Last year, Ukraine manufactured UAH 365 billion worth of weapons and military equipment, 300 percent up from the previous year, and domestic armaments production is expected to reach USD35 billion by the end of this year.
Today, we can finally talk about the emergence of private sector manufacturers among major defense product manufacturers in Ukraine, who have managed to overcome the long-standing State’s monopoly on weapons production. Private businesses are infiltrating, gradually and persistently, into the industries where they could not be imagined before, in missile programs or the explosives industry among others. Ukrinform sat down for an interview with Ihor Fedirko, executive director of the Ukrainian Council of Arms Manufacturers (UCAM), which has brought together a third of domestic defense industries under its “umbrella”, to discuss the path private sector companies have travelled to enter the previously closed sector of the economy, what contributed to their active growth and development, and whether they will be permitted to enter export markets.
MARKET DEVELOPMENT
– Mr. Ihor, you once noted in the first year of the great war, that defense industrial production in Ukraine was excessively regulated, which was stalling the domestic arms manufacturing capacity development. Since then, a number of regulatory instructions have been enacted that simplified production of drone dropped ammunition among other things, and the procedure for new weapons to enter operational service has been shortened, among other measures taken. In your opinion, can we now say that a favorable environment has been set in place for private sector manufacturers to feel comfortable in the defense industry in Ukraine?
– Let me start by saying that even after the war began in 2014, private sector manufacturers were not allowed into the industries such as electronic warfare systems, ammunition, drones, ELINT/SIGINT equipment, along with a multiplicity of other industries producing military weapons and equipment systems. True, individual manufacturers, very few of them, relatively speaking, had the opportunity, with the government’s permission, to produce certain products, but there was no talk of private sector businesses being able to manufacture the above mention products on a massive scale.
Nowadays, there are approximately seven hundred private business involved in armaments production in Ukraine, plus more than 2,000 startups and R&D companies that are about to join this big family soon. If at least one in ten of them survives to the stage of mass production, this will add another third to the overall number of private companies involved in in-country armaments production. Needless to say, this success is down to deregulation and free competition. Recently, the Ministry of Strategic Industries endorsed the possibility for state-owned enterprises to share their working design documentation with privately-run businesses to facilitate production scale-up.
That is, market liberalization has really happened and is gaining momentum. And this has contributed to the fact that commercial defense industries have already come on a par with government-owned counterparts in terms of production of diverse weapons, and even have been able to seize a leading role in particular market segments.
– What is the current ratio between the private and public sectors in terms of production volumes?
– We at the Ukrainian Council of Armaments Manufacturers estimate that this ratio is 60 to 40 percent, where 60 percent of weapons and military equipment come from privately-run defense-technology companies and the other 40 percent from the government-owned sector. That said, however, this ratio is the exact opposite in monetary terms, meaning that approximately 60-65 percent is accounted for by government-owned companies. Because these are missile weapons, heavy equipment, tanks, armored personnel carriers, that is, the classic military equipment, expensive one, so the government-owned sector holds a lead there over the private sector.
– The abandonment of the state’s monopoly on weapons production was, perhaps, a forced measure…
– It was 100 percent definitely demanded by the time. After all, it was the government-owned sector of the defense industry that had taken the first blows. A lot of long-established state-owned enterprises in the eastern and central parts of the country were reduced to ruins in the aftermath of heavy bombing and shelling attacks. It was vitally important to resume production and do it quite quickly. This was about classic types of weapons, but the private market gave birth to innovations. And not only did it give birth, but it was able to scale up production very quickly.
For example, almost the entire range of currently available drones is produced and delivered by privately-run manufacturers, as well as the vast majority of electronic jamming and electronic/signal intelligence technologies. Add to this optical devices, sighting systems, the full range of thermal imaging devices, ground robotic platforms and many more, which all are provided by private sector manufacturers.
Moreover, privately-run enterprises are gradually starting to enter the sector of the classic weapons such as drone missiles or armored vehicles. For now, 85 percent of the demand for light armored vehicles is provided by privately-owned businesses. The only thing holding back growth and development in this sector is the high financial threshold for entry. This type of production requires expensive equipment, large production areas…
– This question is about intellectual property rights. The procedure for state-run companies transferring engineering documentation and manuals to private-sector manufacturers, which you mentioned above, was enacted in early March. What has changed since then?
