How to increase production of Ukrainian weapons: simple steps to scale up national defense industry

First, there has been a significant increase in the number of arms and military equipment manufacturers. According to the President, there are 500 defence companies in Ukraine and more than 300,000 people involved in the production of Ukrainian weapons.

Secondly, the domestic defence industry has changed qualitatively, with new competencies in important areas, primarily in the production of ammunition, drones, and electronic warfare. It was possible to increase the production of artillery systems, armored vehicles, mortars, etc.

Third, the structure of the industry has changed. While before 2019, the defence industry was completely connected to the state-owned Ukroboronprom, with which every step had to be coordinated - from negotiations with partners to marketing - now there are quite a few prominent private players. This has a significant impact on the development of the industry, as business initiative is often the driver of change and market development.

Thus, according to the President, the Ukrainian defense industry today produces 10 Bohdana self-propelled howitzer per month, and this is commensurate and even more than the capabilities of major global manufacturers of similar systems. The production of artillery ammunition by domestic producers is also commensurate with Western ones.

Bohdana self-propelled howitzer

But there is one "but". Russia produces many times more. For example, Russia produces 3 million artillery shells per year, while the US, EU and the rest of our allies together produce 2 million per year. In other words, Russia produces more than all of our other partners combined, and at the time of the full-scale invasion, Russia had much larger stockpiles.

Under the current circumstances, we realize that without the support of our allies, Ukraine will not be able to defeat Russia. But the experience with the long delay in aid from the United States, and the experience with Europe's very slow supply of promised ammunition, indicates that we have no other way but to develop our own military-industrial complex to the maximum.

This requires rapid qualitative changes.

I will focus on the main, in my opinion, priority tasks.

1. First and foremost, we must create a clear, transparent market where both state-owned and private companies operate under the same rules. The task of the Ministry of Strategic Industries today is to look for synergies in cooperation between the private sector and the public sector and not to oppose them in any way. There should be mutually beneficial production cooperation. We have to understand that if we lose this war, there will be neither the state nor the private sector. Today we need maximum market consolidation and any confrontation between producers is unacceptable.

In the third year of the war, the industry is living in a system of permanent rule changes. Changes to the existing regulations governing the market are made at least once a month. Given the history of a year ago with the State Audit Service of Ukraine (SAS) when they tried to declare the profits of enterprises prescribed by the current regulatory framework as illegal, trust in the state has been shaken. The fact that producers are under constant threat of criminal prosecution by law enforcement agencies due to unclear rules that allow for different interpretations of documents is a very serious deterrent to the development of the industry.

For example, in July 2023, by amending Resolution 1275, the government canceled profit regulation for enterprises, which provides for competitive pricing. But, for example, Ukrainian Armour, having learned from the unpleasant experience of its market colleagues, continues to use regulations that provide for a minimum profit to protect itself from possible repeated inspections or accusations. This limits our resources for development. Regulatory documents should be clear and understandable and not change every month.

Excessive bureaucracy is another notable limitation in the market. Undoubtedly, there should be quality control over the compliance of samples with tactical and technical characteristics, because the Ukrainian military must receive high-quality weapons and ammunition. However, this should not turn into a bureaucratic delay. The pre-war practice, when it could take years for a particular model to be tested and put into service with the troops, has not gone away. We have an example with the Bohdana self-propelled howitzer, which began development in 2016; in 2018, a prototype took part in the parade on Independence Square, but the system did not pass all the tests before the full-scale invasion. 

Despite numerous declarations that it is now easier to set up production and pass state tests, the system has not changed significantly. For example, Ukrainian Armour is currently in the process of putting 120mm artillery mines into service, and we see that the volume of tests under the simplified procedure is greater than it was during state tests under the regular procedure before the full-scale invasion.

Titanic super-efforts have indeed taken place in the field of unmanned systems, both in terms of drones and their ammunition. In other types of weapons, there have been no dramatic changes, let alone noticeable simplification. 

These are the main points regarding the rules. Their unification and simplification, in my opinion, will give a significant impetus to the development of the industry, create a transparent market, healthy competition, which will have a decisive impact on both product quality and price.

1. Second, and no less important, is long-term planning and ordering. This issue is critical for any private manufacturer if we are talking about the development and scaling of production. For example, we, as a company, do not need any additional funds from the state to expand production. We need contracts for two or three years. Then we will be able to increase production many times over from our own working capital without attracting any state funds to organize production, to relocate, to expand production capacities.

Having a plan, we understand tomorrow, we understand the next year, which will allow us to form a portfolio of component orders and increase volumes. We can significantly increase production by having a plan, orders and minimum prepayment or alternative financing, such as loans.

