The armaments industry - the new attraction for companies and investment funds

The conflict in Ukraine and the one in the Middle East forced the states and companies in the defense industry to adapt their strategies and invest massively in the development of new technologies and military capabilities.

• The Arms Race Hampered by the Financial Situation of State-Owned Companies in Our Defense Industry

The global geopolitical situation and the ongoing threats of potential war expansion have led to increased investments in the armaments sector. Internationally, start-ups and investment funds are focusing on the arms business, making this field one of the most profitable today. A similar trend is emerging to what was seen during the pandemic when most companies were manufacturing masks, gloves, disinfectants, dietary supplements, and pharmaceutical companies focused primarily on antivirals and COVID-19 medications.

Now, with the war in Ukraine triggered by the Russian Federation-a conflict currently also being fought on Russian territory-and the tense situation in the Middle East, where Israel has not yet completed its operation to eliminate Hamas in Gaza and the West Bank, is also fighting Hezbollah in Lebanon, Houthi rebels in Yemen, and has a simmering conflict with Iran, alongside the potential escalation of tensions between the USA and China over Taiwan, we are witnessing a global arms race.

In Romania, this race is being hampered by the severe financial situation in which most state-owned companies in the Romanian defense industry find themselves. In today's edition, we will present the situation of the arms sector in Romania, as well as the moves of specialized companies in Europe. In the next issue of the BURSA newspaper, we will publish an article about the orientations of venture capital funds.

• Evolution of the romanian defense industry in the context of the new arms race

The conflicts in Ukraine and the Middle East have led to a major shift in the dynamics of global security, forcing states and companies in the defense industry to adapt their strategies and invest heavily in developing new technologies and military capabilities. In Romania, this trend has been marked by increased defense budgets and the signing of international partnerships for the modernization of the military-industrial complex.

While private companies in the Romanian defense industry are making profits through collaborations with Western partners, most state-owned companies face financial difficulties that prevent them from modernizing and expanding their existing production capacities. This situation shows an urgent need for a massive capital infusion-between 100 and 250 million euros, according to industry experts-a sum that the government does not seem willing to provide but could be attracted from the private investment environment. However, this would require that all these companies have leadership recruited in accordance with the corporate governance law in public enterprises.

This condition is necessary, especially since, according to data provided by Early Game-a generalist venture capital fund-the number of military industry companies that have applied for funding in the last six years has been extremely low, even though for the past two and a half years we have been dealing with the war in Ukraine.

Read Schimbare de direcţie în investiţii: producţia de armament atrage atenţia marilor fonduri de capital de risc

The first step in strengthening the defense industry in Romania was the increase in budget allocations for defense, which were set at 2.5% of GDP, an increase that allowed the Ministry of National Defense to initiate new programs for the acquisition, modernization and development of military capabilities. The conflict in Ukraine, in particular, has heightened the need for defense investment, given the geographic proximity and risks associated with regional instability. In this context, MApN has prioritized the acquisition of modern equipment such as Patriot air defense systems, Piranha V armored vehicles and F-16 multi-role aircraft, even planning the acquisition of fifth-generation fighter jets, the F-35, the first this type to be delivered to the Romanian Air Force around 2030.

Read The war in Ukraine - financial boom for European defense companies

In addition to foreign purchases, the representatives of the central authorities have stated that they will start an extensive process of modernization of the defense industry in our country and have even approved a national strategy in this regard, but most of the companies in the state sector are facing problems financial and historical debts to the state budget, problems that prevent them from starting any re-engineering and modernization program. It seems that the only solution for the implementation of such a program is the takeover by private companies of the mechanical plants subordinated to Romarm - as was the case with the takeover of the Automecanica Mediaş Plant by the German Rheinmetall concern - or the creation of joint ventures with Western partners for the development of joint projects that also involve the transfer of technology to companies from our country - as we have, for example, the partnership between Uzina Mecanică Bucharest and the American company General Dynamics for the production of Piranha V tracked conveyors.

Read Nicu Fălcoi: "The only solution is the privatization of state companies in the defense industry"

• Private companies in Romania with strategic partnerships with Western firms

Basically, the state companies would only follow the path opened by the private companies in the defense industry in our country, companies that established strategic partnerships with Western companies, collaborations that allowed the transfer of technology and know-how, essential for the development of new products and services with high added value.

Read Constantin Bucuroiu: "We need a financing of 250 million euros in the defense industry"

In this sense, we have the following examples:

- Establishment of the private company Elbit Systems Romania, a company that played an important role in the modernization of on-board electronic equipment and air defense systems. This company contributed to the integration of advanced technologies in the equipment produced in Romania, increasing the defense capabilities of the country.

- Aerostar Bacău, a private company, listed on the Bucharest Stock Exchange, which, in collaboration with the American concern Lockheed Martin, is involved in the maintenance and modernization of F-16 aircraft of the Romanian Air Force, an activity that transformed the Romanian company into a regional hub for maintenance military aircraft, thus attracting international attention. More recently, the Aerostar company produces part of the equipment that is part of the F-35 fighter plane, a plane that will enter the Romanian Air Force in 2030.

Read Aurel Cazacu: "If the Russians attack us, we only have ammunition for two or three days"

- Pro-Optica, a private company specialized in the production of optical equipment and surveillance systems, has developed strategic partnerships for the supply of essential equipment to both the Romanian army and international forces, contributing to the increase of monitoring and recognition capabilities.

- Rheinmetall, which, in addition to the investment made with the takeover of the Mediaş Automecanica Factory - where military vehicles are built, opened a factory in Satu Mare dedicated to the maintenance and repairs of Leopard tanks used on the front in Ukraine and will create, together with the Romanian state, a factory of powders and explosives in the city of Victoria, Braşov county. This project is part of a European support program for ammunition production, financed with 47 million euros through the ASAP program of the European Union, the total funding amounting to 400 million euros, the majority of the amount being investments from the Romanian state and the Rheinmetall company. The factory will produce powders and explosives needed by the defense industry, ensuring control of the entire production chain.

Read Damen Shipyard - ignored by the Romanian state for the development of the defense industry

- Based on the existing partnership at Uzina Mecanică Bucharest, the American giant General Dynamics established a subsidiary in Romania that would contribute to the development of the defense industry in our country, by expanding the current collaboration, but also by creating a research center in the future -innovation in the field of military equipment and technique.

The need for military equipment and ammunition is huge in the current regional and geostrategic context, and the defense industry in our country cannot afford not to enter into an extensive re-engineering and modernization process, especially since funds are allocated at the European level to achieve of joint, cross-border projects in this field. Therefore, there is a need to urgently recruit new management teams, based on corporate governance, for the 15 state-owned companies in the defense industry, after which the new managements should draw up a financial-economic recovery plan, which subsequently to allow the respective companies, under the conditions of the amendment of the law, to be listed on the capital market in order to attract private investments.

Otherwise, a possible global conflict would find the Romanian army, not in shambles like in Marăşti in the First World War, but without the weapons and ammunition necessary to defend the national territory.