– It goes without saying that we are not empowered to disclose what documentation was transferred and for what purpose, but initial requests are already being processed. National policies regarding intellectual property rights and their transfer from the Government to a privately-run entity remains strictly regulated. And the first attempts, I think, will be quite difficult, but they will allow us to tread this path, which many will follow. Because a private entity is interested, for example, in developing an anti-tank missile system of its proprietary design, which the Design & Development company KB Luch is doing. Or at least join in a collaboration for production scale-up. The same applies to upgrading and updating Soviet legacy missile technologies. This takes a permission for an access to the engineering drawings and manuals left behind from Soviet times. And even an access to testing sites, because such weapons need to be trialed on specialized testbeds using special measurement methods and systems. And work on that matter has already been underway.
– In which product ranges is Ukraine self-sufficient, and in which ones are we still critically dependent on imports and partners?
– As the President said, domestic defense industries currently provide 40 percent of what is required by our military. Now we can already state the fact that we have FPV drones that are 70–100 percent made up of the parts and components made in Ukraine. And this is inspiring. I am confident that localization will go further and will also take place in the market for ground robotic platforms, electronic warfare equipment… True, we are still dependent on imported components, but in Ukraine, there are already over six dozen manufacturers of parts and components for military equipment in all categories, for drones, ground robotic systems, and these companies are increasingly growing in numbers.
I would say that we are heavily dependent on international markets for means of defense against aircraft and missile threats. This is true. We also face a certain shortage of explosives, gunpowder, hexogen compounds, precursors. But this is what is currently in short supply worldwide, because countries are arming themselves in anticipation of a potential major war. And Ukraine is one of the competitors on that global market. But today this is the Number One issue for the Government, and it is already being resolved. I am convinced that it won’t be long before Ukraine is able to build up its domestic deep tech industry for production of innovative high-tech products and components for, let’s say, components. These are microcontrollers, chips, some components, for example, for drone control and communication systems and for optical navigation systems.
– It follows from your words that the domestic defense technology market is developing quite well…
– It is growing and developing, and at a very high speed. By way of comparison with the USA, there is indeed a far greater number of innovation-based companies, defense technology companies in that country. But against the backdrop of any European country, we already prevail in defense tech. Our companies are quite diversified and present in almost every sector of the defense industry. Now the main problem is the government’s low capability to purchase all the weapons and military equipment products our manufacturers are able to produce.
– By the way, recently, report on a research study titled “The Results of the Activity and Development of the Defense Industry of Ukraine in 2024” was published, which was conducted with the support of your Council of Armaments Manufacturers. The research places on record a 6-fold increase in domestic defense industrial production, but production capacities are loaded at just 30–40 percent. Does this statistics apply to the private sector, too? Would you give your comment on this discrepancy?
– It’s true that the level of production capacity utilization currently does not exceed 30–40 percent, but it could potentially be much higher. In the period from mid-2022 to mid-2024, I won’t say that there was enough funding money, but there was enough money to load capacities at least at a minimum feasibility level for both state-owned and private-sector manufacturers. But as defense industries were growing in numbers, they were all told that they should step up production levels, that the government wanted to work with manufacturers that are capable of systainably producing products of consistent quality and on a mass scale, and of ramping up production where required to meet demand.
And every manufacturer that started up by producing a dozen drones per month wanted to grow to at least a thousand drones per month in order to meet these sustainability criteria. It is this excess amount of production that is currently offered on the market.
At present, the military is formulating its priorities on armaments. It is the military that determines what equipment they need and in what quantity. Needless to say, the Ministry of Defense does not have enough money to absorb all of these needs. At the same time, lots of companies have contracts concluded for very short terms, for an average of three months. And for a manufacturer, it’s a disaster to not have a production plan for at least until year’s end. They are uncertain if further orders will follow, so they can’t plan for production or related purchases, neither do they know what to do with their redundant workforce.
Even if the war ends tomorrow, it doesn’t mean that armaments manufacturers will cease to need long-term contracts. We all well understand that the aggressor, if undefeated, will return as it always does. Therefore, we can’t sit with our hands fold and say that we longer need to care about the country’s future capability to defend itself.
– What is the proportion of the domestic weapons production that can be bought out by volunteer organizations or military units that currently have the opportunity to conclude contracts directly with manufacturers? Can this alleviate the shortage of funding from the Ministry of Defense?