Another painful problem is that the current realities, when domestic producers work exclusively for the domestic market, given the lack of financial resources on the part of the customer, leads to production losses. Despite the fact that our three-year defense planning was stipulated in the law on defense procurement back in 2020, this rule does not work. In fact, today we buy according to the system: here is a contract - fulfill it, then we may order something else. This causes interruptions in production - people are not involved for some time, there are long breaks related to the supply of components. With such a broken production process in such a difficult time, we lose production capacity that is idle. But most importantly, in such conditions, companies have no chance to develop (scale) or develop new products.

1. The third layer of problems is financing and support from the state. Today, we do not have a single program to support the defense sector. As of the beginning of the third year of the war, no private manufacturer has received any investment from the state for equipment, relocation, or construction, except perhaps compensation for destroyed property. 

If we want the defense industry to develop and new developments to appear, we need to find money. How does it work in other countries? For example, in Turkey, defense companies can easily obtain land plots for production construction and preferential loans for a long period of time to launch an enterprise. We do not have this.

At present, defense companies have no way to raise credit, despite the high liquidity of the banking sector. There is a support program called 5-7-9 for civilian businesses, so why not launch something similar for the defense industry?

We need to understand that in the current environment, enterprises have to work, they have to produce what they can to the maximum. In order for the industry to develop, we need to either find funds and load these enterprises so that they utilize their capacities, or give them the opportunity to work freely - open exports.

Another important point is the state's ability to respond promptly to challenges.

For example, the new law on mobilization has created a real threat to the defense industry - the loss of qualified personnel. Despite the government's permission to reserve 100% of the employees of defense companies that fulfill government orders, in reality, companies are actually deprived of this opportunity. After all, to reserve an engineer or designer, they must first update their registration details, and a visit to the TCR is almost a guaranteed mobilization draft notice. The loss of key employees for an industry that is already suffering from staff shortages means, at the very least, the threat of disruption of government contracts and a reduction in product supplies.

We were also unprepared for problems with electricity. Today, there are resolutions of the Cabinet of Ministers that stipulate that critical infrastructure enterprises have priority status and should not be subject to power outage schedules. But in fact, this mechanism does not work. Neither the civil-military administrations, nor DTEK, nor other electricity suppliers are taking any steps in this direction. We, for example, as an enterprise that has the status of a critical one, have scheduled power outages at our production sites.

I think we have to learn to overcome such challenges quickly. We simply don't have time for long bureaucratic delays. Promptness and flexibility are the keys to our survival. 

How will the entry of Western players change the market?

The entry of Western companies was a positive signal for the defense market. We are now seeing the creation of joint defense enterprises with German manufacturers. From the point of view of the army's combat capability, this means reducing the logistics burden and the time required to repair the equipment that our partners have provided us with as assistance, and this is a huge positive. American and European giants have announced their intentions to enter the market. What can we expect from such a step? 

I am convinced that the entry of large players into the market will be an impetus for serious changes. This is a big plus for the country and the economy, as it means increased competitiveness, which always means improved quality and lower costs. Ukrainian producers will have to develop, invest in production, make it more technologically advanced, improve working conditions, and compete for highly qualified specialists in order to compete with Western ones. 

However, we need to understand that the business processes of large players are built on profit, understanding the market, etc. Full involvement of external players will be possible only when Ukraine has a clear transparent system of work and the assets of producers are protected. In the third year of the war, it is unacceptable that information about defense contractors, their locations, sales volumes, etc. is publicly available.

At this point, Western companies are studying the market, testing their capabilities, and looking for partners. Here, the role of the state is another important point: it should not interfere. All attempts to prioritize state-owned producers in negotiations by the state are an "ingrained Soviet mentality", not a modern market mechanism that will lead (and is already leading) to a reduction in production capacity. The West works according to market mechanisms. The state should not oppose itself to a private producer.

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The unique experience of using a wide variety of Western weapons on the battlefield shows that in some segments, domestically produced weapons and military equipment are better than their Western counterparts. For example, our maritime drones, long-range UAVs, and electronic warfare systems are more effective and cheaper than their foreign counterparts.

The main advantage of the national defense industry is flexibility, creativity and adaptability. To survive, we have to quickly develop new products and adapt existing ones to the realities of modern warfare. But this is not enough to win. To win, we need to outnumber the enemy, both quantitatively and qualitatively. To win, there must be more quality developments and more quality weapons. That is why our strategy for the near future should be to develop and scale up the defense sector, which will ensure an exponential increase in the number of weapons and military equipment produced.

Vladyslav Belbas, General Director of Ukrainian Armor LLC