 18/13) – Money for new military equipment guaranteed.
- DID (July 23/13) – German Submarines for Poland? The country’s submarine plans remain murky.
- DID (July 18/13) – Poland Expands Orders for Rosomak Wheeled IFVs. A variant of Patria’s AMV. They’ve also worked with Israel’s Elbit Systems to offer UAV integration.
- DID (Oct 2/12) – Polish Equipment Issues and Consequences. In August 2009, Polish Land Forces Commander Lt. Gen Waldemar Skrzypczak resigned, accusing defense bureaucrats in Warsaw of “serious incompetence” in procurement that was partly responsible for the deaths of Polish soldiers.
- DID (Sept 12/11) – Poland to Modernize 16 MiG-29s. But they seem to have chosen a very basic upgrade.