— At the initial stage of the war, there were instances of privately-run defense technology companies earning half of their sales revenues precisely due to purchases from the volunteer movement. This has currently fallen down to ten percent, which is the proportion of the defense technologies purchased through volunteer donations. But in no way does this affect production planning. Because this percentage is very volatile – it grows as the demand soars. When a disaster occurs, massive amounts of donated money come pouring in to the frontline forces, and then it falls down once the social shock passes. However, the advantage of volunteer-funded purchases is in their mobility. That said, in no case is it worth discarding the volunteer movement, and I think it will remain active for quite a long while.
As for direct contracts with military consumers, the amount of the government funding budgeted for this purpose has increased significantly this year. Brigades and military units already come playing a fairly visible role in the overall structure of government procurements from commercial defense industries. It is so far difficult to assess this process as it is just at the budding stage. But companies are already opening specialized divisions that travel directly to military units, introduce their products to potential military users, and negotiate potential supplies.
– Recently, there has been an increasing opinion that our military deploys an excessively wide range of military technologies, which causes certain difficulties with maintenance and operational deployment, user training, raising warehouse stocks, and all that. For example, we have over a hundred diverse drone modifications alone. Is there an understanding of the way defense industrial production should proceed, with more focus placed on reducing inventory types, improving product effectiveness and consolidation of manufacturers?
– It is the military that is the only one to have the right and ability to determine in a real-world combat situation what they want to fight with in the future. Because this is about their effectiveness on the battlefield and about their lives. I am also convinced that, over time, the number of drone manufacturers, for example, will decrease. Some will be absorbed by rivals, others will refocus to other products. The companies that produce more effective weapons will also have an advantage in attracting financing. And business consolidation, technical harmonization will occur naturally. Even for a country at war, 700 privately-run defense manufacturers are too many. I think that the situation with the existing technology “zoo” will also logically change over time. Though these are not only Ukrainian private sector businesses who are to blame here. We are hostages to a situation where France provides French weapons, Denmark – Danish, Sweden – Swedish. No army in the world fights with weapons of such a wide diversity. This all has to be standardized. Manufacturers should get used to this by now. At least minimize the required range of the subsystems and assemblies that need to be repaired and brough back to operation very quickly in-field on the front line. So that one piece of broken equipment could be cannibalized to repair another piece of equipment. Nowadays, we cannot even use a battery from one robot in another one. This should not be the case any longer.
ON THE ORGANIZATION
– The Ukrainian Council of Armaments Manufacturers began its operations in late February. What’s its mission?
– We created UCAM as a platform to forge a dialogue between sectoral associations: industry associations, military consumers, government ministries, agencies. The Defense Procurement Agency used that platform to introduce an innovative procurement system. The Ministry of Strategic Industries, which oversees state-owned manufacturers, is building a bridge between its controlled companies and commercial defense industries. In particular, it provides the opportunity for new products to be tested at the Iron Testing Ground. In other words, we help forge a dialogue among market players, set up smooth communication between the Government and businesses. I believe in effective public-private partnership, which is present in any civilized country.
– How many associations does the UCAM bring together, and the interests of how many companies do you represent?
– The Ukrainian Council of Armaments Manufacturers currently includes six industry associations and one venture fund that directly invests in the Ukrainian defense industrial sector. Unfortunately, there are not too many of such funds currently existing in Ukraine. This is especially needed for funding innovation technology projects. In total, we bring together approx. 270 enterprises. I think that we will hopefully increase our aggregate market share to 50 percent by the beginning of summer.
– UCAM is often referred to as an advocacy organization. What issues make the cornerstone of public-private partnership that require UCAM’s advocacy?
– This year we are aiming to change some legal and regulatory acts insofar as it pertains to, in particular, deferrals from military service for employees of privately-run defense industries. After all, if the chief engineer is mobilized, this is going to entail disastrous consequences for production.
Another issue that we are seeking to solve is the disclosure of information in registers. Information about defense-related production should be secured from unauthorized access as much as possible. It is vital to raise the level of data security across registers so as not to reveal, for example, the location of critical industrial sites to be known by the enemy.
Next comes the abolition of customs duties and VAT on manufacturers of parts and components. On that matter we are looking for a compromise with the government so that it becomes more profitable to manufacture components than to buy them from international markets.
Another issue concerns fines imposed on domestic defense product manufacturers but never on foreign suppliers. It is nonsense where the level of penalties surpasses the profit a company earns according to government’s calculation.
A separate issue is that of the defense industry lending. Banks are gradually joining in this program, but we well understand what amount of loaned funding may be need to expand production in an industry where production capacities are underloaded by 70 percent.
That is, there are lots of urgent issues to be addressed.
ON EXPORTS
– The issue currently discussed the most is perhaps that of opening controlled exports of armaments and defense technologies. You are among those who are advocating for this idea, as is the Ukrainian Council of Armaments Manufacturers as a whole. Could you provide your arguments in favor of this measure?
– We understand that we, having that big production capacity in reserve, have something to offer democratic countries. It is only reasonable that a company manufacturing armaments and military equipment aspires to sell it on international markets. And it is only reasonable that the government aspires to make a profit from this: profits from customs duties, additional fees, etc. Businesses need money for development, for new research and development projects, for renting premises and for ensuring smooth production flows. And this money can be taken from abroad. Because the price for our products is drastically different here and there. But we understand that the government seeks to maintain a balance between national security interests and the opportunities provided for the domestic defense industry. So as to ensure this, we suggest specific safeguard mechanisms. I am confident that the issue of defense exports will be resolved in the short term.
– Could you reveal the details of your proposals on how the export of defense industry products could work during the war?
– It matters the most that the weapons exported from Ukraine do not end up in the hands of the enemy through third or fourth companies. So that we are not subsequently accused of allegedly self-bombing ourselves, self-blowing up ourselves, killing ourselves or being unable to ensure proper control over the circulation of our weapons in a world where the Russians have their own or affiliated companies for possible “shadow” procurements. Therefore, the issue of security should be finalized with the involvement of the experience of European countries, where the circulation of weapons is strictly regulated by laws.
The mechanism should embrace legislatively normalized partnership relations between the countries to which we want to sell our products. These can be the countries that provided Ukraine with maximum support during the full-scale war: the Baltic countries, Scandinavian countries, Canada, Saudi Arabia. That is, we can start from these countries and, perhaps, use them as a testbed for future export mechanisms.
– Is the international market ready to absorb Ukrainian products, which, let’s be frank, will create considerable competition on it? Will our hopes materialize in specific requests from other countries?
– For now, over a hundred companies from 25 countries across the world have expressed willingness to cooperate with Ukrainian partners. We are telling them: if you are not present in Ukraine (your representative office, R&D center, production lines or at least collaboratively produced products) yet, you are not present in the arms market at all. No one is going to purchase weapons that have never been used in combat or have not proven their effectiveness in the high-tech war that is currently taking place. Everything else is nonsense that has nothing to do with war.
– Do you mean to say that these hundred companies already have in mind establishing joint production partnerships with us?
– That’s true, but, reasonably enough, they want the partnerships be located mostly on their own territory. I am not empowered to disclose these countries, but they do exist.
– Here another issue arises, which is our weapons products’ conformity to NATO’s interoperability requirements. Domestic industries are just beginning to switch to a new system of technical requirements, but in parallel, we, responding to the demand of the time, are simplifying codification procedures for particular types of weapons and military equipment products. How to harmonize technical data and performance parameters in anticipation of entry to export markets?
– You raised a very important issue. Yes, in 2023, the Cabinet of Ministers, taking into account the existing challenges and circumstances at that time, went for an experiment, having simplified codification procedure for weapons and military equipment products. As it turned out, this became one of the catalysts of the boom in the arms market. So the experiment was appreciated as a success, and work is currently underway to adopt the appropriate permanent decision. I take this opportunity to encourage manufacturers not to worry – all the issues they raise will be finalized.
However, since the procedure is too simplified, NATO countries are unlikely to accept this type of our codification procedure in the future. So, we need to get prepared to use the full codification cycle developed by the Ministry of Defense, even though there are seemingly no problems with standards regarding the export. If a domestic manufacturer sells certain solutions to foreign companies that know what NATO standards are like, they will simply adapt our technologies to their requirements and codify them under their own code numbers. That is, a Ukrainian product will have a formally foreign “origin”. But many of our companies want to produce their products here in Ukraine and sell them to international markets from Ukraine. This is a patriotic position, first of all, because the price tag for our weapons products on the world market, at least for some of them, is almost 10 times higher than the price at which these products are sold to the Ukrainian army. And at the same time, our products are in demand on foreign markets. So the question is only in a mechanism to balance out export and control.
ON DRONES AND MORE
– Ukraine has emerged as the world’s leading producer of drones. Is that true?
– If you look closely, Ukraine has already created an understanding for the whole world of what combat drones are like, what types of them exist, how they can be operationally deployed. And now we see how foreign manufacturers, including the best renowned of them, are replicating our drone technologies. Everyone wants to make something for use in the missions currently being done in Ukraine. But they are lagging behind. That makes them look for partners in Ukraine, and they are even ready to buy components or complete products that we make.
– Probably the most revealing thing would be to compare our produced drones with the enemy’s. What are the differences, advantages, disadvantages?
– Here it is worth talking about the difference in approaches to production. Russia follows the post-Soviet system, which is based on the principles of standardization. They have only five main models of UAVs. The main strike drone is Shahed, the auxiliary strike drone is Lancet, reconnaissance drones are Orlan-10 and “Orlan-30”, and the integrated strike and reconnaissance drone is Forpost. In other words, they have chosen one main drone brand for each sector of responsibility, which they continuously upgrade and improve.
We have taken a different path – we have given the private market the opportunity to create solutions for carrying out specific tasks. The result is that we have more than 15 brands of reconnaissance drones alone, while the number of various FPV drone brands and modifications is simply hard to count. We have conventional bombers, fixed-wing bombers, reconnaissance drones, integrated reconnaissance and strike drone missiles, deep strikes, and there are also anti-drones. That is, the model range is simply colossal, with at least a dozen manufacturers involved in each of these niche markets.
In Russia, by the way, the issue of excessive standardization is also pertinent to other industry sectors. There is a BMP-3 infantry fighting vehicle; one was destroyed, the surviving parts were removed and mounted on exactly the same BMP vehicle type. Same is with other equipment. They have two or three main models of armored personnel carriers, tanks, airplanes – that is, everything is unified, with the opportunity to replicate products using similar technology.
– Fiber-optic controlled drones have emerged as a game changer at this stage of the war. Has production of fiber-optic controlled drones been established in our country?
– Fiber optics, in my opinion, is not a game changer. Drones of this type come with both advantages and disadvantages, particularly in terms of weight, low maneuverability, cable ruptures, large dimensions, relatively short operational range, difficulty to control at high altitudes — briefly, an imperfect thing. But it is one of the best for use in ambushed attacks. Of course, we can continue improving such drones, but the technology itself, in my opinion, is pretty limited by physics and seems to have already exhausted its potential for innovation. Meanwhile, more conventional radio-controlled FPV drone technology has yet to reach its full development potential as electronic jamming technology simply cannot keep up with it.
– Regarding electronic warfare equipment — have we already reached the desired production level, or is this equipment still in short supply? And what about modern devices?
– Production levels only depend on the ability to finance. Give us money, and we will make as many as we need, and of the bandwidths that we need.
As for future directions in electronic warfare technology development and use, we are currently moving towards “smart jamming”, as referred to by the manufacturers. While previously, electronic jamming systems generated electromagnetic interference with electronic/signal reconnaissance systems on site, and vice versa, reducing each other’s effectiveness and reliability, now the developing engineers are working to teach these different systems to distinguish between signals and integrate them in a way precluding interference. I am expecting that these systems will soon become fully automated.
– Also, almost every week, the Ministry of Defense allows new ground robotic platforms to be introduced into the Ukrainian military’s inventory. What exactly does the military lack today, where is production headed?
– The only thing we lack in terms of ground robotic technology is usage experience. Today, only the 3rd Separate Assault Brigade has this experience. I am hopeful that other military units and formations that are open to innovations, such as Khartiya, Achilles and others will also catch up. It is the usage experience and the lessons to be learned from this experience that will help formulate new requirements, systematize the inventory of ground robotic systems, and standardize specific parts and components. That is to say, they will shape future development designs, just as happened with FPV drones.
– Is everyone equally open to employing the latest technologies?
– Not everyone. In the 3rd Assault Brigade, this is quite systematic work, a completely different level, still unattainable for many other brigades. They take something, try it, modify it to their needs, set tasks for the manufacturer, and test it again. They have established a direct dialogue with manufacturers throughout the country. I think that it’s for a reason that they are currently being expanded into a Corps formation. This approach, where the military is able to quickly communicate its needs to the manufacturer, is the most effective for all stakeholders.
The military is currently gaining practical experience in using robotic platforms on the battlefield for all sorts of missions, including medical evacuation, offensive and defensive actions. That is, when the military understand exactly what type of robotic systems and for what purposes they need them, we, on our part, will quickly scale up. Drones and ground robotic systems are the future of military campaigns. And Ukraine is in the forefront in this domain, because we, unfortunately, are forced to use these devices more intensively and extensively than anyone else in the world is.
Interviewed by Yulia Abakumova, Kyiv
Photo: Danylo Antonyuk
Source: Ihor Fedirko, executive director, Ukrainian Council of Arms Manufacturers
